The consequences of failing to comply with novation

The importance of identifying the correct contracting parties to a contract is of paramount importance. Failure to adequately identify the correct legal entity could result in the contract being unenforceable.

In the construction industry, it is common for contracts to be novated or assigned part way through a project. This could be for any number of reasons, although typically such a transfer is used to novate design responsibility from a consultant to a main contractor or due to the business restructuring of one of the parties. In any event, failure to properly ensure the transfer is effectively made and/ or evidenced to the new contracting party can lead to unintended, and dire, consequences.

Such unintended consequences are well demonstrated in the High Court decision of (1) M Hart Construction Limited (2) P K Maintenance Limited v Ideal Response Group Limited [2018] EWHC 314 (TCC).

The case

The dispute concerned works that were performed at the Olympic Athletes Village (the Site) in London during the redevelopment into residential units. Ideal Response Group Limited (Ideal) were engaged by the landlord to repair water damage that had occurred at the Site. Ideal then engaged Mr Hart in a personal capacity to undertake those works, pursuant to an oral contract (the Rectification Contract).

Once the works under the Rectification Contract were complete, the landlord further engaged Ideal to undertake works for other defects appearing at the Site. Again Ideal engaged Mr Hart in a personal capacity to undertake these works, along with P K Maintenance Limited (PKM), making it a tripartite oral contract (the Defects Contract).

Sometime after the Rectification and Defects Contract were put in place, Mr Hart set up his own limited company, M Hart Construction Limited (MHCL).

It is unsurprising that, given the informal oral nature of the Rectification Contract and the Defect Contract, the nature and evidence of the novation of these to MHCL was equally informal (and/ or non-existent).

Ideal then failed to make payments of sums said to be due to MHCL and PKM. Adjudications were pursued for these sums on the basis of there being no Payment or Pay Less notices in place. Both MHCL and PKM were successful in the adjudication and then sought to enforce the decisions at the TCC.

During the adjudication process Ideal contended that there was no proper novation of either contract from Mr Hart to MHCL, and, given that the adjudications were commenced in the name of MHCL any decision would be unenforceable. Ideal further contended that PKM adjudicated under a contract that did not exist (namely the novated MHCL tripartite contract), as opposed to the tripartite contract between Ideal, Mr Hart and PKM.

Decision

The Court considered the scant evidence provided by MHCL that the contracts were properly novated over to MHCL. This evidence consisted of a purported telephone conversation between MHCL and Ideal (it was in dispute if this telephone call even took place) and alleged conduct between the parties, namely the production of invoices in MHCL’s name (these were not paid by Ideal) and some email correspondence between an Ideal temporary member of staff and MHCL.

Ultimately the Court decided that the adjudicator’s decisions in favour of MHCL would not be enforced, as Ideal would have a real prospect of defending a substantive action on the basis that there was no novation of the underlying contract to MHCL. However, the Court did enforce the decision in favour of PKM on the basis that the novation did not affect the contractual relationship between Ideal and PKM.

Lessons learnt

Clearly, the outcome in cases where the evidence of any novation is limited to conduct and correspondence will be fact sensitive. For example, if Ideal had made payment of some of the MHCL invoices this may have given rise to a novation taking place by conduct.

That being said, the most effective way to avoid such ambiguities is to have the novation or assignment properly set out in a written contract agreed between all of the parties.