Legal And Contractual Issues Of Novation Agreement In Construction Contracts

The Concept of Novation Agreement in Construction Contracts

The following guidelines should be strictly adhered to:

1.All propositions of law referred to in the legal problem question – see section A of the assignment below – should be supported by an appropriate reference to a case or statute or, in the case of a reference to a standard form of building contract such as for example the JCT Standard Building Contract with Quantities 2016, by an appropriate reference to the relevant contract.

2.The word limits for each component of the assignment appear at the end of the relevant section of the assignment. These limits should be adhered to, otherwise the student will be penalised. Each submission should include a word count.

3.Footnotes should be included in the essay. A bibliography should appear at the end of the essay. The bibliography should contain all relevant material consulted by the student, whether referred to in footnotes or not and material in the bibliography should be arranged under the following headings, where applicable:

Legislation
Case Law
Internet resources
Other resources

Words in footnotes and bibliography should not be included when taking into account the essay word count.

4.Footnotes must be used for referencing and further reading only and should contain as little text as possible.

5.The completed coursework assignment must be submitted prior to the submission deadline (see below), by submission via an electronic drop-box set up in the study area for the Construction Contracts in Context module in the RGU Moodle online campus. Note that one submission only is permitted to avoid multiple submissions (where a later submission by a student is stated or intended to supersede an earlier one). Students must be satisfied that the version of the completed coursework is the absolutely final version prior to submission. Completed coursework submissions should not under any circumstances be directly emailed to the module leader Dr Hamish Ross. Dr Ross’s email facility at RGU is not resourced to handle emails with large attachments. Accordingly, Dr Ross will have no alternative but to delete such courseworks on arrival without reading them.

6.The completed coursework assignment must be submitted using the template (a Microsoft Word document) provided in the study area for the Construction Contracts in Context module in the RGU Moodle online campus. The template should be completed in full prior to submission. Use of the template is intended to ensure that the coursework submission is contained in a single document and contains all relevant student details. This will make submission via the electronic drop-box simpler.

7.The completed coursework assignment must be submitted by the following deadline:

The main issue of this case revolves around the possible legal and contractual issues being raised based on the facts given resulting from the novation agreement. There is also the issue of whether Sitting-Duck can hold ScotFree liable for the design flaws in a legal manner, and for rectifying the resulting structural defects or not.

In the construction contracts, it is a common practice that during the project’s life, there is a need to shift the burden or the benefit or burden of the contract to another party, who had no contact with the original arrangement or contract. This can be undertaken through novation. Through novation, a contractual obligation can be transferred from one party to another party. It is suggested to do so by tripartite novation contract, which results in existing contract being extinguished between A and B and the contract being replaced with a new contract on same terms between varied parties like B and C. There have been arguments that the entire contract has to be replaced for novation but this is not the case always. The case of Langston Group Corporation v Cardiff City Football Club Ltd is a leading example of this, where only a part of obligations of the contract between A and B were changed to B and C’s contract. So, the original party can novate certain obligations and the remaining can continue to be their own liabilities.

Blyth & Blyth Ltd v Carillion Construction Ltd was a case in which a design and build project was involved where the consultant novated the contract to the contractor. By the end of project, the consultant sued for fees and a counterclaim was made by contractor for breach of contract. This breach was related to services which were preformed before novation. It was held by the court that the contractor was not entitled to get the losses recovered from the consultant. Clause 4 of the novation agreement drawn in this case provided that the liability of the consultant whether it was present before or after the novation date, had to be that of contractor and that the consultant had agreed to perform the appointment and to be bound by terms of appointment in every respect, so that the contract had been named as party to appointment in the employer’s position.

The ruling was based on the fact that the judge had decided that the contractor was entitled to damages but these were limited by extent to which the employer would have recovered the loss owing from the contravention. Since the employer could have recovered only minimal losses, the contractor was not allowed to recover major losses which they claimed to have suffered. And as is the case with all the assignments, the contractor was allowed only to recover the losses to extent that the original party to appointment, which was the employer, would have born such losses for purchasing claims which they had with them before the novation. In order for ensuring that the novation contracts are successful, there is a need to avoid any kind of uncertainties as had been created by the quoted case, where clear drafted clauses are covered under the novation agreement.

The Validity of Novation Agreement and Its Effect on Existing Contracts

In the present instance, ScotFree had been the consultant, and Sitting-Duck had been the contractor. The employer in this case was the original developer. A novation contract had been drawn in this case and there is a need to decide on the possible legal and contractual issues being raised from it. Before going in the legal issues, the contractual issues are discussed herewith. It is assumed in this case that the elements of contract, which are crucial for creating any contract, were present in this case, in terms of offer, consideration, acceptance, intention, consent, legality and capacity. The next contractual issue which needs to be referred here relates to the novation agreement being valid in this case. This is because only of the terms was being novated here. Based on the case of Langston Group Corporation v Cardiff City Football Club Ltd, this would be valid. And the remaining obligations would continue to be in the hands of consultant.

In context of the possibility SittingDuck, i.e. the contractor holding ScotFree, i.e. the consultant liable for the possible flaws in design and for rectifying the resultant structural defects in the residential development, there is a need to make reference to the case of Blyth & Blyth Ltd v Carillion Construction Ltd. In the present case study also, the consultant has novated the contract to the contractor. By the end of the contract, the consultant has denied the liability and even the responsibility for the flaws in design and for getting the structural defects right in the residential development. Now these design flaws and the structural defects are the ones which had been performed before the novation. Even with the novation clause, the precedent would mean that the court would make ScotFree go free and Sitting Duck would not be entitled to get the losses recovered from ScotFree. There is a stark similarity between clause 4 of the precedent case and the present instance, where both provide that the liability of the consultant would be that of contract, even including the one which accrued before the date of novation. Both the cases had faulty

Thus, on the basis of the discussion undertaken in the previous segment, where the law was applied on the given case study, it can be concluded that the novation agreement would be a valid one. However, Sitting-Duck would not be able to make ScotFree liable for the design flaws in a legal manner, and for rectifying the resulting structural defects due to the ruling given in the landmark case quoted earlier.

The previous case study was largely based on the landmark case of Blyth & Blyth Ltd v Carillion Construction Ltd. The reason for stating this case as a landmark case is because this case set the premises for the novation contract to not meet its stated purpose, where it had a fault drafting. In strict legal language, the novation is a position whereby one of the contracts is discharged and a new contract is entered into in its place. It has already been discussed that even a part of contract can be novated in certain cases, but that is not the issue of concern here. Majority of construction practitioners consider novation as an important mechanism despite the quoted case, and it has not changed the perception in a fundamental manner. This is the reason why novation still continues to be used in majority of commercial property development schemes.

In order to make certain that the novation agreement is successful and serves the purpose intended by the contractor and the employer, there is a need to avoid the uncertainties as had been present in the quoted matter, where the clauses are clearly drafted and these are properly covered under the novation agreement. In such cases where a professional consultant is required to be made liable, for instance, for the losses suffered as had been suffered in Blyth & Blyth Ltd v Carillion Construction Ltd by Carillion, there is a need for expressly providing the same in the novation agreement. Merely because of faulty drafting of novation agreement, Carillion was unable to recover the losses he suffered. The defective drafting of novation agreement resulted in assignment of rights of employer but it did not create new set of duties.

It is basically a fine balancing act which is required for the protection of contractor concerns for establishing the wording which the consultants are happy with. As a result of the conflicting views, there have been new forms which attempt at reconciling and taking on board the issues which had been highlighted through Blyth & Blyth Ltd v Carillion Construction Ltd. The CLLS form provides a novation ab initio where the contractor is treated in a manner as if the contractor had been a party to appointment in the employer’s place from the very beginning. As against this, the approach of CIC form is that novation is nothing but an assignment, which comes with a consultant’s warranty to the contractor regarding the pre-novation services. There is still a need for the contractors to exercise caution on literal reading of warranty to contractor, which could allow for the consultant to be able to avoid liabilities as were present in the quoted case, where the loss is incurred by the contractor similar to the one which had been incurred by employer regarding the pre-novation contravention.

Clarity and Simplicity in Novation Agreements

The CLLS and CIC forms suggest that there should be no more than five clauses in novation contracts and the warranties should not be included regarding step in right or for backing the employer. It is also suggested to draft a novation contract in a separate document. There is a need to draft a simple document which can be easily adapted, covering range of different context, with different standard form, and should speak about the consultancy agreements which are present in marketplace. If possible there should be only three clauses to keep the document as simple. The first clause would cover the deal with novation in itself, the second would deal with the jurisdiction and the last clause would cover the respective rights of the third parties.

The agreement would begin by releasing the consultant from any and all obligations which are owed to the employer. This would then transition into ovation ab initio whereby the consultant would promise to perform the services, as if from the starting, the contractor had been the party to appointment. There is also a need for the provision which would release the employer from all the obligations owed to the consultant. In practical viewpoint, the payment by employer is dealt through warranty from consultant regarding all the fees being paid up to the novation date. Under the CLLS approach to the damages, the liability of the consultant for the losses of contractor is limited by any limits on their appointment liability. Though, this could easily evade Blyth & Blyth Ltd v Carillion Construction Ltd by getting a proviso included which provides that this was “in spite of such damage or loss would not have been incurred or suffered by employer, or incurred or suffered to the same extent by such employer”.

It has already been stated earlier that the CLLS form does not cover warranty back to employer. The cited guidance note in Blyth & Blyth Ltd v Carillion Construction Ltd, doubt had been placed on the novation agreement’s effectiveness as it did not cover warranty back to employer. There is also the absence of step in rights which could allow for the employer to gain their rights again for instructing the consultant in appointment where building contract ended, say in the instance of contractor being insolvent. By keeping these provisions separate, clarity can be retained. The guidance note in the quoted case also provided the consideration of judge regarding including such rights being inconsistent with the normal legal novation concepts.

The CLLS and CIC Forms of Novation Agreements

A similar approach had been adopted under the CIC form, which helps in solving the problems which had been raised through Blyth & Blyth Ltd v Carillion Construction Ltd. The CIC form refrains from releasing the consultant absolutely from their employer obligations. There is a need for retention of obligations of consultant for providing warranties and for maintaining confidentiality. So, where a consultant is appointed on a specific project where the traditional procurement stays in mind, which is changed later on to design, there is a need to carefully check the services using CLLS form. And where the novation is agreed from starting, it is crucial to make certain that the services are proper from the very start.

A remarkable and possibly unique intervention was brought through the Housing Grants Construction and Regeneration Act, 1996, (HGCRA) along with the statutory instruments provided under it. These interventions where carefully bright forward in selected aspects of construction industry which allowed for the ordinary freedom of contract in between the commercial parties, to regulate the relationship being overridden in various areas, without any regard to the bargaining power, as was held in Outwing Construction Limited v H Randell & Son Limited by Judge Humphrey LLoyd QC. HGCRA brought with it adjudication and also introduced new payment rules and notices, which at present are mirrored in the standard forms of construction contracts, albeit not accurately at every instance, and also in the professional appoints, and has to be covered in the oral contracts as well. This discussion is focused on evaluating these adjudication and statutory payment provisions of HGCRA.

In the backdrop of the financial and the cash flow difficulties in the construction industry, which took place in the late 1980s and in the early 1990s, along with the increase in the lengthy construction disputes, in the report Constructing the Team, Sir Michael Latham made recommendations that there was a need for a system of adjudication to be brought in the standard forms of contract, where the same was underpinned by a legislation. The intent here was that there had to be no restrictions on the matter of permitting the issue to be referred to a mediator, adjudicator or conciliator, and that this could be included in the main contract, or in the subcontract. Latham also made a suggestion that the award of the adjudicator had to be implemented at the very earliest situation and that the use of stakeholders had to be allowed where all the parties were in a disagreement or where the same had been directed by the adjudicator. Only after the practical completion of this, should the further appeals to courts or arbitration be permitted. There had to be avoidance of delay in implementing the award save for an exceptional situation being raised before the courts in which there is a refusal by the party to implement the adjudicator’s award. There had been recommendation that the courts could support the adjudication system by agreeing the expedition procedures for the interim payments.

The HGCRA is a milestone in the English legislation history as this was the very first legislation where recommendations were made to the parties to contract to include the need for adjudication of disputes in their contract provisions, as had been covered under the statute. This act provided that where the contract did not provide so, the party still got the right of referring the matter to adjudication as per the provisions of HGCRA. The act has been in operation for quite some time now and it has been working well enough. The very first judicial pronouncement regarding the enforcement of decision of adjudicator came through Dyson J in the seminal judgement given under Macob Civil Eng. Ltd v Morrison Construction Ltd. This case had backed up the intent of Parliament in bringing out HGCRA, even when it felt uneasy owing to the implication of speedy adjudication. The act not only covers provisions for adjudication but also brings forth statutory payment provisions through different sections under it. These provisions are applicable on majority of construction contracts and on professional appointment and it is crucial for being aware of these and also being aware of the result of failing to fulfil these requirements.

Through HGCRA, the statutory adjudication was introduced which applied to the parties to construction contract, and this provision cannot be contracted out. This procedure involved a period of 28 days, though the same can be extended by the parties. The statutory adjudication brought through HGCRA is often referred to as a pay first and argue later mechanism for solving the issues being raised in the construction industry. The construction industry of UK well received the payment and adjudication provisions and these can be deemed as a success. Though, there are avoidance tactics which have the goal of reducing the liability for payment and for discouraging the payees away from adjudication which is becoming a common parlance. In one of the conducted surveys, it was found that there was a broad support for the original legislation and the changes which were made in the new act resulted in tempering of pessimism regarding the possible inability of new measures for addressing the matters which revolved around in the industry practice. There are high instances of evasion and avoidance of key terms, for instance regarding the extension of payment terms and in drafting the contracts in paying party’s favour.

It is often stated that dispute and conflict are widespread in construction industry. With the HGCRA, an automatic right to adjudication was created under the written contracts formed after May 1998, which resulted in a boom in low value disputes. In place of having to wait for years or months for the decision of the court, the aggrieved party could get a binding decision in just over a month. This made adjudication is an easy approach and the majority of decisions were thus honoured. In such cases where these were not honoured, the courts could easily enforce them in some days by making use of the special procedure.

The older regime was only applicable on contract which had been summarized in writing and there were a number of instances where the adjudicators were asked to resign where it seemed that a part of agreement in between the parties, be it big or small, had not been in writing. There were also other cases where the claim consultants, advisors, barristers and solicitors ruled out adjudication as dispute resolution option due to these very reasons. With HGCRA, all this was done away with. A path was clearly opened up for swift dispute resolution. There is a statutory power with the adjudicators to take the initiative for ascertaining the law and the facts and to act in a fair manner but at the same time doing so inquisitorially.

The new provisions regarding payment have also been mandated. However, this new provision is quite complex and is also full of loopholes, which has resulted in columns being published on this very matter. This has also resulted in recommendations for redrafting the payment terms for complying with the obligatory new procedure. At the very top of this are the organizations, who have redrafted their bespoken terms. The industry participants need to be aware of the fallback provisions of the scheme for construction contracts and to apply these in making payments.

Even with the time which has been spent on bringing forth these changes, there continues to be an ongoing controversy regarding the future disputes regarding disputes, and of its scope. Inevitably, there would be disputes regarding the allowed scope of the bespoken contract clauses where the attempt is made to place preconditions on what would be deemed as valid application. There is a possibility of these going far away in attempts of sidestepping the intent of HGCRA. The Tolent clauses brought through the case of Bridgeway Construction Ltd v Tolent Construction Ltd have been placed a statutory bar on them which provided for the party to pay cost of adjudication even when they won. These clauses were deemed as being opposed to the true meaning and spirit of HGCRA. There are also the controversies surrounding section 108A of HGCRA as having being misdrafted and having the converse effect from what the intention of this section had been. Till clarity is attained on this matter, the contractors continue to be tempted to continue using the standard clauses where the subcontractors are required to bear all costs of adjudication, though it is unlikely that these could be enforced. All in all, the general notion is that in the legal professional and in the construction industry, the merits brought through the provisions of HGCRA outweigh the perceived disadvantages which show that the provisions of this legislation have been a huge success.

Thus, on the basis of the discussion undertaken in the previous segments, it can be concluded that the HGCRA is a landmark legislation which brought with two key provisions of adjudication and statutory payment. The statutory payment provisions brought forth new requirements, which have the possibility of being misused. However, even with its misuse, the chances of it being enforceable are minimalistic. The more important provision, which was the theme of this discussion, was adjudication. With this provision, a measure was given to solve the disputes rising in the construction industry in an easy, quick and hassle free manner. Due to the effective provisions covered under the HGCRA in this context, even when the matters were referred to court after adjudication order being passed, the dispute was still resolved in a swift manner. Even though these provisions have been criticized by some scholars on varied basis, they continue to be the reason for success of HGCRA.

References

Housing Grants Construction and Regeneration Act, 1996

Blyth & Blyth Ltd v Carillion Construction Ltd (2001) 79 Con LR 142

Bridgeway Construction Ltd v Tolent Construction Ltd [2000] CILL 1662; [2000] WL 1027055

Langston Group Corporation v Cardiff City Football Club Ltd [2008] EWHC 535 (Ch)

Macob Civil Eng. Ltd v Morrison Construction Ltd [1999] EWHC Technology 254

Outwing Construction Limited v H Randell & Son Limited [1999] 15 Constr LJ Vol.3