Novation is often noticed in different contracts in which the existing contract is replaced by a new contract. Novation is defined as the method of replacing the existing contract with a new one by mutual agreement and consent. As a result of being replaced by a new contract, the rights and obligations of the original contract do not exist. The rights and obligations of the existing contract discharged on spot and the new obligations and rights come into action. Novation is a part of the contract law that highlights three major characteristics. The characteristics are replacing one obligation for performing with another obligation, including a new obligation for performing and replacing the party to an agreement with a new party.
In contract law as well as business law novation is defined as the action of replacing an existing obligation of performing a contract with another existing obligation. In this process an obligation to process is incorporated into the contract. It may also include the process of replacing a party to the contract with a new party. A novation is different from an assignment. In general an assignment is valid as long as notice is provided by the other party on the other hand only when the other party has provided consent can a novation be deemed as valid. The parties who have to provide consent have to be the parties to the original agreement. When a contract is transferred by the process of novation all obligations and duties are transferred to the new obligor from the original obligor. For instance, if there is a contract under which Dan will give a radio to Alex and another contract in which Alex will give the radio to Kim and it is possible to novate both contract and replace the process with a single contract in which Dan is to give the TV directly to Kim. However in this situation the consent of all the parties in the agreement would be required. In relation to the new contract consideration will still be required and it will be assumed that the former contract has been discharged. Another instance can be provided in relation to an organization X enters a contract with another organization Y and the novation is present to make sure that when company Y sells, transferes or merges the main part of their business to another organization, the new company assumes the liability and obligation with company Y had with company X in relation to the contract. Alternatively, there may be a novation agreement may be signed after the final contract.
Novation is valid only when all the associated parties have consent to the original agreement. In the case of novation, the contract transferred by novation includes the transfer of all the obligations and duties to the new obligor from the original obligor. According to the Indian Contract Act, 1872, Discharge of Contract means finishing the existing contractual relationship between the associated parties. Therefore, a contract is discharged once no further operations are performed. In other words, the obligations and rights that were developed in the beginning come to an end with implementation of novation.
The agreement mentioning the deeds of novation mentions clearly what happens to the liabilities in accordance to the contract that was created in the first place. When a contract os novated, the rules and obligations of the original contract ceases automatically and is replaced with the new contract. However, the newly formed contract possess the same rights and obligations as the previous or the original contract but the only difference is that one of the original parties of the contract is replaced with another party known as the third party.
As after novation a new contract is formed, providing fresh consideration is essential. The novation can be used as a deed that is executed with the need of consideration though a sample agreement is sufficient between all the associated parties. In accordance with the novation contract, the party going out of the contract will be free from all the associated liabilities. As a result, the new and incoming party has to overtake the associated liabilities. This is where the difference lies between novation and contract, as in assignment, the outgoing party is not free of the inherited liabilities.
Novation falls under contract law and gives rise to huge issues when a contract is novated. The main problem of novation in the construction industry is that it changes the overall design as well as the relationship between the parties in the agreement. Problems are recognized in terms of the issues that are highlighted due to facts mentioned in the novation agreements. Another issue that has been observed due to novation is in respect to the fact whether the design flaws can be recognized in a legal manner or not. In addition to, problem also arises in rectifying the resulting structural defects in a more appropriate manner or not. In terms of novation, problems are also identified in terms of professionalism, maturity along with the three significant participants that includes design team, contractor and customers.
Another significant risk that is encountered due to novation is failure of the agreement due to incompatibility between the members. Due to higher rate of complexity in the novation agreement, it is important for the design contract to novate carefully to the associated contractor. This provides an opportunity for the contractor to avoid likely conflicts or disputes in the agreement. Novating a contract is extremely time consuming because a completely new contract has to be designed that is going to replace the original contract. The party that is replaced facilitates potential risks that can lead to penalties. Thus, this study is conducted with the aim of analyzing the legal and contractual issues that take place from novation agreement within the procurement process.
The aim of the research is to investigate the legal and contractual issues resulting from the novation agreement and the risks involved for the contractor in respect to design, novate and constructing contracts.
The objectives of the research are:
This research is important and justified as this helps in analyzing the the legal and contractual issues resulting from the novation agreement and the risks involved for the contractor in respect to design, novate and constructing contracts. As a result, the contractors will be able to understand the potential risks that are involved while they settle down for novation to an existing contract. This research will also help in understanding the future use novation and trading options for describing a particular or special situation in which the central house of clearing includes itself for between the sellers and the buyers and the buyers and the sellers. For example, the clearing house acts as a buyer to every seller.
As a result, the requirement of confirming credit worthiness of individual counter party and credit risk becomes obvious thereby, making the risk of the clearing house defaulting. Thus, the risk involved with novation in context to this can be analyzed and investigated in this research. In addition to, the conduction of this research will help to in evaluating the legal abd contractual issues that occurs due to novation agreement to the existing parties as well as the new party that will be a part of the agreement. This will help the involved parties to save them from the penalties imposed due to novation agreement.
The entire structure of the study is categorized into five different chapters. The five chapters are introduction, literature review, research methodology, data analysis, conclusion and recommendations.
This is the base of the overall study in which an overview of the research topic is provided along with mentioning the problem based on which the entire study will be conducted. Followed by this, is the research aim, objectives and hypothesis that are formulated and is analyzed in the later section of the study. Also, the significance of commencing with the work is justified in this section. This chapter also includes, the different methodological tools are highlighted. In order to complete a research successfully, it is important to select and apply appropriate methodological tools. The researcher, in this chapter defines the different methodological tools along with providing suitable justification of selecting the specific methodology
This chapter deals with discussing and analyzing the information and data present in the existing pieces of literature. The independent and dependent variable are selected based on the research topic, aim and objectives in the first chapter. Relevant headings and sub-headings are developed that are analyzed critically in this chapter. .
As mentioned in the previous chapter, this chapter analyzes the collected data for proving the research aim, objectives and hypothesis. The data analysis in this chapter is conducted by following the methodological tools in the above chapter.
This is the last chapter of the study in which the researcher deduces conclusion by considering the data presented in the above chapters. After justifying the topic, this chapter highlights the identified gap followed by mentioning the impact of the gap and the benefits of mitigating the gaps. The objectives are linked with the literature review and the data analysis in order to align the overall study and prove the research aim and objectives successfully.
This chapter serves the purpose of allowing the researcher in gathering the important tools that will help the research to be undertaken in a cohesive manner. The explanation of the philosophies, approach, design and type has been provided by the researcher in this chapter. The researcher has also considered the use of secondary sources of data so that proper information can be collected with regards to the research topic that has been taken up for the study.
The researcher has collected the relevant data and evaluated it as well, which has helped in authenticating and relating the study with the topic that has been taken up. There are different kind of philosophies that can be used in a research process namely realism, positivism and interpretivism. The philosophy that is known as interpretivism helps the researcher in using the information that is already available and are interpreted in a social manner. The positivism philosophy helps the researcher in collected the factual data that are in relation with the research topic. The realism philosophy is a mixture of the above philosophies that helps the researcher in collecting relevant data and those that are socially construed as well.
This study will be done using the positivism philosophy, as the information that are relevant will be collected and used for the research. The data that will be taken up by the researcher will affect the research quality on an overall manner.
The research approach has allowed the researcher in gaining important knowledge on the topic that has been taken up for the research. The researcher has taken up the topic based on the topic on which the study has been conducted. The research approach can be segregated in to two types such as the deductive and inductive approach. The deductive approach allows the researcher in studying the research processes with the help of theories and models that has been already published by the authors. The approach that is inductive in nature helps the researcher in forming models and theories in a new manner so that the study can be conducted successfully.
This research has been carried out using the deductive approach, as the time taken by the research for research can be reduced to a great extent and maintains a lower budget as well.
The design that is present in a research helps the researcher in completing the process in a simplified manner. There are three design types that are available to the researcher namely primary, secondary and mixed design method. The design that is primary in nature allows the researcher in conducting surveys, studying the focus groups and conducting interviews as well. The secondary nature of research helps the researcher in collecting information from the newspapers, articles and other relevant articles as well. The design that is of mixed nature helps in gathering the data that are secondary and primary as well.
Justification
The following research had been conducted using the mixed method due to the fact that the researcher has used the primary as well as the secondary sources of data for conducting the review of literature. The data that is primary in nature has been done with the help of surveys so that it can be analysed and proper conclusion can be provided to the research that has been conducted.
The research process has been conducted properly, as the researcher had been able to understand the topic in a proper manner. There are basically three types of research types namely descriptive, exploratory and explanatory. The exploratory type of research evaluates the background of the research efficiently so that the process can be completed properly. The research type that is known as explanatory helps in establishing the relation between the variables so that the research can be conducted successfully. The type that is known as descriptive in nature allows the researcher in giving a proper explanation regarding the topic and the articles that has been collected for the research to be conducted.
This process of research has been conducted using the explanatory type, which has helped the researcher in examining the different variables that are present in the research process. Furthermore, the researcher had been able to collect the ideas on a proper manner s that the questions and objectives of the research can be framed in a proper manner.
This present research will be conducted by collecting the different journal articles that are present with respect to the topic. The literature that had been collected from the articles has helped the research to be conducted in a more authentic manner so that the risks present among the contractors regarding the novation agreement can be explained in a proper manner. This will help in authenticating the research process in a proper manner so that the study can be done in a complete manner.
The research has been done using the secondary sources of data. The data that has been collected through secondary sources has allowed the research to be conducted in a qualitative manner by taking in to consideration the pitfalls that are present in the novation agreement. The use of the secondary data has been done for the purpose of conducting the review of literature so that the existing studies can help the researcher in gaining better level of information regarding the topic that has been taken up.
This particular research has been conducted by taking in to consideration the secondary siources of data that were collected by the researcher. The articles had provided relevant information regarding the various agreements that are present in the novation agreement in the construction industry. The use of the relevant information has helped the researcher in presenting the data that has been collected in a proper manner as well.
The researcher has to maintain certain policies and regulations so that it can help the process to be completed in an efficient manner. The responses that had been collected from the population was not done using any external force, which might have changed the opinion of the population who had taken part in the survey process. The data that was collected from the respondents were unbiased in nature so that the analysis can reveal proper information based on which the recommendations and conclusion of the study can be done. Moreover, the researcher will make it a point that the data that had been collected from the population would not be published anywhere, which may hamper the commercial progress of the contractors. It will be stored in a safe place so that it can solely be used for the research process and after its successful completion, the data will be destroyed. The responses will also be collected with the consent of the sample population so that it does not have any influence on the opinion of the contractors.
Thus, in this chapter, it can be summarized novation is a serious problem for both the parties, as the previous and the existing ceases completely. As a result, all the terms and conditions in the previous contract go in vain, as it is replaced with a new contract with new terms and conditions. Developing a new contract results in providing new considerations to the original contract thereby, making it time-consuming and difficult. The consequences of novation are high as the parties involved have to incur risks in terms of design, novate and constructing contracts. The research aim and objectives developed in this chapter will be analyzed in the upcoming chapters.
This chapter is based on the previous chapter in which detailed study is being conducted in terms of the research topic. In this chapter, the independent and the dependent variable is identified based on which the overall chapter is conducted. This chapter contains in-depth information of the research topic and the information is provided from previously existing pieces of literatures and data. In accordance with the research topic, this chapter provides detailed information about novation agreement that is a part of the contract law and the factors associated with it. In addition to, the impact of novation on the associated parties is also analyzed in this chapter by considering the legal issues and contractual issues.
The very moment when the existing rights and obligations cease to exist is termed as novation. The definition itself suggests discharge of the original contract and replacing it by a new contract as per Rhone v Stephens [1994] 2 AC 310, 322. Along with replacing of the original contract with the new contract, novation agreement also highlights the inclusion of a new or a third party and exclusion of the already existing party. According to Adamu, Mohammad and Osei, 2017, it can be said that novation is one of the methods that can be used to discharge an existing contract. However, on the contrary, in simpler words, novation can be defined as the agreement in which the existing parties of a contract agree mutually and consensually for substituting the existing or the original contract by a new one. As a result, the obligations and rights that formed the original contract stops functioning right there and the new contract with new obligations and rights comes into action right there. In other words, in an existing contract, new contracts can be substituted for either between the existing parties or different parties. However, according to Radstock Co-operative and Industrial Society v Norton Radstock UDC [1967] Ch 1094 both the parties need to discharge the contract mutually in the case of novation agreement. Two elements form the base of the novation elements. They are substitution of a new debtor or debt and discharging one debt or debtor. The Indian Contract Act, 1872, Discharge of Contract signifies termination of contractual relationship between the two or the associated parties. Therefore, once the contract stops operating, it is said to be discharged due to which the associated obligations and rights come to an end on the spot. From a layman’s perspective, novation can be defined as the situation in which the existing parties agree mutually for substituting the existing contract with a new one.
As stated by Caltex Ltd v FCT (1960) 106 CLR 205, novation is said to be a tripartite agreement due to which an existing contract between A and B is nullified or discharged followed by the establishment of a fresh and new contract between A and C. However, the terms and conditions of the new and fresh contract are usually similar to that of the original one. As the preceding of novation, B stops operations and B is no more liable to A. As a result, B is discharged from any further performance in the future by A. On the other hand, the liabilities developed by B and from which A gathered profit is now transferred to C. As a result of novation, C enjoys the benefits of the liabilities and is also responsible for performing the obligation that was inherited by B for performance. As mentioned in the article Olanrewaju et al. 2016, the transaction is known as a variation only when the terms of contract are modified by the agreement of the parties.
Until and unless the new contract is a kind that requires written rights and obligations or in a specific manner, it is not require for novation to be documented or drafted in a specific format or need not to be in writing under the rule of NT Power Generation Pty Ltd v Trevor (2000) 23 WAR 482. Oral documentation of novation agreement is functional and approved under such circumstances. However, as argued by Yue 2013, as novation is a contract, it is essential to have the intention and consent for performing novation. Also, it is important that novation is supported by consideration if novation is way of a deed. The concept behind novation contract was straightforward circumstances such as paying off debts in which the obligations that are novated are hardly affected due to the identity of the new party. Under certain circumstances, the early case law of novation handled situations in respect to paying off debts that are regarded as one-off obligations according to the application of Noonan v Martin (1987) 10 NSWLR 402.
Construction industry is one such sector that highlights the classic sense of novation. According to Salpeas, 2013, either the employer shifts the interest of a project to a relevant company or the company sells the interest of the project to another company. Under these circumstances, one of the parties is easily interchanged by another party. In the recent years, the employers of the construction industry, aimed towards having the best of both the worlds by including their own consultants before appointing the design and building the contractor. However, on the contrary, followed by this, the selected contractors are novated for designing and building a contractor those accepts the whole responsibility of designing by including any design carried out by the consultants before the appointment. As a result, new situation are developed that differs largely from the classic novation because both the contractor and the employer has different set of interests as ruled by Sheperd v FCT (1965) 113 CLR 385. As in classic novation, the employer is not discharged from the picture but retains the interest in the project. As a matter of fact, the obligations of the consultant changes even the novation fails to mantion this in the contract.
Though the meaning of sub-contracting, novation and assignment are somewhat, there lies little differences thereby, making them different. Understanding the difference in concepts between sub-contracting, novation and assignment helps in better use of novation agreement in contract law. As mentioned in the article by Liu, Skibniewski and Wang, 2016, in many contracts, it is not significant to know whether a party performs the obligations by himself or the obligations are performed by other parties, that is, the sub-contractor, instead of the original party. As a result, the original contractor is responsible for the obligations due to the contract because of the performance and burden of the contract may not be assigned. This is known as sub-contracting, as the contract that was given to the original party is given to a third party without transferring the rights and obligations as per Norman v FCT (1963) 109 CLR 9.
However, on the contrary, the concept of sub-contracting differs from that of assignment. The concept of assignment highlights the transfer of the benefits of B to C of one or more than one contractual rights and obligations that is owed by A to B. This sheds light on the advantage of the benefit of the performance rather than considering the obligation that is associated with performance. As a result, the original contract formed between A and B remains intact and continues to function. However, as per Comptroller of Stamps (Vic) v Howard-Smith (1936) 54 CLR 614 in the case of assignment, consent is not essential for make an assignment effective. A is bound by the assignment once A has received notice of the assignment. It is mandatory for A to pay to C in accordance with the notice of the assignment received by A. In this case B gives the benefit to C and A owes money to B for the performance of the contract between the A and B.
As discussed in the article by Portman, 2016, the concept of novation differs from that of sub-contracting and assignment. The concept of novation highlights the exchanging of a contract between A and B inyo a contract between A and C. Novation agreement can be achieved among all the parties such A, B and C. However, both A and B are not permitted to get rid of the rights and obligations that they owes to the other part under the contract until and unless such a contract exists. Such a situation is expressed in the context of a contract that cannot be assigned unilaterally. For example, if A has the responsibility of looking into the performance of B, A cannot look into the performance of C until and unless there is a novation.
There are different ways of discharging or ceasing a contract. One of the ways is by performance or tender. In this two parties are involved that is, the actual performer and the attempted performer or the tender. According to the judges in William Brandt’s Sons & Co v Dunlop Rubber Co Ltd [1905] AC 454, the role of the actual performer is when the associated parties to a contract work towards keeping their promise whereas the role of the attempted performance is when there is only a single offer for performing obligation in respect to a particular contract. According to Lazareva, 2018, another method of discharging a contract is by highlighting the impossibility of a performance that is divided into two sections, subsequent impossibility and inherent impossibility. By failing to keep a promise for offering facilities for performance is another method that is used for discontinuing a contract.
Under Paul v Constance [1977] 1 All ER 195 it was stated that operation of law such as death, merger, unauthorized alteration of the terms and conditions of written document and merger are also techniques of discharging a contract. In addition to, lapse of time, breach and discharging mutual agreement and consent are methods of discharging a contract. This is where novation comes into action where a contract is discharged by mutual agreement and consent between the parties.
In terms of obligation, novtion is defined as the abolishment of the rights and obligations by the substitution and exchange of the obligation by a similar one that abolishes or changes the initial on either by changing the principle or object or by exchanging the existing debtor with a new one or subrogating a third party in the rights of the creditor.
According to Norman v FCT (1963) 109 CLR 9, per Windeyer J at 26 in contract law, novation can be done in two different ways. One of the methods for doing novation contract is involving the change of parties. In accordance with the concept of novation agreement, the novation agreement includes the change of parties in which one party is substituted from the rights and obligations of the original contract and is shifted to the new party that is replaced by a new party.
Novation of a contract consists of two elements. One of the elements highlights discharging of one debtor or debt and another element is substitution of a new debtor or debt.
In simpler terms, a novation is defined as the involvement of change in parties in which one party is discharged from the rights and obligations and the new party that is included in the contract inherits the rights and obligations. For instance, a debtor, A, owes the creditor, B, certain amount of money. In the case of novation agreement, B instead of A agrees to accept the same amount from C. As a result, the original contract formed initially between A and B here ceases due to the inclusion of another party, C. This situation can be explained in three distinctive ways. Though the creditor and debtor are the same, a new debt takes the place of the old one. Another way of explaining the above situation is that a new debtor is substituted however, the debt remains the unchanged. Lastly, another way of explaining the situation is that the new creditor is substituted but the debtor and the debt remains intact.
A novation that includes the interchanging of a old contract by a new contract
According to Ruparathna, Rajeev and Kasun, 2013, this is another method of doing novation contract. In this case, the associated parties in the contract agree mutually to interchange the original contract with a new one. In light of Re Oasis Merchandising Services [1998] Ch 170, 174 the original contract stops to function and does not need to be performed with the inclusion of the new contract. One of the significant and crucial points that need to be considered is that the implementation of this principle of the original contract needs to be unbroken and subsisting.
However, according to J R Stevens Holdings Pty Ltd v Von Begensey [1992] ANZ Conv R 375 on the contrary in addition to, it is important to have irreconcilable incompatibility between the new and the old party in order to ensure that novation happens. It is important to declare the changes in the contract requisitely and in unequivocal terms while changing the objects of the contract. On the other hand, it is necessary for the new and the old rights and obligations to be incompatible at each single point in respect to each other. However, slight modifications that are made in the rights and obligations do not define novation.
Other than the aforementioned two ways, another method of getting a contract involved in novation is by including the subrogating a third party in the rights of the creditor. According to this method, the exchange of the third person rights of the creditor provides an opportunity for the third person to obtain the rights of the creditor against the debtor. In this case, the exchange of the rights and the obligations can be either conventional or legal. It is essential for the legal exchange to establish clearly in order to take the effect in the same manner and is not presumed unless it is expressed by law as per Neville v London Express Newspaper Ltd [1919] AC 368, 385. However, on the contrary, the conventional exchange highlights the need of consent of the third party as well as the original parties.
Novation agreement gives rise to variety of issues. The issues due to novation highlight what are being novated, analyzing the liability of the consultant and the problems of conflict of interest as per Polson v Wulffsohn (1890) 2 BCR 39.
In accordance with the the first issue of novation that emphasizes on what is being novated, performance is considered based on the obligations presented in the original appointment that needs to be performed. One cannot novate the obligations hat has already been performed as opinioned by Torkington v Magee [1902] 2 KB 427 at 430. For instance, A, B and C have to agree to the fact that B is discharging the debt that A owes to B due to which B agrees mutually to novate obligation of A and pay £100 to C provided if A owes £100 to B and B owes £100 to C. However, if A has already paid £50 to B before the initiation of novation agreement, then C can only demand £50 for payment following the action of novation agreement.
In context to the services that has been performed, no change is visible to them thereby, minimizing the scope of the consultant’s duty to perform them. However, a change in relation in terms of the services that is yet to be performed occurs due to novation. Followed by this, the duty of the consultant is now inherited by the contractor but it must be noted that the concern and interest of the contractor is different to those of the employers. As a matter of fact, the content of the duties might be questioned along with influencing the way the duties are performed by the consultants. If there had been no novation, the services expected by the contractor differed from those the employer would have required or expected. Another issue due to novation is that some of the services of the original appointment might not be suitable for an engagement by the contractor as ruled by Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1993] UKHL 4. Upon rise of a dispute with a contractor, the employer is provided assistance. This kind of obligation is found in majority of the services that has standard form of appointment for the individual building professions. As a result, the consultant is strictly prohibited from performing the service but can offer help or provide assistance in the dispute with the employer.
According to Sarhan et al. 2018, the second issue is to analyze the liability of the consultant. Keeping in mind the benefit of the employer and not the contractor, the consultants perform obligation before novation agreement. The pre-novation obligations are the liability of the consultant for the performance as per Tolhurst v Associated Cement Manufacturers Ltd [1902] 2 KB 660, 668. Thus, it needs to be measured in comparison to the duty of the consultant owed to the employer but not the contractor because the contractor was not a party at the time of developing the contract.
Another pitfall due to novation is the problems in terms of conflict of interest that the consultant find themselves in relation to the services that is yet to be performed. Therefore, it is essential to differentiate between the situation before and after novation. As a result, the consultant is not answerable to both the contractor and the employer during either stage that is, before and after novation. This is because of the existing risk involved stating that the consultant is unable to perform the appointment without breaching it. During the time of appointment, the consultant might agree that with time novation agreement might take place as per Goodridge v Macquarie Bank Limited [2010] FCA 67 . As a result, duties of care in tort might rise but within the contract the consultant should not owe any duty to the contractor until and unless it engages the contractor practically.
The pitfalls and issues of novation can be explained in reference to the case of Blyth & Blyth versus Carillion Construction Ltd.
The case of Blyth & Blyth versus Carillion Construction Ltd included the design and construction of a leisure development in Edinburgh. This case highlighted a novation agreement that had the purpose for placing upon a consultant responsibility for all the services that are performed before the novation agreement performed by the contractor. Proceedings were commenced against the contractor for not paying fees by the consultant. Cross-claim of breaches was done by the contractor that took place before novation. As a result, the Court gave the verdict that the contractor is not able to bring proceeding against the consultant. This is because no loss was encountered or suffered by contractor for which the consultant owed a duty to the contractor.
This concept was implemented by the Court in Blyth & Blyth and was mentioned by Lord Hoffman in South Australia Asset Managemet Corporation v York Montague Ltd. The abstract lack the duty of care in terms of what the valuer owes.
According to the Blyth & Blyth versus Carillion Construction Ltd case, in accordance with the clause presented, Carillion’s claimed that the contract was written again because the word contractor was used in the place of contractor. This modification led to nonsensical results according to the Judge thereby, resulting in conflict of interest due to advice in one hand on the employer and on the contractor as well. Due to this, the Judge the gave the verdict of inherently unlikely because the intention aimed to re-casting of the duty performed and awed to the employer as the duty is owed by the contractor.
As opined by Curtis, a contract maybe defined as an agreement which is legally enforceable. Thus all contracts are agreements however all agreements cannot be categorized as contracts. In order to ensure that an agreement is a contract, legality is an absolute essential. Legality is brought in through an establishment of the elements of a contract which are namely, oneness of mind, agreement, consideration and the intention to create legal relationships. This is the same as considering that an agreement that does not have one or more of these elements would be deemed to be lawfully valid contract. Moreover it is absolutely essential that all parties to such a contract are given valid consideration for the obligation that they would ideally undertake. A novation contract is one such contract where the obligations of a previous contract are amended. Thus, it forms a new contract while carrying over the unchanged obligations in the previous contract.
The obligations of parties to a contract are described under the various terms of a contract. According to Andrews and Fan, the terms of a contract can be assessed to be for two types, implied and express. In case of express terms of contracts these are terms which are incorporated into the framework of the contract and these obligations are explicitly specified in the contract. Thus these are clearly set out in the words of the contract itself. Implied terms on the other would be terms of a contract which are not explicitly incorporated into the wording of the contract but it would form a part of the contract as a supplementary obligation which would have to be observed in order to ensure that the explicit terms are adequately discharged. These terms are consolidated and agreed upon at the beginning of the execution of the contract and cannot ideally be amended unless the parties to the contract agree upon the same. Thus, in most ideal cases of contracts the parties to the contract remain the same throughout the execution of the contract. However, there are times when after the commencement of the execution the parties to the contract assess that a third-party would be able to discharge the duties of one of the parties more adequately. In such a case a contract can be entered into conferring the obligations of that party to the contract to a third party. In these cases a new contract is formed stating that the third party would discharge the duties of one of the parties to the contract. Resultantly the obligations of the third party are undertaken by the new designated entity and a new contract is thus formed. This is known as a novation contract and it can only be implemented through an agreement of all parties involved in the same. These contracts substitute the obligations of one of the parties to the contract and thus create a situation where a new entity is responsible for the same. However substitution of such rights and obligations can be problematic especially in cases where the same is related to construction projects as observed by Lam, Peter and Clever. These projects have designated responsibilities for parties involved in the construction project and these include various modes of payments as well as observed by the court in the landmark judgment in Neville v London Express Newspaper Ltd. A substitution of rights would dictate that the substitution of various receivers of these payments. Thus it leads to a cumbersome process for all parties involved in assessing the payment modes of the same.
As opined by Brodec and Václav, novation contracts are also categorized into two segments these are ab-initio novation and switch novation. The first of these, which is known as ab initio novation considers that the third party designated to undertake the responsibilities of this particular party has taken the same from the inception of the contract. Ab initio refers to and expression meaning from the beginning. Thus this form of novation contract negates the fact of the party (whose obligations are being substituted) was ever obligated to perform duties under such a contract. This leads to an ambiguous situation where the operation of such a party is almost completely negated unless only a few of these obligations are substituted. The other form of novation contract is a switch novation which is better indicator of the practical transaction taking place. This form of novation contract records the passing of all or certain obligations of one party to the contract to a third party as laid down in the landmark judgment in Norman v FCT. Thus showing that initially the party whose obligations are being substituted was a part of the contract and was tasked with discharging these obligations under the contract this was reiterated in the case law Holroyd v Marshall. The first problem with a novation contract, as observed by Alidousti et al., is that in case of contract the parties to a contract are an essential that must remain constant. The substituting of rights and obligation of parties take into account the change of flow of finances from the original entity to the newly designated entity. Thus it would be essential to assess the extent to which these considerations should flow from the original entity to the newly designated entity. This creates a problematic situation which states that these parties would be uncertain about the payment mode and the flow of finances while the execution of the contract is taking place in practicality. Other than monetary consideration all other forms of consideration would also have to be adjusted as per the new designated entities interests and the entity would have to consent to same as observed by the court in Goodridge v Macquarie Bank Limited.
At certain instances novation of a contract can also amount to a unilateral assignment of obligations under a contract to a designated third party as seen in the case Kakara Estate Ltd v Savvy Vineyards 3552 Ltd. These instances go against the formation of a new contract which basically dictates that all contracts must have consideration for all parties involved in a particular contract. This means that in the absence of consideration for all sides the same would be an invalid contract and thus would leave the designated third party devoid of any remedy in case of compensation relating to the obligations discharged under the contract as held in the case Paul v Constance. Thus it would mean that such a contract would not be enforceable in law.
The final most important point for consideration is the effect a novation contract has on the stipulated team management of the construction. When agreeing upon a construction contract the parties ideally agree upon the teams that would manage the contact. Construction projects are usually undertaken as long term investments and the eventual execution of the same takes a considerable amount of time. Thus the personnel to be employed for such projects, in the managerial positions, are pre-determined. These individuals are from the parties to the contract. Thus, in effect when a novation contract substitutes the obligations of one party and confers them on another designated third party the managerial team of both these parties would also change. Thus, the designated third party would be giving the managerial personnel for the observance and discharge of their obligations under the novation contract. Thus ideally this would dictate that the managerial team envisaged at the inception of the contract would change and thus the same would be effectively a change of the original terms of the contract. According to Marinescu, these parties would thus face a variation in the initial agreement between the parties. The same cannot be endorsed under contract law as observance of the obligations under a particular contract would not include variations to these terms. Thus, novation contracts pose such a situation that the original contract itself would be at jeopardy. In such a situation the court would deem the contract void ab initio and thus the same would result in the negation of the new contract formed between the original parties and the designated third party.
Sub-contracting is immaterial to the extent where the contract party has to perform the duties or have to delegate the duties towards others so that it can be fulfilled by a third party. The third party is known as sub-contractor who helps in carrying out the duties on behalf of the main party. This makes the main contractor liable under the obligation that the performance or the contract cannot be assigned.
Novation is the process through which the contract between two parties that is A and B can be transformed in a new contract between C and A. This can only be done with the agreement between A, B and C whereas A or B cannot rid themselves from the obligation that is mentioned in the contract. This is due to the fact that the contract burden cannot be assigned to C until there is a novation agreement between them.
In the modern time, it can be seen that the employers have attempted in engaging consultants so that it can help in building up the agreement in a better manner. The consultants are then novated to the contractor so that they can carry out the duties and responsibilities regarding the design before the appointment have been done. With respect to Blyth & Blyth Limited v Carillion Construction Ltd [2001] 79 Con LR 142, it can be seen that it involved construction and design of a leisure agreement in Edinburgh so that the responsibility of the services can be placed on the consultant and the novation services can be carried out by the contractor. It was seen that the consultant filed a case against the contractor over not paying the fees. The court was of the opinion that the contractor was not able to put the proceedings forward against the consultant, as the contractor did not suffer any loss for the duty that was owed to the contractor.
The novation case in Blyth & Blyth contained the following clauses based on which the argument was done. It also contained the scope of the duties that were presented to the contractor. It was concluded that the liability of the consultant in the agreement after or before the novation date was present and the consultant had agreed to perform the appointment in lieu of employer. In Clause 3 of the novation agreement, the consultant had agreed to do any kind of services that was given by the employer. The claim that was done by Carillion in the contract was that the word employer had been substituted with that of contractor and the judge pointed out that the interest was conflicted by the employer and the contractor. This led to the decision of the judge that the duty that was owed and performed to the employer was same as that of the contractor.
The principal of novation states that the contract of fabrication and design with respect to certain items has to work in prior to the main contract. This helps in saving the cost and time as well. It also decreases some of the risks, which can be explained in the next 4 steps:
The specialist (S) has to give a contract to the Principal (P) regarding some particular work (W);
The main contractor (MC) needs to undergo a contract with P so that the same work assigned to P can be done by S;
S has to agree to do W with MC;
S and P has also agreed to terminate the contract.
If S and MC are provided the payment in full and S has done the W for MC, then it is the obligation of MC towards P to complete the work, which will result in no problem whatsoever. There will be problem if:
Theme 1: S or MC have refused to enter the subcontract
There are two types of arrangement that can take place within this industry. Firstly, S and MC have to undergo a new subcontract and the second one is where P can assign MC the contract that is present between S and P.
The first arrangement can be demonstrated through a clause that can be included within the contract of S and P where it is stated that S will make the subcontract with MC and a contract clause between MC and P that states that MC will undergo a subcontract with S. In making the contract between S and P, the identity of MC is not known and the clause of MC and S is that they have to enter in to a novation agreement where MC and S will be both the parties.
The problem with any kind of agreement is that it needs to be involved in a new contract where all or one of the parties of the contract may enter or refuse it. This problem results in the contract that is included in the requirement of MC that it needs to enter in to a subcontract that has been nominated by P. In the novation agreement, the novated subcontractor does not exist and P also cannot force S and MC to enter in to a subcontract. Therefore, if S and MC does not enter in to a subcontract, then the contract will be under repudiation by MC.
The second type of arrangement can be taken up in he recommended precedents where it has to be an assignment rather than novation. P simple assigns the contract to MC instead of S and P and since MC has agreed to accept the assignment, there is no way in which MC can avoid the contract with S based on disagreeing on accepting the assignment. The subcontract between S and MC will come in to existence when P gives a notice regarding the assignment to S and MC. The subcontract between S and MC will be in existence and operating under the law without S or MC doing a thing.
It can be stated that rights and not liabilities can be assigned which is not the case in Calaby Pty. Ltd. V Ampol Pty. Ltd. [1990] 102 FLR 186, Holland-Stolte Pty. Ltd. v Bill Acceptance Corporation LtdandPrincess Theatre Holdings Pty. Ltd. [1992] 11 ACLR 181, Impediments to Assignments, Nyuk Yin Chin [1992] WALR 123.
Theme 2: Subcontract between S and MC is terminated before the W is completed
When the assignment in the novation is distinct, then the problem needs to be overcome so that S or MC can refuse to enter in to a subcontract. Therefore there is no mechanism through which there can be a repudiation between S and MC in making the subcontract coming in to existence. The termination of the subcontract is the same where the contract is created through assignment or novation agreement.
S will agree with P that he will perform the work for MC and will underwrite P in case there is a failure by S in completing the work. M will go in to an agreement with P so that the subcontract with S can be terminated without any cause. When the subcontract has been terminated by P, then there are three options where firstly another subcontract can be nominated by P in finishing the uncompleted work, secondly the main contract can be varied by P by omitting the main work and thirdly there has to be a given consent by MC that p has to complete the work.
Theme 3: S does defective work
This can be illustrated with the help of a case Fairclough Building Ltd. v Rhuddlan Borough Council [1985] 30Build.L.R. 34. The subcontract that was nominated was terminated over the question whether MC or P had to bear the cost of correcting the work that was defective and was given by the nominated subcontractor. The court was of the order that P had to bear the entire cost of proceeding. When the work done by S is defective in nature then MC may recover the damages from S with respect to the case that has been mentioned above. This may lead to the fact that MC may terminate the subcontract with S and put the entire burden on P as well.
Theme 4: MC, S or P becomes insolvent
MC will be liable to S if P becomes insolvent. This is due to the fact that MC is under obligation to S to work, which was done by S as there is a subcontract in existence between MC and S. In the recommended precedent, MC is currently liable to S, as the work has to be done for MC by S after the subcontract has been assigned.
If by any chance there is an insolvency case filed by MC, then S under no circumstances can claim any duties against P. In the recommended arrangement, the rights can be retained by S to recover any amount that is present in P before the assignment.
In the case of Hillcrest Homes Ltd v Beresford and Curbishley Ltd, it was seen that Hillcrest wanted to purchase the design of a modern 5 bedroom house in Sleepy Hollow that was located in Prestbury. The structural engineer was appointed as Howard Taylor Associates (HTA) and Beresford and Curbishley (B&C). The completion of the house was expected to be in September of 2012. The contract was done using the JCT Design and Building Contract, 2005 edition, Revision 2:2009. It was provided that the appointment of HTA will be novated by B&C and that a draft of the agreement was also attached.
However, it was seen that the appointment of HTA was not under the obligation of the novation agreement and the topic of site meetings was missing from the novation agreement. It was signed eventually by HTA in 2012 of October after a month of the completion of the project. B&C at this point of time had refused to sign the agreement and stated that there was no contract between HTA and the issues regarding the structural design were the responsibility of Hillcrest.
The verdict that was given by the court was that the novation agreement between the parties was contemplated during the time of the building contract that was undertaken. This has resulted that HTA was in to a relationship with B&C through a contract when the work was progressing and that they would be liable towards B&C for the breach in their contract duties. Moreover, the consent of the novation agreement with B&C happened at a later date and not during the time of completing the project.
From this case analysis, it can be seen that the project managers regarding the legwork of the contractors cannot be assumed. The building contract for the novation of the design consultant had failed due to the fact that HTA had signed the agreement at the same time as well. It was assumed by B&C that Hillcrest had taken the consent of HTA, as they were appointed first. It can also be inferred that the plan for proper procurement is necessary among the employees so that the design consultants can be novated towards the design and build contractor. It will also result in reducing the risk of Hillcrest as well.
B&C in this case benefitted, as they did not accept the novation agreement. Nevertheless, in other cases it can be seen that failed novation have resulted in the contractor to be in an unsatisfied situation, as claim were being made to recover the economic loss. An example of this would be Galliford Try Infrastructure Ltd and another v Mott MacDonald Ltd, where the appointment of the engineer was never completed. This resulted in no claim made by Galliford against the engineer for the delays and the losses that were being suffered due to the heavy reliance on the advice of the engineers.
Conclusion
Novation is an area in contract law which is subjected to long standing concerns because of lack of certainty in relation to transfer of consultants’ responsibility, the conflict of interest between the consultants and to different clients and difficulty in adequately demarcating the duty of the consultant to one client forms the duty which is owed to the other client. Various bespoke novation agreement in circulation have failed to address the risk and have created onerous obligations on the part of the consultants. There is not much doubt in relation to the fact that general concerns have been exacerbated with respect to the industry wide reaction relating to the case of Blyth & Blyth in which it had been seen that the lawyer of the contractor redrafted the novation agreement for the purpose of including additional clauses with an attempt to allow contractors to have reliance in work which has been undertaken by the consultant for the original employer and claim losses which have been suffered in relation to reliance irrespective of the fact that the losses cannot have been suffered by the main employer for whom the work was to be done. In relation to a clinical point of view, a few novation agreements seems to be drafted intentionally to make the contractor pass on the risk of a bid which has been considered poorly or the requirement for rigorous design development in relation to the consultant team.
Even in case there are no onerous contractual provisions, there can still be significant misconceptions among a few legal fraternities. Various number of novation agreements which have been reviewed for the clients have an assumption that with respect to the date of novation, the contractor will substitute the original employer simply in relation to all aspects of the agreement. In case of appointment agreements employers have to be tested as a reference to contractors. The process is well and good in theory and can also be considered as working in situation where the contract is for the supply of goods. However an analysis of the effect which the alteration may have on the obligation in a document of appointment can create a few surprises. More often such as in case of one of such ill-conceived novation it can be derived that the consultant would need to supervise and inspect the work of the contractor, and to give instructions on behalf of the employer contractor, remedy work which is if an unsatisfactory nature and to provide advice to the employer contractor in relation to the deductions which are to be made from payments of the contractor. The question which would arise in the situation is that whether they would be treated as payments which have been made to themselves. Although the situation is simple, it is a kind of nonsense which is created all the time and the exact kind of ambiguity which causes concern. It is academic to speculate in relation to what a court may do in relation to such provisions. In the case of Blyth & Blyth the court had simply recognized that a find and replace terms causes ambiguity and absurdity. The topic for debate is that what future courts may hold in relation to the topic. A few judges may try to find sense of the nonsense and reach the basic of what had been intended by the parties and others may strike out anything simply which they consider as nonsensical. Irrespective of the outcome, the confusion in relation to drafting of novations are ample and need to be avoided.
Limited protection is provided to the contractors through Novation with respect to the risks which are taken by them when they are made responsible for the design which has been prepared by the consultant of the employer. The benefit of service is lost by the employer with respect to its consultants in Novation and therefore it may be required on the part of the consultant to act in a way which is not in the best interest of the employer. In theory novatation should not be problematic for the consultant and where the Novation agreement does not result in any retrospective variations with respect to the scope of its conflicts of duties and interest. In relation to the case of Blyth & Blyth case, it is of much significance for the parties to take into consideration very carefully the service list which is to be made a part of the appointment and not include limited services or services in relation to pre-Novation period which cannot be considered to be completed by the contractor. It is now an accepted practice to have novation of consultants, designs and build contracts and it provided benefits to both contractor and employer if it is drafted in a proper way and its limitations have been identified.
In addition, it is important for the contractors to ensure, irrespective of cost and time considerations, that a fully considered scheme has been represented by a build and design proposal which complies with the requirement of the employer who has to match a price. It is general course for contractual documents to be drafted in a way as to provide an obligation to the contractor to comply with the requirement of the employer not taking into consideration of any qualification attempted which has been provided in the tender proposal of the contractor. The requirements of the employer have to comply with for lump sums with no adjustment have in relation to variations. Thus the risk which is imposed on the contractor is high and this is because any tender which has been submitted on a design and build manner have to be made provisions as much as possible for the problems which occur with respect to such procurements.
Another pitfall due to novation is the problems in terms of conflict of interest that the consultant finds themselves in relation to the services that is yet to be performed. Therefore, it is essential to differentiate between the situation before and after novation. As a result, the consultant is not answerable to both the contractor and the employer during either stage that is, before and after novation. This is because of the existing risk involved stating that the consultant is unable to perform the appointment without breaching it. During the time of appointment, the consultant might agree that with time novation agreement might take place. As a result, duties of care in tort might rise but within the contract the consultant should not owe any duty to the contractor until and unless it engages the contractor practically
In order to ensure operating of novation, it is crucial for the old contract to be in action. This is both significant and critical because only upon the abolishment of the old contract by modifying the principle conditions and object and making them incompatible at each and every step, the new parties are independent from the rights and obligations of the original contract. As a result of the achieved independency, the parties have the ability to undertake new obligation as mentioned in the substituted and new contract. Being incompatible for the contract suggest that the two obligations cannot stand each other thereby, ensuring that each of them have independent existence
In context to the services that has been performed, no change is visible to them thereby, minimizing the scope of the consultant’s duty to perform them. However, a change in relation in terms of the services that is yet to be performed occurs due to novation. Followed by this, the duty of the consultant is now inherited by the contractor but it must be noted that the concern and interest of the contractor is different to those of the employers. As a matter of fact, the content of the duties might be questioned along with influencing the way the duties are performed by the consultants. If there had been no novation, the services expected by the contractor differed from those the employer would have required or expected
The process of Novation is generally not understood with respect to the employers, contractors and consultants and the most recent case law which is available in relation to the matter is that of Blyth & Blyth has rather than helping have exacerbated the understanding. There are many critics who believe that that the judgement provided by the court in this case is incorrect. In addition there was over-reaction in relation to the decision with respect to certain element of legal profession. There is a primary issue in the construction industry as to how the “novel” Novation agreements have to be practically applied. The primary problem which novation in middle of a construction project causes is that it not only changes the structure of the project team but also changes the relationship between team members. There is often a period of uncertainity at a point of novation when the consultants may face a dilemma of finding themselves in a position where they are acting for two masters at the same time irrespective of what has been provided through the novation agreement. This increases pressure on the design team and also creates a risk to which the consultants are exposed in relation to additional liabilities by the manner in which they address the employer and the contractor. Claims in relation to the project in case the design term had been found to be working in close proximity with an employer for various years. Even where there has been a use of CIC switch novation consultants have to be alert for circumstances which can render most favourable agreements of novation to be null and void.
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