Deed of Novation

Deed of Novation:

Novation is a mechanism whereby one party can transfer all its obligations under a contract and all its benefits arising from that contract to a third party. The third party effectively replaces the original party as a party to the contract.

When a contract is novated, the other contracting party must be left in the same position as he was in prior to the novation being made.

A novation requires the consent of all three parties involved. However, consent need not be express and can be inferred from the conduct of the parties.[1] It is important to note that even where the parties expressly envisage novation to take place, this may not be enough for an actual novation to be implied.[2]

If novation is envisaged, the relevant contracts should provide for this and identify the terms on which the novation is to be concluded, which should be by deed if the principal contract is by deed. Initially, there must have been an appointment by the employer of the consultant in the first place, and that appointment must require the consultant to enter into a novation agreement to accept the contractor as his new employer.

The appointment continues – the contractor, as the new employer, has the contractual rights under the appointment to the performance of the services, and the consultant has the right to look to the contractor for payment of the fees payable under the appointment. The nature of the obligations of the parties to each other thereafter will depend on the precise wording of the novation agreement

A matter which the contractor needs to be particularly careful about is that he should not accept, if he can, a higher design responsibility to the employer, under the design-build contract, than the consultant has accepted under its terms of engagement by the employer.

The contractor is obviously exposed if he agrees a fitness for purpose design obligation in the design-build contract, whilst the consultant, whose terms of engagement are to be novated to the contractor and for whose design the contractor is to be responsible, has only accepted a reasonable skill and care design obligation on its terms of engagement.

As is the case with all contracts, in order for it to be a valid contract, consideration, amongst other things, must be provided. In most cases this is deemed to be provided through the actions of discharging the original contract and the contractual obligations. However, in most cases, parties will often use what is called a “deed of novation” – this will simply remove the requirement for consideration to be provided. This will remove the possibility of one of the parties claiming that the contract is not valid due to their being no consideration as the use of a deed removes the requirement for consideration in contract law.

Disclaimer

This article sets out a variety of materials relating to the law to be used for educational and non-commercial purposes only; the author(s) of this blog do not intend the blog to be a source of legal advice. Please retain and seek the advice of a lawyer and use your own good judgement before choosing to act on any information included in the article. If you choose to rely on the materials, you do so entirely at your own risk

[1] McIntosh & Son v. Ainslie (1872) 10 M 304

[2] In Galliford Try Infrastructure Ltd v Mott MacDonald [2008] EWHC 1570 (TCC) a contractor tried to recover losses from an engineer, in circumstances where a novation had been contemplated by the parties, but was not formalised. The novation had not taken effect and so the contractor did not have a contract with the engineer. The contractor had to try and bring a claim in tort and its claim was unsuccessful