Some simple rules will make novation a smoother process
With the novation of consultants becoming increasingly popular, Chris Larkin, associate director, Brewer Consulting looks at the potential problems this brings.
The manner in which construction projects are procured has for many years been quite different to other industries.
Industries such as ship building, car manufacturing and rolling stock production all have a tradition where the same company designs and builds the product.
In the construction industry, however, design and construction have traditionally been divided: the owner engaging a consultant engineer to design the project and later employing a contractor to build it. This is due to the historical evolution of the industry and the professional division between those who design and those who build.
Owners have, however, moved away from the traditional approach favouring design and build. Some of the benefits of design and build are improvements in buildability, greater overlap between design and construction and better communication between the professions. But perhaps the most important benefit for owners is single point responsibility: one company taking responsibility for both design and construction.
Owners still engage consultants to develop the initial concept and preliminary designs before inviting tenders for design and build contracts. It is common for the appointment of the consultant to be novated to the contractor, where the rights and obligations under the initial appointment are transferred from the owner to the contractor. This is achieved by a tri-party novation agreement. Although such agreements are relatively simple, there are a number of matters that they should address.
There should be a clause stating that the owner releases and discharges the consultant from further performance of the obligations under the initial appointment and from all claims in connection with it, whether arising prior to or subsequent to the date of the novation.
Also, there should be a clause that releases and discharges the owner from further performance of its obligations under the initial appointment and from all claims and demands, accompanied by an acknowledgement of the amount that the consultant has been paid.
The novation agreement should contain a provision by which the contractor accepts the liabilities of the owner under the initial appointment and agrees to be bound by all its terms and conditions as if it were named in the initial appointment from the beginning.
It should also require that the consultant agrees to discharge all its obligations under the initial appointment and be bound by all its terms and conditions in favour of the contractor as if the contractor were named in the initial appointment in place of the owner.
The consultant must also agree that the contractor shall have the right to enforce the initial appointment and pursue all future or existing claims by the owner arising out of the initial appointment.
Novation can create a number of difficulties for the contractor; one being the negotiation of additional terms and conditions.
Clearly, the objectives of the owner during the initial concept/preliminary phase will be quite different to the aims of the contractor. The contractor will seek to place further obligations on the consultant in addition to those in the initial consultancy agreement. These may include deadlines for design documents, delay damages in respect of late submissions and a change in the standard of care.
The contractor might be unable to negotiate such terms prior to the novation if the consultant is assisting the owner in assessing the tenders and selecting a contractor, since it could create a conflict of interest for the consultant.
Post-novation, the consultant will be in a strong bargaining position and may well resist any additional conditions proposed.
Another problem concerns the standard of care owed by the consultant. Typical consultancy agreements require the consultant to carry out its work with "reasonable skill and diligence", whereas some design and build forms require the higher standard of "fit for purpose".
FIDIC's Yellow Book (1999) for design and build contracts states: "The contractor shall design, execute and complete the works in accordance with the contract, and shall remedy any defects in the works. When completed, the works shall be fit for the purposes for which the works are intended".
Unless the consultant warrants that its design will be fit for purpose, there will be a gap in the standard provided by the consultant to the contractor and that provided by the contractor to the owner. This gap is the contractor's risk, which it should take into account when tendering for the design and build contract.
It is important for the owner to ensure that, prior to award of the initial consultancy appointment, the consultant is, in principle, willing to work for a contractor of the owner's choice under a design and build contract. At such an early stage the method of procurement might not be finalised. Nonetheless, the owner should seek the consultant's agreement to avoid any future difficulties. Similarly, the owner must ensure, when obtaining tenders for the design and build contract, that the tenderer accepts the novation of the consultant.
The design and build approach coupled with the novation of consultants is becoming increasingly popular in the region. Whilst novation might appear relatively simple, care needs to be taken in its implementation and in the drafting of the novation agreement itself.