REUTERS | Maxim Shemetov

Ask the Team: Can you novate part of an agreement?

PLC Construction recently received an enquiry asking whether it is possible to novate part of a contract.

This question is relevant to several areas of construction law. For example, if a professional consultant enters into a professional appointment under which it provides services covering three disciplines, can you novate one discipline to a third party and continue with the professional appointment for the remaining two disciplines? (To illustrate, could you novate architectural services but not novate project management and CDM co-ordinator services?)

The legal dilemma

As the law stands, there is a risk that the courts would find that a purported novation of part of a contract did not take effect as the parties intended. That risk comes about because the “classical” analysis of a novation is that it creates a new contract, de novo (from the beginning), between the new parties.

If novation creates a new contract, and extinguishes the old contract, then this raises a question: if you purport to novate part of a contract, do you extinguish the existing contract and then create two new contracts, one between the original parties (A and B) and one between one original party (A) and a new party (C), or is it simply not possible to novate part?

Some academics argue that a novation always takes effect by extinguishing one contract and replacing that contract with another. However, the High Court’s judgment in Langston Group Corporation v Cardiff City Football Club Limited [2008] EWHC 535 (Ch) suggests that the courts may be able to interpret a novation agreement in a different way, which does not always extinguish one contract and create another. If so, it may be possible to novate part of a contract, but there remains some doubt as to whether this is possible under the law of England and Wales.

One possible solution

Practitioners in the construction industry sometimes resolve this dilemma by entering into two agreements:

  • A formal variation of the contract between A and B. In our example, varying the existing professional appointment to refer to only two disciplines.
  • At the same time as the variation, entering into a new professional appointment, between A and C (on the same commercial terms as the contract between A and B), referring to (in our example) the one discipline no longer included in the original professional appointment between A and B.

In practice, this solution is not always available to the parties. For example, circumstances may prevent the parties from entering into a new contract or mean that varying, as opposed to novating, a contract may have unintended consequences (from a tax, corporate governance or commercial perspective).

Best practice

Until the courts give clear guidance on whether a novation of part is possible, avoid a “partial” novation, unless it is essential.

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