REUTERS | Mike Blake

Deeds of novation – or not!

To what extent is a deed of novation necessary in order to novate a contract? Can there be a valid novation without a formal deed of novation?

Novation – the basics

We are all familiar with the concept of novation and the all-important deed of novation that the parties sign in order to novate the contract from the original parties to the new parties.

As most infrastructure lawyers (and Latin scholars) will know, a “novation” means “new contract” – hence a novation is not a transfer of the contract or the parties’ obligations under it.  Rather, novation extinguishes the “original” contract and sees the creation of a new contract in which the “new” or incoming party, in essence, steps into the shoes of an “outgoing” party and takes up the rights and obligations of the outgoing party.

Can novation be inferred?

So how is the new contract created? Obviously, all parties concerned must consent to the novation, but obiter dicta in a recent TCC decision, where the court held that there was an express novation, also confirm that this consent may be inferred from the parties’ conduct. Novation by conduct is an often forgotten but long established principle. It arises from time to time in cases dating back to the 1960s when Lord Denning found, in Chatsworth Investments Limited v Cussins (Contractors) Limited, that it would be “very easy to infer a novation in the circumstances of this case”.

Enterprise v McFadden

These very words were repeated by Coulson J in Enterprise Managed Services Ltd v Tony McFadden Utilities Ltd, where the decisive conduct was two-fold:

  • The payment of monies: the incoming party, Enterprise, made a substantial payment to the original subcontractor, McFadden. The court decided these monies were, at least in part, payment for work done under the new, novated contract.
  • The circumstances of the later termination of the new contract: when Enterprise later terminated the new contract with McFadden it expressly confirmed the existence of the new contract and did nothing to limit its liability.

Enterprise clearly conducted itself as if the contract had been novated – novation by conduct could easily be inferred on the facts and had been agreed by all three parties concerned. It was possible to say when the novation occurred, what the circumstances of that novation were and there was evidence that the incoming party agreed that a novation had occurred.

Inferred novation and design and build

So are we about to see, in the absence of formal novation agreements, a raft of inferred novations of consultants on design and build jobs?

Probably not, as it is likely to prove to be difficult to establish precisely the terms on which such a novation takes place.

However, as Enterprise shows, it is possible. An inferred novation may be a design and build contractor’s only route of recourse against a defaulting design consultant in the event that the formal documentation has not been entered into.

As we lawyers never tire of saying, best to get it all down in writing now than to argue the toss about it later.

Risks

So the morals of the story:

  • Take particular care when receiving or paying monies to ensure that you do not become party to a new contract and find yourself assuming new and extensive obligations.
  • When novating consultants as part of a design and build scheme, take the safe option of a written novation agreement.

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