REUTERS | Eric Thayer

It’s not our liability: we novated the contract!

What a perfect defence to a claim: being able to tell the claimant, sorry folks but you’ve got the wrong defendant! We novated the contract, so you need to go after the people that took over from us.

What is novation?

Novation is a familiar concept in the construction industry. It is, after all, common for an employer to initially appoint its own professional consultants and then novate those appointments to the design and build contractor. Novation may also occur where either party goes through some sort of corporate restructuring when it may, for example, transfer its interest in the project to an associated company.

Novation extinguishes the original contract and replaces it with a new contract in which the new third party stands in the place of one of the original contracting parties. As such the consent of all parties is absolutely essential.

A deed of novation is not always necessary

In an ideal world, a deed of novation should be signed by all parties… but what happens if the parties don’t execute any such contract? Can consent to a novation be inferred by conduct?

The simple answer is yes. A novation can occur in the absence of any formal deed of novation. Unless the contract is of a type in respect of which statute requires some degree of formality for it to be effective, it does not need to be in writing.

The difficulty in these circumstances is proving that a novation has actually occurred. This was illustrated in two recent TCC cases:

In both these cases the court decided that there was insufficient evidence to prove that the contract had been novated. In fact, in the Camillin Denny case, the evidence did not even pass the test for resisting summary judgment; that is the court found that the defendant did not even have a “realistic prospect” of establishing a novation. Following these cases, it is clear that consent to a novation can be inferred from the parties’ conduct. However, it remains open to question exactly what evidence is required before such consent will be inferred.

Cash flow is king, but contract formalities are important too

One of the issues that struck me in both these cases is that, at the time of the alleged novation(s), none of the parties appeared to address their minds as to who they were in contract with. This is perhaps understandable in the current market, where parties are less concerned with who is paying them and are more concerned that they are receiving regular payments, even though these payments may be coming from a third party with whom they do not have a formal contract.

Anyone who works in the construction industry knows how easy it is to forget about the contractual niceties of formally entering into a contract. Unfortunately, when things go wrong this can become a real problem: history cannot be re-written.

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