REUTERS | Ricardo Moraes

“The Legend of Sleepy Hollow” – pitfalls of a failed novation

With design and build (D&B) now firmly established as the procurement route of choice for many UK building projects, novation is a popular way of ensuring that single point responsibility for design rests with the contractor. However, the recent decision in Hillcrest Homes Ltd v Beresford and Curbishley Ltd reminds us that we must not take it for granted. In that case, a novation agreement executed by the structural engineer after practical completion was held not to be effective to transfer its appointment to the contractor. As a result, the employer remained responsible for structural design defects as between it and the contractor.

Setting the scene

Hillcrest wished to procure the design and construction of a modern, 5-bedroom “eco-mansion” at Sleepy Hollow, Prestbury. It appointed Howard Taylor Associates (HTA) as its structural engineer in July 2010 and Beresford and Curbishley (“B&C”) as its D&B contractor in May 2011. Practical completion was achieved in September 2012.

The contract between Hillcrest and B&C (the building contract) used the JCT Design and Build Contract, 2005 edition, Revision 2:2009. It provided that HTA’s appointment (along with those of the other design consultants) would be novated to B&C. A draft novation agreement was also attached.

However, HTA’s appointment did not oblige it to sign the novation agreement and it was reluctant to do so. The missing novation was the topic of a variety of site meetings and correspondence throughout the course of the project. Eventually HTA signed it in October 2012, a month after practical completion. At this point B&C refused to sign it, arguing that it had no contract with HTA and that all structural design issues were Hillcrest’s responsibility.

In response to a demand to enter into the novation agreement, B&C commenced an adjudication and Hillcrest brought Part 8 proceedings. (For information on the adjudication aspects of this case, see Blog post, Setting the judicial cat amongst the adjudication pigeons.)

The denouement

The court held that the parties had contemplated novation occurring at the same time as the building contract was entered into. As a result, HTA would be in a contractual relationship with B&C throughout the execution of the works and would know, as those works progressed, that they would be liable to B&C for breaches of their contractual duties (which would of course be of material benefit to B&C). However, B&C had not consented to the novation occurring at a much later date, and certainly not after practical completion.

Accordingly, for the purposes of the building contract, HTA were an “Employer’s Person” whose design services were (as far as B&C were concerned) the responsibility of Hillcrest.

Timely reminder

The moral of this tale is a simple one: make sure all project documents are properly executed in a timely manner. This sounds obvious, but it is a problem that seems to be prevalent in the construction industry and often has a material and adverse impact on the rights and remedies available to the parties in the event of a breach of contract by one of them.

In this case, Hillcrest had procured the project on a D&B basis and would have expected to take advantage of the single point responsibility that D&B is supposed to offer. Instead, had a structural design defect arisen before practical completion, B&C would have had no liability (without more) to Hillcrest for any resulting losses or delays suffered by it. Indeed, B&C may itself have been able to raise a claim against Hillcrest for an extension of time and/or for loss and expense under the building contract. There may yet be a sting in this tail.

Other lessons

This case teaches us a few other lessons:

  • Employers/project managers: don’t assume the contractor will do the legwork. The building contract may state that the contractor consents to the novation of a design consultant, but that does not necessarily oblige the contractor to make it happen. The court held that B&C was not in breach of the building contract for failing to ensure that HTA signed the novation agreement at the same time as the building contract. B&C was entitled to assume that Hillcrest had already obtained HTA’s consent, since HTA had been appointed first.
  • Employers: proper procurement planning is key. This was a D&B procurement, which anticipated that the design consultants would be novated to the D&B contractor, thus minimising Hillcrest’s interface risk. However, one weak link (the absence of an obligation on HTA to enter into the novation) meant the plan fell apart.
  • Contractors: be careful what you wish for. In this case it benefitted B&C not to accept the novation. However, in other cases a failed novation may leave the contractor in the unsatisfactory situation of having to bring a claim against the consultant in tort to recover its economic loss. For example, in Galliford Try Infrastructure Ltd and another v Mott MacDonald Ltd the novation of the engineer’s appointment was never completed. As a result, Galliford had no contractual claim against the engineer for the delays and substantial losses it allegedly suffered, having relied on the engineer’s advice and made no (or inadequate) allowance within its contract price or programme for addressing the pile bracing and facade support problems that it ultimately encountered. Likewise, if a design defect appears after practical completion (perhaps even years later) the absence of a novation may leave the contractor unable to pass on liability to the true culprit, even though the defective design was carried out prior to its involvement.
  • Purchasers/investors/funders: ensure your due diligence is thorough. Make sure that you fully understand the allocation of design risk and responsibility, and check that any intended novations have in fact been effected. It can be a costly exercise subsequently working out who is responsible for a design element, investigating and rectifying defects and dealing with potential claims and counterclaims.

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