No right to cash without deed of novation?

A common issue crossed my desk this month: a dispute had arisen on a typical design and build project where the employer was looking to recover costs from its D&B contractor, and the losses had been caused by a negligent architect who should have been novated to the contractor.  It had become clear, contrary to my client’s expectations, that the deed of novation had never been signed.

The question: if the contractor wants to recover sums paid to the employer from the architect without a deed of novation, can the novation of the architect’s appointment be implied to have taken place?

The answer: novation can sometimes be implied by conduct but it will not always be.

So what will the courts take into account? Consider:

• If it is clear when the novation is said to have taken place ie when did the parties act as though the architect was appointed by the contractor;
• Whether the architect’s appointment (in particular) envisaged novation and contained an agreed form of novation;
• Whether the scope of services or terms of the architect’s appointment were the same with the employer and with the contractor;
• Whether the contractor paid the architect for his work after the intended date of novation;
• Was agreement on the terms of novation ever reached?

For example, in Galliford Try v Mott MacDonald [2008] EWHC 1570, Akenhead J held that no novation had taken place.  The parties had been discussing but had never agreed a form of novation, and Mott MacDonald’s appointment did not contain a form of novation. However, in Enterprise Managed Services Limited v Tony McFadden Utilities [2009] EWHC 3222,  Coulson J said that it would have been easy to infer a novation by conduct because Enterprise had paid Tony McFadden Utilities “large sums of money”.

In a dispute situation, it is therefore worth bearing in mind that the absence of a novation agreement may not prevent a party from establishing that a novation took place.

However, parties should not rely on this at contract stage and should ensure that the relevant deed of novation is negotiated and signed. A properly drafted deed of novation will also protect the contractor from arguments that the losses it has suffered are different to those the architect envisaged when he entered into his appointment with the employer, and that there is no “black hole” in the contractual position.

But that’s another story…