Novation in Construction Contracts - What Does It Really Mean - Lexology
Novation in Construction Contracts - What Does It Really Mean - Lexology
Novation in Construction Contracts - What Does It Really Mean - Lexology
Lexology
Novationinconstructioncontractswhatdoesitreallymean?
Australia August302013
Novationisasignificantfeatureofbuildingandconstructionprojects,particularlyinrelationtodesignandconstruct
(D&C)procurement.
Itisimportantforconstructionindustryparticipants(particularlyprincipals,headcontractorsandconsultants)tohave
asoundunderstandingoftheconcept,afailureofwhichcanhaveunintendedconsequences.
Whatisnovation?
Novationisalegalconceptthat,atitscore,aimstoachieveaprocessofsubstitution.Itisatransactionbywhich,with
theconsentofallthepartiesconcerned,anewcontractissubstitutedforonethatalreadyexists.
Theeffectofanovationistodischargetheoriginalcontractbetweentwoparties(thecontinuingpartyandthe
outgoingparty)andsubstituteitwithanewcontractbetweenthecontinuingpartyandanewparty(theincoming
party).Theincomingpartymustperformthecontractualobligations(underthenewcontract)thatwereformerly
owedbytheoutgoingpartyundertheoriginalcontract.
Forexample,itiscommonunderaD&Carrangementfortheprincipaltoengageaconsultanttocarryoutdesign
workspriortotheprincipalengagingaheadcontractortocarryouttheconstructionworks.Atsomepointduringthe
project(forexamplewhenthedesignhasreachedaparticularstage)theprincipalmaynovatetheappointmentsofits
designconsultantstotheheadcontractor.Novationfundamentallychangestheriskallocationintheproject,asthe
headcontractorgenerallythenassumesresponsibilityfortheentiredesign(includingthepriordesignwork).
Novationvsassignment
Novationisoftenconfusedwiththeconceptofassignment,howeverthesearetwodistinctconcepts:
Novationtransfersboththerightsandobligationsoftheoutgoingpartytotheincomingparty,whereas
assignmentisatransferofrightsonly.Itisnotpossibletoassigncontractualobligationstoanotherparty.
Novationrequirestheconsentofallpartiesinorderforittobevalid(i.e.bywayoftripartiteagreement).
Conversely,acontractmaybeassignedwithoutconsent(unlessthereisacontractualprovisiontothecontrary).
Novationgivesrisetoanewagreementonthesametermsastheoriginalagreement,withtheoriginal
agreementbeingdischarged.Onceanassignmentoccurs,theoriginalcontractisnotextinguishedand,
consequentially,theassignorwillremainboundbyanyprospectiveobligationsandliabilitiesunderit.
Novatedconsultantsbeware
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3/29/2017 Novationinconstructioncontractswhatdoesitreallymean?Lexology
MoststandardformsofD&Ccontractprovidefornovationaswellasincludingstandardnovationdeeds(forexample,
AnnexurePartDofAS49022000)(standarddeedofnovation).
Issuesthatshouldbeconsideredandaddressedbypartiestoadeedofnovationinclude:
Release
Theprovisionsofthestandardnovationdeedincludeageneralrelease,wherebytheoutgoingpartyandcontinuing
partyreleaseeachotherfromallclaimsinconnectionwiththeoriginalcontract.
Itisimportanttobeclearaboutthescopeofthereleaseanditstiming,andtotailorthedraftingofthenovation
accordingly.Afirstprinciplesunderstandingoftheconceptofnovationisessential.Alackofunderstandingcan
leadtounintendedconsequences.Forexample,inMWHAustraliaPtyLtdvWyntonStoneAustraliaPtyLtd(inliq)
theVictorianCourtofAppealwasscathingaboutapoorlydraftedTransferAgreement,saying:1
Insofarasitusesthenomenclatureoftransfer,ithasclearlybeendraftedandexecutedbyindividualswithout
acompleteunderstandingofthelawofnovation.
Therefore,partiesshouldseektoclarifytheeffectofthenovationonaccruedrights,claimsanddemandsin
connectionwiththeoriginalcontractaswellasallfuturerights,claimsanddemands.
Warranty
Theprovisionsofthestandarddeedofnovationincludeawarrantybytheoutgoingpartyandthecontinuingparty
thatthecontinuingpartysworkperformedundertheoriginalcontractisinaccordancewiththeprovisionsofthe
originalcontract.
Bewareoftherisksofsuchaseeminglybenignpromise.Thenovatedconsultanthasnowgivenastandalone
contractualwarrantythatitsservicescompliedwiththeoriginalcontract.Manyprofessionalindemnitypolicies
excludeindemnityforcontractuallyassumedliabilitywherethatliabilitydoesntalsoariseintheabsenceofthe
contract(forexampleaclaiminnegligence).Spotthepotentialblackhole,whichinsurancemightnotcoverinthe
eventofaclaim.
Managetherisk
Therefore,thekeypointisthattheconsultantsinsuranceprogramneedstobecarefullytailoredtoaddressthis
potentialhole.Dontletyourexpensiveinsuranceprogrambeanumbrellaforasunnyday.
Toviewallformattingforthisarticle(eg,tables,footnotes),pleaseaccesstheoriginalhere.
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