A Nod To Novation – Part Two

Challenges In Construction & Property

Published on January 27, 2020

This is the second entry into my two- part series on Novation, where I look into some more must-know case law for anyone seeking to novate.

When has a Novation taken place?

An area of much dispute is whether or not the Novation actually took place. It is sometimes unclear, causing the parties seeking to rely on the newly transferred rights and obligations suddenly finding themselves suddenly unable to do so. This was set out in the case of Camillin Denny Architects Ltd v Adelaide Jones & Company Ltd [2009] EWHC 2110 (TCC).

In February 2008, Camillin Denny was retained by Adelaide Jones to provide architectural services regarding the renovation of a building in Mayfair. Between July and September 2008, the parties held discussions regarding the novation of the contract from Camillin to Euro Constructions. The parties also corresponded regarding the extension of Adelaide’s services and revised fees for doing so. However, on September 2008 the parties had a meeting and were unable to reach an agreement.

Adelaide’s employment was terminated in February 2009, and in response Adelaide sought to recover its costs amounting to £131,161 by issuing a Notice of Adjudication against Camillin. Camillin argued against the Adjudicator’s jurisdiction, claiming that a novation had taken place in August 2008 transferring the obligations to Euro Constructions and therefore they were not the correct party. The Adjudicator found that there was not sufficient agreement between the parties to form a novation, siding with Adelaide. This ruling was upheld by Akenhead J in the enforcement proceedings.

Failure to complete a Novation agreement

Camillin is not the first time one party tried to argue that a novation did in fact take place; a similar scenario unfolded in Galliford Try Infrastructure Ltd v Mott MacDonald [2008] EWHC 1570 (TCC).

Galliford Try (G) was retained by a building development company (S) in January 2000 to be the design and build contractor of the redevelopment of the former Victorian Birmingham Children’s Hospital. Mott MacDonald (M) had been retained by a wholly owned subsidiary of S (L) in 1998 to provide structural and building engineering services, including major elements of the design for the project.

During 1999 and in the period leading up to G being retained, G and M had begun to liaise directly on the project. Shortly before G was retained, it employed a sub-contractor (R) to carry out and take over responsibility for the steelwork design in place of M. Discussions and negotiations took place with regard to novating M’s contract with S to G upon G being retained, but irreconcilable differences between the parties led to the novation agreement never being agreed.

The project was completed substantially later than anticipated and G tried to recover losses from M. However, the Court found that the novation had not in fact taken place. Without an effective novation agreement between G, M, and S, G did not have a contract with M. G’s only option was to try and bring a claim in tort, which was unsuccessful.

gilliford diagram

Just because G had planned to enact the novation, this was not sufficient. In the majority of circumstances there must be a clear agreement between the parties for a novation to take place.

These cases go to show that a novation should be a transparent and with consent from both parties for it to take place beyond doubt. However, the Courts have also taken the stance that this is not the only way for a valid novation to occur.

Implied Novation?

This concept was illustrated in Chatsworth Investments Ltd v Cussins (Contractors) Ltd [1969] 1 WLR 1 where Chatsworth entered into a contract with building contractors in 1960. In 1963, the contractor assigned all of its assets to the Defendant, who in turn changed their name to that of the contractor. Chatsworth, thinking the Defendant was the contractor, issued proceedings against them for damages due to breach of contract. Cussins sought to argue that because they were a different company, they did not owe any liability to Chatsworth.

Cooke J found that an implied novation had taken place when the contractor transferred all of its assets to the Defendant in 1963, and this ruling was upheld by Lord Denning on appeal where he stated the following:

“They wished to allege that there was a novation whereby the second company, if I may call it so, Cussins (Contractors) Limited (No. 2) made a new agreement with them to take over and to be responsible to the plaintiffs for the liability of Cussins (Contractors) Limited (No. 1). They said that this novation was to be implied from all the circumstances of the case. The defendants objected to the proposed amendment. They said that the alleged novation was too tenuous and was wanting in particularity. There is nothing in this objection. It would be very easy to infer a novation from the circumstances of this case.”

While this case took place 50 years ago, its findings were echoed by Coulson J obiter dicta in Enterprise Managed Services Ltd v McFadden Utilities Ltd [2009] EWHC 3222. It is clear from these cases that ordinarily a clear novation agreement is required, however it is possible for an agreement to be implied based on the circumstances. Though, considering no consent was given by Chatsworth, it follows that a novation of this kind could only be implied in very specific circumstances.

Given the case law as outlined above and in my previous article, it is plain to see that the best friend of a successful novation agreement is clarity. If engaging in a novation make sure there is a clear and formalised agreement from the parties, preferably by deed or standard form contract of novation. Finally, if in doubt, seek legal advice. Any confusion or doubt when carrying out a novation could prove costly indeed down the line.

Author Massimo Furlotti is a Paralegal with Silver Shemmings Ash and is a graduate of the University of Portsmouth (LLB Law). He is an experienced legal professional having spent several years handling contentious matters for a wide variety of clients.

 

Written by Massimo Furlotti
Massimo has spent several years as a fee-earning paralegal before joining the Construction department in August 2019. He graduated with a 2:1 in Law from the University of Portsmouth in July 2016, whilst working as a Volunteer Mediator alongside his studies.

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