Building Blocks - What is novation?

What is Novation?

Novation is the substitution of a new contract in place of an old one. The process involves the rights and obligations of one of the original parties to the contract being transferred ('novated') to a third party; that third party 'steps into the shoes' of one of the original parties.

In a construction context, consultants (most commonly those involved in design) who were originally appointed by the employer are often novated to the contractor, when the contractor enters into a design and build contract with the employer. 

Types of Novation

There are two types of novation.  These are known as “ab initio” and “switch”, although technically a "switch" novation is not a novation. 

Ab initio

The employer transfers its interest in a design consultant's appointment to the contractor. The contractor steps into the shoes of the employer as far as the consultant’s appointment is concerned and is treated as if it (the contractor) was always a party to appointment.

The consultant becomes liable to the contractor for design services it carried out for the employer prior to the novation.  The contractor becomes liable to the employer for all the design of the works  (both pre and post novation). 

Employers favour this type of novation as it means that that they can hold the contractor responsible for any design defect.  There is a 'one stop shop' for design responsibility.

Employers usually also seek a collateral warranty from the consultant. I will deal with this in a subsequent blog. 

Switch

At the point of novation, the consultant’s liability to the employer switches to the contractor. The contractor agrees to step into the shoes of the employer only from the point in time of the novation. The consultant is responsible to the employer for pre-novation design services and the contractor is for responsible for post novation design services. 

Even though the Construction Industry Council has recently issued a "switch" novation, this form of novation is not attractive to employers.  This is because if there is a design issue, it has to determine whether it relates to pre or post novation design and pursue either the consultant or contractor.