Novation Agreement 

Novation is the transfer of contractual rights and responsibilities from one party to another. While the benefits of a contract can be transmitted by assignment, the parties must use a novation agreement to transfer both the benefits and the liabilities.

A novation happens when one contract is canceled and replaced with a new contract in which the original contractual duties are carried out by different parties. In the context of building design and construction, novation typically refers to the process through which design consultants are first engaged to the employer  but later 'novated' to the contractor.

This is common on design and build projects where the design team is appointed by an employer to conduct preliminary studies or prepare a concept or detailed design, but when a contractor is appointed to carry out or complete the design and construct the works, the design team (or a part of the design team) is novated to work for them.

This can be advantageous to employer s because it preserves continuity between pre-tender and post-tender design while leaving the contractor solely responsible for designing and building the project.

The procedure of novation does not hold a contractor liable for any design work done for the employer prior to novating their contract. To accomplish this, the building contract must clearly declare that the contractor studied and adopted the design.

Documentation of the Novation Agreement

Without approval, a novation agreement is not feasible. If novation and the terms of the novation agreement were not agreed upon when the consultant was first hired, they are under no duty to consent to be novated. It is also critical that the primary contracts between the employer and the consultants, as well as the primary contracts between the employer and the contractors, have specific language requiring the contractor and the consultant to enter into the novation agreement.

To eliminate the risk of simply agreeing to an unenforceable agreement, a specimen form of the proposed novation agreement should be affixed to the original contractual instrument.

It is critical that any novation documentation is properly drawn up and makes clear which services consultants performed for the employer and which they will now perform for the contractor; otherwise, initial appointment agreements, such as a requirement for the consultant to inspect the contractor's work and report to the employer, may be rendered meaningless when they are in fact now appointed by the contractor.

Kinds of Novation

Standard: When two parties agree that additional conditions must be added to their contract, creating a new one.

Expromissio: This novation must involve three parties: a transferor, a counterparty, and a transferee. All three parties must agree to the new terms and enter into a new contract.

Delegation: One of the contract's parties transfers their responsibilities to a new party, legally tying that party to the contract's provisions.

Novation vs. Assignment

An assignment transfers rights or property from one person or business to another. However, the assignment merely transfers the benefits; any duties stay with the original contract party. The new party receives benefits and potential liabilities due to the novation.

Another significant difference is that novation requires the approval of all parties involved, which is why novation is nearly often accomplished through a tripartite agreement. Subject to the precise provisions of the contract, it is not necessarily essential to get consent in the case of an assignment.

Novation Subcontractor of Construction Contract

A novation agreement transfers a construction subcontractor's rights and duties from the first (in administration) contractor to a second (solvent) contractor.

Changing a consultant's appointment from the professional consultant and the employer to the professional consultant and the contractor under a novation agreement. A deed of novation is typically used on a construction project to transfer the appointment of a professional consultant from the employer and the professional consultant to the design and build contractor and the experienced consultant.

Novation Agreement Consideration

Most common Design-Build contracts allow for novation and include standard novation deeds. The following issues should be taken into account and handled by parties to a novation deed:

Release

The standard novation deed includes a general release in which the outgoing and continuing parties release each other from all claims arising from the original contract.  Parties should obtain clarification on the novation's impact on accrued rights, claims, and demands arising from the original contract, as well as all future rights, claims, and demands.

Warranty

The requirements of the standard deed of novation include a warranty by both the outgoing and continuing parties that the work completed by the continuing party under the original contract is in conformity with the provisions of the original contract.

Risk management

The crucial point is that the insurance program for the consultant must be properly structured to meet this potential gap.

Advantages and Disadvantages of Novation in Construction

Advantages of Novation are:

A Reduced Learning Curve: Working with the customer early on allows the architect to obtain a thorough understanding of the customer's needs. If the architect is not novated, this knowledge may be lost, and parts of the process may have to be repeated with a new design team. This can be damaging to the ultimate design of a complex or highly technical undertaking. Novation can give some economies of scale that the customer can benefit from in terms of the design team's learning curve. If the architect knows they will be involved throughout the process, not just during the pre-contract and tender stages, there is a chance of achieving a lower overall cost. Not to mention the time and money it takes to brief a new design team.

Reduced Contractual Risk for the Employer: The procedure of novation and the transfer of responsibility to the contractor implies that the employer contractually accepts minimal risk while yet having control over project design. Of course, exact contracts vary, but at the point of novation, the Design-Build contractor is responsible for all future design work, which can occasionally extend to cover all previous design work accomplished prior to the contract being granted (including any design errors). As the contract proceeds, the employer only has to deal with one company: the contractor. This streamlined method benefits the employer by removing the possible complications and hassles of interacting with many organizations to resolve issues.

Early design development improves cost certainty: Cost certainty is better in Design-Build projects when the initial employer's needs are most precise. Novation assists customers in achieving a well-developed design early in the process by providing the architect with clarity across the duration of their collaboration. If the architect is satisfied that the scheme will move forward and is not working "at risk," they are more inclined to develop the design further, providing for a more accurate grasp of costs during the tender stage and boosting total cost certainty.

The Contractor has more influence and control over the design: Traditional contracts have the potential for conflict between the contractor and the design team over who is responsible for flaws and whether they are the consequence of a design or construction quality issue. This often puts the employer in a tough position and raises the likelihood of the parties reaching a 'stalemate. 'Novation helps to avoid this problem; in an integrated design and construction team, the contractor is automatically responsible for resolving the issue. These concerns should potentially appear less frequently in a novated Design- Build contract because the designer and contractor worked closely to jointly develop and agree on the final design, as well as to ensure buildability and quality. Through the influence of design decisions at each level, the contractor is better positioned to manage and control the risk to quality.

Whereas The Disadvantages of Novation are:

The Contractor and Architect Must Have a Good Relationship: On every Design- Build project, the contractor and architect must collaborate closely, but this is more crucial when novation has occurred. Novation is frequently criticized for putting further strain on these parties' relationship. Without a healthy relationship, there is a larger possibility that the project will suffer and crucial concerns such as time and cost will suffer.