Episode 43:

Hello and Welcome to the Part3 with me podcast, 

The show that helps part 3 students jump start into their careers as qualified architects and also to provide refresher episodes for practicing architects. I am your host Maria Skoutari and this week we will be talking about Novation vs Consultant Switch— PC2 & PC3 of the Part 3 Criteria.

Lets start by defining what is Novation:

Novation means ‘new’ – a new contract on the same terms (normally) as the previous contract and is a three-way agreement between the original client, the prospective client and the architect - under such an arrangement, the architects appointment is transferred from the original client to the new client so that after novation occurs the architect carries out their duties for the benefit of the new client and the new client takes on the payments to the architect. 

The most common scenario for novation is where the contractor is whole or largely responsible for both the design and the construction, most commonly found under a Design and Build Contract. In this scenario, what tends to occur is that the client engages consultants early to develop a design for the project on the basis that the design and build contractor will be able to produce a more accurate tender price from the works than if the design hadn’t been sufficiently developed.The contractor accepts all the obligation and liabilities that had been original clients under the appointment and the architects prior and future obligations/liabilities are now owed to the contractor. 

There are two types of novation: 

• A basic switch of employer from the client to the contractor
• And a novation ‘ab initio’, whereby the new client is deemed to have been the architects client from the outset.

The RIBA’s position is the ‘ab initio’ type should be avoided, and the RIBA recommends that you seek legal advice before entering into any novation agreement. The CIC Novation Agreement, published by the Construction Industry Council, is recommended for the a switch type novation agreement, and is the standard novation form recommended by the RIBA.

The reason why ‘Ab initio’ is to be avoided is because its legal wording has raised concerns with the architects obligations and position as it states that the expectation that the architect, at one stage was advising the client about tenderers for the building contract, and then would be acting for the contractor when the architect was giving this advice - if they were considered as being under the agreement with the contractor from the outset then this would cause conflict of interest and therefore this process doesn’t make sense and puts the architect in an extremely difficult position. 

What are the benefits of novation and why do clients and contractors tend to prefer it:

So clients tend to prefer novation for the design consultants they have initially engaged for the design stages in order to ensure a degree of continuity in the design effort and because novation offers a single point of responsibility. Now when it comes to the contractor, they tend to be reluctant to accept their role as the single point of responsibility to the client without the protection that is provided by being the direct client of the consultants who have produced the design. That’s where novation is preferred as it provides the opportunity to the contractor to take over the appointments of the consultants from the client. 

This process commonly takes place at or around RIBA Stage 4, after planning has been granted and at the time the building contract is executed. So the benefits of novation include that the rights and obligation of the original parties are transferred, with the original clients involvement ending and the contractor taking over the contractual right to sue as well as pay the consultants fees, as if they were their client from the beginning of the process. 

What are the risks under novation:

The key areas of risk under novation is that the architect must be confident in the financial strength of the incoming employer, the terms of the novation must be very clear and the architect should be wary of accepting an ongoing role performing services for the original client after novation. 

So when it comes to novation and the architects appointment it is a bit risky as there can be an expectation for the architect in addition to carrying out their services for the new client as if they have always been the client, the architect will also be expected to carry out post-novation services for the original client. The key thing for the architect is to make sure their fees will continue to be paid and that their liability will not be extended due to the novation. The risks for the architect can be reduced if the architect knows what the terms of their novation will be and what the terms of an ongoing agreement for services to the client will be. If there is any doubt that the party to whom the architect will be novated to isn’t financially stable then the architect shouldn’t go through with the novation. The architect should therefore ensure that provision is made to make sure that all fees are paid, either by the novation stating that it can only take place if all the fees due to date have been paid, or that the party to whom the contract is being novated accepts written responsibility for paying all the architects fees that are outstanding at the date of the novation. 

If for any reason the architect is given no option but to accept strict obligation to enter into a deed of novation on the client’s request, the architect could still refuse to comply with the request in breach of contract when its made, because if they do enter into the agreement and the documentation for the novation isn’t clear the architect may end up working without a clear contract with either party. This is definitely a very high risk route and shouldn’t be considered lightly unless the risk of carrying out services that won’t be paid for exceeds the risk of being sued for breaching the obligation to enter into the novation. The best way to avoid such a situation is for the architect to resist the inclusion of a novation obligation in the professional appointment. 

Now when it comes to architect services themselves, the architect should ensure and agree any changes with the contractor now new client, to the brief, changes in the architects role and responsibilities  and agree any additional fees before committing.

Now, what happens if the architect is to carry out post-novation services for the original client:

It is quite common for the original client to expect the architect to continue performing services for them after novation to the contractor, an example of such services is monitoring the construction phase and reporting on progress. This is not necessarily and unreasonable request  since the architect has all the knowledge of the project, but it is still considered as bad practice to do so. If an architect does end up accepting such an arrangement they should be aware of the conflicts of interest likely to arise and as such the wording in the novation agreement should be allowed for to suit.

The way in which clients tend to keep the architect to perform services for them post-novation can be either through the use of a collateral warranty with the architect since in essence the original client becomes a third party after novation and give up their rights to sue for breach of the professional appointment. Another way clients may keep the architects appointment is by including an obligation to provide further services in the novation deed itself or within the schedule of services in the professional appointment. Or the other way is the client may propose a supplemental services agreement, separate from the novation and collateral warranties. A key item to highlight here is that if the client does insist on one of these processes to go ahead with the architect having ongoing obligations to the original client may call into question the general effectiveness of the novation as a whole. 

So say this process does go ahead, and the architect does have an obligation to continue performing services for the original client after novation, to limit the amount of risk and conflict of interest, the architect should have different individuals working for the two clients and the novation deed should express the obligation to keep their work separate. If the architect feels this can’t be done they shouldn’t enter into an obligation like this no matter the pressure imposed as it goes against theirs Professional Code of Conduct. 

A possible solution to relieve the architect of such pressure, is to allow for a clause within the novation agreement outlining the possibility of post-novation services to the original client under a supplemental agreement which also considers the existence and resolution of conflicts of interest. If conflict does arise at any time, the architect should notify the client and contractor straight away.

What does a Novation Deed typically consist of:

A deed of novation should aim to be short and uncomplicated and should make reference to the architects ongoing services to the client, if applicable, and set out one a separate agreement as already mentioned. Under the terms of the novation the architect and original client should release and discharge any and all obligations and liabilities owed under the appointment and to avoid any misunderstandings it is best practice to list in the deed the pre-novation services performed by the architect that were obviously not performed for the contractor and to exclude such services from the scope of the novation. And for the avoidance of doubt there should be an inclusion within the deed removing the any implied term that the architect was always acting for the benefit of the contractor from the outset, the ‘ab initio’ type. 

That covers Novation, now lets look at what Consultant Switch is: 

Under Consultant Switch, the original appointment with the client is brought to an end and a new appointment is entered into between the architect and the contractor. A supplementary agreement will then be required between all three parties to permit this change. Under Consultant Switch the architect normally remains liable to the client for any breach of duty under the earlier appointment but won’t be liable to the client for any default in services performed for the contractor. 

An similarly with novation, the architect should make sure to review all their services, obligations, fees, responsibilities and so on when it comes to the new appointment in order to protect themselves and make sure to run their appointment by their PI insurers. 

So in essence the difference between the two methods is:

Consultant switch is when the architects enter into two separate contracts the first with the employer and the second with the contractor each will cover the services applicable to each appointment and Novation is when the contract between the employer and architect is replaced by a contract on identical terms between the contractor and architect.

So to sum up what I discussed today:

• Novation is the legal mechanism enabling one of the parties to a contract to transfer both the benefit and the burden of the contract to an incoming party. 
• Novation often occurs in the context of a design and build contract where a client wishes to transfer the rights and obligations under their appointments with the design team to an incoming contractor.  
• There are two types of novation: A basic switch of employer from the client to the contractor a novation ‘ab initio’, whereby the new client is deemed to have been the architects client from the outset - The ‘ab initio’ process should avoided as it causes issues to the architect
• Ensure the terms of the novation have been agreed and all parties have signed the novation agreement.
• The architect should be wary of conflict of interest situations arising, e.g retaining some duties and responsibilities for the original client
• The deed of novation should aim to be short and uncomplicated and make reference to the architects ongoing services to the client, if applicable, and set out one a separate agreement.
• And Consultant Switch is when the architect enters into two separate contracts, one with the client and other with the contractor each cover their relevant services to each appointment.