1. INTRODUCTION

Although the practice is not new, it is becoming more frequent for employers to engage their own consultants to carry out the preliminary design of a project, and then to use a design-build contractor to complete the design. The contractor is often required to accept contractual responsibility not just for the design and construction works he carries out himself, but also for the preliminary design carried out by the employer's consultant.

As a palliative to the contractor, the terms of engagement of the consultant by the employer are novated to the contractor. The advantages of this system to the employer are:

1. He is able to use his own preferred designer to obtain whatever aesthetic or other technical design advantages he believes are to be had, by using a designer who is not also responsible for construction.

2. He can involve the contractor in the design process and obtain the contractor's buildability knowledge at an early stage.

3. He is able to obtain the benefit of the contractor, effectively, guaranteeing the consultant's design. In this regard, the larger design-build contractors will often be able to afford to maintain higher limits of indemnity of professional indemnity insurance than many consultants.

2. THE DESIGN TRAP

A matter which the contractor needs to be particularly careful about is that he should not accept a higher design responsibility to the employer, under the design-build contract, than the consultant has accepted under its terms of engagement by the employer. The contractor is obviously exposed if he agrees a fitness for purpose design obligation in the design-build contract, whilst the consultant, whose terms of engagement are to be novated to the contractor and for whose design the contractor is to be responsible, has only accepted a reasonable skill and care design obligation on its terms of engagement.

3. NOVATION

Novation is an act whereby, with the consent of all parties, a new agreement is substituted for an existing agreement and the latter discharged. Usually a novation takes the form of an introduction of a new party to the agreement and the discharge of one of the parties to the old contract. For example, where "A" is indebted to "B" and "C" is indebted to "A", and all three parties agree that "C" shall become "B's" debtor in place of "A". Three conditions, however, have to be fulfilled to enable "B" to sue "C" upon such an agreement. These are:

1. The intermediate debt of "A" to "B" should be extinguished;

2. The same or a larger amount should be due from "C" to "A", than from "A" to "B"; and

3. A defined and ascertained liability should be transferred.

4. THE EXTINGUISHMENT OF INTERMEDIATE OBLIGATIONS
 
A feature of many novation agreements currently in use, is that they do not contain terms discharging the consultant from liability to the employer under the terms of engagement, even though the consultant is made liable to the contractor for a breach of the terms of engagement by the substitution of the contractor for the employer under that agreement. The reason for this omission is to attempt to keep the consultant liable to the employer even after the novation.

Because a novation requires the parties to the 'old' contract to give each other a mutual discharge of liabilities, it is considered that, in certain circumstance's, the attempt to keep the consultant on the hook to the employer may actually rebound on the employer.

If, for example, the novation agreement is not executed as a deed (and because of this consideration has to pass from the employer to the consultant), then there will be a total failure of consideration from the employer to the consultant if no discharge is given to him by the employer. The result of this would be that not only would the consultant remain liable to the employer after the novation, but also the employer would still be liable to the consultant, notwithstanding the express words of the novation agreement which states that the employer is no longer liable to him. If, therefore, the contractor failed to pay the consultant's fees after novation has taken place, in the above circumstances the employer would still be obliged to the consultant for the same.

5. IMPLIED NOVATION

Although, on its face, the total failure of consideration referred to above would result in the employer remaining liable to the consultant, post novation, it is possible for a discharge of the consultant to be inferred from conduct, without express words. The courts may look at the three agreements (the terms of engagement, the design-build contract and the novation agreement) all as one composite agreement. If this were to be the case then it is doubted whether the courts would infer that the contractor had accepted liability to the employer for any matters other then design and construction of the building.

This would mean that for non-design obligations contained in the terms of engagement, following either an express or an inferred discharge of liability of the consultant, the employer would have no legal redress against anybody. It would not, however, be possible for the courts to infer a discharge of the consultants liabilities to the employer if one of the three agreements referred to above contained an entire agreement clause' (ie a claim which states that the agreement represents the entire agreement between the parties), because such a clause would prevent the three agreements from being construed as a single composite transaction.

6. NON-DESIGN LIABILITIES

Consultants' terms of engagement do not simply comprise design responsibilities. The typical services to be provided by an architect, for example, include investigating the site, carrying out an initial feasibility study, advising on cost implications of alternative designs and supervising the construction works.

An example of a situation in which the employer may be left without a remedy (where the consultant is either expressly discharged from liability in the novation agreement or such a discharge can be inferred in the way described above), is where a site boundary is not well defined physically on site and the consultant pegs out the boundary incorrectly, so that when the contractor comes to commence building he is prevented from doing so by the adjacent land-owner who objects to the encroachment onto his land. Pegging out the site boundary is neither a design function nor a construction function. Therefore the contractor will have no liability for the same under the terms of the design build contract.

7. CONCLUSION

The purpose of a novation agreement is to substitute a new party for one of the parties to the 'old' agreement without, in any way, altering the terms of the 'old' agreement. Notwithstanding this, it will be seen from the above that, in certain circumstances, one or more of the employer, the contractor or the consultant, may be worse off, in terms of additional liabilities assumed or remedies lost, after the novation has taken place. Careful drafting of the documentation is necessary to avoid the pitfalls.