| Date | 6 June 2001 |
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| Judgment | Blyth & Blyth Limited -v- Carillion Construction Limited, Outer House, Court of Session 18 April 2001. |
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| The Issue | The effect of novation agreements in design and build contracts. |
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| Implication |
The wording commonly used in novation agreements may not give the contractor recourse against the consultant to cover the extensive obligations which may be owed by the contractor to the employer. |
printDesign and build continues to be a popular form of procurement. Part of the structure of design and build contracts will often be that the consultant originally engaged by the employer for initial advice leading to the preparation of the employer's requirements will be novated to the design and build contractor. The novation, a type of three-party agreement, will often be structured in such a way that it will bring an end to the original terms of engagement between the employer and the consultant, and create a new form of agreement between the consultant and the contractor. The nature of the obligations of the parties to each other thereafter will depend on the precise wording of the novation agreement, the underlying building contract, and any continuing warranties given by the consultant to the employer. It is common place however, for design and build contractors to accept responsibility for any failings of the consultant prior to the novation, including errors which may emerge in the employer's requirements upon which the contractor tendered. Indeed, under such an arrangement, the contractor's responsibility may extend potentially to wider issues such as cost advice which the consultant might have given to the employer prior to tender. The contractor therefore might expect that, should losses be incurred as a consequence of such undertakings given to the employer, it will be in a position to seek recovery from the consultant. These matters were closely investigated in the case of Blyth & Blyth -v- Carillion Construction in the Outer House of the Court of Session in Scotland. Blyth & Blyth were engaged by a company called THI Leisure to provide consultancy services in connection with a proposed leisure development to be constructed in Edinburgh. The appointment required Blyth & Blyth to provide design advice to the employer prior to the commencement of construction to allow the development of the employer's requirements. The appointment envisaged that once a main contract was entered into, the consultant would enter into a novation agreement and thereafter be under a duty to the main contractor for the further preparation of drawings and giving advice during the construction phase. In due course, Carillion were appointed as main contractor for the design and construction of the leisure development. The novation agreement was concluded and work proceeded. All did not run smoothly however, and eventually Blyth & Blyth commenced proceedings against Carillion for the payment of alleged unpaid fees. Carillion defended and counterclaimed that Blyth & Blyth were in breach of contract. Many of the losses claimed by Carillion were referred to as "pre-novation" losses. By way of example, one head of claim was that information provided by Blyth & Blyth as part of the employer's requirements regarding the amount of steel reinforcement, was significantly understated. Carillion had been unable to recover the resultant additional costs from the employer by virtue of an amendment to the JCT design and build form, to the effect that the contractor was responsible for any design of the works contained in the employer's requirements. Carillion argued that the terms of the novation agreement entitled it to recover such costs from Blyth & Blyth. Clause 4 of that agreement stated that "the liability of the consultant under the appointment, whether occurring before or after the date of this novation, shall be to the contractor . . . as if the contractor had always been named as a party to the appointment in place of the employer". Counsel for Blyth & Blyth countered that an attempt to re-write the original consultant agreement, by substituting the word "contractor" for "employer" would produce nonsensical results. For example, in one clause, the consultant would be bound to assist the contractor "as to the relative merits of the tenders received for the project". Blyth & Blyth argued that it would be inherently unlikely that the parties intended the effects of the novation agreement to be a recasting of duties owed and performed to the employer, as if they were now duties owed to the contractor. Carillion conceded that this was not the main thrust of its case. Its principal argument was that the novation agreement effectively provided for an assignment of any claims that the employer might have in respect of the consultant's failings. It noted that the novation agreement did not provide for the extinction of the employer's rights, since it envisaged the original appointment of the consultant remaining in force. Counsel for Blyth & Blyth accepted this proposition, but argued that the effect of the novation agreement was accordingly to enable the contractor to recover from the consultant only those damages which might have been recoverable by the employer. The agreement was not intended to provide the contractor with a guarantee that certain elements of the construction would not be more costly to build than the contractor had envisaged within its tender. Carillion argued that this simply did not stand up. In circumstances where under the building contract the contractor assumed responsibility for design, the employer would not suffer any loss in the event of a failing by its consultant. Indeed, the more inaccurate the information provided to tenderers, the better for the employer who would thereby get a cheaper building. Reviewing all of the evidence, Lord Eassie concluded that Blyth & Blyth were correct in their interpretation. Carillion could not claim for their own losses arising out of the consultant's pre-novation failings. It could only claim for an assignment of the employer's losses, if any, which were based on the consultant's alleged breach of duty committed prior to the novation. Since there were no such losses incurred by the employer, there could be no claim by Carillion.
CJ-0122
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