Novation Of Agreements To Provide Architectural Services

May 9, 2023

After signing a Consultancy Services Agreement (CSA) with the project owner, Architects are often asked to novate the CSA to the incoming builder (Contractor) engaged by the owner. In some cases, there is a term imposing an express obligation to novate in the CSA and a template for the Deed of Novation is annexed. In other cases, the CSA may be silent on novation obligations or the terms of novation may be subject to negotiation.

What is Novation

Novation involves two steps. The first step is the termination of the existing CSA between the Architect and the owner. The second step is the replacement of the CSA with a new contract between the Architect and Contractor, usually on the same terms as the old CSA. This is intended to transfer the contractual rights and obligations.

It is important to note that an obligation to novate the CSA does not equate to an obligation to renegotiate the CSA on whatever terms suit the Contractor.

Classic Arrangement

Novation is not appropriate for every CSA. Novation changes the Architect’s relationship with the owner and can result in a loss of engagement for both the owner and Architect on important design and aesthetic decisions. This is something to be discussed early with the owner to ensure alignment.

There are some projects where novation has the potential to create complexity. For example, a casino or retail development where the owner wants to have a high level of ongoing decision making on subjective preferences around aesthetics and design may not be an ideal candidate for novation. Refurbishment of heritage buildings can present the same issue.

Depending on the project, the classic arrangement where the Architect remains directly engaged by the project owner may be better aligned to the needs of both the Architect and owner. Alternatively, it may be better to defer novation until the key design and aesthetic decisions have been finalised.

Solvency

With insolvency on the rise in the construction sector, solvency of the Contractor is a threshold question.

It is common to find that the incoming builder does not have the financial strength of the project owner. Recent experience indicates that many credit searches are raising red flags.

Bear in mind that a credit search can only search public information and will not identify disputes which are in progress via arbitration or other forms of private dispute resolution.

There is nothing to stop the Architect from asking questions about credit worthiness to satisfy itself that the builder will be able to make payment. If there is any question about financial strength, this concern should be raised for discussion with the owner.

One of the most obvious warning signs is where the Contractor proposes to change the payment terms under the CSA. If a longer time for payment is proposed, it is reasonable for the Architect to assume that the Contractor probably intends to pay when paid by the owner, despite the prohibition on this approach under security of payment legislation.

Changing the Deal

It is common for Contractors to view novation as an opportunity to change the CSA, often based on claims that the Construction Contract and the CSA ‘need’ to be back to back.

Contractors often present a list of proposed changes to the Deed of Novation annexed to the CSA. For example, the Contractor may propose:

Time frames for notification of claims under the CSA ‘should’ be changed from (say) 7 Business Days to ‘promptly’ (that is, immediately);
Work which is expressly excluded from the Architect’s lump sum is deemed to be included;
Additional certification obligations;
A different dispute resolution regime that makes it slow and difficult to progress claims.

Even if the Architect has accepted an obligation under the CSA to novate, the Architect is not obliged to change the terms to make it more difficult to lodge a valid claim, to reduce the price of the Services or to accept extra certification obligations.

It is unreasonable to expect the Architect to re-negotiate the CSA for the convenience of the Contractor. The Architect should seek advice on how to navigate this situation.

Payment Claims

Pending the novation coming into effect, the owner remains liable for payment of payment claims under the CSA. If in doubt, seek advice before serving payment claims on the Contractor if the novation has not yet been finalised.

Program

Is it common to find that the CSA refers to a program to be agreed. In many cases, the program has never been agreed with the owner (either formally or informally) or the agreed program has been overtaken by town planning, design changes and other events.

The request for novation provides an opportunity for the Architect to take stock of the situation and to ensure that there is an agreed position. This should include a review of dependency information that the owner was required to provide to the Architect. Has all of the information been provided and, if not, what dates should be agreed for the Contractor to deliver this information?

Checklist

Early engagement with the owner is helpful to ensure there is alignment on whether the CSA is intended to be novated to a Contractor and to understand the timing for novation.
The obligation to novate does not necessarily equate to an obligation to accept renegotiation of the CSA.
Architects should seek advice before agreeing to a novation that changes the deal that has been negotiated with the owner.
Architects should seek advice before claiming payment from the Contractor if the novation has not been finalised.
Always carry out a credit check on the Contractor before proceeding to novate.