Novation

Page contents:

• Terminology
• Overview
• Code of Novation
• Novation deed
• Principal’s Project Requirements 
• Reports
• Certification
• Client's representative
• Architect's site visits and compliance statements
• Benefits and disadvantages
• Costing the additional risk
• Resources

Terminology

In this note:

• 'Principal' means the architect's original client.
• 'Contractor' means the incoming party to whom the architect will provide services following the novation (usually a design and construct contractor, although the incoming party may be a different entity such as a financier or related company of the principal).
• 'Novation' means the agreement by which the owner or principal (the outgoing party) is substituted with the contractor (the incoming party) to form a new contract on the same terms between the architect (the continuing party) and the contractor (the incoming party).

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Overview

Novation is often used on design and construct projects where the principal initially employs an architect to carry out design and documentation but only to the extent that the client's needs and intent are clearly identified and documented in the principal's project requirements. On the basis of the principal's project requirements, tenders are called and a building contractor selected. The principal then novates the architect to the contractor who takes responsibility for the design and construction of the project.

Novation of an architect is used to provide a principal with a single point of accountability in relation to design issues and to allow contractors to cost effectively accept the risk of the design and construct model.

Novation reflects a fundamentally different project structure from the traditional client-architect engagement model and involves new and additional risks for consideration by architects as discussed below.

Suitability

The novation process is not universally suitable for all building projects, and where it is to be used, the ultimate success of the project will depend to a great degree on the professionalism and competency of the three participating interests: the principal, the architect and the contractor.

Projects which require the principal’s ongoing and highly detailed control of the final constructed project might not be suitable for design and construct contracts.

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Code of Novation

The Australian Institute of Architects has developed a Code of Novation with industry-wide stakeholder input. The Code is intended to be a guideline document covering many matters including the level of completeness of documentation at the novation point, input into the Principal’s Project Requirements (PPR), head contractor selection, timely access to cost plans and construction program for consultants, protocols for product substitution, and transparency of the scope of service for all consultants. It discusses communications protocols, value management, client relationships and the independence of the superintendent role during the construction phase. Refer Resources.

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Novation deed

Terms

When it is agreed that the architect will be novated during the project it is important that the architect’s agreement provide certainty in relation to:

• the terms and conditions of engagement
• the scope of work
• the fees payable to the architect

both prior to and after novation.

The novation deed should be a fairly simple agreement signed by all parties which transfers the obligations of the principal onto the contractor. However, it is sometimes utilised as a mechanism to introduce new or different terms within the contract. If this occurs, the architect should consider the impact of these new or varied terms as a variation to either scope, quality or program and consider including a variation to the new agreement.

See the Australian Institute of Architects' Deed of Novation (Discussion release).

Preparation and form

The process of novation usually involves the original parties (being the architect and the principal) and the new party executing a document setting out the basis of the novation. This document is usually referred to as a novation deed.

In order to effect the novation, the parties to the novation (the architect, the original party (principal) and new party (usually the contractor) must agree the terms of the novation in writing.

As there is no standard novation document the form of the written novation deed must be prepared by one of the parties and reviewed by the other parties to ensure that it reflects the agreed arrangements for the novation. A deed of novation template example is discussed below.

It is advisable for anyone entering into a contract involving novation to seek legal advice in relation to new and additional risks, to consider the form of a proposed novation deed and to ensure the terms are insurable with your professional indemnity (PI) insurer.

Part D Deed of Novation Annexure to AS 4904—2009

Novation deed templates such as the document included in Part D Deed of Novation Annexure to the Australian Standard Consultants agreement—Design and construct AS 4904—2009, are available. However these should be amended to exclude any obligations that (typically) an insurer would not cover, such as warranties, and ensure that there are appropriate releases included.

To make this deed of novation more specific to architects, you could also consider substituting the following phrases:

• ‘Prior contract’ with ‘consultancy agreement’
• ‘Preliminary design or selected subcontract work, as the case may be’ with ‘the services under the consultancy agreement’

As above, we recommend that you seek legal advice before entering into any contract (including a novation deed) and ensure the terms are insurable with your PI insurer.

Issues when considering a novation deed

It is important that the architect does not incur additional, concurrent or uninsured liability in executing the novation deed. In particular, be careful to ensure that the arrangements contemplated by the novation of the architect agreement do not result in additional exposure to risk such as:

• providing warranties or guarantees in relation to the services that were not included in the original architect agreement
• agreeing to render observations or reports at the site to ensure the contractor's compliance with the terms and conditions of the contract documents
• establishing a new contractual relationship with the contractor through the novation where the agreed terms and conditions (including agreed liability caps and exclusions of liabilities) do not apply
• creating potential dual liability to the original party and the new party in relation to the same potential claim for loss.

Additional matters that should be dealt with in the architect agreement in relation to the novation include:

• the process for novation including whether the architect has a right to veto a proposed contractor who may be considered risky for the delivery of the project
• the stage at which novation will occur and establishing a clear point when the architect shall no longer provide services to the original party and shall commence providing the services to the new party
• the payment provisions that make clear the amounts of the architect's fee to be paid by the original party and the parts to be paid by the new party
• provisions that make it clear that the architect will not be liable for claims by the original party in relation to services performed after the novation and shall not be liable for claims in relation to the same loss from both the original party and the new party
• confirmation of the terms and conditions that will apply following the novation including that the agreed terms and conditions from the original agreement continue to apply and that there are no additional obligations assumed as a result of the novation unless expressly agreed
• the inclusion of an agreed form of novation deed included as an appendix to the architect agreement with the effect that the novation deed cannot be amended by the original party or new party without the architect's consent.

Limitation period to be that of an agreement

Novation deeds are often drawn up in the form of a deed so that they are enforceable even if there is no consideration. However, deeds typically carry a longer liability period – sometimes twice as long as an agreement – under the various state statutes of limitation. A novation deed should state that, despite being in deed form, the limitation period applicable to the deed will be the period that would usually apply to an ordinary agreement.

Limitation and exclusion of liability

Given that the risk profile of claims against the architect by a contractor is different to claims by a principal, it is important that appropriate limitation of liability clauses limiting the architect's liability by way of a monetary cap on claims and/or excluding liability for indirect and consequential loss are carried forward into the arrangements that will apply following novation or are reconsidered based on the different risk profile.

Insurance

Virtually all PI insurance policies exclude liability in relation to contractually assumed liabilities (such as liabilities arising out of express warranties and guarantees). It is strongly recommended that the terms and conditions of the architect agreement and any novation deed are reviewed by your PI insurer and your legal advisor before they are agreed in order to ensure that you understand the risk and insurance profile of the engagement under the architect agreement and arising out of the novation arrangements.

Also refer Acumen notes:

• Warranties in client and architect agreements 
• Professional indemnity cover exclusions

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Principal’s Project Requirements

The Principal’s Project Requirements (PPRs) is all the documentation which indicates to the Contractor what is to be delivered and the level of quality expected. This will likely involve all the design documentation prepared, schedules, specifications and a brief which describes portions of the intended built work which is not yet sufficiently documented in the other documents. This can take any form, ie a brief, a report, photographs of a precedent building or a specific precedent building or components of a precedent building. Any element not sufficiently detailed or described within the PPRs will allow the contractor to implement that element how they choose, as long as it doesn’t contradict other elements of the PPRs and that any codes or legislation requirements are met. The contractor must deliver what is documented in the PPRs, which can only be varied by agreement with the principal. The final built form will be assessed against the PPRs.

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Reports

It is common for architects to be required to prepare monthly reports during the construction phase of a project. These reports are often addressed to or supplied to the principal. After novation, the architect is responsible to the contractor and no longer has any contractual duty to the principal (including any obligation to continue to provide reports directly to the principal).

If the architect observes poor-quality work or materials in conflict with the brief, but the contractor disagrees with this assessment, then the architect may be in a difficult position. The architect should ensure that any report that it is obliged to provide under its agreement, together with the contractor's decision in relation to any issue, is carefully documented. Careful consideration should be given to the form of the report that is to be included in the architect agreement including a section of the report that allows the architect to identify any issues that it may have.

In order to avoid the potential conflict, it is preferable to have an independent representative reporting on quality rather than the novated architect or to ensure that the novation allows for transparent communication between the consultant team and the principals as defined within the Code of Novation.

A template for an architect’s monthly report can be downloaded here.

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Certification

Architects who have been novated should not certify payments to the contractor or certify practical completion because it would involve a conflict of interest.

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Client's representative

If the client wishes to have an independent representative for any function, the role and authority of this person must be clearly defined and cannot be taken by any of the novated architects who are not, while contracted to the contractor, independent.

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Architect's site visits and compliance statements

On a novated project, the architect does not administer the construction contract, and has no authority to direct the contractor on how to construct the architect's design.

The responsibility to the principal for the quality of the constructed works must therefore rest with the contractor. At most, the architect may assess whether the constructed works comply generally (to the best of the architect's knowledge) with the design intent of the architect's documentation. The architect cannot be expected to provide a certificate as to the detailed compliance of the works, or to provide certificates addressed to third parties such as the principal. It would still remain appropriate for the architect to provide this advice to the contractor highlighting that the works may have diverted from the PPRs.

Refer Acumen note: Requests for issuing certificates.

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Benefits and disadvantages

Benefits

At its best, novation allows the architects and the contractor to work on the same side as part of a design team to achieve the design objectives with the contractor taking on the role of coordinating design issues. This reduces the risk of time and cost overruns and claims in relation to design issues.

A benefit of the team approach, which novation can foster, is that construction methods are tailored to the preferred systems of the contractor, resulting in enhanced time, cost and quality performance. If the design team does not work well together then this will create difficulties and a novation process that forces together an incompatible mix of architect and contractor will invariably lead to a poor result for all parties.

A benefit for the principal is that the contractor assumes a single point of accountability for design issues to the principal. The issue for the architect is that in the event of a design issue the contractor will look to the architect and the architect will not be able to work directly with the principal in relation to the issue.

Another perceived benefit of novation is that the principal can go to market for the procurement of the contractor with a design that is not complete because the architect will be novated to the contractor who will in turn complete the design under a design and construct contract.

Disadvantages

The novation process may expose the architect to additional and new risks. If an architect is prepared to accept the additional and new risks related to novation of the architect agreement from the original party (the principal) to the new party (usually the contractor) then the architect should consider how these risks will be managed and what is appropriate compensation for accepting the additional or new risks.

The principal should understand that they will lose their direct contractual relationship with the architect and it is the contractor who will direct the architect. If, for instance, the contractor directs the architect to substitute a cheaper material in place of a better one, the architect will be obliged to comply and in the absence of an agreed process for communicating with the principal will not be able to raise these issues with the principal.

As a result of the relationship rearrangement following novation it is not appropriate that the architect administer the construction contract on behalf of the principal. This means that the principal must engage an experienced person or entity to fulfil that role. The principal and the principal's representative must be vigilant in observing the contractor's contractual responsibilities with respect to items such as quality and cost control.

Risks arise from the principal seeking to engage a contractor on incomplete documents where the design is not completed to detailed design stage. This means that the contractor's tender is based on assumptions in relation to the design and these assumptions may not reflect the architect's position.

Following novation, the contractor may seek to make changes (often under the guise of value engineering) to the design which may place the architect in a difficult position particularly if the architect considers that the changes impact the quality of the design. The architect should include provisions in its agreement as to how this issue is to be resolved.

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Costing the additional risk

Given that novation creates additional and extra risks and costs for the architect these should be factored into the fee structure by the architect. It is not unreasonable for the architect to increase their fees in the event of novation to account for these risks and costs. Additional risks might include:

• increased detail and documentation expectations
• disagreement on the extent of documentation completion
• additional time reviewing material or system substitutions
• increased consultant coordination expectations
• increased reporting expectations to the contractor and the principal.

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Resources

• Australian Institute of Architects (2023) Deed of Novation (Discussion release)
• Australian Institute of Architects (2022) Code of Novation
• Australian Institute of Architects (2012) Guiding Principles for Balanced and Insurable Novation Deeds - this document aims to simplify the negotiation process for architects and their clients contemplating novation.
• Monthly report template
• Office of the Victorian Government Architect (2023) Government as Smart Client

Related courses - Available via Online CPD

• Member Lean-in: Novation Renovation: Introducing the model Deed of Novation.

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