6.1 Overview of collateral warranties

6.1.1 The network of collateral warranties on a typical project

Construction projects often require a network of collateral warranties to be put in place. Figure 6 shows a typical example.

Figure 6 Network of collateral warranties on a typical project

6.1.2 Why do interested third parties 'need' collateral warranties?

Because of the doctrine of privity of contract, only those people who are parties to a contract can sue for breaches of the contractual obligations. An architect may be sued by the client for breach of the architect’s appointment; the freehold landowner, or a third party who takes an interest in the completed building, such as a tenant, funder or purchaser, cannot sue the architect for breach of their appointment with the client. If the building is defective, these third parties will want to recover the diminution in value of their interest – a purely economic loss. But the law now severely restricts the ability of claimants to recover pure economic losses in negligence, so interested third parties typically insist that the client provides a contractual route for recovery of such losses from the contractor, the design team and the subcontractors.

6.1.3 What is a collateral warranty?

It is generally not good practice to refer to a collateral warranty by the shorthand term ‘warranty’. This book aims to do so only when there is no scope for confusion between a ‘collateral warranty’ – a short collateral contract – and a ‘warranty’, which is a name for a specific materia obligation that may feature in any contract. A collateral warranty generally contains a number of warranties.

Freehold landowners of the site, future tenants, purchasers and funders now regularly receive the benefit of collateral warranties – individua contracts between the beneficiary (the party receiving the benefit of the collateral warranty) and the relevant member of the project team.

Like any contract, a collateral warranty has to be properly executed by the parties. This will usually mean execution as a deed. Any collateral warranty should always be executed in the same way, either under hand or as a deed, as the underlying appointment. An architect should never agree to greater liability under the collateral warranty than in their appointment, in scope (what they have to do or the standard they must achieve), quantum (the sums they may be liable for) or duration (the length of the limitation period on actions under the contract); equally, the beneficiary is unlikely to be willing to accept the lesser protection of a collateral warranty executed under hand if they know that the client has the comfort of an appointment executed as a deed.

Usually, if a project is sufficiently complex or high value for the architect to be asked to provide collateral warranties, the architect will have been appointed by deed.

These individual collateral contracts, generally short in format, are separate from the underlying professional appointment or building contract that the party giving the collateral warranty (the ‘warrantor’) has entered into with the client. But, although separate, the collateral warranty typically refers back to the obligations in (and hence is ‘collateral’ to) the relevant underlying agreement.

If collateral warranties are required from an architect, they are being expected to extend the scope of their liability to third parties who would otherwise in all likelihood not be able to sue them. The architect should consider, on a project-by-project basis, whether it is appropriate for them to be giving collateral warranties at all.

If a project is small in scale and low in value, the architect’s fee is equally small and their services limited, and if other members of the team are not being required to provide collateral warranties, then the architect should argue that a request for collateral warranties is disproportionate. The architect’s professional indemnity insurers will also have a view on whether its insured should be accepting this type of additional liability on a project. If the client wants collateral warranties and the architect wants the job, they should price the risk accordingly. This may involve a significant fee increase for a very small project, which may discourage unnecessary requests for collateral warranties.

6.1.4 How does an architect become obliged to give a collateral warranty?

To make the arrangement work, there must be a clause in the architect’s appointment explicitly obliging them to provide collateral warranties to particular parties or in specified circumstances. This is known as a collateral warranty ‘enabling clause’. The architect and their lawyer should consider whether a particular collateral warranty obligation is too extensive in terms of the number required or the nature of the potential beneficiaries.

A client on a large-scale commercial project will understandably want to be able to obtain collateral warranties in favour of future purchasers and tenants, to increase the marketability of their development. A purchaser generally has no ability to sue the seller for defects in a development; a tenant with a full repairing covenant in their lease (the market norm) will be obliged to carry out, at their own expense, repairs on the property they have rented.

Any third party funder of a project will require collateral warranties in order to protect their investment. On completion, the funder has to be sure that the development achieves sufficient market value to provide adequate security for the loan it has provided to the developer. A funder will usually require a provision in any collateral warranty it receives allowing it to ‘step in’ to the shoes of the client and take over the appointment of the architect, any other important designers and the building contractor, in order to complete the development if the client falls out of the picture.

6.1.5 Forms of collateral warranty wording

The main standard forms of collateral warranty that an architect may be asked to enter into are those drafted by the Construction Industry Council, and known generically as CIC/ConsWa, published in 2003/2005 and planned for release in fresh editions in 2018. Different versions cater for the interests of a funder, purchaser or tenant, or client post-novation. These collateral warranty forms are generally insurable and provide significant limitations on liability to protect the architect’s position; if you have to sign a collateral warranty, these are the safest options.

Many clients are happy to use these forms, but many prefer to use their own bespoke forms, and on important or high-value commercial projects it is more likely than not that bespoke forms of collateral warranty will be proposed.

In any case where collateral warranties are required, you should check with your professional indemnity insurer to make sure that they are satisfied your policy covers both the collateral warranty wording proposed and the overall number of collateral warranties that may be requested. Insurers will want to have the chance to approve the collateral warranty terms.

All types of collateral warranty, bespoke or standard form, will typically cover the same territory. However, bespoke forms, drafted by solicitors acting for clients, tend not to include the level of protection for the consultant that would be present in an industry standard form.

There is one important rule of thumb. If a specific obligation is included in a professional appointment, for example a list identifying prohibited materials, the equivalent provision in the collateral warranty must be the same or no more onerous. The architect will perform their services in accordance with the obligations in their professional appointment so, if a collateral warranty imposes a stricter obligation, there is a possibility that the architect will be in breach of the collateral warranty obligation.

The architect's 'warranty' itself

This is the core provision of the collateral warranty. The architect will be expected to warrant that, in respect of their professional services under the appointment, they have complied with the terms of the appointment and have exercised and will continue to exercise reasonable skill, care and diligence. As discussed in the context of professional appointments above (section 5.2.6), the standard of care for an architect will, in the absence of any other wording, usually be that of the ordinary skilled architect. If a client seeks to impose a higher standard, this should be resisted.

Many PII policies contain an exclusion of cover for any contractual performance warranties that would not have existed but for the wording of the contract itself; that is to say, any performance warranty in excess of the warranty of reasonable skill and care implied by law. Although it is unlikely that an insurer would take this point in respect of the enhanced skill, care and diligence wording that clients often seek, it is possible if the PII policy is based on the ordinary professional standard; particularly if the insurance market is ‘hard’, and if there are other aspects of the architect’s behaviour which, in addition, the insurer may view as meriting a denial of cover.

Enquiries by the client do not affect the architect's liability

A provision will usually be included to the effect that the architect’s obligations and liabilities shall not be released or diminished by any enquiry or inspection carried out by or on behalf of the beneficiary. This is fair. The architect is not prevented from seeking a contribution from any such independent surveyor that the beneficiary may have appointed, if the beneficiary sues the architect for a loss they have incurred and if that surveyor is liable to the beneficiary for the same loss, for the purposes of the 1978 Contribution Act.

The architect's acknowledgement of payment

Some bespoke forms of collateral warranty require the architect to acknowledge that, at the date of the collateral warranty, the professional appointment remains in full effect and the client has paid all sums due to the architect under the appointment. The intention seems to be to prevent the architect from raising any set-offs in relation to claims by the collateral warranty beneficiary. It is difficult to see how an architect can be expected to agree such a provision when signing the professional appointment – and it must be agreed then, because the draft form of collateral warranty must be attached as an appendix to the appointment – because at the time the collateral warranty is requested the architect may be in dispute with the client over fees, so any such provision should be deleted.

The risk of agreeing that the beneficiary is 'deemed' to rely on the architect's performance

In a bespoke collateral warranty the client may include wording such that the architect acknowledges that the beneficiary has relied and will rely on the satisfactory performance by the architect of their obligations under the appointment. This should not usually be accepted. Some beneficiaries will be reliant on the contractor and the professional team. But a beneficiary who has considerable experience in the construction industry, for example a repeat-player anchor tenant, an established developer or even a fellow construction professional, may not have relied particularly on the architect’s collateral warranty, but may have relied on its own experience or in-house or retained professional advice. Ordinarily, when seeking to establish a claim against the architect, the beneficiary would have to prove that it had relied on the architect’s performance.

The obligation to avoid specification of prohibited materials

As mentioned in section 5.2.10, in the context of professional appointments, an architect should generally resist prohibited materials obligations based on the outdated ‘list’ format. The vast majority of products that might reasonably be prohibited are adequately dealt with in the relevant British Standards, European Standards or the 2011 BCO guidelines. A material that complies with these documents can be expected to perform satisfactorily and safely.

Maintenance of PII by the architect

As with the equivalent provision in the architect’s professional appointment, the obligation to maintain PII should properly reflect the level of insurance actually being maintained. It is standard for the obligation to be subject to such insurance being available at commercially reasonable rates and on commercially reasonable terms. Ideally, the test for what is commercially reasonable should be linked to the architect’s subjective position, rather than the general availability of PII in the market.

How many times should the beneficiary be allowed to assign the benefit?

It is the market norm for the benefit of a collateral warranty to be assignable by the beneficiary once, and for their assignee to have the ability to make one further assignment – two assignments in total – without the consent of the warrantor being required. Thereafter assignment should either not be permitted at all (which should be the architect’s preferred position) or permitted only subject to the architect’s written consent, with such consent not to be unreasonably delayed or withheld.

Clients will generally accept the principle of a maximum limit of two assignments, but may try to include wording to the effect that assignments of the benefit to companies in the same group as the beneficiary, or to parties providing finance to the beneficiary, will not count as one of the two permitted assignments. This should not usually be accepted. The effect of an assignment of the benefit of a contract is generally the same, whoever the assignee is; the architect has no control over the assignment and finds they are in a contractual relationship with an unknown third party. These are serious risk factors and it is not unreasonable for the architect to expect certain limitations on their potential exposure. But each such clause should be considered in the context of the circumstances of the project – how much of a risk does free assignment to such parties really represent? The architect can gain some comfort if they include wording to say that any assignment of the benefit must be an assignment of the whole of the beneficiary’s interest – the risk is easier to manage if all of the obligations are owed to one party. In addition, wording can be included so that assignment is only possible at the same time and to the same party as the beneficiary assigns the whole of its interest in the project.

Such restrictions may be viewed by the client as having a negative impact on the marketability of the project, and may not be acceptable. This issue is not merely a theoretical risk for the architect, though; there is a real risk of assignment to a party with the specific intention of facilitating a claim for an existing breach. For example, the case of Larkstore v Technotrade involved the assignment by one party of the benefit of a geotechnical survey to a subsequent purchaser of the site, after an actionable breach of contract under the surveyor’s report had arisen, and several years after the transfer of site ownership. The court found nothing wrong with the assignment of the right to sue the surveyor for breach of contract; but if the surveyor had included wording in their appointment to the effect that the benefit of the report was only assignable at the same time as the benefit of the rest of the client’s interest, they would, on the facts of the case, have escaped liability to the subsequent purchaser of the site.

The obligation to grant a copyright licence

Generally, the same considerations apply here as apply to the copyright licence wording included in the underlying appointment. Ideally, the provision of a copyright licence should be linked to continuing payment of the architect’s fees, as is the case in the RIBA Standard PSC. Clients in a strong bargaining position will be unwilling to accept this, because they would say, a fee dispute between the client and the architect should not affect the tenants, purchasers or funders. This is not unreasonable, but an architect with a stronger bargaining position could argue at least for the inclusion of wording which would allow for the copyright licence to be suspended in the event of a fee dispute which has proceeded to adjudication or litigation. This would counteract any arguments about spurious claims being used to hold the client to ransom; an architect would not adjudicate or litigate unless they thought they had a good case.

Provisions allowing the beneficiary to 'step in' to the underlying appointment

In a collateral warranty to a funder, or to a party who has agreed to purchase the whole of a project prior to completion, or in a collateral warranty back to the client after a novation, it is usual to provide step-in rights.

Taking the position of the funder as an example, their return on their investment is dependent on satisfactory completion of the project before it can be sold or let. The funder will not want to risk an important member of the project team, such as the architect, being able to leave the project prior to completion if it seems more likely that the project could be completed on time and on budget with the original architect. For this reason, the funder will typically require step-in rights in any collateral warranty they receive from an architect, which would allow the funder to ‘step in’ to the architect’s appointment in the position of the architect’s client by giving notice in certain specified circumstances.

The right to step in may be reactive or proactive, and a sensible funder will want both. If, for example, the original client has stopped paying the architect’s fees and the architect has given notice to terminate their appointment, the funder’s step-in right under their collateral warranty from the architect will allow the funder to give notice to the architect saying that the funder requires the architect to carry on, with the funder being responsible for all payment of fees on stepping in (including those outstanding at the date the architect gave notice to terminate). This is a reactive step-in. The funder may want to proactively step in when, for example, the funder/client relationship has broken down and the funder wants to build the project out, having removed the client, to protect their investment.

Step-in operates to restrict the architect’s ability to terminate their own appointment for breach of the client’s obligation to make fee payments, but this is usually acceptable in principle as long as the incoming party commits to paying all outstanding fees and all fees going forward after the date of step-in:

If the collateral warranty beneficiary can appoint a nominee (not every funder will have the capacity, ability or inclination to take over running a project as client directly) to step in, the exercise of this right must be subject to the beneficiary agreeing to act as guarantor for the nominee’s payment obligations.

The step-in clause should make clear that there is a limited period during which the collateral warranty beneficiary may serve their step-in notice. In the context of a reactive step-in, it is usual for the beneficiary to receive 21 days’ prior written notice of the architect’s intention to terminate their appointment, and the beneficiary must serve notice of their intention to step in within that period.

There will be projects where more than one party is entitled to issue a step-in notice under their collateral warranties. Any issues of ‘priority’ of step-in should be taken out of the hands of the architect and should be dealt with in the background funding and development agreements. The architect should be entitled to treat any first step-in notice they receive as valid and binding.

Governing law, notices and third parties

It is important for a collateral warranty to include provisions setting out the agreed position in respect of certain basic formalities. There should be a clause setting out the law governing the contract – this should always be the same as applies to the underlying appointment – and there should be a provision giving details of the names, addresses and procedure for giving written notices under the collateral warranty.

There should also be a clause setting out the position under the collateral warranty with respect to the application of the Contracts (Rights of Third Parties) Act 1999. There is generally no reason why the architect, as the warrantor, would want this Act to apply. The Act allows third parties in certain circumstances to take the benefit of a contract, but a collateral warranty is for the most part all one way; there is no real benefit for the architect, only obligations. The standard way to ‘exclude’ the effect of the Act is to include wording such that:

What limitations on liability should be included?

In a collateral warranty, clients are generally more receptive to the inclusion of limitations on liability, although there may be some resistance in relation to funder collateral warranties. This is because of the powerful position of the funder on many large projects, and also because it is more likely that the funder will be in place early in the project (not necessarily the case with tenants and purchasers) and will be able to exert through their solicitors direct influence on the form of funder collateral warranty.

In addition to a limitation on actions in time, a net contribution clause and an overall cap on liability, it is very important that the architect includes wording that ties their liability under the collateral warranty to their exposure under the underlying professional appointment:

This is generally acceptable to clients, although a client may try to restrict the ‘scope, quantum or liability’ drafting, arguing that it is too wide. A commercial client will also usually try to prevent the architect from exercising any right of set-off against the collateral warranty beneficiaries; the argument put forward will be that the beneficiaries are not in a position to influence a payment dispute between the client and the architect. If a client is not alive to the point, however, the ability to raise set-off arguments against collateral warranty beneficiaries can be a potentially useful way to encourage the client to compromise on a fee payment issue.

‘Liability’ is not the same concept as ‘duty’; an architect may owe the same duties to the client and to the beneficiary of the collateral warranty, but in the event of a claim may have greater liability to the beneficiary. It is important that the wording ‘no greater liability’ is insisted on.

6.2 Overview of third party rights

6.2.1 The principle of third party rights

The Contracts (Rights of Third Parties) Act 1999 (TPR Act), which came into force in May 2000, made a profound change to the law on privity of contract (discussed in section 2.2.1). Section 1 of the TPR Act provides that a person who is not a party to a contract (described in the Act as a ‘third party’) will be entitled in their own right to enforce a term of the contract if the contract expressly provides that they may, or if the term in question purports to confer a benefit on them.

To achieve this, the TPR enabling clause in the appointment must expressly identify the potential beneficiary by name, or otherwise the potential beneficiary must be identifiable as a member of a particular class or as answering a particular description; for example, ‘any tenant of the whole or any part of the completed development’.

Once a beneficiary has been identified, for example once a tenant has signed a lease, the client should give notice to the architect that the architect’s TPR obligation will extend to this particular beneficiary. It is safest for the client (and the beneficiary), although not strictly required by the TPR Act, for an acknowledgement of service of the notice of TPRs to be sent to the architect, and for this to be signed and returned by the architect, confirming their specific agreement to the grant of TPRs to the particular beneficiary. If the architect genuinely disputes that the beneficiary is within the scope of the class of parties in favour of whom TPRs may be required, now is the time to raise the issue. If the architect is correct, the client may wish to offer an addition to the fee in exchange for accepting the additional risk, but if the proposed beneficiary is outside the scope of the TPR obligation, there is nothing the client can do legally to force the architect to agree to extend the scope of their obligation.

Conversely, if the proposed beneficiary is within the scope of the TPR obligation, because they are expressly identified individually or as part of a group, there is nothing the architect can do legally at that stage to deny the grant of TPRs.

6.2.2 Collateral warranties or third party rights?

Many bespoke appointments provide options for the client to request either collateral warranties or TPRs. This flexibility may be required because different third parties have different preferences. Some developer clients favour TPRs; other potential beneficiaries, banks in particular, still prefer collateral warranties. Does it make a difference to the architect?

Some insurers are wary of their insureds granting TPRs, and prefe the relative familiarity of collateral warranties. When asked to sign an appointment with a provision for the grant of TPRs, check that your insurer is comfortable with the principle and that there is no specific exclusion in your PII policy.

Even if covered by your insurance, there are particular commercia disadvantages of agreeing in the appointment to confer TPRs. If the beneficiaries are not identified individually, but as a class, how can the architect judge the potential risk of the beneficiary making a claim against them?

Also, once a TPR obligation has been agreed in the appointment, there is no going back if, at the time the client gives a TPR notice, the architect considers they would rather not be bound. There may be valid reasons why the architect would wish not to give TPRs in favour of a particular beneficiary; for example, the architect may know the beneficiary to have a history of making unwarranted claims, which could be a drain on the architect’s time and resources.

In theory, the same could be said of an obligation to provide collateral warranties – there is no going back once the obligation is agreed in the appointment – but in practice this is not strictly true.

Unless and until the architect puts pen to paper (assuming they have not agreed a ‘power of attorney’ provision in their appointment), the proposed collateral warranty beneficiary has no contractual rights against the architect and the client cannot force the architect to sign.

It is unlikely that a court would grant an order forcing an architect to sign a collateral warranty if, in breach of contract, they refused to do so. More likely, a court would try to assess the worth of the missing collateral warranty in damages. That may be a particularly unsatisfactory result for the client, and the proposed beneficiary.

In practice this type of dispute may arise in particular where the client and architect have fallen out over fees. An architect, with little other commercial leverage, may deliberately choose to breach their contractual obligation, and refuse to sign a collateral warranty, in the hope that the client will as a result agree to compromise on the fee dispute. This is not good practice, but it can be a commercial reality and it is an advantage that an architect subject to a TPR obligation does not have. Some professional appointments undermine the architect’s ability to ‘hold the client to ransom’ in this way by setting out a defined level of compensation for failure to provide a collateral warranty. However, the level of compensation must be commensurate; a clause that obliges the architect to provide collateral warranties as a condition precedent to any payment of fees is unlikely to be upheld by a court, as it would constitute an unenforceable ‘penalty’, as discussed in the case of Gilbert-Ash v Modern Engineering.

An architect should weigh against this the potential disadvantage of agreeing to provide collateral warranties while the architect’s services are ongoing. As described above, in section 5.2.13, the court in the Parkwood case held that a collateral warranty given in this context is a ‘construction contract’ for the purposes of the Construction Acts, and that a beneficiary has the option to make a claim against the warrantor architect by adjudicating – a much cheaper and quicker alternative to litigation. In contrast the Hurley Palmer Flatt case also noted in section 5.2.13 makes clear that TPRs cannot be a construction contract, and the ability to adjudicate is not a benefit conferred by TPRs.

6.2.3 The form of a third party rights schedule

In a bespoke set of appointment documents, if a schedule of TPRs is attached as an appendix, it will tend to closely follow the form of a collateral warranty. The comments set out above in relation to the form of a collateral warranty generally apply to the form of any proposed schedule of TPRs.

6.3 Novation

6.3.1 The risks of novation

The most common context for a novation is a project where the contractor is wholly or largely responsible for both the design and the construction. The client will typically have engaged consultants early, to develop a design for the project on the basis of which the design and build contractor will have been able to produce an accurate tender price for the works.

The client will favour novation of the design consultants whom they had initially engaged, partly (as they would see it) to ensure a degree of continuity in the design effort, but also because it is often preferable to have a single point of responsibility, rather than be faced with the prospect of suing multiple parties if anything goes wrong. The design and build contractor, for their part, will be reluctant to accept their role as the single point of responsibility to the client without the protection (and ability to control) that is provided by being the direct employer of the consultants who have actually produced the design.

The usual solution is for the contractor, when they sign up to the project, to take over the appointments of the key designers from the client. This process commonly takes place at or around RIBA Stage 4, after planning permission has been granted, at the time the building contract is executed. Novation requires that the rights and obligations of the original parties are transferred, with the client dropping out of the picture and the contractor taking over their contractual right to sue, as well as their obligation to pay the consultants’ fees, as if they had been a party to those contracts from the outset.

An architect should not generally enter into a deed of novation with a building contractor whose own contract remains outstanding, simply because the potentially uncertain terms of the contractor’s future involvement in the project could negatively affect the architect.

Novation can work well, but there are three key areas of risk:

• the architect must be confident in the financial strength of the incoming employer
• the terms of the novation must be very clear
• the architect should be very wary of accepting an ongoing role performing services for the original client after the novation.

There are, in theory, two types of novation:

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

The formal position of the RIBA and the Construction Industry Council is that consultants should, where possible, avoid ab initio novation agreements.

A client who wishes to novate will generally want to achieve an ab initio novation, and if novation is provided for in a bespoke appointment, this will be the intention. Some commentators have expressed difficulty with the legal fiction involved in novation ab initio and have expressed concerns with the expectation that the architect – who, for example, at one stage would have been advising the client about tenderers for the building contract – would logically be assumed to have been acting for the contractor when the architect was giving this advice – which obviously does not make sense. In truth, no type of novation is easier to justify logically than another; any novation presents the architect with practical difficulties.

Viability of the incoming employer

It will hopefully be a rare occurrence that the client on a project should ever want to transfer the appointment of a consultant to a party who will not be able to pay the consultant’s fees. But it may occur if the original client knows that their money is running out and wishes to avoid claims for fees from the design team. In such circumstances, there may be no intention to complete the project, and a novation may be proposed, to a new client, to extricate the original client from their contractual ties to the consultant. An architect faced with an obligation to novate in these circumstances has a stark choice – go through with the novation, or breach the contract and take their chances against the original client. Including wording to provide that the obligation to accept novation is subject to a standard of reasonableness would go some way to protecting the architect’s position.

Clarity of novation terms

It is possible for consent to novation to be inferred by the conduct of the parties. If an architect does not take care to protect themselves by insisting on very clear novation terms, a purported novation can be used by unscrupulous clients to muddy the waters with regard to the client’s payment obligations. Unless the documentation used to record the novation is very clear, the novated party can be left in an unenviable position – working for two masters – or, worse still, working without a clear contract with either master. Any proposal that the architect should enter into an ‘informal’ novation arrangement without a written deed should be rejected.

The Camillin Denny v Adelaide Jones case is an example of what can go wrong. The architect brought proceedings to enforce an adjudicator’s decision that had been made against their client, but the clien claimed that there had been a novation under which it was replaced as the architect’s employer by another company. If this was correct, the adjudicator’s decision would not have been enforceable against the original client. On the facts, the court found in favour of the architect, but the architect would no doubt have preferred to avoid incurring increased legal costs by having to fight the client’s spurious novation argument.

As an architect you can protect yourself by approaching a purported novation with caution. Take legal advice, and do not be afraid to ask common-sense questions:

• Why is the novation being suggested, and why now?
• Am I obliged under my appointment to accept novation?
• Is there an agreed form of novation deed?
• Is there proof that the proposed new employer formally exists as a legal entity?
• Is there any evidence of the proposed new employer’s financial standing?
• Will the new employer be able to pay my current outstanding fees, as well as my fees going forward?
• Are the other design consultants being novated at the same time?

The importance of a formal professional appointment and, if the principle of novation is accepted, a formal deed of novation executed by all parties cannot be overemphasised.

Post-novation services for the original employer

It is not uncommon for the original client to expect the architect, after novation to the design and build contractor, to continue performing services for them, for example monitoring the construction phase and reporting on progress. This is not unreasonable; the client’s interest in the project after novation will remain unchanged, and it makes sense for the architect, with their existing knowledge of the project and existing lines of communication with the client, to continue to advise the client on certain matters. But it is not good practice either.

If an architect does agree to accept this arrangement (it can sometimes be very hard to argue against if the client has a strong bargaining position at the time the appointment is negotiated), they must be aware that conflicts of interest are likely to arise; the wording of the novation should expressly deal with this possibility.

A client who wants the architect to perform services for them post-novation may try to bring this about in a number of ways. Most commercial clients will want a collateral warranty from the architect on novation (known as the collateral ‘warranty back’) to cover the work previously carried out by the architect for the client; legally the original client becomes just another third party after novation and gives up their right to sue for breach of the professional appointment. Some clients will also attempt to include in the collateral warranty wording that imposes positive ongoing obligations to provide further services. A client may instead try to include an obligation to provide further services in the novation deed itself, or they may have sought to cater for the eventuality by including a schedule of post-novation client services in the professional appointment. Perhaps most sensibly, a client may propose a supplemental services agreement, separate from the novation and any collateral warranty back. It is possible, on the basis of judicial comment in the case of Blyth and Blyth v Carillion, that combining the novation with ongoing obligations to the original client may call into question the effectiveness of the novation as a whole.

The deed of novation should, in circumstances where the parties know that the architect will be performing some ongoing services for the original client, make clear that this work will be carried out separately from the post-novation work for the contractor. If possible, the architect should have different individuals working for the two employers, and the novation should express the obligation to keep the work separate. If there is any question of the architect carrying out services that go beyond reporting on progress or passing on reports, for example an obligation to provide support to the client in the event of disputes (which may include disputes with the contractor) then the novation should provide a confidentiality obligation to prevent individuals within the architect firm working for one party disclosing information to those working for the other. Sometimes it will simply not be possible for the architect to effectively provide a service or guarantee the separation of personnel required in a credible way. If it cannot be done, the architect should not enter into an obligation to do it, whatever the commercial pressure.

One way of relieving the pressure on an architect, where the client requires extensive post-novation services, is to confront the issue explicitly in the novation with a clause that contemplates the possibility of post-novation services for the original client under a supplemental agreement, and which goes on to consider the existence and resolution of conflicts of interest. The architect should be given the right to notify at the same time both the client and the contractor in the event of a conflict, and the novation deed should provide for a period within which the parties try to agree how the conflict should be addressed. However, such a clause can only work if there is a default position that applies if the parties cannot agree how to resolve the conflict; if the novation is to be effective and survive, the clause must allow for the ongoing services for the contractor to take precedence. The clause must provide that, if the parties cannot reach agreement within the given timescale, the particular service which has caused the conflict – or, if necessary, the whole supplemental agreement with the original client – shall no longer be of any effect.

Do the circumstances give rise to a built-in conflict of interest?

Was the architect aware from the outset that their appointment was likely to be novated to a contractor? If not, there is a greater risk that the architect’s prior performance will contain elements that are incompatible with their future role as the contractor’s architect. If this is the case, and if there is no obligation to novate, then the architect should be very wary of agreeing to do so, no matter how great the commercial pressure to agree. Would the architect have carried out their services differently if the contractor had been their client from the outset, or if the architect had known from the outset that, through a deed of novation, the contractor was going to be deemed to have been their client? If the answer is yes, and if it is too late to go back and make appropriate adjustments, then the architect should again proceed only with extreme caution.

6.3.2 Typical terms of a novation deed

A deed of novation should generally be as short and uncomplicated as possible. Any references to the nature of the architect’s ongoing services (if any) for the client should be removed and the detail of those services should be set out in a separate agreement between the client and the architect. If additional client services are being provided under a separate agreement, it may be appropriate to include ‘ethical wall’ and conflicts resolution wording in the deed of novation.

Under the terms of the novation, both the architect and the original client should:

This release and discharge should be mutual in the novation deed, in spite of any supplemental agreement or collateral warranty given by the architect.

As discussed above, a client will typically want to provide that the mutual undertakings of the main contractor and the architect:

should take effect as if the contractor and the architect had been the parties to the professional appointment from the date of its execution.

Following the case of Blyth and Blyth v Carillion it has become usual for clients to include wording in a deed of novation to the effect that:

Blyth and Blyth is a case still considered by many to have been oddly decided, in which the court held that following a novation, the contractor was unable to recover their losses against the novated consultant because, at the time the consultant performed the action that ultimately caused the contractor’s loss, the consultant had been acting for the original client – and the original client had not suffered any loss. The court decided that the contractor’s right to recover losses in respect of the pre-novation services, through the novation, was limited to the measure of losses appropriate to the original client.

To avoid the possibility of confusion, best practice is to list in the deed of novation those pre-novation services performed by the architect that cannot sensibly be regarded as having been performed for the contractor, and to expressly exclude them from the scope of the novation.

The architect should not ‘warrant’ to the contractor ‘that it shall be liable’ for ‘any’ losses suffered by the contractor; any language similar to this, which suggests an indemnity, should be deleted.

The deed of novation should provide, subject to the Blyth and Blyth wording above (which means that wording takes precedence):

Finally, in addition, it is helpful for the architect to include wording which waters down the legal fiction that the architect should be judged as if it had always been acting solely for the benefit of the contractor. This is an important qualification to make, particularly in the context of the architect’s work in producing the employer’s requirements:

Apart from these provisions, and clauses stating which national law applies and (assuming English law) excluding the effect of the Contracts (Rights of Third Parties) Act 1999, there is arguably nothing else that a deed of novation should include, and any additional provisions should only be agreed with caution.

Chapter summary

• An architect may be required to provide a contractual benefit to third parties, through collateral warranties or third party rights, especially on high-value and complex projects.
• Collateral warranties and third party rights create a contractual relationship with the third party beneficiary, and an architect should take the same care in reviewing the terms of any such agreements as it would with its professional appointment.
• In the context of a design and build project an architect may be asked to accept a novation of their appointment from the client to the contractor – again, the architect should make sure they are happy with the terms of the novation deed before agreeing to the novation.
• Architects should take particular care when agreeing to perform post-novation services for their original client.