Why Novation is in the Spotlight

28 February 2022

In November 2021, Wendy Poulton presented an informative one-hour webinar on Novation. Here she lists the reasons why the topic is so important and what makes a better novation experience.

Why did I spend an hour talking to ACA members about novation in November 2021?

Because, like “BIM” it’s something that clients often think they want, without always understanding what it is, or how to use it to produce a quality outcome.

Because, anecdotally, it’s the most commonly used procurement model on multi-residential projects, and multi-residential has been identified by various investigations over the last five years as a problem area for defects and non-compliances. While we don’t have a “smoking gun” to prove a causal link between one and the other, the correlation deserves examination.

Because it’s often used and little understood. The concept of novation was developed in the UK courts in the late 19th century to deal with transfer of debts. It remains a common law concept, largely unregulated by legislation, and there is little reported case law. All this means that we lack definitive guidance on what novation is, and how this complicated transfer of rights and obligations works – for example, novation could take place at 5% completion of design documentation, or at 95%. Every novation is different. The requirements applicable to each novation depend on the design and construct contract, consultancy agreement, scope of services and novation deed in play on that individual project.

Because it tends to exacerbate some of the factors that contribute to poor project outcomes. When a head contractor takes the reins on a project, it can be easy for consultants to think they now have a reduced role and less responsibility. However, as the judgments in the Lacrosse Building case illustrate, a consultant’s role is not automatically changed or reduced by novation, unless their scope of services specifically sets out a reduced role. In addition to role confusion, novation can also lead to isolation and siloing of consultants, so that critical specialist advice is missing. By way of example, it appears that in both Lacrosse and the deadly fire in London’s Grenfell Tower, the fire engineer did not review or advise on completed design documents.

And finally because, while the new Design and Building Practitioners Act in NSW does not prevent novation, it does greatly discourage early novations on partly complete designs. For projects that come under the Design Compliance Declaration portion of the Act (chiefly class 2 residential buildings and buildings with a class 2 part), the Act now prohibits a builder from starting to build until the builder has obtained, and lodged on the NSW Planning Portal, (1) construction issued regulated designs; and (2) Design Compliance Declarations from certain key consultants. The inability to start building will further reduce the already dubious benefits of early novation.

Bearing all this in mind, what makes for a better novation experience?

  • An invested principal/owner who remains involved during construction and appoints a knowledgeable superintendent.
  • A design that is well developed, with detail and quality locked in, before novation.
  • Realistic tender prices that price the building as designed, rather than factoring in a multitude of possibly non-compliant substitutions.
  • Commitment to a culture that discourages changes to the design, encourages collaboration between the consultant team, and empowers (and pays) consultants to continue taking on a strong role in monitoring construction quality.
  • And, lastly, a consultancy agreement, novation deed and scope of services that realistically define the consultant’s post-novation role, without imposing duplicated or uninsured liability. This is one of the issues that we regularly advise on, in our legal reviews at informed Lawyers Pty Ltd (ACN 635 862 145).

For anyone interested in hearing more about novation, our webinar “Spotlight on Novation” is available to purchase on demand.

Wendy Poulton is the Principal of informed Lawyers Pty Ltd (ACN 635 862 145).