Novation deeds and prior-services warranties: what you are actually signing

On novation your client changes from the developer who appointed you to the builder delivering the project. The deed that effects it usually contains a prior-services warranty: a promise that everything you did before novation was done as if the builder had been your client all along. That warranty, not the change of client, is the part that carries the risk.

What actually changes on novation?

The counterparty. You keep performing the same services, but you now perform them for the builder, and the builder now holds whatever rights the developer held against you.

That is the intended effect and on a design and construct project it is entirely conventional. A builder taking design responsibility needs the design team under its own contracts. The difficulty is not novation itself. It is what gets added to the deed while everyone is treating it as a formality.

Why is the prior-services warranty the risky part?

Because it works backwards.

Everything before novation was done for the developer, under their brief, with their instructions, and often under time and fee pressure they created. The prior-services warranty asks you to warrant that work to a party who was not there, did not brief you, and has every commercial reason to look hard at it if the project goes wrong.

You are also warranting to someone whose interests may be opposed to yours. If the builder later has a dispute with the developer about the adequacy of the design documentation, the prior-services warranty is the mechanism that brings you into it.

Two practical consequences follow. Your exposure extends to a period during which you took instructions from someone else. And your ability to defend by pointing at the developer's instructions is weakened, because you have warranted the outcome rather than the process.

What should you check in the deed?

In order of how much money is at stake:

Does your liability cap carry across? A deed silent on the cap is not the same as a deed preserving it. If the original agreement was negotiated to a capped position, the deed must say those terms continue.

Does the prior-services warranty have a date and a scope? An unqualified warranty covers everything, indefinitely. A warranty limited to the services described in the original agreement, performed to the standard in that agreement, is a very different obligation.

Is the standard of care unchanged? Novation is a common place for reasonable skill and care to become fitness for purpose without anyone drawing attention to it. A builder carrying design and construct risk has a reason to want that.

Are your fees preserved? Including fees already earned and unpaid. A novation that leaves outstanding invoices with a developer who no longer has an interest in the project is how consultants lose money on otherwise successful jobs.

Does the builder assume the developer's obligations, or only take the benefits? A deed that transfers rights without transferring obligations is not a novation in substance, whatever it is called.

How do the positions compare?

Is novation the same as assignment?

No, and the difference decides who can sue you.

Assignment transfers rights. Novation replaces the contract with a new one on the same terms between different parties. In an assignment the original agreement survives and the original client generally remains liable for its obligations. In a novation the incoming party steps fully into the position, taking the obligations as well as the benefits.

That distinction matters when the deed is drafted loosely. A document called a novation deed that transfers only the benefit of your agreement leaves you performing for a party who has taken the right to enforce against you without accepting the duty to pay you or to give you the information you need.

Read what the operative clause does rather than what the title says. If the incoming party is not assuming the outgoing party's obligations in terms, it is not a novation in substance and should not be signed as one.

What happens to the developer's outstanding obligations?

This is where consultants lose money quietly.

At the point of novation the developer usually owes you something: fees for work already performed, decisions you have been waiting on, information promised weeks ago, or an approval that has not arrived. A deed that transfers everything to the builder can leave those obligations with a party who has no further interest in the project. A deed that leaves them with the developer can leave you chasing a company whose project is now someone else's problem.

Neither is automatically wrong, but it should be a decision rather than an accident. Settle three things in the deed itself:

• Unpaid fees for pre-novation services. State who pays them. The outgoing party is the usual answer, because they received the benefit.
• Outstanding claims and extensions of time. If you have a live claim, say whether it survives and against whom.
• Information and instructions. If the incoming party is now responsible for giving you what you need, say so, because your programme depends on it.

When should you raise it?

Before the consultancy agreement is signed, not when the deed appears.

Most consultancy agreements on design and construct projects contain an obligation to novate on request. That obligation is where your leverage is, because at that point the developer still needs your signature on the agreement. Once the builder has been appointed and the developer has promised your novated agreement as part of the construction contract, you are the only party who can deliver something everyone else has already committed to.

The practical step is to ask for the form of deed to be attached to the consultancy agreement as an agreed annexure. If the developer will not attach it, agree the principles in the agreement instead: that novation is on the terms of the agreement as amended, that existing limitations of liability continue, and that fees for prior services remain payable by the outgoing party.

An hour spent on this at appointment is worth considerably more than a day spent on it at novation.

A worked example

Take the sample review commission again: a Victorian design and construct consultancy agreement with a fee of $180,000.

The original agreement, as issued, required the "highest standard achievable by leading consultants" rather than reasonable skill and care, and carried a fitness for purpose warranty. Both were amended during review, because both sat outside what professional indemnity cover responds to.

Now add novation. If the deed carries across the agreement "as amended", the negotiated position holds. If it recites the original terms, or warrants prior services without reference to the amended standard, the consultant has re-acquired an uninsurable obligation months after successfully removing it.

The amount at stake is not theoretical. It is the difference between a claim your insurer defends and a claim your insurer declines.

That is why the deed deserves the same attention as the agreement, and usually gets a fraction of it, because it arrives as a single page marked for signature.

What to ask for

To tie the deed to the agreement you actually negotiated:

The Consultancy Agreement is novated as amended and in force at the date of this Deed, and all limitations and exclusions of liability in that agreement continue to apply to the Consultant's liability to the Incoming Party, including in respect of services performed before the date of this Deed.

To narrow the prior-services warranty:

The Consultant warrants that services performed before the date of this Deed were performed in accordance with the standard of care in the Consultancy Agreement. The Consultant gives no warranty as to the suitability of any brief, instruction or information provided by the Outgoing Party.

On fees:

Novation does not affect the Consultant's entitlement to fees for services performed before the date of this Deed, which remain payable by the Outgoing Party.

And the covering note:

We are happy to novate. We are not able to warrant the earlier work on a different standard from the one we were engaged on, or to lose the liability position agreed in the consultancy agreement. The amendments attached preserve the existing terms rather than change them.

Framing it as preservation rather than negotiation is accurate and lands better, because it is genuinely what you are asking for.

Raise it early

The best time to deal with novation is before the consultancy agreement is signed, not on the day the deed appears. If the agreement obliges you to novate, it should also record the terms on which you will, and attach the form of deed.

Once the builder is appointed and the developer has committed to delivering your novated agreement, your leverage is materially lower.

Where this stops being general

You now know what a deed should preserve and what a prior-services warranty does. What you cannot know from a guide is whether the deed on your desk preserves your cap, whether it quietly restates the original standard of care, or whether the agreement it novates still contains the fitness for purpose warranty you thought had been removed.

That is the work that remains, and it is specific to your documents.