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Wed July 15 2020

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Lessons to be learned from Hillcrest’s novation defeat

3 Mar 14 The case of Hillcrest Homes Ltd (Hillcrest) v Beresford and Curbishley Ltd reveals weak links in contractual chains. Sarah Phillips, solicitor at Thomas Eggar LLP, reports.

Sarah Phillips, solicitor at Thomas Eggar LLP
Sarah Phillips, solicitor at Thomas Eggar LLP

This case, decided last month, has excited lawyerly interest. The findings have thrown up issues relating to, among many other things, what types of dispute can be adjudicated and whether an adjudicator can consider more than one dispute. These are important things that your lawyer really needs to know about.

What everyone else needs to know about is the base cause of the dispute so that they can avoid finding themselves in the same situation as Hillcrest.

Hillcrest (the employer) intended to let a design and build contract for a residential property. It appointed a technical design team to do the upfront design with the intention of having those appointments novated to the contractor once one was appointed, thereby transferring all the design risk to the contractor. Nothing unusual, it happens every day.

One of the appointments was for the structural engineer and it appears (although this point was not argued) that the appointment did not contain a clear requirement for the structural engineer to accept novation to the contractor.

The build contract was a standard JCT form and the associated Employer’s Requirements included a specific requirement that the contractor novate the structural engineer’s appointment. They also contained the wording “Novation shall occur on execution of the Building Contract” (added emphasis). You can doubtless see how the seeds of disaster were sown.

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The house was built, practical completion was achieved and throughout all of this the contractor tried to persuade the structural engineer to sign the novation agreement. The engineer resisted and only conceded and signed it more than a month after practical completion. The contractor then refused to sign it himself and asserted that as there was no contract between him and the structural engineer all liability for the structural design would remain with Hillcrest.

Hillcrest argued in court that the novation agreement should have retrospective effect; the contractor argued that, per the Employer’s Requirements, novation was supposed to occur on execution of the build contract not after practical completion. The judge agreed with the contractor and held that there was no effective novation. Hillcrest was therefore left holding a direct liability for structural works that it did not want.

The decision relating to retrospective effect is important and you should always get contract documents finalised sooner rather than later but this was not the point I wanted to emphasise in this note because it was not the real root of the problem. The issue that should have been addressed was of course the terms of the structural engineer’s appointment. If his appointment did not clearly state that he had agreed to be novated to the contractor then he was quite within his rights to refuse to be.

If you are creating a contractual chain and you do not make sure that the terms that apply to each link in that chain are wholly consistent with each other you cannot be surprised if it falls apart.

Always consider all of the contractual documents relating to a project as a whole and make sure your chain doesn’t have any weak links.

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