The contract is an important document that underpins the legal relationship between parties. Many professionals have their contracts novated during the lifetime of a project. The recent case of Munkenbeck and Marshall -v- The Vinyl Factory Limited  EWHC 3225 (TCC) provides an important reminder that parties should ensure when entering into contracts that they understand the implications of the novation process, and that they should seek legal advice if necessary.
The case also demonstrates the Court's continued unwillingness to apply rights of restitution to correct mistakes in contract as to do so would go against established principle.
Refresher - Contract and Novation
A contract is an agreement between parties that is protected by law. For a contract to be legally upheld, a Court will look at a number of factors including whether; (i) an offer has been made, (ii) that offer has been accepted, and (iii) parties intended to create legal relations having agreed all of the terms of the offer.
It is easy to take these characteristics for granted, however, if overlooked this may result in parties disputing whether a contract exists between them, as in Munkenbeck.
Novation is an agreement that transfers contractual rights and responsibilities from one party (A) to another party (B). These contractual rights and responsibilities are sometimes described as "benefits and burdens"; the transfer of performance (the benefit) and payment (the burden) of (C)'s professional services.
For a novation agreement to be recognised in English law, the consent of all parties (A, B and C) is required. Therefore, a novation agreement is usually tripartite and often replicates the terms of the original contract.
Novation agreements are commonly used in construction contracts, typically on design and build projects where the design team is initially appointed by the client and the appointment is subsequently novated to the contractor.
Munkenbeck (architects) brought a claim against The Vinyl Factory (property developers) for unpaid fees concerning design works at the Marshall Street Baths, Westminster, London.
Two claims were made:
- whether the Claimants were entitled to certain fees for design work as proposed in a letter they issued to the Defendant in early correspondence; and
- whether the Claimants were entitled to fees for additional design work that they performed allegedly on instruction by the Defendant after their contract had been novated.
The first claim was made in contract pursuant to what the Claimants described as an 'Initial Agreement' letter which they alleged the Defendant had accepted, and in the alternative, a claim for unjust enrichment.
The second claim was made for unjust enrichment on the basis that the Claimant's contract with the Defendant had been novated.
Adam Constable QC (sitting as Deputy High Court Judge in the Technology and Construction Court) considered the evidence and found against the Claimants on both heads of claim.
The Court found that the 'Initial Agreement' letter sent by the Claimants to the Defendant did not form the basis of a contract between the parties, and was therefore unenforceable. The Court held that the language of the letter appeared ambiguous and consequently was incapable of acceptance. The letter, at most amounted to an indication of the negotiating parameters between the parties. Although the Defendant had paid the Claimants for some phases of the design work as described in the Initial Agreement, that in itself did not amount to waiver or acceptance of any wider obligations relied on by the Claimants. The Court found that subsequent conduct supported the Defendant's submission; the terms of the Initial Agreement letter were later refined and made into a contract that formed the legal relationship between the parties.
In the alternative claim for unjust enrichment for payment of a reasonable fee, the Court found on the facts that either the Claimants had accepted to forgo payment on commercial grounds or that a mistake was made by the parties during contract negotiations.
The Court held that it was no part of the law of restitution to correct mistakes made by parties in entering into a contract and that Claimants must bear the consequences of their error unless they could show valid reasons to vitiate a contract based on unilateral or mutual mistakes.
The claim in unjust enrichment for unpaid fees following novation of the contract also failed. The Defendant relied on the terms of the novation agreement, stating that the parties had agreed a contractual regime with a clear demarcation of responsibility post novation.
The Court agreed with the Defendant's position, adding that at the date of the novation, the contractual relationship between the parties was clear and that the novation agreement included clear requirements for the Claimants to advance any claim for additional payment.
The Court pointed to a provision in the novation agreement which stated that the Claimants:
- Should not commence work outside of their architectural appointment unless it had obtained written approval from its new Employer regarding payment of additional services; or
- Had written to its new Employer (before commencing works) notifying them of the need for such additional services.
The Court said that the purpose of the contractual regime and of the above clause was to provide certainty and clarity to the legal relationship between parties. The Court accepted that in light of the clear contractual regime between the parties there was no room for any restitutionary claim.
The Court also referred to the decision in Macdonald Dickens v Macklin (a firm) v Costello & Ors  QB 244 which concerned builders performing work on land owned by the defendants. Rather than contract directly with the builders, the Costellos used a company (Oakwood) of which they were the sole shareholders and directors to pay the builders. The builders commenced proceedings in contract for unpaid fees against both Oakwood and the Costellos. On appeal, it was held that the Costellos had not been unjustly enriched because to allow such a claim would impermissibly undermine the contractual arrangements between the parties.
The Court's decision confirms the law of contract formation, novation and unjust enrichment.
Professionals, and in particular construction professionals such as architects and consultants, should be vigilant when entering into appointments that include novation terms as such terms will invariably dictate who they should accept instructions from and the basis upon which they will be paid.
Professionals should be careful when accepting instructions from their original Client following a novation because if payment of fees becomes an issue, it may be difficult to reclaim those fees in circumstances where the law does not permit a straightforward route to recovery.
Before moving on to the offensive for fee recovery, professionals should be aware of the financial risks that may attach, for example;
i. The risk of a counterclaim being made by their Client;
ii. The risk of a referral to the professional body for misconduct; and
iii. The risk of incurring substantial liability for delaying project completion.
However, if work has been done which should be paid for, professional should be entitled to enforce what rights they may have against an unscrupulous Client seeking to take advantage.
On that basis, if a professional is unsure as to the contractual relationship between past and present Client following the novation of their appointment they should, at the earliest opportunity, attempt to address such issues in writing and seek to obtain proper and informed legal advice on contract terms.