While a contract is signed by both parties A&B and in just start of the project one of the party ie A requests for novating the contract between B& C. As per contract conditions it is not allowed until unless both parties agree to it. To understand and learn more on this change request, do anyone experienced such situations and have any inputs to share on following.A is employer, B is contractor and C is EPC contractor of A but now A wants C to act as employer. Also additional C is customer of B in another project.
1. Does it is accepted to keep payment obligations with original party and get new contract with another party on above situation?
2. What are potential risk involved?
3. Key deliveries or Obligations shiuld not be transferred?
4. Any lesson learned if experienced earlier.
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Peter RapinSubject Matter Expect; Project Delivery| Independent ConsultantOntario, Canada
This is not a legal opinion.
Novation is the complete/total substitution of one party to a contract by a third party. Novation does not allow for partial transfer of the contract - its all or nothing. In your question Party A (Owner) wants to substitute party C for itself. Party B would then hold the contract with Party C instead of A. A contract is a willing (usually written) agreement between two (or more) parties thus all parties have to agree to a change in contract structure in order for it to be enforceable.
If you are looking to retain some of the agreement with the original parties (terms of payment for example) it is no longer novation of the initial contract but a second contract..
There are risks on all tree parties:
Party A) can no longer manage the novated contract and has to accept the actions of Party C and B related to the novated contract
Party B) assumes all risks associated with contracting with Party C including possible breeches (payment),
Party C) assumes all the obligations of Party A as well as the risk of breeches (failure to perform) by Party B.
All parties are at risk on questions related to the validity of the contract should things not work out (courts may find the novation was not legal under the terms of the initial contract and/or local contract law.
Lessons learned; 1) identify the intent to novate up front with circumstance under which novation will be initiated. 2) Clearly state the intent and process to novate in the initial contract. 3) Recognize and analyze the risks and have mitigation strategies. Saving Changes...
Thomas WalentaGlobal Project Economy ExpertHackenheim, Germany
SivaPrakesh,
I have seen several contracts regarding projects but no novation yet.
In case I experienced such a situation (being with A B or C), I would immediately involve a company lawyer.
Also, I would strive to understand the reason and motivation for the request and maybe try to influence the requestor to withdraw the change. Saving Changes...
