Time to put a scythe to Blyth & Blyth?

United Kingdom
As the construction industry awaits with interest the appeal hearing in the landmark decision of Blyth & Blyth v Carillion Construction Limited, contractors across the country continue to fall prey to the very evil that their novation agreements were designed to protect against, and commentators remain equivocal on the correct means of redressing the balance.

The background facts to this case are not unfamiliar. Contractor enters into JCT/81 Building Contract with the project Employer and takes on full design responsibility. Employer is novated to the Contractor to provide the Contractor with rights of recourse against the design team for duties carried out (and owed to the Employer) prior to the Contractor's involvement. Design Consultant sues Contractor for fees. Contractor, relying on the novation agreement, counterclaims for design errors committed prior to the novation.

Taking for granted the design errors by the Consultant, the Court must presumably find in favour of the Contractor? Wrong. The Court of Session held that because the breaches by the Design Consultant were incapable of causing loss to the Employer (which had, of course, successfully unloaded all its risk by passing design responsibility to the Contractor under the JCT/81), the Contractor would be confined to exactly the same parameters. No loss, no judgment – the upshot being that it is no longer safe to assume that a standard novation agreement which passes the rights and obligations of the Employer to the Contractor will be sufficient to allow the Contractor to pursue the various consultants for their alleged shortcomings prior to the novation.

Perhaps not surprisingly, the Court of Session decision has been met with widespread criticism. Looking back retrospectively to the time of the breach – before the Contractor has come into the equation under the risk-reapportioning JCT/81 – the Employer would doubtless have difficulties in accepting that it was prevented from suing its designers on the basis of no loss.

So much for the logic. Commentators and advisers have now turned their attention to potential mechanisms available to Contractors for plugging their exposures. Suggestions range from use of the Contracts (Rights of Third Parties) Act 1999 to give the Contractor rights to enforce the Consultant's appointment directly, to careful drafting of warranties and indemnities for inclusion in the novation agreement. The problem, of course, is that none of these methods have been properly tested within the new framework and many will be hoping that the Court of Appeal removes the need by overturning the decision.

If, however, the outcome of the appeal continues to favour the Consultant, it is to be hoped that the Court will formulate its reasoning in such a way as to leave the Contractor in no doubt as to an effective and practical method for crystallising its risk-passing intentions.

For further information please contact Edward Spencer by e-mail at edward.spencer@cms-cmck.com or by telephone on +44 (0)20 7367 3089.