An (almost) fatal assignment: when to novate or assign!

The significance of novation and assignment

The case Shaylor Group Ltd v Valescure Property Ltd [2024] EWHC 750 (TCC), reported earlier this year, demonstrates the importance between the differences of novation and assignment (and in this case, whether a contract had been novated or assigned at all). The significance of novation and assignment arose because the court had to assess whether the adjudiator had erred in his decision and if the contractor was entitled to a £11m payment, due to niche circumstances concerning the calculation of a post-termination statement of accounts.

Background

The defendant, Valescure Property Ltd (VPL) (as employer), entered a building contract with the claimant, Shaylor Group Limited (SGL) (as contractor) in November 2017 for £19m (with further variations) to build 157 apartments in the Jewellery Quarter of Birmingham (the contract). The wording of the contract was similar to the JCT suite of construction contracts. 

During the works, the parties fell into dispute over the correct value of the work done by SGL. In June 2019 SGL alleged it was owed £750,000 and VPL maintained it had overpaid by £850,000. The works at this stage were not close to being completed. SGL subsequently went into administration triggering the contract’s termination provisions for insolvency.

VPL decided to press on with the works until April 2020 when it purported to assign its rights and obligations to Grainger Plc (Grainger). It was unclear if the notice of assignment had been provided to SGL, or if SGL’s consent was required. Meanwhile, SGL (in administration) continued to dispute the amounts owed under the contract and subsequently commenced adjudication proceedings against VPL.

First adjudication

SGL claimed that VPL:

1. had breached the contract by failing to provide a statement of account post-termination; and
2. owed SGL a total of £11,264,544.57 as the figure due under the contract.

The first adjudicator decided that VPL had both breached its obligation to draw up a statement of account and failed to provide evidence of the loss and damage it claimed by way of set-off against SGL. However, the adjudicator decided they “cannot assume that [VPL] did not incur any such cost”.[1] It was noted SGL had been paid £9m by the last interim application, whilst claiming it was owed the “Forecast Final Account” figure of £20m, as included on its interim application. This was not accepted by the first adjudicator, who was unwilling to accept that "the Works were completed to an anticipated value of £20m without any expenditure beyond the £9m that had been paid to [SGL] before it ceased work".[2] Nor was he willing to "assume that the total amount payable would in fact have been £20m".[3] The adjudicator reasoned that, on the balance of probabilities, the amount due from one party to the other would be "significantly less than £11m"[4] (the difference). Ultimately the adjudicator decided that due to a lack of evidence to support the sums SGL had claimed, he could not say what was owed and consequently awarded a nil payment to SGL.

Second adjudication

SGL then commenced a second adjudication to determine the sum properly due to it under the contract. The second adjudicator accepted he was bound by the decision of the first adjudicator as to breach, but decided he could determine the sum consequentially due to SGL.

VPL took part in the second adjudication despite claiming the second adjudicator did not have jurisdiction. For the first time VPL submitted, that due to the assignment of the contract, it was no longer the employer at the relevant time the statement of account should have been produced. Furthermore, VPL argued that it was the losses of Grainger (as the new employer) that should have been used when calculating the post-termination statement of account.

The second adjudicator identified five issues that had to be determined in order to decide whether either party was entitled to a payment and, if so, how much. These five issues were:

1. The effect, if any, of the assignment
2. The date of completion of the works within the meaning of the contract:
3. The amount of direct loss or damage suffered by VPL.
4. The amount that had been paid to SGL at the time of termination.
5. The value of the works at the time of termination.

On the first four points above, the second adjudicator confirmed he was bound by the decision in the first adjudication. On the question of the value of the work done by SGL up to the date of termination, the second adjudicator was, unlike his predecessor, able to make a determination. Accordingly, he decided to base his decision upon VPL’s last payment notice (as the value of the works done and accepted by VPL’s agent). By comparison between the first adjudicator’s decision (the sums that had been paid to SGL) and the second adjudicator’s decision (on the value of the works), the second adjudicator found he was able to award SGL the difference, £356,008.

Liquidation of VPL

Following the second adjudication, SGL petitioned for the winding up of VPL, who subsequently went into liquidation before enforcement of the second adjudicator’s decision could be brought. SGL was granted permission to bring the enforcement claim (under section 130 of the Insolvency Act 1986) to prove the debt owed to it in the liquidation. 

The judgment - part 8 proceedings

Despite VPL being insolvent, the administrators of SGL decided to pursue a part 8 claim. This was permitted by the courts because the liquidators for VPL were not opposing the application for permission, nor entering any defence on the part of VPL, who was unrepresented at court. The judge, Mr Justice Kerr, noticeably mentioned that he relied upon VPL’s defence as set out in the second adjudication.

Interestingly, SGL was not seeking a straightforward enforcement of the second adjudicator’s decision, but a declaratory relief that the second adjudicator had reached the wrong conclusions, notwithstanding that the decision was in SGL’s favour.

SGL submitted the second adjudicator had erred in his interpretation of the contract and that the value of the works had been significantly higher. Indeed, were this submission to succeed the amount owed to SGL would jump from £356,008 to nearer £11m (which VPL had described as a windfall).

In the judgment, Mr Justice Kerr found:

• The second adjudicator had misinterpreted the contract in determining the amount payable by reference to the value of the work done. This is not what the Contract stipulated as the relevant sum for the purpose of calculating sums due.
• VPL had not sought SGL’s consent to the assignment as was required by the contract.
• VPL could not pass the burden of the contract (to prepare the statement of account and make payment) through an assignment.
• However, whilst the assignment was invalid, the assignee, Grainger, “should be treated as “the Employer” for limited accounting purposes to avoid injustice.”[5] For this reason, the party that had actually incurred costs should be brought into the account. Consequently, SGL was not entitled to its £11m “windfall” on the equitable principle that "where it is a condition of enjoying the benefit that a burden is assumed, the assignee cannot enjoy the benefit without discharging the burden".[6]
• SGL had submitted a case containing a logical fallacy. It had sought to deny the effectiveness of the assignment to transfer VPL's rights and obligations to the assignee, while simultaneously relying on the assignment to deny the incurring of expenses and the suffering of losses by VPL. It could not have it both ways.
• For these reasons, the judge held that declaratory relief was dismissed, and SGL was not entitled to claim the £11m difference.

Key takeaways:

• Had VPL chosen to novate to Grainger (and novated successfully), then SGL would not have been able to bring its claim as it would be directly liable for the costs incurred by the replacement contractor in completing the works under the contract. However, Grainger would understandably have been reticent to agree to this as an assignment effectively protected them from any potential claims being brought by SGL. Accordingly, this is likely to be one of the reasons there wasn’t a novation.
• Conditions surrounding assignment must be followed or else parties risk the assignment being void. The giving of notices is sometimes overlooked due to being thought of as a courtesy rather than an obligation.
• Novation and assignment are very different in their effect and implementation. Parties should seek advice if unsure of the distinction between the two. 
• In construction contracts it is quite common for obligations to survive and continue to have effect post-termination. Therefore, parties should ensure that they correctly follow these even if they were not the cause of termination, so as to avoid any unintended consequences.