Cornerstone – Consultants after novation: who pays when the employer instructs?

The recent case of Munkenbeck and Marshall v. Vinyl Factory Limited (2019) serves as a good reminder, especially to consultants, to only carry out instructions given to you by those you are in contract with.

This case was brought to the Technology and Construction Court (TCC) by an architect (Munkenbeck and Marshall). The architect was appointed by Vinyl Factory and a subsidiary to carry out design work relating to the redevelopment of baths and a car park in London.

Much of the case revolved around a dispute of the level of fees agreed for the pre-planning and pre-novation aspects of the scheme. It was brought after the architect’s claims against the contractor to which it had been novated, ISG, had been settled.

The most noteworthy aspect of the case was the claim made by the architect for unjust enrichment arising out of additional works instructed by the employer post-novation. It argued that the employer had benefitted from design work that it had instructed, but had not paid for.

No claim could be made in contract, as the architect had no direct appointment with the employer post-novation. The novated appointment included a clear mechanism regarding the instruction of additional services (i.e. that the architect would only carry out additional services on the written instructions of the contractor, and following approval by the contractor of a fee for such additional services). The novation agreement included a ‘release’ clause, releasing and discharging the employer from all liabilities arising out of the appointment arising prior to, or subsequent to, the novation. It also contained an ‘acceptance of liability’ clause, whereby the contractor accepted all liabilities arising out of the appointment whether arising prior, or subsequent to, the novation.

The architect tried to argue that as it had carried out design work on the instruction of the employer, the employer had been ‘unjustly enriched’ with the benefit of that additional work. Further, as the instruction came directly from the employer the appointment was ‘irrelevant’, as the employer instructed services which fell outside of the original appointment.

This stance was rejected by the TCC, which stated that all additional services are, by their nature, ‘outside the scope’ of the appointment, else they would not be ‘additional’. Construction projects routinely include requests for additional work or variations, especially those relating to value engineering (as was the case here). As the appointment was between the architect and contractor, there was no direct cause of action against the employer (even if it derived benefit).

The TCC considered that on receipt of direct instructions from the employer, the architect had three options if had wanted to secure payment:

(i) to ignore the instruction as it had no obligation to follow any instruction from anyone other than the contractor
(ii) to seek to make a separate specific payment agreement with the employer; or 
(iii) comply with the additional services clause in the appointment and obtain written approval for such services from the contractor, for an agreed fee.

It had done none of these. The TCC further found that the beneficiary of the ‘enrichment’ was not in fact the employer, but the contractor whose obligation to pay fees under the appointment was reduced. As a result, the employer was not liable to the architect for any fees arising post-novation, and as the architect had already settled all claims against the contractor, it had nowhere to go. This case reminds consultants to be wary of employers who, post-novation, still try to instruct services directly: carrying on without thinking of the proper contractual structure may leave them out of pocket.

This article is from the March 2020 issue of Cornerstone, our monthly newsletter for those working in the construction industry. To download the latest issue, please visit the newsletter section of our website. For further information please contact a member of Birketts’ Construction Team.