Where the business of a partnership is incorporated the existing contractual rights and obligations of the partners are seldom novated to the new company. That is because that would involve the participation of each outside contracting party in the novation arrangements.
Instead the new company will, as between itself and the old partnership, take over the benefit of those rights, and assume responsibility for the performance of those obligations, probably informally.
However the position of the outside contracting parties remains unchanged. Generally, their contract will still be with the old partnership even if the old partnership has delegated its performance to the new company.
This was ruled to be the position in the High Court case of AT Stannard Ltd v Tobutt & Anor [2014] where the employing main contractor unsuccessfully challenged the sub contractor’s successful reference to adjudication.
The Employer challenged the adjudicator’s decision to award the full amounts claimed against the old partnership of £53,392.63 plus interest based on the facts that:
– the subcontractor had informally participated in the “novation” of the subcontract from the old partnership to the new company; and
– the breaches complained of had occurred whilst the contracting parties had still been the old partnership and the subcontractor; and
– such “novation” had passed the benefit of the old partnership’s rights and the burden of its obligations to the new company; and
– the “novation” which the subcontractor had informally participated in had released the old partnership from any liabilities for the breaches and had caused the new company to assume those liabilities; and
– the “novation” meant the parties to the contract were now the new company and the claimant; and
– therefore the adjudicator had had no jurisdiction to make the award against the old partnership.
The High Court rejected any idea that there had been any informal participation by the subcontractor or any “novation”. It had been the sort of informal takeover mentioned above.
Had the old partnership wished to challenge the adjudicator’s jurisdiction they should have done so in the adjudication proceedings instead of taking part in them without objection and waiting for an unfavourable outcome and doing it then. Indeed, by expressly and actively participating in the adjudication “without any reservation”, the old partnership had waived any right to challenge the adjudicator’s jurisdiction.
The court expressed disapproval of parties who challenge adjudications on jurisdictional grounds instead of challenging the substance of their outcomes in further arbitrations and legal proceedings.
This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.
Original article: Challenge to adjudicator’s jurisdiction over “novation” unsuccessful and waived.