Concept of Novation in EPC (Engineering, Procurement & Construction) Industry’s Contracts



Above is Pictorial re-presentation of Novation Process:

INTRODUCTION:  Doing Business is very challenging, Clients / Owners are finding all best ways to minimize their Cost and Schedule of building Energy Sector Plants. Novation of Contracts / Purchase Order to EPC Contractor is one of the best techniques in Energy Sector to reduce cost and minimize schedule risk.

Building a large Plant required Budget in Billions of Dollars, and Major cost component (Appx 20-25%)  associate with Critical Project Long Lead Items. As these long lead items comprise large sums of money, substantial cost & schedule risk, huge liabilities.  Engineering & Procurement process of these Long delivery items some time takes months or a year to negotiate. So Owner prefer to finalize these Contracts during the FEED stage, It helps Owner to negotiate best market rate for critical Long lead items  and on later date Novate these Long Lead Items to EPC Contractor to execute.

WHAT IS NOVATION In EPC INDUSTRIES? :  Novation is a process by which Contractual rights and obligation transferred from Owner to EPC Contractor or it is a transaction by which, with the consent of all the parties concerned, a new contract is substituted for one that already exists.

BASIC CONCEPT:

In novation process, we discharge the original contract between the Owner & Supplier / Manufacturer and substitute it with a new contract between the Supplier / Manufacturer and a new incoming party (EPC Contractor). The incoming party (EPC Contractor) must perform the contractual obligations (under the new contract) that were formerly owned by the outgoing party (Owner) under the original contract.

It is a triparty agreement between the original parties (Client & Supplier) and the new party (here is EPC Contractor). A novation usually takes the form of a deed called Deed of Novation.

Due Diligence of Main Contract:  Due diligence involve following critical area of Contractual obligations:

Here we clearly specify responsibilities, liability and Risk of the original Supplier / Manufacturer and the new EPC contractor at pre-novation stage, It is often supported by indemnities. We also review representations and warranties with respect to the power of the original contractor and new EPC Contractor to enter into the deed of novation.

DEED OF NOVATION:

This is the final stage where triparty Agreement get signed among Owner, Supplier (or Manufacturer) and EPC Contractor.

  • Deed of Novation clearly defines the responsibility of EPC Contractor to be performed for the successful execution the contractual obligation with Supplier/ Manufacturer.
  • It also explains Supplier to whom they have to approach for any breach of Contract.
  • It also ensure that the proper due diligence has been performed before novation by EPC Contractor.
  • It ensure ethics and probity maintain in novation process.