Dan Morris, 16 July 2026
Construction Contractors: Never Accept Novation of Unseen Consultancy Terms
For each new development, a developer will typically set up a separate, special purpose vehicle (SPV). SPVs are separate “shell” or “$2” companies, so called because they have no substantial cash or assets, only the $2 in capital that their parent company pays up on their establishment. Once the SPV’s special purpose is achieved (construction and sale of lots), the vehicle is wound up and ceases to exist.
The Risk of Novation
Commitments that continue after practical completion, typically consultancy agreements with design consultants (architects, various engineering consultants, surveyors, etc.), are novated to the construction contractor.
- The design team bears the primary onus to get things right and the preponderant liability if things go wrong.
- This is the deep liability footprint that a construction contractor will inherit from the developer-SPV by novation at practical completion.
- Contractors must assess if liability under the novated design contracts is limited, capped, or excluded, and if the insurance cover is commensurate with the design risk.
Case Example: Lacrosse Apartment Tower
In Owners Corporation No.1 of PS613436T v LU Simon Builders Pty Ltd [2019] VCAT 286, where combustible cladding fueled an inferno, the preponderant liability was held to lie with the fire safety engineer. However, the Council of Owners will pursue the construction contractor, which holds the frontline contractual liability, because the contractor remains liable for defects for at least six years after practical completion (possibly longer if the defects are latent). The contractor is then left to take third-party action against the negligent consultants, who must be joined due to proportionate liability legislation.
Actionable Advice:
Construction contractors must get their legal advisor to look at the underlying terms of engagement between the SPV and the design team before signing the construction contract. If the SPV resists, walk away.
Managing Construction Management Agreements (CMAs)
CMAs are agreements to manage construction projects, imposing a professional standard of care on construction contractors—a much higher standard than typically applies. This exposes contractors to a greater risk of liability and may be harder or more expensive to insure against.
Additional Risks of CMAs:
- Novation: When the proponent is a developer’s SPV, risks arise from the standard novation, by the developer to the construction manager, of construction, supply, and consultancy agreements, as discussed in the dangerous novation article.
- Delay Liability: A construction manager typically risks liability for the delay of any contractor it is required to manage, even though those contractors are contracted to the developer prior to novation.
Actionable Advice:
DO NOT SIGN a construction management agreement without having engaged an expert construction lawyer to consider and advise on it and all related agreements, to negotiate better terms, and to help you comply.