P Eng Suraj Singh Faridabad NCR Delhi	Novation Agreement Sample (Draft) - For Engineers & Managers
Blog	Posted By: suraj on:5/1/2012 11:08:48 AM

Novation Agreement (Draft)

Project: 225 MW Gas based Power Project at ……………………, India - Phase-I

Part A

Brief explanation of contractual terms ‘Novation’ & history for executing ‘Novation’ agreement:

 Article meaning of ‘Novation’

Novation is a substitution of a new for an old debt. The old debt is extinguished by new one contracted in its stead; a novation may be made in three different ways which form three distinct kinds of novations.

 NOVATION AGREEMENT-Contractual meaning

1.       A legal instrument executed by (a) the contractor (transferor), (b) the successor in interest (transferee), and (c) the by which, among other things, transferor guarantees performance of contract, transferee assumes all obligations under contract, and purchaser recognizes the transfer of contract and related assets.

2.       Substitution of a new contract for an old one. New agreement extinguishes rights and obligations that were in effect under old agreement.

3.       A novation ordinarily arises when a new individual assumes an obligation to pay, that was incurred by original party to the contract. It is distinguishable from situation that occurs when another individual makes a guarantee that a debtor will pay what he or she owes to a creditor. In case of a novation, original debtor is totally released from obligation, which is transferred to someone else. Nature of transaction is dependent upon agreement between parties.

4.       A novation also, takes place when original parties continue their obligation to one another, but a new agreement is substituted for old one.

Statutory provision-Indian Contract Act- Section 62, Provides

Effect of novation, rescission, and alteration of contract.

If parties to a contract agree to substitute a new contract for it, or to rescind or alter it, original contract need not be performed.

 Part B

Contractual History leading To This Novation of Existing Original Subcontract Agreement.

1.      M/s. ………………..2^nd party on main contract, a contractor to M/S…………………….. 1^st party on main contract entrusted certain supply & erection contract in capacity of subcontract to M/S …………………….2^nd party on subcontract, designated on lower tier profile subcontracting status.

2.      M/S ………………….EPC contracting company, 1^st party on main contract, allowed tacitly this lower tier subcontractor, ………………..2^nd party on subcontract on project based on tacit request for approval by M/s. ………………………………..2^nd party on main contract.

3.      M/S ………………2^nd party on subcontract performed to its capacity & competency on project, a considerable quantum of subcontract work, as included within referred hereinafter/under, subcontract.

4.      Due to reason beyond control of EPC contractor M/S ………………….1^st party on main contract, contract that existed between M/S ………………..1^st party on main contract, & contractor M/s. …………………2^nd party on main contract, has been terminated effective dated 23 March, 2012 by serving on termination notice under mandate of contract articles enjoyed by 1^st party M/S ……………..EPC contracting company, 1^st party on main contract within that contract.

5.      By virtue of this termination of contract by M/S ……………….EPC contracting company, 1^st party on main contract, M/s. ………………..2^nd party on main contract has lost all its contractual rights to participate on contract & project actively.

6.      A considerable amount has also, not been paid by contractor M/s. ………………..2^nd party on main contract to its subcontractor M/S ………………………2^nd party on subcontract. In consequence of which, subcontractor M/S 2^nd party on subcontract registered an official complaint with ……………………..EPC contractor M/S contracting company, 1^st party on main contract, dated 20 March, 2012 regarding an outstanding subcontract payment due to an extent of 102.53 lacs that M/s. …………………………..2^nd party on main contract should have paid to subcontractor but, that did not realize.

7.      M/S ……………… …………….contracting company, 1^st party on main contract, currently, concerned about unforeseen & uncertain future of this project, resolved jointly & severely, to prosecute relevant critical element of erection & installation remaining to go activities on scope of contract, by engaging optionally, an alternative arrangement of sourcing, appointing either to already mobilized & working entity or to procure a new one on risk & cost of Terminated contractor.

8.      Keeping abreast project interest that can contribute saving & minimizing project lost duration, facilitating an earliest possible delivery of product, M/S …………………………EPC contracting company, 1^st party on main contract elected to negotiate with already mobilized entity namely M/S ………………….2^nd party on subcontract relating to continuation of their scope of works from progress achievement percentage mark that they reached on day of Contract termination onwards for whole remaining scope of subcontract on/under Terminated contract provided, M/S …………………………..EPC contracting company, 1^st party on main contract shall protect their subcontract’s due interests in all respects contractually, sub-contractually, operationally, legally & by law of Novation under provision of Indian Contract Act as well as, relevant common law provisions, whatever could be admissible according to law within India. Consequently, M/S …………. ………..EPC contracting company, 1^st party on main contract & M/S …………………….2^nd party on subcontract jointly attempted successfully for proposition of Novation of subcontract under purview of Terminated contract. Due to foregoing causes, both parties have decided to enter into novation of enforce subcontract, which details for incorporation on that document composition, design/drawn body of Novation of Contract, is given below for purpose of contract execution under purview of India Contracts Act.

Part C

Operations of Contractual Clauses & relevant provisions included within contract between M/S ……………..EPC contracting company, 1^st party on main contract & M/s. ………..2^nd party on main contract:

1.      Since, M/s. ………………….2^nd party on main contract contractor has been terminated effective dated 23 March, 2012, project performance cannot be allowed to be effected adversely due to fact that already, more than 39 weeks have been lost consequently, delaying project final delivery to client.

2.      General purchase conditions clause 21.0.0 Assignment & subletting provides, as given below:

·        Clause 21.1.0 Except for raw materials work of ancilliaries of supplier or part of this order for which makers are named in approved vendor list, supplier shall not assign order or any part thereof, or sublet order or any part thereof, without prior written consent of purchaser.

·        Clause 21.2.0 Supplier to furnish purchaser two unpriced copies of all suborders issued for direct deliveries subvendor items as agreed upon, within seven days of placement of such orders.

·        Clause 42.0.0 Supplier’s default & under it Clause 42.5.0

·        If purchaser shall think fit, it shall be lawful for him without prejudice to any other right he may have under order to take supplies wholly or in any part out of supplier’s hands & reorder with any person or persons to complete contract/order or any part thereof.

·        Inference & construction from foregoing clauses provisions permit without being limited by any contractual qualification or reservation, M/S ……………………….EPC contracting company, 1^st party on main contract, to elect & to resolve Termination risk sever impact, which impedes running/earned progress negatively on foregoing project by appointing, either a new party or an existing agency on project, so as project progress time loss adverse effect is minimized & if not, at least, optimized within application of projects control methodology.

Novation Agreement/Contract

Objective of main contract is to deliver EPC demands/requirements for Ultimate Purchaser Company/Client/Owner/Ultimate Purchaser: M/S ……………………….EPC contracting company, 1^st party on main contract

Contract Form:

Part D

Definition on this Novated Contract parties:

1.      First Party: M/S ………………..EPC contracting company, 1^st party on main contract Called EPC Contractor/Employer, who has undertaken to deliver EPC services to M/S ………………………….client as indicated above.

2.      Second Party: ……………………………..previous 2^nd party on terminated contractor’s subcontract, who had undertaken a service subcontract/purchase order for supply & erection services of plant facility installation as defined in details vide their old contract agreement reference from …………………………………..2^nd party on main contract, 1^st party on subcontract Email- ……………….  address references Order number ………………………………………….. issued via GPI reference ………………………………..with original first party, as named hereinafter,

3.      Original First party: M/s. …………………………………2^nd party on main EPC contract, now stands terminated of its Contract, on this day of this Novation agreement is entered into/executed, between M/S  ………………………..2^nd party on novated contract, former 2^nd party on subcontract & M/S ………………………………..EPC Contractor/Employer.

4.      Original Second party: M/S ………………………….2^nd party on novated contract, former 2^nd party on subcontract, address…………………………E mail ………………………………. hereinafter, called contractor for exactly true scope that it had to prosecute within its subcontract, as referred in foregoing with M/S. ………………………2^nd party on main EPC contract.

5.      Both new contract parties by virtue of this Novation, agree as follows, respecting title project:

·        First party: M/S …………………………..EPC contracting company, 1^st party on main contract. Hereinafter called Employer/Purchaser. Reference included above

·        Second party: M/S …………………………..2^nd party on novated contract, former 2^nd party on subcontract. Hereinafter called Contactor. Reference included above

·        Terminated party: M/s. ……………………………..2^nd party on main contract hereinafter called Terminated party. Reference included above

Other Provisions:

1.      Date of Novation: This Novated contract comes into effect immediately, appointed date of enforcement being 24 March 2012.

2.      Performance Security/Guarantee:……………………

3.      Date of Subcontract & this Novated Contract Mechanical Completion:…………………

4.      Date of Contract Final Completion:………………….

5.      Revised Liquidated damages: ……………………..

6.      Defects Liability period: …..from final handing over/completion

7.      Subcontract Amount:……………………..

8.      Percentage of subcontract works completed cost wise: 89%

9.      Amount received by subcontractor:……………………..

10.   Outstanding Amount On subcontract:…………………………..

11.   Percentage of subcontract works yet to be completed:11% of subcontract purchase order

12.   Amounts due to remedial or corrective works, not due to fault of contractor on subcontract, if applicable:………………………………

Part E

Terms & conditions-General/Contractual:

1.      Novation Contract Documents: precedence -This contract form, Subcontract enforce under Terminated Contract, all financial/commercial documents constituted under subcontract & forming it, MOM dated 5 Feb 2012 under subcontract ambit, all technical & engineering drawings & sketches, all relevant specifications, all communications with Novated contractor post Termination of Contract, Contract provisions under scope of contract reference (terminated contract) 1^st party/employer/001/MECH/HRSG/WO/003/2010 Dated: 25.05.2010, awarded under provision 18.0, Award of contract covered within chapter ‘Instruction to bidder’ to an extent of scope items, activities & works applicable under subcontract & Novated contract, shall together constitute contract documents which all, shall be construed with mutual recognitions with each other & collectively to define, on or for every consideration or resolution of disputes.

2.      Sequence to contract documents construction for interpretation/inference.

Precedence to documents shall be followed as indicated below for purpose of interpretation or construction of documents contractual relations definitions.

This contract/Statutory inspection requirements/Terminated Contract/Subcontract & MOM or other records within its purview or ambit/Design Drawings/Working drawings/Shop/Installation drawings/Specifications/schedules/industrial conventions & general practices etc.

Agreement in principle By Employer:

1.      Employer agrees to pay all outstanding dues/monies to Contractor that he had to receive from subcontract prosecuted works in line to terms & conditions provided in relevant paragraphs below under ‘Payments’. This amount shall be released in proportion in due course in installments & as referred under Payment clause below.

2.      Employer agrees to pay all monies, which shall become due to be paid to contractor in future for all works carried out or prosecuted/performed by contractor satisfactorily until, whole project within its scope is delivered.

3.      Employer agrees to commit, honour, regard, observe & comply with, all provisions that were included within subcontract, saving exceptions specifically included or revised herein to be no more applicable on subcontract, which this contractor had agreed with Terminated contractor.

4.      Employer agrees not to impose any Liquidated Damages clauses that were applicable on Terminated contract on to this contractor until, day of this Novation agreement is executed.

5.      Employer agrees to do, act, carryout, manage, provide all requirements whatsoever, that constituted as similar activities on Terminated party’s responsibilities.

Agreement in principle By Contractor:

1.      Contractor agrees to carry out all remaining works or activities, not performed under original subcontract that is an integrated part of this contract henceforth, for all contractual & legal purposes.

2.      Contractor also, agrees to obtain approvals, process procurement, deliver to site, install or erect, & effect all following in sequence activities until, carried out works are delivered satisfactorily in compliance with provisions of relevant terms & conditions on terminated contract, a copy of which shall be provided to contractor.

3.      Contractor also, agrees to deliver installations on date of completion appointed herein without causing any further delay under any circumstances that are within contractor’s controls.

4.      Contractor also, agrees to allow a new LD specified above per day or part of a day & after accumulation, deductable not more than an amount specified in foregoing LD provision.

5.      Contractor agrees to own full contract responsibility, accountability, liabilities & all other deeds & acts, that shall be required by contractor to carry out on remaining works on contract as well as, remedial works, if so required from previous subcontract.

6.      Contractor agrees to comply with all relevant, pertinent provisions included within Terminated contract, those shall be applicable for prosecution of various works & activities with an understanding that all such terms & conditions would remain in force till completion of all works within scope of this contract as well as, in subcontract.

7.      Contractor agrees to own responsibilities & obligations in a similar manner or fashion as were agreed in full implications by terminated contractor, to an extent full scope of this contract & subcontract is related.

8.      Contractor agrees to comply with all requirements respecting standard engineering construction industrial practices for disciplines such as, quality controls, quality requirements/assurances, health, safety & environment etc. Project safety is governed under using required safety equipment on all operations all times. Quality controls & quality assurance/requirements are governed by standard testing procedures for various activities & compliance to strictly adhering to quality procedures & documentations to an extent required within scope of this contract.

Part F

Payments:

1.      An amount rupees 20 lacs (twenty lacs only) shall be paid to contractor immediately, for meeting very urgent requirements to keep activities moving. This allowance shall be considered as an advance payment against provision of surety (to be decided).

2.      Recoveries of this advanced sum, has to be adjusted on running /interim payments that shall be approved for carrying out remaining scope of works.

3.      Progressive payments shall be made in proportion to works carried out prior to novation & only, when works are accepted after quality & quantity measurements.

4.      Contractor shall provide to employer or purchaser all evidences of whatever payments were received by him from Terminated contractor. All subcontract priced documents shall constitute part of this contract.

5.      Contractor shall also, provide an attested copy of original work order & payment certificates received from Terminated subcontractor.

6.      Contractor shall undertake to record with employer/purchaser, any further payment received post Termination of contract.

Part G

Special Conditions:

1.      Suspension of works restriction: Avoidance of suspension of works- Both parties undertake to avoid to a maximum extent possible, any move to suspend any part of scope of remaining works, so that appointed target date for completion is achieved successfully. Suspension of works conditions shall be applied only when, circumstances occur very remotely beyond controls of either party namely force majeur of serious nature like natural calamity.

2.      Application of efficiency on works-All works covered in this contract purview shall be carried out promptly without involving any remaining time wastage even, utilizing holidays for work to maximum extent without concerning about overtimes payments to involved personnel. Piece work payment rate shall be preferred to be applied on performance of this scope of contract.

3.      Encountering problems-In case of certain problems are encountered unforeseen relating to causing delay on works & contractor is unable to resolve it, contractor shall immediately, inform employer to extend assistance for resolution for an earliest achievement of installations.

4.      Transfer of responsibilities & liabilities-By virtue of this novation agreement, all responsibilities that were shared by Terminated contractor till day of Termination, now, henceforth, shall be shared in full by employer to an extent project management / administration is concerned. Contractor shall report to employer for any issues involved whether, contractual, statutory, cost wise, commercial, managerial or others. 

5.      Relations with Terminated contractor-Contractor shall have no more functional or contractual relations with Terminated contractor. Contractor shall provide all available documents of any sort whatsoever, relating to subcontract under Terminated contract, to process all those documents as a part of this contract for all contractual & legal purposes.

6.      Disputes with Terminated contractor- Novated contractor shall not deal with any dispute that exists due to any cause pertaining to period prior to this novation agreement. It shall be responsibility of employer/purchaser to deal contractually, legally or otherwise, with Terminated contractor. Novated contractor is required to complete its scope promptly with defined time schedule quantitatively & qualitatively.

Part H

Communications: Between contract parties

1.      Contractual-Preferable medium E mails, 2^nd is by faxes followed original by couriers, contract meetings, progress review meetings, work done valuations etc.

2.      Technical- technical queries, clarifications, method statements, procedures, approvals etc.

Part I

1.      Insurances- All insurances by third party for all personnel shall operate according to law of India applicable in project location region.

2.      Safety- safety shall be conducted according to project safety plans & relevant industrial safety procedures adhered with.

3.      Contract Jurisdiction for Adjudication of disputes: ?