Construction Law/Novation Contract
QUESTION: I have a main contract with my client to build a gas processing facility. Separately we entered into a novation contract, and therefore I accepted client's obligations of several purchase orders for various materials. My client is now quoting from our main contract when administering our novation contract. Is our novation contract a stand alone agreement or is it just because we have a main construction contract that he can quote articles from that contract? I assumed our novation contract would be a stand alone contract.
ANSWER: Dear Kade
Thanks for your question. Please clarify the scope of novation contract so that I may advise adequately.
However based on you current scenario, it is understood that the said Novation pertains to a part of overall works and that particular scope has been novated under you.
If my assumption is correct then in my opinion, the rights/obligations of the Novated Scope will be yours; however the same will be governed by the Conditions of Contract included in the Novation Agreement (unless some special clauses have been inserted to relate the novation agreement with your Main Contract).
Hope this helps; else you may send more details and follow-up further....
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QUESTION: Thanks. The Novation scope is for long lead materials that are required for the construction project and these procurement item contracts have been Novated under me and I now have full rights and obligation. The problem is
I pay the actual amount for the material to the vendor but I deduct 7% With Holding Tax under the novated contract AND when I invoice my client for the money for the novated amount, they deduct 7% under the auspices prime construction contract. I feel I am being double taxed! Any insight?
Further to my previous response; hereunder is another response from one of my ex colleague, Hope this will help you:
The question is strictly a taxation matter and is best dealt with by an expert.
The first paragraph is, however, a sad reminder of some of the most fundamental misconceptions that exist about novation. If your client understands that novation means the legal, and therefore contractual, substitution by one of the original signatories by another with the consent of the two original signatories, there won’t be the question of whether the novated contract is standalone. The novated contract is, of course, standalone but that’s vis-à-vis your client and whoever it is who’s his vendor through the novated PO. The obligations that your client has undertaken towards his client through the ‘main construction contract’ are what his client will, and can, always enforce.
Notwithstanding the foregoing, your client should be able to get his answer if he asked himself this question – if I had placed the PO with the vendor instead of my client, would I have had to withhold 7% from my vendor’s invoices? If the answer is Yes, then I’m afraid that it’s just like any other PO.
My personal suspicion is that your client hadn’t factored this in the pricing of his contract with his client. All novation agreements would have been disclosed at the time of tendering; if not, he shouldn’t have accepted it as it stood.