During the planning phase of a chemical process plant (“Project”) which requires several technologies, a project developer (“Purchaser”) may prefer to select technology licensor(s) (“Licensor”) to carry out developmental work through early work agreement (“Agreement”). Work through this Agreement can provide basic engineering, specifications of long lead items (“LLIs”), technical evaluation of bids for LLIs and prepare cost estimate and time schedule for execution of the Lincesor plant. At a later stage, the early work can be transferred to the EPC contractor (“Contractor”) for construction of the Project.

One of the arrangements which can be used to utilise the work done by Licensor is Novation Deed between Licensor, the Purchaser, and the Contractor. This arrangement can be useful in EPC contract where the Contractor carries single point responsibility for delivering the Project against performance guarantees.  

Novation Deed permits substitution of the Contractor for the Purchaser, and the Purchaser is excused from any liabilities and gives up all rights under the Agreement. However, before proceeding with Novation Deed, the governing law as applicable to the Novation Deed in relation to the Contract should be examined for applicability of the concept so that the Novation Deed can be legally enforced, if the need arises.

The characteristics of the Novation Deed are :

• The Agreement between the Purchaser and the Licensor must be valid.
• After effectiveness of Novation Deed, the Contractor takes over all duties and obligation of the Purchaser.
• After effectiveness of Novation Deed, the Purchaser’s association with Licensor is extinguished.
• Purchaser remains responsible for all obligation before effectiveness of the Novation Deed.
• The Purchaser transfers all its rights and obligations under the Agreement to the Contractor and the Contractor takes over all rights and benefits of the Purchaser under the Agreement.
• The Contractor agrees to perform the Agreement and be bound by its terms in every way as if it was the Purchaser.
• The Contractor and the Licensor agree to perform the Agreement and be bound by its terms in every way.

The Licensor and the Purchaser release each other from all future obligations under the Agreement.

The advantages and disadvantages of the Novation Deed in the Project are described in the subsequent paragraphs.

Advantages

It is one of best method to reduce cost and time schedule risk. The Agreement with the Licensor permits the Purchaser to define the basic parameters of the Project and determine cost-benefit analysis. The foremost advantage of the Agreement and Novation Deed is the time savings in execution of the Project and determination of the cost upfront.

The work done by Licensor becomes readily available to the EPC Contractor to carry-out due diligence on the Licensor technology and use the data to determine the performance guarantees, time schedule and contract price. Due diligence made before the Novation Deed permits executed work to be used for the Project and taken as fit for purpose.

Preparation of request for quotation for LLIs and obtaining bids permit the Project to take advantage in the EPC contract phase. Using technical bid evaluation of LLI bids, the Contractor can determine the most economic mode of transportation for oversized consignment which helps to reduce the risk to the Project.

Even though through Novation Deed, the association between the Purchaser and the Licensor is extinguished, the Purchaser has the same interest in the outcome of the new arrangement due to stake in the Project.

Novation will not be an issue to the extent any variation to design is made by the Contractor and paid accordingly.

Disadvantages

The Contractor takes-over the partly executed work with profit motive. The Contractor does not take over interest of the Purchase as the Contractor has obligations as per the EPC contract.

The Licensor is unlikely to cooperate with either party in case of legal issues. Following Novation Deed, the Purchaser has no right to make any claim against the Licensor as the Licensor is now subordinate to the Contractor. Depending upon the licensing fee arrangement, the Licensor may have to collect Licence fee for each year of operation which may make Licensor cooperation with the Contractor unlikely in case of legal dispute.   

The risk associated with work done on instruction of the Purchaser before effectiveness of the Novation Deed cannot be totally extinguished. If any instruction given to the Licensor by the Purchaser before effectiveness of Novation Deed was not disclosed to the Contractor and it caused significant risk, the Contractor may make efforts to pass-on the liabilities back to the Purchaser. To illustrate the issue, an example of a plant will be appropriate. The plant was designed for operating pressure and flow rate much higher than previous operating designs and without experience of using the type of raw material required in this case. This plant experienced issue with quality of production. During investigation it was noted that in early stages the licensor had recommended a pilot plant test to which the purchaser did not agree for economic reasons. Consequently, the results obtained through experimental work were used to design the plant. This fact when came to light  became an issue between the parties. However, the issue was amicably settled between the parties.