Informal novation
Gama Aviation v MWWMMWM (High Court) [2022]
A novation is distinct from a simple assignment. It requires the consent of all 3 contracting parties (X, Y and Z) and it involves the original contracting party (X) being released from contractual liability and the new contracting party (Y) stepping into the shoes of X. In other words, a novation facilitates a clean break unlike an assignment where the original contracting party, X, remains fully liable for future non-performance by Y. However, seemingly, a novation involves the termination of the original contract between X and Y and the creation of a brand-new contract between Z and Y on precisely the same terms.
Facts:
Aircraft services provider IJL concluded a contract with MWWMMWM Ltd (the Customer) in 2008 for the provision of aircraft management and operation services. Following an acquisition and internal re-organisation in 2014, all services performed under the contract were taken over by GAMA Aviation UK Ltd. GAMA continued to perform the contract and deliver services to the Customer, with the Customer paying GAMA’s invoices just as it had paid IJL, until January 2019 when the Customer stopped payment. GAMA subsequently brought a debt claim against the Customer for unpaid invoices.
As GAMA was not a party to the original contract it argued that it had become a party to the contract by implied novation when it had taken over the performance of the contract from IJL. For a novation to be effective, all parties to the original contract and the incoming party must consent to it.
The Customer’s novel argument relied on a termination clause in the contract to prevent any implied novation. The clause in question said
“This Agreement shall commence from the date of this Agreement and shall subject to [clause dealing with termination for breach] continue until such time as either party gives the other not less than three months’ notice in writing of termination of this Agreement.”
The Customer asserted that the termination clause prevented an informal novation as it would be inconsistent with the requirement that the contract could only be terminated by giving three months’ written notice. No notice of termination had ever been given.
Decision:
The court found that an informal novation was necessary on the facts in order to give business efficacy to the dealings between GAMA and the Customer.
The judge found that the termination clause could have two possible constructions. Either it provided an exclusive code for contract termination simply on notice, or the clause was limited to unilateral termination by one party (as opposed to a mutually agreed termination). The judge decided that the interpretation limiting the clause to unilateral termination was more consistent with business common sense. As the termination clause was found to be limited to unilateral termination, it did not prevent the implied novation, which depended on termination by mutual consent.
The court also determined that even had the termination clause been effective in preventing the implied novation, the Customer was prevented (in legal terms ‘estopped’) from relying on the clause in any event. The basis for the estoppel (first set out in the 2018 Supreme Court Rock Advertising decision see http://www.trglaw.com/news260.html ) being that it was unjust to permit a party to rely on the express terms of the contract where the other party has reasonably relied on the contract as informally varied (or in this case novated).
The judge concluded that such an estoppel arose on the basis that the Customer had encouraged GAMA to believe that it was now contracting with GAMA for the services under the contract. GAMA had relied on that and incurred the cost of performing the contract.
Where a course of dealing with a new party, having effectively stepped into the shoes of the original counterparty, has been established – this may give rise to a Rock Advertising estoppel argument as happened in this case.
Points to Note:
- This case illustrates that if you, as a contracting party, wish to object to another entity stepping into the shoes of your original counterparty, then you need to do so explicitly and reasonably promptly upon becoming aware of the new provider. Failure to do so, particularly if you have started making payments to the new entity, may mean that you have consented to an implied novation without realising it or having intended to do so.