The High Court has held that an agreement was novated through the parties’ conduct even though it included a prohibition on dealings without written consent.
Novation is the process of replacing one of the parties to a contract with a new party. The incoming party takes on the rights – and, importantly, the obligations – of the outgoing party. Novations are a common feature when the business of a company is purchased and where ongoing customer contracts may be transferred from the company selling its business to the purchaser. But in theory any type of contract can be novated/transferred.
In Magee and others v Crocker and other, a dispute surrounding novation arose after a share transfer from one trustee company (Camelot) to another (Fitzpatrick) had purportedly taken place. The High Court needed to establish whether Fitzpatrick had replaced Camelot in the shareholders agreement and was therefore subject to the same rights and obligations as Camelot had been.
The shareholders agreement contained an assignment clause which provided that any assignment or novation of the agreement by one party was subject to the prior written consent of the other parties. It also included a clause requiring any contract variations to be in writing.
Mr Crocker argued that because consent had not been obtained in accordance with the assignment provision, the agreement had not been novated to Fitzpatrick so, accordingly, Fitzpatrick was not a party to the shareholders agreement and therefore not entitled to the declaratory relief they were seeking under the shareholders agreement.
Generally, it is possible for a contract to be novated by virtue of the parties’ conduct. In this case the Court found that this is what had happened, taking account of the following when reaching its decision:
In this case the Court found that this is what had happened, taking account of the following when reaching its decision:
- There had been discussions between Fitzpatrick and Crocker where it had been said that Fitzpatrick would ‘step into Camelot’s shoes’ as far as the shareholders agreement was concerned.
- After the shares were transferred, the parties had relied on the shareholders agreement for a significant amount of time before the claim was made and, in any event, novation should be inferred to give the transfer of shares the result that was intended (in this case, for Fitzpatrick to take over from Camelot).
The wording of the assignment clause was significant for the Court in making its decision, because the Court’s interpretation was that it did not prevent an informal novation. The wording prohibited bilateral dealings of a single party, rather than consensual arrangements concerning multiple parties.
Although novation by conduct can replace contractual terms, there remains a high threshold for courts to determine that novation by conduct has occurred, and evidence is required to support it. Nevertheless, when agreeing contractual terms, parties should take care to ensure that if the intention is to prevent novation by conduct specifically, that the relevant terms in the agreement explicitly refer to this.
It is worth noting that Fitzpatrick also attempted to rely on promissory estoppel, which the Court did not accept. Promissory estoppel is the concept which allows a claimant to recover damages where there is no actual contract in place but where a promise has been made which the claimant has relied on (and relied on it reasonably) to their detriment. The judge refused Fitzpatrick’s argument that it applied to them on the basis that there was no legal relationship between Fitzpatrick and Crocker and that Fitzpatrick could have been trying to use promissory estoppel to establish completely new rights against Crocker.
If you have any questions as a result of this article, please contact: [email protected]
