Poorly drafted no assignment clause did not stop novation by conduct

In the case of Magee v Crocker, the High Court has agreed to grant a declaration, ruling that a novation by one contracting party had taken place in favour of a new party. A novation is where one party replaces an existing party to a contract and takes over their rights and obligations. The contract was a share purchase agreement, but the principles could apply to any contract.

The contract contained a no dealing clause, which restricted the parties from assigning or dealing with any rights under the contract without the prior written consent of the other party. In the event, one of the parties transferred its shares to a third party and they executed a deed of assignment in favour of the new company, purporting to assign all rights and obligations relating to those shares. The outgoing and incoming parties sought a declaration from the High Court that the transfer had gone ahead as a novation by conduct, whilst the remaining party to the contract argued that it was not valid as it had not given written consent.

However, the High Court ruled in favour of the transfer, deciding that on the facts a novation by conduct had occurred, despite the no dealing clause in the contract and there not having been written consent by the remaining party. There were some factors pointing to the novation by conduct, including the fact that the remaining party had been involved with issuing new share certificates to the new party - thus requiring all parties' involvement. A novation by conduct had therefore taken place.

One factor the Court looked at was that the clause did not prohibit novation and only assignment - which only deals with rights. The rest of the wording should be read in that light too as it referred to "dealing with any rights under the contract". The wording did not cover the scenario that had occurred, ie novation rather than assignment.

Takeaways from this case

There are a lot of standard clauses in contracts - so called "boiler plate". Often, businesses are not aware of all the boiler plate that needs to go into contracts, or even the dangers of having some wording for the boiler plate instead of others. I see this with assignment clauses like this; or sometimes others such as entire agreement clauses. Without understanding the legal implications of using certain words rather than others, businesses could be leaving themselves exposed.

If you would like advice on drafting commercial contracts, please contact Paul Gershlick in our Commercial Contracts team on 07795 570072, or complete the form below.