Implied novation by conduct despite contract requiring variations and termination to be in writing
Gama Aviation (UK) Ltd v MWWMMWM Ltd  4 WLUK 364, and addendum approved on 17 May 2022
Will an express unilateral termination clause or a clause requiring any variation to the contract to be in writing prevent an implied novation from occurring?
The key takeaway
Implied novation will not be prevented by a unilateral termination provision or a clause requiring any variation to the contract to be in writing if novation can be inferred from the circumstances.
In a High Court application for summary judgment, GAMA Aviation (GAMA) claimed $1.35 million in unpaid fees due under a 2008 Aircraft Support Services Agreement (ASSA) originally entered into by International Jetclub Limited (IJL) the second claimant, with the defendant MWWMMWM (M), to provide services for the management and operation of the aircraft.
The ASSA contained a standard clause requiring any variation to the ASSA to be in writing. A separate clause required unilateral termination to be in writing.
The claim was brought by GAMA because under a company reorganisation, IJL became part of the GAMA group. GAMA took over performance of the ASSA including holding the regulatory permissions which companies need when they service aircraft. They contended that the ASSA had been novated from IJL to them by virtue of the parties’ conduct, for example, M started to receive invoices from and to pay GAMA having previously paid IJL and requested that GAMA provide various services. GAMA became the sole entity with the regulatory approval for, and were registered as the operators of, the aircraft. GAMA and M also sought to negotiate a revised agreement, but this was never finalised.
M’s defence was that the novation was ineffective. GAMA had attempted to cover off this argument by entering into an assignment of any rights which IJL had in relation to the ASSA. M also claimed that the assignment was not effective because their consent was required (not to be unreasonably withheld) and they had not given their consent because they “may have” a residual counterclaim (which they did not explain).
The High Court granted GAMA summary judgment, finding that there was an implied novation and GAMA was entitled to the sums claimed. Case law established that a novation can be inferred from conduct if that inference is necessary to give business efficacy to what happened. Evidence of subsequent conduct was also relevant; the fact that the parties were negotiating a revised written agreement supported a finding that the original agreement was novated.
The clauses requiring variation of the contract or unilateral termination to be in writing did not operate to prevent the novation. This was because, first, the generally accepted effect of a novation is that it rescinds the original agreement and replaces it with a new one. Therefore, this was not a variation to the terms of the agreement. Second, the termination clause merely provided for unilateral termination and not mutual termination (ie there were no formalities dictating how the contract could be terminated by agreement).
The court also found that M had unreasonably withheld its consent to the assignment.
Why is this important?
This is a summary judgment decision; however, it still provides some useful examination of novation by conduct. Novation is a matter which merits express provision in an agreement, particularly as to when and how it can occur. The decision confirms that in the absence of formal parameters the law will follow the facts and if the parties have, within the factual matrix, novated then the new contract will be enforceable.
Any practical tips?
To avoid potentially lengthy and complicated arguments down the line, agreements should include specific provisions either barring novation altogether, or defining the scope within which novation can occur. If no such provision is made in the contract, parties should carefully consider their conduct when a third party becomes involved since the court will consider such conduct when determining whether a novation has occurred.