Contract novation – consent inferred by conduct despite written restrictions in contract

The question

Where consent for novation has not been provided for explicitly in a contract, how may courts approach inferring consent by conduct?

The key takeaway

The court found that the agreement was novated by conduct despite the agreement containing various restrictions on variation and transfer. The requirement for prior written consent for a transfer was considered to be waived by the remaining party who provided retrospective consent by subsequent correspondence.

The case

Musst Holdings Ltd v Astra Asset Management UK Ltd [2023] EWCA Civ 128

The background

Mr Mathur developed a new business in 2012 involving attracting investors to invest in “synthetic” asset backed securities. Mr Siddiqi’s role in this was to introduce contacts, provide his own technical expertise and to coordinate distribution activity through his company, Musst Holdings Ltd (Musst).

Mr Mathur intended to provide these investment services under two companies (collectively known as Astra). These companies did not have the necessary regulatory approvals to conduct business so Mr Mathur traded under two, already approved, companies (Octave). In practice, Astra did the work on behalf of Octave, but Octave were the contracting party.

In 2013, Octave entered into an introduction agreement (Octave Contract) with Musst. By this agreement Musst introduced investors to Octave and received a 20% share of the management and performance fees. Just over a year later, Astra obtained FCA authorisation and agreed in correspondence that, for a nominal amount, they would take over Octave’s investment management responsibilities and receive the fees direct. The Octave Contract was not mentioned in this correspondence, however, in separate correspondence, Musst agreed to invoice Astra. Thereafter, Astra paid Musst’s invoices.

In 2016, Astra began to experience financial difficulties and stopped payments to Musst. Musst brought a claim for breach of the Octave Contract, which it claimed had been novated to Astra. It sought an order for payment of the revenue share to which it claimed it was entitled either contractually or on the basis of unjust enrichment. Astra denied the contract was novated because a draft contract was sent to Musst but it was never agreed.

The court at first instance acknowledged that there was no express agreement on novation, that the language of novation had not been used and that it would be wrong lightly to infer a novation. Instead, the court focused on the parties’ conduct—Astra and Octave were closely related entities working from the same address and were evidently seen by the parties as such. There was an overlap of staff between Octave and Astra and they shared the same offices at the date of the novations. The lack of formality was therefore not surprising—both parties anticipated that Mr Mathur would “spin out” of the Octave umbrella. Astra replacing Octave was no different from a name change. Further, the request on the part of Astra to Musst to be invoiced the money instead of Octave was not administrative but substantive. Astra was not acting as agent for Octave, it was acting for itself as a consequence of the transfer of business from Octave to Astra.

The High Court found that the contract had been novated by conduct. Astra appealed.

The decision

Denying Astra’s appeal, the Court of Appeal (CA) found that the court at first instance was right in its finding that the contract had been novated by conduct.

The CA specified that consent will only be inferred from conduct if that inference is required to give business efficacy to what happened. Repeating many of the points made by the court of first instance (see above), the CA emphasised that the parties knew that Octave was being used because Astra was not initially authorised and that Astra presented the change as the name changing exercise which, from a commercial perspective, it was. When the income steam transferred to Astra, Octave dropped out of the picture and had no continuing role. The judge held that a novation was not just necessary to give business efficacy, it was the only rational explanation for the parties’ conduct.

The court focused on three clauses of the Octave Contract as relevant to the issue of novation. The first was clause 9.4 which provided that Octave must do “everything within their power” to retain responsibility for management of the funds. Despite this, Octave handed over control to Astra in 2014 without seeking Musst’s consent. However, Musst waived this breach by continuing the arrangement with Astra. The draft written novation agreement was then simply an attempt to formalise what had already been agreed by conduct.

The court then turned to clause 16, a “no oral modification” (NOM) clause which provided that the contract could not be varied unless the variation was in writing and signed by the parties. The court dispatched this point promptly on the basis that a novation is not a variation because a varied contract remains in place whereas a novation replaces the contract with a new contract between different parties.

Clause 17 of the Octave Contract imposed an obligation on Octave not to “assign or transfer... or deal in any other manner” with any of its rights and obligations under the agreement without prior written consent. The CA held that it was open to Musst to waive the requirement for prior consent and instead provide consent after that dealing occurred. The correspondence between Astra, Octave and Musst amounted to the provision of consent to the transfer.

Why is this important?

Where there is a clause which prevents a party from being able to novate the agreement without prior written consent from the other party, a court may find on the facts that a breach of such a provision is capable of waiver by the injured party, in the form of retrospective consent. The case also acts as a reminder that provisions covering a variation to the agreement will not, as a matter of course, apply to novation.

Any practical tips?

Ensure that novation is considered when drafting, in terms of potential consequences for the remaining, incoming or outgoing party, understand what obligations and liabilities may transfer, and keep in mind the requirements for a valid novation. Consider whether other options to a novation such as assignment, subcontracting, termination or variation may be more appropriate.

Consider specifying in the contract how a waiver of the novation requirements must be met. NOM clauses, or any other clauses which seek to limit a party’s ability to vary, transfer or deal with the contract, should refer explicitly to novation (or other dealings) if this might be relevant to the transaction.

Summer 2023