Novation is where you replace a party to a contract with a third party. The third party takes on the obligations and rights of the original party that it has replaced.
As a general rule, one party cannot unilaterally decide to vary a contract. Normally, all parties have to consent to the novation and a separate written contract will be entered into. This is described as “formal novation”.
Novation | what happened in this case?
In 2008, IJL (an airport services provider) concluded a contract with MWWMMM Ltd (the Client) for the provision of aircraft management and operation services.
In 2014, IJL was subject to an acquisition and internal re-organisation. Accordingly, all services previously performed by IJL were taken over by GAMA Aviation UK Ltd (GAMA).
GAMA delivered all the required services to the Client and the Client paid the invoices for a number of years. However, in January 2019, the Client stopped paying GAMA’s invoices and GAMA brought a claim in respect of the unpaid invoices.
The Client defended the claim and argued that the termination clause contained within the original IJL contract prevented informal novation. This was on the basis that informal novation would breach the requirement that the contract could only be terminated by giving three months’ written notice.
What did the court decide?
The Court ultimately found that informal novation was necessary on the facts in order to give business efficacy to the dealings between GAMA and the Client.
There were two key aspects to the judgment:
- The termination clause the Client was seeking to rely on did not prevent informal novation. This is because the clause related to unilateral termination (i.e. where one party can give notice) whereas novation related to termination by mutual consent.
- Even if the termination clause had been effective in terms of preventing informal novation, the Client would be estopped from relying upon this defence in any event. This is on the basis that both parties had acted in accordance with a valid novation and it would now be inequitable for the Client to avoid paying GAMA’s invoices for services they had provided in good faith.
Implications for businesses
When novating a contract, it is always preferable for everything to be recorded in writing to show the consent of all parties involved. However, this case shows that a lack of written contract is not necessarily fatal. If the relevant parties have acted in accordance with the novation, the Court may still find it to be enforceable even if it is informal.