Opinion
Novation: clause vs. conduct
- Jonathan Swil
- Adriana Pastuszek
The High Court has found that a shareholders’ agreement was novated by conduct, even though the agreement had clauses preventing assignment without prior written consent, and oral variations or waivers, and there was, in fact, no written consent. This is a reminder that parties’ contractual rights and obligations can be extinguished or created by novation, notwithstanding express contractual provision that might be thought to prevent that situation arising or the absence of any express intent to bring it about.
Disputed share transfer
A shareholders’ agreement had been entered into between Mr Crocker and a trustee company, Camelot, in relation to a joint venture between them. There was an issue around whether a share transfer in a golf club company effected by Camelot to the trustees of the Fitzpatrick family trust was open to challenge. Another key issue (relevant to novation) was whether the Fitzpatrick trustees had replaced Camelot in the shareholders’ agreement and taken up Camelot’s rights and obligations at the time of the share transfer i.e., whether the shareholders’ agreement had been novated by the parties’ conduct.
Factors relevant to novation
The court gave weight to, amongst other things, the following factors when finding that the shareholders’ agreement had been novated:
- Findings of fact and objective approach: that it was expressly discussed and agreed between Mr Crocker and the Fitzpatrick trustees that if the shares were transferred to the Fitzpatrick trustees, then the Fitzpatrick trustees “would step into Camelot’s shoes” as far as the shareholders’ agreement was concerned. It did not matter what labels the parties used or what, legally, they might have thought they were doing.
- Business efficacy: that even if it was not possible to conclude that novation was expressly agreed to by Mr Crocker, he accepted that the shareholders’ agreement was a “guiding light” for the joint venture. It was to be inferred that there had been a novation, in order to provide business efficacy to the share transfer.
- Subsequent conduct: that for some time after the share transfer, Mr Crocker and Fitzpatrick trustees had relied on the terms of the Shareholders' Agreement and no attempts were made to suggest that the Shareholders' Agreement was not binding between Mr Crocker and the Fitzpatrick trustees, until it became “tactically advantageous” for Mr Crocker to suggest that there had been no novation.
What about no oral variation clauses and restrictions on assignment?
The court addressed the no oral variation and non-consensual assignment clauses. While holding that such clauses require caution before finding there has been novation by conduct, the court concluded that neither clause was apt to apply to what, in truth, had been a novation i.e. a tripartite agreement involving the extinction of rights and obligations between A and B, and the creation of the same rights and obligations between A and C.
Judgment: Magee & ors (as the Fitzpatrick trustees) v Crocker
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