Assignment of a Contractual, Consent and Novation
Can one party to a commercial contract unreasonably withhold consent to assignment of a contract? Businesses need to know that consent ought to be given, unless there are good reasons for not doing so.
The necessity (or desire) to assign a contractual right to a third party may arise if you want to pass on the benefit to someone else, for example, by way or mortgage or declaration of trust. If the contract is silent as to assignment, you can normally assign it without consent of the other contractual party.
Novation goes further: here, the contract is replaced by a duplicate contract under which the third party agrees to all right and obligations of the original contract. All the parties - including the third party - must sign the novation agreement.
A key difference between novation and assignment is that you can only assign the benefit of a contract to another, whereas novation assigns both the benefits and the obligations to the third party. But what if one party wants to assign the contract; the other party’s consent to it is required – but they refuse to do so? This issue, and that of novation, arose in this case.
What’s the background?
The defendant company owned by a high net worth individual based in Hong Kong entered an aircraft support services agreement with a business aviation service organisation (ICJ) for his aircraft. The contract stated that “neither party shall assign its rights under this agreement except with the written consent of the other party, such consent not to be unreasonably withheld”.
It also included a clause requiring at least three months’ notice in writing of termination by either party.
The claimant company acquired ICJ and while there were then operational changes in control, its ownership remained the same. Following registration of the aircraft in Bermuda, the claimant company was registered as its operator and the aircraft owner eventually stopped paying the amount due under the contract.
The claimant took proceedings to recover the unpaid sums and argued that it had to all intents and purposes replaced ICJ as party to the contract, therefore there was an implied novation of that agreement. ICJ also sought to formally assign its contractual rights to the claimant but the aircraft owner refused consent.
The court allowed the claimant’s claim for summary judgment for these reasons:
Assignment – Consent to the assignment had been unreasonably withheld, and it was therefore effective
Novation – The contract contained no provision for termination by agreement, therefore the contract could be terminated by implied novation. Novation of the contract in this instance was effective. An important factor was that the aircraft owner had fully known of the claimant taking over the contract from ICJ and had, by his conduct, effectively consented to the transfer.
Furthermore, by applying the doctrine of estoppel, the aircraft owner carried on as though the novation was valid.
What does this mean?
Where a party to a commercial contract wishes to assign the benefits of the contract to a third party and the terms are silent on the issue, they are free to assign those rights. However, where consent is required, it is not to be unreasonably withheld. In this case, the reasons given for refusing consent were insufficient.
The ruling also provides important clarity on contractual termination and when novation of the contract may be implied.
Gama Aviation (UK) Ltd v MWWMMWM Ltd [2022] EWHC 1191 (Comm)
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