Can a contract be novated by conduct?

In the recent Court of Appeal case of Musst Holdings Ltd v Astra Asset Management UK Ltd [2023] EWCA Civ 128, the Court provided useful guidance on when a contract may be deemed to have been novated by conduct.

The facts

The original contract arose from an agreement that Mr Siddiqi and his wife Ms Galligan would introduce potential investors to Mr Mathur, in order for those investors to invest in asset-backed securities through Mr Mathur’s asset management business.

It was agreed that Mr Siddiqui and Ms Galligan would enter the contract, and make the introductions through Mr Siddiqui’s company, Musst Holdings Limited (“Musst”).

At the time, Mr Mathur was in the process of establishing his own asset management business, comprising Astra Asset Management UK Limited and Astra LLP (together “Astra”). However, neither Astra entity had yet obtained the necessary regulatory approvals to carry out asset management business, so Mr Mathur decided instead to initiate the agreement through another organisation called “Octave”, a fund established by Mr Mathur and comprising Octave Investment Management Limited as “manager” and Octave Investment Management LLP as “investment manager”. Crucially, Astra LLP were contracted to provide investment advisory services and essentially, carried out all work on behalf of Octave under the terms of an umbrella agreement.

The contract

A contract was concluded between Musst and Octave (the “Octave Contract”). Under the terms of the Octave Contract, Musst agreed to introduce clients to Octave and Octave agreed to pay Musst 20% of all fees it received from such clients.

The contract also contained a standard no oral modification clause and a ‘no dealing’ clause that prevented either party from assigning or transferring any of its rights or obligations under the contract without the prior written consent of the other party.

The issue

Once Astra obtained FCA approval, Astra LLP agreed to take over Octave’s investment management responsibilities. Astra sent out revised agreements to two clients who were introduced to Octave by Musst, replacing the agreement they had with Octave with a contract with Astra. All subsequent invoices raised by Musst in respect of these two clients were sent to, and paid by, Astra.

Astra also sent a revised version of the Octave contract to Musst, replacing the two Octave entities with Astra LLP and Astra Capital (with Astra Capital having assumed the payment obligations of Octave Limited). Importantly, Astra LLP and Astra Capital specifically acknowledged that there were “no substantive changes” to the agreement itself and the document was described as “effectively a name changing exercise”. Despite discussions between the parties, the contract was never executed.

A subsequent transfer of Astra LLP’s obligations to a different Astra entity, Astra UK, occurred not too long thereafter.

The dispute

Under the terms of the transfer of Astra LLP’s obligations to Astra UK, Astra UK assumed all the “assumed liabilities” of Astra LLP. Despite this, Astra UK paid Musst’s first invoice but refused to pay any subsequent ones.

Musst bought a claim against Astra UK for breach of the Octave Contract, which it argued had been novated from Octave to Astra LLP and then to Astra UK.
Astra argued that there could not have been a novation because the terms of the Octave Contract prevented either party from transferring the contract without the prior written consent of the other party. As no written consent from Musst had been received, a novation could not possible have occurred.

Conclusion

Upholding the original decision of the High Court, the Court of Appeal found that both novations had occurred.

Astra tried to argue that the “no oral variations clause” prevented the transfer of the contract as it was a change of party for which Astra did not obtain Musst’s consent. However, the court did not agree and confirmed that a no oral variation clause did not apply here because “a novation is not a variation”.

The court further disagreed with Astra’s assertion that the lack of prior written consent meant that no novation could have occurred. The court maintained that it was open to Musst to waive the requirement for prior written consent and to provide consent after the dealing has occurred and that through its conduct, Musst must be treated as having done so.

As soon as Astra assumed the responsibilities of Octave, Musst had started addressing, and Astra had started paying, its invoices, and a relationship had commenced between the parties along the terms of the Octave Contract.

Furthermore, it was clear that the change from Octave to Astra was anticipated by both parties at the outset and it was expected that the contract would be transferred to Astra on them gaining FCA approval.

The court also noted that Octave and Astra were closely related, working from the same address with an overlap of staff. Astra LLP was even contracted to provide services for Octave. From a commercial perspective therefore, the court agreed that the transfer was merely a name change.

This case is an important reminder of the value in documenting transfers of contracts properly. In the case of a novation, this includes identifying all of the incoming and exiting parties, setting out what responsibilities are being transferred and ensuring all parties sign the novation agreement.

If you have any queries on this article or require any advice in respect of any commercial contracts, please do not hesitate to contact a member of the Commercial team.