- 02 Jan 2025
- •
- 3 min read
Ask the Litigator: Can a "no assignment" clause protect your organisation against novation by conduct?
Organisations carefully choose who they want to enter into business with. They conduct due diligence, weigh up the risks and benefits, and satisfy themselves that the other party will perform or pay when they are meant to. Novating a contract, whereby rights and obligations are transferred to a new party, can be risky business with a big impact – especially if one of the parties becomes insolvent. To mitigate these risks, novation should always be carefully considered, and a formal Novation Agreement put in place.
However, as any lawyer knows, even with the best of intentions, what happens on paper and what happens during the actual course of business is often miles apart. Goods or services might be provided to a new party, or payments received from them, without much reference to the original agreement. Over time, these actions could amount to novation by conduct.
So, the question for in-house legal teams is often: do standard boilerplate clauses, such as those prohibiting assignment, variation or waiver, offer adequate protection against such situations?
The High Court recently considered this question in Magee and others v Crockers and others [2024] EWHC 1723 (Ch).
The Court concluded that while boilerplate clauses are influential, will cannot always protect a contracting party from novation by conduct.
Key factors in the Magee case
In Magee, the Court considered several elements that led to its decision:
- Express discussions and agreement: There were express discussions and an agreement between the original parties that the new party would “step into the shoes” of the existing party. Even though the word “novation” was not used or legally considered, it was what was required to give effect to the agreement they reached.
- Business efficacy: A novation was necessary to give business efficacy to the actions the parties took. In this case, involving a shareholders’ agreement, the parties signed a share certificate, registered the new party as a member, and treated them as a contractual party.
- Prolonged conduct: Actions indicative of novation spanned several years. Attempted reliance on boilerplate clauses was only made at a much later date when it became tactically beneficial.
- No specific reference to novation: The no-assignment clause in the contract did not explicitly include novation.
Lessons we can learn from Magee
The take home point is that these no-assignment, no-variation, no-waiver boilerplate clauses are persuasive and well-worth including – but they are not infallible.
Express agreement, conduct, and continuing recognition of the contract may be enough for there to still be novation by conduct in certain circumstances. Parties must be cautious with their conduct in delivering goods or services to a third party who is not the customer in the contract, and especially in accepting payment such a third party. Upon review, if a novation by conduct seems a real risk, the parties may wish to enter into a formal deed or contract to regularise the position.
It is also a timely reminder to revisit your boiler-plate clauses to touch up on any drafting – and add express reference to novation where necessary.
Disclaimer
This information is intended for general informational purposes only and does not constitute legal advice. We recommend seeking professional advice before taking any action on the information provided. If you would like to discuss your specific circumstances, please feel free to contact us on 0800 2800 421.
