Novating contracts and how the courts assess novation

Novating contracts and how the courts assess novation

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Musst Holdings Ltd v Astra Asset Management UK Ltd & Astra Asset Management LLP (2023)

This case involved rather complex investment and introduction services, which were broadly that Musst Holdings intended to introduce clients to two new entities, Astra LLP and Astra Ltd, both of which were asset management businesses lacking regulatory approvals at the time.

To bridge this gap, Octave LLP and Octave Ltd (both of which did have the necessary approvals) were brought into the structure through an agreement between Musst and Octave. Two investors then contracted with Octave, anticipating a subsequent transition to the Astra entities as soon as they received regulatory approval. A year later, the required approvals were granted, and the Astras replaced the Octaves as fund managers. Octave LLP and Astra LLP later agreed that Octave Ltd's obligations would transfer to Astra Ltd. Replacement agreements were signed with the investors, transferring them from Octave to Astra. A revised introduction agreement was sent to Musst, replacing Octave with Astra. However, this revised version remained unsigned. Almost a year later, Astra LLP formally transferred its business to Astra Ltd, which entered into revised agreements with the investors.

The dispute

A dispute arose when Astra Ltd faced financial difficulties (an oft-recurring cause of disputes) and ceased paying referral fees to Musst under the introduction agreement and denied liability. Musst claimed that the agreement had been novated twice: firstly, from Octave Ltd and Octave LLP to Astra Ltd and Astra LLP, and secondly, from Astra LLP to Astra Ltd. Musst argued that this novation occurred through conduct - without any formal legal documentation but by virtue of the way the parties had all acted. Astra countered, citing the "no dealings" provisions in clause 17 of the introduction agreement, which required the prior written consent of the other party (i.e. Musst) for any transfer and clause 16 which required any variation of the agreement to be in writing, signed by the parties.

The appeal ruling

Was there a novation? The Court of Appeal upheld the High Court's decision. The judge had been entitled to infer novation from the parties’ conduct – this was a matter of fact that the court of appeal would not interfere with lightly. It emphasised that a relationship was formed between Musst and Astra when Musst addressed invoices to Astra after Octave's exit. The court highlighted that Octave and Astra were closely related, sharing premises with an overlap of staff, and all parties had known from the outset that the intention was to spin the business out from Octave into Astra (after Astra received regulatory approval).

Clause 16 – the "no variation" clause. Astra argued that the failure to comply with this clause prevented the alleged novations. The court said there had not been any breach of this clause as it did not apply. Novating a contract is not the same as variation, novation means the original agreement is discharged and replaced with a new agreement, rather than modified or varied.

Clause 17 – no dealings and prior written consent. Astra also argued that the language of clause 17 meant that the original introducer agreement could not have been transferred without Musst’s prior written consent, and that therefore this could not now be rectified. The court agreed that “arguably” what had occurred was some form of dealing in rights, pulling into play clause 17. Astra argued that Musst could not now retrospectively waive this requirement, relying on the case of MWB Exchange Centres Ltd v Rock Advertising Ltd (2019). This MWB v Rock case proved that clauses requiring variations to be agreed in writing were effective – i.e. if such a clause was not complied with, then any purported variation was not valid. The court, however, decided that clause 17 was not the same type of clause as the MWB clause. The MWB clause (like clause 16) meant that proposed variations had to be signed by both parties. Here, clause 17 was an obligation on each party not to “deal” without the other’s prior written consent. Existing case law established that breach of such a requirement can be waived by giving retrospective consent and here it was “clearly” open for Musst to waive the requirement for prior written consent, and provide consent by its conduct after the event.

Key takeaways for contracting companies:

  1. Proper documentation - Relying on the courts to piece together what has happened is expensive, time consuming and uncertain. In addition to ensuring contracts are correctly executed, ensure that all legal transactions affecting them are properly documented (especially in novation scenarios), where confusion can creep in, especially to historic arrangements. Ensure novation documents make clear exactly what is happening, who is responsible for which ongoing activities and liabilities and from what date.
  2. Intention - Maintain awareness of the parties’ intentions and consider documenting this – e.g. in the recitals, to explain the position from the outset. In this case, all parties were aware of the intention to transfer the business and contracts to Astra and operated accordingly. Astra’s arguments to the contrary seem to have only arisen after it started encountering financial difficulties.
  3. Legacy liabilities - Future obligations will generally be intended to transfer to the incoming party, but what about the obligations and liabilities before this transfer - should these stay with the outgoing party?
  4. Check the contract - Even where the presence of a novation agreement clearly demonstrates consent, there may be other procedural requirements to be observed – e.g. obtaining third party consents from guarantors. Check the original contract and any other relevant documents.

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