Court infers novation despite 'no dealings' clause

The question

How will a court interpret a 'no dealings' clause restricting assignment and other dealings when addressing an alleged novation by conduct.

The key takeaway

The inclusion of a 'no dealings' clause and other clauses intended to restrict the parties’ ability to vary any terms, or to transfer or dispose their rights may not be sufficient to prevent a finding of novation by conduct.

The background

The parties entered into a shareholders' agreement in respect of shares in a golf course, one in his own name (Mr Crocker) and the other (Mr Fitzgerald) via a company (Camelot).

The shareholders' agreement contained a 'no dealings' clause: "No person may assign, or grant any Encumbrance over or sub-contract or deal in any way with, any of its rights under this agreement or any document referred to in it without the prior written consent of all the parties (such consent not to be unreasonably conditioned, withheld or delayed)."

Later, Mr Fitzgerald sought to transfer the shares owned by Camelot into a settlement, managed by his daughters (who were also the trustees).  Written consent from Mr Crocker, required to make such a transfer effective, was never obtained but Mr Crocker behaved as though he were in agreement with it (including signing the share certificates) and the shares in the golf course transferred to the settlement.

To evidence the transfer, the trustees relied on a deed of assignment between the settlement and Camelot which stated that the settlement had offered to purchase the shares held by Camelot along with “an assignment of all rights and obligations attaching to such Shares pursuant to the [2010 SHA] for the sum of £25,000.”

Relations between Mr Fitzgerald and his family on the one hand and Mr Crocker on the other broke down, and the trustees brought a claim for declaratory relief concerning the validity of the transfer of shares and as to their entitlement to rely on the terms of the shareholders' agreement.

The decision

The court determined that, even in light of the 'no dealings' clause, the transfer of shares was valid and that there had been an effective novation of the shareholders' agreement so that the trustees could rely on and enforce its terms.

The assignment was in fact a novation – a tripartite agreement involving, effectively, the extinction of rights under the shareholders' agreement and the entry into of a new agreement (with new rights). The agreement involved the settlement "stepping into Camelot's shoes". A novation was the effect of what was agreed, and it was necessary to infer a novation in the context to provide business efficacy to what had happened, irrespective of the label on the relevant document.

The court also reasoned, applying the ejusdem generis principle (i.e. that the following general words used are limited to the same kind or nature as the prior specific examples), that a novation was not prohibited by the 'no dealings' clause. The general words “or deal in any way with, any of its rights” came after a reference to assigning, granting any encumbrance, or sub-contracting, which, the court decided, pointed to some bilateral disposition of the rights under the shareholders' agreement, involving a party to the agreement and a third-party.  These words did not point to an agreement that involved a consensual arrangement, such as a novation, including both parties to the shareholders' agreement and involving a termination of the rights under it.

The court also commented that, where a contract contained clauses intended to restrict the parties’ ability to waive or vary any terms, or to transfer or dispose their rights (as was the case here), then even if those clauses did not apply specifically to novation, the inclusion of those provisions required the court to "read all the clauses together" and be more cautious before concluding that there has been a novation by conduct.

Why is this important?

This case shows that the courts will treat novation as different in nature to assignment, subcontracting and other dealings with a third party.  Although the existence of   a 'no dealings' clause and other clauses intended to restrict the parties’ ability to vary any terms, or to transfer or dispose their rights, may well be relevant, they will not necessarily prevent novation, without an express provision to that effect.

Any practical tips?

Ensure that novation is considered when drafting, in terms of potential consequences for the contracting parties. Understand what obligations and liabilities may transfer and keep in mind the requirements for a valid novation (if that is what is intended). If there is no intention to novate a contract, avoid performance that would indicate that a novation has taken place.  In any event, seek to document the intended transaction to avoid future disputes.

'No dealings' clauses, or any other clauses which seek to limit a party's ability to vary the contract, should refer explicitly to novation, if it is intended that novation should also be restricted (absent prior written consent or other conditions).

Autumn 2024