Guidance on unreasonable withholding of consent to an assignment and whether an express termination clause prevents an implied novation from occurring

The recent case of GAMA Aviation & International Jet Club v MWWMMWM Ltd caught our eye, for both its helpful guidance on the meaning of that familiar phrase "such consent not to be unreasonably withheld", and whether an implied contractual novation is valid, notwithstanding certain formality requirements on contract termination were not met.

The GAMA Aviation case concerned a claim for unpaid monies due under an agreement originally entered into by International Jet Club Ltd (the second claimant) (IJL) with the defendant to provide services for the management and operation of an aeroplane. The unpaid sums totalled over $1.35m. Some time later, as part of a corporate restructure, the first claimant, GAMA Aviation, took over providing services to the defendant. Gama and IJL had entered into a deed of assignment which purported to assign absolutely all of IJL’s rights, interests and benefits under the agreement to GAMA Aviation.

The defendant paid GAMA Aviation for the services for few years but then refused to pay. GAMA Aviation issued a claim against the defendant for the unpaid sums, arguing that it had taken IJL’s place under the agreement for services, either by the terms of the express assignment or by virtue of an implied novation. The defendant argued that neither the assignment nor the novation were valid and therefore no money was owed. It was quite a bold position to take, and it therefore perhaps unsurprising that the judge found strongly in favour of the claimants.

Was the assignment effective?

The defendant argued that the assignment of the contract from IJL to GAMA Aviation was not effective because the initial agreement between IJL and the defendant included a clause which said any assignment would require the defendant’s consent, “but such consent is not to be unreasonably withheld”. The defendant said that it had not consented to the assignment and therefore the assignment was not valid. The question before the court therefore was whether the defendant had acted unreasonably in withholding its consent to the assignment.

The judge in this case, Justice Kramer, provided some helpful guidance on the meaning of such qualifying words:

• Reasonableness has to be given a broad, common sense meaning.
  
  
• It requires a reasonable process, which means a party must take into account considerations which have a legitimate purpose and disregard irrelevant considerations.
  
  
• It also requires a rational outcome. A party's refusal must serve a purpose sufficiently connected with the subject matter of the party's conduct. It cannot refuse consent on the basis of unconnected matters or to achieve a collateral purpose.
  
  
• The party refusing consent can only rely upon reasons which actually influenced the refusal at the time of the assignment, not afterthoughts.
  
  
• If a party does unreasonably withhold its consent, the party seeking consent is entitled to carry out the assignment as if consent had been given.

Applying all of this to the current case, the court found that the assignment would have been fully effective in transferring IJL’s rights to GAMA Aviation despite the defendant’s lack of consent. The defendant had argued that the assignment had been carried out for the purposes of litigation rather than an ordinary business purposes, and that the assignment was unclear in its effect because it was prepared against a background in which there was an issue as to whether the novation was effective. However, the court said that GAMA Aviation and IJL were entitled to regularise their position to ensure it was clear to whom obligations were owed. Furthermore, the assignment itself was perfectly clear and comprehensive. In conclusion, the court found that the defendant had unreasonably withheld its consent and therefore the defendant’s assertion that the assignment was invalid was unsustainable.

What about the implied novation?

This aspect of the case is particularly interesting as it considered the impact of the 2018 Rock v MWB Supreme Court ruling (which said that contractually prescribed formalities for terminating or varying contracts must be observed before any such termination or variation can take effect).

The claimants argued that the contract originally entered into between IJL and the defendant had been novated to GAMA Aviation. The defendant argued that the wording of the contract prevented such an implied novation from taking place. Clause 1 of the contract stated:

“This agreement shall….continue until such time as either party gives the other not less than three months’ notice in writing of termination of this agreement.”

The defendant argued that this provision constituted an exclusive code for how the contract can be terminated, thus preventing any other form of termination (which is what a novation essentially is: the termination of one contract to be replaced by another). Following the Rock judgment, parties are free to prescribe formalities governing the termination of contracts, and only terminations that follow such formalities shall be binding.

The claimants disagreed with this reasoning and said the clause relates to unilateral terminations only. As such, novations are outside of the scope of this clause as they are a form of consensual (mutual) termination. The judge was persuaded by this argument. Despite the reference in the clause to termination in general terms, rather than to the narrower category of unilateral termination, the judge considered the claimant’s construction of the clause to be more consistent with commercial common sense. Parties to a contract have traditionally always been able to terminate at any time if they both agree to do so. While the Rock judgment does give one pause for thought on this issue, when such mutual termination does not follow the prescribed formalities, in this instance the judge was bolstered in his decision by the fact that he could not see the reason for this clause 1 to cover consensual termination. He was persuaded by the following rhetorical question: “if the parties agree to terminate now, why would they need three months’ notice?”. He further bolstered his decisions by finding that even if his interpretation of the clause was not correct, an estoppel argument leads one to the same conclusion.

If you require further information about anything covered in this briefing, please contact Ben Longworth, Lucy Billett, Jane Randell or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, July 2022