No-consent novations can and do happen

In the recent case of Musst Holdings Ltd v Astra Asset Management UK Limited the Court of Appeal held that a contract was effectively novated by conduct of the parties, despite the lack of prior written consent.

What is a novation?

Novation is the method by which the parties to an existing contract 'transfer' the rights and obligations under that contract to a third party. Novating a contract does not strictly transfer rights and obligations but instead it discharges the rights and obligations as between the original contracting parties and recreates these as between one (or more) of the original contracting parties and a new third party. A novation requires consideration and consent.

The introduction agreement

Musst, Octave Ltd and Octave LLP entered into an “introduction agreement”. Under the agreement, Musst introduced clients to Octave. If the client then invested in asset-backed securities, Octave Ltd paid Musst a 20% share of management and performance fees received from the client.

Octave Ltd was responsible for paying fees under the introduction agreement and Octave LLP’s role was purely administrative. Astra LLP was not a party to the introduction agreement.

The introduction agreement ultimately resulted in two contracts with two investors in the fund.

How did this escalate?

A dispute later arose when Astra Ltd began experiencing cashflow issues. Astra Ltd ceased paying the fees to Musst and denied liability.

Musst brought a claim against Astra Ltd for breach of the introduction agreement, claiming that the introduction agreement had been novated: (i) first, from Octave Ltd and Octave LLP to Astra Ltd and Astra LLP; then (ii) subsequently, from Astra LLP to Astra Ltd.

• Musst's argument - Musst claimed that the novation had taken place by conduct. In other words, the agreement had been novated by virtue of the way the parties had all acted.
• Astra's argument – Astra relied on a clause in the introduction agreement with set out the requirement for Musst's prior written consent to be given to the novation, therefore asserting the novation could not have occurred by conduct without being formally documented.

What did the Court decide?

The Court of Appeal upheld the High Court's original decision and found that both novations had occurred, for the following reasons:

• As soon as Octave was no longer in the picture and Musst had started addressing its invoices to Astra, a relationship had commenced between Musst and Astra along the terms of the introduction agreement.
• Octave and Astra worked from the same address with an overlap of staff, and were, in reality, very closely related. Commercially, this was really just a name change.
• The parties all had the same knowledge and understanding from the outset that Mr Mathur intended to spin the business out from Octave into Astra once Astra had received regulatory approval.

Regarding prior written consent, interestingly the Court claimed it did not matter that Musst had not provided written consent to the transfer in advance. Musst was seen to have waived the requirement for prior written consent and instead provided consent after the event.

The overarching message is that the conduct of the parties clearly demonstrated that all parties knew and intended that the business and contracts would ultimately rest with Astra, not Octave. This case shows that is possible for a contract to be novated by conduct.