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.


Husband and wife team, Mr Siddiqi and Ms Galligan (“SG“), and Mr Mathur.


Mr Siddiqi owned Musst Holdings. SG and Mr Mathur agreed to enter into an introduction agreement, whereby SG would introduce their contacts to Mr Mathur so those contacts could invest in asset-backed securities through Mr Mathur’s asset management business.


Mr Mathur established Astra Asset Management UK Limited (Astra Ltd) and Astra Management LLP (Astra LLP) to run the asset management business. However, neither Astra Ltd nor Astra LLP had the required regulatory approvals to carry out the asset management business.


Mr Mathur used the Octave entities, which did have the correct approvals, to run his business. He established a fund, which contracted Octave Investment Management Limited (Octave Ltd) to act as its “manager” and Octave Investment Management LLP (Octave LLP) to act as its “investment manager”. Crucially, the fund also contracted Astra LLP to act as an “investment adviser”.

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.

What happened next?

All parties understood at the time that when the new Astra entities had gained the necessary regulatory approvals, Mr Mathur would “spin out” the operations from Octave. When FCA approval was obtained, the parties conducted themselves in the following ways:

  • Astra Ltd and Astra LLP replaced Octave Ltd and Octave LLP as the fund’s manager and investment manager respectively.
  • Octave LLP and Astra LLP agreed in correspondence that Astra LLP would take over Octave LLP’s investment management responsibilities, that fees payable to Octave Ltd would instead be payable to Astra Ltd, and that Octave Ltd’s obligations would transfer to Astra Ltd.
  • Octave and Astra entered into replacement agreements with the two investors, effectively moving them across from Octave to Astra. Musst was asked to invoice Astra LLP going forward.

However, a revised version of the introduction agreement which was sent to Musst, in which Octave Ltd’s and Octave LLP’s names were replaced with Astra Ltd and Astra LLP, was never signed.

Lawyers speaking in court

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.

Key Takeaways

The case is a timely reminder of the importance of documenting transfers of contracts properly. Some useful tips when novating a contract:

  • Check the contract first to see if there are any restrictions that may prevent one party assigning or novating the contract without the prior written consent of the other. Obtain prior written consent from the appropriate party if it’s needed.
  • Make sure you’re clear on who the contract is being novated to and ensure that all parties to the contract sign the novation.
  • Make sure the novation agreement doesn’t leave any areas of responsibility unallocated. It should clearly set out who is taking on what responsibilities and who is responsible for any legacy liabilities.

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