The recent High Court decision in Gama Aviation (UK) Ltd v MWWMMWM Ltd is a rare example of a claimant successfully relying on the principle of informal novation to bring a claim for breach of contract.
Aircraft services provider IJL concluded a contract with MWWMMM Ltd (the Customer) in 2008 for the provision of aircraft management and operation services. Following an acquisition and internal re-organisation in 2014, all services performed under the contract were taken over by GAMA Aviation UK Ltd. GAMA Aviation continued to perform the contract and deliver services to the Customer, with the Customer paying GAMA Aviation’s invoices just as it had paid IJL, until January 2019 when the Customer stopped payment. GAMA subsequently brought a debt claim against the Customer for unpaid invoices.
As GAMA Aviation was not a party to the original contract it argued that it had become a party to the contract by implied novation when it had taken over the performance of the contract from IJL. Novation is the termination of the original contract and its replacement with a new contract on identical terms between the continuing party and the incoming party. For a novation to be effective, all parties to the original contract and the incoming party must consent to it. Typically, that consent is recorded in writing; however, the parties’ consent (particularly that of the continuing party) may also be implied by conduct, resulting in an informal novation.
The court will only find an informal novation where novation is necessary to give business efficacy to what has actually happened between the parties in order to provide a lawful explanation or basis for the parties’ conduct.
The Customer relied on the following termination clause of the contract to argue that there could be no implied novation:
“This agreement shall commence from the date of this agreement and shall subject to clause 9 continue until such time as either party gives the other not less than three months’ notice in writing of termination of this agreement.”
The Customer asserted that the termination clause prevented an informal novation as it would breach the requirement that the contract could only be terminated by giving three months’ written notice.
The court had no issue in finding that an informal novation was necessary on the facts in order to give business efficacy to the dealings between GAMA Aviation and the Customer.
With respect to the Customer’s reliance on the termination clause, the court applied the well-known test for the interpretation of a contractual term: what would a reasonable person with all the background knowledge reasonably available to the parties in the situation at the time of the contract have understood by the term? Where there are two possible constructions the court may prefer the construction more consistent with business common sense.
Applying the test, Judge Kramer found that the termination clause could have two possible constructions:
- it provided an exclusive code for contract termination; or
- the clause is limited to unilateral termination by one party.
Judge Kramer decided that the construction limiting the clause to unilateral termination was more consistent with business common sense. In reaching this conclusion Kramer J was particularly influenced by the incongruity of the termination clause requiring a three month notice period even if the parties had agreed to terminate: “I will ask the rhetorical question; if the parties agree to terminate now, why would they need three months’ notice?”. As the termination clause was found to be limited to unilateral termination, it did not prevent the implied novation, which depended on termination by mutual consent.
Rock Advertising Estoppel
Interestingly, the court also determined that even had the termination clause been effective in preventing the implied novation, the Customer was estopped from relying on the clause in any event. The basis for the estoppel (first set out in the 2018 Supreme Court Rock Advertising decision) being that it was unjust to permit a party to rely on the express terms of the contract where the other party has reasonably relied on the contract as informally varied (or in this case novated) and found itself unable to enforce the contract.
Judge Kramer concluded that such an estoppel arose on the basis that the Customer had encouraged GAMA to believe that, regardless of what the arrangements were back in 2008, it was now contracting with GAMA for the services under the contract. GAMA had relied on that and incurred the costs of performing the contract.
The courts continue to place significant emphasis on giving effect to the written terms of contracts whenever possible, particularly where the meaning and effect of the provision in question is clear. This decision is an unusual example of where the court has used the principles of contractual construction and the doctrine of estoppel to prevent a party (the Customer) from relying on an express term of the contract.
It is important to remember that the effect of any contract term will always turn on its particular drafting and the surrounding facts. For example, it is clear that an appropriately drafted contract term can preclude a party from relying on an implied novation. Ultimately, parties should keep in mind that a widely drafted variation or termination provision may prevent the unpredictable effects of an implied novation but that such provisions may not be enforceable where a course of dealing with a new party, having effectively stepped into the shoes of the original counterparty, has been established – this may give rise to a Rock Advertising estoppel argument as happened in this case.
For a more in-depth review of this case see the July 2022 issue of The Reporter by Calleja Consulting.