Recent decisions indicate that a party to a contract can pre-authorise novation of that contract.

Pre-authorised novation can be useful for a business that may have a future need to transfer customer contracts to a third party (e.g. on the sale of its business to a third party). It is helpful because the transferor does not need to go through the time consuming and often expensive process of seeking the consent of the counterparty customer at the time of novation.

Reflecting on the distinction between assignment and novation in the context of loan agreements, Windeyer J in Olsson v Dyson noted that novation is the making of a new contract between a creditor and his debtor while an assignment is a transaction between the creditor and the assignee, to which the assent of the debtor is not needed.

It is settled that the consent of all parties involved (the initial parties and the incoming party) is required to effect a novation. But the key issue discussed in recent decisions is whether prospective consent is sufficient to authorise the novation.

In Leveraged Equities Limited v Goodridge the Full Court of the Federal Court reversed the decision of the primary judge and found that a loan facility with the following term was effective to pre-authorise novation:

[Macquarie Bank] may assign, transfer, novate...any of its rights, remedies, powers, duties and obligations under this Agreement to any person, without the consent of the Borrower.

Jacobson J found that the clause was not merely an agreement to agree because the references to 'novate', 'obligations' and 'without the consent of the borrower' made it sufficiently clear that Mr Goodridge was giving prospective consent to all the elements required to give effect to a novation.

Sackville AJA in CSG Limited v Fuji Xerox Australia Pty Ltd acknowledged that the ability to pre-authorise a novation indicates that the line between novation and assignment is blurring. In that case, their Honours recognised an intention to novate even where draftsmen had confused the concept of novation with assignment. The relevant clause dealing with assignment and novation was as follows:

Fuji Xerox may...assign its rights and obligations under [the Dealership] Agreement...to any related corporation without [CSG's] consent.

The NSW Supreme Court commented that the clause was drafted on the incorrect assumption that assignment by a party effects the transfer of not only the party's benefits under the contract but also its obligations. Nevertheless, the Court found that the underlying intention to transfer both rights and obligations could only be achieved if the word 'assign' were construed as 'novate'. Accordingly, the clause was effective to record CSG's prospective consent to Fuji's unilateral decision to novate.

DRAFTING TIPS

Although courts have been willing to recognise prospective consent to novation even where such intention is not explicitly expressed, it is prudent to clarify in the terms of the contract that a party gives such consent. To avoid being characterised as an agreement to agree, the clause should mention that the relevant party consents to the assumption of liabilities under the contract by the new party and the release of obligations under the contract of the exiting party.

If, on the other hand, the intention is that each party must seek the consent of the other at the time of novation, the agreement should expressly provide that neither party may assign, transfer or novate rights or obligations under the agreement without the prior consent of the other party.