The case of Finning UK Limited v Inveresk PLC is a harsh reminder that a company cannot just ignore its contractual obligations upon a sale of a plant hiring company.

No agreement to take on contractual obligations

Inveresk operated a papermill and entered into construction plant hire contracts with Finning for three and five years. The contracts included an undertaking to pay damages in the event of their early termination.

Inveresk subsequently sold the papermill, but decided, rather than terminate the hire contracts and pay damages, to allow the buyer to use the hired plant and effectively take over the contracts. The buyer subsequently used the plant and was invoiced for the hire charges.

The buyer and Inveresk began negotiations about who was responsible to Finning under the contracts for the hire of the plant. A formal transfer of the obligations under the contacts (a “novation”) did not take place. The buyer did not wish to agree to a full novation, as it did not want to be responsible for the early termination charges.

The buyer subsequently closed the papermill and Finning repossessed the plant. This effectively caused the early termination of the hire agreements and, therefore, Finning sought payment of damages for early termination. The question was: who was liable; the buyer or Inveresk?

The Court found that there had been no novation of the contracts to the buyer. Inveresk was, therefore, liable for the early termination charges. The Court found that the novation required all of the parties to agree to the novation. The buyer had not done so, as it had put restrictions on that transfer. On that basis, it could not have been a proper novation and, therefore, Inveresk remained liable for the early termination charges.

Summary

The Finning case reminds hirers of plant to ensure that their obligations are discharged in the event that a third party wishes to take over the hiring of equipment upon a sale of the business. The failure to ensure that a proper novation takes place can mean that a hirer remains liable under the contracts.

Equally, owners of plant should insist on the enforcement of contracts where a ‘proper’ novation has not taken place. They should not be forced to deal with another party, which could potentially be insolvent.

Also, hire companies should not feel forced to agree to a novation or any other restricted form of transfer of rights to another party.