When can you transfer contractual rights and obligations to someone else? The Supreme Court has changed the rules in Savvy Vineyards v Karaka Estate,1 a decision concerning a vineyard owned by Karaka Estate in the Wairau Valley near Blenheim.
The Supreme Court overturned previous Court of Appeal authority and restored the traditional rule that obligations under a contract can only be transferred with the consent of all of the original parties to the contract.
However, the Supreme Court also ruled that the parties’ consent can sometimes be inferred from the original contract, even in the absence of a clear term to that effect.
The decision contains four important lessons:
- When drafting a contract, specifically consider whether and how any of the parties should be permitted to transfer their obligations and exit the contract altogether, including whether the other parties’ consent is needed.
- If transfer rights are included, consider the impact of an assignment on other clauses, such as termination or event of default clauses: to which party do these clauses apply following a transfer?
- When interpreting existing contracts, carefully consider how transfer rights might operate in light of the Supreme Court’s approach. Many contracts will have been drafted without specifically considering the issues addressed by the Supreme Court.
- If one party seeks the other’s consent to a transfer of obligations, the other party should make sure that it clearly states its position. If it does not, the Court will look to the parties’ conduct, which greatly increases the risk of a dispute.
What happened in the Savvy case?
Goldridge managed Karaka’s vineyard, and had the first right to acquire any grapes, under four contracts between the parties.2 The contracts were long-term – potentially for up to 50 vintages. However, either party could cancel the contracts if the other party went into liquidation.
Goldridge decided to transfer its rights and obligations under the contracts to its subsidiary, Savvy. There was no clause in the contracts that specifically allowed this. The applicable assignment clause said only that Goldridge “must not assign its interest” in the contracts to an unrelated party without Karaka’s consent.
Goldridge prepared a deed of novation, which would have released Goldridge from its obligations and made Savvy liable in its place. However, Karaka did not sign the deeds. That said, Karaka dealt with Savvy for the next two years as if Savvy had replaced Goldridge.
Goldridge went into liquidation, and Karaka decided that it wanted to get out of the contracts. Karaka argued that Goldridge was still a party to the contracts, and that as a result, Karaka could cancel the contracts because a party was in liquidation. Savvy said that Goldridge was no longer a party, so that its liquidation did not affect the contract, and that Karaka wrongfully cancelled.
The issue for the Court was whether Goldridge had transferred its obligations to Savvy in such a way that Goldridge was no longer a party to the contracts.
Could Goldridge transfer the contracts to Savvy without Karaka’s consent?
Traditionally, you could not assign contractual obligations to a third party unless both the third party and all of the original parties to the contract agreed. This global agreement is called a novation.
The traditional view was upended recently by the Court of Appeal in SB Properties, which ruled that even in the absence of a novation, contractual obligations can be assigned (but without releasing the assigning party from liability).3
The Supreme Court in Savvy overruled SBProperties and reaffirmed the traditional position: you cannot assign a contractual obligation to a third party unless the other party to the contract agrees (that is, a novation).
As a result, unless Karaka consented to Savvy taking over Goldridge’s obligations, it was impossible for Goldridge to have assigned its obligations to Savvy.
Did Goldridge transfer the contracts to Savvy with Karaka’s consent?
By a majority, the Supreme Court ruled that Karaka had consented to Savvy taking over Goldridge’s obligations and that Goldridge was no longer a party to the contracts. The majority reached this conclusion by two alternative routes.
First, they said that the original contract can give a party the right to transfer its contractual obligations to somebody else in the future, without the need for any further consent from the other party to the contract.
Here, the Court was prepared to find that Karaka had given its prior consent in the contracts, even in the absence of a clear term to that effect. The only clause dealing with an assignment by Goldridge appeared to restrict Goldridge’s right to assign to unrelated parties, rather than to create a new right to transfer to related parties. However, the majority said that, taken as a whole, the contracts recorded Karaka’s prior consent to Goldridge transferring the contracts to a related party such as Savvy.4
Second, the majority said that even if the contracts did not give prior consent, Karaka in fact consented by its conduct in treating Savvy as if it had taken over the contracts. This was the primary basis for the Court’s decision. The Court reached this conclusion even though Savvy had not signed the proposed deed of novation, and even through there was a clause requiring amendments to be in writing.
As a result, because the majority found that Goldridge had transferred its rights and obligations to Savvy by way of a novation, Goldridge was not a party to the contracts, and Karaka could not terminate based on Goldridge’s liquidation.
The Savvy case reached the Supreme Court partly because of ambiguities in the assignment provisions in the contracts. These ambiguities created the opportunity for Karaka to act opportunistically when the original party to the contract was placed into liquidation. The differing reasoning and results in the various courts highlights the difficulties this type of contractual uncertainty can cause. As a result, assignment clauses should be reviewed carefully when drafting and interpreting contracts.