The recent Court of Appeal case of Kakara Estate Ltd v Savvy Vineyards 3552 Ltd  NZCA 101 provides a useful reminder that an assignment and a novation of an agreement are different. When an agreement is assigned, the assignor remains a party to the agreement. If the agreement is novated, a new agreement is created between the assignee and the continuing party, and the "assignor" is released. In Kakara the practical consequence of the agreement being assigned rather than novated was that the continuing party was entitled to terminate that agreement on the grounds of the liquidation of the assignor, even though the assignee remained solvent and was continuing to perform the original obligations of the assignor under the agreement.
This case involved an agreement for management of a vineyard and the purchase of grapes. The agreement was originally between The Vines Development Management Company Limited (the Vines) and Goldridge Estate Limited (Goldridge). The Vines owned the vineyard, and under the agreement Goldridge agreed to manage and buy the grapes grown at that vineyard. The Vines sold the vineyard to Kakara Estate Limited (Kakara), and the agreement was novated from the Vines to Kakara.
Goldridge then assigned the agreement to its subsidiary, Savvy Vineyards 3552 Limited (Savvy). It did so by drafting a deed of novation, which it signed and sent to Kakara. The covering letter said that Goldridge had assigned the agreement (for which it did not need Kakara's consent), but that it had prepared assignment documents nonetheless. Kakara did not sign the deed of novation.
Goldridge, the assignor, was then put into voluntary liquidation. Kakara purported to terminate the management agreement on the basis that Goldridge, which Kakara argued was still a party to the agreement, had gone into liquidation. Savvy objected, arguing that as the agreement had been novated, Goldridge was no longer a party to the agreement. Savvy also argued that, even if Goldridge was still a party to the agreement, only the liquidation of the 'active' party to the agreement gave rise to a right to terminate.
The court rejected both of Savvy's arguments. The court held that, as a novation of the agreement would have created a new agreement between Kakara and Savvy, Kakara's consent to the purported novation was required. Kakara had not signed the deed of novation, and its subsequent conduct was insufficient for the court to infer consent to the novation. There had therefore only been an assignment, meaning Goldridge remained a party to the management agreement. As the agreement contained a clause providing that a reference to a party included persons to whom that person had assigned the agreement, the reference to "the other party" in the termination clause included both Goldridge and Savvy. Kakara was therefore entitled to terminate the agreement when Goldridge was put into liquidation.
This case reminds us that it is important to carefully consider whether to use an assignment or a novation when transferring an agreement from one party to another, as there can be practical consequences of choosing one or the other. The other important reminder from this case is that, unless the contract states otherwise, generally either party can assign the contract without the consent of the other party (except where the contract is so personal the parties would not have contemplated an ability to assign without consent), although a novation will always require the consent of both parties.