A recent Court of Appeal decision (Kakara Estate Ltd v Savvy Vineyards 3552 Ltd [2013] NZCA 101) highlights how important it is for parties to be aware of all of the legal consequences of a unilateral assignment of an agreement. The decision also demonstrates the risks of relying on a party's conduct to argue that a contract has been novated and not assigned.

The facts of the case and the issues under consideration

In this case, the appellants (Kakara and Weta) were parties to identical management and supply agreements with Goldridge. Goldridge 'transferred' the agreements with Kakara and Weta to two separate related companies (Savvy 3552 and Savvy 4334). The 'transfers' did not require the consent of Kakara or Weta as the Savvy companies were permitted assignees as related companies of Goldridge. However, Goldridge purported to treat the 'transfers' to the Savvy companies not as assignments under the terms of the agreements, but as novations under which the respective Savvy company was to substitute Goldridge as a party to the relevant agreement.

Goldridge argued that this was evidenced in a 'deed of novation' (signed by both Goldridge and Savvy 3552) which was sent to Kakara for execution but was never acknowledged or executed by Kakara, and Kakara's subsequent dealings with Savvy 3552.

The issues before the Court of Appeal arose because Kakara and Weta wanted to rely on Goldridge's subsequent liquidation (which had occurred 15 months after it had 'transferred' the agreements to the Savvy companies) as a ground for issuing termination notices under the management and supply agreements. Kakara and Weta had to show that:

  • there was no novation of the relevant agreements; and

  • under the terms of the original agreements, Goldridge, as an original contracting party, remained as a 'party' to the respective agreements in addition to the Savvy companies for the purposes of the termination provisions.

The Court of Appeal's decision

Were the transfers novations or assignments?

A novation is a transaction that creates a new contract that is substituted for the original contract. The court confirmed that, to be effective, a novation requires:

  • the consent of all parties (that is, the original parties, and the new party), which may be inferred from conduct and need not be express; and

  • consideration (which may be in the form of mutual promises).

On the facts, the High Court had found that Kakara's conduct following the receipt of the deed of novation had amounted to consent to the novation. However, Kakara argued that its consent to the novation could not be properly inferred from the factors relied on by the High Court given that its conduct could be construed as being consistent with both a novation and a simple assignment.

The Court of Appeal agreed, particularly in light of the contractual framework set by Goldridge and Savvy 3552 through the presentation of the deed of novation to Kakara for execution.

The court noted that the orthodox position is that "where a party has declined to execute a written contract sent to it by the other party, the normal inference is that the declining party did not [intend] to be bound, unless there was clear evidence to the contrary". It went on to note that "a party that chose not to execute an agreement has a strong argument that it should not be bound to that very agreement because of its later conduct".

The court disagreed with the significance the High Court placed on Kakara's failure to sign the deed of novation but not inform Goldridge that it regarded Goldridge still as a party to the agreements. Unlike the High Court, the Court of Appeal saw this as evidence that Kakara, when asked to accept the novation, did not do so. The Court of Appeal also did not consider that the fact that Saavy 3552 was a member of the Goldridge corporate group and not an "outsider" lowered the bar of what is required for a novation. The only conduct the court considered as having relevance to the High Court's finding was the fact that Kakara had issued notices to Savvy 3552 to remedy defaults under the agreements after it had received the deed of novation. The notices were formal legal agreements prepared by lawyers and referred to Kakara and Savvy 3552 as "the present parties" without reference to Goldridge. However, ultimately the court did not see the features of the notices as sufficient to constitute agreement to the deed of novation and concluded that Goldridge had not been substituted as a party to the agreements under a novation.

Did Goldridge remain as a party to the agreements for the purposes of the termination clauses?

The termination clauses in the agreements provided that "either party" had the right to terminate the agreements if the "other party" was placed in liquidation.

Savvy 3552 argued that the reference to 'party' in these clauses was limited to the "active" parties under the agreement, namely Kakara and Savvy 3552. It argued that for the court to hold that the assignor remained as a party to the agreements would lead to an outcome that "flouts business common sense" noting that "it would be absurd if the liquidation of the [assignor] could give rise to a right of termination".

However, the court held that there was nothing in the original supply and management agreements that revealed an intention to create an exception to the general rule that assignments do not remove the assignor as a contracting party. The wording of the interpretation clauses in the respective agreements provided that "assigns" were included in addition to, and not in substitution for, the original named parties. The court noted that if it was intended that references to 'party' in the agreement were to have excluded the 'assignor', the assignment clause would have provided for full substitution of the assignor by the assignee.

As a result, the court was in agreement with the High Court that the interpretation clause did not limit the class of parties to only the successors or assigns, or to the currently "active" parties.

The Court of Appeal issued a declaration in favour of Kakara and Weta that their notices of termination were valid.