UK Court of Appeal considers when an agreement can be novated by conduct

Published on 10th Aug 2023

Changing a party to an agreement should be viewed as a novation not a variation, and a 'no dealing' clause might apply

Close up of people in a meeting, hands holding pens and going over papers

In Musst Holdings Ltd v Astra Asset Management UK Ltd [2023], the Court of Appeal considered the interaction between an alleged novation and a "no variation" clause, as well as a "no assignment or dealing" clause. It held that the novation of the agreement could be inferred from the parties' conduct and that the requirement for written consent prior to dealing with the agreement could be waived, and given retrospectively. 

The Octave contract

Central to the case is an introduction agreement between Musst Holdings Limited and two Octave entities (the Octave contract). Under the Octave contract, Musst agreed to introduce Octave to potential investors and Octave agreed to pay Musst 20% of all fees it received from investors introduced by Musst.  

Importantly, another party was involved: Astra LLP, which in practice did the work on behalf of Octave under an umbrella arrangement. The reason for this arrangement was that Astra did not initially hold the necessary regulatory approvals to conduct business in its own right and therefore it traded under the regulatory approval of Octave. Later, after Astra had obtained authorisation from the Financial Conduct Authority (FCA), it was agreed in correspondence that Astra would take over the investment management responsibilities of Octave in relation to two of its clients and that fees payable to Octave as well as Octave's obligations were to be transferred to Astra. There was no specific mention of the arrangement with Musst.  

Astra then made arrangements with the two clients whereby agreements were entered into between Astra and these clients, replacing the agreements they had with Octave. Subsequently, invoices in respect of these clients were issued by Musst to Astra and paid by Astra.

Astra sent a revised version of the Octave contract to Musst, replacing the two Octave entities with the relevant Astra entities. Astra noted that there were "no substantive changes" to the agreement and that it was "effectively a name changing exercise". This agreement was not formalised.

Musst continued to submit invoices to Astra, but they were not paid. Musst, therefore, brought a claim for breach of the Octave contract, arguing that it had been novated to Astra and seeking an order for payment of the revenue share to which it claimed it was entitled.

The High Court found that the claimed novation did take place, and, subsequently, Astra appealed claiming that the judge was wrong in their findings.

Could a novation be inferred from the parties' conduct?

The Court of Appeal reinforced the High Court's judgment and agreed that there had been a novation from Octave to Astra.

The judge confirmed that a novation takes place where a new contract is substituted for an existing contract and reiterated that novation requires the consent of all parties, which can either be provided expressly or can be inferred from conduct. Whether consent has been provided is a question of fact, but a novation will only be inferred from conduct if that inference is required to give business efficacy to what happened; for example, to provide a lawful explanation or basis for the parties' conduct.

The judge referred to Chitty on Contracts, which explains that a novation differs from an assignment in a number of respects, including because of the requirement for consent by all parties, that rights and obligations are extinguished and replaced, and that not only rights but obligations are taken over by the new party. A novation need not be of an entire contract, and one party may be substituted for another only in some respects of a contract.

The specific facts taken into consideration in determining that a novation could be inferred from the parties' conduct in this case were as follows:

  • It was clear that the change from Octave to Astra was anticipated at the outset since Octave only stepped in due to the fact that Astra did not have an FCA authorisation initially.
  • Astra and Octave were working from the same address and had an overlap of staff which indicated close relations between the parties. This made Astra not a new counterparty with which Musst would need to become comfortable before agreeing a change.
  • The court agreed with Astra that the change was "a name changing exercise" only, from a commercial perspective.
  • In respect of payment arrangements, Astra simply replaced Octave as the recipient as at that point Octave "dropped out of the picture".

Could the 'no variation' clause apply to prevent the novation?

The Octave contract contained a standard variation provision.  Astra argued that a change of party was a variation and that Astra did not obtain Musst's prior written consent, as was required.

The court did not agree. It stated that this clause did not apply and that "a novation is not a variation". The judge confirmed that a novation is the replacement of a contract by a new contract between different parties. This is what happened in this case as there was a new agreement involving Musst and Astra, not a change in the terms of the contract with Octave.

Could the 'no transfer or dealing' clause apply to prevent the novation?

The Octave contract also contained a "no assignment" clause under which the parties were not permitted to "assign, transfer … or deal in any other manner with any of its rights and obligations under this Agreement without the prior written consent of the other party". Astra argued that the new arrangement with Astra was a dealing and that Astra did not obtain Musst's prior written consent.

The court agreed that arguably what occurred in this case could be construed as some form of attempted dealing by Octave when it agreed with Astra that Astra should take over Octave's role. However, the court also made it clear that it was open to Musst to waive the requirement for prior written consent and provide consent after the dealing had occurred. (Following Rock Advertising v MWB, one might have believed that a written variation in accordance with the variation clause would be required to vary the Octave contract so that prior written consent was not required. But, interestingly, the judge said that the variation clause did not apply on the facts and agreed with an earlier case that breach of a provision requiring prior consent to a transfer is capable of waiver, in the form of retrospective consent, albeit that that consent would not be the prior consent contemplated by the clause.) The court held that Musst must be treated as having waived the requirement for prior consent.

Osborne Clarke comment

This case is interesting for a number of reasons. First, it confirmed that changing a party to an agreement should not be viewed as a variation, but a novation of that agreement.

Second, the restriction on a party dealing with its rights and obligations under the agreement without the prior written consent of the other party was a potential bar to the alleged novation – but the court stated that the party whose consent was needed was to be treated as having waived the requirement for prior consent. This is interesting because, since Rock Advertising, it may have been believed that a variation in accordance with the applicable "no variation" clause would be required to amend the requirement for prior written consent.

Here, that requirement was found to have been waived, by way of the retrospective consent that Musst was found to have given and the judge said that the "no dealing" clause was not the same sort of provision that the Supreme Court was considering in Rock Advertising.

Anna Matsiienko, a Paralegal with Osborne Clarke, contributed to this Insight.


* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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