High Court finds termination clause requiring written notice posed no bar to implied novation

The High Court has granted summary judgment to an aviation services provider for the recovery of unpaid sums under a novated contract. In so doing, the court held that a contractual clause which required three months' written notice to terminate posed no bar to the implied novation of the contract, despite the absence of a written notice: Gama Aviation (UK) Ltd v MWWMMWM Ltd [2022] EWHC 1191 (Comm) (including addendum).

As the Supreme Court held in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24 (see our blog post here), as a general rule, where a contract expressly provides for a specific mechanism for its variation or termination, the parties are taken to be bound by the agreed formalities – and any purported variation or termination which does not comply with the relevant requirements will be ineffective.

The present case demonstrates, however, that the effect of such a clause depends on its interpretation. Here the court construed the termination clause as applying only to unilateral termination, finding that it would be contrary to commercial common sense to require three months' notice where the parties both wanted to bring the contract to an end immediately. Accordingly, the clause had no bearing on a novation, as that is a mutual process under which a contract with one party comes to an end and is replaced by a contract with a new party on the same terms.

This case also serves as a reminder that, in certain circumstances, a party may have recourse to estoppel where a strict approach would lead to injustice.

Background

The claimants are aviation services providers and the defendant is the owner of an aircraft.

In 2008, the second claimant, IJL, entered into an Aircraft Support Services Agreement (the "ASSA") with the defendant to provide services for its aircraft. Following a corporate reorganisation in 2017, the first claimant, Gama, took over IJL's role in providing services to the defendant. Despite the absence of any contractual formalities, Gama continued to provide services to the defendant at its request, which the defendant paid for.

However, the defendant stopped its payments to Gama in January 2019. Gama sought summary judgment for the recovery of unpaid sums from the defendant, on the basis that Gama had stepped into the shoes of IJL by implied novation of the ASSA and Gama was therefore entitled to payment for the services it had provided.

In its defence, the defendant argued the purported novation was ineffective due to an express termination clause in the ASSA, which provided that:

"This agreement shall commence from the date of this agreement and shall… continue until such time as either party gives the other not less than three months' notice in writing of termination of this agreement."

Since no written notice had been given in accordance with the termination clause, the defendant argued that the ASSA had not been terminated and therefore (termination being a pre-requisite for novation) the novation was ineffective.

Gama disputed this construction, and argued that the defendant was estopped from denying the novation in any event. Alternatively, the claimants submitted that Gama was entitled to the sums payable under the ASSA by virtue of a deed of assignment between Gama and IJL, whereby any rights which IJL had in relation to the ASSA were assigned to Gama.

Decision

The High Court (HHJ Kramer sitting as a High Court judge) held that the termination clause did not prevent novation of the ASSA. In any event, the defendant was estopped by its conduct from denying the efficacy of the novation, and (if necessary) Gama could have relied on the assignment to bring its claim. On this basis, the judge held that the defendant had no real prospect of defending the claim and granted summary judgment in favour of the claimants.

Novation

The defendant submitted that the novation was ineffective because the termination clause required either party to give three months' written notice in order to terminate the ASSA. Since no written notice was served in accordance with the termination clause, the ASSA could not have been novated.

The judge held that the clause did not prevent termination by novation, for reasons set out in an addendum to his judgment. He noted that the termination clause was capable of two competing interpretations. Either (i) it only applied to unilateral (rather than mutual) termination, in which case it would not prevent a novation, or (ii) it constituted an "exclusive code" as to the methods for terminating the contract, thereby preventing any other method of termination such as novation.

The judge considered that the first construction was the correct one, as it was consistent with commercial common sense. If the clause did contain an "exclusive code" as contended by the defendant, three months' written notice would still be required to terminate, even if the parties agreed the contract should come to an end right away. That was a powerful argument in favour of construing the clause to apply only to unilateral termination. On that interpretation, since the ASSA was silent on the issue of consensual termination, there was no bar within the contract for termination by novation. Therefore, the judge held that the novation was effective.

Estoppel

In any event, the judge considered that the defendant was estopped from denying the efficacy of the novation.

The judge referred to Rock Advertising where the Supreme Court recognised that an estoppel could operate to circumvent the injustice which would be caused in circumstances where the parties agree that a particular mechanism is required to vary the contract terms (typically, agreement in writing), but a party then acts to its detriment relying on an oral variation.

The judge found that the defendant had requested and paid for services from Gama, which encouraged Gama to believe that (whatever the terms of the ASSA as to termination) the defendant was contracting with Gama for services under the ASSA. Gama had relied on the defendant's conduct in providing the services and incurring expenses.

On this basis, the judge held that the principle of estoppel applied as a result of the defendant's conduct and the defendant could not deny that the ASSA had been novated.

Assignment

The ASSA provided that the defendant's consent to an assignment was required, although such consent was not to be unreasonably withheld.

The defendant submitted that the assignment was invalid because it had not consented to it. In considering the defendant's case, the judge referred to the following established principles on the unreasonable withholding of consent by a contracting party:

• If a party unreasonably withholds consent, the other party is entitled to proceed as if consent is no longer required.
• Reasonableness has to be given a broad, common sense meaning. It involves both a reasonable process and a reasonable outcome.
• A reasonable process takes into account considerations which have a legitimate purpose and disregards irrelevant considerations.
• A party's refusal must serve a purpose sufficiently connected with the subject matter of the party's conduct, not a collateral purpose.
• The party seeking to justify its refusal may only rely on reasons which actually influenced the refusal at the time of the assignment.

The judge considered the defendant's reasons for objecting to the assignment (which included, among others, the possibility of having a potential but unsubstantiated claim) and held that the defendant had unreasonably withheld its consent. The assignment was therefore valid.