Assigning A Contract – A Costly Refusal to Give Consent

A decision made by a business organisation to refuse consent to assigning a contract must only be made if it’s reasonable – otherwise a costly dispute can arise. The assignment of a contract arises when one party transfers its rights to a third party, but the process must be done correctly to be legally valid.  That includes securing consent to assignment when required. The experienced commercial lawyers at ParrisWhittaker are specialists in advising on contractual rights and responsibilities, including the transfer and assignment of contracts. 

A recent ruling from the UK’s High Court – which has important persuasive authority on the courts in The Bahamas – emphasizes that consent should be given, unless there are good reasons not to. Unfortunately, particular cases are often more complicated in reality – as this case illustrates¹. 

What’s the background?

A wealthy individual (the defendant) based in Hong Kong owned a company which entered into an aircraft support services agreement with a business aviation service organisation (ICJ) for his aircraft. The terms of the contract said neither party could assign its contractual rights, except with written consent of the other party (consent not to be unreasonably withheld). A minimum of three months’ notice of termination was also required of the parties. 

As a result of a reorganization, the claimant company acquired ICJ, though its ownership remained unchanged. The aircraft was subsequently registered in Bermuda and the claimant was registered as its operator.

However, the defendant eventually stopped paying the money due under the agreement and proceedings were brought against him on the basis of implied novation of the agreement, with ICJ having been replaced as a contractual party. Novation of a contract takes place when an agreement is replaced by a duplicate contract in which a third party takes on the right and obligations of the original contract. All parties involved must sign the new ‘novation’ agreement for it be legally effective. 

The defendant did not accept that implied novation had taken place, saying that the contract specifically required at least three months’ notice of termination.  ICJ sought to formally assign its contractual rights to the claimant (the defendant refused to give his consent).

The court rejected the defendant’s arguments. First, the contract could be terminated by implied novation. Further, in the absence of any contractual provision for termination by agreement, implied novation could terminate this contract – and it did so in this case. Not only had the defendant known that the claimant was taking over the contract from ICJ, he had by his conduct effectively consented to it. He had also carried on as if the novation was valid and was, therefore, ‘estopped’ from denying it. 

Second, the defendant had unreasonably withheld consent to the assignment.

What does this mean?

It’s not unusual for a contractual party to seek to transfer or novate their contractual rights and responsibilities to a third party, for example in the case of selling a business or as a result of corporate reorganisation.  To effect a transfer, the existing terms should be complied with, however where the agreement is silent on termination or transfer – there is greater flexibility for assigning such rights. The conduct of the parties may also be an important aspect for anyone taking a view as to whether or not a transfer or novation has effectively taken place.  

Where consent is required, the ruling is a further reminder that consent should not be unreasonably withheld. Our award-winning team of commercial lawyers at ParrisWhittaker are available to assist – contact us urgently at +1.242.352.6112 or Parriswhittaker.com

Gama Aviation (UK) Ltd v MWWMMWM Ltd [2022] EWHC 1191 (Comm)