A recent case heard in the High Court has highlighted the importance of clear drafting, especially of key clauses such as termination, in a contract in order to accurately reflect the parties’ intentions.
In the recent case of Gama Aviation (UK) Ltd v MWWMMWM Ltd, the court found that a contractual requirement for termination by written notice did not prevent a novation of the contract due to conduct.
The case concerned a new supplier who had been performing a contract in place of the original supplier to a customer following a novation (i.e. transfer) of the contract. The new supplier was seeking a summary judgement for unpaid sums from the customer. The customer in turn argued that they were not obliged to pay. This was because the novation of the contract to the new supplier was not effective. The customer argued the novation had been organised informally, without any form of documentation, whereas the original contract had a clause which set out the formalities for termination for convenience. The question before the court was whether that particular clause also applied to novations.
The court wrestled with the interpretation of the clause, requiring an addendum to the original judgment. The court considered that the clause could either (a) only be applied to unilateral termination. i.e termination for convenience by one party, or alternatively (b) it could constitute an exclusive code of conduct for termination. If (b) applied, the informal novation would be ineffective because it didn’t comply with the code of conduct.
The court eventually decided that in order for the clause in question to make business sense, it would mean that the clause only applied to unilateral termination. For example, it would not make sense to require the notice period where both parties agreed together to terminate. Due to there being no further clauses in the contract which referred to termination by agreement, the contract couldn’t be interpreted to apply to informal novation by agreement, as all the parties had consented to it by conduct.
The court also said that even if its interpretation of the clause was incorrect, the customer would not have been able to rely on this clause to argue against the novation as they had been paying the new supplier’s invoices. Therefore, due to the customer’s conduct the new supplier would have (quite reasonably) believed they are contracting with the customer directly, rather than with the old supplier.
This case highlights the importance of being clear in drafting to reflect the parties’ intentions. If caution is not taking at the drafting stage, it could lead to later confusion, which at worst could in turn lead to the costly situation in which the courts are left to interpret the offending clauses. Separately, had the parties formally recorded the novation by way of a novation agreement, the dispute could have been avoided.
When contracting with other parties, or changing existing arrangements (e.g. novation), it is worth seeking legal advice. Our Commercial Team can assist with all manner of contracts. If you have any queries, please contact Michael Winder.
