Savvy Vineyards 3552 Limited & Or v Kakara Estate Limited & Or [2014] NZSC 121 – assignment and nova

Wednesday 1st October 2014

The Supreme Court recently delivered an important judgment in the area of assignment [1] and novation [2] of contracts. The judgment overturned the Court of Appeal’s decision and reinstated the decision of the High Court in favour of the appellants.

The defendants, Kakara Estate Limited (“Kakara”) and Weta Estate Limited (“Weta”), had long term agreements with Goldridge Estate Ltd (“Goldridge”) for Goldridge  to develop and manage their vineyards  and acquire their grapes. The agreements allowed either party to cancel if the other party went into liquidation.  Importantly, the agreements allowed Goldridge to assign its “interest” in the agreements to related companies without the consent of the defendants.

Goldridge relied on this clause to assign its interest in the agreements to related companies, the appellants, Savvy Vineyards 3552 Limited and Savvy Vineyards 4334 Limited (“the Savvy companies”) by way of deeds of assignment.

The appellants, noting that the defendants’ consent to the assignment was not required, requested the defendants to nevertheless execute the deeds. The defendants did not execute the deeds, nor did they refuse to do so. It was accepted by both parties, however, that the Savvy companies assumed both the rights and obligations of Goldridge in continuing the performance of the contract.

Goldridge went into liquidation and the defendants sought to terminate the agreements. They relied on the fact that Goldridge had entered voluntary administration, where insolvency qualified as a ground for termination of the agreements. The issue was whether Goldridge remained a party to the vineyard agreements as assignor. If not, the defendants did not validly terminate the agreements.

The Supreme Court’s decision was split. The majority[3] agreed with the High Court’s finding that Goldridge was no longer a party to the agreements, and therefore the defendants’ purported termination was invalid. Despite the language used in the agreements and by the parties, the substitution of the Savvy Companies for Goldridge was not an assignment as it was impossible to assign obligations under a contract, only rights.[4] Similarly, the Savvy companies could not join the agreements as a party without releasing Goldridge from liability. By default, therefore, the transfer was a novation.

The majority found that the agreements also permitted novation without the defendants’ consent. While the facts of this case are specific, and the Court was critical of the drafting of the relevant documents,  the finding leaves scope for similar arguments in contractual disputes where the language of assignment or novation lacks clarity.  

Regardless, it was held that the defendants did consent to the novation. The majority found that the defendants “did not challenge the terms proposed [by the appellants] ... It follows that they therefore accepted those terms. Such acceptance is further apparent from … various notices … and other conduct.” [5]

The minority[6] agreed with the Court of Appeal in finding that Goldridge remained a party to the agreements as assignor and the defendants had validly terminated the agreements. The minority based its finding on basic contractual principles: there was no acceptance of the novation by the defendants, whether by conduct or otherwise.[7] The defendants’ conduct was consistent with an assignment,[8] and the defendants were given no choice but to acquiesce.[9] The minority therefore disagreed with the majority’s view that the defendants’ consent was not required to effect the novation.

Overall, the majority’s argument that a novation of the agreement did occur is attractive given the defendants did not object to the transfer and their conduct arguably went beyond mere acquiescence. The finding that the defendants’ consent was not required to the effect the novation when the wording in the agreements was not clear that novation was envisaged is perhaps more uncertain.

In any case, the decision highlights the need for parties (including their legal representatives) to be aware of legal concepts such as assignment and novation, to be careful in their drafting, and to voice any disagreement to proposed changes to the parties, to avoid disputes such as this.

[1] Describing assignment the majority noted that, “…where there has been a contract between A and B and an assignment by B to C, and nothing else, the traditional view is that: (a) the rights but not the obligations of B are transferred to C; (b) C may enforce the rights of B against A; (c) B remains liable on the contract to A; and (d) A and C are not otherwise in contract.”  Paragraph [85] of the judgment.
[2] Describing novation, the minority noted that, “Novation of a contract takes place where contracting parties agree that a third party, who must also agree, is to take the place of one of them. The substituted party is released from its obligations so that the remaining original party is able to enforce the contract only against the new party. It is essential to novation that the remaining original party releases the other original party from liability either entirely or at least from the date of the novation.” Paragraph [24] of the judgment.
[3] William Young, Glazebrook and Arnold JJ at paragraphs [44] to [113].
[4] The majority also found that the Contractual Remedies Act did not disrupt this view, despite the language that a burden may be assigned. Paragraph [91] of the judgment.
[5] Paragraph [61] of the judgment.
[6] Elias CJ and McGrath J at paragraphs [1] to [43].
[7] Paragraph [34] of the judgment.
[8] The minority noted for example that the defendants sent letters “c/- Goldridge Estate Limited”.
[9] Paragraph [36] of the judgment.

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