The High Court has considered whether a clause preventing termination except by written notice also prevented an informal novation. A new supplier had been performing a contract in place of the original supplier without any formal agreement to do so and sought summary judgment for recovery of unpaid sums from the customer. The customer’s main defence was that an informal novation was ineffective because of an explicit clause requiring written notice to terminate.
Informal novation takes place when a supplier transfers its business to a new supplier, the customer is notified of the change, receives invoices from the new supplier and gives its informal consent to the change by paying the new supplier’s invoices.
In this case, the contract between the original supplier and the customer stated that the contract continued until either side terminated on three months’ written notice.
Although the customer had paid some of the new supplier’s invoices it argued that informal novation had not taken place because no written notice had been given to terminate the contract with the original supplier.
The Court decided that the requirement for written notice only applied where one party wanted to terminate the contract unilaterally. It wouldn’t be consistent with business common sense to require three months’ written notice where both parties agreed termination. Because novation relies on the consent of all parties (whether explicit or, in the case of informal novation, implicit) then the clause did not prevent the contract novating over to the new supplier.
Customers wanting to object to their supplier transferring their contract to a new supplier should therefore bear in mind the limited window in which they can raise that objection – effectively before they start to pay the new supplier’s invoices.
Categorised in: Corporate and Commercial, Dispute Resolution, NewsTags: Commercial Agreements, Company Law, Contracts, Dispute Resolution