The High Court recently issued a lengthy judgment (following a three week trial) about a shareholder dispute involving a golf club in Kent.

A shareholders' agreement (SHA) contained a clause which stated, amongst other things, that no party could assign or deal in any way with any of its rights under the SHA without the prior written consent of all the parties (such consent not to be unreasonably conditioned, withheld or delayed).  A further clause provided that variations of the SHA had to be in writing and signed by or on behalf of all parties and that any waiver of any right under the SHA was only effective if it was in writing and it applied only to the person to which the waiver was addressed and in the circumstances for which it was given.

Declarations were sought as to the validity of a purported novation of the SHA. There were two key issues - novation and promissory estoppel.

Novation

The claimants argued that the SHA was binding between them and the defendant, even though the claimants were not parties to it. Camelot, the original party, had transferred its shares to another party, of whom the claimants were trustees. 

The court said that although the consent of all parties is required for a novation, consent can either be provided expressly or can be inferred from conduct. Whether consent has been provided is a question of fact. However, a novation will only be inferred from conduct if that inference is required to give business efficacy to what has happened.

The court was satisfied that there had been a novation in this case. This was because the parties had agreed that the claimants would step into Camelot's shoes if the shares were transferred - and this had been done via the share transfer and updates to the members' register and share certificates. Therefore, a novation was required to give business efficacy to those changes.

In addition, an informal novation was not prevented by the clause's prohibition on dealing with contract rights without written consent. The judge said that the ejusdem generis principle applied. This is a rule of interpretation that where particular words are followed by general words, the general words are limited to the same kind as the particular words. 

The relevant clause included the general words “or deal in any way with, any of its rights”, but these general words followed a reference to assigning, granting any encumbrance, or sub-contracting, which pointed to some bilateral disposition of rights under the SHA involving a party to the SHA and a third-party, rather than some agreement that involved a consensual arrangement, such as a novation, including both parties to the SHA and involving a termination of the rights under the SHA.

Consequently, the court did not consider that the clause prevented any novation from being effective because prior written consent was not obtained. However, the judge did point out that if there is a “no dealings” clause, the court is required to be more cautious before finding that the evidence is sufficiently strong to conclude, considering the matter objectively, that there has been a novation. 

Promissory estoppel

The court also considered the claimants’ separate claim for promissory estoppel. The defendant had given assurances that he accepted the share transfer from Camelot to the claimants. However, the court said that there was no existing legal relationship between the claimants and the defendant.  The court also wondered if the claimants were seeking to use promissory estoppel as a sword, rather than a shield, to establish new rights of their own against the defendant. Therefore the judge said “I am not persuaded that [claimants’] case can properly be founded upon, or assisted by any promissory estoppel…”.

Comment

This decision shows the court taking a liberal interpretation of the wording of the clause in question and adopting a solution which promoted business efficacy on the facts of the case. Whether or not novation will be prevented by a “no dealings” clause, which can impose restrictions on a party ‘dealing’ with its rights or obligations under a contract, will be a matter of interpretation. The court will have regard to the express wording of the clause in question, the contract as a whole, the commercial objective of the contract and the surrounding facts and context. 

If you are drafting a contract, you need to consider if you want to prevent novation by conduct and draft accordingly.