Alert – Debt and contract novations – Goodridge appeal application refused

15 June 2011

On 10 June the High Court of Australia has rejected the application of Mr Goodridge for special leave to appeal the decision in Leveraged Equities Limited v Goodridge [2011] FCAFC 3, handed down by the Full Federal Court in January 2011. As a result, the Federal Court decision represents the current state of the law. 

The current position

A contracting party can as a matter of principle:

  • prospectively authorise a novation to be made by another party unilaterally; and
  • assign rights arising under a contractual arrangement,

but whether this is the case will be a matter of construction of the specific contract.

This has obvious application to loan sell-downs securitisation and loan portfolio sales.

Prospective consent to novation

The Full Federal Court held that contracting parties can agree that one party can consent in advance (without knowing the identity of the new party) to a novation to be made by another party to the contract and that this is consistent with Australian, English and US authority.

Further, where a contract permits novation of a party's duties and obligations, there will be no uncertainty in the terms of the resulting agreement (that is, it is not an agreement to agree) simply because the original contract does not specify who the new party will be.

Drafting issues

Sell-down provisions should clearly distinguish between novation and assignment and deal with each separately.

In the circumstances of Goodridge it was held that the references to 'novate,' 'obligations' and 'without consent of the borrower' make it sufficiently clear that the borrower was giving prospective consent to all the elements required to give effect to a novation.