Lenders breathe a sigh of relief as basic assignment law upheld and decision of rogue judge overturned

On 18 January 2011 the full Federal Court, in Leveraged Equities Limited v Goodridge [2011] FCAFC 3, has allayed concerns raised by the decision of the trial judge, Justice Rares, in relation to assignment transactions.

A loan facility was made available by Macquarie Bank to Goodridge in May 2003. In January 2009, Macquarie Bank sold its loan book to Leveraged Equities. In February 2009, Leveraged Equities sought to enforce its security against Goodridge. Goodridge argued that there had been no effective assignment and he won at first instance.

The loan documentation included a clause that read:

The Bank may assign, transfer, novate and otherwise grant participations or sub-participations in, and can otherwise deal in any manner (including to grant any Security Interest over), all or any part of the benefit of this Agreement and any of its rights, remedies, powers, duties and obligations under this Agreement to any person, without the consent of the Borrower

The trial judge held that novation, by definition, always requires the consent of all parties (and as distinct from assignment). He therefore interpreted this clause as no more than an agreement to agree as it was “impossible” for one party to a contract to prospectively authorise a novation to be made by another party unilaterally. The Full court rejected this view noting:

Novation will, ordinarily, require the agreement of the original and the substituted party although the original contract may, on its proper construction, authorise a party to substitute a contracting party in its place without need for a further tri-partite agreement an agreement.

The Full Court noted that the trial judge was criticized in a English case that referred to it as “wholly uncommercial”, and a “purist point” which is contrary to the development of the law of contract. The Full Court also noted that in the United States:

There is nothing exceptional about permitting two parties to a contract to establish ahead of time the ground rules for consenting to the substitution of one party to the contract for another.

The Full Court noted the trial judge correctly identified the essence of novation, namely the making of a new contract between a creditor and a debtor, in consideration for the extinguishment of the obligations of the lender under the former contract.

The Full court noted that:

The question which arises in the present case is whether the terms of the clause contain a consent by the borrower to the introduction of a new lender to assume the rights and obligations of Macquarie as well as to the release of Macquarie from its rights and obligations. It may well be that the draftsperson failed to give sufficient attention to the distinction between assignment and novation in drafting the clauses. But I think that the better view is that the references to “novate”, “obligations” and “without the 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.

The Full Court held that the primary judge was incorrect in his view,  that “there was no identified new contract to which Mr Goodridge could have ‘consented’ to become a party”. Nor was he correct in concluding at that Mr Goodridge’s consent was to a “non-existent future transaction on uncertain and unidentified terms”. Instead the Full Court held that it is clear, that the words “under this Agreement” explicitly qualify the obligations which may be novated. Mr Goodridge’s consent was therefore given to the introduction of a new lender who was substituted for Macquarie on the same terms and conditions as the existing loan. There was therefore no uncertainty about the terms and conditions of the new contract to which Mr Goodridge consented to be a party.

Mr Goodridge was refused leave to appeal to to the High Court.

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