What is a Deed of Novation?

Consider this – you have entered into a contract to purchase a property, but for various reasons, the property no longer suits you.  But it will suit your parents perfectly.  So can you transfer the contract over to your parents, so that your parents are the purchasers?

Also consider this – your business has a really valuable commercial contract, supplying services to a large organisation.  However you are moving interstate and closing up the business, but rather than letting the valuable commercial contract lapse, you would like to instead transfer the benefits (and obligations) under it to a friend’s business which is operating within the same industry.

So how are these transfers dealt with legally?  With a Deed of Novation.

A Deed of Novation is used when a party wishes to transfer or assign its rights and obligations under an existing contractual arrangement to another party – that is, the outgoing party is substituted for the incoming party without changing the original rights and obligations under the original agreement.

The effect of such a Deed is that the outgoing party is released from its obligations under the contract, and the various rights and obligations under the contract are transferred to the incoming party.

From the point of view of the other party to the contract, nothing changes – although they would need to consider and consent to the transfer (see below)Question

What is the difference between novation and assignment?

  • Novation transfers both rights and obligations under the contract to the incoming party, whereas assignment transfers rights only.
  • Novation requires tri-partite consent (that is, the consent of all parties – the outgoing party, the incoming party and the remaining party), whereas assignment may not require the remaining party’s consent (subject to the actual wording of the contract)
  • Novation results in a new agreement on the same terms as the original agreement, whereas assignment doesn’t necessarily discharge the original agreement, meaning that the outgoing party will remain bound by any obligations

Points to consider

It is important to consider the following points when considering a deed of novation:

  • does the original contract allow one party to novate its rights and obligations to another party?
  • does the novation require pre-approval from the remaining contractual party?
  • is there a requirement for pre-approval not to be unreasonably withheld?
  • would it make more commercial sense to terminate the existing contract, and replace it with a new contract?
  • who will be liable for past performance or default prior to the novation?  Will the incoming party take on the rights and obligations pre-dating the novation?
  • what will be the effective date of the novation?  The date of the agreement, or some other pre-determined date?

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Contact the team at Shire Legal on 9526 3444 or info@shirelegal.com.au if you have any questions about Deeds of Novation, or commercial agreements generally.

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Have you entered into an unfair contract?

Have you ever entered into a business contract which you think is unfair? Was it a standard form contract which offered plenty of protection for one party but not the other? Smaller businesses now have protection from unfair contracts under laws which were introduced on 12 November 2015.

Which contracts will the law apply to?

The laws will apply to standard form contracts (that is, where the terms and conditions are set by one party with no negotiation) entered into or renewed on or after 12 November 2016 where:

  • at least one of the businesses employs less than 20 people,
  • the price of the contract is no more than $300 000, or $1 million if the contract is for more than 12 months, and
  • the contract relates to the supply of goods or services (including financial goods or services), or the sale or grant of an interest in land.

It does not matter whether the smaller business is the customer or the supplier – the laws apply equally.

The ACCC, Australian Securities and Investments Commission, and state and territory offices of fair trading will enforce this law.

Which contracts will the law specifically NOT apply to?

The laws will not apply to the following types of contracts:

  • contract of marine salvage or towing
  • charterparty of a ship
  • contract for the carriage of goods by ship
  • constitution of a company, managed investment scheme or other kind of body
  • small business contract that is covered by Commonwealth, state or territory law that is prescribed by the regulations.

 How do I know if a contract is unfair? 

Ask yourself:

  • does the contract allow one business, but not the other, to change or cancel the contract, or to limit or avoid their obligations
  • does the contract penalise one business, but not the other, for breaching the contract?
  • are there terms within the contract that are not reasonably necessary to protect the stronger business?

If so, then it may be considered an unfair contract.

But we have plenty of standard form contracts which we give to all of our customers and suppliers!

We suggest that you:

  • know your customers/suppliers – so you know whether they fall within the definition of smaller business. Ask questions!
  •  review your contracts with smaller businesses as a matter of priority, so that you can ensure that your contracts are fair, and you avoid investigation by ACCC, ASIC and/or Fair Trading. If your contracts do contain terms that may be considered unfair, then consider how important the terms in that contract are to your business and whether the terms protect your legitimate business interests.
  • consider structuring the value of the contract so that you exceed the monetary threshold
  • consider developing a separate set of contracts for smaller business clients, and another set of contracts for other business clients – if you are in the transport industry, develop a separate set of contracts for shipping contracts (being an excluded contract).

The law will only apply to contracts entered into or renewed from 12 November 2016, so there is approximately 12 months for you to review and amend your standard form contracts if required.

What can we do if we believe that our small business has entered into an unfair contract?

Whilst having an unfair term in a contract is not an offence (meaning that no pecuniary penalties apply), the smaller business has the right to commence court proceedings against the other business to apply for orders that part of the contract is set aside (that is, declared void) or varied (that is, changed so that it is fair).

If the other business attempts to enforce the unfair term(s) against the smaller business, then the smaller business could seek compensation from the Court.

Of course, it is always our recommendation that if you believe that you have rights against another party, obtain legal advice first, then attempt to negotiate a resolution to the issue without rushing off to Court.

The importance of requisitions on title when purchasing a property

As part of the normal conveyancing process, the purchaser will make enquiries with the vendor about the Title of the property.  These are referred to as “requisitions on title”.

The purpose of requisitions is to ask the vendor information which may not have been disclosed in the contract or discovered during an inspection of the property.  The information can range from whether there is a dispute with the neighbour regarding fences, to whether there is any matter that could justify the making of a demolition order.

Requisitions

There are four categories of requisitions:

  • Requisitions as to title – these are matters relating to the title of the property for sale, such as whether there is an easement affecting the property.
  • Requisitions as to conveyance – these are matters relating to how the property will pass to the purchaser, such as the documents to be handed over at settlement. For example, the proper execution of documents to be handed over at settlement and the time and place for settlement.
  • Requisitions in the nature of general enquiries – these are best described as things that are routinely asked and may include information on how matters are to be dealt with on completion. For example, adjustments to be made, documents to be handed over, or the existence of any statutory notices.
  • Requisitions in the nature of reminders – these are as they sound, simply reminders to comply with the Contract.  For example, any caveat on title must be removed before settlement, vacant possession must be provided on settlement, and so on.

Whilst a great deal of the information sought in Requisitions on Title are now covered in a vendor’s duty to disclose matters affecting the property, there are some areas that are not covered by this duty of disclosure.  Given that purchasing property is probably one of the biggest decisions and investments a person will make in their lifetime it goes without saying that it is vitally important that as much information as possible is obtained about the property before settlement takes place.

The vendor is required to answer Requisitions on Title honestly and to the best of their knowledge.  There are a range of remedies if this is not done, some of which can be quite severe.

Incorrect  Answers

A vendor who deliberately answers a requisition falsely is liable for damages for deceit if the false answer was intended to, and does, induce a purchaser to complete the purchase.  This not only applies to the answers originally given but also to situations where the vendor unintentionally provides an incorrect answer, becomes aware that the answer is incorrect and does nothing to disclose the truth to the purchaser.

If a vendor or their practitioner intentionally conceals a matter that is material to the title of the property in order to induce the purchaser to settle, then they may both face criminal and civil charges (s183 Conveyancing Act 1919).

If the reply is honest but incorrect the vendor and possibly their practitioner may be liable for negligent misstatement.

Incorrect replies may also be found to be a breach of consumer protection legislation such as the Australian Consumer Law.

If a vendor is unable or unwilling to reply to a requisition the contract provides that the vendor may rescind the Contract but only if:

  • the purchaser has made a proper requisition;
  • the vendor is acting on reasonable grounds, not for ulterior purposes or out of recklessness.

Any notice of intention to rescind under this clause must give the purchaser a reasonable time to waive the requisition (s56 Conveyancing Act 1919).

Was the kiss in the contract?

8808432-lawYou may recall reading earlier this year about the wedding photographer who was sued by the bride and groom because, amongst other things, he missed photographing the all important first kiss.

Whilst the photographer’s fee for the day was $2,700, the disappointed bride and groom refused to pay the remaining $390 of his fee, and instead sued him for $6,400 for failing to capture the kiss, the ribbon cutting and the certificate signing. The photographer counter-sued (that is, filed his own claim against the bride and groom) for $6,000, which included the $390 balance outstanding for his fee, court fees and $63 for paying for a meal out of his own pocket.

The Victorian Civil and Administrative Tribunal considered the importance of the first kiss photo, agreed that a wedding kiss is difficult to capture, but nevertheless ordered the photographer to pay the newlyweds $710 for failing to meet the value of the $2,700 package, and ordered the newlyweds to pay for the photographer’s $63 meal.

The lesson to be learnt is this – if there is an expectation that the other party to a transaction is going to perform a particular service for you, make sure you spell out in detail exactly what level of service will be provided. And ideally, in writing. Hiring a photographer and ensuring that you instruct the photographer to capture all of the important photos comes down to discussing everything in detail, so make a list of the photos that you definitely would like (such as first kiss, cake cutting etc) and give it to the photographer so that the photographer can ensure that they are in the right place at the right time, taking the photo when it needs to be taken.

The list should form part of a written legal contract between you and the photographer, outlining the services to be provided on the day, and all of the other rights and obligations of each party. The contract then becomes an enforceable document should things go ary.

There are a number of other legal issues that should be discussed with the photographer as well, such as who owns the copyright of the photos – this issue came arose in a case earlier this year when Lowes clothing used a photo loaded onto the photo sharing website flickr.com, without first obtaining the photographer’s permission. The photographer sued Lowes for breach of copyright.