Business sale - formal novation of onerous contract did not occur.

Inveresk Plc sold its paper mill.? The 5 trucks it used in the business were on hire from Finning UK under 3-5 year term contracts. The buyer agreed to use the trucks following the sale and to pay sums akin to the hire charges to Inveresk, but did not formally take over the contracts.

The buyer subsequently closed the papermill and Finning repossessed the trucks. In effect, this caused the early termination of the hire agreements.? Finning sought payment of damages for early termination. It took proceedings aginst Inveresk and succeeded.

The Court affirmed that a novation required all of the parties to fully consent to the changed arrangements so that the contractual obligations of one of the original parties (Inveresk in this case) were extinguished and replaced by equivalent obligations of a new party. Here the buyer had only agreed to take on certain financial responsibilities of Inveresk but had not been prepared to take over Inveresk's place in its entirety as party to the contract with Finning.

The case reminds sellers of a business that if they do not obtain formal novation of a business contract from the buyer and the buyer subsequently defaults the seller is at risk on the contract.? Parties in Finnings position should not feel forced to deal with the buyer where formal novation has not taken place.? However had Inveresk become insolvent rather than the buyer Finning would no doubt have attempted to claim from the buyer.? Uncertainty can be costly so if at all possible formal novation is the ideal.? This may be idealistic in the current market where sellers may neeed to be acommodating to buyers and buyers may wish to cherry pick.

Case: Finning UK ltd v Inveresk Plc

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