Goodridge appeal - legal principles governing assignment and novation of contracts

Abstract

The recent decision of the full bench of the Federal Court in Leveraged Equities Ltd v Goodridge1 has unanimously overturned the contentious first instance decision of Rares J2 and, in doing so, has restored clarity to the legal principles governing assignment and novation of contracts. Although the decision centred on the enforcement of margin lending arrangements and the proper construction of an ambiguously drafted contract, the case has wider implications for syndicated loans, securitisations and commercial transactions generally.

The first instance decision caused much consternation in financial and legal circles, as it appeared to challenge existing legal principles and practice regarding the novation and assignment of contracts. Although several commentators suggested that the statements from the Goodridge decision should be confined to the specific facts, there was concern that if applied more broadly, the Goodridge decision undermined the validity of existing loan transfers, securitisations and other commercial transactions.

The appeal decision has put such fears to rest, while providing a cogent and authoritative summation of the Australian law on novation and assignments, in line with both English and US authorities. Nevertheless, there are some aspects of the decision which may require further clarification.