Purchasing a business? Don’t forget to transfer your customer and supplier contracts
One of the most important considerations when a business is being sold is the treatment of its existing contracts with customers and suppliers. However, this tends to be an issue that purchasers do not pay sufficient attention to getting right. Of principal concern is the transfer of customer contracts. If a purchaser does not effectively transfer a customer contract, then they may not have the ability to sue for non-payment.
This is an issue that affects all sales of businesses and has even stung some of Australia’s largest companies. The recent case of Goodridge shows how even some of the most sophisticated companies can get it wrong, with potentially disastrous consequences.
Facts of the case
Goodridge involved a barrister who held a margin loan account with Macquarie Bank. Under this arrangement he was loaned money to trade whilst his share portfolio acted as security for his loan. If the value of his portfolio dropped below a certain value the bank had the right to demand a ‘margin call’ payment from him.
In January 2009 Macquarie sold their margin lending business to Bendigo and Adelaide Bank. This supposedly involved the transfer of all its existing customers, including the account of Mr. Goodridge. As the stock market fell, the bank made margin calls on his account and eventually sold off his portfolio.
Mr. Goodridge subsequently challenged the margin call in the Federal Court on the basis that the transfer of his loan account and his contract from Macquarie to Bendigo and Adelaide Bank was not effective and consequently, the margin call was wrongly made.
Novation and Assignment
The bank first argued that the margin lending agreement was novated; in other words, the parties to the contract had agreed to rescind their existing contract and a new contract was entered into between Mr Goodridge, Bendigo and Adelaide Bank. In this case, it was an important finding that Mr. Goodridge had not received any notification from Macquarie of the purported transfer of his contract. Though his contract with them included a term that stated they were entitled to assign, transfer or novate it without his consent, Justice Rares found this was merely an ‘agreement to agree’. He considered it impossible to novate a contract in circumstances where one of the parties is not aware of, and not a party to, the novation.
As an alternative to novation, the Court also considered whether there was an effective assignment by the bank of its rights under the agreement. He found that there could be no effective assignment as the bank’s rights were incapable of being separated from its obligation to extend credit to Mr. Goodridge.
Implications of the decision
While Goodridge concerned one particular type of agreement, it has considerable implications outside the context of margin lending. The issues it raises are present in nearly every sale of business where a purchaser wishes to benefit from pre-existing contracts with customers and suppliers.
If a business has a right to collect payment of some sort from a third party, prospective purchasers need be very careful to ensure this right is properly transferred to them. Depending on the circumstances, purchasers may need to contact all suppliers and customers to obtain their consent to the transfer and ensure that appropriate documentation is signed.
For further information please contact one of our Corporate Advisory lawyers.
Authors: Richard Lim and Darren Sommers