A benefit under a contract may be nominated to a third-party nominee under a nomination clause. Here we look at nomination clauses in contracts relating to the sale of property. Commonly you may see a contract providing for property to be transferred to the buyer or their nominee.”
Á contract of sale may provide for a buyer and allow the buyer to nominate the property to an unnamed third party. A nomination clause is to be distinguished from a novation of the agreement as it is restricted in being a right for the benefiting party to direct a transfer to the nominee.
A nomination clause does not result in the nominee becoming a party to the contract. Consequently, the nominee can reject the nomination. The courts have held that such a clause will only be effective if it’s language and intention are clear and compelling.
Interaction with privity of contract legislation
Legislation exists in Queensland, the Northern Territory, and Western Australia which operates to allow a third party, who is not a party to a contract, to enforce a contract made for their benefit. The question then arises whether such a third party can sue to seek to enforce a nomination clause. In general terms, the third party must be identifiable under a contract to be able to seek to rely on those legislative provisions. This is obviously a complex area of law and legal advice should be obtained to understand its operation.
The lack of a nomination clause
The absence of a nomination cause will not necessarily preclude a buyer from directing a seller to sign a transfer in favour of a third party. However, a nomination clause is preferable as it can deal with the process to be followed and the costs incurred.
Drafting considerations
The first concern is to ensure that the parties intend on a nomination as opposed to a novation or assignment.
As noted above, a nomination clause must be clear and compelling. Words such as substitution can indicate a novation rather than nomination, and so should be avoided. The nomination clause should specify the process to be followed to give effect to the nomination; including timelines, notice requirements, and responsibility for costs.
