Novation

Novation, in contract law and business law, is the act of – Novation, in contract law and business law, is the act of – In international law, novation is the acquisition of territory by a sovereign state through 'the gradual transformation of a right in territorio alieno into full sovereignty without any formal and unequivocal instrument to that effect intervening'. Novati, as a legal term is derived from the Roman law, in which novatio was of three kinds—substitution of a new debtor (expromissio, or delegatio), of a new creditor (cessio nominum vel actionum), or of a new contract. In English law the term (though it occurs as early as Bracton) is scarcely naturalized, the substitution of a new debtor or creditor being generally called an assignment, and of a new contract a merger. It is doubtful, however, whether merger applies except where the substituted contract is one of a higher nature, as where a contract under seal supersedes a simple contract. Where one contract is replaced by another, it is of course necessary that the new contract should be a valid contract, founded upon sufficient consideration (see Contract). The extinction of the previous contract is sufficient consideration. The question whether there is a novation most frequently arises in the course of dealing between a customer and a new partnership, and on the assignment of the business of a life assurance company with reference to the assent of the policyholders to the transfer of their policies. The points on which novation turns are whether the new firm or company has assumed the liability of the old, and whether, the creditor has consented to accept the liability of the new debtors and discharge the old. The question is one of fact in each case. See especially the Life Assurance Companies Act 1872, s. 7, where the word 'novations' occurs in the marginal note to the section, and so has quasi-statutory sanction. Scottish law seems to be more stringent than English law in the application of the doctrine of novation, and to need stronger evidence of the creditor's consent to the transfer of liability. In American law, as in English, the term is something of a novelty, except in Louisiana, where much of the civil law is retain. In contrast to an assignment, which is generally valid as long as the other party is given notice (except where the obligation is specific to the obligor, as in a personal service contract with a specific ballet dancer, or where assignment would place a new and special burden on the counterparty), a novation is valid only with the consent of all parties to the original agreement. A contract transferred by the novation process transfers all duties and obligations from the original obligor to the new obligor. For example, if there exists a contract whereby Dan will give a TV to Alex, and another contract whereby Alex will give a TV to Becky, then, it is possible to novate both contracts and replace them with a single contract wherein Dan agrees to give a TV to Becky. In contrast to assignment, novation requires the consent of all parties. Consideration is still required for the new contract, but it is usually assumed to be the discharge of the former contract. Another classic example is when Company A enters a contract with Company B and a novation is included to ensure that if Company B sells, merges or transfers the core of their business to another company, the new company assumes the obligations and liabilities that Company B has with Company A under the contract. So in terms of the contract, a purchaser, merging party or transferee of Company B steps into the shoes of Company B with respect to its obligations to Company A. Alternatively, a 'novation agreement' may be signed after the original contract in the event of such a change. This is common in contracts with governmental entities; an example being under the United States Anti-Assignment Act, the governmental entity that originally issued the contract must agree to such a transfer or it is automatically invalid by law.