Novation
The Use of Novation in Contracts and Agreements
In both business law and contract law, novation is a mutual agreement of the substitution of a new debt or obligation for an old one. The old one is then relieved and replaced by the newly contracted one. This can happen both with or without a chance in the parties involved.
A novation is most often applied when the parties involved are in the situation where performance or payments are not possible under the given terms of the original agreement or contract. A novation can also be applied when the debtor has no choice but to default or declare bankruptcy if the debt cannot be restructured. Examples of contracts that are discharged by novation are mortgages, legacies, and negotiable instruments.
There are three different ways to make a novation, which result in three different types:
• The first scenario does not involve any new person or parties. In this situation, the debtor creates the new engagement with a creditor, which liberates the parties from the former engagement. This form of novation does not have an appropriate term and is simply called a novation.
• The second scenario requires the intervention of a new party for the debtor. Here, a third party becomes a debtor and replaces the former debtor. This new debtor is then accepted by a creditor, now called the expromissor, and the former debtor is then released from the obligation. This is an expromissio novation.
• The third and final type of novation occurs when a new creditor replaces the old one. Here the debtor makes an agreement or contract some with the new creditor. This is a delegation novation.
It is a defined quality of the common law, that a simple agreement for substitution of another obligation in lieu of the original one is not valid unless it is actually executed and accepted to a satisfactory point. No situation or action can be kept upon the new obligation, nor can the obligation be held to the original demand. However, if the agreement is put into by a deed, the deed gives provides a cause of action and can potentially be enough and satisfactory for a for a simple contract debt.
The general rule that applies to a novation is that if one party is indebted to another party through a typical contract, give his creditor a promissory note, drawn by him for the same amount or value, without any new consideration, the new note will not be considered satisfactory to the original obligation unless agreed by the creditor. But if the agreement is transferred, he cannot sue based on the first contract while the note is not in his possession.
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