From Wikipedia, the free encyclopedia Novation
Novation
Contract law Tort law · Property law
Wills, trusts and estates
Part of the common law series
Criminal law · Evidence
Contract formation
In contract law and business law, novation is the act of ei-
Offer and acceptance · Mailbox rule
ther replacing an obligation to perform with a new oblig-
Mirror image rule · Invitation to treat
ation, or replacing a party to an agreement with a new
Firm offer · Consideration
party. In contrast to an assignment, which is valid so
Defenses against formation long as the obligee (person receiving the benefit of the
bargain) is given notice, a novation is valid only with
Lack of capacity
the consent of all parties to the original agreement: the
Duress · Undue influence
obligee must consent to the replacement of the original
Illusory promise · Statute of frauds
obligor with the new obligor.[1] A contract transferred by
Non est factum
the novation process transfers all duties and obligations
Contract interpretation from the original obligor to the new obligor.
Parol evidence rule For example, if there exists a contract where Dan will
Contract of adhesion give a TV to Alex, and another contract where Alex will
Integration clause give a TV to Becky, then, it is possible to novate both con-
Contra proferentem tracts and replace them with a single contract wherein
Dan agrees to give a TV to Becky. Contrary to assignment,
Excuses for non-performance novation requires the consent of all parties. Considera-
Mistake · Misrepresentation tion is still required for the new contract, but it is usu-
Frustration of purpose · Impossibility ally assumed to be the discharge of the former contract.
Impracticability · Illegality Another classic example is where Company A enters a
Unclean hands · Unconscionability contract with Company B and a novation is included to
Accord and satisfaction ensure that if Company B sells, merges or transfers the
core of their business to another company, the new com-
Rights of third parties pany assumes the obligations and liabilities that Compa-
Privity of contract ny B has with Company A under the contract. So in terms
Assignment · Delegation of the contract, a purchaser, merging party or transferee
Novation · Third party beneficiary of Company B ’steps into the shoes’ of Company B with
respect to its obligations to Company A.
Breach of contract
The criteria for novation comprise the obligee’s ac-
Anticipatory repudiation · Cover ceptance of the new obligor, the new obligor’s accep-
Exclusion clause · Efficient breach tance of the liability, and the old obligor’s acceptance
Deviation · Fundamental breach of the new contract as full performance of the old con-
tract.[2]
Remedies
Specific performance
Liquidated damages Application in financial mar-
Penal damages · Rescission kets
Quasi-contractual obligations Novation is also used in futures/options trading markets
Promissory estoppel to describe a special situation where the clearing house
Quantum meruit interposes between buyers and sellers as a legal counter
party, i.e., the clearing house becomes buyer to every
Related areas of law
seller and vice versa. This obviates the need for ascer-
Conflict of laws · Commercial law taining credit-worthiness of each counter party and the
only credit risk that the participants face is the risk of
Other common law areas
clearing house committing a default. Clearing House puts
1
From Wikipedia, the free encyclopedia Novation
in place a sound risk-management system to be able to as "stepping into" the contract. This is analogous to sell-
discharge its role as a counter party to all participants. ing a futures contract.
The term is also used in markets that lack a centralized
clearing system (such as the swap market), where "nova-
tion" is used to refer to the process where one party to a
References
contract may assign its role to another, who is described [1] Always Legal Associates, Inc
[2] Duhaime’s Contract Law Center
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Categories:
• Contract law
• Business law
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