Novation
What is the Novation?
A novation substitutes a new party or a new contract for an existing obligation, immediately extinguishing the original duty. All parties must consent to the substitution.
Definition
A novation is the substitution of a new contract or a new party for an existing contractual obligation, resulting in the immediate extinguishment of the original duty. Unlike an accord and satisfaction, where the original obligation is discharged only upon performance of the substitute agreement, a novation takes effect immediately upon the agreement of all parties. The original party whose duty is substituted is completely released from liability.
There are two types of novation. A substituted contract novation replaces the original agreement with an entirely new one between the same parties, with different terms. A substituted party novation replaces one of the original parties with a new party, who assumes the obligations of the departing party. The most common scenario is a debtor novation, where a new debtor assumes the obligation and the original debtor is released, but a creditor novation (substituting a new creditor) is also possible.
The critical requirement for a novation is the consent of all parties, including the party being released. Without the consent of the obligee (creditor) to release the original obligor (debtor), there is no novation—the situation is merely a delegation of duties, and the original party remains liable. This consent requirement distinguishes novation from assignment and delegation, where the original party may remain secondarily liable. Consideration for the novation is found in the mutual release of the departing party and the assumption of the obligation by the new party.
Key Elements
- 1A valid existing obligation between the original parties
- 2Agreement to substitute a new obligation or a new party
- 3Consent of all parties, including the party being released
- 4The original obligation is immediately extinguished
- 5Valid consideration supports the new arrangement
Landmark Cases
Seale v. Bates
145 Colo. 430 (1961)
Held that a novation requires the express consent of the creditor to release the original debtor, distinguishing it from a mere assumption of duties.
Rosenberg v. Son, Inc.
491 N.W.2d 71 (N.D. 1992)
Addressed the requirement that all parties must consent to a novation and that consent of the creditor to release the original debtor cannot be implied from silence.
Crane Ice Cream Co. v. Terminal Freezing & Heating Co.
147 Md. 588 (1925)
Distinguished between assignment (original party remains liable) and novation (original party released), emphasizing the necessity of creditor consent.
Exam Tips
- The key distinguishing feature of novation is the immediate extinguishment of the original obligation—compare this with accord and satisfaction.
- All parties must consent, especially the obligee/creditor—without consent to release the original party, it is an assignment or delegation, not a novation.
- Look for evidence of the creditor's intent to release the original party; implied consent is disfavored.
- Distinguish novation from assignment and delegation: in assignment, the original obligor remains liable; in novation, they are released.
Common Mistakes to Avoid
- Assuming that a new party's assumption of duties automatically constitutes a novation—the original obligee must consent to release the original obligor.
- Confusing novation with accord and satisfaction—novation extinguishes the original duty immediately, while accord and satisfaction requires completion of the substitute performance.
- Overlooking the consent requirement and treating a delegation of duties as a novation.
Memory Aid
Novation = New party or New deal, and the old one is GONE immediately. Everyone must agree. Think: 'Nov' = new, like 'novel.'