HOME

TheInfoList



OR:

Novation, in
contract law A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to t ...
and business law, is the act of – # replacing an obligation to perform with another obligation; or # adding an obligation to perform; or # replacing a party to an agreement with a new party. In
international law International law (also known as public international law and the law of nations) is the set of rules, norms, and standards generally recognized as binding between states. It establishes normative guidelines and a common conceptual framework for ...
, novation is the acquisition of territory by a
sovereign state A sovereign state or sovereign country, is a political entity represented by one central government that has supreme legitimate authority over territory. International law defines sovereign states as having a permanent population, defined ter ...
through "the gradual transformation of a right ''in territorio alieno'' n foreign territoryinto full sovereignty without any formal and unequivocal instrument to that effect intervening".John P. Grant and J. Craig Barker (eds.), "Novation", in ''Perry & Grant Encyclopaedic Dictionary of International Law'', 3rd ed. (Oxford University Press, 2009).


Origins in Roman law

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 English law is the common law legal system of England and Wales, comprising mainly criminal law and civil law, each branch having its own courts and procedures. Principal elements of English law Although the common law has, historically, b ...
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 A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...
). 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 Louisiana , group=pronunciation (French: ''La Louisiane'') is a state in the Deep South and South Central regions of the United States. It is the 20th-smallest by area and the 25th most populous of the 50 U.S. states. Louisiana is bord ...
, where much of the civil law is retained.


Novation vs. assignment

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.


Examples of novation

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 Consideration is a concept of English common law and is a necessity for simple contracts but not for special contracts (contracts by deed). The concept has been adopted by other common law jurisdictions. The court in '' Currie v Misa'' declar ...
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. The criteria for novation comprise the obligee's acceptance of the new obligor, the new obligor's acceptance of the liability, and the old obligor's acceptance of the new contract as full performance of the old contract. Novation is not a unilateral contract mechanism, hence allows room for negotiation on the new T&Cs under the new circumstances. Thus, 'acceptance of the new contract as full performance of the old contract' may be read in conjunction to the phenomenon of 'mutual agreement of the T&Cs'.


International law

Novation is a rare means of acquiring title in international law. Examples include
Orkney Orkney (; sco, Orkney; on, Orkneyjar; nrn, Orknøjar), also known as the Orkney Islands, is an archipelago in the Northern Isles of Scotland, situated off the north coast of the island of Great Britain. Orkney is 10 miles (16 km) north ...
and the
Shetland Islands Shetland, also called the Shetland Islands and formerly Zetland, is a subarctic archipelago in Scotland lying between Orkney, the Faroe Islands and Norway. It is the northernmost region of the United Kingdom. The islands lie about to the n ...
, which were pledged to
Scotland Scotland (, ) is a country that is part of the United Kingdom. Covering the northern third of the island of Great Britain, mainland Scotland has a border with England to the southeast and is otherwise surrounded by the Atlantic Ocean to ...
by the
King of Norway The Norwegian monarch is the head of state of Norway, which is a constitutional and hereditary monarchy with a parliamentary system. The Norwegian monarchy can trace its line back to the reign of Harald Fairhair and the previous petty kingd ...
in lieu of a debt in 1468. They were annexed by Scotland in 1472; Corsica, which was only pledged to
France France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...
by
Genoa Genoa ( ; it, Genova ; lij, Zêna ). is the capital of the Italian region of Liguria and the sixth-largest city in Italy. In 2015, 594,733 people lived within the city's administrative limits. As of the 2011 Italian census, the Province of ...
in a treaty of 1768; and
Belize Belize (; bzj, Bileez) is a Caribbean and Central American country on the northeastern coast of Central America. It is bordered by Mexico to the north, the Caribbean Sea to the east, and Guatemala to the west and south. It also shares a wa ...
, which was originally only a grant of logging rights to the British by
Spain , image_flag = Bandera de España.svg , image_coat = Escudo de España (mazonado).svg , national_motto = '' Plus ultra'' (Latin)(English: "Further Beyond") , national_anthem = (English: "Royal March") , ...
in the
Treaty of Paris (1763) The Treaty of Paris, also known as the Treaty of 1763, was signed on 10 February 1763 by the kingdoms of Great Britain, France and Spain, with Portugal in agreement, after Great Britain and Prussia's victory over France and Spain during the S ...
. Some cases, like that of Belize, remain controversial.See J. H. W. Verzijl, ''International Law in Historical Perspective'', Volume 3: State Territory (A. W. Stijthoff-Leyden, 1970), pp. 387ff.


References


Further reading


Understanding Derivatives; Markets and Infrastructure
Federal Reserve Bank of Chicago, Financial Markets Group {{Authority control Business law Contract law Derivatives (finance)