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{{ | {{About|the legal term}} | ||
{{Contract law}} | |||
'''Novation''', in [[contract law]] and [[business law]],<ref>{{cite web | url=http://www.chicagofed.org/digital_assets/publications/understanding_derivatives/understanding_derivatives_chapter_1_derivatives_overview.pdf |title=Derivatives Overview|publisher=Chicago Fed|author=Richard Heckinger and David Mengle}}</ref> is the act of – | '''Novation''', in [[contract law]] and [[business law]],<ref>{{cite web | url=http://www.chicagofed.org/digital_assets/publications/understanding_derivatives/understanding_derivatives_chapter_1_derivatives_overview.pdf |title=Derivatives Overview|publisher=Chicago Fed|author=Richard Heckinger and David Mengle}}</ref> is the act of – | ||
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# adding an obligation to perform; or | # adding an obligation to perform; or | ||
# replacing a party to an agreement with a new party. | # replacing a party to an agreement with a new party. | ||
In [[international law]], novation is the acquisition of territory by a [[sovereign state]] through "the gradual transformation of a right ''in territorio alieno'' [in foreign territory] into full sovereignty without any formal and unequivocal instrument to that effect intervening".<ref name=Grant>John P. Grant and J. Craig Barker (eds.), "Novation", in ''Perry & Grant Encyclopaedic Dictionary of International Law'', 3rd ed. (Oxford University Press, 2009).</ref> | |||
==Origins in Roman law == | ==Origins in Roman law == | ||
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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.<ref name="Chisholm 1911, p. 832"/> | 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.<ref name="Chisholm 1911, p. 832"/> | ||
[[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.<ref name="Chisholm 1911, p. 832"/> | |||
In American law, as in English, the term is something of a novelty, except in [[Louisiana]], where much of the civil law is retain.<ref name="Chisholm 1911, p. 832"/> | In American law, as in English, the term is something of a novelty, except in [[Louisiana]], where much of the civil law is retain.<ref name="Chisholm 1911, p. 832"/> | ||
==Novation vs. assignment== | ==Novation vs. assignment== | ||
In contrast to an [[ | In contrast to an [[Assignment (law)|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.<ref name=duha1>{{cite web|last=Duhaime|first=Lloyd|title=Part 6: Restraint of Trade, Assignment, Novation & Frustration|url=http://www.duhaime.org/LegalResources/Contracts/LawArticle-91/Part-6-Restraint-of-Trade-Assignment-Novation-Frustration.aspx|work=duhaime.org|publisher=Duhaime's Contract Law|accessdate=30 July 2013|date=25 May 2012}}</ref> A contract transferred by the novation process transfers all duties and obligations from the original obligor to the new obligor. | ||
==Examples of novation== | ==Examples of novation== | ||
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The term is also used in markets that lack a centralized clearing system, such as [[Swap (finance)|swap]] trading and certain [[Over-the-counter (finance)|over-the-counter (OTC)]] [[Derivative (finance)|derivatives]], where "novation" refers to the process where one party to a contract may assign its role to another, who is described as "stepping into" the contract. This is analogous to selling a future contract. | The term is also used in markets that lack a centralized clearing system, such as [[Swap (finance)|swap]] trading and certain [[Over-the-counter (finance)|over-the-counter (OTC)]] [[Derivative (finance)|derivatives]], where "novation" refers to the process where one party to a contract may assign its role to another, who is described as "stepping into" the contract. This is analogous to selling a future contract. | ||
==International law== | |||
Novation is a rare means of acquiring title in international law. Examples include [[Orkney]] and the [[Shetland Islands]],<ref name=Grant/> which were pledged to [[Scotland]] by the [[King of Norway]] in lieu of a debt in 1468. They were annexed by Scotland in 1472; Corsica,<ref name=Grant/> which was only pledged to [[France]] by [[Republic of Genoa|Genoa]] in a [[Treaty of Versailles (1768)|treaty of 1768]]; and [[Belize]],<ref name=Grant/> which was originally only a grant of logging rights to the British by [[Spain]] in the [[Treaty of Paris (1763)]]. Some cases, like [[Belizean–Guatemalan territorial dispute|that of Belize]], remain controversial.<ref name=Grant/><ref>See J. H. W. Verzijl, ''International Law in Historical Perspective'', Volume 3: State Territory (A. W. Stijthoff-Leyden, 1970), pp. 387ff.</ref> | |||
==References== | ==References== | ||
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==Further reading== | ==Further reading== | ||
* [http://www.chicagofed.org/webpages/publications/understanding_derivatives/index.cfm Understanding Derivatives; Markets and Infrastructure] Federal Reserve Bank of Chicago, Financial Markets Group | * [http://www.chicagofed.org/webpages/publications/understanding_derivatives/index.cfm Understanding Derivatives; Markets and Infrastructure] Federal Reserve Bank of Chicago, Financial Markets Group | ||
[[Category:Business law]] | |||
[[Category:Contract law]] | |||
[[Category:Derivatives (finance)]] |