 |
Wiki Law School will soon be moving! Please update your bookmarks. Our future address is www.wikilawschool.org |
Contracts/Novation
- This article is on the legal term. For the keyboard company, see Novation Digital Music Systems; for the former modem manufacturer, see Novation CAT.
Novation is a term used in contract law and business law to describe the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party. In contrast to an assignment, a novation must be agreed upon by all the parties to the original agreement.[1] The obligee, the person receiving the benefit of the bargain, must only be given notice. The obligor, the party making the novation, must only make the new obligor aware and receive consent from the new obligor. A contract transferred by the novation process transfers all duties and obligations from the original obligor to the new obligor.
For example, if there exists a contract where Alex will fix a printer for Becky and a contract where Daniella will fix a printer for Alex, then it is possible to novate both contracts and replace them with a single contract wherein Daniella agrees to fix a printer for Becky. Contrary to assignment, novation requires the consent of all parties. Consideration is still required for the new contract, but it is usually assumed to be the discharge of the former contract.
The criteria for one possible successful novation are: the complete acceptance of the liability by the new obligor, the acceptance of the new obligor by the obligee, and the acceptance by the old obligor of the new contract as full performance of the old contract.[2]
Novation is also used in futures/options trading markets to describe a special situation where the clearing house takes all positions with all the brokers, buying all the brokers sell, and selling all that the brokers buy. When selling brokers buy, buying brokers tend to sell.
In business, novation is typically the process by which a newly formed corporation assumes the pre-incorporation liabilities incurred by its founders. Novation is also used in transactions through electronic exchanges.
