Novation


Novation

In contract law and business law, novation is 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, which is valid so long as the obligee (person receiving the benefit of the bargain) is given notice, a novation is valid only with the consent of all parties to the original agreement: the obligee must consent to the replacement of the original obligor with the new obligor.[1] 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 Dan will give a TV to Alex, and another contract where 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. 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. Another classic example is where 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.

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.[2]

Application in financial markets

Novation is also used in futures/options trading markets to describe a special situation where the clearing house interposes between buyers and sellers as a legal counter party, i.e., the clearing house becomes buyer to every seller and vice versa. This obviates the need for ascertaining credit-worthiness of each counter party and the only credit risk that the participants face is the risk of clearing house committing a default. Clearing House puts in place a sound risk-management system to be able to discharge its role as a counter party to all participants. The term is also used in markets that lack a centralized clearing system (such as the swap market), where "novation" is used to refer 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 futures contract.

References

  1. ^ Always Legal Associates, Inc
  2. ^ Duhaime's Contract Law Center

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  • novation — no·va·tion /nō vā shən/ n [Late Latin novatio renewal, legal novation, from Latin novare to make new, from novus new]: the substitution by mutual agreement of one obligation for another with or without a change of parties and with the intent to… …   Law dictionary

  • novation — [ nɔvasjɔ̃ ] n. f. • 1307; bas lat. novatio, de novare « renouveler », rad. novus 1 ♦ Substitution d une obligation ancienne, soit par changement de créancier, de débiteur, soit par changement d objet ou de cause. 2 ♦ (1548, repris XXe) Rare… …   Encyclopédie Universelle

  • Novation — (von lat. novatio, Genitiv –onis) bedeutet (Er )Neuerung→Neuerungsvertrag Im österreichischen und deutschen Schuldrecht versteht man darunter eine Schuldersetzung in inhaltlicher Hinsicht, durch die die Parteien entweder eine Änderung des… …   Deutsch Wikipedia

  • Novation — No*va tion, n. [L. novatio; novus new: cf. F. novation.] 1. Innovation. [Obs.] [1913 Webster] I shall easily grant that novations in religion are a main cause of distempers in commonwealths. Laud. [1913 Webster] 2. (Law) A substitution of a new… …   The Collaborative International Dictionary of English

  • Novation — (v. lat.), jedes Rechtsgeschäft, wodurch eine bisherige Verpflichtung aufgehoben u. an deren Stelle eine neue gesetzt wird. Dies geschieht entweder so, daß der bisherige Schuldner u. Gläubiger unverändert bleiben (Novatio simplex); od. so, daß an …   Pierer's Universal-Lexikon

  • Novation — (lat., Neuerung, Umwandlung), im juristischen Sinne die Aufhebung einer bestehenden Verbindlichkeit durch Begründung einer neuen, die an die Stelle der bisherigen tritt. Es kommen z. B. Gläubiger und Schuldner dahin überein, aus einer… …   Meyers Großes Konversations-Lexikon

  • Novation — Novatiōn (lat.), Neuerung, Tilgung einer Rechtsverbindlichkeit dadurch, daß eine neue an ihre Stelle tritt …   Kleines Konversations-Lexikon

  • Novation — Novation, lat. deutsch, Abänderung eines alten Rechtsgeschäftes durch ein neues, das an dessen Stelle tritt u. jenes aufhebt. Also wenn für den bisherigen Schuldner ein anderer eintritt u. der Gläubiger den letztern mit Entlassung des erstern… …   Herders Conversations-Lexikon

  • novation — (n.) replacement of an old obligation by a new one, 1530s, from L. novationem (nom. novatio) a making new, renewal, noun of action from pp. stem of novare make new, from novus new (see NEW (Cf. new)) …   Etymology dictionary

  • novation — [nō vā′shən] n. [LL novatio < L novare, to make new < novus, NEW] Law the substitution of a new obligation or contract for an old one by the mutual agreement of all parties concerned …   English World dictionary