Novation Nova
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Novation, in
contract law A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more Party (law), parties. A contract typically involves consent to transfer of goods, Service (economics), services, money, or pr ...
and
business law Commercial law (or business law), which is also known by other names such as mercantile law or trade law depending on jurisdiction; is the body of law that applies to the rights, relations, and conduct of persons and organizations engaged in ...
, 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 Rule of law, rules, norms, Customary law, legal customs and standards that State (polity), states and other actors feel an obligation to, and generall ...
, novation is the acquisition of territory by a
sovereign state A sovereign state is a State (polity), state that has the highest authority over a territory. It is commonly understood that Sovereignty#Sovereignty and independence, a sovereign state is independent. When referring to a specific polity, the 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).


History

"Novation", as a legal term, is derived from the
Roman law Roman law is the law, legal system of ancient Rome, including the legal developments spanning over a thousand years of jurisprudence, from the Twelve Tables (), to the (AD 529) ordered by Eastern Roman emperor Justinian I. Roman law also den ...
, 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. The term was used by
Henry de Bracton Henry of Bracton (c. 1210 – c. 1268), also known as Henry de Bracton, Henricus Bracton, Henry Bratton, and Henry Bretton, was an English cleric and jurist. He is famous now for his writings on law, particularly ''De legibus et consuetudinib ...
, a thirteenth-century English
cleric Clergy are formal leaders within established religions. Their roles and functions vary in different religious traditions, but usually involve presiding over specific rituals and teaching their religion's doctrines and practices. Some of the ter ...
and
jurist A jurist is a person with expert knowledge of law; someone who analyzes and comments on law. This person is usually a specialist legal scholar, mostly (but not always) with a formal education in law (a law degree) and often a Lawyer, legal prac ...
. The 1911
Encyclopædia Britannica The is a general knowledge, general-knowledge English-language encyclopaedia. It has been published by Encyclopædia Britannica, Inc. since 1768, although the company has changed ownership seven times. The 2010 version of the 15th edition, ...
notes that in
English law English law is the common law list of national legal systems, legal system of England and Wales, comprising mainly English criminal law, criminal law and Civil law (common law), civil law, each branch having its own Courts of England and Wales, ...
Under English case law, "discussions about novation to another company" which do not reach fruition will not be taken as evidence of a novation. Consent to a novation can be implied by conduct.
Scottish law Scots law () is the List of country legal systems, legal system of Scotland. It is a hybrid or mixed legal system containing Civil law (legal system), civil law and common law elements, that traces its roots to a number of different histori ...
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 ( ; ; ) is a state in the Deep South and South Central regions of the United States. It borders Texas to the west, Arkansas to the north, and Mississippi to the east. Of the 50 U.S. states, it ranks 31st in area and 25 ...
, 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 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 federal Anti-Assignment Act, where the governmental entity that originally issued the contract must agree to such a transfer or it is automatically invalid by law.
Federal Acquisition Regulation The Federal Acquisition Regulation (FAR) is the principal set of rules regarding Government procurement in the United States. The document describes the procedures executive branch agencies use for acquiring products and services. FAR is part o ...
42.1204 covers the applicability of novation agreements when they are allowed as consistent with the interests of the government, and notes that "when it is in the Government's interest not to concur" the original obligor will retain responsibility for contractual performance. The conditions 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, referred to in some cases as a "novation package". 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'. Novation is a common practice for
design and build A design is the concept or proposal for an object, process, or system. The word ''design'' refers to something that is or has been intentionally created by a thinking agent, and is sometimes used to refer to the inherent nature of something ...
construction projects, where a design team is initially appointed by the client to undertake initial studies or prepare a more detailed design, but then when a contractor is appointed with a brief to complete the design and construct the building, the design contract is novated to the contractor. In the case of ''Galliford Try v Mott MacDonald'' (2008), the contracting parties had been discussing a novation of this kind but had not actually agreed it. Akenhead J therefore held that no novation had taken place. However, in ''Enterprise Managed Services Limited v Tony McFadden Utilities'' (2009) the fact that "large sums of money" had been paid to Tony McFadden provided a basis for the court to imply that a novation had actually taken place.


International law

Novation is also a means of acquiring title in international law. Examples include *
Orkney Orkney (), also known as the Orkney Islands, is an archipelago off the north coast of mainland Scotland. The plural name the Orkneys is also sometimes used, but locals now consider it outdated. Part of the Northern Isles along with Shetland, ...
and the
Shetland Islands Shetland (until 1975 spelled Zetland), also called the Shetland Islands, is an archipelago in Scotland Scotland is a Countries of the United Kingdom, country that is part of the United Kingdom. It contains nearly one-third of the Uni ...
, which were pledged to
Scotland Scotland is a Countries of the United Kingdom, country that is part of the United Kingdom. It contains nearly one-third of the United Kingdom's land area, consisting of the northern part of the island of Great Britain and more than 790 adjac ...
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 king ...
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 located primarily in Western Europe. Overseas France, Its overseas regions and territories include French Guiana in South America, Saint Pierre and Miquelon in the Atlantic Ocean#North Atlan ...
by the
Republic of Genoa The Republic of Genoa ( ; ; ) was a medieval and early modern Maritime republics, maritime republic from the years 1099 to 1797 in Liguria on the northwestern Italy, Italian coast. During the Late Middle Ages, it was a major commercial power in ...
in a treaty of 1768; and *
Belize Belize is a country on the north-eastern 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 maritime boundary with Honduras to the southeast. P ...
, which was originally only a grant of logging rights to the British by
Spain Spain, or the Kingdom of Spain, is a country in Southern Europe, Southern and Western Europe with territories in North Africa. Featuring the Punta de Tarifa, southernmost point of continental Europe, it is the largest country in Southern Eur ...
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 Kingdom of Great Britain, Great Britain, Kingdom of France, France and Spanish Empire, Spain, with Kingdom of Portugal, Portugal in agree ...
. 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) International law