What Is a Novation?
Time and again lawyers are admonished for draping everyday concepts in complicated or difficult language. Novation, a rather cryptic word for a practice with many common applications, is one of those instances. .
Other People Are Reading
-
Novation Defined
-
Novation is most commonly found in contract law and simply means "to replace." Novation can occur in two ways, either by replacing an existing obligation with a new obligation, or replacing one party to the obligation with another. It is important that this replacement cannot be done unilaterally by one party or the other, but only by agreement. However, in some circumstances novation can be court-ordered.
Novation of Obligation
-
Novation of obligation is typical in commercial law, especially by a corporation assuming liabilities incurred by its founders prior to incorporation, though it can be found in other instances as well. To the general public the most recognizable novation occurs within a mortgage contract. In these occurrences the creditor, rather than seek legal remedies for repossession and foreclosure of the property for nonperformance, agrees to replace the original obligation with one that can be more easily performed.
-
Novation of Party
-
Complete novation of a party is rare. Not only does it require the original parties to a contract to agree to the replacement, it also requires a third party to agree to be bound and responsible for another's obligation. As these gratuitous actions are unusual, the typical novation of party involves adding a third party to the original obligation, such as a cosigner. In this way the third party agrees to perform the contractual obligation should the original party fail to do so. However, as the third party did not completely replace the original party, legal remedies may be sought against the original party as well.
Subleases
-
Though similar, subleasing is not a true novation. With novation a new party is completely substituted into an agreement and completely replaces an original party, taking on all of his or her obligations to himself. This differs from a sublease in that, while a new party would be contractually bound to perform one of the original party's obligations under the contract, if he should fail to perform the original party remains obligated.
Credit Contracts -- Credit Cards
-
The most likely scenario in which novation will occur is with a credit card default. When a cardholder fails to continue monthly payments on the credit debt the creditor, rather than attempt the expensive, time-consuming and imperfect legal remedies against the nonpayer, simply replaces the original credit agreement with a new agreement. This may be called "settling a debt" or "settling the account" or something similar, but in practice it is novation.
Caution
-
Laws vary from state to state and before any action is taken please consult a licensed attorney.
-
