Entry: Novation
Pronunciation: no - vay - schun
Definition: a substituted contract where a new person - who was not part of the original contract - takes complete contractual responsibility from a person part of the original contract
Ok, this is not as complicated as it may sound. Once again, it will help tremendously to go over an example to show how this works.
Here, Al agrees in a written contract to pay Bob $1000 for Bob to paint his fence. Then, Bob gets sick and asks Al if Ron can paint the fence instead, and Ron agrees to paint the fence for the $1000 from Al. Al agrees to allow Ron to paint the fence. So, a new contract is created which states that Ron will paint the fence and Bob no longer has to paint the fence. Upon signing the new contract, Al, Bob and Ron have created a novation.
The novation completely discharges all obligations by Bob to paint Al’s fence. In other words, if the fence is not painted, Al cannot sue Bob. Rather, Al can only sue Ron. So, Ron takes complete liability for painting the fence upon the novation created by Al and Bob.
A novation is different than an assignment. For example, if Bob assigned Ron to paint the fence for Al and the fence was never painted, Al could sue Bob! But with a novation Bob could not be held liable for Ron’s failure to paint Al’s fence. So, novations are a good way to reduce your liability if you don’t want to be held to the terms of a particular contract that you signed – but you have to get all parties to agree!
Also, keep in mind that a novaiton must meet the elements of creating a contract because a novation is a new contract. The elements of contract include (i) an offer, (ii) acceptance, and (iii) consideration (e.g. money).