NOVATION.1

HENEVER there is a change in one of the parties, or in

WHE

the form of an obligation the substance of which remains the same, there is said to be a novation. We have borrowed the name from the Roman law, but the institution itself is of native growth. Novation in the Roman law was effected by the stipulatio. But we have nothing in our law corresponding to the Roman stipulation. Novation, by a change in the form of the obligation, as by the substitution of a specialty for a simple contract, has existed in English law from time immemorial under the name of merger. But our novation by a change of parties, whether by the intervention of a new creditor (novatio nominis) or by the substitution of a new debtor (novatio debiti), is a modern institution. The earliest judicial recognition of the doctrine seems to be the oft-quoted opinion of Mr. Justice Buller in 1759:

"Suppose A owes B £100, and B owes C £100, and the three meet, and it is agreed between them that A shall pay C the £100: B's debt is extinguished, and C may recover the sum against A."

That this doctrine had no place in the ancient common law appears clearly from the following case of the year 1432:

Rolf. In case B is indebted to C in £20, and A buys a chattel of B for £20, so that A is his debtor for so much; if A comes and shows C how B is indebted to C in £20, and how A is indebted to B in £20 by reason of the purchase, and A grants to C to pay C the £20 which A owes, and that B shall be discharged of his debt to C, and C agrees to this, and B also, A shall now be charged to C for this debt by his contract and own act.

"Quod COTESMERE, J., negavit, and said, although all three were of one accord that A should pay the money to C, this is only a nudum pactum, so that for this C cannot have an action.

"Rolf. I say this is not a pactum nudum, but pactum vestitum, for there was a contract between B and C, and also between A and B, so that this accord between them is not pactum nudum. But when I grant to pay a

1 The writer desires to acknowledge his obligations to Mr. Edmund A. Whitman, whose article on Novation in 16 Am. and Eng. Encyc. of Law, 862, is, by far, the most valuable essay upon the subject in our language.

certain sum to a man, or when I grant to pay the duty of another to whom I am not indebted, that is pactum nudum, because in the first case there is no contract, and in the last case there is no contract or duty between me and him for whom I grant to pay, so that for this he cannot have an action. But in my case there is a contract by the duty between A and B for whom A grants, and between B and C to whom A grants, to pay the debt. So pactum vestitum, for which he shall have an action, wherefore, etc.

"COTESMERE, J. It is nudum pactum in both cases, for although all three are agreed that A shall pay this debt for B, still B is not discharged of his debt in any manner. Quod TOTA CURIA concessit."1

At the time of this decision B, the old obligor, could be discharged only by a release under seal, or by an accord and satisfaction; that is, an accord fully performed. Furthermore, the action of assumpsit being then unknown, the new obligor must be liable, if at all, in debt. But there could be no debt in the absence of a quid pro quo, and A, the new obligor, received nothing in exchange for his assumption of B's obligation. The two essential features of a novation-namely, the extinguishment of the original obligation, and the creation of a new one in its placetherefore both wanting in the case supposed. In other words, novation by simple agreement of the parties was at that time a legal impossibility.

were

The first step towards the modern novation is illustrated by the case of Roe v. Haugh2 (1697). The count alleged that B was indebted to C in the sum of £42, and that A, in consideration that C would accept A as his debtor for the £42 in the room of B, undertook and promised C to pay him the said £42, and that C, trusting to A's promise, accepted A as his debtor. But there was no averment that C discharged B. After a verdict and judgment for C, the plaintiff, it was insisted in the Exchequer Chamber "that this was a void assumpsit; for except B was discharged, A could not be chargeable." Three judges were of this opinion. But Powis, B., NEVILL, J., LECHMERE, B., and TREBY, C. J. [thought?], that this being after verdict, they should do what they could to help it; to which end they would not consider it only as a promise on the part of A, for as such it would not bind him except B was discharged; but they would construe it to be a mutual promise, viz., that A promised to C to pay the debt of B, and C on the other

12 Mod. 133; 1 Salk. 29; 3 Salk. 14 S. C.

hand promised to discharge B, so that though B be not actually discharged, yet if C sues him, he subjects himself to an action for the breach of his promise."

As a consequence of the introduction of the action of assumpsit, there was in this case one of the marks of a novation, the liability of a new obligor; but the other, the liberation of the old obligor, was still wanting, for the creditor might, notwithstanding his agreement, sue on the old debt. His right of action, however, must be in the long run a barren one; for whatever he recovered he must refund as damages for the breach of his promise not to sue. Equity, to prevent the scandal of two actions where there ought to be none, would have enjoined the first action; and it is not surprising that the common-law judges should ultimately have allowed the promise not to sue to operate as a legal bar, on the principle of avoiding circuity of action. In Lyth v. Ault, a creditor of two persons agreed to take the obligation of one of them in the place of his claim against them both. PARKE, B., said, p. 674: "As I am, therefore, clearly of opinion that the sole responsibility of one of several joint debtors is different from their joint responsibility, the plea discloses a sufficient consideration for the plaintiff's promise to exonerate this defendant from the residue of the debt, and affords a good answer to the action."

"2

As soon as this final step was taken, the process of effecting a novation became extremely simple. To convert a claim of C against B into a claim of C against A it is only necessary for C and A to enter into a bilateral contract, in which C promises never to sue B, and A promises to pay to C the amount due from B. C's promise operating as an equitable release, now pleadable as a defence at law, the claim of C against B disappears, while A's promise creates in its place the new claim of C against A.

The difficulty in novation cases is therefore no longer one of law, but of fact: namely, Has the creditor entered into the bilateral contract with the new debtor? This question has come up frequently in recent times when a new corporation has acquired the assets and assumed the liabilities of an old company.3

2 See also Bird v. Gammon, 3 B. N. C. 883; Bilborough v. Holmes, 5 Ch. D. 255; and especially Corbett v. Cochran, 3 Hill, S. C. 41, where the rationale of novation is admirably described.

8 The evidence was sufficient to establish a novation in Re Times Co., 5 Ch. 381; Re Anchor Co., 5 Ch. 632; Re Medical Co., 6 Ch. 362; and Miller's Case, 3 Ch. Div. 391, where accordingly the old company was discharged; and in Re British Co., 12

The same question arises still oftener when a partnership transfers its assets to a new firm or to an individual, and the transferee assumes the payment of the debts of the transferor.1 And there are, of course, many other occasions when it may be desirable to bring about a substitution of debtors.2

We have thus far considered only novations effected by a change of debtors (novatio debiti). But a novation may also be accom

W. R. 701; Burns v. Grand Lodge, 153 Mass. 173, where the new company was held liable to the creditor.

The novation was not proved in Re Manchester Association, 5 Ch. 640; Griffith's Case, 6 Ch. 374; Conquest's Case, I Ch. Div. 334; Blundell's Case, Eur. Ass. Arb. 39; Coghlan's Case, Eur. Ass. Arb. 31; Bristol Co. v. Probasco, 64 Ind. 406, where, therefore, the old company continued liable; and in Re Commercial Bank, 16 W. R. 958; Re Smith, 4 Ch. 662; Re Family Society, 5 Ch. 118; and Re India Co., 7 Ch. 651, where the new company was not chargeable.

The reported cases of aovation under these circumstances are legion; the following may serve as illustrations. The novation being complete, the old firm was discharged in Thompson v. Percival, 5 B. & Ad. 925; Lyth v. Ault, 7 Ex. 669; Bilborough v. Holmes, 5 Ch. D. 255; Ludington v. Bell, 77 N. Y. 138; and the transferee was charged in Ex parte Lane, De Gex, 300; Rolfe v. Flower, L. R. 1 P. C. 27; Lucas v. Coulter, 104 Ind. 81. On the other hand, the evidence being insufficient to establish a bilateral agreement between the creditor and the transferee of the firm, there was in the following cases no novation: Thomas v. Shillibeer, 1 M. & W. 124; Eagle Co. v. Jennings, 29 Kas. 657; Wildes v. Fessenden, 4 Met. 12.

2 The mutual assent to a novation being proved, the old debtor was discharged in Brown v. Harris, 20 Ga. 403; Anderson v. Whitehead, 55 Ga. 277; Struble v. Hake, 14 Ill. Ap. 546; McClellan v. Robe, 93 Ind. 298; Foster v. Paine, 63 Iowa, 85; Besshears v. Rowe, 46 Mo. 501; Thorman v. Polys, 13 N. Y. Sup. 823; and the new obligor was held liable in Browning v. Stallard, 5 Taunt. 450; Goodman v. Chase, I B. & Ald. 297; Bird v. Gammon, 3 B. N. C. 883; Butcher v. Steuart, 11 M. & W. 857; Re Rotheram, 25 Ch. Div. 103, 109; Carpenter v. Murphree, 49 Ala. 84; Underwood v. Lovelace, 61 Ala. 155; Barringer v. Warden, 12 Cal. 311; Welch v. Kenny, 49 Cal. 49; Packer v. Benton, 35 Conn. 343; Karr v. Porter, 4 Houst. 297; Harris v. Young, 40 Ga. 65; Edenfield v. Canady, 60 Ga. 456; Runde v. Runde, 59 Ill. 98; Grover v. Sims, 5 Blackf. 498; Walker v. Sherman, 11 Met. 170; Wood v. Corcoran, 1 All. 405; Osborn v. Osborn, 36 Mich. 48; Mulcrone v. American Co., 55 Mich. 622; Yale v. Edgerton, 14 Minn. 194; Wright v. McCully, 67 Mo. 134; Smith v. Mayberry, 13 Nev. 427; Van Epps v. McGill, Hill & D. 109; Bacon v. Daniels, 37 Oh. St. 279; Ramsdale v. Horton, 3 Barr. 330; Corbett v. Cochran, 3 Hill, S. Ca. 41; Scott v. Atchison, 36 Tex. 76; Williams v. Little, 35 Vt. 323.

The fact of novation was not proved in Cuxon v. Chadley, 3 B. & C. 591; Wharton v. Walker, 4 B. & C. 163; Fairlie v. Denton, 8 B. & C. 395; Brewer v. Winston, 46 Ark. 163; Gyle v. Schoenbar, 23 Cal. 538; Decker v. Shaffer, 3 Ind. 187; Davis v. Hardy, 76 Ind. 272; Jacobs v. Calderwood, 4 La. An. 509; Jackson v. Williams, 11 La. An. 93; Choppin v. Gobbold, 13 La. An. 238; Rowe v. Whittier, 21 Me. 545; Curtis v. Brown, 5 Cush. 488; Furbush v. Goodnow, 98 Mass. 296; Caswell v. Fellows, 110 Mass. 52; Halsted v. Francis, 31 Mich. 113; Johnson v. Rumsey, 28 Minn. 531 ; Vanderline v. Smith, 18 Mo. Ap. 55; Jawdon v. Randall, 47 N. Y. Sup'r Ct. 374; Styron v. Bell, 8 Jones, N. C. 222; Jones v. Ballard, 2 Mill. C. R. 113; Lynch v. Austin, 51 Wis. 287; Spycher v. Werner, 74 Wis. 456.

plished by the substitution of a new creditor for an old one (novatio nominis). The problem is here how to convert a claim of X against Z into a claim of Y against Z. The desired result is commonly attained by two successive transactions. In the first place, X assigns to Y his claim against Z. This assignment, being legally the grant of an irrevocable power of attorney to Y to sue Z in the name of X, makes Y practically dominus of the claim. But it does not create a direct relation between Y and Z. Even under codes allowing Y to sue in his own name, Y is not a true successor to X.1 Y, however, being dominus of the old claim against Z, may enter into a bilateral contract with Z, Y promising never to enforce the old claim in consideration of Z's direct promise to him to pay him the amount of the old claim. The promise of Y operates as an equitable release of the old claim of X against Z, and at the same time is a valid consideration for the new claim of Y against Z. The novation is therefore complete. The right of Y to bring an action in his own name against Z, independently of any statute permitting an assignee to sue in his own name, because of Z's direct promise to Y,. has been almost everywhere recognized.2 An instructive illustration of this form of novation is found in the custom by which insurance companies assent to the assignment of their policies.3

The practical differences between the position of an assignee of the old debt and a promisee under the new promise are considerable.

1 3 Harvard Law Review, 341; see Moyle, Justinian, 466.

2 Israel v. Douglas, 1 H. Bl. 239 (justly criticised, because the count was not in special assumpsit); Moore v. Hill, Peck's Add. Cas. 10; Surtees v. Hubbard, 4 Esp. 203; Lacy v. M'Neill, 4 D. & Ry. 7; Wilson v. Coupland, 5 B. & Al. 228; Noble v. Nat. Co., 5 H. & N. 225; Griffin v. Weatherby, L. R. 3 Q. B. 753; Tiernan v. Jackson 5 Pet. 580 (semble); Howell v. Reynolds, 12 Ala. 128; Indiana Co. v. Porter, 75 Ind 428; Cutters v. Baker, 2 La. An. 572; Lang v. Fiske, 11 Me. 385; Smith v. Berry, 18 Me. 122; Warren v. Wheeler, 21 Me. 484; Farnum v. Virgin, 52 Me. 576; Getchell v. Maney, 69 Me. 442, 443 (semble); Barger v. Collins, 7 Har. & J. 213; Austin v. Walsh, 2 Mass. 401; Crocker v. Whitney, 10 Mass. 316; Mowry v. Todd, 12 Mass. 281 ; Armsby v. Farnam, 16 Pick. 318; Bourne v. Cabot, 3 Met. 305; Eastern Co. v. Benedict, 15 Gray, 289; Blair v. Snover, Halst. 153; Currier v. Hodgdon, 3 N. H. 82; Wiggin v. Damrell, 4 N. H. 69; Thompson v. Emery, 27 N. H. 269; Boyd v. Webster, 58 N. H. 336; Compton v. Jones, 4 Cow. 13; Quinn v. Hanford, 1 Hill, 82; Phillips v. Gray, 3 E. D. Sm. 69; Ford v. Adams, 2 Barb. 349; Esling v. Zantzinger, 13 Pa. 50; Clarke v. Thompson, 2 R. I. 146; DeGroot v. Darby, 7 Rich. 118; Anderson v. Holmes, 14 S. Ca. 162; Mt. Olivet Co. v. Shubert, 2 Head, 116; Wescott v. Potter, 40 Vt. 271, 276; Bacon v. Bates, 53 Vt. 30; Brooks v. Hatch, 6 Leigh, 534.

8 Wilson v. Hill, 3 Met. 66; Fuller v. Boston Co., 4 Met. 206; Kingsley v. N. E. Co., 8 Cush. 393; Phillips v. Merrimack Co., 10 Cush. 350; Burroughs v. State Co., 97 Mass. 359; Barnes v. Co., 45 N. H. 21, 24.