Novation, a law term introduced recently into use by English and American lawyers, from the Roman civil law. It may be defined as the creation of a new debt or contract in substitution for an old one. It differs from a mere renewal, such as takes place when A renews a credit he has given B, or receives a new debt or obligation from B in payment of an old one. To a novation there are three parties. It takes place when A owes B, and C owes A, and A transfers to B in payment of his debt C's debt to him, A. The effect of this is. that A is no longer the debtor of B nor the creditor of C; and B is no longer the creditor of A, but has become the creditor of C; and C is no longer the debtor of A, but has become the debtor of B. In the civil law, the new contract of C to pay B, and the discharge of A's debt to B by the transfer of A's claim on C, would be regarded as different forms of novation. By our law, however, it is one thing, and the whole transaction forms one novation. It is a universal principle in the law of England and of this country, that a promise can be enforced at law only when it is founded upon a consideration.
This rule is applied to the case of novation; the effect of it is, that the original liabilities must be extinguished and discharged by the novation, and their discharge is then a sufficient consideration for the new liabilities. Thus, C becomes the debtor of B by the above described novation; and when B claims the debt of C, the consideration on which the claim can be upheld is the fact that C's debt to A was discharged. So if B claims the debt from A, and A interposes his agreement to release him, that agreement is valid only because B has received C's debt to A by way of consideration for his release of A. Thus all the parts of this transaction are mutually connected and dependent. Hence, an order by a creditor to his debtor, directing him to pay the debt to some one to whom the creditor is indebted, operates as the substitution of a new debt for an old only when the order is accepted, and when the original creditor of him who drew the order has agreed to receive the accepted order in payment of his claim.
This transaction may be oral only, none of the promises being in writing, because C, the original debtor of A, does not undertake to pay A's debt to B, inasmuch as A's debt is entirely discharged by the novation; but C contracts a new debt to B. This therefore does not come under the provision of the statute of frauds, requiring that the promise to pay the debt of another should be in writing. Hence, also, if after the transaction is complete C wholly fails to pay B, B's claim against A does not revive, for the reason that A's debt to B was wholly discharged; and this is reasonable, because C's debt to A was wholly discharged, and therefore A would have no claim over on C, if he, A, were obliged to pay his original debt to B.