Also known as: novations · novate · novates · novated · novating
Written by attorneys — see sources below.
A substituted contract that includes as a party one who was neither the obligor nor the obligee of the original duty. The new contract immediately discharges the prior duty and creates a fresh obligation enforceable only under its own terms.
Elm Grain contracted with Field Rural to deliver wheat. After drought reduced yields, Elm Grain, Field Rural, and Neighbor Farm signed a three-way writing under which Neighbor Farm would deliver its own crop directly to Field Rural. The writing substituted Neighbor Farm as the new obligor, discharging Elm Grain from any further duty under the original contract.
Lena and Priya formed a limited partnership that signed a data-center lease with personal guarantees from both. After Lena dissociated, the landlord dealt only with Priya and the partnership defaulted. Lena remained liable on the lease because the landlord never agreed to substitute Priya or the entity alone for Lena's original obligation.
In December 1949, petitioner Dairy Queen, Inc. entered into a written licensing contract with the respondent owners of the DAIRY QUEEN trademark under which petitioner agreed to pay $150,000 for the exclusive right to use the trademark in portions of Pennsylvania. The payments consisted of a small initial sum followed by 50 percent of amounts received on sales and franchises together with minimum annual payments regardless of receipts. In August 1960, the respondents sent petitioner a letter claiming a material breach of the contract due to default in excess of $60,000 on the payment provisions and notifying petitioner of the termination of the contract and cancellation of its rights to use the trademark unless the default was remedied immediately. When petitioner continued to deal with the trademark despite the notice of termination, the respondents brought an action based upon their view that a material breach of contract had occurred. The complaint alleged that petitioner had ceased paying as required, that the default constituted a material breach, that petitioner was contesting the cancellation and continuing business as an authorized dealer, that this constituted trademark infringement, that petitioner's financial condition was unstable, and that respondents faced irreparable injury with no adequate remedy at law. It sought temporary and permanent injunctions against future use of the franchise and trademark, an accounting to determine the exact amount owing with a judgment for that amount, and an injunction pending the accounting to prevent collection of money from Dairy Queen stores. Petitioner answered by denying any breach of contract and alleging that the parties had entered an oral agreement in January 1955 modifying the written contract to remove the minimum annual payment requirement. Petitioner also raised defenses of laches and estoppel arising from respondents' delay in asserting the claim after petitioner had expended large sums developing the trademark rights, and alleged antitrust violations by respondents. Petitioner endorsed a demand for trial by jury on the answer. The district court granted respondents' motion to strike the jury demand on the alternative grounds that the action was purely equitable or that any legal issues were incidental to equitable issues. Petitioner sought mandamus in the Court of Appeals for the Third Circuit to compel the district judge to vacate the order striking the jury demand. After that court denied the request without opinion, the Supreme Court granted certiorari.
View caseNovation replaces the original duty with a new contract that immediately discharges the prior obligation. An accord is merely a promise to accept different performance. Discharge occurs only upon actual performance of the accord.
Supporting sources
No. Delegation leaves the original obligor liable unless the obligee expressly agrees to release that party and accept the delegate as the sole obligor. Such an agreement is required to form a novation.
The parties must demonstrate a previous valid contract, an agreement among all three parties including the new party, immediate extinguishment of the original duties, and formation of a valid new contract. Clear evidence of mutual assent to the substitution is required.
Supporting sources
No. The promoter remains personally liable even after the corporation is formed and adopts the contract. Only a novation among the promoter, the corporation, and the third party releases the promoter.
…contract was modified by a subsequent oral agreement—presents a purely legal question having nothing whatever to do either with novation, as the district judge suggested, or reformation, as suggested by the respondents here. Such a defense goes to the question of just what, under the law, the contract between the respondents…