Section 3: Novation

Novation is a contract whose purpose is to substitute for an obligation, which it extinguishes, a new obligation which it creates. It can take place by substitution of obligation between the same parties, by change of debtor or by change of creditor.

Novation cannot be presumed; the intention to effect it must be clear from the instrument.

Novation takes place only if both the old obligation and the new obligation are valid, unless its declared object is to substitute a valid undertaking for an undertaking which is vitiated by a defect.

Novation by change of debtor may be effected without the involvement of the first debtor.

Novation by change of creditor requires the debtor’s consent. The latter may, in advance, agree to the new creditor being designated by the first creditor.

The extinction of the old obligation extends to all its accessories. As an exception, the original collateral may be reserved to secure the new obligation with the consent of the third-party guarantors.

Novation agreed between the creditor and one of the joint and several debtors discharges the others. A novation agreed between the creditor and a guarantor does not release the principal debtor. It releases the other sureties to the extent of the contributory share of the one whose obligation has been novated.