A novation is an agreement to transfer the duties of one party to a third party. It is a must for all the parties to approve the revisions they agree to write on the novation agreement. Furthermore, it is the process of making a new agreement that replaces the old existing contract. In this process, the original party needs to give up some rights from the old contract. Therefore, both parties need to agree to cut off the old agreement and make a new one to replace it. In the novation agreement, a third party can replace one of those parties after reading the contract rights. In the process of the novation agreement, all the parties must sign and agree to transfer the agreement of Novation to the new party.
After this agreement, the bank transfer all the duties and rights to the third party. It includes the business sales, mergers, acquisitions, and takeovers in the novation agreement. While the transferee, counterparty, and transferor play an essential role in the agreement.
How does Novation operate?
It is the chosen replacement of an agreement in which a third party speculates the rights of the original party. Furthermore, the original party transfers its interest to the new party that they agree to write in the agreement. So novation agreement is not a transfer of complete property or company. A novation agreement is necessary for the situation when the original agreement becomes very difficult to apply.
A novation agreement seems like an assignment, but both are different from each other. Furthermore, an assignment only transfers the benefits to the new party and leaves the original party with all its duty. At the same time, a novation agreement transfers both the liabilities and advantages of the original agreement to the new party.
Next step after completing the novation agreement
All the engaged parties are discharged from any obligations that can arise from the original agreement after being agreed upon and signing the novation agreement. Therefore, the new party in this agreement will not be able to hold the liability of the original party for any obligations that can arise from the contract.
In the novation agreement, all the parties agree to refund each other in the case of any scam or damage to the company. Furthermore, the new party is responsible for repaying the original party in the case of damage to the original party’s action.
Judgment on Novation
The Abu Dhabi Court of Cassation dated the 4th of May in 2022, investigated the parties that are engaged in the novation agreement. In that investigation, they used an objective test on the base of relevant circumstances and facts to check out the intent of parties and the characterization of the arrangement. The Abu Dhabi court did resolve that there was no debt remaining that they did not pay.
Facts of the Case
- The Claimant Bank of Dubai gave the total amount of AED 1.5 billion to the first defendant corporation. The owner of the company and his father signed personal guarantees to protect the facilities, and then the father of the company’s owner died.
- The Bank of Dubai in 2013 agreed the Article 1078 of the Civil Transactions Law. This article allows the creditor to demand the debt from the obligor or the Guarantor in his capacity.
- They also secured an agreeable attachment on many properties that developed to their advantage. It included mortgage assets that were in favor of banks at the time when facilities were issued.
Argument by the heir of Guarantor
The heirs of the dead Guarantor claimed that the novation agreement established a replacement of the original agreement, and they also claimed that the novation agreement discharged the debt and they are no longer to pay the outstanding amount.
The decision of the Court
The Court of First Instance announced the heir’s successful in their appeal, and the Court of Appeal maintained this decision of the Court of First.
The Court of Cassation’s Judgment
The bank did not release the responsibility of the Guarantor on loan. Furthermore, the bank appealed to the Court of Cassation and claimed that the Court of Appeal implemented the act incorrectly. As a result, the Court of Cassation claimed that the novation agreement had no bearing on the issue, in which an action was opened to recover the liability of the dead Guarantor to the bank and his debut as a guarantee for the company from his heirs.
Held: Nevertheless was an agreement between the Principal Debtor and the bank. The bank did not release the Guarantor from his debt responsibility to the company. But the bank did release the Principal Debtor from their debt responsibility of the company. Therefore, that was the subject under the novation agreement in this action.
There will be no Debt Novation
The Court found that the declared agreement did not provide for the debt conciliation against the novation agreement title. Therefore, the bank did set a timetable for payment of the obligation. So this was the reason that the agreement did not reserve an existing one by adjusting the matter of subject. Not by changing the debtor, by sources of an existing obligation, or by the foundation. Not by checking the debtor and creditor, which are the situations in replacing a new debt.
As a result, the agreement was proved just the obligation by the first defendant of the agreement as the major debt in favor of the bank as a commitment to carry out the management arrangement of the property. Therefore, they did announce that there would be no debt novation for the party.