Novation

The decision in Weyerhaeuser Company Limited v. Hayes Forest Services Limited, 2008 BCCA 69 dealt with the concept of novation.



The concept is sometimes used as a 'Hail Mary' defence when a party, seeking to avoid contractual liability, claims novation has occurred and the party is relieved of liability. In reality, of course, novation is very rare.



The modern concept of novation is described by Wilson J. in National Trust Co. v. Mead, [1990] 2 S.C.R. 410 at 426:



"A novation is a trilateral agreement by which an existing contract is extinguished and a new contract brought into being in its place. Indeed, for an agreement to effect a valid novation the appropriate consideration is the discharge of the original debt in return for a promise to perform some obligation. The assent of the beneficiary (the creditor or mortgagee) of those obligations to the discharge and substitution is crucial. This is because the effect of novation is that the creditor may no longer look to the original party if the obligations under the substituted contract are not subsequently met as promised."



The Court in Weyerhaeuser found that novation did not occur but in so doing described the concept in some detail. The description is useful.



"1. The new debtor must assume the complete liability;



2. The creditor must accept the new debtor as principal debtor and not merely as an agent or guarantor; and



3. The creditor must accept the new contract in full satisfaction and substitution for the old contract. "



James Morton

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