WHAT IS NOVATION?
E. Alberto Luna Nuñez (2015, p. 195) affirms that “novation is a method of extinguishing an obligation by creating a new one that substitutes the former.”
TYPES OF NOVATION
There are two main types of novation: subjective novation and objective novation.
SUBJECTIVE NOVATION
Subjective novation occurs when one of the parties in the obligation (either the creditor or the debtor) is replaced. This allows a new debtor or creditor to assume the existing obligation under the same contract but with different ownership. Article 357 of the Bolivian Civil Code refers specifically to the substitution of the debtor.
Example: Sara owes Tiana 8,000 Bs. Later, they agree that Carlos will assume the debt, thus releasing Sara from the obligation.
OBJECTIVE NOVATION
This type occurs when the original obligation is replaced by a new one with a different object or title (Article 352 of the Bolivian Civil Code). Supreme Court Ruling AS/0192/2024 confirms that objective novation happens when parties agree to change contract terms by creating a new contract that substitutes the previous one.
Example: Alejandro owes Bruno 7,000 Bs. Eventually, they agree to replace the debt with a new obligation, where Alejandro commits to giving Bernardo a laptop equivalent to the owed amount.
REQUIREMENTS FOR VALID NOVATION
Legal doctrine and jurisprudence agree that several essential conditions must be met for a novation to be valid:
- Existence of a Prior Obligation: Novation requires a pre-existing obligation to be extinguished.
- Legal Capacity: Both the creditor and the debtor must have the legal capacity to novate—i.e., to extinguish the old obligation and create a new one.
- Consent (Animus Novandi): The intention to novate must be clearly and expressly agreed upon. It cannot be presumed and must be explicitly stated in the contract.
WHAT HAPPENS TO PRIVILEGES AND SECURITY INTERESTS?
As a result of novation, any guarantees or security interests linked to the original obligation are extinguished. However, the parties may agree to maintain these protections for the new obligation, provided it is expressly stipulated.
Example: Diana borrowed money from Tatiana and provided a piece of land as collateral. Later, they agreed to novate the debt. Although the original guarantee would typically expire, both agreed to retain the land as collateral for the new obligation.
RELEVANT CASE LAW
The importance of novation in civil law has been reinforced by several court decisions. For instance, Supreme Court Ruling AS/0090/2013 emphasizes that novation cannot occur unilaterally; it requires a clear and mutual agreement. Similarly, Ruling AS/0192/2024 analyzed an objective novation case where an antichresis contract was replaced by a purchase agreement to adapt the legal relationship to the parties’ updated needs.
DIFFERENCE BETWEEN NOVATION AND SIMILAR LEGAL CONCEPTS
Novation may resemble other legal mechanisms, but it is distinct from them:
- Remission of Debt (Condonation): The creditor voluntarily waives the debt without creating a new obligation.
- Compensation: Occurs when two parties owe each other. Debts are canceled out to the extent that they are equivalent.
- Settlement (Transacción): A contract where parties make mutual concessions to end a dispute or avoid litigation. Unlike novation, settlement does not necessarily extinguish a pre-existing obligation and may instead create new ones.
THE IMPORTANCE OF NOVATION
Novation is a powerful legal mechanism for modifying or replacing existing obligations. It becomes especially relevant during times of crisis when individuals and businesses must adapt to new economic and social realities. Its main advantages include:
- Flexibility: Novation enables contract parties to adjust their obligations based on changing circumstances. For example, in an economic downturn, a debtor may request to modify loan terms in line with their new financial capacity.
- Prevention of Breach: By modifying obligations, novation helps avoid contract breaches, minimizing legal conflicts and financial strain.
- Risk Mitigation: In uncertain times, novation can help reduce contractual risks. Suppliers and clients can renegotiate terms to account for market fluctuations.
- Facilitates Restructuring: For financially distressed businesses, novation can be essential for debt restructuring and avoiding insolvency.
- Encourages Collaboration: Since novation requires mutual agreement, it promotes negotiation and cooperation during challenging times.
Novation is an essential legal tool that ensures contractual obligations remain current and applicable. Its proper application demands a thorough understanding of its elements and requirements, as well as an explicit agreement between the parties. In an increasingly complex legal environment, novation stands out as a valuable mechanism to maintain relevant and effective contractual relationships.
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Frequently Asked Questions (FAQs)
What is the main purpose of novation?
Novation serves to extinguish an existing obligation and replace it with a new one, allowing parties to adapt their legal relationships to new circumstances.
Is novation valid without mutual consent?
No. Novation requires the clear and express agreement of both parties. Unilateral decisions are not sufficient.
Can guarantees from the original obligation be preserved?
Yes, but only if both parties explicitly agree to maintain the guarantees for the new obligation.
What is the difference between novation and condonation?
Condonation is the voluntary waiver of a debt by the creditor without creating a new obligation, whereas novation replaces the old obligation with a new one.
When is novation most commonly used?
Novation is often used during financial restructurings, economic crises, or when parties need to adapt existing contracts to new realities.
- Luna Yañez, E. A. (2015). Obligaciones: Curso de Derecho Civil (8ª ed.). La Paz, Bolivia, Imprenta El Original San José.
- Morales Guillen, C. (1994). Código civil: concordado y anotado (4a. ed.). La Paz, Bolivia, Editorial Gisbert.
The content of this article does not reflect the technical opinion of Rigoberto Paredes & Associates and should not be considered a substitute for legal advice. The information presented herein corresponds to the date of publication and may be outdated at the time of reading. Rigoberto Paredes & Associates assumes no responsibility for keeping the information in this article up to date, as legal regulations may change over time.
