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Rajah Lehal

Concept of “novation” to transfer a liability to another party

October 26, 2016

In Re Temple (2012, Ont SC), the applicant lent money to Temple (an individual) in 2005. The debt was due in 2006, and the last payment was made in November 2007. The applicant brought an application for a bankruptcy order in February 2011, more than two years after the debt was due. Temple raised a number of defences. In this case, Temple contended that there was a novation of the loan obligation from him to Beach Triangle Townhomes Limited, a corporation owned by him. There is a three-part test: The debtor must assume complete liability The creditor must accept the new debtor as principal debtor and not just as an agent or guarantor The creditor must accept the new contract in full satisfaction and substitution for the old contract The judge concluded that novation had not been established. Making the company liable on the loans would not of itself make the loans repayable only by the company. The evidence did not establish that the applicant accepted the liability of the company in full satisfaction and substitution of the obligation of Temple.

Case Law

Written by Rajah. Rajah Lehal is Founder and CEO of Clausehound.com. Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software.