In the latest Weekly Wright Report:
Can A Later Contract Automatically Cancel A Prior Contract? It Depends on the Law of Novation
So, let’s say you have a contract with a party and then you and that party enter into a later contract governing the same subject matter. Under the law of novation, the later contract could have the effect of extinguishing the prior contract. A novation immediately discharges a prior agreement, permitting recovery only to be had upon the new contract. A novation has four essential elements: (1) A previous valid obligation; (2) the agreement of all the parties to the new contract; (3) the validity of such new contract; and (4) the extinguishment of the old contract, by the substitution of the new one. In order for a novation to occur there must be a clear intention on the part of all concerned, however, there does not have to be an expressed intention to substitute the new agreement for the previous contract. If the parties do not clearly state their intention in the contracts, the courts will determine the legal effect of a later contract on a former contract from an examination of the documents. Further, the requisite intent can be inferred by the court from the facts and circumstances surrounding the transaction and the subsequent conduct of the parties.
A recent case involving the law of novation can illustrate the issues. In this recent case, in order for a contractor to obtain bonds from a surety, the individual owners of the contractor executed a General Agreement of Indemnity in which they agreed to indemnify and hold the surety harmless from any and all loss, costs and expenses as a result of issuing bonds for the contractor. Over the next several years, one of the indemnitors stopped being involved with the contractor and had no ownership or management functions. The contractor later approached the surety to get additional bonding and the surety required that a new General Agreement of Indemnity be executed. The original indemnitor, who was no longer involved with the contractor, did not execute the new Indemnity Agreement. The new bonds were issued and the contractor subsequently defaulted and the surety incurred large losses. As a result, the surety sued the continuing indemnitors under the new Indemnity Agreement and the former indemnitor under the original Indemnity Agreement.
The original indemnitor argued that the new Indemnity Agreement was a novation of the original Indemnity Agreement and that the original indemnitor was no longer bound to the surety. Maryland courts have noted that while a novation may occur by a change of parties to the contract, such changes alone are not enough to create a novation. There must be evidence establishing a clear intent regarding the effect of the later agreement on the original agreement.
In this recent case, both the original Indemnity Agreement and the new Indemnity Agreement had provisions that indicated a clear intent of the parties that (1) the original agreement would remain in effect even if subsequent Indemnity Agreements were entered into and (2) the new Indemnity Agreement was not intended to substitute or extinguish any prior or other Indemnity Agreements. In light of the terms in the two Indemnity Agreements, the court held that there was no novation.
The takeaway from this discussion of novation is that when parties are entering into multiple agreements with one another, the parties must be careful to avoid a novation carefully explain their intentions in the agreements and preserve their rights under the various agreements.
Noncompete Agreements Now Illegal for Lower-Wage Maryland Workers
Maryland is now the latest state to prohibit employers from entering into noncompetition agreements with employees who earn equal to or less than $15 per hour or $31,200 annually. This new law takes effect October 1, 2019.
The bill passed both houses of the state legislature and automatically became law on May 25, 2019 when the governor did not veto the bill. The law declares that, for employees earning less than the threshold, all “noncompete [provisions] that restrict the ability of an employee to enter into employment with a new employer or to become self-employed in the same or similar business or trade” are “null and void as being against the public policy of the State.”
If you need help navigating this new law in your workplace, please contact the Employment and Labor team.
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