Certified Residential Appraiser Practice Exam

What is the process of substituting a new obligation for an old one in legal terms?

1. Rescission

2. Novation

3. Assignation

4. Modification

The correct answer is: Novation

The process of substituting a new obligation for an old one is known as novation. This legal term signifies an agreement where one party replaces an old contract with a new one, thereby discharging the original obligation and transferring the rights and duties to a new party. Novation is crucial in various legal and business contexts, especially when there is a need to update contractual obligations, involve a new party, or when the original party cannot fulfill their obligations. This process ensures that all parties involved consent to the new terms, including the release of the original party from any further liability, which is a key characteristic that distinguishes novation from mere assignments or modifications. In contrast, rescission invalidates a contract entirely, returning the parties to their pre-contractual positions without creating a new obligation. Assignation refers to the transfer of rights or benefits from one party to another, which can occur without discharging the original obligation, whereas a modification involves changing the terms of an existing contract without creating a completely new agreement. Thus, novation specifically addresses the scenario of substituting obligations, making it the correct answer.