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Novation as a Defense to a Breach of Contract Claim

Anecdotally, the defense of novation to a breach of contract claim under Tennessee law seems to do about as well as the multitude of other defenses which are often pled, but much less frequently successful. In a nutshell, a novation occurs when a prior contract between the same parties is replaced and extinguished by a new contract. The defense is often used by defendants who claim that, because of a novation, they were let off the hook and are no longer responsible for the obligations to which they agreed.

In a recent breach of contract case before the Court of Appeals of Tennessee, Premier Imaging/Medical Systems, Inc. v. Coffey Family Medical Clinic, P.C., that court affirmed the decision of the trial court that the defendant had failed to prove the defense of novation.  Here are the key facts:

  • The defendant, CFMC, was a medical practice
  • CFMC entered into a contract (the “Contract”) with Premier whereby Premier was to service a medical scanner used by CFMC
  • The Contract had a five-year term and required CFMC to pay about $4,500 per month
  • The effective date of the Contract was January 1, 2011
  • In 2013, the principal of CFMC, Dr. Coffey, entered into a separate contract with a company called Pioneer (the “Pioneer Contract”)
  • Under the Pioneer Contract, Pioneer assumed contractual obligations of CFMC including CFMC’s contractual obligations to Premier under the Contract
  • Premier was not a party to the Pioneer Contract and did not agree that CFMC was no longer obligated pursuant to the Contract
  • CFMC requested that Premier begin sending its monthly invoices to Pioneer
  • Premier, thereafter, did send the monthly invoices to Pioneer
  • Pioneer made monthly payments to Premier for only four months after which its relationship with Dr. Coffey and CFMC deteriorated

Since the Court of Appeals affirmed the decision and reasoning of the trial court, the appellate court’s reasoning will be discussed here. The court started its analysis by laying out the four elements that have to be proven for a novation: (1) a prior valid obligation; (2) an agreement supported by evidence of intention; (3) the extinguishment of the old contract; and (4) a valid new contract. It also noted a couple of other key points about the defense of novation. First, the party asserting it has the burden of proving it. Second, while a novation may be implied and does not have to be established by evidence that it was expressed, it is never presumed and must be established by a clear and definite intention.

The court found that CFMC’s argument that a novation was implied by the fact that Premier billed Pioneer and accepted payment from it was without merit in light of the other undisputed facts. The court found no evidence that Premier ever agreed to let CFMC off the hook. Furthermore, the evidence showed that Pioneer never intended to enter into a contract with Premier.

While the novation defense can be a tool for lawyers who handle breach of contract cases, it is often difficult to prove as the above case demonstrates.