Good day, readers. Today, we’ll explore the concept of novation, which occurs when a new contract replaces an existing one, either by introducing new parties or altering the terms. This process discharges the old obligation and establishes a new, legally binding one. To prove novation, you need to show four key elements: a previous valid obligation, agreement from all parties to the new contract, extinguishment of the old obligation, and validity of the new obligation N.N.P.C. v. Klifco (Nig.) Ltd. (2011) 10 NWLR (Pt.1255) 209.
To illustrate the principle, we have examined the 2024 supreme court case of Heritage Bank Limited & Anor v. Ajugwo. (2024) 12 NWLR 473
In this case, the 1st appellant (formerly African Continental Bank) had a customer, Jerome Ajugwo (the respondent’s father), who acted as a guarantor for a loan of N10,000 given to S.B.C. Maduakolam, another customer of the bank. Ajugwo used his property as collateral for the loan. However, the borrower, Maduakolam, failed to repay the loan and later relocated to another town. He also took another loan from the bank’s Owerri branch, and his accounts were merged.
Upon realizing the complication, Ajugwo requested that the merged accounts be separated so he could repay the loan linked to his property and redeem it. The bank agreed to this under certain terms, and Ajugwo accepted. Afterward, he promptly repaid the loan as agreed. Despite this, the bank went ahead and sold Ajugwo’s property to a third party (the 2nd respondent), ignoring Ajugwo’s fulfillment of the repayment terms. This led to a lawsuit, which was later consolidated with a separate claim by the 2nd respondent( Sydney Obi), who purchased the property.
For ease of comprehension, the exhibits are:
• Exhibit J: Original deed of legal mortgage between Spring Bank Plc, S.B.C. Maduakolam, and Jerome Ajugwo.
• Exhibit C: Letter agreeing to separate Maduakolam’s accounts and waive interest on the loan.
• Exhibit D: Ajugwo’s acceptance of the new repayment terms.
• Exhibit E: Request for payment details under the new repayment plan.
• Exhibit F: Ajugwo’s response detailing his payments.
• Exhibit H: Letter requesting reconsideration of the property sale due to Ajugwo’s compliance with repayment terms.
The appellants didn’t go down without a fight. They brought up two contentions. First , they argued that there was no novation since S.B.C. Maduakolam was not a party to the subsequent agreements (Exhibits C, D, E, and F). This highlights the technicality the appellants relied on. Secondly, the appellant argued that the respondent’s father was not a guarantor but rather an equal partner in the block-making business with S.B.C. Maduakolam. This argument aimed to deny that there could have been a novation since the respondent’s father had equal responsibility and could not be treated as merely a party trying to protect his mortgaged property.
Deciding this matter, the trial court found that the bank had effectively replaced the original mortgage contract with a new agreement based on the repayment terms agreed between Ajugwo and the bank. As a result, the sale of the property was declared void, and the court ordered that the property title documents be returned to Ajugwo’s family.
On appeal, the Court of Appeal upheld the trial court’s decision, affirming that a Novation had taken place, where the original mortgage agreement was replaced by the new repayment terms. The appellants challenged this at the Supreme Court .
The Supreme Court found no merit in the appellants’ argument that novation could not have taken place because Maduakolam was not a party to the new agreements. As explained by Kekere-Ekun JSC (now CJN), the original mortgage agreement (item 2 of the exhibit J) allowed either the borrower or the mortgagor to repay the debt. Since the respondent’s father had fulfilled the repayment terms, the property should have been returned to him. The appellants could not exercise their rights under the original mortgage agreement (Exhibit J) because it had been replaced by the new terms in Exhibit C.
In conclusion, this case illustrates how novation can modify contractual obligations and the importance of adhering to agreed terms. Thank you for reading ❤️. See you next week🙏
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