Arbitration — Does a Novation Extinguish an Arbitration Clause?

Under many states’ laws, a novation agreement — under which a new party is substituted for an original contracting party — terminates the prior contract between the parties. Does that apply to an arbitration clause in the underlying contract? Goshaw Dedicated Ltd. v. Portsmouth Settlement Co. I, 2006 U.S. Dist. LEXIS 91036 (N.D. Ga. Dec. 18, 2006), holds that the novation must indicate the parties specific intent to rescind their original agreement to arbitrate, else the original agreement to arbitrate remains enforceable. The decision collects cases on the subject, including a reference to a Seventh Circuit case suggesting that the opposite rule may apply if the novation is between the original contracting parties.

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