There are several reasons why the novation of a contract may be required.
To find out what novation is and how to achieve it, we’ve created the brief summary below.
What is meant by novation of a contract?
Novation means to replace or substitute.
When a contract is novated, both parties agree that the responsibilities and obligations of one party are transferred from the original signee to a third party.
The original party is freed from the original agreement, creating a new contract.
When is contract novation required?
Novation of a contract is required when it becomes impossible for the original party to complete their contractual obligations under the agreement.
Novation may also be required when ownership of business transfers and the seller hands over existing contracts with an incoming party such as consumers or suppliers to the buyer.
What is the difference between novation and the assignment of a contract?
When a contract is assigned to a third party, that party takes over the benefits of the contract.
However, the liabilities remain with the original party. Novation of a contract transfers and assigns the benefits and liabilities to the third party, thereby relinquishing the original signee from all their responsibilities and liabilities.
Does novation terminate a contract?
Yes, as the classical analysis of a Novation Agreement is that it operates by extinguishing the original contract between the parties involved (A and B). It then replaces it with another new contract (between A and C).
Can you partially novate a contract?
As the contract law states, novation is an elastic concept; therefore, it is possible to novate part of a contract.
This can be complex regarding the legal issues it may trigger. Therefore, it is imperative to instruct an experienced commercial law solicitor to advise and represent you.
Novation vs assignment
Both assignment and novation are forms of transferring an interest under a contract from one party to another. However, they’re very different in their effect. An assignment transfers the benefit of a contract from one party to another, but only the benefit, not the burden.
In contrast, a novation will transfer both the benefit and the burden of a contract from one party to another. This means the burden of a party's obligation to perform, execute, and complete the contract will be transferred. A novation essentially creates a new contractual relationship.
Always review the obligations of the original contract
As mentioned above, when you novate a contract you take on all the benefits and burdens of the original agreement. This means it’s important to check the terms of the original contract before you sign a Novation Agreement, to ensure that you're not taking on any responsibilities that you might not be able to fulfil.
This also allows you to check your rights under the original agreement and consider what provisions have been made in your favour. This includes terms such as payment and how disputes will be handled.
Free Novation Agreement template
Our lawyers have drafted a free Novation Agreement template that you can use to detail the transfer of a contract. We recommend that if you’re not experienced in dealing with contractual law, that you speak with one of our expert contract lawyers. They’ll be able to review the terms of your contract transfer before you sign the Novation Agreement, to ensure your interests are protected.
Get legal assistance from LawBite
LawBite has helped 100s of startups and small businesses achieve their commercial ambitions. To find out how LawBite can help you comply with contractual law or draft a agreement, book a free 15 minute consultation or call us on 020 3808 8314.
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