Novation: Overview, definition and example
What is novation?
Novation is the process of replacing one of the parties in an agreement with a new party, transferring all rights and responsibilities from the original party to the new one. Unlike an assignment, which only transfers rights, novation changes the actual party to the contract, and all parties must agree to this change.
Why is novation important?
Novation is important because it allows businesses to change parties in an existing contract without the need to create a new agreement from scratch. It’s often used in situations where one party wants to exit a contract but another party wants to continue the relationship. For businesses, novation offers a way to restructure deals, bring in new partners, or transfer liabilities without starting over.
Understanding novation through an example
Imagine a company, Company A, has a contract with Supplier B. Company A wants to transfer the contract to Company C. Through novation, Company C would step in as the new supplier, assuming all responsibilities and obligations under the contract, and Company A would be released from them. All parties, including Supplier B, must agree to the novation for it to be legally valid.
An example of novation in a contract
Here’s how a novation clause might be written:
"The parties agree that, upon mutual consent, the Buyer may transfer all of its rights and obligations under this agreement to a third party, subject to the approval of the Seller."
Conclusion
Novation allows businesses to transfer a contract’s rights and responsibilities to a new party, replacing the original contracting party entirely. It’s a useful tool for restructuring agreements and facilitating smooth transitions between parties, but it requires the consent of all involved parties. Understanding novation helps ensure that businesses can adapt contracts as needed without starting from scratch.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.