How Does a Novation Agreement Work?

In a novation agreement, a new party agrees to the original terms.

A novation is an agreement that effectively substitutes a new party for one or more parties to a contract. The original contract remains in effect and requires the same performance, but a new party undertakes the original party's contractual role.

Elements

Four elements are required to create a valid novation: 1. a valid, enforceable original contract , 2. an agreement among both old and new parties, 3. release of original parties from all duties under the original contract, and 4. a valid, enforceable new contract. Without all of these elements, a new agreement will not constitute a valid novation.

Contract

Both the original contract and the new (novation) contract must be valid and legally enforceable. The validity and enforceablility of contracts are cumulative decisions based on a number of issues in contract law; consequently, anyone thinking of drawing up either an original or novation contract should seek legal advice and counsel.

Agreement

Substitution of a party to a contract requires the assent of all parties concerned, including both the original parties and any new party that will be bound by the novation. An original party who will remain bound by the novation contract may consent expressly, or that party's consent may be implied by knowledge of the intended novation and failure to express disagreement in a timely manner.

Effect

The effect of a novation is to completely substitute a new party for an original party. The new party to the contract will not only assume all of the duties, but also receive all of the benefits of the replaced party under the contract. The novation releases the replaced party from any liability for non-performance of the contract, and extinguishes any rights that party may have had to the benefits of performance.

Delegation

Novation should be distinguished from delegation. When a party delegates his duties under a contract to a third party, the original party remains liable for any non-performance. Consequently, delegation of a contract requires fewer formalities; a delegation of duties may be written or oral, and only the delegating party must manifest consent to the delegation. Since novation permanently excises one party from the contract and inserts a new one, effectively creating a new contract, novation requires more formalities in execution.

References

• "Cases and Materials on Contracts, Sixth Edition"; Farnsworth, E. Allan and William F. Young, Jr. and Carol Sanger and Neil B. Cohen and Richard Brooks; 2002
• Business Dictionary: Novation

Resources

• OneCle: Sample Assignment and Novation Contract