Novation Agreement Modifications
A novation is a separate agreement that makes changes to an already executed contract (the "underlying" contract). The typical use of novations is to release one party from its duty to perform under the contract and substitute another party who will perform the same duties. Those considering creating a contract or entering into a novation should seek the advice of a contract attorney.
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Types of Novation
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There are two types of novation contract: objective novation, which substitutes a new contract obligation for an old one, and subjective novation, which substitutes a new party to for an old party but leaves the new party with the same obligations under the contract. Most novations are subjective. In a subjective novation, the new party has all of the duty to perform and also the right to receive all benefits to which the replaced party was entitled under the contract.
Valid Original Contract
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Contract law may vary depending on the state in which the contract is executed or performed, but certain elements are generally required to create a novation. The first is a valid, enforceable original contract. Legal enforceability of a contract requires both the assent of both parties, and consideration, meaning that each party to the contract sacrifices something of legal value in return for the other party's promise. A court may also decide to hold even a valid contract unenforceable if it finds the contract unfair or exploitative.
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Agreement Among Parties
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A valid novation requires agreement among both all the parties to the original contract and any new parties to the novation. Original parties who will still have duties under the novation contract may give affirmative consent. However, even if such parties do not expressly consent, the enforcing court may imply their consent if the parties knew about creation of the novation and did not give any evidence of disagreement before the time of contract.
Release of Parties
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A valid novation must release all original parties from all of their duties based on underlying contract. This elements distinguishes a novation from a delegation, a similar contract action. However, in a delegation, one party "gives" his contract duties to another. The party's duties are not extinguished, and the delegating party remains liable under the contract if the new party doesn't perform. By comparison, a novation wipes out the underlying contract and creates a new one.
Valid New Contract
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The new novation contract must meet all of the contract law requirements described above (offer, acceptance and consideration). Moreover, a court may hold the novation contract unenforceable if any party should raise a defense to enforcement. Enforcement defenses range from claims that fraud or duress was applied in the process of creating the novation, to claims that one of the parties to the novation was not legally competent (sane and of legal age) to enter into the contract.
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References
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