Are you looking to substitute your contract to a new party? Perhaps novation is a suitable path for you. Novation may be useful in situations involving leasing arrangements, corporate takeovers or to transfer business risks.
If you are considering entering into a novation agreement, LawPath has access to experienced contract lawyers who can provide you with guidance on whether it is right for your circumstances.
What Is Novation?
A novation refers to an arrangement where parties substitute an existing contract and replace one party to the agreement. As a result, a new, third party enters the picture. The rights and obligations of the original contract are transferred over to the new contract. The third party will hence incur liability for breaches of the contract.
In this way it is different to an assignment, where only the rights under a contract are transferred over. For more information on what an assignment is, check out our legal guide.
How Does Novation Work?
For novation to be given effect, the consent of all three parties involved MUST be expressed. Most novation agreements are documented in the form of a deed, which is a formal contract that must be “signed, sealed and delivered” to the parties. You must ensure that your novated contract is in writing.
The rights and obligations of the original parties involved up to the point of the novation remain, however these can be substituted into the new agreement as well.
A Novation Deed Should Include:
1. A Release Clause
It is essential that a clause in the novation deed outline the discharge of both rights and obligations from the outgoing party.
Parties must ensure that all amendments are set out clearly to avoid conflicts between accrued and future rights.
2. Representations and Warranty Provisions
The deed should also outline that both the outgoing and continuing party have full legal capacity to proceed with business, including relevant authorisation. It should also evidence that both parties have taken all actions to the best of their abilities to finalise the novation deed.
3. Insurance/Indemnity Clause
If you are the incoming third party to the novation, an indemnity clause can protect you from being liable for work completed before the novation date. This again can help to reduce the likelihood of conflict.
For various transactions such as novated leases, parties should calculate and include agreed costs arising from arranging the actual novation, and also for any future salaries to be paid.
Final Checks – Due Diligence
As with entering any sort of business contract, you should always conduct any necessary background checks on new parties.
In particular, a thorough examination of factors such as their:
- Management capabilities and skills;
- Financial status; and
- Level of access to resources to facilitate completion and performance of obligations.
Since novation involves renewed acceptance from an incoming third party, the resulting contract and implications may be quite complex to finalise. However, when executed effectively, they may be an appropriate means to exit unwanted contracts or to sell existing businesses. As a small business, it is best to seek legal advice before choosing to novate rights and obligations.
Unsure about whether novation is right for you? LawPath can connect you with an experienced contract lawyer for a fixed-fee to advise and help you understand your business situation. Submit a quote request and receive up to 3 fixed-price quotes in 24 hours.