What is Novation of Contract?

Novation is the legal process of replacing one party to a contract with a new party, with the agreement of everyone involved. The original contract ends and a new one takes its place, usually on the same terms, so the incoming party takes on both the rights and the obligations of the party stepping out.

Most people only think about novation after something has already changed. You’ve sold the business, set up a company, or a client wants someone else to finish the job. The contracts are still in the old name and nobody is quite sure who’s on the hook. Good news: fixing that is a short, well-worn process once you know the moving parts.

What does novation mean in plain English?

Think of novation as a clean handover. Three parties are involved, and every one of them has a role:

• The outgoing party is the business leaving the contract.
• The incoming party is the business stepping into their shoes.
• The continuing party stays put and has to agree to the swap.

Once the novation takes effect, the continuing party deals only with the incoming party. The outgoing party is released from future obligations and, if the deed says so, from past ones too.

You’ll also see the word used as a verb. To novate a contract is to put it through this process. A novated contract is one that has already been transferred, and novating is simply the doing of it. In legal terms, the novation of a contract always produces a new contract, even when every word of the old one carries across.

A worked example

Say you run a commercial cleaning business with a three-year contract to clean a gym chain’s sites. Eighteen months in, you sell the business to a larger operator. The gym is happy to keep the arrangement going and the buyer wants the work.

Without a novation, you’re still the gym’s contractor on paper. If the buyer misses cleans or damages equipment, the gym’s claim is against you. With a signed deed of novation, the buyer becomes the gym’s contractor from the agreed date and you walk away.

Here’s another version we see. Your customer is struggling to pay, but its parent company is in good shape. A novation can move the contract to the parent, so you’re dealing with the entity that has the money. It only works if all three businesses agree, and old unpaid invoices don’t disappear (or get paid) unless the deed deals with them directly.

Novation vs a novated lease

If you searched “novated” and landed here, you might be after a car. A novated lease is a salary-packaging arrangement where an employer takes on the lease payments for an employee’s vehicle. It uses the same legal idea, with the employer stepping into the lease obligations, but it’s a finance product rather than a commercial contract handover. Our guide explains how a novated lease works.

Novation vs assignment vs variation: which one do you need?

These three get mixed up constantly. Pick the wrong one and the risk stays with the wrong business.

	Novation	Assignment	Variation
What changes	Who the party is	Who receives the benefit	The terms
Do obligations move?	Yes	No, the original party stays liable	No, same parties
Who must agree	All three parties	Depends on the contract’s assignment clause	The existing parties
The original contract	Ends and is replaced	Continues	Continues, as amended
Usual document	Deed of novation	Deed of assignment	Deed or agreement of variation

The short version: if someone else needs to do the work, you need a novation. Australian law lets you assign the benefit of a contract, such as the right to be paid, but you can’t assign away the burden. Even after an assignment, you stay responsible for performing.

If you only need to pass on a benefit, a Deed of Assignment template does the job. For more detail on where the line sits, read our breakdown of the difference between assignment and novation.

A variation changes the terms but keeps the same people at the table. Novations and variations travel together more often than you’d expect, and that’s where people get caught out (more on that below).

When do Australian businesses novate a contract?

Selling your business

This is the big one, and the sale structure decides how much novation work you face. Sell the shares in your company and the company stays the contracting party, so its contracts don’t need novating. Just check for change-of-control clauses, which can give the other side an exit right anyway.

Sell the business assets instead and it’s a different story. Every customer, supplier and equipment contract the buyer wants has to be novated or assigned one by one. Build that list early. Our guide to buying and selling a business walks through the rest of the sale process.

Moving from sole trader to company

Your new company is a separate legal person. Contracts you signed in your own name don’t follow you into it automatically, no matter how obvious the move feels to you. Ongoing client agreements, leases and finance arrangements all need dealing with as part of any business restructure.

Handing work to another provider

Maybe you’re winding down one service line, or your client wants a specialist to take over halfway through. Subcontracting keeps you liable for the work. Novation hands the whole relationship over, which is cleaner if you genuinely want out.

When you don’t need a novation

Changing your company’s name doesn’t trigger a novation. The ACN stays the same, so the legal entity hasn’t changed and your contracts carry on. Update your invoices and letterhead and let your key contacts know. That’s it.

What we see in Lawpath consultations about novation

Across the novation briefs our lawyers handle, the same problems keep coming up. None of them are exotic. All of them are avoidable.

A “your contract has moved to us” letter isn’t a novation

A pattern we see in disputes: a service provider is bought out, and customers get a letter saying the contract has passed to the new owner and nothing is changing. Months later, something goes wrong. The new owner then argues it only bought the assets and never took on the old business’s liabilities.

A one-way notice isn’t a deed of novation, and it doesn’t settle who is responsible for breaches before the handover. If you’re the customer receiving one of these letters, ask for a proper deed. If you’re the business sending it, do the paperwork properly now rather than in front of a lawyer later.

Novation documents that quietly change the deal

Franchisees in particular bring us “deeds of novation and variation” that arrived with a cover note calling them an administrative change. Then you read them. We’ve seen wider restraints of trade, new fee structures, extra obligations and contracts that roughly tripled in length.

A pure novation should leave the terms alone. If yours doesn’t, the new terms are negotiable, and a tight signing deadline doesn’t change that. Compare the new document against the original clause by clause before you sign anything.

Forgetting the financier

Founders moving from sole trader to company tend to think about client contracts first. The vehicle or equipment finance in their personal name gets forgotten. Your lender is the continuing party in that arrangement, which means it gets a say, and it may want new credit checks or a personal guarantee before it agrees.

Planning for the company before it exists

Smart founders sign the big contract now and plan the novation in advance. If you’re about to incorporate, ask for a clause where the other party agrees upfront to novate the contract to your new company once it’s registered. One sentence today saves a negotiation in six months, when you have less leverage.

Chasing deeds you don’t need

Not every customer relationship is a contract worth novating. One-off sales to consumers on your standard website terms leave nothing ongoing to transfer. Update the terms to name the new entity and move on. Save your deeds for B2B agreements, leases, finance and subscriptions, where obligations run for months or years.

How do you novate a contract? Step by step

1. List every contract that needs to move. Customer agreements, supplier terms, leases, finance, software licences. A simple spreadsheet with the counterparty, end date and a contact name will do.
2. Read the assignment and novation clauses. Some contracts ban transfers outright, some require written consent, and some give pre-approval for transfers within a corporate group.
3. Talk to the continuing party early. A phone call before the paperwork lands goes a long way. Surprises make people cautious.
4. Agree the effective date and the cut-off for liability. Decide who is responsible for anything that happened before the handover and who collects money already owed.
5. Prepare the deed of novation. Start from a Deed of Novation template and tailor it to the contract you’re moving.
6. Sign it properly. All three parties sign, using the right execution method for each (see the signing section below).
7. Update your records. Change invoice details, bank details, insurance and contact lists. Keep the signed deed with the original contract.

What should a deed of novation include?

Most deeds of novation run only a few pages. The clauses below do the heavy lifting. The sample wording is illustrative, so adapt it to your contract or have a lawyer check it.

Parties and the original contract

Name all three parties with their full legal names and ABN or ACN. Identify the original contract by its title and date, and list any variations made since. Getting the entity wrong here is the single easiest mistake to make and one of the most annoying to fix.

The novation clause

This is the clause that actually performs the swap.

With effect from the Effective Date, the Incoming Party is substituted for the Outgoing Party under the Contract, and the Contract is to be read as if the Incoming Party were named in it instead of the Outgoing Party.

A release clause

The release is what lets the outgoing party actually walk away. Decide whether it covers only the future or everything.

With effect from the Effective Date, the Continuing Party releases the Outgoing Party from all obligations and claims under the Contract arising on or after the Effective Date.

Leave out the release and the outgoing party can stay exposed to claims, even though it no longer has any control over the work. That’s the worst of both worlds.

Assumption of obligations and past breaches

The incoming party promises to perform from the handover date. The deed should then say who carries anything that went wrong before it.

The Incoming Party must perform all obligations of the Outgoing Party under the Contract that arise on or after the Effective Date. The Outgoing Party remains liable for, and indemnifies the Incoming Party against, any breach of the Contract occurring before the Effective Date.

If you’re the incoming party, that indemnity is your protection against inheriting someone else’s mess. Ask for it.

Representations and warranties

Each party should confirm it has the legal capacity and authority to sign. The outgoing party should also confirm the contract is current, lists every variation, and isn’t in breach. Those promises give the incoming party a claim if any of them turn out to be wrong.

Costs, stamp duty and GST

Say who pays the costs of preparing the deed. Plenty of novations of everyday service and supply contracts attract no stamp duty at all. Duty becomes a live question when the novation forms part of a transfer of dutiable property, such as an interest in land, and the rules differ in every state.

Check with your state revenue office or accountant before signing. If someone is paying a fee for the novation itself, ask your accountant about the GST treatment as well.

Does a deed of novation have to be signed in wet ink?

Not for companies. Since permanent reforms to the Corporations Act in 2022, a company can sign a deed electronically under section 127. That means two directors, a director and the company secretary, or a sole director who is also the secretary. No witness is needed, and each signatory can sign their own copy.

Individuals and sole traders are a different matter. Whether they can e-sign a deed, and whether a witness is required, depends on the state or territory. Our guide on whether individuals can sign a deed electronically sets out the rules state by state.

Why use a deed at all?

A normal contract needs consideration, meaning each side gives something in return. In a novation, the outgoing party is being released and might get nothing back. A deed removes that problem because it doesn’t need consideration to be binding.

Deeds also carry a longer limitation period in most states, so claims under them can be brought for longer than under a simple contract. Courts have occasionally found a novation implied from how the parties behaved. Relying on that is a great way to end up in a dispute.

What if the other party won’t agree to the novation?

You can’t force it. Consent is the whole point of novation. That doesn’t leave you stuck, though. Your realistic options are:

• Find out what’s worrying them. Most refusals come down to doubt about the incoming party. Offering its financial statements, references or a parent company guarantee unlocks more consents than any legal argument.
• Assign the benefit and subcontract the work. The new business does the job and gets paid, but you stay liable to the customer. That works for a short remaining term, less so for a long one.
• Use the contract’s exit clause. If there’s a termination-for-convenience right, ending the contract and letting the new business sign fresh may be simpler.
• Run the contract out. If only a few months remain, staying on as the contracting party until the end date can cost less than a fight.

What should you check before taking on a novated contract?

Stepping into someone else’s contract means stepping into their history. Before you sign as the incoming party, get answers to these:

• Have you seen the full contract, including every variation, side letter and email agreeing to changes?
• Are there any complaints, disputes or unpaid amounts sitting with the outgoing party?
• Can your business actually deliver on the price, timeframes and service levels, or were they set for a different operation?
• Does the deed give you an indemnity for anything that happened before the effective date?

If you’re the continuing party, flip the question. Check the incoming business’s financial position, its experience and its capacity to perform before you agree to release the business you’ve been dealing with.

Novation FAQs

What is novation in simple terms?

Novation is swapping one party to a contract for another, with everyone’s agreement. The old contract ends, a new one starts on the same terms, and the new party takes on both the rights and the obligations.

What does it mean to novate a contract?

To novate a contract is to transfer it to a new party through novation. Once novated, the incoming party performs the contract and the outgoing party is released, usually by signing a deed of novation.

Is novation the same as assignment?

No. Assignment transfers only the benefit of a contract, such as the right to be paid, and the original party stays liable. Novation transfers rights and obligations and needs the consent of all three parties.

Does novation create a new contract?

Yes. Legally, the original contract is extinguished and a new contract is formed between the continuing party and the incoming party. In practice the terms are usually identical, unless the parties agree to vary them at the same time.

Who needs to sign a deed of novation?

All three parties: the outgoing party, the incoming party and the continuing party. If any one of them doesn’t sign, the novation doesn’t take effect.

Can a deed of novation be signed electronically?

Companies can sign deeds electronically under section 127 of the Corporations Act, without a witness. For individuals and sole traders, it depends on the rules in their state or territory, including whether a witness is needed.

Does novation release the outgoing party from past breaches?

Only if the deed says so. Many deeds release the outgoing party from future obligations but keep it liable for breaches before the effective date. Spell this out, because silence is where disputes start.

Can you novate part of a contract?

Yes, if all parties agree. A deed can novate a defined portion, such as specific sites or services, while the rest stays with the original party. Partial novations need extra care so nothing falls between the two.

Is “novated” the same as a novated lease?

Not quite. A novated lease is a car salary-packaging arrangement that uses novation to move lease obligations to an employer. Contract novation is the broader legal process of replacing any party to any contract.

Ready to novate your contract?

If you’ve got contracts sitting in the wrong name, you’re not behind. It’s one of the most common loose ends after a sale or restructure, and it’s fixable in an afternoon. Pick the contract that matters most, get the other side on board, and put it in a deed.

Create your Deed of Novation today and keep everything in one place, with a Lawpath lawyer on hand if the other side pushes back.