What Is a Novation and Why Would You Novate a Contract?

Novation replaces one party to a contractual relationship with another. In a typical three-party novation, the outgoing, incoming and continuing parties all agree to the change.

This explanation focuses on contracts in England and Wales.

Lowdown

A novation generally replaces the original contractual arrangement with a new one, allowing the incoming party to take the outgoing party's place. The agreement should make clear what happens to existing rights, liabilities and claims.^[1]

Why It Matters

Novation can be useful when a contract needs to move from one business to another, such as during a restructuring or business sale.^[2]

It is different from assignment. Assignment usually transfers contractual rights or benefits but does not, by itself, transfer the original party's obligations. Novation allows those obligations to be taken over by another party with the necessary agreement.^[1][2]

If you are staying in the contract, check whether the incoming party can perform the work and meet its payment obligations.

Also check the effective date, outstanding payments, existing claims and whether the outgoing party remains responsible for anything that happened before the change.

The novation agreement should clearly identify the parties, the contractual arrangements being replaced and the rights and obligations affected.^[1]

Novation must also be legally binding. This usually means the parties exchange something of legal value, such as mutual promises (known as "consideration"), or sign the agreement as a deed.^[3]

Our Conclusion

Novation changes who is party to a contractual relationship. Check who is leaving, who is replacing them and exactly which rights, duties and existing liabilities are affected.

Sources

[1] HMRC, Company Taxation Manual — Assignment or novation of debt

[2] HMRC, Corporate Finance Manual — Transferring debt by assignment or novation

[3] RICS, Assignment and novation: different terms, different effects