Ask a lawyer for: advice when there is no consideration from one of the parties advice if you want to execute the agreement as a deed advice on drafting bespoke terms in a Novation letter This Novation letter is governed by the law of England, Wales or the law of Scotland.

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Overview of the Novation agreement

This novation agreement allows one party to replace or substitute another party to an original contract, A and B, with a new contract and a new party, A and C. This document will also include the background to the novation as well as the reason for the novation. It also includes the option for indemnities which will protect the parties after the novation has occurred.

This agreement is a contract between three parties:

the outgoing party is one of the original parties to the agreement which wants to transfer its rights and obligations under it
the incoming party is the party which is coming to replace one of the original parties to the agreement
the remaining party is the other original party to the agreement, which needs to agree to the novation

When should I use a novation agreement?

Use this novation agreement:

if you want to end an existing contract between Party A and B, and create a new contract on the same terms as the old contract with a new party, Party C
when there are no changes to the terms of the contract
where you want to transfer the rights, benefits, obligations and burdens to a new party

Use this letter as a business or individual when you want to transfer all of your rights and obligations under a contract to a third party. Use this letter following an asset purchase transaction or as a stand alone agreement.

What’s included in a novation agreement?

This novation agreement covers:

the three parties
the reason for novation
the original agreement
indemnities (optional)
novation start date
governing law

What’s a novation agreement?

A novation letter is a three-way contract that extinguishes one contract and replaces it with another in which a third party takes up rights and obligations of one of the original parties to the agreement. The other original party effectively continues its rights and obligations.

Do I need a Novation letter?

You will need this Novation letter when you want to transfer your obligations under a contract. This is very common in asset purchase transactions or as a one-off novation.

What is novation?

Novation is a mechanism in law where one party transfers all their rights and burdens under a contract to a third party. The original party, eg 'B', is removed from the contract and is replaced by a new party, eg 'C'.

Do there need to be three parties to the agreement?

In order for a novation to be effective, there must be three parties to the contract. A novation agreement is a tripartite agreement which extinguishes the old contract and replaces it with another contract in which a third party takes up the rights and obligations of the contract. It is also important to make sure that all three parties give consent to the novation, so having all three parties is essential to the novation.

What is the difference between an 'assignment' and a 'novation'?

An assignment of a contract transfers the benefit and the interest from one party to another party. However the obligations and burdens of the contract are not transferred. The parties to the original contract do not change in an assignment. Only the person who is to receive the benefit or interest from the contract is changed. For further information read Assigning a contract.

A novation will create a new contractual relationship between two parties. The third party effectively replaces one of the parties to the contract. All benefits and burdens under the contract are transferred to this third party.

What is meant by the benefit and burden?

The benefit is the benefit received from a contract. This could be in the form of money or the benefit of a service. The burden is what one party will be obliged to do in order to fulfil the contract. This could be payment for a service or goods, or the performance of a service.

What are indemnities in the novation agreement?

An indemnity is a contractual obligation of one party to compensate the loss incurred to the other party due to the acts of the indemnitor or any other party.

Indemnities are commonly but not automatically included in a novation agreement. There are two indemnities you can add to this agreement:

Outgoing party indemnifies incoming party in respect of any liabilities and obligations the incoming party agrees to take over.
Incoming party indemnifies outgoing party in respect of any liabilities that the outgoing party retains.

What happens to the liabilities before the novation?

Under the Novation letter the outgoing party and the remaining party agree to release each other from any liability and claims in respect of the original agreement on or after the date the agreement was signed.

Further advice

Ask a lawyer for:

advice when there is no consideration from one of the parties
advice if you want to execute the agreement as a deed
advice on drafting bespoke terms in a Novation letter

This Novation letter is governed by the law of England, Wales or the law of Scotland.

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