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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

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. 

This novation agreement covers:

  • the three parties

  • the reason for novation

  • the original agreement 

  • indemnities (optional)

  • novation start date

  • governing law 

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.

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.

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'.

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.

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.  

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.

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.

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. 

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.

Other names for Novation letter Novation agreement

Novation agreement, Letter of novation.