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Contracts/Novation
- This article is on the legal term. For the keyboard company, see Novation Digital Music Systems; for the former modem manufacturer, see Novation CAT.
Novation is a term used in contract law and business law to describe the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party. In contrast to an Assignment , a novation must be agreed upon by all the parties to the original agreement [1]. The obligee, the person receiving the benefit of the bargain, must only be given notice. The obligor, the party making the novation, must only make the new obligor aware and receive consent from the new obligor. A contract transferred by the novation process transfers all duties and obligations from the original obligor to the new obligor.
For example, if I had a contract with you to cut my lawn and if John had a contract with me to cut his lawn, we could novate both contracts and replace it with a single contract wherein you agree to cut John's lawn. Contrary to assignment, novation requires the consent of all parties. Consideration is still required for the new contract but it is usually assumed to be the discharge of the former contract.
The criteria for a successful novation is the complete acceptance of the liability by the new debtor, the acceptance of the new debtor by the creditor, and the acceptance by the outgoing creditor of the new contract as full performance of the old contract.[1]
Novation is also used in futures/options trading markets to describe a special situation where the clearing house takes all positions with all the brokers, buying all the brokers sell, and selling all that the brokers buy.
In business, novation is typically the process by which a newly formed corporation assumes the pre-incorporation liabilities incurred by its founders. Novation is also used in transactions through electronic exchanges.
