Novation is a contract law term in which a party transfers its rights and obligations to a third party with the agreement of the original party. The old contract is canceled, and a new one is formed with the same terms. It differs from assignment, where only rights or obligations are transferred.
The term novation is mainly used in contract law to describe a situation in which a contracting party transfers all of its rights and obligations to a third party. Generally, for the transfer to be valid, the other original party must agree in writing to the replacement. When a novation occurs, an old contract is essentially canceled and a new contract is formed. The new contract usually contains the same terms and conditions as the old contract, the only difference being that one part of the original contract is different.
To illustrate, suppose John wishes to take out an auto loan that Jane has taken out with Big Bank. If Big Bank accepts this transaction, all three parties would sign a novation agreement. Under the deal, John would be replaced by Jane for the car loan and be responsible for any of his payment obligations to Big Bank. Jane would be relieved of any liability to Big Bank for the loan.
For a novation to be valid, both original parties, including the promissory, must accept the new promissor. The promisor is the person who makes a promise or accepts an obligation, and the promissory is the person in whose favor the promise or obligation was made. In addition, the new promisor must fully agree to accept any responsibility or liability assumed by the original promissor. The original promissor must also agree that he is no longer responsible for the performance of the contract once the novation agreement has been signed by all parties.
In general, a novation contract is only enforceable if agreed in writing. Also, the contract must be signed by both the parties to the original agreement and the new party. The contract is usually written in such a way as to ensure that the original promisor is in the same position it was in before the replacement.
A novation is different from an assignment, which occurs when one party’s contractual rights or obligations are transferred to a third party. Unlike a novation, the contracting parties themselves do not change when a cession is made. Instead, the assignor is simply passing on some benefit or burden under the contract to a third party. Typically, the third party has the right to enforce the contract on its own initiative.
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