Novation In Business Contracts

In business, things can change rather frequently. Business owners should always be prepared for a turn of events, especially when it comes to contracts. Sometimes, you’ll need to switch out one party for another. At times, you’ll be the party gracefully bowing out of a contract. Adjusting to change is the hallmark of every smart business owner. You just need a safe, legal way to do this so no one incurs any loss or feels they have been undercut during this process. 

This is where a Deed of Novation comes in handy. 

A Deed of Novation allows one party to securely switch for another party in a business contract. Keep reading to know more about novation and how you can utilise it. 

What Is Contract Novation?

Contract novation in business is where one party takes over from another party. In this process, all rights, obligations and liabilities stemming from the contract get transferred from the old party over to the new one. 

Basically, a new contract (even if the terms are the same) is created, with a different party.  Once the contract novation is complete, the party that has left the contract no longer has any obligation or duty towards it.

A contract of novation is commonly used during business sales. When a business is being sold, the contracts of the business will usually go to the new owner of the business. However, as the third party in this scenario only agreed to do business with the original owner of the business, it usually means a Deed of Novation needs to be signed, so the new owner of the business can take over the contract. 

Example: Jo is selling his wedding photography business to Sam. The business’s sale is to be finalised next week however, Jo has already signed a contract to shoot Hannah’s wedding taking place next month. As the business will be sold to Sam, Jo won’t be able to conduct business with Hannah. Instead, Jo informs Hannah of the situation and she agrees to let Sam do the photography for her wedding. They sign a Deed of Novation, essentially replacing Jo with Sam as Hannah’s wedding photographer.

Is Contract Novation Legal?

Yes, contract novation is legal as long as it’s done the right way. There shouldn’t be any shady conduct or illegal practices when signing any kind of contract. For instance, you cannot force a party to sign a Deed of Novation or break any laws or regulations. 

As long as contract novation is done with proper consent and without breaking any laws, it’s a perfectly legal practice. 

How Do You Novate A Contract?

When you novate a contract, the general process will look something like this: 

All parties agree to novate the contract: Once you have determined that a novation is necessary, you’ll need to get all the affected parties to consent to the novation, including any third parties. 

Getting the Deed of Novation drafted: With everyone on board it’s time to get a Deed of Novation drafted by a legal expert.  

Double check the agreement: When the agreement is drafted, it’s good for all parties to have a final read and make any necessary amendments, before they sign the deed. 

Execute the legal agreement: Now that everything has been sorted and signed, all parties can move forward with the new agreement. 

It’s important to have a legal expert draft your Deed of Novation for you. It’s a crucial document, so it needs to be able to accurately capture the rights and obligations of the new party as well as effectively cement the release of the old party. This way, you can be assured the legal agreement you have signed covers everything necessary and you can proceed with the novation without any worry.  

Can You Novate One Part Of A Contract?

Generally no, only one part of a contract cannot be novated. As novation in business contracts typically involves moving all the rights, responsibilities and obligations of the contract from one party to another, it is not possible to only do this with a singular part of the contract. 

However, if you’re looking to assign particular rights and obligations of a contract to another party without transferring the whole contract, then it might be worth looking into getting a Deed of Assignment. 

Contract Assignment vs Contract Novation

There’s a pretty large difference between contract assignment and contract novation. 

As you’ve likely understood by now, contract novation is where the contract is completely transferred over to a new party. 

Contract assignment on the other hand, only transfers part of the obligations of the contract to another party. The original signer of the contract still has duties and liabilities under the contract. 

Let’s say, you’re a contractor and are building a client’s home when you suddenly get injured. Instead of cancelling the contract, you assign the contract (or part of it) to a third party. Similarly to contract novation, you will need to get the consent of the third party (in this case it’s your client) before doing so. Under a Deed of Assignment, the duties and rewards of the contract will be available to the new contractor, however you will still be liable for what happens on site. Therefore, instead of completely removing yourself from the contract, you’ve simply passed some of it on to another party. 

In some cases a Deed of Assignment will make sense, where as in other instances, a Deed of Novation will fit the situation better. It can be difficult to determine what kind of agreement will work best in what context, which is why it always helps to chat things through with a legal professional. Our legal experts at Sprintlaw can help you decide which legal agreements are right for a particular instance, then draft one up for you. 

Next Steps

If you have found yourself in a position where switching one party out for another in a contract seems to be the way to go, then it’s important to conduct this process the right way. Getting a Deed of Novation drafted by an expert can help protect the interest of all parties involved in a contract novation. To summarise what we’ve discussed: 

• Business contracts can change, requiring parties to switch or replace each other while maintaining legal integrity
• A Deed of Novation is used in business to securely switch one party for another in a contract
• Contract novation involves transferring all rights, obligations and liabilities from the old party to the new party
• It’s commonly used during business sales to transfer contacts to new owners 
• Contract novation is legal when done properly with consent and without breaking laws
• Novating a contract involves getting all parties to agree, drafting a Deed of Novation, reviewing and amending it and executing the agreement 
• Legal experts should draft the Deed of Novation to ensure accuracy and completeness
• Novating only part of a contract is generally not possible; consider a Deed of Assignment for such cases
• Contract assignment transfers some obligations while keeping the original signer liable. Contract novation transfers the entire contract
• Consult legal professionals to decide between Deed of Assignment and Deed of Novation based on the context 
• For proper contract novation, use a Deed of Novation drafted by an expert to protect all parties’ interests 

If you would like a consultation on your options moving forward, you can reach us at 08081347754 or [email protected] for a free, no-obligations chat.

---