Deed of Novation

A Deed of Novation is a document for one party to transfer all its rights and obligations in an existing contract or agreement to a new third party. The terms of the agreement remain the same, but one of the former party exits from the agreement and the new third party replaces its position by accepting all the rights and obligations of the outgoing party.

When Should I Use a Deed of Novation?

A deed of novation is an agreement that is used to transfer one party’s rights and obligations under a contract or agreement to a new third party.

The terms of the agreement remain the same. But one of the former party exits from the agreement and the new third party replaces its position by accepting all the rights and obligations of the outgoing party.

For a Deed of Novation to be effective, all parties to the original agreement plus the new party stepping into the contract needs to sign on the document.

For example:

A and B have an agreement where A supplies goods to B. 

A has sold its business to X, and now X will supply the goods to B instead of A. 

Now, A, B and X can all sign a Deed of Novation to keep the original supply agreement with A and B valid but with a change that X will replace A in that agreement, taking over all the rights and obligations of A under that agreement.

In the above example, A is the outgoing party, B is the continuing party and X is the incoming party.

When should you use a Deed of Novation?

A Deed of Novation will specify the impact of the novation on any claims between the continuing party and the outgoing party. A Deed of Novation may specify that a party will provide indemnity to another party.

How is novation different from the assignment?

Novation and assignment both are ways for someone to transfer their interest in a contract to a third person.

An assignment is used to allow a third person to deliver the rights and obligations under a contract, but it does not relieve the party from its obligations. It is more of a delegation of the rights and obligations to a third party, but you’ll still be liable for the obligations as you will remain a party to the original contract.

Whereas novation releases you completely from the rights and obligations under the original contract as are no longer a party to the original contract. 

What to include in a Deed of Novation?

-Details of the original contract;

-Background or reason for the novation;

-Effective date of novation;

-Impact of novation on claims; and

–Indemnity (if any).

Novation: FAQs

1.) Difference between a Novation and an Assignment?
In the case of a novation, the original contract is canceled and the third party is given all rights and obligations by one of the parties who has signed the two-party agreement. In the case of an assignment, the original contract is still in place but one party has to give up the rights mentioned in the contract but still remain responsible to fulfil the terms of the contract.

2.) What gets transferred in a Novation?
In a novation, all rights, as well as the obligations of the transferring party, are transferred to a third party.

3.)What Are the risks involved in a Novation?
Novations are relatively uncomplicated and mostly done to fulfill a formality. However, it requires three parties to be in agreement and so a risk of uncertainty looms over the actions of other parties over the two. 

Conclusion

If you need to exit an agreement and a third party is going to take over your place in the agreement, then a Deed of Novation is the document to use. Be careful in deciding between using a Deed of Novation or an Assignment by considering whether you want to have nothing to do with the agreement or still be a part of it.

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• Shareholder Agreement
• Option Agreement
• Employee Option Repurchase Agreement
• Share Appreciation Rights Plan
• Share Option Plan

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