The substitution of a new contract for an old one. A novation may change one of the parties to the contract or the duties that must be performed by the original parties.
(law) the replacement of one obligation by another by mutual agreement of both parties; usually the replacement of one of the original parties to a contract with the consent of the remaining party
- legal Replacement of a contract with one or more new contracts, in particular in financial markets the replacement of a contract between a particular buyer and seller with contracts between the clearinghouse and each party.
- legal A new contract between the original contracting parties whereby the first obligation is extinguished and a new obligation is substituted.
n. agreement of parties to a contract to substitute a new contract for the old one. It extinguishes (cancels) the old agreement. A novation is often used when the parties find that payments or performance cannot be made under the terms of the original agreement, or the debtor will be forced to default or go into bankruptcy unless the debt is restructured. While voluntary, a novation is often the only way any funds can be paid.
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. The obligee, the person receiving the benefit of the bargain, must only be given notice. The obligor, the party making the innovation, 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 Daniella had a contract with me to cut his lawn, we could novate both contracts and replace them with a single contract wherein you agreed to cut Daniella’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 one possible successful novation are: the complete acceptance of the liability by the new obligor, the acceptance of the new obligor by the obligee, and the acceptance by the obligee of the new contract as full performance of the old contract.
Novation is also used in futures/options trading markets to describe a special situation where the clearinghouse 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.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 13th April, 2024.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
- Page URL:https://dlssolicitors.com/define/novation/
- Modern Language Association (MLA):Novation. dlssolicitors.com. DLS Solicitors. April 28, 2024 https://dlssolicitors.com/define/novation/.
- Chicago Manual of Style (CMS):Novation. dlssolicitors.com. DLS Solicitors. https://dlssolicitors.com/define/novation/ (accessed: April 28, 2024).
- American Psychological Association (APA):Novation. dlssolicitors.com. Retrieved April 28, 2024, from dlssolicitors.com website: https://dlssolicitors.com/define/novation/