What Is the Meaning of Novation Agreement?

Written by erika johansen
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What Is the Meaning of Novation Agreement?
Novation agreements often substitute new parties to a contract. (contract 20309 image by pablo from Fotolia.com)

When a valid contract has already been executed, parties sometimes wish to change their duties under the contract, or one party might wish to take himself out of the contract altogether. A novation agreement is a new contract that makes such significant changes to the original. Those with specific questions about contract execution and enforcement should seek legal advice.

Effect of Novation

Novation agreements wipe out an old contract and create a new one. Novation agreements can be either objective (meaning that the parties substitute a new contract duty for an old one), or subjective (meaning that a new party is substituted for an old one.)

If the novation agreement is subjective, the new, substituted party must perform the old party's duties, and the new party also has the right to all benefits owed to the old party under the original contract. Subjective novation also releases the original parties from all duties and extinguishes all rights under the old contract.

Elements of Novation

The law requires four elements to create a novation agreement. There must be a valid and legally enforceable original contract; agreement between all parties, old and new, to the novation agreement; release of the parties to the original contract from all duties; and creation of a valid and legally enforceable new contract. If an agreement does not have these four elements, it might be a valid contract but it will not constitute a novation.

Agreement of Parties

Agreement of parties to the novation contract is determined by courts based on objective evidence. Parties' explicit consent is sufficient. But even if the parties don't give such explicit consent, courts might imply consent to a novation.

If a party to the original contract knows about creation and execution of the novation and does not object in a timely fashion, courts will often find that that party gives implicit consent.

Contract Requirements

The novation agreement is a new contract, and therefore it must meet all of the requirements of contract law. The parties must mutually assent to the contract, and each party must offer some form of consideration in exchange for the other parties' promises.

A novation contract cannot relate to illegal subject matter (for instance, commission of a crime). And each party may raise any one of a number of contract defences to prove that it should not have to perform its duties under the novation contract.

Delegation Distinguished

Sometimes a party decides to delegate her duties under an existing contract to another party. Although this may resemble subjective novation, the legal effects are very different.

Novation completely removes the original party from duties and rights under the new contract. However, if one party delegates duties to a third party and the third party fails to perform the delegated duties, the original party remains legally liable for that failure. Delegation does not take the original party out of the contract.

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