Novation Agreement Process: Step-by-Step Guide For Businesses

Big changes sometimes occur during the life cycle of a contract. Cancelling a contract outright can be bad for your reputation and your bottom line. Businesses need to know how to best address a change in circumstances, while also protecting their legal rights. One option is to transfer the "benefits and the burdens" of a contract to another party using a novation agreement. Unlike amending the terms of the original contract, a novation agreement creates a new three-way contract. It terminates the original contract and replaces it with a new one. In this new contract, a third party takes up the rights and obligations of one original party.

What Is a Novation Agreement?

The word "novate" means to replace an old obligation with a new one. In a novation, a new party takes over the rights and obligations of the original party. This transfer releases the original party from its obligations.