What is a Novation Agreement?
To understand what a novation agreement is, let’s first under what is novation? In contract law and business law, novation is an act that facilitates the happening of one of these three things:
- Replacing a party to a contract with a third party
- Replacing an already agreed-upon contractual obligation
- Adding a contractual obligation that is to be performed in the existing contract
Therefore an agreement to carry out such novation is called a novation agreement. When a corporation accepts legal responsibility for a contract, it is called novation. Consent is a must.
What is novation in real estate?
To understand the novation real estate concept, here’s an example. A & B, decide to buy an apartment, put in an offer that is accepted by the seller. Later, the sellers state that they need 5000 dollars more. Here, a novation contract would be needed to change the terms. Mortgage novation is also frequent.
The novation finance concept is also well-known and is used for risk management.
Types of Novation Agreement
There are three kinds of novation:
- New agreement: Here, the parties remain the same. The same parties enter into a new agreement.
- Expromissio: The agreement remains the same, but the debtor is replaced by a third party and is discharged from the debt.
- Delegation: The debtor remains the same, but the creditor is replaced.
Who Takes the Novation Agreement?
Under the novation law, there are three parties to a novation agreement. All three parties must sign the agreement to indicate their consent.
- The transferee (the one to whom the rights or assets are being transferred, also known as the third party)
- The transferor (the one who transferred the rights or assets also known as the departing party)
- The counterparty (the opposite party in the original contract or the party that continues to be a part of the contract)
The contract is taken by people who want to add a new obligation to their agreement or want to get out of a preexisting one.
Purpose of a Novation Agreement
A novation agreement serves the purpose of providing a new contractual obligation that is agreed upon by all the parties and of replacing a party to a contract with a third party when the performance of a contract has become impossible.
In common law, a contract can be substituted with a new one unless it is consented by all three parties. Situations tend to change with time and may no longer allow him/her to continue performing the obligation. A novation contract releases one party from a contractual obligation and also allows for replacing a clause of the old agreement through a new one. It is a provision for updation and to ensure the performance of a contract.
Key Terms of Novation Agreement
The following are the key terms to a novation agreement:
- The novation contract must be written.
- It should contain the personal details of all the parties.
- If must include the original agreement as an exhibit.
- If a party to a contract is being replaced, it should mention the name of the new party and the list of contractual obligations and rights that are being transferred to the third party.
- It should include the novation date from which the new contractual arrangement shall commence.
Drafting a Novation Agreement
While drafting a novation contract, these guidelines should be kept in mind:
- The language used for drafting the novation contract must be clear.
- Must contain a clause where it states that the transferee is capable of fulfilling the contractual obligations.
- A provision about the fees and costs incurred related to the execution of the agreement must be included. Who will bear the costs must be mentioned.
- It must mention the governing law for the contract.
- It should include the methods of alternative dispute resolution and the place.
- A clause should be drafted, stating what happens to the original agreement.
- It must be mentioned that are the whole of the agreement’s obligations being transferred or just a part.
- It should include the ‘Waiver,’ ‘Entire Agreement,’ ‘Indemnity,’ ‘Severability,’ ‘Force Majeure’ clauses, and a clause that all subcontracts will remain in force.
Negotiation proves to be helpful, especially when there is a change in contractual obligation, as this allows the parties to sit down and reform the contract in a way that suits them all.
Benefits and Drawbacks of the Novation Agreement
- Allows for the performance of a contract that has become impossible to perform.
- Protects the interests of the counterparty.
- Protects the departing party from any future liabilities.
- It adds flexibility to the legal relationship.
- Cannot be executed without the consent of all parties.
- There is a possibility that the third party may not fulfil the obligations of the departing party despite novation, making the exercise futile.
- A time consuming tedious process.
- Usually requires expensive professional legal help.
What Happens in Case of Violation?
When a novation contract is violated by either party, it constitutes a breach of contract. In case of violation, the aggrieved party can opt for any of the five remedies of claiming damages, asking for specific performance, opting for rescission, remission or reformation of the contract.
Novation contracts have been the solution whenever a contract becomes impossible to perform. If referring to an online sample novation agreement does not work, an attorney should be hired to ensure that the new agreement is executed according to the law. Almost every legal professional offers novation services.
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Sample Novation Agreement
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