What Is A Novation Agreement?

A Novation Agreement is a legally binding three way contract which transfers the contractual obligations of one party to a third party, or replaces a contractual obligation with another one. In other words, when a third party enters into the agreement, this agreement will allow the third party to take the place of the departing party.

Novation vs. Assignment   

Key differences between “novation” and “assignment” of contract:

      • A novation, under a novation agreement, will create an entirely new contractual relationship between two parties. The third party steps into the shoes of the party the he/she will be replacing.
      • Under a novation, benefits and burdens stipulated in the novation agreement will be effectively transferred to the third party.
      • In an assignment, only the benefits and the interests from one party to another are transferred. The obligations and burdens of the contract are not transferred.

After Novation Agreement Signed

Once the novation agreement has been signed by both parties, the outgoing party and the party that remains to the agreement will typically release each other from any liability and claims in regards to the original agreement. The parties may also wish to indemnify each to ensure that: 1) the incoming party regarding any liabilities and obligations the incoming party will be taking over; and by equal measure, 2) the incoming party and also agree indemnify the outgoing party in regards to any liabilities that the outgoing will be retaining.


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