Novate

Novate is a legal term used as a verb to describe the substitution of a party or obligation in a contract, resulting in the extinguishment of the original agreement and the creation of a new one. The related noun is novation. The word derives from Latin novare, to make new.

Core elements of novation include: an existing contract; consent by all involved parties to the substitution; a new contract that replaces the old one; and the discharge of the original obligation and the release of the original party. Because the old contract is extinguished and a new contract is formed, novation differs from simple assignment, which transfers rights or duties without necessarily canceling the original contract.

There are two common forms. True novation occurs when one party is replaced by another and the original contract is terminated, with all parties agreeing to the new arrangement. A contract assignment, by contrast, transfers rights and may not release the original obligor unless expressly agreed. Novation typically requires the consent of all parties to the original contract, though some contexts recognize novation by operation of law, such as corporate restructurings or mergers, where a new entity assumes the obligations.

Practical considerations include formal requirements, which vary by jurisdiction and contract type. Writing is often required or advisable to document the release of the original party and the assumption of obligations by the new party. Parties should ensure that the novation clearly outlines retained or altered terms, security interests, and guarantees to avoid unintended liability.

See also: novation, assignment, contract substitution.