Novation

Novation is a legal process by which an agreement or its obligations are replaced with a new contract, typically involving a new party or a new set of obligations that extinguish the original contract. The concept, originating from the Latin novatio meaning renewal, is used in contract law to effect a complete substitution rather than a mere modification or transfer of rights.

A valid novation requires three elements: the original obligor, the original obligee, and a new party who will assume the obligation; the consent of all parties; and the creation of a new contract that discharges the old agreement. Once executed, the original party is released from liability, and the new contract governs the substituted obligations or terms.

Novation is distinct from assignment and delegation. In an assignment, rights under a contract are transferred to a third party but the original party may remain liable unless additional steps are taken. In a delegation, duties are transferred, but the original party often remains liable. A novation, by contrast, involves a full substitution that ends the initial contract and creates a new one among the remaining or new parties.

Common forms include substitution of a debtor (where a new debtor takes on the obligation and the former debtor is released) and substitution of a creditor (where a new creditor is substituted). Novation can be voluntary or may arise by operation of law in cases such as corporate restructurings or mergers.

In practice, novation is frequently used in financing and project agreements to restructure obligations, refinance debt, or reorganize contractual relationships. Some jurisdictions require a written instrument and clear consent of all parties to ensure enforceability.