novations

Novation is the substitution of a new contract or party for an existing obligation, resulting in the extinguishment of the original agreement. The term originates from the Latin novatio, meaning renewal. In a novation, all original parties must agree to the change, and the new party assumes the rights and duties of the contract while the original party is released from liability.

Mechanics typically involve a novation agreement that records the substitution and releases the original obligor. The new contract may adopt the same terms or reflect modifications, but the essential effect is that the old contract ends and a fresh contract with the new party begins. Unlike an assignment, which transfers only the right to receive performance while leaving the original contract in place, novation replaces the contract outright.

Novation is commonly used in loans, leases, service agreements, and licenses when a party wishes to replace another in the agreement. For example, a bank may consent to replace Borrower A with Borrower B, releasing A from liability and creating a new loan arrangement with B. In such contexts, the consent of all affected parties and clear documentation are typically required to ensure enforceability.

Legal considerations include jurisdictional rules and the terms of the underlying contract. A novation requires explicit agreement; otherwise, it may be treated as an assignment or a modification. Potential complications include tax consequences, guarantees, or collateral that may need to be amended, and ensuring that all parties understand the release of liability for the original party.