Novation

What Is Novation?

Novation is a three-party agreement in which one party to an existing contract is replaced by a new party, releasing the original party from further obligations. Unlike assignment, which transfers rights without releasing the assignor's duties, novation fully discharges the original obligor and substitutes a new one in their place.

Required Elements

• A valid existing contract that is being replaced - Agreement of all three parties: the original two and the substituted party - Mutual intent to extinguish the old contract - A new, valid contract supported by fresh consideration - The original obligor is released from liability

Common Uses

Novation is frequently used in business sales, when an acquiring company assumes the seller's contracts; in commercial leases, when a new tenant takes over; and in lending, when a borrower substitutes a new debtor. Without novation, the original party generally remains secondarily liable even after assigning their obligations. Courts require clear evidence that all parties intended to release the original obligor, as silence or acquiescence typically is not enough to find novation.