Novation Agreement (Malaysia)
NOVATION AGREEMENT
Contracts Act 1950, Section 62 (Act 136) | Civil Law Act 1956 (Act 67)
THIS NOVATION AGREEMENT is entered into on [Novation Date]
BETWEEN:
(1) [Original Party Name] (the "Original Party");
(2) [Continuing Party Name] (the "Continuing Party"); AND
(3) [New Party Name] of [New Party Address] (the "New Party").
BACKGROUND
A. The Original Party and the Continuing Party are parties to the [Original Contract Name] dated [Original Contract Date] (the "Original Contract").
B. The parties have agreed that the Original Party shall be released from its obligations under the Original Contract with effect from [Effective Date] (the "Effective Date"), and the New Party shall be substituted as a party to the Original Contract in place of the Original Party on and from the Effective Date, pursuant to Section 62 of the Contracts Act 1950 (Act 136).
1. NOVATION
1.1 With effect from the Effective Date, the Original Contract is novated as follows: (a) the New Party is substituted as a party to the Original Contract in place of the Original Party; (b) all rights and obligations of the Original Party under the Original Contract are transferred to and assumed by the New Party; and (c) the Original Contract shall continue in full force and effect between the Continuing Party and the New Party as if the New Party had been a party to the Original Contract from the outset.
2. RELEASE OF ORIGINAL PARTY
2.1 With effect from the Effective Date, the Continuing Party irrevocably and unconditionally releases and discharges the Original Party from all obligations, liabilities, and claims arising under or in connection with the Original Contract from and after the Effective Date.
2.2 Pre-novation obligations: [Pre-Novation Liability]. For the avoidance of doubt, the Original Party's release applies only to post-Effective Date obligations unless otherwise expressly agreed.
3. NEW PARTY'S ASSUMPTION OF OBLIGATIONS
3.1 The New Party hereby: (a) confirms that it has read and understood the terms of the Original Contract; (b) assumes and agrees to be bound by all obligations of the Original Party under the Original Contract from the Effective Date; and (c) agrees to perform all future obligations under the Original Contract as if it had been a party thereto from the date of execution of the Original Contract.
3.2 The Continuing Party accepts the New Party as a substituted party to the Original Contract and agrees that the New Party's performance shall be in full satisfaction of the Original Party's obligations.
4. GOVERNING LAW
4.1 This Agreement is governed by the laws of Malaysia, including the Contracts Act 1950 (Act 136). The parties submit to the non-exclusive jurisdiction of the courts of Malaysia.
Original Party
________________
Signature
Continuing Party
________________
Signature
New Party
________________
Signature
What Is a Novation Agreement (Malaysia)?
A Novation Agreement in Malaysia sets out the rights and obligations the parties agree to be bound by.
Novation in Malaysia is governed by the Contracts Act 1950 (Act 136). Section 62 of the Contracts Act 1950 expressly recognises novation — defined as the substitution of a new contract in place of the original one — as a valid method of discharging an existing contract. The key distinction between novation and assignment is that novation requires the consent of all three parties (including the original counterparty) and completely extinguishes the original party's obligations, whereas assignment transfers rights without requiring the counterparty's consent and does not necessarily release the assignor from liability.
Novation is most commonly used in the context of business transfers and company restructurings — when a company is acquired or its contracts are transferred to a new entity, a Novation Agreement substitutes the new entity as the contracting party in place of the old entity. In Malaysian property transactions, a Novation Agreement may be used when a developer transfers an uncompleted development project to a new developer entity, with the original developer released from its obligations to purchasers under the Sale and Purchase Agreements.
In the banking and finance context, a Novation Agreement is used in loan transfers — when a syndicated loan lender sells its participation to another lender, a novation agreement substitutes the incoming lender as a party to the Loan Agreement, releasing the original lender. The Loan Market Association (LMA) standard form documentation adopted in Malaysian syndicated lending practice uses novation as the primary transfer mechanism.
The legal framework governing the Novation Agreement (Malaysia) in Malaysia draws on several key statutes and regulatory bodies. Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Parties executing a Novation Agreement (Malaysia) in Malaysia should confirm the document reflects current law, including any amendments enacted since the original drafting date. The Companies Act 2016 (Act 777) sets the foundational requirements.
When Do You Need a Novation Agreement (Malaysia)?
A Novation Agreement in Malaysia is used whenever an existing contract party is being completely replaced by a new party with the consent of all parties.
A Novation Agreement is needed when a Malaysian company is acquired by a buyer through a business transfer (as opposed to a share acquisition), and the seller's existing contracts — service agreements, supply contracts, and customer agreements — must be novated to the buyer entity so that the buyer steps into the seller's shoes as the contracting party.
A Novation Agreement is required when a property developer transfers an uncompleted residential or commercial development to a new developer, with the new developer assuming all obligations under existing Sale and Purchase Agreements signed with purchasers, requiring each purchaser's consent to the novation.
A Novation Agreement is needed when a government procurement contract held by a Malaysian company is transferred to a new entity following a corporate restructuring — government contracts often require ministry or government agency approval for novation under the Government Contracts Act 1949 (Act 120).
A Novation Agreement is required in Malaysian construction projects when a main contractor is replaced mid-project — the employer, main contractor, and replacement contractor must execute a novation agreement substituting the replacement contractor under the PAM Contract 2018 or CIDB standard form contract.
A Novation Agreement is needed in syndicated loan transactions when an existing lending bank transfers its loan participation to a new lender under the LMA Loan Transfer Agreement, substituting the new lender as a party to the Facility Agreement.
A Novation Agreement is required when a franchise agreement is transferred from one franchisee to another with the franchisor's consent under the Franchise Act 1998 (Act 590), which requires the franchisor's prior written approval for any assignment or novation of the franchise.
What to Include in Your Novation Agreement (Malaysia)
A Malaysia Novation Agreement must include the following essential components.
Three Parties: Identify all three parties — the original party being released ("Original Party"), the continuing party ("Continuing Party"), and the new incoming party ("New Party"). All three must sign the novation agreement for it to be effective. If any party does not consent, the novation is void.
Original Contract: Precisely identify the contract being novated — full title, parties, date, and any amendments. Attach a copy of the original contract as a schedule if necessary.
Effective Date: State the date from which the novation takes effect. All rights and obligations under the original contract transfer to the New Party from this date.
Release of Original Party: Include a clear and unambiguous release clause — the Continuing Party irrevocably releases and discharges the Original Party from all past, present, and future obligations under the original contract from the effective date. This is the essential legal effect of novation under Section 62 of the Contracts Act 1950 (Act 136).
Assumption by New Party: The New Party expressly assumes all obligations of the Original Party under the novated contract from the effective date and agrees to be bound by all terms of the original contract as if it had been a party from the outset.
Preservation of Existing Rights: Confirm the status of rights and obligations that arose before the effective date — typically, the Original Party retains liability for pre-novation obligations, and the New Party assumes only post-novation obligations.
Third-Party Consents: Identify and obtain any third-party consents required for the novation — for example, regulatory approvals, landlord consents, or government agency approvals.
Stamp Duty: Acknowledge any stamp duty payable under the Stamp Act 1949 (Act 378) on the novation agreement or the novated contract.
Governing Law: Specify Malaysian law under the Contracts Act 1950 (Act 136) and the courts of Malaysia or AIAC arbitration for dispute resolution.
Additional compliance elements for a Novation Agreement (Malaysia) used in Malaysia include: Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Forms-legal.com provides this template as a starting point for Malaysia-compliant documentation.
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year = {2026},
howpublished = {\url{https://forms-legal.com/malaysia/business/contracts/novation-agreement-malaysia}},
note = {Free legal document template. Based on Companies Act 2016 (Act 777)}
}Also available for these jurisdictions:
Frequently Asked Questions
Novation and assignment are two different methods of transferring contractual rights and obligations in Malaysia under the Contracts Act 1950 (Act 136) and the Civil Law Act 1956 (Act 67). Novation replaces the entire original contract with a new one — the original party is completely released from all obligations, the new party steps in with fresh liability, and all three parties (original debtor, original creditor, and new party) must consent. Assignment, by contrast, transfers only rights (not obligations) from the assignor to the assignee under Section 4(3) of the Civil Law Act 1956 — the assignor retains its obligations to the counterparty and remains secondarily liable. The counterparty's consent is not required for a legal assignment, though notice must be given. In practice, where a business is sold as a going concern in Malaysia, novation is preferred because it cleanly transfers both rights and obligations and releases the seller, whereas assignment alone would leave the seller contractually liable.
Yes, all three parties must consent to a Novation Agreement in Malaysia for it to be effective. Section 62 of the Contracts Act 1950 (Act 136) recognises novation as the substitution of a new contract for the original — and a new contract requires the consent of all contracting parties. If the continuing party (creditor) does not consent to releasing the original party and accepting the new party, no novation occurs. This is the fundamental difference from an assignment, which can be made without the counterparty's consent. In commercial practice, obtaining the counterparty's consent is often the most challenging aspect of a novation — for example, a government agency may withhold consent to novating a government procurement contract to an untested new entity, or a bank may condition consent on the new party providing equivalent security. The novation agreement must be signed by all three parties, and counterparty consent cannot be implied.
Whether a Novation Agreement is required when a Malaysian company is acquired depends on the acquisition structure. In a share acquisition — where the buyer acquires the shares of the company — the company itself remains the contracting party on all its existing contracts, so no novation is required (the contracts continue with the same legal entity). In a business or asset acquisition — where the buyer acquires the business assets, employees, and contracts rather than the shares — the contracts are held by the seller entity and must be novated to the buyer entity to transfer them. Without novation, the buyer does not become a party to the seller's contracts. In Malaysia, many government contracts, licensed business agreements, and franchise agreements (under the Franchise Act 1998, Act 590) require the contracting authority's approval before they can be novated, making the novation process a key part of due diligence in asset acquisitions.
The treatment of pre-novation obligations — rights and liabilities arising before the novation effective date — depends on the terms of the Novation Agreement itself. The standard position in Malaysian practice, consistent with Section 62 of the Contracts Act 1950 (Act 136), is that: (a) the Original Party retains liability for all obligations that arose or accrued before the effective date of the novation (pre-novation liabilities); and (b) the New Party assumes responsibility only for obligations arising from the effective date onwards (post-novation obligations). The Continuing Party retains the right to claim against the Original Party for pre-novation breaches. However, the parties can expressly agree in the Novation Agreement to allocate pre-novation obligations differently — for example, the New Party may assume responsibility for all outstanding obligations, both pre- and post-novation, as part of a business acquisition. Clear drafting of the pre-novation obligations clause is critical to avoid disputes after completion.
Yes, a Novation Agreement is commonly used in Malaysian construction contracts when a main contractor is replaced during a project. Under the PAM Contract 2018 (published by the Pertubuhan Arkitek Malaysia) and the CIDB Standard Form of Contract for Building Works (2000), the employer and main contractor may enter into a Novation Agreement with a replacement contractor, substituting the replacement contractor as the main contractor with the employer's consent. The Novation Agreement should address: the status of works completed to date; the new contractor's acceptance of the existing design and specifications; retention monies and variations certified under the original contract; the new contractor's liability for defects in work completed by the original contractor (which should be expressly addressed); and the original contractor's release from post-novation obligations. In Malaysian housing development projects, novation of the developer's obligations to purchasers requires Bank Negara Malaysia's End-Financing banks' consent if the project is financed by bridging loans.
This template is provided for informational purposes only and does not constitute legal advice. Laws vary by jurisdiction and change over time. Consult a qualified attorney for advice specific to your situation.Full disclaimer
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