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A Novation Agreement is a three-party legal instrument that extinguishes an existing contract between two parties and replaces it with a new contract on identical terms between the incoming party and the remaining original party β completely releasing the outgoing party from all future rights and obligations. Unlike an assignment, which transfers only benefits while leaving the assigning party's obligations in place, a novation achieves a clean break: the outgoing party steps out entirely, the incoming party steps in as if they were an original signatory, and the remaining party consents to the substitution. All three parties must agree and sign for the novation to be legally effective.
Without a properly executed novation agreement, a party exiting a contract retains liability for everything that follows β whether or not they have sold the business, been replaced as a supplier, or restructured their corporate group. Courts have held sellers liable for ongoing customer contracts, departed service providers liable for delivery failures, and outgoing lenders liable for facility drawdowns β all because no valid novation was in place. An incomplete substitution, such as a two-party assignment without the remaining party's consent, leaves the outgoing party exposed and gives the incoming party uncertain standing to enforce the contract. This template gives all three parties a single, clear instrument covering consent, release, transfer of obligations, and allocation of pre-novation liabilities β closing the gaps that informal arrangements leave open.
| If your situation is⦠| Use this template |
|---|---|
| Selling a business and transferring all contracts to the buyer | Novation Agreement (Business Sale) |
| Transferring only benefits of a contract, not obligations | Assignment Agreement |
| Adding a new party to an existing contract without releasing the original | Contract Amendment (Add Party) |
| Replacing a lender in a loan facility with consent of borrower | Loan Transfer and Novation Agreement |
| Substituting a subcontractor on a construction project | Subcontractor Novation Agreement |
| Transferring a service agreement between related corporate entities | Intercompany Novation Agreement |
| Modifying existing contract terms at the same time as novating | Novation and Amendment Agreement |
Why it matters: An assignment transfers benefits but not obligations β the outgoing party remains liable for non-performance. Using the wrong instrument defeats the entire purpose of the novation.
Fix: Ensure the operative clause explicitly transfers both rights and obligations to the incoming party and includes a full release of the outgoing party.
Why it matters: A novation requires the consent of all three parties. A document signed by only two parties is at best an assignment and at worst unenforceable.
Fix: Do not treat the document as effective until all three parties have executed it. Use a signature tracking tool to confirm completion before the novation date.
Why it matters: Without it, both the outgoing and incoming parties may believe the other bears responsibility for pre-novation unpaid invoices, deliveries in transit, or pending claims.
Fix: Conduct a pre-novation reconciliation and explicitly state in the agreement which party is responsible for each category of accrued obligation.
Why it matters: Conflicting governing law between the novation and the original contract can create interpretive gaps β courts may apply different rules to the same underlying obligation.
Fix: Default to the same governing law as the original contract unless there is a specific commercial reason to differ, and note the reason in the recitals.
Why it matters: Many contracts contain clauses requiring counterparty consent before any transfer β proceeding without consent can constitute a breach of the original contract and render the novation void.
Fix: Review the original contract for assignment, change of control, and consent clauses before initiating the novation process, and obtain any required written consents.
Why it matters: If the terms of the original contract are disputed later, the novation agreement alone may not be sufficient to establish what obligations were transferred.
Fix: Attach a complete copy of the original contract (and all amendments) as Schedule A to the novation agreement and reference it expressly in the recitals.
In plain language: Names all three parties in their respective roles and identifies the original contract being novated by date, title, and parties.
WHEREAS, [OUTGOING PARTY] and [REMAINING PARTY] are parties to that certain [CONTRACT TITLE] dated [DATE] ('Original Contract'); and WHEREAS, [OUTGOING PARTY] wishes to transfer all its rights and obligations thereunder to [INCOMING PARTY];
Common mistake: Describing the original contract imprecisely β omitting the date or using a trade name instead of the contract's legal title β which creates ambiguity about which agreement is being novated.
In plain language: Records the remaining party's agreement to accept the incoming party as a substitute and release the outgoing party, which is the cornerstone of a valid novation.
[REMAINING PARTY] hereby consents to the substitution of [INCOMING PARTY] in place of [OUTGOING PARTY] under the Original Contract and agrees to accept [INCOMING PARTY] as its counterparty with effect from the Novation Date.
Common mistake: Obtaining consent after the novation date rather than before or simultaneously β courts may find the novation ineffective if the remaining party's consent was not contemporaneous.
In plain language: Formally transfers all rights, benefits, duties, and liabilities of the outgoing party under the original contract to the incoming party.
With effect from the Novation Date, [INCOMING PARTY] assumes all rights, benefits, obligations, and liabilities of [OUTGOING PARTY] under the Original Contract as if [INCOMING PARTY] had been an original party thereto.
Common mistake: Using language that transfers rights but not obligations, inadvertently creating an assignment rather than a true novation β leaving the outgoing party exposed to residual liability.
In plain language: Discharges the outgoing party from all past, present, and future obligations and liabilities under the original contract from the novation date forward.
[REMAINING PARTY] hereby releases and discharges [OUTGOING PARTY] from all obligations, liabilities, and claims arising under the Original Contract on and after the Novation Date.
Common mistake: Limiting the release to future obligations only β without releasing accrued pre-novation liabilities (where intended), the outgoing party remains exposed to claims for prior breaches.
In plain language: Clarifies how rights and liabilities that arose before the novation date are allocated β either retained by the outgoing party or assumed by the incoming party, depending on the commercial agreement.
The parties agree that [OUTGOING PARTY / INCOMING PARTY] shall be responsible for all obligations and liabilities arising under the Original Contract prior to the Novation Date, including without limitation [SPECIFIC ACCRUED ITEM].
Common mistake: Omitting this clause entirely, leaving both parties uncertain about who bears liability for invoices, deliveries, or breaches that occurred before the novation date.
In plain language: Each party confirms they have the legal authority and capacity to enter the novation agreement and that no consent other than those already obtained is required.
Each party represents and warrants that: (a) it has full power and authority to execute this Agreement; (b) this Agreement constitutes a valid and binding obligation; and (c) no further consent, approval, or authorization is required.
Common mistake: Having a signatory execute on behalf of a corporate entity without confirming board authorization β if the signatory lacked authority, the novation may be voidable.
In plain language: Confirms that all terms of the original contract remain in full force and effect between the incoming party and the remaining party, except as modified by the novation.
Except as expressly modified by this Agreement, all terms, conditions, and provisions of the Original Contract shall continue in full force and effect and shall be binding on [INCOMING PARTY] and [REMAINING PARTY] from the Novation Date.
Common mistake: Failing to attach the original contract as a schedule β if there is a later dispute about what was novated, both parties need the complete original terms on record.
In plain language: Specifies which jurisdiction's law governs the novation agreement and where disputes will be resolved.
This Agreement shall be governed by and construed in accordance with the laws of [STATE / PROVINCE / COUNTRY]. Any dispute arising under this Agreement shall be subject to the exclusive jurisdiction of the courts of [JURISDICTION].
Common mistake: Choosing a governing law different from that of the original contract without a specific reason β inconsistent governing law between the novation and the underlying contract can create interpretive conflicts.
In plain language: States the specific date the novation takes effect and provides signature blocks for all three parties β the novation is not effective without all three signatures.
This Agreement shall take effect on [NOVATION DATE] ('Novation Date'). Executed by the duly authorized representatives of each party as of the date first written above. [OUTGOING PARTY] ______ [INCOMING PARTY] ______ [REMAINING PARTY] ______
Common mistake: Obtaining only two of the three required signatures β a novation requires the consent of all three parties and is ineffective if any one signature is missing.
Enter the full legal name and entity type (e.g., corporation, LLC, partnership, individual) of the outgoing party, incoming party, and remaining party. Confirm each name matches the relevant corporate registry or government ID.
π‘ For business sales, the remaining party is typically the customer or supplier whose contract is being transferred β confirm their legal name hasn't changed since the original contract was signed.
Enter the full title of the original contract, the date it was signed, and the names of the original parties exactly as they appear in that document. If the original contract has been previously amended, reference those amendments too.
π‘ Attach a copy of the original contract (and any amendments) as a schedule to the novation agreement β this eliminates disputes about what terms were transferred.
Choose a specific calendar date for the novation to take effect. For business sales, this is typically the completion or closing date. For lender substitutions, it is usually the date the new facility is drawn.
π‘ The novation date and the execution date can differ β parties often sign in advance and specify a future effective date tied to a closing condition.
Decide whether the incoming party is assuming all liabilities (including pre-novation amounts owed), or only liabilities arising after the novation date. Record the agreed allocation explicitly in the accrued rights clause.
π‘ In a business sale context, the buyer typically assumes post-completion liabilities only β run a reconciliation of open invoices and accrued obligations before the novation date to avoid disputes.
For each company signatory, verify that the person signing holds a title with binding authority (CEO, director, authorized officer) and that no board resolution or additional internal approval is required.
π‘ Request a certified copy of the board resolution or signing authority certificate for the incoming party β they are new to the contract and the remaining party has the most to gain from confirming capacity.
Check whether the original contract requires a third party's consent to transfer β such as a licensor, lender, or regulator. If so, obtain written consent before executing the novation.
π‘ Government contracts and regulated financial agreements frequently require regulatory approval before novation β allow several weeks' lead time and confirm the approval condition in the recitals.
Arrange for the outgoing party, incoming party, and remaining party to all execute the document. Electronic signature is accepted in most jurisdictions; confirm the original contract does not require wet ink.
π‘ Use Business in a Box eSign to collect and timestamp all three signatures in sequence and store the fully executed copy automatically.
Send a fully executed copy to each party and update your contract register to reflect the incoming party as the counterparty going forward. Notify any related systems (ERP, CRM, accounts payable) of the counterparty change.
π‘ If the novated contract is registered (e.g., a construction contract with a performance bond or a lease), check whether the novation must also be registered or endorsed on the original instrument.
A novation agreement is a three-party document that replaces one party in an existing contract with a new party, extinguishing the original party's rights and obligations entirely. All three parties β the outgoing party, the incoming party, and the remaining party β must consent and sign. It differs from an assignment, which transfers benefits only and leaves the outgoing party's obligations in place.
An assignment transfers only the benefits of a contract to a third party; the original party remains liable for obligations. A novation transfers both benefits and obligations and formally releases the outgoing party from all liability. If you want the outgoing party to have no further exposure under the contract, novation is the correct instrument.
Yes. A novation is a consensual substitution and requires the agreement of all three parties β the outgoing party agreeing to be released, the incoming party agreeing to step in, and the remaining party consenting to the substitution. A document signed by only two parties cannot constitute a valid novation in most jurisdictions.
In an asset sale, the buyer acquires the seller's contracts but cannot be bound by them without the counterparty's consent. A novation agreement is used to transfer each material contract β supplier agreements, customer contracts, leases, and licences β to the buyer at closing, releasing the seller from future liability. Assignment clauses in the original contracts must be reviewed first to confirm consent requirements.
Yes, consideration is required to make the novation binding. In many commercial novations, the consideration is the mutual exchange of releases and the incoming party's assumption of obligations, which courts in most common-law jurisdictions accept as sufficient. For caution, some practitioners include a nominal monetary consideration (e.g., $1) explicitly. The original contract's consideration does not carry over automatically.
Unless the novation agreement says otherwise, liabilities that accrued before the novation date typically remain with the outgoing party. The incoming party is generally responsible only for obligations arising after the novation date. The agreement should state the allocation explicitly β particularly for unpaid invoices, pending deliveries, and open warranty claims β to prevent disputes.
A document should never be backdated to show execution on a date earlier than it was actually signed. However, parties may legitimately sign the novation on one date and specify an earlier effective date for the transfer, provided the context is transparent and all parties consent. Backdating to misrepresent the date of execution is fraudulent in all jurisdictions.
Many contracts restrict assignment but do not expressly restrict novation, and courts sometimes treat them differently because novation requires consent of all parties rather than a unilateral transfer. However, broadly worded anti-assignment clauses may be interpreted to cover novation as well. The safest approach is to review the original contract carefully and obtain express written consent from the remaining party regardless of how the restriction is worded.
For straightforward contract transfers β a single supplier agreement or a standard service contract in a business sale β a high-quality template is typically sufficient. Engage a lawyer when the original contract is complex or high-value, when there are regulatory consent requirements, when accrued liabilities are material, or when the transaction involves multiple jurisdictions. A 1β2 hour review typically costs $300β$800 and is worthwhile for any novation involving contracts worth more than $50,000.
An assignment transfers only the benefits of a contract to a third party; the assigning party remains liable for obligations. A novation transfers both benefits and obligations and fully releases the outgoing party. If the outgoing party needs a clean break from all future and, potentially, past liability, novation is the correct instrument β assignment alone is not sufficient.
A contract amendment modifies the terms of an existing agreement between the same two parties β changing price, scope, or dates β without substituting any party. A novation changes who is party to the contract without necessarily changing the underlying terms. Use an amendment when the parties stay the same; use a novation when one party is being replaced.
A business sale agreement governs the overall transfer of a business β assets, liabilities, price, and conditions. A novation agreement is a supporting document used to transfer individual contracts as part of that sale. The business sale agreement creates the obligation to novate; the novation agreement actually effects each transfer with the counterparty's consent.
An assumption agreement records the incoming party's agreement to take on the obligations of the outgoing party, but it is typically a two-party document between the outgoing and incoming parties only. Without the remaining party's consent, the outgoing party is not released. A novation agreement is the three-party instrument that achieves a full, clean substitution.
Asset sales require novating every material contract to the buyer at closing; incomplete novation can leave the seller exposed to ongoing customer and supplier obligations.
Subcontractor substitutions and development entity restructures frequently require novation agreements; performance bonds and security interests must be updated simultaneously.
Lender transfers, loan participations, and derivatives clearing all rely on standardized novation protocols; regulatory approval may be required before the novation is effective.
Software licences and cloud service agreements often restrict transfer and require vendor consent; novation is used in corporate restructures to move IP licences between group entities.
Consulting and advisory firms use novation when a partner retires or a practice group is sold to transfer client engagement letters to the continuing or acquiring firm.
Government contracts typically require formal novation approval from the contracting authority; the process can take weeks and must be initiated well before the planned transfer date.
Novation is governed by common-law contract principles in all US states and generally requires offer, acceptance, and consideration from all three parties. Government contract novations are specifically regulated under FAR Subpart 42.12 and require written approval from the contracting officer before the transfer is effective. Anti-assignment clauses in private contracts are enforceable and should be reviewed before proceeding.
Canadian common-law provinces follow English common-law principles for novation, requiring consent and consideration from all three parties. Quebec applies civil law under the Civil Code of Quebec, where novation (novation) is a recognized concept but the rules differ slightly β notably that Quebec courts may imply novation from the circumstances without a written agreement. Commercial contracts with anti-assignment clauses should be reviewed for provincial variation.
English law is the primary source for novation doctrine and requires that all three parties consent and that fresh consideration exists. Executing a novation as a deed removes the consideration requirement and is common practice for high-value transactions. TUPE (Transfer of Undertakings) regulations apply to employee contracts in business transfers and cannot be novated β they transfer automatically by operation of law.
EU member states apply their own national civil or commercial codes; France, Germany, Spain, and the Netherlands each recognize contract substitution but with varying formality requirements. Under GDPR, if the original contract involves personal data processing, transferring the data processing role to an incoming party requires a new data processing agreement alongside the novation. Cross-border novations should be reviewed under the Rome I Regulation on choice of law.
| Path | Best for | Cost | Time |
|---|---|---|---|
| Use the template | Single-contract transfers in straightforward business sales or supplier substitutions where the contract value is under $50,000 | Free | 30β60 minutes |
| Template + legal review | Multi-contract business sales, lender substitutions, or contracts with regulatory consent requirements | $300β$800 | 1β3 days |
| Custom drafted | High-value transactions, complex accrued liability allocations, government contracts, or multi-jurisdiction transfers involving material IP or regulated activities | $1,500β$5,000+ | 1β2 weeks |
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