If you run a business, you may have heard about contracts being ‘novated’. Novation can transfer obligations, rights, or liabilities from one party to another under a contract. When selling or purchasing a business or undergoing a business restructure, you may need to use a deed of novation to make sure the existing contractual arrangement can continue smoothly. This article will explain what a deed of novation is, what it includes, and how it may affect your business.
What is a Deed of Novation?
A deed of novation transfers one party’s rights and obligations contained within a contract to another third party.
The terms of the original contract remain the same, but one party is replacing itself with a third party. This benefits the other party because the contract stays the same. They will now work with a different entity.
When you novate a contract, the new party assumes all legal responsibilities. You must understand the liabilities or obligations you will pass on or take on, as this can have significant consequences for your business.
However, if you are closing or selling your business and wish to transfer your existing contracts and obligations to a third party, you will need a deed of novation to do so.
What Does it Include?
A deed of novation is usually a straightforward document that outlines the changes to the contract.
You would expect to see the following inclusions in a deed of novation:
- details of the parties – including the outgoing party, the incoming party and the remaining original party;
- novation or effective date – the date from which the novation applies to the parties;
- novation – the operative clause affecting the novation;
- release – a clause releasing the original party from all performance of the contract from the novation date;
- representations – any representations or warranties made by either party; and
- fees – either party must make or exchange any fees, payments, or other benefits.
Deed vs Assignment
Once you have determined that you need to transfer a contract from one business to another, you should consider whether a deed of novation is the correct approach.
An assignment is another useful tool when the underlying contractual arrangements change. Under an assignment, a party transfers some or all of its contractual rights and benefits to another party. A common example of an assignment is assigning a debt under an agreement to a debt collection agency.
Deciding which legal mechanism to use will depend on the type of transfer you are completing. The original contract may have a clause that covers assignment or novation, and this may help guide your decision.
However, in some circumstances, another party will be taking over your contractual risks, liabilities and obligations. Here, you should use a deed of novation, and all parties need to consent to it.
Deciding which is right for you is entirely dependent on the particular circumstances regarding the changes to your contract. You should always obtain individual legal advice to confirm how you should proceed.
How Does It Affect My Business?
Entering into a deed of novation may be much simpler than terminating a contract and negotiating terms for a new contract. It simply requires transferring the risks, rights and obligations to a third party.
Entering into a deed of novation will affect your business by releasing you from your obligations under a contract and transferring those contractual rights to a new person or business. A deed of novation registers the new party’s acceptance of the original contract. The rights and obligations of the other party to the original contract do not change.
Signing a Deed
A ‘deed’ differs from a ‘contract’ and should not be confused with it. The main difference lies in how each document is properly executed. Generally, you must sign a deed in “wet ink.” This means that deeds cannot be electronically signed and must be signed by each party in pen and on paper. Additionally, a non-party must accurately witness the signing.
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Key Takeaways
If you are selling your business or changing the way your business operates, you might wish to consider a deed of novation. A deed of novation allows you to seamlessly transfer your contractual rights, obligations and liabilities to a third party with all parties’ consent. Whether you are selling your business, restructuring or otherwise refocusing your business, a deed of novation is a simple yet effective way to reorganise your contractual arrangements.
If you have any questions about deeds of novation, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A deed of novation transfers a party’s contract rights and obligations to a third party, allowing the contract to continue unchanged. It ensures smooth transitions during business sales, purchases, or restructures, and manages all legal responsibilities properly.
A deed of novation includes party details (outgoing, incoming, and remaining), effective date of novation, novation clause, release clause, representations and warranties and fees and payment details.
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