Summary
- A deed of novation transfers one party’s contractual rights, obligations, and liabilities to a third party, with the original contract remaining unchanged.
- All three parties – the outgoing party, the incoming party, and the remaining party – must consent to the novation.
- A deed of novation differs from an assignment and must be signed in wet ink by all parties, witnessed by a non-party.
- This article is a plain-English guide to deeds of novation for Australian business owners, covering key legal considerations under Australian law.
- It has been prepared by LegalVision, a commercial law firm that specialises in advising clients on business contracts and novation.
Tips for Businesses
Identify whether novation or assignment suits your situation before proceeding. Check your existing contracts for novation or assignment clauses. Ensure all three parties consent and sign in wet ink. Clearly document the effective date, release of the outgoing party, and any fees or payments involved in the transfer.
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.
Call 1300 544 755 for urgent assistance.
Otherwise, complete this form, and we will contact you within one business day.
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.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
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.
LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced contract lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 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.
No. You must sign a deed in wet ink – meaning pen on paper – and a non-party must witness the signing.
Yes. All three parties – the outgoing party, the incoming party, and the remaining party – must consent to a deed of novation.
We appreciate your feedback! Request your free consultation now.
