If you run a business, you may have heard about contracts being ‘novated’. If you need to change the details of your contract, you may need to use a deed of novation. This article will outline:

  • what a deed of novation is;
  • how they are used to transfer rights and obligations between parties;
  • what a deed of novation generally includes; and
  • other legal mechanisms that you may wish to consider.

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.

While the terms of the original contract remain unchanged, the identity of one party is being substituted with a third party. The benefit of this for the other party is that their contract does not change. Instead, they are now simply dealing with a different entity.  

When a contract is novated, the new party now assumes all the legal responsibility under the contract. You must understand what liabilities or obligations you will either be passing on or assuming, as this can have significant consequences for your business.

For example, if your business is changing its name from ‘Tea and Teapots Pty Ltd’ to ‘Teapots ‘R Us Pty Ltd’, you will not need to make any contractual amendments. This is because the actual legal entity is not changing. 

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 transfer these contracts.

What Does it Include?

A deed of novation is usually a straightforward document setting out the changes being made to the contract.

You would expect to see the following inclusions in a deed of novation:

  • novation or effective date – the date from which the novation applies to the parties;
  • 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 – any fees or payments to be made by either party.

Deed vs Assignment

Once you have determined that you need to transfer a contract from your business to another, you need to consider whether a deed is a correct approach.

An assignment is another useful tool when there is a change to the underlying contractual arrangements. Under an assignment, a party will transfer its contractual rights and benefits to another party. In addition, depending on the assignment clause within your contract, you may be able to assign your contractual rights to a third party without the original party needing to enter into the assignment.

Deciding which legal mechanism to use will depend on the type of transfer you are completing. 

For example, if another party is taking over your contractual rights and benefits, and there is no need to make a new contract, this should be an assignment. 

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. It is best to obtain clear legal advice on what approach you should take.

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 that new party’s acceptance of the original contract. The rights and obligations of the other party to the original contract do not change.

For example, if you are operating a business providing flower and chocolate products for delivery, and the chocolate arm of the business is taking up all your time and resources, you may wish to stop providing the flowers. However, you have a number of existing contracts in place with businesses to supply flowers. Here, rather than terminating these contracts, you can have another flower delivery company take over these contracts for you.

Signing a Deed

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. This signing must be accurately witnessed by someone who is not a party to the deed.

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 is a simple and effective tool to assist you in transferring your rights and obligations to a third party. It is generally a straightforward and simple document setting out the changes to the details in the contract. If you need any assistance drafting a deed of novation, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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