Here is a scenario that may help you understand what a Deed of Novation is and how it operates in a commercial setting. Imagine you’re a small business owner and you base your operations out of a small office space – you even have a coffee machine! In your previous jobs, you always appreciated an employer who kept the workplace clean, safe and tidy and so you hire a cleaner to make sure your employees are able to have the same experience. Brian cleans regularly on a Wednesday and Friday; he’s never late and the office always looks sparkling after Brian has paid a visit.
One Wednesday, you’re in early as usual and meet Brian in the office. Brian lets you know that he is moving interstate and won’t be in to clean anymore, but not to worry – he has found another cleaner who he knows and trusts who will continue to clean your office. The new cleaner will visit on Wednesdays and Fridays (just like Brian) and works on exactly the same conditions; you’re okay with this. What Brian has done is to transfer his rights under the cleaning contract you held with him to another party – a deed of novation.
What is a deed of novation?
Brian has ‘novated’ his rights under the cleaning contract. He is able to do this through a deed of novation; an agreement which transfers one party’s rights and obligations under a contract or agreement to a new third party. The terms of the original agreement remain the same – the only thing that changes is the identity of one party (so instead of Brian, the contract is now held by Thuy).
How does it affect your business?
In the simplest terms, a deed of novation is a way of substituting or switching one party to a valid, binding contract with another party.
There are many reasons why a deed of novation may be used in business, for example:
- a businessperson may wish to get out of a contract. If the businessperson finds a person who is willing to take on the rights and obligations contained in the contract, then using a deed of novation to switch this new person in may be an appropriate cause of action. Brian needed to move interstate and he was lucky enough to know Thuy, who was willing to take on Brian’s obligations in the cleaning contract.
- if a person sells his or her business, there are inevitably contracts which must be transferred to the purchaser of the business. For example, Dana’s organic foodstore has contracts to supply 32 different offices in the CBD with fresh fruit twice weekly. Dana is looking for a change and wants to start her own yoga studio, so she sells her business to Claudio. As part of the business sale, the supply of fruit to the workplaces will continue and Dana and Claudio execute a deed of novation so that Claudio now has the contracts to supply the CBD offices with fruit. The effect of the deed of novation is to release Dana from her obligations under the contracts and to transfer these rights and obligations to Claudio.
Besides releasing one party from their obligations under a contract and transferring these rights to a new person, a deed of novation represents the new party’s acceptance of the terms of the contract. The position of the other party to the contract doesn’t change at all – she or he is simply dealing with a different person or company. All parties to the original agreement need to agree to the deed of novation.
In summary, a deed of novation can be a way for one person to a contract to transfer his r her rights and obligations under a contract because she or he wants to get out of the contract, or they are selling their business or for another reason. Remember that a deed of novation may be appropriate in some circumstances and not others – it’s always best to seek legal advice for what is right for your situation.