In today’s article we will take a look at the inner workings of a Deed of Novation, as well as the circumstances under which you may need one.

Hypothetical

Over the past eighteen months you have built up a stellar dog-walking business. You used to work as a babysitter and realised that most of the families you worked for had dogs that needed caring for too – they would sit outside looking longingly at you while you kept the kids busy, as if they wanted to join in too!

You enlist the help of a friend to help set up your sparkling, user-friendly website allowing families to book your services on-demand and you use your babysitting contacts to get your first contracts. Word quickly spreads and soon you have your 9.10 labradoodle (3km), 10.15 french bull terrier (1.5km) and 10.35 kelpie (10km) regulars. With your clients booking three months in advance, you hire five additional contractors and your walkers cover the CBD and suburbs. Eighteen months in, you only walk your favourites and let your contractors take care of the rest.

An entrepreneurial friend of yours, Riad, has expressed an interest in getting to know the industry, so you arrange for Riad to take over the contract for one of your medium-sized clients. You consider your options and decide that using a deed of novation might be the best method to transfer the rights under the contract to Riad.

Before deciding to execute a deed of novation, there are a number of key factors to consider:

  • what are the terms of the original agreement?
  • will the novation have any impact on other agreements?
  • On what date will the deed of novation take effect? At signing or at some future point in time?
  • will the novation involve any additional expenses (such as stamp duty) and if so, who will be responsible for paying?

Does the original agreement or contract allow for novation?

Some contracts can expressly exclude a deed of novation. If a contract does not allow the rights of one party to be transferred to another external third party, then using a deed of novation to transfer a party’s rights under a contract may not be possible.

Do all parties agree to the novation?

Before executing a deed of novation, you must gain every party’s consent. This means that the parties to the original agreement, plus the person taking on a party’s rights must agree to the novation. One party to an agreement cannot novate their rights under a contract to a third party without the other side’s consent.

Is novation difficult?

When a contract is novated, the original contracting party must be left in the same position as she or he was in prior to the novation coming into effect. While obtaining the consent of the transferor and the transferee can be relatively easy, obtaining the consent of the original party is more difficult due to the following factors:

  • the original party may not understand the benefit to her or him of having the original contract novated and require extra information about the process, which is time consuming to provide.
  • She or he may need extra assurance to be persuaded that she or he will not be worse off as a result of the novation (this is especially common where the novation transfers service contracts between suppliers).

Conclusion

In summary, if you wish to transfer your rights under a contract to a third party, using a deed of novation to achieve this may be the best option. Before entering into a deed of novation, make sure that you are fully aware of the effect of the deed and that this is the right choice for you. The most important factor to consider is whether all parties have agreed to the deed – each party to the original contract must agree, as well as the person taking on the rights under the contact.

Contact LegalVision’s contract lawyers at 1300 544 755 for a fixed-fee quote and free consultation!

Chloe Sevil

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