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Novation

Novation

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This precedent has been authored by Ilija Vickovich, Lecturer, Macquarie Law School and updated by Dr. Gordon Hughes, Principal, Davies Collison Cave Law.

Introductory note

Novation involves the substitution of one contract with another, with the necessary consent of all parties to both contracts. It is a transaction by which all parties to a contract agree that a new contract is substituted for one that has already been made and involves the extinguishment of one obligation and the creation of a substituted obligation in its place. The novation may involve the same parties, and it may affect only part of the original contract. Where a new party is being introduced, it must generally be a party to the novation agreement.

However, it should be noted that it is possible for a contract to authorise one party to substitute another party in its place without the need for a further tripartite agreement. This may be done where:

• the contract in question clearly and expressly sets out the means for how the pre-approved novation is to take place and for the assumption of liabilities by the new party and the release of the outgoing party; or

• the contract expressly permits the assignment of rights, even if such rights are not otherwise assignable.

It seems then that a party to a contract can prospectively authorise a novation to be made by another party unilaterally and without any further involvement or knowledge of the first party.

Consider the consequences of a permitted novation, eg if one party novated its interest to a $1 shelf company, then consider seeking a guarantee by the outgoing party for the performance by the new company or entity.