What is Novation?
Novation means that a valid existing contract is substituted by a new one, where both parties agree to the change. In most novation situations, one of the original parties in the contract is replaced by a completely new party, who voluntarily takes over the rights and obligations of the original party. Novations are often used in business sales and company takeovers.
How does novation work?
Novation is a legal term that means transferring a contract's rights and duties to another party. Rights are anything that the contract gives, such as payments for work. Duties are anything that the contract requires, such as doing the work. All parties must agree to the transfer.
Canceling a contract can be a hassle for the company, which can cause problems, costs, and damage to reputation. Novations allow another party to take over the contract with the same terms and conditions.
Novations are common in the construction industry, where subcontractors may have multiple jobs simultaneously. They may pass on some jobs to other subcontractors with the client's approval.
Novations are also used when another company sells or takes over a business. The new owner may want to keep the business's contracts, while the other parties want to continue their deals without any changes. Novations make the transition easier.