Novation: When and How Contracts Are Transferred

Updated 12 Mar 2026Content was accurate at the time of publication

A surprise in commercial life: you need to move a contract from one party to another without breaking the deal. Whether you call it novation, a contract transfer, or substitution of party, you need to know when to novate a contract, how a novation deed works, and the practical steps to keep obligations, security and tax treatment intact. This guide explains novation in plain language, shows how it works in practice, contrasts it with assignment, and gives a concise checklist and an annotated precedent to use when preparing or reviewing a novation agreement.

What is novation?

Novation (also called contract novation or substitution of party) is a three-party transaction that replaces one contracting party with another so the original party is discharged and the incoming party takes on the rights and obligations of the original contract. Crucially, novation is not a mere transfer of benefits — it creates a new contractual relationship between the continuing party and the substitute party while extinguishing the original obligations.

Key points:

A novation requires the consent of all parties: the outgoing party, the continuing party and the incoming party.
The outgoing party is typically released from future obligations once the novation takes effect.
The incoming party steps into the shoes of the outgoing party and owes the same contractual duties (unless the novation expressly varies them).
Novation can be effected by a standalone novation deed (preferred) or by a novation clause in a wider agreement.

See related concepts: novated lease, finance lease and assignment for comparison.

How novation works (legal effect and mechanics)

Novation is a consensual tripartite act. The core legal elements are:

Parties: three parties are involved — the original contracting party (A/outgoing), the counterparty who remains (B/continuing) and the incoming substituting party (C/incoming).
Consent: B must consent to releasing A and accepting C. Consent should be unequivocal and is usually documented in writing.
Intention: the documentation must show an intention to extinguish the original contract and create a new one.
Consideration: consideration for the new contract is generally required unless the document is executed as a deed.
Scope: novation can transfer both rights and obligations (full novation) or only part of the contract if agreed (partial novation).

Typical mechanics:

Prepare a novation deed or novation clause in a wider agreement. A deed removes the need for fresh consideration and provides a clearer release.
Specify an effective date and whether accrued rights, past breaches and warranties survive.
Record transitional arrangements (invoicing cut-over, interim performance).
Obtain signatures from all parties, and evidence of corporate authority where relevant.

Practical consequence: once effective, B looks to C for future performance. A should be released but may remain exposed for pre-novation liabilities if the deed preserves indemnities or warranties.

Types of novation

Common forms of novation you will encounter:

Substitution of party (standard novation): A is replaced by C; B consents and A is released.
Substitution with release vs without release: A may be released completely or remain liable as guarantor/indemnitor.
Partial novation: only certain rights or obligations are novated (e.g., specific supply lines).
Back-to-back novation in supply chains: upstream and downstream novations align obligations across a project.
Novation in financial markets: derivatives, loan participations or clearing-house transfers, often subject to regulation.

Novation vs assignment — key differences

Feature	Novation	Assignment
Effect on original party	Original party is discharged (replaced)	Original party generally remains liable unless released
Transfer of obligations	Yes — obligations transfer to new party	Generally no — assignment transfers benefits/rights only
Number of parties required	Three-party consent required	Usually two parties; counterparty consent may be needed for personal rights
Formality	Often executed as a deed for certainty	Can be a simple transfer of rights, subject to contract terms
Use case	Substituting a party (sale of business, outsourcing)	Passing on a receivable or benefit (invoices, receivables)

Use novation when you must transfer both rights and obligations and discharge the original party. Use assignment when you only transfer benefits like receivables and want the original contracting party to remain responsible for performance.

For comparison, see assignment and drafting guidance.

When you should use novation (common use cases)

Novation is commonly used for:

Mergers and acquisitions: transfer of customer or supplier contracts from seller to buyer.
Outsourcing and supplier replacement: substituting a service provider and releasing the original supplier.
Corporate restructures: moving contracts between group entities.
Project contracting: replacing contractors without interrupting client relationships.
Financial markets: clearing and novation of derivative trades.
Asset and equipment finance transfers: portfolio restructures by lenders or lessors (see products such as equipment finance and secured business loans).

Short example: a supplier (A) is acquired by C. The client (B) agrees to a novation so C becomes the supplier and A is released; a novation deed records that C assumes future obligations while preserving rights for past breaches if required.

Execution and practical steps — checklist

A practical novation checklist:

Due diligence:

Identify all contracts, schedules and ancillary documents affected.
Check consent, change-of-control and assignment restrictions.

Corporate authority:

Ensure board resolutions or powers of attorney authorise execution.

Parties and roles:

Confirm legal entity details, ACNs/ABNs and signatory authority.

Documentation:

Draft a novation deed or novation clause with effective date and transitional arrangements.

Consents and notices:

Secure written consent from the continuing party and any third parties (funders, insurers, subcontractors).

Security and PPSR:

Plan transfer, discharge or re-registration of security interests; update PPSR entries.

Tax and duty:

Check GST and stamp duty risk; consult state revenue guides.

Execution:

Use correct signature blocks; witness or execute as a deed if appropriate.

Records:

Exchange executed counterparts, update contract registers and notify operational teams.

Post-novation:

Update billing, bank mandates and insurance certificates; re-register security where necessary.

Keep this checklist in your deal pack and tick items as you move from negotiation to execution to avoid common timing and priority gaps.

Drafting essentials — what to include in a novation agreement

Include these essentials in a novation agreement or deed:

Recitals: identify the original contract, parties, execution dates and reason for novation.
Operative novation clause: clear words of substitution and release.
Release/no-release detail: specify whether the outgoing party is released from past liabilities or remains subject to indemnities.
Warranties: incoming party warranties on capacity, authority and ability to perform.
Indemnities: allocation of risk for pre-novation breaches or misrepresentations.
Effective date and transitional arrangements: invoicing, records, interim performance.
Preservation of accrued rights: confirm survival of accrued claims unless waived.
Consideration: include fresh consideration unless the document is a deed.
PPSR and security: treatment of security interests and any transfer schedules.
GST and tax clause: allocate GST risk and specify whether the transfer is part of a going concern.
Governing law and dispute resolution: specify applicable law and process.
Execution block: suitable signature blocks and witnessing/attestation as required.

Decide whether to use a deed — deeds are common where a conclusive release of the outgoing party is required and where fresh consideration is absent.

Execution formalities & corporate authorisations

Practical tips to avoid execution problems:

Signature blocks:

For companies include ACN and the correct director/company secretary blocks.
For trusts show trustee execution and evidence of trustee authority.

Board minutes/resolutions:

Keep certified copies of resolutions authorising execution.

Electronic execution:

Electronic signatures are generally acceptable under Electronic Transactions Acts, but confirm whether the other party accepts e-signatures and whether deed formalities require wet signatures.

Witnessing:

Where executed as a deed, check local witnessing/attestation rules.

Proof of authority:

Retain evidence of signatory authority (director ID, power of attorney) in your transaction file.

See corporate authority sections for templates and practical steps.

Tax, stamp duty and regulatory considerations

Novation can trigger tax, duty and regulatory consequences. Key flags:

GST:

Determine whether the novation is treated as a supply. If the transfer is part of a sale of business, the special GST rules for supply of a going concern may apply — check ATO guidance.

Stamp duty:

States differ on whether novation triggers stamp duty. Check state revenue guidance before assuming nil duty.

PPSR and security:

A novation may require discharge and re-registration of security interests to preserve priority.

Financial services and derivatives:

Novation of derivative or financial contracts can be subject to ASIC rules and reporting — consult ASIC guidance and clearing-house procedures.

Income tax and CGT:

Consider whether novation creates taxable supplies or capital gains events for any party.

Reliefs and exemptions:

Some corporate reorganisations attract stamp duty or GST relief; confirm eligibility with state revenue and tax advisers.

Always instruct your tax adviser and confirm regulatory implications before completing a novation.

Common pitfalls and how to avoid them

Watch for these recurring issues:

Missing consents: identify required consents early and obtain them in writing.
Inadequate release wording: use explicit release language or a deed to protect the outgoing party.
Overlooking accrued liabilities: be explicit about survival or waiver of pre-novation claims and unpaid invoices.
PPSR lapses: plan timing for discharge and re-registration of security interests to avoid priority gaps.
Stamp duty blind spots: check state rules—don't assume no duty applies.
Authority failures: keep board resolutions and proof of signatory authority on file.
Electronic execution errors: verify deed formalities before relying on e-signatures.

Mitigation: use the checklist above, coordinate legal/tax/commercial teams and treat the novation cut-over as a collective operational event.

Example novation clause / short precedent (annotated)

Below is a concise novation clause you can adapt. This is illustrative only — review with counsel.

Operative clause (short form):

Definitions: defined terms have the same meaning as in the Original Agreement.

Novation:
- (a) With effect from the Effective Date, the Incoming Party is substituted for the Outgoing Party under the Original Agreement.
- (b) The Continuing Party releases the Outgoing Party from its future obligations under the Original Agreement, except for liabilities accrued prior to the Effective Date.
- (c) The Incoming Party agrees to perform all obligations and be bound by all terms of the Original Agreement as if it were the original named party.

Annotations:

"Effective Date": specify exact date/time for cut-over.
"Release": decide whether indemnities or claims for past breaches survive.
Accrued liabilities: confirm treatment of outstanding invoices and claims.
Execution block: include signature blocks for all parties and consider execution as a deed.

For fuller templates and schedules (warranties, GST, security transfer), teams often use a standalone novation deed with a contract schedule listing documents to be novated.

Case law & authoritative guidance (select references)

Authoritative sources and practical guidance:

AGS Legal Briefing: Novation and assignment of contracts — https://www.ags.gov.au/publications/legal-briefing/lb-20170519
ASIC — company changes, execution and reporting guidance — https://asic.gov.au
ATO — GST: supply of a going concern and related guidance — https://www.ato.gov.au
Revenue NSW — stamp duty and transfer guidance — https://www.revenue.nsw.gov.au

Consult AGS and the listed regulator pages for statutory and case references relevant to novation and assignment.

FAQ

Does novation require consideration?

If not executed as a deed, fresh consideration is advisable. Deeds remove the need for consideration.

Can you novate part of a contract?

Yes — partial novation is possible if the parties agree to novate specific rights or obligations.

Do you need to notify customers?

Often yes, especially where consent or change of party affects customer rights; check contractual notice provisions.

What happens to security interests?

Security must be expressly addressed: transfer, replace or re-register security interests on the PPSR to preserve priority.

Can you novate without consent?

No — novation requires the continuing party's consent. If the contract prohibits assignment/transfer, adhere to those terms or obtain waivers.

Is novation the same as assignment?

No — assignment transfers benefits; novation substitutes parties and transfers obligations. See the comparison above.

Key takeaways

Novation is a three-party process that substitutes one contracting party for another and requires consent from all parties. It differs fundamentally from assignment in that it transfers both rights and obligations while releasing the outgoing party. When executing a novation, use a deed for certainty, obtain written consents early, and address tax, stamp duty and security interest implications with professional advisers before completing the transaction.