What is novation?

Three parties are involved: the original contracting party going out, the counterparty who stays in, and the new party coming in. The continuing party must agree to release the outgoing party and accept the incoming one, and the paperwork must show an intention to extinguish the original contract and create a new one on the same terms. Novation can cover the whole contract or, if everyone agrees, only part of it.

In practice the parties sign a standalone novation deed or a novation clause in a wider agreement. The document sets an effective date, says whether accrued rights, past breaches and warranties survive, and records transitional arrangements such as invoicing cut-over and interim performance. Once it takes effect, the continuing party looks to the incoming party for future performance. The outgoing party is released for the future but may stay exposed for pre-novation liabilities if the deed preserves indemnities or warranties.

The two are often confused, but they do different jobs. An assignment transfers benefits or rights, such as the right to be paid under an invoice, and the original party generally stays liable for performance unless expressly released. Novation substitutes the party itself, so obligations move across and the outgoing party is discharged. Assignment can often be done between two parties as a simple transfer, while novation always needs three-party consent and is commonly executed as a deed for certainty.

Use novation when you need to move both rights and obligations and release the original party, for example on a sale of business or when replacing a supplier. Use assignment when you only want to pass on a benefit, such as receivables, and the original party should remain responsible.

Novation appears wherever a contract has to change hands without breaking the deal: mergers and acquisitions, where customer and supplier contracts move from seller to buyer; outsourcing, where one service provider is swapped for another; corporate restructures that shift contracts between group entities; project work where a contractor is replaced mid-job; and financial markets, where derivative trades are novated through a clearing house. In asset and equipment finance, lenders and lessors novate agreements when restructuring portfolios.

Before signing, check for consent, change-of-control and transfer restrictions in the original contract, confirm each entity's ACN or ABN and signatory authority, and secure written consent from any funders, insurers or subcontractors who need to sign off.

A novation can be a supply for GST purposes, and where it forms part of a sale of business the going concern rules may apply, so check the ATO's guidance. States differ on whether a novation attracts stamp duty, and some corporate reorganisations attract relief, so confirm the position with the relevant state revenue office rather than assuming nil duty. Security interests must be transferred, replaced or re-registered on the PPSR to preserve priority, and there may be capital gains consequences for one of the parties. E-signatures are generally acceptable, but confirm whether deed formalities call for wet signatures and witnessing.