A novation process transfers each contract by the mutual agreement of all three parties.Ī design and build contractor in the construction industry transfers a construction contract to a new, substitute contractor. The seller of a business transfers the contracts with their customers and suppliers to the buyer. Michael persuades Peter and Fred to enter into a novation agreement, signed by all three of them, whereby Fred takes over Michael’s obligations to Peter and Fred now deals with Peter in Michael’s place. Michael wants out, but has obligations to both parties. Michael then sells the car to Fred under the same terms.
Let us suppose Michael buys a car from Peter, owing him £5,000 as part of the sale price until Peter obtains a certifcate of authenticity.
Novation is a mechanism where one party transfers all its obligations and rights under a contract to a third party, with the consent of their original counter-party. The legal concepts of novation and assignment have been developed to overcome the restrictions imposed by the doctrine. Statute law has created a few exceptions but they apply rarely. In contract law the principle of privity of contract means that only the parties to a contract have the obligation to fulfill it and the right to enforce it. Assigning when you should novate could leave you in a position of being liable for your original contract when the other party is not liable to perform their obligations. Whilst the difference between assignment and novation is relatively small, it is an essential one. Novation and assignment are ways for someone to transfer their interest in a contract to someone else.
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