Novation Agreement

 

Novation Agreement

What is 

• Consensual replacement of a contract's party or obligation with a new one.

• Transfers the contractual obligations of one party to a third party in a contract. 

• All parties involved in this type of contract must consent to the changes.

• When a third party enters the agreement, it takes the place of the departing party.

 

Three parties are involved

• The transferee

• The transferor

• The counterparty

General Examples:

1.  Lease - When one tenant signs a lease over to another person, this new tenant is responsible for paying lease charges and is liable for property damage. But with the consent of the Lessor. 

2. Construction industry - A contractor transfers a job to another contractor. But with the consent of the client. 

Difference between Novation and Assignment

Novation	Assignment
Involves 3 parties	Involves Two parties only
Consent of all parties are compulsory	Doesn’t necessarily require the consent of the third party
Transfer obligations as well as rights	Transfers rights only. Therefore the original party can actually held responsible if the assignee doesn’t fulfill the contractual performance

Advantages: 

1.  Protect the sellers from future liabilities. 

2. Learning curve

 

Disadvantages: 

1. Tedious process. 

2. Requires consent of a third party. 

3. Conflict of interest. 

Examples in Indian Railways

• EBR -IF funded works through IRFC 

• Standard novation agreement issued by the Railways with the consent of Ministry of Law and Justice. 

• Tender documents are suitably modified to incorporate the provisions of standard Novation agreement.

 

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