Novation Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Novation, written in plain English, along with examples of how it is used.

What is Novation?

A contract agreed upon by the concerned parties to replace an old contract with a new one which terminates the old contract.It is done to improvise on the performance level and change the payment strategy or the debtor will be forced to go bankrupt.It is a solution to pay off the debts.\*

History and Meaning of Novation

Novation is a legal term used to refer to a process whereby a new contract is substituted for an old one, and the parties to the old contract are released from their obligations under it. This process is a type of legal agreement in which an existing contract is replaced with a new one that involves different parties or obligations. Novation is used for a variety of reasons, such as to change the payment strategy, terms, or obligations of a contract.

The term "novation" comes from the Latin word "novus," which means "new." It was first used in the 16th century in English law to describe a process whereby a debtor could be released from his or her obligations to a creditor by substituting a new debtor in his or her place. Today, novation is used in a wide range of contexts, including contract law, corporate law, and intellectual property law, to name just a few.

Examples of Novation

  1. A music publishing company sells the rights to one of its songs to another company. As part of the sale, the two companies agree to a novation, in which the new owner of the rights assumes all of the original company's obligations under the contract.

  2. A construction company hires a subcontractor to complete a portion of a project. When the subcontractor has difficulty meeting the terms of the original contract, the two parties agree to a novation, in which the subcontractor is released from the contract and a new subcontractor is hired in their place.

  3. A bank lends money to a borrower under a contract that includes a floating interest rate. When the interest rate drops, the borrower and bank agree to a novation, in which the original contract is replaced with a new one that includes a fixed interest rate.

Legal Terms Similar to Novation

  1. Assignment: A legal transfer of rights or obligations from one party to another, usually without the need for a new contract.

  2. Merger: The combination of two or more companies into a single entity, often resulting in a novation of the contracts held by the original companies.

  3. Amendment: A change or alteration made to an existing contract, often involving modifications to terms or obligations instead of a complete replacement of the old contract.