Novation

A novation is the substitution of a new contract or party for an existing one, with the intent to extinguish the original obligation.

• Replaces an existing contract
• Requires mutual agreement of all parties
• Discharges the original obligation
• Creates a new, enforceable contract

• New Party Novation
  • A new party replaces one of the original parties
  • Example: buyer assumes seller’s contract and seller is released

• New Contract Novation
  • Original parties remain, but the contract terms are replaced

• Novation
  • Original party is released from liability
  • Requires consent of all parties

• Assignment
  • Original party remains liable
  • Transfers rights, not obligations

• Seller is released from a loan when lender approves a new buyer as the obligor

• Without clear intent, a transfer is presumed to be an assignment, not a novation