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Dear Sir or Madam,
We refer to the contract between (the Remaining Party) and (the Outgoing Party), for dated (the Original Agreement).
, the Outgoing Party proposes to novate its rights and obligations under the Original Agreement to
Yours faithfully,
We agree to the transfer of the Original Agreement to with effect from the Effective Date on the terms set out above.
and
This Novation Agreement template covers:
how the novation will take place
who the three parties to the Agreement are
the reason for novation
identifying the original contract
indemnities (optional)
when the novation begins
the Agreement’s jurisdiction
You will need a Novation Agreement if you want to transfer your obligations and rights under a contract to a new party (or if another party is transferring their obligations and rights to you).
Novation Agreements commonly form part of asset purchase transactions (ie when a party buys a selection of another party’s assets). In this context, the purchasing party may use Novation Agreements to take over some or all of the selling party’s contracts with third parties. Alternatively, a novation may stand alone (ie a one-off novation).
For more information, read Novating a contract.
There must be three parties to a Novation Agreement in order for a novation to be effective. The parties to a Novation Agreement are sometimes referred to as:
the outgoing party - one of the original parties to the Agreement, which is transferring its rights and obligations under it
the incoming party - the party that was not one of the original parties to the Agreement, which is being introduced to replace one of the original parties to the Agreement
the remaining party - the other original party to the Agreement, which will remain party to it. This party needs to agree to the novation
An assignment of a contract transfers the benefits from one party to another party. However, the obligations and burdens of the contract are not transferred. The parties to the original contract do not change in an assignment - the contract remains in place. Only the person who is to receive the benefits from the contract is changed. For more information, read Assigning a contract.
A novation will create a new contractual relationship between two parties (ie the original contract is ended and a new one is formed). The new party effectively replaces one of the parties to the contract. All benefits and burdens under the original contract are transferred to this new party. For more information, read Novating a contract.
The benefit is the value received (or the value that a party has a right to receive) from a contract. This could be, for example, in the form of money or the benefit of a service.
The burden is what one party will be obliged to do in order to fulfil the contract. This could be paying for a service or goods or performing a service.
An indemnity is one party’s contractual obligation to compensate another for losses incurred due to the acts of the indemnitor (ie the party making the indemnity) or any other party. For example, a promise to compensate for any losses caused if the indemnitor breaches a provision of the relevant contract. For more information, read Indemnity.
Indemnities are commonly (but not automatically) included in Novation Agreements. You may choose to add two indemnities to this Agreement:
an indemnity from the outgoing party indemnifying the incoming party against losses, damages or costs connected to any liabilities and obligations the incoming party agrees to take over, for losses connected with conduct occurring before the novation
an indemnity from the incoming party indemnifying the outgoing party against losses, damages or costs connected to any liabilities that the outgoing party retains, for losses connected with conduct occurring after the novation
These indemnities function as safety nets for the parties so they can feel confident that, if issues relevant to the contract arise which they shouldn’t be responsible for, they can pursue financial compensation from the party that should be responsible.
In this Novation Agreement, the outgoing party and the remaining party agree to release each other from any liability and claims in respect of the original contract, on or after the date the Novation Agreement is signed.
Making your Novation Agreement online is simple. Just answer a few questions and Rocket Lawyer will build your document for you. When you have all the information about the contracts and parties prepared in advance, creating your document is a quick and easy process.
You’ll need the following information:
Parties
What are the remaining party’s, the outgoing party’s, and the incoming party’s details? You’ll need their:
Address.
Business’ legal structure.
Signatory, if it’s a company or a partnership (ie the person who will sign the Agreement on the company’s or partnership’s behalf).
Company number, for any parties that are companies.
Who is the incoming party’s main contact? This is the person to whom correspondence relating to the original contract should be sent, if necessary, by the remaining party.
The contract
On what date was the original contract signed?
Will you attach a copy of the original contract to your Novation Agreement?
What was the original contract’s main purpose? This may be the sale of goods, the supply of services, the payment of a debt, or another purpose (eg distributing goods).
The novation
On what date is the Novation Agreement being sent?
On what date will the Agreement start?
Why are you novating the contract? Due to an internal reorganisation or for other reasons (eg a recent merger)?
Which indemnities will parties offer under your Novation Agreement:
Will the outgoing party indemnify the incoming party?
Will the incoming party indemnify the outgoing party?
Governing law
Novation Agreements set out the transfer of the benefits and burdens of a contract to a new party, creating a new contract on essentially the same terms. To do this, this Novation Agreement template includes sections covering:
Heading the letter
The Novation Agreement is structured as a letter addressed to the remaining party. Therefore, it starts by identifying and addressing this party.
Transfer of agreement
This section introduces the intended novation. First, it clearly identifies the original contract that the Novation Agreement applies to by noting its date, parties, and purpose.
It then states that novation of this (ie the original) contract is being proposed and why.
Novation, transfer and release
This section contains the key terms setting out the novation that’s to take place. It explains that the rights and obligations (ie benefits and burdens) of the outgoing party are being transferred to the incoming party under a new contract on the same terms as the original contract.
It includes a term setting out the remaining party’s consent to the novation and their promise to retain their obligations (and benefits) under the contract.
It ends the remaining party and the outgoing party’s obligations to each other under the contract and contains an agreement by these two parties to release each other from any claims (eg contract legal claims) that may arise in future.
Finally, it explains that the remaining party should only deal with the incoming party in future, and provides a key contact.
Crucially, this section sets out the date that the Novation Agreement is to be effective from. This is the date from which the terms of this section (and the rest of the Agreement) must be followed.
Pre-effective date claims
This section ensures that the outgoing party and the remaining party may still pursue any legal claims related to the original contract after the novation has taken effect, if the basis of these claims arose before the novation came into effect.
Indemnities
This section will appear if you choose to include one or both indemnities. It sets out which parties agree to indemnify which other parties for losses caused in relation to the original contract (eg the outgoing party indemnifying the incoming party against losses caused by conduct related to the contract that takes place before the novation).
Third party rights
The third party rights section excludes the Contracts (Rights of Third Parties) Act 1999 (in England and Wales) or the Contract (Third Party Rights) (Scotland) Act 2017 (in Scotland) from applying to this Novation Agreement as far as legally possible.
This essentially means that third parties (ie parties who aren’t a part of this Novation Agreement) cannot enforce its provisions if a breach of contract occurs - as these Acts would otherwise allow in certain circumstances.
Governing law
This section explains which country’s legal system must be used to resolve any disputes (ie the contract’s ‘jurisdiction’). This is necessary as the legal systems of England and Wales and of Scotland are different.
Signatures
The Novation Agreement ends with space for all three parties to sign and date the Agreement. Remember, all three parties must agree for a novation to be effective.
If you want your Novation Agreement to include further or more detailed provisions, you can edit your document. However, if you do this, you may want a lawyer to review the document for you (or to make the changes for you) to make sure that your modified Novation Agreement complies with all relevant laws and meets your specific needs. Use Rocket Lawyer’s Ask a lawyer service for assistance.
Consider whether assigning your contract may be more appropriate
You may choose to assign the benefits of a contract to a new party, instead of novating to transfer the benefits and burdens to them. Businesses that assign a contract may also transfer the obligations of the contract in another way. For example, they (the party who assigned their benefits to the new business) may subcontract the assignee (ie the business who’s been assigned the benefits) to perform their obligations under the contract too.
Using assignment rather than novation may be a more desirable option in certain circumstances. For example, if you’re the remaining party and you’re unsure if you trust the incoming party to perform their obligations under the contract, you might prefer assignment to novation so that the party assigning the contract to another is still responsible for ensuring the contract is performed.
You can Ask a lawyer if you’d like help working out which option is right for your contract.
Understand when to seek advice from a lawyer
In some circumstances, it’s good practice to Ask a lawyer for advice to ensure that you’re complying with the law and that you are well protected from risks when novating a contract. You should consider asking for advice if:
there is no consideration from one of the parties (you may still be able to novate, but you may need to use a deed)
you want to execute the agreement as a deed
you want to draft bespoke terms in a Novation Agreement
you want to make a Novation Agreement as part of an asset purchase and you’re unsure how to proceed
