Novation agreement template

Novation agreements ensure a smooth transition of rights and obligations from one party to another. That's why it's important to get them right first time.

This guide talks about all things novation contract agreement – we even have a free novation agreement template below for you to use as a starting point.

What is a novation contract agreement?

Novation is when a party to a contract transfers their rights, obligations, or liabilities to someone else who wasn’t involved in the original contract

A novation agreement is a legal contract involving three parties. It enables the transfer of rights and responsibilities from one party to another with the full consent of everyone involved.

This means, the party that initially held certain rights and obligations (termed the 'outgoing party' or 'transferor') can pass these on to another party (termed the 'incoming party' or 'transferee').

An example, of novation may be when a small supplier/business changes location and finds their business customer another source to replace them directly.

The most important thing to note here is that the original agreement gets superseded by this new arrangement, effectively forming a fresh contract between the continuing party and the incoming party.

Why are novation agreements important?

Novation agreements are especially important when:

• selling or transferring the ownership of a company or its assets;
• adjusting debt agreements; or
• amending service contracts when outsourcing. 

By ensuring a legal and mutual transfer of obligations and rights, novation agreements reduce potential disputes and enable smoother transitions.

When is a novation agreement required?

A novation agreement comes into play in various situations where it's necessary to transfer the rights and obligations of an existing contract to a new party. Below, we've listed some of the most common scenarios where a novation agreement might be required:

1. Change of service provider: If your business decides to switch service providers, a novation agreement will be crucial to transfer the existing contract from the current service provider to the new one.
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2. Business sale or merger: During the sale, merger, or acquisition of a company, novation contract agreements allow for the smooth transfer of contracts associated with the business from the old owner(s) to the new one(s).
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3. Debt restructuring: In the case of debt restructuring or refinancing, novation agreements can be used to replace the debtor while keeping the remaining terms of the loan intact.
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4. Property lease transfers: When a tenant wants to move out before the end of the lease term, a novation agreement can be used to replace the original tenant with a new one in the lease agreement. (Need a property management agreement template?)
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5. Contractual risk management: If a party to a contract is at risk of not being able to fulfil their contractual obligations, a novation agreement can be used to replace them with a party who can.
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6. Employee role changes: If an employee's role changes significantly, such as a promotion or transfer to another department, a novation agreement can be used to replace the original employment contract with a new one that reflects the new role.

In essence, anytime you need to replace one party in a contract with another, while keeping the rest of the contract intact, you should consider using a novation agreement.

However, it's essential that you obtain legal advice to ensure that a novation agreement is appropriate for your specific circumstances.

What should a novation agreement template include?

A novation agreement must contain specific elements to ensure it is legally valid and to clearly outline the rights and obligations of all parties involved. A novation agreement should include:

1. Identification of parties

‍Clearly identify all three parties involved - the outgoing party (the one transferring the obligations and rights), the incoming party (the one receiving the obligations and rights), and the remaining party (the one whose relationship with the outgoing party will end and begin afresh with the incoming party).

2. Details of the original contract

‍The agreement should specify and reference the original contract that's being replaced. This includes its date, the parties involved, and its essential terms and conditions. The objective is to clearly establish the foundation upon which the novation is occurring.

3. Novation details

‍The agreement should explicitly state that the rights and obligations of the outgoing party are being transferred to the incoming party. The incoming party should accept these obligations and rights, and the remaining party should consent to the replacement of the outgoing party.

4. Release clause

‍There should be a clear statement that the continuing party releases the outgoing party from any future obligations under the original contract. This absolves the outgoing party of any liability for future performance of the contract.

5. Indemnity clause

‍The agreement should include an indemnity clause where the incoming party agrees to indemnify, or compensate, the outgoing party for any losses arising from any breaches of the contract that occur after the novation.

This ensures the outgoing party isn't held responsible for actions of the incoming party after the novation takes place.

6. Governing law

‍Specify the jurisdiction or the legal system that will interpret the novation agreement and manage any disputes that may arise. This is often the same jurisdiction as the one specified in the original contract.

7. Execution details

‍Finally, the agreement should contain a place for all parties to sign and date. The signatures indicate all parties' acceptance of the novation agreement.

Remember, these are just the standard elements of a novation agreement. Depending on the circumstances and the jurisdiction, more detailed terms may be required.

Always consult with a legal professional when drafting a novation agreement to ensure it accurately reflects the intent of all parties and complies with applicable laws. After all, novation agreements are versatile and can be used in a wide variety of scenarios. No template will or can be one-size-fits-all.

How do novation agreements typically work?

The creation and management of novation agreements, when handled manually, can be a complex and time-consuming process.

iIt often involves various steps that demand careful attention. Which include:

1. Identifying the need for a novation agreement

‍This is the initial stage of novation. This stages determines if the responsibilities and rights of an existing contract should be transferred from one party to another or not.

This usually involves a lot of consideration and a discussion with various stakeholders to decide which course of action to take.

2. Consulting with legal teams

Consulting with your in-house legal team is crucial to making sure you understand the nuances of novation and the implications of the new arrangement. Missing this important step may land you in difficulty later down the line.

3. Drafting the novation agreement

Once you've established how you want the novation to work, you need to draft the novation agreement. How you do this varies depending on whether you have a novation agreement template in place or not.

If you do, you'll need to populate and edit the novation agreement template manually to tailor it to your specific needs. This involves describing the original contract, the parties involved, and the exact obligations and rights being transferred.

But if you don't have a novation agreement template to hand, you'll need to ask your legal team to draft one from scratch for you. This can take a while given that legal teams often report feeling buried in low value work.

4. Reviewing and negotiation

‍This stage often involves multiple rounds of review and amendments to ensure all parties are satisfied with the terms of the agreement.

This is a repetitive process that happens across multiple different tools, with redlines, comments and suggestions bouncing back and forth via email and across new versions of the novation agreement.

5. Signing the agreement

‍After extensive reviews and negotiations, the agreement is manually signed by each party, thereby cementing the terms legally.

Traditionally, the novation agreement would be signed in wet ink. However, it's often signed using an electronic signature tool today since this gives parties the freedom to sign contracts online.

6. Post-signature contract management

‍After the agreement is signed, it needs to be managed. This ranges from monitoring the compliance of the incoming party with the transferred obligations and ensuring the outgoing party is released from their obligations to manually tracking any breaches or disputes that might arise.

This post-signature contract management process is completed through physical filing systems or spreadsheets, which can be challenging to keep organized and updated.

How can Juro help to manage your novation agreement template?

1. Automated contract drafting

We can help. Juro enables you to automate your novation agreement templates, simplifying the contract drafting process. The platform's intuitive editor allows parties to generate novation agreements in seconds using automated contract templates.

2. Collaborative review and negotiation

‍Juro offers a collaborative workspace where contract terms can be discussed, negotiated, and agreed upon in real-time - all within your browser. This eliminates the need for lengthy email threads, reduces miscommunication, and accelerates the agreement process.

3. Electronic signing

Juro's native electronic signature enables signatories to sign novation agreements on any device, rather than them having to be present in-person to sign the contract in wet ink.

Not only is this convenient, but it also speeds up the signing process considerably compared to manual signing.

4. Secure storage and tracking

‍Juro's software keeps all your contracts in one place, ensuring that monitoring contract compliance, tracking obligations, and managing potential disputes is made easier and more efficient.

Juro also integrates seamlessly with platforms you already use, like Salesforce, Google Drive, and Slack, enabling data to move seamlessly between platforms.

5. Automated reminders and notifications

‍Juro takes the task of manually remembering key dates and actions off your shoulders by providing automatic reminders and notifications for your novation agreements.

Automate your Novation Agreement with Juro

To find out more about Juro and how it empowers businesses to create, agree, update and manage contracts more efficiently, hit the button below.