1. About Novation Contracts
2. Novation Agreement Example

A novation contract example may outline typical language and scenarios that happen in novation contracts when one contractual party transfers its obligations to a third party. The other contractual party doesn't change. When drawing up a novation contract, you'll input specific information that pertains to you and any other contractual parties.

About Novation Contracts

Novation contracts transfer one of the contractual party's rights and obligations to another party. The second contracting party remains the same. The new party basically takes the place of the departing entity.

The original contract is then extinguished in a novation. When the third party comes in to take the place of an original party, it takes on the same rights and obligations. Once this substitution happens, the withdrawing party's obligations are discharged, and there's no need for an express release.

Two different novation agreements exist: a standard contract and an ab initio novation contract.

  • In a standard agreement, the new party assumes the existing party's contractual liabilities and rights from some point in time after the contract was originally executed.
  • Under the ab initio document, the new party assumes all historic liabilities and rights.

It's required for all three parties — the transferee, the transferor, and the counterparty (or the other contracting party) — to sign the novation contract.

Certain contractual and legal restrictions on assigning rights, and particularly obligations, under a contract make novation agreements necessary at times. Some major corporate transactions such as acquisitions and mergers often call for a large number of novation agreements.

It's never presumed that novation takes place. The novation contract has to be in writing. If it's not, novation has to be established based on the parties' conduct and actions.

Assigning an agreement isn't equivalent to novation. In an assignment, there's no need for a new agreement when the duties and rights transfer from the assignor to the assignee.

Novation Agreement Example

While your novation agreement will be unique to your situation, the following is an example of what one may look like, including typical contractual language.

Agreement is entered into as of (INSERT DATE) by (INSERT COMPANY NAME “A”), a partnership, organized and operating under the laws of the State of (INSERT STATE NAME), with a principal office in (INSERT LOCATION) (hereinafter known as the "Transferor"; INSERT COMPANY NAME "B"), a corporation organized and operating under the laws of the State of (INSERT STATE NAME), with a principal office in (INSERT LOCATION) (hereinafter known as the "Transferee"); and the UNITED STATES (hereinafter called the "Government").

THE PARTIES AGREE TO THE FOLLOWING:

1. The Government, which is represented by various contracting officers, enters into certain agreements and purchase orders with the Transferor, as set forth in the attached document marked “Exhibit A” to this contract. The term “Contracts” as used here refers to the above contracts and purchase orders outlined in Exhibit A, as well as all other agreements and purchase orders (whether or not payment and performance are complete and releases executed). The term “Contracts” includes all modifications taken under the terms and conditions of these agreements and purchase orders, on or after this agreement's effective date.

2. As of (DATE), the Transferor is transferring the entire portion of its assets to the Transferee. The assets involved in said contract performance, dated (INSERT DATE), between the Transferee and the Transferor.

3. By virtue of the transfer, the Transferee has acquired the entire portion of the assets involved in said contract performance.

4. By virtue of the transfer, the Transferee assumes all liabilities and obligations of the Transferor.

5. The Transferee is fully able to perform all obligations existing under the Contracts.

6. The interest of the Government is to recognize the Transferee as the Contracts' successor party.

7. The Government has filed evidence of the transfer.

Contracts often contain a lot of legalese that isn't always easy to understand. It's very important to understand what you're signing before you agree to a contract's terms. If you need help understanding the various terms and provisions, consult with a legal professional first. This is a good way to ensure you sign only after you know what you're agreeing to.

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