Novation
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- This article is on the legal term. For the keyboard company, see Novation Digital Music Systems; for the former modem manufacturer, see Novation CAT.
Novation is a term used in contract law and business law to describe the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party. A novation need not be agreed upon by all the parties to the original agreement. The obligee, the person receiving the benefit of the bargain, must only be given notice. The obligor, the party making the novation, must only make the new obligor aware and receive consent from the new obligor. A contract transferred by the novation process transfers all duties and obligations from the original obligor to the new obligor.
A typical example of a novation is where a person has the rights to receive loans from a Bank (Bank A). Bank A can make a novation by asking Bank B if they will accept the duties and liabilities of providing loan payments to the person. If Bank B accepts this novation, (which they would typically do if they owed Bank A something) then the person receiving the loans does NOT have to consent. As a practical matter though, it would be wise to make them aware of this change.
Novation is also used in futures/options trading markets to describe a special situation where the clearing house takes all positions with all the brokers, buying all the brokers sell, and selling all that the brokers buy.
In business, novation is typically the process by which a newly formed corporation assumes the pre-incorporation liabilities incurred by its founders.
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