Novation Agreement

Novation Agreement

Tripartite agreement substituting an Incoming Obligor for the Original Obligor with Continuing Obligee consent. Achieves full release—no residual liability for the exiting party.

Prerequisites

Gather before drafting:

1. Original contract — executed copy with all amendments and contract numbers
2. Business rationale — APA, merger docs, board resolutions, or restructuring records
3. Authority docs — org documents, good standing certificates, authorization resolutions (all three parties)
4. Security instruments — guarantees, LCs, performance bonds tied to original contract
5. Incoming Obligor diligence — financials, licenses, permits, operational capability evidence
6. Disclosed defaults — identify all pre-existing breaches before drafting

Party Roles

Drafting Workflow

1. Recitals

• Identify original contract: title, date, number, subject matter, key terms, amendments
• State business rationale (M&A, restructuring, regulatory)
• Declare intent as true novation — not assignment or delegation
• Recite consideration among all three parties

2. Operative Novation Clause

Present-tense operative language must include:

• [ ] Incoming Obligor hereby substituted for Original Obligor in all respects
• [ ] Incoming Obligor assumes all obligations, liabilities, and covenants (pre- and post-effective date)
• [ ] Incoming Obligor succeeds to all rights, benefits, and remedies
• [ ] No continuing liability (primary or secondary) for Original Obligor post-effective date

3. Release Provision

• [ ] Unconditional release for post-effective date obligations
• [ ] Carve-out: pre-existing defaults, accrued claims, and pre-novation breaches excluded from release
• [ ] Continuing Obligee looks solely to Incoming Obligor for future performance

4. Representations and Warranties

5. Conditions Precedent

• [ ] Regulatory/governmental approvals (mandatory for government contracts)
• [ ] Third-party consents required under original contract
• [ ] Insurance or bond evidence from Incoming Obligor
• [ ] Assumption fee or consideration payment
• [ ] Ancillary instrument execution (security agreements, guarantees, IP assignments)

6. Effective Date

• Define precisely: execution date, calendar date, or last-condition-satisfied date
• Require written certificate confirming all conditions met
• Address gap-period obligations between execution and effective date

7. Transitional Provisions

• Original Obligor cooperation: records transfer, introductions, WIP handoff
• Allocate prepayments, deposits, and outstanding invoices at cutoff
• Prorate recurring or periodic payments

8. Ancillary Transfers

• Security instruments: transfer existing or require new from Incoming Obligor
• IP licenses: confirm assumption or replacement
• Regulatory licenses/permits: covenant to obtain before effective date
• UCC filings or perfection steps if collateral transfers

9. Indemnification

Include notice requirements, defense control, cooperation obligations, settlement limits, and survival period.

10. Governing Law and Disputes

• Align governing law with original contract unless domicile/jurisdiction change warrants otherwise
• Address whether original arbitration clause binds Incoming Obligor
• Separate resolution paths: three-party (novation validity) vs. two-party (post-novation performance)

11. Standard Provisions

• [ ] Entire agreement / integration (includes original contract as novated)
• [ ] Amendment requires all three parties' written consent
• [ ] Severability with replacement obligation
• [ ] No-waiver (written only)
• [ ] Counterparts + electronic signatures
• [ ] Notices: addresses, methods, deemed-received timing for all three parties
• [ ] Further assurances covenant
• [ ] Exhibits: original contract, disclosed defaults, ancillary docs, conditions schedule

12. Signature Blocks

• Individuals: signature, printed name, date
• Entities: legal name, "By:" line, signatory name, title (must match authorization), date
• Check notarization/witness/recording requirements (government contracts, real property)

Critical Pitfalls

• Novation ≠ assignment: Use "novation" throughout; never "assignment" or "delegation." Every provision must confirm full discharge of Original Obligor
• Residual liability trap: Language like "guarantee," "backup obligation," or "secondary liability" for Original Obligor converts novation into assignment-with-assumption
• Three-party execution required: A two-party document cannot achieve novation
• Effective date precision: The pre/post liability cutoff is the most legally significant date—define precisely and reference consistently
• Government contracts: FAR 42.12 [VERIFY] governs federal novation; agency consent is mandatory and must be a condition precedent
• E-signature enforceability: Varies by state and contract type; confirm governing jurisdiction requirements