What Are Novation Agreements? By Mark Warner At Isnare.com Ezine Articles

A well-drafted Novation Agreement must clearly define the Assignor, the Assignee, the contract at issue for which the Assignee is substituting in for the Assignor, and all other conditions and terms relative to the novation. This first paragraph must expressly state that the Assignor hereby assigns, transfers, conveys and delivers to Assignee, effective as of a certain date ("the Effective Date") Assignor's right, title and interest in, to and under the Assets, subject to any existing liens and encumbrances on the Assets in favor of third-party arising under the terms of the Contract, but free and clear of all other liens and encumbrances.

The Assignee, of course, must accept such assignment and agree to assume, from and after the effective date of the agreement, all of Assignor's rights, duties and obligations in, to, and under the Assets, subject to any liens and encumbrances if favor of the third-party under the contract, but free and clear from all other liens and encumbrances. The agreement must also clearly state that upon such assignment and assumption, Assignor shall be released from all rights, duties, and obligations with respect to the contract, and Assignee agrees to hold Assignor harmless against any obligation to perform any of the assigned duties and obligations included in the contract for which they were originally responsible.

In the next paragraph, all three parties must agree that the Agreement shall constitute a novation of the obligations of Assignor under the Contract, and that all the rights, duties, and obligations of Assignor under the Contract have been extinguished with respect to the Contract to the extent that they have been assigned to and assumed by the Assignee. If applicable, this section should expressly note that all of Assignor's rights, duties and obligations under the contract not expressly assigned and assumed by Assignee shall be retained by Assignor. Here it is important that the third party recognize Assignee as Assignor's "successor-in-interest."

The agreement must also expressly note any consideration being paid by Assignee or to Assignee for the novation, and how the effectuation of that payment will be made. This paragraph should also make clear, if the parties intend, that the assignment shall inure to the benefit of be binding upon the parties hereto and their successors and assigns, and matters herein with respect to the contract shall inure to the benefit of the third-party and its successors and assigns from and after the Effective Date.

The parties may also want to include a general good-faith provision stating that the parties agree that they will take actions reasonably necessary to carry out the matters contemplated by the Agreement. Finally, the parties may want to include a definition or rules of construction paragraph to avoid any confusion over interpretation of the agreement, and possibly severability and governing law provisions as well.

As you can see, a Novation Agreement is a unique type of contract in that it involves at least three parties (Assignor, Assignee, and a Third-Party or Third-Parties with whom the underlying contract is made). A novation agreement must expressly identify the parties, the underlying contract at issue, the effective date of the Agreement, any consideration being paid, and all other relevant terms and conditions. Naturally, it must be signed and duly executed by all affected parties to be effective.

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