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Aug 6th, 2022
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How to Shade light in the Novation Agreement

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Novati, as a legal term is derived from the Roman law, in which novatio was of three kindssubstitution of a new debtor (expromissio, or delegatio), of a new creditor (cessio nominum vel actionum), or of a new contract.
Generally, a novation is a legal instrument used to replace one obligation or party with another in a contract. All parties in the original contract must agree to the changes to execute a novation. Once all parties accept it, the novation nullifies and replaces the previous agreement.
A novation agreement transfers both the benefits and the obligations of a contract to a third party. In contrast, an assignment does not transfer the burden of a contract. This means the outgoing party remains liable for any past liabilities incurred before the assignment.
Types of Novations Standard: This novation occurs when two parties agree that new terms must be added to their contract, resulting in a new one. Expromissio: Three parties must be involved in this novation; a transferor, a counterparty, and a transferee. All three must agree to the new terms and make a new contract.
1. Legal Novation takes place by operation of law. 2. Conventional Novation takes place by agreement of the parties.
Novation is covered under Section 62 of the Indian Contract Act, 1872. It is a convenient and simplified process that allows contracting parties to modify the terms of the original agreement and replace the old contract with a new one.
Novation is a mechanism where one party transfers all its obligations and rights under a contract to a third party, with the consent of their original counter-party.
Also, novation is a consensual transfer of rights and obligations that requires all contracting parties to agree and sign the agreement. On the contrary, for an assignment to be completed, it does not require the consent of the new party.
Another classic example is when Company A enters a contract with Company B and a novation is included to ensure that if Company B sells, merges or transfers the core of their business to another company, the new company assumes the obligations and liabilities that Company B has with Company A under the contract.
Consideration (the price paid, whether financial or otherwise, by the new party in return for the contract being novated to it) must be provided for this new contract unless the novation is documented in a deed signed by all three parties.

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