Novation means to replace or substitute.Â In the legal world, novation is a way of transferring a party’s rights and obligations under a contract to a third party. Effectively, the third party replaces the original party and acquires the rights and obligations set under the novation agreement.Â Upon novation it is a requirement that the other party should be left in the same position as he was in prior to the novation taking place.
A novation is generally used when parties find that payments or performance cannot be made under the terms of the original agreement, or the debtor will be forced to default or go bankruptcy unless the debt is restructured.Â While voluntary, a novation is often the only way any funds can be paid.
For this type of contract to be enforceable agreement of all parties is required.Â It must be signed by the person assuming the obligation.
When forming a novation contract it is important to note that all the obligations under the contract for the debtor and creditor are very clear.