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:

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

Party Roles

| Party | Role | |---|---| | Original Obligor | Exiting party; receives full release on effective date | | Continuing Obligee | Remaining party; consents to substitution and releases Original Obligor | | Incoming Obligor | Substituted party; assumes all future rights and obligations |

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

| Party | Key Reps | |---|---| | All parties | Authority, power, no violation of law or other agreements | | Original Obligor + Continuing Obligee | Contract valid and in force; no undisclosed amendments, defaults, or litigation | | Incoming Obligor | Reviewed all terms; has financial resources, licenses, capability to perform; completed diligence; obtained required consents and approvals |

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

| Indemnifying Party | Scope | |---|---| | Incoming Obligor | Post-effective date performance or non-performance losses | | Original Obligor | Pre-effective date breaches and violations (unless disclosed and accepted) |

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