California Contract Novation Attorney
Do you need to create a contract novation? At SD Esquire, we help businesses protect their interest by novating agreements. Contact us at email@example.com for more information about our flat fee contract novation drafting service. Our flat fee service starts at $595. Sign up to get started. Review our 100% money back guarantee. Read on to learn more about contract novations.
What is a Contract Novation?
A contract novation is the replacement of an obligation or a party with another. A novation allows the rights and obligations of the contract to be transferred to a third party. The novation agreement must be signed by both of the original parties and the new party. There are three basic types of contract novations: general, expromisso, and delegation.
A general novation is a novation between the two original parties and no one else. It usually involves replacing one obligation with another. For example, Sara owes Jim $500. Sara owns a TV that she was planning on selling worth $500. Sara agrees to give Jim the TV to settle her debt with him as an alternate form of payment. Novations can also be used to restructure debt when the debtor is struggling to make payments. If a debtor is close to declaring bankruptcy, a creditor will be willing to negotiate a novation so the creditor can get some of the original debt repaid.
An expromissio novation replaces the debtor with a new debtor with the creditor’s consent. An example of this would be Katie owes Peter $1000. Peter owes Marcos $1000. Peter tells Katie to pay Marcos the $1000 owed. In exchange, Peter forgives his debt with Katie and the debt to Marcos is satisfied.
The third type of novation is a delegation novation. This type of novation replaces the original creditor with a new creditor.
Novations frequently occur when a company is bought out. When a company is sold, the new company will assume all of the contracts from the old company. This requires multiple novations. If a company is sold that contracts with the Federal Government, the contracts may need to be renegotiated. The Anti-Assignment Clause prohibits assignments of contracts with federal entities. The contract can be novated with the approval of the original contracting agency, but there is no guarantee that the federal agency will agree to the contract with the new company.
Novation vs. Contract Assignment
Novations are similar to assignments, but there are a few main differences. Assignments require an agreement between the assignee and the assignor. Unless the original contract prohibited an assignment or required notification before the contract could be assigned, the original obligor is not a party to the assignment agreement and does not need to be notified. With a novation, the parties to the original contract must sign the novation for the contract to be valid. Another major difference between a novation and an assignment is that with an assignment the original contract still exists. Under a novation, the original contract is extinguished. The parties can no longer sue on the original contract. The novation is a new contract. Like any other contract, a novation requires consideration. Usually the consideration is the discharge of the previous contract. Novations must be in writing, but it may be possible to establish a novation based on the conduct of the parties.