When it comes to matters made for the corporate, a business contract is like a car that only has a seat for two. The two companies involved are the passengers and the endgame or goal of the contract is their destination. Now, there comes a time when one of the passengers wants out of this car, but they still have not arrived at the destination yet. Well, the other passenger cannot just simply kick them out of the car while it’s moving, can they?
In observing proper business partnership manners, the other passenger must park the car, let the outgoing passenger alight safely, and ensure that another passenger will be let in. This careful transition of passengers mirrors the legal process where a company is replaced or substituted by another in an official contract. This substitution is known as novation, and the legal document that validates it is called a novation agreement. You may also see agreement samples.
A novation agreement relinquishes the responsibility and entitlement of one party to another. It serves as a legal piece of proof that the leaving party, the staying party, and the incoming party all agrees with all the substitution going on. Essentially, a novation contract is made to bridge the transition from the old contract of the old parties to the new contract of the new parties. It involves three entities and a main legal provision, and they are the following:
1. Outgoing Party: Originally, there was a certain contract that involved two parties. When one of the parties involved wants to be discharged from the burden of the original contract and pass it on to someone else, this party will be known as the outgoing party in the novation agreement. In some other legal languages, the outgoing party is also known as the transferor or debtor.
2. Continuing Party: The continuing party is one of the original entities involved in the first contract. While the outgoing party leaves and transfers the responsibilities to another party, the continuing party remains. This party is also known as the creditor.
3. Incoming Party: This is the party that will carry the benefits and burden passed on by the outgoing party. The incoming party has the responsibility to perform the contractual obligations under a new contract through a novation agreement.
4. Words of Novation: This pertains to the legal clause which explicitly states what responsibilities and duties are discharged by the outgoing party and are transferred to the incoming party. It also states any contract change that can cause a shift in the dynamics between the incoming party and the continuing party.
1. Accomplish prerequisites of the agreement: Before writing the novation agreement, set a meeting first with all the parties involved. They can all agree on a business term sheet that outlines the transfer of responsibilities and all the provisions that should be involved. This business sheet will be your guide in drafting up the content of the novation agreement.
2. Set the names in the preamble: This part introduces all the parties involved and what particular role they will be fulfilling in the contract. The full name of their company should be stated along with their designation that can be any of the following: “OUTGOING PARTY,” “INCOMING PARTY,” or “CONTINUING PARTY.” Take note that their designation should also be written in all capital letters as they are mentioned throughout the contract.
3. Write the words of novation: Your words of novation are the main part of the agreement, and it has two parts, which are:
4. Add in the general provisions: These are the boilerplate provisions of your choice that you can add to fortify or solidify your novation agreement. Two of the most common general provisions that are added are the jurisdiction clause, which specifies the state of law that your novation agreement will fall under, and the confidentiality provision, which limits the disclosure of information regarding the agreement to only within the parties involved.
5. Don’t forget to put the signature blocks at the end of your document. The signature blocks are where the executive heads of all parties get to sign to certify the validity of the novation agreement. Print their names in bold typeface and then place their position and company below.
The type of novation agreement is determined according to the way it is executed. Most commonly, there are three types, which are the following:
Novation agreements, like other legal agreements, follow the standard sizes of business documents, which are the US legal size (8.5 inches by 14 inches), the US letter size (8.5 inches by 11 inches), and the A4 size (8.27 inches by 11.69 inches). When it comes to length, a novation agreement should only span for about two pages long.
Novation transfers all your rights, benefits, and the burden stated in the contract to another party. It is complete, legally-binding, and requires a new contract to be drafted involving the new parties. On the other hand, an assignment is pretty much the same process that transfers your responsibility to the other party, however, the burden of the original contract will still be held by you as it will still be held in place. It is partial and not binding.
When a certain company cannot find another entity to transfer its rights through novation, a clearinghouse comes in to act as a temporary receiver of the assets and responsibilities until a rightful entity comes up. A clearinghouse is a business agency responsible for this kind of scenarios and acts as an intermediary between a company and its potential receiver.
Various reasons exist to push a company to relinquish its rights and responsibilities to another entity. In the corporate industry where power play dictates business partnerships and affiliations, a novation agreement gets drafted more often than not. Take note, though, that a novation contract may enable the transfer of the deed and responsibilities of an original contractor to a new entity, or add more responsibilities to the incoming party, but it will still maintain the spirit of the original contract.