Novation is the substitution of a new party or obligation for an old one, usually with the required consent of the affected parties.
In plain language, novation replaces the old arrangement with a new one. It can release an original party if the parties agree to that substitution.
Why it matters
Novation matters because it can change who is bound and who is released. In business sales, financing, leases, and service relationships, parties may need more than an assignment or delegation if they want a clean substitution.
The term is important whenever someone says a contract was transferred and the original party is no longer responsible.
Where it appears
Novation appears in business acquisitions, loan modifications, lease transfers, settlement agreements, vendor substitutions, and contract restructurings.
Practical example
A buyer purchases a service company and the customer agrees that the buyer will replace the seller as the contract party, releasing the seller from future duties. That may be a novation.
How it differs from nearby terms
Novation differs from assignment and delegation. Assignment transfers rights; delegation transfers duties. Novation substitutes a new party or obligation and may release the old one.
It also differs from waiver, which gives up a right rather than replacing a party or obligation.
Related terms
Quick knowledge check
Question: What is the practical effect of novation?
Answer: It substitutes a new party or obligation for an old one, often releasing the original obligation when properly agreed.