A deed of novation is a powerful legal tool that allows one party to exit a contract and be replaced by another – without restarting negotiations. It’s commonly used in business sales, corporate restructures, and service transfers.
Understanding how novation works helps businesses and individuals manage risk and maintain continuity when parties change.
In this article, our contract lawyer explains what a deed of novation is, when to use one, and how to avoid costly mistakes.
Key Takeaways
A deed of novation replaces one party in a contract and creates a new legal agreement without disrupting obligations.
All parties must consent in writing, including the original, outgoing, and incoming parties.
Novation is widely used in business sales, corporate restructuring, and contractor agreements.
Legal risks include double liability, accidental waivers, and insurance gaps.
Properly drafted deeds protect all parties and meet enforceability requirements under Australian contract law.
What is a Deed of Novation?
A deed of novation is a legally binding document that substitutes one party to a contract with a new party, transferring both rights and obligations.
This is different from an assignment, which only transfers rights – not obligations.
After novation:
The outgoing party is released from the contract.
The incoming party steps in as if they were part of the original agreement.
The original party continues under the new arrangement.
Legal Requirements of a Deed of Novation in Australia
To be valid and enforceable:
- Consent: All parties must agree in writing.
- No consideration required: A deed (unlike a standard contract) does not need payment or value exchanged.
- Clarity of intention: The document must clearly state that the original agreement is terminated and replaced.
- Execution formalities:
For companies: Sign under section 127 of the Corporations Act 2001 (Cth).
For individuals: Signature must be clear and identifiable.
Why Use a Deed of Novation?
1. Business Sales and Acquisitions
In the acquisition or sale of a business, existing contracts (such as supplier, service, or lease agreements) often need to transfer to the new business owner.
A deed of novation avoids renegotiating each contract, ensuring that the buyer acquires both the benefits and responsibilities of the original owner.
2. Corporate Restructuring and Group Transfers
Internal restructuring or the merger of entities within a corporate group may require transferring contractual responsibilities from one business entity to another.
Deeds of novation simplify this process while avoiding continuity disruptions.
3. Service and Outsourcing Agreements
In construction, IT, or consulting, businesses may outsource work or change providers. Novation lets parties exit contracts cleanly, with the new party (such as a subcontractor) picking up responsibilities.
Key Legal Risks (and How to Avoid Them)
1. Double Liability
If the outgoing party isn’t properly released, they could still be liable. Include a reciprocal release clause.
2. Accidental Waiver of Claims
Poor drafting could waive a party’s right to sue for earlier breaches. Always review indemnities and warranty language.
3. Ambiguity in Financial Terms
Misstated figures or vague dates may trigger disputes. Confirm all monetary and scheduling details before execution.
4. Insurance and Indemnity Gaps
The outgoing party may lose cover if the novation doesn’t address risk allocation. Speak to both your lawyer and insurer before signing.
Learn more about risk allocation in constructions contracts.
Essential Clauses in a Deed of Novation
A well-drafted deed of novation should include:
- The title “Deed of Novation”
- Full legal names of all three parties
- The date and nature of the original contract
- A clause stating the termination of the old contract
- A clause stating the creation of the new contract
- A reciprocal release clause
- Execution blocks compliant with the Corporations Act or for individuals
Learn more on execution clauses and who can sign in our article.
Frequently Asked Questions
How is novation different from assignment?
Novation replaces both rights and obligations, extinguishing the original contract. In contrast, an assignment primarily transfers rights only, with obligations remaining unchanged.
Is consideration required in a deed of novation?
No. Under Australian law, a deed does not require consideration, unlike typical contracts, if properly drafted and executed.
Are electronic signatures valid?
Although wet ink signatures are commonly preferred, electronic signatures can be valid under Australian law (e.g. under the Electronic Transactions Act 1999 (Cth) and state equivalents). However, the nature of the contract and relevant statutory requirements must be carefully reviewed.
What if a party refuses to consent?
If all parties do not consent, the novation is legally unenforceable. Alternative solutions, such as opting for a contract termination or renegotiation, may need to be pursued.
Are deeds of novation common in Australia?
Yes. Deeds of novation are commonly applied in Australian practices involving corporate transactions, service continuity, and major asset or business transfers.
