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What is a Deed of Novation?

Deeds of novation are fundamental instruments within the commercial and legal framework in Australia. They allow the seamless replacement of one party to a contract with another, effectively extinguishing the original agreement and creating a new one while maintaining continuity of the contractual obligations and rights.  

These instruments are widely utilised in business mergers, acquisitions, corporate restructuring, and service contract arrangements. This makes them a critical tool for mitigating risks and ensuring legal clarity during transitions.

In this article, our contract lawyer discusses deeds of novation under Australian law. 

Key Legal Takeaways

  • Novation Overview: A deed of novation replaces a contracting party, extinguishing the original agreement and creating a new contract with revised parties.  
  • Consent Requirement: Legally applicable novation requires the explicit and written consent of all parties.  
  • Applications: Primarily used in business sales, corporate reorganisations, and service contracts involving a business change.  
  • Risk Areas: Double liability, accidental waiver of claims, errors in terms or amounts, and insurance gaps.  
  • Execution Standards: Proper drafting and execution (in compliance with specific legislative requirements under Australian law) are paramount to negating financial and legal exposure. 
deeds of novation

What is a Deed of Novation?

A deed of novation refers to a legally binding instrument that facilitates replacing one party to an existing contract with a new party.  

Unlike an assignment, which transfers only rights, a novation involves the transfer of both rights and obligations.  

Once the novation is completed, the outgoing party is released from its contractual obligations and liabilities, while the incoming party steps into its position as if it were originally part of the agreement. 

Key Characteristics of Deeds of Novation

  • Consent of All Parties: All three stakeholders (the outgoing, incoming, and remaining original party) must approve the substitution and agree on terms explicitly. This requirement is consistent with general contract law principles.  
  • Enforceability Without Consideration: The deed of novation is enforceable without consideration under Australian law as it is executed as a deed. This reflects the principle that deeds do not require contractual consideration.  
  • Intentions Set Out Clearly: The document must explicitly outline the intention to extinguish the original agreement and replace it with a new legal arrangement. Ambiguity in wording may render the deed legally void or ineffective. 

Common Applications of Deeds of Novation in Australian Transactions

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. 

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. 

Service and Outsourcing Agreements

In sectors such as construction or IT, parties contracted to perform services may wish to transfer their obligations and rights to another entity (e.g., subcontractors). A deed of novation ensures the transferring party is released from liability while maintaining ongoing obligations. 

Key Legal Risks to Address in Drafting a Deed of Novation

  • Potential Double Liability: If the deed does not include reciprocal releases or is poorly worded, the outgoing party may remain liable for obligations, resulting in undesirable financial or legal exposure. 
  • Waiver of Claims: Ambiguous clauses may inadvertently waive a party’s claims for pre-existing breaches or debts under the original contract. Careful review of indemnities and warranty language is critical. 
  • Financial Misstatements or Ambiguities: Errors in computational amounts, financial terms, or contractual references in the deed may create disputes between parties about rights and obligations post-novation. 
  • Insurance Gaps and Related Liabilities: Outgoing parties risking indemnities or other insurance coverage without addressing this issue in novation clauses may create unintended liabilities. 
deed of novation

Mitigating Risks: Recommendations

  • Verify Financial Data: All contractual amounts, schedules, and monetary terms should be carefully verified.  
  • Reciprocal Releases: Ensure that the deed incorporates clear releases so that the substituted party (outgoing) is discharged fully from future liabilities.  
  • Defined Obligations and Dates: Clearly document the respective rights, obligations, and liabilities before and after the novation date.  
  • Independent Third-Party Verification (if applicable): Any warranties or indemnities should undergo legal and financial examination. 

Elements Essential to a Deed of Novation under Australian Law

  • Label the document as a “Deed of Novation.”  
  • Properly identify all three parties (e.g., outgoing party, incoming party, and the continuing original party).  

The deed must provide background information, including:  

  • The original contract’s date and significant points.  
  • A statement of intention to replace one party with another. 

Detailed obligations and changes before, during, and after the novation must be addressed, such as:  

  • The discharge of the outgoing party’s obligations.  
  • Assumption of obligations by the incoming party. 
  • A reciprocal release clause to discharge the outgoing party from ongoing liabilities while binding the incoming party to all obligations for post-novation performance.  

Signatures are required as follows:  

  • For Companies: Must comply with Section 127(1) of the Corporations Act 2001 (Cth)—either two directors, one director and a company secretary, or a sole director in the case of sole proprietary entities.  
  • For Individuals: The individual must sign, although a witness is no longer required under Australian law. 

FAQs

How is novation distinct from assignment?

Novation replaces both rights and obligations, extinguishing the original contract. In contrast, an assignment primarily transfers rights only, with obligations remaining unchanged 

No. Under Australian law, a deed does not require consideration, unlike typical contracts, if properly drafted and executed.

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.  

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.

Yes. Deeds of novation are commonly applied in Australian practices involving corporate transactions, service continuity, and major asset or business transfers.

About the Author

Farrah Motley
Director of Prosper Law. Farrah founded Prosper online law firm in 2021. She wanted to create a better way of doing legal work and a better experience for customers of legal services.

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