Novations Law & Legal Definition


A novation is a mutual agreement among all concerned parties to substitute a new contract in place of a valid existing agreement. A novation is often used when the parties find that payments or performance are impossible under the terms of the original agreement, or the debtor will be forced to default or go into bankruptcy unless the debt is restructured. Legacies, mortgages, negotiable instruments, and simple contractual debts may be discharged by novation.

Novation may be accomplished by a substitution of another for one of the parties to the contract, or substitution of the performance to be made under the contract. The effect of a novation that substitutes one party for another is to bind the substituted party to all the terms of the original contract to the same extent as the original party so that the discharged party may not sue or be sued on the original contract. A novation that substitutes one contract for another destroys the original contract.

A novation is "the substitution of a new obligation for an old one, with intent to extinguish the old one, or the substitution of a new debtor for an old one, with the intent to release the latter, or the substitution of a new creditor, with the intent to transfer the rights of the old one to him." G.D. Deal Holdings, Inc. v. Baker Energy, Inc., 501 F. Supp. 2d 914, 919 (W.D. Ky. 2007)