Novating a Contract or Purchase Order

In the April 11, 2011 post I talk about the general concepts of assignment and novation. Novation is an activity that excuses an original party to the agreement from future performance obligations.

To actually do a novation you would normally write what is called an assignment, assumption and novation agreement letter that is signed by the three parties involved.For example, if you made an early purchase and did a contract or PO with a Supplier and then wanted to assign and novate that agreement to contractor there would be three parties, you, the supplier and the contractor.

An assignment, assumption and novation agreement would normally include a recitals section that describes what you are assigning and why to show the intent of the parties. It then needs to do three additional things.

You include language that exercises your right to assign agreement or PO to the contractor.Under an assignment you would still remain secondarily liable under that assigned agreement if it isn't novated.To avoid that liability you then include the novation portion where the supplier acknowledges the assignment and agrees that the contract is being assigned and novated to the contractor and that only the contractor will be responsible for performance under that contract in the future, Then to close it, you include language where the party to which the agreement is being assigned (in our example the Contractor) where the Contractor agrees to accept the assignment and assume the responsibility for the full performance of the agreement

If you expect of plan on having to do assignments and novations, in both agreements (using my example the Supplier and Contractor) you need to include those rights otherwise it would be subject to their agreeing to them. In the Supplier's agreement you should include the right to assign the agreement and have it novated (usually subject to some reasonable creditworthiness standard) to a third party. In the contractors agreement you should provide them with advance notice of the contracts that you may assign and novate to them and have them agree that they will accept those assigned and novated contracts or P.O.'s and manage them as their own.

The agreement is then signed by the three parties.

In jurisdictions like New York for there to be a novation it must specifically state that it is a novation.

Assignments and novations are frequently used in construction contracting or any other area where fast tracking programs requires a lot of advance contracts and orders and then requires assigning them.

I also used them frequently in divestitures where I needed to assign contracts and didn't want to have any liability going forward. If you are on the receiving end of an assignment and novation agreement (as happens when companies spin off businesses or sell business to third parties) always make sure that the new party has the assets and resources to meet all the obligations. I've had suppliers want to assign and novate agreement to companies that I had concern about and would refuse to accept the novation aspect. So that it didn't affect my supply
I would go to the new supplier and suggest that we create a duplicate of the current agreement and sign that. In doing that the original company would still be responsible for all liability for purchases we made from them and we only needed to look to the new company for protection for what we purchased from them going forward.

Most company law departments have standard templates that should be used.