Alex is Sprintlaw's co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
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As your business grows, relationships change. You might switch suppliers, sell a part of your business, restructure entities in your group, or transfer a long-term service contract to a new provider.
When that happens, you’ll often need a clean way to swap one party to a contract for another without starting from scratch. That’s where novations come in.
In this guide, we’ll explain what a novation is, when to use one, how to do it properly in Australia, the risks to watch out for, and the key documents you’ll want in place to protect your business.
What Is A Novation And When Would A Small Business Use One?
A novation is a three‑party agreement that replaces one party to a contract with a new party, with the consent of all involved. It extinguishes the old contract and creates a new one on the same (or agreed) terms, but with a different party stepping in.
Think of it as a contract “swap” that fully releases the outgoing party from future obligations and transfers those obligations (and usually benefits) to the incoming party.
Common novation scenarios for small businesses
- Business sale: You sell your business and need to transfer customer or supplier contracts to the buyer.
- Group restructure: You move contracts from a sole trader or partnership into your company, or between related entities.
- Outsourcing changes: You replace a subcontractor or service provider mid‑contract, and the client is happy for the new provider to take over.
- Project continuity: A project manager leaves and is replaced by another entity that steps into the contract.
In all these cases, a novation ensures the incoming party takes over rights and obligations going forward, and the outgoing party is released.
Why not just rely on consent emails?
Informal consent (like a helpful email thread) is risky. A properly drafted Deed of Novation clearly sets out the release, transfer of obligations, effective date, warranties, liability position for pre‑existing breaches, and how notices and security interests will be handled. It prevents disputes later about “who’s responsible for what”.
Novation Vs Assignment Vs Variation: What’s The Difference?
These terms are often confused. Here’s the plain‑English version:
- Novation: Replaces one party with another. Requires all parties’ consent. The outgoing party is released from future obligations.
- Assignment: Transfers rights (usually the right to receive payment) to a new party, but not obligations. Typically does not require the other party’s consent unless the contract says so. The original party often remains responsible for performance. Read more about assignment of contracts.
- Variation: Changes certain terms (like price or scope) but keeps the same parties. This can be done by mutual agreement or via a formal document such as a deed or amendment letter. If you need to tweak terms, you may prefer to vary a contract rather than novate it.
If you need to transfer both rights and obligations to a new party and be fully released, a novation is generally the right tool.
How Do You Novate A Contract In Australia?
There are two key paths: rely on a built‑in novation clause (if your original contract has one), or execute a standalone Deed of Novation.
Step 1: Check the original contract
Look for clauses about assignment or novation, consent, and conditions for transfer. Some agreements include a “novation mechanism” that sets out exactly how to change parties, what consents are required, and how liabilities transfer.
If the contract is silent or prohibits assignment/novation, all parties still can agree to novate by entering into a separate deed. But you’ll need the other party’s cooperation.
Step 2: Get the right form of agreement
Use a Deed of Novation rather than an informal letter. In Australia, deeds can be enforceable even without consideration (i.e. without payment), and they signal that the parties intend to be bound. If you’re unsure about deed mechanics, this overview of what a deed is (and why it matters) is a helpful starting point.
Step 3: Draft the key terms
A well‑prepared novation should cover the essentials:
- Parties: Identify the outgoing party, incoming party, and continuing party.
- Effective date: When the incoming party takes over and the outgoing party is released.
- Release and discharge: Confirm the outgoing party is released from future obligations after the effective date.
- Liability for past breaches: Decide who is responsible for breaches or claims that arose before novation (this is often preserved against the outgoing party unless agreed otherwise).
- Accrued rights: Clarify how accrued rights (like unpaid invoices) are handled.
- Security interests: If any PPSR registrations or guarantees exist, specify how they will be handled or replaced.
- Warranties: Include basic warranties (authority, capacity, no undisclosed encumbrances).
- Notices and governing law: Keep these aligned with the original contract, unless you have a good reason to change them.
Step 4: Get consent from all parties
A novation needs everyone’s agreement. That means the continuing party must sign, not just the incoming and outgoing parties.
Step 5: Execute correctly
Deeds have specific signing requirements. If a company is signing, execution under section 127 of the Corporations Act is a common method. You can also sign electronically where permitted-Australian law generally recognises electronic signatures, but check any deed formalities, witness requirements, and the terms of the original contract before you proceed.
Step 6: Implement the change
Notify operational teams, update billing details, arrange handover of information and assets, and lodge or amend any security interests. If government approvals or customer notifications are required (e.g. under a procurement panel), diarise and complete them.
Key Legal Risks And How To Manage Them
Novations are powerful, but a few pitfalls can cause headaches. Here’s how to avoid them.
1) Missing or conditional consent
Risk: The other party refuses consent or attaches conditions that change the deal.
How to manage: Engage early, explain the commercial reasons, and demonstrate continuity (e.g. no service disruption). If consent is likely to be needed in the future, build “consent not to be unreasonably withheld” wording into your customer Terms of Trade or master agreements from day one.
2) Unclear liability for pre‑novation issues
Risk: Disputes about who bears responsibility for defects, delays, or debts that arose before the novation date.
How to manage: Clearly allocate pre‑existing claims and accrued rights in the Deed of Novation. Many parties agree that the outgoing party remains responsible for pre‑novation breaches, while the incoming party is responsible going forward.
3) Security interests and guarantees left behind
Risk: PPSR registrations, bank guarantees or personal guarantees remain tied to the outgoing party, creating enforcement or release issues later.
How to manage: Address these in the deed. Plan for fresh guarantees or security to be provided by the incoming party where needed. Record releases in writing and update registrations promptly.
4) Confidential information and IP handover
Risk: The outgoing party retains access to confidential information or IP after release.
How to manage: Include confidentiality and IP provisions in the novation (or reference the original contract’s continuing obligations). Require return or destruction of confidential materials on or before the effective date.
5) Payment directions and tax settings
Risk: Payments still flow to the outgoing party or are delayed because accounts weren’t updated, or tax withholding settings aren’t aligned.
How to manage: Confirm final invoices, set a clear cut‑over date, update billing systems, and communicate with finance teams so there’s no double‑paying or missed payments.
Which Documents And Clauses Should You Have?
Getting your core contracts and templates right makes novations easier when you need them. Consider the following tools:
- Deed of Novation: A template customised for your business that you can use whenever you need to transfer a contract to or from your entity. This is the safest way to capture consent, releases, and liability allocation.
- Deed of Assignment: Useful if you only need to transfer rights (e.g. to receive payments) without transferring obligations. If obligations also need to move, choose novation instead.
- Consent and transfer clauses in your customer agreements: Build in clauses that allow assignment/novation with consent not to be unreasonably withheld. If you sell or restructure later, you’ll have a smoother path.
- Deed of Variation or amendment letter: Handy when you simply need to adjust price, timelines or scope while keeping the same parties, rather than replacing a party.
- Clear master agreements: Strong, plain‑English Customer Contract or Terms of Trade with well‑drafted transfer and consent clauses can save time and cost when novation becomes necessary.
- Contract review process: Before agreeing to third‑party terms (e.g. enterprise customer contracts), a quick contract review to spot restrictive transfer clauses can prevent roadblocks down the track.
You won’t need every document for every situation. The right choice depends on whether you’re changing parties, changing terms, or both-and how your existing contract is written.
Execution And Formalities For Novations
Even the best draft won’t help if the novation isn’t executed correctly. Keep these practical points in mind.
Deed formalities
In most cases, a novation is documented as a deed. Deeds have special execution requirements and, in some states, witnessing rules. As a general rule, ensure each party signs in accordance with its constitution or governing rules. If a company is signing, following section 127 gives you a straightforward and reliable method.
Electronic signing
Many novations can be signed electronically, and most Australian jurisdictions recognise electronic execution for commercial contracts. Deeds can also be signed electronically in many cases, but you should confirm any jurisdiction‑specific requirements, witness rules, and what the original contract says about signing formalities. For a quick refresher on best practice, see this comparison of wet‑ink and electronic signatures.
Counterparts and delivery
Include a “counterparts” clause so each party can sign separately. State how the deed is delivered and becomes effective (e.g. on the last party’s signature or on a specified date). If your original contracts don’t already include this wording, consider updating your templates.
Authorised signatories
Make sure the people signing are authorised. If you’re dealing with a larger customer, ask for confirmation of authority. This is especially important where there are multiple entities in a group.
Implementation follow‑through
Once signed, circulate the fully‑executed deed, update your contract register, notify relevant teams, and action any attached conditions (like replacing a bank guarantee or transferring a PPSR registration). The best legal documents come undone if the operational steps don’t happen.
Practical Tips To Make Novations Smoother
- Engage early: Give the continuing party time to review and ask questions. Share a short summary of what’s changing and what isn’t.
- Minimise disruption: Present the novation as a “no‑change change” to service and pricing wherever possible, so it’s easy for the other party to say yes.
- Allocate liabilities clearly: Don’t leave past claims or accrued payments ambiguous. Spell them out in the deed.
- Standardise your process: Keep a house template for novations (and assignments) so your team isn’t reinventing the wheel each time.
- Future‑proof your contracts: Build in practical transfer clauses in your standard customer and supplier agreements so you don’t get stuck later.
Key Takeaways
- A novation replaces one party to a contract with another by agreement of all parties, releasing the outgoing party from future obligations.
- Use a novation (not an assignment) when obligations need to transfer-an assignment typically only transfers rights, not responsibilities.
- Document novations with a clear Deed of Novation that covers consent, releases, liability for past breaches, accrued rights, and implementation details.
- Execute properly: consider deed formalities, authority to sign, counterparts, and whether electronic signing is appropriate.
- Plan ahead: strong standard contracts with practical transfer clauses make future novations faster and reduce negotiation friction.
- When in doubt, get tailored advice-transfer mechanics, security interests, and legacy liabilities can be complex and costly if mishandled.
If you’d like help preparing or reviewing a Deed of Novation for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
