What Is a Novation Clause? How It Works and When to Use One

If your business signs contracts with customers, suppliers or partners, there may come a time when one party needs to be swapped out. Maybe you sell your business and the buyer needs to step into your existing contracts, or you change service providers mid-project and want a clean handover so the client is fully on board.

That’s where a novation clause can save a lot of time and risk. Used correctly, it allows one party to be replaced with another, with all rights and obligations continuing seamlessly. Used poorly, it can create gaps in liability, confusion about who’s responsible for what, and disputes about consent.

In this guide, we’ll explain what a novation clause is, how it differs from assignment, when to use it, the key terms to include, and the practical steps to put a novation into effect in Australia.

What Is Novation (And How Does It Differ From Assignment)?

A novation is a legal mechanism that replaces one party to a contract with a new party, with the other original party’s consent. The original contract is effectively discharged and a new contract is created on the same terms, just with the new party stepping in. The critical point: all rights and obligations move across, and the continuing party agrees to look only to the new party from the effective date.

An assignment, by contrast, transfers a benefit (like a right to be paid) to someone else, but not the burdens (the obligations to perform). In most cases, the original party remains on the hook to perform unless the other party also agrees to a novation.

Practically, if you want a clean substitution of a supplier, contractor or customer without the outgoing party remaining liable, you generally need novation, not assignment. If you only need to transfer a receivable or a limited contractual benefit, assignment may be enough.

For more detail on the transfer of rights without changing the party responsible for obligations, see our overview of Assignment of Contracts.

When Should Your Business Use A Novation Clause?

You won’t need a novation clause in every contract. But adding one at the start can make life much easier when your business evolves. Consider including a novation clause if you anticipate:

• Selling the business or its contracts and needing the buyer to step into your customer and supplier agreements.
• Restructuring within a group of companies and moving contracts between entities (e.g. from a sole trader to a company, or into a holding/subsidiary structure).
• Swapping subcontractors or service providers mid-term with your customer’s consent, so obligations transfer to the new provider.
• Moving leases, licences or long-term service arrangements as part of a broader commercial deal.

Without a clear novation pathway, you may need to negotiate ad hoc three‑party agreements each time, which can slow down transactions or even cause deals to fall over.

Sometimes you’ll implement novation through a standalone document, often called a Deed of Novation. This is common where the original contract doesn’t have an express novation clause, or where you want a formal, one-off instrument to capture consent and releases. If you’re planning a sale or internal restructure and know multiple contracts will need to transfer, getting a simple, reusable Deed of Novation template in place can save time and reduce risk.

What Should A Novation Clause Include?

There’s no single “standard” novation clause. However, strong novation clauses typically cover the following building blocks in plain terms:

1) Consent Mechanism

Novation requires consent from all relevant parties. Your clause should specify who must consent and how:

• Will written notice and the counterparty’s written consent be enough?
• Do you want consent not to be unreasonably withheld, or can the counterparty refuse for any reason?
• Is deemed consent acceptable (for example, if the counterparty doesn’t object within a stated timeframe)? Note that “deemed consent” works best where it’s reasonable and clearly drafted.

2) Effective Date And Continuity

State when the novation takes effect and confirm that the contract continues on the same terms, just with the new party substituted. This avoids arguments about whether a new, unintended set of terms has been created.

3) Release And Discharge

Make it clear that from the effective date, the outgoing party is released from future obligations and the continuing counterparty agrees to look solely to the incoming party. You might also address what happens to pre‑existing liabilities (e.g. they remain with the outgoing party or are taken on by the incoming party). Being explicit here prevents disputes later.

4) Transfer Of Security, Guarantees Or Collateral

If there are bank guarantees, personal guarantees, security interests or bonds supporting the contract, your clause should deal with whether and how they transfer or are replaced. This is a common trap-security backing often doesn’t automatically move with the contract.

If an owner or director has given a personal guarantee for performance or payment, consider how that guarantee will be handled on novation. Our overview of Personal Guarantees highlights the risks if guarantees are left dangling or not expressly released.

5) Practical Handover Aid

It’s good practice to include cooperation commitments around the handover (for example, sharing records, passwords, access credentials, and status reports) so that the incoming party can perform from day one.

6) Costs And Taxes

Specify who pays legal or administrative costs and note any GST implications of the novation (your accountant can advise, but signalling responsibility for tax and duty helps avoid disputes).

7) Execution Method

While a clause may enable novation later, the actual novation will typically be documented in writing and executed by all relevant parties. For company signatories, you may wish to sign under Section 127 of the Corporations Act for added certainty about due execution.

How Do You Put Novation Into Effect? (Step-By-Step)

Even with a novation clause, you still need to follow a simple process to make the substitution legally effective and practically smooth. Here’s a straightforward roadmap.

Step 1: Check The Existing Contract

Confirm the contract actually allows novation. Look for a novation or “transfer” clause and note any conditions, timelines or consent requirements. If your contract doesn’t have one, you can still novate, but you’ll need the counterparty’s agreement via a dedicated document (commonly a deed).

If your contract needs to be amended before novation (for example, to fix an outdated reference or align the term), do that properly. It’s not enough to just agree informally-there are rules about how to Vary a Contract so the changes are binding.

Step 2: Decide On The Right Instrument

There are two common ways to document novation:

• Use the contract’s novation clause (with a short confirmation letter or agreement capturing the details and consent); or
• Execute a standalone Deed of Novation signed by all relevant parties (outgoing party, incoming party, and continuing counterparty).

A deed is often preferred because novation involves releasing one party and imposing obligations on another. Where no fresh payment or “consideration” is given for those promises, a deed can help avoid technical issues about enforceability. If you’re deciding between an agreement and a deed, see our plain-English explainer on what a Deed is and when to use one.

Step 3: Get Clear, Informed Consent

Novation is a three‑way deal. Obtain the continuing counterparty’s written consent, confirm the effective date, and secure any required third‑party consents (for example, from a landlord, financier, or end-customer). Don’t assume consent-document it.

Step 4: Transfer Security And Operational Access

Make sure guarantees, bonds, or security interests are either transferred or replaced as agreed. Operationally, arrange for handover of documents, systems access, and in‑flight deliverables so performance continues without disruption.

Step 5: Execute Properly

Finalise and sign. If companies are parties, consider execution under Section 127 for certainty, or through authorised attorneys/representatives per your internal delegations. If you anticipate multiple novations, having a standardised Deed of Novation template tailored to your business can streamline future transactions.

Step 6: Notify Stakeholders And Update Records

Tell affected stakeholders (customers, suppliers, insurers) about the change. Update invoicing details, bank accounts, contact points, and internal registers so the administrative side matches the legal reality.

Common Pitfalls To Avoid With Novation

Novation is conceptually simple, but several practical issues can trip businesses up. Here’s what to watch for.

Confusing Novation With Assignment

Replacing a party (with burdens and benefits moving) is different from transferring a benefit only. If you only do an assignment when a true substitution is needed, the outgoing party might remain liable. Where a clean swap is the goal, implement novation, not just assignment. If you’re unsure about the difference, revisit Assignment of Contracts versus novation concepts.

Not Getting The Right Consents

Novation without the continuing party’s clear consent won’t stick. And where there are upstream or downstream contracts (for example, a subcontract tied to a head contract), extra consents may be required. Always map dependencies and get consent in writing.

Forgetting About Security, Guarantees Or Insurance

Personal guarantees, bank guarantees, PPSR registrations and insurance arrangements rarely move automatically. If you don’t update or replace them, you could end up unsecured-or worse, with a guarantee still binding the wrong person. If directors or owners have given guarantees, revisit your approach to Personal Guarantees before and during any novation.

Unclear Treatment Of Past Liabilities

Be explicit about who is responsible for breaches or debts that arise before the novation date. If the intention is for the incoming party to take on historical liabilities, say so in black and white. If the outgoing party keeps them, make that clear and consider a settlement or adjustment mechanism.

Not Using The Right Form

Where there’s no fresh consideration (payment) for the promises made as part of the novation, a simple agreement may not be enough. Using a deed is usually safer in that scenario. If you need to transfer rights only (without swapping the obligor), that’s more like a Deed of Assignment-see our overview of Deed of Assignment if that better suits your situation. And if you need to tweak terms as part of the transition, make sure you formally document any variations (here’s more on how to Vary a Contract the right way).

Poor Execution Or Authority

If the document isn’t signed properly by each party (or by someone with the right authority), you risk enforceability issues. For companies, execution under Section 127 or via an authorised attorney can provide certainty.

Sample Structure: What A Novation Clause Might Say

Every business is different, so treat the following as guidance rather than a one‑size‑fits‑all draft. A workable novation clause commonly covers:

• Right to novate: a statement that either party may novate the agreement to a third party, subject to the consent requirements below.
• Consent: consent to novation not to be unreasonably withheld or delayed (or another standard you prefer), with a clear process for requesting and giving consent, and a timeframe for response.
• Effective date and continuity: on the effective date, the contract continues with the incoming party substituted for the outgoing party, on identical terms unless otherwise agreed in writing.
• Release and discharge: the outgoing party is released from obligations arising on or after the effective date, and the continuing party agrees to look solely to the incoming party for performance from that date.
• Pre‑existing liabilities: who is responsible for any liabilities or claims that accrued before the effective date.
• Security and guarantees: arrangements to transfer or replace guarantees, securities or bonds, and timing for doing so.
• Costs and taxes: who pays legal and administrative costs of novation and how GST, duty or other taxes (if any) are handled.
• Documentation: novation to be documented in writing, including by a Deed of Novation if required.

If you’re building contracts for repeat use (for example, customer terms or supplier agreements), weaving a concise novation clause like this into your template can reduce friction later if you sell, restructure or swap providers.

Frequently Asked Questions About Novation Clauses

Is a novation clause enough, or do we still need a separate document?

Often, a clear novation clause plus the counterparty’s written consent will do the job. However, in many commercial deals-especially where there are releases, no additional consideration, or third‑party approvals involved-a short, signed deed helps capture the details cleanly. Many businesses keep a simple Deed of Novation on hand for this reason.

Does novation require consideration?

Because novation involves releasing an outgoing party and binding an incoming party, there may not always be “consideration” (a legal term for value exchanged) flowing between all parties. That’s why deeds are popular for novations-deeds don’t require consideration to be enforceable. If you’re weighing up agreement vs deed, revisit what a Deed does in Australian law.

Can we novate just part of a contract?

You can novate a specific scope (for example, particular work orders under a master agreement) if the contract allows it and all parties agree in writing. Be very clear about the parts being novated versus the parts that remain with the original party to avoid split responsibilities.

What if the other party refuses to consent?

If your clause allows refusal or doesn’t require consent to be reasonable, the counterparty may be able to say no. In that case, you may need to renegotiate or consider alternatives (for example, a transitional subcontracting arrangement), but you won’t have a clean novation without consent.

Key Takeaways

• A novation clause lets you replace a contracting party with another, with the counterparty’s consent, so rights and obligations continue seamlessly.
• Don’t confuse novation with assignment-assignment transfers benefits only, while novation swaps the party responsible for performance.
• Good novation clauses cover consent, effective date, release, pre‑existing liabilities, security/guarantees, costs and how the novation will be documented.
• In practice, many novations are documented via a short Deed of Novation, especially where there’s no fresh consideration or releases are involved.
• Watch for common traps: missing consents, unsecured guarantees, unclear liability for past breaches, and sloppy execution or authority.
• If you need to tweak terms during the transition, make sure you properly document any variations rather than relying on informal emails.

If you’d like help drafting a tailored novation clause or a Deed of Novation for your contracts, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.