What It Does
For in-house counsel, a novation is the consent document used when the entity on the other side of a signed contract changes and the departing entity needs a full release. It moves rights and duties together and requires the remaining party's signature. The commercial question is who carries liability for what happened before the substitution.
A practical test: read the release clause and the effective date together. Then ask whether a claim that arose last quarter now sits with the departing entity, the incoming entity, or nobody at all.
Substitutes the incoming party for the departing party under an existing contract, so the agreement continues on its own terms with a different name on it.
Requires a signature from every party, including the remaining party whose consent turns a transfer into a release.
Releases the departing party from further performance, and states whether that release reaches liabilities that accrued before the effective date.
Fixes the effective date that divides pre-transfer claims from post-transfer claims.
Carries forward or replaces the credit support behind the contract, such as a parent guaranty, a letter of credit, or a security interest.
Across the novation agreements reviewed for this page, the substitution language is close to standard, the release language varies widely, and the effective date decides which entity keeps the older claims.
When You'll See It
Novation lets a contract survive a change in ownership or performance.
Mergers, acquisitions, and carve-outs: At closing, a buyer moves supply agreements, leases, or guaranties into its name. The counterparty releases the seller after confirming the buyer can perform.
Government contracts: Federal contracts follow FAR 42.12 successor-in-interest procedures because 41 U.S.C. 6305 bars transfer. A stock purchase may avoid novation when the contracting entity remains.
Intragroup reorganizations: Affiliates move service, investment management, and intercompany agreements between entities on existing terms.
Supply agreements and purchase orders: A group moves a purchase order or master purchase agreement for financing or tax reasons, with the supplier's protections preserved.
Licenses and collaborations: A sold or spun-out program may require novation of collaboration, license, and supply agreements while both sides perform.
Derivatives and financing documents: A swap, guaranty, or facility position moves with its collateral and security documents.
Focus on release and credit support when the departing entity disappears after closing.
Novation and assignment answer three questions:
What moves: An assignment transfers rights; delegation transfers duties. Novation moves both and replaces the party.
Whose signature you need: An assignment may require notice or anti-assignment clause consent. A novation requires the remaining party's signature to release the departing party.
Who keeps the old liability: An assignor remains liable for delegated duties. A novation releases the departing party to the extent stated in the release.
Examples
Nelnet Diversified Solutions, LLC / Nelnet Servicing, LLC
Novation Agreement With the U.S. Department of Education
Waiver of claims against the Government
One-Sided
2023
"The Transferor confirms the transfer to the Transferee and waives any claims and rights against the Government that it now has or may have in the future in connection with the 0005 Contract."
Apollo Asset Management Europe PC LLP / Aspen American Insurance Company
Deed of Novation
Clean release of the outgoing party
One-Sided
2025
"The Remaining Party ... releases and discharges the Outgoing Party from further performance of the Contract and from all claims and demands (actual or potential) which it may have against the Outgoing Party arising out of or in connection with the Contract, howsoever arising"
Cidara Therapeutics, Inc. / Mundipharma Medical Company
Assignment and Novation Agreement
Release limited to post-closing liability
One-Sided
2024
"the Transferor shall be relieved of all covenants, undertakings, warranties and other obligations under the Original Agreements and shall be fully relieved of liability accruing therefrom on and after the Effective Date to any other Party arising out of the Original Agreements"
Dell Marketing L.P. / IE US Hardware 4 Inc.
Novation and Amendment Agreement
Supplier consent plus mutual release
Mutual
2026
"The Supplier hereby consents to the novation of the Agreements from Original Customer to New Customer on the terms set forth in this Novation and Amendment Agreement. ... Supplier and Original Customer hereby release each other from all obligations to the other in connection with the Agreements, provided that no obligation shall exist for which neither the Original Customer nor the New Customer is responsible in accordance with Sections 1.1 and 1.3."
Bristow Group Inc. / Era Group Inc.
Financed Conditional Novation Agreement
Transferee takes the pre-closing liability
One-Sided
2020
"Transferor transfers by novation to Transferee, and Transferee accepts the transfer by novation of, all the rights, duties, liabilities and obligations of Transferor, regardless of whether such rights, duties, liabilities or obligations occurred or existed prior to, or occur or exist after, the Novation Date, and the Remaining Party accepts Transferee as its sole counterparty with respect to the Guarantee as if Transferee was named as the Guarantor therein on the date the Guarantee was entered into."
Waha AC Coöperatief U.A. / Deutsche Bank AG, London Branch
Novation and Security Release Deed
Mutual release with a payment carve-out
Mutual
2019
"the Remaining Party and the Transferor are each released and discharged from further obligations to each other with respect to the Old Transaction and their respective rights against each other thereunder are cancelled, provided that such release and discharge does not affect any rights, liabilities or obligations of the Remaining Party or the Transferor with respect to payments or other obligations due and payable or due to be performed on or prior to the Novation Date"
Negotiate
You want a complete release: one wide enough to cover what already happened, with a stated effective date.
Ask for a release that reaches claims arising before the effective date as well as after it, because a release worded to cover only "further performance" leaves your pre-transfer exposure unchanged.
Put the release in its own numbered clause with its own heading, so a later dispute cannot turn on whether the substitution language alone discharged you.
Outside a federal contract, resist a guarantee of the transferee's performance. FAR 42.1204(h)(3) makes that guarantee standard in government novations, and commercial counterparties borrow the idea, which converts your exit into a contingent liability you still have to disclose.
Get the remaining party's signature on the novation itself rather than accepting a separate consent letter, because consenting to a transfer and releasing you are two different acts.
Confirm that the credit support you posted comes back to you. Parent guaranties, letters of credit, security deposits, and pledged collateral each need express release language, and each usually needs a separate document.
You want the substitution to leave you in the position you bargained for when you signed the original contract.
Condition your consent on evidence that the transferee can perform. Ask for the same package FAR 42.1204(e) requires of a federal transferee: the transaction documents, the list of affected contracts, and proof of capability.
Require the transferee to assume liabilities that accrued before the effective date, so a claim you already hold does not fall into a gap between two entities.
Where you agree to release the transferor for past conduct, price it: take a survival period, a claims-notice deadline, or an indemnity from the transferee that covers the same ground.
Carve fraud and willful misconduct out of the release, so the departing entity stays answerable for its own bad acts no matter who performs the contract afterward.
Replace the credit support at the same moment the novation takes effect, with a new parent guaranty, a reissued letter of credit, or a fresh security interest. Make delivery of it a condition to the effective date.
Novation review compares four documents: the novation, underlying contract, consent, and credit support. They must use the same effective date. GC AI's Playbooks hold your release, survival, and credit-support positions, and GC AI for Word checks the draft against them inside the document you are redlining.
Red Flags
A novation that substitutes the party without a separate release clause, which lets the remaining party argue later that it consented to the transfer while keeping its claims against the original party.
A release worded to cover only "further performance," which leaves the departing entity exposed on every claim that accrued before the effective date.
A transferor guarantee of the transferee's performance carried over from the FAR 42.1204 model form into a commercial deal, which recreates the liability the departing party negotiated to remove.
Silence on the credit support behind the contract, so a parent guaranty or a security interest keeps running against an entity that is no longer a party to the contract.
An effective date that differs from the closing date of the underlying transaction, which opens a window where neither entity is clearly responsible for performance.
FAQs
This content is for informational purposes only and does not constitute legal advice.
