Topic of the day...Novation

As per FREE DICTIONARY, Novation means "substitution of the new obligation for an old one" or Novation is "the replacement of one obligation by another by mutual agreement of both parties; usually the replacement of one of the original parties to a contract with the consent of the remaining party"

However, the WIKIPEDIA have more details on Novation. Wikipedia states Novation is a term used in contract law and business law to describe the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party. In contrast to an Assignment , a Novation must be agreed upon by all the parties to the original agreement . The obligee, the person receiving the benefit of the bargain, must only be given notice. The obligor, the party making the novation, must only make the new obligor aware and receive consent from the new obligor. A contract transferred by the novation process transfers all duties and obligations from the original obligor to the new obligor.

For example, if I had a contract with you to cut my lawn and if John had a contract with me to cut his lawn, we could novate both contracts and replace it with a single contract wherein you agree to cut John's lawn. Contrary to assignment, novation requires the consent of all parties. Consideration is still required for the new contract but it is usually assumed to be the discharge of the former contract.

The criteria for a successful Novation are: the complete acceptance of the liability by the new debtor, the acceptance of the new debtor by the creditor, and the acceptance by the outgoing creditor of the new contract as full performance of the old contract.

Novation is also used in futures/options trading markets to describe a special situation where the clearing house takes all positions with all the brokers, buying all the brokers sell, and selling all that the brokers buy.

In business, Novation is typically the process by which a newly formed corporation assumes the pre-incorporation liabilities incurred by its founders. Novation is also used in transactions through electronic exchanges.

Being in the largest plantations company in the world required me to learn new things everyday. Besides, Value Management and Investor Relations, i am also required to assist the Capital Management team to prepare all the documentations needed prior to the merger. One of the documents are the Novation Agreements. I've been thinking what is it all about as i never know what the Novation Agreements are. As far as i'm concerned the Novation Agreement is between the company and the Banks (in our case) and to be submitted to the lawyers to make necessary arrangements.

Haaa........now i know why do we need this Novation. Means we do not required to enter in to a new agreement / contract as if we would like to apply for new banking facilities, i will takes a lot of times and requires a lot of documentations and paperwork. Novation only change the tittle whereas the other terms and conditions remains i.e in our case changes of Company name and authorised signatories.