Novation

Novation is a legal process where an existing contract is replaced by a new one with the agreement of all parties involved. The original contract is completely extinguished, and a fresh set of rights and obligations is created. It allows for a new party or modified terms without breaching the original agreement.

Key Features:

1. Requires mutual consent of all parties.
2. Replaces the original contract with a new one.
3. Transfers rights and obligations to the new party or under the new terms.
4. It is a voluntary arrangement, not a remedy for breach.

Types:

1. Novation by Change of Parties: One party is replaced by another.
2. Example: Company A owes ₹5 lakh to Company B. Company C agrees to take over the debt with consent from all three. Company A is released, and Company C becomes liable.
3. Novation by Change of Contract: Parties remain the same, but the contract terms (like payment or interest) are modified.

Common Uses:

1. Business sales or takeovers
2. Loan restructuring
3. Mergers and acquisitions
4. Replacement of contractors or service providers

Example: When a business is sold, the new owner may take over all supplier and client contracts through novation, transferring rights and responsibilities from the previous owner.