Novation: Difference between revisions
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An | {{g}}An layperson’s terms a [[novation]] is the transfer in full of one party's rights and obligations under a contract to another person. The other party to the contract stays put. | ||
Unlike an [[assignment]], a [[novation]] requires the agreement of all three parties (the exiting party, the incoming party and the party staying put). A party to an [[English law]] {{t|contract}} may “[[assign]]” its ''[[right]]s'' to a third person without its counterparty’s permission (as long as the contract does not forbid it); however, it cannot unilaterally assign its'''[[obligation|obligations]]''' under English law. | |||
There are pretty obvious economic reasons why that should be so: the creditworthiness of the party with whom you have contracted is a fundamental part of the bargain you have made: that party should not be able to substitute itself without your permission. | |||
Therefore a [[novation]] is, in effect, the consensual termination of the existing contract (between “[[transferor]]” and the “[[remaining party]]”) and the creation of a new contract on identical terms between “[[remaining party]]” and the incoming party (known often as the “[[transferee]]”. | |||
===[[Consideration]]=== | |||
The [[consideration]] given for terminating one contract and creating the other are related: In effect, there will be a [[MTM]] value payable to or from the [[transferor]] under the first, and an equal payment to or from the [[remaining party]] under the second, so [[transferor]] and [[transferee]] settle these payments directly between each other. [[Remaining party]]’s obligation to discharge [[transferor]] of its liabilities under the terminating {{t|contract}} is conditional on [[transferee]]’s agreement to accept the identical liabilities under the new [[contract]]. | |||
{{sa}} | |||
*[[ISDA Novation Anatomy]] | |||
Revision as of 14:41, 15 January 2020
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An layperson’s terms a novation is the transfer in full of one party's rights and obligations under a contract to another person. The other party to the contract stays put.
Unlike an assignment, a novation requires the agreement of all three parties (the exiting party, the incoming party and the party staying put). A party to an English law contract may “assign” its rights to a third person without its counterparty’s permission (as long as the contract does not forbid it); however, it cannot unilaterally assign itsobligations under English law.
There are pretty obvious economic reasons why that should be so: the creditworthiness of the party with whom you have contracted is a fundamental part of the bargain you have made: that party should not be able to substitute itself without your permission.
Therefore a novation is, in effect, the consensual termination of the existing contract (between “transferor” and the “remaining party”) and the creation of a new contract on identical terms between “remaining party” and the incoming party (known often as the “transferee”.
Consideration
The consideration given for terminating one contract and creating the other are related: In effect, there will be a MTM value payable to or from the transferor under the first, and an equal payment to or from the remaining party under the second, so transferor and transferee settle these payments directly between each other. Remaining party’s obligation to discharge transferor of its liabilities under the terminating contract is conditional on transferee’s agreement to accept the identical liabilities under the new contract.