Novation

An layman'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.

Novation requires the agreement of all three parties: a party to an English law contract may assign its rights to a third person without the permission of its counterparty (provided the contract does not forbid it); however, one cannot unilaterally assign contractual obligations under English law. There are pretty clear economic reasons why that should be so: the creditworthness 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.

A novation agreement therefore requires the consent of all three parties (the Transferor, the Transferee and the Remaining Party). It is, in effect, the consensual termination of one contract (between Transferor and Remaining Party) and the creation of a new contract on identical terms between Remaining Party and Transferee.

The consideration given by the parties for the termination of the first and creation of the second 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 first contract is conditional on Transferee’s agreement to accept the identical liabilities under the new Contract.

Here you will find a version of the ISDA Uniform Novation Agreement.