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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]] |