Legal jargon can be overwhelming and confusing, especially when it comes to contracts. Two terms that often get thrown around are novation and alteration, but what do they actually mean?
Novation refers to the substitution of an existing contract with a new contract, replacing one party or altering terms with the consent of all involved. While alteration involves making changes or modifications to an existing contract without replacing it entirely.
Novation vs. Alteration
| Novation | Alteration |
|---|---|
| Novation refers to the substitution of an existing contract with a new contract, involving the replacement of one party or a change in terms with the consent of all parties involved. | Alteration refers to making changes or modifications to an existing contract without completely replacing it, typically involving amendments or revisions to certain terms or conditions. |
| It completely extinguishes the original contract and creates a new contract, releasing the parties from their obligations under the original agreement. | It maintains the existence of the original contract but modifies specific terms or conditions, allowing the parties to continue their obligations under the revised agreement. |
| Novation requires the explicit consent of all parties involved to replace the existing contract with a new agreement. | Alteration typically requires the agreement and consent of the parties involved to modify or amend specific terms of the existing contract. |
| It has the legal effect of discharging the original contract and creating a new contractual relationship with different terms or parties. | It preserves the validity of the original contract but changes specific provisions, potentially impacting the rights and obligations of the parties involved. |
| Novation allows for substantial changes, such as the substitution of one party with another or a complete overhaul of the terms and conditions of the contract. | Alteration usually involves more limited changes, focusing on specific provisions, terms, or conditions while keeping the overall structure and intent of the contract intact. |
| It requires the consent of all parties involved, a new agreement with mutual assent, and consideration to replace the original contract. | It typically requires the parties to follow any procedures or requirements outlined in the original contract for making amendments or revisions, such as providing notice or obtaining written consent. |
What is novation?
Novation refers to the legal process of substituting an existing contract with a new contract, involving the replacement of one or more parties or the alteration of terms and obligations with the mutual consent of all parties involved.
Through novation, the original contract is extinguished, and a new contractual relationship is established, often with different parties or modified terms. It releases the parties from their obligations under the original agreement and creates new rights and obligations under the new contract.
What is an alteration?
The alteration, in the context of contracts, refers to making changes or modifications to an existing contract without completely replacing it. It involves amending or revising specific terms, provisions, or conditions within the contract while keeping the overall structure and intent of the agreement intact.
The alteration may involve adding, removing, or modifying clauses, adjusting timelines, changing pricing terms, or addressing other contractual elements. It typically requires the agreement and consent of the parties involved and may be subject to any procedures or requirements outlined in the original contract for making amendments or revisions.
How does this affect contractual obligations?
Novation:
In novation, the original contractual obligations are extinguished and replaced by new obligations under the newly formed contract. The parties involved are released from their obligations under the original agreement, and the terms, parties, or both may be changed. The parties are bound by the terms and conditions outlined in the new contract, and any obligations from the original agreement no longer apply.
Alteration:
In alteration, specific terms or conditions within the existing contract are modified or amended. The overall contractual obligations remain in force, but certain provisions may be adjusted or revised. The parties are still bound by the unaltered terms of the original contract, but the modified terms now govern the specific areas that have been altered.
Types of agreements and contracts affected by novation or alteration
- Bilateral Contracts: A bilateral contract is an agreement between two parties in which each party agrees to perform a certain obligation. This type of contract is commonly used in business transactions. If one party to a bilateral contract wants to change the terms of the agreement, they must first secure the consent of the other party before making any changes.
- Unilateral Contracts: A unilateral contract is an agreement in which only one party is obligated to perform a certain act. The most common type of unilateral contract is a will, where someone leaves instructions for their estate to be distributed after their death. If the terms of a unilateral contract need to be changed, the party who is not obligated to perform the act can agree to the changes without consulting the other party.
- Multilateral Contracts: A multilateral contract is an agreement between three or more parties. This type of contract is often used in international business deals. If one party to a multilateral contract wants to make changes to the agreement, they must first get the consent of all of the other parties involved before making any alterations.
Common scenarios for novation and alteration
- You’re taking over a project from another company and need to alter the contract to reflect the new arrangement.
- You’re merging with another company and need to novate the contracts of the two businesses.
- You’re selling part of your business and need to novate the contracts associated with that part of the business.
- You’re making changes to your product or service and need to update your contracts accordingly.
Key differences between novation and alteration
- Definition: Novation refers to the substitution of an existing contract or agreement with a new one, involving the replacement of one party or obligation with another. Alteration, on the other hand, refers to making changes or modifications to an existing contract without completely replacing it.
- Parties involved: Novation requires the consent of all parties involved, including the original parties and the new party being substituted. Alteration typically involves changes made by one or both parties to the existing contract.
- Legal effect: Novation effectively terminates the original contract and creates a new one, releasing the original parties from their obligations and transferring them to the new party. The alteration does not terminate the original contract but modifies certain terms or provisions within it.
- Difference between Common and Statutory Law
- Difference between Contract and Quasi-Contract
- Difference between Holder and Holder in Due Course (HDC)
Conclusion
Novation replaces the original contract with a new one, requiring the consent of all parties involved, while alteration involves making modifications to specific terms within the existing contract. Novation results in a complete substitution of parties and obligations, while alteration focuses on adjusting specific provisions. Consulting legal professionals can provide guidance in determining the appropriate approach based on the specific circumstances and goals of the parties involved.
