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Finance professionals use the term "novation" to refer to the process of replacing one party in a contract with another one, therefore effectively swapping one set of duties for another. When a contract is novated, the original party is relieved of their duties and is replaced by a new party, who then takes over those obligations.
Novation is frequently used when one party to a contract wants to transfer their rights and obligations to a third party, like in a merger or acquisition, or when that party wants to assign their obligations to a new party.
A novation agreement, which specifies the conditions of the replacement and exempts the original party from liability, is often entered into by the parties concerned. The agreement may also have clauses governing the transfer of any contract-related assets or obligations.
One crucial element of novation is that it necessitates the agreement of all parties to the original contract. This is due to the fact that novation entails a fundamental modification of the terms of the contract, and the new party must be prepared to take on the obligations of the original party.
Novation occurs frequently in a range of financial transactions, such as loans, insurance policies, and derivatives contracts. To manage the parties' exposure to financial risk in these situations, a novation can be used to transfer risk and responsibilities from one party to another.
