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A novation is an agreement made between two contracting parties to allow for the substitution of a new party for an existing one. The original contracting party who is replaced by the new party with the novation is excused by the novation, and therefore the original party who is replaced gives up any rights they have against the other original party to the contract. Both original contracting parties must agree to the novation. 

Generally, novation is sometimes called a substituted contract. In this context, a novation is a new obligation that extinguishes and replaces an old contract or obligation. Novation can be used as a defense against any claim from the old agreement because the old agreement is void. While both novation and substituted contracts are replacing old contracts with new contracts, novation can be used for substitution of parties specifically.

Novation is governed by the choice of law provision in each contract that determines which state’s laws apply. Where no provision exists, novation will be governed by the relevant jurisdiction.

See also: assign

[Last updated in August of 2023 by the Wex Definitions Team]