If you’re running a startup or small business, your contracts rarely stay “set and forget”. You might restructure your group, bring in investors, switch suppliers, sell a part of the business, or move a project into a new entity.
When that happens, a common question comes up: how do you move an existing contract from one party to another without breaking it?
That’s where a novation deed is often the practical solution. Used properly, novation lets you replace one contracting party with another (with everyone’s consent), usually on the same commercial terms.
In this guide, we’ll walk you through what a novation deed is, when you might need one, how it differs from assignment, what to include, and the common traps we see for Australian small businesses.
What Is A Novation Deed (And Why Do Businesses Use One)?
A novation deed (often just called a “deed of novation”) is a legal document that:
- replaces a party to an existing contract with a new party; and
- transfers rights and obligations from the outgoing party to the incoming party; and
- continues the arrangement by ending the old contract and replacing it with a new contract on the same (or varied) terms, as agreed.
In plain English: it’s a “swap” of parties in a contract, with everyone agreeing to the change.
This is why businesses use novation deeds so often: they allow continuity. You don’t have to terminate and renegotiate everything from scratch, and you can keep the commercial deal moving while the legal structure changes behind the scenes.
Who Are The Parties In A Novation?
A novation deed typically involves three parties:
- Outgoing party (sometimes called the “transferor”): the party leaving the contract.
- Incoming party (sometimes called the “transferee”): the party stepping into the contract.
- Continuing party: the other original party who stays involved in the arrangement (for example, your client, supplier, landlord, or service provider).
Because the continuing party is being asked to contract with someone new, their consent is essential.
If you need a deed prepared to reflect your exact commercial arrangement (and not just a generic template), a tailored Deed of Novation is often the cleanest way to document it properly.
Novation Vs Assignment: What’s The Difference (And Why It Matters)?
One of the biggest practical issues we see is businesses using “assignment language” when they actually need a novation (or vice versa).
While both are used to move contractual arrangements around, they do very different things.
Assignment (Generally) Transfers Rights, Not Obligations
An assignment is usually used when one party wants to transfer the benefit of a contract (for example, the right to receive payment), but not necessarily the burden (the obligation to perform).
In many contracts, you can’t assign without consent (or you can only assign in limited circumstances). Also, even if an assignment is permitted, it generally does not automatically release the original party from their obligations.
In practice, that can leave you with “loose ends” where the original party is still on the hook.
If you’re dealing with an assignment scenario (especially for services or commercial agreements), you may be looking at something like a Deed of Assignment instead of a novation.
Novation Transfers Rights And Obligations (And Typically Releases The Old Party)
With a novation, the goal is usually that:
- the incoming party takes over all obligations going forward; and
- the outgoing party is released from future performance (subject to how you draft the deed).
This is why novation is so common in business restructures, group reorganisations, and asset sales: you want a clean handover, not a half-transfer.
A Quick “Which One Do I Need?” Check
- If you want to transfer the whole contract relationship (rights + obligations) to a new entity, you’re usually looking at a novation deed.
- If you only need to transfer the benefit (or a specific right), you may be looking at an assignment (if the contract allows it).
Because the consequences can be significant (especially around who is liable if something goes wrong), it’s worth getting the underlying contract reviewed before you choose the pathway. A Contract Review can help you confirm what the contract actually permits and what document is appropriate.
When Would A Startup Or Small Business Need A Novation Deed?
Novation isn’t only for “big corporate” transactions. For startups and small businesses, it comes up more often than you’d expect-especially as you grow, pivot, and restructure.
1) Restructuring Your Business Or Group
It’s common for founders to start in one structure (like a sole trader or a single company), then later create a new company, set up a holding company, or split IP and operations into different entities.
If your existing contracts (with customers, suppliers, platforms, or service providers) are in the old entity’s name, a novation deed can move them into the new entity without renegotiating the commercial deal from scratch.
2) Selling Or Buying A Business (Or Part Of One)
In an asset sale, the buyer often wants key customer and supplier contracts to continue after completion.
However, many contracts can’t simply be “handed over” informally. A novation deed is often used to formally shift the contract from seller to buyer-especially where the buyer needs to perform ongoing obligations (like delivering services, providing support, or meeting service levels).
3) Swapping The Contracting Entity (But Keeping The Same Team)
Many startups operate with multiple entities for practical reasons: one entity holds IP, another employs staff, another signs with customers, and so on. As you refine this, you may need to swap which entity is the contracting party.
A novation deed is the “admin-friendly” way to do that while keeping the customer relationship consistent.
Sometimes a growing business decides to shift work from a founder-led entity to a new services entity, or bring in a new delivery partner. If your customer contract needs the new party to take over performance, novation may be required.
Separately, if you’re putting new arrangements in place with your customers going forward, you may also want to tighten the underlying Service Agreement so your scope, fees, and risk allocation are crystal clear.
5) Funding Rounds And Investor-Driven “Clean Up”
During a capital raise, investors often ask for contract tidy-ups. That can include moving key contracts into the right entity (for example, the main operating company), so the company they’re investing in actually holds the revenue-generating contracts.
This is one of those moments where novation becomes less of a “legal technicality” and more of a deal-critical task.
How Does A Novation Deed Work In Practice?
Most novations follow a similar process, but the details matter (particularly around timing, liability, and what happens to past breaches).
Step 1: Review The Original Contract First
Before anyone signs a novation deed, you should review the existing contract to check:
- does it allow novation (or does it restrict transfers generally)?
- is written consent required, and in what form?
- are there notice requirements or preconditions?
- are there personal performance elements (where the other party might object to a new party)?
Even if you’re confident the other party will agree commercially, the contract may still impose formal steps you need to follow.
Step 2: Get Clear Internal Alignment On The Commercial Deal
Before you send a novation deed out, confirm internally:
- who is the incoming party (exact legal name and ACN/ABN)?
- what is the effective date of novation?
- are any terms changing at the same time (pricing, term, scope)?
- who is responsible for anything that happened before the novation?
Many novations fail (or create disputes later) because the parties weren’t aligned on the “before and after” responsibilities.
Step 3: Prepare The Novation Deed (And Any Side Documents)
A well-drafted novation deed usually:
- identifies the original contract clearly (date, parties, and often annexes a copy)
- states the intention to novate (replace a party, not just assign rights)
- sets the effective date/time
- confirms what happens to liabilities accrued before the effective date
- confirms the continuing party’s consent
- includes execution blocks (often as a deed, which has its own signing requirements)
If your business has a company structure, execution mechanics matter. For example, if you’re signing under section 127 of the Corporations Act, it needs to be done correctly-and your internal governance documents (like your Company Constitution) should align with how directors can make decisions and sign documents. Execution requirements and accepted signing methods (including e-signing) can also vary depending on the state/territory and the type of party signing, so it’s worth checking what applies to your situation.
Step 4: Sign, Date, And Store It Properly
It sounds basic, but it’s not unusual to see novation deeds that are signed but not dated, or dated inconsistently between parties.
Make sure:
- all parties sign the same version
- the deed is properly dated (or the effective date clause is clearly drafted)
- you store it with the original contract and any variations
Your future self (and your future accountant, investor, or buyer) will thank you for clean contract records.
What Should A Novation Deed Include? Key Clauses To Get Right
Every novation deed is slightly different, but for startups and small businesses, these clauses are usually the ones that make the biggest difference in practice.
1) The Effective Date (And What Happens Between Signing And Effectiveness)
The deed should clearly state when the novation takes effect.
Sometimes parties sign today, but want the novation to be effective from:
- a past date (for example, start of the month), or
- a future completion date (for example, settlement of a business sale).
If there’s a gap between signing and the effective date, clarify who is responsible for performance during that gap.
2) Release Of The Outgoing Party
A core reason businesses use novation is to achieve a “clean break”.
But that clean break needs to be drafted properly. The deed should address whether the outgoing party is:
- released from future obligations only, or
- also released from past liabilities (which is less common and usually negotiated).
If you’re the continuing party (for example, you’re the client and your supplier is trying to novate to another supplier), pay close attention here. You may not want to release the original supplier from prior breaches or warranty obligations.
3) Responsibility For Past Breaches, Warranties, And Indemnities
This is where novation deeds can become commercially sensitive.
For example:
- If the outgoing party delivered defective work before novation, who fixes it?
- If there’s an indemnity in the original contract, who benefits from it after novation?
- If there’s a dispute already brewing, does novation change who can enforce rights?
A practical approach is often:
- the outgoing party remains liable for issues arising before the effective date; and
- the incoming party takes responsibility from the effective date onward.
But the right answer depends on leverage, risk appetite, and the underlying deal.
4) Consents And “No Further Action Required” Language
The deed should make it very clear that the continuing party consents to the incoming party replacing the outgoing party.
This is especially important where the original contract required written consent to transfer or novate. If the consent is unclear, you can end up with arguments later about whether the novation actually happened.
5) Security, Guarantees, And Finance Arrangements
If the original contract is supported by some form of security (for example, a guarantee, a bank guarantee, or a security interest), you need to consider what happens after novation.
For instance:
- Does a director guarantee given by the outgoing party stay in place?
- Does the incoming party need to provide equivalent security?
- Are there Personal Property Securities Register (PPSR) implications?
If your business uses secured arrangements, it may be relevant to consider a General Security Agreement (or to update existing security documents) alongside the novation, depending on the transaction.
Key Takeaways
- A novation deed is used to replace a party in an existing contract, transferring both rights and obligations to the incoming party, and typically replacing the old contract with a new one on the same terms (unless varied).
- Novation and assignment are different - assignment generally transfers rights only, while novation transfers rights and obligations and typically releases the outgoing party from future performance.
- Novation deeds are common for startups and small businesses during restructures, business sales, funding rounds, and operational changes where the contracting entity needs to change.
- The most important practical points to get right are the effective date, the release (what the outgoing party is released from), and who remains liable for past issues.
- Always review the underlying contract first, because it may restrict transfers, require consent, or impose formal notice steps before any novation can work.
- A properly drafted novation deed helps avoid costly disputes about who is responsible for performance, payment, warranties, and liabilities after the change.
Not legal advice. This article is general information for Australian businesses and doesn’t take into account your specific circumstances. If you’d like advice for your situation, consider getting tailored legal help.
If you’d like help preparing or reviewing a novation deed for your startup or small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
