101 on Assignment and Novation Agreements
by Aqila Zulaiqha Zulkifli ~ 6 January 2024
As a general rule, parties to an agreement must perform their respective obligations set out therein. However, where such performance becomes unfeasible or impossible to perform, parties may consider novating or altering the agreement. The present article, shall focus on novation of the said agreement.
A novation of an agreement is summarized as when an agreement is made between two contracting parties to allow for the substitution of a new party for an existing one.
There could be two (2) classes of novation[1], that is:
- where a new contract is substituted for an old one between the same parties; and
- where a new contract is substituted for an old one between different parties.
Novation is provided for in Section 63 Contracts Act 1950 as follows:
“Section 63 Effect of novation, rescission and alteration of contract
If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.
Several examples are reproduced below:
- A owes money to B under a contract. It is agreed between A, B and C that B shall henceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted.
- A owes B RM10,000. A enters into an arrangement with B, and gives B a mortgage of his (A's) estate for RM5,000 in place of the debt of RM10,000. This is a new contract and extinguishes the old.
Novation requires the consent of all parties as a new contract is substituted for an existing contract and a former party is discharged. Whether there was is no written consent, to novation may, however, be inferred from conduct and not only by way of express words[2].
Unlike assignments (See our article on Assignment of Debt in this link), a novation is not to assign or transfer a right or liability. Rather, it is to extinguish the original contract and replace it with another[3].
The effect of it is that the original contract between parties need not be performed. It is a practical way to rescue a transaction amicably between parties and to avoid a situation where a party to the agreement is stranded without recourse or is forced to resort to litigation to recoup it’s losses.