Novation

Novation is a three-party transaction (or a two-party transaction with a new contract) that discharges the original obligation by replacing it. It can mean substituting a new debt for an old one between the same parties, substituting a new debtor for the original debtor with the creditor's consent, or substituting a new creditor for the original creditor. In every case, the original contract is extinguished, not merely modified.

The defining feature is consent from all affected parties. Without consent from the remaining party, what looks like novation is just an unenforceable assignment, and the original obligor remains liable. California courts (under Civ. Code §§1530-1532) treat the consent requirement strictly. Internal communications, email approvals, and conduct can establish consent, but the most defensible novations are documented in a signed three-party agreement.

Novation matters in business sales (assignment of customer contracts), commercial leases (substitute tenants), and complex financing (debt refinancing where the original lender exits). Distinguishing novation from assignment is essential, assignment transfers benefits but typically not obligations, leaving the original obligor on the hook. A clean novation cuts the old party out of the deal entirely.