Novation vs Alteration: Difference and Comparison

Key Takeaways

1. Novation is a legal concept that plays a crucial role in contract law.
2. Alteration in the context of a contract refers to any change or modification made to the terms and conditions of an existing agreement.
3. In novation, there are three parties: the original party, the incoming party, and the outgoing party, while alteration involves only the original parties to the contract as they change the existing contract.

What is Novation?

Novation is a legal concept that plays a crucial role in contract law. It refers to the process by which one party in a contract is replaced with a new party, with the consent of all involved parties. This results in substituting one obligation with another, effectively releasing the original party from their duties and transferring them to the new party.

It occurs when there is a need for change in the contractual relationship due to various reasons, such as business mergers, acquisitions, or the desire of one party to transfer their obligations to a third party. It requires the unanimous consent of all parties involved in the contract. This includes the original party, the new party, and any other relevant parties.

Depending on the jurisdiction and the nature of the contract, novation may require specific legal formalities, such as a written agreement signed by all parties involved.

What is Alteration?

Alteration in the context of contracts refers to any change or modification made to the terms and conditions of an existing contract. This change can be initiated by one or more parties to the contract, but it requires the mutual agreement of all involved parties.

Any alteration to a contract necessitates the mutual consent of all parties involved. This ensures that all parties are aware of and agree to the changes. The proposed alterations must comply with legal requirements and regulations.

An alteration does not create a new contract, it modifies an existing one. Therefore, the altered agreement continues to be governed by the terms and conditions initially set forth and any newly agreed-upon changes.

Difference Between Novation and Alteration

1. Novation is a legal process in which a new contract replaces an existing one with all parties’ consent, while alteration refers to making changes or amendments to an agreement without completely replacing it.
2. In novation, there are three parties: the original party, the incoming party, and the outgoing party, while alteration involves only the original parties to the contract as they change the existing contract.
3. Novation agreements are formalized in a separate contract that clearly outlines the substitution of parties and terms, while alteration may be documented through contract amendments that specify the changes.
4. Novation is commonly used in scenarios like the transfer of debt or the substitution of a party in contracts while alteration is used when parties need to update specific terms in a contract, such as changing the delivery date or payment terms.
5. Novation results in the automatic termination of the original contract as the new one entirely replaces it, while alteration merely modifies specific provisions while keeping the rest of the agreement intact.

Comparison Between Novation and Alteration

Parameters	Novation	Alteration
Definition	A new contract replaces an existing one with the consent of all parties involved	Making changes or amendments to a current contract
Parties involved	Three parties- the original, the incoming and the outgoing	Only original parties as they make changes to the existing contract
Documentation	Formalized in a separate contract	Through amendments
Usage	Used in the transfer  of debt or substitution of a party	Used in changing the delivery date or payment terms
Termination	Automatic termination	Through certain modifications

References

1. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/jmcl7&section=12
2. https://www.sciencedirect.com/science/article/pii/S1541461220300215