Novation

What is Novation?

Novation is the legal mechanism by which all the rights and obligations of one party to a contract are transferred to a new party, with the agreement of all parties involved. In government procurement, novation occurs when the original contracted supplier is replaced by a different entity, and the new supplier assumes all existing contractual obligations.

When Does Novation Occur in Government Procurement?

Novation commonly arises in the following situations:

• Business sale or acquisition — when the contracted supplier’s business (or relevant division) is sold to another company
• Corporate restructure — when the supplier reorganises its corporate structure, creating a new legal entity that will perform the contract
• Merger — when two companies merge and the surviving entity needs to take over existing contracts
• Insolvency — in some cases, when a contracted supplier enters administration, the administrator may seek to novate the contract to a viable entity
• Joint venture changes — when the composition of a JV holding a government contract changes

How Does the Novation Process Work?

1. Request — the outgoing supplier (or the incoming party) requests the agency’s consent to novate the contract
2. Assessment — the agency conducts Due Diligence on the proposed new supplier, assessing capability, financial standing, and suitability
3. Negotiation — the parties agree on any changes to contract terms necessitated by the novation
4. Deed of novation — a formal legal document is executed by all three parties (outgoing supplier, incoming supplier, and agency) effecting the transfer
5. Transition — the incoming supplier assumes full responsibility for contract performance

Key Considerations

• Agency consent is required — novation cannot occur without the procuring agency’s agreement
• The incoming supplier must meet all original requirements — including Insurance Requirements, Performance Bonds, and security clearances
• The agency is not obliged to consent — if the proposed replacement does not meet the required standards, the agency can refuse
• Novation transfers all obligations — unlike assignment (which transfers rights only), novation transfers both rights and obligations

Tips for Suppliers

• Notify the agency early — if a corporate change is planned that may require novation, engage with the agency as soon as possible.
• Prepare comprehensive due diligence documentation — the agency will need to assess the incoming entity’s capability and standing.
• Ensure continuity of service — the agency’s primary concern will be uninterrupted contract performance during the transition.
• Seek legal advice — novation is a significant legal process with implications for both outgoing and incoming parties.