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NOVATION
- This article is on the legal term. For the keyboard company, see Novation Digital Music Systems; for the former modem manufacturer, see Novation CAT.
Novation is a term used in contract law and business law to describe the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party. A novation must be agreed upon by all original parties to the original agreement. Furthermore, a contract transferred by the novation process transfers all rights and obligations from the original owner to the new owner.
Novation is also used in futures/options trading markets to describe a special situation where the clearing house takes all positions with all the brokers, buying all the brokers sell, and selling all that the brokers buy.
In business, novation is typically the process by which a newly formed corporation assumes the pre-incorporation liabilities incurred by its founders.
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