ThomasMoreAI Novation Agreement
Tripartite agreement substituting an Incoming Obligor for the Original Obligor with Continuing Obligee consent. Achieves full release—no residual liability for the exiting party.
Prerequisites
Gather before drafting:
- Original contract — executed copy with all amendments and contract numbers
- Business rationale — APA, merger docs, board resolutions, or restructuring records
- Authority docs — org documents, good standing certificates, authorization resolutions (all three parties)
- Security instruments — guarantees, LCs, performance bonds tied to original contract
- Incoming Obligor diligence — financials, licenses, permits, operational capability evidence
- Disclosed defaults — identify all pre-existing breaches before drafting
Party Roles
| Party | Role |
|---|---|
| Original Obligor | Exiting party; receives full release on effective date |
| Continuing Obligee | Remaining party; consents to substitution and releases Original Obligor |
| Incoming Obligor | Substituted party; assumes all future rights and obligations |
Drafting Workflow
1. Recitals
- Identify original contract: title, date, number, subject matter, key terms, amendments
- State business rationale (M&A, restructuring, regulatory)
- Declare intent as true novation — not assignment or delegation
- Recite consideration among all three parties
2. Operative Novation Clause
Present-tense operative language must include:
- Incoming Obligor hereby substituted for Original Obligor in all respects
- Incoming Obligor assumes all obligations, liabilities, and covenants (pre- and post-effective date)
- Incoming Obligor succeeds to all rights, benefits, and remedies
- No continuing liability (primary or secondary) for Original Obligor post-effective date
3. Release Provision
- Unconditional release for post-effective date obligations
- Carve-out: pre-existing defaults, accrued claims, and pre-novation breaches excluded from release
- Continuing Obligee looks solely to Incoming Obligor for future performance
4. Representations and Warranties
| Party | Key Reps |
|---|---|
| All parties | Authority, power, no violation of law or other agreements |
| Original Obligor + Continuing Obligee | Contract valid and in force; no undisclosed amendments, defaults, or litigation |
| Incoming Obligor | Reviewed all terms; has financial resources, licenses, capability to perform; completed diligence; obtained required consents and approvals |
5. Conditions Precedent
- Regulatory/governmental approvals (mandatory for government contracts)
- Third-party consents required under original contract
- Insurance or bond evidence from Incoming Obligor
- Assumption fee or consideration payment
- Ancillary instrument execution (security agreements, guarantees, IP assignments)
6. Effective Date
- Define precisely: execution date, calendar date, or last-condition-satisfied date
- Require written certificate confirming all conditions met
- Address gap-period obligations between execution and effective date
7. Transitional Provisions
- Original Obligor cooperation: records transfer, introductions, WIP handoff
- Allocate prepayments, deposits, and outstanding invoices at cutoff
- Prorate recurring or periodic payments
8. Ancillary Transfers
- Security instruments: transfer existing or require new from Incoming Obligor
- IP licenses: confirm assumption or replacement
- Regulatory licenses/permits: covenant to obtain before effective date
- UCC filings or perfection steps if collateral transfers
9. Indemnification
| Indemnifying Party | Scope |
|---|---|
| Incoming Obligor | Post-effective date performance or non-performance losses |
| Original Obligor | Pre-effective date breaches and violations (unless disclosed and accepted) |
Include notice requirements, defense control, cooperation obligations, settlement limits, and survival period.
10. Governing Law and Disputes
- Align governing law with original contract unless domicile/jurisdiction change warrants otherwise
- Address whether original arbitration clause binds Incoming Obligor
- Separate resolution paths: three-party (novation validity) vs. two-party (post-novation performance)
11. Standard Provisions
- Entire agreement / integration (includes original contract as novated)
- Amendment requires all three parties' written consent
- Severability with replacement obligation
- No-waiver (written only)
- Counterparts + electronic signatures
- Notices: addresses, methods, deemed-received timing for all three parties
- Further assurances covenant
- Exhibits: original contract, disclosed defaults, ancillary docs, conditions schedule
12. Signature Blocks
- Individuals: signature, printed name, date
- Entities: legal name, "By:" line, signatory name, title (must match authorization), date
- Check notarization/witness/recording requirements (government contracts, real property)
Critical Pitfalls
- Novation ≠ assignment: Use "novation" throughout; never "assignment" or "delegation." Every provision must confirm full discharge of Original Obligor
- Residual liability trap: Language like "guarantee," "backup obligation," or "secondary liability" for Original Obligor converts novation into assignment-with-assumption
- Three-party execution required: A two-party document cannot achieve novation
- Effective date precision: The pre/post liability cutoff is the most legally significant date—define precisely and reference consistently
- Government contracts: FAR 42.12 [VERIFY] governs federal novation; agency consent is mandatory and must be a condition precedent
- E-signature enforceability: Varies by state and contract type; confirm governing jurisdiction requirements