Novation of Contract in Australia
Novation of contract is a well-established but frequently misunderstood mechanism in Australian contract law.
It is commonly encountered in commercial transactions in which parties seek to replace an existing contractual relationship with a new one, often in the context of corporate restructurings, property transactions, financing arrangements, or construction projects.
Despite its regular use, novation is often confused with assignment or informal substitution, errors which can have serious legal and commercial consequences.
At its core, novation concerns substitution and discharge. It is not merely a change in who performs obligations, nor is it simply the transfer of contractual benefits. Confirming this, the High Court of Australia has emphasised that novation operates at a more fundamental level than assignment, affecting the obligations of all parties to the original agreement.
In ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2012] HCA 6, the Court stated at [12]:
A novation, in its simplest sense, refers to a circumstance where a new contract takes the place of the old. It is not correct to describe novation as involving the succession of a third party to the rights of the purchaser under the original contract…
This passage captures the defining features of novation under Australian law:
- the extinguishment of the original contract,
- the creation of a new contractual relationship, and
- the consent of all relevant parties to that substitution.
Importantly, novation is not presumed. Courts will not find that a novation has occurred merely because a third party performs contractual obligations or because parties label an arrangement as a “novation of contract”.
As earlier High Court authority makes clear, the law requires careful attention to the structure and effect of the transaction, rather than its form.
In Vickery v Woods [1952] HCA 7, the Court considered whether the incorporation of a company and subsequent dealings amounted to a novation of a contract of sale, illustrating that novation requires more than a mere change in circumstances or parties’ expectations.
The Court examined whether there had been a true substitution of contracting parties and a discharge of the original obligations, rather than a performance by or transfer to another entity
Similarly, in Olsson v Dyson [1969] HCA 3, the High Court rejected the existence of a novation where the evidence did not support a concluded tripartite agreement substituting parties to the original contract, reinforcing that novation is a question of objective agreement, not unilateral intention or informal direction
Against that background, this article explains what novation means in Australian law, how it differs from assignment, when it is commonly used, and how courts, particularly Australian appellate courts, determine whether a novation has in fact occurred.
Particular emphasis is placed on Queensland-relevant contexts, including construction contracts, where novation frequently arises and where errors can be especially costly.
Definition of Novation in Australian Contract Law
Novation of contract is a discrete doctrine in Australian contract law that extinguishes an existing contract and replaces it with a new one.
Although it is frequently mentioned alongside assignment or contractual delegation, novation is conceptually and legally distinct.
Its defining feature is not merely the movement of rights or performance, but the replacement of the contractual relationship itself.
Novation as a replacement of the contract
The High Court of Australia has made clear that novation concerns the substitution of contracts, not the continuation of the original agreement under altered arrangements.
In ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2012] HCA 6, the Court explained the analytical focus required when determining whether novation has occurred as stated at [12]:
The enquiry in determining whether there has been a novation is whether it has been agreed that a new contract is to be substituted for the old.
This formulation confirms that novation is not concerned with partial changes to contractual performance.
Rather, it requires that the parties agree to terminate the original contract and to regulate their rights and obligations thereafter by a new agreement.
Consistent with that approach, novation necessarily involves the discharge of obligations under the original contract.
If the original contract continues to operate, in whole or in part, novation will not be established.
Novation is not an assignment
Australian appellate authority has repeatedly stressed that novation should not be confused with assignment.
Assignment involves the transfer of contractual rights, but it does not, of itself, transfer contractual obligations or discharge the original contracting party.
This distinction was recognised at an early stage by the High Court in Olsson v Dyson [1969] HCA 3, where the Court rejected the contention that a novation had occurred, where the evidence did not support a concluded agreement substituting parties to the contract.
Barwick CJ observed at [2] that there was:
… no sound basis to infer a tripartite agreement to infer a tripartite agreement, to which the deceased, his wife, and the debtor company were parties by which a novation of that kind took place.
The absence of a tripartite agreement was fatal. Without the assent of all relevant parties to the substitution of contractual obligations, novation could not be inferred.
The same principle underpins the High Court’s reasoning in Vickery v Woods [1952] HCA 7, where the Court examined whether later dealings following the incorporation of a company resulted in a novation of a contract of sale.
The Court analysed whether the transaction amounted to a rescission and substitution of the original contract, rather than a conveyance carried out in conformity with it, underscoring that novation requires a true replacement of the contractual framework rather than performance through another entity
Agreement and objective intention
Whether a novation has occurred is ultimately determined by objective intention, assessed in light of the contractual documents and the surrounding circumstances.
Courts will look to the legal effect of what the parties have done, not merely the terminology they have used.
In ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2012] HCA 6, the High Court emphasised that descriptions such as assignment do not control the analysis if, properly construed, the arrangement operates to substitute one contract for another.
Accordingly, novation will not be established simply because a third party assumes performance or because parties subjectively intend that another entity “take over” a contract.
What must be shown is a consensual substitution that results in the discharge of the original contract and the creation of a new and enforceable contractual relationship.
Novation vs Assignment vs Nomination
One of the most persistent sources of confusion in Australian contract law is the conflation of novation, assignment, and nomination.
Although these concepts often arise in similar commercial contexts, particularly property transactions, construction contracts, and corporate restructures, they operate in materially different ways.
Courts have repeatedly warned that mischaracterisation can lead to serious legal and fiscal consequences.
Novation and assignment: fundamentally different mechanisms
An assignment concerns the transfer of rights, not obligations. At common law, contractual burdens cannot be assigned without the counterparty’s consent.
Novation, by contrast, effects a substitution of contracting parties and results in the discharge of the original obligations.
This distinction was expressly addressed by the High Court of Australia in Olsson v Dyson (1969) 120 CLR 365; [1969] HCA 3, where Barwick CJ rejected the proposition that a novation had occurred in circumstances where there was no tripartite agreement replacing the original debtor-creditor relationship.
His Honour emphasised that the facts did not support a restructuring of obligations between all parties, noting at [2] that:
The respondent cannot succeed as upon a promise made to her by the debtor company.
The reasoning underscores that novation requires a new enforceable contractual promise involving all relevant parties. The unilateral redirection of performance or benefit characteristic of the assignment will not suffice.
The High Court returned to this distinction in ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2012] HCA 6, where the Court analysed whether a transaction described as an “assignment” was, in substance, a novation.
The Court noted that describing a transaction as an assignment does not determine its legal effect if the arrangement operates to replace the original contractual obligations altogether.
Contractual language: “assignment” clauses and novation
Difficulties frequently arise when contracts use the term “assignment” but purport to permit the transfer of both rights and obligations.
This issue was directly considered by the New South Wales Court of Appeal in CSG Limited v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335.
In that case, the dealership agreements required the dealer to cooperate in procuring the novation of customer maintenance contracts.
Sackville AJA observed that the contractual regime contemplated more than a mere assignment of rights, noting that the dealer was required to as stated at [5]:
.. provide commercially reasonable co-operation to [the supplier] to procure the novation to [the supplier] of existing maintenance contracts with customers.
The Court’s reasoning illustrates that where obligations are intended to pass to a new party, novation rather than assignment is the necessary legal mechanism.
Drafting that conflates the two can leave parties exposed to unenforceable obligations or unintended residual liability.
Nomination in property transactions
Nomination most commonly arises in contracts for the sale of land, where a purchaser seeks to direct that the transfer be made to another entity, often a related company or trustee.
Nomination does not, of itself, substitute the contracting party or discharge the original purchaser’s obligations.
The High Court examined this distinction in Dudley Buildings Pty Ltd v Rose [1933] HCA 14. In determining whether the transferee was a “purchaser” for stamp duty purposes, emphasis that the purchaser status involves more than the receipt of title:
The position of purchaser involves contractual obligations as well as rights.
This observation reinforces the point that nomination affects the mechanics of conveyance, not the identity of the contracting party.
Unless the original purchaser is released and replaced by novation, the contract remains binding on the purchaser.
Why the distinction matters
The practical consequences of confusing novation, assignment, and nomination are significant.
An ineffective assignment may leave the original party liable for performance. An assumed nomination may fail to transfer contractual obligations.
Conversely, an unintended novation may extinguish accrued rights or alter statutory outcomes, including taxation and regulatory consequences.
As these authorities demonstrate, courts will look beyond labels to the legal substance of the transaction.
Where the intention is to substitute parties and extinguish the original contractual relationship, novation properly documented and consented to is required.
Where only rights are to pass, an assignment may suffice. Nomination, meanwhile, is a limited concept that does not alter contractual liability unless coupled with novation.
Essential Elements of a Valid Novation
Although novation is conceptually straightforward, Australian courts have consistently emphasised that it is established only where specific legal elements are satisfied.
The doctrine is not engaged merely because parties intend a commercial substitution, nor because performance shifts in practice.
Rather, novation requires a clearly identifiable legal structure that demonstrates the replacement of one contract with another.
Consent of all parties
The first and most fundamental requirement is the consent of all parties whose rights or obligations are affected.
Because novation operates to discharge an existing contract and replace it with a new one, the agreement of every party to both the outgoing and incoming arrangements is essential.
This principle is well illustrated in Olsson v Dyson [1969] HCA 3, where the High Court rejected the existence of a novation on the basis that the evidence did not establish the necessary tripartite agreement. Barwick CJ held at [2] that:
There is no sound basis to infer a tripartite agreement, to which the deceased, his wife, and the debtor company were parties by which a novation of that kind took place.
The absence of consent from all parties was determinative. Without mutual assent to the substitution of contractual obligations, novation cannot occur.
Importantly, consent must be real and legally effective, but it need not always be contemporaneous. In appropriate cases, consent may be given in advance by contractual agreement, provided the terms clearly authorise a future novation.
Discharge of the original context
A second essential element is the discharge of the original contract. Novation cannot exist where the original agreement continues to operate alongside the new arrangement.
The legal effect must be that the original obligations are extinguished.
In Vickery v Woods [1952] HCA 7, the High Court examined whether subsequent dealings amounted to a novation of a contract for the sale of land.
The Court analysed whether the transaction resulted in a rescission and replacement of the original contract, or whether the transfer was merely carried out in conformity with the existing agreement.
The reasoning demonstrates that novation requires a clear termination of the original contractual obligations, not merely a different mode of performance
This requirement explains why novation is often effected by express deed, particularly in complex commercial or construction transactions (not insolvent transactions), to ensure there is no ambiguity as to whether the original contract has been terminated.
Creation of a new contract
Novation is not complete unless a new contract comes into existence.
That contract must be legally enforceable and govern the parties’ rights and obligations going forward.
The new agreement may replicate the terms of the original contract, but it must do so as a matter of fresh contractual obligation.
The High Court in ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) (2012) [2012] HCA 6 emphasised that novation concerns contractual substitution, not the mere assumption of obligations by a third party.
In analysing whether a novation had occurred, the Court focused on whether the original purchaser’s obligations had been replaced by those of a new party under a newly constituted agreement
Absent a new contractual framework binding the substituted party, novation will fail.
Consideration and deeds of novation
As with any contract, novation must be supported by consideration, unless it is affected by the deed.
In practice, novations are frequently executed as deeds to avoid disputes over consideration and to provide certainty regarding timing and enforceability.
The importance of proper contractual machinery is illustrated in CSG Limited v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335, where the Court upheld orders requiring cooperation to procure novations of customer contracts.
The decision reflects judicial recognition that novation is a formal legal process requiring express agreement and compliance with contractual mechanisms, rather than an informal consequence of commercial convenience.
Types of Novation of Contract
Australian courts recognise that novation can arise in different structural forms depending on the commercial context.
While the underlying legal requirements remain constant, the way in which substitution occurs varies.
The cases demonstrate that courts focus on the legal effect of the transaction, rather than categorising novation by rigid labels.
Nonetheless, several recurring forms of novation can be identified.
Substitution of one contracting party
The most common form of novation involves the replacement of one contracting party with another, with the consent of all parties.
This is often described as a tripartite novation because it requires the agreement of the outgoing party, the incoming party, and the counterparty.
The High Court addressed this structure in Vickery v Woods [1952] HCA 7, where the appellant argued that the incorporation of a company and subsequent dealings resulted in a novation of a contract for sale.
Dixon J explained that novation in such circumstances depends upon whether there has been as stated at [2]:
… a rescission of the contract within the meaning of [the statute] and the appellant would be entitled to have the duty upon the contract refunded to him
This reasoning illustrates that party substitution novation is not inferred merely because a different entity ultimately receives the benefit of performance. What must be shown is a consensual replacement of contractual responsibility.
Novation by assumption of both rights and obligations
Another common form of novation occurs where a third party assumes both the rights and the obligations of an existing party, and the original party is released.
Courts have consistently rejected attempts to characterise such arrangements as assignments.
In ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2012] HCA 6, the High Court examined a deed under which a third party promised to perform the purchaser’s obligations and the original purchaser was released.
In describing the legal effect of the arrangement, the Court observed that the transaction operated upon as stated at [12]:
The effect of a novation is upon the obligations of both parties to the original, executory contract.
The Court’s analysis confirms that where obligations are extinguished and replaced, the arrangement falls squarely within novation, regardless of whether the documentation uses the language of assignment.
Construction contract novation
Novation is particularly common in the construction industry, especially where a project changes hands or a contractor is replaced mid-project. Queensland authority provides a clear illustration of this form.
In Schneider v Queensland Building and Construction Commission [2021] QCA 155, the Court of Appeal at [3] recorded as an undisputed fact that:
In October 2014 there was a novation of the construction contract and Line Constructions Pty Ltd (Line Constructions) became the contractor
The case demonstrates a practical example of novation, whereby one builder is substituted for another, with the effect that contractual rights and obligations thereafter attach to the new contractor.
Importantly, the novation had regulatory and insurance consequences, reinforcing that novation is not merely a contractual formality but a transaction with legal ramifications beyond the immediate parties.
Novation contemplated or required by contract
Some contracts expressly anticipate novation and impose obligations on parties to facilitate it. In such cases, novation may occur pursuant to a pre-agreed contractual mechanism, rather than by ad hoc negotiation.
This was considered in CSG Limited v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335, where the dealership agreements required cooperation to effect novations of customer contracts. Sackville AJA noted at [5] that the dealer was obliged to:
His Honor also ordered CSG to execute deeds of novation for certain customer contracts in favour of [the supplier].
The Court’s reasoning highlights that novation may be contractually mandated and that parties
Absence of novation: attempted but ineffective substitutions
Finally, the authorities also illustrate situations where novation was asserted but not established. These cases are instructive in defining the boundaries of the doctrine.
In Olsson v Dyson (1969) 120 CLR 365; [1969] HCA 3, the High Court rejected the contention that a novation had occurred, emphasising that the facts did not disclose a concluded agreement substituting parties.
Barwick CJ observed at [2] that:
… the respondent cannot succeed as upon a promise made to [the respondent] by the debtor company.
This reinforces that novation will not be inferred from unilateral intention, informal directions, or expectations unsupported by an enforceable agreement.
Common Commercial Uses of Novation in Australia
Novation is most frequently employed in Australian commercial practice where parties require a complete substitution of contractual responsibility, rather than the limited transfer of rights achievable by assignment.
The case law demonstrates that novation is commonly used in construction projects, corporate restructures, financing arrangements, and property transactions, particularly where regulatory or statutory consequences attach to the identity of the contracting party.
Construction and building projects
Construction projects frequently require novation due to insolvency, project sale, or restructuring during the life of a contract.
In these circumstances, novation enables the project to continue while ensuring that contractual responsibility is vested in the correct party.
A clear Queensland example appears in Schneider v Queensland Building and Construction Commission [2021] QCA 155, where Morrison JA recorded at [4] that following the change in builder:
Following the novation of the contract to Line Constructions, a second certificate of insurance was issued.
This passage confirms that novation was treated as legally determinative of the contractor’s identity, with consequential effects under Queensland’s statutory insurance scheme.
The issue of insurance would not have arisen in this way if the original contractor had merely subcontracted performance rather than being replaced by novation.
Corporate restructures and substitutions with corporate groups
Novation is commonly used where contracts are transferred between related corporate entities, particularly where liabilities must be extinguished against the outgoing entity.
An assignment is often inadequate in these circumstances because it does not release the original contracting party.
In ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2012] HCA 6, the High Court examined a deed under which one entity undertook obligations previously owed by another.
In describing the structure of the transaction, the Court noted at [2] that:
On 27 June 2008, Oakland, Trust and ALH Group Property Holdings Pty Ltd (“ALH”) executed a document entitled “Deed of Consent and Assignment” (“the Deed of Consent”) under which, in essence: Trust agreed to assign its rights under the 2003 contract to ALH; Oakland consented to the assignment; ALH promised Oakland that it would perform Trust’s obligations under the 2003 contract; and Oakland released and discharged Trust from all liability under the 2003 contract.
The express release of liability was central to the Court’s analysis.
It demonstrated that the arrangement went beyond assignment and extinguished the original contractual obligations, an outcome only achievable through novation.
Financing arrangements and lender substitution
Novation is frequently used in financing and lending arrangements where a lender is replaced and the borrower’s contractual relationship must continue seamlessly (for example, after a portfolio transfer, syndication, or internal restructure).
In these contexts, courts approach the question by objectively construing the transaction documents in their commercial setting.
That approach is stated clearly by the High Court in Pacific Carriers Ltd v BNP Paribas [2004] HCA 35 at [22]:
The construction of the letters of indemnity is to be determined by what a reasonable person in the position of Pacific would have understood them to mean… That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction…
In a financing novation dispute, the same method applies: the legal question is whether, properly construed, the documents evidence agreement to substitute parties (and release the outgoing party), or whether they amount only to a transfer of rights or administrative arrangements.
The Full Court’s articulation of orthodox contractual construction in Leveraged Equities Limited v Goodridge [2011] FCAFC 3 reinforces the same point at [136]:
It is well established that the proper construction of a contract is to be determined objectively. Ordinarily, this requires consideration of the text, the surrounding circumstances known to the parties and the object of the transaction…
Accordingly, in lender-substitution scenarios, novation must be demonstrated by the transaction’s objective legal effect, assessed by reference to the contract language, the circumstances known to the parties, and the transaction’s purpose.
Property and secured transactions
Novation can also be essential in property and secured transactions where parties seek to replace a party to the underlying obligation while preserving (or reconstituting) ancillary obligations such as guarantees.
A recurring pitfall is assuming that a transfer of the secured debt automatically carries collateral obligations.
In Consolidated Trust Co Ltd v Naylor [1936] HCA 33, Starke J explained that statutory transfer provisions for mortgage securities do not necessarily extend to collateral obligations:
The purpose of these provisions is to transfer the mortgage security and the rights, powers and privileges relating to the debt secured by the mortgage. But the provisions do not, I think, extend to collateral obligations, such as guarantees.
The practical consequence is that where parties intend the incoming creditor (or substituted contracting party) to enjoy the benefit of collateral undertakings, or where the outgoing party is to be released, careful documentation is required.
Novation (or fresh contractual assumption) is often the mechanism needed to align the intended commercial outcome with the legal position.
Commercial contracts requiring objective consent to substitution
Across commercial transactions, parties sometimes attempt to treat substitution as having occurred simply because business is being conducted through a different entity or because performance has shifted in practice.
The authorities emphasise that such arguments cannot displace the core principle: signed contractual documents (and objectively ascertainable agreement) remain central.
The High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 warned against importing notice-style concepts into signed contracts in a way that undermines settled principle, observing at [54]:
When an attempt is made to introduce the concept of sufficient notice into the field of signed contracts, there is a danger of subverting fundamental principle based on sound legal policy.
In novation disputes, the same discipline applies.
The court’s task is not to validate informal understandings about who is actually performing, but to determine, objectively and from the documents and admissible context, whether the parties have agreed to substitute a new contractual relationship and discharge the old one.
How Courts Determine Whether a Novation Has Occurred
Whether a novation has occurred is a question of law, determined by reference to the parties’ agreements and the admissible surrounding circumstances.
Australian courts approach this inquiry with caution, recognising that novation extinguishes existing contractual rights and obligations and therefore should not be lightly inferred.
Objective construction of the documents
The primary focus of the court is the objective construction of the contractual documents said to effect the novation.
Courts do not ask what the parties subjectively believed had occurred, but what a reasonable person would understand the documents to mean in their commercial context.
This orthodox approach to contractual construction is confirmed by the High Court in Pacific Carriers Ltd v BNP Paribas [2004] HCA 35, where the Court explained that construction turns on the understanding of a reasonable person in the parties’ position, assessed by reference to the transaction’s text and context.
The judgment makes clear that contractual effect is not determined by labels or subsequent assertions, but by the legal meaning of the agreement.
Applied to novation, this means that courts examine whether the documents, properly construed, evidence:
- substitution of one contracting party for another, and
- discharge of the original contractual obligations.
If those consequences do not objectively arise from the documents, novation will not be found.
Discharge of the original obligations
A decisive indicator of novation is whether the original contract has been discharged. If the outgoing party remains liable, whether directly, contingently, or residually, the arrangement will generally fall short of novation.
This requirement explains why courts distinguish novation from arrangements involving third-party performance or administrative substitution.
The legal question is not who performs the contract in practice, but whether the original contractual obligations have been brought to an end and replaced by new obligations binding different parties.
In property and secured-transaction contexts, this distinction is particularly important. In Consolidated Trust Co Ltd v Naylor [1936] HCA 33, the High Court made clear that the transfer of contractual rights does not necessarily carry with it collateral obligations.
As Starke J explained, statutory transfer mechanisms may move the secured debt and associated rights, but do not automatically extend to collateral undertakings such as guarantees.
That reasoning reinforces the point that without novation, original obligations remain legally intact.
Labels and commercial convenience are not determinative
Courts consistently emphasise that the parties’ terminology, such as assignment, transfer, or novation, is not decisive. What matters is the legal effect of the arrangement.
This principle is illustrated across the authorities examined earlier in this article. Transactions described as taking over a contract may, on proper analysis, amount to nothing more than the assignment of rights or the delegation of performance.
Conversely, a transaction labelled an assignment may operate in law as a novation if it substitutes parties and discharges the original contract.
Accordingly, courts look past labels to identify whether the legal elements of novation are present.
Limited role of post-contact conduct
Post-contract conduct may assist the court in resolving ambiguity, but it cannot by itself create a novation.
Performance by a third party, acceptance of payment from a different entity, or administrative changes to invoicing or correspondence do not establish novation unless they reflect an underlying agreement that satisfies the legal requirements.
This approach is consistent with the High Court’s treatment of novation arguments in cases such as Olsson v Dyson [1969] HCA 3, where conduct consistent with the continued performance of an existing contract was insufficient to establish a substituted contractual relationship.
In determining whether a novation has occurred, Australian courts ask:
- Do the documents, objectively construed, provide for the substitution of contractual parties?
- Has the original contract been discharged, including the release of the outgoing party?
- Is there a new enforceable contract governing the substituted relationship?
If any of these elements is absent, novation will not be established, regardless of commercial intention or practical arrangements.
Legal Consequences of Novation of Contract
Novation has consequences that extend well beyond a change in the identity of the party to a contract.
Because novation operates by discharging the original contract and substituting a new one, its effects extend to accrued rights, liability allocation, and the survival (or loss) of collateral obligations.
Courts, therefore, approach novation as a legally transformative event rather than a procedural convenience.
Accrued rights and past breaches
As a general principle, novation operates prospectively, not retrospectively. Unless the novation agreement provides otherwise, rights that have already accrued under the original contract, such as claims for payment or damages for breach or contract repudiation, will ordinarily survive.
Whether accrued rights are preserved or released is ultimately a matter of construction.
Courts examine the novation instrument to determine whether the parties intended merely to substitute parties going forward, or to compromise liabilities arising under the earlier contract.
Because novation extinguishes the original contract, any intention to preserve accrued rights must usually be made clear.
This explains why professionally drafted novation deeds routinely contain express provisions dealing with prior breaches and accrued entitlements.
Release of the outgoing party
A defining consequence of novation is the release of the outgoing party from future contractual liability. If the original party remains bound in any capacity, the arrangement will ordinarily fall short of novation.
This point is implicit in the High Court’s analysis of substitution and discharge in ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2012] HCA 6, where the Court treated the express release of the original contracting party as central to whether the transaction operated upon, as stated at [12]:
The effect of a novation is upon the obligations of both parties to the original, executory contract.
The release of liability is therefore not incidental to novation; it is one of its defining legal consequences.
Guarantees and other collateral obligations
One of the most significant consequences of novation is the transfer of collateral obligations, such as guarantees and indemnities.
These obligations do not automatically follow a novated contract.
This principle was articulated by the High Court in Consolidated Trust Co Ltd v Naylor [1936] HCA 33, where Starke J explained that statutory mechanisms transferring contractual rights do not extend to collateral undertakings, stating:
The purpose of these provisions is to transfer the mortgage security and the rights, powers and privileges relating to the debt secured by the mortgage. But the provisions do not, I think, extend to collateral obligations, such as guarantees.
Although decided in a secured transactions context, the reasoning applies directly to novation.
Unless a guarantor agrees to be bound to the substituted contract, the guarantee will generally fall away or remain enforceable only in respect of the original contract.
Security interests and insurance arrangements
Similar issues arise regarding security interests and insurance. Security documents are typically tied to specific contractual obligations and parties.
When those obligations are discharged by novation, the security may no longer attach unless it is expressly preserved or re-granted.
In regulated industries such as construction, novation may also affect insurance arrangements.
As illustrated in Schneider v Queensland Building and Construction Commission [2021] QCA 155, novation of a construction contract gave rise to new insurance documentation reflecting the substituted contractor.
This demonstrates that novation can have consequences extending beyond private rights, into statutory and regulatory frameworks.
Objective limits on unintended consequences
Courts are slow to attribute sweeping legal consequences to novation unless those consequences are supported by the documents.
The High Court’s insistence on objective construction in commercial contracts provides an important constraint.
In Pacific Carriers Ltd v BNP Paribas [2004] HCA 35, the Court held that the contractual effect turns on what a reasonable person would understand from the transaction’s text and context.
Applied to novation, this means that consequences such as release of liability, loss of guarantees, or alteration of security will only follow where they arise from the objectively ascertained agreement.
Practical Implications
The legal consequences of novation can therefore be summarised as follows:
- The original contract is discharged.
- The outgoing party is released from future liability.
- Accrued rights survive unless expressly released.
- Guarantees and collateral obligations do not automatically carry over.
- Security and insurance arrangements may need to be re-established; and
- Statutory consequences may follow from the substitution of parties.
For these reasons, novation is a powerful but high-risk contractual mechanism. Its consequences must be addressed expressly, rather than assumed.
Drafting and Implementing a Novation Deed
Because novation replaces one contract with another, drafting needs to make the legal effect unmistakable: substitution, discharge, and a new enforceable contractual position for the incoming party.
Courts decide these questions by construing the documents in their commercial setting.
Draft for construction “as a whole” and spell out the intended legal effect
A recurring mistake is to rely on labels (“assignment”/“novation”) rather than drafting operative clauses that effect substitution and discharge.
The High Court’s approach in ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2012] HCA 6 is a direct warning: the legal nature and effect of the parties’ agreement is determined by the construction of the deed read as a whole. The Court stated at [15]:
ALH’s solicitors were right to assert that conclusions about the agreement between Oakland, Trust and ALH could only be reached by having regard to the terms of the Deed of Consent read as a whole. The legal nature and effect of the agreement is to be determined by the construction of its terms, including those terms which may be implied in order to give effect to the intention of the parties evident from the Deed of Consent.
Drafting implication: if the commercial deal is novation, the deed should say so in substance (substitution + discharge) and not leave the court to infer it from partial provisions.
Express substitution and discharge, not just performance by a new party
A novation deed should do more than record that the incoming party will “perform” the contract.
It must show the substitution of parties and the discharge of the original contract. In ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2012] HCA 6, the High Court’s statement of principle is clear as stated at [12]:
Under the common law such a description comes closer to the effect of a transfer of rights by way of assignment. Nor is it correct to describe a third party undertaking the obligations of the purchaser under the original contract as a novation.
Drafting implication: include an express discharge/release clause, and pair it with express terms substituting the incoming party as the contracting party going forward.
Make the incoming party’s assumption of obligations explicit
Courts look for clear language by which the incoming party binds itself to perform the outgoing party’s obligations as a party (not merely as an agent/administrator). In ALH Group, the deed provisions were set out and explained at length.
One operative example the Court highlighted in ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2012] HCA 6 was the incoming party’s covenant as stated at [19]:
Further provision is made in the Deed of Consent respecting the obligations of Trust and the undertaking of those obligations by ALH, by cll 4 and 6… Clause 4.1 concerns ALH’s covenants with Oakland. It is in these terms:
‘[ALH] covenants with Oakland that:
(a) it has read and is aware of and specifically acknowledges the provisions of [the 2003 contract]; and
(b) as from the Date of Assignment, [ALH] shall perform and observe all obligations of the Purchaser [Trust] under [the 2003 contract].’
Drafting implication: include an assumption clause framed as a covenant to the counterparty, not just an internal arrangement between outgoing and incoming entities.
Ensure genuine tripartite agreement (consent is not presumed)
Where the issue is whether novation occurred (or could be inferred), courts require evidence that the counterparty accepted the substituted obligor “in lieu” of the original.
The High Court’s reasoning in Vickery v Woods [1952] HCA 7 shows how the absence of evidence of agreement between the counterparty and the incoming party defeats novation, as stated at [8]:
The one and only contract was the preliminary contract between the three vendors and the plaintiff… The novation of the contract between the vendors and the plaintiff in the present case into a contract between the vendors and the company would have meant that the vendors were content to accept the liability of the company to pay the purchase money in lieu of the liability of the plaintiff. There is no evidence of this and no evidence that the company ever agreed with the vendors to pay the purchase money… there is no evidence of a novation with any of them.
Drafting implication: obtain express execution/consent from the counterparty (and any other party whose obligations/rights are affected). Don’t rely on “everyone understood” or post-completion conduct.
Deal expressly with accrued rights and pre-novation breaches
Because novation substitutes contracts, parties should expressly preserve (or release) accrued rights and liabilities.
Legal effect depends on construing the deed’s terms as a whole, making the drafting necessity plain: if you want past rights preserved, say so expressly.
Drafting implication: include clauses addressing:
- whether pre-novation breaches of contract remain actionable.
- allocation of responsibility for existing defaults; and
- whether any releases are given (and their scope).
Re-document guarantees and other collateral obligations
A major transactional trap is the assumption that collateral obligations transfer automatically with the transferred/novated arrangement.
Consolidated Trust Co Ltd v Naylor [1936] HCA 33 explains at length why transfer provisions concerning the mortgage security and the debt secured do not extend to collateral guarantees:
The purpose of these provisions is to transfer the mortgage security and the rights, powers and privileges relating to the debt secured by the mortgage. But the provisions do not, I think, extend to collateral obligations, such as guarantees, given by strangers to the mortgage transaction.
The judgment returns to the same idea when analysing the Conveyancing Act mechanism:
But here again, the purpose of the Act is to convey the estate or interest mortgaged, and all the rights, powers, and remedies in relation to the debt secured by the mortgage. The provision does not… extend to collateral obligations, such as guarantees, given by strangers to the mortgage transaction.
Drafting implication: if guarantees/indemnities must continue post-novation, require guarantors to consent/reaffirm (or execute fresh security).
Draft with objective construction in mind
Even outside novation cases, the High Court’s approach to commercial construction is relevant: the instrument is interpreted in light of the commercial setting, and parties can be bound by the objective meaning that arises from how they structured authority and documentation.
In Pacific Carriers Ltd v BNP Paribas [2004] HCA 35, the Court explained (in a longer, contextual passage) that apparent authority and representation depend on the company’s conduct as a whole and the complex of appearances created by organisational structure, as stated at [36]:
In many cases the representational conduct commonly takes the form of the setting up of an organisational structure consistent with the company’s constitution. That structure presents to outsiders a complex of appearances as to authority… In the ordinary case, however, it is necessary, in order to decide whether there has been a holding out by a principal, to consider the principal’s conduct as a whole…
Drafting implication: make execution authority and operative effect clear on the face of the deed (proper parties, proper capacity, proper releases), because courts assess objective appearances and overall documentary structure not private intentions.
Implementation checklist
Drawing these authorities together, a novation deed (and its implementation steps) should, at a minimum:
- Identify all necessary parties and ensure execution (avoid the evidentiary gap highlighted in Vickery v Woods).
- State substitution and discharge expressly (avoid “assignment” language that might not discharge obligations).
- Include an incoming-party covenant to the counterparty assuming obligations (as in cl 4.1 in ALH Group).
- Deal expressly with accrued rights and prior breaches (construction will turn on the deed “read as a whole”).
- Re-paper guarantees/security/indemnities (they may not carry as “collateral obligations”).
Common Drafting Mistakes and Risk Management
Despite the apparent simplicity of novation, disputes frequently arise because the legal requirements are only partially addressed or are assumed rather than expressed.
The authorities demonstrate that courts are unwilling to fill gaps where drafting is incomplete or imprecise.
This section identifies the most common errors and the judicial reasoning that explains why they are fatal.
Treating assignment language as sufficient
One of the most common mistakes is assuming that contractual language permitting assignment is sufficient to effect novation.
Courts have repeatedly emphasised that assignment and novation are legally distinct, and that the use of assignment language may actively undermine a novation argument.
The High Court made this distinction explicit in ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2012] HCA 6, where it rejected characterisations that blurred the two concepts, as stated at [12]:
Under the common law such a description comes closer to the effect of a transfer of rights by way of assignment. Nor is it correct to describe a third party undertaking the obligations of the purchaser under the original contract as a novation. The effect of a novation is upon the obligations of both parties to the original, executory contract.
The Court’s reasoning demonstrates that drafting which focuses on the transfer of rights, rather than the substitution of contractual responsibility, will generally fail to achieve novation.
Risk management: If obligations are intended to move and the original party is to be released, the document must be framed in terms of substitution and discharge, not assignment.
Failing to obtain clear tripartite consent
A frequent and fundamental drafting error is assuming that novation can be inferred from surrounding circumstances, commercial expectation, or the later involvement of a new entity.
The High Court has made clear that novation requires evidence that the counterparty agreed to accept the substituted party in place of the original obligor.
This point is illustrated in Vickery v Woods (1952) 85 CLR 336; [1952] HCA 7, where the purchaser argued that a novation occurred upon the incorporation of a company which subsequently took the transfer. Dixon J rejected that contention in clear terms, as stated at [2]:
The appellant, accepting this view or hypothesis, maintains that … when the company was incorporated a novation of the contract of sale took place by obligation, the company agreed to assume the obligation of the contract and the vendors agreed to the substitution of the company as the party to the contract agreeing to purchase. Accordingly there would be a rescission of the contract … In support of this conclusion a number of considerations was arrayed.
His Honour then explained why the argument failed, making clear that the evidentiary foundation for novation was absent.
The case demonstrates that novation is not established merely because a new entity becomes involved or because the transaction proceeds as though substitution had occurred.
Risk management: Ensure that novation deeds are genuinely tripartite, with execution or express consent from the counterparty whose rights are affected. Courts will not infer acceptance of a new obligor without clear evidence.
Omitting an express release of the outgoing party
Another recurring mistake is failing to deal expressly with the release of the outgoing party. Because novation operates by extinguishing the original contract, the absence of a release strongly suggests that novation was not intended.
The High Court’s reasoning in ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2012] HCA 6 makes clear that novation turns on whether the original obligations are ended. In analysing the deed before it, the Court emphasised that at [15]:
Conclusions about the agreement … could only be reached by having regard to the terms of the Deed of Consent read as a whole. The legal nature and effect of the agreement is to be determined by the construction of its terms…
Where drafting leaves the original party exposed to ongoing liability, whether by silence or ambiguity, courts are reluctant to characterise the arrangement as a novation.
Risk management: Always include an express release of the outgoing party and ensure it is consistent with the remainder of the deed when read as a whole.
Assuming guarantees and collateral obligations continue automatically
A particularly serious error is assuming that guarantees and other collateral obligations automatically attach to a novated contract. The High Court has squarely rejected that assumption.
In Consolidated Trust Co Ltd v Naylor [1936] HCA 33, Starke J explained the limited effect of statutory transfer provisions in a passage of enduring relevance:
The purpose of these provisions is to transfer the mortgage security and the rights, powers and privileges relating to the debt secured by the mortgage. But the provisions do not, I think, extend to collateral obligations, such as guarantees, given by strangers to the mortgage transaction.
The Court later reiterated that the same limitation applied under general conveyancing legislation. The reasoning applies equally in novation contexts: collateral obligations do not survive unless they are expressly preserved or re-created.
Risk management: If guarantees, indemnities, or other collateral obligations are to continue after novation, the guarantor must consent expressly or execute fresh security documentation.
Ignoring accrued and pre-novation breaches
Because novation replaces the original contract, silence as to accrued rights creates real legal risk. Courts determine whether accrued rights survive by construing the novation instrument.
The High Court’s approach in ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) (2012) 245 CLR 338; [2012] HCA 6 underscores this point.
The Court repeatedly emphasised that legal effect cannot be determined by isolated provisions, but only by examining the deed in its entirety.
Where the deed is silent or ambiguous, parties may face arguments that accrued rights were released unintentionally.
Risk management: Novation deeds should deal expressly with:
- claims arising before novation;
- responsibility for existing breaches; and
- whether any releases extend to past conduct.
Relying on labels rather than the operative effect
Finally, a common drafting mistake is reliance on labels such as a novation deed without ensuring that the operative provisions achieve novation in law.
The authorities consistently demonstrate that courts focus on substance rather than terminology.
If the deed does not objectively substitute parties, discharge the original contract, and create a new enforceable relationship, calling it a novation will not make it one.
Risk management: Draft with the expectation that a court will scrutinise:
- What obligations are discharged,
- Who is bound going forward, and
- Whether the document, read as a whole, achieves substitution.
Practical takeaway
The case law demonstrates that novation disputes arise not from obscure doctrine, but from incomplete or imprecise drafting.
Courts will not infer novation from convenience, conduct, or expectation. Where novation is intended, it must be express, comprehensive, and supported by clear agreement.
Key Takeaways – Novation of Contract
Novation is a powerful but exacting mechanism in Australian contract law. When properly implemented, it enables parties to substitute contractual relationships cleanly and lawfully, facilitating commercial transactions such as restructures, project transfers, financing arrangements, and changes in contractor or supplier.
When handled imprecisely, however, novation can expose parties to unintended ongoing liability, loss of security, or unenforceable assumptions about who is bound by a contract.
The authorities make clear that novation will not be inferred lightly. Courts require objective evidence of substitution, discharge of the original contract, and the creation of a new enforceable contractual relationship, supported by the consent of all affected parties.
Labels, commercial convenience, and post-contract conduct are no substitute for careful drafting.
For practitioners, the lesson is a practical one: novation should be treated as a transactional event, not an administrative step.
Clear documentation, express releases, and deliberate treatment of accrued rights, guarantees, security, and insurance are essential. Where these elements are addressed with precision, novation can achieve its intended commercial purpose with certainty and confidence.
Frequently Asked Questions – Novation of Contract
This FAQ section explains how novation operates in practice and why it is used to transfer both rights and obligations under an existing contract.
It addresses common questions about consent, legal effect, and risk issues that frequently arise when contracts are restructured or parties are replaced.
What is novation of a contract?
Novation is the legal process by which an existing contract is discharged and replaced with a new contract. It usually involves substituting one party for another, with the consent of all affected parties. The original contract ends, and the new contract governs future rights and obligations.
What is the difference between novation and assignment?
Assignment transfers contractual rights only, not obligations. Novation transfers both rights and obligations and releases the outgoing party entirely. Assignment does not require the other party’s consent (unless the contract says otherwise); novation always does.
When is novation required instead of assignment?
Novation is required where contractual obligations need to move to a new party and the original party is to be released. This commonly arises in construction contracts, financing arrangements, corporate restructures, and service contracts where performance obligations are central.
Does novation require consent from all parties?
Yes. Novation requires the consent of all parties whose rights or obligations are affected, including the incoming party, outgoing party, and the counterparty. Without clear consent, courts will not treat the arrangement as a novation.
Does novation cancel the original contract?
Yes. Novation extinguishes the original contract and replaces it with a new one. Unless expressly preserved, the original contract no longer governs the parties’ relationship once novation takes effect.
What happens to past breaches after novation?
Past breaches and accrued rights usually survive novation unless the novation agreement expressly releases them. Whether they are preserved or discharged depends on how the novation deed is drafted.
Do guarantees carry over after novation?
No, not automatically. Guarantees and other collateral obligations generally fall away unless the guarantor expressly agrees to continue them or provides a new guarantee after novation.
Is novation common in construction contracts?
Yes. Novation is common where contractors are replaced mid-project or where design consultants are novated from developers to builders. It ensures contractual responsibility properly transfers to the new party.
Does novation affect insurance and security?
It can. Insurance policies and security interests are often tied to specific parties and obligations. After novation, insurers and secured parties may require notification, endorsement, or re-documentation.
Should novation be done by deed?
Often, yes. Novations are commonly documented by deed to avoid disputes about consideration and to clearly evidence substitution, discharge, and assumption of obligations.
