A counterparty has sent you a draft deed of novation, or your solicitor has said you need one before settlement can proceed. Either way, you're looking at a document that will change who is legally responsible for performing a contract — and you want to understand what each clause actually does before you sign.
A deed of novation is not simply an "update" to an existing contract. It is a legal instrument that substitutes one party for another, with the consent of all parties, and (subject to the deed's terms) releases the departing party from future obligations while binding the new party going forward. Because it operates as a deed rather than a plain agreement, the formal execution requirements are stricter — and the legal consequences more durable — than those attached to an ordinary contract variation. The sections below walk you through the clauses that matter, the drafting choices behind each one, and the traps that create disputes down the track.
Why a deed rather than an agreement?
Before looking at the clauses, it is worth understanding why novations are almost always documented as deeds rather than simple written agreements.
A deed is enforceable without consideration. In a novation, the continuing party is releasing the outgoing party and accepting the incoming party in their place. Depending on the structure of the deal, it can be difficult to identify sufficient consideration flowing to every party. Executing as a deed removes that argument entirely.
A deed also carries a longer limitation period for bringing a claim. In New South Wales, an action on a deed may be brought for up to 12 years after the cause of action accrues, compared with 6 years for a simple contract — and the period is even longer in some other states. If a breach of the novated contract surfaces years later, the difference matters.
Finally, executing as a deed signals formality and finality. Courts treat deeds with a degree of gravity that plain agreements do not always attract.
For a company to execute a deed, s 127 of the Corporations Act 2001 (Cth) provides the mechanism: the document must be signed by two directors, or by a director and a company secretary. A proprietary company with a sole director who is also the sole secretary (or who has no secretary) may execute by that director alone. Importantly, a witness is not required when a company executes under s 127.
The essential clauses
Parties and recitals
The opening of the deed names all three parties — the outgoing party (leaving the contract), the incoming party (stepping in), and the continuing party (staying and agreeing to the change). Each party should be identified by its full legal name, ACN or ABN, and the capacity in which it signs (for example, as trustee for a trust, or in its own right).
The recitals describe the background: the original contract (identified by date, title, and the parties to it), why the transfer is happening, and what the deed is intended to achieve. Recitals are not operative — they don't create obligations — but they frame how the operative clauses are interpreted if a dispute arises later.
Trap: using a trading name rather than the correct legal entity. If "Smith Constructions" is actually "S & T Smith Pty Ltd ATF the Smith Family Trust", getting the name wrong can put the whole transfer in doubt.
The novation clause
This is the operative heart of the deed. It should state clearly:
- that the outgoing party's rights and obligations under the original contract are transferred to the incoming party from the novation date
- that the continuing party consents to the transfer and agrees to look to the incoming party for performance
- that the original contract continues in full force, binding the incoming party and the continuing party, from the novation date
Drafting choice: whether the novation operates "on execution" or "from the novation date". These are not always the same. A deed may be signed weeks before the business sale completes, with the operative date being the completion date. Make this explicit; ambiguity here is one of the most common causes of post-settlement disputes.
The effective date (and what it divides)
The effective date — also called the novation date or commencement date — is the line in the sand. Everything before it belongs to the old arrangement; everything after belongs to the new one.
The deed should be precise about:
- the date (day, month, year — not "the date of this deed" if execution and effectiveness are different moments)
- whether any work in progress as at that date is treated as pre-novation or post-novation
- who is entitled to receive payment for work performed but not yet invoiced at the effective date
- how existing disputes or unresolved claims sitting at the effective date are allocated
Release of the outgoing party
A release is the clause that most business owners are focused on — the outgoing party wants to know they're off the hook. But a release is not automatic and its scope is entirely a drafting question.
Common variants:
- Full release: the continuing party releases the outgoing party from all obligations, past and future. This is the cleanest outcome for the outgoing party but the continuing party bears all risk for any pre-novation problems that emerge later.
- Release limited to future obligations: the outgoing party is released from performance after the effective date but remains liable for breaches that occurred before that date.
- No release / retained liability: the outgoing party stays on as a guarantor or co-obligor, often used where the continuing party has concerns about the incoming party's capacity to perform.
Trap: a deed that releases the outgoing party "from all claims" without carving out pre-novation liabilities. If a defect or non-payment surfaces six months later, the continuing party may find it has released its right to pursue the outgoing party even for wrongs that occurred before the transfer.
Assumption of obligations by the incoming party
The incoming party formally agrees to perform all obligations under the original contract from the effective date. This should specify what "the original contract" means — including any amendments, variations, or ancillary documents that form part of the contractual suite.
The deed should also address:
- obligations that were already accrued at the effective date (is the incoming party taking them on, or not?)
- whether the incoming party's obligations are co-extensive with the outgoing party's, or modified in any way
- insurance requirements: if the original contract required the outgoing party to hold specific cover (professional indemnity, public liability), the incoming party must have equivalent cover from the effective date — the deed should confirm this
Payment, invoicing, and outstanding amounts
Novations have immediate cashflow consequences. A deed that is silent on money creates confusion fast.
The clause should address:
- who holds the right to invoice for work performed before the effective date
- who is responsible for paying invoices that were issued before the effective date but remain unpaid at the time of signing
- what happens to deposits, retentions, or amounts held in escrow
- the payment details (bank account, remittance instructions) for the incoming party from the effective date
If the outgoing party has already invoiced and not yet been paid, the deed should make clear whether that debt runs to the outgoing party (most common) or is novated across along with everything else.
Representations and warranties
Many deeds of novation include limited representations — statements each party makes and stands behind. Typical representations include:
- each party has authority to enter the deed and is not in breach of any other agreement by doing so
- the original contract is in full force and effect at the date of signing (no existing breaches the continuing party hasn't disclosed)
- the outgoing party is not aware of any outstanding claims or disputes under the original contract that have not been disclosed
Trap: the outgoing party warranting that the original contract is not in breach when it knows, or suspects, there is a problem. This creates warranty liability on top of whatever contractual liability already exists.
Variation of the original contract terms
Sometimes the parties want to novate and update at the same time — for example, updating pricing, adjusting scope, or adding a new notice address. If terms are being changed, the deed should spell out exactly what is amended and confirm that everything else in the original contract continues unchanged.
Vague wording like "as otherwise agreed between the parties" is not sufficient. Each variation should be set out in a schedule or as numbered amendments within the deed itself.
Notices
The original contract will have a notices clause — who gets communications and how. After novation, these need to be updated to reflect the incoming party's details. The deed should either update the original contract's notices clause or confirm the new contact details in a schedule.
Optional and situational clauses
- Guarantor consent: if the original contract was supported by a personal guarantee, the guarantor should be a party to the deed of novation, confirming that the guarantee extends to the incoming party's obligations (or expressly terminating it). Without this, the guarantee may fall away.
- Confidentiality: if the novation involves disclosure of commercially sensitive information (pricing, customer data, IP) during the transfer process, a confidentiality obligation on all parties prevents that information being used beyond the deal.
- Consent of additional parties: some contracts require consent of a financier, head contractor, or government authority before they can be novated. The deed should recite that all required consents have been obtained and attach evidence if needed.
- Stamp duty acknowledgment: in most states, a deed of novation of a commercial services contract does not attract stamp duty, but property-related or financial contracts may. If there is any doubt, the deed should record the parties' position and the basis for it.
- Dispute resolution: if the original contract had a specific dispute resolution mechanism (mediation, arbitration, adjudication), the deed should confirm that mechanism continues to apply to any disputes about pre- or post-novation obligations.
Where Artificer Legal can assist
A deed of novation looks straightforward until something goes wrong. The clauses where we most commonly push back or insist on amendments are:
- The release clause: broad releases that wipe out the continuing party's rights against the outgoing party for pre-novation conduct are a material risk, and we will typically insist on carving those out unless there is a clear commercial reason to accept them.
- The effective date mechanics: "date of this deed" is almost never the right answer when execution and completion are happening in stages.
- The outgoing party's warranties: an outgoing party that knows of a latent defect or ongoing dispute has an incentive to give narrow warranties. We look at what has and hasn't been disclosed.
- The incoming party's insurance obligations: we check that the cover required under the original contract has actually been placed before the effective date — not just promised.
If the deed accompanies a business sale, we review it alongside the sale agreement to make sure the allocation of pre- and post-sale risk is consistent across both documents. Mismatches between a deed of novation and the broader sale documents are a common source of post-completion disputes.
The release of the outgoing party
The release of the outgoing party is the clause that most often determines the outcome of a novation dispute — not the novation clause itself. It is also the clause most likely to be drafted too broadly, under time pressure, by a party who is focused on completing the deal rather than on what happens two years later when a problem surfaces.
A novation that releases the outgoing party from "all past and future claims" without any carve-out for pre-novation conduct is effectively a waiver of the continuing party's right to pursue whatever was wrong before the transfer. That is a very significant concession, and it is frequently made without the continuing party understanding what they have given up. The release clause should be negotiated carefully, scoped precisely, and tested against every category of risk that could realistically arise from the outgoing party's performance before the effective date.
As a summary: a deed of novation substitutes one contracting party for another, binds the incoming party to the original contract from the effective date, and (if drafted correctly) gives the outgoing party a clean exit. The critical drafting decisions are the scope of the release, the precision of the effective date, and the allocation of pre-novation liabilities and payments. A deed also offers advantages over a plain agreement — no need for consideration, a longer limitation period for claims, and a higher standard of formality — but those advantages only materialise if the deed is properly executed under s 127 of the Corporations Act 2001 (Cth) or the equivalent state rules for non-corporate parties.