|
Explanatory Notes
Novation Agreement - Business
EXPLANATORY NOTES The purpose of this particular Novation Agreement is to formalise an arrangement where a company (the "Seller") that has a contract with a customer is selling its business to another part (the "Buyer") and, as part of the transaction, the Buyer will take over the Seller's contracts with its customers. All the rights and obligations of the Seller under the contract with the customer are transferred to the Buyer and the Buyer, by virtue of the Novation Agreement, replaces the Seller as a party to the contract with the customer. As will be seen, the Agreement can be quite short and is reasonably straightforward. The Introduction refers to the underlying transaction between the Seller and the Buyer. Clause 1 creates the obligation on the Buyer to perform the contract with the customer in place of the Seller. Under this clause the Buyer becomes liable to the customer as if the Buyer had been the original party to the contract; the Buyer will accordingly become liable to the customer for any breaches of the contract by the Seller before the Novation. The Buyer must therefore address separately, e.g. in the agreement between it and the Seller for the sale of the business, the question of liability for any such antecedent breach; generally speaking the Buyer should seek an indemnity from the Seller against any cost, loss or damage arising from such antecedent breach. Clause 2 contains the customer's agreement to release the Seller from its obligations and to accept the Buyer in its place. This clause also contains confirmation from the customer that the customer remains fully bound by the terms of the customer contract. Clause 3 relates to governing law. This will usually be the governing law of the contract. It is usual for a Seller to write to its customers with the form of Novation Agreement, explaining the reasons for the transaction and asking the customer to sign the Novation Agreement and return it within a specified period. A sample form of letter is attached to these explanatory notes. Sometimes, if there is a dispute between the Seller and a customer, the latter will take the opportunity to withhold signature of the Novation Agreement. Alternatively, the Novation Agreement might contain a clause, which resolves the dispute or makes it clear what liability the Buyer is taking on.
[Draft Letter from Seller to Customer] Dear Sirs, We are writing to inform you that the Company is in the process of finalising an agreement for the sale of its business to [ ] (the Buyer). We have certain active contracts with you listed in the annexure to this letter (the "Contracts") in respect of which the Buyer will take over responsibility [and we are confident that the level of service which you will receive in the future, will be at least as good as the service which you have received from us to date]. In order to formalise the arrangements, we are writing to request your agreement to the novation of the Contracts from ourselves to the Buyer. We are enclosing with this letter three original copies of a Novation Agreement and would ask you to sign each of these agreements and return them to us in the enclosed pre-paid envelope. Please do not date the Agreements; we will date them when the transaction with the buyer if complete. The novation of the Contracts is conditional upon certain other agreements and approvals. Once the formalities are completed, we will send you one copy of the Novation Agreement duly dated and signed on behalf of the Buyer and ourselves. In the meantime, it will be helpful if you could confirm your agreement to the proposed transaction by signing and returning to us by fax the attached copy of this letter. Yours faithfully, ............................................... for and on behalf Seller [type onto copy: We, accept the proposed novation referred to above .................................................... for and on behalf of Customer Dated: ................................]
Back to top | 