What is novation and when does it replace a contract in Ontario?

Novation is the substitution of a new contract — or a new party — for an existing one, with the result that the old obligation is extinguished and a new one takes its place. Unlike assignment (which transfers rights but leaves the original party responsible for performance), novation releases the original party entirely.

For novation to occur in Ontario, three elements must be present: there must be an existing valid contract, a new contract must replace it, and all parties involved — including the departing party — must consent to the substitution. If one party does not agree, there is no novation; the original obligations remain.

A common commercial example is where a business is sold and the buyer takes over the seller's contract with a supplier. For novation to occur, the supplier must agree to release the original business and look only to the buyer going forward. Without that consent, the original seller may remain liable.

Novation can happen expressly (in a written novation agreement) or may be implied from the conduct of all parties — though implied novation requires clear evidence that all parties agreed the old contract was replaced. Courts do not find implied novation lightly.