Partnership Firm

What is the Novation of a Partnership Deed?

calendar30 Jan, 2023
timeReading Time: 4 Minutes
What is the Novation of a Partnership Deed?

A business is perpetual but dynamic, so to maintain the perpetually, the partnership firms will have to deal with the dynamism of the world and businesses. It is quite inconvenient for business partners to cancel a previous contract wholly and enter into another contract so often. It is well said that partners may come and go but the business stays forever, so if the business partners want to keep the original agreement as it is and the need is to just change the name of a partner who voluntarily exits and transfer his rights and obligation to another partner then, there comes the role of novation of a partnership deed. In this article, we discuss more about the Novation of a Partnership Deed.

It allows the business to carry forward the original partnership agreement by making the necessary change and that will be considered as a novation of partnership deed. However, the previously existing document will come to an end.

It would help the businesses to save cost and time and it will help them deal with the necessary changes that are to be needed to be done for the good sake of the business. It is also helpful for Contractors, as they deal in various contracts simultaneously, and if they feel a need to transfer any of their contract, then they can make use of the novation of agreement by merely transferring the agreement from his name to another contractor’s name after taking consent from all parties. Novation will be helpful to smoothen and ease the process of making new partnership deed or just to transfer.

Types of Novation of a Partnership Deed

There are particularly 3 ways to novate an agreement:

  • Standard Novation: Novation is not only done when there is the transfer of rights and obligations between parties. It can also be used when the existing parties agree that there is a need to bring some changes in the contract, so instead of making a contract from the very beginning, only the parts or clauses which need to be added or removed will be done.
  • Expromissio Novation: this type of novation requires the involvement of three parties i.e., the transferor, transferee, and the counterparty, which clearly represents that in Expromissio novation, there is the entry of a new partner, and the transfer of rights and obligations takes place after the consent of all the parties.
  • Delegation Novation: To delegate is to transfer responsibilities. Delegation novation is used when the previously existing debtor is replaced by a new debtor. So now, the original partnership deed will be replaced by a new deed along with a few new obligations.

Difference Between Assignment and Novation of a Partnership Deed

As we have read above to novate means to rescind the previous contract and enter into a new one whereas if we learn about assignment then first thing to understand is that when assignment is carried the contract does not end. That means the previous contract stays in existence, but only the rights are transferred.

In novation of a Partnership Deed, the parties enter into a new contract as both the rights and the liabilities are transferred to the new party as he will replace the previous party or there may be a few changes to the contract but altogether, it brings an end to the originally existing contract. If we talk about assignment, then only the transfer of rights and not the liabilities is done by one party to another and the contract does not end. The previous contract stays only with a change of assignment in rights.

Praful A Mehta Vs Nainesh M Gandhi:

Praful Mehta entered into a partnership agreement with the respondent Nainesh Gandhi. Later Praful Mehta re-entered into a partnership deed with another party, excluding the respondent, Nainesh Gandhi. This caused a dispute between the two; the previous partnership deed had an arbitration clause, the applicant filed a suit against the respondent on the basis of an arbitration clause in the subsequent partnership deed.

The respondent held a defence that during the second agreement, he was not a party to the partnership firm and that his signatures were forged. As due to the novation of a partnership deed, the previous deed stands cancelled and in consequence to that the business has also gone under reconstruction and the respondent has retired, but according to the applicant, the respondent was a party in the business transactions after the entering into the subsequent partnership, and that he was a continuing partner.

Hon’ble Justice AK Menon of the Bombay High Court held that in order to prove the allegation of the respondent that the signatures were forged, the parties shall undergo an arbitration process. And held that the arbitration clause contained in the deed could be invoked.

When To Sign Novation Agreement? – Novation of a Partnership Deed

Novation[1] agreement is basically to revoke the previous contract and enter into a new contract without much alterations in the agreement so it can be used under various situations and various types of business.

  1. Banking: Banks use a lot of transfer agreement for loan related transactions to other parties, and so they enter into agreements with other parties which revolves around cancelling and creation of new contracts.
  2. Financial Market: In the financial markets the clearing house does a lot of transactions of purchasing and selling of security between parties which require entering into agreements between the transferor, transferee and the other party.
  3. Governmental transactions: Governments carry business between public and public sector units and private and public sector units and various other agreements, so it will be very costly and time taking if every time a separate agreement is entered, and so novation of deed proves to be of use at such situations.
  4. Real Estate: Real estate involves agreements between seller, buyer, and brokers. It involves selling and purchasing or renting of properties either directly between the buyer and seller or through the intermediaries. So, it is very convenient to make use of the novation of a partnership deed to establish a transaction every time by changing a few important clauses, if any or by merely altering the names of the parties.

Conclusion

Novation of a partnership deed hence is a very important and time saving way for not only the corporate business but also otherwise such as financial transaction markets, bank, real estate business etc. Recently the courts have also started to look into the novation of a partnership deed when a no. of disputes arise due to novation. One such case is Union Of India & Ors vs Tantia Construction Pvt.Ltd, wherea change in the design of the bridge over railways was made, but the construction had already begun for the bridge, so the government was made to pay for the work done at the previous rate and it was held that the new contract would not entitle the government to hand over the project to other contractors. Novation is a way to rescind an old contract and enter into a new one.

Read Our Article: What Are The Provisions Of The Partnership Deed?

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