Novation of a Contract in California: When a New Party Takes Over and the Old One Is Released

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

A novation is the substitution of a new obligation for an existing one. (Civ. Code, § 1530.) Under California law, putting a new debtor in place of the old one requires an intent to release the old one, and a novation is itself a contract that needs consent. (Civ. Code, §§ 1531, 1532.) So the original party is released only if you agreed to release it. A sale of the business does not by itself release it. Kolmogorov Law, P.C. litigates these disputes for businesses in California.

Call (909) 235-6116 or contact us online to discuss who is bound by a contract after a sale, a restructuring, or a replacement agreement.

What novation means under the Civil Code

The Civil Code describes three ways a novation is made. The same parties may substitute a new obligation for the old one, intending to extinguish the old one. A new debtor may be substituted for the old debtor, with intent to release the old debtor. Or a new creditor may be substituted for the old creditor, with intent to transfer the old creditor's rights. (Civ. Code, § 1531.)

In each, something old ends and something new takes its place, on purpose.

A novation is made by contract and is subject to all the rules that govern contracts in general. (Civ. Code, § 1532.) Like any contract, it needs consent.

The consent a release requires

Whether a novation took place is always a question of intention, the California Supreme Court has said. The controlling factor is whether the party owed the performance intended to release the original obligor. The party asserting a novation must prove it, and the evidence must be clear and convincing. (Alexander v. Angel (1951) 37 Cal.2d 856, 860.)

Consent runs in both directions. No new debtor can be bound without its assent, and no old debtor can be discharged without the creditor's consent. (Id. at p. 863.)

Consent does not have to be spelled out in a document titled "novation." In that case the creditors signed a new agreement with the people who took over the debt. It had a different payment schedule, added interest, and an acceleration clause the original notes lacked. Those facts supported the trial court's finding that the creditors meant to replace the original debtor, not to add a second one.

Novation vs assignment

An assignment transfers rights. The burden of an obligation may be transferred only with the consent of the party entitled to its benefit. (Civ. Code, § 1457.) So a company can hand its contract to a buyer, and the buyer can promise to perform, while the original company stays liable to the other side. Our page on contract assignment covers anti-assignment clauses and what an assignee takes.

To be a novation and not a mere assignment, the former debtor must be released from its obligation, with the creditor's consent. (Wells Fargo Bank v. Bank of America (1995) 32 Cal.App.4th 424, 431-432.)

That consent can be given in advance. In Wells Fargo, a ground lease said the lessee would be relieved of all liability after any assignment. Decades later the lease was assigned to a bank that assumed it, and the court held the transfer was a novation. Read the assignment clause for that kind of language before assuming anyone remains bound.

Novation, accord, and modification

A modification changes a term and leaves the contract in place. A novation ends the old obligation completely, and it must clearly appear that the parties intended to extinguish it and not merely modify it. (Wells Fargo, supra, 32 Cal.App.4th at pp. 431-432.) The practical consequence is that after a novation the old contract can no longer be sued on. Our page on contract modification covers amendments.

An accord is an agreement to accept, in extinction of an obligation, something different from or less than what is owed. (Civ. Code, § 1521.) Our page on accord and satisfaction covers that doctrine.

A novation is not always written. The statute on modifying written contracts leaves room for the rules on oral novation. (Civ. Code, § 1698, subd. (d).) An oral novation must still be proved by clear and convincing evidence.

When the company you contracted with is sold

The answer depends on what was sold and what you agreed to.

If only the ownership of the company changed, ask whether the company that signed your contract is still the one bound to perform it. The kind of novation that releases a debtor puts a new debtor in its place. (Civ. Code, § 1531.)

If the company sold its assets and assigned your contract, the buyer may now owe you performance. The seller still does too, unless you released it or the contract released it in advance. (Civ. Code, § 1457.)

If a corporation merged into another, the surviving corporation is subject to all the debts and liabilities of the one that disappeared. (Corp. Code, § 1107, subd. (a).) Our page on successor liability covers buyers that deny having taken on anything.

Whether a personal guaranty survives a sale is a separate question. See our page on personal guaranties of business debt.

If you are told the old party is released

Ask for the document that released it. Then look at your own conduct. Accepting the new company's payments is consistent with an assignment, and the party claiming a release must prove your intent by clear and convincing evidence. A new agreement signed with the new company, on new terms, is stronger evidence against you.

If you have not agreed to anything, say so in writing. State that you accept performance from the new party without releasing the original one.

If your business wants to be released

Get the release signed by the other side before closing, or confirm that the contract releases an assignor. A buyer's promise to assume the contract gives you a claim against the buyer if the customer sues you. It does not end the customer's claim. We read the contract and the sale documents together for that reason.

What to bring to the first meeting

The original contract, with its assignment clause and any guaranty.
The purchase agreement, assignment, or assumption agreement from the sale.
Any consent, release, or replacement agreement, signed or proposed.
Invoices, payments, notices, and correspondence exchanged since the change.

Frequently asked questions

The company I contracted with was sold and the buyer says the old owner is off the hook. Did I agree to that?

Only if you consented to a release, in the original contract or afterward. In California a novation that substitutes a new debtor requires intent to release the old one, and the party claiming it must prove it by clear and convincing evidence. Accepting performance from the buyer does not by itself release the company that signed the contract.

What is a novation in contract law?

A novation is the substitution of a new obligation for an existing one. California's Civil Code recognizes three forms: a new obligation between the same parties, a new debtor in place of the old, or a new creditor in place of the old. In each, the old obligation ends. Because a novation is itself a contract, a new party must agree to be bound, and the party owed performance must agree to any release.

What is the difference between novation and assignment?

An assignment transfers a party's rights. It does not move the burden of the obligation unless the party owed the performance consents, so the assignor remains liable. A novation releases the original party and replaces it with a new one, which in California requires the consent of the party owed the performance. The label on the document does not control.

We sold our company's assets and the buyer took over our customer contracts. Are we still liable if the buyer stops performing?

Yes, unless you were released. Under California law the burden of a contract can be transferred only with the consent of the party entitled to the performance. Unless each customer released your company, or the contract released an assignor in advance, your company remains liable. Your recourse is against the buyer under the assumption terms of the sale agreement.

Does a novation have to be in writing in California?

Not always. California's statute on modifying written contracts expressly leaves room for the rules on oral novation. The practical obstacle is proof. The party asserting a novation carries the burden, the evidence must be clear and convincing, and some contracts must be in writing for other reasons. A signed release is the safe course.

Talk to a California breach of contract attorney

If your business is being told that a contract moved to someone else, or needs to know whether it is still bound after a sale, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is a business litigation firm in Irvine, California, that represents companies and their owners in court and in arbitration.

This page provides general information about California law and is not legal advice. Outcomes depend on the contract, the sale documents, the parties' conduct, and the court.