In legal terms novation occurs when a new contract is substituted for an existing contract where old contract is mutually discharged. This new contract can be between the same parties which were parties to the old contract OR it can be between new parties.
Usually such contracts occur when the debtor or creditor is replaced with another debtor or creditor where the other party stands at the same position.
For example, A sold some goods to B under a contract and now B is under an obligation to pay for such goods. B approached A to accept C as his debtor in place of B. Thus A, B and C agreed on a new contract that from now on C is the debtor to A instead of B. This is Novation and the new contract formed is Contract of Novation. As B has been substituted by C and also any obligation on part of B is now stand discharged.
The important thing to note in novation is that all the parties i.e. old and new parties must agree to the contract and also when a new contract is substituted then old contract will be discharged automatically. And is one of the modes of discharge of contracts
This is a usual term in debt settlement contracts and Mortgage.