A substituted contract is an agreement between parties that were involved in a previous contract. The substituted contract replaces the original contract, completely taking its place and discharging the terms of the original agreement.

Substituted Contract Definition

Substituted contracts are not the same as novation, because novation requires a third party who was not part of the original contract to be involved. In novation scenarios, when the third party is accepted by the obligee, the agreement is discharged immediately. Substituted contracts discharge the previous contract immediately and merge it into the new contract. This results in an effect that renders the original contract unenforceable unless there is a specific agreement in place that states otherwise.

Substituted contracts are created with the intention to circumvent rules that were unsatisfactory until recently when certain executory accords came into play.

Similarities and Differences Between a Substituted Contract and a Novation

A substituted contract happens when two parties or more are involved in a joint venture and find the current agreement is no longer relevant or effective. When this happens, the involved parties replace the original contract with a new one. This requires consent from all involved parties. If the original contract was written, the substituted contract must also be written. A substituted contract can also be considered a variation on an agreement when the contract as a whole is left unchanged, but amendments are added for the purpose of fulfilling certain requirements.

Novation, on the other hand, is essentially an agreement involving a third party replacing one of the original parties to the contract and releasing the replaced party from any obligations they may have had under the agreement. The main factor in novation is the original contract remains unchanged and is still in effect. Novation is important when conducting business of any kind in South Africa when existing parties to a contract wish to transfer their contractual obligations to a third party. This is also sometimes referred to as "deed of assignment contract."

There are a few similarities between a substituted contract and novation, the most significant being they both involve making a change in partnership. However, the nature of this change in a substituted contract is in the contract itself whereas, with novation, the change lies with the involved parties to the contract.

Some of the most significant differences between novation and substituted contracts include:

  • Substituted contracts require a change to be made to the entire contract.
  • When novation occurs, the contract usually remains largely intact.
  • The same parties who were involved in the original contract remain involved in a substituted contract.
  • When novation occurs, a new party is brought into an existing agreement.
  • Substituted contracts are made to satisfy all current parties to a contract.
  • When novation occurs, a new party takes over the contractual obligations of the party he or she is replacing without making any changes to the contract itself.
  • A substituted contract continues to contractually bind all existing parties.
  • When novation occurs, the incoming party releases the party they are replacing from the contract.

There are a number of other subtle differences between substituted contracts and novation, and these are simply the most significant. To fully understand and navigate these concepts, it is recommended you seek aid from an attorney with knowledge and experience in this area.

Legal Aspect of Substituted Contracts and Novation

In South Africa, all issues pertaining to business, including business partnerships of any kind, are catered to by the South African Companies Act of 1973. To avoid any kind of potential dispute when conducting business within a partnership, substituted contracts and novation are vitally important. This is because they help partners:

  • Facilitate making changes to contracts they have entered into with one another.
  • Withdraw from a company through the act of allowing a new party to take their place.

Without the flexibility provided by substituted contracts and novation agreements, parties involved in a contract would be stuck in potentially undesirably business situations with no way to remedy the issues they are facing or withdraw from the company without legal repercussions. These two methods allow for some flexibility and provide partners with an opportunity they might not otherwise have.

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