Legal Definitions - substituted agreement

A substituted agreement, also known as novation, occurs when all parties involved in an existing contract agree to replace that contract with a completely new one. This new agreement effectively extinguishes the old one, meaning the original contract's obligations and rights are terminated and replaced by those in the new contract. Novation often involves a change in the parties to the agreement or a significant alteration of the original terms, but it always requires the consent of everyone involved.

• Example 1: Changing a Lease Agreement

  Imagine Sarah is renting an apartment under a one-year lease. Three months into her lease, she gets a job offer in another city and needs to move. She finds a friend, Mark, who is willing to take over her lease for the remaining nine months. Sarah, Mark, and the landlord all agree to this arrangement. They sign a new lease agreement where Mark becomes the tenant, taking on all the responsibilities and rights that Sarah previously held. This new agreement is a substituted agreement (novation) because it completely replaces Sarah's original lease, releasing her from her obligations and establishing a new contractual relationship between Mark and the landlord.

• Example 2: Replacing a Debt Obligation

  A small business, "InnovateTech," owes $50,000 to its supplier, "Global Parts Inc.," for a shipment of components. InnovateTech is experiencing cash flow issues but has a valuable patent. Instead of paying cash, InnovateTech proposes that "Venture Capital Group" (a third party interested in the patent) will pay Global Parts Inc. the $50,000 directly, in exchange for a share of InnovateTech's patent rights. Global Parts Inc. agrees to this. A new agreement is drafted where Venture Capital Group assumes InnovateTech's debt to Global Parts Inc., and InnovateTech is released from its original obligation. This is a substituted agreement because the original debt contract between InnovateTech and Global Parts Inc. is extinguished and replaced by a new arrangement involving a third party.

• Example 3: Modifying a Service Contract

  A marketing agency, "Creative Campaigns," has a contract with "Local Bakery Co." to run a three-month advertising campaign. Two weeks into the campaign, Local Bakery Co. decides to pivot its business model to focus solely on online sales and no longer needs traditional advertising. Creative Campaigns, understanding the change, agrees to terminate the original advertising contract. Instead, they enter into a new agreement to build and manage Local Bakery Co.'s new e-commerce website for the next six months. This new website development contract is a substituted agreement because it completely replaces the initial advertising contract, with both parties agreeing to new terms and obligations that supersede the original arrangement.