Legal Definitions - substituted agreement

A substituted agreement, also known as novation, is the act of replacing an old obligation with a new one. This can involve replacing an existing obligation with a new one or replacing an original party with a new party. A novation can substitute a new obligation between the same parties, a new debtor, or a new creditor.

For example, if person A owes person B $100, and person C owes person A $100, person A cannot transfer the legal duty of paying their debt to person B to person C without person B's consent. However, if person B agrees to accept person C as a debtor in place of person A, and person C agrees to accept person B as their creditor in place of person A, the three parties may make a tripartite agreement to this effect, known as novation. The effect of this is to extinguish person A's liability to person B and create a new liability on the part of person C.

Novation can be objective or subjective. Objective novation involves the substitution of a new obligation for an old one, while subjective novation involves the substitution of a new obligor for a previous obligor who has been discharged by the obligee.