LEADER TREAD ZIMBABWE (PVT) LTD V SMITH 2003 (1) ZLR 139 (H)

Flynote

Contract ” compromise ” novation ” distinction between ” compromise of illegal contract ” whether valid

Contract ” novation ” distinction between novation and compromise ” novation of illegal contract ” whether valid

Headnote

In general compromise differs from novation in that the existence of a valid prior obligation is not a requirement, whereas the intention to novate presupposes a valid existing obligation, and if there is no such obligation then a new obligation does not arise from the purported novation agreement. Compromise may, however, in certain circumstances constitute a novation.

The parties entered into an arrangement whereby the plaintiff would pay the defendant to provide foreign currency for the plaintiff's business. The plaintiff claimed it was an express term of their agreement that the currency should be obtained legally; the defendant, on the other hand, alleged that the parties agreed that he would obtain the currency illegally on the black or "parallel" market. The defendant subsequently failed to provide the plaintiff with foreign currency for which it had paid, so the plaintiff's representatives got him to sign an acknowledgement of debt for the amount it had paid him. When the defendant failed to pay the amount, the plaintiff sued him on the acknowledgement of debt. The defendant raised the defence that the acknowledgement was based on an illegal transaction.

Held that the acknowledgement of debt was a compromise which constituted a novation. Its effect was to extinguish the original agreement between the parties and to replace it with a new one. The validity of the compromise did not depend on the legality of the original agreement, and any defence which the defendant might have relied upon had he been sued upon the original agreement fell away.