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Novation-Discharge of Contract by Agreement

A contract can be discharged either by agreement or by a breach. Novation is one way to discharge a contract by agreement and section 62 of the India Contract, 1872 Act gives expression to the doctrine of Novation. The substitution or replacement of an old contract with a new one is termed as Novation. It takes place with the consent and agreement of both the parties to a contract thus with the creation of new contractual obligations, the old ones are discharged. The doctrine of Novation exists to give expression to the concept that parties to a contract should be competent to add, subtract or vary the terms of the contract before its breach with the help of a new contract.[i]

Few elements which become extremely necessary for the discharge of contract by novation are:

  1. There has to be a complete substitution of the original contract by a new contract.
  2. Till a new contract comes into existence, the original contact stands to exist and is enforceable as well.
  3. The new contract should be a valid contract as under the provisions of the Indian Contract Act, 1872.
  4. The original contract has to remain unbroken which implies that novation can take place only before the breach of the original contract.
  5. The essence of novation lies in the intention of both the parties to substitute the old with the new one, and not in the similarity/dissimilarity between the terms of the old and new contract.[ii]
  6. With the creation of a new contract, the parties can excuse performance under the original contract as mentioned under section 62 of the Indian Contract Act, 1872.

In Shiba v Tincouri[iii], the court stated that in a case based on novation, few things need to be proved by the plaintiff (I) that there existed a liability under the original contract (II) and there was an extinguishment of that liability through a new contract.

In Manohur Koyal v Thakur Das[iv], the plaintiff sued the defendant to recover the sum due on a bond. The defendant failed to pay the sum on the due date but promised to pay Rs. 400 and also promised to execute a fresh kistibundi bond which was agreed by the plaintiff. Later the defendant even failed to pay that sum and thus the plaintiff sued the defendant for the original bond. Calcutta High Court gave a decision in favor of the plaintiff as a new bond was created after the breach of the original bond. It was held that the original contract was not discharged by novation but by the breach.

In Lata Construction v Rameshchandra Ramniklal Shah[v], it has been stated that though there is a requirement of complete substitution by a new contract it the terms are not consistent with that of the old contract then the new contract cannot be said to be a substitution of the previous one.

In City Bank N. A. v Standard Chartered Bank[vi], it was stated that the substitution of the old contract by the new one cannot be unilateral rather it has to be bilateral to be considered valid in the courts of law.

Kinds of Novation

In Ramdayal v Maji Devdiji[vii], it was stated that novation can occur in two situations by introducing new terms and conditions to a contract or by the introduction of new parties to a contract. Such observation can broadly divide Novation into two types which are as follows:
  1. Novation in terms of the contract

    When the parties to a contract choose to make changes to the terms of the original contract with the help of a new one then the new contract would be termed as a novated contract.
    In R.S. Amarnath Mehra v. Union of India[viii], it was held that if a contract comprises of several terms then calling each term as a separate contract would be wrong. Similarly, fresh quotations or rates would not amount to a fresh contract. Also, minor changes in contract without an intention to create a new contract would not amount to novation.
  2. Novation by the change in parties

    If in case, after the original contract becomes enforceable and then the parties choose to substitute one party with another party, it is well within their rights to do so. With the formation and enforcement of the new contract, the newly added party becomes responsible and the party that is hence substituted is discharged of its obligations under the original contract.

In Godan Namboothiripad v. Kerala Financial Corporation [ix], a loan was lent by the respondent to a party for the purchase of a vehicle and as the party defaulted in the payment of the loan, the corporation took away the vehicle. A property that was equal to that of the amount of the loan was mortgaged by the appellant. It was held that novation of contract took place as a new party took over the obligation to pay the loan.

Effect of Novation

The effect of novation is mentioned in section 62 of the India contract act, 1872. The new contract extinguishes the liability under the original contract. Discharge of the original contract forms a part of the consideration in the cases of novation[x], thus if the original contract doesn't cease to exist then the new contract will fall short of consideration.

A collateral agreement should be considered as a complete legal contract but they are viewed with skepticism by the courts. Hence, they must be strictly proved and the burden of proof is on the party who is asserting novation. In the case of T.O.T. Co. v Uganda Sugar Factory[xi], it was stated that if the party is not able to prove any of the points that are required for the court to accept the existence of an animus contrahendi, then the parties to the contract can escape from the liabilities under the contract.

There is no scope for making a unilateral change in any terms or conditions of a contract unless there is a provision in the contract or law to do so. For instance to perform novation under section 60 of the Indian Contract Act, 1872; it should precede the contract making process.

In Delhi Development Authority, N.D. v Joint Action Committee, Allottee of SFS Flats[xii], it is stated that the parties should be ad idem as far as the terms of the contract are concerned.

In Scorpion Express Pvt. Ltd. V Union of India[xiii], a clause in a contract was unilaterally deleted by railway but it was considered contrary to the provisions of the India Contract Act, 1872. Thus, for an effective novation, it has to be bilateral in nature until mentioned otherwise in the original contract.

Accord & Satisfaction Versus Novation

Accord and Satisfaction is nothing but creditor's acceptance of the payment of a lesser amount offered by the debtor. It is another type of discharge of contract by agreement by performing a new agreement. The agreement part is 'accord' and the performance part is satisfaction.

In the case of accord and satisfaction, the obligee does not intend to discharge the other party of its pre-existing obligation merely by the formation of a new contract. The party is discharged from its pre-existing duty only when the performance of the new contract is satisfied. As against novation, the mere creation of a new contract stratifies the pre-existing duty.[xiv] With the creation of a new contract, there remains no possibility of the revival of the original contract which is not the case with accord and satisfaction.

Conclusion
A contract can be discharged by agreement or by breach and novation is one way of discharging a contract by agreement. There are few other ways of discharging a contract by agreement like remission, alteration and so. To discharge a contract by agreement one basic pre-requisite is that both the parties to the contract must be in agreement to such discharge. It cannot be unilateral until mentioned otherwise in the contract. Also, for discharge to take place by agreement like that in the case of novation, it is necessary for the parties to form a new contract before the breach of the original contract. Otherwise, it will be considered as an ordinary breach of contract and no novation.

Courts are generally suspicious regarding novated contracts but it is the duty of the party to assert the novation to convince the court about the valid existence of the new contract and the extinguishment of the pre-existing duty under the original contract. The doctrine behind such provision under the Indian Contract Act is to provide liberty to the parties forming a contract to alter its terms when it is considered fit by them.

Bibliography
Statutes:
  1. Indian Contract Act, 1872
Books:
  • Avtar Singh, Contract and Specific Relief
  • H. K. Saharay, Dutt on Contract The Indian Contract Act, 1872
  • J. Beatson, A. Burrows, and J. Cartwright, Anson's Law of Contract
  • Pollock and Mulla, The Indian Contract Act

Websites:
  • Hein Online
  • Jstor
  • Lexis Nexis
  • Manupatra
  • SCC Online
  • West Law
End-Notes:
  1. Manohur v Thakur das, ILR 15 Cal 326
  2. AIR 1944 Sind 205
  3. AIR 1939 Pat 477
  4. ILR 15 Cal 326
  5. AIR 2000 SC 380
  6. AIR 2003 SC 4630
  7. AIR 1956 Raj 12
  8. 51 (1993) DLT 455
  9. AIR 1998 Ker 31
  10. Scarf v Jardine, 7 AC 345 (351)
  11. AIR 1945 PC 144
  12. AIR 2008 SC 1343
  13. AIR 2009 Pat 106
  14. Novation Distinguished from Accord without Satisfaction, The Yale Law Journal, vol. 16, no. 2, 1906, pp. 133135
Written By: Dhriti Yadav, BA-LLB (H), Bennett University

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