NOVATION – A DISCHARGE OF CONTRACT, UNDER INDIAN CONTRACT ACT 1872

 

NOVATION – A DISCHARGE OF CONTRACT, UNDER INDIAN CONTRACT ACT 1872:

 

Under Section 62 of the Indian Contract Act 1872, novation means substitution of an existing contract by a new contract for consideration of discharge of original contract between the same parties of different parties. when in place of old contract, a new contract is substituted, then it is called novation. Novation is possible only with the consent of all parties.

 

In Delhi Development Authority, N.D. vs. Joint Action Committee, Allottee of S.F.S. Flat (2008), the supreme court has made it clear that novation cannot be made by unilateral act. With a view to make novation of a contract binding and in particular some of the terms and condition thereof the offeree must be made known thereabout. A part to the contract cannot, at a large stage while the contract was being performed, impose terms and conditions which are not part of the offer and which are based upon unilateral insurance of the office orders but not communicated to the other party to the contract and which were not even the subject matter of a public notice. The court further opine that terms and conditions of the offer can be altered but they can not be altered unilaterally unless their exists any provisions in the contract, it is obligatory on his part to bring the same to the notice of other party. Novation of contract must precede the contract making process. The parties thereto must be ad idem so far as the terms and conditions are concerned.

 

In case of Shark vs. Jardin, (1882), novation has been explained well. When present contract is replaced by a new contract between the same parties or between different parties in consideration of extinguishing the original contract, then it is called novation.

 

CATEGORIES OF NOVATION:

 

Novation is made in the following manner: -

 

A. By alteration of parties:

 

When obligation of contract exists but the parties are altered with the consent of all parties, then original parties of the contract are relieved from the obligation of performance of contract and new parties will be under obligation of performing the contract. For such alteration the consent of all three person, the person who undertakes the obligation, the person who wants to be discharged and the person in whose favour the performance of contract is to be made. Thus, for novation it is not that the sufficient debtor has accepted the obligation of the original. It also necessary that the creditor has accepted new debtor in place of old debtor. For this purpose, the consent of original debtor, new debtor and creditor is necessary.

 

B. By substitution of new contract for original or old contract:

 

It parties make a new contract in place of old contract, then they are relieved from performance of new contract. For the substitution of new contract for old contract the consent of all parties necessary. This rule applies only when old contract is valid and is in existence.

 

GROUNDS OF SUIT FOR RECISSION OF A CONTRACT:

 

Any party to the contract can bring a suit for rescission of a contract. such suit can be brought on the following grounds.

 

a.   If the contract is void; or

b.   If it is illegal; or

c.   If it is impossible; or

d.   If the law to which the person is subject has been changed.

 

RULES REGARDING NOVATION:

 

a.   The parties to the contract may remain the same and substitute new term for the old one of the contracts.

b.   The term may remain the same and a new party may be substituted for the old one. For example, there may be agreement between an original promisor, an original promise and a third party that the original promise will look to the third party for the performance of the promise and not to the original promisor.

c.   Whenever novation takes place, the old contract become completely extinguished and no action may be taken on the old contract.

d.   There is no novation if the substituted contract or novation has not taken place with the consent of all the parties.

e.   The substituted contract, in order to effect novation, continue to subsist. It was held in Laxman Waman vs.  Balmukund, (1954), that if new contract is unenforceable the old contract revives.

f.    Section 62 of the Act will not apply where the alleged agreement to substitute a new contract for the old one is made after breach of original contract. In that case original contract may be said upon. But in N.M. Firm vs. Theperumal Chetty, (1922), it has been held that there could be a novation of substitution under section 62 even after the breach of the old contract.

g.   For novation new contract must be valid and enforceable. If new contract is neither valid nor enforceable, it will not substitute the old one and the rights and liabilities of the parties to the contract will be as explained on the basis of old contract and the same will be binding on them; Brij Mohan Das vs. Punjab National Bank (1982).