Published on : September 07, 2021 at 17:21 IST
Introduction
As we know that according to Section 2(h) of the Indian Contract Act 1872, a contract is referred to as an Agreement Enforceable by Law. Mutual agreement between two or more parties is an outcome of a Contract. Even though sometimes parties may also consent to terminate the contract. For a contract to be legally enforceable it should be valid and the Contract Act provides the important conditions for the contract to be valid. These are:
- Free consent,
- Competency of the parties,
- Lawful consideration and object,
- Not declared to be void under the law.
Contracts which need not be Performed
For a contract to be invalid it must be under coercion, threat, fraud, undue influence etc. Also, object should not be inconsistent with any other law of a contract. Moreover, performance would not be required under some circumstances which are clearly mentioned in Sections 62 and 63 of the Act. These circumstances are-
- Novation,
- Rescission,
- Alteration,
- Remission.
Section 62 – Novation
This Section provides that the original contract need not be performed if the parties to a contract agree to alter or substitute a new contract. As Novation of contract means to create a new contract while the new contract needs not to be performed and is terminated.
Furthermore, the newly substituted agreement would be by the mutual consent of the parties, valid, enforceable and have consideration. Basically, it should fulfill the requirements of a valid contract.
Furthermore, essentials of Section 62 of the Act are-
- Consensus ad idem between the parties to contract.
- Substitution, recession or alteration of a contract that gives rise to a valid new contract.
- Termination of the original contract.
- There should be previous contracts entered in between the parties.
As in Ramdayal Vs Maji Devdiji[i] the Court observed that Novation takes place by introducing new terms in the contract or by introducing new parties. A contract of Novation requires a party to agree or discharge his debt. There can be no Novation unless this can be accomplished.
For example, contract are like in a partnership firm liabilities of the old firm are taken over by the new firm, an agreement of lease is where the tenant gives the lease to another party and makes him responsible for the responsibility and obligations that arise from these agreements etc. For Novation to be in effect, contract’s modification must go on to the root of original contract as held by the High Court in case of Juggilal Kamlapat Vs N.V. Internationale[ii].
Contracts in Novation are as:
- Where the obligation under the contract is replaced with the new one
As we know that the parties in a contract have the freedom to enter into a contract and by mutual consent can alter its terms. And when both the parties mutually agree to change the terms of contract of which they entered into then binding of new agreement imposes on them. Hence a party which was not a part of the original contract cannot impose conditions by unilateral term.
- Where a party is replaced by another party
This creates obligation for one party in place of another party as under a Novation agreement it is possible that the terms provide replacement of contract to another party from one party. Under this type of contract, the new party assumes that obligations to another party would not be held liable for any future damages. For instance- A and B are the parties that enter to a contract and A agrees to replace C in B’s place, then the existing contract between A & B will start to happen.
The main necessity that was discussed by the Supreme Court of Section 62 was discussed as in the case Lata Construction & Ors Vs Dr. Rameshchandra Ramnikal Shah And Anr.[iii] It was held that a new contract was required in place of old one with the rule that new contract should completely alter the terms of the original contract.
‘No Novation’
When all the conditions of novation are not satisfied then it will be considered as no novation. As in the case of Godan Namboothiripad Vs Kerala Financial Corporation[iv] it was held that the important features of novation is relinquishment of a right under the original contract and when these are missing then there would be no novation.
Unilateral Act of a Party
As we know that a party on its own, unilaterally cannot change the terms of the contract. Hence in the case Citi Bank N.A Vs Standard Chartered Bank & Others[v] the Supreme Court held that under Section 62 novation, recission and alteration requires that both the parties should agree to alter, rescind or substitute the existing contract with the new one. In case ofPolymatIndia P. Ltd. & Anr Vs National Insurance Co. Ltd. & Ors[vi] it was held that the terms of a contract cannot be varied without mutual agreement of the parties.
The difference between Novation and Assignment is:
| Novation | Assignment |
| The rights and obligations that arise under the new contract are under the novation. | Only some rights that are transferred to the third party are under assignment. |
| Under this the new contract becomes binding of the parties and the original contract is discharged. | The original agreement and the parties will remain bound by obligations under this contract. |
Section 62 – Rescission
It is also under Section 62 that a party should only be in bilateral terms allowed to rescind a contract. To rescind here means to cancel which means a party to the contract can terminate a contract by mutual consent. When some or all terms are cancelled out of a contract, that is known as rescission of a contract.
As in the case Union of India Vs Kishorilal Gupta and Bros.[vii]It was held by Calcutta High Court that a contract under Section 62 of the Contract Act can be rescinded only after there has been a breach. Rescission occurs –
- When one party fails to perform the contract or the other party rescind the contract
- Or termination of the contract by the mutual consent of the parties
The difference between Rescission and Novation
| Novation | Rescission |
| Novation takes place when the old contract substitutes with the new one. | Rescission takes place when both the parties agree to terminate the contract. |
Alteration in Contract (Section 62)
It happens when the parties enter into a contract and with the mutual assent if one of the party wants to modify the contract can do so. Hence, once the parties sign the contract they cannot change or modify its terms but only on the situation where both the parties by their mutual consent agreed to the alteration. As in the case United India Insurance Co. Ltd Vs M.K.J. Corporation[viii]it was held that material alteration is the one which varies the rights and liabilities of the parties ascertained by the deed or it varies the legal effect of the instrument which is originally expressed.
Difference between Novation and Alteration
| Novation | Alteration |
| Here the parties who are in a contract can change. | Here parties remain same, they do not change. |
| The new contract substitute with the old one. | Only certain terms and conditions of the contract changes and there is no substitution of the new contract. |
Remission (Section 63)
This Section enables the promise to agree to dispense with or remit performance of the promise. Remission means waiver and thus the promise can waive either in full or in part the obligation of the promisor. This Section permits a party who is entitled to the performance of a contract as:
- Dispensing with or remitting performance
As the promisee has been authorized to remit with the performance of contract without any consideration, he may fully forego his claim or may agree to a smaller amount in full satisfaction of the whole amount. For example if A owes Rs 5,000 to B, B may accept only Rs 2000 from A.
It means that if B agrees to accept Rs 2000 in lieu of Rs 5000 from A he then cannot ask A to pay the balance of Rs 3000. As in case Kapur Chand Godha Vs Himayatalikhan Azamjah[ix] B had executed a promissory note in favour of A due to which A was offered a sum of Rs 27 lacs in full satisfaction of that note. According to the note first he accepted Rs 20 lacs but late on asked for another 7 lacs and sued B. It was held that the case was completely covered by Section 63.
- Extending date for performance
There is nothing strange for the time of performance being extended even if the original agreement had fixed date. Section 63 provides that every promise may extend the time of performance of the contract. As in the case Keshavlal Lallubhai Patel and Others Vs Lalbhai Trikumlal Mills Ltd[x] it was held that a variation in date of performance by express representation by the defendants, agreed to by the forbearance on the part of the plaintiffs.
- Accepting any other satisfaction instead of performance
Section 63 permits promisee to accept any other satisfaction in lieu of agreed performance and this would discharge the promisor. For example, A owes B under a contract as certain amount of money has not been provided. A without ascertaining the amount gives B in satisfaction and accepts the sum of Rs 2000. This is a discharge of the whole debt, whatever may be its amount. As in case Union of India Through General Vs Babulal Uttamchand Bhandari[xi] it was held that the plaintiffs suit for the balance of the amount was maintainable as the amounts were not accepted in full satisfaction of the claim.
Judgements
- Mrs. SalimaJabeen Vs National Insurance Co. Ltd.[xii]
Appellant released the Insurance Company from Contractual Obligations
In this case it was held that by accepting the said amount of compensation and agreeing not to make any further claim, the appellant has released the insurance company from contractual obligations. She, therefore, was not entitled to claim any further compensation from the insurance company. The parties therefore must be ad idem so far as the terms and conditions are concerned.
- Godan Namboothiripad Vs Kerala Financial Corporation[xiii]
Liability of Original Debtor had come to an End
In this case the appellant requested the respondent corporation to release the article and undertook to pay the balance of the amount due from the debtor. It was held in this case that there was novation as the result the liability of the original debtor had come to an end and the liability of the appellants had come into existence to pay the outstanding dues.
- M.S. Anirudhan Vs The Thomco’s Bank Ltd.[xiv]
If the alterations made were to Disadvantage of Surety, he might be Discharged
In this case the Court relied on the Apex decision wherein it was ruled that the alterations in an instrument which were to benefit the surety did not discharge him from liability. It was held that the surety might be discharged if the alterations made were to his disadvantage or its unsubstantial character was not self- evident. Since the rescheduling of loan and extending the period of its repayment had resulted to the benefit of the surety and not to their disadvantage, the novation did not have the effect of discharge of the sureties.
- Subash Chand Jain & Ors Vs Haryana Financial Corporation[xv]
Amount was Rescheduled and Payment was Extended
Herein the petitioner furnished a continuing guarantee, to secure loan agreement, to continue to remain in force and effect till the time the borrower has repaired in full the said loan together with interest and other charges and all other money that may become due under the agreement. The outstanding amount was re- scheduled and period for payment was extended by two years. The Punjab and Haryana High Court held that it was not the novation of contract of such a nature as to discharge the petitioner.
- Ram Khilona & Ors Vs Sardar & Ors[xvi]
Alterations were not Material and did not made the Agreement Void
In this case there was sale of land through a duly executed deed between the two parties. After the deed was executed the vendees introduced in the agreement two independent persons as marginal witnesses. The question arose whether introducing these witnesses affected the enforceability or validity of the agreement making it void ab initio. Hence it was held that such alterations was not material and did not rendered the agreement void. The document remained valid and enforceable.
Conclusion
Hence, we get to know that novation happens when there is a change in the terms of contract between the parties and most important is that the new changes are consented by both the parties. When both the parties have consented to the alterations of new contract and not unilaterally then only the new contract is said to be a valid contract. Also a valid novation agreement contains the content like definitions, name of the parties, recitals, representations, rights of the third party, obligations of all the parties, effects of novation agreement, jurisdiction and counterparts.
References
- Contracts, which need not be performed
- Novation, Rescission, Alteration under the Indian Contract Act
- Contracts which Need Not to be Performed
[i]Ramdayal Vs Maji Devdiji on 31 August, 1954 [ AIR 1956 Raj 12]
[ii]JuggilalKamlapat Vs N.V. Internationale on 8 August, 1952 [AIR 1955 Cal 65]
[iii]Lata Construction & Ors Vs Dr. Rameshchandra Ramniklal Shah And Anr. On 12 August, 1999 [Civil Appeal No. 2418 of 1996]
[iv]Godan Namboothiripad Vs Kerala Financial Corporation on 22 August, 1997 [AIR 1998 Ker 31]
[v]Citi Bank N.A Vs Standard Chartered Bank & Others on 8 October, 2003 [Civil Appeal No.- 7941 of 1995]
[vi]Polymat India P. Ltd. & Anr Vs National Insurance Co. Ltd. & Ors on 1 December, 2004 [Civil Appeal No.- 4366 of 1999]
[vii]Union of India Vs Kishorilal Gupta and Bros. on 21 May, 1959 [1959 AIR 1362]
[viii]United India Insurance Co. Ltd Vs M.K.J. Corporation on 21 August, 1996 [Civil Appeal No.- 6075- 6076 of 1995]
[ix]Kapur Chand Godha Vs HimayatalikhanAzamjah on 12 April, 1962 [1963 AIR 250]
[x]Keshavlal Lallubhai Patel and Others Vs Lalbhai Trikumlal Mills Ltd on 21 March, 1958 [1958 AIR 512]
[xi]Union of India Through General Vs Babulal Uttamchand Bhandari on 12 July, 1967 [AIR 1968 Bom 294]
[xii]Mrs. Salima Jabeen Vs National Insurance Co. Ltd on 14 October, 1998 [AIR 1999 J K 110]
[xiii]Godan Namboothiripad Vs Kerala Financial Corporation on 22 August, 1997 [AIR 1998 Ker 31]
[xiv]M.S. Anirudhan Vs The Thomco’s Bank Ltd. on 14 September, 1962 [AIR 1963 SC 746]
[xv]SubashChand Jain & Ors Vs Haryana Financial Corporation on 27 November, 2007 [AIR 2008 P H 99]
[xvi]Ram Khilona & Ors Vs Sardar & Ors on 16 July, 2002 [Civil Appeal No. 283- 289 of 1997]