Novation of a contract means any change in the existing contract. Or, in simple word we can say that when an old contract / agreement is replaced into the new contract with the consent of the parties which are involved in the contract.
And, when an novation of contract is made, the existing contract is discharged and the new contract Is made.
Section 62 of The Indian Contract Act, 1872 :
“Effect of novation, rescission and alteration of contract.- If the parties to a contract agree to substitute a new contract for it or to rescind or alter it, the original contract need not be performed.”
According to the Indian Contract Act, 1872, Discharge of Contract means the cessation of contractual relationship between the parties. Thus, a contract is said to be discharged once it ceases to operate that is, when the rights and obligation which have been created by it come to an end.
Novation of contract are of two types :
- Change in the terms of the contract.
- Change in the parties of the contract.
Change in the terms of the contract: Parties has the rights that they can alter or substitute the contract in which they have originally entered into. The parties are free when they want they can alter or substitute the contract they can do this.
If any parties to a contract they do so, their liabilities are regard to be original agreement or if any parties do so the liability of an existing parties may be arise. But the novation parties are to be bound by the new altered. Agreement means they are bound to replace to the new one.
For example : ‘A’ takes loan from ‘B’ Rs 5,000 . A made a contract and both are parties to a contract and ‘A’ gives Rs 5,000 in the place of estate this is a new contract and the old contract they give 5,000 rupees, In this contract the parties are same but the parties to a contract are substitute to a new one in alter termed in the place of the old contract. It may be noted that the novation is valid but both parties are agree on it. Any parties have freedom to entire into the contract with any terms of their choice, they are also free to alter the terms of its by their mutual consent.
Leading Case ; Salima jabeen v. national Insurance Co.Ltd.,
The appellant entered into a contract of insurance of her property against fire, with the respondent company. The insured sum was Rs. 23 lacs. Her property was set on fire by the militants causing substantial damages to the property .
The assessment of damage was made by two surveyors . the appellant accepted the compensation of Rs. 6.61.772 by the way of full and final satisfaction of her claim on the basis of the report submitted by the second surveyor. The said amount was paid by the insurance company and received by the appellant.
It was held that the accepting the said amount of compensation and agreeing not to make any further claim, the appellant has released the insurance company from contractual obligation she, therefore , was not entitled to claim any further compensation from the insurance company.
The term and condition of the contract can indisputably be altered or modified. However, it cannot be done unilaterally unless there exists any provision either in the contract itself or in Law.
To make novation of the contract in terms of Section 62 of the Contract Act , 1872, it must precede the contract making process. The parties thereto must be ad idem so far as the terms and conditions are concerned.
Change in the Parties of the contract: Any parties have freedom to change the parties but with their rules and regulation they have to decide with their own consent.
It is possible that by the novation an obligation may be created for one party in place of another.
For example : ‘A’ is bound to perform the contract in favour of ‘B’ the responsibility of ‘A’ could be taken over by ‘C’. Now ‘A’ being liable towards ‘B’ by novation ‘C’ become liable towards ‘B’ both the parties to the contract have right to take the decision or change the parties to the contract. But there are different parties to the contract , both the parties to the contract are free to make any recession to the contract they will do so. But after the cancellation of the original contract .
Leading Case ; Satish Chandra jain v. National Small Industries Corporation
The appellant stood guarantor to funding done to his proprietary business venture. Subsequently, the son converted his business into the private limited company. It was held that due to subsequent changes, which amounted to novation, appellant’s guarantee stood discharge.
-By Manas Tiwari, 1st Year, Faculty of Law, Dr. Shakuntala Misra National Rehabilitation University, Lucknow