Novation As a Means To Discharge Under Indian Contract Act

Introduction

An agreement enforceable by law constitutes a valid contract. In the case of a contract, each party is legally bound between both parties. Under section 2(h) of the Indian Contract Act, 1872 (I.C.A.), the term contract has been defined as an agreement enforceable by law. The term agreement has been defined under section 2(e) of the I.C.A., 1872 as “every promise and every set of promises forming consideration for each other becomes an agreement.” An agreement involves a promise from both sides, and when an agreement becomes enforceable under the law, a valid contract arises. A critical essential element of a valid contract is the offer and subsequent acceptance to form an agreement. An offer is the manifestation of the promisor’s mind, and an offer can be both positive and negative, that is, to do or not to do something. Towards this offer, consent should be signified and communicated by an act or omission. The promisee or the party accepting the offer intends to express their consent, and this consent is known as acceptance. Once a proposal is accepted by the other party and timely communicated to the party who proposed appropriately, it becomes a binding contract, provided that consideration and object are legal. The parties do have the intention to create legal relationships. 

Novation

The term “novation” means “to substitute with a new contract,” It refers to situations in which separate parties carry out the same commitments. The original contract’s obligations are terminated until a contract is novated. Any agreement can be novated, but only when there is a new contract, not a new deal, can the Novation take place. As a result, simply agreeing to replace an expired contract would not be binding until it is ratified and enforced by both parties. When parties novate a contract, they create a new contractual obligation. 

Novation under the Indian Contract Law

Under the Indian Contract Law, a contract may be terminated by mutual consent or a violation of the contract. Section 62 of the India Contract, 1872 Act expresses the doctrine of Novation, one way to discharge a contract by consensus. Section 62 deals with the Effect of Novation, rescission, and alteration of contract. It states that the original contract will not have to be executed if the parties agree to replace it with a new contract or rescind or amend it. For instance, A owes B 10,000 rupees. X enters into an arrangement with Y and gives Y a mortgage of his (X” s) estate for 2500 rupees in place of the debt of 4,000 rupees. This is a new contract and extinguishes the old. Novation is of two kinds. These two kinds are: 

Novation by Change in The Terms of Contract

The parties to the contract are free to modify the contract which they have originally entered. If they choose to modify/alter the original contract, their obligations or liability regarding the original contract extinguishes. In place of these obligations, they become bound by the obligations regarding the new contract. The case of Salima Janeen v. National Insurance Co. Ltd. is an important judgment in this regard. In this case, the appellant, Salima Jabeen, agreed insurance, under which the insured sum was Rs. 23 Lakhs, and her property was insured against fire. Subsequently, her property was set on fire by the militants, and the damage calculated by the two surveyors was Rs. 6,61,772, and the appellant accepted this sum in place of the agreed insured sum. The appellant was given the newly agreed sum. Subsequently, the appellant claimed a compensation of Rs. 23 Lakhs. But it was held that as the appellant accepted the newly agreed sum, she is not entitled to demand any further compensation from the National Insurance Company Ltd.

Novation by Change in The Parties to The Contract

Apart from changing the terms of the contract, it is possible that by Novation, liability may be created for one party in place of another. For instance, X is liable to perform an agreement in favor of Y. Z. could take over X Now, instead of X being obligated/liable towards Y, by Novation, Z becomes obligated towards Y. In S.B.I. v. T.R. Seethaverma, it has been noted that there should be a consensus among all three parties, that is, the individual who wants to be discharged from the obligation, the individual who undertakes to be liable in place of the person discharged, and the individual in whose favor the performance of the contract is to be made. The same rule is applicable in the contract of partnership. In the case of a Partnership firm, when a partner retires, his liability for the past acts continues. Such liability can be extinguished through the way of Novation, thus extinguishing the partner from such liabilities. This point has been upheld in section 32(2) of the Indian Partnership Act, 1932. It states that an agreement reached by a retired partner with a third party and the partners of the reconstituted firm may release him from any responsibility to such third party for actions of the firm committed before his retirement. Such agreement may be inferred by dealing with such a third party and the reconstituted firm after knowing the retirement.

Conclusion

From the above discussion, it is clear that an agreement enforceable by law constitutes a valid contract. In the case of a contract, each party is legally bound between both parties. Under section 2(h) of the Indian Contract Act, 1872 (I.C.A.), the term contract has been defined as an agreement enforceable by law. The term agreement has been defined under section 2(e) of the I.C.A., 1872 as “every promise and every set of promises forming consideration for each other becomes an agreement.” The term “novation” means “to substitute with a new contract,” It refers to situations in which separate parties carry out the same commitments. Under the Indian Contract Law, a contract may be terminated by mutual consent or a violation of the contract. Section 62 of the India Contract, 1872 Act expresses the doctrine of Novation, one way to discharge a contract by consensus. Section 62 deals with the Effect of Novation, rescission, and alteration of contract. It states that the original contract will not have to be executed if the parties agree to replace it with a new contract or rescind or amend it. The original contract’s obligations are terminated until a contract is novated. Novation is of two kinds. These two kinds are Novation by a change in terms of contract and Novation by a change in the parties to the contract.

References:

1.  The Indian Contract Act, 1872, No. 2(h) (Indian).
2.  The Indian Contract Act, 1872, No. 2(e) (Indian).
3. Diganth Raj, What are the essentials of Contract? IPleaders, https://blog.ipleaders.in/what-are-the-essentials-of-contract/ (last accessed Apr. 30, 2021).
4.  Meera Annie Koshy, What do you mean by revocation of proposals and acceptance under a contract? (2020) IPleaders, https://blog.ipleaders.in/mean-revocation-proposals-acceptance-contract/ (last accessed Apr. 30, 2021).
5. Diva Rai, Novation, Rescission, Alteration under the Indian Contract Act (2020)IPleaders, https://blog.ipleaders.in/novation-rescission-alteration-under-the-indian-contract-act/ (last accessed Apr. 30, 2021).
6. Dhriti Yadav, Novation-Discharge of Contract by Agreement LegalServicesIndia, http://www.legalserviceindia.com/legal/article-3115-novation-discharge-of-contract-by-agreement.html (last accessed Apr. 30, 2021).
7.  The Indian Contract Act, 1872, No. 62 (Indian).
8.  The Indian Contract Act, 1872, No. 62 (Illustration) (Indian).
9.  Dr. R.K. Bangia, The Indian Contract Act, (12^th Edition, 2005), Allahabad Law Agency, Haryana.
10.  Salima Jabeen v. National Insurance Co. Ltd., A.I.R. 1999 J. & K. 110.
11. Bangia, supra note 9, at 264.