The Doctrine of Novation, Kinds of Novation

1) Introduction - 

           Section 62 of the Indian Contract Act 1872 deals with the doctrine of novation. The expression "Novation" means substitution of a new contract in the place of an existing contract. With the creation of the new contract, the existing contact stands extinguished /terminated.

2) What is Novation - 

            Novation means substitution of an existing contract with a new one. When, by an agreement between the parties to a contract, a new contract replaces an existing one, they already existing contract is thereby discharged, and in its place, the obligation of the parties in respect of the new contract comes into existence.

3) Novation takes place when-

1)  a new contract is substituted for an existing one between the same parties, or
2)  there is a change of parties, the contract remaining the same.

        The consideration for the new contract is the discharge of the old contract. It is essential for the principle of novation to apply that there must be the mutual or tripartite consent of all the parties concerned.

Illustrations

(a) A owes money to B under a contract. It is agreed between A, B and C, that B shall thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted.

(b) A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of his (A’s), estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old.

(c) A owes B 1,000 rupees under a contract, B owes C 1,000 rupees, B orders A to credit C with 1,000 rupees in his books, but C does not assent to the agreement. B still owes C 1,000 rupees, and no new contract has been entered into.

             Novation should take place before the expiry of the time of the performance of the original contract. If it does not, there would be a breach of the contract, and if a new contract is subsequently substituted for an existing one, it would only way be to adjust the remedial rights arising out of the breach of the old contract. If for any reason the new contract cannot be enforced, the parties can fall back upon the old contract.

4) Kinds of Novation -

Novation is of the two kinds which are as follows -

            (a) Novation in the terms of the contract,

            (b) Novation by the change in the parties to the contract.

a) Novation in the terms of the contract -

       
            Novation may also involve the substitution of a new contract for the old.  The parties to a contract are free to alter the contract which they have originally entered into if they do so. Their ability as regards the original agreement is extinguished, and in its place, they become bound by the new altered agreement.

b) Novation by the change in the parties to the contract -

           It is possible that by novation an obligation may be created for one party in place of another. If under an existing contract, 'A' is bound to perform the contract in favor of 'B', the responsibility of 'A' could be taken over by 'C'. Now instead of 'A' being liable towards 'B' by Novation 'C' becomes liable towards 'B'.
          

5) Conditions of Valid Novation 

         The following conditions are to be satisfied for valid novation.

1)  to substitute new contract, the old contract must exist

2)  the new contract must fulfill the Essentials of a valid contract. (as prescribed under section 10 of the Indian Contract Act 1872).

See also....

Discharge of Contract

Kinds of Breach of Contract