Novation means substitution of an existing contract with a new one. A contract may be terminated by mutual agreement between the parties. When a new contract replaces the existing one by agreement between the parties, the already existing contract is thereby discharged. Thus, it is also a method of discharge of contract. Once the existing contract is discharged by novation, the obligation of parties in respect of new contract comes into existence.
Sec. 62 of the Indian Contract Act, 1872 prescribes certain provisions in regard of novation stating that if a contract is substituted, rescinded or altered by parties to a contract for a new contract, the obligation to perform the old contract ends.
Thus, it explains the effect of novation, rescission and alteration of a contract. Novation of a contract must be done by mutual consent of the parties to the contract.
It is of two kinds:
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Novation by change in terms of the contract
The parties to a contract are free to alter the contract which they have originally entered into. The parties can alter any term or entire conditions of the contract, by agreement. If they do so, their liability as regards the original agreement is extinguished and in its place, they become bound by new altered agreement. The parties to a contract remain the same as that of the original contract, but there is substitution of new contract with altered terms in place of old one. It must be noted that novation is valid when both parties agree to it As parties enter into a contract with any term of their choice, they are also free to alter it by mutual consent.
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Novation by change in parties to the contract
It is possible that by novation, an obligation may be created for one party in place of another. If one of the party wants to exile from the contract favours another party to replace; the earlier contract is replaced and is extinguished by the new one.
For e.g. Under an existing contract, A is bound to perform the contract in favour of B, the responsibility of A is now taken over by C with consent by both of them. So, original contract between A and B is discharged and replaced by new one. Thus, instead f A being liable towards B; By novation, C becomes liable towards B. It may be noted that, there should be consent of all the parties to the contract, viz.
- Person who wants to be discharged from liability.
- Person who undertakes the liability in place of the person discharged; and
- Person in whose favour performance is to be made.
Thus, original agreements can be discharged by the way of novation.
By Maahi Mayuri
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