Authentication No: JL30519710843-19-720
A contract can be discharged either by agreement or by a breach. Novation is one way to discharge a contract by agreement and section 62 of the India Contract, 1872 Act gives expression to the doctrine of Novation. The substitution or replacement of an old contract with a new one is termed as Novation. It takes place with the consent and agreement of both the parties to a contract thus with the creation of new contractual obligations, the old ones are discharged. The doctrine of Novation exists to give expression to the concept that parties to a contract should be competent to add, subtract or vary the terms of the contract before its breach with the help of a new contract.[i]
In Manohur Koyal v Thakur Das[iv], the plaintiff sued the defendant to recover the sum due on a bond. The defendant failed to pay the sum on the due date but promised to pay Rs. 400 and also promised to execute a fresh kistibundi bond which was agreed by the plaintiff. Later the defendant even failed to pay that sum and thus the plaintiff sued the defendant for the original bond. Calcutta High Court gave a decision in favor of the plaintiff as a new bond was created after the breach of the original bond. It was held that the original contract was not discharged by novation but by the breach.
In Lata Construction v Rameshchandra Ramniklal Shah[v], it has been stated that though there is a requirement of complete substitution by a new contract it the terms are not consistent with that of the old contract then the new contract cannot be said to be a substitution of the previous one.
In City Bank N. A. v Standard Chartered Bank[vi], it was stated that the substitution of the old contract by the new one cannot be unilateral rather it has to be bilateral to be considered valid in the courts of law.
The effect of novation is mentioned in section 62 of the India contract act, 1872. The new contract extinguishes the liability under the original contract. Discharge of the original contract forms a part of the consideration in the cases of novation[x], thus if the original contract doesn't cease to exist then the new contract will fall short of consideration.
A collateral agreement should be considered as a complete legal contract but they are viewed with skepticism by the courts. Hence, they must be strictly proved and the burden of proof is on the party who is asserting novation. In the case of T.O.T. Co. v Uganda Sugar Factory[xi], it was stated that if the party is not able to prove any of the points that are required for the court to accept the existence of an animus contrahendi, then the parties to the contract can escape from the liabilities under the contract.
There is no scope for making a unilateral change in any terms or conditions of a contract unless there is a provision in the contract or law to do so. For instance to perform novation under section 60 of the Indian Contract Act, 1872; it should precede the contract making process.
In Delhi Development Authority, N.D. v Joint Action Committee, Allottee of SFS Flats[xii], it is stated that the parties should be ad idem as far as the terms of the contract are concerned.
In Scorpion Express Pvt. Ltd. V Union of India[xiii], a clause in a contract was unilaterally deleted by railway but it was considered contrary to the provisions of the India Contract Act, 1872. Thus, for an effective novation, it has to be bilateral in nature until mentioned otherwise in the original contract.
Accord and Satisfaction is nothing but creditor's acceptance of the payment of a lesser amount offered by the debtor. It is another type of discharge of contract by agreement by performing a new agreement. The agreement part is 'accord' and the performance part is satisfaction.
In the case of accord and satisfaction, the obligee does not intend to discharge the other party of its pre-existing obligation merely by the formation of a new contract. The party is discharged from its pre-existing duty only when the performance of the new contract is satisfied. As against novation, the mere creation of a new contract stratifies the pre-existing duty.[xiv] With the creation of a new contract, there remains no possibility of the revival of the original contract which is not the case with accord and satisfaction.
Conclusion
A contract can be discharged by agreement or by breach and novation is one way of discharging a contract by agreement. There are few other ways of discharging a contract by agreement like remission, alteration and so. To discharge a contract by agreement one basic pre-requisite is that both the parties to the contract must be in agreement to such discharge. It cannot be unilateral until mentioned otherwise in the contract. Also, for discharge to take place by agreement like that in the case of novation, it is necessary for the parties to form a new contract before the breach of the original contract. Otherwise, it will be considered as an ordinary breach of contract and no novation.
Courts are generally suspicious regarding novated contracts but it is the duty of the party to assert the novation to convince the court about the valid existence of the new contract and the extinguishment of the pre-existing duty under the original contract. The doctrine behind such provision under the Indian Contract Act is to provide liberty to the parties forming a contract to alter its terms when it is considered fit by them.
| Authentication No: JL30519710843-19-720 |
