Effect of novation of Contract

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. Section 62.

Agreement of parties

A contract is concluded when in the mind of each contracting party there is a consensus ad idem and a modification or revocation of the contract may be made with a like consensus. Thus where the plaintiff entered into a contract with the defendants for the supply of liquor at stipulated rates for 7 years, it was open to the parties to agree to an increase in the agreed rates at any time during the stipulated period even if the plaintiffs had supplied liquor for sometime and received payment at the original rates.

Performance of original agreement between parties is dispensed with only where parties to contract agree to substitute original contract by a new contract. Where there is no mutual. agreement among all the parties to substitute a .new contract for the old contract there cannot be a novation. No legal novation or modification of an existing contract is created in a case where one party proposes. the novation but the other party accepts the proposal in a qualified manner.

One party to .a contract cannot unilaterally alter the terms of the contract', or cancel it. Where a party to a contract repudiates the contract it is not effective till it is accepted by the other party and rights under the contract are not given up. It must however be noted that a party may repudiate a contract unilaterally where it is an express term of the contract that one of the parties to it may alter it by itself.

Implied agreement

An agreement to alter or rescind a contract may be express or implied. Thus a balance signed by the defendant which states as payable a rate of interest different from the Tate usually charged in the previous accounts, amounts to a new contract which can form the basis of a suit.

What is novation

Section 62 deals with novation of contract Novation takes place when for an existing contract some new contract is substituted. either between the same parties or between different parties, the consideration mutually being the discharge of the old contract. Novation is brought about by introduction of new parties. or alteration between the same parties by introduction of new terms. It is not consistent with the original debtor remaining liable in any form on the must be extinguished and there must be present substitution of another contract for the original contract.

Novation would amount to substitution of contract and not a mere variation of its terms. Before novation could occur it must be shown as a fact that intention of parties was to substitute a new contract for the original contract. Parties ,must rescind the prior contract altogether in order that there may be a valid novation; if there is no such intention, there is no substitution and the original contract is available to the parties.

Novation by collateral agreement

A collateral agreement must be, in every sense a complete legal contract .and the effect must be to vary or add to the terms of the contract.. Such Collateral agreements are viewed with suspicion and so must be proved strictly. The terms of the agreement and also the animus contract on the part of all the parties must be established clearly. No laxity in this respect should be allowed.

Rescission of previous contract

A contract will be said to be rescinded by another between the same parties when the latter is inconsistent with or renders impossible the performance of the former. There is an implied rescission of contract when a new and inconsistent contract is agreed upon regarding the same subject-matter between the same parties.

Intention of parties

The essence of novation lies not in the dissimilarity of the terms between the two contracts but in the intention of the parties to supersede the old by the new. There is no novation in absence of intention to rescind, alter or substitute previous contract.

Novation of contract can be by contract only

In order to constitute novation, there must be a new contract and not merely a new agreement, i.e. there must be a new enforceable agreement.

Arbitration agreement

Like, all contracts the arbitration agreement is a contract and unless there is any specific prohibition in the statute, the contract can be revoked, altered or varied by the parties to the contract. There is no prohibition in the Arbitration Act for the substitution of one arbitration agreement by another.

No novation

When any of the essential terms, which are preconditions for novation are not 'satisfied, the subsequent contract, claimed to be operating in substitution or by way of novation of the earlier one would be rendered ineffective. Unless parties in such a situation .provide to, the, contrary the earlier contract, if otherwise still effective, would continue to occupy the field.

Unilateral act of one party

Any unilateral act of, a party favouring. the other party like unilateral increase in rent by tenant and its acceptance by the landlord, would not be novation of original contract within the meaning of S. 62.

Renewal of bond

Where the surety for a treasurer was renewed thrice and old bonds were not returned and the treasurer was found guilty; it was held that the surety is liable on all bonds. Renewal of bonds was no novation.

Renewal of pronote

A pronote renewing a promise to pay the debt due under a former pronote wipes out the old debt and creates a new liability and the Court need not enquire into the old transaction unless where the acknowledged, is barred. by time, so as to exclude the application of section 19, Limitation Act.

Extension of time

An agreement to give time for the payment' of money, due under a pronote is operative. But renewed bill or promissory note for a debt giving time to the debtor in consideration of increased interest does not operate as novation: When the. Mortgagor agreed to accept agreed to accept part of the mortgage. money by a certain period and actually, accepted it after that period there is no new contract at the time of the ,acceptance of the  part payment but there is merely an acquiescence in the late payment.

Acknowledgement of debt

Acknowledgement of an existing debt does not change the nature of the debt or operate to create a new debt.

Effect of novation

When a contract is novated a fresh contract comes into existence, directly, or by implication, in place of the on tract. A contract would be rescinded by another contract between same parties where new contract, was inconsistent with, or rendered impossible the performance of the former contract. Where legal effect of both contracts, i.e. new and the former one was the same though they differed in- terms, even then it .would is mere ratification of the former and both must be construed together.

Novation of illegal contract

If unlawfulness or illegality is even indirectly connected with a perfectly innocent and legal contract, the contract is rendered unlawful or illegal and the 'Court would refuse to enforce such -a contract. In this respect cases of contracts whose considerations becomes void have to be distinguished from other contracts where the consideration is unlawful or illegal. In the former class of contracts the mere fact that the earlier or the collateral contracts might be void cannot preclude a plaintiff from maintaining an action on a novated contract which is perfectly legal. Although a wagering contract cannot be the basis of a cause of action in a Court of law, if the wagering contract be a collateral one or if the rights and liabilities of the parties stand altered by a novation, the contract although, of a wagering nature in its origin can be enforced in view of the altered rights and liabilities.

Subsequent contract not enforceable

Where new contract suffered from legal flaw such as 'want of registration:- stamps, etc. on account of which the same became. Unenforceable, original contract would not be extinguished and rights and liabilities of parties would be determined on that basis. Where new contract was to enforced subject to permission from authorities concerned. No such permission was accorded by said authorities. New contract never came into force and there was to novation of contract.

Novation by substitution of new party

To supersede a contract by another contract, all the parties to first contract must be parties to the second contract: Where the original partnership was bifurcated into two different organizations.  New arrangement arrived at between .parties under a separate agreement could not be treated under original partnership, between the parties. Such arrangement arrived at between parties also included two more persons. 'It was held that new arrangernent having been arrived at between parties, basis of claim for dissolution and accounts as averred in Plaint in terms of original partnership (deed did not exist.

Assignment of liability

An assignment of contract to be operating must amount to a novation, requiring the consent of the other party to the contract. In every case where with the consent of the creditor another debtor is substituted for the original debtor there is in effect as assignment of liability. The new debtor would be an assign of the original debtor so long as the identity of debt is maintained.

Substitution of new debtor

Where a new debtor is substituted by a contract for the previous debtor the question is not only whether the new debtor has consented to assume liability but whether the creditor has agreed to accept his liability in substitution of the liability of the original debtor.

Cross contracts

In "cross contracts" the second contract does not operate to extinguish the first contract completely nor is it effective as a novation. The two contracts are distinct and separate and the intention of the parties only to pay the differences does not extinguish them.

Agreement to substitute in future

In order to operate as a novation under S. 62 the new contract must involve present super session or extinguisher of the liability arising under the 'old contract. A mere agreement between the parties to effect such a super session or extinguisher at a future date cannot constitute 'novation. Thus the mere fact that a party. had asked for compensation as an alternate relief would not imply that it no longer insisted upon specific ' performance of the agreement in question. Extension of time by parties for execution of agreement would not amount to novation of earlier agreement. Decree for specific performance of agreement of sale was, thus, valid and objections relating to presence of alternate relief in prayer clause of plaint and extension of time by the parties for execution of agreement in question, were of no consequence.

Novation after breach of contract

Section 62 contemplates that the original contract subsists and that the parties have agreed to replace it by a new contract. If there is a breach of the original contract S. 62 does not apply. If after a breach of contract the parties enter into a new contract to settle the amount of damages suffered in the breach of old 'contract, the cause of action based on the old contract is wiped out and the plaintiff can only sue on the later contract.

Effect of invalid novation

To effect novation a substituted contract must be capable of enforcement in law. The giving of a hundi in payment of the price of goods sold operate as a payment, only if the 'hundi is honored and if the hundi is dishonored as the right to sue on the original cause of action is revived; but if another hundi is substituted, it would operate as discharge of the first one only if the new contract could be legally enforced, failing which the plaintiff can fall back on the first hundi.

Novation of oral agreement by written invalid agreement

When an oral agreement is subsequently embodied in a deed unenforceable due to improper stamp, the creditor cannot fall back on the oral agreement.

Invalid negotiable instrument

Where there is a pre-existing debt or liability and a promissory note or bill of exchange is passed in respect of it, the plaintiff can fall back on the original consideration if for any reason the new contract fails. The execution of a promissory note in satisfaction of a debt does not necessarily mean that the original debt is extinguished but the note may operate as a substitute for that debt and the original debt is kept in abeyance pending the discharge or otherwise of the promissory note. It is however certainly open to the parties to treat the original debt as discharged and substitute therefore the obligation under the promissory note.

Alternation of document

Any material in an instrument even with the consent of the parties vacates the original instrument and makes it a new instrument.

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