Novation and Altercation of Contract

Dated 10th September, 2020

NOVATION

Section 62 of the Indian Contract Act, 1872, deals with the Doctrine of Novation. 

The expression “Novation” essentially refers to substitution of a new contract in the place of an existing contract. With the creation of the new contract by an agreement between the parties to the same, the existing contact stands terminated or discharged and obligation of parties comes into effect with respect of the new contract.

Novation can be done through:-

  1. Substitution of an old contract with a new one by the parties to the previous contract or Novation of terms of the Contract before the expiry of time of performance of the Contract. Such a Novation relieves the parties of their obligations in the old contract as the same is terminated and the parties are bound by the new agreement which either substituted or altered the old one. 

Modification/Variation or Novation of contract.—

For determining whether a case whether falls under Section 62 (i.e. original contract need not be performed or Novation) or Section 63 (i.e. variation of original contract), test is to see whether modification(s) go to very root of original contract and change its essential character and modified contract replaces original contract, or whether original contract survives, but with some modifications. Former case will fall under Section 62 and latter case may fall under Section 63. Terms of original and modified contract(s) have to be examined carefully in each case, Chrisomar Corpn. v. MJR Steels (P) Ltd [(2018) 16 SCC 117]. 

In the Case of Lata Construction and Ors Vs.Dr. Ramniklal Shah and Others [(2000) I SCC 586] it was held that the Section 62 of the Contract Act talks about Novation, what is contemplated by the section is that there should be complete substitution of the original contract by a new one and the older contract needs no longer to be performed.

The substitution has the effect of receding, altering, or extinguishing the older contract. It is import here that the terms of the terms shall be consistent, in case the terms are inconsistent and cannot stand together, the subsequent contract cannot be said to be substitution of the earlier contract.

  1. Where the parties to the Contract changes, the old contract is substituted with a new one. It is essential in such cases that there must be the mutual or tripartite consent of all the parties concerned. Through change in Parties obligations that had been created for one party is created for another, and the substituting party becomes obligated to perform the liability.

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.

In Juggilal Kamlapat v. N.V. Internationale Crediet-En-Handels Vereeninging ‘Rotterdam’ [AIR 1955 Cal 65], it was observed that in the facts of that case since the modification did not go to the root of the first contract and does not change the essential character and thus would not amount to Novation.

Conditions of Valid Novation 

The following conditions are to be satisfied for valid Novation.

  1. To substitute new contract, the old contract must still be existence.
  2. The new contract must fulfill the Essentials of a valid contract. (as prescribed under section 10 of the Indian Contract Act 1872).
  3. The Novation should be through consensus ad idem 

CONTENTS OF NOVATION AGREEMENT:

  • Definition Clauses
  • Name of the parties
  • Recitals
  • Representations made by the Parties ( where there are three parties the rights and duties of Third Party)
  • Obligations of the parties and the rights of parties
  • Effects of Novation agreement
  • Jurisdiction
  • Fees, Costs 

ALTERATION

Unlike Novation in Altercation there is change in merely the terms of the Contract. In Novation there is substitution of an existing contract with a new one, however in Altercation there is no substitution rather a change in certain terms of the contract, without any change in the main contract.

To ensure the validity of new Contract alteration shall be made in conformity with the provisions instituting the process for modifying the terms or conditions, and the subsequent contract law decisions that determined those changes are then deemed valid and the parties perform their duties in concurrence with the modified contract.

In alteration there is direct material change on the signed legal document and it must significantly revise the intention of what the original document established. However, if the modification was made with the intent of one party to defraud the other, the contract is considered invalid and the damaged party may seek a remedy in a court of law

In Nathu Lal v. Mt Gomti Kuar [AIR 1940 PC 160], it was held that a material alteration is one which varies the rights, liabilities, or legal position of the parties as was ascertained by the instrument in its original state, or otherwise varies the legal effect of the instrument as originally expressed, or reduces to certainty some provision which was originally unascertained and as such void. Examples include:

  • Change in Dates: Change in date of execution, which revises the time frame under which the duties of the parties were to be performed, including change in payment terms or performance schedules.
  • Change in signature: Change in signature of either parties or inclusion of a term authorizing another party to act ones behalf, or if person authorized is changed, it is considered a material change. 
  • Change in rights and duties of the parties: A change in payment schedules established or the obligations set between parties is deemed as material change.
  • Any changes in the description of the goods or services that are involved in the transaction are deemed material. 

Conclusion:

An amendment to a contract being in the nature of a modification of the terms of the contract must be read in and become a part of the original contract in order to amount to an alteration under Section 62 of the Contract Act, All India Power Engineer Federation v. Sasan Power Ltd [(2017) 1 SCC (Civ) 277].

“Article by Ms Damini Srestha under internship of Adv Shankarlal Raheja

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