Citations: AIR 1956 Raj 12
Bench: Wanchoo, Modi
In this case, there were money dealings between the plaintiff and the defendant, and the latter went into accounts and struck a balance of Rs. 3000/- in plaintiffs. Thereafter, the defendant took a further loan of Rs. 7000/- from the plaintiff in lieu of which also he signed an entry in the plaintiff’s Khata book.
The plaintiff further alleged that the defendant had agreed to give interest at the rate of 9 per cent, per annum. As the defendant had paid nothing towards the debt, the plaintiff instituted his suit/on 13-6-1949, for the recovery of Rs 10,000/- principal and Rs. 392/- by way of interest, total Rs. 10,392/-.
The defendant admitted that he had executed the Khatas of the plaintiff but later had executed two Hundies for the sum of Rs. 10,000/- in favour of the plaintiff, thereby completely discharging the debt due to the plaintiff.
He further contended that as the old contract between the parties had already been novated, the plaintiff’s suit on the basis of the Khatas was not maintainable and Khatas was inadmissible in evidence for want of stamp.
The plaintiff contended that when the defendant was told the defendant to repay the loan, he had executed two Hundies in the plaintiff’s favour; one for a sum of Rs. 5000/- payable 30 days and another also for Rs. 5000/- but payable 46 days.
The plaintiff produced the Hundies and further stated that today nothing has been paid till that date. The plaintiff also stated that the Khata did bear the necessary stamp and is admissible as evidence in a court of law.
ISSUE BEFORE THE COURT
whether the execution of the two Hundies in the discharge of the plaintiff’s debt amounted to novation
DECISION OF TRIAL COURT
The trial court decreed the suit in favour of the plaintiff’s suit for a sum of Rs. 10,392/- with costs and with pending and future interest at 6 per cent, per annual. So the defendant decided to file an appeal
DECISION OF HIGH COURT
Counsel for the appellant contended before the appellate Court that two Hundies were executed by the appellant in lieu of his debt of Rs. 10,000/- till date neither of them had become mature for payment on the date on which the plaintiff filed the present suit. The counsel contended that the finding of the Trial Court, that the parties had not novated the original contract was completely erroneous.
In order to have a novation, the parties to a contract must agree to discharge the old debt or their obligation. There can be no novation until it has been accomplished. A novation may take place by the addition of new parties or by adding new terms to the contract. The real test lies in the intention of the parties.
No act evidencing the discharge of the old debt and its replacement by the new one has been established in the present case. The court held that they were unable to decide that there was any novation in the case.
The two hundies were probably executed and later passed by the defendant to the plaintiff as a convenient mode of payment. The Judge didn’t consider that the parties purported to alter the original contract under Section 62, Contract Act. So the defendant failed to establish that there was any novation in the present case.
The counsel for the appellant contended that under Section 22, Negotiable Instruments Act, every promissory note or bill of exchange which is not expressed to be payable on demand, the defendant was entitled to a period of three days of grace after the date it became payable. To date, neither the first nor second Hundis had not matured.
The counsel for the respondent contended that the hundies, in the particular case were neither a promissory note nor a bill of exchange under Section 22, Negotiable Instruments Act, and thus, no grace was permissible.
He further urged that as the defendant raised his contention on the basis of the hundies in his written statement, the plaintiff produced them without any hesitation and, accepted the fact of their execution and further pleaded that nothing had been paid towards the hundies.
The Judge held that the plaintiff filed the suit on the basis of the original Khatas executed by the defendant but later in his defence did not raise the plea of the suit being a premature. The main contention raised by the defendant was that the defendant had made an entire discharge of the debt due by him by executing hundies in favour of the plaintiff.
The defendant during the case gave more reliance on the fact that that he had paid the entire money by issuing Hundies. It further held that the plaintiff’s suit should not be dismissed on the ground of being premature in extraordinary circumstances and in the interests of justice. So the court dismissed the appeal of the defendant.
LEGAL PRINCIPLE INVOLVED
The term “novation” means “to substitute with a new contract,” It refers to situations in which separate parties carry out the same commitments. The original contract’s obligations are terminated until a contract is novated. Any agreement can be novated, but only when
there is a new contract, not a new deal, can the Novation take place. As a result, simply agreeing to replace an expired contract would not be binding until it is ratified and enforced by both parties. When parties novate a contract, they create a new contractual obligation.
Novation under the Indian Contract Law
Under the Indian Contract Law, a contract may be terminated by mutual consent or a violation of the contract. Section 62 of the India Contract, 1872 Act expresses the doctrine of Novation, one way to discharge a contract by consensus. Section 62 deals with the Effect of Novation, rescission, and alteration of contract. It states that the original contract will not have to be executed if the parties agree to replace it with a new contract or rescind or amend it. These two kinds of novation are:
Novation by Change in The Terms of Contract
The parties to the contract are free to modify the contract which they have originally entered. If they choose to modify/alter the original contract, their obligations or liability regarding the original contract extinguishes. In place of these obligations, they become bound by the obligations regarding the new contract.
Novation by Change in The Parties to The Contract
Apart from changing the terms of the contract, it is possible that by Novation, liability may be created for one party in place of another. For instance, X is liable to perform an agreement in favour of Y. Z. could take over X Now, instead of X being obligated/liable towards Y, by Novation, Z becomes obligated towards Y.
An agreement enforceable by law constitutes a valid contract. In the case of a contract, each party is legally bound between both parties. Under section 2(h) of the Indian Contract Act, 1872 (I.C.A.), the term contract has been defined as an agreement enforceable by law. The term agreement has been defined under section 2(e) of the I.C.A., 1872 as “every promise and every set of promises forming consideration for each other becomes an agreement.” The term “novation” means “to substitute with a new contract,” It refers to situations in which separate parties carry out the same commitments. Under the Indian Contract Law, a contract may be terminated by mutual consent or a violation of the contract.
Section 62 of the India Contract, 1872 Act expresses the doctrine of Novation, one way to discharge a contract by consensus. Section 62 deals with the Effect of Novation, rescission, and alteration of contract. It states that the original contract will not have to be executed if the parties agree to replace it with a new contract or rescind or amend it. The original contract’s obligations are terminated until a contract is novated. Novation is of two kinds. These two kinds are Novation by a change in terms of contract and Novation by a change in the parties to the contract.