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Novation, Rescission, and Alteration |Law of Contract

Novation of contract

Novation of a contract is when a new contract is been replaced by the old contract, which no more needs to be performed now. Though, the new contract should be made with neutral consent and should be valid and enforceable.

Under section 62 of the Indian Contract Act,  it is stated that if both the parties agree to replace or alter or rescind the old contract with the new one then there is no need to perform the original contract. In Novation liabilities can also be extinguished under an existing contract.

Novation of the contract is the replacement of an old contract with a new contract if both the parties share the same intent. But an old contract must be there  to form a new contract  and  parties to a contract can also be substituted  with the new parties 

X owes money to O under a specific contract. It is agreed between X, Y and O. O shall accept Y his debtor insisted on X.  The old debit of X and Y will end and from Y to O will start. It is an agreement between X, Y and O shall accept Y as his debt from Y to O has been contracted. 

Some of the essential of Novation of contract are as follows: 

  • Both the parties should accept the offer of a contract. There should be a meeting of the minds of the parties with the contract. 
  • A Previous or old contract should be there for a new contract to form. 
  • A valid contract arises from substitution, Alteration, and Recession of the old contract. 
  • The original contract which is made previously should be terminated. 

There are two kinds of Novation : 

  1. When there is a replacement of obligation under the old contract with the new one. 

Both the parties with each other’s consent have the freedom to alter or enter into a new contract with each other. There should be a mutual agreement between both the parties to change the term and alter them with a new one. Though a party cannot impose a condition by unicetral term which was not in the original contract before. 

  1. When a whole party is replaced with a new party. 
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In Novation Contract, it is also possible that the terms in the contract can provide replacement of one party to the contract of another party. Then the new party will follow all the obligations to the new contract and another party will not be held liable under any obligation for any future damages. 

When there are no conditions fulfilled on novation of the requisite conditions are not satisfied then it is called No Novation. 

Essentials of Novation agreement : 

  • Meaning (definition)
  • Parties Name
  • Recitals
  • Representations
  • Third parties Rights 
  • All parties obligation 
  • Effect of Novation Agreement 
  • Expenses, fees, cost
  • Law governance parties and Jurisdiction
  • Counterparts 

Case : Godan Namboothiripad vs. Kerala Financial Corporation, 22 Augest,1997

Equivalent Citation – AIR 1998 KER 31

Facts – In this case,  Kerala financial corporation who was the respondent sanctioned a loan to Gopinath who was the debtor, for a transport vehicle that he wanted to purchase and which was to be paid in installments. Later respondent seized their transport vehicle of Gopinath Because defaulted on making the payment. 

Held – It was held that it was a case of Novation of Contract because the liability to pay the dues was taken by the appellants and Gopinath who was the original debtor ceased to be a debtor. 

Rescission of Contract 

Rescission of contract means to terminate or revoke a contract and can make a new one. The parties in the contract can legally rescind a contract by mutual consent. Under section 62 of the Indian Contract Act, parties are allowed to terminate the contract but only on bilateral terms. 

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A novation usually take place when: 

  1. There is an admission of new partner,
  2. When any of the partner retires,
  3. when a new firm has to accept the liabilities of the old firm with the admission or retirement of the old one.

Alteration in terms of a contract 

Alteration means to change or modify. Alteration in a term of a contract happens when one of the party is a contract in a contract wanted to modify or make a change in a contract. Hence, once the parties have signed the contract then no further changes can be made till the time both the parties by mutual consent agree on it again. 

A novation contract consists of the following: 

  • Relevant clauses

It helps in outlining the discharge of both the rights from outgoing parties.

  • Representation and warranty provision

The deed is also being made when going and continuing parties have full legal capacity including relevant authorization to proceed with business.

  • Insurance clause

This is basically for the coming third party so that the insurance or indemnity clause can protect them from being liable for the work completed before the novation date.

  • Costs

Party should calculate the agreed cost for various transaction like novated leases.

Case: Union of India vs. Kishorilal Gupta and Bros. 

Equivalent Citation – AIR 1959 SC 1369

FACTS – A three-settlement contract has been made between the plaintiff and the government after the breach of contract which also contains some of the clauses of arbitration. In the event of default by the plaintiff, the government executed a hypothecation bond to reserve the right to recover the balance amount. Plaintiff fails to give the given amount to the government upon which arbitration proceedings are been held. 

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Held – It was held by the Calcutta high court that under section 62 of the Indian Contract Act, a contract can only be rescinded after there had been a breach of contract. 

Conclusion 

This article is all about how the Novation, Rescission, and alteration of article 62 of the Indian Contract Act changes the dynamics of the contract and parties to it. This paper is also discussed how a contract can either be changed or altered or also the parties can also be replaced by another party through the contract.

They were certain essentials which were also discussed in the Novation of the contract. It is also essential for both the parties to give their consent so that no action could be taken unilaterally. Also,  it is explained how a new agreement is formed and some of the essentials to form the Legality.

The discharge of the contract is done with the help of Novation. In Novation, a whole new contract is substituted replacing the old one with the mutual consent of both the parties. The parties can either express or implied their opinion.

The article also includes some relevant clauses which help in outlining the discharge of both the rights of an outgoing and outgoing party. Plus, a deed is also being made which includes representation and warranty provisions for outgoing and continuing parties that have full legal capacity including relevant authorization to proceed with business.

The clause of insurance was also been added for upcoming 3rd parties so that they can claim insurance aur indemnity clause which can protect them from being liable for the work completed before the novation date. Parties are also to be calculated the agreed cost for various transactions like novation cost.

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