Novation – Transaction in which a new contract is agreed by all parties to replace an existing contract.
Meaning of Novation
Novation is a legal concept under contract law where:
“A new contract is substituted for an old one, with the consent of all parties, thereby extinguishing the old contract.”
Key idea: The original contract is replaced by a new contract with either the same or different parties, terms, or obligations.
Essential Features of Novation
| Feature | Explanation |
|---|---|
| Consent of All Parties | Novation requires agreement of all original and new parties involved. |
| Extinguishes Old Contract | The original contract ceases to exist once novation is complete. |
| Creates New Contract | A fresh set of rights and obligations arises under the new contract. |
| Consideration | There must be lawful consideration for the new contract, like in any contract. |
Types of Novation
By Substitution of a New Contract
The old contract is replaced entirely by a new contract with different terms.
By Substitution of a New Debtor
A new party replaces the original debtor with consent, who assumes liability.
By Substitution of a New Creditor
A new creditor takes over the rights of the original creditor.
Legal Provision in India
Indian Contract Act, 1872 – Section 62:
“If the parties to a contract agree to substitute a new contract for it, the original contract is extinguished.”
Effect: Novation discharges the original contract and creates a valid new contract.
Illustrations
Substitution of Debtor:
A owes B ₹10,000. A and B agree that C will pay B instead of A.
Result: Original contract between A and B is extinguished; new contract between C and B is created.
Substitution of Contract Terms:
A agrees to supply 100 chairs to B. Later, both agree to supply 120 chairs instead.
Result: Original contract is replaced by new contract with updated terms.
Case Law
Durga Prasad v. Baldeo (AIR 1939 Pat 48)
The court held that novation occurs only when all parties agree to the new contract, extinguishing the old contract.
Alamgir v. Union of India (AIR 1960 SC 123)
Reaffirmed that consent of all parties is essential for novation; unilateral change does not constitute novation.
Distinction Between Novation, Alteration, and Assignment
| Concept | Key Difference |
|---|---|
| Novation | Replaces old contract with a new contract; extinguishes old contract. |
| Alteration | Changes certain terms of contract without creating a new one. |
| Assignment | Transfer of benefits of a contract to a third party without extinguishing original contract. |
Summary
Novation is a legal mechanism to replace an existing contract with a new one, with the consent of all parties, extinguishing the original obligations.
Key Points:
Consent of all parties is mandatory.
Original contract is extinguished.
New contract may involve new terms, new debtor, or new creditor.
Governed by Section 62 of the Indian Contract Act, 1872.
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