A contract to be valid under Indian Contract Act must be entered by two or more adult persons of sound mind with an intention to create contractual relationship with free consent and with law full object and consideration. One of the essential factors for the contract to be enforceable there should be consensus ad idem which means that the parties should have agreed to the same thing in the same sense. A contract can be discharged if the parties perform the contract, if there is a breach of contract, by impossibility to perform the contract and by novation. Discharge by novation means that parties agree to substitute the existing contract with a new contract and the parties need not to perform the old contract, but abide by the terms and conditions of the new contract.
Novation of contract
The effect of novation of a contract is provided under section 62 of Indian contract act as:-“If the parties to a contract agree to substitute a new contract for it to rescind or alter it, the original contract need not be performed.” It means that if the parties to a contract substitute the provisions of contract with a new one, then the old provision will cease to be enforceable and the new changed terms or the provisions which were agreed by the parties will be enforced.
The novation of a contract is done because the parties want to change the terms and contract and/or the parties to the contract have been changed.
Novation because parties to the contract want to change the terms of the contract:
It is usually a very time consuming process for parties to declare the pre existing contract null and void and then to make a completely new contract which would contain new terms and conditions, which would be enforceable. Hence the parties through novation substitute the terms and condition of the contract and therefore the terms of pre- existing contract will cease to be enforceable and parties are free from them and then the parties are only liable for the terms of the new contract.
Novation due to change in parties:
If one of the parties to the contract is substituted by a third party and the third party will have to perform the contract in place of the previous party then the previous party will not be liable to perform the contract. In short the new party will be placed in the position of the previous party and the previous party will be excused from performing the contract.
For example if ‘X’ and ‘Y’ are parties to the contract and ‘Y’ is substituted by ‘Z’ a third party and the new contract will be created between ‘X’ and ‘Z’ . Party ‘Z’ will be liable to perform the contract and ‘Y’ will not be liable for the performance.
Novation is an easy and time efficient way of altering and rescinding the original contract and substituting it by another contract. By using this method parties can save themselves from first declaring the original contract void and then making a completely new one.
This article is written by Mugdha Rao of Balaji law college affiliated to Savitribai Bai Phule University.