Difference Between Novation and Alteration 

Contracts form the backbone of commercial and personal dealings. They set out the rights and duties of parties in a legally binding manner. However, during the course of business or relationships, parties may need to change their agreements to reflect new circumstances or mutual understandings. Two important legal concepts in contract modification under Indian law are novation and alteration.

Both novation and alteration allow parties to modify contracts, but they differ fundamentally in nature, legal effect, and procedural requirements. Understanding these differences is vital for anyone dealing with contracts, be it lawyers, business professionals, or students of law.

This article aims to explain the difference between novation and alteration in detail, with relevant legal provisions, case law, and practical implications, in clear and simple Indian English.

What is Novation?

The term “novation” originates from the Latin word novatio, meaning “renewal” or “making new”. Legally, novation refers to the process by which an existing contract is entirely replaced by a new contract, extinguishing the original one.

Under Section 62 of the Indian Contract Act, 1872, novation is recognised as one of the ways to modify or replace an existing contract. Section 62 states:

“If the parties to a contract agree to substitute a new contract for it, or to rescind it, or alter it, the original contract need not be performed.”

What is Alteration?

Unlike novation, alteration refers to the process of modifying or changing certain terms or conditions of an existing contract, without completely replacing it. The original contract continues to exist but with amended provisions.

Under Section 62 Indian Contract Act, alteration is a recognised method of contract modification, where parties can alter any terms by mutual agreement.

Difference Between Novation and Alteration

Effect on Original Contract

• Novation: The original contract is terminated and replaced by a new contract. The parties are no longer bound by the terms of the old contract.
• Alteration: The original contract remains valid and binding. Only specific terms are modified; the rest of the contract continues unchanged.

Parties to the Contract

• Novation: May involve a change in parties. A new party can be introduced who assumes the obligations of an original party, and the original party is discharged.
• Alteration: The parties remain the same. There is no substitution or addition of parties.

Requirement of New Contract

• Novation: Requires the formation of a completely new contract. The new contract must satisfy all legal requirements for validity under Section 10 of the Indian Contract Act, including free consent and lawful consideration.
• Alteration: Does not require a new contract. It is simply an amendment to the existing contract terms, subject to the mutual consent of parties.

Scope of Change

• Novation: Involves a fundamental change to the contract, either by substituting the entire contract or changing the parties involved. The change must go to the root of the contract.
• Alteration: Involves partial or minor changes to the contract, such as changes to delivery dates, payment terms, or quantity.

Legal Formalities

• Novation: Must be explicitly agreed upon by all parties involved, and often documented through a novation agreement to clearly show extinguishment of the old contract and creation of a new one.
• Alteration: Requires mutual agreement of the parties for the changes to be valid unless the contract specifically allows one party to make unilateral changes.

Discharge of Liability

• Novation: The original party is discharged from all liabilities under the old contract; liability passes to the new party or under the new contract.
• Alteration: The parties continue to be liable under the contract, subject to the amended terms.

Examples

• Novation: A company transfers a contract to a third party with consent from all parties, resulting in a new contract and discharge of the original company.
• Alteration: Two parties agree to extend the deadline for delivery under the existing contract while all other terms remain the same.

Conclusion

Novation and alteration both enable parties to adapt their contractual relationships as circumstances change. However, their legal effects differ significantly:

• Novation extinguishes the old contract and replaces it with a new contract, possibly involving new parties and fresh obligations. It requires clear intention and mutual consent, fulfilling all the requirements of a valid contract under the Indian Contract Act.
• Alteration modifies certain terms of the existing contract without extinguishing it. The parties remain the same, and the original contract continues to govern their relationship, albeit with amended terms.

Parties should carefully determine whether their intention is to completely replace a contract (novation) or merely change some of its terms (alteration). This distinction is crucial for legal clarity, enforceability, and commercial certainty.

Proper drafting and documentation reflecting the true intention of the parties, compliance with Indian contract law provisions, and reference to relevant case law are essential for successful novation or alteration of contracts.