The term “Novation” in layman language refers to that situation in which the parties to a contract agree to replace the existing contract with a new contract. It has been defined under Section 62 of the Indian Contract Act, 1872. Basically, novation can be done in roughly two ways:
1. A Novation Involving Change of Parties– In simple terms, a Novation may involve the change in parties where one of the parties gets discharged from its obligations and this obligation then shifts to another party.
2. A Novation Involving Substitution of a New Contract in Place of the Old One- This happens when the parties to the contract mutually agree to substitute a new contract for the original one and the original contract gets discharged and need not be performed anymore. One of the important and necessary points to keep in mind is that, for the application of this principle, the original contract must be subsistent and not broken. Also, for Novation to take place there must be an irreconcilable incompatibility between the old and the new one. While changing the object or principal conditions, it is a requisite that these changes must be declared in unequivocal terms.
II. Ingredients Of Novation Of Contract
For Novation to take place, the following requisites can be identified:
- There must be a previous valid obligation.
- The parties of the original contract must agree to a new contract.
- The old contract must be extinguished.
- There must be a valid new contract.
III. Intention in Novation Of Contract
Intention is an essential and pre-requisite element in Novation. Whether there is Novation or not depends on the intention of the parties and this can be substantiated with the fact that if there is no intention to rescind the prior contract altogether, there is no substitution, and the original contract is still enforceable.
In Morris v. Baron & Co., Morris entered into a written contract (A) with Baron to provide him with a certain no. of fabric pieces. The dispute arose between the parties when Morris demanded payment for the supplied pieces of fabric, while Baron claimed damages for breach of contract for delay in supplying the rest of the pieces. Subsequently, the parties, on parole, made an agreement (B) by which they both decided to withdraw the legal proceedings, and Morris agreed to give £30 in damages to Baron for not supplying on time. In addition, Baron was given three-month time to pay the amount owed to Morris, and also an option to demand delivery of the remaining assets, if he so desires. The lawsuit was filed by Morris when Baron constantly refused to pay the amount owed while insisting on the delivery of the remaining assets. The core issue involve here was “whether the parties terminated contract A and replaced it with a completely new contract B?” It was held that an attempted Novation which fails to produce a new enforceable contract may also put an end to the original contract, if it was the intention of the parties to rescind it in any event. Such intention is a fact to be clearly proved.
In Producers & Fruit Co. v. Goddard , the plaintiff and defendant entered into a written contract for the purchase and sale of fruit at stipulated prices. Subsequently an oral contract was made by the parties with the understanding that the oral agreement should be substituted for the prior written agreement.
For two years, the vendor delivered the fruit in accordance with the terms of the oral contract. The vendee refused to pay the market price, which was higher than the price stipulated in the written agreement, so the vendor rejected to perform further. The vendee sued for breach of the first agreement and it was held that the oral agreement was effective as a discharge from the written agreement. The court held that the oral agreement was a completely new contract. The agreement is itself evidence of an intention by both parties that it should constitute a Novation. On observation, the first contract was rescinded though the second was unenforceable, and you will find against the party relying on the first contract.
In Lala Bunseedhur v. Government of Bengal, the Privy Council held that mere execution of new bond does not constitute novation. Here there was no mutual intention to cancel the old contract and replace it with a new one. Therefore, the mere action of the defendant to execute a new bond does not constitute a novation because for the novation to occur, the previous contract needs to be terminated.
In this article, it has been constantly emphasized and reiterated that the role of intention in determining whether novation has taken place or not. The intent of the parties is required to be quite explicit i.e. animus novandi.
 Mulla & Pollock, Indian Contract and Special Relief Act, Lexis Nexis, Haryana, Fourteenth Edition, Vol. 1,2013.  AC 1.  Ibid.  Ganpat v. Mahadeo AIR 1925 Nag 26, 85 IC 264.  75 Cal.App. 737 (Cal. Ct.App. 1925).  1871 14 Moo Ind Ap Ca 86.  The intent to substitute a new obligation for the old one– Northern Motors Inc. v. Camaganacan, 79 OG 2614.
Author Details: Nishant Tiwari (National University of Study and Research in Law (NUSRL), Ranchi)