Novation and Remission of Contract

This slide has been made with sole heart and pure explanatory form to make reader understand Novation to Remission clause of Contract, i.e. section 62 to section 63 of the Indian Contract Act, 1872. I hope you find it well. thank you.
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1. NOVATION and REMISSION of Contract Chanakya Kene ; UG20-47

2. Novation: INDIAN CONTRACT ACT, 1872 Section 62 If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not to be performed.

3. Novation is being defined by House of Lords as “ that, there are being a contract in existence, some new contract is substituted for it either between the same parties (for that might be) or between different parties, the consideration mutually being the discharge of the old contract. “ Original Contract need not be performed” clearly indicate that by virtue of the three circumstances specified in Section 62 , the old original contract is discharged completely and it is not to be performed. This Section requires assent of both the parties in respect of novation, alteration or recession. Unilateral novation can take place but only if this is envisaged in original contract or novation accepted by “sub silentio”.

4. NOVATION IS OF TWO KINDS: NOVATION BY CHANGE IN THE TERMS OF THE CONTRACT; AND NOVATION BY CHANGE IN PARTIES TO THE CONTRACT.

5. CHANGE IN TERMS OF THE CONTRACT: The parties to a contract are free to alter the contract which they had originally entered into. If they do so, their liability as regards the original agreement is extinguished, and in its place they become bound by the new altered agreement. This becomes a new contract and extinguishes the old. In this illustration the parties to the contract remain the same but there is a substitution of a new contract with altered terms in place of the old one. It may be noted that novation is valid when both the parties agree to it. As the parties have a freedom to enter into a contract with any terms of their choice, they are also free to alter the terms of it by their mutual consent. Illustration: b) A owes B 10,000 rupees. A enters into an agreement with B. and gives B a mortgage of his (A’s) estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old.

6. LATA CONSTRUCTION v. DR. RAMESHCHANDRA RAMNIKLAL SHAH A.I.R. 2000 S.C. 380 T he judgment passed by the Commission, the entire total due from the appellants has effectively been paid to the respondents including interest at the speed of 18% per annum on the principal proportion of Rs.9,51,000/ - . That being thusly, we are not set up to entertain the request of the appellants that the affirmation passed by the Commission in see of Rs.1 lakh as compensation due to the pain and suffering gone through by the respondents The court finds no merit in the appeal and the same is accordingly dismissed with no order as to costs LATA CONSTRUCTION GROUP MADHUSUDAN INDIRA JOSHI National Consumer Dispute Redressal Commission

7. One of the essential requirements of “novation”, as contemplated by S.62, is that there should be complete substitution of a new contract in place of the old. The original contract need not to be performed then. Substitution of a new contract in place of old contract which would have the effect of rescinding or altering the terms of contract. But if the terms of the two contract are inconsistent and they cannot stand together, then the subsequent contract cannot be said to be in substitution of the earlier contract. Novation can only be done with the agreement of both parties of a contract. IMP CASE LAWS. Salima Jabeen v. National Insurance Co. Ltd., A.I.R. 1999, J&K 110. D.D.A. v. Joint Action Committee, A.I.R. 2008S.C. 1343. CITI Bank N.A. v. Standard Chartered Bank, (2004) 1 S.C.C. 12.

8. Change in Parties to the Contract: It is possible that by novation an obligation may be created for one party in place of another. If under an existing contract A is bound to perform the contract in favour of B , the responsibility of A is bound to perform the contract in favour of B, the responsibility of A could be taken over by C. Now instead of A being liable towards B, by novation C becomes liable towards B. It may be noted here that in such cases there should be consent of all the three persons, viz., the person who wants to be discharged from the liability, the person who undertakes to be liable in place of the person discharged, and the person in whose favour the performance of the contract is be liable to be made. Thus, if A and B agree that in place of A, now C will be liable, but C does not consent to it, there would be no novation. illustrations (a) A owes money to B under a contract. It is agreed between A, B and C, that B shall thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted. (c) A owes B 1,000 rupees under a contract, B owes C 1,000 rupees. B orders A to credit C with 1,000 rupees in his books, but C does not assent to the agreement. B still owes C 1, 000 rupees, and no new contract has been entered into.

9. Godan Namboothiripad vs Kerala Financial Corporation, AIR 1998 Ker 31 T here was novation of contract whereby the original debtor Gopinatha Menon ceased to be a debtor and the appellant undertook the liability as the principal debtor to pay the outstanding dues. Kerala Financial Corpration 1,26,000 Gopinatha menon

10. THE GENERAL RULE IS THAT ALL THE PARTIES TO THE SUBSISTING CONTRACT MUST CONSENT TO THE NOVATION OF THE CONTRACT. BUT, THERE IS AN EXCEPTION TO THIS RULE THAT WHEN A STATUTE VESTS CERTAIN ASSENTS OF THE STATE IN A STATUTORY CORPORATION AND PROVIDES THAT AS A CONSEQUENCE, RIGHTS AND OBLIGATIONS OF THE STATE RELATING TO SUCH ASSETS SHALL STAND TRANSFERRED TO SUCH STATUTORY CORPORATION. CASE LAW: SRIKANT V. VASANTRAO, A.I.R. 2006, S.C. 918. Satish Chandra jain v. National Small Industries corporation, A.I.R. 2003, S.C. 623. Ayodhya Prasad v. Phlesra Bhagwan Das, A.I.R. 2008, All. 169. M.P.S.E.B, v. M/s. Anand Transformers Pvt. Ltd., A.I.R. 2008 (NOC) 1279 (M.P.)

11. Section 63. Promisee may dispense with or remit performance of promise Every promisee may dispense with or remit, wholly or in part, the Performance of the promise made to him, or may extend the time for such performance, for may accept instead of it any satisfaction which he thinks fit.

12. Illustrations A promises to paint a picture for B. B afterwards forbids him to do so. A is no longer bound to perform the promise. A owes B 5,000 rupees. A pays to B and B accepts, in satisfaction of the whole debt 2,000 rupees paid at the time and place at which the 5,000 rupees were payable. The whole debt is discharged. A owes B 2,000 rupees, and is also indebted to other creditors. A makes an arrangement with the creditors including B, to pay them a composition of eight annas in a rupee upon their respective demands. Payment to B of 1,000 rupees is a discharge of B’s demand. A owes B, under a contract, a sum of money, the amount of which has not been ascertained. A, without ascertaining the amount, gives to B, and B, in satisfaction thereof accepts, the sum of 2,000 rupees. This is a discharge of the whole debt, whatever may be its amount. A owes B 2,000 rupees, and is also indebted to other creditors. A makes an arrangement with his creditors including B, to pay them a 14[composition] of eight annas in the rupee upon their respective demands. Payment to B of 1,000 rupees is a discharge of B's demand.

13. The section permits a party, who is entitled to the performance of a contract, to a. Dispense with or remit, either wholly or in part, the performance of the contract, or b. accept any other satisfaction instead of performance. c. Extend the time of performance.

14. i ) DISPENSING WITH OR REMITTING PERFORMANCE The promisee has been authorised, by the above stated provision, to remit or dispense with the performance of the contract without any consideration. He may fully forgo his claim, or may agree to a smaller amount in full satisfaction of the whole amount . if A promises to paint a picture for B, B may forbid him to do so, or if A owes Rs. 5,000 to B, B may accept from A only Rs. 2,000 in satisfaction of the whole of his claim. In such cases A is discharged so far as the performance of that contract is concerned. It means that if B agrees to accept Rs 2.000 in lieu of Rs 5,000 from A, he cannot thereafter ask a to pay the balance of Rs. 3,000.

15. Mohammad Usman v. Union of India, A.I.R. 1982, Raj. 100 Held that the unilateral revocation of the contract by the railway authorities might be unjustified and illegal. A having accepted the refund of the entire amount deposited by him with the railway authorities in respect of the sale price, he must be held to have acquiscesed in revocation of contract. No subsisting right to maintain the present writ petition. 25% + 75%

16. Lala khapurchand v. Himayatali Khan, A.I.R. 1963, S.C. 250. Union of India v. Navilakha , A.I.R. 1997 Bom. 209. Amar nath v. Bharat Heavy Electricals, A.I.R. 1972 All. 176

17. ACCEPTING ANY OTHER SATISFACTION INSTEAD OF PERFORMANCE Section 63 permits the promisee to accept any other satisfaction in lieu of agreed performance, and this would discharge the promisor. For example, a owes B, under a contract, a sum of money, the amount of which has not been ascertained. A without ascertaining the amount gives b, and B, in satisfaction thereof, accepts, the sum of Rs. 2000. This is a discharge of the whole debt, whatever may be its amount. If the promisee pays less than the amount claimed and the promisor does not consider it to be in full and final satisfaction of his claim, the promisee’s liability under the contract is not discharged, and the promisor is free to sue for the balance.

18. In Union of India Vs. Babulal Uttamchand , AIR 1968 Bom. Some goods belonging to the plaintiffs were lost during transit due to the negligence of the railway administration. The Plaintiffs’ made various claims and the railway administration sent cheques along with printed letters mentioning that the said payments were in full and final satisfaction of the plaintiffs’ claims. The plaintiffs, however, informed the railway administration that this payment was being accepted only as part payment of their claims. In an action to recover the balance of the amount of claims, the defendants pleaded that the plaintiffs could not sue for the balance as the payment already made was in full and final satisfaction of the claims. It was held that the plaintiffs’ suit for the balance of the amount was maintainable, as the amounts were not accepted in full satisfaction of the claim. Important case laws: M/s. AK. Construction Banda v. U.P. Power Corpn . Ltd, A.I.R. 2008 All. 117. National Insurance co. ltd. V. M/s. Boghara Polyfab Pvt. Ltd., A.I.R. 2009 S.C. 170.

19. EXTENDING THE TIME OF PERFORMANCE Section 63 permits a party to extend the time of performance, and no consideration is needed for the same. The extension of time must be by a mutual understanding between the parties. A promisee cannot unilaterally extend the time of performance for his own benefit. Thus, if a certain date of delivery of goods has been fixed in a contract of sale of goods and the seller fails to supply the goods on such date, the buyer cannot unilaterally extend the time of delivery so as to claim compensation on the basis of rates prevailing on the extended date. He will be entitled to compensate only on the basis of the rates prevailing on the actual date of performance. If the promisee grants the extension of time be becomes bound thereby. Therefore, if the creditor allows some time for making the payment to a debtor, he cannot bring an action against the debtor to recover the debt, and if such an action is brought it will be dismissed by the court as being premature.