Write short notes on Novation of contract.

Question: Write short notes on Novation of contract. [MPJS 2010]

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Answer

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 be performed. The process to substitute an existing contract with a new contract is known as Novation.

Section 62 provides that “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 be performed”.

In the well-known case of Scurfy v. Jardine [(1882) LR 7 AC 345, 351] Lord Selborne explained the meaning and effect of novation in the following words:

… there being a contract in existence, some new contract is substituted for it either between the same parties or between different parties, the consideration mutually being the discharge of the old contract.

A common instance of it in partnership cases is whereupon the dissolution of a partnership the persons who are going to continue in business agree and undertake as between themselves and the retiring partner, that they will assume and discharge the whole liabilities of the business, usually taking over the assets; and if, in that case, they give notice of that arrangement to a creditor, and ask for his accession to it, there becomes a contract between the creditor who accedes and the new firm to the effect that he will accept their liability instead of the old liability, and on the other hand, that they promise to pay him for that consideration.

Hence novation is of two kinds, namely

1. A novation involving a change of parties; Example: ‘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.
2. A novation involving the substitution of a new contract in place of the old.

For example, ‘A’ owes ‘B’ 10,000/- rupees, ‘A’ enters into an agreement with ‘B’ and gives ‘B’ a mortgage of his A’s estate for 5000/- rupees in place of the debt of 10,000/- rupees. This is a new contract and extinguishes the old.

However, a merely written authority from the creditor to the debtor (i.e. from M to A) to pay the amount of the debt over to a third party, even though the debtor acknowledges in writing the authority given, does not entitle the third party to sue for the amount unless the third party has furnished consideration by an express promise to release the creditor from the debt. Liversidge v. Broadbent [(1859) 4 H & N 603]

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Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

1. Law of Contract Mains Questions Series Part-I
2. Law of Contract Mains Questions Series Part-II
3. Law of Contract Mains Questions Series Part-III
4. Law of Contract Mains Questions Series Part-IV
5. Law of Contract Mains Questions Series Part-V
6. Law of Contract Mains Questions Series Part-VI
7. Law of Contract Mains Questions Series Part-VII
8. Law of Contract Mains Questions Series Part-VIII
9. Law of Contract Mains Questions Series Part-IX
10. Law of Contract Mains Questions Series Part-X