NOVATION, RESCISSION AND ALTERATION OF CONTRACTS

NOVATION, RESCISSION AND ALTERATION OF CONTRACTS

The end or termination of a contract is referred to as the discharge of a contract and there are many ways in which a contract may be discharged which may be classified under three categories:

  1. Bilateral Discharge-Wherein all the parties to an agreement mutually decide to terminate the contract and to end the contractual obligation of the other parties as well. The contract may not even be completely fulfilled however the mutual agreement to terminate the contract ends all contractual obligations regardless of their stance.
  2. Accord and Satisfaction: When Party A terminates Party B’s contractual obligation because Party B is in breach of the agreement or has not fulfilled his/her contractual duty. However, Party A can only terminate the contract if he/she receives some other form of consideration instead. For example, Party B may be asked to compensate the losses endured by Party A for their non-performance.
  3. Unilateral Discharge-Wherein one party terminates the contract after they have fulfilled their part of the contractual duty. However, this kind of discharge is only supported if it is made under seal or if consideration is proven.

As per Section 62 of the Indian Contract Act 1872, if the parties to a contract agree to substitute a new contract for the original one, or to rescind or alter it, the original contract need not be performed.

Hence there exist 6 types of discharge of contract via mutual consent and they include:

  • Novation – This occurs whenever a new contract is either substituted for the original one or when the original contract is rescinded due to the proposition of a new contract to replace it. Novation usually includes scenarios wherein there is a change of parties to a contract or the substitution of the new contract in place of the old one and the essence or the root of the contract must be changed for it to classify as novation. This is highlighted in the case of Lata Construction v. Dr Rameshchandra Ramniklal Shah wherein the Court held that there must be a total and complete substitution of a new contract and it is only in this situation when the old contract may cease to exist.
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In another case of Juggilal Kamlapat v N.V. Internationalethe Calcutta High Court also held that “For novation to take effect, modification to the contract must go to the root of the original contract and change its essential character”.

It is also to be noted that Void Contracts cannot be Novated. For example, Contracts made with Minors or with the Mentally Unsound or with Intoxicated Individuals cannot be Novated because the original contract in itself was void from the beginning and hence it cannot be altered or replaced.

  • Rescission – As under Section 62 of the Indian Contract Act, parties are permitted to rescind their contracts. Contracts that have been rescinded may be renewed or put into action once again if the parties to the contract mutually consent to revive the same. Once revived, the original contract becomes legal and binding upon the parties and the contractual obligations arising from the rescinded contract also are now enforceable. Rescission of a contract can be pronounced in a manner that is similar to the revocation of a proposal as stated under Section 66 of the Indian Contract Act.
  • Alteration – In this case, only certain clauses or conditions stated in the contract are changed or modified with the mutual consent of all parties to the contract. For example, a time-barred contract may be modified and the time limit may be increased or decreased as per the wishes of all the parties involved in the contract.

In the case of United India Insurance Co Ltd v M.K.J. Corpn it was delivered in the judgement that “Good faith is a continuing obligation inasmuch as even after entering into the contract, no material alteration can be made by a party in the terms of the contract without the consent of the other’’.

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If in case any changes are made without attaining the prior consent of the other party, the contract or deed may be deemed cancelled which ends the contractual obligation of both parties automatically. Hence mutual agreement is vital to alteration of any contract.

  • Remission-Under Section 63 of the Indian Contract Act, Remission is defined as the scenario in which one party receives less than what was contracted for in discharge of the whole sum and it is not necessary to ensure that some other form of consideration is given to the party in exchange for the same. For example, Part A owes Party B a sum of Rs 1700 but he pays B only Rs 1000 and if B decides to accept the amount paid as the final settlement of debt, he discharges the contract via remission.
  • Waiver– It is the voluntary individual surrender or forfeit of a few or more rights contractual rights under an agreement by either one of the parties and this may occur either by deliberate failure on the part of the party to perform his duties or by a positive act of giving up certain rights as well. For example, if A was supposed to receive certain goods but he turns them down and refuses to take them, it can be considered a waiver of sale. However, if A did not take the goods because he thought that they were a different product then it would be an unintentional waiver.

It is important to note that silence cannot be taken as a waiver of contract because it is essential to indicate an intentional and voluntary decision to waiver contract rights either by actions/behaviour or by expressed words.

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In the case of Charles Richards Ltd v Oppenheim, the contract was to provide a car frame on which a body was to be built within a certain period of time, time being of the essence. The contractor could not deliver the frame of the car within the due date. Yet the buyer very liberally granted the contractor an extension in time of 4 weeks, he also gave notice that beyond this time there will be no acceptance.

When the delivery was made well beyond 4 weeks the buyer did not accept performance. The defendants pleaded that the buyer through his conduct waived his right of performance in due time by leniently giving time extension. The court held that the buyer reclaimed his right to make time of essence when he gave a notice. Hence, he was allowed to rescind the contract.

Author: Keerthana R,
Christ University 2nd Year, Law Student

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