Discharge by Agreement: Novation, Rescission and Alteration

In one line

What the parties made by agreement they can unmake or remake by agreement, and section 62 names the three ways of doing it.

In the words a student can write in an exam: section 62 of the Indian Contract Act 1872 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." The three modes are novation, substituting a new contract or a new party; rescission, cancelling the contract without putting anything in its place; and alteration, changing one or more of its terms while the contract itself continues.

Why the section exists

A contract binds because the parties agreed to be bound. It follows that the same parties, by the same means, can release each other, and section 62 is that proposition in statutory form. The Latin tag is eodem modo quo quid constituitur, eodem modo destruitur, a thing is unmade in the same way it was made.

The section is placed in the group of provisions headed "Contracts which need not be performed", and that heading is the key to it. Section 62 does not say the contract was never good; it says the parties have agreed that it need not be performed.

The provision itself

"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."

Its 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.

(b) A owes B 10,000 rupees. A enters into an arrangement with B and gives B a mortgage of his estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old.

(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 arrangement. B still owes C 1,000 rupees, and no new contract has been entered into."

Illustration (c) is the one to learn, because it shows the requirement that decides most problems: every party must assent.

Broken down: the three modes

(a) Novation

Novation means substituting a new contract for an old one, and it takes two forms.

• Substitution of a new CONTRACT between the same parties. Illustration (b): a debt of ten thousand rupees replaced by a mortgage for five thousand. The new contract extinguishes the old.
• Substitution of a new PARTY. Illustration (a): B agrees to accept C as his debtor instead of A. A's debt ends and a new debt from C begins.