Discharge by Agreement: Novation, Rescission and Alteration

The conditions, and all must be satisfied.

1. The consent of all parties, including the incoming party. Illustration (c) fails on exactly this point: C did not assent, so no new contract came into existence and B still owed C.
2. The original contract must be subsisting and not already broken. There must be something to substitute.
3. The new contract must be valid and enforceable. If the substituted agreement is void, the old contract revives, because the parties never got what they bargained for in giving it up.
4. The substitution must be made before breach. After breach the cause of action has already accrued.

(b) Rescission

Here rescission by agreement: all the parties agree to cancel the contract, and no new contract takes its place. Both are released.

Distinguish this from rescission for a vitiating factor. Under sections 19 and 19A one party rescinds unilaterally because his consent was defective. Under section 62 both parties agree. The word is the same and the mechanism is not.

(c) Alteration

Alteration means changing one or more terms with the consent of all parties, the contract otherwise continuing. The parties to the contract remain the same, which is the clearest difference from novation.

Novation and alteration compared. In novation the old contract is extinguished and a new one takes its place. In alteration the same contract continues in a modified form. Where the change is so fundamental that the parties cannot sensibly be said to be performing the original bargain, the courts treat it as a novation.

A unilateral alteration is not an alteration at all. Where one party materially alters a written contract without the other's consent, the contract cannot be enforced against the other party, and the party making the alteration cannot rely on the document.

The three modes side by side

Novation compared with two neighbours

With assignment. An assignment transfers a benefit without the other party's consent; a novation substitutes a party and requires the consent of all three. A debtor cannot assign away his liability, which is precisely why novation exists.

With section 41. Under section 41 a third person performs and the promisee accepts, and the promisor is discharged by that fact. There is no agreement to substitute anybody. See [By Whom a Contract Must Be Performed].

A worked example

Kiran owes Lata twelve lakh rupees under a supply contract.

• Kiran, Lata and Manav agree that Manav will pay the twelve lakh and that Lata will look to him alone. Novation by substitution of a party, on illustration (a). Kiran's debt is at an end and a new debt from Manav arises.
• Manav is willing but Lata is not told and does not agree. No novation. On illustration (c) the creditor's assent is essential, and Kiran remains liable. If Manav pays and Lata accepts, section 41 discharges Kiran, but by acceptance of performance and not by novation.
• Kiran and Lata agree that instead of twelve lakh in cash, Kiran will give a mortgage of his shop for seven lakh. Novation by substitution of a new contract, on illustration (b). The new contract extinguishes the old.
• Kiran and Lata agree to extend the payment date by three months, everything else unchanged. Alteration. The same contract continues on modified terms.
• Kiran and Lata agree to call the whole thing off, neither owing the other anything. Rescission by agreement.
• The substituted mortgage turns out to be void for want of registration. The novation fails, and the original debt of twelve lakh revives, because the consideration for giving up the old contract has failed.

What it does NOT mean

"A debtor can substitute somebody else for himself." Not without the creditor's consent. Illustration (c) is the Act's own answer.

"Novation and alteration are the same." Novation extinguishes the old contract and creates a new one, and may change the parties. Alteration keeps the same contract and the same parties.

"Rescission under section 62 is the same as rescission for fraud." Section 62 rescission is by agreement of all parties; rescission under sections 19 and 19A is the unilateral act of the party whose consent was defective.

"One party may alter the written contract to correct it." A material alteration made without the other party's consent makes the document unenforceable against him.

"Novation is possible after a breach." The original contract must be subsisting; after breach the cause of action has accrued and there is nothing to substitute.

Quick revision

• s.62: if the parties agree to substitute a new contract, or to rescind or alter it, the original contract need not be performed.
• Novation: a new contract (illustration (b), the mortgage for five thousand replacing ten thousand) or a new party (illustration (a), C accepted instead of A).
• Conditions for novation: consent of ALL including the incoming party; the old contract subsisting; the new contract valid; and before breach. If the new contract is void, the old one revives.
• Illustration (c): C did not assent, so no new contract, and B still owed C. Assent is the requirement examiners test.
• Rescission by agreement cancels with nothing in its place, and is not the unilateral rescission of ss.19 and 19A.
• Alteration keeps the same contract and the same parties with changed terms. A unilateral material alteration makes the document unenforceable against the other party.
• Compare assignment (no consent needed, benefit only) and s.41 (a third person performs and the promisee accepts).

Test yourself

1. State section 62 and name its three modes. 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, being the substitution of a new contract or a new party; rescission by agreement, cancelling the contract without replacement; and alteration, changing its terms while the contract continues.

2. What are the essentials of a valid novation? The consent of all parties, including any incoming party; a subsisting original contract not already broken; a new contract that is itself valid and enforceable; and substitution before breach. If the substituted contract turns out to be void, the original contract revives.

3. Explain illustration (c) to section 62. A owes B a thousand rupees and B owes C a thousand rupees, and B orders A to credit C with the sum in his books, but C does not assent. Because the incoming party has not agreed, no new contract comes into existence, so B still owes C the thousand rupees. It shows that the consent of every party is essential to a novation.

4. Distinguish novation from alteration. Novation extinguishes the original contract and puts a new one in its place, and it may substitute a different party. Alteration leaves the same contract on foot between the same parties, with one or more terms changed by consent. Where the change is so fundamental that the parties can no longer be said to be performing the original bargain, the courts treat it as a novation.

5. Can a debtor transfer his liability to another person? Not by assignment, because a burden cannot be assigned. It can be done only by novation under section 62, which requires the agreement of the creditor and of the incoming debtor as well as of the original debtor. Alternatively the third person may simply perform, and if the creditor accepts that performance the original debtor is discharged under section 41, though that is not a novation.