In simple terms, a “novation” is a circumstance in which the parties to a contract decide to replace the old contract with a new one; it has been defined under Section 62 of the Indian Contract Act of 1872.
The following conditions must exist for novation to occur:
There must have been an earlier legal responsibility; the parties must approve a new agreement to the initial contract, the previous contract stands terminated, and a legally binding new contract has been introduced.
When corporate lawyers or corporate law firms advise a client, they should be knowledgeable of the criteria for a valid novation as well as the repercussions for the incoming and outgoing novation parties when one occurs, which may be avoidable at the time the novation clause is laid down during contract drafting; thus, in this post, we aim to highlight the differences between intention and novation for the perusal of international law firms, and domestic and corporate law firms, NCLT lawyers and other lawyers in Ahmedabad and elsewhere, who deal daily with the challenges of drafting contracts. Essentially, there are two ways to novate: a novation involving a change in parties and a novation that consists of replacing an existing contract with a new one; however, for this blog post, we will limit ourselves to the question of intention in novation.
In short, the intention is a crucial and prerequisite component in the context of novation. The parties’ intentions determine whether there is novation or not, and this is supported by the fact that if there is no desire to revoke the initial contract entirely, there is no substitute, and the original contract is still binding. One of the first landmark cases in this area of law is Morris v. Baron & Co., wherein the core issue presented to the Court was whether the previous contract was dissolved and replaced by a brand-new agreement between the parties. The facts of the case suggest that Morris and Baron entered into a written agreement for Morris to give Baron a specific quantity of cloth. The parties’ disagreement subsequently occurred when Morris demanded payment for the fabric she had delivered. Baron asserted damages for breach of contract due to her delay in producing the other pieces. On parole, the parties later came to an agreement wherein they resolved to end the legal action. Morris agreed to pay Baron £30 in damages for missing the deadline, along with other stipulations. According to the ruling, it was noted that if the parties intended to rescind the original agreement in any case, an attempt at novation that fails to result in a new, enforceable contract might likewise terminate the previous agreement; pertinently, however, there is a burden on proof placed to prove such intention clearly, and the same cannot be just inferred.
Yet another crucial case here is Producers & Fruit Co. v. Goddard, wherein a formal agreement was made between the plaintiff and defendant to purchase and sell fruit at predetermined prices. The parties subsequently entered into an oral agreement with the understanding that it would take the place of the earlier written agreement. For some time, the vendor fulfilled his half of the oral agreement by delivering the fruit. However, subsequently, the seller declined to carry out further obligations because the vendee refused to pay the market price, which was more than the amount specified in the written agreement. The oral agreement was found to be valid as a discharge from the written agreement when the vendee filed a lawsuit for breach of the initial agreement.
Finally, in the case of Lala Bunseedhur v. Government of Bengal, the Privy Council ruled that executing a new bond does not constitute a novation. In this case, there was no shared desire to terminate the previous agreement and replace it with a new one. Further, because a novation requires the termination of the old contract, the defendant’s decision to simply execute a new bond does not qualify as one. The jurisprudence thus clearly and repeatedly stresses and reemphasises the importance of purpose in assessing whether or not novation has occurred. The parties’ intentions must be unambiguous or animus novandi.