Introduction

A contract is usually defined as a written or spoken agreement, entered into by the parties of
their own volition and their free consent, which is intended to be enforceable by law. Indian
Contract Act of 1872 is the primary enactment for contracts in India, setting out general
standards identifying with formation, performance and enforceability of contracts. The
greater part of the exchanges in commerce, trade and industry are based on these agreements.
The contractual obligations of the parties are said to be completed as soon as legal
relationships between the parties come to an end i.e. liabilities of the parties are discharged or
revised. Apart from normal performance of a contract there are five ways through which a
contract gets discharged, broadly considering the circumstances and situations of each case.
They are- breach of contract, lapse of time limit, mutual agreement, through working of law,
or impossibility of performance. When it comes to mutual agreement, the parties may agree
to rescind the contract, alter the contract or substitute it with a completely new one. Hence, in
such a case the original contract gets discharged.
This research paper attempts to look into Section 62 of the Indian Contract Act, explaining
the concepts of novation, rescission and alteration of contracts which help in discharging the
original contractual obligations.

Section 62. Effect of novation, rescission and alteration of the contract

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

Discharge by Agreement
In a contract, the involved parties can substitute, rescind the entire contract, or to modify,
alter, vary or delete some obligations as per their convenience. Novation or modification of a
contract can take place in the same manner as the conclusion of a contract and requires the
consent of all the parties involved.1Whereas, a consensus ad idem rescission, novation or
alteration should be explicit and in the absence of express or implied terms, can be deduced
from the conduct of parties.
Novation
This has been defined as there being a contract in existence, some new contract is

1 Sir F. Pollock and Sir D.F. Mulla, THE INDIAN CONTRACT AND SPECIFIC RELIEF ACTS, Vol. II, s.62
(N. Bhadbade ed., 14th Edition, 2012).
substituted for it either between the same parties (for that might be) or between different
parties, the consideration mutually being the discharge of the old contract.
Both the parties involved are relieved of their promises as per the old contract, as soon as
they mutually agree to form a new contract. The new contract will make the parties liable to
other substituted promises and the older ones will be expunged. When the parties involved in
the contract release each other from mutual obligations, the point of time at which such
agreed settlement and liberation is done is the moment when the original agreement is
discontinued. Also, it cannot be done unilaterally. The assent of all the parties involved in the
contract is necessary in order to form a new one with different or varied conditions to be
followed.
Novation is of two kinds:
a) Change in terms
Parties involved in a contract are free to alter such agreement which they had originally
entered into. If they do so, their liability as regards to the original agreement is extinguished,
and in its place they become bound by the new altered agreement.

For example, if A owes B 10,000 rupees. A enters into an agreement with B, and sells him his
scooter for 8000 rupees, now owing B a reduced amount of 2000. Hence, this leads to
formation of a new contract, extinguishing the previous one. In this example, the parties to
the contract remain the same but there is substitution of a new contract with altered terms in
place of the old one. As the parties have freedom to enter into a contract with any terms of
their choice, they are also free to alter the terms of it by their mutual consent.2
Under Indian law, one of the necessities of such novation is that all the concerned parties
should be in mutual agreement to do so. The consent of the parties may be explicitly seen as
per the situation present during that time because the essence of novation lies in the implied
mutual agreement of the parties to form a new contract instead of performing the old one and
not in the deviation of terms between the two contracts.3
In Salima Jabeen v. National Insurance Co. Ltd., 4 the appellant entered into a contract of
insurance of her property against fire, with the respondent company. The insured sum was Rs.
23 lakhs. Her property was set on fire by the militants causing substantial damage to the
property. But the assessment of the damage made by the surveyors came out to be Rs. 6.5

2 A.Singh, LAW OF CONTRACT, 434 (10th ed., 2010).

3 Chitty on Contracts, Vol. 1, 857 (30th ed., 2008).
4 AIR 1999 JK 110.
lakhs (appx.) which was paid to the appellant.
It was held that by accepting the said amount of compensation and agreeing not to make any
further claim, the appellant has released the insurance company from contractual obligations.
She, therefore, was not entitled to claim any further compensation from the insurance
company.
b) Change in the parties
It is possible that by novation an obligation may be created for one party in place of another.
55If under an existing contract, A is bound to perform the contract in favour of B, the
responsibility of A could be taken over by C. Now instead of A being liable towards B, by
novation C will be liable towards B.

For example, A owes cash to B under an agreement. It is concurred between A, B and C that
B should from this time forward acknowledge C as his borrower, rather than A. The old
obligation of A to B is at end and new obligation from C to B has been formed. It may be
noted here that the consent of all the parties involved is absolutely necessary. Thus, if A and B
agree that in place of A, now C will be liable, but C doesnt consent to it, there would be no
novation.
In Satish Chandra Jain v. National Small Industries Corporation,6 the appellant stood
guarantor to funding done to his proprietary business venture. Subsequently, the son
converted his business into a private limited company. It was held that due to subsequent
changes, which amounted to novation, appellants guarantee stood discharged.
Intention of Novation
It is a question of fact and circumstances when it comes to novation of a contract, which is in
no way prejudged by Section 62. It all depends on the agreed action of both the parties, as
observed from not just the form of agreement but the material facts of the contract. 7 On the
off chance that there is no aim to cancel the earlier contract inside and out, there is no
substitution, and the first contract is still legally enforceable.
An original cause of action can be discharged even by an executory agreement if the intention
to that effect is clear.8 For example, if B owes A certain amount of cash and A is satisfied
even before the performance, accepting just his promise to give consideration. Hence, on the
date on which the agreement is made, the old promises are done away with.
5 R. K. Bangia, INDIAN CONTRACT ACT, 253 (14th ed., 2010).
6 AIR 2003 SC 623.
7 Pollock and Mulla, supra note 1.
8 Anson's Law of Contract, 462 (29th ed., 2010).
The ascertainment of intention is essentially a question of fact. If parties wanted to novate
their contract and rescind their original agreement, but failed to form a new contract with
different obligations, this may extinguish the liabilities under the original contract. 9 But the
fact that such intention was present, either through explicit terms or by implied conduct, has
to be proved.

It has also been seen that a change in the rate of payment brings about a new agreement by
default as it is a material term of the contract. In Central Bank of India v. Guruviah Naidu
and Sons (Leather) Pvt. Ltd.,10 the bank agreed to withdraw a case for money if the
respondent company paid certain other amount within a specified period, and the company
complied with it. The claim made by the bank in this case was set apart as it could not claim
interest on late payments under the old contract. Hence, novation definitely is present where
both the involved parties settle for a mutually agreed amount, and perform their promises as
such. It makes no difference whether some of the items are statute barred or not.11
Revival of the original contract may not happen due to the mere nonperformance of the new
contract but will happen when one of the parties performs the obligations as per the old
contract and the other party explicitly or impliedly shows that it has no objection to such
performance. In Lala Bunseedhur v. Government of Bengal,12 the defendant was sued by the
then government of Bengal as being surety for the treasurer of a collectorate on four surety
bonds executed by him. On cross checking by the collector, it was found that every time the
defendant executed a new bond, it was without cancelling the old bond and balance was
correct. In view of this, the Privy Council held that mere execution of new bond does not
constitute novation as the replacement of the original contract with a new one happened with
no consensus ad idem. Therefore, intent to rescind the original contract is necessary for
novation to occur which was absent in this case as mere execution of a new bond does not
constitute novation.

Rescission
The parties to a contract may completely extinguish their liabilities by rescinding the original
contract so that they are no longer bound by it, the same way they may vary some of its terms
by a subsequent agreement. But intention should be present, explicit or implicit, from both

9 T.S.V. Iyer, LAW OF CONTRACTS AND TENDERS, Vol. I, 337 (10th ed., 2011).
10 AIR 1992 Mad 139.
11 Supra note 3.
12 (1872) 14 MIA 86 (PC).
the parties. Like novation, this also cannot be done unilaterally.13 One abandons their own
rights and liabilities as per the contract when such rescission takes place as it relieves the
other party of its obligations.
In the case wherein obligations from both the parties involved remain unfulfilled, the
agreement may be rescinded on mutual agreement. This shows that even a partially executed
contract can be rescinded. Likewise, a contract whose obligations have been completely
performed from one side can still be rescinded by the other party provided that it returns the
performance or restores the benefit accrued from such performance of that party,
guaranteeing the fact that both parties need not follow the old contract anymore. 14 Hence, as
both the parties abandon their rights to claim damages or request performance of the contract,
the contract is discharged completely. If the circumstances are interpreted in such a way, from
words or conduct of the parties, that intention is found to be missing from one party, then the
rescission is said to have not taken place at all.
A contract cannot be revived as it gets fully discharged as soon as it gets rescinded through
mutual agreement between the involved parties. Express provisions should be in place and
requested by the aggrieved party for reimbursement, restitution or restoration for goods or
services provided before the contract was rescinded. In the absence of such provision it may
be possible to bring a restitution claim provided that the contract has been set aside and
monetary claims are held to be recoverable if there was no obligation fulfilled from the other
party.15 It is more doubtful whether a claim can be brought in the case where there is partial
performance such as when goods or services were provided prior to the rescission of the
contract because, the party in receipt of incomplete performance may be able to contend that
it was not enriched by receipt of partial performance.16
In Syed Israr Masood v. State of MP ,17 tenders were invited for forest coupes pursuant to
which the plaintiff was awarded the work. However, later it was found that there was
substantial variance between the particulars furnished during the process of auction regarding
the quality and quantity of timber that would be available for extraction and the type of tree
growth actually found at the site. By the time the coupes were allowed to be inspected by the
auction-purchaser, that area was declared to be reserved, with the result that there was a
complete prohibition against the felling of any timber therefrom.

13 Iyer, Supra note 9, at 339.

14 Corbin on Contracts, 985 (1952).
15 T.K. Mukherjee, LAW OF CONTRACT, Vol. I, 871 (2000).
16 Bangia, supra note 5, at 254.
17 AIR 1981 SC 2010.
It was held that the plaintiff can rescind the agreement as this had substantially altered the
very foundation of the contract. He also claimed a refund of the amount kept as security
deposit.

Alteration
Parties to an agreement may vary some of its terms by a subsequent agreement. Whereas the
original obligations of the parties continue to be there, the variation should be inserted into
the contract and become a part of it after mutual agreement between both parties as mere
alteration of terms and conditions is not enough. But if the original terms themselves are not
in consonance with the newly formulated conditions, they get superseded by default.18
The consideration for the variation, if it has to be found, can be explicitly observed in
conferring new benefits or the mutual abandonment of existing rights by each party in respect
to the other or in the assumption of additional obligations or incurring additional liabilities or
increased detriment. The courts have also recognised a 'practical benefit' arising to a party
undertaking an additional detriment, as sufficient consideration.19

In Grogan v. Robin Meredith Plant Hire Ltd. 20,a question arose whether, in a contract for
laying pipes, the signature of an employee on a timesheet recording working hours and
containing new conditions varied the original agreement in a material format or not. This
move of including the new conditions was detrimental to the workers and was without their
assent. The court distinguished between documents of contractual effect in the formation of
a contract and documents of contractual effect in the performance of the contract (viz,
timesheet, invoice, statement of account), and held that generally variations would not occur
through the presentation of documents of performance, and that the timesheet in the instant
case did not vary the contract. The question was whether the time sheet comes within the
class of document which the party receiving it knew contained, or which a reasonable man
would expect to contain, relevant contractual conditions. It was finally held that An
employee becoming required to sign an administrative document, a time sheet did not amount
to a variation of the contract of employment.

A unilateral declaration by one party to another in the absence of agreement cannot constitute
a variation. But a contract may give one of the parties the power to unilaterally vary the

18 P.S. Atiyah, AN INTRODUCTION TO THE LAW OF CONTRACT, 283 (3rd ed., 1981).
19 Supra note 8, at 465.
20 (1996) 20 CA.
obligations under the contract, for example, clauses of price variation, variation in the
building works, etc. There is nothing repugnant to the law of contract to have as one of the
express terms of the contract itself that it will be alterable at the instance of one party
alone.21The extent of the power to vary will not be construed to entitle the party to vary
matters other than those specifically provided in the contract. Unilateral variation, unless
permitted by the contract, or by rules, may amount to breach of contract, and entitle the other
party to damages or repudiate the contract as the case may be. So would variation beyond the
terms of the contract.22

Rescission or Alteration?
Whether there has been a variation of terms or abandonment depends on the intention of the
parties in each case, and is often not easy to determine. 23 The difference between variation
and rescission is a real one, and was tested in the following case.
In Morris v Baron & Co.,24 a written contract was entered into for the sale of some cloth. But
a suit had to be filed to settle a dispute between them. It was concurred between the parties
that the suit and counterclaim should be withdrawn, that an extension should be given to the
buyer for payment of a sum owed by him under the contract and that he should have an
option to purchase the goods remaining due to him instead of being bound to take delivery.
The dispute was settled in the House of Lords which held that the original contract of sale
was discharged by the substituted agreement and in order to extinguish the original contract,
it is not necessary that the substituted agreement should have been performed an executory
contract is sufficient. Nor is it necessary that it should amount to an enforceable agreement.

Conclusion
Contract rests on agreement of the parties: as it is their agreement which binds them, so by
their agreement they may be discharged. Apart from performance of the contract, there exists
three other ways through which contractual obligations can be discharged- novation,
rescission and alteration.
When the contract is said to be discharged, or terminated, or cancelled, all of the legal
relations between the parties cease to exist and when by express terms, one of the party
21 Singh, supra note 2, at 437.
22 S. Row, COMMENTARY ON LAW RELATING TO ICA, 1872 AND TENDERS, 1377 (10th ed., 2006).
23 Pollock and Mulla, supra note 1.
24 Morris v Baron & Co., [1918] A.C. 1.
intends to novate, rescind or alter the old contract with prior assent of the other party,
contractual obligations and legal remedial rights of both the parties are dissolved. Hence, in
such a case performance as per the original contract cannot be demanded by approaching the
law.
In all cases, the inference of such intention of the parties to revise their contractual
relationship is of the utmost importance. It is done by reading between the lines, as in the
conduct of the parties have to be attributed with a legal meaning in those circumstances. Also,
the exercise of the aforementioned power by either of the party, does not mean that the party
which partly performed its part of the contract surrenders its right to remedial measures in
case the other party does not reciprocate.
For contracts like those of employment, variation in a few terms of such contracts can bring
about a material change in the whole purpose of the contract and if such a change is done to
harm the other party, it becomes necessary for the courts to look into the intentions of both
the parties during such contractual negotiations. Hence, the importance of Section 62 is
paramount when looked at a view point of commercial contracts in this burgeoning world
economy.

Commentary
As much as a contract arises as an agreement between parties, which being the parties, it can
also be discharged by further agreements or consent between them. Thus this form of
discharge may be by Novation or by Remission or Waiver.25
Section 62 provides the effect of Novation, rescission and alteration of a contract.
When 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.26

NOVATION
The concept of novation is best explained in the case of Scarf v Jaradine. 27 In this case lord
Selborne explained the same in the following manner 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..
Novation may thus take place by

25
26 Section 62, Indian Contract Act, 1872.
27 (1882) 7 App Cas 345, 351.
 Changing of parties of the original contract.
Substitution of new contract in the place of the old.
In the former case of novation by change of parties an illustration would be where one of the
parties accepts another third person in the place of the opposite party. This normally takes
place in the reconstitution of partnership firms. Sometimes a new partner is admitted into an
existing firm or when a partner retires from the firm and the new firm is constituted it is a
case of novation.
In the latter case when novation takes place there is a substitution of a contract new contract
or the old between the same parties and the original contract is discharged and need not be
performed.
In both these cases the requisites are that:
1. There must be an original and subsisting contract when the novation takes place and
2. The new agreement should be valid and enforceable.
One of the essential requirements of novation as contemplated by Section 62, is that there
should be complete substitution of a new contract in the place of the old. It is in that situation
that the original contract need not be performed. Substitution of a new contract in the place of
the old contract which would have the effect of rescinding or completely altering the terms of
the original contract, has to be by agreement between the parties. A substituted contract
should rescind or alter or extinguish the previous contract. But if the terms of the two
contracts are inconsistent and they cannot stand together, the subsequent contract cannot be
said to be in substitution of earlier contract.28 Novation under Section 62 of the Contract Act
requires a clear plea, issue and evidence. Such a question cannot be raised or accepted
undersection 100, CPC for the first time in Second Appeal. There was no such issue in the
Courts below the defendants evidence contrary to such a theory.29

Recession
Section 62 also provides for the parties to a contract to agree to rescind or alter the contract,
in which case again the original contract is discharged.
This recession may be by mutual consent of the parties whereby they agree to cancel all or
some of the terms of the contract of they may also substitute new terms. Such a rescission
maybe be possible such the party rescinding it does so without prejudice to any of his rights
to claim compensation for breach when the other party fails in his performance.

28 Lata Construction v Rameshchandra Ramnikil Shah AIR 2000 SC 380.

29 Babu Ram v Indra Pal Singh AIR 1998 SC 3021
In the instant case, the general power of attorney itself makes it clear that the power of
attorney holder has a right to deal with all the properties belonging to the principal as on the
date and any other properties which maybe acquired subsequent thereto also. As such the
contention that the contract for sale of property entered by the general power of attorney
holder with the plaintiff-purchaser was liable to be cancelled since the principal had no full-
fledged and valid title to the property at the time when she constituted the power of attorney
and therefore, the power of attorney had no right to deal with the properties which are
acquired and owned by him subsequent to the date of to the date of power of attorney cannot
hold water in the eye of law.
Revocation by purchaser-claim for refund of consideration paid-plea by vendor to set off loss
suffered due to revocation-can be considered only if vendor proves that he was fully ready
and prepared to perform his part of the contract as per the terms of the agreement.