DOCTRINE OF NOVATION

Novation is defined under section 62 of the Indian Contract Act, 1872 as “if the parties to the contract agree to substitute a new contract for it or to rescind it or alter it, the original contract need not be performed.” The new party replaces the old party and hence the latter is completely released from his obligations. A negotiation contract has to be signed.

It is somewhat related to the assignment but has certain fundamental differences like an assignment does not need the consent of the benefiting party and it only transfers obligations whereas novation transfers all the rights and the obligation to the other party and requires the consent of benefiting party as well. Novation terminates the contract but assignment doesn’t.

An example for novation of contract: A owes $10000 to B and B owes $10000 to C then novation can make it as A owes $10000 to C, making B free from liabilities.

In property laws, novation of contracts is a common process. A typical example is when the tenants asked the other person to pat the lease and hence making him responsible for rent payments and damages. Similarly, Constructors pass their jobs to another constructor with the consent of the parties concerned.

There are two novation agreements templates:

1. A standard novation, in which, the party will decide the rights and liabilities which will be applied after signing the contract. 
2. An ab ignition novation agreement, in which, party assumes past rights and liabilities. 

When the contractual rights are limited legally and contractually then the contract of novation comes into play. Several contracts undergo novation in corporate transactions, such as, in mergers and acquisitions. Novation assists in the situation when it becomes impossible to pay, under the terms and conditions of the existing contract. It prevents the debtor from getting insolvent or bankrupt.

Novation has a slightly different meaning when it comes to the financial markets. In financial markets, sellers give their securities to the clearinghouse who further sell them to buyers. Clearinghouse assumes the risk that may occur during these transactions. 

There are three kinds of Novation:

1. A general novation in which only two parties, a debtor and a creditor comes into the contract again and make the former contract void.
2. An expromissor novation: In this type of novation, Creditor remains the same but a third-party comes up as a new debtor replacing the original debtor and taking all his obligations and liabilities.
3. A delegation type of novation: In this type of novation, a new creditor gets introduced in the contract by replacing the original contract.

In common law, any substitution can be made to the Agreement only when both the parties give their consent. For example, if a debtor presents a promissory note to the creditor, it will be valid only when the creditor accepts it. A debtor cannot sue the creditor on the original agreement once the note gets accepted.