Basic Conceptual Questions
1. Define novation under Section 62 of the Indian Contract Act, 1872. What are its essential elements?
2. Distinguish between novation and alteration of contracts with examples.
Expected Answer: Novation extinguishes the original contract entirely and creates a new one, possibly with new parties. Alteration modifies specific terms while the original contract continues. Example: Novation - A owes B Rs. 1 lakh; C agrees to pay B with everyone's consent, discharging A. Alteration - Extending delivery date in a supply contract while other terms remain unchanged.
3. Does alteration or modification of contractual terms amount to novation? Explain.
Expected Answer: No, alteration/modification does not amount to novation under Indian law. Alteration changes specific terms within the existing contractual framework, while novation requires complete substitution of the contract. The test is whether changes go to the root of the contract and change its essential character.
Case-Based Scenario Questions
4. A owes Rs. 5 lakh to B. B owes Rs. 5 lakh to C. A, B, and C agree that A will pay C directly. Analyze this transaction.
Expected Answer: This constitutes novation if all three parties consent. The original contracts between A-B and B-C are discharged, replaced by a new contract between A-C. If C doesn't consent, no novation occurs and original debts remain.
5. In a construction contract, parties agree to change the completion date from March to June and increase payment by 20%. Is this novation or alteration?
Expected Answer: This is alteration, not novation. The original contract continues with modified terms (time and payment). The essential character and parties remain unchanged. Only specific terms are amended with mutual consent.
6. A partnership firm takes over liabilities of another firm with creditors' consent. What kind of discharge is this?
Expected Answer: This is novation. The original contracts between creditors and the old firm are discharged, and new contracts are formed with the new firm. There's substitution of parties with creditors' consent, fulfilling novation requirements.
Advanced Legal Analysis Questions
7. Can novation be unilateral? Support your answer with case law.
Expected Answer: No, novation cannot be unilateral. In Citi Bank N A v. Standard Chartered Bank, the Supreme Court held that novation under Section 62 requires bilateral agreement of both parties. Unilateral acts cannot substitute, rescind, or alter contracts.
8. What is the legal position when parties enter into novation of an illegal contract?
Expected Answer: In Ratanlal v. Firm Mangilal Mathuralal, the court held that if there's direct connection between the fresh contract and earlier illegal contract, the novated contract remains illegal and unenforceable. Courts will refuse to enforce such novated contracts
9. Explain the test to determine whether a case falls under Section 62 (novation) or Section 63 (performance) of the Contract Act.
Expected Answer: As held in Chrisomar Corpn. v. MJR Steels, the test is whether modifications go to the root of the original contract and change its essential character, with the modified contract replacing the original (Section 62), or whether the original contract survives with modifications (Section 63).
Practical Application Questions
10. A lease agreement is transferred to a new tenant who assumes all obligations. The original tenant is discharged with landlord's consent. Analyze.
Expected Answer: This is novation involving substitution of parties. The original lease contract is discharged, and a new contract is formed between landlord and new tenant. Original tenant is completely relieved of obligations.
11. In a loan agreement, the interest rate is changed from 10% to 12% with mutual consent. What kind of modification is this?
Expected Answer: This is alteration, not novation. Only the interest rate term is modified while the loan contract continues. The essential character (loan relationship between same parties) remains unchanged.
12. Differentiate between the legal effects of novation and alteration on original contractual obligations.
Expected Answer: In novation, original obligations are completely extinguished, and new obligations arise under the new contract. In alteration, original obligations continue but are modified as per the agreed changes. Parties' liability differs accordingly.
Judicial Decision-Making Questions
13. As a judge, how would you determine parties' intention in ambiguous contract modification cases?
Expected Answer: Examine: (i) Express words used, (ii) Nature of changes made, (iii) Whether changes go to contract's root, (iv) Parties' conduct, (v) Surrounding circumstances. Apply the Lata Construction test of whether parties intended complete substitution or mere modification.
14. What factors would you consider while deciding whether to enforce a novated contract?
Expected Answer: Consider: (i) Valid consent of all parties, (ii) Legality of new contract, (iii) Proper discharge of original contract, (iv) Consideration for new contract, (v) Compliance with Section 10 requirements, (vi) No illegality or fraud involved.
15. How would you handle a dispute where one party claims novation while another claims mere alteration?
Expected Answer: Analyze: (i) Documentary evidence of parties' intention, (ii) Scope and nature of changes made, (iii) Whether original contract's essential character changed, (iv) Evidence of complete substitution vs. modification, (v) Apply legal tests established in precedents like Juggilal Kamlapat v. NV Internationale.
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