District Judge Interview Questions: Novation, Alteration, and Modification of Contracts

 Basic Conceptual Questions

1. Define novation under Section 62 of the Indian Contract Act, 1872. What are its essential elements?

Expected Answer: Novation means substituting a new contract for an existing one, which completely discharges the original contract. Essential elements include: (i) Consensus ad idem between parties, (ii) A pre-existing valid contract, (iii) Complete substitution creating a new valid contract, (iv) Termination of original contract, and (v) All parties' consent including new parties if any.

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Navigating Novation: Distinguishing Novation, Alteration, and Modification in Indian Contract Law

 Introduction

Contemporary legal disputes frequently draw upon contractual principles such as novation, alteration, and modification. Understanding these nuanced doctrines is critical for judges, advocates, and legal scholars engaged in the interpretation and enforcement of contracts under Indian law. This article unpacks the meaning, key differences, and situational applications of novation, alteration, and modification, drawing upon statutory provisions, judicial precedent, and practical illustrations relevant to today's legal ecosystem.

Novation of Contracts: Meaning and Statutory Basis

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Whether the court can grant specific performance of construction contract?

 24.3. In order to determine the exact nature of the agreement

signed between the parties, the intent of the parties has to be

construed by reading the agreement as a whole in order to

determine whether it is an agreement simpliciter for

construction or an agreement that also creates an interest for

the builder in the property. Where under a development

agreement, the developer has an interest in land, it would be

difficult to hold that such an agreement is not capable of

being specifically enforced.”

(Italics and underscoring supplied)

22.7.2 Where, therefore, as in the present case, the agreement is not merely for development or construction on the property, but also envisages valuable rights enuring, in favour of the developer, in the constructed edifice, the Supreme Court itself holds, unequivocally, that it would be difficult to treat the agreement as incapable of specific performance.

22.8 The requirement of precision, in the construction contract, as a pre-condition for its enforceability, is relatable to the erstwhile Section 14(3)(c)(iii) of the Specific Relief Act. That requirement no longer figures on the statute book, after the amendment of Section 14 by the 2018 Amendment Act. In my prima facie opinion, lack of precision in the construction agreement can no longer be regarded, by itself, as a sufficient disqualification to its enforceability by specific performance. Else, it would be re-introducing, by a side wind, the consideration in the erstwhile Section 14(3)(c)(iii), which the legislature has consciously removed from the statute. Such anexercise is necessarily to be eschewed, as it would militate against the legislative intent.

22.9 The sequitur would, therefore, be that a construction contract can no longer be regarded as incapable of specific performance merely because its terms are imprecise or vague. If, however, owing to such imprecision or vagueness, any direction for specific performance would require continuous supervision by the Court, that would, even now, render the agreement incapable of specific performance by virtue of Section 14(b). For that, however, the Court would have to arrive at a finding that, owing to the imprecision of the agreement, or for any other reason, any direction for specific performance would require continuous supervision by the Court. In the scenario of Section 14 as it exists today, and without the support of the erstwhile Section 14(3)(c) and its various clauses, this would, in almost every case, be arguable at the very least.

22.10 Prima facie, in view of the above legal position, I am unable to convince myself to hold, prima facie, that the defendant has been able to make out a case of the PDA being incapable of specific performance, by operation of Section 14(b) of the Specific Relief Act, as would justify vacation of the interim direction to maintain status quo in respect of the suit property.

 IN THE HIGH COURT OF DELHI AT NEW DELHI

Pronounced on: 22nd October, 2021

IAs 6433/2020 & IA 7643/2020 in

CS(COMM) INFRA 1/2020

M/S GROVY INDIA LTD Vs BALBIR SINGH

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Whether court can enforce old contract if new contract is nullity?(Doctrine of Novation)

 Nearly a century and a quarter ago, one finds this clear exposition of the principle of novation, in the judgement of the Court of the Judicial Commissioner at Nagpur in Ganpat v. Mahadeo  1925 Nag 26 :

“Where the question is whether one party is set free by the

action of the other, the matter for consideration is whether the

acts or conduct of the one do or do not amount to an

intimation of an intention to abandon and altogether to refuse

performance of the contract. The true question is whether the

acts and conduct of the party evince any intention no longer

to be bound by the contract: Mersay Steel and Iron

Company v. Naglir Benzon & Co. 9 A.C. 434 General Bill

Posting Co v. Atkinson (13). The Court requires as clear

evidence of the waiver as of the existence of the contract

itself and will not act upon less: Carolan v. Brabazon (1900)

A.C. 118 = 78 L.J.; C.H. 77=99 L.T. 913 = 25 T.L.R. 173.

What is then required is that an abandonment of the old

agreement, must be clearly made out. There must be clear

and precise evidence of a mutual intention to determine and

abandon the contract: Mathura Mohan Saha v. Ram

Kumar Saha [1946] 43 Cal. 700=23 C.L.J. 26 = 30 I.C.

305: 20 C.W.N. 370. Where the intention to substitute a new

contract is frustrated by the fact that the new contract is a

nullity, the original contract may be enforceable: see Har

Chandi Lal v. Sheoraj Singh 3 J & L 200 = 9 Ir. & E. 121.

Much more so, where the agreement itself is a contravention

of the statute and does not ripen into a contract in the legal

sense of the term.”

(Emphasis supplied)

A coordinate Bench of this Court has held, recently in Knowledge

Podium Systems Pvt Ltd v. S.M. Professional Services Pvt Ltd26,

that “a novation takes place only when there is a complete substitution of a new contract in place of the old”.

 IN THE HIGH COURT OF DELHI AT NEW DELHI

Pronounced on: 22nd October, 2021

IAs 6433/2020 & IA 7643/2020 in

CS(COMM) INFRA 1/2020

M/S GROVY INDIA LTD Vs BALBIR SINGH

CORAM:

HON'BLE MR. JUSTICE C. HARI SHANKAR

Dated: 22.10.2021

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What is basic concept of novation sub silentio?

Under Clause 5 of the agreement, cannot be construed either as novation of the original contract Under Section 62 of the Indian Contract Act (hereinafter referred to as 'the Act'), or acquiescence to any new arrangement by substitution of a new contract. It was an act done under compulsion, and not voluntarily. A novation of contract, can take place only by mutual consent in a tripartite arrangement. In absence of any fresh tripartite agreement executed between the parties, it is futile to contend novation. 
The plea of the Respondents for novation of the contract referring to Section 8 and 62 of the Act, sub silentio finds support from the observations in McDermott International Inc. (supra) as follows:

151. Clause 5 of the contract categorically states that MII was to procure the material which was to be reimbursed by BSCL. The extra amount incurred by MII for procuring materials having extra thickness, therefore, was not payable. To the aforementioned extent, there has been a novation of contract. MII had never asserted, despite forwarding of the contention of ONGC, that it would not comply therewith. It, thus, accepted in sub silentio.

21. The novation of a contract could take place sub silentio was also noticed in BSNL v. BPL Mobile Cellular Ltd. MANU/SC/7717/2008 : (2008) 13 SCC 597 as follows:

45..... They might have also been held bound if they accepted the new rates or the periods either expressly or sub silentio.....

IN THE SUPREME COURT OF INDIA

Civil Appeal No. 1168 of 2007

Decided On: 19.06.2017

 Kanchan Udyog Limited Vs.  United Spirits Limited

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Whether Mere variation of some terms of a contract constitute a novation?

In other words, the novation of contract
comprises of two elements. First is the discharge of
one debt or debtor and the second is the substitution
of a new debt or debtor. The novation is not complete
unless it results in substitution, recession or
extinguishment of the previous contract by the new
contract. Mere variation of some terms of a contract
does not constitute a novation. (See Pollock & Mulla
Indian Contract and Specific Relief Acts, 13th
Edition, pages 1225-1226).
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 8299 OF 2016
(Arising out of SLP (C) No.33227 of 2015)
Sasan Power Limited 
V
North American Coal Corporation
India Private Limited 
Citation: (2016) 10 SCC813

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When substitution of arbitration clause in agreement by novation of contract can be inferred?

The Supreme Court has stated that once consent has been given to appoint an arbitrator, it cannot be withdrawn pointing out the terms of the contract. In this case, Ashoka Tubewell & Engineering Corporation vs Union of India, a works contract was given to a firm by railways with a provision that any dispute will be decided by an arbitrator who will be a gazetted railway officer or none at all. When disputes arose, the railway did not appoint any arbitrator.

Therefore, the contracting firm moved the Calcutta High Court for appointment of an arbitrator under the Arbitration and Conciliation Act. The high court appointed a former judge as arbitrator with the consent of both parties. In the arbitration proceedings, the railway argued that the appointment of arbitrator was not valid in view of the above clause, but he rejected the objection and gave an award in favour of the firm. The railway moved the high court against the appointment of the arbitrator, which was rejected by a single judge bench.

But on appeal, the division bench set aside the award on the ground that the arbitrator was not appointed validly. The firm appealed to the Supreme Court, arguing that since it did not appoint an arbitrator, the firm must move a civil suit and not seek arbitration. The Supreme Court rejected the argument stating that since the consent had been given by railway, the award against it cannot be set aside on the ground that the arbitrator was not validly appointed.

Once the respondent had given consent for appointment of a former Judge of the Calcutta High Court as an Arbitrator, one can presume that there was a new contract by way of novatio, whereby the parties had agreed to appointment of someone else – other than a Gazetted Railway Officer as an Arbitrator.

It is not in dispute at all that the respondent had given consent for appointment of a former High Court Judge as an Arbitrator. The said order dated 27th March, 1998 appointing a former High Court Judge as an Arbitrator had not been challenged by the respondent and therefore, the respondent could not have challenged the validity of the Award on the ground that the Arbitrator was not validly appointed.

In our opinion, after having given consent at the time when a former High Court Judge was being appointed as an Arbitrator, the respondent could not have challenged the validity of the Award on the ground that the Arbitrator was not validly appointed.

Supreme Court of India

M/S Ashoka Tubewell & Engg ... vs Union Of India Etc Etc on 22 September, 2014

Bench: Anil R. Dave, Uday Umesh Lalit

Citation:(2015) 5 SCC702

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