Section 62 Contract Act: Effect of novation, rescission, and alteration of contract

Section 62 of Indian Contract Act: Effect of novation, rescission, and alteration of contract

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

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.

Statutory Defined Terms in this Section: (Click any term for official legal definition)

Contract Sec 2(h)

Legal Commentary & Landmark Judgments: Section 62

If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract is extinguished and need not be performed. The doctrine of novation effects a complete discharge of the original agreement through the mutual consent of all parties, substituting either new contractual terms or entirely new contracting parties.

Core Legal Standard: In corporate debt restructuring, One-Time Settlements (OTS), M&A asset transfers, and tripartite concession agreements, novation is the principal legal mechanism for transferring liabilities.
Operational Mechanism: A valid novation requires complete consensus ad idem among all parties, including any incoming and outgoing entities; a debtor cannot unilaterally transfer its liability without the creditor's express consent.

Crucially, novation must occur before the breach of the original contract; an agreement modifying obligations after a breach has already occurred operates as an accord and satisfaction governed by Section 63 rather than a novation under Section 62.

Key Landmark Precedents:

Union of India v. Kishorilal Gupta & Bros (AIR 1959 SC 1362): The Supreme Court held that where a contract is superseded by novation, the original contract is completely extinguished, along with all arbitration clauses contained in it. The arbitration clause dies with the original contract.
Lata Mangeshkar v. Union of India (1971) 2 SCC 113: The Supreme Court affirmed that novation requires mutual consent of both parties. A unilateral variation of terms by one party does not effect novation under Section 62.
National Insurance Co Ltd v. Boghara Polyfab Pvt Ltd (2009) 1 SCC 267: The Supreme Court clarified that a discharge voucher or settlement agreement operates as accord and satisfaction/novation under Section 62 only if executed voluntarily without economic coercion or fraud.

Legal Commentary:

In corporate debt restructuring and loan refinancing, banks utilize Section 62 to extinguish existing credit facilities and substitute consolidated term loans. The novation deed must clearly express the intention to extinguish the old liabilities, otherwise courts may construe the new agreement as merely supplementary.

Section 62: Effect of novation, rescission, and alteration of contract

Section 62 of Indian Contract Act: Effect of novation, rescission, and alteration of contract

Legal Commentary & Landmark Judgments: Section 62