DISCHARGE OF

CONTRACT BY
AGREEMENT
 NOVATION OF CONTRACT

• CONTRACTS WHICH NEED NOT BE PERFORMED

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

Novation:
• When both the parties to a contract agree to substitute an existing contract with a new contract.
• Types of Novation:
• Affecting Change of Parties. For eg: New Partner admitted in Partnership Firm
• Substitution of an Existing Contract with New Contract.
• Original Contract is said to be discharged.
 NOVATION OF CONTRACT

• The original contract must be subsisting and unbroken

• Substitution of New Contract is not possible after there has been a breach of the original contract.
Manohar Koyal v. Thakur Das Naskar [ILR (1887-88) 15 Cal 319]
• The plaintiff sued to recover the sum of Rs. 1173 due on Bond. After the due date of the Bond, the plaintiff
agreed to accept Rs. 400 in cash and a new bond of Rs. 700/- payable in instalments.
• Subsequently the defendant neither gave Rs. 400/- nor the bond.
• The plaintiff therefore sued him for the original bond.
• The Calcutta HC Held : Original Contract was discharged not by novation but by breach and the plaintiff was
entitled to sue for the breach of the original contract.
 NOVATION OF CONTRACT

• There needs to be a complete substitution of an old contract with a new contract which would have
the effect of completely rescinding the old contract by way of an agreement.
• The New Agreement should be valid and enforceable.
• For eg: Existing Mortgage being replaced by an New Unregistered Mortgage Deed will not be
valid without registration.
 REMISSION OF CONTRACT

Section 63: Promisee may dispense with or remit performance of promise.—Every

promisee may dispense with or remit, wholly or in part, the performance of the promise
made to him, or may extend the time for such performance,1or may accept instead of it
any satisfaction which he thinks fit.

• Section 63 allows a party to a contract to dispense with the performance of the contract by the other
party, or to extend the time for performance or to accept any other satisfaction instead of performance.
• Effect of the Provision: Party who has the right to demand the performance of a contract may
• Remit or Dispense with it, wholly or in part;
• Extend the time for performance or
• Accept any other satisfaction instead of performance.
 REMISSION OF CONTRACT

• The acceptance of a less sum of money where more is due is a good discharge of the whole of the
liability.
• There must be proof that lesser sum is being accepted against full satisfaction of the performance.
• Waiver of Performance?
• The term ‘to dispense with’ means that the party is entitled to claim performance may waive it.
• SC: Waiver : is the abandonment of right which normally everybody is at liberty to waive. Not a
fundamental right.
• Extension of time for performance by mutual consent is not the same thing as waiver.
 REMISSION OF CONTRACT

M. Sham Singh v. State of Mysore [(1973) 2 SCC 303]

Facts:
• M was granted scholarship by the State for higher studies in the United States upon a bond that he would serve
the State on his return, provided that the State offered him a job within 6 months of his return, failing which the
bond is taken to be as waived. .
• If M failed to comply, he was to return the Scholarship Fund.
• On his request the State agreed to an extension of his stay in the United States for practical training for a year.
• During this year, he came back to India for a domestic visit but was allowed by the State of Mysore to re-join
the practical training.
• On completion of his training, he joined the service in United States and the State claimed refund of the
scholarship money.
• He pleaded waiver on the part of the State of Mysore.
Held: There was no waiver whatsoever and M was liable to refund. T
• The extension was mutually agreed upon and there was no conduct on the party of the State showing an
intention to waive.
 REMISSION OF CONTRACT

• Waiver of Waiver?
• The Party who has waived compliance with a particular requirement may in circumstances and by
giving reasonable notice withdraw his waiver.
• Subject to circumstances
• Extension of Time?
• It permits the party to extend time for performance.
• But no unilateral act of extension of time permitted.
 ACCORD AND SATISFACTION

• Usually, accord and satisfaction deals with a debtor’s offer of payment and a creditor’s acceptance of
a lesser amount than the creditor originally claimed to be owed.
• It is a method of discharging a claim by settlement of the claim and performing the new agreement.
The accord is the agreement and the satisfaction its execution or performance.
• A new contract is substituted for an old contract thereby discharging an obligation or cause of action,
which is settled, and must have all of the elements of a valid contract.
• In an accord contract it is typical that the consideration supplied is less than bargained for in the
original contract. Consideration is the value given in return for a promise.
• It has two elements: (1) there must be a bargained-for exchange between the parties (2) what is
bargained for must have legal value.
 ACCORD AND SATISFACTION VERSUS NOVATION,

• intention of the contracting parties

• In a novation, the new promise itself satisfies the preexisting claims, in an accord it is the
performance of the new promise that satisfies the preexisting duty.
• The distinctive feature of an accord and satisfaction is that the obligee does not intend to discharge
the existing claim merely upon the making of the accord. She or he can do so only upon performance
or satisfaction.
• If the satisfaction is not tendered, the obligee may sue under the original claim or for breach of the
accord. On the other hand, novation bars revival of the preexisting duty.
• Burden of proving the extinguishment of preexisting duty is upon the party asserting a novation.
 MATERIAL ALTERATION

• Alteration means change in one or more of the conditions of the contract.

• Alteration made by the mutual consent of the parties will be perfectly valid.
• But any material alteration in terms of a written contract by the one party without the consent of other
party will discharge such party from its obligations under the contract.
• In case of novation a new contract replaces an old contract.
• The parties may also change. While in case of alteration only some of the terms of the contract are
changed. Parties also continue to be the same.
• Any material alteration made intentionally in a written contract by the promisee or his agent without the
consent of the promisor entitles the later to regard the contract as rescinded.
• An alternation will be taken to be material if it directly or indirectly affects the nature or operation of the
contract or the identity, validity or effect of the document.