Essentials: (1) Novation occurs with the consent of both the parties (2) The new contract must be one which is capable of enforcement at law. If new contract is not enforceable, the parties shall be bound by the original contract (3) The agreement to substitute the new contract for the old must not be made after the breach of the original.
Thus in Manohar Koyal v. Thakur das Naker, where the plaintiff sued to recover the sum due on a bond after defendant failed to honor his subsequent promise after due date of bond to pay part amount in cash and part by a new bond, it was held the plaintiff was entitled to sue for breach of original contract as the original contract was discharged by breach and not by novation.
In novation, the old contract is completely extinguished or discharged. A suit based on it is not maintainable as the old contract is not to be performed. In Markandrai v. Virendrarai A advanced money to a partnership firm on certain repayment terms. Before the entire loan amount could be repaid, one of the partners died. A accepted new partners as his debtors agreeing to receive back the loan amount on certain other terms. It was held here that this constituted a new contract with surviving partners only.
Consideration: Section 62 does not require any further consideration for the validity of the substituted contract than putting an end to the obligation under the original contract.
By Accord and satisfaction: (Sec63) Every promisee may dispense with or remit the performance of promise made to him and accept, instead of it, any satisfaction which he thinks fit. When one of the parties to a contract in order to obtain release agrees to do something other than what he was bound to do by the contract, and when he has discharged the obligation and has been set free, the contract is said to have been discharged by ‘accord and satisfaction’. Both the parties must assent to such an arrangement. It may be express or inferred from the conduct of the parties to the contract.
In other words, where a lesser is actually paid than what is due under and existing contract, the new contract is called ‘accord’ and the actual payment is called ‘satisfaction’. An illegal contract cannot constitute an accord and satisfaction.
(1) A owes B Rs 1,000 and B agrees to accept Rs 750 in full satisfaction. The agreement to pay Rs 750 is an accord and the actual payment is the satisfaction.
(2) A owes B Rs 5,000. A pays B, and accepts, in satisfaction of the whole debt, Rs 2,000 paid at the time and place at which Rs 5,000 were payable. The whole debt is discharged.
(3) A owes B, Rs 5,000. C pays B Rs 1,000 and B accepts them in satisfaction of claim on A. This payment is a discharge of the whole claim.
(4) A owes B, under a contract, a sum of money, the amount of which has not been ascertained. A without ascertaining the amount gives to B, and B, in satisfaction thereof accepts the sum of Rs 2,000. This is a discharge of the whole debt, whatever may be its amount.
(5) A owes B Rs 2,000 and is also indebted to other creditors. A makes arrangements with his creditors, including B, to pay them a composition of fifty paise in a rupee upon their respective demands. Payment to B of Rs 1,000 is a discharge of B’s demand.
(6) A owes large sum of money to B. C is offering to pay B a lesser sum in full satisfaction of B’s claim on A. B cannot recover balance from A after receiving payment in full satisfaction.