Section 62 of the Indian Contract Act, 1872 – Contemporary Jurisprudential Analysis

Section 62 of the Indian Contract Act, 1872 – Contemporary Jurisprudential Analysis

1. Introduction

Section 62 of the Indian Contract Act, 1872 (hereinafter “ICA”) embodies the doctrine of novation, permitting parties to substitute, rescind, or alter contracts so that “the original contract need not be performed.” The provision, though succinct, has generated significant doctrinal debate: its temporal reach (pre-breach or post-breach), the standards for a valid novation, and the effect on collateral stipulations such as arbitration clauses. Recent judicial pronouncements—from Union of India v. Kishorilal Gupta & Bros.[1] to Chrisomar Corporation v. MJR Steels (P) Ltd.[2]—have further refined its contours. This article critically analyses Section 62 in light of these authorities, contrasts it with allied provisions (notably Sections 63 and 41), and evaluates its contemporary relevance in Indian contract law.

2. Statutory Text and Conceptual Foundations

“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.” (ICA, 1872)

Three distinct but inter-related concepts emerge:

  • Substitution (novation proper): a fresh contract extinguishes the old.
  • Rescission: mutual agreement to discharge without a substitute.
  • Alteration: modification so fundamental that the old and new cannot co-exist.[3]

Section 62 codifies the common-law principle of novation (Scarf v. Jardine, 1882) while maintaining the requirement of mutual consent, thereby differentiating it from unilateral doctrines such as remission under Section 63 and waiver under the general law of obligations.

3. Temporal Applicability – Pre-Breach Controversy

Early Calcutta jurisprudence held that Section 62 operates only before breach, reasoning that the phrase “need not be performed” presupposes an executory contract (New Standard Bank Ltd. v. Prabodh Chandra Chakrabarti, 1941)[4]. Madras courts, however, rejected that restriction, allowing novation even after breach so long as consideration exists (Ramiah Bhagavatar v. Somasi Ambalam, 1915). The Supreme Court has implicitly favoured the broader view, applying Section 62 notwithstanding antecedent breaches in Lata Construction v. Dr. R.R. Shah[5] and United Bank of India v. Ramdas Mahadeo Prasad[6]. Thus, the prevailing position is functional rather than temporal: the decisive inquiry is whether the parties intended substitution or mere compromise.

4. Elements of a Valid Novation

4.1 Mutual Consensus

In Godan Namboothiripad v. Kerala Financial Corporation, the Kerala High Court reiterated that novation “comprises two elements: discharge of one debt or debtor and substitution of a new debt or debtor,” both requiring mutual consent.[7] The Supreme Court in Chrisomar affirmed that Section 62 is attracted only where “both parties agree to substitute a completely different contract.”[2]

4.2 Complete Substitution

Lata Construction is instructive: the Court held that a second agreement stipulating compensation did not extinguish rights under the original agreement because the substitute was contingent upon full payment; absent such payment, the old contract persisted.[5] The test is substantive incompatibility: if the two sets of terms “cannot stand together,” the latter supplants the former; otherwise, alteration or remission, not novation, results.

4.3 Consideration and Executory Character

Although Section 62 obviates the need for separate consideration (K.M.P.R.N.M. Firm v. P. Theperumal Chetty), the new contract itself must be legally enforceable. Where the alleged novation is conditional or lacks certainty, courts refuse recognition (United Bank of India v. Ramdas Mahadeo Prasad, where non-compliance with an MOU vitiated novation).[6]

5. Section 62 vis-à-vis Section 63 – Accord and Satisfaction

Section 63 permits a promisee unilaterally to remit or accept substituted satisfaction without consideration. The doctrinal distinction was elaborated in Citi Bank N.A. v. Standard Chartered Bank: unilateral acceptance of an SGL form in lieu of Government bonds constituted section 63 remission, not novation, because the debtor’s obligation persisted until the creditor elected to accept alternative performance.[8] Thus:

  • Section 62 – bilateral; extinguishes original contract.
  • Section 63 – unilateral; original promise need not be performed to the extent remitted, but the contractual framework survives.

6. Effect on Collateral Clauses – The Arbitration Conundrum

6.1 Extinction of Arbitration Agreements

In Union of India v. Kishorilal Gupta & Bros., the Supreme Court held that a comprehensive settlement agreement abrogated the earlier supply contracts and their arbitration clauses; consequently, an award rendered under the defunct clause was void.[1] The ruling underscores that an arbitration clause, though severable, is “collateral” and perishes with the underlying contract unless parties intend its survival.

6.2 Contrasting Approach – Survival Doctrine

Damodar Valley Corporation v. K.K. Kar carved a nuanced path, recognising that where the dispute itself concerns whether a full and final settlement is valid, the arbitration clause may survive because the contract is alleged, not admitted, to be discharged.[9] Later, National Insurance Co. v. Boghara Polyfab reaffirmed the position: if the validity of the discharge voucher is disputed, the arbitration clause remains enforceable, demonstrating that novation must be admitted or proved before extinguishing arbitral jurisdiction.[10]

6.3 Practical Guidance

These decisions illustrate a two-step inquiry:

  1. Has novation undisputedly occurred? If yes, ancillary clauses die (Kishorilal).
  2. If novation itself is in dispute, the arbitration clause survives to decide that question (Boghara Polyfab).
Drafting practice should therefore specify whether dispute-resolution provisions survive settlements, forestalling jurisdictional challenges.

7. Banking and Financial Transactions

Financial institutions often rely on renewal or restructuring instruments. In Central Bank of India v. Ali Mohammad, execution of a fresh promissory note for a larger sum was held to novate the earlier loan agreement, wiping out its terms under Section 62.[11] Conversely, State Bank of India v. Vijay Kumar demonstrates the perils of informal settlements: the High Court treated the bank’s conduct as acceptance of the debtor’s proposal, barring subsequent deviation; yet, because the arrangement lacked the mutual intent to substitute the decree, true novation was absent, and the dispute turned on estoppel rather than Section 62.[12]

8. Novation, Waiver, and Regulatory Contracts

The Supreme Court in All India Power Engineers Federation v. Sasan Power Ltd. distinguished amendment (bilateral, akin to alteration under Section 62) from waiver (unilateral).[13] Regulatory contracts, such as Power Purchase Agreements, often incorporate explicit amendment/waiver clauses; failure to comply with prescribed formalities precludes novation, reinforcing the statutory caution against informal modifications in sectors with public-interest implications.

9. Policy Considerations and Critical Perspective

Two competing policy objectives animate Section 62 jurisprudence:

  • Commercial certainty: Parties must be free to rearrange obligations without judicial interference, provided consent is unambiguous.
  • Preventing opportunism: Courts scrutinise alleged novations for coercion, duress, or conditionality, ensuring that stronger parties do not extinguish rights under the guise of substitution (as highlighted in Boghara Polyfab).

The courts’ insistence on clear intention and complete substitution appropriately balances these concerns but places a premium on meticulous drafting and documentary evidence.

10. Conclusion

Section 62 remains a potent instrument for contractual flexibility yet demands rigorous compliance with its twin pillars: mutual intent and complete substitution. Judicial experience reveals that partial settlements, conditional arrangements, or unilateral remissions fall outside its ambit, operating instead under Section 63 or general principles of waiver. Moreover, collateral clauses—particularly arbitration agreements—survive novation only when parties unequivocally preserve them or when the novation itself is contested. Legal practitioners must therefore clearly delineate whether an agreement is intended to supersede or merely adjust existing obligations, articulate the fate of dispute-resolution mechanisms, and adhere to any statutory or contractual formalities governing amendments. Such diligence not only mitigates litigation risk but also upholds the fundamental objective of Section 62: fostering consensual re-ordering of contractual relations without sacrificing legal certainty.

Footnotes

  1. Union of India v. Kishorilal Gupta & Bros., 1959 SCC 0 1362 (SC) – arbitration clause held extinguished upon settlement.
  2. Chrisomar Corporation v. MJR Steels (P) Ltd., (2017) 2 SCC 1 – distinction between Section 62 and Section 63 emphasised.
  3. See Morris v. Baron & Co. (1918 AC 1) and adopted in Indian cases such as United Bank of India v. Ramdas Mahadeo Prasad, (2004) 1 SCC 252.
  4. New Standard Bank Ltd. v. Prabodh Chandra Chakrabarti, AIR 1942 Cal 87.
  5. Lata Construction & Ors. v. Dr. Rameshchandra, (2000) 1 SCC 586.
  6. United Bank of India v. Ramdas Mahadeo Prasad, (2004) 1 SCC 252.
  7. Godan Namboothiripad v. Kerala Financial Corporation, 1997 SCC OnLine Ker 140.
  8. Citi Bank N.A. v. Standard Chartered Bank, (2004) 1 SCC 12.
  9. Damodar Valley Corporation v. K.K. Kar, (1974) 1 SCC 141.
  10. National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267.
  11. Central Bank of India v. Ali Mohammad, 1992 (1) Bom LR —.
  12. State Bank of India v. Vijay Kumar, (2007) 11 SCC 369.
  13. All India Power Engineers Federation v. Sasan Power Ltd., (2017) 1 SCC 487.