Novations in India

NOVATIONS IN INDIA

By

Nitin Sarin

27th September 2017

Sitting at the recent Cape Town Convention Academic Project Conference held in Oxford in September 2017, an interesting discussion was taking place between New York law experts on one hand and English Law experts on the other.

The quality of discussions was crisp, immaculate and informative. The panel of the hour was being moderated by Sir Roy Goode (the brainchild of the Cape Town Convention) and Mr. Jeffrey Wool, Secretary General of the Aviation Working Group.

The New York practitioners were representing that under New York law, “assignments” of aircraft agreements are recognized while the English Law practitioners were arguing as to how “novations” were recognized in their jurisdiction.

Interestingly, the English law specialists highlighted the fact that the term “novation” remains undefined (which is understandable considering the English legal system). This got me thinking that the closest the British ever got to defining a “novation” was through enacting the Indian Contract Act, 1872 (Act No. 9 of 1872).

In 1872, India was still a colony of the British (it would gain independence only 75 years later in 1947) and its laws were still made by England (the Imperial Legislative Council).

The Indian Contract Act 1872 contains section 62 which reads as under:

Contracts which need not be performed
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.
Illustrations
(a) A owes money to B under a contract. It is agreed between A, B and C, that B shall thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted.
(b) A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of his (A’s) estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old.
(c) A owes B 1,000 rupees under a contract, B owes C 1,000 rupees. B orders A to credit C with 1,000 rupees in his books, but C does not assent to the agreement. B still owes C 1, 000 rupees, and no new contract has been entered into.”

The Indian judicial system has, through precedent, certainly built on Section 62 over the last 145 years or so, however, it would still be somewhat of an erroneous statement to state that the British have never defined a “novation”.

Perhaps some food for thought for those English practitioners mentioned above?

Also, it is apt to answer one of the most commonly asked questions by our clients: “Would an Indian court accept a novation of a lease agreement?”

The answer, put succinctly is that Indian law recognizes the concept of a “novation” and especially in aircraft transactions, a valid novation of an agreement, which satisfies all the other tests of the Indian Contract Act, 1872 to be a valid contact (offer, acceptance of offer, consideration and competency to contract, etc.) would be treated as a valid and binding document in the eyes of law.

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