In England, novation is a standard procedure for debt restructuring. In Scotland, novation fulfills a contract by replacing a new obligation between the same parties. This article was written by Sachi Ashok Bhiwgade of Hidayatullah National Law University, Raipur. This article deals with the fundamental differences and foundations of novation, cancellation and modification of a contract under the Indian Contract Act, 1872. Novation agreements become useful when the assignment of contractual rights and obligations is limited by law and contract. Many contracts are new to corporate transactions, such as mergers and acquisitions. A novation is advantageous for situations where payments or benefits become impossible under the conditions of the initial contract. A novation contributes to the restructuring of the debt in order to avoid the default or bankruptcy of the debtor. If the required novation conditions are not met, it is not considered novation.
The parties may retain the original lease or negotiate the terms of the contract until a consensus is reached. Scottish law appears stricter than English law in the application of the novation doctrine and needs stronger evidence of the creditor`s agreement to the transfer of responsibility. [3] Another classic example is that Company A enters into a contract with B and a novation is included to ensure that, when Company B sells, merges or transfers the core of its business to another company, the new entity assumes the obligations and liabilities that Company B has with Company A under the contract. Therefore, as far as the contract is concerned, a buyer, a merged entity or a purchaser of company B follows in the footsteps of company B with regard to its obligations vis-à-vis company A.
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