Novation vs Assignment in India: What Section 62 Actually Changes

Novation and assignment both move a contract from one party to another, and people use the words as if they mean the same thing. They do not. Assignment moves rights, the benefit of a contract, like the right to receive payment or goods. Novation replaces the contract itself, obligations and all, and needs every party's consent to work. Get this wrong in a supply agreement, a loan, or an M&A share purchase, and you can end up with an "assignment" clause meant to hand off delivery duties to a new vendor, except in law the old vendor is still on the hook, because obligations cannot simply be assigned away.

This guide is written by Adira, which builds contract review and CLM software, so we have a stake in you understanding this distinction correctly. Everything below stands on its own either way. If you just want to check one clause by hand right now, Weave (Adira's free browser tool) lets you mark it up without signing up for anything.

Plain meaning: what novation and assignment each actually do

An assignment transfers a right under a contract from the original party (the assignor) to a new party (the assignee), while the underlying contract stays exactly as it was. If A has a right to receive payment from B, A can usually assign that right to C, so C now collects from B, without B's consent and often without asking B first, unless the contract says otherwise. B still owes the same debt, on the same terms, just to a new person.

A novation does something bigger. It extinguishes the original contract and replaces it with a new one, in which a new party steps into an old party's shoes for both rights and obligations. If A owed B a duty to deliver goods, and A, B and a new party C agree to a novation, the old contract between A and B ends, a new contract between C and B begins, and A is released. This is why novation always needs three willing parties: outgoing, continuing, and incoming. Two-party consent is not enough, since the continuing party (B) is being asked to give up its claim against A and accept C instead.

The one-line way to remember it: assignment hands over a slice of the contract, usually the right to receive something; novation hands over the whole relationship, and lets the original party walk away clean.

Who it protects, and the moment it bites

Novation protects the continuing party, the one who did not initiate the change but whose consent makes it valid. A lender novating a loan to a new borrower, a landlord novating a lease to a new tenant, a buyer in an M&A deal novating supplier contracts from target to acquirer, all need the continuing party's clear, documented consent, because that party's recourse is what is changing.

It bites at the moment three things line up: the outgoing party wants out, the incoming party is willing to step in, and the continuing party agrees to accept the incoming party as the new obligor. Before all three agree, there is no novation, just a proposal. This is also where people get sloppy: "we're assigning the contract to the new entity" gets typed into a term sheet, when what actually needs to happen is a signed novation agreement carrying the counterparty's signature.

The dispute usually surfaces when something goes wrong after handover: goods are not delivered, a loan is not repaid, a lease is breached, and the continuing party goes after whoever it can find. If the paperwork only assigned rights, or the "novation" never got the counterparty's signature, the outgoing party can still be liable, years after everyone assumed the change was clean.

What to look for in the actual text

Four things separate a real novation from a defective one, or from an assignment wearing a novation's clothes:

• Does the document use "novate" or "novation," and is it signed by all three parties? A "Deed of Novation" signed only by the outgoing and incoming parties, with the continuing party's consent merely implied, is on shakier ground than one all three have signed.
• Does it expressly release the outgoing party? Novation is not complete without a release. If the outgoing party's obligations are not expressly discharged, you may have a new contract sitting alongside the old one, not replacing it.
• Is there a clear effective date? Obligations before it usually stay with the outgoing party, obligations after usually shift to the incoming party; silence invites arguments about which side of the line a breach falls on.
• Are handover terms addressed (outstanding payments, part-performed work, existing warranties)? A clean novation deals with the transition, not just the future.

The Indian position: Section 62 and the difference from assignment

Novation in India sits inside Section 62 of the Indian Contract Act, 1872, under the heading "Effect of novation, rescission, and alteration of contract." The section reads:

"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."

Read the full section, with its illustrations, on Indian Kanoon. Illustration (a) gives the textbook novation fact pattern: "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." That is, almost word for word, the three-party mechanics described above.

Section 62 does not use the word "assignment" at all, and that gap is deliberate. Assignment of rights is not a creature of the Contract Act; it sits separately, most concretely for debts and actionable claims, under Section 130 of the Transfer of Property Act, 1882, which requires the transfer to be "effected only by the execution of an instrument in writing signed by the transferor," after which "all the rights and remedies of the transferor... shall vest in the transferee." Read Section 130 on Indian Kanoon. Two different statutes for two different things: Section 62 discharges and replaces a contract, Section 130 moves a right out of one person's hands into another's while the underlying contract carries on.

The deeper reason obligations cannot simply be "assigned" the way rights can is ordinary contract principle: a promisor cannot unilaterally foist a substitute performer onto a promisee who never agreed to accept one. Moving obligations needs the promisee's consent, and consent from all three sides is what turns the transaction into a novation rather than a one-sided assignment.

A named Indian case: Khardah Company v Raymon & Co

The clearest statement of this rights-versus-obligations split comes from the Supreme Court in Khardah Company Ltd v Raymon & Co (India) Pvt Ltd, AIR 1962 SC 1810. The Court held that rights under a contract are, as a rule, freely assignable, without the other party's consent, unless the contract is personal in nature or the right is barred by law or the contract itself. Obligations, by contrast, cannot be assigned at all except with the promisee's consent, and when that consent is given, the Court said, it "is really a novation resulting in substitution of liabilities." Read the judgment on Indian Kanoon.

Two further Supreme Court decisions sharpen the point for drafting. In Lata Construction & Ors v Dr Rameshchandra Ramniklal Shah & Anr, (2000) 1 SCC 586, the Court held that "one of the essential requirements of novation... is that there should be complete substitution of a new contract in place of the old," and found that an earlier 1987 flat-purchase agreement survived a later 1991 settlement because the later document had not, in substance, replaced it entirely. See the judgment on Indian Kanoon. And in Citi Bank N.A. v Standard Chartered Bank & Ors, decided 8 October 2003, the Supreme Court held that Section 62 did not apply because both parties must agree to substitute, rescind, or alter a contract, and it cannot be done unilaterally. See the judgment on Indian Kanoon. Together, these mean a court will not read a "substitution" into a document unless the old contract is genuinely and completely displaced, with every relevant party's consent on record.

Red flags table

Normal	Red flag	Why it matters
Clause says "novate" and is signed by outgoing, incoming, and continuing parties	Clause says "assign" but describes moving delivery, service, or repayment obligations	Obligations cannot be validly assigned under Indian law; you need a novation, per Khardah Company v Raymon
Continuing party's signature appears on the novation deed	Continuing party's "consent" is an email, a verbal nod, or assumed from silence	Section 62 requires actual agreement of the parties to substitute the contract; courts read this narrowly, per Citi Bank v Standard Chartered
Outgoing party is expressly released from future obligations	No release language; old contract is not stated to be discharged	Without a release, the old contract may still bind the outgoing party alongside the new one, defeating the point of novation
Effective date is stated, with a clear line on pre versus post handover liability	No effective date, or it is left to be "agreed later"	Disputes over which party is liable for a breach often turn entirely on which side of the effective date it falls
New contract restates key terms: price, scope, warranties, arbitration clause	New contract is silent on whether old terms, including arbitration or governing law, survive	A new contract does not automatically inherit the old one's arbitration or dispute clause unless it says so
Outstanding dues, part-performed work, and existing breaches are addressed in a handover schedule	Handover items are left unaddressed, assumed to "sort themselves out"	Ambiguity here is exactly where post-novation disputes originate
Assignment of a debt or actionable claim is in a signed written instrument	Assignment is done informally, by conduct or oral understanding	Section 130 of the Transfer of Property Act requires a signed instrument for the assignment to be complete and effectual

Bad clause versus better clause

Bad: "The Vendor may assign this Agreement, including its obligations to deliver the Goods, to any third party upon written notice to the Purchaser."

What is wrong: this tries to move delivery obligations, not just a right, using "assign" and unilateral "notice" instead of the Purchaser's actual consent. Under Indian law, obligations cannot be shifted this way without the Purchaser agreeing, so the clause is legally shaky despite looking tidy on paper.

Better: "The Vendor may, with the prior written consent of the Purchaser, novate this Agreement to a third party (the 'New Vendor'), whereupon: (a) this Agreement between the Vendor and the Purchaser shall stand substituted by a new agreement on the same terms between the New Vendor and the Purchaser, effective from the date specified in the novation deed; (b) the Vendor shall be released from all obligations arising after that date; and (c) the Vendor and New Vendor shall remain jointly liable for any obligations, deliveries, or breaches arising before that date until settled."

What changed and why: swapping "assign" for "novate" matches the legal reality of what is moving. Requiring the Purchaser's prior written consent, not mere notice, satisfies Section 62's requirement that all parties agree. Naming an effective date and an express release closes the two gaps, no discharge and no cut-off date, that most defective novations fall into. The joint liability line for pre-handover matters stops "whose problem was this" from having no answer.

How this interacts with related clauses

A novation or assignment clause rarely sits alone. It should be read with the assignment clause in the same contract, since many agreements bar or restrict assignment entirely, in which case novating without the stated consent process can breach the original contract regardless of Section 62. It interacts closely with change of control clauses, since an M&A or restructuring often triggers exactly this question. And it needs a look at the indemnity clause, since a well-drafted novation deed usually includes indemnities from the incoming party for anything that goes wrong after the effective date, and from the outgoing party for anything before it.

US and global contrast

US and English contract practice draw a similar underlying line, rights are assignable, obligations generally are not without the obligee's consent, but the vocabulary is looser. US commercial contracts often use one broad "assignment" clause lumping together the transfer of rights and the delegation of duties, leaning on the Uniform Commercial Code's permissive stance on delegation for goods contracts. A "delegation" of duties still typically leaves the delegating party secondarily liable unless expressly released, similar in effect to the Indian position, but US templates are far more casual about using the single word "assign" to cover both.

The trap for Indian-governed contracts is importing that boilerplate wholesale. A clause permitting assignment of "this Agreement and all rights and obligations hereunder" reads naturally in a US contract, but under Indian law the obligations half is not something one party can achieve by unilateral assignment. It needs the counterparty on board, drafted and executed as a novation.

FAQ

Can a contract completely ban novation and assignment? Yes. Most well-drafted commercial contracts restrict assignment, novation, or both without the other party's prior written consent. Where such a clause exists, even a technically valid three-party novation can put the outgoing party in breach of the original contract if the stated consent process was not followed.

Does novation automatically carry over the arbitration clause from the old contract? Not automatically. Since Section 62 treats a valid novation as substituting an entirely new contract, the dispute resolution mechanism in the old one, including arbitration, does not survive unless the novation agreement expressly says the new contract continues it. Always restate the arbitration and governing law clauses in the novation deed.

If the counterparty never signs anything, but keeps dealing with the new party for years, is that a valid novation? It can be, through conduct, but it is harder to prove and riskier than a signed deed. Courts look for clear evidence that the continuing party knowingly agreed to accept the new party in place of the old one. Years of invoices paid to the new entity without objection can support novation by conduct, but a dispute over exactly when consent existed is the kind of litigation a signed deed avoids.

We are the incoming party in a novation. What should we insist on before signing? At minimum: a clear effective date, an express release of the outgoing party for post-handover obligations, confirmation of what pre-handover liabilities you are taking on, and written confirmation of the continuing party's actual consent, not just a notice sent to them. If the contract's value is tied to pricing, warranties, or an arbitration clause, make sure the new agreement restates them.

Is a novation the same as a "deed of assignment and assumption"? Not quite, though both aim at a similar result. Such a deed typically assigns rights while separately having the incoming party "assume" the obligations towards the outgoing party. Whether this discharges the outgoing party towards the original counterparty still depends on whether that counterparty consented, the same question a novation answers directly. Where full discharge is the goal, a proper three-party novation is the safer route.

This guide explains how novation and assignment generally work under Indian contract law, and the difference between them. It is not legal advice, and it does not tell you whether your specific contract or deal structure achieves a valid novation or assignment in your situation. For that, especially where a release from liability or a large deal is at stake, talk to a lawyer who can look at your actual documents.