By Divyanshu Sharma
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A
contract is a legally binding agreement between two or more parties. The aim of
making a contract is to bind the parties to act in a particular pre-decided
manner, which is profitable for both the parties involved. Contracts are
legally binding on the parties involved. This means that in case of breach of
contract, the party at fault will have to pay the aggrieved party for the loss
suffered by it.
However, there are certain situations might arise which might result in termination of the contract. Terminating a contract means legally ending the contract. A contract can be terminated only by the parties involved in making the contract. The situations surrounding the termination of the contract decide whether a party would be liable for damages or not. In this article, the author shall discuss the several reasons that can lead to termination of a contract and what damages can the aggrieved party demand, if a contract has been wrongfully terminated.
Impossibility
of Performance
Section 56 of the Indian Contract Act 1872
provides that an agreement to do an
impossible contract is void. However, this is outside the scope of our
topic, as such agreements are inherently void and do not require termination by
either of the parties. Such contracts are terminated by the law itself, from
the beginning.
Section
56 also provides for situations where fulfilling the contract becomes
impossible due to the certain surrounding circumstances. Impossibility of
performance might happen due to several reasons, like:
· Destruction
of Subject Matter – A contract comes to an end when the subject matter
of the contract disappears permanently, or it becomes unreasonable to fulfil
the contract. In the first case, the subject matter might get destroyed and the
physical completion of the contract becomes impossible. For example, in a
contract for renovation, if the house gets burnt down, it becomes impossible to
perform the contract. Secondly, there might be situations where completing the
contract would not be reasonable, like a contract for repainting a house would
be terminated, if the house has been taken over by the government.
· Commercial
Hardship – This reason is not wholly recognized in the Indian
Contract law. However, it is applicable when it becomes commercially impossible
to fulfil the contract. However, when the performance becomes expensive or
costly for one of the parties, the contract would not be terminated. For example,
if delay in transfer of goods under a contract would cost double for the
supplier, the contract would not be terminated. But if the delay in delivery
leads to destruction of the subject matter, due to its perishable nature, the
contract can be terminated.
· Death
or Incapacity of Party – This reason especially applies to contracts
involving special skills of one of the parties. If the person dies, then the
performance of the contract becomes impossible. Thus, the contract is
effectively terminated.
· Government
or Legislative Intervention – Sometimes, situations might arise where the
government or the legislature might be forced to take steps which would make
execution of a contract impossible. This might happen in a war situation,
wherein the government will take over some property, under eminent domain, due
to which the performance of the contract becomes impossible.
Breach of
Contract
A
contract becomes terminated when either of the parties acts in contravention of
the agreed terms of the contract, thereby breaching the contract terms. If an
essential term of the contract has been breached or violated, the parties can
decide to terminate the contract. For instance, if the owner of a bar hires a
singer to perform for three days, but the singer doesn’t come to perform on the
second day, the owner can unilaterally terminate the contract by giving a
notice to the singer.
There are
two types of breach, covered under the Indian Contract Act 1872:
· Anticipatory
Breach – Section 39 of the Indian Contract Act 1872 provides
for a situation where a promisor refuses to perform or disables himself/herself
to perform the contract, the promisee can be excused from performance. This
provides for a situation where a person shows that he/she might not perform his
part of the contract, the other party can terminate the contract or carry on
with it. But the promisee or the other party has to expressly intimate his/her
decision to the promisor.
· Actual
Breach – This refers to a situation where a contract is
terminated because one party hasn’t fulfilled his/her obligation under the
contract, in its entirety or partially. Such situations put an end to the
contract.
Prior Agreement
A contract
might contain terms which specify what particular actions could lead to the
termination of the contract. Such provisions are called Termination Clauses. If
either of the parties performs that particular act or omission, then the contract
becomes automatically terminated.
Damages
Arising From Termination of Contract
Once a
contract has been terminated, whether damages will be payable for the
termination of the contract and the wrongful act done will depend upon the
nature of the termination. If the party which terminated the contract had a
legitimate reason to do so, no damages can be taken. However, if the contract
has been terminated due to the wrongful act of one of the parties, in a
situation where the other party had fulfilled his/her obligations, damages
would have to be paid. The damages that have to be paid can be liquidated
(pre-decided amount) or unliquidated (decided by the Court or the parties on
the basis of the loss suffered).
Section 73 of the Indian Contract Act 1872
provides that if any party breaches a contract, the party at fault would have
to pay necessary damages for the loss or
damage suffered. This loss includes future profits which both the parties
knew would accrue from the fulfillment of the contract. If the breach of
contract forces the aggrieved party to incur any extra expenditure or any loss,
the party at fault would have to provide these damages, after the time of
termination of contract.
In case a
contract gets terminated due to impossibility of performance, the Courts would
generally not grant any special damages for the loss suffered. If any amount
has been paid before the termination of the contract, the same would have to be
returned, on the grounds of equity and
natural justice. For instance, if a contract terminates due to the death of
the painter, who was supposed to paint a portrait, and an advance of Rs. 20,000
had been given before, the court would order the return of Rs. 20,000 and
nothing else.
There
might be situations where the contract provides for pre-decided damages in case
of breach of contract. In such situations, Section
74 of the Indian Contract Act 1872 provides that the party at fault would
have to pay the liquidated or decided
amount of damages.
Conclusion
A
contract is generally entered into with the intention of fulfilling all the obligations
under the contract. However, situations might arise where performing the
contract might become impossible, or one party might intentionally act against
the decided terms, or there might be breach of contract. In such cases, the
contract comes to an end and is legally terminated. However, when a contract is
terminated, damages might have to be paid, depending upon the factors leading
to termination. These damages might consist of liquidated or unliquidated
damages and might depend on whether the contract was breached.
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Divyanshu Sharma is a 2nd Year Law student at National Law University, Delhi. An avid researcher, he enjoys reading about several contemporary legal and political issues. He is passionate about the feminist aspect of law and likes to understand law in this direction. His core interests include Constitutional Law and Commercial Law.
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