DRAFTING THE TERMINATION CLAUSE OF THE CONTRACT

Drafting a correctly worded termination clause, upon forming a clear understanding of legal consequences is significantly important since it defines the manner in which a commercial transaction may be brought to an end. Virtually all commercial contracts have a termination clause that sets out a mechanism which the parties shall follow while terminating the contract. 

METHODS OF TERMINATION OF A CONTRACT: –

The Indian Contract Act, 1872, that regulates the Contract law in India does not provide for specific methods of Contract termination and the parties to the contract are free to adopt the methods that best suit their business relationship. Normally there are three methods of terminating commercial contracts, each of which is dealt with hereunder:

  1. Termination upon expiry of the term or completion of the contract:

This is the most commonly used method of contract termination. The contract is terminated upon expiry of the term set out in the contract or upon fulfilment of the purpose for which the Contract was entered into. For example, should a contract state that the term of the contract is 3 years, then the contract shall terminate upon expiry of such time period. It is necessary to state the starting date of the contract. If no such date is mentioned, then the contract is deemed to have commenced from the date it was executed.

  • Termination for Convenance or termination without assigning any reasons:

Also known as “termination without cause”, the parties agree to terminate the contract without assigning any reason but lay down a process of termination by giving a notice to the other Party.

This clause is generally worded as follows; “………Either party hereto may terminate this Agreement without cause at any time, upon at least thirty (30) days written notice, …….”.

  • Termination on the breach of the contract:

This clause may also be worded in the contract as “Termination with cause”. The parties generally incorporate this clause in the contract to protect themselves against any breach of the contract terms by the other Party. For instance, should a contractual party not perform its contractual obligation, the non-defaulting party the non-defaulting party may terminate the contract by giving a notice to the other party. 

Termination clauses in their nature can provide an option to the defaulting party to cure the breach that has been committed within a specified time in an mutual and amicable manner or the non-defaulting party may adopt the legal route and either seek specific performance of the contract or may ask for compensation to make good the loss suffered. 

All above methods of contract termination are apt for any commercial agreement, but the manner in which parties finally terminate the contract may vary depending on how the termination clause has been drafted. All of the above stated methods of contract termination have garnered legal recognition over the years.

VALIDITY OF THE TERMINATION FOR THE CONVENIENCE CLAUSE:

Termination for convenience means termination by giving a prior notice to the other party without assigning any reasons. Parties may make a provision for termination for convenience for any reason. Private commercial transactions can be terminated by the parties even without assigning any reason, with a reasonable period of notice in terms of a clause in the agreement authorizing such termination. 

A lot of concerns are raised over terminating contracts without assigning any reasons, their validity is often questioned and it is now settled that clause for termination for convenience is valid and enforceable.

Courts have held that such termination, when it has been provided for under the contract, cannot be challenged even on the grounds of it being malafide. (Altus Group India Private Limited v. Darrameks Hotels and Developers Pvt. Ltd. (Delhi High Court, 20th April 2018)

CAN THE COURT ORDER SPECIFIC PERFORMANCE IN CASE CONTRACT IS TERMINATED FOR CONVENIENCE AND WITHOUT ASSIGNING ANY REASON?

In a suit for breach of a contract a party may either be 

  1. awarded compensation for loss and consequential damages; or, 
  2. specific performance of the contract, by which the Court directs the defaulting party to perform its contractual obligations 

Non performing parties to the contract may be directed to perform its contractual obligation by invoking the Specific Relief Act, 1963. 

Parties have to be cautious while drafting their contractual terms as these terms directly affect their rights under the contract. Contracts which may be terminated without assigning any reasons, being determinable contracts, cannot be specifically enforced. (Section 14(d) of the Specific Relief Act, 1963) 

The Supreme Court in the case of Indian Oil Corporation Limited v. Amritsar Gas Service and Ors; (Supl. (3) 196 1991 SCC (1) 533) has held that an agreement is revocable by giving certain days notice period allowing the parties to terminate the contract without providing any reasons, it would fall under the category of determinable contracts and therefore specific performance of the contract cannot be granted. The only relief that can be granted to parties in such a case is an award of compensation for the period of notice.

The termination clause is a critical term that should be thoughtfully and meticulously drafted in order to protect either party to the contract.

Aishwarya Says:

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