This article is written by Nimisha Srivastava, a student of Gujarat National Law University.

What is a ‘Termination for Convenience’ Clause?

A typical commercial contract usually contains a mechanism for exiting or terminating the contract.  Such provision in a contract is termed as a ‘termination clause’. The termination clause is basically of two kinds, a) termination with cause and b) termination without cause. The ‘termination without cause’ is also called as termination for convenience clause as the party has an option of exiting the contract after expiration of a pre- determined notice period, without providing any reason.

Enforceability

Specific Relief Act, 1963 governs the principles relating to specific performance and injunctions. Section 14 of the said Act reads ‘Contracts not specifically enforceable’ and Section 14 (1) reads as follows:

The following contracts cannot be specifically enforced, namely:—

(a) a contract for the non-performance of which compensation is an adequate relief;

(b) a contract which runs into such minute or numerous details or which is so dependent on the personal qualifications or volition of the parties, or otherwise from its nature is such, that the court cannot enforce specific performance of its material terms;

(c) a contract which is in its nature determinable;

Section 14 (1) (c) uses the term ‘determinable’, which means the contracts which are by nature revocable[1]. If a contract is by nature determinable, it will be hit by Section 14(1)(c) and cannot be specifically enforced. A contract providing for a termination for convenience clause, allowing a defendant to terminate the contract without notice and without assigning any reason, has been held as determinable in nature and therefore not specifically enforceable.[2]

In a 1991 judgment of Indian Oil Corporation Limited v. Amritsar Gas Service and Ors[3], Supreme Court elaborated upon what determinable means. The distributorship agreement between the parties contained a clause ‘termination for convenience’ clause, which empowered the parties to terminate the agreement by giving 30 days notice to either party without providing reason.  Supreme Court held that such a clause falls within the category of determinable and hence specific performance cannot be granted under Section 14 of the Specific Relief Act, 1963. It was further noted by the Supreme Court that the relief that could be granted in such cases was compensation for loss of earning during the notice period. In another judgment[4] of 2001, the Supreme Court further reaffirmed this view. They held that a contract unilaterally terminable before delivery of possession is ‘determinable’ in nature.

In the case of Sadashiv Narayan Rao Jambhale v. Indian Oil Corporation Limited[5], it was held that ‘for termination of contract there for contract shall be determinable by reasonable notice.’ The dealership agreement in question was determinable by Respondents and thus specific performance could not be granted as claimed by Appellant. It was further held that contract between parties under which arbitration was sought, allows termination with as well as without cause in clauses of agreement. It was contended on behalf of Appellant that termination without cause should had been non-stigmatic and that could not take out of purview termination sought for such gross cause. It was seen that award did not suffer from vice of being against public policy or any of statutory provisions of any law nor it was against justice of morality or illegal.

The jurisprudence of Delhi High Court in its various judgments has further widened the definition of determinable, to include the contracts providing for ‘termination for convenience’. If we analyze and study these judgments, we can come to conclusion that the mere existence of a termination clause might lead to the contract being held determinable and hence, rendering it incapable of being specifically enforceable. In Crompton Greaves Ltd v. Hyundai Electronics[6], the contract in question was a joint venture agreement which contained a clause that each party could terminate the agreement if certain government approvals were not obtained within a given period. The presence of this clause prompted the Delhi high court to conclude the agreement was determinable and specific performance was denied. In Rajasthan Breweries v. Stroh Brewery Co[7] while deciding the dispute arising out of a technical know-how agreement between the parties, the Delhi High Court held that even in the absence of a specific clause enabling either party to terminate the agreement, in the event of happening of the events specified therein, it could be terminated even without assigning any reason and by serving a reasonable notice and was hence, determinable and not eligible for an injunction/ specific performance under the Act.

In Airport Authority of India v. Dilbagh Singh[8] the Delhi High Court noted that agreement clearly showed that the appellant/ defendant had reserved the right to terminate the contract without assigning any reason. The contract is determinable in nature and cannot be specifically enforced, and therefore, no injunction can be granted to prevent breach of such a contract. As per the Specific Relief Act, an injunction cannot be granted to prevent the breach of a contract the performance of which would not be specifically enforced.

In a matter titled Rattan Lal v. S.N. Bhalla and Anr.[9] the Hon’ble High Court of Delhi observed an agreement to sale with a clause that the same shall be terminated if the requisite approvals are not received within six months, was not specifically enforceable under the Act. Be that as it may, the Supreme Court in its choice of the advance against Delhi High Court’s decision observed that the pertinent provision of the agreement being referred to was never intended to give the committed party an option to escape the obligation. The party was not entitled to determine the Agreement and hence the agreement was held to be wrongly terminated. In this case, the Court decreed the suit for costs to the Appellant instead of specific performance due to the steep hike in the real estate prices the Court.

In its 2006 decision of Turnaround Logistics Limited v. Jet Airways Limited[10], the Delhi high court held an agency contract to be determinable, stating that the term ‘determinable contract’ means a contract that can be put to an end and, thus, all revocable deeds and voidable contracts would fall within this term.

Further, the High Court of Orissa in its judgment in Orissa Manganese and Minerals Pvt. Ltd. v. Adhunik Steel Limited[11] noted that the agreement in question in which the ‘Termination clause’ stated that either party had to before termination of contract serve notice of 90 days to the other party to remedy the breach, was not determinable and hence, specifically enforceable. The Court said, occasion of such nature never arose and hence the contract was not determinable unless the condition therein was fulfilled. Despite the fact that, the case was appealed before Supreme Court, the Court did not especially dealt with the issue of the specific performance as per Section 14(1)(c) of the Specific Relief Act.

In another case before the High Court of Orissa[12] a dealership agreement entered into between the parties stated that the agreement shall remain in force for five years and continue thereafter for successive periods of one year each until determined by either party by giving 3 months’ notice in writing to the other of its intention to terminate the agreement and further, as per Clause 56(1) the Petitioner shall be at liberty to terminate the agreement if the dealer deliberately contaminates or tamper with the quality of any of the Corporation’s product as such is determinable in nature. The Court held that the clause providing for termination made the contract determinable in nature and went on to set aside the orders of the trial court as well as the appellate court that granted injunctions with respect to the agreement.

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In a matter titled Atlas Interactive (India) Private Limited v. Bharat Sanchar Nigam Limited[13], the Rajasthan High Court observed that the contract may be determinable in nature but the instrumentality of the State has to act in a fair and just manner and not arbitrarily.

In another case of Ministry of Road Transport and Highway, Government of India v. DSC Ventures Private Limited[14], the High Court of Delhi, citing Indian Oil case, observed that an agreement that provides for termination by providing a sixty days notice to resolve the default in any event of default falls within the ambit of determinable contracts. Notably, this view of the Delhi High Court is contrary to that of the High Court of Orissa in Orissa Manganese case.

Conclusion

Giving due respect to the perspective of different courts it is relevant that due thought and consideration is given while drafting the termination clause of any contract. At the end of the day, the parties to a contract must not downgrade or give less significance to the termination provisions of the contract. Judiciary should also consider equity, good faith and the respective positions of the parties to determine the validity of premature termination of contract.

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[1] Mulla:Indian Contract Act, (13^th edn, 2007).

[2] Dharam Veer v. Union of India AIR 1989 Del 227

[3] (1991)1 SCC 533

[4] Her Highness Maharani Shantidevi P. Gaikwad v. Savijbhai Haribhai Patel, AIR 2001 SC 1462

[5] 2014(2) BomCR 126

[6] (1999) CLT 25

[7] AIR 2000 Delhi 452

[8] 1997 IAD Delhi 722

[9] AIR 2012 SC 3094

[10] MANU/8/DE/8474

[11] AIR 2005 Ori 113

[12] Indian Oil Corporation Ltd. v. Freedom Filing Station, 2011(I)ILR-CUT 93

[13] 2005 (40) RAJ 585

[14] 2015(2) ARBLR 142 (Delhi)