This article has been written by Vaishali, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction

Section 2(e) of the Indian Contract Act, 1872 mentions “every promise and every set of promises, forming the consideration for each other is an agreement”. An agreement is regarded as contract when it becomes enforceable by law.  

Any contractual relationship is maintained on the object of the agreement, and it comes to an end by the accomplishment of the object, mutual agreement or by one party if the other party does not comply with the agreed clauses of the agreement or violate any of them. 

Even at the time of the agreement, the terms of termination is agreed upon by the parties to the concerned agreement. 

The termination of the agreement is lawful only when there is a legitimate reason that validates the end of the relationship before the agreed performance is accomplished. The termination of a contract is regulated by the provision of the Indian Contract Act, 1872. 

This article will help you understand how to end an agreement without invoking legality and avoiding any future legal hassle.

Five ways to end an agreement

There are typically five ways of terminating an agreement, they are as follows:

• The performance is impossible: An agreement exists based on performance, for example, an agreement to deliver something. If due to some reason the performance becomes impossible, then such impossibility of performance can be a reason for termination of the agreement. For example, an electronic item providing shop was hired to provide loudspeakers to an event organized on 05th April 2020, but due to the lockdown declared, the event was canceled, and therefore, the agreement is automatically terminated on the ground of ‘frustration’ or impossible to perform.

• Breach of contract: A contractual relationship between parties is not only based on the clauses mentioned in the agreement they have signed to perform, but it involves several factors like good trust. Good trust means that the party trusts the other party will do justice to the consideration they have agreed to and the promises made. For example, a designer was given a contract to provide dresses for 20 women for an event and accordingly the sizes required for the dresses were provided to the designer. On delivery, it was discovered that the dresses were of the incorrect size, therefore they were not fitting everyone. On informing the designer, the designer refused to alter those dresses on the date of the event. In such a situation, the agreement stands terminated on the ground of breach of contract.
• Termination by prior agreement: An agreement comes into force when both the parties agree on certain points, but before the performance, if they mutually end the contractual relationship, then the agreement shall be considered as terminated. For example, A decorator gets a contract for a wedding event, but the client communicates with the decorator they wish to cancel the booking, and the decorator agrees to that. Here the relationship started with an agreement and ended with an agreement as well.
• Rescission of contract: When an individual misrepresents themselves to make some unlawful gains and causes some illegal activities, such as fraud, the agreement stands terminated automatically, as it was not lawful from its initial stage. For example, a person representing himself as the manager of a superstar, who tries to make some money by booking shows with some events, but the management comes to know that the person is misrepresenting to cheat them, the agreement automatically terminated itself as a void agreement, as the performance of the agreement was never in the capacity of the misrepresenting party, therefore, it can not be a lawful agreement.
• Completion of the agreement: It is the most obvious and expected termination of the contract, where the agreement terminated on the fulfillment of the specified performance by both the parties as agreed upon.

Case laws

• In Air India Ltd v. GATI Ltd, the Hon’ble Court held that “in case of a repudiatory breach of the contract by one party, termination of contract of contract by another party is justified even if the procedures are not followed”.

• In Deva Builders through M.R.Rattan v. Natha Jhakri, 2002, the Hon’ble Court held that “although the defendant has not given the requisite notice terminating the contract but it was the plaintiff who has committed a breach of the contract by not executing the work in accordance with the terms and conditions of the agreement”.

To have better clarity on how to terminate an agreement, let us understand this through an example of how to terminate an employment agreement.

Laws terminating an employment agreement

Termination of an employment agreement is not only regulated by the Contracts Act, 1872, rather it is regulated by the Industrial Dispute Act, 1947. Recently, during the pandemic situation, when the employment agreements were terminated rampant, the question of the legality of such termination was raised.

RELATED LAW: The provision on Sec. 2(kkk) of the Industrial Dispute Act, 1947 regulated the matter of lay off when the employer takes certain measures such as pay cuts, cost-cutting, to manage the shortage of coal, power or raw materials or the stock accumulated is about to exhaust or any breakdown of the machines due to natural calamities or any other unavoidable reasons.

If the lay off continues for 45 days at a stretch, the employer can terminate the employment, thus termination of the employment agreement.

However, as per the labour law, the termination of the employment agreement is subject to follow the prescribed procedure of giving a reasonable notice period, payment of compensation of retrenchment, gratuity and leave encashment must be paid off. Moreover, there is no such provision that in any situation these rights of an employee can be waived off, except the company gets insolvent and closes down.
Labour law is quite specific about the regulations related to termination. If the employer has complied with all the specified rules and terminated the employee for a valid reason, paying the compensation for termination (usually one month of the notice period and an extra one month salary, depending on the policy of the company and the law in practice). 

In case, the employer has terminated an employee without complying with the prescribed regulation or there was an alternative that could be adopted to avoid the termination, the affected employee can proceed to the labour court. 

Therefore, for the termination of an employment agreement, the employer requires to comply with the provisions of the Contracts Act as well as the labour law. Similarly, if there is any specific Act regulating the performance of an agreement, both the legislature gets priority. In absence of any specific provision, the provision of the Contract Act is followed.

Conclusion

When an agreement stands terminated, between the parties, the payment of the consideration must be made clear, subject to the proper performance of the agreement in terms of the delivery of goods or services.

In case, the agreement terminates by the impossibility of agreement and mutually agreeing to terminate, the payment should be made either for the work which has been done or mutually agreed between the parties.

If the agreement is terminated due to misrepresentation or the breach of trust, the liability to pay for the work done depends on the profit made by the affected party. If the party suffers a loss due to the fault of the party causing fraud or violation of the agreement, they are not entitled to receive any payment, moreover may require to compensate the loss. After the end of the agreement, the parties to the contract do not have any future obligations to each other. However, one or both parties might be liable for breach of the terms of the contract prior to termination.

However, every time the monetary compensation is not enough. The Court may pass an order of specific performance to lawfully abiding the parties to perform the activity as agreed by the agreement. After the specific performance, the agreement terminates subject to the order passed by the Court.

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