This article is written by Garima Gunjan, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
When a client who is a production service provider enters into a Contract with another one to produce a media project, then they enter into a Production Agreement. Such a Contract can occur between two companies or two individuals (e.g., a small producer and a documentary filmmaker). The clauses of such contracts are mostly business-oriented, for example, market royalties, types of software to be used, etc.
The section of an agreement consists of clauses about default caused or decision to end the Contract. This Contract’s purpose is to award the payment of the damages to the injured party. If the termination of the Contract occurs in the early stages, both parties then cease to agree upon payment according to the Contract.
This article aims to inform the readers about the different types of termination clause according to Indian Contract Act, and relevance of this clause in the Production Agreement.
Significance of Production Agreement
Production Agreement is one of the types of Service Agreement that includes clauses that specifically develop around relationships. It means that the agreement describes the role of the two parties involved. The understanding and relationships of parties are briefly explained in these clauses.
Entertainment Industry is one of the most successful sectors in India, which also heavily contributes to the Indian Economy. So, whenever a media project is about to start, the investor, director or distributor decides to enter into a Production Agreement with such a service provider to handle personnel, finances, expertise, and other required resources to execute the project on time.
Often filmmakers take several creative calls, which in turn can result in certain arbitrary decisions. As lots of people are involved in decision-making, therefore, it is important that all sides must have equal stakes. Hence, it is advisable for parties involved that they should enter into a Production Agreement.
Significance of Termination Clause
In the production agreement, the termination clause exhibits under what conditions the agreement can be terminated. It defines a party’s right to pay and serve a notice if such an event occurs. One can customise it depending on the nature of the contract. A contract can be terminated in four different scenarios:
- Termination by Convenience: When one party discovers that another party cancels a contract on the grounds of financial difficulty and does not want to be part of the contract, termination by convenience occurs. Suppose if one side is unable to arrange finances, it can terminate contract mutually by consulting the other side.
- Termination by Default: One party can terminate a Contract by default if another party fails to abide by the terms of the agreement. For example, if one side fails to deliver a particular service within a deadline, or the services are not as per quality required, the other side can terminate the contract. Depending on the situation, the other party has to provide evidence supporting the termination. Further, as reasons stated, the parties may put their case before the mediator.
- Termination by Mutual Consent: Sometimes, parties cancel the contract mutually without any issue. For example, if one service provider decides to stop the service of a music arranger permanently, which is an integral part of the production, the other party can’t abide by the contract.
- Fixed Term: Few Contracts get terminated automatically after a given period. Suppose if a singer is hired by the production team for three months, her contract may automatically get terminated after three months gets over. Such contracts are established for an initial term and can be renewed automatically for a particular term unless one party notifies that it does not wish for the contract to be renewed. Hence, the singer’s contract may automatically get renewed unless she or another party decides not to do so.
If a contract gets terminated, it doesn’t mean that one party’s obligation to the other has also got terminated. Even after the contract is canceled, few of its provisions remain in force. For example, if both sides exchange confidential business secrets, they are bound to protect them even after their contract is terminated.
Termination as defined in Indian Contract Act
Two parties enter into a Contract so that no misunderstanding occurs between them while conducting business. Termination Clause is an important part of any agreement that decides how the two sides may end their business relationships and what their respective responsibilities shall be once the contract gets terminated.
According to the sections of the Indian Contract Act (hereby referred to as ICA), a party can opt to terminate a contract by giving valid reasons such as prior agreement, frustration, or breach. On the other hand, if a contract is terminated in a wrongful manner, it can be termed as the ‘breach of contract.’ Sometimes, even after entering into a contract, if one party backs out, another can suffer losses due to the former’s step. This process, more famous as ‘Repudiation’, is defined in Section 39 of the ICA. It states that if any party intimates via words or conduct to decline the continuity of a contract, this process is repudiation.
India has seen several judgments on such laws, which can be considered as a benchmark. One of them is ‘Deva Builders through MR Rattan Vs Nathpa Jhakri Joint Venture, 2002.’ Here, the Court stated in its judgement that although Defendant had failed to award the requisite notice in order to terminate the contract. However, the breach of contract had been taken from Plaintiff’s side as they had not executed the work according to T&C of this agreement.
In another case of ‘Air India Ltd Vs GATI Ltd, 2015,’ the Hon. Judge had stated that if one party breaches the contract as per Sec 39 of the ICA, the act of contract termination by the other party is justified even if they haven’t followed the procedure. Hence we can conclude that if a party commits repudiatory breach or non-performance due to delay, the other party can terminate such contract without even going by the procedures given in the agreement.
In ‘Sadashiv Narayan Rao Jambhale Vs Indian Oil Corporation Ltd,’ the Court had held that reasonable notice makes termination of contract determinable. The Court also noted that clause of the contract under which the parties had sought arbitration, it allows termination with & without causes as stated in the agreement.
Termination Clause in a Production Agreement
Let’s try to understand this point by taking an example of a Director and a Service Provider who plans to come together to make a movie. According to the ICA, the parties will include one of the following three ways of Termination in their Agreement depending on their requirements:
- Termination after terms of Contract has expired, or Contract was completed
In case both Director and Service provider has completed the project on which basis the Agreement was signed between them, its terms get expired, and it is terminated automatically.
- Termination with Mutual Consent
This process is also known as Termination for convenience. Suppose the Director suffers from financial woes, which forces her in a situation where she is unable to produce the film further, then she can initiate the process and terminate the Contract after obtaining permission from the other party.
- Termination for Convenience
If any of the parties decides to terminate the Agreement without giving any proper reason, it falls under the ‘Termination for Convenience’ category. In a production agreement, such a situation can occur if either the Director or service provider ends the Contract abruptly without complying with the termination clause mentioned in the Agreement.
Whenever two parties decide to get into any kind of Production Agreement, they can mention the ways to terminate the Contract under the Termination Clause. Parties can choose the ‘Termination by Mutual Consent’ as defined according to the clauses mentioned. If one party finds another guilty of the ‘breach of contract’, the former can terminate the Contract by giving a notice period for a number of days as mentioned in the Contract.
Such Agreement must clearly state about chances given to parties to terminate it at earliest. Parties should define the time period within which one of them can legally terminate the Contract. It should be mentioned when the ‘Termination Notice’ has to be sent. The penalties should also be defined in case if one of the parties breaches the Contract.
Production Agreement is one of the many contracts that is compulsory to have while the film-making process is underway. In this agreement, termination clause forms an important aspect through which any of the parties can terminate the contract if they don’t want the project to continue. The aggrieved party could choose one of the three above mentioned types of ‘Termination Clause’ if he no longer wishes to be a part of the contract. Termination clause allows the aggrieved party to depart willfully in case he or she doesn’t want to be part of the Contract.
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