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This article is written by Hitanshi Khandelwal pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.

Introduction

The termination agreement is one of the most important agreements with other companies. This clause allows the parties to exit the contract at their convenience. The party will have to compensate the other party for the termination of the agreement. But the parties are not bound by the contracts forever. They can exit the contract if the contract does not fit as per their expectations. The parties can terminate their contract at their convenience. Termination of contract, notice of cancellation of contract, and notice of termination of the contract are the other names of the termination agreement.

What is the termination agreement?

When the agreement between the two parties is ended by one party before the obligation is performed by either of the parties, the contract is said to be terminated.

However, the termination agreements specify the parties that are involved in this termination, the reason why the parties are cancelling the contract, and how exactly the termination of the contract takes place. Termination can take place through the terms of the contract or through the parties’ convenience. 

In normal terms, the main objective of the termination clause is to discharge the parties from the obligation to be performed. However, this does not discharge the other party from the liabilities that occurred due to the breach caused by him. He is entitled to pay all the claims and damages to the other party.

When can a party use the termination agreement?

  1. Impossibility of performance: When a party could not perform his obligations due to some circumstances which were beyond the control of the parties, the contract can get terminated by the mutual decisions of the parties.
  2. Illegality of the contract: When the breach of the contract happens due to Illegality because, after the enforcement of the contract, a law may be passed which in turn, makes the contract illegal. This causes the termination of the contract.
  3. Misrepresentation, fraud, mistake, or coercion: A contract may be terminated if there is misrepresentation, fraud, mistake, or coercion. If there is no consensus ad idem due to false representation of facts or forceful signing of a contract, the contract can be terminated at once.
  4. Breach of contract: If the parties enter into a contract, they have an obligation to perform. If either party fails to perform the obligation during the stipulated time, the contract gets breached and therefore terminated.

Termination of agreement clause

Termination due to convenience

When a party decides to terminate a contract even if there is no breach or fault of the other party, then the termination is called termination for convenience. When a party terminates due to convenience, he is bound to pay the amount for damage or compensation to the other party. If this termination is mutually agreed upon by both parties, then it will be known as cancellation.

Sample clause for termination due to convenience:

“Any party to the contract can terminate the contract upon giving prior notice of a week to the other party. The notice should be in written form. In this case, the party who is terminating the contract should give compensation for the work which is done by the other party prior to the date of such termination. The parties have to waive any sort of damages or loss and only the compensation for the work done which is provided by the said party is the sole remedy.” 

Termination for cause 

If there is a breach or a failure to fulfil the obligation by the other party due to some specific reason like bankruptcy, then that termination will be known as termination for cause. 

Sample clause for termination for cause:

“Either party can terminate the contract due to any material breach if the breach is not cured within 90 days. The ‘Material Breach’ which is referred to here is if the said party faces Bankruptcy.  If the Party files for a petition for material breach, the debts should be settled within 90 days from the date of the petition. If a petition has been filed against the other party for Bankruptcy, it should be dismissed and the funds should be settled within 90 days from the date of the petition.” 

Termination within the cure period

Sometimes, when a party has breached the contract, the other party may allow him to cure the breach, i.e., give him a month or so to fulfil the obligation which he was required to do.

Sample clause for termination within the cure period:

Upon the occurrence of any of the events specified below, the buyer shall be in default of the agreement and the seller shall have the right to terminate the agreement within 60 days from the default. The termination shall be effective from the expiration of the Cure Period and until then if the buyer does not correct the default within that period, then the contract will be terminated.”

Termination due to change of control

This happens when the owner of the business, who is a party to a contract with another company, transfers its business to another company. This transfer of ownership leads to an adverse impact on the contract entered by the parties. In such cases, usually, the other party gets the rights to terminate the contract or make an alteration to the contract. 

Sample clause due to change of control:

“In case of change of control of either party, the party which is undergoing the change of control can terminate the Agreement within 30 days from the change with a written notice.”

Relevant case laws

1. Sainath Enterprises Pvt. Ltd. Vs. Union of India (UOI) and Ors., 

In this case, the court observed, “I consider that looking into the entire facts it is not a case where the court should restrain the respondent from proceeding further with the work with the help of other contractor and force the respondent to continue to work with the petitioner. The relations between the contracting parties ought to be governed by the contract between the parties. Where a contract is terminable for the reasons given in the contract, a party has a right to terminate the contract. The termination of the contract was lawful or unlawful, is a dispute to be raised before the arbitrator. The court under Section 9 of The Specific Relief Act, 1963 cannot compel an employer to continue to work with the contractor whose work has not been satisfactory and who has not been able to complete even 30% of the work within stipulated as well as extended period.”

2. M/S.Chandragiri Construction vs State of Tamil Nadu

In this case, by a reasonable construction of the whole issue, the learned arbitrator has found that the employer has not cancelled the contract on the basis that the contractor has completed only about 25% of the work despite the extension of time, which may be a fundamental breach of contract, but has taken a different stand for contract termination and that the termination is not proper and legal. It was only for that purpose that he was forced to accept some of the numbers, and he has dismissed the argument under this issue as inflated and whimsical, and the reason assigned by the learned arbitrator cannot be said to be arbitrary, unconstitutional, or perverse for this court to exercise its jurisdiction to intervene.

3. P.H.Paul Manoj Pandian vs P.Veldurai

The court held that only the Chief Engineer had the authority to terminate the contracts and that the Divisional Engineer’s termination of the contracts, which was later ratified by the Superintending Engineer, could not be considered legitimate. According to the case record, the respondent wrote a letter to the Divisional Engineer of NABARD on April 10, 2006, informing him of his intention to run for Assembly and demanding that the contracts be cancelled immediately.

Conclusion

One of the most important agreements with other companies in the termination agreement. This clause permits the parties to withdraw from the contract as they see fit. For the termination of the agreement, the party will need to compensate the other party. However, contracts do not forever limit the parties. If the contract does not meet your expectations, you can exit the contract. The contracts may be terminated as appropriate by the parties. The other names in the termination agreement are; termination of a contract, notice of contract cancellation, and notice of contract rescission.

A termination clause shall have as its main objective the discharge of the obligation to be fulfilled from the parties. This does not, however, relieve the other party of the liabilities arising from the violation caused by the other party. He has the right to pay the other party all claims and damages.

Reference


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