This article is written by Ritika Sharma pursuing B.Com LLB (Hons.) from University Institute of Legal Studies, Panjab University. This article explains different ways of termination of a contract, remedies available in case of its termination along with the impact of COVID-19 pandemic on the contractual performance.
It has been published by Rachit Garg.
Section 2(h) of the Indian Contract, 1872 defines contract as “an agreement enforceable by law” and Section 2(e) states that, “every promise and every set of promises, forming the consideration for each other, is an agreement”. This implies that all agreements are contracts.
A contract can be terminated by either of the parties or both by consent or agreement. There are multifarious ways in which a contract comes to an end such as on its completion, impossibility of performance (frustration), breach, termination by prior agreement, rescission, novation of contract or force majeure. Certain remedies are available in case of termination of contract which include damages, quantum meruit, suit for injunction and specific performance.
Essential elements of a contract
For an agreement to be a valid contract, certain essential elements must be present. Section 10 of the Indian Contract Act, 1872 specifies the following essentials of a contract:
- Offer- The first essential is that an offer or proposal should be communicated. Section 2(a) of the Indian Contract Act,1872 states that, “when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal”.
- Acceptance- For a valid agreement, acceptance of the offer is must. Section 2(b) of the Indian Contract Act, 1872 states that, “when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.”
- Consideration- Section 2(d) of the Indian Contract Act, 1872 states that, “when, at the desire of the promisor or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise”.
- Capacity to contract- Section 11 of the Indian Contract Act, 1872 lays down the categories of persons who are competent to contract. It states that the parties should be of the age of majority i.e. eighteen years of age, of sound mind and should not be disqualified from entering into a contract under any law.
- Free consent- The parties should enter into a contract with free consent. Section 14 of the Indian Contract Act, 1872 defines free consent as the consent which is given without coercion, undue influence, fraud, misrepresentation and mistake.
- Lawful object- According to Section 23 of the Indian Contract Act, 1972, the object and consideration should be lawful and if these are unlawful then the agreement is considered void.
- Not expressly void- The contract should not be expressly declared void. Section 2(g) of the Indian Contract Act, 1872 states, “an agreement not enforceable by law is said to be void”. Void agreements include agreement in restraint of marriage, legal proceedings, uncertain agreements, etc.
Termination of a contract
It implies ending a contract between the parties which can be done in several ways. The ways could be legitimate or illegitimate for which there are remedies to compensate the aggrieved party.
Events of termination of a contract
Completion of contract
The contract comes to an end when the parties have fulfilled their part of promises and carried out their obligations. Section 37 of the Act states that, “the parties to a contract must either perform or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or any other law”. When the parties to a contract perform their set of duties then the contract stands discharged.
Impossibility of performance
If a contract is or becomes impossible to perform then it leads to termination of the contract. Section 56 makes provisions regarding the impossibility of contract. The contract could be impossible from the very beginning or it could become impossible afterwards upon some change in circumstance.
- Initial impossibility: A part of Section 56 states, “An agreement to do an act impossible in itself is void”. A contract obligates parties to perform certain tasks and if those obligations are impossible to perform then the agreement is considered void. The maxim “les non cogit ad impossibilia” which means “the law does not compel a man to do what he cannot possibly perform”. For instance, A agrees with B to discover treasure by magic. Such an agreement is void.
- Subsequent impossibility: The second part of Section 56 which talks about “contract to do act afterwards becoming impossible or unlawful” reads as “a contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”. The contracts are built on the premise that the parties are able to perform their set of duties and if the acts become impossible to perform the contract becomes void.
For instance, ‘A’ contracts to take in cargo for ‘B’ at a foreign port. ‘A’s government afterwards declares war against the country where the port is situated, in such cases the contract becomes void. In the case of Punj Sons Pvt. Ltd. v. Union of India (1985) a contract was made between Punj Sons Pvt. Ltd. and the government where the former had to supply some milk containers which were to be duly coated with “hot dip coating” made from tin ingots. Despite efforts by the company the tin ingots could not be made available and the Court held that the contract has become impossible under Section 56.
- The doctrine of frustration: It applies when a party is ‘excused’ from performing their obligation due to subsequent change in the events. In other words, the object of the contract becomes frustrated due to its impossibility. In the case of Satyabrata Ghose v. Mugneeram (1953), the Court held, “the essential idea upon which the doctrine is based is that of impossibility of performance of the contract; in fact impossibility and frustration are often used as interchangeable expressions. The changed circumstances make the performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform an impossibility”. It was also observed that the Doctrine of Frustration nullifies the contract and therefore, it should not be invoked very easily.
- Impossibility by introduction of new laws: If any new law is made after the parties enter into an agreement and it makes it impossible to perform, then the agreement becomes void.
- Impossibility of contracts demanding personal performance: The contracts which require some personal skills of the parties, become impossible to perform upon the death or incapacity of such parties and therefore, they come to an end upon happening of either of these two.
- Non-fulfillment of object of the contract: Along with physical impossibility, the contracts become void owing to the change in circumstances, the purpose behind the contract has got tampered with. In the case of Har Prasad Chaubey v. Union of India (1973), a party purchased coal belonging to other parties’ railways and wanted to transport it to another city Firozabad. However, the seller refused to make any arrangement regarding transportation and said that the coal has to be consumed locally. The contract did not have any such condition. Therefore, the Court held that the object of the contract is void as the object that the buyers had in their mind has not been fulfilled.
- Application to executory contracts only: The contracts which have been executed do not become void due to impossibility of performance as Section 56 applies only to the executory contracts. In the famous case of K.J. Coal Co. Ltd. v. Mercantile Bank (1981), K.J. Coal Co. took a huge loan from Mercantile Bank and the company got nationalised. Consequently, the company pleaded that their contract with the bank has been frustrated due to nationalisation of the company, hence they are not required to pay back the loan amount. The Calcutta High Court, however, held that a mere change in the management cannot frustrate a contract or make it void, thus the company still stands liable to pay the loan.
Breach of a contract
Breach of a contract occurs when one of the parties fails to fulfil their part of obligations. This leads to termination of the contract. There could be actual as well as anticipatory breach of contract.
- Anticipatory breach of contract: When the contract is breached before the due date of performance has arrived then it is called anticipatory breach of contract. Section 39 of the Indian Contract Act, 1872 makes provision regarding anticipatory breach of contract, and states that, “when a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance”. It is pertinent to note that if the breach of contract is not in its entirety then it is not covered under this provision. For instance, ‘A’, a singer, enters into a contract with ‘B’, the manager of a theatre, to sing at his theatre two nights in every week during the next two months, and ‘B’ engages to pay her 100 rupees for each night’s performance. On the sixth night, ‘A’ wilfully absents herself from the theatre. ‘B’ is at liberty to put an end to the contract.
Alternatives available: The aggrieved party has two options in case of breach of the contract.
- Firstly, the party can rescind the contract before the due date of the contract has arrived and sue the other party for the same. In the case of Frost v. Knight (1872), a promise was made by the defendant to the plaintiff to marry the plaintiff on his father’s death but broke off the engagement when his father was alive. There was an anticipatory breach of contract and the plaintiff filed a suit against the defendant when the defendant’s father was still alive.
- Secondly, as the anticipatory breach does not directly terminate the contract before the due date so the aggrieved party has the second option to not terminate it until the due date. Illustration (b) of Section 39 of the Indian Contract Act, 1872 clarifies this part. It states, ‘A’, a singer, enters into a contract with ‘B’, the manager of a theatre, to sing at his theatre two nights in every week during the next two months, and ‘B’ engages to pay her at the rate of 100 rupees for each night. On the sixth night, ‘A’ wilfully absents herself. With the assent of ‘B’, ‘A’ sings on the seventh night. ‘B’ has signified his acquiescence in the continuance of the contract, and cannot now put an end to it, but is entitled to compensation for the damage sustained by him through ‘A’s failure to sing on the sixth night.
Termination by dispensing the promise
A contract comes to an end when the promisee dispenses with the performance of the obligation. Section 63 of the Act states, “every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him”.
For instance, ‘A’ owes ‘B’ 5,000 rupees. ‘C’ pays ‘B’ 1,000 rupees, and ‘B’ accepts them, for satisfaction of his claim on ‘A’. This payment is a discharge of the whole claim. As the contract gets terminated on the application of this provision, therefore, no party can sue the other for the breach of contract.
Rescission of contract
Section 62 lays down that if both the parties agree to rescind the contract, then there is no obligation to perform the original contract. According to Merriam Webster dictionary, rescind means “to abrogate and restore the parties to the positions they would have occupied had there been no contract.” This rescission could be either express or implied.
In the case of Raghumull v. Luchmondas (1916), it was observed that the burden to prove rescission is on the party who rescinds in order to show that it was correctly terminated. Further, in the case of Damodar Valley Corporation v. K.K. Kar (1973), the Supreme Court held that, “in certain circumstances it may be stated that there has been termination of the contract unilaterally and as a consequence all the parties may agree to rescind the contract. In such a situation, rescission would put an end to the performance of the contract in futuro, but it may remain alive for claiming damages either for previous breaches or for the breach which constituted termination”.
Novation of contract
When a new contract is formulated then it automatically leads to the termination of the previous contract. Section 62 talks about the effect of novation, rescission, and alteration of contract and it states, “if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed”. As the new contract replaces the old contract, the old one stands discharged.
Novation of contract is broadly of two types.
- In the terms of the contract: When certain terms of the agreement are altered then it gives rise to a new agreement with the altered obligations. This could be a change in the terms related to liability or time period.
- Change in the parties of the contract. In the case of Satish Chnadra Jain v. National Small Industries (2001), a person was a guarantor to funding done to his proprietary business but afterwards the business was converted into a private limited company by his son. The Court held that there is change in the parties and hence, the contract of guarantee of the person stands terminated. Similarly, in the case of Ayodhya Prasad v. Phalsara Bhagwan Das (1998), an agreement for sale entered between the vendor and vendee was to be executed after 6 years but before the execution, the vendor died and a new agreement was made in which the parties were daughters of the deceased vendor on one side and the vendee on the other. When the vendee filed a suit for specific performance of the previous contract, the Court held that due to the change in the parties, the earlier contract was terminated.
Remedies for termination of a contract
It is one of the most common remedies in case of breach of contract where the injured party is entitled to recover compensation for the loss from the party who has violated the contract. Damages can be compensatory, liquidation, punitive, general and nominal damages. While compensatory damages are the ones which are awarded with the aim of reimbursing the party who has suffered losses, punitive damages are awarded to punish the offending party for breaching the contract. Liquidated damages are damages which have been agreed upon by the parties while making the contract and therefore, the contract itself contains the provision regarding liquidated damages. General damages are calculated from the normal course of breach of events. Nominal damages reflect the injured party’s right to damages in case of breach and are provided even when it has not suffered any loss.
Section 73 to 75 of the Act contains provisions regarding the damages. Section 73 states, “when a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from breach of it.”
For this remedy, the following two aspects are to be considered.
- Remoteness of damages: First, it has to be determined that whether the loss was the proximate consequence of the breach as in the case of remote connection, the damages are not given. The famous case of Hadley v. Baxendale (1854), enunciated the rule regarding remoteness of damage. In this case, the mill of the aggrieved was stopped for a longer time period due to delay in the delivery of shafts by the defendants. However, the defendants were only aware about the whereabouts of the plaintiff and that the article which was to be delivered is a broken shaft mill. Therefore, the England and Wales High Court held that, “the loss of profit here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract. For such loss would neither have flowed naturally from the breach of this contract in the great multitude of such cases occurring under ordinary circumstances nor were the special circumstances, which perhaps, would have made it a reasonable and natural consequence of such breach of contract, communicated to or known by the defendants”.
Similarly, in the case of Wilson v. Lancashire and Yorkshire Railway (1917), the defendants delayed the delivery of the cloth at the destination, consequently, the plaintiff was not able to fulfil the orders of making caps within time. The County Court held that the plaintiff could claim only the difference between the value of the cloth between the agreed date of delivery and the actual date of delivery of the consignment. This rule was also applied in the case of Laxminarayan v. Sumitra (1994), where damages were awarded to a girl who had got pregnant by the person who had promised to marry her but refused afterwards. The damages included the factors such as physical pain, indignity, mental agony, etc. Another rule culled from the case of Hadley v. Baxendale (1854) was that in case of loss on breach of contract which has arisen due to ‘special circumstances’, provided those ‘special circumstances’ were notified to the other party when the contract was entered into, then the party breaching the contract could be made liable.
- Measure of damages: Another question is to assess the amount of compensation or damages for the breach of contract. The factor which has to be kept in mind while making this assessment is to put the aggrieved in the same position in which he/she would have been if the contract had been performed. This was highlighted in the case of Haji Abdul Sattar v. M.P. State, etc. Marketing Federation Ltd. (1998). The damages for the breach of contract are considered as on the date of breach of contract.
In Bismi Abdullah v. Regional Manager, F.C.I. (1986), Trivandrum, a contract of sale was breached by the defendant as he was not able to purchase the rice from the plaintiff. The plaintiff sold the rice after a few months when the market was down and incurred losses. It was held by the Kerala Court that only nominal damages would be provided to the plaintiff by the defendant.
In Brown v. Muller (1963), it was observed by the US Supreme Court that the amount of damages is the difference between the contract price and market price of a specific instalment in case of delivery by instalments.
Furthermore, Section 74 of the Indian Contract Act, 1872 stipulates the right of an aggrieved party to receive reasonable compensation in case of breach of contract, in spite of the fact that they have incurred any loss or not. The only pre-condition is that the contract should contain a provision regarding penalty in case of any breach. In Ashby v. White (1703), the Court observed that, “every injury imports a damage though it does not cost the party one farthing”. An illustration of this Section states, “A’ contracts with ‘B’ to pay ‘B’ Rs. 1000 if he fails to pay ‘B’ Rs. 500 on a given day. ‘A’ fails to pay ‘B’ Rs. 500 on that day. ‘B’ is entitled to recover from ‘A’ such compensation, not exceeding Rs. 1,000 as the Court considers reasonable.”
In the case called Charter v. Sullivan (1957), there was a contract for the sale of the car but the buyer breached it. However, the car was disposed of by the seller within a few days so he did not suffer any loss due to the breach. Therefore, it was held that he can only get the nominal damages. Difference between “earnest money” and “amount deposited for the due performance of the contract” was highlighted in the case of Maula Bax v. Union of India (1969) and the Supreme Court pointed out that on the breach of contract, actual loss has not to be proved and the Court is competent to award reasonable compensation even when no actual damage was proved.
Suit for rescission
Rescission of contract refers to unwinding of a contract by putting the parties, as far as it is possible, into the position in which they were before they entered into a contract. It is an equitable remedy and the party who seeks this remedy offers to return all the benefits that it has received. Rescission of contract has been dealt with under Sections 27, 28, 29 and 30 of the Specific Relief Act, 1963.
Section 27(1) lays down the cases in which the contract can be rescinded. The two cases that it states are, “where the contract is voidable or terminable by the plaintiff; where the contract is unlawful for causes not apparent on its face and the defendant is more to blame than the plaintiff.” Section 27(2) highlights the four cases where the court may refuse to rescind the contract. These include first, when the plaintiff has ratified the contract, second, where the parties cannot be restored to the position in which they stood when contract was formed, third, where third parties have gained rights in good faith from that contract, fourth, where the part which is to be rescinded is inseverable from the rest.
Quantum Meruit is an exception to the rule that a person who has not fulfilled his/ her part of obligation is not to receive anything for the part which has been performed by him/ her. Quantum Meruit gives the right to the party who has carried out a part of the obligation under contract but could not complete the remaining part as he/ she was prevented by the other party from performing it.
In the significant case of Puran Lal v. State of U.P (1971), it was highlighted that, “in order to avail of the remedy under quantum meruit, the original contract must have been discharged by the defendant in such a way as to entitle the plaintiff to regard himself as discharged from any further performance and he must have elected to do so”. However, this remedy is not for the party who has breached the contract.
In the case of Planche v. Colburn (1831), there was a contract where the plaintiff agreed to write a volume on ‘Costume and Ancient Armour’ for a periodical called ‘The Juvenile Library’. When the plaintiff had commenced working on his part of obligation, the defendants ceased the publication, consequently, the Court held that the contract had terminated and by applying the principle of quantum meruit, remuneration was provided to the plaintiff.
Suit for specific performance
Section 10 of the Specific Relief Act, 1963 specifies that the specific performance of the contract could be enforced when the damages cannot be ascertained or when the compensation in money cannot afford adequate relief. Therefore, when the contract is terminated by one of the parties and the case falls under either of the above situations, specific performance of the contract could be enforced. For instance, in the case of Beswick v. Beswick (1968), a business was sold by an uncle to his nephew with the contract that regular payments would be made by the nephew to him and his wife.. However, when the uncle died, the nephew stopped making the payments to the uncle’s wife. The House of Lords granted specific performance of a contract as the compensation would not have provided adequate relief to the plaintiff. Similarly, in the case called Sky Petroleum v. VIP Petroleum (1974), during an oil crisis, the supply of oil to the plaintiffs was stopped by the defendants. Therefore, specific performance was granted to the plaintiff as damages would not have served the purpose of adequate relief at the time of the oil crisis.
Suit for injunction
Suit for injunction is another way of dealing with the breach of contract wherein the aggrieved party could seek legal relief of performing or prohibiting certain tasks till the time the main dispute is solved.
COVID-19 and contractual performances
During the pandemic, the business suffered huge losses and several contracts were affected. Termination of contract due to impossibility or force majeure was very common. The fundamental question was whether the situation of pandemic would be considered force majeure. This question was answered differently around the globe. According to Merriam Webster Dictionary, force majeure refers to “an event or effect that cannot be reasonably anticipated or controlled”. This concept aids parties to save themselves from the bad consequences of not performing their part of obligation in a contract. In 2003, in KSRTC v. Mahadeva Shetty (2003), the Supreme Court held that the ‘Act of God’ cannot include all unexpected natural events. In the case of Energy Watchdog v. Central Electricity Regulatory Commission and Ors. (2017), the Supreme Court highlighted the concept of force majeure by elucidating that the question regarding the discharge of the contract due to non-performance would be dealt in accordance with the terms of contract and in case of impossibility, Section 56 of the Indian Contract Act, 1872 could be referred.
After the onset of pandemic, the notifications were released by the government stating that as COVID-19 is a natural calamity, the force majeure clause could be invoked which would suspend the performance of contract for a certain time period. In the case of Indrajit Power Private Limited v. Union of India (2020) the Delhi High Court refused to apply the concept of force majeure in the pandemic wherein the petitioner wanted to restrain the government from invoking the bank guarantee. Similarly, in Standard Retail Pvt. Ltd. v. GS Global Corp and Ors (2020), where Indian Steel importers sought an injunction on the encashment of Letter of Credits in favour of exporters of South Korea. The contract had the force majeure clause but it was applicable only to the suppliers and not exporters. As the petitioners were exporters, the court refused to grant ad-interim relief of force majeure to them during lockdown. Moreover, it was held that distribution of steel was an essential service. However, in certain other cases the force majeure plea was accepted which postponed the performance of contract for a limited period of time. The parties also invoked the provision of impossibility under Section 56 of the Act of 1872, where in this case the impossibility was not due to the fault of another party but due to natural calamity.
A contract comes to an end in several ways, and judiciary has played a crucial role in interpreting and evolving the concept related to termination of contract. In case of termination by breach, it is essential to balance the rights of both the parties and settle the matter with equitable consequences for both sides.
The remedies for the breach or termination of contract include damages, quantum meruit, suit for rescission, specific performance and injunction. The parties usually take legal advice so as to evaluate all the alternatives or remedies in their cases and choose the one which would be of optimum benefit to them.
- Bangia, R.K. (2003) Indian Contract Act, Allahabad Law Agency.
- Meena, R.L. (2008) Law of Contract, Universal Law Publishing Co.
- Murray, Ryan (2014) Contract Law: The Fundamentals, Sweet & Maxwell.
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