Introduction
The principles pertaining to the termination of the contract that we are about to discuss in the present article are going to apply to all the contracts including the commercial contracts. Commercial contracts between an individual and a corporation or between two corporations are normally an outcome of detailed negotiations, legal advice received by both the parties to the contract and also the understanding of the factual matrix gathered by the parties to a commercial contract through multiple rounds of discussions and negotiations. That being the so, it is normally difficult to find the grounds for terminating a commercial contract without exposing the party terminating such a contract to potential liability and consequences. In this part I, we will deal with aspects of potential liabilities stemming from termination of a commercial contract, aspects to be considered for termination of a commercial contract and grounds for terminating a voidable contract. In Part II, we will discuss what parts of agreements need not be formally terminated, why formal termination notice should be nonetheless issued and how termination should be conveyed to the other side.
Potential Liabilities Stemming from Termination of a Commercial Contract
The party to a commercial contract should be vary of the consequences of wrongful termination of a contract which may be unliquidated damages, a claim based on a clause in a contract for liquidated damages, an application/interlocutory application for specific performance of a commercial contract or for restraining the party terminating the contract from effecting the termination. Added to these, an important factor that must be considered by a party seeking to terminate a contract will be whether it has given any securities/bank guarantees in terms of the contract which could be invoked upon termination of a contract.
What aspects to Examine for Termination of a Contract?
Despite The termination of a commercial contract being difficult for reasons stated herein above and potential liabilities on wrongful termination of the contract, for a variety of reasons, a party to a commercial contract will often find itself in a situation where termination of a commercial contract is a necessity. While a party to a commercial contract will normally not be able to terminate the contract for reasons of non-profitable or a difficult commercial relationship, if the contract is read minutely and taken into consideration along with the contextual circumstances, the events which occurred prior to execution of a contract and events which happened during the currency of the contract, the party could be able to find valid grounds for termination of a commercial contract rightfully and getting out of a non-profitable or difficult commercial relationship may become possible while also avoiding potential liabilities.
Recent Termination of a Contract Handled by us
Recently we came across a commercial contract between one of our clients (an electric vehicle fleet operator) and a joint venture of a multinational oil and gas company based in London and one of the largest power generation companies in India(“The Joint Venture”). This contract required our client to avail of charging services exclusively through the joint venture. When the client wanted to terminate the contract, detailed reading of the contract between the parties and understanding subsequent events that transpired during the currency of the contract along side some facts antedating the execution of the contract, they revealed the grounds for breach of contract and breach of representations by the joint venture and also the fact that the rates of charging services and certain other aspects were to be discussed for each and every for charging infrastructure which would be developed by said joint venture at different locations separately. We could then successfully claim failure to honour reciprocal applications on the part of said joint venture and also that the agreement was void for uncertainty as it was not implementable without separate understanding for rate and other aspects at each location where the joint venture developed the charging infrastructure and our client could successfully come out of this commercial contract and negotiate a fresh contract with more favourable terms.
Grounds for the Termination of a Contract
The grounds for terminating a commercial contract could be purely legal or legal cum factual. A factual ground for terminating the contract may exist at the very time of entering into a contract or may emerge subsequently during the performance of the contract. We hereafter seek to state different grounds for termination of the voidable contract briefly.
Terminating Voidable Contract
Section 2(i) of the contract act provides that an agreement that is enforceable by law at the option of one or more of the parties thereto but not at the option of the other/others is an avoidable contract. A voidable contract gives one of the parties to a contract a right to have the enforcement of the contract or to terminate the contract.
Following are the grounds for terminating a contract at the option of one of the parties:-
- Lack of free consent- free consent of a party to a contract is the consent without any kind of coercion, fraud, undue influence or misrepresentation and if any of the above are in play, the contract lacks free-consent and is voidable at the option of the party whose consent was obtained through misrepresentation, fraud etc. Now this might be a difficult but not impossible ground to find in a commercial contract. For example, in one of the cases we came across, a contract was entered into pursuant to a tender in line with the guidelines of the Union of India, however, later on, it emerged that while it was represented in the tender as well as in the contract subsequently that the contract was being entered into pursuant to a tender that will be concluded in line with the guidelines of the Union of India on the subject matter of oil and gas sales, such guidelines were not followed by virtue of an arrangement entered into with a different party pursuant to the same tender that was not in line with the guidelines of the Union of India which were promised to be adhered to and the same had violated the very representations made in the tender as well as in the contract entered into pursuant to the tender.
- Refusal of a party to perform the promise wholly:- Section 39 of the act that when a party to a contract refuses to perform or disables itself from performing his promise in its entirety, the other party(promise) may put an end to the contract unless it has signified through words or conduct its acquiescence to the continuance. This is a fairly simple thing to find from facts.
- Lack of performing the promise in its entirety- This ground could be found and developed upon reading of the contract provisions, warranties contained in the contract and the promises to be found in the contract along with contemporaneous communication during the currency of the contract with accompanying facts.
- Party preventing an event on which the contract is to take effect- Section 53 of the Contract Act provides that in a contract containing reciprocal promises when one party to a contract prevents the other from performing his promise, the contract becomes voidable the option the party so prevented. Finding ground regarding preventing the party from performing its part of the contract may not be conspicuous and again minute reading of the contract, contemporaneous communication and facts will be required to be taken into account to find the ground falling within the ambit of Section 53 of the Indian Contract Act for terminating the contract.
- Failure to perform at a fixed time. Section 55 of the Contract Act provides that when a party to a contract promises to do a certain thing at or before a specified time and fails to do such things before the specified time, the contract, or so much of it as has not been performed becomes voidable with the option of the promise. This ground is easier to find in a commercial contract. However, it is important to note that this is a ground conditionally available to a party to terminate the contract if the intention of the parties was that the time should be the essence of the contract. While it is possible to find in a commercial contract that the opposite side did not perform a certain task promised under a contract in a stipulated time frame, these contracts also provide for consequences of delay in performing the part of the promises, essentially indicating that time will not be the essence of contract in such a scenario.