Introduction

In Part I we discussed that the 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 and 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. 

We dealt with the 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 this 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.

Part of a Commercial Contract being Not Enforceable as being a Promise in Contravention of Law

Apart from formally terminating a contract, a party to a commercial contract may find that the part of the contract is not enforceable as being a promise in contravention of law. In such circumstances, such a part doesn’t need to be performed even absent any formal termination.

However, in practice, there always will be disputes about whether any promises are actually in contravention of the law and therefore not enforceable or it is a valid promises therefore, in case of such contracts which will be considered to be void contracts, while strictly speaking there is no need to even formally terminate the contract, it is recommended that formal termination notice for such part/parts of the contract indicating reasons in detail for illegality of such part must be issued to be clear about the position of the opposite party, assess commercial risks and plan the strategy accordingly. Types of the contracts that will fall in the category of void contracts will be the following: –

  1. Objects and consideration unlawful in part.

Section 24 of the act provides that if any part of a single consideration for one or more objects, or anyone or any part of several considerations for a single object is unlawful, the agreement is void. The illustration given in Section 24 is that a person promises to the superintendent to supervise on behalf of another person the manufacturing process of indigo and also the illegal traffic in other articles say drugs. And for the services of supervision, the person supervising is promised a salary of ₹10,000, the illustration in Section 24 says that such agreement will be void as an object of the promise and the consideration for the promise is in part unlawful.  Apparently, in a commercial contract, object and consideration will not be conspicuously unlawful, However, a commercial contract might run in violation of certain sector-specific laws, bylaws, rules framed by a statutory authority, etc. which all will make the contract unlawful. For example, a contract to deal in securities or sale or purchase the securities, futures or options which is running contrary to a notification issued by SEBI will be illegal. Apart from that, the example given herein above about pertaining to violation of the guidelines issued by the Government of India on the purchase/sale of oil and gas will make such a contract unlawful.

  • Contract without consideration. 

Section 25 of the Contract Act provides that an agreement without consideration is void unless it is in writing and registered, is a promise to compensate for something done, or is a promise to pay a debt barred by limitation. The commercial contracts will always be based on consideration. However, the party might still be able to find ground for lack of consideration for a particular part of the contract.

Section 2(e) of the contract act provides that every promise and every set of promises forming the consideration for each other is an agreement while it is a settled position of law that a single consideration may support more than one promise and also that the Court will not go into the aspect of adequacy of consideration, in a variety of circumstances, it may be possible to argue in a matter concerning a commercial contract that there is overt lack of consideration for supporting a particular promise/part of a commercial contract.

  • Agreement and restraint of trade.

Section 27 of the act provides that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is to that extent void. It will be worthwhile to mention that restraint of trade as referred to in Section 27 doesn’t have to be an absolute restriction against carrying out a particular kind of trade but this Section will be applicable to a variety of contracts and a variety of clauses, including the restrictive covenants, negative and positive covenants, horizontal and vertical trading agreements and many more. Dealing with all such grounds and elaborating on them is beyond the scope of the present article. However, readers interested in knowing about restrictive covenants being illegal in terms of the act can refer to our article https://rdlawchambers.com/are-restrictive-covenants-non-compete-clauses-commonly-put-in-contracts-enforceable/ .

  • Agreement voids for uncertainty.

Section 29 of the contractor provides that an agreement the meaning of which is not certain or capable of being made certain is void.

This will be a difficult ground to make out in a commercial contract, but not an impossible one. As exemplified, we have successfully taken up this ground in a commercial contract. The general recommendation for finding such ground is to look for open-ended clauses in a commercial contract and to check if any of the open clauses require subsequent understanding/consensus/agreement, However, a minor matter, without which it is not workable.

How to communicate the revocation of a contract and the importance of such communication.

Section 66 of the Act provides that the rescission of an avoidable contract may be conveyed in the same manner and in accordance with the rules applying to communication or revocation of a proposal. These rules are to be found in Section 3 which simply provides that communication must be through act or omission of the party which clearly reflects the intention of the party.

We would recommend a party seeking to terminate a commercial contract to expressly caption the notice/communication as “Termination Notice”. 

It needs to be understood that non-performance of the obligation of a contract after clear communication for termination will give rise to at the most a claim for damages but in case of  lack of clarity on whether a contract stands terminated, the opposite party could make  a debt claim under the contract as against the claim for damages. For, how it is better to face a claim of damages than a debt claim and distinction between the two, the readers may refer to our articles https://rdlawchambers.com/debt-versus-damages-and-significance-thereof-in-various-commercial-contracts-part-i/ and https://rdlawchambers.com/unliquidated-damages-liquidated-damages-and-enforceability-of-liquidated-damages-clauses-under-indian-contract-act-part-ii/

*The content of this article is intended to provide general information. No reader or user should act or refrain from acting on the basis of the information written above without first seeking legal advice from a qualified law practitioner.

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