Contract Act"), On One Hand, A Contract Can Be Validly Terminated by Giving Legitimate
Contract Act"), On One Hand, A Contract Can Be Validly Terminated by Giving Legitimate
Contract Act"), On One Hand, A Contract Can Be Validly Terminated by Giving Legitimate
contract before performance has been completed. Termination of a contract is a basic means
to end the contract. Under the Indian Contract Act, 1872 (hereinafter to be referred as "the
Contract Act"), on one hand, a contract can be validly terminated by giving legitimate
reasons. For example, by frustration, breach or prior agreement. Whereas, on the other hand,
a termination can in itself become a breach of contract if it can be classified as wrongful
termination.
In the case of Air India Ltd. vs. GATI Ltd., 2015 it was held that "in case of repudiatory
breach of contract by one party, termination of the contract by the other party is justified even
if the procedure is not followed". Inaction or delay on the part of the one party can make the
procedure given for termination superfluous as non-adherence of the procedure may not
suffer the party which committed breach due to their inactions3. In another case of Deva
Builders through M.R. Rattan vs. Nathpa Jhakri Joint Venture, 2002 the Hon'ble Court held
that "although the Defendant has not given the requisite notice terminating the contract but it
was the Plaintiff who had committed breach of the contract by not executing the work in
accordance with the terms and conditions of the agreement."
Therefore, it can well be stated that non-adherence with the termination procedure can,
sometimes, be accepted on the basis of compelling circumstances of the case. However, it is
also admitted that noncompliance of the procedure may lead to damages being imposed for
wrongful termination of contract4.
The claim of damages and their quantification would depend upon (i) the nature of injury; (ii)
the injured party's responsibility therefore and the extent thereof; and (iii) the nature and
extent of injuries caused to the parties on each other.
Other than repudiatory breach, a contract can also be terminated in order to mitigate losses. In
support of this proposition, authority of Bharat Petroleum Corporation Limited & Anr. Vs.
M/s Jethanand Thakordas Karachiwala & others, 1998 can be cited wherein due to loss
suffered by the Appellant, there was no alternative before them other than to terminate the
contract. The court, in the instant case held that "The contract could not be specifically
enforceable and Defendant Company could not be compelled to continue the distributorship
1
VIACOM 18 Media Pvt. Ltd. vs. MSM Discovery Pvt. Ltd., 2011, para 112-113.
2
Hindustan Petroleum Corp. Ltd. vs. Super Highway Services and Anr. 2010.
3
D.L.F. Universal Ltd. vs. Atul Limited, 2009.
4
State of Madhya Pradesh and others vs. Respondent: M/s. Recondo Limited, Bhopal, 1989.
of the agent who has duped not only the defendants but even the customers." This conclusion
is also in consistence with the judgement Strategic Outsourcing, Inc. vs. Continental
Casualty Company, 2008. In this case, the Court of Appeal for the Fourth Circuit stated that
when a party loses a substantial amount of money under the contract and the negotiation is
impossible, then a motive to terminate the contract is neither wrongful nor unconscionable. It
further specifically held that "a party's desire to avoid financial losses constitutes reasonable
grounds for declining to perform otherwise applicable contractual obligations."
Parties to a contract can legally terminate their agreement for several reasons.
Illegality. In some cases the subject of the contract may become illegal because a law was
passed after the contract was formed. This “supervening illegality” means the contract cannot
be legally performed and can be terminated.
Breach of Contract. Under the terms of any contract, both parties have an obligation to
perform according to the contract. If one party fails to perform, blocks the other party from
performing, or otherwise violates the terms of the contract without a legal justification, they
have breached the contract and the contract can be terminated. The non-breaching party can
pursue a claim for damages caused by the breach.
Prior Agreement. The parties may agree to allow termination under certain specific
circumstances. Those specific conditions must exist or else there is a breach of the contract.
This prior agreement is a termination clause and is enforceable as long as both parties agreed
to its terms.
CHAPTER 7: NON-PERFORMANCE - SECTION 3: TERMINATION
(1) A party may terminate the contract where the failure of the other party to perform
an obligation under the contract amounts to a fundamental non-performance.
(a) the non-performance substantially deprives the aggrieved party of what it was
entitled to expect under the contract unless the other party did not foresee and could
not reasonably have foreseen such result;
(b) strict compliance with the obligation which has not been performed is of essence
under the contract;
(d) the non-performance gives the aggrieved party reason to believe that it cannot rely
on the other party’s future performance;
(e) the non-performing party will suffer disproportionate loss as a result of the
preparation or performance if the contract is terminated.
(3) In the case of delay the aggrieved party may also terminate the contract if the other
party fails to perform before the time allowed it under Article 7.1.5 has expired.
Deadlock, exit and termination
Deadlock provisions
What deadlock provisions are commonly included in joint venture agreements in your
jurisdiction?
A deadlock is an unresolved difference of opinion between the joint venture parties, which, if
not resolved within a predetermined time period, can stall the joint venture and cause it to
become ineffective. Deadlock usually arises where the partners have a 50:50 share in the joint
venture (or understanding to have equal rights and representation in the joint venture) and
hence equal representation in the board, and when they take opposing views or when a
director exercises the right to veto.
In India, while all the typical provisions exist, we have rarely witnessed parties referring to
external mechanisms unless it is of a very rare or special nature, the issues involved are
specific to the business or if the deadlock remains unresolved after exercising internal
mechanisms. Parties aim to resolve internally, but more often than not, they escalate into
formal disputes owing to a breakdown of the relationship and loss of trust between the joint
venture parties. Such deadlocks may often trigger the termination of a joint venture entity or
lead to exit by either one or all joint venture parties, which is further discussed in question 22.
Exit provisions
What exit provisions are commonly included? Does the law restrict any forms of
mandatory transfer provision or any basis of calculation?
Put and call options are rights that empower shareholders to force the sale and purchase of
shares in the joint venture company. A put option enables the holder of the right to sell its
shares to the other party, where the other party must mandatorily purchase the offered shares.
A call option, being the exact opposite of a put option, enables the holder of the right to call
upon another shareholder to mandatorily sell its shares to the right-holder. However, in terms
of the extant FDI Policy and the RBI notification in relation to pricing guidelines for
instruments with optionality clauses, these rights can only be exercised upon the completion
of a minimum lock-in period of one year or as prescribed under the FDI Policy, whichever is
higher, depending on sector-specific lock-in periods, from the date of allotment of such
shares. The foreign investor shall be allowed to exercise such option or right without any
assured return and at a rate that is either prevailing at the time of exit or other method of
valuation as prescribed by the pricing or valuation guidelines issued by RBI from time to
time.
Third-party sale
A fully operative joint venture company may be sold to a third-party buyer, thus paving an
exit for the various joint venture partners and allowing them to liquidate their shareholding.
Whenever a shareholder in the joint venture company intends to sell its shares, transfer
restrictions, as provided under the shareholder’s agreement and AoA, come into play, which
may be in the form of a right of first refusal (ROFR) or a right of first offer (ROFO). While
the selling joint venture partner may have a ROFR and, therefore, the option to reject the
right-holder’s offer, having the ROFO and, therefore, the opportunity to move first, is usually
valuable to the right-holder.
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