Contract Act"), On One Hand, A Contract Can Be Validly Terminated by Giving Legitimate

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Termination of contract is considered to be lawful when a legitimate reason exists to end the

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.

Repudiatory breach is one of the underlining principles to terminate a contract validly. It


simply means a contravention of a stipulated situation which goes so much into the root of
the contract that it makes further commercial performance of a contract impossible"1. A
Repudiatory Breach can occur if the party does not intend to perform its part of under the
contract any further or does acts which are inconsistent with the terms of the contract. Such
an act ultimately affects the rights of the other party. Consequently, in case of such breach the
option available to the other party is either to terminate the contract or to continue the
contract by repairing the breach. If the party chooses the former one, then it generally, must
be done in fair and reasonable manner as the termination is also subjected to principles of
natural justice2. However, in some exceptional circumstances, a termination following
repudiatory breach of contract can be justified even if principles of natural justice or the
procedure given in the agreement is not followed.

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."

From the aforementioned judgments, it can be concluded that termination of contract is


generally subjected to the principles of natural justice but repudiatory breach or non-
performance or delay caused by one party may entitle the other party to terminate the contract
even without following the procedure stated in the agreement. The underlying reasoning that
appears to be behind this is the fact that if one of the parties has already manifested its
intention not to bound by contract, the other party cannot be put under unnecessary
compulsion of complying with the technical procedure as given in the contract.

Parties to a contract can legally terminate their agreement for several reasons.

Impossibility of Performance. If it is impossible for one or both parties to fulfill their


obligations, the contract can be terminated. It must be impossible for anyone to perform. This
is called objective impossibility. If someone else could perform the duties in the contract,
there is no impossibility.

An example of impossibility of performance is when someone has agreed to paint a house,


but the house burned down before it could be painted. 

Fraud,Misrepresentation, or Mistake. If the contract was formed under circumstances that


constitute fraud, misrepresentation, or mistake, the contract can be terminated. In this
situation there could not have been a “meeting of the minds” on the terms of the contract
because the true facts were not known to the parties.

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

Article: 7.3.1 (Right to terminate the contract)

(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. 

(2) In determining whether a failure to perform an obligation amounts to a fundamental


non-performance regard shall be had, in particular, to whether 

(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; 

(c) the non-performance is intentional or reckless; 

(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.

Deadlock resolution mechanisms can be divided into two categories:

 internal mechanisms, such as:


o mutual discussions or negotiations between joint venture partners or senior
officials of the joint venture company to come to a workable solution;
o the chairman’s casting vote; and
o allowing one partner to take a call depending on their substantial contribution
or expertise on the subject matter of the situation; and
o external mechanisms, such as:
 reference to an independent director, who may or may not be pre-
determined, and who forms a decision based on the best interests of the
joint venture entity;
 Russian roulette, wherein one party offers to sell his or her entire share
in the joint venture entity to the other party or buyout the other party,
both at a given price;
 mediation and conciliation;
 binding dispute resolution procedures (ie, arbitration or litigation); and
 liquidation.

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?

The following exit provisions are typically included.

Initial public offering


An initial public offering (IPO) may be used either as a liquidity event for all joint venture
partners, or as an exit for a particular joint venture partner while the joint venture company
continues to be in business. An IPO may involve issuance of fresh securities or sale of
existing securities, or a combination of both, to the public for the first time. An IPO enables
the listing and trading of the joint venture company on the stock exchanges in India, provided
that the equity shares held by persons other than the promoters have been locked-in for a
period of one year prior to the filing of the draft-offer document with SEBI. The procedure
for conducting an IPO, eligibility criteria for a company to undertake an IPO, minimum offer
requirements, prospectus for the offer, promoters’ contribution, and various other nuances are
primarily governed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations
2009, the Companies Act and the Securities Contracts (Regulation) Rules 1957.

Put or call option

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.

Exercise of pre-emptive rights

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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