All contracts come with the expectation that they will be performed, regardless of any future circumstances. However, the Contract Act 1872 contemplates certain circumstances in which contracts, such as employment contracts and master service agreements, can be terminated, either by one party or both parties. These provisions of the Contract Act 1872 can be used to get out of a contract that would otherwise pose a challenge in its performance.
Provisions under the Contract Act 1872
The following provisions of the Contract Act 1872 allow one or both parties to terminate the contract:
- Section 39 of the Contract Act 1872: In case of either a wilful or accidental breach that was not caused by factors outside the control of the party that wasn’t harmed, the aggrieved party would be in a position to terminate the contract.
- Section 39 of the Contract Act 1872 allows promisees to terminate contracts if the promisor refuses to perform, or disables themself from performing, their contractual obligations.
- Section 39’s definition of breach includes both actual breaches as well as anticipatory breaches.
- An actual breach would occur when one party fails to perform their obligation, whereas an anticipatory breach would occur when they disable themselves from performing their obligation or state their intent to avoid it.
- Both of these situations allow a promisee to terminate a contract in case the other party refuses to honor their promises. The obligations of the party in breach vary from contract to contract, but one common obligation is the prompt delivery of the consideration in the agreed-upon format.
- The Contract Act 1872 allows for the termination of a contract in case of breach.
- Section 56 of the Contract Act 1872: A party to a contract can also terminate the contract if performing it becomes impossible or impracticable. Punishing a person to perform an impossible task would be manifestly unfair, which is why parties have a method to terminate contracts where the obligations cannot possibly be performed.
- Section 56 of the Contract Act 1872 provides that an agreement to do an act that is impossible is void.
- This Section of the Contract Act 1872 has been interpreted by Courts to include both impossibility at the time of the creation of the contract, as well situations where the task becomes impossible at a later date.
- If one party was aware of the fact that the act they promised to do was impossible, and the other party did not know this, the former is liable to financially compensate the latter.
- Moreover, if either of the parties explicitly acknowledges the circumstances through which performance would become impossible, and continues to enter into the contract, they will not be able to avail the defence of impossibility.
- Apart from these two exceptions, the impossibility of performance would render the contract void and would allow one party in a contract to terminate the contract and avoid their contractual obligations.
- To avail this defence, those entering into contracts must take care not to promise things that they know could be impossible, or could become impossible to do.
- Section 62 of the Contract Act 1872: If both parties agree to terminate a contract, both of them would be free of any obligations under the contract.
- This method of terminating contracts is generally recommended as it maintains cordial relations between the parties, leaving the door open for future collaborations.
- Section 62 of the Contract Act 1872 frees parties from the obligations that they were bound by under a contract that has been substituted, altered, or revoked. If one party can negotiate a new contract, or arrange for the revocation of the present contract, they can, in essence, terminate the contract.
- If both parties agree, the Contract Act 1872 allows for hassle-free contract termination.
- Section 67 of the Contract Act 1872: If one party does not provide the other party with the resources and facilities that are required to perform their tasks, the latter would be unable to act in the manner that the former expects them to. Situations like these allow the latter party to terminate the contract.
- Section 67 of the Contract Act 1872 excuses promisees from their obligations under a contract if the promisor refuses or neglects to provide the facilities that they would reasonably be expected to provide for the performance of the contract.
- In a practical situation, this would be applicable if an IT firm refused or neglected to provide internet access to its employees. Similar situations where one party is unable to acquire the resources or information necessary for their tasks would fall under the ambit of this Section of the Contract Act 1872.
- Since it would be unrealistic to expect one party to perform their duties without the resources that are necessary to do so, this Section of the Contract Act 1872 allows such a party in these situations to terminate their contract.
Procedure for termination of a contract
Before terminating a contract, it is necessary to ascertain whether all the prerequisites for termination have been fulfilled. If this is not ensured, then terminating the contract would result in a breach of contract from your end, which could have dire legal consequences. Keep these points in mind before terminating a contract:
- Examine the clauses of the contract to find provisions relating to termination.
- If a relevant provision has been found, document the circumstances that would lead to the clause being applicable. This would include communications with the management, office memos, and other official documentation that records the act which is being used as the basis for termination.
- Draft a letter of termination that clearly states the reasons for terminating the contract, as well as the relevant clause in the consulting contract and the statutory provision allowing termination.
The Contract Act 1872 provides for many situations where a contract can be terminated, be it an employment contract or a master service agreement. By using these statutory provisions, the obligations under the contract can be avoided. However, it is important to ensure that the provisions are actually applicable to your situation before effectuating the termination of the contract.