Breach of contract inherent power to terminate the contract without terminate clause

A contract is a legally enforceable agreement between two or more parties. Upon entering the contract, parties are bound under the terms of the contract and must fulfil the obligations specified. But what do you do if you have been performing your side of the contract diligently but your counter-party has not lived up to expectations?

Do you get the right to terminate the contract based on breach of obligations under the agreement? The answer is yes - but it depends on whether the term is a condition or a warranty. This guide will help you distinguish between conditions and warranties and discuss the range of factors that enable the termination of a contract.

What is a contract?

As we briefly mentioned, a contract is an agreement between two or more parties that creates legal obligations for them to perform specific acts. Parties are legally bound to perform the specified duties - this might include rendering a payment or delivering goods, done for mutual benefits. Unfortunately, not all contracts go according to plan, and breach of contract by one or more parties is not uncommon.

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"28. 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 justice 29.

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 repudiators 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 nonadherence of the procedure may not suffer the party which committed breach due to their inactions.30

In another case 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 contract

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.

Termination for breach of contract

The termination of a contract by reason of one party's breach of contract arises as follows: one party to the contract is in breach of contract the relevant breach is an anticipatory breach or a repudiatory breach, and the innocent party accepts the breach

This Practice Note outlines each of these prerequisites of termination for breach of contract. It also considers the relationship between repudiatory breach and contractual provisions which give an express right to terminate for 'material breach'.

For general guidance on how to terminate contracts, see Practice Note: How to terminate an agreement.

Terminating for breach of contract—has there been a breach?

The general rule is that a party to a contract must perform precisely what they agreed to do.

If a party fails to do this, they will be in breach of contract.

In order to determine whether a party is in breach of contract, the following two stage approach is taken:

first, ascertain the scope of the party's obligations under the contract: a party's obligations under a contract are derived from the terms of the contract, as agreed by the parties, but where there is doubt about the meaning of the contract, a court must ascertain that meaning by using recognised principles of interpretation next, determine whether the party's actual performance measures up to their obligations

(De) Termination of contracts without termination clauses

Typically, agreements set forth the ways in which they can be concluded—a termination clause in a contract may provide for it to be ended in any one or a combination of the following ways:

• Upon The Expiry Of A Specified Period Of Time;
• On The Occurrence Of An Eventuality, Such As Insolvency Or A Force Majeure Event;
• With Cause (In The Event Of A Breach);
• At Will (By Giving A Reasonable Notice For Any Or No Reason).

Agreements executed for indefinite durations, such as for partnerships, employment, public leases, and perpetual licenses, often contain no meticulous clauses for their conclusion. Therefore, where there is no clear and unambiguous language prescribing a contract's termination, or where such language is altogether absent, do the underlying obligations continue forever?

Common law is inclined to disagree

The purported interminability of such contracts is inflicted squarely by two trite principles, viz, the rule against perpetuities and the standard of reasonableness. That an obligation 'without end of time' cannot be tolerated or enforced by law has been recognised for over a hundred years.

In the US, Echols v. New Orleans held an agreement to furnish or do something 'without specification as to time' to be 'terminable at pleasure' or as requiring performance within a reasonable time. Parallelly in the UK, in Postlethwaite v. Freeland, the House of Lords stood by the general rule of reasonableness, ruling that if there is no time prescribed in a contract, it must be performed within a reasonable period Accordingly, in the UK and the US, contracts without termination clauses are deemed terminable at will.

Commercial agreements for sales commissions, agency, supply of goods, and software licenses into perpetuity have all been deemed terminable at any time by either party on submission of reasonable notice, with the exact duration of the 'reasonable' period being a question of fact contingent on the construction of each contract.

While the standard of reasonable performance is judicial doctrine even in India, the concomitant issue of terminating a contract of equivocal or unending duration is still not clear. The Delhi High Court has, nevertheless, consistently adjudicated perpetual contracts in lockstep with international common law standards.

In Rajasthan Breweries v. Stroh Brewery, it was held that 'even in the absence of a specific clause authorising and enabling either party to terminate the agreement […], the same could be terminated even without assigning any reason by serving a reasonable notice.' Applied recently in 2020, the precedent holds good in the national capital, and in the absence of the apex court's findings on the issue, it is relied upon by other appellate courts—for instance, in Madras and Bombay—as well.

Updated November 17, 2020:

When there is no termination clause in an employee contract, it means an indefinite contract of employment is in place, but a termination is still an option with reasonable notice given. There is some question as to how much notice is considered reasonable. Determining whether 30, 60, or 90 days is reasonable can prove challenging because it involves examining all the circumstances, both those precisely expressed and those that have been implied.

Reference:

• https://www.law.ox.ac.uk/business-law-blog/blog/2021/05/determinability-contracts-without-termination-clauses-under-indias
• https://www.mondaq.com/india/contracts-and-commercial-law/674534/intricacies-involving-termination-of-a-contract-without-adhering-with-the-due-procedure

Written By: Lisha Thakral
Email: [email protected]