India: Intricacies Involving Termination Of A Contract Without Adhering With The Due Procedure

Last Updated: 19 February 2018
Article by Surbhi Darad

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 justice29. 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 nonadherence of the procedure may not suffer the party which committed breach due to their inactions.30 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 contract31.

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.32

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 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.


28 VIACOM 18 Media Pvt. Ltd. vs. MSM Discovery Pvt. Ltd., 2011, para 112-113.

29 Hindustan Petroleum Corp. Ltd. vs. Super Highway Services and Anr. 2010.

30 D.L.F. Universal Ltd. vs. Atul Limited, 2009.

31 State of Madhya Pradesh and others vs. Respondent: M/s. Recondo Limited, Bhopal, 1989.

32 Supra note. 1, para 160.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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