How a Contract can be Terminated: Explained
Overview
A Contract gives rise to certain legal rights and obligations. Contract continues so long as the rights created thereby are exercised by the respective parties and their respective obligations are performed by them. When a contract is fully acted upon and honored by both the parties, we say it is performed or naturally discharged. However, there are certain eventualities wherein though the rights and obligations are not performed yet the parties are relieved of them, or alternatively, the rights and obligations under the contract come to an end otherwise than by due performance Some of these eventualities render the contract void while the rest turn it voidable. You may also read what agreements are void?
However, the contract is put to an end / terminated/discharged by any of the following ways:
Types of termination of the contract:
Discharge of the contract by Performance:
Performance means the fulfillment or accomplishment of a promise, contract, or other obligations according to its terms, relieving such person of all further obligation of liability there under. It is the usual mode of discharge. The performance may be made in any manner or at any time which the promise prescribes. If only one of the several parties performs the promise, he alone is discharged. He gets rights against others.
Performance may be of the following types:
(1) Actual Performance:
When each party to a contract fulfills the obligations arising under the contract according to the terms and conditions of the contract, it is called actual performance of the contract and the contract comes to an end.
Illustrations:
(a) A agrees to sell his watch to B for Rs. 400. A delivers the watch and B makes the payments. There is an actual performance.
(b) Cutter was employed as second mate on a ship sailing from Jamaica to Liverpool. The agreement was that he was to receive 30 guineas the journey was completed. Before the ship reached Liverpool, Cutter died and his widow sued Powell, the ships master, to recover a portion of the wages due to her husband. It was held that the widow was not entitled to any thing as the contract required complete performance.
(2) Attempted Performance:
Attempted offer to perform is called “tender of performance”. It is then for the promisee to accept the performance. Where promissor offers to perform the obligation but the other party refuses to accept, the tender is equivalent to performance. promissor is then excused from performance and entitled to sue the promisee for breach.
But a valid tender must fulfill the following conditions.
(a) Tender must be unconditional.
(b) Tender must be made at a proper time and place and under such circumstances that the person to whom it is made may have a reasonable opportunity of ascertaining the legality of tender. If there are several joint promissors, the offer of performance to any one of them shall be sufficient.
Illustration:
A agrees to sell his book to B for Rs. 500 A offers to deliver the book but B does not accept it, there is offer of performance.
(3) Satisfaction of Promisee:
If a party contracts to “personally satisfy” the promisee and the promisee is not satisfied, the courts look to the type of contract to make a decision. If the contract is one in which the personal taste or fancy of the promisee is involved (e.g., painting a portrait of the promisee), the courts generally hold that the promisee has the final word, and there can be no recovery unless he or she is personally satisfied (but the promisee must act in good faith). If the contract involves operative fitness or mechanical utility (e.g., contractor agrees to build a garage to promisee’s satisfaction), the courts usually apply the term “reasonably satisfactory” and if a reasonable person would be satisfied under the circumstances,-the promisor can recover.
Illustration:
FACTS: Plaintiff purchased a Cadillac from the defendant. It was agreed that if the plaintiff was “not happy with the car” he could return the plaintiff demanded that the defendant take it back, which the defendant refused to do.
DECISION: The court held for the plaintiff, stating the words “not happy with the car” meant “not satisfied with the Cadillac.” Fulcher v. Nelson (159 S. E.2d 519 [N.C.1968]
(4) Satisfaction of Third Party:
Suppose a doctor makes a contract with a contractor for the construction of her expensive home and the doctor, realizing that she knows very little about construction, has her attorney place a clause in the contract that states that the doctor does not have to pay the contractor until the doctor’s architect is satisfied with the construction and issues an architect’s certificate of approval. Must the certificate be issued before the contractor has the right of payment? Yes, unless the certificate is withheld through mistake or fraud or in bad faith, in Which case the contractor can recover without the certificate.
Termination of the contract by Agreement:
The contract is the outcome of mutual agreement between two or more parties. In the similar manner parties may consent to terminate the contract (sec 62). Such a consent may-be express or implied. Express consent may be given at the time of:
(1) Formation of contract. (2) Subsequent to its formation.
According to Sec. 62, "If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need riot be performed Termination by agreement or by act of parties occurs in the following ways:
1) By Condition in Contract.
The contract may provide that it shall terminate upon the happening of a certain event (e.g., provision in insurance policy that provides that the insured shall give the insurance company notice of a loss by fire within a stated period and if it is not done, the right to recover on the policy is lost; a seller may sell property agreeing that the property may be returned if it does not comply with certain specifications, thus giving the buyer title subject to rescission; a builder agrees to perform certain construction if the city council passes a pending ordinance; a provision in the contract that either party can terminate the contract upon giving a 30-day written notice).
2) Rescission:
Rescission simply means putting an end to the contract a contract may be rescinded in the following ways:
(a) Mutual Release/Remission:
The parties to a contract may agree to rescind the contract and place each other in status quo by returning any property or money that had been delivered or paid. An oral mutual rescission is valid except in the case of a sale of an interest in land, in which case the mutual rescission must be in writing pursuant to the same formalities as required by the statute of frauds.
Illustration:
A promises to deliver certain goods to B on a certain date before the date of performance, A and B mutually agree that the contract will not be performed. The parties have cancelled the contract.
(b) Unilateral Rescission:
Where one party fails to perform his contractual obligations, the other party may rescind the contract. Where a party fails to perform its obligations, the other party can treat the contract as rescinded without prejudice to its right of compensation. Rescission may be total or partial. Total rescission occurs when all the terms are rescinded.
Illustration:
(i) A includes B to enter into a contract by fraud. The contract is voidable at the option of B. B may rescind the contract.
(ii) A promises to supply certain garments to B after six months. By that time, the goods go out of fashion. A and B may rescind the contract.
3) Novation:
Novation of contract means replacement of an existing contract by another contract. In novation the parties may change. If the parties are not changed then the material terms of the contract must be altered in the new contract because a mere variation of some of the terms of a contract is not novation but alteration.
Illustration:
(a) A is indebted to B and B to C. By mutual agreement B’s debt to C and B’s loan to A are cancelled and C accepts A as his debtor. There is novation involving change of parties.
(b) A owes B Rs 10, 000. A enters into an agreement with B, and gives B a mortgage of his (A’s) estate for Rs. 5,000 in place of the debt of Rs. 10,000. This is a new contract and extinguishes the old.
4) Substitution of New Agreement.
The parties may agree to replace the original contract with a new one. If they do so, the original contract is terminated by substitution.
5) Remission:
Sec. 63 provides that a person who has a right to demand the performance of a contract may:
- (1) Remit or dispense with wholly or in part or
- (2) Extend the time for performance or,
- (3) Accept any other satisfaction instead of performance e.g., a creditor may accept a lesser sum than what is due in satisfaction of the whole debt.
Illustration:
(a) A owes B Rs 5.000. A pays to B and B accepts Rs 3,000 in full settlement of the debt of Rs 5,000. The old debt is discharged.
(b) A promises to paint a picture for B by a certain day at a certain price. A dies before that day. The contract cannot be enforced either by A’s representatives or by B.
6) Prevention:
Where one party prevents the other party from performing, the latter is excused from performance.
Illustration:
Landlord habitually accepts rental payments many days after payments are due. In such a case, before the landlord can insist that the payments be made on due date, the landlord must give a timely notice to the tenant of the reinstatement of the requirement.
7) Waiver:
Waiver means the intentional abandonment of a right which a person is entitled to under a contract. A party may waive his rights under the contract, whereupon the other party is released from his obligations.
Illustration:
A employs B to paint a picture for him. Later on, A forbids him from doing so. B is no longer bound to perform the promise.
8) Merger:
It takes place when an inferior right accruing under a contract merges into a superior right accruing to the same party under the same or some other contract.
Illustration:
A man holding lease of a property, buys the property. His rights as a lessee vanishes. They are merged into the rights of ownership which he has now required.
9) Accord and Satisfaction:
An accord is an agreement for a substituted performance in satisfaction of the original obligation. When the accord is carried out, there is an accord and satisfaction and the original obligation is discharged. The usual purpose is to settle a claim with a different performance.
Illustration:
Debtor owes creditor $1,000. The parties agree that debtor shall paint creditor’s house in satisfaction of the debt. The agreement is an accord. When the house is painted, there has been an accord and satisfaction and the debt is discharged.
10) Account Stated:
An account-is a right to payment under a contract. An account stated is an agreement between parties who have transacted business with each other as to the amount of the final balance due from one to the other. This is a new and independent executory contract. The items in the original accounts are merged into the account stated. No right or action remains as to the items.
Illustration:
A and B have been doing business with each other over a period of time, which has created a relationship of debtor and creditor between them. A and B agree that a certain amount is due, and B promises to pay that amount. This is called an account stated. The agreement discharges the obligations arising under the prior transactions.
11) Material Attention:
Alteration of a contract takes place when one or more of the terms of the contract are changed. It may be made in the following forms:
(a) Mutual Release/Rescission:
If a material alteration in a written contract is made with the consent of all the parties the original contract is discharged by alteration and a new contract takes its place. An alteration may be a change in the amount of money, the rate of interest, or the names of the parties. The difference between novation and alteration is that in case of novation there may be a change of parties but in case of alteration parties remain the same and only the terms of the contract are changed.
Illustration:
A agrees to supply B. 1000 mounds of salt at Rs. 50 a mound within 3 months from date. Later on, A and B alter the agreement in the following way: A agrees to supply 800 mounds of salt at the same rate within 2 months instead of three. The latter agreement puts an end to the former.
(b) Unilateral Rescission:
Generally a material, fraudulent alteration of a written contract by one who asserts a right under the contract extinguishes the person’s right to recover on the contract. The test of materiality is whether the alteration makes any change in the meaning or legal effect of the contract. The following are exceptions to the general rule:
(1) where the alteration is not material, (2) where it is made by stranger to the instrument, (3) Where it is made accidentally or innocently, (4) where it is made to show the actual agreement of the parties, or (5) where the alternation is ratified by the other party.
Termination of the contract by Impossibility:
Contract must be capable of being performed. Sec. 56 provides, an agreement to do an act impossible in itself is Void. This rule is based on:
(a) law does not recognize the impossible. (b) An impossible act does not create any obligation. Impossibility discharge the parties. If the act becomes impossible after the formation of contract, the contract is rendered void. Impossibility falls in the following two categories:
(1) Initial Impossibility:
If performance of a contract was physically impossible at the time the contract was made and this fact was not known to the parties, performance is excused. This is usually called “initial impossibility.” According to Section 56, ‘An agreement to do impossible act is void ab initio. It means agreement which is obviously impossible cannot be binding, e.g an agreement to discover treasure by magic is void agreement. Another example may be that T leases a hall from L Unknown to the parties, the building has been destroyed by fire. The agreement is void.
(2) Subsequent Impossibility/Doctrine of Frustration:
Sometimes a contract is capable of being performed when entered into. But some subsequent event renders the performance impossible. In either case the contract becomes void. This may arise:
- (a) By some event beyond the control of parties,
- (b) By some act of promissor or promisee.
Impossibility of performance is, in general, no excuse unless-impossibility is of such a nature that it is beyond the control of the parties. The rule of subsequent impossibility is also known as the Doctrine of Frustration or the Doctrine of Supervening Impossibility. However under the following circumstances of subsequent impossibility, a contract becomes void:
(a) Act of God:
Many courts hold that an act of God or nature (flood, tornado) does not excuse performance of a contract unless performance is excused in the contract by statute or case law in many jurisdictions, an act of God or nature that renders a contract impossible of performance is a defense to performance.
(b) Strikes and Other Hazards:
Unless provided for in the contract, strikes, picketing, riots, tire, business threats inevitable or unavoidable accidents, breaking of machinery or equipment, or similar hazards generally do not constitute a defense for failure to perform. This type of hazard is generally foreseeable or only of a temporary nature.” For a strike to be used as a defense, two things are necessary:
(1) The strike must be unexpected and unforeseeable, and
(2) The strike must have rendered performance commercially impracticable.
The act of an enemy is generally no defense unless it renders performance impossible or illegal or destroys the basis or subject matter of the contract, in which case most courts excuse performance.
(c) Destruction of Subject-matter:
When the parties make a contract for a particular Subject-matter, the contract is discharged if the subject matter is destroyed without the fault of the promisor or promisee.
Illustration:
(a) A let out a music hall to B for a number of concerts on certain days. The hall was destroyed by fire before the date of first concert the plaintiff sued the defendant for damages. It was held that the contract has become void and the defendant was not liable.
(b) The defendant contracted to sell a part of a specific crop of potatoes to be grown on his farm, but failed to supply them as the crop was destroyed by a pest. The contract was held to be discharged.
(d) Extraordinary Difficulty or Expense:
Mere unforeseen difficulty or expense does not constitute impossibility and ordinarily is not a defense. The modern trend, however, is to allow the defense of impossibility when performance is impracticable because of excessive and unreasonable expense or extraordinary difficulty that was not reasonable foreseeable.
Illustration:
FACTS: The plaintiff entered into a contract with the defendant in which the plaintiff agreed to repair and upgrade the upstream face of Cooper Lake Dam. The contract provided that the plaintiff would quarry at a designated site across the lake. The parties assumed that the rock could be transported to the dam during the winter across the frozen ice. However, in attempting the crossing, the plaintiff lost three trucks and the lives of two drivers when the trucks broke through the ice.
DECISION: The court held the contract was impossible to perform and that the plaintiff was discharged. The court said: “[A] party is discharged from his contract obligations, even if it is technically possible to perform them, if the costs of performance would be so disproportionate to that reasonable contemplated by the parties as to make the contract totally impractical in a commercial sense." Northern Corp. v. Chugach Electric Ass’n (518 P.2d 76 [Alaska 1974])
(e) Failure of Ultimate Purpose:
Where the ultimate purpose for which the contract was entered into fails, the contract is discharged. In this case, there is no destruction of any property affected by the contract and the performance of contract remains possible.
Illustration:
H hired a room in London from K for two days to see the coronation procession of King Edward VII on a particular date, both the parties knew the object of contract owing to the king’s illness the procession was abandoned. K filed a suit for the recovery of rent. It was held that H need not pay the rent as the contract was discharged on failure of the ultimate purpose which was the basis of contract. (Krell vs Henry)
(f) Death or Disability:
Where the performance of a contract depends upon the personal skill, or qualification or the existence of a given person, the contract is discharged on the illness or incapacity or the death of that person. In other words the death or illness of a particular person whose action is necessary for the promised performance discharges the duty to render that performance.
Illustration:
(1) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.
(2) An artist undertook to paint a picture for a certain price, but before he could do so, he met with an accident and lost his right arm. Held the artist was discharged due to disablement.
(3) There was a contract between the plaintiff and defendant’s wife, who was an eminent pianist that she should play the piano at a concert to be arranged by the plaintiff on a specified day. On the morning of the day she informed the plaintiff that she was too ill to attend the concert. The concert had to be postponed and the plaintiff lost a sum of money. The plaintiff's action for breach of contract failed. The court said that under the circumstances she was unfit to do so.
(g) Change of Law:
Sometimes, after the formation of the contract due to change in law, the contract becomes void and thus it is deemed discharged.
Illustration:
(1) A sold to B 100 bags of wheat at Rs, 150 per bag. But before delivery the government rendered the sale and purchase of wheat by private traders illegal. The contract was discharged by impossibility created by subsequent charge in law.
(2) There was contract for the sale of the trees of a forest. Subsequently it was discharged when the State of Rajistan forbade the cutting of trees in the area.
(Man Singh vs Khazan Singh)
(h) Outbreak of War:
A contract entered into with an alien enemy during war is illegal and void ab initio Contract entered into before the outbreak of war is suspended during the war and may be revived after the war is over if the nature of the contract so permits.
Illustration:
The performance of a contract of life insurance had become impossible because the insurer was a German Company and on the outbreak of war its business was closed by the Government of India and the disposal of pending policies was handed over to a firm of Chartered Accountant. The assured was allowed to recover the money paid by him under the policy. (A. F. Ferguson & Co. vs Lalit Mohan Chose)
(i) Change of Circumstances:
A contract will terminate where circumstances arise which make the performance of the contract impossible in the manner and at the time contemplated.
Illustration:
Where ship was chartered to load a cargo but on the day before she could have proceeded to her berth, an explosion occurred in the boiler, which made it impossible for her to undertake the voyage at the scheduled time. It was held that frustration had, in fact, occurred in the circumstances. (Joseph Constatine Steamship Line Ltd. vs Imperial Smelting Corpn. Ltd.)
Termination of the contract by Operation of Law:
Generally, a contract is discharged and performance is excused if after the contract has been entered into, the performance is made unlawful by a governmental order or decree. Under such circumstances, performance would constitute a violation of public policy.
Following cases render a contract void by operation of law:
(1) Insolvency/Bankruptcy:
The insolvency Act provides for discharge of contracts under particular circumstances. Thus where the court passes an order of discharging the insolvent, this order discharges him from liabilities incurred prior to his insolvency.
(2) Expiry of Limitation:
Statutes provide that if you do not tile a lawsuit within a specified time after the right accrues, you are forever barred from bringing the suit. Likewise, if the contract is not performed on the time stipulated in the contract, the other party is discharged from obligations arising there from, provided the time is of the essence of contract. Furthermore, all the remedies against breach of contract are available for a limited period of time, as prescribed in the Limitation Act. After the efflux and expiry of this period, no suit or action can be brought on the contract.
Terminating Contract Without Breach
There are a few ways to terminate a contract without breaching it:
Mutual agreement: You and the other party can agree to terminate the contract by mutual consent. This can be done through a written agreement or by both parties simply agreeing to end the contract.
Termination for convenience: Some contracts include a clause that allows either party to terminate the contract for convenience, without cause. This means that either party can end the contract without breaching it, as long as they give the required notice (as specified in the contract).
Termination upon completion: If the contract has a specific end date or is for a specific task or project, it will automatically terminate upon completion.
Termination due to impossibility: If an event occurs that makes it impossible for one or both parties to fulfill their obligations under the contract, the contract can be terminated. This is known as "frustration of purpose."
Termination due to breach: If one party breaches the contract, the other party may be able to terminate the contract. However, in this case, the termination would be due to the breach and not voluntary.
It's important to carefully review the terms of the contract before attempting to terminate it, as there may be specific requirements or procedures that must be followed in order to do so without breaching the contract.
By Breach of Contract:
A contract must be performed according to its terms. But where the Promisor fails to perform the contract according to the terms of the contract, there is a breach of contract by him. Breach of contract may be of two kinds: (1) Actual Breach (2) Anticipatory Breach.
(1) Actual Breach:
It occurs when a party fails to perform a contract, when performance is due. But, if party who has failed to perform the contract at the appointed time, subsequently expresses his willingness to perform, he can do so after paying compensation.
Illustration:
Where the seller on appointed day does not deliver the goods or the buyer refuses to accept delivery, there is a breach of contract.
(2) Anticipatory Breach:
An anticipatory breach of contract occurs before the time fixed for performance has arrived. It may happen in two ways.
(a) Express Breach:
In this case a party to the contract communicates to the other party, his intention not to perform the contract, before the due date of performance has arrived.
Illustration:
A contracts with B to supply 100 bags of wheat for Rs. 15,000 on 1st March On, 15th February, A informs B that he will not be able to supply the Wheat. There is express rejection of contract.
(b) Implied Breach:
In this case, a party to the contract does an act that makes the performance of the contract impossible.
Illustration:
A promises to sell this horse to B on 1st June and before that date he sells the same horse to C.
Relevant Questions and searches:
Explain the circumstances under which a contract is terminated.
Under what circumstances the obligations of are or both parties under a contract are discharged?
What situations render a contract void or voidable?
What you understand by termination of contract, discharge of contract, performance of contract, breach of contract, Impossibility of contract, Rescission of contract, Remission of contract and cancellation of contract?
