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Key Modes of Contract Termination
1) Performance of Contract
The most natural way a contract terminates is through completion, where all parties fulfill their contractual obligations. Section 37 of the Act mandates that “the parties to a contract must either perform or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act”
2) Termination by Mutual Agreement
Section 62 of the Indian Contract Act allows parties to terminate contracts through mutual consent. This can occur through:
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Novation: Replacing the existing contract with a new one, either by introducing new parties or altering obligations
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Alteration: Modifying contract terms without complete replacement
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Rescission: Complete cancellation by mutual agreement
3) Termination Due to Breach
Section 39 provides that when a party refuses to perform or disables itself from performing contractual obligations, the other party may terminate the contract. This covers both:
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Actual breach: When a party fails to perform their obligation3
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Anticipatory breach: When a party disables themselves from performing or states intent to avoid performance
4) Dispensation of Performance
Under Section 63, “every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him”. This allows the promisee to release the promisor from their obligations, effectively terminating the contract.
5) Impossibility of Performance (Frustration)
When external circumstances make contract performance impossible or radically different from what was originally contemplated, the contract may be terminated due to frustration. The law may excuse both parties from performance if the contract becomes unworkable.
Legal Remedies Upon Termination
When contracts are terminated, particularly due to breach, several remedies are available:
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Damages: Compensation under Section 73 for losses directly resulting from breach
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Quantum meruit: Payment for work already performed
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Specific performance: Court-ordered completion of contractual obligations
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Injunction: Court order preventing certain actions
Important Considerations
Doctrine of Mitigation
Section 73 imposes a duty on the aggrieved party to take reasonable steps to minimize losses resulting from breach. Failure to mitigate may reduce damages awarded by courts.
Notice Requirements
Many contracts include termination clauses requiring advance notice. The notice period and procedures must follow contract specifications, typically ranging from 15 to 90 days.
Burden of Proof
In cases of rescission, the burden lies on the party claiming rescission to prove it was correctly terminated.
Contract termination under the Indian Contract Act requires careful consideration of the specific circumstances and adherence to legal procedures to avoid wrongful termination claims and associated liabilities.
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