TERMINATION OF CONTRACT

• When the obligation and rights created by a

contract come to an end, there is the
termination of contract.
• The contract can be terminated when
contracting parties become free from their
task or legal obligations arising from a
contract.
 Modes of Termination
A. BY PERFORMANCE:
B. BY MUTUAL AGREEMENT
C. BY IMPOSSIBILITY
D. BY LAPSE OF TIME
E. BY OPERATION OF LAW
F. BY BREACH OF CONTRACT
 A. Discharge by Performance
• Discharged by performance takes place when the
parties to the contract fulfill their obligation arising
under the contract within the time and in the
manner prescribed.
• Whenever both of the parties fulfill every things,
which they have agreed, then there will be nothing
left for performance.
• If only one party perform the promise, he alone is
discharged. Such a party gets a rights of action
against the other party who is guilty of breach.
 Performance may be:
a. Actual performance
b. Attempted performance or tender:
Section 532 Muluki civil code 2074, provides that
both the parties to the contract must facilitate each
other for the performance of the contract. In case if
any party fails to perform such contract due to
failure of other party to facilitate the other party,
then the first party shall not be liable for any kind of
consequence that may arise later on.
Essentials of a valid tender are as follows
• It must be unconditional
• It must be made at a proper place time and place
• It must be made for the whole obligation
contracted and not part
• Reasonable opportunity to the promisee for
inspection of goods
• It must be made by a proper person who is in a
position and is willing to perform the promise
 B. BY MUTUAL AGREEMENT
OR CONSENT

 If the parties to a contract agree to substitute any contract for

it or to rescind it or alter it, the original contract is discharged.
• SEC 533 Muluki civil code,2074, In case the parties to a
contract agree, all or any of the portions of the work to be
performed under the contract may be changed or amended,
the time-limit for performing any work under the contract
extended, the contract suspended by not making it obligatory
to perform any work to be performed under the contract for
some time, the work mentioned in the contract may be
replaced by another work, or a new contract may be signed
as a replacement of the original contract.
 CONT..
• Similarly Sec. 533(2) In case any change or
amendment is made in the contract under Sub
section (1), a new contract shall be deemed to
have been signed,and the contract shall
become effective accordingly. In case a new
contract is signed in this manner, liability
under the initial contract need not be borne
except when otherwise provided for in the
contract.
 Cont…
Following are the ways of discharge by agree
ment or consent:
I. Novation: Novation occurs when a new contract is
substituted for an existing contract, either between
the same parties or between different parties.
II. Alternation: Alternation of a contract may take place
when one or more of terms of the contract are
altered by the mutual consent of the parties to the
contract. In sucha case, the old contract is
discharged.
 Cont…..

III. Rescission (Repealing): A contract may be rescinded(repealed)

by agreement between the parties at any time before it is
discharged by performance.
IV. Remission(Accord and Satisfaction): Remission is the acceptance
of a lesser sum than what was contracted for or a lesser
fulfillment of the promise made. Every promise may dispense
with or remit, wholly or in part, the performance of the promise
made to him or may extend the time for such performance or
may accept instead of it any satisfaction which he thinks fit.
• A owes B 5,000 rupees, C pays to B 1,000 rupees and B accepts
them in satisfaction of his claim on A. This payment is a discharge
of the whole claim.
 Cont…
V. Waiver:Waiver means the deliberate
abandonment or giving up of a right, which a
party is entitled to under a contract,
whereupon the other party to the contract is
released from his obligation
 For e.g. A promises to paint a picture for B. B
afterwards forbids him to do so. A is no longer
bound to perform the promise.
 Cont…
VI. Merger: Merger means coming of two rights
in the same place. When a superior rights and
an inferior rights coincide and meet in one
and the same person, the inferior rights
vanishes into the superior rights. This is known
as merger.
 C. BY LAPS OF TIME
 If the parties have agreed upon a contract for
the fixed period, then the contract is
discharged after expiry of such stipulated time
(it does not matter whether the work is
completed or not)
 D. BY OPERATION OF LAW
 A contract terminates by operation of law in the following cases:
• Death:Death of a promisor results in termination of the contract
in cases involving personal skill and ability. In other contracts the
rights and liabilities of the deceased person pass on to the legal
representatives of the dead man.
• Insolvency
• Merger:Where an inferior right contract merges into a superior
right contract, the former stands discharged automatically.
• Unauthorized material alteration: A material alteration made
in a written document or contract by one party without the
consent of the other will make the whole contract void.
 E. By BREACH
Breach of contract means breaking of the
obligation, which a contract imposes. It occurs
when a party to the contract without lawful
excuse does not fulfill his contractual
obligation or by his own act makes it
impossible to perform his obligation under it.
 Cont…
Sec 535, In case any party to a contract does not
meet liability under the contract, or gives a
notice to the other party that he/she will not
perform the work to be performed under the
contract, or in case his/her action or conduct
shows that he/she is incapable of performing
the work under the contract, he shall be
deemed to have breached the contract.
 Cont..
Breach of contract may be of two kinds:
1. Anticipatory breach: Anticipatory breach of contract
occurs when a party repudiates it before the time fixed
for performance has arrived or when a party by his
own act disables himself from performing the contract.
There are two ways in which it can take place.
a. Expressly by words spoken or written:A party may
communicate to the other party by words or writing
his intention not to perform it before the due date of
performance.
 Cont..
b. Impliedly by the conduct of one of the parties:Party may by his
voluntary act also disables himself from performing the contract. The
effects of this breach is that the promisee or other party may either
(a) rescind the contract and at once sue for damages without waiting until
the due date of performance or
(b) he may elect not to rescind but to treat the contract operative and wait
for the time of performance and then hold the other party liable for the
consequence of non-performance. In the latter case the party who has
repudiated may still perform if he can and can also take advantage of any
supervening impossibility which may have the effect of discharging the
contract. The aggrieved party shall lose the right to sue for damages.
 
 Cont…
2.Actual Breach: Actual breach may also
discharge a contract. It occurs when a party
fails to perform his obligation upon the date
fixed for performance by the contract or
during the performance of the contract.
 F. BY IMPOSSIBILITY
(Frustration)
If the performance of a contract is impossible
the same is void. Impossibility in a contract
may be either inherent in the transaction or it
may be introduced later by the change of
certain circumstances material to the contract.
• There are two kinds of impossibility:
 Cont..
1. Firstly, impossibility existing at the time of the making
of the contract.
• There is no question of discharge of a contract which is
entered into to perform something that is obviously
impossible, e.g. an agreement to discover treasure by
magic, because, in such a case there is no contract to
terminate it being an agreement void abinitio. Similarly,
an agreement to bring a dead person to life is also void. It
means not only physically impossibility, but also legal
impossibility like contracts with unlawful objects or
consideration.
 Cont…
2. Secondly, subsequent impossibility
• In this case, a contract, which is possible of
performance and lawful when, made, but the
same becomes impossible or unlawful
thereafter due to some supervening event
becomes void.
• E.g. A and B contract to marry each other.
Before the time fixed for the marriage, A goes
mad. The contract becomes void.
 Cont..
this subsequent impossibility is referred to as
‘Doctrine of Frustration’. It is also called
'Doctrine of Supervening or Subsequent
Impossibility'
 Cont…
Section 531of muluki civil code 2074 has provisions
regarding doctrine of subsequent impossibility.
1. Subsequent illegality -
A subsequent change in law may render the contract
illegal and in such cases the contract is deemed
discharged. The law may actually forbid the doing of
some act undertaken in the contract or it may take
from the control of the promisor something in respect
of which he has contracted to act or not to act in a
certain way.
 Cont…
2.Natural Calamities –
When it becomes impossible to perform a contract
because of the situations beyond the control of human
beings like flood, landslides, earthquake, volcanoes etc.
 
3. Destruction of subject matter -
When the subject matter of contract subsequent to its
formation is destroyed without the fault of the
promisor or promisee the contract is discharged. (Tylor
Vs Caldwell)
 Cont..
4. By the death or disablement of the parties -
• Where the performance of a contract depends upon the
personal skill, capacity or expertise, the contract is discharged
on the ground of physical and mental incapacity, mental
unsoundness or the death of that person and the
representative cannot be made liable to perform such a
contract.
 5.Failure of ultimate purpose
• Where the ultimate purpose for which the contract was
entered into fails, the contract is discharged, although there is
no destruction of any property affected by the contract and
the performance of the contract remains possible in literal
sense. (Krell Vs Henry)
There are certain cases where the impossibility of performance
cannot be an excuse are as follows:
1. Difficulty of performance
• The mere fact that performance is more difficult or expensive or
less profitable than the parties anticipated does not discharge the
duty of performance.
2. Commercial impossibility
When in a transaction profits dwindle to a very low level or actual
loss becomes certain it is said that the performance of the
contract has become commercially impossible. This kind of
commercial impossibility also does not discharge a contract.
Merely because the procurement of the goods becomes difficult
due to strike in the mill or there is rise in prices or a person will
not be able to earn the expected amount of profits, it is not
enough to frustrate the contract.
3. Dependence on the third party - If a promisor to a
contract depends on any third party who is not a party to the
contract for the performance of the same and if that third
party makes a mistake or becomes incapable of fulfilling his
obligation because of which the promisor fails to perform the
contract, then in such case the promisor is not excused from
the duty of performance.
4. Strikes, lockouts and civil disturbances - Events like these
also do not terminate contracts unless there is clause in the
contract to that effect. A strike by the workers or a lock out by
the employer also does not excuse performance because the
former is manageable and the latter is self-induced.
5. Tax, fees or any other taxable revenues -
Liability to pay additional taxes, revenues or
fees shall not be made an excuse for the
impossibility of the performance of the
contract.
6. Failure of on the objects - If the contract is
made for several purposes, the failure of one
of them does not terminate the contract.