Termination of Contract and its legal provision in The National Civil (Code) Act, 2017 (2074) .

  

Background

According to Salmond, A contract is “an agreement creating and defining obligations between the parties.” Sir William Anson defines contract as “a legally binding agreement between two or more persons by which rights are acquired by one or more to act or forbearances on the part of the others.” It establishes respective responsibilities of the parties and the standard of performance to be expected of them. Muluki Civil Code Act, 2074 B.S defines Contract as “An agreement enforceable by law is concluded between two or more persons to do or abstain from doing any act    .” Contract must be strictly carried out as per the agreement between the parties. The formation of the contract is the primary stage and the termination of contract is the ultimate stage in contract. Termination discontinues the contractual relationship between the parties.

  

  
Concept of Termination of Contract

Termination means ‘Bringing to end’ When the obligations and rights created by a contract come to the end, that is the termination of contract. It means the contract can be terminated when contracting parties becomes free from their liabilities or legal obligations arising from a contract. This is known as ‘Discharge of Contracts.’ Termination of contract is an act occurring when the two parties break an agreement which was set between them showing relationship that they have either socially or economically meaning that there was agreement of provision of services from both parties to each other and now they decide that the will do that no more, example if G was giving services to F under certain terms or agreements or condition which was guiding both parties for certain amount of time and then they both come to understanding to each other that they will not work together as from that time or terms that were there making them to have a relationship will be active to them no more, making them free from the agreement that they had to each other and also meaning that no one will any longer be responsible to another.

 Modes of Termination of Contract

There are various modes of terminating a contract. Some of them are as follows:

1.      By Performance

Performance is the most common and simplest method of termination of contract. When the parties fulfill their respective obligations arising under the contract in the same way of what they had promised to do, the contract is automatically terminated. A contract comes to an end by actual performance of the contract according to the terms of the contract and also by attempted performance or tender, if the tender is unconditional and, made at the proper place, time and manner. Performance of contract may be either actual performance or attempted performance or tender.

2.      By Operation of law

Termination of contract takes place automatically by the operation of law. There are rules of law which, operating upon certain sets of circumstances, will bring about the discharge of a contract. The circumstances in which the contract is terminated by this mode are as follows:

v  Merger

If a higher security is accepted in place of a lower, the security which in the eye of the law is inferior in operative power, in the absence of a contrary intention manifested by the parties, merges and is extinguished in the higher. When a contract providing inferior right vanishes into or is mixed with a contract providing superior right, as a result of merger, the former contract is terminated. Hence the major requirement for merger are:

                    i.            The subject-matter of the two securities must be the same that is they must secure the same obligation and it should be made between the same parties.

                  ii.            The latter security must be of higher efficacy than that which it is sought to replace. A negotiable instrument is not a higher security for the purposes of this rule.

v  Alteration of a written instrument

If an alteration is made on the document with the intention to operate it differently from the original, it is a material alteration. Material alteration affects the operation and validity of the document. The alteration must be made without the consent of the other party, else it would operate as a new agreement. Where a party without another party’s consent alters the terms of the contract, it is terminated and the other party is also discharged for his/her obligations. An alteration does not fall within a material alteration if it does not affect the rights and liabilities or is made to carry out the common intention of the parties.

v  Death of the Promisor

If a contract which is based on the personal skill, interest or qualification of the promisor and he/she requires to perform it. The contract can get terminated if the promisor dies.

v     Insolvency

If a party to a contract becomes insolvent, the contract related to him/her gets terminated. If a party to the contract becomes insolvent his/her liabilities and rights will be developed upon the official assignee by the court and therefore the contract will be terminated.

3.      By Breach

 A breach of contract means non-fulfillment of obligation, which a contract imposes. It occurs when a party to the contract without lawful excuse does not fulfill his/her contractual obligation or by his/her own act makes it impossible to perform his/her obligation under it. The parties to a contract must fulfill their respective obligations because they have agreed to do that particular action during the time of creating the contract. If any party fails to fulfill his/her obligations the other party is entitled to sue against the party who resists from fulfilling the contract.

Breach of a contract includes the following elements:

a)      If the party fails to fulfill obligations under the contract

b)      If the party gives information to the other party he/she will not perform the work as mentioned in the contract

c)      If by action and conduct the party seems to be incapable of performing the work as mentioned in the contract.

Breach of contract are of two different ways:

i)        Actual Breach

When one of the parties to a contract does not perform his/her obligation under the contract when due, it is called an actual breach. It is also known as fundamental breach. The actual breach may take place

a)      At the time when performance is due, or

If one party fails or refuses to perform or by his/her actions and conduct he/she seems to be  incapable of performing his/her obligations at the time fixed for performance, it is called an actual breach of contract on due date of performance.

b)      During the performance of the contract.

When one party has performed a part of his/her obligation but fails or refuses to perform the remaining part of obligation under the contract, this is known an actual breach of contract during the performance.

ii)                  Anticipatory Breach

Anticipatory breach of contract occurs, when a party repudiates to carry out the actions prescribed in the contract, before the time fixed for performance has arrived or when a party by his/her own act disables himself/herself from performing the contract. This occurs when a party to a contract either express or clearly implies an intention not to perform the contract even before being required to act. If the time for performance of the contract is fixed in the contract and one party repudiates his/her obligation or he/she gives pre-information to the other party that he/she will not perform his/her obligation before the time for performance arrives, it is said to be an anticipatory breach of contract. It may be express or implied. It is also termed as a constructive breach of contract.

Anticipatory breach of contract occurs in following ways:

a)      By renunciation-When a party to an executory contract renounces his/her liability.

b)      By creating some impossibility-When a promisor to an executory contract, does some acts before the time for performance arrives making the promise action to be impossible to be executed.

4.      By Agreement

A Contract is the outcome of consent of the parties creating rights and obligations between them. The necessity of consent is must for the creation of a contract and same is required for the parties. In order to be discharged from their respective obligations created from a contract agreement of the parties is required, which may be expressed or implied.

Termination of contract may occur if the parties had previously formed an agreement regarding contract termination. For example, the contract itself may have contained a provision stating the conditions under which it may be terminated. Such a provision is known as ‘Termination Clause’ and is enforceable if both parties agree to the termination terms. 

Termination of contract by agreement may occur in different ways. Some of them are:

                    i.            Novation

Novation is a substitution of contract which involves at least three parties. Novation means the substitution of a new contract in the place of the old one. In such case, the old contract is revoked and substituted by a new one. New contract may be either between the same parties or between different parties. The parties of the old contract are free from their obligations as it gets terminated and does not require any performance. Requirement of the mutual consent of all the parties concerned is the essential principle of novation. Novation is necessary to relate to the present actual substitution of any contract for the original one. An agreement to substitute a contract in future will not amount novation.

Novation is of following two forms:

ü  Change of parties

A novation of this kind usually takes place when a new partner is admitted into an old or the present firm or when a partner retires from a firm and the new firm is constituted after admission or retirement accepts the liabilities of the old firm and this is approved by the persons dealing with the firm concurrence of all parties is necessary.

ü  Substitution of contract

When the same parties to a contract agree for substituting a contract with new terms in the place of an old contract, it gets replaced by a new contract which terminates the existence of the previously existing contract.

                  ii.            Rescission

If the parties mutually agree to terminate the rights and duties under a contract then it is called rescission of contract. By rescission contract comes to an end before the performance and parties are discharged from their contractual duties.

                iii.            Remission

 The acceptance by the promisee of a lesser amount in full satisfaction than what was contracted for or a lesser fulfillment of a promise made is considered as remission. Where the promisee accepts smaller amount in full satisfaction of the whole amount, no consideration is necessary for the same. Once accepted, the promisee cannot claim such amount getting rid of the obligation resulting the termination of that particular contract. The contractual rights is curtailed partly.

                iv.            Waiver

Waiver means the relinquishment of right. It arises when a party waives all his/her rights under the contract, whereupon the other party is released from his/her obligations, and the party waiving rights misses it forever. This results the termination of the contract.

                  v.            Accord and Satisfaction 

Accord means the agreement which discharges the obligation and satisfaction is the consideration, which makes the accord enforceable.

5.      By Impossibility of Performance/ Doctrine of frustration

Impossibility-of-Performance Doctrine is a principle whereby a party may be released from a contract on the ground that uncontrollable circumstances have rendered performance impossible.

When the issue of impossibility of performance is raised, the court is asked to construct a condition of performance based on the changed circumstances, a process that involves at least three reasonably definable steps.

1.      A contingency (something unexpected) must have occurred.

2.      The risk of the unexpected occurrence must not have been allocated either by agreement or by custom.

3.      Occurrence of the contingency must have rendered performance commercially impracticable.

Unless the court finds these three requirements satisfied, the plea of impossibility must fail.  If a contract is rendered impossible or frustrated, then the parties are automatically released from their obligations to perform. When the common object of the contract can no longer be achieved because, in the light of the circumstances, a situation fundamentally different from that contemplated when the parties entered into the contract has unexpectedly emerged, the contract is at an end, for otherwise the parties would be bound to perform a contract which they did not make. This notion is referred as Fundamental change in situation in Nepal, in England it is known as ‘Doctrine of Frustration’ and commonly known as ‘Doctrine of supervening impossibility’. As a general rule it is not an excuse for the non-performance of the contract. Certain circumstances are provided to the contracting parties which are immune from the non-compliance of the terms or performance of the contract as sometime not the intention but the uncertain situation creates obstacles in the execution of the contract.

Legal Provision of the Termination of Contract in Nepal

By Performance:

Section 521 states about the Obligation under contract to be fulfilled. It explains that each party to a contract should fulfill his or her obligation under the contract. Fulfilling the contractual obligation terminates the contract automatically.

By Agreement:

Novation-Section 533 states about suspending or altering the contract. It explains that if the parties to a contract agree to make a new contract in substitution for the original contract, a new contract is made, and the new contract becomes effective accordingly which terminates the obligation under the original contract except as otherwise provided for in the new contract. This falls under Novation which states about the substitution of contract.

Rescission-Section 538 states about the consequences of rescission or voidance of contract. It explains that if, after a party to a contract has already received some cash or kind or any other benefit from the other party or after the fulfillment of the obligations under the contract partially, if the contract is rescinded by mutual consent of the parties then the performance of the contract is not required.

By Breach:

Section 535 states about the breach of contract. It explains that If any party to a contract fails to fulfill the obligation under the contract or gives a notice to the other party that he or she will not perform the act to be performed by him or her under the contract or his or her action and conduct demonstrate that he or she is incapable of performing the act under the contract, this is considered as the breach of contract. It further explains that if one party commits a breach of the contract or action or the conduct of that party demonstrates non-performance of the contract in a material respect or demonstrates a material breach of the contract by the conduct or action of a party, the other party can rescind the contract by giving a notice to such a party and the rescinding party is not bound to perform the contract which ends the contract.

By Impossibility of Performance/ Doctrine of frustration:

 Section 531 states about the discharge of contracts in the event of fundamental changes in circumstances. It explains that if it becomes impossible to perform a contract as a result of fundamental change in the circumstance existed at the time of conclusion of the contract, the act according to the contract need not be performed. It has further explained the conditions which constitute a fundamental change in the circumstance. Such as

·         If the contract becomes illegal, it cannot be performed.

·         If it becomes impossible to perform the contract due to emergence of situations beyond human control such as war, flood, landslide, fire, earthquake and volcanic eruption.

·         If the subject matter essential for the performance of the contract is destroyed or damaged, or exists no longer, or such a subject matter could not be obtained.

·         If the contract is so concluded that its performance depends on the personal ability, skill or talent of a person, and the performance of the contract becomes impossible by the reason that such a person dies or becomes insane or is incapable of performing the contract because of physical or mental disability.

This Section has also explained about the circumstances that does not constitute a fundamental change in the circumstance. Such as

·         If the performance of the contract has become difficult.

·         If the performance of the contract results in less profit or in loss.

·         If any party to the contract is dependent upon any third party who is not a party to the contract for its performance, and the third party makes a default or becomes incompetent.

·         In the event of a strike or lockout.

·         If additional tax, fee or other revenue is required to be paid.

·         If a contract is concluded with more than one object and some of the objects cannot be fulfilled.

Analysis and Conclusion

Termination is the ultimate stage of a contract. Termination of contract brings an end to all the obligation inserted among the parties. It occurs through its performance, by mutual agreement, by breach, by operation of law and by impossibility of performance. Contract is a binding legal document as since its inception to its termination if follows the prescribed legal procedure of its national laws. Termination can be done not only by fulfilling the obligation, there are many other circumstances which tends to bring an end to the contractual obligations. The validity of termination of contract should be legal following asserted legal provisions of the nation.

In context of Nepal, The National Civil (Code) Act, (2017)2074 has described the modes which brings the contract to an end. However the provision are not concrete. And it does not cover all the important mode of termination of contract as it exists principally. Separate chapter as the termination or discharge of contract can be made including all the other modes as well. Since contract law of Nepal is evolving its content, the inclusion of new modes of terminations is sure to occur. This helps to find whether the performance of contract is as per the law and condition of the contracting parties itself.