TERMINATION OF A CONTRACT

NAME OF THE STUDENT:

BURIDI DAALU RAJA ASHISH

ROLL NO.: 19LLB027

SEMESTER: 2

NAME OF THE PROGRAM:

5 YEAR (B.A., LL.B. / LL.M.)

NAME OF THE FACULTY MEMBER:

PROF. SUNITA

DATE OF SUBMISSION: 12TH DEC

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

NYAYAPRASTHA “, SABBAVARAM,
VISAKHAPATNAM – 531035, ANDHRA PRADESH

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ACKNOWLEDGEMENT:-
I w0uld like t0 express my gratitude t 0 “PROF. SUNITA” wh0 have given me the g0lden
0pp0rtunity t0 d0 this w0nderful Research paper 0n the TOPIC “TERMINATION OF A

CONTRACT”, which als0 helped me in d0ing l0t 0f research and thr0ugh which I came t0 kn0w
s0 many new things.

Sec0ndly, I w0uld als0 like t0 thank my friends wh0 als0 helped me a l0t in c0mpleti0n 0f Research
paper within the limited time.

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 ABSTRACT

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.

A contract is formed when there is an offer to do something, acceptance of that offer, and
consideration. Consideration is the agreed upon exchange between the parties. For example,
when a person contracts with a carpenter to build a bed, the carpenter builds a bed in exchange
for payment at the agreed upon price.

Once the parties have come to an agreement regarding the terms of the contract, they are both
legally obligated to fulfill their obligations under the contract. If they fail to do so, they have
breached the contract and can be held liable in a court of law.

Terminating a contract means legally ending the contract before both parties have fulfilled their
obligations under the terms of the contract. There are a variety of reasons why a party can
terminate a contract. When and how the contract is terminated will determine whether either
party has any liability for breach of the contract before it was terminated.

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 TABLE OF CONTENTS

1. SYNOPSIS 5

2. INTRODUCTION 6

3. TERMINATION OF OFFER 6

4. WAYS OF TERMINATION OF CONTRACT 7

5. INTEREST IN CONTRACTS 7

6. TYPES OF TERMINATION 8

 TERMINATION OF CONVENIENCE
 TERMINATION FOR DEFAULT

7. GROUNDS FOR TERMINATION OF CONTRACTS 10

8. TERMINATION FOR BREACH OF CONTRACT 10

9. SITUATION AFTER THE CONTRACT IS TERMINATED 11

10. TERMINATE A CONTRACT 12

11. RESCISSION OF A CONTRACT 13

12. DISCHARGE BY AGREEMENT 15

13. PROCEDURES FOR TERMINATION OF CONTRACTS 15

14. TERMINATION OF CONTRACT FOR BREACH 18

15. CASE ANALYSIS 20

 HADLEY V. BAXENDALE

16. CONSEQUENCES OF ILLEGAL TERMINATION 21

17. CONCLUSION 23

18. BIBLIOGRAPHY 23

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 SYNOPSIS

SUBJECT: LAW OF CONTRACTS

TOPIC: TERMINATION OF A CONTRACT

INTRODUCTION: A contract is a legally enforceable agreement between two parties for goods
or services. Contracts can be oral or written, though it is generally recommended that contracts
be in writing and signed by both parties.

OBJECTIVE OF THE RESEARCH:

The aim of this research is to study and understand the topic like Termination of a
Contract with case laws related to the topics. To critically analyze them.

SCOPE OF THE RESEARCH:

The scope of the research is limited to Termination of a Contract

SIGNIFICANCE OF THE RESEARCH:

The research helps the researcher to understand the topic “Termination of a Contract”

LITERATURE REVIEW:

The primary literatures which were reviewed while going through this research topic are contract
and specific relief by Avthar singh, Anson’s law of contracts and some web sources.

HYPOTHESIS:

Is to understand how the Termination of Contract effects the validity of the contract made.

RESEARCH METHODOLOGY:

The research is doctrinal type of research as it relies mostly on books and web sources. The
method of Citation followed in this study is The Bluebook, 20th edition.

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INTRODUCTION:

A contract is a legally enforceable agreement between two parties for goods or services.
Contracts can be oral or written, though it is generally recommended that contracts be in writing
and signed by both parties.

A contract is formed when there is an offer to do something, acceptance of that offer,

and consideration. Consideration is the agreed upon exchange between the parties. For example,
when a person contracts with a carpenter to build a bed, the carpenter builds a bed in
exchange for payment at the agreed upon price.

Once the parties have come to an agreement regarding the terms of the contract, they are both
legally obligated to fulfill their obligations under the contract. If they fail to do so, they have
breached the contract and can be held liable in a court of law.

Terminating a contract means legally ending the contract before both parties have fulfilled their
obligations under the terms of the contract. There are a variety of reasons why a party can
terminate a contract. When and how the contract is terminated will determine whether either
party has any liability for breach of the contract before it was terminated.

TERMINATION OF ‘OFFER’

2.1. ‘Offer’ by itself is not Contract unless it is unilateral contract. Once ‘Offer’ is accepted it
cannot be ‘Terminated’, except by process of Law and ‘Terms of Contract’. ‘Absolute
acceptance’ ‘transforms ‘Offer’ into ‘Contract’. 2 Though ‘Offer’ is revocable any time before
‘Acceptance’, it is not so in case of ‘Option Contract’.

2.2. In ‘Option Contract’, offer is required to be kept valid for agreed time failing which Earnest
Money Bond / Deposit could be forfeited. Thus, even before ‘termination of contract’, you run
the risk of losing money as consequence of termination of offer.

2.3. ‘Offer’ dies on its rejection or expiry of its validity period or by ‘Counter Offer’. If no time
of validity of Offer is stipulated, Courts may decide by appreciating surrounding facts as to what
should be Reasonable Time for considering the Offer as valid. Change in law subsequently, if
distorts the ‘bid parameter’ it results in contract becoming unenforceable.

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2.4. ‘Offer’ gets ‘Terminated’ on death of offeror or frustration of subject matter. Once ‘Offer’
gets transformed into ‘Contract’, the contract dictates process of termination – i.e. as per
provisions in the contract. Contract usually contains fairly well drafted mechanism of
termination listing, Notice of intentions to terminate as an important and mandatory provision. It
may list events of conditions precedent to termination. The law also provides automatic
termination on the other party repudiating the contract, abandoning the performance.

3. WAYS OF TERMINATION OF CONTRACT

There are five ways in which Contract gets terminated.

• Impossibility of Performance (Frustration)

• Breach of condition of Contract

• Foreclosure by agreement

• Rescission

• Completion of Contract

4. INTEREST IN CONTRACTS

4.1. All contracts are entered into to have three principle interests

i. Interest of Expectation of profit

ii. Interest of Reliance

iii. Interest of Restitution

4.2. While entering into a contract, a party has interest to expect reasonable gain. Employer gets
the project envisaged and contract expects profit. If contractor abandons the project/job,
Employer earns right to get executed at the Risk and Cost of the contractor.

4.3. As per trade practice, Contractor reasonably expects 10% to 15% of cost of work as
legitimated profit. In event of unlawful Termination, the contractor expects and is compensated

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10% to 15% of profit out of balance work, he is deprived off [A.T. Brij Paul Singh vs. State of
Gujarat.1]

4.4. Placing reliance on promise made by Employer, Contractor on getting contract starts
investing on following heads and therefore, the losses for the Contractor include

• Mobilization of Resources

• Providing of necessary infrastructure and enabling works

• Finance Arrangements Contracts with vendors / Sub Contractors

5. Types of Termination:

The termination of contract, unless frustrated is of two types:

5.1. Termination for convenience

5.2. Termination for default

5.3. Termination of Convenience is also known as ‘no default termination’. It allows a party at
any time for its convenience to terminate contract by a notice with or without indication of a
particular clause in the contract. The Contractor will have right to receive cost incurred up to
termination and recover damage resulting from such termination.

5.4. There is a growing trend of Termination for Convenience by Employer. If this is envisaged,
fair compensation need be paid. Modern, construction contracts provide for clause for
‘Termination’. The cause of failures due to Employer as enumerated in contract may be

• Failure to provide adequate work fronts

• Failure to issue Drawings, Instructions, material promised in timely manner

• Failure to make timely payments

• Failure to correct situation of suspension of work within Reasonable period (say three months)
• Failure to provide reasonable facilities to perform contractual obligations.

1
AIR 1984 SC 1703

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5.5. In all cases, the Contractor earns right and entitlement to terminate the contract. He gets
right to restitution resulting from ‘Reliance’ he placed on Employer for good faith and diligence.

5.6. In case of frustration or for whatever reason, parties may desire to foreclose or annul a
contract, they may do so on terms they may agree upon. A Contract perfectly legal and valid may
become unenforceable due to change in law or public policy.

5.7. Termination for default - In performance of the contract, either of party finds that the other
party is not reciprocating its obligations or unilaterally is in default of its own obligations, in
such event the party perceiving fault of the other may terminate the contract serving the notice to
suspend all further performance and come forward for final settlement, either on amicable terms
or may lead to disputes to be adjudicated as per contract / law. The alternative in such case may
be to extend time for performance either with or without intention to recover pre-decided
damages.

5.8. Before the termination of default is decided, it is important to consider following facts:

• The terms of contract as provided in termination clause

• The circumstances leading to shortfall / backlog of performance

• Defaulters explanation for the defaults

• Weightage of timely performance

• Consequences of such termination

5.9. In any event, Contract should not be terminated, if there are chances of default to be
considered as excusable causes like Acts of God or circumstances beyond the control of the
Agency.

5.10. This is the most common form of Termination. One of the parties makes it impossible for
the other to discharge its obligation by unilaterally committing those actions of breach of
conditions which make performance impossible.

6. Termination Notice

6.1. Wherever Notice of Termination is required to be served as per contract, it is mandatory to

serve the notice to the authorized agency, providing for a Cure Period to improve the
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performance, failing which there could be an automatic termination. The notice must include
briefly narrated events of defaults which has prompted the issue of termination notice.

6.2. In Construction contracts, one or the other parties may more often lose patience with Time
and / or Money being invested. If ‘Time’ is the cause, most often Employer desires to replace
agency expecting acceleration in performance and opts for Termination of contract. In such a
case Employer’s can terminate because of fault of Contractor on various grounds.

7. GROUNDS FOR TERMINATION OF CONTRACTS

There are a number of ways in which a contract may be brought to an end. The Practice Notes in
this sub-topic summarize the main ways of ending contractual relations and the consequences for
each party when that happens.

There are a number of ways a contract may be brought to an end, including:

1. • Where one party is in breach of contract entitling the other party to terminate the
contract (termination for breach of contract)

2. • Where one party is entitled to rescind the contract by reason of the other party’s
misrepresentation, undue influence or duress (rescission)

3. • Where a contract is void by reason of mistake, non est factum or statute (void contract)

4. • Where the parties agree to bring the contract to an end (discharge by agreement)

5. • Where the contract provides for termination in the event of force majeure (force
majeure)

6. • Where some unforeseen event prevents the parties from performing the contract
(frustration)

TERMINATION FOR BREACH OF CONTRACT

A contract may be terminated by reason of one party’s breach of contract.

Termination for breach arises as follows:

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 • One party to the contract is in breach of contract—this requires consideration of the precise
obligations imposed upon the parties by the agreement and the extent to which those
obligations have been performed

• The breach in question is one which gives rise to the right of the innocent party to terminate
in response—i.e it must be either an anticipatory breach or a repudiatory breach, and

• The innocent party accepts the breach rather than affirms the continued existence of the
agreement.

8. SITUATION AFTER THE CONTRACT IS TERMINATED

After a contract is terminated, the parties to the contract do not have any future obligations to
each other. However, one or both parties might be liable for breach of the terms of the contract
prior to termination. The terms of the contract might also determine what happens after the
contract is terminated.

In the absence of language in the contract that states what will happen if the contract is
terminated, the parties have the option to seek a legal remedy for any breach. There are several
legal remedies available when there has been a breach of contract.

 Monetary Damages: Compensatory damages are awarded in an attempt to put the

innocent party in the position they would have been in if the contract had been
performed.

o Usually that means awarding the innocent party an amount of money that gives
them the “benefit of the bargain” or allows them to enter into an agreement with
someone else for the same service. Punitive damages might be awarded to punish
the breaching party, but are much less common.

 Restitution: Restitution is intended to put the innocent party in the position they were in
before they entered into the contract. The court looks at what the party who breached the
contract gained prior to the breach and orders it returned to the other party.

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 o For example, a customer enters into a contract with a carpenter to build a bed.
After the carpenter builds the bed, the customer refuses to pay and breaches the
contract. Restitution would require the customer to return the bed.

 Specific Performance: If monetary damages are insufficient to compensate the innocent

party, then the court might order specific performance. The breaching party would be
required to perform their obligations under the contract or face contempt of court charges.

9. TERMINATE A CONTRACT

Parties to a contract can legally terminate their agreement for several reasons.

Impossibility of Performance. If it is impossible for one or both parties to fulfill their

obligations, the contract can be terminated. It must be impossible for anyone to perform. This is
called objective impossibility. If someone else could perform the duties in the contract, there is
no impossibility.

An example of impossibility of performance is when someone has agreed to paint a house, but
the house burned down before it could be painted.

Fraud, Misrepresentation, or Mistake. If the contract was formed under circumstances that
constitute fraud, misrepresentation, or mistake, the contract can be terminated. In this situation
there could not have been a “meeting of the minds” on the terms of the contract because the true
facts were not known to the parties.

Illegality. In some cases the subject of the contract may become illegal because a law was
passed after the contract was formed. This “supervening illegality” means the contract cannot be
legally performed and can be terminated.

Breach of Contract. Under the terms of any contract, both parties have an obligation to perform
according to the contract. If one party fails to perform, blocks the other party from performing,
or otherwise violates the terms of the contract without a legal justification, they have breached
the contract and the contract can be terminated. The non-breaching party can pursue a claim for
damages caused by the breach.

Prior Agreement. The parties may agree to allow termination under certain specific
circumstances. Those specific conditions must exist or else there is a breach of the contract. This

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prior agreement is a termination clause and is enforceable as long as both parties agreed to its
terms.

10. RESCISSION OF A CONTRACT

Rescission is available as a remedy to a party whose consent, in entering into a contract, has been
invalidated in some way.

This will happen where:

1. • A party has contracted on the basis of a false statement of fact made to it by the other
party (misrepresentation)

2. • A party was mistaken as to the terms of the contract and the other party was aware of its
mistake (mistake), or

3. • A party was unfairly persuaded by another individual to sign the contract (undue
influence)

EFFECT OF RESCISSION

The effect of rescinding a contract is to extinguish it and to restore (as far as possible) the parties
to the positions they were in before contracting.

A contract that can be rescinded is voidable, not void. In other words, subject to the right to
rescind being exercised, the contract remains enforceable. By contrast, an apparent contract that
is void never has any validity or effect.

GROUNDS OF RESCISSION

The main grounds of rescission are:

1. • Misrepresentation (whether fraudulent, negligent or innocent)

2. • Non-disclosure in relation to contracts of insurance

3. • Undue influence, duress and unconscionability

BARS TO RESCISSION

Rescission will not be available in the following circumstances:

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 1. • The party entitled to rescind affirms the contract

2. • The party seeking rescission is unable to restore the other party to their pre-contractual
position—thus where the rescinding party has already received a benefit, they will not be
entitled to rescind unless they return the benefit

3. • The consequence of rescission is to destroy a third party’s rights

11. DIFFERENCE BETWEEN CANCELLING A CONTRACT AND TERMINATING A CONTRACT

Rescission is the legal term for cancelling or overturning a contract where there has been fraud,
misrepresentation, mistake, duress, or undue influence. Rescission essentially voids the contract
from the beginning, while termination means the parties are under no obligation to perform in the
future.

VOID CONTRACT

A void contract is one that has no legal effect—it essentially never existed. It is to be
distinguished from a contract which is merely voidable (ie it exists and has legal effect unless
and until it is rescinded) or unenforceable (ie it is a binding agreement, but the parties cannot sue
on it due to illegality, for example).

When a contract is void it means:

1. • Neither party is able to sue the other on the contract

2. • If goods have been delivered, they (or their value) should be recoverable because
property cannot pass under a void contract

A contract may be void where:

1. • The parties have entered into the contract under a common mistake that is fundamental
to the contract

2. • There has been a unilateral mistake—ie one party to the agreement accepts a promise
knowing that the terms stated by the other party differ from what that other party
intended

3. • One of the parties is mistaken as to the identity of the other contracting party

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 4. • A party is misled into signing a document which differs from what they had intended to
sign (non est factum)

5. • Certain statutes specify that the contract is void

12. DISCHARGE BY AGREEMENT

The discharge of a contract by agreement covers a range of different factual and legal scenarios.

In its simplest and most absolute form, it involves the parties to a contract agreeing to a total
release of their obligations to one another or to a new contract with different obligations or
parties.

However, it may also involve a more partial release by way of:

1. • Variation of an existing contract

2. • The waiver of existing obligations

RESCISSION BY AGREEMENT

Rescission by agreement is not to be confused with rescission where there has been
misrepresentation, duress or undue influence.

Where an agreement is at least partly executory and some obligations remain unperformed the
parties may expressly agree to discharge the outstanding obligations. Such agreement may also
be implied in certain circumstances.

Where a contract is rescinded by agreement between party A and B there may be novation where
the original agreement is substituted by another agreement between A and C.

13. PROCEDURES FOR TERMINATION OF CONTRACTS

1. Verification. Upon receipt of a written report of acts or causes which may constitute
ground(s) for termination as aforementioned, or upon its own initiative, the Implementing Unit
shall, within a period of seven (7) calendar days, verify the existence of such ground(s) and cause
the execution of a Verified Report, with all relevant evidence attached.

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2. Notice to Terminate. Upon recommendation by the Implementing Unit, the Head of the
Procuring Entity shall terminate contracts only by a written notice to the Supplier/Contractor
conveying the termination of the contract. The notice shall state:

a) That the contract is being terminated for any of the ground(s) afore-mentioned, and a
statement of the acts that constitute the ground(s) constituting the same;

b) The extent of termination, whether in whole or in part;

c) An instruction to the Supplier/Contractor/Consultant to show cause as to why the contract

should not be terminated; and

d) Special instructions of the Procuring Entity, if any. The Notice to Terminate shall be
accompanied by a copy of the Verified Report.

3. Show Cause. Within a period of seven (7) calendar days from receipt of the Notice of
Termination, the Supplier/Contractor/Consultant shall submit to the Head of the Procuring Entity
a verified position paper stating why the contract should not be terminated. If the
Supplier/Contractor/Consultant fails to show cause after the lapse of the seven (7) day period,
either by inaction or by default, the Head of the Procuring Entity shall issue an order terminating
the contract.

4. Rescission of Notice of Termination. The Procuring Entity may, at any time before receipt of
the Supplier’s/Contractor’s/Consultant’s verified position paper to withdraw the Notice to
Terminate if it is determined that certain items or works subject of the notice had been
completed, delivered, or performed before the Supplier’s/Contractor’s/Consultant’s receipt of the
notice.

5. Decision. Within a non-extendible period of ten (10) calendar days from receipt of the verified
position paper, the Head of the Procuring Entity shall decide whether or not to terminate the
contract. It shall serve a written notice to the Supplier/Contractor/Consultant of its decision and,
unless otherwise provided, the Contract is deemed terminated from receipt of the
Supplier/Contractor/Consultant of the notice of decision. The termination shall only be based on
the ground(s) stated in the Notice to Terminate.

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6. Contract Termination Review Committee (CTRC). The Head of the Procuring Entity may
create a committee to assist him in the discharge of his function under these Guidelines. All
decisions recommended by the CTRC shall be subject to the approval of the Head of the
Procuring Entity.

7. Take-over of Contracts. If a Procuring Entity terminates the contract due to default,

insolvency, or for cause, it may enter into a negotiated procurement pursuant to Section 53(c) of
R.A. 9184 and its IRR-A.

8. Procuring Entity’s Options in Termination for Convenience in Contracts for Goods. The
goods that have been performed or are ready for delivery within thirty (30) calendar days after
the Supplier’s receipt of Notice to terminate shall be accepted by the Procuring Entity at the
contract terms and prices. For goods not yet performed or ready for delivery, the Procuring
Entity may elect:

a) To have any portion delivered or performed and paid at the contract terms and prices; and/or

b) To cancel the remainder and pay to the Supplier an agreed amount for partially completed or
performed goods and for materials and parts previously procured by the Supplier.

If the Supplier suffers loss in its initial performance of the terminated contract, such as purchase
of raw materials for goods specially manufactured for the Procuring Entity which cannot be sold
in open market, it shall be allowed to recover partially from the contract, on a quantum merit
basis. Before recovery may be made, the fact of loss must be established under oath by the
Supplier to the satisfaction of the Procuring Entity before recovery may be made.

9. Notice by Contractor/Consultant. The Contractor/Consultant must serve a written notice to

the Procuring Entity of its intention to terminate the contract at least thirty (30) calendar days
before its intended termination. The Contract is deemed terminated if it is not resumed in thirty
(30) calendar days after the receipt of such notice by the Procuring Entity.

CONTRACTUAL TERMINATION

Parties may expressly provide in their contract that either or one of them is to have an option to
terminate the contract. This right may be exercisable:

1. • On a breach of contract by the other

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 2. • On the occurrence or non-occurrence of a specified event other than breach

3. • At the will of the party on whom the right is conferred

FORCE MAJEURE

Many contracts expressly provide for performance to be excused if rendered impossible by

unavoidable causes such as an act of God or force majeure.

A force majeure clause is a contractual term by which one (or both) of the parties is entitled to
cancel the contract or is excused from performance of the contract (in whole or in part) on the
occurrence of a specified event or events beyond their control.

FRUSTRATION

A contract may come to an end if, through no fault of either party, something occurs after the
formation of the contract that has the following effect:

1. • It makes the contract physically or commercially impossible to fulfil, or

2. • It transforms the obligation to perform into a radically different obligation from that
undertaken at the start of the contract

Events which might give rise to frustration include a change in law, sudden illegality in
performance, cancellation of an expected event, delay, death (in contracts for personal service),
illness/incapacity and destruction of particular property.

There are significant limits on the doctrine of frustration. For example the parties may have made
provision for the ‘unforeseen’ event in the contract, the event may well have been foreseen or
foreseeable by one or more parties and the frustrating event might be the fault of one of the
parties.

Where frustration occurs, the contract comes to an end, both parties are released from further
performance and in certain circumstances money already paid can be recovered.

TERMINATION OF CONTRACT FOR BREACH

The Authority was entitled to terminate the contract on any of the specified grounds including
delay in execution of the project. The contractor could not complete the work in time.

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Termination of the contract for this reason was held to be valid. The mere fact that a wrong
ground happened to be mentioned in the order of termination did not have the effect of
invalidating the order of termination. 2

Jurisdiction

A substantial part of the contract remained unexecuted. The textile mills were situated in
Bombay and the supply of the goods under the contract was to be made ex-factory at Bombay.
Accordingly proceedings could be taken at Bombay. 3

A ship was mortgaged in a foreign country the court said that under Section 11 of the Admirality
Act, the jurisdiction of the Indian High Courts in admirality matters is equivalent to that of the
High Court in England Matters as to mortgaged ship can be dealt with by the courts in India
provided the mortgage is registered in accordance with the provisions of the Merchant Shipping
Act, 1894 or of 1958. This was so. The court therefore, had jurisdiction to try the suit.4

Under the Indian Contract Act this type of relief is provided under Section 75.

S. 75. Party rightfully rescinding contract entitled to compensation — A person who

rightfully rescinds a contract is entitled to compensation for any damage which he has sustained
through the non-fulfilment of the contract.

Illustration

A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in
every week during the next two months, and B engages to pay her 100 rupees for each night's
performance. On the sixth night, A wilfully absents herself from the theatre, and B, in
consequence, rescinds the contract. B is entitled to claim compensation for the damage which he
has sustained through the non-fulfilment of the contract.

A work order for repairing the bank of a river was issued directing the work to be completed
within 45 days. The alignment was given after 10 months that turned out to be wrong. Correct

2
K. Pro Infra Works (P) Ltd v State of Manipur, AIR 2015 NOC 505 (Mani). Information about delay was given to
the contractor from time to time, the detailed notice of termination was served. Grounds mentioned by the contractor
were considered and rejected.
3
National Textile Corpn Ltd v Haribox Swalram, (2004) 9 SCC 786: (2004) 3 BC 494.
4
Dallah Albaraka Investment Co Ltd v MT "Symphony" ex MT: Arabian Lady, (2005) 5 Bom CR 589.

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alignment was given subsequently when a substantial portion of the work had already been done.
The work already done was not taken into account. The wrong alignment became the cause of
washing away by devastating floods. The plaintiff's claim for compensation for the work already
done was taken to be established.5

CASE ANALYSIS:

Case Name: Hadley v. Baxendale6

Brief Fact Summary: Plaintiffs operated a mill, and a component of their steam engine broke
causing them to shut down the mill. Plaintiffs then contracted with Defendants, common carriers,
to take the component to W. Joyce & Co. to have a new part created. When delivery was delayed
due to Defendants’ neglect, causing Plaintiffs’ mill to remain closed longer than expected,
Plaintiffs sued to recover damages.

Synopsis of Rule of Law: The damages to which a non-breaching party is entitled are those
arising naturally from the breach itself or those that are in the reasonable contemplation of the
parties at the time of contracting.

Facts: Plaintiffs operated a mill, which they were forced to shut down when the crank shaft of
their steam engine broke. They contacted the manufacturer of the engine, W. Joyce & Co.
(Joyce), and Joyce agreed to make a new shaft from the pattern of the old one. Therefore, a
servant of Plaintiffs went to the office of Defendants, common carriers, to have the crank shaft
taken to Joyce. Plaintiffs’ servant told Defendants’ clerk that the mill was shut down and the
shaft must be sent immediately. The clerk informed Plaintiffs’ servant that if the shaft were given
to them by twelve o’clock any day, it would be delivered by the next day. Plaintiffs took the
shaft to Defendants the next day before noon. Due to Defendants’ neglect, the delivery to Joyce
was delayed, and Plaintiffs did not receive the new shaft for several days after they should have
received it.

Issue: Are Defendants liable to Plaintiffs for damages suffered by Plaintiffs due to lost profits?

5
Raharman Prodhan v State of W.B., (2009) 4 CHN 701.
6
Hadley v Baxendale, (1854) 9 Exch 341

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Held: No. A non-breaching party is entitled damages arising naturally from the breach itself or
those that are in the reasonable contemplation of the parties at the time of contracting. Here,
while the breach by Defendants was the actual cause of the lost profits of Plaintiffs, it cannot be
said that under ordinary circumstances such loss arises naturally from this type of breach. There
is a multitude of reasons for a miller to send a crank shaft to a third party. Defendants had no
way of knowing that their breach would cause a longer shutdown of the mill, resulting in lost
profits. Further, Plaintiffs never communicated the special circumstances to Defendants, nor did
Defendants know of the special circumstances.

Reasoning: Damages are limited to those that arise naturally from a breach and those that are
reasonably contemplated by the parties at the time of contracting.

CONSEQUENCES OF ILLEGAL TERMINATION

As and when a party illegally terminates a contract, the aggrieved party is entitled to
compensation under section 73 of Indian Contract Act. In construction, damage naturally arising
out of Breach (illegal Termination) are as below

For Contractor

a. Profit on balance work due to harm to interest of expectation

b. Untimely demobilization of Resources

c. Partial utilization of infrastructure created

d. Consequences of failure of vendor contract

e. Loss due to distress sale of balance of material at site

f. Compensatory Retrenchment cost for Resources hired and employed to complete the works.

A party illegally terminating a Contract has no right to have counter claims (J.G. Engineers vs
Union of India 20117.)

7
J.G. Engineers Ltd v Union of India, (2011) 5 SCC 758: AIR 2011 SC 2477, breach of contract and termination of
contract based on exclusion clauses and excepted matters involving the question as to which party committed breach
or delay and whether the contract was validly terminated, could be decided only by the adjudicatory forum, i.e. court
or arbitral tribunal, and not by a party to the contract.

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On Contract failing to take off or at any stage of illegal termination of performances, Employer
needs to compensate Contractor for reliance so placed and investment made thereon.

For the Employer include

• Extra cost of getting balance work executed

• Damage due to delay in having return on investment

• Extra Overheads for getting balance work done

• Cost of shifting “Defect Liability” to substituted Agency.

• Compensation for getting Performance Bond released

• Extra cost for unobstructed site as result of unpaid labourers is subcontractors not being paid.

• Cost of updating final unfinished work measured and accounted for.

In short, while final account is being settled as consequence of just and legal Termination,
Employer need be placed back in position, had the contract not being terminated.

It should be remembered that to recover claims it requires acceptable evidence of loss incurred or
most likely to have been incurred. Parties need be posted with contemporaneous record of
expenses so far possible and should afford to the other party opportunity, for verification of cost
incurred and being incurred.

All expenses and costs incurred to protect interest and to perform obligations need be restituted
/reimbursed on contract being terminated.

CARE TO BE TAKEN FOR TERMINATION.

In case, it is intention of Contractor to stop and terminate Performance or abandon the job,
following need be complied.

• Notice of intention must mention period of correction, reference to clause / circumstances need
be given to Employer or party named.

• Final Bill be prepared based on final measurements of work done as per contract works, varied
/ altered and extra indicating approved / disputed rate / intention to charge. Rate in dispute / or

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intention to charge need be accompanied by appropriate Rate analysis. Backed by supporting
evidence of cost and agreed “Overheads and Profit” or as per “Trade Practice”.

• Record of inventory of Tools, Plants, Materials, Equipments, need be furnished to Employer

and copies of `Gate-passes’ be supplied.

• Alternately, clear record of un-uselessness of Employer to permit need be maintained.

• In all events, Employer need be posted with records of unused materials. Tools, plants,
infrastructure created.

In short, Employer and Contractors who may take initiative to end contractual relations need to
demonstrate correct procedure and produce evidence of fairness.

CONCLUSION

Conclusion: In all cases, ‘Termination’ should be the last option for Employer and Contractor.
Experience has shown that party which terminated contract as soft solution to contract
administration, has not favored a repeat experiment of Termination. Admittedly even at high
price termination is the last and only resort.

BIBLIOGRAPHY

Books:

1. Contracts & Specific Relief by Avtar Singh, 12th Edition

Websites:
1. Law Time Journal, http://lawtimesjournal.in/ (Last used on 9th Dec)
2. Lexis Advance, https://advance.lexis.com/ (Last used on 9th Dec)

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