Termination of Contract Legal Environment for Business in Nepal 16 April 2017 Saroj Shrestha

Termination of a Contract Termination of Contract means ‘ending up the contract’. When the obligations and rights created by a contract come to an end, there is the ‘Termination of a contract’. A contract can terminate in any one of the following circumstances modes: Termination by performance By mutual agreement or consent By subsequent impossibility or illegality

Termination of a contract By lapse of a certain period of time By the operation of law By a breach of the Contract

Termination by Performance Performance of a promise by all parties to a contract is one of the most usual easy and natural way of Termination of a contract. If the contracting parties perform their obligations in accordance with the terms and conditions relating to the time, more or place of performance.

Termination by Mutual Agreement or Consent The contracting parties may come to an understanding to end the contract. According to 81 of Section Contract, 2056, the parties to a contract may come to an understanding To change or amend any or all of portions of the work to be performed under the contract or To extend the time limit for the performance of work or To suspend the contract by not making it obligatory for sometime, or

Termination by Mutual Agreement or Consent To replace the work mentioned in the contract by another work, or To sign a new contract as replacement of a original contract.

Termination by Impossibility or illegality Possibility of performance is one of the essentials of valid contract. Impossibility of performance turns the contract into termination in two circumstances i. impossibility may remain unknown to the concerned parties at the time of concluding the contract ii. Impossibility may arise subsequently by fundamental changes in the situation at the time of performance of contract. There is general rule ‘what is impossible, does not create legal obligation’.

Termination by Impossibility or illegality Termination of contract by subsequent/supervening impossibility can be termed into two categories: 1. An excuse: Subsequent impossibility excused from performance, therefore contract is terminated. 2. Not an excuse: Subsequent change in situation is not excused therefore, contract does not terminate.

1. An Excuse (Termination by Impossibility) 1. Destruction of subject matter If the subject matter of a contract is destroyed without any fault of the parties, the contract is terminates. 2. Change of Law: A subsequent change in law may make the contract illegal and the contract terminates (Sec. 79 (a) of Contract Act, 2056) 3. Death or personal incapacity of promisor: It is impossible to perform the contract of which the promisor is dead or becomes incapable of performing it. (Sec. 79 (d) of Contract Act, 2056)

An Excuse (Termination by Impossibility).. 4. Non existence of a particular state of things: Where a particular state of things that was the basis of a contract ceases to exist, that terminate the contract (Sec. 79 (c) of Contract Act, 2056) 5. Declaration of War : A contract between alien enemies becomes void after the break out of a war. (Sec. 79 (b) of Contract Act, 2056) 6. Natural calamity: When any circumstance arises out of the control of human beings such as fire, flood, earthquake, the contract terminates. (Sec. 79 (b) of Contract Act, 2056)

Not an Excuse (Exceptions to the Termination by Impossibility) A contract is not always terminated on the ground of a subsequent impossibility. There is a general rule of contract that says ‘He that, agreed to do, that must to do it or pay the damages for not doing it’. A person is not free from his legal obligations which he has undertaken. There is no excuse for a promisor in the following circumstances: (Section 79 (3) (a-f) of CA 2056)

Not an Excuse (Exceptions to the Termination by Impossibility)… Fundamental changes shall not be deemed to have come in the situation prevailing at the time of signing the contract in any of the following circumstances: (a) In case it becomes difficult to perform the contract; (b) In case profit margin is low or loss is expected; (c) In case any party to a contract is dependent upon any third party who is not a party to the

Not an Excuse (Exceptions to the Termination by Impossibility)… contract for performing the contract, if the third party commits a mistake or becomes unfit; (d) In the event of strikes and lockouts; (e) In case it becomes necessary to pay additional tax, fee or other revenue; (f) In case the contract has been signed with several objectives and only some of them can not be fulfilled.

Termination by Lapse of Time Lapse of time for the performance of promise also terminates the contract. Supreme Court has established a principle in this regards that A contract is terminated automatically and the party is not obliged to fulfill the liability. If the prescribed time of performance lapses, If the prescribed time of performance is not extended (Bhirab Neupane Vs. Chitwan Irrigation Project, NLJ 2046, Pg. 344) In case time of performance has been prescribed in the contract, it shall be performed within the time specified (Sec. 71(1) of Contract Act, 2056)

Termination by Lapse of Time… In case the work can be performed only at the specified time, it shall be performed at that particular time. ( Sec. 71 (2) of Contract Act, 2056) Supreme Court has held in a case that “the aggrieved party to a contract can terminated the contract when promisor party fails to perform the specified promise at the prescribed time. (Sitaram Kedia Vs. Ministry of Forestry NLJ 2046, P.1183

Termination by Operations of Law Sometimes a law itself becomes influenced by some incidents and the law is activated. It can be a cause of the Termination of a contract. The following cases are those in which a law becomes active. 1. Death: A contract based on the personal skills and qualification terminates, in the circumstance of the death of the promisor. If the contract is not of personal nature it may be performed by his legal representative.

Termination by Operations of Law 2. Insolvency: In case of insolvency of a party to a contract, it is terminated. The rights and liabilities of the insolvent party fall on the official receiver and the contract terminates. 3. Merger: Where an inferior right of a party is merged into a superior right of a contract, the former is terminated automatically e.g. if a right of a tenant under a contract is merged into an ownership contract, the former contract is terminated by the operation of law.

Termination by Operations of Law 4. Material alteration: Where any one of the contracting parties alters materially any terms of contract that is illegal and the contract becomes void. A material alteration in a written contract document without the other party’s consent will affect the whole contract. Where the amount of money to be received is altered or an additional signature is forged on a promissory note by a creditor, it is a ground, on which he losses all his rights, either of benefit or of a legal remedy. (Sec. 87 of Contract Act, 2056)

Termination by Operations of Law Such an act of alternation is a contract creates the same effect as that of the cancellation of the contract.

Termination by Breach of Contract A ‘breach’ means ‘an act by any party in contrary’ to the terms of contract. A ‘breach of a contract’ means ‘failing to do something’ promised in a contract. Contract Act, 2056 states that ‘the breach of contract’ takes place, when: Any party does not fulfill liability according to the Contract he renounces about the performance of promise his conduct shows his incapability of performance of the contract (Sec. 82 of Contract Act, 2056)

If you have any questions or concerns, please discuss .. Thank you ! Saroj Shrestha