Presentation Managing Early Termination_TEJAS KARIA

8/4/2019 Presentation Managing Early Termination_TEJAS KARIA

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Copyright: Amarchand Mangaldas

By

Tejas KariaPrincipal Associate

Amarchand & Mangaldas & Suresh A.

Shroff & Co.,Advocates & Solicitors

Amarchand Towers

216, Okhla Industrial Estate Phase -III

New Delhi-110020 India

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MANAGING EARLY TERMINATION

RIGHTS UNDER CONTRACT




MANAGING EARLY

TERMINATION RIGHTS

Importance of Provision for Early Termination of

Contracts

Types of Early Termination of Contract Essential Ingredients for Drafting Termination

Clause

Various Methods of Early Termination of Contract

Consequences of Early Termination

Remedies for Early Termination




IMPORTANCE OF EARLY

TERMINATION OF CONTRACT

No statutory definition of “early termination”

Increasing use and importance of Contracts in every facet of

Business

Necessity for an early termination Clause in Contract

Rising risk of non-performance of the obligations under

Contract

Business expediency to have option and flexibility to

terminate the contract early




TYPES OF EARLY TERMINATION

OF CONTRACT

By Will of the Parties / Mutual agreement

Termination for convenience

No-fault termination

Without giving reasons

Novation

Automatic Termination upon happening or non-happening of a

specified event

Operation or Change of Law

Bankruptcy, Winding-up, Abolition / Repeal of certain Act

Frustration or impossibility of performance / Force Majeure

Breach or repudiation of essential terms of contract




DRAFTING OF TERMINATION

CLAUSE

Essential Ingredients of a Termination Clause:

- Express provision for Early Termination

- Parties: Specify which Party has the right to terminate

- Events: Specific events leading to terminationa) Non-fulfillment of Conditions Precedent

b) Impossibility of performance

c) Force majeure

- Automatic or upon taking certain steps- Remediable or Non-remediable breach

- Cure Period for Remediable breach




DRAFTING OF TERMINATION

CLAUSE (contd.)

Essential Ingredients of a Termination Clause:

- Requirements of Notice

- Modes of giving Notice, Length of Notice

- Specified reasons for termination

- Rights and obligations after termination

- Payment for part-performance or Notice period

- Forfeiture / Refund

- Damages and Compensation- Liquidated Damages and Penalty

- Interest for cure period




Contract can be terminated in case:

Defaulting party has caused irretrievable or incurable damage

Impossibility of performance by either Party

Performance would cause irreparable harm or be prejudicial

Consistent failure to cure the breach

Breach has resulted in non-performance of corresponding

contract by non-defaulting party

DETERMINING THE CORRECT

TIMING FOR TERMINATION




By mutual agreement

By exercising rights under the express terms of contract

By giving Notice

On happening or non-happening of specified event

Non-fulfillment of Conditions Precedent

By Accord and Satisfaction

By giving reasonable cause

Upon expiry of “Lock -in” period

Based on implied terms

METHODS OF EARLY

TERMINATION




A Contract may be terminated by giving Notice:

Express provision for giving Notice:

In writing

Clear and unambiguous

Must be for period specified

Time for giving notice

Address and mode of service

When length not specified, it has to be for reasonable period

Implied provision for Notice:

Upon constructions of the terms of contract

Reasonable notice by one or both of the Parties

TERMINATION BY GIVING

NOTICE




EARLY TERMINATION UPON

HAPPENDING OF SPECIFIED EVENT

• Circumstance and ground for termination upon

happening of an event must be specified

• Occurrence of event may be natural or by an act of the

Party• If a Party has control over happening of event, it cannot

take disadvantage of such event

• “Force Majeure” events, which are beyond control of

Parties and makes the performance impossible• Non-defaulting Party has right to „elect‟ whether to

terminate or continue despite happening of the event




EARLY TERMINATION UPON

HAPPENDING OF SPECIFIED EVENT

Instances of Events:

– Assignment without permission

– Non-commencement of work within stipulated time

– Delay in performance when time is of essence

– Negligence in performance

– Defect or deficiency in service

– Material deviation from the terms of the contract

– Structural changes or substantial damage in tenanted premises

– Sub-letting




NON-FULFILLMENT OF

CONDTIONS PRECEDENT

Termination upon non-fulfillment of Conditions Precedent

Existence of rights and obligations under contract in case of

Non-fulfillment of Conditions Precedent Specified time for complying with Conditions Precedent

Extension of time period for fulfillment of Conditions

Precedent

Automatic termination by efflux of time upon non-fulfillmentof Conditions Precedent




ACCORD AND SATISFACTION

Termination by Accord and Satisfaction

Agreement to accept different performance than

originally agreed in the contract

Discharge of Cause of Action for breach alreadycommitted

Effect of Accord and Satisfaction by substituted contract

Novation




BREACH OR REPUDIATION OF

ESSENTIAL TERMS OF CONTRACT

Termination upon material breach of terms

Refusal to perform the promise (S 39 of Contract Act)

Does something which the contract prohibits Prevents other Party from performing its obligations

Impossibility of performance created by the Party on its

own




BREACH OR REPUDIATION OF

ESSENTIAL TERMS OF CONTRACT

Non-defaulting party has right to “elect” either to

terminate or continue with the performance despite

breach

Implied or express election Communication of decision to terminate

When both Parties have committed breach, the sequence

in which it is committed is relevant




FRUSTRATION AND IMPOSSIBILITY

TO PERFROM

Change of circumstances so fundamental as to striking at the

root of the agreement and entirely beyond contemplation at

the time of entering the Contract

When the Contract, after making it, becomes impossible or by

reason of event which promisor could not prevent, becomes

void (S 56 of Contract Act)

Test for determining Frustration

Act should be impossible or incapable of being performed

Impossibility should be by reason of some event which the promisor

could not prevent

Impossibility was not self induced or due to the negligence of the

promisor




IMPOSSIBILITY OF PERFORMANCE

Traditional doctrine: „ pacta sunt servanda‟ – agreements

must be kept though heavens fall

Major exception is impossibility of performance

Meaning of impossibility of performance Not only strict impossibility, but impracticability because of

extreme and unreasonable difficulty, expense, injury or loss

Very foundation of a contract disappears by virtue of change of

circumstances Temporary impossibility does not discharge the contract




IMPOSSIBILITY OF PERFORMANCE

(contd.)

Supervening personal or corporate incapacity

Death

Insolvency

Dissolution

Winding-up Criminal Offence

No impossibility when the performance of the contract is

physically and legally possible though commercially

unprofitable Difficulty of the work in not a valid excuse for non-

performance




FORCE MAJEURE

Force Majeure or Act of God

Allocation of risk for early termination of agreement if

performance becomes impossible or impracticable as a

result of event beyond the control of the Parties Provision saves the performing party from the

consequence of anything beyond his control

Mitigation and best endeavours to remove the cause of

non-performance by defaulting Party




REMEDIES AFTER TERMINATION

FOR BREACH

Compensation: Party suffering from the breach can claim compensation from the

party who has committed the breach (S 73 of Contract Act)

Loss or damage arising in the usual course of things

Placing the injured Party in the same position as if the Contract had

been performed by the defaulting Party.

Liquidated Damages:

Agreed sum to be paid upon breach of contract

A genuine pre-estimate of the loss

Penalty: Amount to secure the performance of contract

Penalty for early termination




OBLIGATIONS AFTER

EARLY TERMINATION

Continuing obligations to remain in force even aftertermination:

Early Termination may not affect those provisions, which

are expressly stated to operate or have effect after the

termination Confidentiality

Defect liability

Non-compete

Dispute resolution

Rights and remedies already accrued prior to termination




EARLY TERMINATION IN SPECIFIC

CONTRACTS

Contract for Employment Notice period / Payment in lieu of Notice

Lease / Tenancy Agreement

Lock-in period, Handing over peaceful vacant possession

Shareholders‟ Agreement

Right of preemption

Technology Transfer Agreement

Intellectual Property Rights, Confidentiality

Joint Venture or Collaboration Agreement

Non-compete




EARLY TERMINATION IN

NON-LITIGIUOS MANNER

Well-drafted comprehensive termination clausebalancing the rights of both parties

Clear and unambiguous terms for rights and obligations

post termination

Provisions for good-faith negotiations in case of any

dispute

Conciliation or negotiations for amicable settlement as

pre-condition for Arbitration / Litigation Termination by mutual agreement or novation




Thank YouContact: [email protected]

Presentation Managing Early Termination_TEJAS KARIA

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