Legal Environment for Business in Nepal

5 December 2016

Saroj Shrestha 1

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 consentBy subsequent impossibility or illegality

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By lapse of a certain period of timeBy the operation of lawBy a breach of the Contract

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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.

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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

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To replace the work mentioned in the contract by another work, or

To sign a new contract as replacement of a original contract.

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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’.

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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.

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1. Destruction of subject matterIf 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)

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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)

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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)

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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

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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.

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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.

i. If the prescribed time of performance lapses,ii. 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)

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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

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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.

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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.

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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)

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

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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) 20

21Saroj Shrestha

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