Parties to a contract need to pay special attention to cancellation clauses and procedures to avoid jeopardy

04 April 2023

Construction projects often run into complications, sometimes being that either the Employer or Contractor fail or neglects to fulfil their obligations for the project to be successfully executed as provided in the agreement between the parties. This may include a lack of payment, a lack of access to the site or another material breach of the agreement.

The solution is seemingly easy and simple: cancel the contract and enter into a new contract with another party who could fulfil the obligations. However, such an approach is likely flawed beyond recovery. Alongside the ordinary statutory and common law provisions that govern it, any construction contract contains specific procedures to be followed when a breach of that contract occurs. One such provision of particular substance is the termination clause which needs to be carefully considered to enable the innocent, aggrieved party to validly terminate the contract. Therefore, it is of the utmost importance for parties to follow the steps set out in the agreement in order to avoid unlawfully terminating a contract.

It may, at first glance, appear that several of those steps are long-winded or even unnecessary. Why should a written notice be needed when the aggrieved party can simply record at a meeting with the breaching party that it intends to terminate the contract? The fact that something as simple as not giving a cancellation notice in writing may be regarded by the guilty party as a failure to contractually and validly cancel an agreement and a court may agree with that interpretation for want of non-compliance by the innocent party.

The South African courts have extensively dealt with the issue of proper termination of contact. Recently, the High Court in Pretoria found, in the 2022 case of Datacentrix (Pty) Limited v O-Line (Pty) Limited, that the cancellation of a contract between the two parties was valid and properly cancelled, owing to the fact that the service provider materially breached the contract by providing defective services, resulting in the inability to utilize the software and leading the employer to cancel the agreement. The case was appealed, giving the Supreme Court of Appeal an opportunity to deal with the matter.

The SCA delved into determining whether a contract is validly cancelled if the cancelling party does not act in accordance with the termination clause set out in the agreement. The contract between Datacentrix and O-Line included two key clauses: the first, clause 17, dealt with a failure to deliver a service under the contract and the procedure to be followed thereafter, including the potential cancellation of the contract. The other, clause 18, dealt with a “material breach” by either party, along with the specific procedure to be followed in the event of such a breach, also including the potential cancellation of the contract but, crucially, providing that a different type of written notice was first required.

O-Line initially claimed that it had cancelled the contract under clause 17. At the hearing of the matter, O-Line changed its tune, abandoning its reliance on its supposed cancellation under clause 17 in favour of its later cancellation under clause 18. While the SCA found that O-Line was wise to abandon its reliance on its cancellation in terms of clause 17, it had not in any event properly followed the steps painstakingly set out in clause 18. According to the SCA, the contract’s procedure must be followed before cancellation unless the breach is a repudiation of the contract, in which case cancellation can be immediate.

The SCA referred to the Bekker v Schmidt Bou Ontwikkelings CC judgment, which stated that the purpose of the notice requiring the service provider to remedy a default is to inform the recipient of the notice and what is required to remedy the breach. In Datacentrix, O-Line had not given the necessary notice as required by clause 18, which, the SCA said, O-Line was required to follow “strictly:

“[O-Line] was required to couch the notice in such a manner that [Datacentrix] would have been in no doubt as to what was required of it to avoid the consequence of cancellation for such non–compliance. The letter never warned [Datacentrix] that a failure to comply within 30 days would result in cancellation. Instead, it alluded vaguely to instructing its lawyers to ‘proceed to Litigations’. Whatever this may have been intended to mean, it was not an unequivocal statement that the agreement would be cancelled if [Datacentrix] failed to remedy its breaches.

In this case, the SCA said that although Datacentrix had materially breached the terms of the contract, O-Line’s failure to follow the process as provided by clause 18 of the contract rendered the termination invalid.

Our courts have made clear that it is essential for parties to have a clear and correct interpretation of what is outlined in the agreement. This includes any clauses that provide processes to be followed in the event of disagreement and termination which could contain a written-notice process to be followed before termination of the contract can be valid.

It is crucial to understand all required processes that are required in order to execute the agreement accurately – and avoid an unfavourable outcome in expensive litigation.

By Ryan du Preez | Director

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