Terminating a contract – beware of the fine print!

28 February 2023 512
In the world of contracts, the concluding of a contract is only the beginning of the process. Managing a contract to conclusion, including navigating all the pitfalls along the way, is just as big a part of the overall success of a contract. In this article we will explore the importance of correctly terminating a contract, as, let’s face it, things don’t always go to plan and you may need to climb out of a bad contract situation. 

The first mistake parties often make when wishing to terminate a contract, is to lack the same diligence to be contractually accurate as when they concluded the contract. In most contracts, parties would have provided for grounds for when and how the contract may be terminated before the natural conclusion of the contract. Typically, these would include breach provisions or termination notice periods or even warning notices to be first issued etc. Either way, the contract (if properly drafted) will probably contain the provisions parties would need to consult and comply with should one or either of them wish to terminate the contract.

But what happens if these provisions are not followed to the ‘t’? Is it ok, if broadly speaking the processes were sort of followed, or a party sort of communicated its intention to terminate as per the contract?

In the case of Datacentrix (Pty) Ltd v O-Line (Pty) Ltd (891/2021) [2022] ZASCA 162 our Supreme Court of Appeal had occasion to consider whether the termination of a contract was correct in terms of the contract and therefore valid. The court emphasized that in the event of breach the notice of termination had to be given within the contractually prescribed periods and in accordance with the exact process and format as contractually required for such notice in order to be valid and for the contract to be correctly terminated. Part of the reasoning for following the correct procedures, is to allow the party in default an opportunity, within the specified parameters of the contract, to remedy their default. Should the correct notice procedures not be followed, the party in default may lose this chance to remedy the problem and avoid termination of the contract. 

Even in cases where the contract is silent or vague in relation to the termination procedures, our courts have repeatedly held that a contract cannot summarily just be terminated, but that reasonable notice periods must be adhered to, what is reasonable being determined with relation to the language used, intention of the parties, their relationship and even the surrounding circumstances leading up to the termination. 

Even legislatively, certain minimum notice periods are required for a valid termination of a contract. A prime example is the Consumer Protection Act 68 of 2008 which provides that a fixed-term consumer contract must be terminated on at least 20 days’ notice.

In summary, it means that when you are considering to terminate a contract, the first step would be to peruse the contract to determine the exact grounds for termination and related procedures. Only if you are allowed to terminate the contract and do so in accordance with the procedures, may a contract be validly terminated. If you are not allowed, or don’t follow the correct procedures, you run the risk of having repudiated the contract and yourself now being in breach of contract. If there are no grounds or procedures allowing termination in your contract, then it comes down to an assessment of what would be a reasonable period for notice of termination. In all cases it may be prudent before you take the step to terminate and shoot yourself in the foot, to consult with a commercial specialist for guidance on the grounds and procedures relating to your contract and in terms of which you can terminate such.

Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy has been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s). 



 
Related Expertise: Commercial Contracting
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