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"Terminating a Contract: Why the Fine Print Could Save You from Legal Trouble"
When it comes to contracts, signing the agreement is only the beginning.
Managing a contract until its conclusion—avoiding pitfalls and navigating challenges—is just as crucial for success. Terminating a contract involves ending a legally binding agreement between two or more parties, either before its agreed-upon period or without completing all the requirements outlined in the contract.
In South African law, the termination of a contract can occur in various ways, depending on the circumstances surrounding the agreement as well as the intentions of the parties involved.
One common mistake that parties make when terminating a contract is failing to exercise the same level of diligence they used when they first agreed. Most well-drafted contracts outline the circumstances under which they can be terminated before their natural conclusion. These provisions often include breach clauses, required notice periods, or even warnings that must be issued first. If the contract is well-drafted, it will likely contain specific guidelines to follow when one or both parties wish to terminate.
But what happens if these procedures aren’t followed precisely? Is it acceptable to simply take a broad approach and inform the other party of your intention to terminate, even if the process isn’t fully adhered to?
In the case of Datacentrix (Pty) Ltd v O-Line (Pty) Ltd (891/2021) [2022] ZASCA 162, the Supreme Court of Appeal addressed whether a termination was valid when it didn’t strictly follow the contractual provisions.
The court emphasized that if there is a breach, the notice of termination must be issued within the contractually specified period and must adhere to the exact format and process outlined. The reasoning behind this strict adherence is to give the defaulting party the chance to remedy the situation, within the framework of the contract. If the correct procedures aren’t followed, the defaulting party may lose their opportunity to correct the breach and avoid contract termination.
Even if a contract is silent or vague about termination procedures, the courts have consistently ruled that a contract cannot be terminated arbitrarily. Instead, reasonable notice periods must be followed, with the “reasonable” timeframe depending on factors such as the language of the contract, the intent of the parties, their relationship, and the surrounding circumstances leading up to the termination.
Notwithstanding the common law principles, there are certain legislative requirements which need to be taken into consideration when terminating a contract, such as the provisions set out in the Consumer Protection Act 68 of 2008 and Labour Relations Act 66 of 1995. The legislation will specify and regulate provisions relating to a notice period in which to notify the other party of the intention to terminate the contract, as well as the grounds for termination and the process to follow to avoid unlawful dismissal or breach of contract claims. Failing to adhere to these legislative requirements can lead to legal disputes and potential liability.
When considering terminating a contract, the first step is to carefully review the contract to determine the exact grounds for termination and the required procedures. Failure to follow the correct procedures or lack of sufficient grounds may result in a breach of contract. In situations where the contract lacks clear termination provisions, the determination of a reasonable notice period will depend on the specifics of the agreement and the circumstances.
In conclusion, it is crucial to fully understand the terms, conditions, rights, and procedures outlined in the termination clause when drafting or entering into a contract with another party as well as the contract itself. Since termination clauses can vary between contracts, it is essential to have a legal expert review the clause carefully before agreeing to the terms and to know the proper legal steps for terminating the contract if needed. Should the termination clause in the contract not be specific on the procedure, it is important to understand the repercussions of not abiding by the termination clause.
Michelle Bisset
Group General Counsel, LLB (UKZN) Admitted Attorney
Quattro Legal
