By not following the prescribed procedure in cancelling a contract can land you in trouble.
In the recent case of Datacentrix (Pty) Limited (“Datacentrix”) v O-Line (Pty) Limited (“O-Line”), the South African Supreme Court of Appeal (“SCA”) had to determine whether an agreement was cancelled in line with the procedure set out in the contract’s cancellation clause.
Material breach and cancelling a contract
For the purposes of the judgment, the SCA assumed in favour of O-Line that Datacentrix was in breach of the agreement and that this breach was material.
The SCA identified that there were two significant clauses in the agreement that dealt with the breach and the cancellation:
- clause 17, which dealt with service level failures; and
- clause 18, which provided that if a party to the agreement committed a material breach of the agreement and failed to remedy such breach within 30 days of being called upon to do so by the other party, then the innocent party may terminate the agreement on written notice to the defaulting party.
The SCA stated that contracts frequently provide that in the event of a breach, the aggrieved party should inform the breaching party of the alleged breach and stipulate a period within which to remedy the breach. In such a case, the procedure laid down in a contract must be followed prior to cancellation, unless the breach takes the form of a repudiation of the contract.
Breach notice
The breach notice should be expressed in terms that leave the defaulting party in no doubt as to what is required or otherwise the notice will not be a notice as is contemplated in the contract.
This judgment illustrates the importance of strictly following the breach clauses in an agreement if one wants to rely on such clauses to cancel the agreement. It also demonstrates the importance of clearly communicating the consequences of failing to remedy a breach.