What to consider when cancelling a contract

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You might, in future, find yourself in a situation where you will want to cancel a contract. This article sets out the requirements for cancelling a contract and gives basic guidance on what to do.

A contract can be cancelled by agreement between the parties or as a result of a material (serious) breach by one of the parties. Breach of contract is when one party refuses or fails to perform its obligations under a contract.

The law regards breach of a contract as a wrongful act in itself which allows the innocent party to cancel the contract. It is important to remember that cancelling a contract is only an option where there is a cancellation clause or where the breach of contract is material or serious. If the contract is silent on cancellation, the innocent party may still cancel the contract provided that the said breach is material or serious in nature.

When a person wants to cancel a contract, the cancelling party (innocent party) will have a choice to either cancel the contract or to enforce it. This article refers to the ‘innocent party’ and the ‘party in breach’. However, remember that fault it not a requirement for breach of contract.

The point of departure when cancelling a contract is to determine what the exact terms of the contract are, i.e. if the contract has a cancellation clause or not and whether there is a date of performance or not.

If the contract has a cancellation clause, the innocent party will be able to cancel the contract in the event of a breach of a term thereto. The innocent party must however take care not to cancel the contract incorrectly, otherwise the party in breach may interpret the cancellation as a repudiation of the contract, in which case the party in breach will also have the right to cancel the contract.

In the event where the contract does not have a cancellation clause, the innocent party will only be able to cancel the contract if the breach is material in nature. What constitutes a material breach depends on the terms of the contract. According to South African case law, a material breach is one which goes to the root of the contract and constitutes a breach of a vital term thereto.

Depending on the type of breach, the innocent party might have to give the party in breach notice. This will be the case where there is no date of performance specified in the contract. The innocent party must then demand performance by giving the party in breach reasonable notice to perform before he will be able to cancel the contract.

On the flip side, if a date of performance is specified in the contract, and a party does not perform in time and as stipulated, that party will be in breach, otherwise referred to as being in mora. It does however not automatically give rise to the right to cancel the contract. The only instance where there will be an automatic right to cancel a contract is if there is a cancellation clause or a suspensive condition in the contract.

A contract containing a suspensive condition will terminate automatically unless the suspensive condition is fulfilled or waived. If there is not a cancellation clause in the contract and no date of performance, the innocent party must give notice to the party in breach that time is of the essence and give him a reasonable time to perform.

In summary, the requirements for cancelling a contract vary according to the terms of the contract, the type of contract and the circumstances. There are no formalities for cancelling a contract unless the parties otherwise agree and/or a statute (i.e. Alienation of Land Act and the National Credit Act) prescribes such a cancellation.

Other requirements include that the innocent party must give reasonable notice to the party in breach that they are cancelling the contract, which cancellation becomes effective from the time the cancellation comes to the attention of the party in breach.

The consequences of cancelling a contract are that the obligations to perform terminate and the parties are obligated to return what has been performed. If both parties agree to the cancellation, the preferred route would be to enter into a cancellation agreement, setting out what needs to be returned, claims for damages etc.

Considering that each contract and circumstances differ and will be judged and interpreted accordingly, readers are advised to obtain legal advice before cancelling a contract.

For more information regarding contracts, please contact:

 

Henning PietersePartner

E: h.pieterse@bissets.com

Areas of Expertise: Corporate & Commercial Law

 

Reference List:

  • “Contract: General Principles” by Van Der Merwe, Van Huyssteen, Reinecke & Lubbe 2004 (Juta Law)

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)