Introduction
1. A contract is defined as an agreement between two or more parties – which creates legally binding obligations.
2. Contracts lie at the heart of all commercial relationships. They help create certatinty, allocate risk and regulate the legal relationship between the parties involved.
3. However, it often occurs that when disputes arise between parties – businesses are often tempted to terminate a contract immediately.
4. While this may seem like a quick solution – cancelling a contract without lawful justification may expose a business to significant legal and financial consequences.
5. Our courts have frequently emphasised that cancellation is an exceptional remedy – given the fact that it results in the premature and abrupt end of the contract – and should accordingly only be permitted where the law allows it or the contract expressly allows for it.
When can a contract be legally cancelled?
6. A contract cannot be simply cancelled because one of the parties is dissatisfied with the other’s conduct. Cancellation will only be lawful in the following instances:
6.1. The other party has committed a material breach of the agreement;
6.2. The contract expressly grants a right of cancellation; or
6.3. The conduct of the other party amounts to a repudiation – which indicates that they no longer intend to perform in terms of their contractual obligations.
7. Many contracts expressly provide for the notice requirement – wherein the innocent party is required to give written notice of any breach by the defaulting party and allow the defaulting party a specified period within which to remedy the breach before cancellation is permitted.
8. Failure to comply with this contractual procedure may ultimately render the cancellation of the contract unlawful.
The Risks of Premature Cancellation
9. Wrongully cancelling a contract can place the cancelling party in breach of the agreement.
10. The aforesaid act will ultimately expose the cancelling party to signifcant legal liability which includes:
10.1. If the contract is cancelled without any lawful grounds – the innocent party may institute legal proceedings to recover the damages suffered as a result of the wrongful cancellation. These damages may include loss of profit, wasted expenditure or other foreseeable financial losses.
10.2. The premature cancellation of a contract may be construed as a repudiation – which occurs were one party demonstrates, through their conduct, an intention not to be bound by the contract. The innocent party in these respects may then elect to accept the repudiation and terminate the agreement and claim damages.
10.3. Contractual disputes often result in expensive litigation – which may result in legal costs being incurred. Such protracted litigation may result in businesses experiencing operational disruptions, reputational harm as well as strained commercial relationships.
It’s better to prevent litigation
11. Many contractual disputes can be avoided through careful contract management.
12. Businesses should ensure that their commercial agreements contain clear provisions dealing with breach, notice requirements, dispute resolution and termination rights.
13. Well-drafted contracts significantly reduce uncertainty whe disputes arise and assists parties in enforcing their contractual rights.
Conclusion
14. It is clear that cancelling a contract is rarely as straightforward as it may appear and therefore certain requirements would need to be met in those instances which may include: there has to be a material breach and in some contracts – notice of the breach would need to be obtained before the contract can be put to its premature end.
15. Obtaining professional legal advice at an early stage can help businesses determine whether cancellation is legally justified and minimise the risk of costly litigation.
16. If you need any legal advice on this proponent, feel free to contact our offices for assistance.
– By Christopher Mathibela
