Every person, whether referring to an individual or a juristic person, will find themselves in a situation where they will want to terminate a contract. The aim of this article is to set out the requirements for terminating a contract as well as to give basic guidance when doing so.
When the right to cancel a contract becomes available the innocent party will have the election to either cancel the contract or to enforce it. This article refers to the innocent party and the party in breach, however, the reader must remember that fault is not a requirement for breach of 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 an extreme remedy that is only available in exceptional circumstances, namely where there is a termination clause or where the breach of contract is material or serious.
The point of departure when cancelling a contract is to determine what the terms of the contract are: if the contract has a cancellation clause, a so-called lex commissoria, then the innocent party will be able to cancel the contract in the event of a breach of contract. When cancelling the contract the innocent party must take care not to cancel the contract incorrectly, otherwise, the party in breach may interpret the innocent party’s conduct as amounting to a repudiation of the contract. In which case the party in breach will have the right to cancel the contract.
Material breach of contract
If the contract does not contain a lex commissoria, the innocent party will only be able to cancel the contract if the breach constitutes a material breach of contract. What constitutes a material breach of contract depends on the terms of the contract. South African case law states that a material breach of contract is one which goes to the root of the contract and constitutes a breach of a vital term of the contract.
No date for performance
Depending on the type of breach of contract the innocent party might have to give the party in breach notice of such breach. This would be the situation when there is no date for performance specified in the contract. The innocent party must thus demand performance and give the party in breach a reasonable period to perform before he will have the right to cancel the contract.
Date for performance
If there is a date of performance and the party does not perform in time that party will be in breach of the time-factor of the contract, otherwise referred to as being in mora. Mora is a lesser form of breach of contract. It does not automatically give rise to the right to cancel the contract. The only instances where there will be an automatic right to cancel is if there is a lex commissoria in the contract or a suspensive condition. A contract containing a suspensive condition will terminate automatically unless the suspensive condition is fulfilled or waived. If there is no lex commissoria 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 them a reasonable time to perform.
Requirements for cancelling a contract
The requirements for cancelling a contract vary according to the terms of the contract, the type of contract and the factual scenario. There are no formalities for cancelling the contract unless the parties agree otherwise or a statute prescribes same. Examples of statutes that prescribe formalities for the cancellation of contracts are the Alienation of Land Act and the National Credit Act.
Other requirements for cancelling a contract are that the innocent party must give the party in breach notice that he is cancelling the contract. The cancellation becomes effective from the moment that such cancellation comes to the attention of the party in breach. Cancellation is a unilateral legal action and thus, the innocent party must have the intention to cancel the contract.
The consequences of cancelling a contract are that the obligations to perform terminate and the parties are obligated to return what has been performed.
Cancelling a contract is a juristic act taken by one or more of the parties to a contract. That being said parties still have the option to jointly decide to cancel the contract. This is the preferred route as both parties can then enter into a termination agreement whereby they record that they will return what was performed in terms of the original contract and that they will not institute any claims arising from the original contract.