Cancellation - When dreams become Nightmares

In this first in a series of articles, Chris Binnington, current chairman of the Southern African Association of Arbitrators, examines the pitfalls associated with cancellation.

When things have gone seriously wrong on a con tract, the injured party frequently considers that cancellation is a viable option.

Cancellation is however fraught with difficulties and it is all too easy to move from a position of strength, to one of considerable weakness as a result of failing to understand the ramifications of this drastic action.

The right to terminate a contract arising out of one party’s breach is one of the common law remedies available to the innocent party but is subject to certain common law rules. When time is of the essence, breach going to the root of the contract and repudiation, all entitle the innocent party to cancel the contract.

In order to have a right to cancel for a breach, the breach must be of sufficient substance, that it is it must be a material breach, more correctly described in Roman Dutch law as a breach going to the root of a contract. The law, however, requires the innocent party to take certain actions to convey to the other party notice of the breach, and give a reasonable time within which the breach shall be remedied. This notice may or may not include a threat to cancel, if the breach is not so remedied, and if the notice does not contain such a threat it will be necessary to cancel the contract by a further notice, once the time period specified has expired. This action of placing the other party in mora is fundamental to establishing a right to cancel in a common law contract.

Where one party has evinced an intention not to be bound by die contract, a situation which is normally apparent from die con duct of the one party, cancellation may be effected by a notice accepting the repudiation, combined with a notice that the innocent party intends to exercise its election to cancel. The innocent party, should it not wish to cancel, may insist that the contract remains alive and that the other party per forms in terms thereof.

Conduct which might constitute repudiation could be persistent refusal to give access to a site; engaging others to carry out work which is within die scope of the appointed contractor, or persistent failure to make payments by agreed dates. It should be emphasised that the key word in this last example is “persistent”, since mere failure to make payment under both English and Roman Dutch legal jurisdictions is not usually considered to be a breach going to the root of the contract.

CONSTRUCTION WORLD MARCH 1998

Part 2: To summarise the requirements for cancellation in the face of a breach under common law contracts, that is, where no express terms dealing with cancellation exist:-notice must be given to advise the other party the nature of the breach; —a reasonable time must be indicated to remedy the breach and the notice must either then be combined with advice that if the breach is not remedied within the time specified, the contract will be considered to be at an end, alternatively a further notice must be given to effect cancellation.

The majority of standard form contracts contain express provisions for cancellation. JBCC (1991) at clause 33.0, sets out in detail the employer’s entitlement to cancel arising out of contractor’s default and clause 35.0 deals with cancellation arising out of employer’s default. These clauses state, in detail, what situations would give rise to an entitlement to cancel and stipulate, in precise terms, the notices which must be given to effect such cancellation.

In respect of contractor’s de fault, clause 33.2 permits the employer to instruct his or her architect to notify the contractor of his or her intention to cancel the agreement. Should the contractor re main in default for a period of fourteen days after receipt of such notice, then the architect may notify the contractor of the cancellation.

In respect of employer’s de fault, the contractor may notify the employer and the architect of his/ her intention to cancel and similarly a period of fourteen days is provided for the employer, or the architect as the case may be, to remedy the default. The contractor may then notify the employer of the cancellation. These actions are notable for the fact that they are a restatement of the obligations set out in respect of common law con tract cancellations. The civil document GCC9O has similar provisions for cancellation of the contract by the employer, in terms of clause 58, and clause 59 deals with the contractor’s cancellation. The notice provisions are almost identical to the building contract, the injured party being obliged to give fourteen days notice to remedy the default whereafter, by written notice, the injured party may cancel the contract.

Since all of this appears to be so straightforward, why is it then that cancellation is fraught with difficulties and what are those difficulties? The most significant difficulty is failing to cancel the contract correctly, which in it self evinces an intention no longer to be bound; constitutes a repudiation and entitles the other party to accept the repudiation and cancel.

CONSTRUCTION WORLD APRIL 1998

Part3: Although not a building contract, the principles discussed in the case, discussed last month, involving a lessee who was alleged to be causing a nuisance, has certain parallels to the allegations of failing to proceed with due diligence and to the question as to whether or not such an allegation, in itself, is sufficiently specific to allow the employer to cancel.

The law, at this time, does not seem to have come to a conclusion and has avoided the issue by leaving the question dependent upon the facts of the matter. It is, however, strongly suggested that if employers wish to rely upon a “due diligence” clause for cancellation, they would be well advised to specify those aspects of the works the con tractor is accused of not proceeding with due diligence, and to maintain a careful record of such alleged absence of diligence during the notice period pre ceding the cancellation. From the contractor’s point of view, even if it has been guilty of a complete absence of diligence, prior to receiving any notice, and may be considerably behind the con tract programme, a demonstration of diligence during the period of notice will effectively frustrate the employer’s cancellation, albeit that if the contractor reverts to its previous inadequate performance, it will face further threats of cancellation. As with any communication intended to be acted upon, the conclusions are clear; Express, in explicit terms, that which is required of the other party and do not rely upon inferences; Comply strictly with the notice provisions, and if registered post is required, use it even if the notice has been handed to the other party.

Few people are criticised for doing things by the book. Case law is replete with situations where people thought they were right, only to find out later that their inattention to detail, or perhaps lack of understanding of the process, had led them to an unrecoverable position. The law is a hard taskmaster and the learning curve is inevitably expensive. Remember, if in doubt, seek advice.

CONSTRUCTION WORLD — JUNE 1998