The cancellation conundrum

When things have gone seriously wrong on a contract 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. In this article Chris Binnington, Managing Director of Binnington Copeland & Associates (Pty) Ltd, examines the pitfalls associated with cancellation.

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. Mora 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 is it must be a material breach, more correctly described in Roman Dutch law as a breach going to the root of the 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 the contract, a situation which is normally apparent from the conduct 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 performs 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 the scope of the appointed contractor; 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.

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 (July 2007) at Clause 36.0 sets out in detail the Employer’s entitlement to cancel arising out of Contractor’s default and Clause 38.0 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 default, Clause 36.2 permits the Employer to instruct the Principal Agent to notify the Contractor to correct the default which must be one of the defaults listed in clause 36.1. Thereafter the Employer may give notice of termination where the Contractor remains in default for 10 working days following from the Principal Agent’s notice. In respect of default by the Employer in respect of any of the listed causes in clause 38.1 the Contractor may notify the Employer and the P.A. of his intention to cancel and should the default continue for 10 working days following this notice the Contractor may give a notice of Termination which must be given to the Employer and the P.A. As to whether the notice of termination would be defective if only sent to the Employer or only to the P.A. raises interesting questions. These actions are notable for the fact that they are a restatement of the obligations set out earlier in this article in respect of common law contract cancellations.

The civil document GCC 2010 has similar provisions for cancellation of the contract by the Employer in terms of Clause 9.2 and Clause 9.3 deals with the Contractor’s cancellation due to default of the Employer. However the notices and the requirements before terminating are not consistent between the two types of termination i.e. Employer’s and Contractor’s. In an Employer’s termination 14 days’ prior notice must be given to remedy the Contractor’s default. However in a Contractor’s termination only certain of the Employer’s defaults require 14 days’ notice to remedy. The remaining defaults could result in notice of termination without the necessity to give the Employer the opportunity to remedy its default.

Since all of this appears to be so straightforward then why is it that cancellation is fraught with difficulties and what are those difficulties? The most significant difficulty is failing to cancel the contract correctly which in itself evinces an intention no longer to be bound; constitutes a repudiation and entitles the other party to accept the repudiation and cancel. This can lead to a total reversal of the respective positions leaving the injured party with limited recourse and an inability to recover, in particular, any damages which it might otherwise have been entitled to flowing from the cancellation. It may also leave the innocent party open to a claim for damages arising out of the cancellation now effected by the other party.

The process stipulated for cancellation in the agreement must be examined in detail in each and every instance when one party intends to cancel and must be followed to the letter in order that the innocent party should not lose its right to cancel and be hung by its own petard as a result of repudiating rather than cancelling. Prior to any cancellation take advice; ensure that you have the right and entitlement to cancel and comply strictly with the notice requirements stipulated in the cancellation clause.

A cause frequently relied upon by Employers to cancel Contractors’ employment is an allegation that the Contractor is neglecting to carry out his obligations under the contract (see Clause 9.2.1.3.5 of GCC 2010). Is this a catchall which allows Employers carte blanche to cancel for the slightest misdemeanour in performing the Works? As I have stated above the party who wishes to cancel must allege and may subsequently be called upon to prove, in general terms, that:

a) A breach of contract has occurred,

and

b) That the cancellation clause in the contract has been strictly complied with.

Bearing this in mind is it adequate simply to allege a failure to carry out his obligations?

In Rautenbach -v- Venner 1928 TPD 26, the judge when commenting on a notice of cancellation stated:

“The purpose of such a notice is to inform the recipient what he is required to do in order to avoid the consequences of default, and if it is in such terms as to leave him in doubt as to the details of what is required of him, then it may be that it will be held that the notice is not one such as is contemplated by the contract.”

In an appeal against the judgement in which a magistrate had upheld an objection that the written notice given did not constitute sufficient notice to remedy the breach, Judge Howard in Westcar Properties (Pty) Ltd -v- Young 1983(2) SA 188, in dismissing the appeal stated:

“Whether the notice in any given case is sufficiently specific to inform the recipient of what he must do to remedy the breach is a question to be decided according to the facts and circumstances peculiar to that case.”

Judge Howard went on to say:

“Vague references to unacceptable and disgraceful conduct and things … which are causing serious nuisance and annoyance do not serve to inform the Respondent of what she was required to do to avoid cancellation and the fact that she may have been aware of the misconduct complained of could not serve to supplement the inadequate notice.”

Although not a building contract the principles discussed in this case involving a lessee who was alleged to be causing a nuisance, has certain parallels to the allegations of failing to carry out his obligations under the contract 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 Contractor is accused of not proceeding with due diligence and to maintain a careful record of such alleged absence of diligence during the notice period preceding 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 contract 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 clear 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 but 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!

Chris Binnington