Contract Law: Cancelling a contract without a termination clause

An agreement that is reduced to writing is preferred because it is easy to prove the express terms of the contract. However, a party who sues on a contract must prove its terms, which can become a challenge when the term in contention is a cancellation clause that is not in the contract. Two Supreme Court of Appeal (‘SCA’) cases are analysed to illustrate what the court considers when deciding on tacit termination clauses.

In Cecil Nurse vs. Bongile Nkola 2008 (1) ALL SA 428 (SCA) the court had to determine which suretyship agreement was binding on Mr Bongile Nkola (‘the respondent’).

Cecil Nurse (‘the appellant’) sells office- and school furniture. FMMC Holdings (Pty) Ltd (‘FMMC’) would buy and resell the office and school furniture from the appellant to its own clients on a cash-on-delivery basis from April 2000. FMMC had a huge demand of the products in Mthatha; however the appellant only had branches in East London and Port Elizabeth. After discussions it was agreed that FMMC establish a showroom in Mthatha with the assistance of the appellant.

The appellant would provide a credit facility of approximately R50 000 to FMMC and the respondent who was the sole shareholder and director of FMMC would stand surety. On 18 August 2000 the respondent received a credit form application and a deed of suretyship from the appellant. The respondent executed the documents and returned them to the appellant via facsimile on 23 August 2000. On the same day the appellant faxed a letter to the respondent warning that the credit application will not be granted until they received a completed credit application form.

The credit application was granted and the showroom was established. However, it seemed as if the credit facility amount was not capped at R50 000 because FMMC allegedly owed R150 653.94 by 7 December 2000. The appellant obtained a default judgement in the Magistrates Court against the respondent because he failed to settle the debt. The respondent had the judgement rescinded. He placed reliance on an ‘amended suretyship agreement’.

The amended surety agreement differed from the original agreement in two aspects. Firstly, the term future obligation was crossed out in the preamble. Secondly, a handwritten clause 13 had been inserted which capped the respondent’s suretyship to R45 600.

The main issue in dispute was which suretyship document was binding on the respondent. The original suretyship agreement which was duly executed and provided the respondent with an unlimited credit line amount, or the amended credit agreement which capped the respondent’s surety to R50 000.

The respondent argued that he signed the original suretyship agreement whilst still in negotiation to amend the terms of the agreement and that a staff member sent it to the applicant without his permission. He sent the amended copy hours later after realizing the mistake. The letter sent by the appellant was assumed to be an assent by the respondent.

The appellant denied agreeing to amend the contract, arguing that the person who is alleged to have assented to the contract did not have authority to do so. Furthermore, they argued that it is against their business policy and would expose them to unnecessary risk if they entered into the amended suretyship agreement.

The High Court accepted the respondent’s sequence of events and granted judgment in his favour. It held that since the letter was sent separately and after the credit application form was sent proved that the appellant consented to the amended suretyship agreement.

In the SCA, the appellant agreed that they had to prove the suretyship agreement in which they relied on. This the court held was in line with the principle stated in Stocks & Stocks (Pty) Ltd v L J  Daly & Sons (Pty) Ltd 1979 (3) SA 754. The appellant contended that the signed suretyship agreement they received from the defendant was proof that the defendant intended on being bound by the terms of that agreement. The appellant further argued that the amended suretyship agreement did not comply with the terms of the agreement that any amendments require the creditor’s written consent. The SCA was satisfied that the appellant had proved the terms of the contract which it relied on.

In assessing the respondent’s conduct with regards to the amended suretyship agreement, the court applied the test set out in Sonap Petroleum (SA)(Pty) Ltd (formerly known as Sonarep (SA)(Pty) Ltd) v Pappadogianis 1992 (3) SA 234 (A).

The three questions that need to be determined are:

  • Whether there was a misrepresentation from one of the parties?
  • Who made the misrepresentation?
  • Was the other party misled? The last question has two follow up questions, was the other party actually misled and would a reasonable man have been misled?

The court found the first and third part of the inquiry to be positive. It went further to say that the respondent was the party which made the misrepresentation. The respondent had sent a duly executed surety agreement to the applicant. The court held that the amended suretyship agreement was merely a proposal. Furthermore, it was held that clause 6 of the original suretyship and amended suretyship stated that all amendments have to be agreed to in writing by the creditor.

The court decided that the letter sent by the appellant cannot be seen as an approval to the amended suretyship agreement, mainly because it warns of the credit not being granted if the applications were not completed and sent back. The person who sent the letter had no authority to amend suretyship agreements and the respondent knew this.

The importance of this case lies in the ratio decidendi that the party who sues on the contract must prove its terms. With this principle in mind, I now consider the case of Amalgamated Beverage Industries Limited v Rond Vista Wholesalers [2003] 4 All SA 95 (SCA).

Amalgamated Beverage Industries Limited (‘the appellant’) appealed a Durban High Court judgement that their notice of termination with Rond Vista Wholesalers (‘the respondent’) did not terminate the contract. The SCA had to determine whether valid termination had been given and if valid commercial reasons were required for terminating the contract.

The appellant made and distributed cool drink for Coca Cola Company. They experienced numerous challenges when it came to distributing the cool drink. In February 1990, the respondent secured exclusive rights to be sole distributer for the appellant in Durban. This agreement was reduced to writing; it included a service level agreement and the equipment the responded need to purchase in order to execute its duties. The respondent would purchase for resale the appellant products and get a 10 % discount at the end of every month.

The cancellation clause of the contract between the two parties stated that the contract would come to an end on the provisional or final sequestration of the respondent or if an assignment is made to the benefit of the creditors. However, it makes no other provision for cancellation.

The respondent performed excellently in executing its duties surpassing the expectations placed by the service level agreement. The respondent grew so much that in 1997 it bought the property it was conducting its business in for R2 300 000. R1 725 000 was financed by a mortgage bond payable over a period of 20 years. Enhancements to the value of R100 000 were made to the property.

The respondent on the advice of the appellant bought two new trucks 1998. The appellant granted the respondent a credit facility of R300 000 for the purchase of the trucks. The respondent would pay back the appellant in 18 monthly instalments with effect from the end of September 1998. Furthermore, the respondent bought two second-hand trucks from the defendant for R28 000. As from 31 December 1998, the purchase price was payable in twelve monthly instalments.

The dispute began when the respondent started delivering to outlets which already had a trade discount with the appellant. This resulted in the appellant granting double discounts. Furthermore, the appellant wanted the respondent to have a decrease in the 10% discount it enjoyed. The respondent refused, on 8 January 1999 the appellant informed the respondent of their intention to unilaterally change the discount.

The respondent’s attorneys informed the appellant that the unilateral reduction in the discount, removal of the computer link to the server and the trade restrictions amount to breach of contract. On 23 February 1999, the appellant gave notice of termination of the contract with effect from 31 August 1999.By the time notice was given, the respondent had 60 employees, 11 trucks and a occupied warehouse space of 1800m²; and an annual turnover of between R40 million to R50 million a year.

The respondent approached the court a quo and argued that the contract was for an indefinite period of time and cannot be terminated at the election of the appellant. Alternatively, reasonable notice had to be given and six months was not reasonable.

The court a quo ruled in favour of the respondent. It held that the contract could be terminated provided that reasonable notice is given, however in this case it was not given. It added the qualification that the notice was not given for valid commercial reasons.

The main issues before the SCA was whether reasonable notice was given by the appellant and if valid commercial reasons were required for terminating the contract.

The SCA agreed with the court a quo that the contract is terminable provided reasonable notice is given. Determining whether reasonable notice was given is a matter of construction as indicated in Putco Ltd v Radio Guarantee Co (Pty) Ltd and Other Related Cases 1985 (4) SA 809 (A).

The SCA held that there is no rule of law that requires notice to be based on commercial reasons for contracts terminable by notice. The court went on to say that valid commercial reasons are not always required for terminating a contract terminable on reasonable notice. The term may be implied on a proper construction of the agreement. However, in this case the appellant did have valid commercial reasons for terminating the contract. It was based in the respondent’s refusal to accept the reduced discount rate.

Both parties agreed that when determining the reasonableness of the notice period, the crux of the matter was when the notice was given. Determining a reasonable time is then a matter of construction because it falls under a tacit term read into the contract. If this tacit term were to be read to the parties at the time of drafting the contract, having regard to all the relevant factors, what would have been their response?

The appellant would not want to bind itself to a contract that is not terminable on reasonable notice because the contract it had with Coca Cola was for a period of five years and had to be renegotiated after the duration period. Furthermore, the size of the respondent had grown so much that it might have no longer been possible to continue the contract on a 10% discount.

The SCA held that reasonable notice turns on allowing the other party enough time to regulate their own affairs. The court a quo was of the view that the notice did not give the respondent enough time to take care of the outstanding matters. The SCA could not understand why the previous court took this stance. Counsel for the respondent stated that one year would have been enough but could not explain why six months was insufficient.

One of the partners at the respondent’s firm explained that six months were insufficient due to the financial commitments the respondent had because of the contract, the outstanding amount on the mortgage bond, the outstanding instalments on the two new trucks and the two second-hand trucks that the respondent had purchase.

The respondent however conceded that they would be able to find a tenant for the property and that all the trucks can be sold at their market value. This gave the court the impression that six months was a reasonable time.

The court made it clear that the ability to regulate your own affairs is not always the only consideration. Other considerations may be explored when, for example, money which cannot otherwise be recovered save for the continuation of the contract.

The respondent argued that since the contract had been in place for nine years and that the appellant was the respondent’s only customers justified a longer notice period. The court was not satisfied with this argument because it is a generalization. Shorter contracts may require longer notice periods. The court went on to mention that even if the respondent had other clients, it would still want a longer notice period to conduct its affairs. The appeal was upheld by the SCA .

A contract without a termination clause can be terminable provided reasonable notice is given. The notice can be given even though there are no valid commercial reasons for the termination. When granting judgment, the court will consider the reasons for termination and when the notice was given. What amounts to reasonable notice is informed by the facts and the surrounding circumstances. The onus will lie with the party seeking the judgment, to persuade the court to read in the tacit term. However, the tacit term cannot be contrary to the expressed terms of the contract.

It would, in my view, be undesirable to force a party to remain in a contract solely because there is no termination clause. Granting the receiving party reasonable notice provides a safeguard to enable the party to make alternative arrangements.

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