Case update: The importance of following the correct cancelation clause in a contract

One of the most important terms of a contract is the lex commissoria or ‘cancellation clause’, which sets out the process to be followed when an innocent party elects to either cancel the contract or enforce the contract in the event of a breach.

Although the lex commissoria of every contract will be dependent on the terms of the specific contract, the factual circumstances under which the contract was concluded and the specific statutory formalities prescribed, it is important that the correct procedure as determined in the cancellation clause is followed when terminating the contract.

In the recent case of GPC Developments CC and Others v Uys and Another [2017] 4 All SA 14 (WCC), the court addressed the issue as to whether a contract of sale was terminated correctly and consequently whether the eviction of the First Respondent and all those holding title under him was in fact lawful. The facts of the case were as follows:

In July 2012, the First Appellant, GPC Developments CC (hereinafter referred to as “GPC”) concluded a written Agreement of sale (hereinafter referred to as “the main agreement”) in terms of which GPC sold certain immovable property to the First Respondent.The agreement of sale contained a cancellation clause at clause 10 of the agreement, the parties however during August 2013 agreed to an addendum to be included as part of the written agreement, which addendum also contained a cancelation clause at clause 3 thereof.

Clause 10 of the main agreement provided the First Appellant with the right to cancel the main agreement in the event of breach by the First Respondent after the First Respondent had been given notice to remedy the breach within 10 days and had failed to do so. In such event, the First Appellant could claim, forfeiture of the amounts already paid to them by the First Respondent. Conversely, clause 3 of the addendum provided that where the First Respondent has failed to remedy the breach and the Second and Third Applicants elect to be reinstated as members of the close corporation (the First Appellant), the Second and Third Applicants must repay the purchase price stipulated in the addendum.

At an application brought for the evictions of the First Respondent, the Court a qou held that since the Second and Third Applicants cancelled the agreement and demanded to be re-instated as members of the First Appellant, they elected to cancel the agreement in terms of the lex commissoria contained in clause 3 of the addendum, they did not however tender to repay the purchase price as required. It was for this reason that the Court a qou held that “the Second and Third Applicants did not comply with the provisions of the termination clause, and as such, their termination is a nullity” and that the ensuing evictions of the First Respondent was unlawful.

On appeal of the dismissal of the eviction applicant, the Court in casu stated that “if the contract lays down a procedure for cancellation, that procedure must be followed or a purported cancellation will be ineffective”. The Court furthermore stated that the “The term “lex commissoria” has acquired a somewhat flexible meaning in our law of contract. “The phrase denotes, primarily, a term which permits a contracting party to resile from an agreement on the ground of delay, but that it has also acquired a wider and more general meaning, viz, a stipulation conferring the right to cancel an agreement on the basis of any recognised form of breach”. The Court stated that clause 10 of the main agreement constitutes a classic example of a lex commissoria, this was however not the only lex commissoria present and further mentioned that “there can be no reason in law why the parties to a contractual arrangement cannot agree on two (or more) terms which, independently of each other might afford the contractants rights of cancellation, forfeiture and the like in defined circumstances…”.

The Court noted that the First Appellant could previously have relied in clause 10 of the main agreement and could have cancelled the agreement and claimed forfeiture when the First Respondent had breached the agreement at that stage already, however, the parties did not do so and instead elected to take “positive steps to keep the agreement alive” by concluding the addendum.

Having opted to invoke the lex commissoria contained in clause 3 of the addendum, the First Appellant was bound to observe the cancellation requirements of that clause, which required a tender to repay the purchase price paid, and did not permit a claim for forfeiture.

The Appeal Court held that the Court a quo was correct in finding that the cancellation was not lawful, and the appeal had to be dismissed.

It is therefore important to make sure that a contract is cancelled in terms of the correct cancellation clause and that all procedures listed in the cancellation clause are indeed effected in order to avoid any delay and costs implications.

Prepared by:

Noori Edros | Senior Associate | Dispute Resolution: Litigation & Arbitration

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)