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28 Nov 2022
BY Aslam Moosajee AND Humairaa Essop

Why not following the prescribed procedure to cancel a contract can land you in trouble

In the recent case of Datacentrix (Pty) Limited (“Datacentrix”) v O-Line (Pty) Limited (“O-Line”), the South African Supreme Court of Appeal (“SCA”) had to determine whether an agreement was cancelled in line with the procedure set out in the contract’s cancellation clause.

O-Line sold mechanical and electrical support systems in addition to offering manufacturing, warehousing, distribution, and marketing services. The company decided to upgrade its software system and change to a Sage X3 system (the "software”). However, they lacked the necessary skills to operate the Sage software and hired Datacentrix to implement and configure the software.

The parties concluded a written Implementation and Support Services Agreement (the “agreement”). The terms of the agreement were not disputed. O-Line paid an amount of ZAR1 936 815 in terms of the agreement for the implementation of the software. After the software had been installed, O-Line alleged that the services provided by Datacentrix were defective in two material respects:

  • Datacentrix failed to successfully configure and implement the software, which resulted in O-Line being unable to use the software; and
  • Datacentrix failed to provide suitably trained staff to perform the support services set out in the agreement.

O-Line argued that these two breaches by Datacentrix resulted in the company not being able to use the system for its intended purpose. As a result, O-Line cancelled the agreement with Datacentrix.

The Pretoria High Court concluded that Datacentrix had breached the agreement and that O-Line had duly cancelled it. It therefore ordered Datacentrix to refund the contract amount of ZAR1 936 815.

However, the Supreme Court of Appeal granted Datacentrix leave to appeal the Pretoria High Court’s judgment.

For the purposes of the judgment, the SCA assumed in favour of O-Line that Datacentrix was in breach of the agreement and that this breach was material.

The SCA identified that there were two significant clauses in the agreement that dealt with the breach and the cancellation:

  • clause 17, which dealt with service level failures; and
  • clause 18, which provided that if a party to the agreement committed a material breach of the agreement and failed to remedy such breach within 30 days of being called upon to do so by the other party, then the innocent party may terminate the agreement on written notice to the defaulting party.

Clause 17 provided that if it was agreed or determined in a dispute resolution procedure that Datacentrix had failed to comply with any service level in any measurement period, then O-Line may, on written notice to Datacentrix, require it to submit a rectification plan.

Clause 17 also set out a detailed and complex process for the rectification of the service level failure. If the service level failure could not be rectified, this would constitute a breach by Datacentrix of the agreement.

In the particulars of claim, O-Line alleged that it cancelled the agreement in terms of clause 17, but at the start of the trial, it changed its position and abandoned reliance on clause 17. O-Line instead presented its case on the basis that it was entitled to cancel under clause 18, because Datacentrix committed a material breach of the agreement and failed to remedy such breach within 30 days of being called upon to do so.

O-Line relied on two letters:

  • The first letter was dated 8 June 2015 and listed a range of breaches by Datacentrix of the agreement. The 8 June 2015 letter concluded with the following:

“In conclusion Datacentrix needs to submit a comprehensive proposal stating how this will be urgently remedied no later than Friday 12th of June for perusal by the board … O-Line also reserves the right to withhold all outstanding payments … in the event that O-Line is not satisfied with either the proposal or success of the implementation, the company will instruct lawyers to proceed with litigation.”

  • An email dated 22 October 2015 from O-Line’s attorneys, communicating the cancellation of the agreement. In this letter, O-Line relied on the fact that it was unable to produce accounts, trial balances, and management accounts. They also alleged that the fundamental set-up and implementation of the software was flawed. This email referred to the 8 June 2015 letter which put Datacentrix on terms to develop a rectification plan. The 22 October 2015 email concluded with the following sentence:

“Accordingly, Datacentrix is in breach of the Agreement [insofar] as it has failed to provide a Services and/or Additional Services in terms of the Agreement which has not been remedied within a 30 day period despite being called upon to do so … which breaches are fundamental, and which have not been remedied since 12 March 2015.” On the strength of this, O-Line cancelled the agreement and claimed payment of what it had paid under the agreement.

The SCA stated that contracts frequently provide that in the event of a breach, the aggrieved party should inform the breaching party of the alleged breach and stipulate a period within which to remedy the breach. In such a case, the procedure laid down in a contract must be followed prior to cancellation, unless the breach takes the form of a repudiation of the contract. In the case of repudiation, the aggrieved party may cancel the contract immediately, because the repudiating party cannot have it both ways, by repudiating the contract and at the same time, trying to hold the other party to the terms prescribed by the repudiated contract.

The SCA referred to an earlier Western Cape High Court judgment in Bekker v Schmidt Bou Ontwikkelings CC and others, which stated that the purpose of a notice requiring a service provider to remedy a default was to inform the recipient of that notice and what was required in order to avoid the consequences of default.

The breach notice should be expressed in terms that leave the defaulting party in no doubt as to what is required or otherwise the notice will not be a notice as is contemplated in the contract.

The SCA found that O-Line correctly conceded that it was unable to cancel in terms of clause 17, because the letters did not comply with the procedures laid down in clause 17. The 8 June 2015 letter did not explicitly give Datacentrix 30 days within which to remedy the breach. This letter, instead, appeared to partly follow clause 17 by requiring Datacentrix to produce a rectification plan. The SCA held that O-Line was required to comply with the requirement of clause 18 strictly.

O-line was required to phrase the notice in a manner that Datacentrix would have been in no doubt as to what was required of it to avoid the consequence of cancellation for such non-compliance. The court highlighted that the 8 June 2015 letter did not warn Datacentrix that a failure to comply would result in litigation. Instead, it vaguely referred to it instructing its lawyers to proceed to litigation. The SCA held that this was not an unequivocal statement that the agreement would be cancelled if Datacentrix failed to remedy its breaches.

Consequently, the SCA found that O-Line failed to prove that it had cancelled the agreement in accordance with the procedures set out in the agreement. It therefore upheld the appeal, replaced the Pretoria High Court’s order with an order dismissing O-Line’s action against Datacentrix with costs.

This judgment illustrates the importance of strictly following the breach clauses in an agreement if one wants to rely on such clauses to cancel the agreement. It also demonstrates the importance of clearly communicating the consequences of failing to remedy a breach.

Aslam Moosajee

Executive | Dispute Resolution

amoosajee@ENSafrica.com

Humairaa Essop

Candidate Legal Practitioner | Dispute Resolution

hessop@ENSafrica.com

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