Is it possible to have an agreement that is “non-cancellable” and therefore contains no cancellation clause and, automatically, no “termination for convenience (without cause)” clause? On the face of it, one would think that such an agreement is unreasonable and against public policy because, in essence, neither party would then be able to cancel the agreement.
Yet, a surprising number of small business owners are asked to sign such contracts or would like to add such non-cancellable provisions in their own agreements. What does our contract law say about the issue and how have our courts dealt with this interesting contract-conundrum?
The imputing of tacit and / or implied terms into agreements
The 2014 Supreme Court of Appeal (“SCA”) case of Plaaskem (Pty) Ltd v Nippon Africa Chemicals (Pty) Ltd dealt with the issue of whether a written contract – which was for an indefinite duration and did not make provision for the procedure for terminating the contract – could be construed as containing a tacit (implied) term to the effect that the contract was terminable by either party on reasonably written notice. The court said that certain factors must be considered for purposes of determining the existence of such a tacit term, such as the language of the contract, the nature of the relationship between the contracting parties, the goods or services that are the subject matter of the contract, and the surrounding circumstances of the contract.
The court added that, based on the earlier considerations, the contract between Plaaskem (Pty) Ltd and Nippon Africa Chemicals (Pty) Ltd was not intended to bind the parties in perpetuity and therefore said that it was necessary and “commercially efficacious” (smart!) that the tacit term to the effect that the contract was terminable by either party on reasonably written notice to be added in the contract.
The court concluded that the contract between the parties could be terminated by either party on reasonable written notice.
There are at least three older prominent court matters that also tested the idea of tacit or implied terms, being Amalgamated Beverage Industries Ltd v Rond Vista Wholesalers 2004 (1) SA 538 (SCA); Trident Sales (Pty) Ltd v AH Pillman & Son (Pty) Ltd 1984 (1) SA 433 (W); and Putco Ltd v TV & Radio Guarantee Co (Pty) Ltd and Other Related Cases 1985 (4) SA 809 (A).
In the case of Kelvinator Group Services of SA (Pty) Ltd v McCullogh 1999 (14) SA 840, it was held that a term, to be attributed, must not merely be reasonable or desirable, but necessary, and that such a tacit term will not be imputed into an agreement if it is in conflict with its express provisions.
In all these matters, the courts concluded that, in circumstances where it can be inferred, from the circumstances surrounding agreement between parties, that the parties did not intend to be bound to the agreement indefinitely – but where the contract terms did not provide for a duration for the contractual relationship – then the agreement can be terminated on reasonable notice.
The courts did not specify what time period constitutes ‘reasonable notice,’ so ‘reasonable notice’ would depend on the circumstances of each case.
The legality of agreements with an indefinite period
It is important to note that it is not illegal to have agreements that continue for an indefinite period, as long as there are clear intentions from the parties that they wish to be bound to the agreement for such period. In such circumstances, the court will generally not attribute a tacit term to the effect that the contract was terminable by either party on reasonably written notice.
What about repudiation?
Repudiation – where a party indicates their unwillingness or inability to continue with their contractual obligations – may become applicable where the agreement between the parties is for an indefinite period or does not contain a termination clause, and one of the parties wishes to terminate the agreement. If the other contracting party views the conduct of the other party in terminating a ‘non-cancellable’ agreement or an agreement that does provide for termination as a repudiation of the contract, this is considered a breach of contract. Repudiation would invoke the consequences of breach of contract, which include:
- Acceptance of the repudiation by the innocent party and therefore, the agreement would be terminated
- Rejection of the repudiation by the innocent party and the agreement would unfortunately have to continue as per the duration of the agreement
- Upon termination of the agreement because of repudiation (breach), the innocent party may be entitled to claim damages.
This means that if a party no longer wants to be bound to an agreement, they’ll need consider legal ways in which to end an agreement and/or contractual relationship.
In conclusion, it is legal to have agreements that continue for an indefinite period as long as the agreements are reasonable and not against public policy.
Parties, do however, need to ensure that their conduct will not amount to a repudiation of the agreement.
The topic of non-cancellable agreement and repudiation is not clear cut, so it is therefore advisable to approach an attorney to consider the matter and advise you accordingly.
