If a revocation is determined, the other party has the right to accept the revocation and to terminate the contract itself. This means that in circumstances in which Party A has requested termination for breach of contract by Party B but there is no such right of termination, Party B should accept the rejection, the termination would be more due to Party A than to Party B, Party can deny Revocation before acceptance by the other party, there is no obligation for this party to give the rejecting party the opportunity to withdraw before acceptance.
Some contracts try to limit the rights of an infringing party to terminate. For example, the JBCC form of contract prohibits a party from exercising the right to terminate if that party itself commits a material breach of contract. This could also prevent acceptance of a rejection by a party if that party commits a material breach – but this is unlikely as the right of termination mentioned here is more limited to the specific rights mentioned in the clause and does not affect common law termination rights including acceptance of a rejection, which JBCC does not rule out.
While the JBCC seeks to create a regime where the terminating party must do so with “clean hands”, this can lead to a “limbo” situation in which neither party can terminate despite the fact that both sides have established termination rights. It also increases the risk of termination, as a party who has an otherwise clear termination right can still withdraw from the contract if they attempt to exercise the right while in material breach.
Create a clear right of termination
For both practical and legal reasons, termination cannot be taken lightly. There must be as much certainty as possible that a right to terminate has arisen before attempting to exercise that right.
Part of this process requires understanding the reasons for termination and determining where a termination right has been made conditional or its effectiveness has been delayed. For example, termination rights are usually subject to correction periods, contain termination obligations, or both. Slight variations in the drafting of contracts can have significant effects.
Insofar as the termination provisions contain a remedial period, the right of termination only arises if the violation is not remedied after the remedial period has expired.
Depending on the type of violation, it may be unclear to what extent remedial action needs to be taken. In the case of defective works, for example, a substantial, but not complete, elimination of the violation after the subsequent performance period has expired. In other cases, depending on the wording, drawing up a renovation plan and starting the renovation work may be sufficient.
The remedial period itself can also become a nebulous term if only a “reasonable” period is required as the appropriateness depends on the circumstances. In other cases in which the nature of the violation cannot be remedied, a fixed deadline for remedial action may not make much sense – however, failure to comply with the deadline can prove fatal for the right to terminate.
A careful drafting of the contract, which distinguishes between these categories and provides clear regulations, is required.
Insofar as the termination provisions contain a notice period, the right of notice has already arisen and can be exercised if the notice period is adhered to, but the notice of termination itself only becomes effective after the notice period has expired. The right of termination remains regardless of whether the violation that triggered the right is remedied within the notice period.
The reasons for a remedy period and a notice period are different. A remedial period is intended to give the opportunity to rectify a violation before termination can be given; while a notice period is intended as a preparation period that allows the parties to cease operations and complete the tasks required for termination.
In some cases, the violation that triggers the right is so great that immediate effective termination is warranted – for example, if one of the parties has committed a corrupt or unlawful act or has become insolvent. In these examples, the luxury of a settlement period cannot be afforded as immediate steps must be taken to end the contractual relationship between the parties and then to take steps to restore or close them. However, it is important that notice periods are not confused with redress periods and vice versa, and that their use is appropriate given the nature of the breach.
Is a “material” breach required for termination?
In many common law jurisdictions, including South Africa, the right to terminate exists only in respect of a material breach that lies at the root of the contract and the relationship of the parties under this contract, or for multiple breaches that together make a material breach represent .
It is therefore important to determine whether the contract provides a right to terminate without the need to demonstrate the materiality of the breach, so that materiality either becomes irrelevant or applies in relation to certain identified breaches. If the contract fails to do so, termination for an identified reason requires a determination of the materiality of the breach.
Interaction with other termination rights
The exercise of an earlier right of termination can also circumvent a party’s right to terminate due to infringement. If a right to terminate through no fault of one’s own, for example due to force majeure or a right to terminate out of convenience, arises earlier than a right to terminate due to infringement, then the earlier exercise of this right could be used to avoid the consequences of a termination for breach.
In these circumstances, the infringing party remains liable for the breach that occurred before the termination, but the liability does not extend to damage caused by the termination of the contract as the reason for termination would be different. It is therefore important to review the deadlines and reasons for an error-free termination and in whose hands these rights lie in order to assess the risks of using these rights to circumvent a right to terminate due to violation.
Co-written by Thatishi Moloto of Pinsent Masons