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Potential problems when a contract does not specifically deal with its termination

Potential problems when a contract does not specifically deal with its termination

Even the most experienced businessmen have moments of short-sightedness when conducting business deals which may leave them in hot water. All too often, poor contract craftsmanship or legal oversight is the primary reason for their dismay. For example, what happens when you enter into a contract without express terms governing its termination? This is where the parties found themselves in the case of Plaaskem v Nippon Chemicals (574/13) [2014] ZASCA 73 (29 May 2014) heard in the Supreme Court of Appeal.

The facts of the case

On 25 February 2005, a contract between Nippon Africa Chemicals (Proprietary) Limited (“Nippon“) and Plaaskem (Proprietary) Limited (“Plaaskem”) was concluded. A material term of the contract was that Nippon would receive 15% of the Plaaskem’s gross profit in respect of all products sold by Plaaskem.

With the agriculture industry being volatile due to varying climatic conditions and the unpredictable exchange rate, commercial efficacy was an overarching factor in the plausibility of this agreement.

In the case at hand, Plaaskem attempted to terminate the agreement in 2010, however it came to light that there was no express provision granting Plaaskem the right to cancel the agreement.  Accordingly, the contract would exist in perpetuity, but for Nippon reneging on the agreement.

Mr Cross, on behalf of Plaaskem, stated that he had no intention to conclude a contract in perpetuity, and that it would have been poor business practice to do so.

The court commented that if a contract is concluded without specified duration, the onus is on the party who asserts the omitted term, to prove it. Thus, Plaaskem would have to prove on a balance of probabilities that the agreement was terminable on reasonable notice. The court would consider the construction of the agreement and all other admissible evidence in determination of this issue.

The court found that there were three (3) main points of adjudication for the court to consider in determining whether this phantom clause did in fact exist. They were commercial convenience, the relationship between the parties and the common intention of the parties at the time of concluding the contract.

In respect of commercial convenience, the court cited authority which supported the idea that it was commercial prudence which would indicate whether a contract should be determinable rather than perpetual.

Furthermore, that a valid commercial reason will generally be a strong enough reason for termination, in the absence of provisions to the contrary.  With regard to the relationship between the parties, the court found that where there is mutual trust and closeness between the parties, it is reasonable to infer that those parties did not intend to bind themselves indefinitely.

Finally, with regard to the common intention of the parties at the time of the conclusion of the contract, the court would consider the express provisions of the contract and the surrounding circumstances at the time to determine this.

The court took into account the aforementioned criteria and found it ‘difficult to imagine’ that the parties had intended to have been bound in perpetuity.

The SCA accordingly upheld the appeal finding that the agreement did have a tacit term that it may be terminated by either party on reasonable written notice.

It is always wise to seek legal counsel when entering into high stakes contracts. Ensure that your attorney reads all your contracts thoroughly, so as to ensure that you receive no unwelcome surprises.

By Jaryd Kay

Jaryd has experience in labour law and consumer protection. He also has experience in drafting commercial and non-commercial contracts. Jaryd also has a keen interest in non-contentious legal matters and is available for all queries pertaining to succession, property, consumer protection and matrimonial law.