Cancellation clause requirements
Datacentrix (Pty) Ltd (“Datacentrix”) successfully appealed against the judgment and order of the Gauteng Division of the High Court (Pretoria).
The high court ordered Datacentrix to pay ZAR1?936?815 plus interest for breach of a contract entered into between it and O Line (Pty) Ltd (“O Line”). The high court refused leave to appeal -which was granted subsequently by the Supreme Court of Appeal (“SCA”).
Background
O Line, inter alia, manufactures, warehouses, distributes and markets, and sells electrical and mechanical support systems.
O Line used a software system called ACS Embrace for its financial record keeping, accounting and reporting, recording of stock levels, inventory control, monitoring and planning of its manufacturing process, and recording of sales and receipts. O Line wanted to upgrade and change to a Sage ERP X3 system. Based on a recommendation, O Line contracted with Datacentrix to implement and configure its software.
O Line and Datacentrix concluded a written Implementation and Support Services contract (“contract”) on 25 November 2013.
Datacentrix provided the services to O Line. O Line paid Datacentrix ZAR1?936?815 for Datacentrix’s services.
After the installation services were provided, O Line alleged that the services were materially defective in that:
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O Line alleged that these failures resulted in it being unable to use the software system for its intended purpose.
The high court held as follows:
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SCA
The issue before the SCA[1] was whether the high court correctly held that O Line properly cancelled the contract.
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Contractual provisions
Clause 17 of the contract provides that if It was agreed or determined in a dispute resolution procedure that Datacentrix failed to comply with any service level (performance standards and measures for services) in any measurement period, O Line, on written notice to Datacentrix, could require Datacentrix to submit a rectification plan (in accordance with the requirements of clause 17.2 of the contract). Clause 17.3 provided that if the service level failure could not be rectified, such failure shall constitute a breach by Datacentrix of the contract between them.
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Clause 18 of the contract provides that should a party commit a material breach of the contract, and fail to remedy such breach within 30 days of having been called upon to do so by the other party, the innocent party may terminate the contract on written notice to the defaulting party (without prejudice to any claims the innocent party may have for damages against the defaulting party occasioned by the default or termination of the contract in terms of clause 18).
Correspondence from O Line
O Line wrote a letter dated 8 June 2015 to Datacentrix in which it alerted Datacentrix to a range of breaches of the contract (relating to lack of performance of the software and failed project management). The letter concluded by stating that Datacentrix needed to submit a comprehensive proposal stating how this would be urgently remedied no later than 12 June 2015 (for perusal by O Line’s board). O Line advised Datacentix that should it not be satisfied with either the proposal or success of the implementation O Line would instruct its lawyers to proceed with Litigations.
Thereafter correspondence was exchanged and meetings were held to resolve the matter. O Line did not accept two attempts by Datacentrix to bring about a rectification plan.
O Line’s attorney’s communicated O Line’s cancellation of the contract by way of a letter dated 22 October 2015. O Line alleged that it was unable to produce accounts, trial balances, and management accounts and that the set-up and implementation of Sage were flawed. The letter referred to the letter dated 8 June 2015 and that Datacentrix was put to terms to develop a rectification plan. The letter concluded as follows:
“Accordingly, Datacentrix is in breach of the Agreement [in so far] as it has failed to provide the Services and/or Additional Services in terms of the Agreement which has not remedied within a 30 day period despite being called upon to do so, and/or is in breach of the warranties set out in clauses 15.1.1 and 15.3.1 thereof (“the warranties”) which breaches are fundamental, and which have not be remedied since 12 March 2015.”
Applicable law
The SCA quoted the below extract:[2]
“Contracts frequently provide that in the event of breach the aggrieved party should give the party in breach notice of the breach and a stipulated period within which the latter has an opportunity to remedy or purge the breach. In such a case the procedure laid down in the contract must be followed as a necessary prelude to cancellation, except, so it has been held, where the breach takes the form of a repudiation of the contract. In that case the aggrieved party may cancel forthwith since the repudiating party cannot have it both ways by repudiating the contract and at the same time hold the other party to the rules prescribed by the repudiated contract.”
It held that the rationale for requiring strict compliance with the prescribed procedure for cancelling is that the purpose of a notice requiring a purchaser to remedy a default is to inform the recipient of that notice of what is required of him or her in order to avoid the consequences of default. It should be couched in such terms as to leave him or her in no doubt as to what is required, or otherwise, the notice will not be such as is contemplated in the contract.[3]
Application of the law to the facts
O Line conceded, correctly in the SCA’s view, that it was unable to cancel the contract in terms of clause 17 (because this did not comply with the procedure for cancellation).
The SCA reasoned as follows:
“Clause 18, as stated above, especially clause 18.1, states that if a defaulting party ‘commits a material breach of this Agreement, and fails to remedy such breach within 30 (thirty) days of having been called upon in writing to do so . . . then the Innocent Party may, …, terminate this Agreement on written notice to the Defaulting Party.”
The letter of 8 June 2015 did not pertinently give the appellant 30 days within which to remedy the breaches. Instead, it appears in part to have followed clause 17 by requiring the appellant to produce a rectification plan. The respondent was required to comply with the requirements of clause 18 strictly. It was required to couch the notice in such a manner that the appellant would have been in no doubt as to what was required of it to avoid the consequence of cancellation for such non–compliance. The letter never warned the appellant that a failure to comply within 30 days would result in cancellation. Instead, it alluded vaguely to instructing its lawyers to ‘proceed to Litigations’. Whatever this may have been intended to mean, it was not an unequivocal statement that the agreement would be cancelled if the appellant failed to remedy its breaches.”
Conclusion
The SCA concluded, therefore, concluded that O Line failed to prove that it cancelled the contract in accordance with the procedure set out in the contract. The SCA, therefore, did not consider whether the contract was breached and, if so, whether the breach was material.
[1] Datacentrix (Pty) Ltd v O-Line (Pty) Ltd (891/2021) [2022] ZASCA 162 (25 November 2022)
[2] Du Bois (ed) Wille’s Principles of South African Law 9 ed at 877.
[3] Bekker v Schmidt Bou Ontwikkelings CC [2007] 4 All SA 1231 (C) para 17; 2007 (1) SA 600 (C) para 17