Cancellation Of Contracts - Rights, Procedures, And Consequences

Johan De Lange | SchoemanLaw Inc  

Category: Commercial Law  

Introduction 

Cancellation of a contract is an extraordinary remedy available to the innocent party under specific circumstances. Unlike specific performance, cancellation brings the transaction to a premature end, a drastic step contrary to the original intentions of the parties. This article delves into the materiality of breaches, the importance of cancellation clauses (lex commissoria), the act of cancellation, and its legal effects. 

The Materiality of the Breach 

Whether a breach justifies cancellation depends on its materiality and the specific circumstances surrounding it. The common-law principle requires breaches to be sufficiently serious for cancellation. 

Cancellation Clause (Lex Commissoria) 

Parties often insert a cancellation clause in their contracts (lex commissoria), outlining conditions and procedures for cancelling the agreement due to a breach. This clause can override common-law rules and permit cancellation for breaches that might not meet the common-law threshold of materiality. 

The Act of Cancellation 

Once a breach justifying cancellation occurs, the innocent party faces a choice: to affirm or cancel the contract. The election, once made, is final and irrevocable, except with the other party's consent. Notice of cancellation must be clear, unequivocal, and communicated to the party in breach. There are no formalities required except those stipulated in the contract. 

Loss of the Right to Cancel: Elections and Waiver 

An election to affirm the contract results in the loss of the right to cancel. Express or tacit manifestations of an intention to abide by the contract waive the right to cancel. Unreasonable delays in exercising the right may preclude cancellation, and acceptance of performance after knowledge of the breach can indicate waiver. 

Legal Effects of Cancellation 

Cancellation extinguishes primary obligations, with indivisible obligations terminated in entirety. Divisible obligations are terminated only for the remaining executory part. Ancillary obligations such as penalty clauses, arbitration clauses, exclusion clauses, and the obligation to pay damages may still apply after cancellation. 

Restitution 

Cancellation not only extinguishes obligations but also creates new ones—restitution, aimed at restoring parties to their pre-contractual positions. Restitution is excused in certain circumstances, such as when it becomes impossible due to inherent defects, force majeure, or acts of third parties. 

Conclusion 

Cancellation of contracts is a powerful yet exceptional remedy available to the innocent party. Understanding the materiality of breaches, the role of cancellation clauses, and the legal effects of cancellation is crucial in navigating contract disputes and preserving the rights of the parties involved. Contact an expert at SchoemanLaw for your commercial needs.  

Johan De Lange | SchoemanLaw IncAttorneyhttps://schoemanlaw.co.za/our-services/commercial-law/