Follow termination procedures to a T or else
Lessons from Datacentrix (Pty) Ltd v O-Line (Pty) Ltd
A recent decision of the Supreme Court of Appeal (“SCA”) is a timely reminder that a party who fails to follow a contractually prescribed termination procedure does so at its own peril.
In the case of Datacentrix (Pty) Ltd v O-Line (Pty) Ltd [2022] ZASCA 162, Datacentrix appealed a decision of the Gauteng Division of the High Court (“high court”) whereby it was ordered to pay approximately R2m to O-Line as damages for breach of contract following a failed software implementation project.
O-Line, a manufacturer of electrical and mechanical support systems, had entered into an agreement with Datacentrix, an authorised distributer of Sage software, for the installation and configuration of the Sage X3 enterprise resource planning software system in O-Line’s environment. O-Line paid Datacentrix a fee of R1.94m for the implementation of the software.
The implementation project did not proceed according to plan. O-Line claimed that it was unable to use the software due to Datacentrix’s failure to properly implement and configure the software. In addition, O-Line alleged that Datacentrix failed to provide sufficient staff with the requisite skills to perform the necessary support services. As a result, O-Line could not use the software for its intended purpose. In other words, O-Line had spent almost R2m on software it could not use.
The high court held that Datacentrix breached the agreement, and that O-Line’s termination of the agreement was valid. On appeal, the SCA had to determine if the high court’s finding that the agreement had been breached and validly terminated was correct.
Unfortunately for O-Line, the SCA agreed with Datacentrix’s argument that the agreement was not properly terminated, as it had failed to follow the termination procedure set out in the agreement. In its finding, the SCA relied on two letters sent to Datacentrix by O-Line to complain about Datacentrix’s poor performance.
In its initial letter of 8 June 2015, O-Line alleged various breaches of the agreement (including a lack of performance of the software and failed project management) and required Datacentrix to submit a detailed remediation plan by 12 June 2015. In addition, O-Line threatened to withhold outstanding payment and to instruct its lawyers to initiate litigation.
Following the letter, the parties met to attempt to resolve the dispute. O-Line also twice rejected Datacentrix’s proposed remediation plan.
This resulted in an email from O-Line on 22 October 2015 informing Datacentrix of the cancellation of the agreement due to Datacentrix’s failure to perform the services and to remedy its non-performance.
The SCA confirmed the principle that a contract that provides for a breach notice and cure period following the notice must be followed before the aggrieved party may terminate the contract. The SCA applied the Western Cape High Court’s judgment in Bekker v Schmidt Bou Ontwikkelings CC. The Bekker judgment states that the purpose of a notice requiring a defaulting party to remedy a breach is to inform the defaulting party of what is required to avoid the consequences of the default (e.g., cancellation of the agreement). Importantly, the notice must be given in a way that leaves the defaulting party “in no doubt as to what is required”, otherwise the notice will be invalid. This means that the breach notice must be crystal clear.
In its analysis of O-Line’s purported cancellation of the agreement, the SCA found that O-Line had failed to comply with the termination procedure set out in the contract. This termination procedure requires a party wishing to terminate for material breach to provide the defaulting party with 30 days’ notice to remedy the breach, whereafter it may terminate the agreement if the defaulting party has failed to remedy the breach. In other words, O-Line’s demand for a rectification plan to be submitted and threat of litigation, did not satisfy the notice requirement in the termination clause. According to the SCA, O-Line’s letters did not amount to an “unequivocal statement that the agreement would be cancelled if [Datacentrix] failed to remedy its breaches”.
As a result, the SCA dismissed O-Line’s damages claim with costs, without having to consider if the agreement was breached, or if the breach was material.
This judgment illustrates the risk of not following precisely the contractually prescribed termination procedures. O-Line’s ambiguous initial letter therefore resulted in irrecoverable damages of almost R2m. This judgment shows the importance of having a clear understanding of one’s termination rights, as well as the steps to be taken to validly exercise those rights. Failure to do either can be costly.
by George Miller and Tshilidzi Rambuwani
The information and views contained in this article does not constitute legal advice. If you do require legal advice, please contact us on hello@lighthouse.law.
