It is not unusual for contracting parties to conclude either a long-term or an ever-green contract, especially if the contracting parties intended to be bound to such contract. However, problems usually arise when a contract is silent as to its duration and one of the contracting parties then wants to terminate same. This issue was considered in Plaaskem (Pty) Limited v Nippon Africa Chemicals (Pty) Limited 2014 JDR 1126 (SCA).
The contract concluded between Plaaskem and Nippon on 25 February 2005, concerned the importation of agricultural chemical products. Nippon had a business relationship with a Japanese manufacturer for the products and Plaaskem’s function was to distribute the products and pay Nippon an amount equal to 15%, calculated on the gross profit earned in respect of products sold as a result of Nippon’s endeavours. On 18 May 2010, Plaaskem provided Nippon with notice that it intended to cancel the contract with effect from 30 June 2010. Since the contract was silent on duration, Nippon disputed Plaaskem’s entitlement to cancel the contract.
The courta quoheld that the contract did not contain such a term and as a result, the notice of cancellation of the contract by Plaaskem was invalid and of no effect. In overturning the courta quo’sdecision, the SCA held that certain factors had to be taken into account to determine the existence of such a tacit term. Firstly, the SCA analysed the language used in the contract and held that from such language, there was no indication that the parties intended to be bound in perpetuity. Secondly, in considering the intention of the parties, the SCA noted that the contract was of such a nature that it required the parties to form and maintain a close working relationship and have regular contact and interaction with each other.Other aspects such as the contract covering a wide spectrum of products and that the nature of the relationship would change over time were strong suggestions that the parties did not intend to remain bound in perpetuity. Regarding the third factor, being the nature of the relationship, the SCA held that the courta quoerred in stating that the working relationship inter partieswas open to serious doubt.Ex facie the contract, the relationship appeared to be one of good faith and trust. Fourthly, the surrounding circumstances had to be considered. Factors such as production costs, transportation costs, landing costs and the applicable exchange rates would lead one to conclude that the parties had no intention to be bound in perpetuity.
The SCA upheld Plaaskem’s appeal and held that it was necessary for a tacit term to be imported, the tacit term being that the contract could be terminated by either party on reasonable written notice.
As a contracting party, you have the contractual freedom to decide the express terms of your contract such as, for example, the duration and manner of termination. Failure to do so impedes this freedom and affords a court with the discretion to decide on what you and the other contracting party intended, which could have dire consequences as either party may not be content with the court’s decision. To avoid such a situation, exercise your contractual freedom as far as possible by reducing material terms to writing.