The termination of a contract on reasonable notice

Difficulties often arise under circumstances where an agreement, governing the commercial relationship between two parties, is silent on either party's right to terminate that agreement.

It is sometimes contended that an agreement, which makes no provision for a right of termination by either party is, as a consequence, indefinite or 'evergreen'.

A court ought not lightly to infer, from the absence of specific provisions relevant to the termination of an agreement, that the same is one intended to operate in perpetuity. Notwithstanding this fact, a decision delivered in the North Gauteng High Court, Pretoria, found that a written agreement concluded between Nippon Africa Chemicals and a local distributor of its products, was not capable of termination on reasonable notice. That decision was challenged before the Supreme Court of Appeal in the matter of Plaaskem vs Nippon Africa Chemicals 2014 (5) SA 287 SCA.

Thankfully, the Supreme Court of Appeal (SCA) adopted a more commercially realistic attitude to the issue as to whether or not the agreement was in fact capable of termination, on reasonable notice, by either party.

The SCA emphasised that the first question is one of construction, and that it was therefore necessary to have regard to the language used by the parties in the contract. Having considered the terms of the agreement, the SCA found that there was no express term dealing with the agreement's duration, and also that there was no indication that the parties intended to be bound in perpetuity. The second investigation necessary, concerns the intention of the parties, having regard to the nature of the relationship between them, as well as the surrounding circumstances. The court held that where an agreement required the parties to form and maintain a close working relationship, with regular contact and interaction between them, it was reasonable to assume that the nature of the relationship may change from time to time. That commercial reality strongly suggests an intention by the parties not to be bound in perpetuity.

Having applied these tests, and after taking into account the surrounding circumstances and the fact that the contract was silent as to its duration, the SCA held that it was necessary that a tacit term be imported into the agreement to the effect that the contract could be terminated by either party on reasonable notice.

This approach is to be welcomed, as it recognises the commercial realities at play in business relationships.