Building contract cancellation: Beware the pitfalls

The building project is going nowhere and so too is the relationship between the client and building contractor. Both parties have been at loggerheads since the start of the project and the relationship has deteriorated to such a point that both parties are failing to meet their contractual commitments in terms of the building contract. But what now? Can either of them just call it a day and cancel their contract?

Where the relationship between a client and a contractor has been compromised due to a breach of contract by one of the parties, it is usually the natural instinct of the non-defaulting party to cancel the contract. It is not however always that easy and the party opting to cancel the contract may find himself in an even worse position than the defaulting party, should the correct procedures not be followed.

For a party to cancel a contract due to a breach, the breach must go to the root of the contract, i.e. there must be a material breach of an essential term of the contract. Small or immaterial transgressions under the contract do not necessarily provide grounds for cancellation, although the facts of each case will determine whether there are sufficient grounds for cancellation.

If a contract lays down a procedure for cancellation, that procedure must be followed otherwise the cancellation will be ineffective. In the absence of any contractually agreed procedure, in order to establish a right to cancel an agreement due to a material breach by the other party, the non-defaulting party must first place the defaulting party in default by way of a written notice to the defaulting party, which notice should include the following essential elements:

  1. Description of the material breach committed by the defaulting party. This should have sufficient detail to allow the other party to understand what it needs to do to remedy the breach.
  2. The timeframe within which such breach must be remedied.
  3. An indication that the contract will be cancelled should the defaulting party neglect to remedy the breach within the stated timeframe.

Should such a notice omit to inform the defaulting party that the agreement will be cancelled in the event that the defaulting party fails to remedy the breach within the allocated timeframe, the non-defaulting party shall be obliged to issue a further notice to the defaulting party which includes notice of the intent to cancel. Additionally, the party issuing the notice must also adhere to all the contractual formalities regarding the delivery of such a notice to the defaulting party. In this regard standard form building contracts usually contain clear and precise guidelines for the delivery of notices between the contracting parties. If use is made of a custom building contract, care should be taken to include a clear procedure for the issuing of notices between the parties.

Where a party is intent on cancelling a contract due to material breach by the other party, it is important that it should do so with clean hands and ensure that it is not also in default in terms of the contract. A client who wishes to cancel a contract on the grounds of, for example defective workmanship by the contractor, must ensure that it has carried out its obligations in terms of the contract, including that of paying all payment certificates when they become due. The employer cannot withhold payment to the contractor due to its delivery of defective work and then, when the contractor does not remedy the defective work, cancel the contract. The contractor can similarly also not cancel the contract if it has not received payment by the employer, suspend his works and then, when payment remains due, continue to cancel the contract.

Where a party cancels a contract without following the correct procedures or while he is also in breach of a material obligation, the cancellation can be seen as a repudiation of the contract, signifying an indication that he no longer intends to be bound by the provisions of the contract and entitling the other party to accept the repudiation and cancel the contract or even refuse to accept the repudiation, in which case the contract will remain in effect and both parties will have to adhere to all their rights and obligation in terms of the contract. No matter which option the other party elects, he will also have a right to institute a claim for damages against the repudiating party, should he be able to prove his entitlement for damages due to such repudiation. It is therefore essential that a party, who wishes to cancel an agreement, first make sure that he is in not in any default in terms of the contract.

Today’s standard building contracts provide guidelines to both contracting parties on the type of default which can lead to the cancellation of a contract and most importantly, guides the whole process of cancellation. Contracting parties should therefore make sure that when they wish to cancel a contract, they examine the stipulated procedures and follow the contractual guidelines with the utmost care. If in doubt as to your right to cancel an agreement or the correct procedure to be followed, it is advisable that legal advice be acquired to ensure that no missteps are taken which could weaken your legal position. 

February 4, 2014
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