How to cancel a contract

A valid contract is legally binding, but what if you want out? We consider legal means for exiting a contract, with or without an exit clause.

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What is a contract?

A contract, in basic terms, is an agreement between two or more people who promise to perform in accordance with it, says Gerhard van der Merwe, senior associate at Trudie Broekmann Attorneys.

Senior legal advisor Nico Geldenhuys notes that, while some contracts are in writing and signed, most don’t need to be.

“Only a few types of contract require any formality - for instance, the sale of land or an antenuptial agreement,” Geldenhuys says. “For other contracts, it’s sufficient that both parties have a mutual understanding that they intend the agreement to be legally binding.”

Common examples of contracts include lease agreements, employment contracts, and gym memberships.

Grounds for cancellation

Under ordinary circumstances, a contract can only be lawfully cancelled if the parties mutually agree to it, or if the contract contains a clause entitling a party to cancel if specific requirements are met, says Geldenhuys.

A cancellation clause can be reciprocal or non-reciprocal, allowing both, or only one of the parties to cancel, depending on what is agreed during the negotiations.

“It’s a good idea to include such a clause,” Van der Merwe says. “If a contract does not include a cancellation clause, or the clause imposes a cancellation fee, it’s reason for pause - and to obtain legal advice from an attorney.”

Geldenhuys says the following are examples of conditions you may find in a cancellation clause.

• A party must have breached one of its contractual obligations first. The contract may then require the innocent party to afford the breaching party a period, such as 14 days, to remedy the breach. Only then may the innocent party cancel the contract.
• A “termination for convenience” or a “no-fault” clause may be added. This allows one or either party to exit the contract at any point, provided that the other party is notified.
• A notice period may be required. In this case, the exiting party may be required to pay a cancellation penalty. The penalty usually incorporates either a sliding scale, based on the number of months left on the contract, or a formula, based on expenses or losses incurred by the other party.

The consumer protection act (CPA) invariably allows a consumer to exit a contract that falls under its auspices, provided that they give reasonable notice, Geldenhuys says. The supplier, in this instance, is also entitled to impose a reasonable penalty. In the case of cell phone contracts, this may comprise all subscription fees for the remaining term of the contract.

As an important aside, the CPA prohibits suppliers from automatically renewing contracts that are about to expire.

“Once the initial term ends, the contract may only endure on a month-to-month basis, unless the consumer expressly agrees to a new fixed-term period,” Geldenhuys notes.

How to terminate a contract

While it may be wise to seek legal help should you wish to exit a contract, Geldenhuys says it is possible to cancel on your own, if you observe the following steps.

• Find out whether the CPA governs the contract. Read the contract to see whether it contains a cancellation clause and, if so, whether it entitles you, or both parties, to exit.
• If there is a cancellation clause, notify the other party of your intention to cancel the contract. Ensure the notice satisfies all of the requirements set out in the clause. It may, for example, require that the notice is in writing, sent to a specific email address, or sent by registered post to the company’s office. Where the cancellation clause gives a notice period, you will be liable to pay all fees and charges during this period.
• If there is no cancellation clause, contact the other party to negotiate a mutually agreed cancellation. Remember that the other party may accept or reject this request. When the contract is between two companies, a company generally has no obligation to agree to a cancellation if the contract doesn’t contain a stipulation.
• As a last resort, a court may intervene by reviewing and setting aside unduly harsh contractual conditions. However, South African courts tend to honour the validity of a contract as a matter of public policy, as legal certainty attracts economic growth and investment. A court will only relieve a party of unduly harsh contractual obligations under exceptional circumstances, as a party is generally required to take on business risks with open eyes.

Terminating a contract can be tricky for a layperson, says Van der Merwe. Seeking the advice of an attorney could mean the difference between success and failure.

Tip: Ensure your house and car are adequately insured.