The contract is signed, the deal made, the future is bright…! Who really cares about how long the contract must run? A few months later the deal is over, the relationship soured, the future bleak… But the contract is silent as to the duration. Does this spell eternal damnation at the behest of a contract that does not allow for an exit or can a contract which has no express duration clause be terminated?
The clause determining the duration of a contract can be one that is easily forgotten in the euphoria of having a deal concluded. Yet this clause (and specifically the absence thereof) has the potential to cause numerous problems for the contracting parties. The question that often arises is when does a contract terminate when there is no express duration clause? Is the only way out to try and place the other party in breach of contract or commit breach of contract yourself? Are the contractants bound to a perpetual agreement or is there liberation?
Where the duration of certain agreements are regulated by legislation, these provisions regarding duration must be applied to the contract. For example, the Consumer Protection Act specifies a maximum period of 2 years for certain fixed term consumer contracts. Any agreement which purports to be longer than this would need the supplier to prove demonstrable benefit in favour of the consumer.
If a contract is not specifically regulated by legislation, the duration will have to be determined contractually by establishing whether there are any specific termination grounds, including voluntary termination grounds, which the parties can rely on. If no such specific termination grounds are included in the contract, then the following tools recently provided by our Supreme Court of Appeal in the Plaaskem (Pty) Ltd v Nippon Africa Chemicals (Pty) Ltd case can be considered to answer the question:
The construction of the agreement.
The intention of the parties when entering into the agreement.
The nature of the relationship between the parties.
The surrounding circumstances of the agreement.
These considerations will help determine whether a contract which has neglected to specify the duration, is terminable or if the parties are forever bound by its provisions.
This entails an investigation into the language and use of words used in the contract, in order to get a sense of the tacit or implied terms of the contract. If the contract has no express term to the contrary and there is no indication throughout the agreement that its existence should be perpetual, it can be construed that the duration of the agreement is determinable as opposed to perpetual.
According to our law, one of the essential elements of a contract is the meeting of the minds between the parties to the contract. Without this, a valid contract cannot be said to have been created. One of the approaches to determine whether there has been a meeting of the minds is the exploration of the mutual intention of the parties and what they envisioned when entering into the agreement. If this is established to not have been a perpetual relationship, this is also indicative of a terminable agreement.
The type of contract and the relationship between the contractants is an important aspect in the determination of the duration of a contract. Where a contract was entered into between the parties as a temporary arrangement, it cannot be inferred that the parties should be permanently bound to the agreement. A further consideration is a contract which embodies a close and mutual relationship of trust and confidence in each party. In such instance it is reasonable to deduce that the parties did not intend to bind themselves perpetually, but rather that they were able to terminate the agreement by delivering reasonable notice to the other party.
In South Africa, our approach to interpretation is contextual, meaning that all external, relevant factors surrounding an agreement must be considered when determining the duration of a contract. In considering surrounding factors these may also lead to a clear inference of the contract having a terminable nature.
From the above it is clear that commercial prudence will more likely tip the scales in favour of the duration of an agreement being determinable instead of perpetual. Accordingly, where an agreement is silent as to its duration, it will generally be terminable on reasonable notice being provided by one party to the other in the absence of an express term that the contract was intended to continue indefinitely. Ultimately, the determination of duration is strongly dependent on the facts of each case and the particular relationship created between the parties. Furthermore, and contrary to popular belief, there need not always be a valid commercial reason for terminating the contract. Simply put, a contract which has run its course, with no prospect of future potential should be laid to rest and not imprison the parties to an eternal relationship.