Oral Cancellation of a written contract?

Written contracts commonly contain a non-variation clause. This clause usually reads something like the following: “No alteration, variation of or addition to this Agreement shall be of any force or effect unless it is reduced to writing and signed by both Parties”. This is to prevent one of the parties claiming that there was an oral agreement changing the terms of the contract. Without written proof, there is often a dispute about what was said and agreed.

For example, you ask your landlord to pay your rent on the 5^th day of the month, instead of the 1^st. He or she may orally agree to this, but if nothing is written and signed, this arrangement will not be legally recognised if a dispute about late payment arises.

In a recent decision by the Supreme Court of Appeal (“SCA”) Ocean Echo Properties 327 CC v Old Mutual Life Assurance Company (South Africa) Limited (288/2017) [2018] ZASCA 09 the question was whether parties can tacitly (by common understanding, without express oral or written agreement) cancel a contract containing a non-variation clause.

The facts in short

Ocean Echo Properties 327 CC (“Ocean Echo”) leased a commercial property from Old Mutual. The lease contained a non-variation clause, as well as a clause which required Old Mutual’s written consent if Ocean Echo wanted to vacate the property before the end of the lease period.

Ocean Echo vacated the premises during the currency of the lease (without Old Mutual’s written consent) and a Mr. Solomon occupied the premises for the rest of the lease period. Mr. Solomon proceeded to pay all rent and costs and Old Mutual sent the monthly rental statements to Mr. Solomon. When Mr. Solomon fell behind with his payments, however, Old Mutual issued summons to claim the outstanding amounts (R457,816.07) from Ocean Echo.

As defence, Ocean Echo argued that the lease between itself and Old Mutual had been tacitly terminated when it vacated the premises and Mr. Solomon moved in. Old Mutual argued that Ocean Echo’s defence was not valid, as it was not allowed to vacate the premises without Old Mutual’s written consent and the alleged tacit cancellation amounted to a variation of the contract – which was prohibited by the non-variation clause.

The High Court agreed with Old Mutual. This was followed by an appeal to a full bench of the High Court, and eventually an appeal to the SCA. In its judgment the SCA referred to the earlier case of Ferreira & Another v SAPDC (Trading) Ltd [1983] 3 All SA 346 (A) (“Ferreira”) which said that “while an oral agreement varying … the terms of a contract … is not permissible, there is no objection to allowing proof of an oral agreement relating to the cancellation of the contract by which its terms as such are not placed in issue”.

The SCA had to decide whether the tacit agreement alleged by Ocean Echo was a variation of the lease, or a cancellation. If it was a variation it was not valid because of the non-variation clause. If a cancellation was not a variation, a tacit cancellation was valid.

The court distinguished between the two concepts, on the basis that a cancellation terminated the operation of the contract with all its terms for the future, while leaving intact all terms of the contract and its operation in the past. Cancellation, therefore, does not involve a variation of the terms of the contract and therefore does not offend against the non-variation clause in the contract.

The SCA decided that the parties tacitly terminated the contract and that the termination was valid, and Old Mutual’s claim was therefore dismissed.

Why is this case important?

Unless the contract you signed specifically says that consensual cancellations must also be in writing and signed by both parties, a tacit cancellation of the contract will be valid – even if the contract contains a non-variation clause. It is therefore prudent to ensure that a non-variation clause expressly requires consensual cancellations to also be in writing.