To lawfully cancel an agreement based on a contractual discretion tied to clear criteria, there must be valid and reasonable grounds. The example of a written offer to purchase a property subject to confirmation of no structural defects illustrated here provides clarity.
In the case of Talacar Holdings (Pty) Ltd v Cole[1], the High Court dealt with the criteria for an agreement to be terminated unilaterally when the agreement affords a party the discretion to cancel on specified grounds. The High Court held that for such termination to be valid, the objectively ascertainable grounds contemplated in the agreement must be shown to exist.
The Talacar matter dealt with the sale of immovable property. The parties to the sale executed a written agreement in the form of an offer to purchase which included a provision entitling the purchaser to cancel the agreement if an inspection conducted within 14 days of the agreement should reveal that the property in question had any “structural defects or defects that are unacceptable to the purchaser”. The purchaser inspected the property and was accompanied by experts such as a structural engineer, and no structural or other defects were reported. However, when the purchaser was required to perform in terms of the agreement, he purported to cancel the agreement based on alleged defects which were present in the property. He claimed “defects” such as cracks on the walls, the lack of an elevator, a driveway which needed to be made wider, etc.
Significantly, none of these “defects” were identified by the purchaser nor any of the experts that represented him, until they were outlined in the purchaser’s answering affidavit after legal proceedings were instituted by the seller.
What did the Court conclude?
The court held that agreements may be terminated unilaterally (if the agreement contains such a provision) based on the objectively ascertainable criteria contemplated in the clause conferring the discretion. The court held further that the “defects” identified by the purchaser were cosmetic and were based on the personal preference of the purchaser. When all the facts were objectively considered, it was found that there were no objectively identified defects present and that it was thus unreasonable to cancel the agreement. The agreement in this case also contained a voetstoots clause which would “cover minor imperfections such as cracks on the walls if there were any.”[2]
The purchaser consequently had no right to terminate the agreement, and his failure to perform (i.e. obtaining a bank guarantee, signing applicable transfer documents, etc.) amounted to repudiation. The seller was thus entitled to claim specific performance, and the court ruled in favour of the seller, ordering the purchaser to render specific performance.
This judgment illustrates the importance of seeking legal advice before cancelling agreements, as doing so unlawfully can lead to unwanted consequences, such as liability for repudiation of the agreement.
[1] Talacar Holdings (Pty) Ltd v Cole 2023 (6) SA 626 (GJ).
[2] Talacar Holdings (Pty) Ltd v Cole 2023 (6) SA 626 (GJ) para 27.