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Contractual disputes – a guide for small business owners

Contracts are an essential part of conducting any business. As a small business owner, it is crucial to understand the terms and conditions of any contract entered with an individual or business entity, especially regarding your legal interests, obligations, and remedies available in the event of a future contractual dispute.

Contractual dispute generally arises due to a breach of the contract. In contract law there are different types of breaches that may occur, however, a ‘major breach’ or ‘material breach’ of contract is detrimental to a small business owner as it may cause substantial financial loss and damage to the business.

Common Reasons for Contractual Disputes:

  • Failure to perform– A service provider neglects to provide goods or services as agreed or provides an unsatisfactory service or sub-standard goods;
  • Non-payment for services rendered- Your business may have provided a service or delivered goods and your customer neglects to effect payment;
  • Impossibility to perform- A contracting party neglects to perform in terms of their obligations and as a result you are unable to perform. For example, the other party neglects to attend to an interim payment and you are now unable to purchase material required to complete the work;
  • Unreasonable delays- A party neglects to perform in accordance with the timelines or milestones as agreed between the parties without any valid reason;
  • Unreasonable termination – A contracting party may proceed with termination without following the terms of the agreement or contractual law. For example, the contracting party neglects to inform you of any breach and further neglects to provide you with a reasonable time to remedy same prior to termination.

The Breach Clause

All contractual agreements should include a Breach Clause. The purpose of the clause is to confirm the steps to be followed in the event of a breach by either party. The Clause confirms that a written Notice is to be provided to the party in breach. The Notice will state the term of the agreement that has been breached and will provide the party in breach with a reasonable time to remedy same. This is generally between 7 to 14 working days. Should the party in breach neglect to remedy the breach within the requested time frame then the aggrieved party will have the option to terminate the agreement and proceed with a claim for damages, alternatively the aggrieved party may proceed with a claim of specific performance.

  • Claim for Damages- This is a monetary claim for expenses incurred due to terminating the agreement and instructing a new service provider to rectify unsatisfactory or incomplete work. The aggrieved party is required to obtain a quotation and invoice from the new service provider which is used to quantify the damages suffered. The aggrieved party may have suffered other damages such a customer cancelling their services resulting in loss of business. An aggrieved party must have evidence of how loss was quantified which is essential should the matter proceed to Court;
  • Claim for specific performance- An aggrieved party may insist that the other party remedy the breach and complete the work. The aggrieved party will proceed to Court with an application to compel the other party to perform in terms of the agreement.

The Arbitration Clause

The purpose of the Arbitration Clause is to allow for an alternative remedy as opposed to proceeding to Court for assistance with a contractual dispute. An Arbitration Clause will confirm a process to be followed by the parties that allow for discussions to mediate and resolve the dispute. Should mediation be unsuccessful, then the parties may refer a dispute for Arbitration

At Arbitration an expert is appointed and both parties will have an opportunity to present an argument before the Arbitrator. The Arbitrator will then hand down a ruling confirming a resolution to the contractual dispute that is binding on both parties.

NB: The Arbitration process is costly and may in certain instances cost more than having a matter taken to Court, however, in certain instances where the contract is highly technical in nature such as a contract to provide engineering services, it may be beneficial to proceed with Arbitration rather than proceeding to Court as the Arbitrator as an expert will have more technical knowledge on the dispute as compared to a Judge or Magistrate.

Tips to Remember

  1. Avoid “handshake” agreements– Always have a written contract in place for all your business dealings. Ensure that you contact your Legal Advisor to assist you with drafting the correct agreement that is suited for the reasons you are entering into an agreement and further protects your legal interests and contains the necessary clauses to assist you in the event of a contractual dispute.
  2. Read and understand your contract- Always ensure that you read through a contract that is provided to you before signing. Should you require assistance with understanding your agreement then contact your Legal Advisor to review your agreement and provide you with advice on whether there are any terms that effect your legal interest or whether there are essential terms such as Breach Clause that has not been included.
  3. Signing means you understand- Remember that once you sign an agreement you are required to abide by the terms of the agreement. The Courts are reluctant to set aside a contractual term or agreement as it is taken that you understood the terms and conditions of the agreement before signing same.
  4. Stay calm, control your emotions-Should you find yourself in a contractual dispute refrain from arguing with or threatening the other party as it may result in a breakdown of the relationship and effect your business interests.
  5.  Negotiate- Remember that negotiating with the other party is more cost effective and less time consuming than proceeding to Court. Should you be unable to effectively communicate with the other party then contact your Legal Advisor who has the necessary skills to assist with your contractual dispute.
  6. Don’t be hasty- Do not proceed with termination of an agreement without first seeking the advice of your Legal Advisor as you need to ensure you follow the correct steps before proceeding with termination, failing which the other party may be able to dispute the termination as you will then be in breach of the contract.
  7. Time to claim- Remember that in terms of South African Law you have 3 years from the date that a claim is due to you to proceed to with legal Summons, failing which your claim would have prescribed. Once a claim prescribes there is a possibility that the other party can raise same as a defense in Court, which may result in the matter being removed from Court. You will further have to pay for the legal cost of the other party.