Cancellation: make sure you do it the right way

More often than not, when entering into an agreement the parties' focus is far removed from the cancellation and notice provisions buried among the terms of the document that they sign. A recent case illustrates that those express notice provisions can be costly if not followed to the letter.

In this case¹, a contractor entered into a written agreement to carry out a 12-year painting programme on a property owned by the defendants. Under the terms of the contract the defendants had agreed to pay a fixed annual amount to the contractor by instalments invoiced monthly. A clause in the agreement stated that failure on the part of the defendants to pay a monthly invoice would constitute an event of default and would entitle the contractor to terminate the agreement. The agreement further provided that if the contractor gave a “written notice of termination” the contractor would be entitled to a termination sum (calculated by a formula set out in a liquidated damages clause).

The defendants defaulted in payments in early 2006 and summary judgment proceedings were brought by the contractor for payment of the unpaid invoices and the termination sum.

The notice provision in the agreement required notices to be signed by any “Director, Secretary or Manager” of the contractor and went on to state that the notice “may be given by post or hand” to a specified address and addressee set out in an appendix to the agreement.

However, on the facts, the notice given by the contractor to cancel the agreement was in the form of a letter signed by the contractor’s financial controller and sent by post to one of the defendants at his address contrary to the details set out in the agreement.

The contractor argued that although the notice did not strictly comply with the terms of the notice provisions in the agreement it was nevertheless still legally effective because:

• by sending it to one of the defendants it was sufficient to bring notice of the cancellation to both of them; and

• the notice provisions in the agreement were not compulsory and did not exclude notice being given by other means.

The Court disagreed with these arguments and dismissed the contractor’s claim for the payment of the termination sum. In its view:

• the wording of the notice provisions were both prescriptive and exclusive on the mode of service of cancellation; and

• the existence of express notice provisions ruled out the ability to apply common law or statutory rules allowing for service to be effected by other means.

Commentary

As is illustrated by this case, little importance is often given by parties to notice provisions both at the time of entering an agreement and when purporting to give notices under the agreement. Yet as this case also illustrates these provisions deserve to be addressed with more than just a cursory glance as they often play a key role, especially around issues of default and termination.

One issue that has arisen in more recent times with notice clauses is the question of whether a notice by email should be included as a prescribed means of service for written notices. Email notices were made possible under the Electronics Transactions Act 2002 and it is now common to find email communications included in standard notice clauses.

If you do agree to receive a notice by email it is always a good idea to include a specific email address in the notice provision of the agreement to ensure that the relevant person within your business receives the email. It is also advisable to specify in the notice clause when receipt of the notice occurs to avoid any later arguments on this point.

¹ Programmed Maintenance Services (NZ) Ltd v Witters (Unreported Judgement HC, Auckland, Harrison J., CIV-2006-416-193, 29 March 2007)

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For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.