Plaaskem (Pty) Ltd v Nippon Africa Chemicals (Pty) Ltd

The parties entered into a written agreement ('Samewerkingsooreenkoms') on 25 February 2005 concerning local distribution authority for imported agricultural chemical products. The respondent (Nippon Africa Chemicals) had a business relationship with Mitsui, a Japanese manufacturer. The appellant (Plaaskem) was to distribute the products and pay the respondent 15% calculated on gross profit earned from products sold. The contract was silent as to its duration. On 18 May 2010, the appellant sent written notice terminating the contract with effect from 30 June 2010. The respondent rejected the termination, claiming the contract did not contain a tacit term permitting termination on reasonable notice. The respondent sought an order directing the appellant to account for products sold from 25 February 2005 onwards. The high court (Makgoka J) found in favour of the respondent, holding that the contract did not contain a tacit, implied, or properly construed term allowing termination on reasonable notice. The appellant appealed to the Supreme Court of Appeal with leave.

• Whether a contract of unspecified duration contains a tacit term that it may be terminated by either party on reasonable notice
• What principles apply to determine whether such a tacit term should be implied into a contract
• Whether the specific contract between the parties, having regard to its express terms and surrounding circumstances, contained a tacit term permitting termination on reasonable notice
• Whether the purported termination of the contract on 18 May 2010 with effect from 30 June 2010 was valid

The appeal succeeded with costs. The order of the high court was set aside and substituted with an order declaring that the written agreement concluded on 25 February 2005 does have a tacit term that it may be terminated by either party on reasonable written notice. The respondent (plaintiff in the high court) was ordered to pay the costs incurred by the determination of this issue.

Where a contract is silent as to its duration, the question of whether it is terminable on reasonable notice is a matter of construction, determined by ascertaining the common intention of the parties at the time of conclusion, having regard to the express terms of the contract and the surrounding circumstances. There is no presumption one way or the other, and the onus is on the party asserting termination to demonstrate the parties' intention. However, when parties bind themselves to an agreement which requires them to work closely together and to have mutual trust and confidence in each other, it is reasonable to infer that they did not intend to bind themselves indefinitely, but rather contemplated termination by either party on reasonable notice. Where an agreement is silent as to its duration, it is terminable on reasonable notice in the absence of a conclusion that it was intended to continue indefinitely. A tacit term to this effect may be implied where: (1) the nature of the relationship requires close cooperation, trust and confidence; (2) surrounding commercial circumstances (such as variable costs, third-party dependencies, unpredictable factors) suggest perpetual binding was not intended; (3) the term can be clearly formulated; and (4) it is commercially efficacious to do so.

The Court noted with approval Carnegie's article expressing concern about parties being bound in perpetuity as imposing 'an excessively severe penalty for the misdemeanour of careless craftsmanship' and that commercial prudence indicates contracts should be determinable rather than endure perpetually. The Court also noted that while Smalberger AJA in Putco suggested that a valid commercial reason might be required for termination, Streicher JA in Amalgamated Beverage Industries clarified there is no rule of law requiring termination only for valid commercial reasons, though such a term may be implied on proper construction. The Court emphasized that its decision had no effect on other disputes between the parties which may still be pending. The Court also observed that the change in the respondent's circumstances (the passing of Dr Engelbrecht who was founder, sole director and sole shareholder, and with whom the relationship had been built) fundamentally altered the dynamic and relationship, making it doubtful the collaboration would continue in the same manner.

This case is significant in South African contract law as it clarifies and applies the principles governing contracts of unspecified duration. It reinforces the approach that commercial agreements requiring close cooperation, trust and confidence will generally not be interpreted as binding parties in perpetuity. The judgment provides guidance on when courts will imply a tacit term permitting termination on reasonable notice, emphasizing: (1) the nature of the relationship between parties; (2) surrounding commercial circumstances; (3) the absence of any indication of perpetual intention; and (4) commercial efficacy. The case demonstrates the courts' reluctance to hold parties bound indefinitely where the contract is silent on duration, particularly in commercial relationships dependent on mutual trust, cooperation and variable external factors. It is an important authority on the construction of commercial contracts and the implication of tacit terms.