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The perils of performance prior to signing a written agreement

29th April 2009

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An unsigned agreement is still an agreement.
It often happens that parties reach an agreement and begin to perform while the written contract is still being negotiated. Their intention is that the written contract, once signed, will reflect the agreement and only those terms embodied in the written document will be binding on the parties.
Sometimes, however, the written agreement is never signed, prompting the question: What happens if there is a dispute between the parties before the written agreement has been signed?
Cell C (Pty) Limited v Zulu, a 2008 decision by the Supreme Court of Appeal, illustrates this point. Cell C entered into an agreement with Zulu in terms of which Cell C was to supply Zulu with a community service container equipped with telephones and other equipment. Cell C would also provide a cell phone signal to the container to enable Zulu to run a telecommunication service.
On 13 January 2004, a Cell C representative provided Zulu with Cell C's standard contract and asked him to sign and return it. Zulu duly signed it, but never returned it to Cell C. On the following day, Cell C delivered the container to Zulu, along with a signal. Zulu began trading, even though Cell C had not yet received his signed contract.
On January 26, Zulu decided to move the location of the container and sent Cell C a notice indicating his intentions. Cell C did not respond. On 3 February 2004, having now traded for some two weeks, Zulu moved the container. On the same day, and without notice to Zulu, Cell C deactivated the cell phone signal to the container.
Zulu brought an application, which Cell C opposed, to have the signal to the container restored. The court found in favour of Zulu and Cell C appealed the judgment.
The question before the Supreme Court of Appeal was whether an enforceable agreement had been concluded between the parties and, if so, whether Cell C had lawfully cancelled it in terminating the signal.
The court found that an interim agreement was concluded between the parties. Although it was the intention of the parties that a written agreement be drawn up and signed, Zulu had made payment to Cell C and Cell C had delivered a container and provided Zulu with a cell phone signal prior to receiving the signed contract from Zulu.
The conduct of the parties clearly indicated that an agreement was operating between them. That unwritten agreement would be terminated, however, upon signature of a written agreement and the written agreement would then replace the unwritten agreement.
But if there was no written agreement, what was required of Cell C in order to cancel the contract with Zulu?
As both parties had anticipated that all of their rights and obligations would be governed by the written document, neither party had thought about what they would need to do to cancel the agreement before signature of the written agreement. Cancellation had therefore simply not been discussed.
The court held that in the absence of an agreement regarding cancellation, a party must give reasonable notice of its intention to cancel the agreement. On the facts, the court found that Cell C had failed to give reasonable notice and its cancellation was invalid.
Where parties begin to perform contractual obligations under an oral agreement before signing a written document, it is important to remember that:
• There is an agreement between the parties;
• The agreement is an unwritten one;
• The provisions in the written document do not govern the relationship until and unless the written agreement is signed by both parties; and
• The terms of the unwritten agreement will be determined from the terms expressly agreed between the parties and their conduct, and not from the terms of the written document or from what the parties profess their intentions to have been.
Where there is no written agreement, it may be difficult for a party who wishes to cancel the agreement to do so, unless the parties have expressly agreed on the terms on which it may be cancelled, which is unlikely where they contemplated that the written agreement would be signed. In such circumstances, the party wishing to cancel the agreement must give the other party reasonable notice of its intention to do so.
Whether a particular notice period is reasonable or not is a factual question determined in accordance with the circumstances of each case. It is not capable of precise determination and a court might disagree with the party giving notice on what constitutes reasonable notice.
The lesson to be gleaned from this is that parties should be wary of performing prior to signing a written agreement regulating their relationship. Sometimes, however, because of time pressure or commercial necessity or the unavailability of the appropriate signatories, the parties cannot wait for the agreement to be signed prior to commencing performance. In such a situation parties would be well advised to consider how they intend to deal with cancellation, breaches or disputes in the period prior to signature of the written agreement and, if they can reach agreement on those issues, to record them in writing.

By Berna Oluka, a candidate attorney at commercial law firm Bowman Gilfillan.

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