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Vavasor Properties (Pty) Ltd v Ehlers and Others (2) (51/2001) [2002] ZASCA 31 (28 March 2002)

.RTF of original document

THE SUPREME COURT OF APPEAL

OF SOUTH AFRICA

Not reportable

Case No: 51/2001

In the matter between :

VAVASOR PROPERTIES (PTY) LTD Appellant

and

CHRISTIAAN FREDERIK EHLERS First Respondent

HESTER JOHANNA EHLERS Second Respondent

________________________________________________________________

CORAM: MARAIS, STREICHER et CAMERON JJA

HEARD: 12 MARCH 2002

DELIVERED: 28 MARCH 2002

________________________________________________________________

J U D G M E N T

________________________________________________________________MARAIS JA/

MARAIS JA: [1] I have had the advantage of reading the judgment of my learned brother Cameron JA. With respect, I am unable to concur in the conclusion he has reached. For me, the key to a proper understanding of the contract is an appreciation of its dual character. It is neither solely a partnership agreement nor solely a contract which regulates the basis upon which a potential sale of immovable property is to take place. It is a composite agreement which accommodates both in one document and the jural relationships which spring from it are governed partly by special principles derived from the law of partnership and partly by general principles derived from the law of contract. Care must be taken not to conflate, consciously or unconsciously, these two distinct sources of legal obligation into a single hybrid source of obligation and then to attempt to deduce from it what obligations do or do not exist.

[2] The basic elements of the written agreement are quite clear. The plaintiffs, Mr and Mrs Ehlers, owned and lived on a piece of land which Vavasor thought it might be profitable to exploit commercially by developing it as a precinct for the motor industry. But it was not prepared to buy it from the plaintiffs until it had conducted a viability study. That study was not to be confined to such matters as the feasibility of acquiring the necessary developmental rights and road access and the drawing of plans. It was also to extend to the financial feasibility of developing the property which would have to take into account the methods, availability and cost of financing the development. That is the plain meaning of clause 3 (“en (my emphasis) ‘n gangbaarheidstudie doen om te bepaal of dit haalbaar is om die eiendom te ontwikkel”).

[3] Just as Vavasor was not prepared to commit itself to buying the property until that study had been completed and it was satisfied of both the physical and financial viability of the development it had in mind, so were the plaintiffs not prepared to wait indefinitely for that to be done and to be committed indefinitely to holding their property available for purchase and use in the development. Hence the time limit of six months imposed by clause 3 for the completion of the viability study.

[4] Although the plaintiffs were to be partners in the partnership (the Doreg 27 Ontwikkeling) which would undertake the development they were not expected to contribute to the assets of the partnership by donating their property to it. The partnership was to be conducted through the medium of a company to be formed by Vavasor alone and that company was to be obliged to buy the property from the plaintiffs for R950 000. The formation of that company and the purchase of the plaintiffs’ property was to take place as soon as Vavasor decided to go ahead with the development and the purchase price was to be paid in cash against transfer of the property to the company so formed.

[5] The plaintiffs’ interest in the company was to be 30% and that of Vavasor 70%. The plaintiffs were to pay nothing for their interest and were not to be liable for any of the partnership’s obligations. Vavasor alone was to be the executive partner and the plaintiffs were barred from concluding any transactions or incurring any debts on behalf of the partnership. Vavasor was to indemnify them for any claims made against them arising out of the partnership or the development.

[6] What is abundantly clear therefore is that Vavasor was required to make up its mind after completion of the viability study whether to go ahead with the development. A decision to do so would trigger the plaintiffs’ obligation to sell their property for R 950,000 to a company to be formed by Vavasor for the specific purpose of buying the property, providing a corporate framework for the Doreg 27 Ontwikkeling partnership, enabling appropriate shareholdings to be conferred upon Vavasor and the plaintiffs, and developing the property. Reciprocally, a decision by Vavasor to go ahead with the development would oblige it to form a company to undertake and give effect to the obligations spelt out in clause 6.

[7] It is critical to the proper interpretation of the agreement to bear in mind the distinction between the different and shifting capacities in which Vavasor and the plaintiffs were parties to the agreement. I have already pointed out that the plaintiffs were not required to transfer their property to the partnership which would come into being in corporate garb in their capacity as partners and in fulfilment of any obligation to contribute to the capital assets of the partnership. They were obliged to do so only in their capacity as sellers. Equally, the partnership’s obligation to them to buy the property and pay the price was not owed to them in their capacity as partners. Nor was Vavasor’s obligation to them to bring about the formation of the company which was to purchase the property. For the purposes of that transaction they rank in law as ordinary parties to a commercial contract who contracted at arm’s length with one another.

[8] In their capacity as partners, the plaintiffs had other rights against their partner Vavasor. They could enforce Vavasor’s undertaking to fund the development if Vavasor failed to do so. However, if objectively assessed, it were to become apparent at any time that the development was doomed to failure, the plaintiffs would not be entitled to insist that the development go ahead. That would not be compatible with their obligation as partners to act in good faith. But Vavasor would not be entitled to undo the purchase by the partnership of the property.

[9] For that reason I consider it to be unsound to equate the obligation in clause 6.1 with the obligation in clause 6.2 and then to narrow the ambit of the former as if it were subject to the same limitations as the law of partnership imposes upon the superficially wide breadth of the obligation in clause 6.2.

[10] To my mind, no question of a tacit term arises. The ordinary meaning of the language in which the agreement is couched obliged Vavasor, once it had decided to go ahead with the development after having had the benefit of a viability study comprehending inter alia financial viability, to bring into being a company which would buy the property for a predetermined price, pay that price, and take transfer of the property. That is quite a different case from that in which A undertakes to B that A will procure C to buy B’s property. There C is an identifiable, existing, person (whether natural or legal) with an existing patrimony (be it large or small) and B is able to decide whether to sell to C in the light of C’s ascertainable financial ability to fulfil the obligation to pay the price. In such circumstances, there can be no suggestion that A is obliged to ensure that C is financially able to and does pay the price.

[11] This is a case in which Vavasor alone would decide whether there was to be a purchase at all. If it decided that there would, there would be no identifiable existing person (whether natural or legal) who would be entitled to be the buyer and whose financial strength or weakness the plaintiffs could have assessed before committing themselves to selling the property to her, him or it. The buyer was to be a subsequent creation of Vavasor’s. I use the word “creation” advisedly for the buyer could and would not be a natural person. The plaintiffs were to be obliged to sell their property to Vavasor’s creation. It had to be created for the specific purpose of buying the property for R 950,000 and paying cash against transfer.

[12] In my opinion, it would be absurd to suppose that Vavasor was free to give birth to a legally and financially still-born company which was incapable of effectively acquiring the property by buying it and obtaining transfer by paying for it. Just as Vavasor would have failed to fulfil its contractual obligations if it had formed a company the memorandum of association of which did not allow it to acquire immovable property, so would it have failed to do so if it provided it with no share or loan capital or other financial means to enable it to function effectively or at all. Unless it was Vavasor’s obligation to empower the company legally and financially to purchase the property and pay for it, it would not matter whether its failure to do so was simply the result of it choosing not to do so although able to do so, or the result of its own financial inability to do so. In neither event would the plaintiffs have any cause for complaint in law.

[13] It would also mean that in order to escape the charge that it had been guilty of any breach of contract by failing to form a company to buy the property, it would be open to Vavasor to form a penniless company and cause it to sign a deed of sale without having any intention whatsoever of the company actually acquiring the property and the plaintiffs being paid the purchase price.

[14] The interpretation of the agreement for which Vavasor contends is the basis for Vavasor’s stance in this case. That stance amount to this: Vavasor admits that it failed to carry out its contractual obligations to establish the company which would be obliged to buy the property but says that the plaintiffs have suffered no damages because Vavasor was not obliged to provide the company with the means to pay for the property. Bluntly stated, the proposition is that Vavasor was to be in a position to render itself immune from any claims for damages for its own breaches of contract.

[15] A reading of the agreement which gives rise to these absurd results is, in my view, untenable and in conflict with the ordinary meaning of the words used. I am unable to agree that the agreement would make commercial sense if it were to be read as excluding any obligation on Vavasor’s part to fund the company to be formed, provided that at that time there were, or were thought to be, funds available from another source. It would mean that the plaintiffs were prepared to commit themselves contractually to holding their property available for possibly as long as six months for purchase by an as yet non-existent company which no one would be contractually obliged to fund to enable it to pay for the property and, in return, to be content with a mere spes that the company would find the money.

[16] An interpretation of an agreement which would be commercially absurd cannot escape being labelled as such merely because, if certain things were to happen which no one is obliged by the agreement to make happen, the purpose of the agreement will adventitiously have been achieved.

[17] However, if I am perhaps wrong in so thinking, and the implication of a term would be necessary, I have no doubt that a term should be implied. With respect, I do not believe that the hypothetical question posed in paragraph [16] of the judgment of Cameron JA is the question which must be asked. It presupposes that it would have been in order for a company with no financial resources or facilities of its own to be formed by Vavasor and that that company might then experience “probleme met finansiering”. It does not address a logically anterior question which I think is the true question to be posed: Does the agreement mean that the company which Vavasor is obliged to establish need not be one which can in both fact and law buy, take transfer of and pay for the property?

[18] The plaintiffs would certainly have answered that question in the negative. Can it realistically be supposed that Vavasor might have answered it in the affirmative? I think not. Vavasor would not have dared to answer in the affirmative for if it had, the proposed transaction would have fallen to the ground. There can be no doubt that the plaintiffs would not have been willing to commit themselves to Vavasor to hold their property for six months for possible acquisition by the partnership and then to sell their property to a company to be established by Vavasor but which Vavasor was refusing to commit itself to fund. Vavasor would have known that that would be the reaction of the plaintiffs and would therefore have had to reply to the question in the negative.

[19] The reasoning in the previous paragraph postulates that Vavasor might have contemplated answering in the affirmative but was driven to answer in the negative if the transaction was to survive. In point of fact there is no reason to suppose that it would at that time have even considered answering in the affirmative. As has been pointed out in the judgment of Cameron JA, Vavasor did not at that time anticipate any problem in financing both the purchase of the property and the development. That is an added reason why it is unrealistic to suppose that it might have answered in the affirmative to the hypothetical question I have posed. In the words of Nienaber JA (quoted in paragraph 15 of the judgment of Cameron JA) the placing of an obligation upon Vavasor to fund the company which it was obliged to establish to buy and take transfer of the plaintiffs’ property is “necessary to render the contract fully functional”.

[20] In my opinion, the reference in clause 6.3 to the company’s entitlement to fund the purchase price and the development costs by way of loans secured by mortgage bonds cannot be regarded as lending any support to the counter argument. In marked contrast to the usually encountered bond clause in deeds of sale of immovable property (entire sale and with it the obligation to pay the price conditional upon obtaining of a bond), the company’s obligation to pay the price is not stated to be conditional upon the obtaining by it of loans secured by mortgage bonds. Secondly, there is no obligation upon the company to finance the purchase by way of such loans.

[21] It was not for the plaintiffs to prove that Vavasor was in a position to provide the company with enough money to pay for the property. Nor was it relevant in law whether or not Vavasor was in such a position. If, on a proper construction of the agreement, it was its contractual obligation to provide the company with the money, its inability to do so (which I may say was not proved) would not be an answer to a claim for damages against it (Vavasor). Those damages would have to be assessed by comparing the financial position in which the plaintiffs would have been if Vavasor had established the company, the company had bought the property, and Vavasor had provided it with sufficient funds to pay for it, with the position in which they are as a consequence of the failure to do these things. That is what the Court a quo did.

[22] In my opinion the appeal should be dismissed with costs.

_________________________

R M MARAIS

JUDGE OF APPEAL