|
|
[Home]
[Databases]
[WorldLII]
[Search]
[Feedback]
South Africa: Supreme Court of Appeal |
[Database Search] [Name Search] [Recent Decisions] [Noteup] [Help]
Reportable
CASE NO: 238/2001
In the matter between :
CASH CONVERTERS SOUTHERN AFRICA
(PTY) LTD Appellant
and
ROSEBUD WESTERN PROVINCE FRANCHISE
(PTY) LTD Respondent
________________________________________________________________________
Coram: Howie, Schutz, Navsa, Brand JJA and Lewis AJA
Date of delivery: 31 May 2002
Summary: Interpretation of two linked agreements to determine whether cancellation of one results in the termination of the other.
________________________________________________________________________
________________________________________________________________________
[1] I have read the judgment of Navsa JA and respectfully disagree with the conclusion reached by him that the appeal should be allowed.
[2] For the sake of convenience I shall in this judgment refer to the parties in the same way as Navsa JA has done.
[3] I agree that the two contracts are divisible. They were entered into separately, deal with different aspects of the parties’ relationship, and have different provisions governing breach of any term of each contract. No doubt there were good reasons for deciding to regulate the different aspects of the transaction through the use of separate contracts. The sale agreement, although executory in the sense that the purchase price was to be paid in instalments over a period, is essentially one of limited duration. Once the price was paid in full, the obligations of the parties would have been performed. This does not mean, of course, that the contract could not be rescinded, and restitution effected, even after performance had been completed, if it were found, for example, that the sale had been induced by misrepresentation, or was the result of a material and actionable mistake. The franchise agreement, on the other hand, would have continued to operate for the initial term, and possibly for longer if extended.
The franchise agreement was probably modeled on the contract between Cash Converters and the Australian company that had licensed it to grant franchises. No doubt certain terms were required to be included by the latter, and were non-negotiable. The agreement would have been in virtually standard terms, leaving little opportunity for either Cash Converters or Rosebud to negotiate any changes. It would thus probably have been both convenient and cost-effective to embody the terms governing one aspect of the legal relationship between the parties in one contract, and the sale of the rights and other assets to Rosebud in another.
[4] The suggested reasons for creating separate contracts do not, however, throw any light on their interpretation, especially given that they are speculative. However, even if it be accepted that the contracts are divisible, this does not mean that they are not inter-dependent, and that the termination of the one does not lead automatically to the termination of the other.
[5] An examination of their respective terms demonstrates, in my view, that they are interrelated in such a way that if either agreement is cancelled or terminated, the other is affected. I do not propose to traverse all the relevant terms since Navsa JA has done so. However, the following terms seem to me to be particularly significant.
1 Clause 1 of the sale agreement, the definition section, describes the
object of the sale as that part of Cash Converters’ business (rights acquired by Cash Converters from the Australian corporation to promote the franchised system by granting franchise rights) ‘as a going concern’ my emphasis), but excluding certain proprietary rights of Cash Converters such as names, colour schemes and insignia. It follows from this that if Rosebud is deprived of the right to promote franchises then it is deprived of the merx itself.
2 Clause 2, the ‘Narrative’, makes the sale conditional on entering into the franchise agreement, and clause 9 imposes an obligation on Rosebud to enter into the franchise agreement on Cash Converters’ terms.
3 Clause 2.1 of the franchise agreement provides that ‘in consideration of’ the sub-master franchisor (Rosebud ) under the sale agreement having purchased the business, and the performance and observation of the terms of the franchise agreement, Cash Converters grants Rosebud the right, for the term of the contract, ‘to market, promote, and distribute by way of franchise, the Franchised System and the right to use and/or apply the Industrial Property in connection with Franchised Businesses’. Industrial property includes marketing and operations manuals, the name, logos, trademarks and other intellectual property rights.
[6] The sale agreement is thus of no import without the franchise agreement and vice versa. Each gives substance to the other. Without the franchise agreement, the business sold is an empty shell. Without the sale, there can be no franchise agreement. Thus, while I agree that each contract is a separate legal transaction, it is my view that if the one fails the other must too.
[7] It is my respectful view that there are a number of faulty premises underlying the conclusion of Navsa JA. The first is that if one accepts that the contracts are inter-dependent, breach of one amounts to a breach of the other. That is clearly not so. Each contract sets out forms of breach and the steps and remedies that may follow. But termination is different from breach: it may be the result of it, or occur for some other reason. Certain forms of breach may result in cancellation. And some other vitiating factor might result in rescission and restitution. In my view, where cancellation is the remedy for the victim of the breach, this must, because of the nature of the contracts and their inter-dependence, result in the termination of the other. If the sale were breached and cancelled then surely the franchise agreement would necessarily fall away. Its entire reason for being would cease. What would the franchise agreement regulate? Is there any purpose in its continued existence? The answer must surely be No. If, on the other hand, the franchise agreement is terminated then the sale, whether fully executed or not, must also terminate because Rosebud is left with no merx. I cannot therefore agree with the conclusion of Navsa JA that the sale agreement was no more than a springboard for the franchise agreement.
[8] The second fallacy in the reasoning of Navsa JA, I suggest with respect, is that what Rosebud purchased was an opportunity to run a business. That does not appear to accord with the wording of the agreements nor with the parties’ intentions flowing from them. Rosebud purchased rights as part of a business that was defined as a going concern. It did not purchase a spes: the rights existed and were to be exercised in the manner contemplated in the franchise agreement. Of course the acquisition of the rights might have given rise to opportunities that Rosebud may or may not have exploited. But the rights to franchise others to run businesses were more than opportunities. One would be hard-pressed to argue that such rights were unenforceable. But how does one enforce an opportunity?
[9] Thirdly, Navsa JA has proceeded on the assumption that if the franchise agreement were cancelled, the sale agreement would terminate only if it were expressly cancelled too. This is not necessarily so. The sale would, in my view, have terminated because its entire reason for existence would have ceased to exist. There must surely be a tacit term that if the business sold were taken back by Cash Converters, there would be a rescission of the sale and restitution to the status quo ante.
[10] I consider that on any of the tests used by our courts over the years to establish whether a tacit term can be found in a contract, an unexpressed term that both of the contracts would terminate if one were cancelled or rescinded would be implied into both contracts. (See R H Christie The Law of Contract 4 ed pages 190ff; Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial Administration 1974 (3) SA 506 (A); and, for a comprehensive, more recent exposition of the general principles, Wilken v Voges 1994 (3) SA 130 (A).)
[11] Two of the commonly used tests, both of which are discussed by Colman J in Techni-Pak Sales (Pty) Ltd v Hall 1968 (3) SA 231 (W) in a passage quoted below, are whether the term sought to be implied is necessary to give business efficacy to the contract; and whether the parties, if asked about the inclusion of the term, would have agreed immediately that it was intended to be a part of their agreement, but they had not thought to include it because it was so obvious (the ‘officious bystander’ test).
[12] It is my view that the parties in this case would undoubtedly have agreed that if the one contract failed for any reason, the other would too. So too, the absence of the term renders the contracts ineffective: as discussed earlier, what purpose is served, if the sale is cancelled, in the continuation of the franchise agreement? And equally, if the franchise agreement is terminated, what content does the sale agreement have? The answer in both cases must be ‘None’.
[13] However, clause 16.2 of the sale agreement reads: ‘This document constitutes the sole record of the agreement between the parties in respect of the subject matter hereof’. And clause 17.6 of the franchise agreement provides that ‘this Agreement embodies the entire understanding of the parties and constitutes the entire terms agreed upon between them and supersedes and replaces entirely any prior written or verbal agreement between the parties’.
[14] Do these express terms of the respective agreements preclude the implication of the tacit term suggested into the contracts? The general principle is that a tacit term will not be imported if it is in conflict with an express provision of the contract: Robin v Guarantee Life Assurance Co Ltd
1984 (4) SA 558 (A) at 567C—F) and First National Bank of SA Ltd v Transvaal Rugby Union & another 1997 (3) SA 851 (W) at 864E—865D.
These and other cases deal, however, with terms sought to be implied which are in conflict or inconsistent with terms of substance in the written contract. Can it be said that the term relating to termination in the contracts under consideration is in conflict with the express term in each contract that states that the written document embodying the agreement is the sole record of the parties’ agreement?
[15] In my view they do not. Both express terms make it clear that no other written or verbal agreement will have any effect: such agreements are replaced by the express terms of the contracts. But what of terms to which the parties did not apply their minds? In Techni-Pak Sales (Pty) Ltd v Hall (above) Colman J, dealing also with the general tests for the implication of tacit terms, said (at 236F—237A):
‘The suggested term must, in the first place, be one which was necessary as opposed to merely desirable, to give business efficacy to the contract: and, what is more, the Court must be satisfied that it is a term which the parties themselves intended to operate if the occasion for such operation arose, although they did not express it. As Scrutton LJ put it in Reigate v Union Manufacturing Co [1918] 1 KB 592 at p 605, it must be
“such a term that it can confidently be said that if at the time the contract was being negotiated someone had said to the parties, ‘what will happen in such a case’, they would both have replied, ‘of course, so and so will happen; we did not trouble to say that; it is too clear’”.
That does not mean, in my view, that the parties must consciously have visualized the situation in which the term would come into operation. . . . It does not matter, therefore, if the negotiating parties fail to think of the situation in which the term would be required, provided that their common intention was such that a reference to such a possible situation would have evoked from them a prompt and unanimous assertion of the term which was to govern it.’
In Wilken v Voges (above) at 136H—137D, Nienaber JA referred to such terms as ‘imputed terms’. A term is imputed if the parties would have agreed if only they had thought about the matter.
[16] I consider that the term suggested is one that falls into the category discussed in Techni-Pak Sales and Wilken. It is an imputed term. The parties may not actually have discussed and agreed what the consequences of termination of contract would be for the other agreement. But if they had applied their minds to the situation they would, on a balance of probabilities, have said that the other must inevitably terminate. This would be an unexpressed term, or an imputed term, the implication of which would not be precluded by either of the clauses in the contracts that exclude reliance on other agreements.
[17] That the ownership of the business had not passed to Rosebud because the full purchase price had not yet been paid is of no consequence. The position should be the same whether ownership had passed or not.
[18] As counsel for Rosebud argued, it would have been possible for the parties expressly to exclude the possibility that the sale would terminate if the franchise agreement were cancelled. If they had done so then clearly Rosebud would have been taking the risk that it might pay for a business whether or not it were able to retain it.
[19] The fourth proposition with which I do not agree is this: if Rosebud were able to claim that the sale was terminated, and it were entitled to restitution of the purchase price at any stage after the contracts had been concluded, it could simply fail to carry out any of its obligations, effectively destroy the business and yet obtain restitution. However, restitution is reciprocal. The parties are required to restore each other to the position they were in prior to the conclusion of the contract. If complete restoration cannot be made where the merx has deteriorated in the hands of the buyer, then it is possible for an adjustment to be made to the amount repaid by the seller.
[20] In Feinstein v Niggli & another 1981 (2) SA 684 (A) at 700E-701D Trollip JA discussed the general principles relating to restitution where a contract is set aside on the ground of fraudulent misrepresentation. The principles would, however, be the same where the contract is set aside or rescinded on another basis: see Hall-Thermotank Natal (Pty) Ltd v Hardman 1968 (4) SA 818 (D) at 832H-833A. In Hall-Thermotank Henning J said (at 832E—F):
‘The basis of restitutio in integrum is the equitable doctrine that no one is permitted to enrich himself unjustly at the expense of another. A party who has benefited by a contract must, therefore, tender to return what he has gained, if he seeks to rescind the contract upon a ground recognized by law. Similarly he is required to tender return of what he has received into his possession.’
In Feinstein’s case, Trollip JA reaffirmed the principle that restitution is based upon equity, and stated (at 701A-C) that where the subject-matter of the contract cannot be restored in full because of deterioration in its value, whether due to the buyer’s fault or for some other reason, restitution is not precluded. The learned judge said also, albeit obiter (he found that the business bought in that case had not deteriorated through any fault of the buyer) that ‘Even where the deterioration or depreciation is due to the representee’s [the buyer’s] fault, restitutio is not necessarily precluded for the Court may allow him to adjust the deficiency by a monetary compensation’ (at 701B-C).
[21] There seems to me to be no reason to distinguish between the position of the victim of a breach, or a misrepresentee, on the one hand, and the perpetrator of the breach on the other (see Feinstein v Niggli above). If the business purchased deteriorates as a result of the failure of the buyer to run it properly, or to perform his obligations under a franchise agreement, and the buyer nonetheless claims restitution of the purchase price, it seems obvious that he cannot claim the full price. The amount to which the buyer is entitled must be determined having regard to the value of the business when restitution is made. See also Van Heerden en Andere v Sentrale Kunsmis Korporasie (Edms) Bpk 1973 (1) SA 17 (A) at 31H-32E. The Court there relied on the decision in Harper v Webster 1956 (2) SA 495 (FC), where Clayden J said (at 502D--H):
‘The South African Courts, where justice requires it, have excused the purchaser from the need to make restitution, either wholly or partially, in a number of varying circumstances. With an underlying principle that it is unjust for a man to retain a benefit he has obtained by his misrepresentation, . . . there seems to be good reason, provided that justice is done also to him, to apply the principle in a broad way. The general rule that the person seeking restitution must himself make restitution always governs, but relief should not be denied when substantially that restitution can be made and, in so far as it falls short of complete restitution, compensation in money can make good the deficiency. That was the manner in which justice was done in the action redhibitoria -- see the authorities earlier referred to, especially Voet 21.1.4
“Finally the purchaser is bound to make good the full extent of any deterioration of the subject occasioned by him” (Berwick’s translation), and Pothier sec 221
“For the same reason when the thing has deteriorated due to his fault he is not thereby denied relief, but is only obliged to make good to the seller to whom he restores it that depreciation which has come about by his fault.”
And there seems to be no reason, in applying an equitable principle to a case where the seller has actually made representations, not to allow the same latitude to a purchaser. And in the English and Scots system of law, in which the matter is dealt with under the same equitable principle, relief is given to the purchaser to this extent.’
[22] The possibility of adjustment of the amount to be repaid by Cash Converters, following a cancellation because of Rosebud’s breach, seems to me to be the answer to the problem posed by Navsa JA (and in the dissenting judgment in the court a quo of Josman J) that a buyer could, in a case like this, if he were entitled to claim restitution of the purchase price under the sale agreement, for the duration of the initial period of the contract, fail to comply with his obligations under the franchise agreement, and yet be repaid in full. If Rosebud were to have followed such a course, it would hardly be entitled, on the equitable principles discussed, to restitution of the full price.
The absurdity adverted to by Navsa JA (and Josman J), that Rosebud could return worthless franchise rights at the end of the franchise agreement (or indeed at any time after the conclusion of the sale), yet still be entitled to recover the purchase price, is therefore not one that arises. Equally, the absurdity and injustice that would follow if Cash Converters were entitled to take back the franchise rights, yet keep the money, is avoided by allowing restitution subject to appropriate compensation or adjustment.
[23] It follows that I also do not agree with the proposition that Rosebud took the risk that if it did not comply with the franchise obligations, it would have to forfeit the price it had paid for the franchise rights. The sale agreement nowhere suggests, on any reading, that Rosebud was willing to pay for a business that might at any time after the conclusion of the sale become worthless, whether through its fault or otherwise.
[24] For these reasons I would dismiss the appeal with costs.
ACTING JUDGE OF APPEAL
SAFLII:
|
Terms of Use
|
Feedback
URL: http://www.saflii.org/za/cases/ZASCA/2002/69.html
.RTF of original document