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Sun Packaging (Pty) Ltd v Vreulink (665/94) [1996] ZASCA 73; 1996 (4) SA 176 (SCA); (31 May 1996)

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Case No 665/94
IN THE SUPREME COURT OF SOUTH AFRICA
(APPELLATE DIVISION)
In the matter between:
SUN PACKAGING (PTY) LTD Appellant
and
ANTON HENDRIK VREULINK Respondent
Coram: NESTADT, F H GROSSKOPF, HARMS, OLIVIER JJA et ZULMAN AJA
Date heard: 24 May 1996
Date delivered: 31 May 1996
JUD GMENT NESTADT. JA:

Iri a judgment reported in 1995(2) SA 326(C), the court

a quo (Mitchell AJ, sitting in the Cape Provincial Division) refused
an application to amend a plea. The appellant was the applicant.

It is the defendant in an action brought against it by the respondent. The application to amend was moved at the commencement of the trial. As will be seen, its object was to introduce an alternative defence to the respondent's main claim. The trial judge found, however, that the proposed plea did not disclose a defence and, if granted, would, on this ground, be excipiable. He therefore upheld the respondent's opposition to the amendment. In issue before us is the correctness of this decision. The trial is still pending.

It is necessary to analyse the pleadings in a little detail.

The respondent's cause of action against the appellant is based on a

contract of employment. The summons alleges that he first started

working for the appellant in 1986. On 22 March 1991, the terms of

their relationship were reduced to writing. They were contained in

a letter of that date written by the appellant to the respondent. The letter (which is annexed to the summons) commences by referring to the "concern" which the respondent had expressed at "a recent meeting" between the parties "regarding the future of our company and also your own future within the company, especially in the light of the recent announcement that Holdains have acquired a controlling

interest in our holding company " It is also stated that "the offer

of this contract has come about due to your request for job security in the light of the changes mentioned above." Against this background, it is recorded (in clause 1) that with effect from 1 January 1991 the respondent would be employed as a "Director/General Manager, Speciality Products" at the appellant's factory in the Cape for a period of five years. His "annual

remuneration package" was to be R140 400 (subject to annual
revision). In terms of clause 2 the contract "will be automatically
renewed for a further period of five years unless notice of termination
is given by the one party to the other at least six months prior to
termination". Then follows the clause on which this appeal turns.
It is clause 3. It reads:

"I confirm that it is an integral part of the Company's policy to remain operative for an extensive period of time - in fact our latest Annual Report stresses that part of our Mission is 'to build Sunpak into a 100 year Company'. However, should the Company decide for some unforeseen reason to restrict, limit or in any other way change it's operation to the extent that your employment is directly affected, you will be compensated for the premature termination of this contract as follows; Compensation = Unexpired portion of 5 year contract based on annual salary at time of termination with an escalation of 18% per annum thereafter."

The final provision is that all other general terms of employment are

to be governed by the company's "Personnel Policy". The terms of the letter were accepted by the respondent.

I return to the further allegations contained in the
summons. They make out the case that the respondent's concern, to
which reference has been made, was not misplaced. He did not
remain in the appellant's employment for the five year period
provided for. Instead, his employment was prematurely terminated
by the appellant with effect from 1 September 1992. The reason
given by the appellant appears from a letter to the respondent dated
20 August 1992. It is that due to "the reorganisation" of the
appellant, his position was being "made redundant". This, so it must
be accepted (for the purposes of this appeal), constituted an
"unforeseen reason to change its operation to the extent that [the

respondent's] employment [was] directly affected" within the meaning of clause 3. Relying on it, the respondent's main claim is for payment of an amount of R739 174,37. This, so it is alleged, represents the compensation due to the respondent for the unexpired portion of his five year contract, calculated according to clause 3. An alternative claim, based on the appellant's personnel policy is for payment of R78 553,19.

The appellant's plea admits the alternative claim and tenders payment thereof. The plea to the main claim, however, raises various defences. One is that the writer of the letter was not authorised to act on behalf of the appellant. Another is that the agreement was a fraud on it. The (alternative) plea which the appellant now wishes to advance seeks to invoke a further defence, viz the protection of the Conventional Penalties Act, 15 of 1962.

This Act provides, of course, for the enforceability of penalty
stipulations in contracts. The material part of sec 1(1) reads:

"A stipulation, hereinafter referred to as a penalty stipulation, whereby it is provided that any person shall, in respect of an act or omission in conflict with a contractual obligation, be

liable to pay a sum of money for the benefit of any other

person, hereinafter referred to as a creditor, either by way of a penalty or as liquidated damages, shall, subject to the provisions of this Act, be capable of being enforced in any competent court."

However, by virtue of sec 3, the penalty may be reduced if it is
excessive, ie if the Court considers it out of proportion to the
prejudice suffered by the creditor. It is on this section that the
appellant relies. Alleging that "the provisions of clause 3
constitute a penalty stipulation in terms of sec 3 of the Act", the
amendment pleads that the compensation claimed by the respondent
is (for a number of reasons which it is unnecessary to detail) out of

proportion to any prejudice suffered by him; indeed that having regard to the amount of R78 553,19 for which liability is admitted, he had suffered no prejudice at all; the respondent was therefore not entitled to any compensation under clause 3.

Following from what has been said, two points need to be emphasised. The first is the obvious one that it is a prerequisite to the operation of sec 3 that the creditor's claim be based on a penalty stipulation (Christie: The Law of Contract in South Africa. 2nd ed, 657-8). Accordingly, unless clause 3 constitutes a penalty, it is not subject to moderation. The other is that on the wording of sec 1(1), and especially "an act or omission in conflict with a contractual obligation", the liability of the debtor to pay must derive from a breach of contract (Da Mata v Otto NO 1972(3) SA 858(A)

at 871 A). Failing this, the stipulation relied on by the creditor would not qualify as a penalty. As the present case shows, this may give rise to a quaint state of affairs, namely a debtor who, in order to avoid or reduce liability, contends that he breached his contractual obligations. But that is the effect of the Act

The question before the court a quo was whether clause 3 is a penalty stipulation. The answer was held to depend on its proper interpretation and, in particular, on whether the compensation provided for is payable in consequence of a breach by the appellant of its obligation to employ the respondent for five years (as provided for in clause 1). If so, the proposed plea was clearly good in law and the amendment should have been allowed. It was decided, however (see especially at 329 C-E and 330 H), that the clause

afforded the appellant the right, in return for payment of the compensation provided for therein, to terminate the respondent's employment prior to the expiry of the five year period stipulated in clause 1; that in doing so, the appellant had therefore not committed any breach of contract; this being so, clause 3 was not a penalty stipulation; and, seeing the Act did not apply, the plea that the amount claimed by the respondent be reduced (to nil) in terms of sec 3 was thus not legally sustainable.

Before us, Mr Gauntlett, on behalf of the appellant, accepted that if this was so, the application to amend was rightly refused. This concession was soundly based. An amendment which renders a pleading excipiable will not normally be allowed. But he

stressed the principle that an excipient has the duty to persuade the court that upon every interpretation which the pleading in question, and in particular the document on which it is based, can reasonably bear, no cause of action or defence (as the case may be) is disclosed; failing this, the exception ought not to be upheld (Lewis v Oneanate (Pty) Ltd and Another 1992(4) SA 811(A) at 817 F-G). Proceeding on this basis, counsel submitted that clause 3, whilst undoubtedly open to the construction that it afforded the appellant the right to terminate, was also reasonably capable of meaning that a premature termination of the respondent's employment (even where the criteria for its operation are satisfied) amounts to a breach of the appellant's obligations under clause 1. In summary, the argument was that this was so (i) on what I may call a linguistic approach (or,

as it was put, on an "internal" interpretation), alternatively (ii) because the proper meaning of the clause could not be determined without the aid of evidence. In either event, so it was said, clause 3 was capable of being a penalty; it should therefore not have been held that the proposed plea was excipiable; and the amendment ought thus to have been allowed.

It will be apparent that the argument assumes that the problem is one of interpretation. I am not sure that this is in truth so. It may be that it is basically one as to the legal effect of the clause (cf Aubv and Pastellides (Pty) Ltd v Glen Anil Investments (Pty) Ltd 1960(4) SA 865(A) at 872 G). But this would not affect the result of the appeal and I leave it aside. Problems of contractual interpretation are often before the courts. No wonder then that there

is a large body of case law dealing with the applicable principles.

Text-book writers have also contributed to the subject. Mr Gauntlett

cited the most important authorities in both classes. Save to the

extent which follows, I have not thought it necessary to refer to them

in this judgment. The basic principles are, for the most part, clear.

The determining factor is the intention of the parties. This is

ascertained from the language used, read in its contextual setting and

in the light of any admissible evidence (Total South Africa fPty) Ltd

v Bekker NO 1992(1) SA 617(A) at 624 F-G). Broadly speaking

there are three classes of such evidence. One is of background facts.

Another relates to surrounding circumstances. The third is evidence

of what passed between the parties on the subject of the contract.

Only the first and second need be considered. It would seem that

evidence of the former, ie background facts, is part of the context and as such is always admissible. It has been described as encompassing the "genesis of the transaction" or its "factual matrix". Its aim is to put the Court "in the armchair of the author(s)" of the document (LAWSA, First Reissue, vol 9, para 547, p 373). Evidence of surrounding circumstances, on the other hand, is only justified in cases of uncertainty or ambiguity. At least this is the conventional thinking. But the possibility of the adoption of a more liberal approach has recently been raised by this Court (Pangbourne Properties Ltd vs Gill and Ramsden (Ptv) Ltd 1996(1) SA 1182(A) at 1187 B-F). Whether this would mean that ambiguity is not, after all, a sine qua non for the admission of evidence of surrounding circumstances, is an issue which, for reasons which follow, it is

unnecessary to decide.

With these principles (and problems) in mind, I turn to a consideration of the argument. It is convenient to begin with that part of it based on the quest for evidence ((ii) above). It can be briefly disposed of. The mere notional possibility that evidence of surrounding circumstances may influence the interpretation of a contract does not necessarily operate to debar a Court from deciding the issue on exception. The contention that such evidence exists must be examined with care (Davenport Corner Tea Room (Pty) Ltd v Joubert 1962(2) SA 709(D) at 716 A-E). The proposed plea contains no allegations in this regard. It will be recalled that it

simply states that "the provisions of clause 3 constitute a penalty
stipulation " This smacks of a purely linguistic allegation (if I

may call it such). Nor does the rest of the plea advance the matter. To be admissible evidence must be relevant. I fail to see how, as was suggested, evidence of the alleged fraud could possibly affect the proper interpretation of clause 3. When it comes to background facts, the position is no more favourable to the appellant. One looks first, in this regard, to the terms of the contract of employment itself. Mr Gauntlett carefully took us through them. The submission was that the acquisition of control by Holdains and evidence of the parties' respective bargaining positions when the contract of employment was entered into, might bear on the meaning of the clause. I remain entirely unpersuaded that this could be so. Ultimately, we must look to the wording of clause 3 itself. And if its meaning is clear, this would provide a further and perhaps the

most cogent reason for my conclusion that extrinsic evidence is not admissible in aid of interpretation.

This brings me to the argument that clause 3 is indeed ambiguous and that within the confines of the language, it is open to the interpretation contended for on behalf of the appellant ((i) above). There are factors which support this. Clearly, the possibility of (premature) termination is contemplated. This can only mean a termination by the appellant. "Terminate" is an ambiguous word, since it may refer to a termination by a right under the agreement or by a deliberate breach by one party amounting to a repudiation of the whole contract (per Lord Radcliffe in Bridge v Campbell Discount Co Ltd [1962] 1 All E.R. 385(HL). The appellant's primary obligation was to employ the respondent for five years. The

reference in clause 3 itself to a "premature" termination reinforces this. And there is, of course, no express mention of the appellant having a right to terminate the respondent's employment (early).

But it does not follow that clause 3 is to be construed as not affording the appellant such a right. In Legh v Lillie 158 E.R. 69 (referred to in Tobacco Manufacturers Committee v Jacob Green and Sons 1953(3) SA 480(A) at 488 in fin - 489 B) a distinction was drawn between covenants not to do particular acts with a penalty for doing them and covenants that acts shall not be done unless subject to a certain payment. The second type of undertaking would not involve a breach. Similarly, the parties to a contract may agree that it be terminable by one of them on payment of a specified sum. Depending on the wording used, this may amount to a right (in the

form of an option) so to terminate (Halsbury's Laws of England, 4th
ed, vol 12, para 1119). A comparable principle is referred to in
Wessels' Law of Contract in South Africa. 2nd ed, vol 1, para 1454.
Under the heading "Alternative Obligations", the following is said:

"In the facultative obligation there is a promise to deliver some definite thing or to perform some definite act, but at the same time the debtor reserves to himself the right of performing his contract by some other prestation, e.g., I promise to deliver A, but I reserve to myself the right of delivering B instead. The primary object of the obligation is A, but I have the power (facultas) of substituting B."

(See too the further examples of alternative contracts given in the
dissenting judgment of Bovill CJ in Deverill v Bumell. 28 L.T. 874
at 876-7).
In my opinion, clause 3 is an example of the type of
agreement postulated by Wessels. The appellant undertook in clause

1 to employ the respondent until 31 December 1995. But this obligation was qualified by the contingency of premature termination referred to in clause 3. By virtue of this clause, and provided its prerequisites were satisfied, the appellant reserved to itself the right, and thus had the option, on payment of the agreed compensation, to terminate the respondent's employment before such date. The sum payable was the price of such right. The choice of this course would not involve a breach of its obligations under clause 1. The contract was in the alternative.

It was urged upon us that this result would elevate form above substance. This is not so. In a case such as ours, form is substance. They coincide. We have to interpret clause 3 as it is, not as it could have been. Then it was said (I quote from counsel's

heads) that "such an approach would be an invitation to the framers

of contracts to evade the application of the Act by a mere contrivance of words". But there is nothing wrong with that. There is no reason why parties to a contract should not so structure their relationship. They did so here. Clause 3 does not use the word "damages". The reference is to "compensation". Ordinarily, these words are not synonomous (Avenue Shipping Co and Others v South African Railways and Harbours 1936 CPD 20 at 26). This is some indication that a lawful termination was intended (cf Regina v Westminster Compensation Appeal Tribunal and Sell [1953] 1 WLR 506 (CA)). Another is that there is no mention of "breach". The wording is rather suggestive of a premature termination being justified by "some unforeseen reason". The possibility of this

happening is foreseen. And "premature" itself simply means "before

the proper time" (The Shorter OED); I do not read it as necessarily

pointing to a breach (which, incidentally, is not even alleged in the

plea). The application of the clause is moreover, confined. The

appellant must have decided to restrict its business operations to an

extent that the respondent's employment be "directly affected". Only

then could the respondent's employment be terminated by the

appellant. Had the termination envisaged by clause 3 been intended

to constitute a breach, one would not expect its ambit to be limited.

The clause would simply have provided for the payment of

compensation in the event of any (unjustified) premature termination.

Bear in mind also that in terms of the clause, termination is

dependent on the appellant's decision. But a repudiation per se does

not normally bring a contract to an end; it is the innocent party who has the election whether or not to cancel.

It is true, of course (and this follows from what has been said), that where the appellant unjustifiably discharges the respondent in circumstances not covered by clause 3, the respondent's remedy will be one for his ordinary common law damages. On the basis that such damages might be less than the compensation stipulated for, Mr Gauntlett advanced an argument with which I must specifically deal. It was that the appellant could avoid payment of the compensation by the simple device of unlawfully repudiating the contract. In other words, by ensuring that its dismissal of the respondent did not fall under clause 3 but constituted instead a breach, the appellant would in these circumstances pay less than if it

had exercised its right of termination. This, it was said, would lead to an absurdity; accordingly, clause 3 had to be interpreted as relating to a breach, not the exercise of a right. A similar argument was rejected by the court a quo (at 329 F-I) and in my opinion correctly so. It may be regarded as anomalous that a party breaching a contract be in a better position than if he had performed it. But such a result is no warrant for not giving effect to the plain meaning of the clause. The sanctity of contract behoves us to do so. The question was raised whether there was not a conflict between clause 2 (which it will be recalled provides for the automatic renewal of the respondent's employment unless notice of termination be given six months prior to the five year period) and clause 3. If, say, there was an automatic renewal, would the appellant have the

right to terminate during the last six months? I am not sure of the answer. But this uncertainty bears on the scope of the right, not on whether the appellant has a right to terminate in an entirely different situation.

As a rule, courts are reluctant to decide upon exception questions concerning the interpretation of a contract. But this is where its meaning is uncertain (Dettmann v Goldfain and Another 1975(3) SA 385(A) at 400 A). In casu, the position is different. Difficulty in interpreting a document does not necessarily imply that it is ambiguous (Standard Building Society vCartoulis 1939 AD 510 at 516). Contracts are not rendered uncertain because parties disagree as to their meaning (Williston on Contracts. 3rd ed, vol 4, para 601 (supplement)). Counsel was probably right in saying that

the letter is not a lawyer's contract. But this is no reason for interpreting it differently. For the reasons given, I do not find the meaning of clause 3 doubtful. Properly interpreted, it has only one meaning. It affords the appellant the right to terminate. This is what Mitchell AJ found. His conclusion that the amendment should be refused was therefore the correct one.

The appeal is dismissed with costs, including those occasioned by the employment of two counsel.
H H Nestadt
Judge of Appeal
F H Grosskopf, JA )
Harms, JA ) Concur
Olivier, JA ) Zulman, AJA )