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[2004] ZASCA 72
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South African Forestry Company Ltd v York Timbers Ltd (656/02) [2004] ZASCA 72; [2004] 4 All SA 168 (SCA); 2005 (3) SA 323 (SCA) (9 September 2004)
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Last Updated: 7 December 2004
THE SUPREME COURT OF APPEAL
OF SOUTH
AFRICA
REPORTABLE
Case number: 656/02
In the matter between:
SOUTH AFRICAN FORESTRY
COMPANY
LIMITED APPELLANT
and
YORK TIMBERS LIMITED RESPONDENT
CORAM: STREICHER, CAMERON, BRAND JJA, JAFTA et PATEL AJJA
HEARD: 20 AUGUSTS 2004
DELIVERED: 9 SEPTEMBER 2004
Summary: Where contractual provisions became unworkable through
statutory amendment while government still a party to contracts –
appellant as successor to government's right and obligations cannot rely on
supervening impossibility – role of good faith
in contract –
importation of implied terms that contracting party will act reasonably and in
good faith – frustration
of rights conferred upon other contracting party
– amounting to breach in the form of both malperformance and
repudiation.
_____________________________________________________
JUDGMENT
BRAND JA/
BRAND JA:
[1] The outcome of this appeal will determine the
fate of two contracts between the parties that were entered into more than 30
years
ago. For present purposes, the terms of the two contracts were identical.
In each case the South African Government, as the one contracting
party,
undertook to sell to the other contracting party softwood saw logs obtained from
two government plantations in the Mpumalanga
province. The contracts were
referred to as the 'Witklip agreement' and the 'Swartfontein agreement' after
the plantations from which
the saw logs derived. In 1982 the respondent ('York')
took over all the rights and obligations of the other party in terms of both
contracts. With effect from 1 April 1993 the government, in turn, transferred
all its rights and obligations under the contracts
to the appellant ('Safcol')
pursuant to the provisions of s 4 of the Management of State Forests Act 128 of
1992.
[2] In 1999 Safcol instituted action in the Pretoria High Court for
an order declaring that the two contracts had been terminated.
The court a
quo (De Vos J) found that Safcol had failed to make out a case for an order
to that effect. This appeal is with the leave of the court
a
quo.
[3] The two contracts were entered into at a time when the South
African Government decided, as a matter of policy, to encourage investment
by
the private sector in the sawmilling industry. One of the ways of giving effect
to that policy was to enter into long term agreements
with sawmills to supply
them with softwood logs from government plantations so as to provide investors
with some security of tenure
in a capital intensive industry. In the contracts
the government is described as the seller and the other contracting party as the
purchaser. The intention on the part of the seller to provide the purchaser
with security of tenure was specifically recorded in
clause 4.1 of the
contracts. In the same vein clause 4.2 went on to provide that the contract
would, subject to certain terms and
conditions, operate for an indefinite
period. Safcol's first contention as to why the unlimited duration of the two
contracts had
come to an end, was that the contracts had lapsed through
supervening impossibility, in that certain of their material provisions
had
become unworkable. In the alternative Safcol contended that the contracts had
been validly cancelled by it on 10 November 1998
as a result of York's breach,
either through repudiation of or through non-compliance with its obligations in
terms of clauses 3.2
and 4.4. Since the provisions of these two clauses also
underlie Safcol's contentions based on supervening impossibility, it is
necessary
to refer to their contents and context in some
detail.
RELEVANT PROVISIONS OF THE CONTRACTS
[4] Clause 3.2 was
substituted in the two contracts during 1979 and 1982, respectively. It is to be
read in conjunction with clause
3.1 which listed the prices of saw logs in the
various classes at the inception of the agreements. It was obviously foreseen by
the
parties, however, that these prices would not remain static for the
indefinite contract period. Consequently, clause 3.2 from the
outset provided a
mechanism for future price revisions. Under the original clause 3.2 a deadlock
in price negotiations would lead
to advice being sought from the Board of Trade
and Industries and the automatic termination of the contracts in the event that
agreement
could still not be reached on the basis of such advice. The import of
the subsequent amendment of clause 3.2 was to change the mechanism
for price
revision. In its amended form, the relevant part of the clause reads as
follows:
'Log prices shall be subject to revision provided that changes of
price shall not take place more often than once every twelve months
and provided
further that:
(i) The Seller and the Purchaser shall both agree to new
prices;
(ii) New prices shall become effective on a date to be agreed upon by
the Seller and the Purchaser, or, if no agreement in regard
to such date can be
reached within 30 days of the date on which new prices were agreed to, on 26
March of the year in which negotiations
between the Seller and the Purchaser,
concerning such prices, commenced;
(ii) Should no agreement be reached by the
parties as to whether new prices are to be introduced or the existing prices
retained,
within 120 days from the date on which negotiations concerning new
prices were first initiated, the matter shall be referred to the
Minister of
Environmental Affairs and if the Minister is of the opinion that no such
agreement can be reached the matter shall be
referred to
arbitration.
...'
[5] Both clauses 3.2 and 4.4 are to be read in their
contextual relationship with clauses 4.2 and 4.3. These two clauses provide
that:
'4.2 The contract shall operate for an unspecified period but shall in
any event and subject to clauses 3.2(c), 4.3, 4.4, 28.1 and
28.2 [clause 28
deals with breach of contract on the part of York] remain in force for an
initial period of five years commencing
on [1 April 1968 and 1 April 1970,
respectively] and shall remain in operation at the conclusion of the said
initial period of five
years for further successive periods of five years,
provided that the parties shall have agreed mutually in advance as to the terms
which shall apply during each successive period of five years. In the event of
no agreement having been reached regarding the terms
which are to apply in
regard to any period of five years, the matter shall be referred to the Minister
of Forestry for a decision,
and should his decision be acceptable to both
parties, the contract shall continue for such period of five years on the terms
and
conditions of this contract as modified by the Minister. Should however the
Minister's decision not be acceptable to the Purchaser,
the contract shall
nevertheless continue for such a five year period on the same terms and
conditions as laid down in this contract
but it shall, unless otherwise agreed
by the parties, terminate at the end of the five year period
concerned.
4.3 Notwithstanding the provisions contained in clause 4.2 the
Purchaser shall at any time have the right to cancel the contract by
giving to
the Seller one year's written notice of his intention so to
do.'
[6] Clause 4.4 provides:
'4.4 Should it at any stage, in the
opinion of the Minister of Forestry, be in the interest of the wood industry or
the country as
a whole to terminate this contract, then the Seller shall be
entitled to cancel the contract on giving the Purchaser written notice
of at
least five years. In the event of the contract being cancelled in terms of this
clause, the payment of compensation subject
to Treasury and if necessary
Parliamentary authority, will be considered by the Seller.'
FACTUAL
BACKGROUND
[7] A proper understanding of the contentions advanced by
Safcol on the basis of these clauses requires a somewhat more detailed
exposition
of the background facts. I start with the history of price revisions
pursuant to the provisions of clause 3.2. While the government
was still
administering the contracts, it sought an upward revision of prices practically
every twelve months. After Safcol stepped
into the shoes of the government in
1993, it did the same. The way in which negotiations for the increases sought
were initiated,
was by means of a letter from the government and, subsequently,
Safcol, setting out its motivation for the price increases sought
as well as the
new price structures proposed. The letter was sent to every individual sawmill
that was a party to a long term supply
contract with the government in the same
terms as the ones involved in this case. At all relevant times, there were about
sixteen
of them. These sawmill owners, including York, organised themselves into
an informal association called the South African Lumber
Millers Association or
Salma. Although clause 3.2 of the respective contracts required an agreement to
be reached with each individual
contractor separately, negotiations were
conducted between the government (later Safcol) and Salma.
[8] It was
accepted by everybody concerned, albeit on an informal basis, that the price
increases agreed upon between the government
and Salma would be regarded as a
newly established ruling price which would not be deviated from unless a
particular contractor could
persuade the government that there was good reason
why it should pay less than the ruling price. Despite this common understanding
that, as a matter of course, individual contractors would agree to the increases
indicated by the new ruling price, York refused
to do so in respect of the price
increases agreed upon in 1991, 1992 and 1993. When Safcol took over the
administration of the two
contracts from the government with effect from 1 April
1993, it therefore inherited a price dispute with York for three different
periods. In the meantime, Safcol was obliged to supply York with saw logs at
1990 prices while all other long term contractors were
paying the increased
prices. This obviously gave York a substantial edge on its competitors in the
marketplace.
[9] Safcol saw the solution to its problem in the reference
to arbitration provided for in clause 3.2. In order to do so, however,
it
required an expression of opinion by the Minister of Environmental Affairs, or
whoever was the Minister responsible for the Department
of Forestry at the time
('the Minister'), that no agreement on the new prices could be reached by the
parties. Consequently, Safcol
approached the Minister with a motivated request
to express an opinion to that effect. York's response in its letter to the
Minister
was that such opinion would be unwarranted because the possibility of
an agreement could not be excluded. On this occasion, as on
all other subsequent
occasions relevant in this matter, York was represented by its chief executive
officer, Mr Solly Tucker, who
is an admitted but non-practising advocate.
Despite Tucker's assertions to the contrary, the Minister agreed with Safcol
that in
all the circumstances an agreement between the parties was not a real
possibility. This gave rise to a review application by York
in the Pretoria High
Court for the Minister's decision to be set aside. The ensuing litigation was
eventually settled in April 1994.
In terms of the settlement York undertook to
pay the increased prices claimed by Safcol with effect from April 1991 without
interest,
by way of a surcharge on future deliveries of saw logs by Safcol. It
is common cause that the outcome of the litigation and the eventual
settlement
was to the substantial benefit of York.
[10] In terms of the settlement
York also agreed to the new price increases, with effect from 1 April 1994, that
had in the meantime
been agreed upon by Salma and all the other long term
contractors. As will soon transpire, that was the last time that York actually
agreed to an increase in price.
[11] Towards the end of 1994 Safcol decided
to negotiate an amendment of the terms of all the long term supply agreements in
accordance
with the provisions of clause 4.2. Safcol initiated these
negotiations by way of a standard letter to all its long term contractors,
including York. One of the amendments proposed was that the contract period
stipulated in clause 4.2 be reduced from five years to
three years and that the
terms of the contract should therefore be revised at three year instead of five
year intervals. Eventually,
most of the long term contractors agreed, after
extended negotiations, to an amendment of the agreements, more or less in
accordance
with Safcol's proposals. York's response, on the other hand, was that
Safcol's proposal to shorten the contract period was in breach
of the
Constitution in that it would amount to an expropriation without appropriate
compensation. Its counterproposal was that the
contract period be extended to 20
years. At a later stage it even suggested a contract period of 50 years. In
November 1995 York
went one step further. It sought an order in the Pretoria
High Court declaring, inter alia, that it was not obliged in terms of the
provisions of clause 4.2
'to negotiate in regard to the indefinite duration
of the contract ... or the fact that it is to be comprised of successive five
year
periods and that, should he be called upon to do so, it is not open to the
Minister of Forestry to impose terms and conditions which
impinge upon the
aforesaid two matters ...'
[12] In these circumstances, Safcol concluded
that an agreement with York regarding the variation of the terms of the
contracts under
clause 4.2, was highly unlikely. Consequently, it redirected its
efforts to obtain York's consent to the price increases for 1995.
In a letter to
York, dated 1 December 1995, it therefore proposed price increases and pointed
out that these increases had already
been agreed upon by the other long term
contractors and had in fact been paid by them since 1 August 1995. York's
reaction was not
to make a counterproposal about price, but to revert to the
pending litigation about the proposed amendments to the terms of the
contract
and to other issues between the parties. In order to avoid entanglement in
disputes that were the subject of pending court
proceedings, Safcol decided to
suspend the price negotiations until the litigation had been resolved.
[13] In September 1996 the court case was settled. As a consequence,
Safcol attempted to resume the suspended negotiations regarding
1995 prices
which had in the meantime been overtaken by another price increase for 1996.
Again Tucker's reaction on behalf of York
was not to make any counterproposal
about price, but to revert to the issues concerning either the amendment or the
implementation
of the contracts. From then onwards, this became Tucker's
repeated tactic and strategy. Every endeavour on the part of Safcol to
negotiate
an increase in price was deflected by Tucker's insistence on discussing issues
of a different kind.
[14] At the beginning of 1997, Safcol decided that
the parties had reached deadlock in their price negotiations and that
arbitration
was the only way out. It therefore resolved to obtain the Minister's
opinion that the parties were unable to reach agreement, as
contemplated in
clause 3.2. York denied that the reference to the Minister was warranted. As a
result, Safcol sought an order in
the Pretoria High Court confirming the
propriety of its approach. This application was opposed by York. One of the
defences raised
by Tucker was that, on a proper interpretation of clause 3.2, a
reference to the Minister could occur only if the parties were unable
to agree
that there should be any price variation at all. This argument would entail that
if the seller was seeking a price increase
while the purchaser suggested a
downward variation in price, that would exclude any approach to the Minister
and, consequently, any
reference to price arbitration. Another defence raised by
Tucker was that Safcol was too pessimistic in that, given time, the parties
would eventually be able to reach agreement. The court was not impressed by
Tucker's arguments. In the result, the declaratory order
sought was granted.
York lodged an appeal to the full court. That appeal was dismissed on 7
September 1998.
[15] The effect of the full court's judgment was that the
first stumbling block in Safcol's way to refer the 1995 price increases
to
arbitration was eventually removed. In the meantime, however, the train had
moved on. Price increases were agreed upon and were
in fact being paid by
virtually all the other long term contractors, in respect of 1996, 1997 and 1998
while York was still paying
1994 prices. On average it was paying 58,6 per cent
less for saw logs than its competitors. As a consequence, it was able to
undercut
prices and extend its market share without sacrificing any profit.
Safcol realised that in these circumstances it would not be able
to win approval
for further price increases with Salma until its problems with York had been
resolved. To avoid further delay, Safcol
therefore proposed, after York's appeal
had been dismissed by the full court, that the reference to the Minister be
abandoned and
that they proceed directly to arbitration on all four suggested
price increases between 1995 and 1998.
[16] This proposal was rejected by
York. Whereas it had previously resisted any reference to the Minister, it now
proclaimed his involvement
indispensable in that he could facilitate a
settlement between the parties. Moreover, Tucker found support for York's cause
in the
injunction against more than one price increase during any twelve month
period provided for in clause 3.2. In the light of York's
attitude, Safcol had
to approach the Minister. It did so in October 1998. York, however, again
opposed any expression by the Minister
of an opinion that agreement could not be
reached. Apart from the recurring argument that, despite the odds, the parties
could still
come to an agreement, Tucker raised the objection that Safcol had
approached the wrong Minister. The fact that this objection was
in direct
conflict with a pertinent admission by him in earlier court proceedings,
obviously did not perturb him. A further argument
raised by Tucker was that the
Minister could not consider the matter until the parties had agreed on his terms
of reference. Finally
he suggested that the Minister should recuse himself on
grounds of perceived bias in the light of pending litigation between York
and
the Minister's department on matters of a similar kind. This suggestion was
difficult to reconcile with Tucker's earlier insistence
that the Minister should
remain involved.
[17] If Tucker's objections were aimed at persuading the
Minister to distance himself from the matter, he was successful. On 31 December
1998 the Minister responded:
'I decline to form an opinion as to whether an
agreement on log prices can be reached between SAFCOL and Yorkcor. I therefore
cannot
accept the referral.'
[18] At more or less the same time, Safcol
approached the Minister to take a decision under clause 4.4. It will be
remembered that
while York had the right to cancel the contract by giving one
year's written notice to that effect in terms of clause 4.3, the contracts
afforded Safcol no such opportunity. Clause 4.4 provides in the absence of a
breach of contract by York that Safcol can only cancel
the contract on five
years' written notice and only if the Minister of Forestry is of the opinion
that it would 'be in the interests
of the wood industry or the country as a
whole to terminate this contract'. Safcol's request to the Minister to express
the opinion
contemplated in 4.4 was also opposed by York, inter alia on
the basis that the Minister was biased. This time the Minister did not decline
to become involved but he refused to express the
opinion sought by
York.
SUPERVENING IMPOSSIBILITY
[19] Safcol's case that the
contracts had lapsed through supervening impossibility is primarily based on the
Minister's alleged refusal
to perform his assigned functions in terms of clauses
3.2 and 4.4. With regard to the latter clause Safcol has failed to establish
that the Minister had actually refused to perform the function allocated to him.
For that reason alone Safcol's case, insofar as
it is based on clause 4.4,
cannot be sustained. As to clause 3.2, the Minister had clearly refused to
become involved. Given this,
Safcol contended that the Minister's involvement
was an integral cog in the mechanism for price revisions created by clause 3.2,
while this mechanism in turn formed an essential part of the contracts as a
whole. Consequently, Safcol's argument went, the Minister's
refusal to perform
his allocated function made price revisions impossible and these contracts of
inordinate duration unworkable.
For its contention that the contracts had thus
been terminated through supervening impossibility, Safcol sought authority in
the
decision of this court in Kudu Granite Operations (Pty) Ltd v Caterna Ltd
2003 (5) SA 193 (SCA). The contract in that case contemplated that the
parties should reach agreement on the amount of what was referred to as the
'CAG
loan account'. Failing such agreement the amount of the loan was to be
determined by a firm of auditors, KPMG. The parties could
not reach agreement on
the amount of the loan account and KPMG was either unwilling or unable to
resolve their dispute. Because of
this, so it was held, the contract had failed.
The reason for this finding appears from the following statement by Navsa JA and
Heher
AJA (at 201H-I):
'Caterna's case was one of a lawful agreement which
afterwards failed without fault because its terms could not be implemented. The
intention of the parties was frustrated. The situation in which the parties
found themselves was analogous to impossibility of performance
since they had
made the fate of their contract dependent upon the conduct of a third party
(KPMG) who was unable or unwilling to
perform. In such circumstances the legal
consequence is the extinction of the contractual nexus:
...'
[20] Though I agree that in the present case it can also be said
that the intention of the parties became frustrated when the Minister
refused to
become involved, there is one feature which, in my view, renders the Kudu
Granite case distinguishable on the facts. In the latter case KPMG could not
be compelled to perform its allocated function. That was not
the Minister's
position at the time when clause 3.2 was introduced by way of an amendment to
the two contracts under consideration
in 1979 and 1982, respectively. At that
time the Minister was under a statutory duty to exercise the discretion
conferred upon him
by clause 3.2 when requested to do so. This statutory duty
originated from the provisions of s 30(2) of the Forest Act 72 of 1968
which
read as follows:
'Whenever on revision of prices of forest produce derived
from State forests and in respect of which contracts of sale for a period
of 5
years or longer have been concluded, a dispute arises on which, in the opinion
of the Minister, agreement cannot be reached,
such dispute shall be submitted to
arbitration.'
[21] Section 30(2) was introduced by s 9 of the Forest
Amendment Act 87 of 1978. It was tailor-made for long term contracts of the
present kind and it was obviously intended to provide the statutory substructure
for the Minister's involvement contemplated in the
new clause 3.2 proposed at
the time. Soon thereafter clause 3.2 was grafted upon all these contracts.
Succinctly stated, the new
s 30(2) was aimed at creating a specific statutory
power and duty for the Minister to exercise the discretion conferred upon him
by
clause 3.2 of the contracts.
[22] When the 1968 Forest Act was replaced
by the Forest Act 122 of 1984 with effect from 27 March 1986, the essential
provisions
of s 30(2) were re-enacted in s 17(4) of the latter Act. A
fundamental change was brought about, however, with the passing of the
Management of State Forests Act 128 of 1992 ('the Management Act'), which came
into operation on 1 August 1992. Section 4(3)(c) of
Management Act provided in
effect that, once the State's rights and obligations in terms of a particular
long term contract had been
assigned to Safcol, as envisaged by the provisions
of the Act, s 17(4) of the 1984 Forest Act would no longer apply to that
contract.
Consequent upon the enactment of s 4(3)(c) of the Management Act, the
position was that although the Minister still had the power
to perform the role
allocated to him in clause 3.2, he was no longer under an express statutory duty
to do so and his involvement
could thus no longer be compelled on this basis.
[23] In this light, York's answer to this part of Safcol's case was that
the impossibility relied upon amounted to self created impossibility
in that it
was brought about by the South African Government, while it was still a party to
the contracts, through the enactment
of s 4(3)(c) of the Management Act. As a
matter of law, so York's argument proceeded, self created impossibility does not
discharge
the contract, but leaves the party whose conduct created the
impossibility liable for the consequences (see eg Christie, The Law of
Contract in South Africa 4th ed 552 and the authorities there
cited). Accordingly, York contended, Safcol's reliance on supervening
impossibility cannot be sustained.
Safcol's counterargument was twofold.
Firstly, that it (Safcol) cannot be held responsible for the passing of
legislation by its
predecessor. Secondly, that, in any event, legislation which
renders performance of a government contract impossible can be described
as self
created impossibility in the contractual sense only where the legislation had
been employed by the government as a stratagem
to avoid its obligations in terms
of the contract. If the legislation was intended to bring about change on a much
wider front, so
the argument went, it cannot be regarded as an instance of self
created impossibility of a particular contract. Safcol sought authority
for this
line of argument in Gordon v Pietermaritzburg-Msunduzi Transitional Local
Government and Another 2001 (4) SA 972 (N) 978B-C.
[24] I find
Safcol's counterargument unpersuasive in both its constituent parts. It is true
that Safcol is not the government and
that it cannot be held responsible
directly for the enactments of Parliament. However, when s 4(3)(c) of the
Management Act came
into existence, the government was still one of the
contracting parties. Indeed s 4(3)(c) formed part of the very same legislation
that enabled the government to transfer its rights and obligations under the
contracts to Safcol without the cooperation of York.
If, before the actual
transfer of the contracts to Safcol, the government were to rely on the
impossibility of performance created
by its own legislation, it would clearly be
open to York to raise the argument that the impossibility was a self created
one. If
that response was valid against the government, it could not be avoided
by the subsequent transfer of the contracts to Safcol. After
all, the notion
that Safcol can be in a better position than the party from whom it obtained its
contractual rights, appears to be
untenable, particularly where York had no say
in the assignment of the government's obligations to Safcol.
[25] The
second leg of Safcol's counterargument is based on the supposition that the
government can be denied reliance on impossibility
created by its own
legislation only if the legislation in question amounted to a legal stratagem by
the government to avoid its contractual
obligations. In my view the supposition
is invalid. Why should the government be allowed to rely on its own legislative
enactments
to avoid its contractual obligations where the legislation was due,
say, to legislative mistake? After all, as a matter of law, the
sanction against
reliance on self created impossibility is not limited to situations where the
act causing the impossibility could
somehow be described as wrongful or
reprehensible (see Christie op cit). Of course, the position could be
quite different if the legislative enactment under consideration relates to
matters of general
public interest (see eg Gordon v Pietermaritzburg-Msunduzi
Transitional Council, supra 978B-D). That, however, does not appear to be
the position in this case. Here we have the rather peculiar situation that s
17(4) of
the 1984 Act was enacted solely to facilitate the contracts of the
present kind. As a consequence, neither s 17(4) nor its revocation
in terms of s
4(3) of the Management Act could be said to affect the interests of anyone but
the parties to these contracts. Though
we do not know why it was thought
necessary that s 17(4) of the 1984 Forest Act should be rescinded, the most
likely reason appears
to be legislative mistake. After all, I can think of no
reason why Parliament would have intended that Safcol should be saddled with
an
unworkable contract (cf also s 74(5) of the National Forest Act 84 of 1998). For
these reasons Safcol's case based on supervening
impossibility cannot be
sustained.
BREACH OF CONTRACT BY YORK
[26] This brings
me to that part of Safcol's case which is based on York's breach of contract.
The particular breach relied upon was
that York, by its conduct over an extended
period of time, had acted in breach of an implied term of the contracts,
alternatively
that York repudiated its obligations arising from the same term.
This implied term, as formulated by Safcol, was said to have imposed
an
obligation on York to act in accordance with the dictates of reasonableness,
fairness and good faith when Safcol exercised its
rights in terms of clauses 3.2
and 4.4 of the contracts.
[27] York's answer to these contentions, which
found favour with the court a quo, was that they were in conflict with
the judgments of this court in Brisley v Drotsky 2002 (4) SA 1 (SCA)
paras 21-25 and 93-95 and Afrox Healthcare Beperk v Strydom 2002 (6) SA
21 (SCA) paras 31-32. In these cases it was held by this court that, although
abstract values such as good faith, reasonableness and
fairness are fundamental
to our law of contract, they do not constitute independent substantive rules
that courts can employ to intervene
in contractual relationships. These abstract
values perform creative, informative and controlling functions through
established rules
of the law of contract. They cannot be acted upon by the
courts directly. Acceptance of the notion that judges can refuse to enforce
a
contractual provision merely because it offends their personal sense of fairness
and equity, will give rise to legal and commercial
uncertainty. After all, it
has been said that fairness and justice, like beauty, often lie in the eye of
the beholder. In addition,
it was held in Brisley and Afrox
Healthcare that – within the protective limits of public policy that
the courts have carefully developed, and consequent judicial control
of
contractual performance and enforcement – constitutional values such as
dignity, equality and freedom require that courts
approach their task of
striking down or declining to enforce contracts that parties have freely
concluded, with perceptive restraint.
[28] Safcol's argument is,
however, that its case is not directly based on the abstract notions of fairness
and good faith, but on
a term implied by law under the informative influence of
good faith. Thus understood, Safcol's argument went, its case amounts to
an
application and not a negation of the judgments in Brisley and Afrox
Healthcare. This argument is not without appeal in logic, particularly in
the light of established principles regarding implied terms. Unlike
tacit terms
which are based on the inferred intention of the parties, implied terms are
imported into contracts by law from without.
Although a number of implied terms
have evolved in the course of development of our contract law, there is no
numerus clausus of implied terms and the courts have the inherent power
to develop new implied terms. Our courts' approach in deciding whether a
particular
term should be implied provides an illustration of the creative and
informative function performed by abstract values such as good
faith and
fairness in our law of contract. Indeed, our courts have recognised explicitly
that their powers of complementing or restricting
the obligations of parties to
a contract by implying terms should be exercised in accordance with the
requirements of justice, reasonableness,
fairness and good faith (see eg
Tuckers Land and Development Corporation (Pty) Ltd v Hovis 1980 (1) SA
645 (A) 651C-652G; A Becker & Co (Pty) Ltd v Becker and Others 1981
(3) SA 406 (A) 417F-420A; Ex Parte Sapan Trading (Pty) Ltd 1995 (1) SA
218 (W) 226I-227G). Once an implied term has been recognised, however, it is
incorporated into all contracts, if it is of general application,
or into
contracts of a specific class, unless it is specifically excluded by the parties
(see eg Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial
Administration 1974 (3) SA 506 (A) 531D-H). It follows, in my view, that a
term cannot be implied merely because it is reasonable or to promote fairness
and justice
between the parties in a particular case. It can be implied only if
it is considered to be good law in general. The particular parties
and set of
facts can serve only as catalysts in the process of legal
development.
[29] Conceptually, Safcol's argument is therefore well
founded in the principle that a term can be implied if it is dictated by
fairness
and good faith. The further progression of the argument is, however,
flawed by misconception. It confuses the rationale for implying
a term with the
contents of the term to be implied. To say that terms can be implied if dictated
by fairness and good faith does
not mean that these abstract values themselves
will be imposed as terms of the contract.
[30] The acceptance of the new
implied term contended for by Safcol will mean that it becomes a term of every
contract that the parties
must not only perform their obligations in compliance
with the provisions of the contract, but that they must do so in accordance
with
the dictates of fairness and good faith. This is in conflict with the
established principles of our law. The question whether
parties have complied
with their contractual obligations depends on the terms of the contract as
determined by proper interpretation.
The court has no power to deviate from the
intention of the parties, as determined through the interpretation of the
contract, because
it may be regarded as unfair to one of them (see eg
Scottish Union & National Insurance Co Ltd v Native Recruiting
Corporation Ltd 1934 AD 458 at 465-466; Robin v Guarantee Life Assurance
Co Ltd [1984] ZASCA 72; 1984 (4) SA 558 (A) 566 H-I). Once it is established that a party has
complied with his or her obligations as properly determined by the terms of
the
contract that is the end of the inquiry.
[31] Moreover, acceptance of
Safcol's contentions will result in negation of the considerations and reasoning
underlying the decisions
in Brisley and Afrox Healthcare. To say
that contractual stipulations cannot be avoided on the basis of abstract notions
such as fairness and good faith, but that
the same result can be attained when a
party's conduct is said to offend these same abstract notions, because they have
been imported
by means of an implied term, amounts to a distinction without a
difference. The outcome will again depend on the individual judge's
perception
of what is just and fair. I therefore find myself in agreement with the finding
by the court a quo that Safcol's argument based on an implied term
demanding reasonableness and good faith on the part of York, is in conflict with
the decisions of this court.
[32] Unlike the court a quo, I do
not believe, however, that this is the end of the matter. The pivotal question
remains whether York has complied with its obligations
in terms of clauses 3.2
and 4.4 of the contracts. This will depend on a proper interpretation of these
two clauses. In the interpretation
process, the notions of fairness and good
faith that underlie the law of contract again have a role to play. While a court
is not
entitled to superimpose on the clearly expressed intention of the parties
its notion of fairness, the position is different when
a contract is ambiguous.
In such a case the principle that all contracts are governed by good faith is
applied and the intention
of the parties is determined on the basis that they
negotiated with one another in good faith (see eg Trustee, Estate Cresswell
& Durbach v Coetzee 1916 AD 14 at 19: Dharumpal Transport (Pty) Ltd v
Dharumpal 1956 (1) SA 700 (A) 706-707; Mittermeier v Skema Engineering
(Pty) Ltd 1984 (1) SA 121 (A) 128A-C; Joosub Investments (Pty) Ltd v
Maritime & General Insurance Co Ltd 1990 (3) SA 373 (C) 383E-F. See also
Farlam and Hathaway, Law of Contract, 3 ed (by Lubbe and
Murray) 468, para 6).
[33] Having regard to the provisions of clause 3.2
it is clear that it confers the right upon a party (in this instance, Safcol)
who
found it impossible to come to an agreement on revision of price, firstly,
to approach the Minister as a preliminary step to arbitration
and, secondly, to
refer the matter to arbitration if the Minister should express the opinion that
no agreement could be reached.
Although the clause does not expressly impose any
duty or obligation on the other party (York) the corollary of the rights
conferred
upon Safcol is an obligation or duty on the part of York not to
frustrate Safcol in the exercise of these rights. This follows logically
from
the structure of the rights and duties the parties themselves created.
[34] However, had there been any interpretative ambiguity as to the
existence of such a duty or obligation on the part of York, it
is removed by
considerations of reasonableness, fairness and good faith. In other words, even
where the logical consequences of the
rights and duties may not necessitate such
an inference, the underlying principles of good faith requires its
importation.
[35] The next question is whether it can be said that York
failed to comply with its obligation not to frustrate or delay Safcol in
the
exercise of its rights under clause 3.2. I believe that the answer to this
question must be in the affirmative. From the background
facts it is clear, in
my view, that York had no intention of agreeing revised prices with Safcol. It
therefore knew all along that
no agreement would be reached in this regard. It
also knew that in these circumstances Safcol was entitled to refer the matter to
the Minister and to obtain the Minister's opinion that agreement could not be
reached so as to enable it to proceed to arbitration.
Nevertheless, York did its
utmost over a period of several years to prevent or delay Safcol from obtaining
such an opinion with the
obvious intent to avoid arbitration. It did so by
pretending that it was prepared to negotiate; by contending that it was possible
to reach agreement whereas obviously it was not; by contending, contrary to the
whole scheme of the agreements revealed by clauses
3.2 and 4.2, that revised
prices could not be negotiated before the terms of the long term contracts had
been settled; by raising
contentions which can only be described as absurd, as
for example, that a reference to the Minister was inappropriate where the
parties
were in agreement on the principle that there should be price revision,
thus creating an obvious deadlock; by insisting upon the
Minister's involvement
only to raise the objection subsequently that Safcol had approached the wrong
Minister and that the Minister
should recuse himself on grounds of
bias.
[36] Essentially the same considerations apply, in my view, with
reference to clause 4.4. This clause confers the right on Safcol
to approach the
Minister to express the opinion contemplated as a preliminary step to
cancellation of the contract by York. Again,
the corollary of this right is an
obligation on the part of York not to frustrate this right. Again York acted in
breach of this
obligation by seeking to inhibit or intimidate the Minister
through thinly veiled threats of court proceedings if the Minister should
decide
to get involved.
[37] York's further contention was that even if it is
found to have failed to comply with its contractual obligations, Safcol was
not
entitled to resort to cancellation on the basis of breach, because Safcol failed
to comply with the procedural requirements for
cancellation. These procedural
requirements are stipulated in clause 28.1 of the contract. It required of
Safcol, before it was entitled
to terminate the contract on the grounds of
breach by York, to give written notice to York to remedy such breach as well as
a reasonable
opportunity to do so. It is common cause that no such notice was
given to York prior to Safcol's letter of cancellation. The answer
to York's
argument is in my view to be found in those cases where it was held that the
requirement of notice prior to cancellation
contemplated in clause 28.1 of the
contracts does not apply where the breach of contract complained of was in the
form of anticipatory
breach or repudiation (see eg Taggart v Green 1991
(4) SA 121 (W) 124D-126I; Metalmil (Pty) Ltd v AECI Explosives and Chemicals
Limited [1994] ZASCA 96; 1994 (3) SA 673 (A) 683G-I).
[38] Repudiation occurs where
one party, without lawful grounds, indicates to the other party, by word or
conduct, a deliberate and
unequivocal intention that all or some of the
obligations arising from the contract will not be performed in accordance with
its
true tenor (see eg Datacolor International (Pty) Ltd v Intamarket (Pty)
Ltd [2000] ZASCA 82; 2001 (2) SA 284 (SCA) 294H-I; Metalmil (Pty) Ltd v AECI Explosives
and Chemicals Ltd supra at 684-685B). It is clear, I think, that in
particular circumstances conduct of a contracting party can constitute both a
breach
of contract in the form of malperformance and a repudiation. A fair
example of this is to be found in the present case. York's conduct
amounted to
breach in the form of failure to comply with his obligations in terms of clause
3.2 and 4.4. However, at the same time
it also amounted to a repudiation in that
York conveyed the clear indication to Safcol of its intention not to comply with
those
obligations in the future either. In these circumstances, the contracts
were in my view duly terminated when Safcol accepted York's
repudiation in its
letter of 10 November 1998.
[39] For these reasons, the appeal is upheld with
costs, including the costs of two counsel, and the following order is
substituted
for that of the court a quo:
'(a) An order is issued declaring that the plaintiff validly cancelled the two contracts between the parties, referred to as the Swartfontein agreement and the Witklip agreement, on 10 November 1998.
(b) The defendant is ordered to pay the plaintiff's costs, including the costs of two counsel.'
...................
F D J BRAND
JUDGE OF APPEAL
Concur:
Streicher JA
Cameron JA
Jafta AJA
Patel AJA