About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Supreme Court of Appeal
SAFLII
>>
Databases
>>
South Africa: Supreme Court of Appeal
>>
2016
>>
[2016] ZASCA 102
|
|
Hangar and Others v Robertson (211/2015) [2016] ZASCA 102 (10 June 2016)
THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
JUDGMENT
Not
Reportable
Case
No:
211/2015
In
the matter between:
RUSSEL HANGAR
FIRST
APPELLANT
GARTH HANGAR
SECOND APPELLANT
GRAHAM
OBERHOLZER
THIRD APPELLANT
and
JOHN
ROBERTSON
RESPONDENT
Neutral
citation:
Hangar v Robertson
(211/2015)
[2016] ZASCA 102
(10 June
2016)
Coram:
Lewis, Leach, Pillay, Petse and Dambuza
JJA
Heard:
16 May 2016
Delivered:
10
June 2016
Summary:
Contract
– interpretation – contract not too vague to be
enforceable.
ORDER
On
appeal from:
KwaZulu-Natal Local
Division of the High Court, Durban (Koen J sitting as court of first
instance):
The
appeal is dismissed, with costs.
JUDGMENT
Leach
JA (Lewis, Pillay, Petse and Dambuza JJA concurring)
[1]
It is truly astonishing how often businessmen conduct their affairs,
involving at times huge financial interests, on the strength
of crude
and vague agreements and then ‘rely on hope, good spirits, bona
fides and commercial expediency to make such agreements
work’.
[1]
This is another such case, and resulted in successful businessmen
finding it necessary to go to court to determine the true meaning
of
an agreement they had concluded. Dissatisfied with part of the
court’s interpretation and a declaratory order which obliges
them to make a substantial payment to the respondent at some
uncertain future time, the appellants appeal to this court with leave
of the court a quo.
[2]
The appellants, first to third defendants respectively in the court a
quo, are the directors of a private company, Merlog Foods
(Pty) Ltd
(Merlog), which carries on business as a wholesaler and distributor
of frozen and chilled food products, a large percentage
of which is
imported. Each appellant has a family trust which holds 25 per cent
of the shares in Merlog. The remaining shares are
held by the family
trust of the first and second appellant’s mother. Merlog,
essentially a family business, was not
as profitable as those
involved thought it ought to have been. The profit the company was
making certainly seems to have been small
when compared to the volume
of its turnover.
[3]
The respondent, Mr John Robertson, the plaintiff in the court a quo,
is a successful businessman who retired and relocated to
Australia in
January 2006. He had spent the previous 24 years with the McCarthy
Motor Holding Group, the last 14 years as managing
director of the
particularly successful Yamaha Group. In 2005, a mutual friend
introduced him to the three appellants to see if
he could possibly
help them improve Merlog’s business. Despite his retirement, he
was keen on being involved in some commercial
project. After
meeting the appellants and having inspected Merlog’s books of
account, he believed that he could achieve
a significant improvement
in its profitability. The three appellants had reached a stage in
their business lives when they were
considering the possible sale of
the business. The more profitable Merlog was, the more attractive it
would be to a potential buyer.
As was said by the third appellant
when he testified, the sale of the business if it became more
profitable ‘would have been
an exit strategy for us’ and
‘would have been a way to realise a large value out of the
business’.
[4]
After negotiations, it was eventually agreed that the respondent
would provide his services as a consultant. In a document dated
19
June 2006, the parties recorded the terms of their agreement as
follows (the initials ‘JR’ refer to the respondent;
while
PBT abbreviates ‘profit before tax’):
‘
JR
Role and Reward Agreement
Through
discussion, and with knowledge of and reference to the past and
current trading environment, JR is to facilitate a process
to:
Define/determine
clear business objectives
Set
some financial targets/goals
PBT
R15M,>R19M,>R24M
PBT/Sales
ratio 3% - 4% - 5%
.
. .
Assess
what has to change to achieve the above.
Develop
and implement necessary action plans.
If
implemented, this should achieve company value in excess of R60
million within 3 years.
Agreed
that
JR
basic expenses will be reasonably covered, approx. R5 000 per week
JR
will be entitled to 10 per cent of the PBT exceeding R10 mil per
financial year. This will exclude abnormal income or expenditure
(eg
sale of assets, abnormal bonus payments)
JR
will be entitled to 10 per cent of the net increase in the value of
the company ie of the value in excess of R24 million. This
will only
be awarded at the time when value is realised, for example when the
business is sold
JR
will be given the option to purchase up to 10 per cent of the shares
in the company, based on the current “value”
of
R24million, and such option will remain open until 30 June 2009.’
[5]
Unfortunately things did not go as well as had been hoped. There were
personality clashes, particularly between the first appellant
and the
respondent, both of whom appear to be strong-willed individuals. It
is unnecessary for present purposes to deal with the
problems that
arose nor to apportion blame, but by mid-2009 it was clear that the
relationship was in its death throes. Whether
it was terminated
at a meeting held at a coffee shop in mid-year or several months
later, an issue that was in dispute in the court
a quo, is neither
here nor there. The court a quo found the relevant date to have been
22 December 2009. This was not challenged
and can be accepted as
being the date the contract between the parties ended.
[6]
The respondent had considered taking up his option to acquire a
shareholding in Merlog, but did not get around to doing so before
30
June 2009. He thereafter received legal advice that the option
had lapsed and could no longer be exercised. However, during
the time
he had rendered his services as a consultant, Merlog’s value
had substantially increased from the R24 million it
had been agreed
was its value when the contract commenced. Accordingly, the
respondent sought to exercise the clause which entitled
him to 10 per
cent of that net increase in the company’s value. He also
claimed payment of 10 per cent of Merlog’s
profit before tax
for the years 2009 and 2010 up to the date his services ceased, which
he claimed as due to him under the contract.
[7] The
appellants and Merlog resisted these claims and so, in July 2014, the
respondent instituted action. The matter came
to trial before
Koen J who, on 19 January 2015, found in favour of the respondent.
Unfortunately, due to a patent error and a corruption
that occurred
during electronic storage of the original judgment, it was necessary
for the learned judge to issue a corrected order
on 24 March 2015.
Inter alia, this declared the respondent to be entitled to be paid a
percentage of Merlog’s profit before
tax for the tax years 2009
and 2010. This portion of the order has not been challenged in this
appeal and no more need be said
about it. The appellants, however,
seek to impugn the relief granted against them in the second
paragraph of the order which reads
as follows:
‘
Judgment
against the First, Second and Third Defendants jointly, as follows:
2.1
An order declaring the First, Second and Third Defendants liable
jointly to pay to the
Plaintiff 10 per cent of any excess by which
the value of the Fourth Defendant as a termination of the agreement
on 22 December
2009 (calculated as the net profit before tax of the
Fourth Defendant for the financial year ending on 30 June 2010,
excluding
any abnormal items of income or expenditure, multiplied by
four),
[2]
exceeded the sum of R24
000
000,
such payment becoming due when either the Fourth
Defendant disposes of its business or the First, Second and/or
Third
Defendants dispose of or realise their
direct or indirect interest in the Fourth Defendant, whichever
shall
occur first; and
2.2
An order granting leave to the Plaintiff to set the matter down for
hearing again for the
purpose of obtaining judgment when it is
contended that the liability of one or more of the First, Second or
Third Defendants’
liability in paragraph 2.1 above has become
due for payment.’
[8]
The appeal essentially turns on the interpretation and effect of the
clause in the agreement of 19 June 2006 that the respondent
would be
entitled to 10 per cent of the net increase in Merlog’s value
over R24 million ‘only to be awarded at the
time value is
realised, eg when the business is sold’. For convenience I
intend to refer to this provision as ‘the
disputed clause’.
[9]
The principles applicable to the interpretation of a contract are
well known. A commercial contract seriously executed by parties
with
the intention of being bound thereby should not lightly be held to be
unenforceable because they failed to express themselves
as clearly as
they could have done. Furthermore, the context in which a contract is
concluded is often of great importance. It
is often said that, in the
interpretation of a contract, context is everything. That probably
goes too far, but it does emphasise
the importance of context in the
process of interpretation. Disputed words have to be considered in
the light of all relevant and
admissible context, including the
circumstances under which the contract came into being.
[3]
As this court recently said:
‘
.
. . the interpretative process is one of ascertaining the intention
of the parties ─ what they meant to achieve. And in
doing that,
the court must consider all the circumstances surrounding the
contract to determine what their intention was in concluding
it.
KPMG
[ie
KPMG Chartered
Accountants (SA) v Securefin Ltd & another
2009
(4) SA 399
(SCA) para 23] . . . explains that parol evidence is
inadmissible to modify, vary or add to the written terms of the
agreement,
and that it is the role of the court, and not witnesses,
to interpret a document. It adds, importantly, that there is no real
distinction
between background circumstances and surrounding
circumstances, and that a court should always consider the factual
matrix in which
the contract is concluded ─ the context ─
to determine the parties’ intention.’
[4]
[10] In
the present case, an important part of the admissible factual matrix
is the correspondence which passed between the parties
leading up to
the conclusion of their agreement on 19 June 2006. The crucial parts
of this correspondence are the following:
(a) On
27 March 2006 the respondent addressed an email to the first
appellant attaching a letter setting out certain strategies
and
goals. After stating that if the necessary action plans were
implemented, the company should achieve a value in excess of R60
million within three years, he went on to state:
‘
I
would want (to be discussed)
My
basic expenses covered
10
per cent of the net profit exceeding R10 mil
10
per cent of the net increase in value ie of the value in excess of
R24 mil
Option
on 10 per cent of shares, based on value of R24mil, open for 3 years
I
do not particularly want a “retainer” (although that
would be nice) as I want to earn my rewards through results.’
(b) On
31 March 2006 the third appellant responded:
‘
Thanks
for the response which you sent through to Russell [first appellant],
we have had a chance to discuss it and would like to
take it further.
Regarding your remuneration, we would need to define what is covered
by “basic expenses” and try to
put together some budgeted
figures for this. . . .
We
are happy with the 10 per cent of net profit exceeding R10m and the
share options, but would obviously have to firm up the finer
details
- timing, etc. The only point we are not comfortable with is the 10
per cent of the net increase in value of the business,
as this
increase in value would represent an unrealised gain. I assume we
would have to define the basis on which we have reached
the business
valuation and then apply the same method down the line to determine
the increase, but until we actually realise this
value it doesn’t
really benefit us. We would like to somehow tie this in with a
possible sale of the business?’
(c) The
respondent replied to this the same day, saying:
‘
As
I have said from the outset, I must earn my keep from the results. So
basic expenses would be about R5k per month . . .
.
. .
I
don’t want to pre-judge the outcome, but my gut-feel is that
the strategy will be to have an exit plan for about 3 years
hence. So
the goals and strategies would be to maximise the value of the
business by that time, so as to make it attractive for
someone to
acquire, or merge with another business; I do have one in mind. Then
a new direction, or shareholders enjoy unlocking
some serious cash to
do what they really want to do. Bearing in mind that a significant
transaction would inevitably have some
restraint, service contract,
profit performance undertakings. So linking some value to a sale (at
some point in time) would be
fine by me, and makes sense.’
(d)
In an email message to the respondent of 2 April 2006, the third
appellant stated that ‘we are pretty much in agreement
in terms
of how your remuneration should be structured, so let me know how you
would like to progress from here.’
[11]
Considering the disputed clause in the light of these background
circumstances, the court a quo found that the agreement had
been
concluded at a time when the parties contemplated the possible sale
of Merlog or its business at a time reasonably soon in
the future.
The appellants, however, did not want to have to pay out what could
be a substantial sum of money before they had received
payment for
Merlog or its business, and it was to address this concern of paying
an ‘unrealised gain’ that the disputed
clause had
included the provision that the increased value would only be paid
when ‘value is realised’.
[12]
The appellants argued at the outset that, as appears from the
respondent’s email of 27 March 2006, he wished to be
remunerated in four ways: first his ‘basic expenses’;
second, being paid 10 per cent of Merlog’s net profit exceeding
R10 million; third, by payment of 10 per cent of the net increase in
Merlog’s value; and fourth, having the option to buy
a 10 per
cent shareholding in Merlog. However, so went a somewhat tortuous
argument, this morphed into the agreement of 19 June
2006 providing
that the third element of remuneration as set out in the disputed
clause was an alternative to the share option
(without that ever
having been stated to be the case, either in the preceding emails or
the written agreement itself). Moreover,
as the agreement was to
endure only for three years until 30 June 2009, or so the appellants
argued, if value had not been realised
by then the disputed clause
would fall away and there could be no award of value thereafter ─
although the respondent would
still have the prospect of long term
growth in the company’s value if he had taken up his share
option before it lapsed.
As the business had not been sold during the
currency of the agreement with the respondent, the disputed clause
had fallen away
and, effectively, the respondent had only himself to
blame for not exercising the option to purchase his 10 per cent
shareholding
and thereby obtaining any percentage increase in value
of the company.
[13]
This cannot be accepted. First, while the parties were hopeful of
Merlog being turned around and sold when they concluded the
respondent’s service agreement, their contract was never one
that was due to lapse at the end of June 2009. It was only the
share
option that was extended to the respondent that would lapse at that
time. Indeed, as was found by the court a quo, the respondent’s
contract only came to an end in December 2009, and there can be no
reason to conclude that his entitlement to exercise his right
to
claim a percentage of the increase in the value of the company had
terminated months before then.
[14]
In addition, the underlying pillar of the appellants’ argument,
namely that the share option and the disputed clause
were ultimately
agreed to be alternative and not cumulative forms of remuneration, is
unsustainable. Had it been the parties’
intention that the
option was to be an alternative to the 10 per cent of the net
increase in value of Merlog, it would have been
both easy and obvious
for them to have said so. They did not. They limited the option to a
set date but left the duration of the
contract open-ended. That is in
itself a clear indication that the two clauses were cumulative and
not alternative. Indeed the
third appellant, in testifying, stated
that the various elements of the respondent’s remuneration were
separate and distinct.
He was correct, and that appears from a plain
reading of the agreement. As already mentioned, a court must be wary
of providing
terms that the parties did not agree upon, even if with
the wisdom of hindsight it might be of the view that the parties
ought
to have reached an agreement along those lines.
[15]
The appellants, however, argued that the respondent had never had in
mind ‘a double 10 per cent’(as appellants’
counsel
put it) being both 10 per cent of the increase in value of Merlog, as
well as the right to obtain a 10 per cent shareholding
at a price
determined before any increase in value had occurred. They sought to
find support for this in the respondent’s
reaction when he
raised the possibility of exercising his option in an email he sent
to the appellants on 27 June 2007, stating
that he had been thinking
about exercising his right to purchase a 10 per cent share of Merlog
and asked whether this raised any
concerns or points for discussion.
In a response emailed to him the following day, the third appellant
said:
‘
As
per our agreement you do have the option of purchasing a 10 per cent
shareholding in Mercantile at the agreed value of R24m,
so I have no
problem with this. In the agreement regarding how you will be
remunerated there are five points:
1.
Basic expenses
2.
Commission on PBT > R10m
3.
Commission on value > R24m on sale
4.
Option to purchase 10 per cent
5.
Commission on negotiating successful sale
Am
I correct in my understanding that should you choose to exercise the
share purchase option it replaces the commission option
in point 3?’
The
so-called ‘commission option in point 3’, to which the
third appellant referred is, of course, the disputed clause
entitling
the respondent to an increase in Merlog’s value. The
respondent’s immediate reaction in an emailed response
was that
‘
I
had not thought about it, but basically yes. As a shareholder I would
invest and thus be entitled to profit shares/dividends,
so I guess
the point 3 would be superfluous as I will get 10 per cent of the
total sale value in the event of a sale’.
[16]
It is opportunistic for the appellants to rely upon this as an
indication that the parties had always been of a mind that the
disputed clause and the share option were alternative provisions.
Indeed it is quite clear from the correspondence that the first
four
points mentioned in the third appellant’s email of 29 June 2007
had at all times been separate and independent forms
of remuneration
and benefit (as was conceded by the third appellant). It was never
suggested in any of the correspondence that
the disputed change was
ever to be an alternative to the option to purchase a shareholding.
And, as the respondent stated at the
outset in his response, he had
not really thought about the matter before he replied to the third
appellant’s question. On
testifying before the court a quo, he
stated that, to his mind, the situation was that if the business of
Merlog was about to be
sold he could, technically, have exercised his
option to purchase but that it would have appeared to have been ‘a
little
bit excessive’ and that ‘I did not want to be
unduly greedy and we were working all together’. In the
circumstances,
his reaction can hardly be seen as providing proof of
an intention, in concluding his contact to regard the option as an
alternative
to obtaining a share in the increased value of the
company.
[17]
On a somewhat different tack, the appellants then argued that the
series of emails preceding the conclusion of the agreement
on 19 June
2006 demonstrates that the increase in value mentioned in the
disputed clause was to be linked to and determined either
by the sale
of the business, which the parties had specifically in mind, or any
other transaction that should realise value. It
was argued that this
was not a ‘formula driven as at the date of termination of the
contract and then payable on the realisation
of any value at all at
some later date,’
[5]
and that the ‘value’ had to be determined when it was
‘realised’ ─ and that to hold otherwise would
result in the appellants having to face the situation the parties had
sought to avoid, namely, the creation of a liability that
could not
be met without the funds being at hand. The argument was therefore
that if value were to be determined at a particular
point of time,
and the business sold at a later date when its value might have
decreased, the purpose of the provision would be
defeated. And thus,
so the argument went, on a proper construction of the contract,
should value not have been realised when the
respondent’s
contract came to an end, there would be no award.
[18]
There is no merit to this. The clear intention of the parties in
providing for the increase in value only being ‘awarded
at the
time when value is realised’ was to defer payment of an amount
to which the respondent had already become entitled.
Indeed the third
appellant also testified that his understanding of the word ‘awarded’
was that it meant ‘paid
over’. The court a quo
consequently correctly concluded that the clause ‘awarded at
the time when value is realised’
emphasises that the
realisation of the value would not determine the amount of the
payment but that ‘it is the time when
value is realised which
determines when such remuneration is to be “awarded” to
the plaintiff.’ To conclude that
the value had to be realised
before the appellants’ contract of service came to an end would
amount to inserting a clause
to that effect into the agreement that
had never been agreed between the parties. The appellants’
contention in that regard
cannot be sustained.
[19]
The court a quo also found that in order
to give the agreement a business efficacy, and to avoid an absurdity,
the agreement cannot
be interpreted as meaning that payment of any
amount under the disputed clause is dependant only on the extent to
which value might
ultimately be realised. It commented that the
Merlog shares might only be sold after many years and at a time when
the value realised
could have increased dramatically through no
effort of the respondent. On the other hand, it might have been run
into the ground
after he had left which would result in him receiving
no remuneration for his services which had previously increased its
value.
In the light of this, the court concluded that the parties
must have intended that value would be determined either when the
business
was sold or realised, if that occurred during the currency
of the parties’ agreement or, if thereafter, at the time the
respondent
ceased to render services. That indeed seems to me to have
been implicit in the agreement between the parties, and there is no
reason to interfere with the conclusion of the court a quo in that
regard.
[20]
As a final string to their bow, however, the appellants argued that
the phrase ‘when value is realised’ is impossible
to
decipher as the parties never properly appreciated the legal
complexities of what they were doing when they reached agreement
or
precisely what it was that they were agreeing to, beyond giving the
example of a sale. It was argued that they had not catered
for the
fact that it was a company that owns the business and that, should it
be sold, the appellants themselves will not realise
any value as the
shares are owned by family trusts which are neither parties to the
litigation nor parties to the agreement. In
my view there is no merit
in these contentions. The respondent may have been short-sighted in
agreeing to the appellants’
suggestion to the insertion of the
clause, but it is not in my view so vague as to be unenforceable. The
amount to which the respondent
became entitled on termination of his
contract is readily capable of ascertainment, albeit that it will
only become payable to
him when that value is realised by the
appellants. And as counsel for the respondent argued, although it may
not be possible or
practical to endeavour to specify in advance what
particular occurrence will trigger the obligation to make payment,
that in itself
does not render the contract vague and unenforceable.
Should an event occur which the respondent feels amounts to
realisation of
value in the hands of the appellants, he would be at
liberty to demand payment and, should it be refused, to place
evidence before
a court for it to decide whether the circumstances
are such that the payment has become due. Hopefully it will not
come to
that, and the parties will show more common sense than they
have displayed thus far. For these reasons I am not persuaded that
the court a quo erred in any way. The appeal must therefore fail.
[21]
One further matter should briefly be mentioned. Counsel for the
respondent asked for an order for costs, to which the respondent
is
of course entitled. However, he specifically requested that the costs
order should include the costs ‘consequent upon
the employment
of senior counsel’. This court has previously observed that
such an order is inappropriate and that, where
a single counsel is
employed no special order is required, it being for the taxing master
to determine a fair and reasonable fee
on taxation ─ see
City
of Johannesburg Metropolitan Municipality v Chairman of the Valuation
Appeal Board for the City of Johannesburg & another
.
[6]
Although the employment of senior counsel in the present case appears
to have been a wise and reasonable precaution, it would be
wrong for
this court to fetter the taxing master’s discretion.
[22] The appeal is
dismissed, with costs.
__________________
L E Leach
Judge of Appeal
Appearances:
For the
Appellants:
M Pillemer SC
Instructed
by:
Goodrickes Attorneys, Durban
Matsepes, Bloemfontein
For the
Respondent:
S R Mullins SC
Instructed
by:
Mark Drummond Attorneys, Kloof
Webbers,
Bloemfontein
[1]
Per Harms JA
in
Namibian
Minerals Corporation Ltd v Benguela Concessions Ltd
[1996]
ZASCA 140
;
1997 (2) SA 548
(A) at 561G.
[2]
This was the
formula the parties used in calculating the value of the company as
at the date of commencement of the contract.
[3]
See in regard
to these principles
Bothma-Batho
Transport (Edms) Bpk v S Bothma & Seuns Transport (Edms) Bpk
[2013]
ZASCA 176
;
2014 (2) SA 494
(SCA) paras 10-12; and
Novartis
SA (Pty) Ltd v Maphil Trading (Pty) Ltd
[2015] ZASCA 111
;
2016 (1) SA 518
(SCA) paras 27-31.
[4]
Novartis
above para 27.
[5]
I quote from
appellants’ heads of argument.
[6]
City of
Johannesburg Metropolitan Municipality v Chairman of the Valuation
Appeal Board for the City of Johannesburg & another
[2014] ZASCA 5
;
2014 (4) SA 10
(SCA) para 34.