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[2020] ZAGPJHC 410
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Klopper N.O and Others v Naka Diamonds (Pty) Ltd and Another (14246/2020) [2020] ZAGPJHC 410 (24 November 2020)
GAUTENG
LOCAL DIVISION, JOHANNESBURG
CASE
NO: 14246/2020
REPORTABLE:
NO
OF INTEREST TO OTHER
JUDGES:
YES
REVISED.
24 November 2020
In the matter between:
KLOPPER
N.O, JOHANNES FREDERICK
First Applicant
PIETERS
N.O, RYNETTE
Second Applicant
SOUTHERNERA
DIAMONDS (PTY) LTD
Third Applicant
And
NAKA
DIAMONDS (PTY) LTD
First
Respondent
DIRECTOR-GENERAL
OF THE
Second Respondent
DEPARTMENT
MINERAL RESOURCES
JUDGMENT
SPILG,
J:
24 November 2020
INTRODUCTION
1.
The first and second applicants are the
duly appointed business rescue practitioners (“
the
BRPs
”) of the third respondent,
SouthernEra Diamonds (Pty) Ltd (“
SE
Diamonds
”).
2.
The BRPs brought the present urgent
application in order to declare that a joint venture agreement
between SE Diamonds and the first
respondent, Naka Diamond Mining
(Pty) Ltd (“Naka”) had terminated. They also sought an
order that any residual obligations
that may be owed by SE diamonds
to Naka were to be immediately cancelled.
3.
Of importance is that the argument, in
relation to the agreement, was confined to a particular clause-
namely clause 26.3 as read
with clause 8.7. It did not cover clause
14.3. which contains the operative provisions for the dissolution of
the joint venture
on its termination
4.
Although
Naka disputed that SE Diamonds had validly terminated the joint
venture some time previously and in turn SE Diamonds disputed
that
Naka was entitled to terminate it earlier this year, each party needs
to rely on their being a termination under the breach
clause of the
agreement (namely clause 26) in order to support their respective
positions.
[1]
5.
Naka had however approached the court in
December 2019 for a temporary interdict against SE Diamonds, which
was not yet under business
rescue, to prevent it from mining or
otherwise exploiting the rights under the joint venture agreement to
the exclusion of Naka
pending an order declaring that the joint
venture agreement had not been validly cancelled by SE Diamonds.
Both parties however now
accept that by the time of the business rescue proceedings the joint
venture agreement had been terminated.
I believe the real questions
to be asked are how termination arose and whether that could result
in a termination under clause
26.3.
6.
The second leg of the relief sought is
intended to deal with Naka’s contention that despite the
termination of the joint venture,
in terms of the agreement between
the parties there remains extant a residual obligation which requires
SE Diamonds to “
maintain in place
and continue its contribution to the joint venture”.
The effect of this would
require SE Diamonds to allow the continuation of mining operations on
Rusland until the mining rights expire
or the extraction of the
minerals to which the mining rights pertain has been exhausted.
Once again it is
important to note that this argument is confined to clause 26.3 of
the breach provisions read with clause 8.7,
the latter being a
funding provision in the joint venture agreement.
7.
The
BRPs dispute Naka’s interpretation of the two clauses. They
also have a fallback position if it is found that the residual
obligations under clause 8.7 are operative post termination. It is to
rely on the provisions of
s 1362)
(b) of the
Companies Act 71 of
2008
.
[2]
They contend that this
section allows them to cancel any obligation of the company which
would otherwise become due during the business
rescue proceedings.
Naka in turn submits that
s 136(2)(b)
does not apply because the obligations arising from
termination did not become due
during
the business rescue
proceedings as termination occurred prior to that event. It remains
common cause that termination, on whatever
basis, occurred prior to
the commencement of business rescue.
THE JOINT VENTURE
AGREEMENTS
8.
It is common cause that a joint venture
agreement, identified as the Klipspringer Joint Venture (“
the
joint venture”
), had been
concluded on 31 July 2001 between the predecessors of SE Diamonds,
the predecessors of Naka and De Beers Consolidated
Mines Ltd (“
De
Beers
”). During the existence of
this agreement De Beers was a shareholder in Naka,
For ease of reference the
parties to the agreement will be referred to by their present names.
9.
In broad terms the joint venture was
established to exploit certain mining rights held on adjacent farms
by SE Diamonds and De Beers,
although in one instance the mining
right was held jointly by SE Diamonds and Naka. SE Diamonds also
owned the surface rights in
respect of the farm, known as Rusland, to
which its mining rights pertained. These rights have been referred to
in the papers as
the Klipspringer right.
SE Diamonds had also
built a plant and developed an infrastructure on Rusland for mining
purposes. While De Beers and SE Diamonds
had a significant portfolio
of mining rights, and in the case of the latter also plant and some
infrastructure, Naka was obliged
to contribute an amount of R49.6
million which was the development cost required to “
ramp
down and open new production levels”
in respect of the
mining rights over Rusland.
10.
In terms of clause 11.2 of this
agreement, De Beers was entitled to reduce its shareholding in Naka
provided it was acquired by
a black empowerment partner. It was
recorded that any dilution of its shareholding in Naka would not
affect De Beers’ rights
and obligations under the joint venture
agreement unless otherwise agreed to in writing.
11.
Subsequently De Beers disposed of its
shares in Naka and reached agreement with the other two joint venture
partners to terminate
its participation in the joint venture. This
agreement was identified as the Addendum Agreement of 2004.
12.
The Addendum Agreement then regulated the
relationship between SE Diamonds and Naka. It did so by retaining the
terms of the joint
venture agreement save that reference to the
rights and obligations of De Beers were removed and one or two
additional clauses
were introduced, one of which I believe should be
key to the resolution of this case; namely clause 8.
13.
It is therefore convenient at this stage to
identify the main clauses in the joint venture agreement which
survived and were carried
forward to regulate the relationship
between SE Diamonds and Naka under the reconstituted joint venture
arrangement.
14.
As
previously mentioned, the purpose of the joint venture was to exploit
the mining rights until the mineral deposits to which they
pertained
had been exhausted
[3]
. It also
envisaged that the joint venture would acquire more mining rights in
the future. Accordingly the joint venture agreement
was also an
umbrella agreement intended to cover any future acquisitions of
mining rights on behalf of the parties.
15.
The joint venture agreement can be divided
into a number of parts each dealing with a different contingency
affecting the relationship
between the parties.
16.
One of the main concerns which required
addressing was funding. Firstly, only SE Diamonds and Naka were
required to provide funding.
Presumably De Beers was excluded because
it would be providing funds through its involvement as a shareholder
in Naka. The parties
appreciated that continued funding was required
for the ongoing development of mining operations. While the parties
contemplated
obtaining third party funding cl 8.1 imposed an
obligation on SE Diamonds and Naka to contribute an equal amount to
the extent
that there was a shortfall of outside funding.
17.
However
it was accepted that either one or the other joint venture partner
may not be able to find the matching funds required.
The parties
therefore considered that this should not constitute a breach of the
agreement. What would occur in such circumstances
would be a pro-rata
dilution of the 50:50 profit sharing ratio between SE Diamonds and
Naka (identified as the “
participation
interest”
)
in
the joint venture agreement.
[4]
Nonetheless if the one
party’s inability to meet its parity funding obligations
resulted in its interest being diluted to
5% or less, then such party
was deemed to have “
withdrawn forthwith from the agreement”.
A further consequence was that such party’s entire share of the
net revenue earned by the joint venture would automatically
be
forfeited to the other party. It will be recalled that only SE
Diamonds and Naka had a participation interest in the net revenue
earned.
18.
The relevant provisions, which identifies
Naka by its previous name (Steppon), are to be found in clauses 8.4
through to 8.7 read:
8.4
If either Steppon or SouthernEra (“a defaulting party”)
fails to provide its
proportionate share of funding to the Joint
Venture, then:
8.4.1 the
other of them (“the other party”) shall be entitled but
not obliged to provide the funding which
the defaulting party has
failed to provide;
8.4.2
provided that the non-defaulting party provides its proportionate
share of the funding and the defaulting party’s
proportionate
share, the defaulting party’s Participation Interest shall
forthwith be diluted in accordance with the following
formula:
The
formula determines the share of revenue each party is entitled to, by
in effect pro-rating it to their actual respective on
going funding
contributions.
[5]
8.5
Any dispute as to the extent to which the Participation Interest of
the defaulting party
should be so diluted shall be referred to KPMG
for determination. In making any determination referred to in this
clause, KPMG
shall be deemed to be acting as experts and not as
arbitrators, and the Parties shall, in the absence of manifest error,
be bound
by any such determination.
8.6
The defaulting party whose Participation Interest shall have been
reduced in terms of 8.4
shall not thereafter be entitled to increase
its Participation Interest and its Participation Rights shall
accordingly be limited
to the reduced Participation Interest, unless
the non-defaulting party thereafter fails to provide its share of
funding to the
Joint Venture in which case 8.4 shall apply.
8.7.
If either Steppon or SouthernEra's Participation Interest is diluted
to 5% or less, such party
shall be deemed to have withdrawn forthwith
from this Agreement and shall relinquish its entire Participation
Interest free of
any consideration; provided that such withdrawing
party shall nevertheless be obliged to maintain in place and continue
its contribution
to the Joint Venture as set out in 7 (but excluding
funding of capex in 7.2.1) and shall be liable for its obligations
under this
Agreement until termination of this Agreement, save that
it shall have no further funding obligations in terms of this clause
&
such relinquished Participation Interest shall be deemed to
have accrued automatically to the other party free of any
consideration.
19.
It
is therefore evident that cl 8.7 ensured that if a party failed to
contribute to the funding on a 50:50 basis that would not
constitute
a breach. And if the amount contributed was less than 5%, then that
party would be obliged to relinquish its interest
in the revenue to
the other and, save for the funding obligation which would cease, was
obliged to continue to contribute its mining
rights and utilisation
of plant and infrastructure. This makes perfect commercial sense when
regard is had to the high operational
costs involved in mining
operations of this nature.
[6]
20.
But all good things must come to an end.
Accordingly, provision had to be made for such an eventuality. The
eventualities which
would have precluded a continuation of mining
would be if the parties agreed, or once all viable deposits of
precious stones had
been exhausted, and of course if there was a land
claim which resulted in the restitution of a right in land, which
might include
the surface rights or the right to mine, arising from
an earlier dispossession of people’s rights as a consequence of
past
racially discriminatory laws and practices.
These are indeed the only
grounds expressly identified as constituting a basis for termination.
They are to be found in the termination
provisions of clause 14 which
provide:
TERMINATION
14.1
The Parties may terminate the Joint Venture:
14.1.1 in terms of
clause 12.3; or
14.1.2 at any time by
mutual agreement.
14.2
In addition to the above, the Joint Venture shall terminate 90
(NINETY) days after the Manager shall have
delivered to each of the
Parties a written notice stating that all viable deposits of precious
stones to which the KJV Rights relate
have been mined and are
exhausted.
14.3
Upon termination of the Joint Venture, the Manger shall take all
actions necessary to wind up the activities
of the Joint Venture, and
all costs and expenses incurred in connection with the termination of
the Joint Venture, any accrued
expenses and all other continuing
obligations hereunder until final settlement of all accounts and for
any liability, if it accrues
before termination, and if it arises out
of activities during the term of this Agreement, shall be expenses
chargeable to the Joint
Venture.
21.
So far the agreement therefore provides for
the case where one party is unable to maintain its funding
obligations, in which event
its participation interest is
proportionately reduced so that its net return is commensurate with
its actual funding contribution;
it being accepted that the capital
injection of each of these two joint venture parties comprised the
mineral rights contributed
and the right to utilise by SE Diamonds on
the one hand and (to all intent and purposes) the R46.9 million
funding contribution
by Naka on the other.
The agreement also
provides for the ending of the joint venture, even in cases where the
one party has effectively taken over the
participation interest of
the other. Where termination arises in terms of cl 14 alone or when
the provisions of clause 14 arise
in a case where the provisions of
clause 8.7 have already been triggered then the dissolution of the
joint venture is to be dealt
with in terms of cl 14.3.
22.
However, the parties also appreciated that
despite the good intentions, it may arise that one of them commits an
act which justifies
a punitive remedy.
This is to be found under
the provisions headed “
Breach
”.
Save in one respect the
provisions are carefully worded.
23.
Clause 26.1 reads:
The remedial of the
Parties under 26.2 shall not be exhaustive and shall be in addition
and without prejudice to any other remedies
in law which they might
have, whether under this Agreement or at common law.
The effect is that, while
cl 26.2 identifies the remedy of cancellation for a breach cl 26.1
recognises that other remedies are
available in law, “
whether
under this Agreement or at common law”.
It will be
necessary to determine what other remedies, aside from cancelation,
are available under the agreement itself
24.
Clause 26.2 then lists the events which
would justify canceling the agreement. They are:
A Party shall be
entitled to cancel this Agreement by written notice to the others
upon the occurrence of any one or more of the
following events:
26.2.1 if the other
Party commits a material breach of this Agreement which is incapable
of being remedied;
26.2.2 if the other
Party commits any other material breach of this Agreement and fails
to remedy the breach within a reasonable
time (which shall not be
less than 30 days) after receiving written notice to do so;
26.2.3 if the other
Party commits a breach of the Principal Agreement or this Agreement,
which breach is either incapable of remedy
or, if capable of remedy,
is not remedied within the period allowed for remedy in terms of such
agreement;
26.2.4 if any
provisional or final order is made or an effective resolution passed
for the winding up of the other Party otherwise
than for the purposes
of its reconstruction of an amalgamation with another company;
26.2.5 if any
provisional or final order is made for the judicial management of the
other Party;
26.2.6 if any event
analogue to any of the events set out in 26.2.4 and 26.2.5 should
occur with respect to a Party in any other
jurisdiction.
25.
Of interest is that an application of cl
26.2 to sub-clauses 4 and 5 would presumably have been intended to
include business rescue
proceedings in a foreign jurisdiction while
in our jurisdiction judicial management was effectively replaced by
the present business
rescue regime.
26.
Clause 26.3 accepts that cancellation would
result in termination but then, instead of proceeding to cl 14.3
which is the operative
provision dealing with how one goes about
terminating, the parties are taken to cl 8.7.
27.
In
my view the intention is clear as is the entire structuring. If a
party has breached the joint venture agreement
[7]
in one of the respects set out in cl 26.2, each of which is of a
material nature, then the other party should not be prejudiced
nor
should the party who has breached be able to walk away and once again
peddle the mineral rights to someone else in the face
of the enormous
amount of funds which may have already been spent just to keep the
mine operational and maintained. Once again
I can see a perfectly
rational commercial consideration. Whether it will be held to be
contra
bonos mores
in its application is another matter; but as it stands it is
commercially rational.
28.
While the parties argued about the
interpretation of cl 26.3 read with cl 8.7. The assumption made by
both parties is that cl 8.2
became operative (whatever its meaning
might be) because the agreement had been terminated by one or the
other party.
I proceed to consider the
matter on the basis of this argument, although there appears to be a
more direct resolution because both
parties need to rely on the
breach provisions under cl 26.3 and this does not appear possible by
reason of a term in the subsequent
Addendum Agreement.
29.
There are two methods by which the joint
venture can be ended. The one is by cancellation in terms of cl 26 by
reason of a breach
and the other is by termination in accordance with
cl 14.
It is to be recalled
however that a failure to provide matching funding or any funding
beyond the initial capital injection of rights
or finance does not
entitle a party to cancel, claim repayment of the shortfall, or even
claim damages for breach- the agreement
continues.
30.
It is also evident that the breach clause
is intended to give a remedy to the innocent party. It therefore
cannot provide a benefit
to the guilty party by allowing that person
to invoke the provisions of cl 8.7 which are clearly intended to
enable a parson who
has performed but who is frustrated by a material
breach or failure to inject capital by the other to carry on
exploiting the benefits
under the agreement.
31.
Both parties accepted that there was a
breach but said it was irrelevant who breached as the consequent
termination triggered the
application of cl 26.3 and by association
cl 8.7.
Clause 23.6 provides:
On termination of this
Agreement in terms of 26.2, the provisions of 8.7 shall apply mutatis
mutandis.
32.
In my view there is a missing step. Clause
26.3 can only be triggered if a party has proven that the other party
has committed a
fundamental breach. The mere fact that both accept
that the agreement has terminated is not enough to trigger cl 26.3:
It must
be positively asserted that the party seeking to invoke cl
26.3 is the innocent party who was entitled to cancel the agreement
on one of the grounds mentioned in cl 26.2.
33.
Both parties disavowed that the
lis
before me included determining whether there had been a breach of cl
26.2 let alone who was entitled to the cl 26.2 remedy of cancelation
and therefore be entitled to invoke cl 26.3.
On
my reading of that clause as read with cl 8.7, only the innocent
party is entitled to the cl 8.7 remedy. I repeat; if cl 26.3
was
simply intended to result in a termination then it would have
referred to the straight forward provisions of cl 14. It did
not.
While this appears to be one of the few lapses in the agreement, it
is evident that when considered in light of cl 26.1 and
its reference
to another available remedy under the agreement itself, the word
“
termination
“in cl 26.3 is intended to mean “
on
exercising the right to cancel this agreement
”.
The term “
cancel”
is confined to instances where the relationship between the parties
is ended as a result of a breach.
[8]
34.
There is however a far more direct
resolution of the case: Clause 8 of the 2004 Addendum Agreement
appears to pose an insuperable
obstacle to the arguments advanced by
the parties.
Clause 8 reads:
8.1
If any of the Parties breaches any material provision of this
Agreement and, (if such breach
is capable of being remedied) falls to
remedy the breach within 14 days after written notice has been given
by any Party requiring
the breach to be remedied, such Party shall be
entitled, without prejudice to their rights to take such action as
may be available
in law, provided that no Party shall be entitled to
cancel this Agreement.
8.2
The Party in default shall be liable for all costs and expenses
(calculated on an attorney
and own client scale) incurred as a result
of or in connection with the default.”
In other words, cl 8 has
superseded and, in doing so, nullified clause 26 in its entirety.
Accordingly the only manner of terminating
the agreement is by cl 14.
This in turn gives greater justification for invoking cl 8.7 in cases
where the one party has fallen
so far short of meeting its funding
obligations that it has contributed no more than 5% of the total
capital requirements while
the other party has exceeding its funding
commitment by almost double.
35.
In my view since the agreement is at an end
and since neither party asked me to find that it had lawfully
cancelled the agreement
under cl 26.2, the agreement by default
terminated because the parties, for whatever reason, agree that it
has. This scenario would
be covered by cl 14 1.2 or by reason of an
application of ordinary common law consequences
36.
It is common cause that the agreement was
terminated prior to the commencement of business rescue proceedings.
Accordingly it is
unnecessary to consider the interesting arguments
presented regarding the proper interpretation of
s 136(2)(b)
of the
Companies Act.
I
am uncomfortable with the wording of the second prayer if cl 14.3
does impose what may be interpreted to be residual obligations
(either because the agreement was terminated in circumstances to
which cl 14.3 apply or under the common law
[9]
).
This is so because the parties did not deal with cl 14.3 in the
context of whether its terms, or the consequences of its application,
would result in any residual obligations being imposed as
contemplated by
s 136(2)(b)
of the
Companies Act.
COSTS
37.
Both parties were in agreement that the
joint venture had terminated.
38.
I accept that both parties had made
bona
fide
attempts at resolving the matter
through mediation. Indeed I was asked to hold back on my judgment
until further mediation efforts
proved unsuccessful.
39.
In my view both parties’ arguments
were unsuccessful for reasons that I have given. Accordingly each
party is to pay its own
costs.
ORDER
40.
I accordingly order that:
1.
It is declared that the joint venture
agreement between the third applicant and the first respondent or
their predecessors in title
dated 31 July 2001, as amended on 6
October 2004, was terminated between them prior to the business
rescue proceedings
2.
Each party is to bear its own costs
SPILG, J
Electronically
submitted
DATE OF JUDGMENT AND
ORDER: 24 November 2020
FOR
APPLICANTS:
Adv. A Gautschi SC
Adv.
JG Smit
Van
Wyk Van Heerden Inc.
FOR FIRST
RESPONDENT
Adv. BM Gilbert
David
Levithan Attorneys
[1]
In other words, whether cl 26.3 is actually impacted at all if
regard is had to the manner of termination.
[2]
Section
136(2) provides:
(2)
Subject to subsection
(2A), and despite any provision of an agreement
to the contrary,
during business rescue proceedings, the practitioner may—
(a)
entirely, partially or conditionally suspend, for the duration of
the business rescue
proceedings, any obligation of the company that—
(i)
arises under an agreement to which the company was a party at the
commencement
of the business rescue proceedings; and
(ii)
would otherwise become due during those proceedings; or
b)
apply urgently to a court to entirely, partially or conditionally
cancel, on
any terms that are just and reasonable in the
circumstances, any obligation of the company contemplated
in paragraph
(a).
[3]
Clause 5.1
[4]
The “
participation
interest”
was
defined as SE Diamonds and Naka’s “
share
(expressed as a percentage) of the net revenue earned by the Joint
Venture, according to the provisions of the Agreement”
[5]
The
formula is:
“
P
=
(AxB) = D
B
+ C
Where:
A
= the defaulting party's
Participation Interest prior to the relevant call for funding;
B
= total funding provided by the
Parties to date plus SouthernEra's Deemed Expenditure plus
any
further funding provided by the Parties, or either of them, after
the Effective Date;
SouthernEra's Deemed
Expenditure shall be equal to the expenditure incurred by Steppon in
terms of 7.5 from time to time subject
to a maximum of R 49,6
million (Basis Date November 2000);
C
= the total amount received by
the Joint Venture in respect of the current call for funding;
D =
the defaulting party's contribution to the current call for funding;
and
P
= the defaulting party's
Participation Interest after receipt of the current call for
funding.
[6]
Nor
can the entitlement of a party who has put up 95% of the funding be
considered to have expropriated the right of the other.
If that
party did not have the funds to exploit the right itself or utilise
the plant for its intended purpose, then it follows
that it should
not be entitled to simple walk away and try and peddle the right to
someone else. The agreement itself recognises
that the
non-contributing party is no longer to be called upon to provide any
future funding
[7]
It
may be that the joint venture is
a
so called relational contract and intended to be of long duration
which is one to which a fiduciary relationship based on good
faith
applies. It is unnecessary to decide the point or to have regard to
clauses which disavow that the parties are to be regarded
as
partners.
[8]
See the wording to the preamble of para 26.2 which is limited to a
right to “
cancel
”
only in cases of breach.
[9]
The effect would be effectively the same