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[2010] ZASCA 116
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Telkom Directory Services (Pty) Ltd v Kern (482/09) [2010] ZASCA 116; [2011] 1 All SA 593 (SCA) (22 September 2010)
Links to summary
THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case no
: 482/09
In the
matter between:
TELKOM
DIRECTORY SERVICES (PTY) LTD
.................................
Appellant
and
FREDERICK JOSEPH KERN
.............................................................
Respondent
Neutral citation:
Telkom Directory Services v Kern (482/09)
[2010] ZASCA 116
(22 September 2010)
Coram:
Lewis, Heher, Ponnan, and Mhlantla JJA and R Pillay AJA
Heard:
7 September 2010
Delivered 22 September 2010
Summary:
Interpretation of contract in terms of Californian
law, as agreed: extrinsic evidence of intention admitted
provisionally: terms
of written agreement not, however, susceptible
to meaning advanced by plaintiff: claim for breach of contract should
have been
dismissed.
ORDER
On appeal from: South Gauteng High Court (Johannesburg) (Victor J
sitting as court of first instance).
1 The appeal is upheld with costs.
2 The order of the court below is replaced with:
‘
The plaintiff’s claim is dismissed
with costs, including those of the plaintiff’s expert witness,
Mr Meredith, who is
declared a necessary witness.’
JUDGMENT
LEWIS JA (HEHER, PONNAN AND MHLANTLA JJA and R PILLAY AJA concurring)
[1] This appeal turns on the interpretation of a contract in terms of
Californian law. Fortunately the parties have agreed on the
principles that govern the interpretation, and the appeal turns only
on whether the high court applied them correctly. The respondent,
Frederick Kern, claimed damages for breach of contract from the
appellant, Telkom Directory Services (Pty) Ltd (TDS). The contract
was expressly stated by the parties to be governed by the domestic
laws of the state of California. The issues of liability and
quantum
(some R6m was claimed) were separated by agreement. A claim for
rectification of the contract was abandoned at the outset
of the
trial. Victor J found that TDS was liable to pay damages to Kern in
terms of the agreement. TDS appeals against that order
with the leave
of this court.
[2] Kern is an expert in creating systems for entries in yellow pages
of telephone directories. He is American and was resident
in
California when the contract was concluded in November 1998. In 1997
Ms C Sheasby became the managing director of TDS, a South
African
company that publishes the telephone directories, and which was in
the process of merging its yellow pages database with
the white pages
database previously managed by Telkom, the state entity that provides
telephone services in South Africa. In 1998
TDS mandated Sheasby to
find an appropriate computer system for this purpose.
[3] To this end, in October 1998 Sheasby attended a conference in
Florida, America, on behalf of TDS: there she met Kern, who agreed
to
provide services to TDS. They concluded a contract, referred to as a
Master Consulting Agreement on 3 November 1998, and subsequently
(on
18 January 1998) a ‘work order’ in respect of the first
phase of services to be rendered. The work order was extended
(updated) twice, once in September 1999 and then in June 2000. Kern
had drafted the master agreement and the work order and updates
himself, using a precedent that he had worked on previously. (The
agreements were all in the name of Logos Consulting Group, but
it
transpired that there was no such entity and that Kern himself was
the party to the contract and would render the services.
Nothing
turns on this.)
[4] On 13 March 2001 TDS purported to exercise its right to terminate
the agreement, giving the requisite notice. The dispute centres
on
whether a termination clause in the master agreement had been
superseded by a term in the work order. If so, TDS would be liable
in
damages having repudiated the contract. If, however, the right to
terminate was not affected by the work order then Kern would
have no
claim.
[5] I shall turn to the terms and the parties’ respective
interpretations shortly: but it is necessary to state at this point
that Californian law allows the leading of evidence on the intention
of the parties provisionally. If, after considering the evidence,
the
court decides that the parties had a common intention and that the
language of the contract is reasonably susceptible to the
interpretation suggested by a party, the court will admit the
evidence and give effect to that intention. Both Kern and Sheasby
(for Kern) testified as to what had been intended by them in the
conclusion of the contract and the high court admitted the evidence.
But first the terms themselves.
[6] The master agreement provided that it would become effective on 3
November 1998 and would remain in force ‘until terminated
as
provided herein’. Kern would render services in terms of ‘work
agreements’ which would be ‘attached
to and become an
integral part of this Master Agreement’.
A clause headed ‘Termination’ provided: ‘Either
party may terminate this agreement upon giving thirty (30) days
prior
written notice thereof to the other.’
[7] The work order, which was part of the master agreement, stated:
‘
This
Work Order shall become effective on January 18, 1999, and,
unless
sooner terminated as provided in the Master Consulting Agreement
,
shall remain in force and shall continue thereafter until all work
has been satisfactorily completed as described herein’
(my
emphasis).
Under the heading ‘Compensation’ it was stated that
project management would be broken into several stages ‘for
the
purposes of corporate approval’. The first stage would be from
January to September 1999; the second the remainder of
1999 and 2000;
and the third stage would encompass subsequent periods ‘if any,
that are mutually agreed upon’. The
work order had been
extended, as I have indicated, to the third stage. The clause
continued:
‘
Negotiations
for each subsequent stage must be completed 45 days prior to the next
stage or Logos is free to accept alternate assignments.
Once both
parties have signed the Work Order for a subsequent stage,
they
are both bound to fulfil the time and monetary obligations of the
Work Order
’
(my
emphasis).
[8] Kern contended that this provision in effect excluded the right
to terminate on 30 days’ notice in the master agreement.
Once a
work order or extension had been signed, the stage in question had to
run its course and the contract could not be terminated.
TDS, on the
other hand, argued that the work order was part of the master
agreement and that the termination clause continued to
be operative.
TDS contended moreover that there was no conflict between the
different provisions of the contract: at all times
either party had
the right to terminate on notice. The obligation to ‘fulfil the
time and monetary obligations’ had
to be read in the context of
the entire clause. It meant no more than that the parties were bound
to negotiate the next stage within
a particular period and to perform
their respective obligations. This is reflected in the letter of
termination of 13 March 2001
which first gave notice and then stated:
‘
We
confirm that, in terms of the termination provisions of the Master
Agreement, we shall have no liabilities to you except for
charges for
services performed by you and accepted by you under the agreement
prior to receipt of this notice.’
[9] As indicated earlier, Californian law allows the provisional
tendering of evidence: if the terms of the written contract are
susceptible to the interpretation contended for in evidence as to
their mutual intention then that interpretation will prevail.
Evidence as to what the parties intended was thus provisionally
allowed. Only evidence for Kern was led. Both he and Sheasby
testified
that they believed that after signing the master agreement,
and once the first phase had been completed, TDS was not entitled to
invoke the termination clause. They made much of the fact that Kern
would have to relocate to South Africa to render his services,
and
would be foregoing work in America. It was thus important to him to
know that he had some security – assured work from
TDS. From
Sheasby’s perspective, it was important not to lose Kern’s
services. He was central to the project TDS was
undertaking. And so
once a work order was signed the contract would remain in force until
the agreed date. But neither of them
showed that their understanding
had been conveyed to anyone else at TDS, including its board of
directors.
[10] Victor J considered the evidence to be admissible and accepted
Kern and Sheasby’s assertion that the right to terminate
could
not be invoked once the work order had been signed. She accordingly
found for Kern. TDS contended on appeal that the learned
judge erred
in the application of the principles governing contractual
interpretation – that the written contract was not
susceptible
to the meaning attributed to it by Kern and Sheasby.
[11] Prior to the trial the parties had agreed on certain principles
of interpretation based on expert advice. They state:
‘
1 The
parties agree that there is one contract that consists of the Master
Agreement, the Work Order and the two updates to the
Work Order.
2 The contract must be
interpreted so as to give effect to the mutual intention of the
parties as it existed at the time of the
contracting (meaning the
dates that the Master Agreement, the Work Order and the two updates
were executed).
3 The language of the contract
is to govern its interpretation, if the language is clear and
explicit, and does not involve an absurdity.
4 Since the contract is in
writing, the intention of the parties is to be ascertained from the
writing alone, if possible.
5 To determine whether it is
possible to ascertain the intention of the parties from the writing
alone the court should consider
the following:
a The language of the contract;
and
b Extrinsic evidence, including
testimony of the intentions of the parties, if not excluded by the
parol evidence rule.
6 The parol evidence rule
provides that the terms set forth in a writing intended by the
parties as a final expression of their
agreement with respect to such
terms may not be contradicted by evidence of any prior agreement or
of a contemporaneous oral agreement
7 Extrinsic evidence to explain
an extrinsic ambiguity or otherwise to interpret the terms of the
contract is not excluded by the
parol evidence rule.
8 Evidence of subsequent
negotiations or subsequent agreements may be received when the
subsequent agreement is in writing.
9 Where the court finds an
apparent conflict between different clauses or provisions of the
written contract, the court may consider
the recitals of the
agreement and other admissible extrinsic evidence.
10
If
a party asserts a meaning of the contract, the court shall
provisionally receive evidence of the asserted meaning. If the court
finds that the language of the contract is reasonably susceptible to
the asserted meaning based on the language of the contract
and the
evidence of the asserted meaning, then the evidence is not excluded
by the parol evidence rule
(my
emphasis).
11 The whole of a contract is to
be taken together, so as to give effect to every part, if reasonably
practicable, each clause helping
to interpret the other. That is, if
one provision of the contract, taken in isolation, is clear and
explicit, it does not necessarily
follow that that provision will
govern the interpretation of the contract.
The
court should attempt to give some meaning to every provision of the
contract so that none is rendered meaningless, so long as
consistent
with the mutual intent of the parties
(my
emphasis)
.
12 Under no circumstances is
evidence of unexpressed unilateral intentions of a party admissible.
If admissible under the above
principles, evidence of expressed
intentions of a party is admissible. . . .
13 The purpose of these
principles is to make the language of the contract serve rather than
subvert the mutual intention of the
parties
14 When a general provision and
a specific provision are inconsistent the specific provision is
paramount to the general provision
so long as consistent with the
intention of the parties.
15 Based on the foregoing
principles, the court should attempt to give effect to the mutual
intention of the parties.’
[12] These principles are borne out by Californian cases dealing with
contractual interpretation, and on which both parties relied.
The
leading case is
Pacific Gas and Electric Company v GW Thomas
Drayage and Rigging Company
(1968) 69 Cal. 2D
33, followed in
Bionghi v Metropolitan Water District of Southern California
70 Cal App 4
th
1358 (March 1999). In
Pacific Gas
Traynor CJ said (para 5):
‘
Although
extrinsic evidence is not admissible to add to, detract from, or vary
the terms of a written contract, these terms must
first be determined
before it can be decided whether or not extrinsic evidence is being
offered for a prohibited purpose. The fact
that the terms of an
instrument appear clear to a judge does not preclude the possibility
that the parties chose the language of
the instrument to express
different terms. That possibility is not limited to contracts whose
terms have acquired a particular
meaning by trade usage, but exists
whenever the parties’ understanding of the words used may have
differed from the judge’s
understanding.
Accordingly, rational
interpretation requires at least a preliminary consideration of all
credible evidence offered to prove the
intention of the parties.’
[13] The principle is elucidated further in
Bionghi
(at 1365):
‘
Pacific
Gas & Electric
is
thus not a cloak under which a party can smuggle extrinsic evidence
to add a term to an integrated contract, in defeat of the
parol
evidence rule. Instead, it calls for a two-step process. First, the
court must determine whether the language of the contract
is
reasonably susceptible to the meanings urged by the parties. In so
doing, the court must give consideration to any evidence
offered to
show that the parties’ understanding of words used differed
from the common understanding. If the court determines
that the
contract is reasonably susceptible of the meanings urged, extrinsic
evidence relevant to prove the meaning agreed to by
the parties is
admissible.’
[14] In my view, the evidence was not helpful. Neither of the
witnesses shed any light on the mutual intention of the parties in
respect of the exclusion of the termination clause. And, as TDS
argued, the high court gave effect to the intention of Kern and
Sheasby, as expressed in their oral evidence, without regard to the
written contract as a whole. While they asserted that they
believed
that after the first phase the agreement could not be terminated,
this was not consonant with the wording of the contract.
Their
testimony ignored entirely the express provision that the work order
and updates were part of the master agreement. In effect,
on their
view, the termination provision was excluded from the agreement,
contrary to the express terms of the work order.
[15] The principles agreed make it clear, argued TDS, that it is the
mutual (shared) intention of the parties that must be given
effect.
There was no evidence at all that the board of TDS was aware, at the
time of entering into the master agreement and subsequent
work order,
of Sheasby and Kern’s view that the right to terminate fell
away once the second phase commenced. And they did
not explain
coherently how the termination clause fitted in with their
understanding of the contract.
[16] In my view the most important principle on which the experts
agreed is that every provision in a contract should be given
effect:
none should be rendered meaningless as long as ‘consistent with
the mutual intent of the parties’. The high
court invoked this
principle in finding that the ‘monetary and time clause’
must be given meaning – but in the
process appeared to overlook
the termination clause itself.
[17] TDS contended, correctly in my view, that the high court assumed
that there was a conflict between the termination clause
and the
clause imposing an obligation to perform (fulfil time and monetary
obligations) under the work order. The assumption led
the learned
judge to allow the latter provision to prevail over the termination
clause, and to ignore the fact that the termination
clause was very
much part of the entire contract. The decision took no account of the
principle that every part of the contract
must be given effect.
[18] As indicated, TDS argued that the time and monetary clause in
the work order simply set the time when the second and third
stages
would come into operation. But once in operation either party could
invoke the right to terminate. To find otherwise would
be to read
into the termination clause a provision that it ceased to be
operative as soon as a work order was signed: and that
would be
contrary to the express provision of the work order that it was part
of the master agreement and would remain in force
until a specified
date ‘unless sooner terminated as provided in the Master
Consulting Agreement’.
[19] I consider that TDS’s interpretation is the only one
consonant with the express provisions of the contract, read as
a
whole. The contract was not reasonably susceptible to the
construction advanced by Kern. The evidence was thus not admissible.
The high court accordingly erred in admitting and relying only on the
evidence of Kern and Sheasby and in failing to consider the
actual
terms of the contract, as is required by Californian law, reflected
in principles 3, 10 and 11 above and as stated in
Pacific Gas
and
Bionghi
, above. TDS was entitled to terminate the agreement as
envisaged in the termination provision.
[20] 1 The appeal is upheld with costs.
2 The order of the court below is replaced with:
‘
The plaintiff’s claim is dismissed
with costs, including those of the plaintiff’s expert witness,
Mr Meredith, who is
declared a necessary witness.’
_____________
C H Lewis
Judge of Appeal
APPEARANCES
APPELLANTS: B H Swart SC
Instructed by Klagsbrun De Vries & van Deventer, Johannesburg
Naudes Attorneys, Bloemfontein.
RESPONDENTS: J L C Janse van Vuuren SC
(with him S Strydom)
Instructed by Kevin Cross & Affiliates ,
Johannesburg Matsepes Inc, Bloemfontein.