Brief Summary

Contract — Interpretation — Consent as a requirement for sale of shares — Appellants, Capitec Bank Holdings and Capitec Bank, denied consent for the sale of shares by Coral Lagoon Investments to the Transnet Second Defined Benefit Fund, claiming breach of good faith obligations under the subscription agreement — High Court ordered Capitec to consent, finding refusal unreasonable — Appeal upheld, with High Court's order set aside as moot due to subsequent transactions that rendered the appeal without practical effect.

Comprehensive Summary

Summary of Judgment

Introduction

This judgment concerns an appeal to the Supreme Court of Appeal of South Africa (SCA) arising from urgent motion proceedings in the Gauteng Division of the High Court, Johannesburg. The central dispute was contractual: whether, on a proper interpretation of a subscription of shares and shareholders agreement concluded in December 2006, Capitec Bank Holdings Limited (first appellant) was required to give written consent before Coral Lagoon Investments 194 (Pty) Ltd (first respondent) could sell certain Capitec shares pursuant to a later settlement agreement, and whether Capitec’s refusal to consent constituted a breach of duties of good faith and reasonableness.

The appellants were Capitec Bank Holdings Limited and Capitec Bank Limited. The principal respondents were Coral Lagoon Investments 194 (Pty) Ltd and Ash Brook Investments 16 (Pty) Ltd. The Transnet Second Defined Benefit Fund (third respondent) participated in the high court proceedings as a respondent and also brought a counter-application, but the SCA was informed that the dispute between Capitec and the Fund (including costs as between them) had been settled by the time of the appeal. Two minority shareholders of Ash Brook, Rorisang Basadi Investments (Pty) Ltd and Lemoshanang Investments (Pty) Ltd, were permitted to intervene in the high court and supported Coral and Ash Brook.

In the high court, Vally J granted relief in favour of Coral and Ash Brook, declaring that Capitec’s refusal to consent to the sale was in breach of contractual and common-law duties of good faith and reasonableness, and issuing a mandatory order directing Capitec to give consent within two days. Vally J also made adverse costs orders against Capitec in favour of Coral, Ash Brook, the Fund, and the intervenors. Leave to appeal was refused by the high court, but was granted by the SCA.

The general subject-matter of the dispute was the interpretation and enforcement of contractual provisions aimed at maintaining black economic empowerment (BEE) shareholding within Capitec’s shareholder structure, and the attempted use of an asserted consent requirement (and good faith) to facilitate a share sale intended to fund a settlement payment to a pension fund.

Material Facts

In December 2006, Capitec Holdings, Coral, and Ash Brook concluded a subscription of shares and shareholders agreement (“the subscription agreement”). Pursuant to that agreement, Coral subscribed for and was issued 10 million ordinary shares in Capitec Holdings. Coral was required to allot and issue shares to Ash Brook so that Ash Brook became the only ordinary shareholder of Coral. The stated purpose of the subscription agreement, according to its recital, was to increase Capitec’s black shareholding and thereby fulfil its black empowerment obligations.

Regiments Capital (Pty) Ltd held a 59.82% interest in Ash Brook. On 8 August 2019, Regiments Capital and related parties, together with Coral and the Transnet Second Defined Benefit Fund (“the Fund”), entered into a settlement agreement under which Regiments Capital and related entities would pay the Fund R500 million plus interest. The settlement amount was to be funded by the sale of 810 230 Capitec Holdings shares (“the sale shares”). The proceeds were to be applied to the settlement payment, with any balance paid to Coral.

A suspensive condition in the settlement agreement (clause 3.1.4) required that “the Capitec Consent” be obtained and executed. “Capitec Consent” was defined as the written agreement and consent of Capitec to the sale and purchase of the sale shares. Coral and the Fund sought Capitec’s consent, but Capitec did not provide it.

On 2 September 2019, Coral and Ash Brook launched an urgent application in the high court seeking, among other relief, a declaration that Capitec’s withholding of consent was unreasonable under clause 13.7 of the subscription agreement and in breach of good faith under clause 13.11 of that agreement, alternatively at common law, and a mandatory order compelling Capitec to consent. The Fund brought a counter-application asserting that Capitec had no right under the subscription agreement to prevent Coral from selling the sale shares to the Fund. Capitec opposed both applications, but accepted that Coral could sell its shares without Capitec’s consent, contending that the consequence would be that Capitec could invoke clause 8.3 to require Coral to reacquire an equivalent number of shares if the purchaser was not, in Capitec’s opinion, a qualifying black person under the applicable BEE framework.

After Vally J granted relief against Capitec, subsequent transactions occurred while appellate steps were underway. A fourth addendum to the settlement agreement (dated 19 November 2019) provided for Coral to lend 810 228 shares to a Regiments subsidiary, which would sell them to the Fund and cede the proceeds back to Coral. Capitec regarded this as a sham and, on 3 December 2019, invoked clause 8.3 by requesting Coral to reacquire 810 228 shares within 30 days, which Coral declined. The settlement agreement (including the addendum) was later made an order of court by Meyer J on 17 July 2020. Capitec submitted a dispute to arbitration in January 2021 seeking to compel Coral to reacquire the shares under clause 8.3.

On appeal, the respondents contended that the matter had become moot because the sale had occurred pursuant to the addendum, allegedly without reliance on Vally J’s order. Capitec contended that the high court’s order had continuing practical consequences, including potential res judicata effects in arbitration and ongoing implications for future sales.

Legal Issues

The SCA was required to determine whether the appeal was moot under section 16(2)(a) of the Superior Courts Act 10 of 2013, and if not, to decide the merits. The merits turned on the proper interpretation of clause 8.3 of the subscription agreement, and relatedly whether any other provisions (notably clauses 13.6 and 13.7) required Capitec’s prior written consent for Coral’s sale of shares.

The central legal questions were whether, as a matter of contractual interpretation, Capitec’s consent was a precondition to the sale of the sale shares; whether the parties’ subsequent conduct could legitimately influence interpretation; how the parol evidence rule interacts with contextual evidence under the modern approach to interpretation; and whether good faith—whether contractually expressed or under the common law—could be used as an independent basis to impose a consent requirement or compel Capitec to grant consent.

The dispute primarily concerned questions of law and the application of law to facts, specifically the interpretive methodology applicable to written contracts, the legal relevance and weight of post-contractual conduct, and the doctrinal limits of invoking good faith to alter the substantive obligations reflected in the contract text.

Court’s Reasoning

On mootness, the SCA held that the dispute remained live. It accepted that the interpretation of clause 8.3 had ongoing practical consequences for the parties’ relationship, including the possibility that arbitration could require Coral to reacquire shares, returning the parties to the same position that precipitated the initial dispute: whether Capitec would be obliged to consent to future sales. The court also held that, even if mootness were arguable, it retained a discretion to hear the appeal where a legal issue of importance for the future required adjudication. It therefore declined to dismiss the appeal on mootness.

Turning to interpretation, the SCA held that the high court’s reasoning was flawed because it did not begin with the text of the subscription agreement as the point of departure, as required by the approach to interpretation articulated in Natal Joint Municipal Pension Fund v Endumeni Municipality. The SCA emphasised that the interpretive exercise is unitary (text, context, purpose), but does not authorise importing meanings not grounded in the contract’s language, nor does it permit courts to recast a contract into a “better” or “ethically preferable” arrangement.

The SCA read clause 8.3 as regulating the consequences of certain sales by Coral, rather than prohibiting sales or making consent a condition precedent. Clause 8.3 provided that if Coral sold shares to an entity or person who, in Capitec’s opinion, did not comply with the Broad-Based Black Economic Empowerment Act 53 of 2003 and its Codes, then Capitec could determine the number of shares sold and Coral would, upon request, be obliged to acquire an equal number and register them in its name within 30 days. The SCA found that the clause contained no express requirement that Coral first obtain Capitec’s consent before selling; it instead contemplated that sales could occur and then established remedial or restorative consequences (reacquisition) for a defined category of sale.

The SCA reinforced this reading through the context of clause 8 as a whole. It noted that where the agreement intended to prohibit sales, it did so expressly and clearly (for example, prohibitions affecting Ash Brook’s shareholders and Ash Brook’s holding in Coral), whereas clause 8.3 did not use prohibitory language and did not refer to consent. This structural contrast supported the conclusion that Coral was not prohibited from selling and did not need Capitec’s consent; Coral’s risk lay in the potential reacquisition obligation if the sale fell within the clause’s demarcation.

The respondents’ reliance on clauses 13.6 and 13.7 was rejected. The SCA held that clause 13.6 concerned the cession, assignment, or transfer of the agreement itself or rights and obligations under it, and did not cover a sale of shares as an object distinct from the personal rights and obligations created by the agreement. The sale of shares was not a cession or assignment of Coral’s contractual rights or obligations. The court also reasoned that the savings language (“save as otherwise herein provided”) would in any event exclude clause 8.3 from clause 13.6 because clause 8 specifically provided the regime applicable to share disposals.

On the respondents’ attempt to rely on the parties’ prior practice (Capitec having required and granted consent in earlier transactions), the SCA engaged at length with the admissibility and weight of extrinsic evidence under the modern interpretive approach and the continuing recognition of the parol evidence rule, with reference to Comwezi Security Services (Pty) Ltd v Cape Empowerment Trust Limited, KPMG Chartered Accountants (SA) v Securefin Limited and Another, The City of Tshwane Metropolitan Municipality v Blair Atholl Homeowners Association, and University of Johannesburg v Auckland Park Theological Seminary and Another. The court accepted that, consistent with University of Johannesburg, such evidence could be admitted as potentially relevant context even absent textual ambiguity, while emphasising that its weight may be limited and that interpretation remains a matter for the court.

Applying those principles, the SCA held that the post-contractual conduct was equivocal. While Capitec and Coral had previously behaved as if consent were required, Capitec later adopted the opposite position (influenced by the Fund’s stance). The SCA found that this did not displace the clear meaning derived from the text and structure of clause 8.3. Evidence of past implementation could not justify importing a consent requirement that was not supported by the contractual language when construed in context and with reference to purpose.

The respondents’ invocation of business efficacy and commercial reasonableness was also rejected. The SCA held that clause 8.3 was designed to protect Capitec’s objective of retaining black shareholding; it therefore legitimately restricted Coral’s freedom to dispose of shares, and the fact that this might be commercially restrictive did not make the clause unbusinesslike or justify reading in a prior-consent requirement.

Having concluded that the subscription agreement did not require Capitec’s consent, the SCA considered the high court’s reliance on good faith. It held that the high court’s approach could not stand in light of Beadica 231 CC and Others v Trustees, Oregon Trust and Others, which authoritatively reaffirmed that, although good faith underlies contract law and informs its doctrines, good faith and fairness are not free-standing, substantive bases upon which courts may refuse to enforce bargains or impose new contractual obligations. The SCA found that the high court had effectively used good faith to “reengineer” the agreement by conjuring a consent requirement and then compelling Capitec to provide consent, which was impermissible.

The SCA further held that even if Capitec’s change of stance could be criticised, this could not justify imposing an obligation the parties did not agree to, nor could a court’s assessment of the ethical desirability of an outcome justify altering contractual rights. The court characterised the practical effect of the relief sought as an attempt to secure a waiver by Capitec of its clause 8.3 entitlement to require reacquisition, and held that Capitec had no obligation to grant such a waiver.

Outcome and Relief

The SCA upheld the appeal with costs, including the costs of two counsel. It set aside paragraphs 4 to 8 of the high court order and replaced them with an order dismissing the application under case number 30899/2019, and directing that the applicants (Coral and Ash Brook) and the first and second intervening parties (Rorisang and Lemoshanang) pay the costs of the first and second respondents, including the costs of two counsel where employed.

The court recorded that the dispute between Capitec and the Fund had been settled, and it therefore did not further consider the appeal insofar as it related to the costs order in favour of the Fund.

Cases Cited

Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] ZASCA 13; [2012] 2 All SA 262 (SCA); 2012 (4) SA 593 (SCA).

Comwezi Security Services (Pty) Ltd v Cape Empowerment Trust Limited [2012] ZASCA 126.

KPMG Chartered Accountants (SA) v Securefin Limited and Another [2009] ZASCA 7; [2009] 2 All SA 523 (SCA); 2009 (4) SA 399 (SCA).

The City of Tshwane Metropolitan Municipality v Blair Atholl Homeowners Association [2018] ZASCA 176; [2019] 1 All SA 291 (SCA); 2019 (3) SA 398 (SCA).

University of Johannesburg v Auckland Park Theological Seminary and Another [2021] ZACC 13.

Beadica 231 CC and Others v Trustees, Oregon Trust and Others [2020] ZACC 13; 2020 (5) SA 247 (CC).

Atlantis Property Holdings CC v Atlantis Excel Service Station CC 2019 (5) SA 443 (GP).

Qoboshiyane N O and Others v Avusa Publishing Eastern Cape (Pty) Ltd and Others [2012] ZASCA 166; 2013 (3) SA 315 (SCA).

Trident Center v Connecticut General Life Insurance Co [1988] USCA9 688; 847 F.2d 564 (9th Cir. 1988).

AM International, Inc v Graphic Management Associates, Inc [1995] USCA7 19; 44 F.3d 572 (7th Cir. 1995).

Legislation Cited

Superior Courts Act 10 of 2013 (section 16(2)(a)).

Broad-Based Black Economic Empowerment Act 53 of 2003.

Rules of Court Cited

No specific rules of court were cited in the judgment.

Held

The SCA held that the appeal was not moot because the interpretation of clause 8.3 continued to have practical consequences for the parties’ relationship, including potential future disputes if Coral were required to reacquire shares and sought to sell again. The court also held that, even if mootness had been established, the court would have been inclined to determine the merits because the interpretive issue was of continuing importance to the parties.

On the merits, the SCA held that the subscription agreement, properly interpreted, did not require Capitec’s consent before Coral could sell Capitec shares, including in circumstances that would constitute a “demarcated sale” under clause 8.3. Clause 8.3 did not impose a prohibition or condition precedent; it stipulated consequences (a right in Capitec to require reacquisition) if Coral sold to a purchaser who, in Capitec’s opinion, did not comply with the relevant BEE legislation and Codes.

The SCA further held that clauses 13.6 and 13.7 did not convert the sale of shares into a cession or assignment of contractual rights and obligations requiring consent. The court accepted that evidence of how the parties previously implemented the contract could be admitted as contextual material, but held that such evidence was equivocal and did not displace the interpretation derived from the text, context, and structure of the agreement.

Finally, the SCA held that good faith could not be deployed as a free-standing basis to impose a consent requirement or compel Capitec to grant consent. In light of Beadica, good faith informs existing doctrines but does not permit a court to rewrite contractual arrangements on grounds of fairness or justice. The high court’s orders were therefore set aside, and the application was dismissed with costs.

LEGAL PRINCIPLES

Contractual interpretation is a unitary exercise in which text, context, and purpose are considered together, but the interpretive enquiry must remain grounded in the language and structure of the written instrument. The approach articulated in Natal Joint Municipal Pension Fund v Endumeni Municipality does not authorise importing obligations that are not supported by the contractual text when read in its proper setting, nor does it license reshaping a contract to achieve an ethically preferable result.

A contractual provision that regulates the consequences of a transaction does not, without more, impose a prohibition or a condition precedent such as a consent requirement. Where a contract intends to prohibit dispositions or require consent, it ordinarily does so by clear language; a court should be slow to infer such a constraint where the agreement instead specifies post-sale consequences.

Evidence of the parties’ conduct in implementing an agreement may, in appropriate circumstances, be admissible as contextual material relevant to interpretation, consistent with Comwezi Security Services (Pty) Ltd v Cape Empowerment Trust Limited and the Constitutional Court’s guidance in University of Johannesburg v Auckland Park Theological Seminary and Another. However, such evidence must be weighed against the text and structure of the contract, and equivocal conduct will not displace an interpretation that is otherwise compelled by the language and scheme of the agreement.

Good faith underlies and informs the law of contract but is not a free-standing substantive rule permitting courts to refuse enforcement of contractual terms or to impose new obligations based on fairness or “justice”. In line with Beadica 231 CC and Others v Trustees, Oregon Trust and Others, good faith may be relevant within established doctrines (including public policy review), but it cannot be used to reconfigure a bargain by reading into it duties and consent requirements not found on proper interpretation of the contract.

Capitec Bank Holdings Limited and Another v Coral Lagoon Investments 194 (Pty) Ltd and Others (470/2020) [2021] ZASCA 99; [2021] 3 All SA 647 (SCA); 2022 (1) SA 100 (SCA) (9 July 2021)