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[2008] ZASCA 139
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Boundary Financing Limited v Protea Property Holdings (Pty) Limited (597/07) [2008] ZASCA 139; 2009 (3) SA 447 (SCA) ; [2009] 2 All SA 7 (SCA) (27 November 2008)
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THE
SUPREME COURT OF APPEAL
REPUBLIC
OF SOUTH AFRICA
JUDGMENT
Case
No: 597/07
BOUNDARY
FINANCING LIMITED
Appellant
and
PROTEA
PROPERTY HOLDINGS (PTY) LIMITED
Respondent
Neutral
citation:
Boundary
Financing v Protea Property
(597/07)
[2008]
ZASCA 139
(27 November 2008)
Coram:
STREICHER,
CAMERON, LEWIS, JAFTA and PONNAN JJA
Heard:
10
NOVEMBER 2008
Delivered:
27
NOVEMBER 2008
Summary:
Rectification
and interpretation of contract – prescription does not run
against a claim for rectification.
_______________________________________________________________________
ORDER
_______________________________________________________________________
On appeal from:
High Court, Cape Town (Griesel J sitting as court of first instance).
The appeal is
dismissed with costs including the costs of two counsel.
______________________________________________________________
_______
JUDGMENT
_____________________________________________________________________
STREICHER JA
(CAMERON, LEWIS, JAFTA and PONNAN JJA
concurring)
[1] Protea
Property Holdings (Pty) Ltd, the respondent and the plaintiff in the
court a quo, is a property holding company in the
Protea group of
companies (‘Protea’), of which the holding company is the
Protea Hospitality Corporation (Pty) Ltd,
which through a management
company, Protea Hotels and Inns (Pty) Ltd, markets and/or manages
approximately 130 hotels in Africa
and the Middle East. This appeal
concerns the Edward Hotel in Durban. Boundary Financing Limited,
formerly known as International
Bank of Southern Africa Limited
(Ibsa), the first defendant in the court a quo and the appellant in
this court, got involved in
financing schemes with the Karos group of
companies which went into liquidation during 1999. One of the
companies in that group
was Karos (Pty) Ltd (‘Karos’),
the third defendant in the court a quo, which owned and still owns
the property on which
the Edward Hotel is situated. The second
defendant in the court a quo was Swanvest (Pty) Ltd (‘Swanvest’),
which had
purchased the Edward Hotel property from the liquidators of
Karos. All the issued shares in Swanvest were held by the appellant
and were thereafter sold to the respondent. This agreement (‘the
sale of shares agreement’) gave rise to the action
in the court
a quo which resulted in the court a quo ordering:
(i) the
rectification of the agreement of sale of shares so as to reflect a
warranty and undertaking by the appellant that the Edward
Hotel
property (and not a different hotel) would be an asset in Swanvest;
(ii) the
delivery by the appellant to the respondent of all the issued shares
in Swanvest against payment of R674 701; and
(iii) performance
of the warranty in respect of the Edward Hotel property as per the
agreement so rectified.
With the leave
of the court a quo the appellant now appeals against that order.
[2] It is common
cause between the parties that Protea wished to acquire the Arthur’s
Seat Hotel (owned by Karos Cape Shareblock
(Pty) Ltd) as well as the
Edward Hotel. To this end various contracts were concluded between
the appellant and companies within
Protea in respect of the Arthur’s
Seat Hotel and subsequently, on 1 March 2001, in respect of the
Edward Hotel. The latter
set of contracts consisted of the following:
2.1 The
agreement of sale of shares in terms of which the appellant, the
respondent and Swanvest agreed that notwithstanding the
date of
signature of the agreement and with effect from 2 February 2001 the
appellant was deemed to have sold to the respondent
60 ordinary
shares of R1 each in Swanvest comprising 60% of the total issued
share capital of Swanvest as registered in the name
of the appellant
for a purchase price of R1. In an annexure incorporated into the
agreement it is stated:
‘
1 The
Seller hereby warrants and undertakes in favour of the Purchaser both
as at the effective date and as at the delivery date
(unless the
context otherwise indicates) that:
. .
.
1.24 the
sole assets of the Company shall be the immovable property known as
Remainder of Erf 948 Sea Point West, in extent 4048
square metres,
held by Deed of Transfer No. T25566/1997, commonly described as The
Arthur Seat Hotel; . . .’
In terms of the
agreement the effective date was 2 February 2001 and payment of the
purchase price had to be effected within 30
days of that date.
Delivery of the shares had to take place within seven days of payment
of the purchase price. It is common cause
that the agreement formed
part of the set of agreements relating to the Edward Hotel and that
it had nothing to do with the Arthur’s
Seat Hotel. The
appellant nevertheless contended that the respondent was not entitled
to the rectification of clause 1.24 by the
substitution of the
property description therein with the property description of the
Edward Hotel property.
2.2 A
shareholders’ agreement concluded by the same parties in terms
of which it was recorded that the respondent had acquired
from the
appellant 60% of the equity of Swanvest and that Swanvest would be
‘the registered owner of the bare dominium of
the property
known as ‘Remainder of Sub 1 of Lot 11258 Durban, situate in
the city of Durban, Administrative District of
Natal, Province of
Kwazulu-Natal’ (‘the Edward Hotel property’).
2.3 An agreement
of sale in terms of which Swanvest sold to the Protea Hotel Group
(Pty) Ltd (‘PHG’) the furniture,
fixtures and equipment
(‘FF&E’) then in use on the premises of the ‘the
Hotel known as The Edward Hotel Beach
Front Durban’ for a
purchase price of R2 000 000.
2.4 A cession
and pledge agreement in terms of which the respondent ceded and
pledged to the appellant 60% of the equity in the
second defendant
in
securitatem debiti
for the due payment of every sum of money which was then or could
thereafter become owing by the respondent to the appellant.
2.5 An agreement
of lease in terms of which the appellant let to PHG the Edward Hotel
as from 1 February 2001 for a period of 10
years. Although structured
as a lease the trial judge rightly found that the rent payable in
fact constituted consideration for
the acquisition by Protea of the
Edward Hotel property.
2.6 A ‘Side
Letter’ recording an agreement between PHG, the respondent and
the appellant as follows:
‘
We
hereby record that you have given us the irrevocable right to
restructure the series of transactions or any or more of them as
contained in the abovementioned documents after we have completed a
due diligence investigation of both Swanvest 258 (Pty) Limited
as
also Karos (Pty) Limited (in liquidation) as to the acquisition of
the shares in Karos (Pty) Limited and as to the tax implications
of
the transactions involving Swanvest 258 (Pty) Limited. In terms of
any such reconstruction, we will be entitled to cancel any
of the
above agreements to enable us as an alternative to purchase the
entire share equity of Karos (Pty) Limited subsequent to
a section
311 application to the High Court in terms of the Companies Act
provided that IBSA is not unreasonably prejudiced thereby,
either
financially or in terms of its security. An objection by IBSA shall
be
prima
facie
proof that it is unreasonably prejudiced by the restructure.’
[3] Karos, the
owner and operator of the Edward Hotel, had a substantial assessed
loss which Protea hoped to utilise by acquiring
the shares in Karos
and operating the Edward Hotel through Karos instead of Swanvest, in
the event of the liquidation of Karos
being terminated pursuant to an
application in terms of s 311 of the Companies Act 61 of 1973.
It is this possibility that
gave rise to the ‘side letter’.
It is also as a result of this possibility that effect was not given
to the sale of
shares agreement. Both the appellant and the
respondent accepted that a restructuring was going to take place and
that it could
serve no purpose to give immediate effect to the
provisions of the agreement. The FF & E and lease agreements were
nevertheless
implemented.
[4] Negotiations
concerning a restructuring of the agreements ensued and continued
until 2004, some considerable time after a scheme
of arrangement
between Karos (Pty) Ltd (in liquidation) and its creditors had been
sanctioned in terms of s 311 at the end
of 2002. During the
course of these negotiations, on 13 March 2002, the appellant agreed
to sell ‘the remaining 40% shareholding
in the Arthur’s
Seat and the Edward Hotel’ to the respondent for a purchase
consideration of R2 349 400 which
was subsequently, on 23
May 2002, reduced by R1m to R1 349 400 or R674 000
each. At that stage the parties were
still negotiating as to the
company in which the Edward Hotel property was to be housed in the
event of the agreements being restructured.
[5] The
negotiations came to an end on 25 November 2004 when the appellant’s
attorneys wrote to the respondent that, for a
period in excess of
three years, the parties had not regarded themselves bound by the
suite of agreements concluded on 1 March
2001 and that the
obligations arising from the agreement of sale of shares had become
prescribed. The respondent thereupon issued
summons against the
appellant claiming the relief eventually granted by the court a quo.
Swanvest and Karos were joined as second
and third defendants
respectively but no relief was claimed against them.
[6] In the court
a quo and also before us the appellant contended that the respondent
was not entitled to rectification of the agreement
of sale of shares
and in the alternative that the claim for such rectification had
prescribed. In respect of the claim for the
making good of the
warranty and undertaking that the Edward Hotel property would be an
asset in Swanvest as on 2 February 2001
the appellant contended that
such an order could not be made as it was impossible to make Swanvest
the owner of the property on
that date, and also because an order of
specific performance was in the circumstances legally inappropriate.
In the alternative
the appellant contended that the claim for
transfer of the shares in Swanvest and the claim that the warranty
and undertaking be
made good had become prescribed. I shall deal with
each of these contentions in turn.
Rectification
[7] A party is
entitled to rectification of a written agreement which, through
common mistake incorrectly records the agreement
which they intended
to express in the written agreement. In the present case it is quite
obvious and, as stated above, indeed common
cause, that the parties
never intended to warrant and undertake that the Arthur’s Seat
Hotel property would be an asset in
Swanvest as stated in clause 1.24
of the annexure to the agreement of sale of shares. It seems to me to
be equally obvious that
the parties intended the reference to be to
the Edward Hotel property. That is so because Protea wished to
acquire the Edward Hotel
and the agreements concluded on 1 March 2001
were entered into with that object in mind. Any doubt that there
could possibly be
in this regard is dispelled by the statement in the
shareholders’ agreement that the respondent had acquired from
the appellant
60% of the equity of Swanvest and that Swanvest would
be the owner of the bare dominium of the Edward Hotel property. One
can add
to this the fact that on 14 August 2000 the liquidators of
Karos had sold the Edward Hotel property to Swanvest and also the
fact
that the reason for the error seems to be clear. As Mr Arnold
Cloete, the financial manager of Protea (the sole witness at the
trial), explained, similar agreements in respect of the Arthur’s
Seat Hotel had already been concluded and were probably used
as a
precedent or template.
[8] Despite all
these indications, counsel for the appellant submitted that it could
not have been their intention that the appellant
should warrant and
undertake that the property would as at 2 February 2001 be an asset
in Swanvest because they knew, when the
agreement of sale of shares
was concluded, that that was not the case. The fact that the parties
knew that the property was not
an asset of Swanvest on 2 February
2001, taken in isolation, may be considered to be an indication that
the parties did not have
the intention in question but it may also be
an indication that, by so warranting and undertaking, the appellant
was simply undertaking
to procure transfer of the property to
Swanvest. That the latter was the case is in my view put beyond
question by the fact that
the parties concluded the agreement of sale
and the shareholders’ agreement, as also by the terms of the
shareholders’
agreement. No other reason has been advanced as
to why the parties would have concluded the agreement of sale of the
shares of
Swanvest and the shareholders’ agreement if not to
house the property in Swanvest except in the event of the parties
subsequently
agreeing to house the property in another company.
[9] The
appellant submitted furthermore that, as it was envisaged that the
liquidation of Karos and the agreement of sale between
the
liquidators of Karos and Swanvest could be terminated in terms of a
scheme of arrangement in terms of s 311, the appellant
would not
have warranted that the Edward Hotel property would be an asset in
Swanvest. However, the appellant could well have had
reason to
believe that it would in any event be able to procure transfer of the
property to Swanvest.
[10] Yet a
further submission advanced by the appellant as to why the parties
would not have entered into a binding agreement to
transfer the
Edward Hotel property into Swanvest was that the respondent was
desirous of making use of the taxed loss in Karos
by leaving the
property in Karos after its liquidation had been terminated and by
acquiring the shares in Karos instead. It is
true that, at the time
when the agreements were concluded, it was envisaged that it could
eventually be agreed to house the Edward
Hotel property in a company
other than Swanvest but it does not follow from that that the parties
had no intention of entering
into a binding agreement that it be
housed in Swanvest should they fail to agree on another structure. As
stated above it is common
cause that Protea was desirous of acquiring
the Edward Hotel and that it was with that object in mind that the
agreements were
concluded. Unless the agreement of sale of shares is
rectified as claimed by the respondent the parties would not have
achieved
that object.
[11] For these
reasons I am satisfied that the parties intended clause 1.24 to refer
to the Edward Hotel property.
Prescription
of the rectification claim
[12] The
appellant, referring to
Primavera
Construction SA v Government, North-West Province, and another
2003 (3) SA 579
(B) at 599H-I as authority, submitted that the
respondent’s claim for rectification has in any event
prescribed. In terms
of
s 10
of the
Prescription Act 68 of 1969
read with
s 11(d)
of that Act, a debt other than the debts
mentioned in ss 11(a) to (c) is extinguished by prescription
after the lapse of a
period of three years, save where an Act of
Parliament provides otherwise.
[13] ‘A
debt’ is not defined in the
Prescription Act. Dealing
with the
meaning of the Afrikaans ‘`n skuld’ Van Heerden AJA said
in
Oertel
en andere NNO v Direkteur van Plaaslike Bestuur en andere
1983 (1) SA 354
(A) at 370B:
‘
Volgens
die aanvaarde betekenis van die begrip slaan “`n skuld”
op `n verpligting om iets te doen (hetsy by wyse van
betaling of
lewering van `n saak of dienste), of nie te doen nie. Dit is die een
pool van `n verbintenis wat in die reël `n
vermoënsbestanddeel
en –verpligting omvat . . ..’
A claim for
rectification does not have as a correlative a debt within the
ordinary meaning of the word. Rectification of an agreement
does not
alter the rights and obligations of the parties in terms of the
agreement to be rectified: their rights and obligations
are no
different after rectification. Rectification therefore does not
create a new contract; it merely serves to correct the written
memorial of the agreement. It is a declaration of what the parties to
the agreement to be rectified agreed. For this reason a defendant
who
contends that an agreement sued upon does not correctly reflect the
agreement between the parties may raise that contention
as a defence
without the need to counterclaim for rectification of the agreement
(see
Gralio
(Pty) Ltd v D E Claassen (Pty) Ltd
1980 (1) SA 816
(A) at 824A-C). Should a claim for rectification of a
contract become prescribed after three years parties may become
entitled
to rights and subject to obligations wrongly recorded and
never intended eg in the case of a debt secured by a mortgage bond
which
only prescribes after the lapse of a period of 30 years.
1
That, in my view, is a result never intended by the
Prescription Act.
It
follows that in so far as it may have been held in
Primavera
that prescription runs against a claim for rectification of a
contract that decision is wrong.
[14] For these
reasons the appeal against the order rectifying the agreement of sale
should be dismissed.
Making good
the warranty
[15] As
rectified, the appellant in terms of the annexure to the agreement of
sale of shares warranted and undertook in favour of
the respondent
that the sole asset in Swanvest, as at the effective date and as at
the delivery date, would be the Edward Hotel
property.
[16] The
appellant submitted that the warranty as formulated is an affirmative
warranty of fact in so far as it related to the effective
date
whereas the Edward Hotel property was, as a fact, not the sole asset
of Swanvest at that date. It was therefore factually
and legally
impossible for the warranty to be rendered true. As a result the
respondent’s only remedy was to claim damages,
so the appellant
submitted. As authority for the submission the appellant referred to
De Wet and Van Wyk
Kontraktereg
& Handelsreg
5
ed p 88-89 where the authors, with reference to the example of a
person selling a horse with a warranty that the horse was still
alive
only to discover subsequently that the horse was already dead, said:
‘Waar ek die onmoontlike as moontlik waarborg,
kan ek dit wel
nie moontlik maak nie, maar moet ek by wyse van skadevergoeding my
waarborg goed maak.’ In these circumstances
the warranty that
the horse is still alive is in reality an undertaking to pay damages
should it transpire that the horse is already
dead.
2
Similarly, so the appellant submitted, the sale of shares agreement
goes no further than a promise by the appellant to pay damages
if the
facts are not as warranted.
[17] There is no
reason to interpret the warranty and undertaking at issue here in a
like manner. Unlike the case of the horse,
there is no reason to
believe that the parties intended that, in the event of the property
not being an asset in Swanvest as at
the effective date, there would
be an obligation on the part of the appellant to pay damages but not
an obligation to cure its
breach of a term of the contract by
procuring transfer of the property to Swanvest. Furthermore, unlike
the example, the appellant
not only warranted but also undertook that
the property would be an asset in Swanvest. An undertaking to procure
a certain state
of affairs on a particular date does not, in the
absence of any reason to so interpret the undertaking, change into an
undertaking
to pay damages should the undertaking not be honoured.
Any doubt that there may be in this regard is dispelled by reference
to
the background circumstances.
3
At the time when the agreement of sale of shares was concluded the
parties to the agreement were aware that the property had not
been
registered in the name of Swanvest. They could not, therefore, have
intended the ‘warranty and undertaking’ to
be anything
other than an undertaking to procure transfer of the property to
Swanvest.
[18] In the
alternative the appellant submitted that the court a quo had a
discretion to order specific performance and that the
present case
was not an appropriate case for such an order. It is settled law that
a court has a discretion to grant or refuse
a decree of specific
performance of a contractual obligation. That discretion has to be
judicially exercised upon a consideration
of all relevant facts and
will only be interfered with on appeal when it can be said that ‘the
Court
a
quo
has exercised its discretion capriciously or upon a wrong principle,
that it has not brought its unbiased judgment to bear on the
question
or has not acted for substantial reasons’.
4
[19] The
appellant submitted that the court a quo should not have granted
specific performance because it was not an appropriate
remedy as the
order could be given effect to only by way of an agreement of sale
complying with the formalities prescribed by
s 2(1)
of the
Alienation of Land Act 68 of 1981
, between Karos and Swanvest. Not
only did such an agreement not exist, the terms of the agreement of
sale could not be determined
and although the appellant was the sole
shareholder of both Karos and Swanvest the directors of these
companies might not consider
it advisable either to sell or buy the
property. For these reasons the order of specific performance by the
court a quo amounted
to a
brutum
fulmen
.
[20] There is no
merit in these submissions. An agreement of sale between Karos and
Swanvest is not a requirement for the transfer
of the property by
Karos to Swanvest.
5
The appellant undertook to procure such transfer and must have been
confident that it would be able to give effect to that undertaking.
The appellant did not plead that it would not be able to give effect
to an order of specific performance and tendered no evidence
to that
effect. Moreover, both Swanvest and Karos were parties to the action
in the court a quo and neither of them sought to contend
that the
appellant would not be able to perform the obligation undertaken by
it. In these circumstances the court a quo had no
reason to doubt
that the appellant would be able to do so. No other basis for
interfering with the exercise by the court a quo
of its discretion to
order specific performance was advanced by the appellant.
Prescription
of the obligations
under
the agreement of sale of shares
[21] The
appellant pleaded that its obligations to deliver 60% of the
shareholding in Swanvest and to comply with the warranty and
undertaking in respect of the Edward Hotel property fell due for
performance by not later than 11 March 2001 and that they were
extinguished by prescription by not later than 11 March 2004 ie
before service of the summons which took place no earlier than
2
February 2005. The respondent in its plea and before us denied that
the appellant’s obligations had prescribed and contended
that
the running of prescription was interrupted in terms of
s 14
of
the
Prescription Act in
that after 11 March 2001, the appellant
either expressly or tacitly acknowledged its liability to give effect
to the agreement
of sale of shares. It did so by, amongst others,
concluding, on or about 6 February 2002 and 25 May 2002, the
price-reduction agreement
in respect of ‘the remaining’
40% of the shares in the company that was going to hold the Edward
Hotel property and
also by engaging in negotiations with the
respondent in order to effect a restructuring of the agreements
relating to the Edward
Hotel.
[22] In terms of
s 14
the running of prescription is interrupted by an express or
tacit acknowledgement of liability by the debtor and commences to run
afresh from the day on which the interruption takes place.
[23] At the time
when the sale of shares agreement was entered into the parties knew
that the liquidation of Karos could possibly
be terminated in terms
of
s 311
and that this might enable the respondent to acquire
the Edward Hotel property by acquiring the shares in Karos instead of
Swanvest.
For that reason they agreed that the respondent would be
entitled to restructure the agreements relating to the Edward Hotel
even
to the extent of cancelling the agreement of sale of shares.
Pursuant to that agreement, and shortly after the conclusion thereof,
the appellant and the respondent started negotiating a restructuring
of the agreements. As a result of these restructuring negotiations
the agreement of sale of shares was not implemented. It does not
however follow that the parties had no intention of implementing
the
agreement of sale of shares. On the contrary, the agreement of sale
of shares was clearly entered into to bind the parties
to a fall back
position should the restructuring negotiations fail. By negotiating a
restructuring of, amongst others, the agreement
of sale of shares,
and not a fresh agreement, the parties tacitly acknowledged the
binding nature of that agreement. Confirmation
that that was the case
is afforded by an internal memorandum of the appellant dated 12
February 2002 in which it is stated, with
reference to the set of
agreements relating to the Edward Hotel, that due to the
s 311
compromise no change would be allowed to the agreements until they
(the appellant) understood the implications on the agreements.
By
selling the remaining 40% of the shareholding in the company that was
eventually to hold the Edward Hotel property, the appellant
similarly
tacitly acknowledged the binding nature of the sale of the other 60%
of the shares.
[24] The
restructuring negotiations were terminated only during 2004 while the
sale of the remaining 40% of the shares in the property
holding
company was concluded on 6 February 2002 and amended on 25 May 2002.
It follows that the running of prescription was interrupted
by an
acknowledgement of liability less than three years before 2 February
2005 when the summons was served and that the respondent’s
claims had not become prescribed as contended by the appellant.
[25] For these
reasons the appeal against the court a quo’s order that the
shares in Swanvest be delivered to the respondent
against payment of
the purchase price in respect thereof and that the warranty be made
good should be dismissed.
Order
[26] The appeal
is dismissed with costs including the costs of two counsel.
_____________________
P E STREICHER
JUDGE OF APPEAL
APPEARANCES:
For appellant: E
Fagan
C Hugo
Instructed by:
Edward Nathan
Sonnenbergs, Cape Town
Matsepes,
Bloemfontein
For
respondent: H M Carstens SC
S P Rosenberg
SC
Instructed by:
Jan S de
Villiers, Cape Town
McIntyre &
Van der Post, Bloemfontein
1
Section 11(a)
of the
Prescription Act 68 of 1969
.
2
S Williston
A Treatise on the Law of Contracts
(1938) vol 6 p
5417.
3
See
Coopers & Lybrand and others v Bryant
[1995] ZASCA 64
;
1995 (3) SA 761
(A) at 767E-768E.
4
Ex parte Neethling and others
1951 (4) SA 331
(A) at 335; and
Benson v SA Mutual Life Assurance Society
1986 (1) SA 776
(A)
776 at 781A-783C.
5
Cape Explosive Works Ltd and another v Denel (Pty) Ltd and others
2001 (3) SA 569
(SCA) at 577D-H par [10].