Brief Summary

Contract — Service Level Agreement — Validity and interpretation — Applicant sought declarations regarding the validity of a Service Level Agreement (SLA) with the First Respondent and the cancellation of a Joint Venture Agreement (JV) with the Second Respondent — First Respondent attempted to terminate the SLA based on a clause deemed void for vagueness — Court held that the SLA remained in effect and the First Respondent was obligated to make payments to the Applicant, as the Second Respondent had no rights under the SLA — First Respondent's termination of the SLA was invalid and constituted mala fide conduct.

Comprehensive Summary

Summary of Judgment

Introduction

This was a motion application in the Gauteng Division of the High Court, Pretoria, in which the applicant sought primarily declaratory relief and specific performance arising from two written commercial agreements connected to a municipal procurement arrangement.

The parties were Dikala Plant Hire CC (the applicant), Bela Bela Local Municipality (the first respondent), and Salimi Barui Trading (Pty) Ltd (the second respondent). The applicant contracted directly with the municipality under a Service Level Agreement, and separately concluded a Joint Venture Agreement with the second respondent concerning aspects of performance and revenue-sharing.

Procedurally, the matter came before the High Court on the papers. A central feature of the respondents’ opposition was an attempt to re-characterise the contracting parties under the Service Level Agreement by reference to the Joint Venture Agreement, including an effort by the first respondent to obtain rectification of the Service Level Agreement. The second respondent did not pursue rectification and, at argument, did not support the first respondent’s rectification contention.

The dispute concerned the validity and effect of a termination clause (clause 10) in the Service Level Agreement, whether the municipality had lawfully cancelled that agreement, whether payment was due to the applicant, and whether the applicant had validly cancelled the Joint Venture Agreement on the basis of repudiation by the second respondent.

Material Facts

The court treated as central the existence of two distinct written agreements, each containing so-called “whole agreement” clauses, recording that the written document constituted the complete agreement between the relevant parties. The first was a Service Level Agreement concluded on 4 August 2014 between the applicant and the first respondent (the municipality). The second was a Joint Venture Agreement between the applicant and the second respondent.

In terms of the Service Level Agreement, the applicant undertook to supply a full maintenance lease for the municipality’s pool vehicles. The remuneration structure under the Service Level Agreement consisted of two components: payment for the supply of the vehicle fleet, and payment for administrative services rendered under the arrangement.

The Joint Venture Agreement, by contrast, allocated responsibilities and benefits between the applicant and the second respondent. It recorded that the applicant would supply the entire fleet, that the vehicles would remain the property of the applicant, and that the applicant would receive the amounts due from the municipality for the vehicle-supply component. It further provided that the applicant and second respondent would together administer the fleet and would share the administration fees equally.

A dispute then emerged involving the municipality’s payment obligations. The municipality adopted the stance that, because of the Joint Venture Agreement, the applicant and the second respondent (as an alleged joint venture) were together the municipality’s counterparty under the Service Level Agreement. On that basis, the municipality contended it could withhold payment to the applicant unless payment was made jointly to the applicant and second respondent.

On 30 July 2015, the municipality purported to terminate the Service Level Agreement relying on clause 10, with termination stated to take effect on 31 January 2016. The applicant contended clause 10 was void for vagueness and that the purported termination was therefore ineffective.

As between the applicant and the second respondent, the applicant’s case (accepted by the court on the papers) was that the second respondent had arrogated to itself the position of a partner to the Service Level Agreement and had approached the municipality on the basis that amounts payable under the Service Level Agreement should be paid to the second respondent. The applicant characterised this as conduct inconsistent with the second respondent being bound only by the Joint Venture Agreement, and as an unequivocal indication that the second respondent did not regard itself bound by the Joint Venture Agreement.

On 7 October 2015, the applicant purported to cancel the Joint Venture Agreement, accepting what it alleged to be the second respondent’s repudiation.

Legal Issues

The court was required to determine, primarily as questions of law and the application of legal principles to largely common-cause contractual facts, the following issues.

The first issue was whether clause 10 of the Service Level Agreement was so uncertain that it was void for vagueness, and, if so, whether the municipality’s attempted termination of the Service Level Agreement under that clause was legally ineffective.

The second issue was whether the Service Level Agreement should be treated as having the applicant alone as counterparty, as its text indicated, or whether it should be treated (or rectified) to reflect a different contracting arrangement involving the second respondent or a joint venture. This raised an issue of rectification and the interaction between the two written agreements.

The third issue was whether the municipality was entitled to withhold payment or insist on joint payment to the applicant and second respondent, given the structure of the Service Level Agreement and Joint Venture Agreement and the absence of any direct contractual nexus between the municipality and the second respondent on the documents.

The fourth issue was whether the second respondent’s conduct constituted repudiation of the Joint Venture Agreement, entitling the applicant to cancel it, and whether the court should confirm that cancellation. This involved applying the legal test for repudiation to the conduct evidenced on affidavit.

Court’s Reasoning

The court began from the premise that the matter involved two separate written instruments, each with a whole agreement clause, and that the parties’ rights and obligations had to be assessed with close regard to the terms actually recorded in those documents. The respondents’ attempt to “import” terms into the Service Level Agreement by reference to the Joint Venture Agreement was approached critically because, on the face of the documents, the Service Level Agreement and the Joint Venture Agreement had different parties, different aims, and different allocations of rights and obligations.

On rectification, the court accepted the trite principle that rectification requires proof that the parties to the document sought to be rectified intended to be bound by the agreement as rectified. Applied to the Service Level Agreement, the municipality would therefore need to show that the applicant and the municipality (as parties to that agreement) intended that the Service Level Agreement should reflect that the applicant and second respondent acted as joint venture partners in that agreement. The court considered it significant that only the first respondent pursued rectification and that the second respondent neither brought its own rectification application nor supported the rectification claim at argument. In the court’s assessment, granting rectification would also create untenable and irreconcilable differences between the Service Level Agreement and the Joint Venture Agreement, because the Joint Venture Agreement allocated the vehicle-supply component to the applicant alone while sharing only the administrative component between the applicant and the second respondent. This structural inconsistency reinforced the conclusion that no direct rights and obligations arose between the municipality and the second respondent, and that any linkage between the second respondent and the municipal contract operated only through the applicant.

Turning to the municipality’s non-payment stance, the court questioned the legitimacy of the municipality’s refusal to pay the applicant by insisting on joint payment to the applicant and second respondent. The court’s reasoning proceeded from the contractual allocation in the Service Level Agreement, read with the Joint Venture Agreement, that the municipality’s counterparty under the Service Level Agreement was the applicant alone. The existence of a joint venture arrangement for internal sharing between the applicant and second respondent did not, on the court’s approach, alter the municipality’s contractual obligations under the Service Level Agreement.

The court then dealt directly with clause 10 of the Service Level Agreement. It held that clause 10 was inchoate, could not reasonably be interpreted, and was void for vagueness. The municipality’s reliance on authority cautioning that invalidity should be a last resort did not persuade the court to “overlook” words in clause 10 (treat them as pro non scripto) in order to make it workable. The court rejected this interpretive approach on the facts, and concluded that the attempted termination under clause 10 was accordingly of no force and effect, leaving the Service Level Agreement in full force. The court also rejected the municipality’s contention that it was placed in an “invidious position” by disputes between the applicant and second respondent; it held that such disputes should not have affected the municipality’s duty to perform under the Service Level Agreement, including its obligation to pay.

As to the Joint Venture Agreement, the second respondent argued that the repudiation issue could not be decided on affidavit because of factual disputes, and sought to tie the repudiation analysis to the contention that the joint venture (rather than the applicant) was intended to be the service provider under the Service Level Agreement. The court did not accept this, reasoning that the agreements had distinct purposes and that, on the papers, the second respondent could not plausibly contend it would provide the services contemplated in the Service Level Agreement.

Applying the repudiation test, the court relied on authority stating that repudiation is established where conduct, fairly interpreted, exhibits a deliberate and unequivocal intention no longer to be bound. On the affidavits, the court found that the second respondent’s conduct—approaching the municipality as if it were entitled to payment under the Service Level Agreement and asserting a status inconsistent with the Joint Venture Agreement—could “hardly” be said not to constitute repudiation. The applicant’s cancellation of the Joint Venture Agreement by accepting that repudiation was therefore treated as proper, and the court confirmed the cancellation.

Outcome and Relief

The court granted the relief sought by the applicant in full.

It declared that clause 10 of the Service Level Agreement dated 4 August 2014 was void for vagueness, and declared that the Service Level Agreement remained of full force and effect and had not been lawfully cancelled by the municipality.

The court ordered the municipality to comply with its obligations under the Service Level Agreement, including immediate payment of R8 673 359.88 to the applicant together with interest at 9% per annum a tempore morae, and to make future payments falling due under the Service Level Agreement into the applicant’s nominated bank account.

It further confirmed the cancellation of the Joint Venture Agreement between the applicant and the second respondent.

Costs were awarded against the first and second respondents jointly and severally, the one paying the other to be absolved.

Cases Cited

CTP Ltd v Argus Holdings Ltd 1995 (4) SA 774 (A)

Haviland Estates (Pty) Ltd and Another v McMaster 1969 (2) SA 312 (A)

Lewis v Oneanate (Pty) Ltd 1992 (4) SA 811 (A)

Highveld 7 Properties (Pty) Ltd v Bailes 1999 (4) SA 1307 (SCA)

OK Bazaars (1929) Ltd v Grosvenor Buildings (Pty) Ltd 1993 (3) SA 471 (A)

Legislation Cited

No legislation was cited in the judgment.

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that clause 10 of the Service Level Agreement was void for vagueness, with the result that the municipality’s purported termination relying on that clause was legally ineffective and the Service Level Agreement remained binding and enforceable.

It held further that the municipality was not entitled to withhold payment to the applicant on the basis that payment should instead be made jointly to the applicant and the second respondent, given the contractual structure reflected in the written agreements and the absence of any direct contractual rights and obligations between the municipality and the second respondent.

The court also held that the second respondent’s conduct, as reflected in the affidavits, constituted repudiation of the Joint Venture Agreement, entitling the applicant to cancel it, and it confirmed that cancellation.

LEGAL PRINCIPLES

A contractual term may be declared void for vagueness where it is inchoate and cannot reasonably be interpreted so as to ascertain the parties’ obligations with sufficient certainty. While invalidity is approached as a measure of last resort, a court is not obliged to render a clause operative by disregarding problematic words (pro non scripto) where the clause remains incapable of sensible interpretation on the text before it.

A party seeking rectification bears the burden of showing that the parties to the document intended to be bound by the contract in the form contended for, and that the written instrument fails to record that common intention. Rectification cannot properly be used to reconfigure contractual relationships in a manner that creates irreconcilable conflict with other operative agreements defining different roles, rights, and obligations.

Repudiation is determined objectively: the question is whether the conduct, fairly interpreted, demonstrates a deliberate and unequivocal intention no longer to be bound by the contract. Where repudiation is established, the innocent party may accept it and cancel the agreement, and a court may confirm that cancellation where the contractual and factual foundation is established on the papers.

Dikala Plant hire CC v Bela Bela Local Municipality and Another (95187/2015) [2016] ZAGPPHC 1225 (9 November 2016)