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[2007] ZASCA 106
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Schwartz NO v Pike and Others (668/06) [2007] ZASCA 106; [2007] SCA 106 (RSA) [2008] 1 All SA 89 (SCA); 2008 (3) SA 431 (SCA) (19 September 2007)
THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
REPORTABLE
Case no: 668/06
In the matter
between
I
SCHWARTZ NO
.......................
APPELLANT
and
S
E PIKE
.......................
1
ST
RESPONDENT
A
VAN DER MERWE
.......................
2
ND
RESPONDENT
M
M MASITO N.O.
.......................
3
RD
RESPONDENT
Coram:
MTHIYANE, HEHER and VAN HEERDEN JJA
Heard:
3 SEPTEMBER 2007
Delivered: 19 SEPTEMBER 2007
Summary: Contract – interpretation – association
agreement – disposal of deceased member’s interest in
close
corporation – unilateral appointment by executor of
accountant to value interest in conflict with parties’
intention
– members to be afforded opportunity to reach
consensus on appointee.
Neutral citation: This judgment may be referred to as
Schwartz
NO v Pike
[2007] SCA 106 (RSA).
_____________________________________________________________________
JUDGMENT
__________________________________________________________________
HEHER JA
HEHER JA:
[1] The appellant is
the executor in the estate of Michelle Ann Pennels (the deceased) who
died in a motor accident on 7 December
2002. In the Pretoria High
Court he applied for an order that the first and second respondents
(hereinafter referred to as ‘Pike’
and ‘Van der
Merwe’ respectively) each pay to the estate the amount of R1
053 712,00 together with interest at the rate
of 15,5% per annum
thereon from 17 March 2006 and the costs of the application. As third
respondent he joined the liquidator of a
close corporation, Lore
Marketing 46 CC (hereinafter referred to as ‘the corporation’)
but sought no relief against him.
[2] Bredenkamp AJ
dismissed the application with costs but this Court granted special
leave to appeal. Pike and Van der Merwe opposed
the appeal before us.
[3] The appellant
founded his case on a written Association Agreement entered into by
the deceased, Pike and Van der Merwe as members
of the corporation at
Krugersdorp on 5 March 2001. According to its terms the respective
interests of the members were to be in the
proportions 15 : 60 : 25.
The object of the corporation was to conduct a restaurant business
(‘The Hungry Hunter’) in
Centurion which was to be
managed by the deceased and Pike as full-time employees of the
business. According to the appellant’s
affidavit, the deceased
died while returning from work at the restaurant with the night’s
cash takings of R33 000 belonging
to the corporation in her
possession.
[4] Clause 16 of the
Agreement regulated the disposal of a deceased member’s
interest in the event of his or her death as follows:
‘
16.1
The remaining Members (“Remaining Members”) and the duly
appointed executor of the Deceased’s estate (“executor”)
shall within 30 (THIRTY) days from the date of the executor’s
appointment as such enter into negotiations with the view of
reaching
an agreement as to the reasonable and fair value of the Deceased’s
Interest as at the date of the Deceased’s
death. If the
Remaining Members and the executor are unable to reach an agreement,
then they shall jointly appoint a chartered accountant
to determine
the reasonable and fair value of the Deceased’s Interest. If
the parties concerned are unable to reach an agreement
as to the
appointment of a chartered accountant, then either the Remaining
Members or the executor may request the acting President
of the South
African Institute of Chartered Accountants to nominate a chartered
accountant for the purpose as aforementioned, in
which event any such
nomination by such acting President shall be final and binding on all
the Remaining Members and the executor.
16.2 Any value that the chartered
accountant, appointed in accordance with the aforementioned
provisions, [determines] in regard to
the value of the Deceased’s
Interest as at the date of his death shall be final and binding on
all the Remaining Members and
the executor.
16.3 Upon the death of the Deceased there
shall be deemed to have taken place, with effect from the date of the
Deceased’s death
an automatic sale by the deceased’s
estate of the Deceased’s Interest and his Loan Account
(collectively referred to
as the “Whole Interest”) . . .
to the Remaining Members upon the following terms and conditions:-
16.3.1 The Remaining Members shall in
equal shares purchase the Whole Interest, irrespective of the size of
their respective Interests;
16.3.2 The purchase price in respect of
the Whole Interest to be paid to the Deceased’s estate shall be
the aggregate of the
value of his Interest (determined as provided
above) plus an amount equal to the value of the Deceased’s Loan
Account as reflected
in the Corporation’s books of account as
at the date of the Deceased’s death. Unless the parties
concerned agree otherwise,
such purchase price shall become due and
payable to the Deceased’s estate within 4 (FOUR) months from
the date on which the
value of the Deceased’s Interest has been
agreed upon or determined by a chartered accountant, as the case may
be, in accordance
with the aforementioned provisions.’
[5] The appellant
deposed that he had, on 20 June 2003, written to an attorney who
represented Pike and Van der Merwe ‘calling
on them to agree on
the value of Pennels’ interest and stating that they are
invited to follow the procedures in terms of Clause
16’. That
was wildly inaccurate. In fact the terms of the letter, Annexure G to
the founding affidavit, were as follows:
‘
Thank
you for your letter dated the 5
th
June
2003.
I do not accept that the Lore Marketing
C.C. did not exist trading as Hungry Hunter. A copy of one of the
cheques drawn is attached.
As
you are aware I have placed a value on the Lore Marketing C.C. as per
my letter dated the 13
th
May 2003.
In terms of clause 16 of the Association
Agreement, we are to reach an agreement on the value, failing which
clause 16 prescribes
the procedure to be followed.
Your clients are invited to advise what
value they place on the Lore Marketing C.C. at date of death of Miss
Pennels, and your clients
are to confirm how they arrived at such
value so that I as Executor of Miss Pennels’s Estate can give
proper consideration
thereto.
Once
you have provided me [with] the aforesaid valuation and how it is
calculated, I will revert to you for purposes of holding a
meeting to
attempt to resolve the matter, provided, of course, we are not too
far apart on the valuation.’
Clearly, the
reference to clause 16 was made merely in passing as the main focus
was directed to arriving at a value by agreement
which, if achieved,
would have rendered the subsequent procedures of no concern to
anyone.
[6] The appellant
did not in his affidavit refer to or rely upon previous
correspondence. It is apparent that by the time he wrote
Annexure G
he was aware of a fundamental dispute between the parties as to
whether the corporation was operating the restaurant at
the time of
the deceased’s death.
[7] The appellant’s
affidavit continues,
‘
We
could not agree on a valuation nor could we agree on the appointment
of an accountant. Accordingly, I addressed a letter to . .
. the
South African Institute of Chartered Accountants calling on them to
appoint a Chartered Accountant in terms of the provisions
of Clause
16 of the Association Agreement . . . On or about the 8
th
December
2005 I received a letter from Lucro Auditing (“Lucro”)
enclosing a copy of a letter from the South African Institute
of
Chartered Accountants confirming that Lucro had been appointed as
Chartered Accountant to determine the valuation of the deceased’s
interest . . . Liza Julie Wood (“Wood”) of the firm Lucro
was appointed to do the valuation . . . Wood determined the
valuation
to be R2 107 424,00 as at the 7
th
December
2002 as per a copy of the valuation annexed hereto marked “K”.’
[8] In letters dated
8 December 2003 the appellant demanded payment from each of Pike and
Van der Merwe of a half of the value of
the deceased’s interest
and tendered delivery and transfer of her interest in the corporation
and cession of the value of her
loan account.
[9] On 14 December
2005 the attorney representing Van der Merwe responded that his
client denied being indebted to the estate in any
amount whatsoever.
According to his letter,
‘
2.
Our client denies that he was ever requested by your client to agree
to the appointment of an auditor as contemplated in clause
16.1 of
the association agreement. There was no attempt by the members to
agree to such an appointment. Your client’s alleged
request to
the President of the South African Institute of Chartered Accountants
for the appointment of an independent auditor was
therefore premature
and our client accordingly does not deem himself bound by such
appointment.
3. In any event, it is quite evident that
the valuation by Lucro Auditing was performed upon certain
assumptions apparently based
on information furnished to them by your
client. It is abundantly clear that at least some of the information
upon which the valuation
was based is incorrect and completely
unfounded. We place on record that Lucro Auditing never even
approached our client in order
to obtain any information from him or
to verify any information or facts furnished to them in regard to the
close corporation.
4. Our client is adamant that the
valuation arrived at by Lucro Marketing is based on a complete
misconception of the actual and true
facts and circumstances
pertaining to the said close corporation as at the date on which the
late M.A. Pennels passed away. Therefore
our client rejects the
valuation furnished by Lucro Marketing and our client most certainly
does not deem himself bound by such valuation.’
[10] Pike and Van
der Merwe both deposed to answering affidavits. There is conflict
between them as to how and when the latter abandoned
his interest in
the corporation, but, on either version, the deceased was still alive
at the time. Pike sets up a case that the remaining
members agreed to
dispose of the business to a new corporation (‘Telegenix
Trading 161 CC’) which they incorporated for
the purpose and
which owned and was running the restaurant by November 2002. Because
of the narrow issue on which this appeal turns,
further references to
the merits of the dispute are unnecessary.
[11] Pike denied in
his affidavit that he and the appellant had been unable to agree on
the appointment of a chartered accountant
as contemplated in clause
16.1. He drew attention to a letter written shortly thereafter by
attorneys representing him which suggested
to a Mr Jack Roux (who
represented the estate) that Roux should nominate an independent
valuator and ‘[s]hould we be satisfied
with a nomination we
shall both jointly appoint him to value the assets of Telegenix
Trading 161 CC’. He attached to his affidavit
Roux’s
reply of 22 December 2003 suggesting the appointment of one Roode and
asking whether Pike would be satisfied if Roux
were to appoint him.
He also attached his reply to Roux’s proposal; which read as
follows:
‘
In
order to clarify this matter, kindly furnish us with a complete list
of all the entities which you allege the deceased held an
interest
in.
On receipt of the list, we can deal with
all the entities individually.
We look forward to hearing from you
soon.’
[12] Pike stated on
oath that neither he nor his attorneys received any further written
communications from Roux or the appellant
regarding the appointment
of an accountant for purposes of a valuation of the deceased’s
interest in the corporation. On 5
December 2005, he deposed, ‘my
attorneys of record were simply advised by the [appellant] that Lucro
Auditing had been appointed
to value Pennel’s interest in the
close corporation and that they had placed a value on her interest in
the said corporation’.
[13] Van der Merwe,
in his answering affidavit, denied that the appellant ever requested
him to agree on the appointment of an accountant
as provided for in
clause 16.1. With regard to the valuation he denied that he chose not
to be involved in the process. He stated
that until he received a
copy of the valuation report during December 2005 he had been unaware
of the appellant’s request to
the Institute to appoint an
accountant or of the fact that Lucro Auditing had performed a
valuation. If he had been informed of the
situation he would, he
deposed, certainly have become involved.
[14] The denials by
the respondents that the appellant had complied with the terms of
clause 16.1 in so far as that related to the
choice of a chartered
accountant cried out for a reply setting out facts that substantiated
the appellant’s bald averments
in the founding affidavit. But
the appellant could not rise to the challenge. The paragraph in which
he deals with their denials
encapsulates the argument which was
addressed to us by his counsel in the appeal:
‘
10.
It is apparent from the aforementioned that either the remaining
members or the executor “
may
”
request
an appointment from the president of the South African Institute of
Chartered Accountants. It is common cause that there was
no agreement
reached as to the identity of the chartered accountant to be
appointed. Even on the first and second respondents’
version no
agreement is contended for. The only issue therefore is whether there
was an obligation upon the executor to request the
first and second
respondents to agree to an appointment. The clause does not specify
the need for such a request. The first and second
respondents have
accordingly misunderstood or deliberately misconstrued the provision
of the agreement. The only requirement is that
no agreement should
have been reached. On their own version, no such agreement was
reached. There is accordingly no dispute of fact
on this issue which
is relevant to the determination of this application.’
[15] Bredenkamp AJ
did not swallow the argument and neither can we. The matter is one of
interpretation. The essential exercise is
to extract the parties’
true intention from the words which they used to express that
intention, accepting that life can only
be given to the language by a
proper regard for the context in which the words appear together with
any admissible background facts.
[16] The substance
of clause 16.1 shows that the parties chose a four stage process to
give effect to the disposal of a member’s
interest. In the
first stage the parties were to negotiate with each other to try to
reach agreement on the price. Then, if they
failed, they were to try
to agree on the identity of a chartered accountant who, as their
joint appointee, would undertake the valuation
of the interest.
Thirdly, if they were unable so to agree, any member of the
corporation or the executor could approach the Institute
to make the
appointment. Finally, the person so appointed would make the
valuation, impliedly after receiving the input of interested
parties.
This last step was a dispute-breaking mechanism which could only be
invoked once the preceding procedures had been exhausted
- such is
clear from the conditional nature of stages two, three and four.
Counsel’s submission that the appellant would have
been
entitled to proceed directly to the third or fourth stage is in
conflict with the words and the apparent underlying intention
to
resolve matters by agreement without the trouble, delay and cost
involved in employing an accountant if that could be avoided.
The
co-operative efforts which the clause envisages should be understood
in this light rather than, as counsel suggested, be treated
merely as
wishes which can be disregarded. Moreover the members would know
that, until it could fairly be said that they were unable
to reach
agreement as to the identity of the joint appointee, they would not
have to expect an appointment by the Institute or deal
with its
consequences. The exhaustion of the opportunity thus served a
practical purpose in the whole scheme. The contention of appellant’s
counsel that absence of agreement was the equivalent of inability to
agree in the circumstances of this case cannot be sustained.
Inability to agree may readily imply absence of consensus but the
reverse is not necessarily the case. How could it be concluded
that
they were or would be unable to agree on the appointment simply
because they were poles apart on the question of value, as counsel
argued? The clause clearly contemplates that all parties shall have
the reasonable opportunity to arrive at agreement on a joint
nominee.
The evidence shows without any possibility of doubt that the
appellant did not afford the respondents such an opportunity.
To that
extent he failed to prove a necessary precursor to his reliance on
the valuation procedures of clause 16.1.
[17]
Appellant’s counsel sought to avoid the logic of the clause by
submitting that the second stage of the parties’ design
was
nothing more than an agreement to agree which, in accordance with
established principle, could not be enforced against his client.
He
relied particularly on the formulation by Schutz JA in
Premier,
Free State, and Others v Firechem Free State (Pty) Ltd
2000
(4) SA 413
(SCA) at 431G-H. I am by no means sure that a court will,
in determining whether a party has complied with a contractual term,
necessarily
allow the unenforceability of that term to override the
clear intention of the parties;
cf
the
remarks of Grosskopf JA in
Whyte
v Da Costa Couto
1985
(4) SA 672
(A) at 683D-E. In any event, on the interpretation which I
have placed on the second stage of the agreed process, the appellant
was
under an obligation to afford a reasonable opportunity to the
other members to reach consensus on a joint appointment before
approaching
the Institute. Whether he did or did not do so is a
simple question of fact which is capable of ready proof. It is
irrelevant to
that obligation that agreement would or would not
result from proper compliance or that the parties could not be
compelled to reach
agreement in consequence of compliance. As Ponnan
JA pointed out when considering an analogous situation in
Southernport
Developments (Pty) Ltd v Transnet Ltd
2005
(2) SA 202
(SCA) at 208D:
‘
The
contract under consideration in
Firechem
contained
no deadlock-breaking mechanism. In the present case the agreement
prescribes what further steps should be followed in the
event of a
deadlock between the parties. The engagement between the parties can
therefore be analysed as requiring not merely an
attempt at good
faith negotiations but also the participation of the parties in a
dispute resolution process that they have specifically
agreed upon.’
Put simply, if the
appellant wished to derive the benefits of the process he was obliged
to participate in it in accordance with the
agreed terms.
[18] Since it was at
the end of the day common cause that the applicant had not afforded
the respondents any opportunity to achieve
consensus on the identity
of the accountant who would resolve the dispute concerning the value
of Ms Pennel’s interest, the
application was premature and had
to fail.
[19] The appeal is
accordingly dismissed with costs.
____________________
J A HEHER
JUDGE OF APPEAL
MTHIYANE JA )
Concur
VAN HEERDEN JA )