Brief Summary

Contract — Inducing contract — Effect of prior inducing contract on rights and obligations of parties — Plaintiff claimed damages from defendants as trustees of the West Coast Trust (WCT) for failing to remit a dividend from the Development Trust after the latter's sequestration — Plaintiff contended he was entitled to the dividend based on a sale agreement where he purchased the WCT's interest in the Development Trust — Defendants argued that the dividend was properly paid to the WCT, discharging the Development Trust's indebtedness — Court held that the defendants breached their obligations under the sale agreement, entitling the plaintiff to claim damages for the amount paid to the WCT.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings took the form of an action in which the plaintiff, Izak Adriaan Johan de Villiers, claimed contractual damages against the defendants, David Lawrence Cornelius McCay N.O. and Marlene McCay N.O., in their capacities as trustees of the West Coast Trust (“WCT”). The plaintiff’s claim was premised on an alleged breach of obligations arising from a written agreement of sale (“the main agreement”), in terms of which the plaintiff contended he became entitled to the benefit of the WCT’s claims against a related trust, secured by mortgage bonds, but was later deprived of that benefit when the defendants caused payment to be made to the WCT instead of to him.

The defendants resisted the claim and advanced a counterclaim (reconvention). Their defence and counterclaim were grounded in the existence and legal consequences of a prior arrangement commonly referred to in South African contract law as a prior inducing contract (here, an “undertaking” regarding the transfer of plots), which they alleged had induced the conclusion of the main agreement. They contended that the failure (or termination) of that undertaking had legal consequences for the continued enforceability of the main agreement and required restitution, including the reversal of benefits the plaintiff claimed under the main agreement.

The matter proceeded to trial before Thring J in the Cape of Good Hope Provincial Division (Western Cape High Court). Only the plaintiff gave evidence. Although a number of doctrinal issues were raised on the pleadings and in argument (including the parol evidence rule, rectification, reciprocity, and whether the agreements were separate or one composite contract), the court explicitly approached the case on a set of assumptions favourable to the plaintiff and decided the matter on a narrower basis relating to the termination of the inducing contract and the resulting restitutionary consequences.

The general subject-matter of the dispute was the effect of a prior inducing agreement on the parties’ rights and obligations under a related written contract, particularly where the inducing agreement later becomes impossible to perform and is treated as having terminated retrospectively, and whether that retrospective failure carries restitutionary consequences that undermine the plaintiff’s claim to benefits said to have been ceded under the main agreement.

2. Material Facts

The material facts relied upon by the court were largely common cause. A trust known as The Sixteen Mile Beach Development Trust (“the Development Trust”) was created on 30 June 1993. Its trustees included the plaintiff and the first defendant (among others). The Development Trust was established, among other purposes, to purchase and develop certain land at Yzerfontein (“the property”) into residential plots.

In 1994 the Development Trust purchased and registered the property in its own name (or that of its trustees). On 4 March 1994 the Development Trust registered covering mortgage bonds over the property in favour of the WCT. These bonds secured the Development Trust’s indebtedness to the WCT for loans/advances and predetermined liquidated damages, in a total amount reflected in later documentation as owing to the WCT and secured by the bonds.

On 16 November 2000 the plaintiff and the WCT, represented by the first defendant, concluded a written agreement of sale (“the main agreement”) in terms of which the plaintiff purchased, for a purchase price ultimately reduced to R1 million, the WCT’s “entire right, title and interest” in and to the Development Trust (and related interests). The main agreement provided for payment against, among other things, cancellation of mortgage bonds and cession to the plaintiff of corresponding loan and option agreements. On 28 December 2000 the plaintiff paid the purchase price of R1 million to the WCT.

The plaintiff’s case was that upon payment he became entitled to (and in fact received) the benefit of a cession of the WCT’s claims against the Development Trust, secured by the mortgage bonds. Those claims had a capital value of R1,080,000 at the time (with mora interest accruing later). The plaintiff also relied on the fact that he had been given a general power of attorney (dated 13 December 2000) authorising him, inter alia, to transfer the merx referred to in the main agreement.

On 15 May 2003 the Development Trust was provisionally sequestrated, and the order was later made final. On 29 October 2003 the plaintiff submitted a claim in the Development Trust’s insolvent estate, as the WCT’s “gevolmagtigde”, for an amount that included capital and mora interest. However, during June 2004 the defendants recovered payment from the trustees of the insolvent estate for the benefit of the WCT, instructing that the dividend be paid to the WCT. The dividend was paid to the WCT in good faith, discharging the Development Trust’s indebtedness to the WCT. The amount received by the WCT was R2,481,700.30. The WCT refused to remit this amount to the plaintiff.

The defendants’ defence depended materially on further events in 2000 which were also essentially not in dispute. Before the main agreement was concluded, the first defendant (through his attorney, Mr Key) made it clear that the plaintiff would have to provide a further “sweetener” for the sale. The plaintiff then produced and signed a letter dated 16 November 2000, addressed to the first defendant personally, recording an undertaking that he would procure the transfer to the first defendant (or nominee) of one, two, or three beachfront plots (depending on the approved subdivision yield), with stipulated value for transfer duty/VAT purposes and with transfer costs and taxes payable by the first defendant. It was common cause that Mr Key orally accepted this undertaking on behalf of the first defendant and that it constituted a legally valid and binding oral agreement (as recorded in the letter).

It was further common cause that the first defendant was induced to conclude the main agreement by the undertaking. The court treated the undertaking, for purposes of its reasoning, as a prior inducing contract.

After sequestration of the Development Trust and sale of the property by the trustees in sequestration, it became impossible for the plaintiff to procure transfer of plots as contemplated in the undertaking. The plaintiff did not contend that he was at fault for this impossibility, and he did not really dispute that the undertaking had come to an end.

3. Legal Issues

The central legal questions the court was required to determine concerned the legal consequences of the failure of the prior inducing contract (the undertaking) for the enforceability and performance of the main agreement, and for the plaintiff’s claim to the dividend paid to the WCT. The dispute primarily involved the application of legal principles to largely undisputed facts, and the legal characterisation of the relationship between the two contracts.

Although the parties raised multiple questions—such as whether the main agreement was wholly written or partly oral; whether the undertaking formed part of the main agreement; whether the plaintiff’s undertaking obligations were reciprocal to the WCT’s cession obligations; whether the parol evidence rule excluded evidence of the undertaking; whether rectification of the main agreement was competent; and whether tacit or implied resolutive/suspensive conditions existed—the court stated that it was not necessary to decide most of these issues to resolve the case.

Instead, the court identified the decisive issue as whether the undertaking had terminated due to supervening impossibility of performance, whether that termination operated retrospectively ab initio, and whether the consequence of that termination was to trigger restitution of benefits received as a result of the inducing contract, including the reversal (in effect) of the cession said to have been made under the main agreement. This implicated the doctrinal treatment of failed contracts, conditions (suspensive/resolutive), and enrichment-based restitution in South African law.

4. Court’s Reasoning

The court deliberately proceeded on a set of assumptions favourable to the plaintiff, while emphasising that those assumptions were open to serious debate and had been argued at length. The court assumed (without deciding) that the undertaking and the main agreement were two separate and independent contracts, rather than a single partly oral and partly written contract; that there was no contractual reciprocity entitling the WCT automatically to withhold performance of the main agreement upon non-performance of the undertaking; that the undertaking merely induced the main agreement rather than supplying “additional consideration”; that a cession of the WCT’s rights against the Development Trust occurred when the plaintiff paid on 28 December 2000; that rectification of clause 9 of the main agreement was not established; that the parol evidence rule did not prevent proof of the undertaking as a distinct prior inducing contract; and that the main agreement contained no tacit or implied condition making its enforceability depend on performance of the undertaking.

On these assumptions, the court then focused on the fate of the undertaking. It applied the general principle that supervening impossibility of performance discharges a contract, with the consequence that no contractual remedy is available under that contract. The court referred in this connection to Peters, Flamman and Co. v. Kokstad Municipality, 1919 AD 427 and to the discussion in Christie. The court accepted that, after sequestration of the Development Trust on 15 May 2003, it lay beyond the plaintiff’s power to procure the promised transfers of plots, and that there was no evidence that the plaintiff was to blame. The undertaking therefore became impossible of performance and was treated as having terminated.

A further step in the reasoning was the court’s conclusion, derived from Peters, Flamman, that termination in these circumstances took effect ab initio, meaning retrospectively from the time when the undertaking was accepted (16 November 2000). The court treated the position as analogous to the failure of a contract because a resolutive condition is fulfilled or a suspensive condition is not fulfilled, where the effect is to destroy the contractual basis retrospectively and trigger a need to restore performances.

The court then addressed the restitutionary consequences. Drawing on authorities dealing with conditional obligations, insolvency, and restitution, the court held that where a contract fails without fault and is treated as void retrospectively, the parties must restore what they received under it. It cited, among other authorities, Ex parte de Villiers & Another NN.O.: in re Carbon Developments (Pty.) Ltd. (in liquidation), 1993(1) SA 493 (AD) on the “natural death” of an obligation where a condition becomes incapable of fulfilment on sequestration; Wilkens N.O. en ’n Ander v. Bester, 1997(3) SA 347 (SCA) and Melamed & Another v. B.P. Southern Africa (Pty.) Ltd., 2000 (2) SA 614 (W) on the reclaiming of payments and restoration where conditions fail; and Kudu Granite Operations (Pty.) Ltd. v. Caterna Ltd., 2003(5) SA 193 (SCA) on the distinction between contractual damages after cancellation and enrichment remedies where a contract becomes inoperative without breach, including the relevance of the condictio ob causam finitam.

Although the first defendant had received nothing directly under the undertaking (no plots were transferred), the court reasoned that the plaintiff had received a material benefit because the undertaking induced the main agreement. On the court’s assumptions, this benefit included, crucially, the cession of the WCT’s claims against the Development Trust. When the undertaking was terminated retrospectively, the plaintiff was treated as not having been legally entitled to retain those ceded claims; accordingly, the defendants would have been entitled to compel a re-cession (restoration) of those rights to the WCT. The court reasoned that this restitutionary entitlement meant that the defendants’ subsequent recovery of the dividend on behalf of the WCT did not constitute a breach of the main agreement, because the basis upon which the plaintiff claimed entitlement to the ceded debt had fallen away retrospectively.

The court acknowledged that this outcome might appear novel but considered it to follow from the principles it regarded as applicable. It rejected the submission that contract termination operates on a closed list that excludes the termination of an inducing agreement as a relevant event, and it rejected the contention that what the plaintiff had to restore was merely a “spes”. In the court’s view, the plaintiff’s restitutionary obligation related to what he had actually received (on the assumptions made), namely the ceded claims, and restoring those claims necessarily undermined the continued existence of the main agreement in any meaningful sense. The court accordingly held that the termination of the undertaking brought about the termination of the main agreement as well, in the same way that failure of a condition precedent causes a dependent contract to “die a natural death.”

Finally, the court held that restitution must be mutual. Since the WCT had received the R1 million purchase price, it was obliged to restore that amount to the plaintiff, which restoration the defendants had tendered. On that reasoning, the plaintiff could not succeed in a claim for damages measured by the dividend received by the WCT.

5. Outcome and Relief

The court dismissed the plaintiff’s claim in convention and entered judgment in favour of the defendants, with costs. The plaintiff therefore did not obtain an order directing payment of R2,481,700.30 (or interest) from the defendants.

On the defendants’ claim in reconvention, the court granted an order declaring that the agreement between the parties has been terminated, with costs. The court indicated that the reconvention succeeded only in part, reflecting that not all relief sought in reconvention (such as rectification) was necessary to the result or was granted in the final order as formulated.

The court’s reasoning contemplated restitutionary consequences, including the defendants’ tender to repay the purchase price of R1 million, but the operative order recorded in the judgment was the dismissal of the plaintiff’s claim and the declaration of termination, both with costs.

Cases Cited

Peters, Flamman and Co. v. Kokstad Municipality, 1919 AD 427

Ex parte de Villiers & Another NN.O.: in re Carbon Developments (Pty.) Ltd. (in liquidation), 1993(1) SA 493 (AD)

Wilkens N.O. en ’n Ander v. Bester, 1997(3) SA 347 (SCA)

Melamed & Another v. B.P. Southern Africa (Pty.) Ltd., 2000 (2) SA 614 (W)

Design and Planning Service v. Kruger, 1974(1) SA 689 (T)

Thiart v. Kraukamp, 1967(3) SA 219 (T)

Dirk Fourie Trust v. Gerber, 1986(1) SA 763 (A)

Legate v. Natal Land and Colonialization Co Ltd., [1926] LKCA 17; (1906) 27 NLR 439 at 455

Kudu Granite Operations (Pty.) Ltd. v. Caterna Ltd., 2003(5) SA 193 (SCA)

Baker v. Probert, 1985(3) SA 429 (A)

Pucjlowski v. Johnston’s Executors, 1946 WLD 1

Wilken v. Kohler, 1913 AD 135

Clark v. Muller, 1913 NPD 447

du Plessis v. Nel, 1952(1) SA 513 (AD)

De Lassalle v. Guildford, [1901] 2 K.B. 215

Frith v. Frith, [1906] A.C. 254

Morgan v. Griffith, 6 Exchq., 70

Pym v. Campbell, 25 L.J. Q.B., 277

Clifford v. Turnell, 57 Rev. Rep., 275

Legislation Cited

No legislation was cited in the judgment as reproduced.

Rules of Court Cited

No rules of court were cited in the judgment as reproduced.

Held

The court held that the undertaking regarding the transfer of plots, accepted orally on 16 November 2000 and inducing the conclusion of the main agreement, became impossible of performance after the Development Trust’s sequestration. Applying the principle of supervening impossibility, the court treated the undertaking as terminated and, on the authority relied upon, as having failed retrospectively ab initio.

On the assumptions adopted, the retrospective failure of the undertaking triggered restitutionary consequences. In particular, the plaintiff was not entitled to retain the benefit he had received as a result of the inducing contract, which (on the assumed facts) included the cession of the WCT’s claims against the Development Trust. The defendants’ recovery of the dividend for the WCT therefore did not constitute a breach of the main agreement, and the plaintiff’s damages claim failed.

The court further held that the failure of the inducing contract had the consequence that the main agreement itself could not stand, such that the relationship between the parties was to be treated as terminated, with mutual restitution contemplated (including repayment of the R1 million purchase price by the WCT, as tendered). Judgment was granted for the defendants on the plaintiff’s claim, and the defendants obtained declaratory relief in reconvention that the agreement between the parties had been terminated, with costs.

LEGAL PRINCIPLES

The judgment applied the principle that supervening impossibility of performance discharges a contract, rendering it void and extinguishing contractual remedies under that contract, where the impossibility is not attributable to fault.

It treated the retrospective effect of such discharge as analogous to the consequences that follow when a contract fails due to the fulfilment of a resolutive condition or the non-fulfilment of a suspensive condition/condition precedent, in which event the law may regard the contract as if it had never existed and require parties to restore what has been transferred in performance.

The judgment endorsed that, where a contract becomes inoperative without breach and the contractual nexus is extinguished, the appropriate remedy for recovery of transferred value lies in unjust enrichment, including the use of enrichment actions such as the condictio ob causam finitam or, in suitable circumstances, the condictio indebiti, rather than conflating such remedies with contractual damages for breach.

In relation to proof of the undertaking, the court accepted (on its approach) that a prior inducing contract may be proved as a separate agreement that induced a written contract, and that evidence of such an inducing contract is admissible provided it is not inconsistent with the written contract; accordingly, the parol evidence rule did not, on the court’s reasoning, preclude proof of the undertaking when treated as distinct and not repugnant to the main agreement.

Finally, the judgment applied the restitutionary principle that the termination or failure of an inducing agreement may require restoration of benefits received as a consequence of that inducing agreement, and that such restoration may, as a matter of practical and legal compatibility, entail the dissolution or termination of the related main agreement where the benefit obtained under the main agreement is itself the subject of restitution.

De Villiers v McCay NO and Another (6077/04) [2007] ZAWCHC 10 (28 February 2007)