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[2007] ZAWCHC 39
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Protea Property Holdings (Pty) Limited v Boundary Financing Limited (formerly known as International Bank of Southern Africa Ltd) and Others (758/05) [2007] ZAWCHC 39; 2008 (3) SA 33 (C); (8 August 2007)
Reportable
in
the high court of South Africa
(cape
of good hope provincial division)
Case
No 758/05
In
the matter between:
Protea
property holdings (Pty) Limited
Plaintiff
and
boundary
financing limited
(
formerly
known as
International Bank
of Southern Africa Ltd
)
First
Defendant
swanvest
258 (Pty) Limited
Second Defendant
karos
(Pty) Limited
Third Defendant
judgment:
delivered 8 august 2007
Griesel
J:
During
March 2001, the plaintiff in this matter, Protea Property Holdings
(Pty) Limited
(
PPH
), together with an associated
company, Protea Hotel Group (Pty) Limited (
PHG
), concluded a
suite of agreements with the first defendant, known at
that time as International Bank of Southern Africa
(
IBSA
).
(At a later stage, there was a change of corporate control at the
first defendant and it is now known as Boundary Financing Limited
(
Boundary
). In order to avoid confusion, however, I shall
refer herein to
âthe first defendantâ
, irrespective of
the entity that was in control at any given stage.)
Loosely
speaking, the suite of agreements concerned the acquisition by
the plaintiff of the Edward Hotel in Durban. It followed
on a
similar suite of agreements concluded between the same parties
during October 2000 in relation to the Arthurâs Seat Hotel
in Sea
Point. Both the aforementioned hotels were previously owned and
managed by different companies in the Karos Group (
Karos
),
which were placed in provisional liquidation during October 1999.
The present action concerns only the set of agreements relating
to
the acquisition of the Edward Hotel.
The
agreements comprising the suite were the following:
1
PC1
A
sale of shares agreement between the first defendant, the plaintiff
and the second defendant (
Swanvest
),
in terms of which the first defendant sold to the plaintiff 60% of
the share capital of Swanvest for R1,00. In terms of the agreement,
the purchase price was to be paid within thirty days of the effective
date, stated to be 2 February 2001. Share certificates
were to
be delivered within seven days of the payment of the purchase price.
In terms of clause 1.24 of Appendix 2 to the agreement,
the first
defendant warranted and undertook, furthermore, that as at the
effective date and the delivery date âthe sole assets
of
[Swanvest] 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 Arthurâs Seat
Hotelâ.
2
PC2
A
shareholdersâ agreement between the same three parties, which
recorded that the plaintiff had acquired 60% of the equity in
Swanvest,
and that Swanvest would be the registered owner of the bare
dominium
in the Edward Hotel property. The parties
undertook to procure that the shares in Swanvest would be allotted as
to 60% to the plaintiff
and the remaining 40% to the first defendant.
PC3
An
agreement of sale between Swanvest and the plaintiff, in terms of
which the plaintiff acquired the furniture, fixtures and equipment
(
FFE
) in the Edward Hotel for R2 million.
PC4
An
agreement of cession and pledge between the plaintiff, the first
defendant and Swanvest, being a cession and pledge of equity
in
securitatem debiti
by the plaintiff of the share
certificates pertaining to its shareholding in Swanvest to the first
defendant, securing the plaintiffâs
(future) indebtedness to the
first defendant.
PC5
A
lease agreement between
the first
defendant
and PHG, in terms of which the former
let to the latter the Edward Hotel for a period of ten years
commencing on 1 February 2001
at a monthly rental of R87 500
during the first year, escalating to R94 500 during the second
year and escalating at an
annual rate of 8% thereafter.
PC6
An
addendum to the aforesaid lease agreement, providing for additional
rental if the gross annual turnover were to exceed R2 million.
PC7
A
âside-letterâ between PHG, the plaintiff and the first defendant
in terms of which the latter gave PHG and the plaintiff the
right âto
restructure the series of transactions or any one of themâ
after a due diligence investigation had been performed
and with
reference to the tax implications of the transactions.
PC8
Another
âside-letterâ dealing with the payment of municipal charges under
the lease agreement.
According
to the plaintiff in its amended particulars of claim, the foregoing
agreements âeach formed a necessary part of
a series of
transactions or scheme, designed and intended by the plaintiff and
the defendants to enable the plaintiff to acquire
ownership, as to a
60% share, in the immovable property on which the Edward Hotel
standsâ.
In
addition to the foregoing suite of written
agreements,
t
he plaintiff also relies on a subsequent
contract, partly written and partly oral, concluded between the
plaintiff and the first
defendant during the first half of 2002, in
terms of which the plaintiff is alleged to have acquired the right
to the remaining
40% of the shareholding in Swanvest against payment
to the first defendant of R674 700.
Flowing
from the aforementioned agreements, the plaintiff brings a threefold
claim against the first defendant:
(a) a
claim for delivery of all the shares in
Swanvest
against payment by the plaintiff of R674 701;
(b) a
claim for rectification of
PC1
so as to reflect a warranty by
the first defendant that the sole asset of Swanvest on the effective
and delivery dates would be the
Edward Hotel property, and
not
the
Arthurâs Seat property; and
(c) a
claim that the first defendant be ordered to âmake goodâ the said
warranty.
The
evidence presented
on behalf of
the
plaintiff in support of its claims consists, firstly, of a
substantial body of documentary evidence, arranged chronologically
and numbered consecutively. In addition, the plaintiff
also presented
viva voce
evidence by its financial director,
Mr Arnold Cloete, who was the only witness to testify at the trial.
It
is clear from the evidence that, almost immediately after signature
of the suite of agreements, attention shifted to the question
of a
possible restructuring of the Edward Hotel transaction. This was so
because Karos, the owner of the Edward Hotel, had an assessed
tax
loss of some R40 million, which could potentially be utilised
by the plaintiff to its own advantage. While this possibility
of
restructuring was being explored, the plaintiff and the first
defendant did not proceed with the immediate implementation of
the
sale of shares agreement. Thus, the nominal purchase consideration
of the shares was not paid over, and delivery of the shares
was, in
turn, delayed. Likewise, the Edward Hotel property remained the
property of Karos.
A
scheme of arrangement in terms of s 311 of the Companies Act
was ultimately sanctioned on 31 December 2002. In January 2003
the
plaintiffâs attorney, Mr Traub, produced a set of fresh
agreements which would implement a restructured deal. This gave
rise to protracted negotiations between the parties, which had not
come to fruition when new shareholders acquired the shares in
the
first defendant on 7 November 2003.
It
is quite evident from the correspondence that the new shareholders
of the first defendant were not
au fait
with the negotiations
that had been ongoing until that stage, nor did they appear to
recognise the need for restructuring of any
of the transactions.
Attempts were made to simplify the very convoluted contractual
arrangements designed to effect the proposed
restructuring. These
attempts were unsuccessful and, by letter dated 12 July 2004, Mr
Traub recorded that the first defendant did
not appear to be
prepared to go along with any restructuring process. He accordingly
recorded that the plaintiff had no option
but to proceed with
implementation of the original 2001 suite of agreements. When he
called for delivery of the share certificates
in respect of the 60%
shareholding in Swanvest, tendering payment of R1,00, however, the
first defendantâs attorneys responded,
pointing out that the sale
of shares agreement (
PC1
)
was
âone of a suite of
agreementsâ
. Their letter proceeded as follows:
â
The
structure contemplated in the suite of agreements has never been put
in place by the parties, nor have the parties acted in
accordance
with their rights and obligations provided for in the suite of
agreements. It is quite clear that the parties have not
regarded
themselves as bound by the suite of agreements for a period in
excess of three years. In the circumstances, your clientâs
sudden
attempt to enforce the terms of the agreement of sale is
inappropriate.â
This
gave rise to the present litigation, in which the plaintiff, seeks
enforcement of the outstanding matters arising from the
original
suite of agreements.
Claim
(a) â the sale of the shares in Swanvest
With
regard to the first claim, t
he sole defence raised against
the first leg of the claim (for transfer of 60% of the shareholding
in Swanvest) is one of prescription.
I find it convenient to
deal first with the plaintiffâs claim in respect of the remaining
40% of the shareholding in Swanvest,
before considering the plea of
prescription.
The
plaintiff claims that it acquired the right to claim transfer of the
remaining 40% of the shareholding in Swanvest as a result
of certain
negotiations that took place between the parties during the
period 4 January 2002 to 13 March 2002, culminating
in an agreement
that was partly written and partly oral. The salient events were the
following:
On
4 January 2002 the first defendant offered to sell the remaining 40%
shareholding in both the Arthurâs Seat and Edward hotels
to the
plaintiff for an aggregate amount of R3 356 285,34.
On
18 January 2002 the plaintiff made a counter-offer to buy the
remaining shareholding in the hotels at a 30% discount on the price
offered by the first defendant.
On
22 January 2002 the first defendant, in turn, offered to reduce the
asking price by 30%, arriving at an aggregate figure of
R2 349 399,74.
On
29 January 2002 the plaintiff accepted the last-mentioned offer,
âsubject to the condition that both purchase transactions,
as
agreedâ, are finalised by the end of 30 March 2002.
On
4 February 2002, and after a meeting between the parties, the
plaintiff extended the date for finalisation to 30 April 2002.
On
6 February 2002 the first defendant thanked the plaintiff for
accepting its offer of R2 349 400 for the purchase of
the
remaining 40% shareholding in the Arthurâs Seat and Edward
hotels, but informed the plaintiff that the condition that
both
purchase transactions be finalised by the end of April 2002, could
not be accepted. The first defendant, however, undertook
to do
everything possible to finalise the transactions by that date.
The reason given for its unwillingness to accept the
condition was
the fact that some aspects of the transactions were not under its
control. These âaspectsâ refer to the sanctioning
of the section
311 scheme of arrangement and the finalisation of the annual
financial statements of Karos.
Mr
Cloete, the plaintiffâs financial director, accepted the first
defendantâs rejection of the condition imposed by the plaintiff
and âwaivedâ or âstepped away from itâ (so he testified). On
13 March 2002 he communicated his acceptance to the first
defendant
in the following terms:
â
We
hereby accept your offer of ZAR2 349 400 for the purchase
of the remaining shareholding in the Arthurâs Seat and
Edward
Hotel Property companies, subject to the following condition:
1. That
the complete transaction for both the Arthurâs Seat and the Edward
(this includes the successful completion of section
311 in respect
of the Edward, the financial statements of the separate companies,
etc.) is finalised as envisioned as urgently
as possible.â
On
23 May 2002 the first defendant, as part of a separate transaction
linked to the acquisition of the Kruger Gate Lodge, agreed
to
âreduce the Karos (Pty) Ltd (Edward Hotel) transaction by ZAR 1
millionâ. The net result, so it is claimed, was that the
plaintiff
became entitled to acquire the remaining 40% of the shareholding in
the Arthurâs Seat as well as the Edward Hotel transactions
at an
aggregate purchase price of R1 349 400, in other words,
R674 700 in respect of each hotel.
Against
this background, the first defendant argued, firstly, that t
he
correspondence which passed between the parties does not indicate a
meeting of their minds, because there was always a dispute
about the
attachment of one or more conditions. Neither the written
confirmation of an unconditional agreement nor the
written
acceptance of a conditional agreement exists, so it was argued.
The
plaintiff countered this argument by referring to the difference
between a term and a condition of a contract. It relied in
this
context,
inter alia
, on the following remarks of Hoexter JA
in
Resisto Dairy v Auto Protection Insurance Co
:
3
â
The
terms of the contract cannot be changed into suspensive conditions
merely by calling them conditions precedent. A term of the
contract
may be so material that a breach of it will entitle the other party
to repudiate the contract, and in the present case
the parties have
used the words âconditions precedent to any liabilityâ to
indicate that the so-called conditions are material
terms of the
contract.â
In
his evidence, Mr Cloete emphasised that he never intended to impose
a condition by requiring the complete transaction to be âfinalised
as envisioned as urgently as possibleâ; he merely wished to stress
the importance of an urgent finalisation. According to him,
this did
not even form a term of the agreement. I accept this evidence
and find that his requirement regarding urgent finalisation
did not
amount to a âconditionâ properly so called.
In
any event, nowhere in the correspondence or in the pleadings has it
been suggested
on behalf of
the first
defendant that the 40% agreement was conditional or that the
agreement was unenforceable by reason of non-fulfilment
of a
suspensive condition or fulfilment of a resolutive condition. On the
contrary, the parties gave effect to the â40% agreementâ
during
May 2002 by agreeing to a reduction of the purchase price in respect
of
both
hotels. Furthermore, the transaction in relation
to the Arthurâs Seat was subsequently consummated on the
basis as
agreed and the reduced purchase price was paid by the
plaintiff. In these circumstances, the first defendantâs argument
that
there had been no final and binding agreement in respect of the
40% shareholding in relation to the Edward Hotel is not borne out
by
the uncontested evidence.
In
the circumstances, I am satisfied that the 2002 agreement in respect
of acquisition of the remaining 40% shareholding in Swanvest
is
valid and enforceable. The plaintiff has consequently proved on a
balance of probability that it acquired the right to 100%
of the
shareholding in Swanvest against payment of the amount of R674 701.
The question is whether this right has become prescribed,
as alleged
by the first defendant.
Prescription
With
regard to the plea of prescription in relation to the first leg of
the claim (i.e. transfer of 60% of the shareholding in terms
of
PC1), the first defendant contended that the debt in question was
extinguished by prescription in terms of Chapter III of the
Prescription Act 68 of 1969 (
the Act
). In this regard, it
alleged that the obligations in question fell due for performance by
not later than 11 March 2001, regard
being had to the provisions of
PC1.
It
is common cause that the nominal purchase price â in the sum of
R1,00 â in relation to the 60% shareholding was not paid
within 30
days of the effective date (i.e. 2 February 2001). In fact, it was
only tendered by means of a cheque under cover of
the plaintiffâs
attorneysâ letter of 11 November 2004, which tender was rejected
by the first defendantâs attorneys. It was
accordingly argued on
behalf of the plaintiff that the first defendantâs obligation to
deliver the share certificates only arose
within seven days of the
receipt of the cheque in November 2004.
There
was some debate as to whether one party could unilaterally postpone
the commencement of the running of prescription, as the
plaintiff
appears to have done in this instance. In the view that I take of
the matter, it is not necessary to decide this issue
or to decide
exactly when the debt became due. I shall assume in favour of the
first defendant (without so deciding) that the debt
in fact became
due by not later than 11 March 2001.
In
its replication, the plaintiff answered the plea of prescription by
relying on various alleged express or tacit acknowledgements
by the
first defendant of its liability to give effect to the agreements
contained in
PC1
,
PC2
and
PC7
. One of the
instances relied on by the plaintiff as an express or a tacit
acknowledgment of liability was the conclusion
of the
above-mentioned agreement regarding the acquisition of the
remaining 40% shareholding in Swanvest. The plaintiff
submitted
that such agreement presupposed and recognised that the plaintiff
had already, in terms of
PC1
, acquired the right to 60% of
the shareholding in Swanvest. In agreeing to sell the
remaining
40% shareholding (so the argument went), the first defendant
must necessarily be understood to have acknowledged that the
obligation to transfer the
first
60% was binding.
Having
regard to the objective test in respect of a tacit acknowledgement
of liability,
4
I am persuaded by the plaintiffâs argument in this respect. In my
view, the first defendantâs conduct constituted at least
a tacit
acknowledgment of liability in relation to its obligations
under the sale of shares agreement (
PC1
) to transfer to the
plaintiff 60% of the shareholding in Swanvest. It follows that
the first defendantâs plea of prescription
in relation to the 60%
agreement cannot succeed. (For the same reason, the plea of
prescription in relation to the plaintiffâs
claim to make good the
warranty, which arises from the same sale of shares agreement,
likewise cannot succeed.)
Given
my earlier conclusion with regard to the agreement to acquire the
remaining 40% of the shareholding, it follows that the first
defendant is liable â in terms of PC1, as amplified â to
transfer 100% of the shares in Swanvest to the plaintiff against
payment of the agreed purchase price of
R674 701
.
Claim
(b) â rectification
It
is clear from the evidence as a whole that the reference in clause
1.24 of Appendix 2 to Annexure
PC1
to the Arthurâs Seat
property â rather than to the Edward Hotel property â was an
obvious error. This occurred because the
first suite of agreements,
which related to the acquisition of the Arthurâs Seat Hotel, was
used as the precedent or template
for the second suite relating to
the Edward Hotel.
The
only issue for determination in relation to the claim for
rectification is the first defendantâs plea of prescription.
In this regard, the first defendant contended that the plaintiffâs
claim for rectification is a âdebtâ for purposes
of chapter
III of the Act, which debt became due by not later than 1 March
2001, this being the date since when the plaintiff must
have had
knowledge of the facts giving rise to the claim. It contended
further that its obligation to comply with the warranty
fell due for
performance by not later than 11 March 2001 and that, accordingly,
this debt was also extinguished by prescription
by not later than 11
March 2004, whereas summons herein was only served on 1 February
2005.
The
term âdebtâ is not defined in the
Prescription Act. As
pointed
out by Loubser,
5
the term has been used primarily in our case law to describe the
correlative of a right or claim to some performance, in other
words,
as the duty side of an obligation produced by contract, delict,
unjust enrichment, statute or other source. Counsel on both
sides
also drew attention to the âwide and general meaningâ attached
to the term âdebtâ in our case law.
6
Counsel
for the first defendant sought to extend this wide interpretation
of âdebtâ to include a claim for rectification.
In support of
their argument, counsel relied on
Primavera Construction SA v
Government, North West Province
7
and an article by Prof Loubser under the title â
Is a right of
rescission subject to extinctive prescription?
â
8
However, neither authority deals pertinently with the issue at hand
and, in my respectful opinion, neither provides support for
the
argument advanced
on behalf of
the first
defendant. In the
Primavera
case,
supra
, the court was
not required to decide whether a claim for rectification had
prescribed. Whether or not a claim for rectification
is subject to
the
Prescription Act was
not argued. Friedman JP, in what was
clearly an obiter observation, merely assumed for the purpose of
that observation (without
any apparent further consideration)
that a claim for rectification could become prescribed.
9
As
for Prof Loubserâs article, his analysis deals with the exercise
of the contractual remedies of rescission and cancellation.
I do not
find it necessary, for purposes hereof, to consider the correctness
or otherwise of the learned authorâs conclusion,
namely that on a
wide interpretation of the term âdebtâ, âthe liability
correlative to a right of rescission would be subject
to extinctive
prescriptionâ.
10
The fact of the matter is that very different considerations
prevail in relation to rectification as a contractual remedy.
11
Rescission or cancellation serves to create rights and correlative
obligations not hitherto in existence. Hence the fact that,
in
various ways, these remedies were subject to various prescriptive
periods in the legal regime existing before the introduction
of the
Prescription Act of 1969
.
12
Rectification is a procedural remedy which, in certain
circumstances, is necessarily antecedent to the enforcement of
existing
contractual rights and their correlative obligations.
Rectification is not in itself a contractual right, and a claim for
rectification
is not in itself a claim for enforcement of a
contractual right with a corresponding contractual performance
required by the
debtor. Rectification does not create rights or
obligations. It does not involve the variation of a contract. It
merely results
in the document being made into an accurate
reflection of the agreement.
13
It is the procedural device resorted to when enforcing the relevant
contractual right and the correlative obligation. The policy
of
legal certainty and finality underlying the principle of
prescription is met in that the underlying
obligation
is
subject to prescription. Extending the concept of âdebtâ to a
claim for rectification introduces legal uncertainty and anomaly.
In
my view, neither linguistic nor policy considerations support
the extension of the word âdebtâ (Afrikaans: â
skuldâ
)
to include a claim for rectification.
Christie
14
draws an apt analogy where he states that a party claiming
rectification is in much the same position as a party seeking to
imply
a term in a contract. In each case an attempt is being made to
establish contractual terms sufficient to ground a basis for the
contractual obligation or debt sought to be enforced. I agree with
this argument. If the first defendantâs argument were to be
accepted, namely that a claim for rectification is a separate and
self-standing âdebtâ for the purposes of the running of
prescription, the anomalous situation could arise that a claim
for performance due under a contract which has not become prescribed
may be defeated on the basis that the right to claim rectification
of the contract necessary to support such claim has been
extinguished
by prescription. Clearly, if a claim for the payment of
a money debt has not itself become extinguished by prescription, it
would
be most incongruous if it were nonetheless effectively to
be extinguished by prescription where it is necessary for one of
the
parties to rely upon rectification of the agreement.
Take
the following example: A borrows an amount of R200 000 from B.
Interest on the loan at an agreed rate is payable monthly,
with the
capital being repayable on demand. After making regular payments in
respect of interest for five years, A stops paying.
B now demands
repayment of the capital of the loan, but discovers that the written
agreement erroneously records the capital of
the loan as R20 000
instead of R200 000, as agreed. He accordingly claims
rectification of the agreement, together with
payment of the full
amount of the capital, as rectified. Can A now raise prescription as
a defence to Bâs right to claim rectification,
even though the
main debt, namely repayment of the capital of R200 000, has not
become prescribed as a result of the tacit
acknowledgments of
liability by A by way of the monthly interest payments? If the first
defendantâs argument were to be accepted,
the answer would have to
be yes. I would find this to be a startling result.
Conversely,
say the same agreement erroneously recorded the capital amount of
the loan to be R2 000 000, instead of R200 000.
B in
his summons, however, claims payment of R2 000 000. Could
Aâs plea of rectification conceivably be defeated by
a special
plea of prescription raised by B? An affirmative answer to this
question would produce an equally startling result.
These
examples illustrate why, in my view, the first defendantâs
argument, namely that a claim for rectification of a contract
should be regarded as a separate âdebtâ, cannot be accepted. It
follows that the defence of prescription cannot succeed,
with
the result that the plaintiff is entitled to an order rectifying the
warranty contained in clause 1.24 of Appendix 2 to Annexure
PC1 by
the deletion of the reference to the Arthurâs Seat Hotel property
and the substitution therefor of a reference to the
Edward Hotel
property. As rectified, the clause thus reads as follows:
â
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:
1.1â1.23
â¦
1.24 the
sole assets of the Company
[Swanvest]
shall be the immovable 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, commonly described as
the Edward Hotel, Beach Front, Durban.â
Claim
(c) â making good the warranty
The
final question is whether the plaintiff is entitled to claim
specific performance of the obligation undertaken in terms of the
aforementioned clause as rectified. This aspect forms the true nub
of the plaintiffâs claim.
In
opposing this part of the claim, counsel for the first defendant
referred to two types of warranties found in the law of insurance,
namely affirmative and promissory: A warranty is affirmative if the
party concerned warrants the truth of a representation regarding
an
existing fact, and promissory when the party concerned warrants
the performance of a certain act or that a given state
of affairs
will exist in the future.
15
Counsel sought to apply this distinction to contracts in general.
Having done so, they argued that if the clause in question were
to
be interpreted as being an affirmative warranty of fact, it could
never serve as the basis for a claim for specific performance
because, to the knowledge of the plaintiff, the warranty was
incorrect at the time when it was given inasmuch as the Edward Hotel
was
not
the sole asset of Swanvest at that stage. If, on the
other hand, the clause were to be interpreted as a âpromissoryâ
warranty,
certain other problems would arise, with which I shall
deal below.
Leaving
aside the question whether the distinction contended for is
permissible, there are various difficulties with the first
defendantâs argument. First, as Reinecke
et al
themselves
point out,
16
âthe term âpromissoryâ as a special term is a misnomer, in
that all warranties are promissory, that is, all involve an
obligation
or promise to performâ. The learned authors accordingly
prefer to call such warranties âcontinuingâ warranties.
Secondly,
counselâs argument seeks to attach to the word âwarrantyâ a
certain limited meaning, namely the meaning ordinarily
attached to
it in the context of insurance law. However, Christie
17
rightly observed that â
ââ¦
the
word âwarrantyâ is one of the more unfortunate importations
into our law from English legal terminology, because it
has so many
different meanings. It may mean, generically, a term of the
contract as opposed to a mere puff or representation;
or it may
mean, specifically, a term not going to the root of the contract as
opposed to a condition in the sense of the term going
to the root of
the contract; or it may mean, in an insurance contract, a term the
breach of which entitles the insurer to elect
to avoid the policy
and repudiate liability; or it may, especially when described as a
collateral warranty, mean a term of a contract
prior to and inducing
the main contractâ.
In
the final analysis, there is no unanimity among the authorities as
to what the expression âwarrantyâ connotes, save that
it is a
contractual term. It accordingly becomes necessary, as pointed out
by Farlam JA in
Masterspice (Pty) Ltd v Broszeit Investments
CC
,
18
âin every case where the expression is used, to examine the terms
of the contract in question closely in order to endeavour to
ascertain in what sense the parties have used itâ.
Examining
the terms of the contract in issue in the context of the suite of
agreements as a whole, it is clear to my mind that clause
1.24
amounts to an undertaking or promise by the first defendant to take
all necessary steps to effect transfer of the Edward Hotel
property
to Swanvest by the time the shares in Swanvest are transferred to
the plaintiff. This is evidenced,
inter alia
, by the
introductory words of the appendix where the âstandard warrantiesâ
are recorded, namely âthe seller warrants
and undertakes
â
(emphasis added). The obligation contained in clause 1.24 is
therefore simply a contractual term, in terms of which the first
defendant undertook to perform certain acts by certain specified
dates so as to bring about the factual position as warranted.
The
next line of defence raised on behalf of the first defendant was the
argument that the court should not grant an order for specific
performance of clause 1.24, because where the term âmake good the
warrantyâ is used in South African case law, what is âordinarilyâ
intended, is payment of damages.
19
Counsel also referred to various academic authorities
who focus their discussions of remedies for breach of warranty
entirely on
the remedies of cancellation and damages.
20
The
short answer to this argument is that none of the authorities
referred to â or any other authority of which I am aware â
say
that specific performance is
not
a competent remedy for
breach of warranty; on the contrary, as pointed out by Lubbe &
Murray,
21
breach of what is described as a warranty âresults in the remedies
for breach of contract becoming availableâ. Foremost among
such
remedies is, of course, specific performance.
As
an alternative argument, it was submitted that even if specific
performance were to be held to be a competent remedy for breach
of
warranty, such relief would not be appropriate in this case as it
would amount to a form of specific performance which would
be
âlegally inappropriate, and indeed even legally impossibleâ,
according to counsel. This argument was based on the proposition
that the
âdelivery dateâ must be interpreted
as being, at the latest, 11 March 2001. It follows, according to the
first defendant, that
the performance which the plaintiff is asking
the court to order is impossible: the first defendant cannot be
ordered now to turn
back the clock, as it were, and to âmake goodâ
the warranty by housing the Edward Hotel property in the second
defendant on
11 March 2001. In the result, so it was argued, the
only remedies potentially available to the plaintiff are
cancellation
of the contract and damages.
I
find this a strained and artificial construction of the clause in
question. The fact that it was impossible to give literal effect
to
the warranty on a particular date (eg the âeffective dateâ, as
here), does not mean that performance of the substance of
the
obligation is therefore objectively and absolutely impossible.
It is still possible to give effect to the substance of
the
warranty, albeit not on the âeffective dateâ, as defined. On the
plaintiffâs construction, the warranty was required
to be made
good
at the date the shares are delivered
.
I
am inclined to agree with the plaintiffâs interpretation.
To
hold otherwise, would enable the first defendant to avoid liability
for specific performance merely by tendering the shares one
day
late. This could never have been the intention of the parties, as
rightly submitted on behalf of the plaintiff.
Relying,
finally, on the fact that specific performance is a discretionary
remedy, counsel for the first defendant urged the
court to take into
account that t
he order sought would mean that the
first defendant must in some way procure the transfer of ownership
of the Edward Hotel property
from the third to the second defendant.
Whilst it is common cause on the pleadings that the first defendant
is the sole shareholder
of the third defendant, it is a different
question whether the directors of the third defendant and the second
defendant â about
whose identity there has been no evidence â
will in the exercise of their fiduciary duties think it advisable
either to sell
or to buy the property. Counsel also drew attention
to
s 2(1)
of the
Alienation of Land Act 68 of 1981
, which
requires the conclusion of a written contract of sale between the
second and third defendants. There is currently no such
contract.
They accordingly posed the rhetorical question as to how the first
defendant is supposed to comply with such an order.
I
am unimpressed with this argument. There is nothing vague or
uncertain about the solemn undertaking contained in clause 1.24
of the appendix in question. Exactly how the first defendant was to
give effect to its obligations was not spelt out in the
agreement, nor was it of any concern to the plaintiff. What is
clear is that it was entirely within the power of the first
defendant at the time to give effect to this undertaking, as
both Swanvest and Karos were its wholly-owned subsidiaries. No
evidence has been placed before me to indicate that this factual
situation has changed in the interim, or that it has become
impossible
for the first defendant to give effect to its contractual
undertaking. In this context, the plaintiff rightly drew my
attention
to the judgment of Miller JA in
Tamarillo (Pty)
Ltd v BN Aitken (Pty) Ltd
,
22
where it was held that it is not for the plaintiff to allege or
prove that there are no impediments to specific performance, as
in
the absence of evidence it can be assumed that the defendant can
perform the obligations he has undertaken.
Moreover,
both Swanvest and Karos are before the court as parties and neither
have advanced any reason or raised any impediment
as to why it might
not be feasible for the first defendant to give effect to its
undertaking.
In
this regard, the general principle in our law of contract, unlike
the position in the English common law, is that specific performance
is the primary and not a supplementary remedy for contractual
breach. This cardinal principle of our law was recently reaffirmed
and applied by a Full Court of this Division in
Santos
Professional Football Club (Pty) Ltd v Igesund
.
23
In
the present matter, the warranty was fundamental to the suite of
agreements. The plaintiff (together with its associated company,
PHG) was paying some R12 million (in the form of rental
payments) to acquire the property; the entire structure of the suite
of agreements was predicated upon Swanvest (being the property
holding company) being or becoming the owner of the property.
No
sound reason has been advanced as to why the plaintiff should be
denied its contractual bargain, particularly where more than
half of
the purchase price has already been paid.
In
all the circumstances, I am satisfied that this is pre-eminently a
case where the plaintiff is entitled to its primary remedy
of
specific performance.
Conclusion
For
the reasons set out above, the following order is issued:
(
a
) The
first defendant is ordered forthwith and against payment to it
of the amount of R674 701,00 to deliver the share certificates
in respect of its 100% shareholding in the second defendant, together
with duly completed transfer forms, to the plaintiff.
(
b
) The
sale of shares agreement (Annexure
PC1
) is rectified by the
deletion in clause 1.24 of Appendix 2 of the description of the
property contained in the said clause and the
substitution therefor
of the following:
â
Remainder
of Sub 1 of Lot 11258 Durban, situate in the city of Durban,
administrative district of Natal, Province of Kwazulu-Natal,
commonly described as the Edward Hotel, Beach Front, Durban.â
(
c
) The
first defendant is ordered forthwith to take all steps necessary to
make good the warranty referred to in clause 1.24 of Appendix
2 to
Annexure
PC1
.
(
d
) The
first defendant is ordered to pay the costs of this action, including
the costs of two counsel.
B
M Griesel
Judge
1
The
numbering refers to annexures to the particulars of claim.
2
This
misdescription of the property forms the subject of the plaintiffâs
claim for rectification, which is dealt with below.
3
1963
(1) SA 632
(A) at 644FâH.
4
Cape
Town Municipality v Allie
1981 (2) SA 1
(C) at 7DâG.
5
Extinctive
Prescription
(1996).
6
Cf
eg
Evins
v Shield Insurance Co Ltd
1979
(3) SA 1136
(W) at 1141FâH;
HMBMP
Properties (Pty) Ltd v King
1981
(1) SA 906
(N) at 909AâB;
The
Master v IL Back and Co Ltd
1981 (4) SA 763
(C) at 777-778;
Escom
v Stewarts and Lloyds of SA (Pty) Ltd
1981 (3) SA 340
(A) at 344EâF.
7
2003
(3) SA 579
(B) at 599H.
8
(1990)
53
THRHR
43.
9
At
599 of the judgment para 19.
10
Op
cit
at 60.
11
As
more fully appears from R H Christie
The
Law of Contract
5ed (2006) at 483â484.
12
Christie
op
cit
at 483-484.
13
Spiller
and Others v Lawrence
1976 (1) SA 307
(N) at 310H-311A;
Gralio
(Pty) Ltd v DE Claasen (Pty) Ltd
1980 (1) SA 816
(A) at 824AâB.
14
Op
cit
at 332.
15
Reinecke
et
al
in 12
Lawsa
1st
reissue (2002,
sv
Insurance
)
at para 361 and authorities referred to therein.
16
Loc
cit.
17
See
Christie
op
cit
156.
18
2006
(6) SA 1
(SCA) at para 35.
19
Cf
Evans
and Plows v Willis & Co
1923 CPD 496
at 498â502;
Whitfield
v Phillips and Another
1957 (3) SA 318
(A) at 325A;
Prima
Toy Holdings (Pty) Ltd v Rosenberg
1974 (2) SA 477
(C) at 483C;
Mainline
Carriers (Pty) Ltd v Jaad Investments CC and Another
1998 (2) SA 468
(C) at 473Gâ474B.
20
Van
der Merwe
et
al Contract: General Principles
2ed
(2003) at 272; De Wet en Van Wyk
Kontraktereg
en Handelsreg,
5ed
(1992) Vol I at 339â340; Lotz âPurchase and saleâ in
Zimmermann and Visser (eds)
Southern
Cross: Civil Law and Common Law in South Africa
(1996) at 378; Zulman and Kairinos
Normanâs
Law of Purchase and Sale in South Africa
5ed at para 19.1.
21
G
F Lubbe and C M Murray
Farlam
and Hathaway Contract
3ed (1988) at 427 note 1.
22
1982
(1) SA 398
(A) at 441Dâ443G. See also Christie
op
cit
at 525.
23
2003
(5) SA 73
(C) at 82A
et
seq.