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[1988] ZASCA 2
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Thomas Construction (Pty) Ltd. (in Liquidation) v Grafton Furnitue Manufacturers (Pty) Ltd. (250/1986,253/1986) [1988] ZASCA 2; [1988] 2 All SA 228 (A) ; 1988 (2) SA 546 (AD) (18 February 1988)
LL
Case No 250/1986
and No 253/1986
IN THE SUPREME COURT OF
SOUTH AFRICA APPELLATE DIVISION
In the matter between:
THOMAS CONSTRUCTION (PROPRIETARY)
LIMITED (IN
LIQUIDATION)
Appellant
and
GRAFTON FURNITURE MANUFACTURERS
(PROPRIETARY) LIMITED
Respondent
CORAM
: CORBETT, BOTHA, NESTADT JJA, NICHOLAS et
BOSHOFF AJJA
HEARD
: 16 NOVEMBER 1987
DELIVERED
: 18
FEBRUARY 1988
JUDGMENT
/
BOTHA JA
...
BOTHA JA
:-
The appellant is a company in liquidation.
Its joint provisional
liquidators instituted legal pro=
ceedings against the respondent in the
Natal Provincial
Division, by means of two separate cases, numbered
22/86
and 23/86 respectively. Case No 22/86 was an applica=
tion on notice
of motion in which the appellant sought
judgment against the respondent for
payment of R330 767,98
with interest and costs. Case No 23/86 was an
action
for provisional sentence against the respondent in which
the
appellant claimed payment of R59 538,60 with interest
and costs. The
respondent opposed the application and
defended the action. The two cases
were heard together
by NIENABER J, who dismissed both the application and
the
action, in each case with costs. The appellant now
appeals against
these orders, with the leave of the. Judge
a quo
.
The two cases have been conjoined in this
/appeal
...
3.
appeal - conveniently, for the issues to be decided in both are in substance
the same. What is at stake, in the broadest terms, is
the right of the appellant
to en= force payment of the amounts reflected as being due to it by the
respondent in two interim certificates
issued to it, prior to its liquidation,
in terms of two separate building contracts between the parties, in the face of
a defence
raised by the respondent that the contracts had been duly cancelled by
the respondent after the ap= pellant's liquidation.
The judgment of NIENABER J has been published in the Law Reports: see
1986
(4) SA 510.
I shall refer to it as the reported judgment. The facts which gave
rise to the litigation are set forth in the reported judgment;
consequently all
the details thereof need not be repeated here. For convenience the facts which
are relevant for the purposes of
this judgment can be sum= marized in the form
of a chronological synopsis, as
/follows:...
4. follows:
1. Prior to its liquidation the appellant, as
the contractor, was engaged upon the perform= ance of construction and
building work for the respondent, as the employer, pursuant
to two separate
contracts in writing between the parties. The one contract was administered on
the respondent's behalf by a consulting
engineer; the other by an architect.
I
shall differentiate between the two contracts simply by referring to the one
as "the first contract" and to the other as "the second
con= tract". Except for
the references in the first contract to the consulting engineer, as opposed to
the references in the second
con= tract to the architect, the conditions of
contract governing the legal relationship between the parties in both instances
were
the same. Two clauses of the conditions
/of ...
5.
of contract are relevant: clause 22, under the heading
"DETERMINATION BY EMPLOYER", and clause 25, under the heading "CERTIFICATES
AND
PAYMENTS". The relevant provisions of these clauses will be quoted later.
2. On 29 October 1985 the engineer issued an
interim certificate to the appellant in terms
of clause 25.1 of the first contract. It
certified that the "AMOUNT NOW
DUE" by the
respondent to the appellant was the sum of
R330 767,98. Under clause 25.1, read with
the schedule referred to therein, the contrac=
tor became entitled to payment of the amount
stated in the certificate to be due to it,
within a period of 14 days after the date of
issue of the certificate.
3. On 4 November 1985 the architect issued an interim certificate to the
appellant in terms of clause 25.1 of the second contract.
It
/certified ...
6.
certified that payment was due by the respond= ent to the
appellant of an amount of R59 538,60. In this instance, too, under clause
25.1
and the schedule referred to in it, the contractor became entitled to payment of
the amount stated to be due to it, within a
period of 14 days after the date of
issue of the certificate. 4. On 8 November 1985 the engineer (in respect of the
first contract)
and the architect (in respect of the second contract) both gave
writ= ten and registered notice to the appellant, calling upon it
to proceed
with the works in each case with reasonable diligence, in terms of clauses
22.1.2 and 22.1.3 of each contract. Under the
latter sub-clause the contractor
was required to comply with the notices with= in 14 days, failing which the
employer became entitled
to terminate the contractor's employ= ment under the
contracts.
/5. ...
7.
5.
Also on 8 November 1985 the
application for the winding up of the appellant was lodged with the Registrar of
the Court
a quo
.
6.
On 12 November 1985
a provisional liquidation order was made in respect of the
appellant.
7.
On the same date, 12 November
1985, the interim certificate referred to in para 2 above matured, in the sense
that the 14 days' period
for payment by the respondent of the amount certified
in it expired; thereafter the payment was overdue.
8.
On 18 November 1985 the interim certificate referred to in para 3
above matured, in the same sense as just mentioned.
9.
On 22 November 1985 the 14 days' period with= in which the appellant
was required to remedy its default, as mentioned in para 4 above,
elapsed.
10.
On 26 November 1985 the
respondent purported
/to ...
8.
to cancel both contracts. This was done by
means of a letter addressed by the respondent's
attorney to the joint provisional liquidators
of the appellant, in which it was recorded
that the respondent regarded both contracts
as terminated,
inter alia
on the ground of the
appellant's failure to remedy its breaches in
terms of
clause
22. The letter also re=
corded that another contractor had been ap=
pointed to complete the works
and that, in
terms of clause 22.3.4, no payment would be
made in respect of amounts certified until
the contracts had been completed. (This part
of the letter is quoted in the reported judg=
ment at 514 C.)
11. On 29 November 1985 the joint provisional
liquidators replied to the letter mentioned
in the preceding paragraph, in a letter writ= ten by one of them. In this
letter the
/liquidators ...
9.
liquidators claimed that the contractor was entitled to be
paid in respect of work which had been certified prior to the liquidation,
notwithstanding the provisions of clause 22.3.4. This clause, it was said, was
in= valid, because it purported "to vary on liqui=
dation the provisions of the
contract after liquidation." It was said also that there hadbeen "an accrued
right to receive payment
of the value of the certified work as at the date of
liquidation" and that the company in liquidation was therefore "entitled to
imme= diate payment of this overdue amount." (The relevant parts of this letter
are quoted in the reported judgment at 514 E-H.)
12. On 12 December 1985 the
joint provisional
liquidators elected not to proceed with the performance of the contracts. In
a letter of that date the respondent was advised that
the
/liquidators ...
10.
liquidators had received sufficient informa= tion to enable them to decide
whether to affirm or to repudiate the contracts, and the
respondent was
"formally notified" that the contracts were "terminated". The claim for
immediate payment in full in respect of certificates
issued prior to the
liguidation was repeated.
13.
On 18 December 1985 the
appellant was finally liquidated.
14.
In
January 1985 the legal proceedings to which reference was made in the opening
paragraph of this judgment were initiated. The notice
of motion in the one case,
and the provisional sentence summons in the other, were both dated 7 January
1985. In the one case the
cause of action relied upon was the interim certi=
ficate issued on 29 October 1985 in respect of the first contract, and in the
other it was
/the ...
11.
the interim certificate issued on 4 November
1985 in respect of the second
contract. The
different forms of procedure adopted in the
two cases are
accounted for by the differences
in the wording of the two certificates
(see
the reported judgment at 512 H - 513 B).
15. In both cases the main
defence put forward in
the opposing affidavits filed on behalf of
the
respondent was that each of the contracts
had been duly cancelled by the
respondent on
the ground of the appellant's breach of
con=
tract,
The facts recited above, which are common cause,
require further comment in one respect. The validity or otherwise of the
respondent's
purported can= cellation of the contracts has not been adverted to.
In its opposing affidavits the respondent had made appro= priate
allegations of
fact, justifying the giving of notices to the appellant calling upon it to
proceed with
/the ... .
12.
the works with reasonable diligence (as mentioned in para 4 above), and in
regard to the appellant's failure to com= ply therewith,
thus laying the factual
foundation for the validity of the respondent's purported cancellation of the
contracts (as mentioned in
paragraph 10 above). In the replying affidavits filed
on behalf of the appellant the deponent in each case stated that he did not
admit the factual allegations to which I have referred, but he made no attempt
to controvert them, saying merely: "I do not regard
this dispute as material to
the present proceedings". In these circumstances it is not open to the appellant
to challenge the existence
of the facts alleged by the respondent which entitled
it to cancel the contracts. In argument before this Court counsel for the
appellant
correctly conceded as much. Accordingly the valid= ity of the
respondent's cancellation of the contracts must be accepted, in so
far as the
facts relating to the appellant's breaches of the contracts are concerned.
However, counsel for the appellant ,did challenge
the validity of the
cancel=
/lation ...
13.
lation on a different ground,which relates to the inter=
pretation of clause 22.1.3 of the conditions of contract in each case. I
shall
deal with this presently.
It will be convenient at this stage to quote the relevant provisions of
clauses 22 and 25 of the conditions of contract. I quote from
the first
contract:
"22. DETERMINATION BY EMPLOYER.
22.1 DEFAULT
If the Contractor shall make default in any of the following respects:
22.1.1 without reasonable cause wholly suspends the Works before completion;
22.1.2 refuses to proceed with the Works with reasonable diligence;
22.1.3 refuses or to a substantial degree per= sistently neglects, after notice
in writing from the Consulting Engineer to remove
defective work or improper
mater= ials, then if such default shall continue for fourteen days after a
written and registered notice
to the Contractor from the Consulting Engineer
specifying the same, the Employer may, without prejudice to any other rights
herein
contained, thereupon by written and registered notice determine the
employment of the Contractor under this contract: Provided that
notice hereunder
shall not be given unreasonably or vexatiously, and such notice shall
be
/void ...
14.
void if the Employer is, at the time of the notice, in breach
of this contract.
22.2 INSOLVENCY OF CONTRACTOR.
If the Contractor's estate is sequestra= ted as insclvent, or if, being a
company, it is placed in voluntary or compulsory liquidation,
the Employer may,
without prejudice to any other rights herein contained by written and registered
notice determine the employment
of the Contractor under this contract.
22.3 In either of the above cases the follow=
ing shall apply:
22.3.1 the Employer may employ and pay a Con=
tractor or other person or
persons to
carry out and complete the Works, and
he or they may enter upon the site and
use all materials, temporary buildings, plant and appliances thereon, and
may
purchase all materials necessary for the
purpose aforesaid;
22.3.2
22.3.3
22.3.4 until after completion of the Works under
this clause no payment
shall be made to
the Contractor under this contract:
Provided that upon completion as afore=
said, and the verification within a
reasonable time of the accounts therefor, the Consulting Engineer shall
certify the amount of expenses properly incurred by
the Employer, and if such amount added to
the monies paid to the Contractor before
such determination exceeds the total amount which would have been payable on
due com= pletion, the difference shall be a debt
/payable ...
15.
payable to the Employer by the Contractor; and if the said
amount added to the said monies be less than the said total amount, the
difference shall be a debt payable by
the Employer to the Contractor.
25. CERTIFICATES AND PAYMENTS.
25.1 The Contractor shall be entitled to re= ceive from the Consulting
Engineer in= terim certificates at intervals not greater than
one calendar
month, a pen= ultimate certificate and a final certi= ficate (as more fully set
out hereunder), stating the amount due
to him and to
payment of such amount by the Employer within the period set out in the
attached schedule. The Consulting Engineer shall notify the
Employer of the date
and amount stipulated in each certificate at the time of issue thereof. If,
after expiry of the aforementioned
period, the amount so certified has not been
paid to the Con= tractor, the Employer shall be liable, without prejudice to any
right
the Con= tractor may have to determine his employ= ment under this
contract, to pay the Contractor interest on the amount so due,
calculated at a
rate of 2 per cent greater than the minimum lending rate charged by commercial
banks to their clients, which interest
shall accrue as from the due date for
payment if the Contractor has presented the certificate for payment within the
period stipulated
herein, or the date of presentation of the certifi= cate by
the Contractor, whichever date is
/the ...
16.
the later. 25.2.1 The amount so due as aforesaid shall,
in
respect of each monthly certificate, be a reasonable estimate:
25.2.1.1 of the total value of the work duly
executed; and
25.2.1.2 of the materials and goods delivered
upon the site for use in the
works;
assessed up to and including a date
not more than seven days prior
to the
date of the said certificate, less
the amount to be retained by the
Em=
ployer, as hereinafter provided, and
less any amounts previously
certified
under this clause: Provided that such
certificate shall, subject
to the pro=
visions of clause 25.2.2, only include
the value of the said materials and
goods as and from such time as they are
reasonably, properly and not prematurely brought upon the site, and then only
if adequately stored and/or protected
against weather and other casualties."
For ease of expression I shall use "the contract" in the singular with
reference to the first contract. What
is said in regard to the first contract
applies equally to the second contract (with the notional substitution of "the
architect"
for the engineer). It is only when a difference
in the facts makes
it necessary to distinguish between the two contracts that I shall deal with
them separately.
/And ...
17.
And for ease of reference, with a view to the discussion of the contractual
provisions which is to follow, I shall use the expressions
"the contractor" and
"the employer" interchangeably with "the appellant" and "the respondent"
respectively.
I revert to the guestion of the validity of the cancellation of the contract.
Counsel for the ap= pellant argued that the respondent's
notice of cancella=
tion of 26 November 1985 was a nullity, because of the concluding words of
clause 22.1.3 and the fact that the
empïoyer was, at the time of the
notice, in breach of the contract. The breach relied on was the failure of the
employer to
pay the amount due to the contractor under the: interim certificate
before the expiry of a period of 14 days from the date of the
issue of the
certificate, as it was obliged to do in terms of clause 25.1 read with the
schedule referred to therein. In the case
of the first contract payment was
overdue after 14 November 1985
/and ...
18.
and in the case of the second contract payment was
over=
due after 18 November 1985. Since the notice of can=
cellation was
given only on 26 November 1985, counsel con=
tended, it was hit by the
provision that
"such notice shall be void if the Employer is, at the time of the notice, in
breach of this contract."
It is apparent that the argument depends for its validity
on the premise
that the notice of cancellation falls with=
in the ambit of the expression
"such notice". To deter=
mine whether that is so requires an analysis of the
whole
of clause 22.1.3.
Clause 22.1.3 can be dissected into three
parts. The first part comprises
the words (I guote the
essentiais only):
"refuses or neglects, after notice
to remove defective work or improper
materials,".
It is clear that in this part a form of default is defined,
which falls
under the heading next to the number 22.1,
"DEFAULT", and which is governed by the opening words of
/clause ...
19.
clause 22.1:
"If the Contractor shall make default in any of the following
respects:".
The first part of clause 22.1.3 is on a
par with clauses 22.1.1 and 22.1.2, which define other forms of default. The
second part of
clause 22.1.3, which commences with the words
"then if such default"
and concludes with the
words
"under this contract"
immediately before the
proviso, was obviously intended, in my view, to be linked, not only with the
first part of clause 22.1.3, but
also with clauses 22.1.1 and 22.1.2 as well as
with the opening words of clause 22.1. Logi= cally the second part of clause
22.1.3
should be separated from its first part by notionally beginning a new
line with the words "then if such default . ..", so as to reflect
/that ...
20.
that the second part is connected with everything that precedes it in clauses
22.1, 22.1.1, 22.1.2 and the first part of clause 22.1.3.
The words "such
default" in the second part of clause 22.1.3 accordingly refer to any of the
three forms of default mentioned in
clauses 22.1.1 and 22.1.2 and in the first
part of clause 22.1.3. Following upon those words, the second part of clause
22.1.3 mentions
two notices. They are different in kind. The first is a notice
from the engineer to the contractor, specifying the default in question.
If such
default continues for 14 days after the notice, then the employer may by a
second notice determine the employment of the
contractor under the contract. The
effect of the second part of clause 22.1.3 is thus to confer upon the employer
the right to cancel
the contract, by notice, in the event of the contractor
remaining in default in any of the three respects contemplated,for a period
of
14 days after notice from the engineer specifying the default in question.
/Next ...
21.
Next, we come to the third part of clause 22.1.3, which is the proviso. For
convenience I quote it again:
"Provided that notice hereunder shall not be given unreasonably or
vexatiously, and such notice shall be void if the Employer is,
at the time of
the notice, in breach of this contract."
As a matter of syntax there can be no doubt, I consider, that the words "such
notice" refer to the preceding words
"notice hereunder". Hence, in order to
determine whether a notice of cancellation falls within the ambit of the
proviso, the crucial
enquiry is whether the expres= sion "notice hereunder" is
to be interpreted as referring also to a notice of cancellation. I say
also
because it is clear that the expression does refer to a notice by the engineer
specifying the default. (Whether or not the expression
was intended to include a
notice of the kind which is mentioned in the first part of clause 22.1.3 need
not be considered; whatever
answer
/may ...
22.
may be given to that question, it will not affect the
reason=
ing which follows.) If the expression "notice here=
under" had stood
alone, it might have included a notice
of cancellation. But it does not stand
alone. It
appears in a context which effectively qualifies it:
"notice hereunder shall not be
given unreasonably or vexatiously
".
There is no difficulty in applying the broad concept in=
volved in the
words I have emphasized to the first kind
of notice mentioned in the second
part of clause 22.1.3,
viz a notice by the engineer specifying the
default.
Having regard to the three forms of default defined in
clauses
22.1.1 and 22.1.2 and the first part of clause
22.1.3, one can readily visualize circumstances under
which it would be
unreasonable or vexatious for the en=
gineer to require the contractor to
purge his default with=
in 14 days. In that context, the proviso makes sense.
However, in relation
to a notice of cancellation the posi=
tion is vitally different. If the engineer gives a
/proper ......
23.
proper notice, i e one that is not given unreasonably or
vexatiously, and the contractor fails to rectify his de= fault, the employer
acquires the right to cancel the con= tract. If he elects to exercise that
right, and he does so by giving notice of cancellation,
I am unable to imagine
how there could ever be room for an enquiry as to whether the notice of
cancellation was given unreasonably
or vexatiously. The concepts of
unreasonableness and vexatiousness are wholly foreign to the exercise of a right
conferred by contract
on one party to cancel the contract on the ground of a
breach of it by the other party. In my view, therefore, the expression "notice
hereunder" in the proviso to clause 22.1.3 cannot be in= terpreted as including
a notice of cancellation given by the employer. Accordingly
the expression "such
notice" also does not include a notice of cancellation.
It follows that the attack by counsel for the appellant on the validity of
the respondent's cancellation
of the contract fails.
/The ...
24.
The fundamental issue to be considered, then, is whether the
appellant was entitled to enforce payment in terms of the interim certificate
despite the cancel= lation of the contract by the respondent. I shall deal with
this issue in two phases: first, I shall discuss
the legal position between the
parties without taking into account the fact of the appellant's liquidation;
there= after, I shall
consider the effect (if any) of the appel= lant's
insolvency and liquidation on the legal position.
In the Court
a quo
, as appears from the re= ported judgment (at 511
H-I), NIENABER J took as the starting point of his analysis of the legal
position
a passage in the judgment of HOLMES JA in
Crest Enterprises (Pty)
Ltd v Rycklof Beleggings (Edms) Bpk
1972 (2) SA 683
(A) at 870 G-H, which is
to the effect that a contractual right is enforceable after the rescission of a
contract if, before the
rescission, it was accrued, due and en= forceable as a
cause of action "independent of any executory part of the contract". Focusing
attention on the last-
/mentioned ...
25.
mentioned phrase, the learned Judge examined the question
whether that
requirement was satisfied on the facts of
the case and came to the conclusion
that it was not.
Thereafter the learned Judge (at 519 E-J) turned his
at=
tention to the provisions of clause 22.3.4 of the condi=
tions of
contract and found that those provisions were in
line with what he considered
in any event to be the true
position according to the law of contract. I
propose
to adopt a reverse approach. I shall first examine the
meaning and
effect of the relevant provisions of the con=
ditions of contract and
thereafter deal with the
Crest
Enterprises
case
supra
.
The consequences of the cancellation of the contract under
inter alia
clause 22.1.3 are provided for in clause 22.3. In terms of clause 22.3.1 the
employer is entitled to employ and pay a third party
to carry out and complete
the works. Clause 22.3.4 contains the all-important provision, which merits
quoting again:
"until after completion of the Works
/under ...
26.
under this clause no payment shall be made to the Contractor under this con=
tract:".
I shall refer to the words quoted as the
main provision of
clause 22.3.4. It is followed by a proviso, which
regu=
lates the final accounting between the employer and the
contractor
which is to take place after the completion of
the works by the third party.
In brief, the difference
is to be calculated between (a) the sum of the
expenses pro=
perly incurred by the employer and the monies paid to
the
contractor before the determination of his employment, and
(b) the total amount which would have been payable on due
completion; such
difference, depending upon whether from
the employer's point of view it constitutes a surplus or a
deficit, is to be paid by the employer to the contractor or
by the contractor to the employer, as the case may be.
On the face of it, the main provision of clause 22.3.4 would seem to
constitute a valid defence in
favour of the respondent against the claim of
the appellant. But counsel for the appellant argued to the contrary, on
/grounds ...
27.
grounds which will be adverted to presently. Fundamental to
the arguments advanced on this score was the fact, much stressed by counsel,
that the appellant's claim was founded solely upon the interim certificate
issued by the engineer on 29 October 1985. (In the case
of the se= cond contract
the cause of action was the interim certi= ficate issued by the architect on 4
November 1985.) That certificate,
however, was issued in terms of clause
25.1.
Under this clause the contractor was entitled to receive
from the
engineer,
inter alia
, monthly interim certifi= cates, stating the amount
due to him (as determined in accordance with the provisions of clauses 25.2.1,
25.2.1.1, and 25.2.1.2). Clause 25.1 provides further that the
contractor
would be "entitled to payment of such
amount" within a certain period, which in this case was 14 days. The contract
itself, therefore, expressly con= ferred on the contractor
the right to be paid
the amount stated to be due in the certificate. That being so, it cannot be
doubted that any payment on a certificate
would
/necessarily ...
28.
necessarily be a payment under the contract. That is the
plain meaning and effect of the conditions of contract. For the purposes
of
interpretation the relevant provisions must, of course, be viewed in conjunction
with one another. Since it is clear from clause
25.1 that payment on a cer=
tificate is payment under the contract, it follows that payment on a certificate
falls within the purview
of the
words "payment under this contract" in the
main pro=
vision of clause 22.3.4. Furthermore, since clause 25.1 provides in
general terms for the payment of an amount due
on a certificate, while clause
22.3.4 provides specifically
that no such payment shall be made under particular circum=
stances, it follows, as a matter of simple logic, that
under the
particular circumstances envisaged in clause
22.3.4 it is the specific provision of that clause that
must prevail over
the general provisions of clause 25.1.
Accordingly, when the contract has
been cancelled under
clause 22.1.3 and the employer has employed a third
party
to complete the works under clause 22.3.1, as happened in
/this ...
29.
this case, clause 22.3.4 comes into operation, and, in terms
of its main provision, until after completion of the works no payment
shall be
made to the contractor under the contract, which includes any payment on a cer=
tificate already issued.
The conclusion just stated is based on an interpretation of the relevant
provisions of the condi= tions of contract. The effect of
the conclusion is that
the main provision of clause 22.3.4 afforded the respond= ent a valid defence to
the appellant's claim —
prima facie
at least, and subject to a
consideration of the arguments advanced to the contrary by counsel for the
appellant, to which I now turn.
The first and major contention of counsel for the appellant was that an
interim certificate of the kind in question here provided
the contractor with a
self-sufficient right of action and a distinct cause of action
which could be enforced without any need for the contractor to go beyond the
certificate or to rely on the contract
/under ...
30.
under which it was issued. For present purposes counsel's
contention can be accepted as correct (c f
S A Builders and Contractors v
Langeler
1952 (3) SA 837
(N) at 842 F-H, and the apparent approval with
which that case was referred to by TROLLIP JA in
Mouton v Smith
1977 (3)
SA 1
(A) at 5 C-G). I am unable, however, to see how the contention'can avail
the appellant. The validity of the contractor's cause of
action, as such, is not
at stake. When it is said that the contractor can found a claim against the
employer on the certificate standing
by it= self, no more is being said than
that a cause of action couched in;such a form is in order from the point of view
of pleading,
practice and procedure. To say that the contractor has a cause of
action is not to say that the employer has no defence to it. Whether
there is a
defence is a different question, and it is that question which is material in
this case. In the course of his argument
counsel for the appellant said that the
certifi= cate was "sacrosanct". That cannot be right. Counsel
/was ...
31 .
was elevating the recognition of a cause of action into a postulate that
there could be no answer to it. At one stage counsel did
accept that there could
be a defence to a claim on a certificate, but submitted that it would be limited
to cases of fraud and the
like. There is no need, for the purposes of my
judgment, to embark upon a general consideration of the nature or scope of the
defences
which would be available to an employer when sued on an interim
certificate (c f
Langeler
's case
supra
at 843 A-B and
Mouton
's case
supra
at 5 F). We are concerned in this case with a
defence which is squarely based upon an express provision (clause 22.3.4) of the
very
contract which caused the certificate to come into being (clause 25.1). The
fact that the contractor when claiming on the certificate
need not rely on the
contract obviously does not preclude the employer from relying on the contract
by way of defence to the claim.
I can think of no reason in logic or in
principle why a defence based on clause 22,.3.4 should not be a valid defence to
the contractor's
claim on
/the ...
32.
the certificate. To hold otherwise would be tantamount to conferring upon the
certificate an independen't and absolute viability and
enforceability, totally
divorced from the contract under which it was issued, for which there is no
warrant. I agree, therefore,
with the reason stated by NIENABER J in para (b) at
520 C of the reported judgment for his conclusion that after cancel= lation of
the contract the employer is not obliged to pay out on the certificate. (For
clarity I should add that I agree also with the reason
stated in para (a) at 520
B/C, but that is not germane to the present discussion.)
The remaining contentions of counsel for the appellant in the present context
can conveniently be
grouped together, for they all relate to the nature of an
interim certificate and the effect of a payment made in terms of it. The
main
thrust of this part of the argu= ment was that an interim certificate and
payment made in terms of it related solely to the
past performance of the
contractor under the contract and had no connection with
/the ...
33.
the future at all, so that the remuneration certified and
paid was remuneration for work actually done and materials actually supplied
and
nothing else. To sustain this line of argument counsel made submissions at
variance with a number of views expressed by the learned
Judge in the Court
a
quo
. Thus, it was contended that payments under interim certificates were
not to be regarded as advances on account of the ultimate contract
price; that
the sum certified was indeed to be regarded as compensation for a completed
segment of the work; and that the sum certified
was not to be treated as
provisional and subject to adjust= ment and re-adjustment in later certificates.
I have no hesitation in
rejecting this entire line of argument, coupled with all
the submissions made in support of it. Not only does it do violence to the
fundamental nature of a building contract and the reciprocal obligations of the
parties to such a contract; it flies in the face
of the clear authorities cited
and discussed by NIENABER J in the reported judgment at 516 F - 517 D and 519 D.
I agree,
/with ...
34. with respect, with the views expressed
by the learned Judge in the passages mentioned. Apart from that, no trace of
counsel's
contentions is to be found in the word= ing of the main provision of
clause 22.3.4 itself. At one stage of his argument counsel was
constrained to
submit that the clause had to be interpreted subject to some limitation, such as
by the notional addition to the main
provision of the words "unless certified".
Suffice it to say that there is no justification for reading any such limitation
into
the clause.
In the result the arguments advanced by counsel for the appellant do not
detract from the view expressed earlier as to the effect
of the main provision
of clause 22.3.4, in the light of the conclusion arrived at concern= ing the
interpretation of the relevant
conditions of con= tract. In this context it
follows, therefore, that the respondent's defence, based on the cancellation of
the
contract, was a valid defence to the appellant's claim.
/I ...
35.
I turn now to the case of
Crest Enterprises supra
, and
the passage in the judgment of HOLMES JA in that case, to which I referred
earlier. In argument before this Court counsel for
the appellant was not con=
tent to argue that the Court
a quo
had erred in relying on that passage
for the purpose of coming to a conclusion against the appellant; counsel went
further and argued
that the passage provided positive support for a finding in
favour of the appellant.
The passage in question (1972 (2) SA at 870
G-H) reads as follows:
"To sum up on this aspect, the rule in the
Walker
case,
supra
,
is confined to cases where, prior to the rescission of a contract by one party's
acceptance of the other's repudiation, there exists
a right which is accrued,
due, and enforce= able as a cause of action independent of any executory part of
the contract."
NIENABER J held (at 516 A of the reported judgment) that
the principle
embodied in this passage was not restricted
to rescission upon repudiation,
but that it applied to all
/forms ...
36.
forms of breach culminating in cancellation. I agree, with
respect. Nor was there any argument to the con= trary in this Court.
Counsel for the appellant sought to use this passage in favour of the
appellant in the following way. He pointed to the words "prior
to" in the
expression "prior to the rescission of the contract" and urged that those words
were of decisive importance. They meant,
he said, that the ascertainment of
the existence of an accrued and enforceable cause of action was to be isolated
entirely from both
the fact and the consequences of the cancellation of the
contract. He claimed that this was the way in which the Court applied the
principle to the facts in the
Crest Enterprises
case, at 871 C-E and 872
B-D. Applying that approach to the facts of the present case, counsel said that
one must look to the position
"prior to" the cancellation of the contract on 26
November 1985, and no further. On 25 November 1985 the appellant had an accrued,
due, and enforceable cause of action based
/on ...
37.
on the interim certificate, for payment of the amount stated
in it. That, counsel said, was the end of the enquiry; the fact of the
subsequent cancellation had to be ignored, as also the consequences of it,
including the operation of clause 22.3.4. These matters
were excluded from
consideration, it was argued, because they fell out= side the limitation of the
principle which is embodied in
the words "prior to".
The argument has a superficial aura of plausi= bility about it, but it will
not bear examination. In fact, I am satisfied that it
is wholly untenable. A
simple example can be used to demonstrate that it cannot
be right. Take the
cas'e of a sale. A sells fixed pro=
perty to B for a purchase price of R20 000. The contract
provides that B is obliged to pay the full price on or
before 30 September, and that A will pass transfer by not
later than 30 November. B fails to pay on due date. On
26 November, say, the contract is cancelled, either by A's
exercise of a
right of cancellation conferred by the
/contract ...
38.
contract, or by A's repudiation of it, for reasons unre= lated to B's
non-payment, and B's acceptance of the repu= diation. Thereafter
A sues B for
payment of R20 000. If counsel's argument were right, A could enforce payment
without being obliged to pass transfer,
for "prior to" the cancellation A had an
accrued, due and enforceable right to claim payment and, as counsel would have
it, the subsequent
cancellation and the consequences of it must
be ignored.
Of course that is not the law, and HOLMES JA could not have intended to suggest
that it was.
What, then, is the fallacy in counsel's argu= ment? In the first place it
lies in the process of treating a
dictum
in a judgment as if it were a
legislative enactment, subjecting it to close examination, then select= ing
certain words in it and
applying those words in a factual context not
contemplated by the
dictum
. That process is always dangerous. In the
present case it is fatally so, for the reasons following.
/In ...
39.
In the
Crest Enterprises
case HOLMES JA re= ferred to
"the rule in
Walker
's case". Earlier in the judgment (at 869 H - 870 C)
he had discussed the case of
Walker's Fruit Farms Ltd v Sumner
1930 TPD
394.
That was a case in which the plaintiff had for several months ren= dered
services to the defendant under a contract, which was then
repudiated by the
defendant. The plaintiff ac= cepted the repudiation and sued for payment of
moneys which had accrued and were due
under the contract before the repudiation.
In holding that the plaintiff was en=
titled to do so, GREENBERG J, in a
passage of his judgment
quoted in the
Crest Enterprises
case at 870 A-B, drew a
distinctioh between the enforcement of the executory por= tion of the
contract and the enforcement of a "right .... accrued" before
the cancellation
of the contract. HOLMES
JA was concerned with the sense in which GREENBERG J
had
used the word "accrued". He found, for reasons given by
him, that the
word was meant to convey "accrued, due and enforceable". The importance of this
finding in the
/context ...
40.
context of that case becomes apparent when regard is had to
the facts, as dealt with later in the judgment of HOLMES JA. The plaintiff
had
sued for transfer of pro= perty in terms of a contract which had been rescinded
by virtue of a repudiation by the defendant and
the plaintiff's acceptance of
it. On an interpretation of the contract it was found that the plaintiff's right
to claim transfer
was not "complete and enforceable" until the plaintiff
had
made a certain election and communicated it to the defend= ant (at 871
C-D) and had furthermore tendered payment of a certain amount
to the defendant
(at 871 i f - 872 A). It appeared that the plaintiff's particulars of claim,
which had been attacked by means of
an exception, lacked averments showing that
the election had been made and communicated and the payment tendered
before
the rescis
=
sion
of the contract — this was emphasized by
HOLMES JA -and accordingly it was held that the plaintiff had not brought its
claim
"within the rule in the
Walker
case
supra
" (see at 871 D-E
and 872 A-D). That was what the
/
Crest
...
41.
Crest Enterprises
case was about. In that setting the
passage in the judgment of HOLMES JA which is under dis= cussion can now be
viewed in its proper
perspective. It is now clear why he said that the "rule" in
the
Walker
case
supra
was "confined" to certain cases, and why he
used the words "
prior to the rescission
". It is equally clear that the
words at the end of the passage in question, "independent of any executory part
of the contract",
played no role at all in the actual decision of that case. For
the purposes of the
ratio decidendi
those words might as well have been
left out of the passage. But, of course, since the learned Judge of Appeal was
seeking to formulate
a principle in general terms, which was intended to be of
general application, the words had to be added, for with= out them the
reference
to the "rule" in
Walker
's case would have been incomplete and the passage
would have pre= sented a distorted picture of the legal position. It is
important
to note why the reference to the "rule" in
Walker
's case
required the addition of the words "independent
/of ...
42.
of any executory part of the contract". In
Walker
's
case the facts showed clearly, in my opinion, that the contract involved the
performances of periodically ac= cruing obligations
of such a kind that the
performance of the plaintiff's obligation before the cancellation of the
contract and the defendant's counter-performance
for it, which it was sought to
enforce, were obviously severable from the obligations under the executory
por=
tion of the contract. There was no indispensable link nor any reciprocity
between the obligations of the past and the obligations
of the future. That is
the context in which one must assess the words "independent of any executory
part of the contract".
On the above analysis the interpretation which counsel for the appellant
sought to place on the
passage in the judgment in the
Crest Enterprises
case is without
foundation. The words "prior to the rescission" qualify the accrual of a due and
enforceable right, but they bear
no relation to the manner in which the
criterion
/"independent ...
43.
"independent of any executory part of the contract" is to be
applied. In particular, the words "prior to" do not bear the pregnant
meaning
assigned to them by counsel, viz that the principle embodied in the passage must
be applied without reference to the fact
and the consequences of the
cancellation. They are incapable of bearing that meaning, for if they did, the
criterion "independent
of any executory part of the contract" would be
emasculated, and the application of the principle stated in the passage would
not
only be futile, but would indeed violate funda= mental principles of the law
of contract.
In my judgment, therefore, the passage in the
judgment in the
Crest
Enterprises
case affords the appel= lant no avenue of escape from the fact
that the contract has been cancelled or from the consequences of such
can=
cellation, which include the coming into operation of the main provision of
clause 22.3.4 of the contract.
To round off this aspect of the case I.would
/add ...
44.
add that I agree, with respect, with the observation of
NIENABER J, at 519 I-J of the reported judgment, that the express terms of
the
contract (contained particularly in the main provision of clause 22.3.4) are in
line with the true position according to the
law of contract, as it is stated by
the learned Judge in his treatment of the appli= cation of the
Crest
Enterprises
passage, at 517 D - 518 C of the reported judgment.
I proceed to deal with the second phase of
the enquiry: whether the fact
of the appellant's liquida= tion has any effect on the legal position between
the parties as discussed
above. It was common cause that the appellant was
liquidated because of its insolvency,
and that a
concursus creditorum
arose on 8 November 1985
when the application for the liquidation of the
appellant was filed with the Registrar of the Court
a quo
.
In argument before this Court it was common cause that. the contract, which
was not one of the kind spe= cifically dealt with in the
Insolvency Act 24 of
1936
, was
/not ...
45.
not terminated by the liquidation but remained in
force
thereafter (see e g
Bryant & Flanagan (Pty) Ltd v Muller
and
Another NN O
1978 (2) SA 807
(A) at 812 H). The
liquida=
tors could decide not to carry on with the execution of
the
contract (as they eventually did, on 12 December 1985),
but such a decision
constitutes a repudiation of the con=
tract; the statement, frequently
encountered, that a
trustee or a liquidator in insolvency has a "right
of
election" whether or not to abide by a contract does not
signify more
than that the other party cannot exact spe=
cific performance against the
trustee or the liquidator,
if the latter should decide to abándon the
contract (c f
De Wet and Yeats,
Kontraktereg en Handelsreg
(4th ed)
at
460, and
Smith and Another v Parton N O
1980 (3) SA 724
(D) at
728 H - 729 D).
In the present case, however, the respondent's cancellation of the contract
preceded the liquidator's decision to repudiate it. As
I understood the argument
of counsel for the appellant, he was not concerned with
/the ...
46.
the question whether the liquidation precluded the exer= cise of the
respondent's right to cancel the contract,
per se
(c f
Tangney and
Others v Zive's Trustee
1961 (1) SA 449
(W) at 452 H - 453 F;
Smith and
Another v Parton N O supra
at 729 D-G). His argument was directed at the
consequences of such cancellation, which, he said, could not be countenanced
without
violating the principies which apply in a
concursus creditorum
.
He stressed, in particular, the main provision of clause 22.3.4 and the method
of final accounting prescribed in the proviso to
ciause 22.3.4, the effect of
which was summarized earlier in this judgment. On the facts, it appears from
the
figures and calculations contained in the affidavits filed on behalf of the
respondent that, in the case of the first contract, the
estimated cost of
completing the works was
about R936 000; if that sum is added to the monies already paid to the
appeliant (some R466 000), the total arrived at would be approximately
R114 000
less than the amount which would have been payable to the appellant on due
compietion
/of ...
47.
of the contract (about R1 517 000). In the case of
the
second contract similar calculations show an expected ultimate deficit of
about R137 000, comparing the esti= mated cost of completion
plus the amounts
already paid to the appellant (together about R1 198 000) with the amount which
would have been payable to the appellant
on due completion by it (about R1 061
000).
Counsel for the appellant argued that the ap=
plication of the provisions
of clause 22.3.4 would result
in the respondent obtaining a substantial preference over
other creditors
of the appellant, which would be in con=
flict with the well-known passage in the judgment of INNES
J in
Walker
v Syfret
N 0
1911 AD 141
at 166:
"The sequestration order crystallises the insolvent's position; the hand of
the law is laid upon the estate, and at once the rights
of the general body of
creditors have to be taken into consideration. No trans= action can thereafter
be entered into with regard
to estate matters by a single cre= ditor to the
prejudice of the general body. The claim of each creditor must be dealt with as
it
existed at the issue of the order."
On this basis counsel urged that the respondent could not
/be ...
48.
be allowed to retain, for its own, sole benefit, the amounts due to the
appellant under the certificates, but was obliged to pay over
those amounts into
the general fund for the benefit of all the creditors. Otherwise, counsel said,
the respondent would in effect
reap the benefit of a set-off of its claim for
damages for non-completion against the amounts due on the certificates, which is
not
permitted.
In my judgment counsel's argument is unsound and must be rejected, for the
following reasons. In the context of the factual situation
which falls to be
con= sidered in this case, it is not correct to regard the respondent as a
creditor in the appellant's insolvent
estate. The respondent is in the position
of a debtor. It is being sued by the appellant for performance of the contract.
For reasons
explained earlier, the fact that the appellant's claim is based on
the certificate does not render it the less a claim for payment
under the con=
tract. The respondent is not seeking to enforce the
/contract ...
49.
contract; it is resisting a claim brought by the appel= lant,
as creditor, for the enforcement of the contract. The liquidators, who
are
pursuing the claim, must take the contract as they find it. There is no way in
which the liquidators can isolate one part of
the con= tract, for the purpose of
enforcing it, from the rest of
the contract, in terms of which the respondent
need not perform. The
concursus creditorum
does not prevent the
respondent from raising a defence founded upon the very contract upon which it
is being sued for performance.
It is not a case of the respondent being
preferred over other creditors; it is a case of the liquidators not
being in
a better position in relation to the enforcement
of the contract than the
appellant itself would have been
but for the liquidation.
On the above analysis the case of
Administra
=
tor, Natal v Magill, Grant & Nell (Pty) Ltd (In Liquida
=
tion
1969 (1) SA 660
(A) at 671 A - 672 D, on which counsel for the
appellant relied in support of his
/argument ...
50.
argument, is distinguishable. In that case the employer had,
after the contractor's liquidation, elected to make a direct payment
to certain
sub-contractors, which had the effect of conferring a benefit on those
sub-contractors over other creditors of the contractor.
The facts there are not
comparable to the situation in the present case. In regard to the question of
set-off, counsel relied on
the cases of
Consolidated Agencies v Agjee
1948 (4) SA 179
(N) at 190 and
The Government v Thorne and Another N N O
1974 (2) SA 1
(A) at 9 E-G. Those cases are also distinguish= able, on the
facts, from the situation in the present case. The respondent is not
relying on
any set-off. For the purposes of its defence to the appellant's claim, the res=
pondent needs to go no further than the
main provision of clause 22.3.4. That is
sufficient to defeat the appel= lant's claim on the contract. The method of
final ac= counting
which is provided for in the proviso to the clause does not
really enter into the picture at all, at least not at this stage of the
proceedings. The appellant cannot
/enforce ...
51.
enforce a claim on the contract. It may have a claim in the nature of a
quantum meruit
, in which event the method of accounting envisaged in the
proviso to clause 22.3.4 would, speaking broadly, come into play in any
event.
If, after the completion of the works, there is a deficit, the respondent would
presumably have a concur= rent claim for payment
of it against the insolvent
estate of the appellant. If there is a surplus due to the contractor, the
liquidators would presumably
be able to claim payment of it. But there is no
need to discuss these possibilities further, for they do not arise in these
proceedings.
There is one final observation that I would make. In the discussion above I
have assumed that the respondent's cancellation of the
contract was not invali=
dated by the fact of the appellant's liquidation. If an assumption were to be
made to the contrary, the
result would be no different. The liquidators'
subsequent re= pudiation would come into play then. In the context of
/the ...
52.
the preceding events the respondent must be taken,
ex
hypothesi
, to have acguiesced in the repudiation. The
contract
would then have been cancelled in that way, in
any event. That being so, the
liguidators would not
have been able to enforce the contract by claiming
pay=
ment on the certificates, for, by virtue of the applica=
tion of the
principle in the
Crest Enterprises
case
supra
,
as discussed in
the passages of the reported judgment re=
ferred to earlier, apart from the
provisions of clause
22.3.4, the claim would also have been defeated by
a
defence based on the cancellation of the contract.
In the result, therefore, the validity of the respondent's defence to the
appellant's claims is not af=
fected by the appellant's liquidation.
The appeal is dismissed with costs, including the costs of two counsel.
A.S. BOTHA JA
CORBETT JA
NESTADT JA
NICHOLAS AJA
CONCUR
BOSHOFF AJA