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[2003] ZASCA 103
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Amalgamated Beverage Industries Ltd. v Rond Vista Wholesalers (539/2002) [2003] ZASCA 103; [2003] 4 All SA 95 (SCA); 2004 (1) SA 538 (SCA) (26 September 2003)

THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
REPORTABLE
CASE NO
: 539/2002
In the matter between :
AMALGAMATED BEVERAGE INDUSTRIES
LIMITED
Appellant
and
ROND VISTA WHOLESALERS
Respondent
_________________________________________________________________________
Before: HARMS, STREICHER, BRAND JJA, SOUTHWOOD &
VAN HEERDEN AJJA
Heard: 12 SEPTEMBER 2003
Delivered:
26 SEPTEMBER
2003
Summary: Contract of indefinite
duration – whether terminable on reasonable notice a matter of
construction – time of determining
whether period of notice of
termination reasonable a matter of construction – notice period of
six months reasonable in the circumstances.
_________________________________________________________________________
J U D G M E N T
_________________________________________________________________________
STREICHER JA
STREICHER JA:
[1] In an action instituted by the respondent against the appellant
in the Durban and Coast Local Division the court granted judgment
for
the respondent in terms of which it (a) declared that a notice of
termination of a contract by the appellant to the respondent
did not
terminate the contract and (b) interdicted the appellant from
conducting itself towards the respondent as if the contract
had been
validly cancelled. With the leave of the court
a quo
the
appellant appeals against its judgment. Before us the main issue
between the parties was whether reasonable notice of termination
of
the contract had been given.
[2] The appellant manufactures and distributes carbonated soft drinks
of the Coca Cola Company in terms of a franchise agreement
with that
company. By the end of 1989 the appellant was experiencing various
problems in so far as the distribution of its products
was concerned.
There were labour problems; some customers needed deliveries over
weekends while the appellant only operated five
days a week; the
appellant’s trucks were huge and were finding it difficult to get
into some of the small streets in the centre
of Durban and to find
parking; it was uneconomical to deliver to customers who only took a
few cases at a time; and some of the customers
had their premises
high up in multi-storey buildings in the city centre.
[3] As a result of the aforementioned considerations the appellant,
on or about 12 February 1990, concluded a written contract with
the
respondent, a partnership, in terms of which it appointed the
respondent as a sole distributor in Durban for its products. In
terms
of the contract the respondent undertook to service all outlets for
the appellant’s products including trade discount outlets
and to
attend to customer needs; to purchase a forklift, two trucks and a
Hi-Ace van; and to achieve a distribution target of 16 000
cases
per month. The distribution was to be done on the basis of the
respondent buying the product from the appellant and on-selling
it to
the relevant outlet. The appellant undertook to pay a discount at a
fixed rate of 10% on the purchases by the respondent, at
the end of
each month. Clause 19 of the agreement provided that the appointment
of the respondent would be terminated by the appellant
if the
respondent became insolvent or was sequestrated whether provisionally
or finally or if it made an assignment for the benefit
of its
creditors. It did not in express terms provide for the termination of
the contract in other circumstances.
[4] The respondent leased warehouse space for its operations and
started with some 13 to 15 employees and a sales representative.
The
sales representative was employed by the appellant and made available
to the respondent. As was required by the contract the
respondent
acquired two trucks, a forklift and a Hi-Ace van. The trucks were
painted in signage which described the respondent as
an official
distributor of appellant’s products. The appellant gave the
respondent a list of customers it required the respondent
to service
but continued to distribute its products to trade discount outlets
itself.
[5] The respondent rendered a very good service. It could make
deliveries on short notice and over weekends. As a result some of
the
trade discount customers, at times, preferred to buy from it instead
of from the appellant. Because of the increase in the warehouse
space
requirements of the respondent it, in 1997, ‘acquired’ the
property from which it was, at that time, conducting its business,
by
taking over the trust which owned the property. The purchase
consideration was R2 300 000, R1 725 000 of which
was financed by way of a mortgage bond over the property payable over
a period of 20 years. Improvements to the value of approximately
R100 000 were subsequently effected on the property.
[6] Until a Mr Gould came onto the scene as general manager of the
appellant’s Durban operation in 1998 the appellant had no
complaints
about the service rendered by the respondent. At first
Gould was also satisfied with the service rendered by the respondent.
He channelled
more work towards the respondent and encouraged the
respondent to buy another four trucks in order to service additional
outlets.
The respondent complied with the request. In 1998 it
purchased two new trucks. The purchases were financed by the
appellant by way
of allowing the respondent to repay a debt of
R300 000 in 18 monthly instalments with effect from the end of
September 1998.
In addition the respondent purchased two second-hand
trucks from the appellant for a purchase price of R28 000. The
purchase
price was payable in twelve monthly instalments as from 31
December 1998. As a result of Gould’s encouragement the
respondent’s
turnover doubled.
[7] However, Gould did not remain satisfied. He wanted the respondent
to agree to a reduction of the agreed 10% discount. He threatened
to
‘pull the plug out beneath’ the respondent when the respondent
refused to agree to a reduction. He contended that the respondent
was
not entitled to deliver to trade discount outlets without the
appellant’s consent and complained that such deliveries resulted
in
the appellant having to grant a double discount. He also threatened
to remove the respondent’s existing computer link to the
appellant's main computer system. On 8 January 1999 the respondent
was informed, in writing, that the discount would be changed
unilaterally.
[8] The respondent’s attorneys, thereupon, advised the appellant
that its demand that the respondent should cease deliveries to
clients who received a trade discount, its unilateral reduction of
‘commission’ payable and its decision to terminate the
respondent’s
computer link constituted breaches of contract. The
appellant then, on 23 February 1999, gave the respondent notice of
termination
of the contract with effect from 31 August 1999.
[9] By the time that the notice of termination was given the
respondent’s employees had increased from about 15 to 60; the
number
of sales representatives allocated by the appellant to it had
increased from one to three; the number of vehicles used by it had
increased to 11 trucks and three forklifts; the warehouse space
occupied by it had increased from 300m
2
to 1800m
2
;
and its turnover had increased to between R40 million and
R50 million a year or 1 178 000 cases.
[10] The respondent instituted action for the relief eventually
granted by the court
a quo
. It alleged that the notice was
invalid as the contract was for an indefinite period and could not be
terminated at the election
of the appellant. In the alternative the
respondent alleged that the period of the notice terminating the
contract had to be reasonable
and that a notice period of six months
was unreasonable.
[11] The court
a quo
held that the contract was terminable on
reasonable notice. It held, furthermore, that notice of termination
was not given for valid
commercial reasons and that the respondent
had not been given reasonable notice.
[12] Before us the appellant attacked the judgment of the court
a
quo
on the basis that it erred in finding that reasonable notice
had not been given and that valid commercial reasons were required
for
terminating the contract. The appellant did not persist in
various other defences raised by it in the court
a quo
. The
respondent, on the other hand, did not persist in its contention that
the contract was not terminable on reasonable notice.
It contended
that one year was a reasonable notice period.
[13] In my view the court
a quo
correctly decided that the
contract was terminable on reasonable notice. Whether it was is a
matter of construction.
1
The question is whether a tacit term to that effect should by
implication be read into the contract. That would be the case if the
common intention of the parties at the time when they concluded the
contract, having regard to the express terms of the contract
and the
surrounding circumstances, was such that, had they applied their
minds to the question whether the contract could be so terminated,
they would have agreed that it could.
2
[14] The appellant’s franchise agreement with Coca Cola was for a
period of five years after which it had to be renegotiated. It
would
therefore have made no commercial sense for the appellant to enter
into a contract of indefinite duration which could not be
terminated
on reasonable notice. The respondent on the other hand was embarking
on a new venture. The cost of distributing the appellant’s
product
could have escalated to such an extent that it could no longer be
performed economically at a discount of 10%. For these
reasons it is
highly unlikely that either the appellant or the respondent would
have intended the contract not to be terminable on
reasonable notice.
[15] It is not clear why the court
a quo
considered it
necessary to make a finding that the notice of termination was not
given for valid commercial reasons. It may have
had in mind the
following statement by Smalberger AJA in
Putco Ltd v TV &
Radio Guarantee Co (Pty) Ltd and Other Related Cases:
3
‘
Once a contract is terminable on reasonable notice
either party is entitled to give such notice for any valid commercial
reason .
. .’
I do not think Smalberger AJA intended to say that a valid commercial
reason is always required for terminating a contract terminable
on
reasonable notice. He was probably of the view that because of the
special relationship between the parties it was implicit in
the
contract between them that notice could only have been given for
valid commercial reasons. There is no rule of law to the effect
that
it is implicit in a contract which may be terminated by notice that
it may only be so terminated for a valid commercial reason.
Such a
term may of course be implied on a proper construction of the
agreement.
[16] In the present case it is not necessary to decide whether such a
term is a tacit term of the contract. It can be assumed to
be the
case. That is so because it is clear that the appellant did have a
valid commercial reason for terminating the contract. It
wished to
reduce the discount payable to the respondent and the respondent
refused to agree to such a reduction.
[17] The only issue that remains to be decided is whether the notice
period of six months was reasonable. The parties were agreed
that the
reasonableness of the period of notice has to be tested at the time
when notice is given. As the term that the contract
can be terminated
on reasonable notice is a tacit term of the contract the time for
testing the reasonableness of the period of the
notice is likewise a
matter of construction. Again the question is what the parties would
have replied, at the time when they concluded
the contract, to the
question whether the reasonableness of the notice should be tested in
the light of the circumstances pertaining
at that time or in the
light of the circumstances pertaining at the time notice is given.
[18] At least one object of requiring a reasonable notice is to give
the receiving party sufficient time in which reasonably to regulate
its own affairs.
4
It is, therefore, in the absence of any indication to the contrary,
probable that parties who agree that their contract may be terminated
by reasonable notice would require the reasonableness of the notice
period to be tested in the light of the circumstances pertaining
at
the time when the notice is given. In the present case where the
parties, at the time when the contract was concluded, could not
foresee to what extent the business would grow there can be little
doubt that they would have required the reasonableness of the
notice
period to be tested in the light of the circumstances pertaining at
the time when the notice was given. In
Putco
5
it was considered that the minority judgment of Jansen JA in
Nel v
Cloete
6
was authority for the proposition that in determining what is a
reasonable period of notice, regard must be had to the circumstances
at the time of the contract. However, Jansen JA was not dealing with
a notice of termination of a contract; he was dealing with a
demand
made by a contracting party on the other contracting party to perform
an obligation in terms of their contract.
[19] Whether the notice period of six months was reasonable must of
course be determined in the light of all the relevant circumstances.
The court
a quo
held that the notice of termination left the
respondent with insufficient time to regulate its affairs. However,
it does not appear
from the judgment why it was of that view or what
it considered to be a reasonable time for the respondent to regulate
its affairs.
[20] Asked in the court
a quo
what a reasonable notice period
would have been Mr A Saeed, one of the partners of the respondent,
said 20 years. Before us counsel
for the respondent submitted that
one year would have been a reasonable notice period. He could,
however, not suggest why one year
would be reasonable but six months
not.
[21] Mr M Saeed, another partner of the respondent, who effectively
runs the business of the respondent, testified that the main
reasons
why the respondent could not regulate its affairs within six months
were the overheads and the commitments the respondent
had in respect
of the mortgage bond and the four additional trucks purchased by it.
At the date of termination approximately R1,6 million
was still
outstanding in terms of the mortgage bond, R116 662 (or seven
instalments) in respect of the acquisition of the two
new trucks and
three instalments in respect of the purchase price of the two
second-hand trucks.
[22] However, M Saeed testified that he thought that the property was
worth about R4,5 million and that one ought to be able to find
a
tenant therefor. In respect of the vehicles he testified that he
thought that the respondent would be able to sell them for their
market value. In the circumstances the capital expenditure of the
respondent and the monthly payments which the respondent still
had to
make on the effective date of the notice of termination would, in my
view, not have prevented the respondent from properly
regulating its
affairs in a period of six months.
[23] I should not be understood to say that the ability to regulate
one’s own affairs is the only factor to be taken into account
in
determining what a reasonable notice period would be. Capital
expenditure which is not recoverable otherwise than through a
continuation
of the contract may for example, in appropriate
circumstances, be a factor to be taken into account. Reasonableness
may require that
time be allowed to reap the benefits of such capital
expenditure. This is not such a case.
[24] On behalf of the respondent it was contended that the fact that
the distribution of the appellant’s product was the sole business
of the respondent and that the contract between the parties had
endured for nine years justified a longer notice period. There is
in
my view no logic in this generalisation. In each case one has to have
regard to all the relevant circumstances. Had the distribution
of the
appellant's product been intertwined with other businesses the
respondent may conceivably have required a longer period to
regulate
its affairs. Similarly, it is not difficult to conceive of
circumstances where, in the case of a contract of short duration,
reasonableness would require a longer notice period than in the case
of a contract of longer duration. In any event the submission
that,
because of a certain consideration, a longer period should have been
allowed is unhelpful if no reason is given why a six month
notice
period is unreasonable.
[25] In
Decro-Wall International SA v Practioners in Marketing
Ltd
7
Sachs LJ considered a less than 12 month notice period unreasonable
as neither of the contracting parties would have entered into
the
agreement at the time that the notice was given on the basis that it
could be terminated on less than 12 months’ notice. Counsel
for the
respondent submitted that the parties in the present case would
likewise not have been willing, on the date when notice of
termination was given, to conclude the initial agreement on the basis
of a six month notice period. I do not think that there is,
on the
evidence, any basis for the submission. If in all the circumstances
six months’ notice of termination is reasonable there
is no reason
to think that the respondent would not have entered into the
agreement on the basis that it could be terminated on six
months
notice. Even if it is accepted that the respondent would not have
entered into an agreement for a six month period only, it
does not
follow that it, in the hope that the contract would last much longer,
would not have entered into an agreement which could
be terminated on
six months' notice.
[26] It was submitted that, by encouraging the respondent to expand
its business and by financing the acquisition of additional vehicles,
the appellant represented that the contract would not be terminated
before expiry of the time allowed by the appellant for the repayment
of the amounts advanced by the appellant to the respondent, in
respect of the acquisition of the four trucks. However, such a
representation
or any reliance thereon was never pleaded by the
respondent. Moreover, the respondent never testified that it
understood the appellant
to have made such a representation or that
it relied on such a representation. As stated above the respondent’s
case was that the
contract could not be terminated at the election of
the appellant, alternatively that it could only be terminated on
reasonable notice.
The fact that the respondent expanded its
operations can of course not be ignored and is not ignored when the
reasonableness of the
notice period is adjudged in the light of the
circumstances pertaining at the time when the notice of termination
was given.
[27] In my view six months is
prima facie
a reasonable notice
period. I do not think that a longer period than six months would
have placed the respondent in a more favourable
position as regards
the realisation of its assets, finding a tenant for its warehouse or
diverting its business in another direction.
It would still have had
to comply with its obligations in terms of the contract and would
only have been able to realise its assets,
let its warehouse or
divert its business in another direction towards the end of the
notice period. The respondent has not tendered
any evidence to the
contrary. For these reasons the appeal should be upheld.
[28] The following order is made:
The appeal is upheld with costs including the costs of two counsel.
The order by the court
a quo
is set aside and replaced with
the following order:
‘The plaintiff’s action is dismissed with costs including the
costs of two counsel and the costs of the application under case
no.
9065/99.’
_______________
STREICHER JA
Harms JA)
Brand JA)
Southwood AJA) CONCUR
Van Heerden AJA)
1
Putco Ltd v TV & Radio Guarantee Co (Pty) Ltd and Other
Related Cases
1985 (4) SA 809
(A) at 828A-B.
2
Techni-Pak Sales (Pty) Ltd v Hall
1968 (3) SA 231
(W) at
236D-237A; and
Van den Berg v Tenner
1975 (2) SA 268
(A) at
277D-F.
3
1985 (4) SA 809
(A) at 832H.
4
Putco supra
at 831C.
5
At 831B-C.
6
1972 (2) SA 150
(A) at 177E-G.
7
[1971] 2 All ER 216
(CA) at 230d-e.