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[1993] ZASCA 55
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Elgin Brown & Hamer (Pty) Ltd. v Industrial Machinery Suppliers (Pty) Ltd. (272/92) [1993] ZASCA 55; 1993 (3) SA 424 (AD); (1 April 1993)
Case No 272/92
IN THE SUPREME COURT OF SOUTH AFRICA APPELLATE DIVISION
In the matter between:
ELGIN BROWN & HAMER (PROPRIETARY) LIMITED
Appellant
and
INDUSTRIAL MACHINERY SUPPLIERS
(PROPRIETARY) LIMITED.
Respondent
CORAM:
HOEXTER, SMALBERGER, F H GROSSKOPF, JJA et VAN COLLER, KRIEGLER
AJJA
HEARD:
19 March 1993
DELIVERED:
1
April 1993
J U D G M E N T
HOEXTER, JA
2
HOEXTER, JA
The appellant company ("the plaintiff") carries on the
business of marine engineering at Durban. The respondent company ("the
defendant")
is an industrial machinery supplier and repairer whose main place of
business is at Pinetown. In April 1991 the plaintiff instituted
an action in the
Durban and Coast Local Division against the defendant (which was cited as the
first defendant) and two co-defendants.
For purposes of this appeal no reference
to the claims against the co-defendants is necessary. Relevant to the
plaintiff's action
are two contracts, as varied from time to time, which are
respectively described in the particulars of claim as "the first agreement"
and
"the second agreement." Against the defendant the plaintiff claimed payment of
damages in the sum of R1 482 179,48 flowing from
the defendant's alleged
3
breaches of the second agreement.
The defendant excepted to the
plaintiff's particulars of claim on the ground that they lacked averments
necessary to sustain a cause
of action. Mall AJ upheld the exception with costs,
including the costs of two counsel. With leave of the court a quo the plaintiff
appeals against the whole of the judgment.
The terms of the first and second agreements are set forth in paragraphs 5 to
12 of the particulars of claim. The main content of
these paragraphs may be
shortly stated. The first agreement was concluded in June 1987 between the
plaintiff and Emopesca E.E. ("Emopesca").
In terms thereof the plaintiff
undertook, against payment of a certain contract price, to overhaul two fishing
trawlers, the Sistallo
and the Fontaeo, including the reconditioning of their
diesel engines, within a period of twelve weeks of a defined date. If this
period were exceeded the
4
plaintiff would be liable to Emopesca for penalties. After September 1988 the
first agreement was varied by a further agreement that,
while the Sistallo would
still be reconditioned, the Fontaeo would be scrapped, save that its two engines
would be reconditioned
by using parts from the two engines of the
Sistallo.
The second agreement, which was concluded in November 1988, was a
contract between the plaintiff and the defendant. In terms thereof
the
reconditioning of the aforesaid two engines would be carried out at a certain
contract price by the defendant as a sub-contractor
to the first agreement. The
defendant would use the spares available from all four engines. Prior to
delivery the engines would be
thoroughly tested on a test-bed, and the engines
would be installed and run in by the defendant. The defendant's Standard
Conditions
of Contract would apply to the second agreement.
5
In June 1989 Emopesca and the plaintiff and the defendant agreed to vary the
first and second agreements. The estimated budget price
for completion of the
two engines was increased and time limits were set for the reconditioning of the
two engines by the defendant.
During September 1989 the plaintiff and the
defendant further varied the second agreement by agreeing (i) that prior to
delivery
the engines would not be run on a test-bed; (ii) the engines would be
installed in the Sistallo by a technician of the defendant
assisted by labour
from the plaintiff; and (iii) the engines would be commissioned by the defendant
after they had been installed
in the Sistallo.
The performance of the engines after they had been installed is described in
paragraphs 13 to 17 of the particulars of claim. They
initially ran successfully
for some thirty hours. On 9 January 1990, when tested under
6
full load conditions, the port engine failed within five minutes. Both
engines were removed and stripped and found to have been damaged
during their
commissioning. The engines were taken to the defendant's premises where they
were once again stripped and overhauled,
whereafter at the beginning of March
1990 the defendant returned the engines to the Sistallo. On 28 March 1990, and
after being installed,
the port engine was tested at Durban and again failed.
Both engines were again removed, stripped and found to be damaged.
The computation of the damages claimed by the plaintiffs from the defendant
is set forth in paragraphs 23 to 25 of the particulars.
The plaintiff alleges
(i) that in terms of the first agreement it was obliged to buy two new engines
for use in the Sistallo at a
cost of R199 646; (ii) that it suffered damages in
the sum of R745 839 being wasted costs for items installed on the Sistallo which
were
7
destroyed during the refitting of the engines, items which
became
redundant when the new engines were installed,
labour and wasted fuel costs; (iii) that it suffered loss
and damages in
the sum of R536 694,48 being the total of
penalties payable by it to Emopesca
and loss of interest on
the contract price payable by Emopesca calculated
from 12
November 1989 to 31 May 1990.
Mention has already been made of the fact that it
was a term of the second agreement that the defendant's
Standard Conditions of Contract ("the SCC") would apply
thereto. The plaintiff annexed to its particulars of
claim a copy of the SCC. The exception noted by the
defendant is based on the provisions of clause 8 of the SCC
in which reference is made to the defendant as "IMS".
That clause is in the following terms:-
"Whilst reasonable care will be taken to ensure that first class materials and
workmanship will be used in the execution of the contract
IMS will not be liable
for any loss or damages
whatsoever
8
direct or indirect, including penalties or liquidated damages, including
consequential damages, due to late or defective delivery,
defective, faulty or
negligent workmanship or material, or to any act, default or omission of its
employees, suppliers or sub-contractors,
unless specifically negotiated with IMS
and confirmed in writing. Any claim shall be limited to the repair or
replacement of any
defective or deficient parts, it being at the discretion of
IMS whether to repair or replace in every instance. It is a condition
precedent
to any such claim that the defective or deficient parts shall be delivered at
the purchaser's expense to an IMS workshop
or a workshop nominated by
IMS."
In its notice of exception . the" defendant
recited the
provisions of clause 8 of the SCC and then stated:-
"The amounts claimed by the Plaintiff in paragraphs 23, 24 and 25 are damages in
respect of which liability is excluded in terms
of the said clause."
The allegations in paragraphs 13 to 17 of
the
particulars of claim, in which the performance
of the
engines subsequent to their installation in January 1990
is
described, have already been summarised. At this juncture
9
it is convenient to see in what fashion the plaintiff characterised the
defendant's alleged breaches of the second agreement on which
the claim for
damages is based. This appears from the averments set forth in paragraphs 18(a)
and 18(b) of the particulars of claim
which are quoted hereunder in full:-
18(a)
The First Defendant accordingly breached its
obligations in
terms of the second agreement, as
amended, in that:-
(i) It supplied to the vessel on
the first occasion two engines that, as a result of negligence or defective
workmanship on the part
of the First Defendant's employees, had not been
reconditioned to a reasonable and acceptable standard;
(ii) It supplied to the vessel on the second occasion two engines that, as a
result of negligence or defective workmanship on the
part of the First
Defendant' s employees, had not been reconditioned to a reasonable and
acceptable standard.
18(b)
The First Defendant's breaches aforesaid constituted
fundamental breaches of its
10
obligations in terms of the second agreement in
that:-
(i) Its reconditioning of the two engines
in terms of that agreement; and/or (ii) Its performance in terms of
that
agreement;
were both totally ineffective and useless for the purpose for which they were
intended."
Clause 8 of the SCC contains a limitation
of
liability clause couched in the widest possible
terms.
On the face of it the exclusion of liability "for any loss
or
damages" in the clause refers to every kind of loss or
damages. The damages
claimed by the plaintiff are alleged
to flow from "negligence or defective workmanship" of the
defendant's
employees. Clause 8 specifically excludes
liability for damages "due to ....defective .... or
negligent workmanship....or to any act, default or omission
of its employees . . . ." If clause 8 means what it says
then it relieves the defendant from liability for loss
flowing from precisely the breaches of contract pleaded by
11
the plaintiff in paragraph 18 of its particulars.
Mr Shaw, who argued the appeal on behalf of the
plaintiff, sought to avoid such a construction of clause 8
by reliance on
two alternative arguments. The first
argument was based on the introductory
words which preface
the exclusionary provisions and which read:-
"Whilst reasonable care will be taken to ensure that first class materials and
workmanship will be used in the execution of the contract
...."
Mr Shaw submitted that the words just quoted
created on the
part of the defendant a contractual obligation
which
operated reciprocally with the exclusionary provisions in
the remainder of clause 8. From this it followed, so the
argument
proceeded, that in order to invoke the protective
effect of the exclusionary provisions it was a legal
precondition that the plaintiff should plead and prove that
it had discharged its obligation stipulated in the opening
words. This argument appears to me to be untenable. In
12
Agricultural Supply Association v Olivier 1952(2) SA 661
(T) (Olivier's case) the issue on which an appeal from the
magistrate's
court turned was the meaning of a non-warranty
clause by which the supplier
of seeds excluded its
liability in certain circumstances. It was held that no
cause of action on
the part of the buyer lay, and that the
exclusion of liability was unaffected
by a statement
preliminary to the operative clause that the supplier took
'the utmost care to supply seeds, plants, etc., true to
name and
character'. De Wet J (at 664B-H) endorsed, as
being in accordance with our law, and applied the
following principle cited by Halsbury Laws of England vol
10 para 352 (Hailsham ed):-
"In the construction of an instrument the recitals are subordinate to the
operative part, and consequently, where the operative part
is clear, this is
treated as expressing the intention of the parties, and it prevails over any
suggestion of a contrary intention
afforded by the
recitals."
13
Olivier's case (supra) was discussed in Wijtenburg Holdings, trading as
Flaming Dry Cleaners v Bobroff 1970(4) SA 197(T). In the latter
case Viljoen J
(at 206G)
and Phillips AJ (at 214C) came to the conclusion that
the
decision in Olivier's case was clearly wrong. I am, with
respect,
unable to agree with that conclusion.
In the instant case the operative part of clause
8
appears to me to be both clear and unambiguous. It is
unnecessary to enlarge upon this topic because in any event
it seems to me that in the present case the recitals do not
in fact reflect any intention contrary to the operative
part. The recitals are ushered in by the word "Whilst".
It seems to me that it would involve a strained and
unnatural interpretation to read the recitals as meaning:-
"On condition that reasonable care will be taken to ensure...."
I agree with Mr Wallis, who appeared for the defendant,
that the recitals are properly to be construed as
14
signifying no more than
"Notwithstanding the fact that reasonable care will be taken to ensure
..."
There is, I consider, a compelling reason which
militates
against the interpretation supported by counsel for
the
plaintiff. That interpretation would create an antithesis
between the
recitals and the operative part which would
entirely deprive the exclusionary
provisions of contractual
force.
I turn to Mr Shaw's alternative argument.
While
conceding that clause 8 used words of wide
import counsel
pointed out that its exclusionary terms did not cover the
eventuality of "complete non-performance" on the part of.
the plaintiff. Next it was urged upon us that no sensible
reason existed for drawing a distinction between (a) the
situation in which a party contractually bound makes no
attempt whatever to perform his part of the contract and
(b) the situation in which the contracting party makes
15
attempts towards performance which are completely ineffectual. In neither
case, so it was said, does any benefit accrue to the other
party to the
contract. Since in paragraph 18(b) of its particulars the plaintiff had pleaded
"complete non-performance" it was submitted
that clause 8 did not relieve the
defendant from liability for the plaintiff's loss.
I am unable to accept Mr Shaw's alternative argument. Its roots are to be
found in the outmoded English doctrine of fundamental breach
which, in the
matter of interpreting exemption clauses, has never been part of our law.
According to the doctrine, if I understand
it correctly, the position in English
law was at one stage thought to be that an exemption clause, no matter how
widely expressed,
availed the party seeking to invoke it only when he performed
his contract in essential respects. It did not avail him when he was
guilty of a
breach going
16
to the root of the contract - see the remarks of Denning LJ
in Karsales
(Harrow) Ltd v Wallis
[1956] 2 All E R 866
(CA) at 868I - 869A. The effect in the current state of
English law of a
"fundamental breach" of contract upon a
provision in the contract exempting
the party from
liability is stated thus by Halsbury, Laws of England, 4th
ed. vol 9 para
372 at pp 247 - 8:-
"At one time it was considered that there was a rule of law whereby no exclusion
clause could protect a party from liability for
a 'fundamental breach' or breach
of a 'fundamental term' of the contract. It is now clear that no such rule of
law exists and that
the earlier cases are only justifiable on grounds of
construction of the individual contract involved. The true principle is that
in
all cases the question is one of construction, and the court must determine
whether the exclusion clause is sufficiently wide
to give exemption from the
consequences of the breach in question. If the clause is sufficiently wide the
result may be that the
breach in question is reduced in effect or not made a
breach at all by the terms of the clause, notwithstanding that without the
clause it would be a breach of sufficient gravity to allow the other party to be
discharged from the contract."
17
See further: Suisse Atlantique Societe d'Armement Maritime SA v NV
Rotterdamsche Kolen Centrale
[1966] 2 All ER 61
(HL); Photo Production Ltd v
Securicor Transport Ltd
[1980] UKHL 2
;
[1980] 1 All ER 556
(HL); Ailsa Craig Fishing Co Ltd v
Malvern Fishing Co Ltd and another et e contra
[1983] 1 All ER 101
(HL).
A
South African decision on which Mr Shaw sought to rely was Hall-Thermotank Natal
(Pty) Ltd v Hardman 1968(4) SA 818 (D). In that
case, which also involved the
construction of an exemption clause it was argued (see 834 in fin) that the
clause would not protect
the plaintiff in a case of fundamental breach of
contract. The court found that there was a fundamental breach and upheld the
argument
(836E). The learned judge (Henning J) began by saying (at 835B-C) that
he knew of no rule of our law to the effect that an exemption
clause did not
avail a party who had committed a fundamental breach of contract. That
18
notwithstanding he went on to say (at 835 E-F):-
"In spite of the emphatic language of the exemption clause in this case it
appears to me that the parties could hardly have intended
that the plaintiff
would be exonerated from liability if it failed to perform its obligations at
all, or if its performance proved
useless, or if it committed a breach going to
the root of the contract. After all the parties must have had in mind that both
of
them would carry out the terms of the contract. It is most unlikely that they
contemplated that the plaintiff would be excused from
the consequences of a
fundamental breach. The clause is in my view to be construed as affording
limited protection to the plaintiff
against faults or imperfections in the
product of its labours, which is otherwise substantially in accordance with the
contract.
Mr Feetham conceded that, if the plaintiff committed a fundamental breach, or a
breach which went to the root of the contract, the
exemption clause would not
apply."
In my judgment the concession by counsel to
which Henning J
referred was incautiously made, and it represents an
incorrect statement of the legal position. So too does the
learned judge's consequential finding (at 836E):-
19
"....that a complete failure of the plant entitled the defendant to repudiate
the contract. I am satisfied that the exemption clause
does not
operate...."
In the instant case one is not
concerned with total non-performance on the part of the defendant in the sense
that the defendant did
nothing whatever to perform under the second agreement.
It is therefore unnecessary to consider whether, had there been such complete
non-performance, the defendant would have been able to invoke the protection of
clause 8. Here the defendant in fact performed, however
much such performance
may have disappointed the expectations of the plaintiff.
The extent of positive malperformance may no doubt in a particular case be
such that the plaintiff is no better off than he would
have been had the
defendant been guilty of total non-performance. In my view, however, total
non-performance on the one hand and
positive malperformance on the other are in
the law of contract two
20
separate and distinct concepts; and it is impermissible to treat them as
being identical. The extent of a breach and the question
whether it is
fundamental or goes to the root of the contract are matters relevant in
determining whether there is a right of rescission.
But the fact of a
fundamental breach is irrelevant and alien to the construction of an exemption
clause and cannot govern its compass.
In the instant case the exemption in
clause 8 serves to protect the defendant even if it were to have committed a
fundamental breach
of the second agreement. Cf the remarks of Didcott J in
Government of the Republic of South Africa (Department of Industries) v Fibre
Spinners & Weavers (Pty) Ltd 1977(2) SA 324(D) at 339B-F.
In my judgment Mall AJ correctly upheld the defendant's exception. Counsel
were ad idem that, should this court so conclude, the order
in the court a quo
should be altered to provide for the striking out of paragraphs
21
23, 24 and 25 of the particulars of claim and the prayer
relating thereto.
Although that is how the prayer to the
notice of exception read, Mall AJ
merely allowed the
exception with costs. The question arises
whether
counsel's suggestion should be followed. I do not think
so. The
nature and effect of an order upholding an
exception to a combined summons on
the ground that it does
not disclose a cause of action were recently
considered in
the as yet unreported judgment of this court in the case of
Group Five
Building Ltd v The Government of the Republic of
South Africa (Case No 400/91, delivered on 18 February
1993). At page 26 of the typed judgment Corbett CJ said
the following:-
"As far as I am aware, in cases where an exception has successfully been taken
to a plaintiff's initial pleading, whether it be a
declaration or the further
particulars of a combined summons, on the ground that it discloses no cause of
action, the invariable
practice of our Courts has been to order that the
pleading be set aside and that the plaintiff be given
leave,
22
if so advised, to file an amended pleading within a certain period of
time."
In the present case an order upholding the
defendant's
exception results in the plaintiff's particulars of
claim
against the defendant (the first defendant in the action)
having to
be set aside. It is ordered as follows:-
(1) The appeal is dismissed with costs, including the costs occasioned by the
employment of two counsel.
(2) The order of Mall AJ is altered to read: "a) The exception is
upheld.
b)
The plaintiff's particulars
of claim as against the first defendant are set aside and the plaintiff is given
leave, if so advised,
to file amended particulars of claim within thirty
days.
c)
The plaintiff is to pay the costs,
including the costs occasioned by the employment of two
counsel."
23
(3) The period of thirty days referred to in paragraph 2(b) above will run
from date of delivery of this judgment.
G G HOEXTER, JA
Smalberger, JA )
F H Grosskopf, JA ) Concur
Van Coller, AJA )
Kriegler, AJA )