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[1995] ZASCA 45
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H Merks & Co (Pty) Ltd. v B-M Group (Pty) Ltd. and Another (270/93) [1995] ZASCA 45; 1996 (2) SA 225 (SCA); (10 May 1995)
Case No 270/93
IN THE SUPREME COURT OF SOUTH AFRICA
(APPELLATE DIVISION)
In the matter between:
H MERKS & CO (PTY) LIMITED
Appellant
and
THE B-M GROUP (PTY) LIMITED
First Respondent
C P F DISTRIBUTORS
CC
Second Respondent
CORAM
: CORBETT CJ, HEFER, NESTADT, F H GROSSKOPF et HOWIE JJA
Date heard: 3 March 1995
Date delivered: 10 May 1995
JUDGMENT NESTADT. JA
:
The issue in this; appeal is whether the first
respondent
2
("B-M") repudiated a written agreement entered into by it with the appellant
("Merks"). If it did, the appeal succeeds. If not, the
appeal fails.
Part of the business of B-M was the manufacture and marketing of hair care
products. It began this activity in March 1986. The products
were known as the
Clairol Professional Formula ("Clairol") range of products. As will be seen the
range consisted of a number of
items. Merks, suppliers of hairdressing
requisites, was appointed one of B-M's distributors in the Transvaal. The
products were purchased
by hairdressing salons for use by their customers. By
about October 1988 B-M had decided to discontinue the manufacture and sale
of
the Clairol products. The business was not profitable. Mr Lars Fischer, a
consultant employed by Merks,
3
heard of B-Ms decision. He thought that if Merks was appointed sole
distributor for the whole country, it could successfully market
the products.
With this in mind he met with B-M's managing director, a Mr Paul Woolfson (as
also with the company's sales manager,
a Mr Rodney Hesketh-Maré). They
were amenable to his proposal. The result was the agreement to which I earlier
referred. It
will, in due course, be necessary to analyse the agreement in some
detail and to quote certain clauses. For the moment, however,
it suffices to
merely outline its effect. The agreement was entered into and commenced on 15
November 1988. The parties to it were
B-M and Merks. Merks was for a period of
five years appointed "the exclusive sales agent, distributor and purchaser" of
Clairol products
for South Africa and certain of its
4
neighbouring states. However, in terms of clause 2 of the agreement, Merks
was given the right to nominate a company or close corporation
"who shall on its
behalf handle all matter's regarding the [Clairol] range of products". Merks
committed itself to purchasing a certain
quantity of Clairol products each year.
The parties would in this regard agree on a forecast which Merks was obliged to
submit annually,
in advance. To ensure that B-M had stocks available, Merks also
undertook to furnish, by way of further (quarterly) forecasts, details
of the
purchases to be made. As will appear, the issue of forecasts is of importance.
Even more so, is the question of the price
of the products. It, too, is dealt
with in the agreement. Those for 1989 would be B-M's prices as at October 1988.
For the ensuing
years, however, it is stipulated that they may,
5
subject to certain qualifications, be increased. Clause 22 provides for the
agreement to be replaced by a more comprehensive contract
prepared by B-M
"within a reasonable period of time". (Such contract was never concluded.)
During the months that followed, the agreement was implemented. To begin
with, and pursuant to clause 2, Merks caused the second respondent
("CPF") to be
formed and nominated. Thereafter orders were placed by CPF with B-M who duly
executed them. Such orders included products
to the value of R62 816.07 sold and
delivered during the period from September 1989 to November 1989. At about this
time, however,
problems arose between the parties. They culminated in B-M on 13
March 1990 stating in a letter addressed to Merks that the agreement
was
"henceforth
6
terminated".
Thus it was that the business relationship between the parties came to an
end. Litigation took its place. B-M issued summons in the
Witwatersrand Local
Division claiming payment from Merks of the R62 816.07 referred to earlier.
Subsequently, by way of an amendment,
CPF was cited as a second defendant. It
was now alleged that CPF, alternatively Merks, had purchased the goods. Payment
was accordingly
claimed from CPF, alternatively Merks. In its plea CPF denied
liability. Merks, on the other hand, admitted that it had purchased
the goods
and that it was liable to B-M for the amount claimed. Payment was sought to be
excused on the basis of a counterclaim which
Merks averred it had against B-M
and which it pleaded should first be adjudicated on. The counterclaim was
for
7
damages in the sum of a little over R8,2 m. Merks' cause of action was that
B-M had repudiated the agreement and that Merks had accepted
such repudiation.
The damages claimed represented the loss of profit which it was alleged Merks
had suffered over the remaining term
of the agreement as a result of its
premature termination. In its plea in reconvention B-M raised a number of
defences in support
of its denial that it had repudiated the agreement. The
matter came to trial before Mynhardt, J. At the request of the parties, and
in
relation to the claim in reconvention, an order in terms of Rule 33(4) was made
that certain agreed issues relevant to the question
of whether B-M repudiated
the agreement first be determined and that in the meantime proof of damages
stand over. Somewhat surprisingly
(seeing that the liability of CPF on the
8
claim was in issue), Merks and CPF tendered evidence first. They relied on the
testimony of Fischer. Evidence on behalf of B-M was
given by Woolfson and
Hesketh-Maré. It was held that B-M had not proved that CPF was liable for
payment of the purchase price
of the products. Accordingly, B-M's claim against
CPF failed. As regards the counterclaim, the court found that in law there had
been no repudiation of the agreement. Consequently, the counterclaim was
dismissed. It followed that judgment of the claim (in the
sum of R62 816.07) was
granted against Merks. With the leave of the trial judge Merks appeals against
the dismissal of the counterclaim.
With the leave of this Court B-M
cross-appeals against the dismissal of its claim against CPF (as well as the
refusal of an amendment
to the plea to the counterclaim which B-M had sought
during the trial).
9
Both cross-appeals are conditional on the appeal succeeding.
It is
necessary at this stage to examine the course of events which gave rise to the
dispute between the parties and B-M's notification
in March 1990 that it had
terminated the agreement. They concern the forecasts which Merks was obliged to
submit and the prices at
which the products were to be sold by B-M. These issues
must be considered with clauses 3, 4 and 5 of the agreement in mind. They
provide:
"3. This agreement shall have a tenure of 5 years. Merks will be committed to
achieving certain forecasts, such forecasts being mutually
agreed upon yearly in
advance. It is agreed that the forecast for 1989 will be R286 000,00. Such
forecast is at the transfer price
existing in October 1988. The transfer price
is the price paid by Merks for the goods received.
4. The transfer price may be increased by mutual agreement from time to time.
Such increases will only be effected at reasonable intervals
taking cognisance
of
10
the effect they may have on the prevailing market conditions. The transfer price
for the stocks on hand at B-M's warehouse (see attached
stock list) will not be
increased until such stocks are depleted. 5. To ensure that stocks are always
available for sale to Merks,
it is a requirement that a phased quarterly
forecast be completed for the year and updated for the 12 months on a rolling
basis.
Stocks forecast and not taken off by the year end must be taken by Merks
in the first quarter of the following
year."
I have already stated that (save for the
non-payment
referred to) there was no problem in the
first year of the agreement's
operation (ending 15 November 1989 but which I
refer to as 1989).
The quantity and type of products which Merks forecast it would
(and did) purchase and the price of the goods were agreed to (largely,
as will have been seen, in clause 3 of the agreement itself). When,
however, it comes to 1990, a different picture emerges. The
following are its components (as they appear, for the most part, from
11
an exchange of letters between the parties):
(i) It was common cause that at an early stage B-M agreed to Merks' forecast
of R620 000 for 1990,
(ii) Thereafter, on 11 September 1989, in a letter to B-M, Merks submitted
what is termed a "suggested" or "preliminary" forecast
or projection (which
Merks said
it "would like to firm up closer towards the end
of the year"). In the letter eighteen products (being the Clairol range) are
listed and in each case the number of units which it
was envisaged would be
purchased. But there is no reference to individual prices or the total price.
(iii) On 30 October 1989 B-M
(as it was entitled to do,
12
seeing that the stocks on hand and referred to in clause 4 had been
exhausted) informed Merks what its 1990 prices would be. Such
prices were
between 36% and 150% higher than B-M's 1989 prices. This was because, so B-M
stated, "some of these products have not
been produced and costed for over two
years" and "it was necessary to update all costs and sources of materials".
(iv) Fischer objected to the increased prices. At his request, Woolfson
undertook to reconsider the amount of the increase.
(v) Woolfson did this. He was prepared to reduce the increase. On 6 December
1989 he advised Fischer what
13
B-M's adjusted 1990 prices would be. At the same time it was pointed out that
on the basis of Merks' provisional forecast (see (ii)
above) and at B-M's
increased prices, products totalling only R464 753 were to be purchased. This
did not meet the forecast of R620
000 (see (i) above). Merks was also requested
to supply B-M with "quarterly forecasts as soon as possible to enable us to plan
our
batch production on this basis". Such forecasts would have to be adjusted
"for the additional units to make up the R620 000 (we presume
this would be the
last quarter)". (vi) Fischer remained dissatisfied with B-M's proposed prices.
In a letter to B-M dated 13 December
1989
14
(emanating from CPF but obviously written on behalf of Merks) he said that
the average price increase was still just under 50%. He
asked that the intended
increase be reconsidered; that it be "more in line with the ruling inflation
rate"; failing this "we would
find it extremely difficult, if not impossible, to
achieve the intended objectives".
(vii) B-M's response on 15 December 1989 was that because the 1989 prices were
already two years old and that since then costs had
risen, it could not reduce
the increase in prices.
(viii) Fischer was not persuaded. In a
letter dated 15 December 1989 he warned B-M that "it is impossible to
15
pass this 50% cost increase on to the consumers". In his evidence Fischer
confirmed that such consumers could not afford to pay the
increased price at
which the products would have to be sold to them if Merks were to pay the
increased prices proposed by B-M. (ix)
B-M replied (on 20 December 1989) that
the prices referred to in its letter of 6 December 1989 ((v) above) were
"final". Merks was
told that we "await your acceptance and quarterly forecast as
soon as possible". (x) Merks never supplied the quarterly forecast
either as
adjusted or at all. Nor did it agree to B-M's price demands. On the contrary,
and as the trial judge found, it had by this
time become clear that there was
a
16
stalemate between the parties and that Merks would not
place
any orders with B-M for 1990. Indeed, it did not.
It was in these
circumstances that B-M on 13 March 1990 purported
to terminate the agreement.
The reason given was that "you have not
acceded to our price structure for
1990".
I think I can best sum up the parties' respective contentions, as they emerge
from the pleadings in reconvention read with the Rule
33(4) order, in the
following way. The pith of Merks' allegations was that B-M was not unilaterally
entitled to increase prices and
that its attempt to do so and its purported
termination of the agreement on 13 March 1990 was a repudiation of the
agreement. The
plea in reconvention denies this. The effect of what is pleaded
in amplification is that the parties failed to agree on (i) the forecasts
17
for 1990 or (ii) the prices of the products for that year (as contemplated in
clauses 3 and 4 respectively) and that the agreement
had accordingly terminated
or was unenforceable. The court a
quo
upheld this defence. It was found
that the agreement was not enforceable (after its first year).
Plainly, if this conclusion was correct, there can be no question of any
repudiation of the agreement by B-M. There would have been
no obligation by B-M
to supply Merks with any Clairol products. Whether there was such an obligation,
depends on a proper interpretation
of the agreement. It is of a kind which is
not uncommon (see, eg, the one which featured in
Decro-Wall International SA
vs Practitioners in Marketing Ltd
[1971] 2 All ER 216
(CA)). One could call
it a distribution or concessionaire
18
agreement. I do not believe that Mynhardt J intended to find that it did not
give rise to a
vinculum juris
between the parties. It did. A reciprocal
contractual relationship was created. As such it was capable of affording Merks
a remedy
if for example B-M, during the currency of the agreement, had appointed
someone else to market its products or had sold its products
directly to
customers (see the
Decro-Wall
case). But this is not the position here.
The gravamen of the counterclaim is that B-M, in breach of its obligations,
refused to
supply Merks with Clairol products during 1990 and the three
subsequent years at the 1989 prices. And the loss of profits claimed
by Merks is
calculated on this basis. So it does not suffice for Merks to prove merely that
the agreement was enforceable in general
terms. What Merks had to establish was
that, the parties
19
having failed to agree on the price of the products for 1990, the 1989 prices
were to apply; and, of course, either that it duly submitted
the forecasts
required for 1990 or, if it failed to, that this did not avail B-M.
Let me immediately deal with the issue of the forecasts. A great deal of the
argument was devoted to it. As already indicated there
were two kinds of
forecast that were required from Merks. One (in terms of clause 3) had to be
mutually agreed upon in advance. Its
purpose was to define, in monetary terms,
what amount of Clairol products Merks was to purchase during the ensuing year.
The other
(in terms of clause 5) was a more detailed forecast identifying the
products required and the quantities thereof. It will be recalled
that B-M's
complaint, as pleaded, related to the clause 3
20
forecast. As I understand the judgment a
quo
it was that the forecast
of R620,000 was not a proper one (because it did not specify the number of units
of each product required
during 1990); and that B-M was accordingly not obliged
to supply Merks with any products for that year. I am not sure that this is
a
sound conclusion. It may be that Mynhardt J has imported into clause 3 what
clause 5 provides for. It is, however, unnecessary
to decide this or the other
arguments advanced by Mr
Horwitz
on behalf of Merks in support of the
submission that the forecast of R620,000 was a proper one. I shall assume that
it was. Even
so, and for the reasons which follow, I do not think the appeal can
succeed.
This brings me to a consideration of the effect of the parties having failed
to agree on prices for 1990. Undoubtedly, the
21
agreement contains a flavour of sale. Rather I should say that it provides
the framework for the conclusion of a series of purchases
which Merks would,
from time to time, make from B-M in order to give effect to its right to market
the Clairol range of products.
In other words, there would (to quote Sachs LJ in
the
Decro-Wall
case at 226 d) be "a continuing number of individual
transactions for the sale and delivery of goods" (by B-M to Merks). These would
be grouped together on an annual calendar year basis, commencing in 1989. The
one reason for this was that the forecasts which Merks
was obliged to furnish in
terms of clauses 3 and 5 were on a yearly basis. The other was, as appears from
clause 4, that it was envisaged
that there would be periodic increases of
prices. These were to be "from time to time" and "at reasonable intervals". But
it was
not in
22
dispute that here too this would be on an annual basis. Of course, there
would have to be "mutual agreement" on such increases.
This being so, and as Mynhardt J held, the agreement
was a species of
pactum de contrahendo,
ie an agreement to make a
contract in the future. Such a contract may be enforceable (Christie:
The Law of Contract in South Africa
, 2nd ed, 40). In
casu
whether
it is depends on the price of the products having (post 1989) been
fixed or at least being ascertainable. The principle to be applied was
stated by the present Chief Justice in
Westinghouse Brake and
Equipment (Pty) Ltd vs Bilger Engineering (Pty) Ltd
1986(2) SA
555(A) at 574 B-C as follows:
"It is a general rule of our law that there can be no valid contract of sale
unless the parties have agreed, expressly or by implication,
upon a purchase
price. They may do so by fixing the amount of the price in their contract or
they may agree
23
upon some external standard by the application whereof it will be possible to
determine the price without further reference to them.
There can be no valid
contract of sale if the parties have agreed that the price is to be fixed in the
future by one
of them This is part of the wider general principle that
contractual obligations must be defined or ascertainable, not vague and
uncertain."
Equally so, an agreement to later negotiate and agree
on a price is
not acceptable (
Hattingh vs van Rensburg
1964(1) SA
578(T) at 582
C;
Letaba Sawmills (Edms) Bpk vs Majovi (Edms) Bpk
1993(1) SA
768(A) at 773 I). If then this is the effect of clause 4, Merks must
fail. Its case was, however, that this is not what the provision
means. The argument was that it was only the increase that had to
be mutually agreed to and not the price; in the absence of the parties
agreeing on an increase the previous, ie original, price remained;
accordingly, the parties having failed to agree on the increase for
24
1990, the 1989 prices applied and the agreement was valid.
A similar argument was rejected by the trial judge and
in my
view rightly so. The language of clause 4 does not warrant
the meaning
contended for. Merks never disputed that a reasonable
interval (see the
second sentence of clause 4) had elapsed. So B-M
was entitled to require
Merks to pay an increased price. This is what
it did. When this happened and
notwithstanding the enjoinder in the
clause that increases had to take
"cognisance of the effect they may
have on the prevailing market conditions"
(i) the old prices fell away
and (ii) in their stead the parties had "by
mutual agreement" (see the
first sentence of clause 4) to fix new (increased)
prices. The
position would, of course, have been different had the
clause
stipulated that failing an agreed increase, the price referred to
in
25
clause 3 would continue to apply after 1989. But (as in
Wasmuth
vs Jacobs
1987(3) SA 629 (SWA) at 633 B-C)it does not.
And to
read clause 4 as doing so would be to make a contract for the
parties.
It would be a singular contract. It would make clause 4 futile.
If
in default of agreement the old prices were to continue there would
be
no incentive for Merks to agree to an increase (cf
Beer vs
Bowden
[1981] 1 All ER 1070
(CA) at 1073 d). In the result what we
are
concerned with is a lack of agreement on prices, not merely a
failure
to agree on an amendment or review of the original prices (so
that
the latter continue to apply).
So much for what may be regarded as a linguistic interpretation. A contextual
approach (including a reference to permissible background
evidence) confirms it.
The parties never
26
contemplated that the initial price would continue to apply subsequent
to
1989. On the contrary, the parties anticipated that prices would
increase. The correspondence referred to bears this out. And so
does the evidence. I content myself with the following extract from
that of Fischer, namely:
"I thought that that price list [for 1989] would rule for the first year.
Prices in my experience with this product range
normally went up once a year As I said yesterday I
experienced previously with the B-M group that the prices were increased once
a year and the price increases were
reasonable increases in line with inflation My Lord I am a
business man. I understand that prices go up".
In these circumstances Merks' construction is not a tenable one. It
would mean that failing an agreed increase, the initial price would
continue to apply throughout the five year duration of the agreement.
No wonder that Merks never at any time advanced it in the pre-
27
litigation correspondence and discussions between the parties. Mr
Horwitz
submitted, however, that it was unthinkable that Merks
would set up a selling organisation with no security of tenure beyond
the first year of the agreement. This is a consideration but not a
very strong one. Fischer himself, as his evidence makes clear,
"expected [the parties] to reach agreement on the price increases".
In any event, the agreement was intended to be an interim one; as
clause 22 shows, it was to be replaced by a more comprehensive
agreement.
On behalf of Merks an alternative argument (not foreshadowed in the pleadings
and not raised in the court below) was relied on. It
was that, either on a
proper interpretation of the agreement or on the basis of an implied term, the
increase had to be
28
a reasonable one; there was accordingly an objective yardstick by which it
could be measured; in this way the price for the years
following 1989 was
ascertainable and the agreement was enforceable. Even assuming that a sale at a
reasonable price is valid (as
to which see
Genac Properties Jhb (Pty) Ltd vs
NBC Administrators CC (previously NBC Administrators (Pty) Ltd)
1992(1) SA
566(A) at 577 G - 578 D), I am unable to agree with the argument. The express
terms of clause 4 negate it. That clause
defines the method by which price
adjustments are to be determined, namely, by the parties agreeing thereto. Where
in a given case
that fails, a court will not usually substitute its own
machinery in the form of a reasonable price. This is what was said in
Sudbrook Trading Estate Ltd vs Eggleton and others
[1981] 3 All ER 105
(CA) especially at
29
114 f - 116 d). According to Templeman LJ, the principle stems from "one
central proposition, that where the agreement on the face
of it is incomplete
until something else has been done by further
agreement between the
parties the court is powerless, because
there is no complete agreement to enforce." In our case the determination of
a reasonable increase (a difficult task I would have
thought) is an alternative
which, on the wording of the agreement is not available, either by way of an
interpretation or an implication.
To sum up. In terms of clause 4, price
increases had to be agreed. In the absence of such agreement in respect of 1990,
the obligation
on B-M to continue to supply Clairol products to Merks became
unenforceable. B-M's letter of 13 March 1990 did not therefore constitute
a
repudiation. The counterclaim was correctly
30
dismissed by the court a
quo
. The appeal must fail.
This brings me
to the cross-appeals. As was stated earlier, they are both conditional on the
appeal succeeding. This being so, Mr
Schwartzman
. on behalf of B-M,
fairly conceded that in the event of the appeal failing, the cross-appeals
should be dismissed with costs including
those of two counsel. The order for
costs is also to include those which this Court reserved when granting B-M leave
to appeal. They
are the costs of the counter-application to the court a
quo
for leave to cross-appeal and the costs of the petition to this Court
to cross-appeal. In this latter regard, however, I feel impelled
to add a rider.
It arises from the fact that a full set of the pleadings, including the summons
and the affidavit opposing an application
of the summary judgment, were annexed
to the
31
petition. These documents comprise 189 pages. It was unnecessary to have done
this. The pleadings are summarised in the judgment a,
quo
(which, of
course, was annexed to the petition). AD Rule 3(5) requires that every
application for leave to appeal furnish succinctly
all information necessary to
enable the court to decide whether leave ought to be granted. Succinctly means
concisely or briefly
expressed. In the light of what I have said, the Rule was
not complied with. The unfortunate result is that unnecessary costs have
been
incurred. B-M's Johannesburg attorneys must be held responsible for this. I
therefore propose to direct that they pay such costs
de
bonis propriis
.
This Court has previously warned practitioners that their breach of duty in this
regard may result in an order of this kind being
made (see
Government of the
Republic of South Africa vs Maskam
32
Boukontrakteurs (Edms) Bpk
1984(1) SA 680(A) at 692 G - 693 A).
Indeed, such orders have been made. With this in mind, the matter was raised
with counsel during
argument before us. The attorneys have therefore had an
opportunity of being heard.
The following order is made:
(A)
As to the appeal
:
(1) The appeal is dismissed with
costs.
(2)
Such
costs are to include the costs occasioned by the employment of two
counsel.
(B)
As to the cross-appeals:
(1)
The cross-appeals are
dismissed with costs.
(2)
Such costs are to
include the costs occasioned by the employment of two
counsel.
33
(3) Such costs are also to include:
(i) the costs of the application to the court a
quo
for
leave to appeal and (ii) the costs of the petition to this Court for leave to
appeal, save that the costs arising from the pleadings
having been annexed to
the petition are to be paid by the cross-appellant's Johannesburg attorneys de
bonis propriis
.
H H Nestadt
Judge of Appeal
Corbett, CJ )
Hefer, JA ) Concur
F H
Grosskopf, JA )
Howie, JA )