REPUBLIC OF SOUTH AFRICA
IN THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
Reportable
Case Number : 440 / 03
In the matter between
SOUTHERNPORT DEVELOPMENTS (PTY) LTD APPELLANT
and
TRANSNET LTD RESPONDENT
Coram
: HARMS, FARLAM, CAMERON JJA, COMRIE et PONNAN AJJA
Date of hearing
: 16 AUGUST 2004
Date of delivery
: 29 SEPTEMBER 2004
SUMMARY
Contracts - lease- essential elements of - restated
- an agreement to negotiate in good faith - which is linked to a provision that an
arbitrator’s award will be final in the event of a dispute between the parties – does
not lack certainty - such an agreement to be distinguished from an unenforceable
agreement to agree.
______________________________________________________________________
J U D G M E N T
2
PONNAN AJA
[1] On 7 December 1998, the appella nt’s predecessor in title Tsogo Sun
Ebhayi (‘Tsogo Sun’) concluded a written agreement (‘the first agreement’)
with the respondent (‘Transnet’). The first agreement was subject to a
suspensive condition that Tsogo Su n be granted by 31 December 1999 a
casino licence as contemplated by the Eastern Cape Gambling Act. It
recorded that Tsogo Sun wished to de velop a temporary casino, temporary
casino parking, a casino, a hotel a nd certain ancillary entertainment and
retail facilities with ancillary parking on portions of erven 1051, 578 and 577
Humewood (collectively referred to in the first agreement as ‘the
properties’). To that end Tsogo Sun was authorised to procure the
rezoning or special consent to ut ilise the properties for the purpose
specified in the agreement. The extent of the erf, the subject in each
instance of the agreement, was specifi ed in the first agreement and clearly
demarcated on a plan annexed thereto.
[2] On 10 February 2000 the partie s concluded a second written
agreement (‘the second agreement’). The second agreem ent, described
by the parties as a bridging agreement, provided for the conclusion in due
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course of a definitive agreement in t he event of Tsogo Sun’s application for
a casino licence succeeding and an alternative agreement should it fail.
[3] Clause 3 of the second agreem ent, to the extent here relevant,
provides:
‘3.1.2 In the event that the Tsogo Su n Ebhayi casino licence application
fails, and all appeals, reviews and ot her legal challenges initiated
by Tsogo Sun Ebhayi that may potent ially prohibit th e exploitation
of the casino licence granted to a competitor of Tsogo Sun Ebhayi
in the Port Elizabeth zone, Ea stern Cape Province (if any) are
finally resolved in favour of that competitor then for three years from
that date or from the dat e of the award of the casino licence to that
competitor if no such appeal, revi ew or other legal challenge is
made as the case may be, Tsogo S un Ebhayi (or its nominee) shall
have the option to lease the pr operties (or the agreed portions
thereof) on the terms and conditions of an agreement (“the
alternative agreement”) negotiated bet ween the parties in good
faith and approved by each of the party’s board of directors.’
‘3.4 Should the parties be unable to agree on any of the terms and
conditions of either the definitiv e agreement or of the alternative
agreement within 30 days of the date of any notic e given by either
of such parties to the other of them requiring such agreement, then
the dispute shall be referred for decision to an arbitrator agreed on
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by the parties. The arbitrator’s decision shall be final and binding
on the parties. If Tsogo Sun Ebhayi and Transnet are not able to
agree on that arbitrator within five da ys of either of them calling on
the other to do so, then that arbitr ator shall be selected for that
purpose by the Arbitration Fou ndation of South Africa, and the
arbitration shall be finalised in accordance with the Foundation’s
expedited arbitration rules.’
[4] Premised on the factual f oundation that Tsogo Sun’s licence
application was unsuccessful and that Transnet had failed pursuant to the
second agreement to enter into good faith negotiations with its
predecessor, the appellant instituted action against Transnet claiming the
following relief:-
‘1. The defendant be required forth with, to enter into good faith
negotiations with the plaintiff regar ding the terms and conditions of
an agreement of lease in respect of the properties described in
clause 1 of annexure “PC 1”.
2. That any dispute bet ween the parties be referred for decision by an
agreed or selected arbitrator, as the case may be, in accordance
with clause 3.4 of the second agr eement, annexure “PC 2” hereto,
if the parties are unable to reac h agreement on the terms of the
alternative agreement, within 30 days from the date of this order.’
5
[5] The appellant’s particulars of claim were met with an exception,
which was upheld by Blieden J in th e High Court (Johannesburg). With
leave of the learned trial judge the matter is now before this Court on
appeal. The judgment of the court a quo is reported as Southernport
Developments (Pty) Ltd (previously k nown as Tsogo Sun Ebhayi (Pty) Ltd)
v Transnet 2003 (5) SA 665 (W). The principal thrust of the argument
advanced on behalf of Transnet, is: first, there was no agreement between
the parties regarding the e ssential terms of a leas e, and, secondly, the
second agreement was an unenforceable preliminary agreement. Each of
those contentions will be considered in turn.
(i) Was there agreement between the parties as to the essential terms of
a lease agreement?
[6] The essentials of a contract of lease are that there must be an
ascertained thing and a fixed rental at which the lessee is to have use and
enjoyment of that thing ( Kessler v Krogmann 1908 TS 290 at 297; Cooper,
Landlord and Tenant 2 ed p3). The parties had not agreed upon the use
and enjoyment of the property, whic h according to Blieden J was ‘a
requirement in any lease agreement su ch as the one relevant in the
present case’. Whilst it is always open to parties to a contract of lease to
agree on the intended use of the leased property (and if they do that would
6
constitute a material term of the agreement (see Oatorian Properties (Pty)
Ltd v Maroun 1973 (3) SA 779 (A) at 785G) as also, the period of the lease,
failure so to do would not invalidate the agreement. For those are not, in
each instance one of the essentialia of an agreement of lease (Pothier's
Treatise on the Contract of Letting and Hiring para 28). It is worth noting, I
may add, that the nature of the use and the enjoyment of the property
usually flows from the nature of the propert y itself. In the ca se of land, that
is usually dictated by external fact ors such as the nature or zoning of the
property.
[7] It is indeed so that Clause 3.1. 2 of the second agreement contained
no agreement on the rental to be paid. Our law has, however, long
accepted that principal parties to a contract may delegate to a third party
the responsibility of fixing certain te rms. Thus parties may validly agree
that the price of an article sold may be fixed by a named third party (Grotius
3.14.23) and they may leave the determ ination of the rental in a lease
agreement to a particular arbitrator (Voet 19.2.7). (See also Genac
Properties Jhb (Pty) Ltd v NBC Administrators CC (previously NBC
Administrators (Pty) Ltd) 1992 (1) SA 566 (A); Benlou Properties (Pty) Ltd v
Vector Graphics (Pty) Ltd 1993 (1) SA 179 (A); NBS Boland Bank Ltd v
One Berg River Drive CC and Others, Deeb and Another v ABSA Bank Ltd,
7
Friedman v Standard Bank of SA Ltd 1999 (4) SA 928 (SCA); Engen
Petroleum Ltd v Kommandonek (Pty) Ltd 2001 (2) SA 170 (W).)
[8] In Letaba Sawmills (Edms) Bpk v Majovi (Edms) Bp k 1993 (1) SA
768 (A), an option to renew a lease on t he basis that the rental was to be
determined by arbitrators ‘ … within t he limits of market-related prices for
the timber on the leased property and rent al payable in respect thereof … ’
was held not to be vague. Even though the concepts ‘market-related
prices’ and ‘market price’ were not defined, this Court held (per Botha JA)
that it was not necessary for t he parties to formulate a precise,
mathematical criterion for the determinat ion of the rental. In the view of
Botha JA the rent remained determinable even though the valuers might so
differ over the actual amount as to embroil the court in a protracted
hearing.1 I can conceive of no reas on why the principle that Letaba
Sawmills so firmly establishes should be circumscribed to the determination
solely of the rental in a contract of lease. The flexibility that Letaba
Sawmills introduces must logically ex tend to other terms as well the
formulation of which the parties to a contract may have chosen to delegate
to a third party.
1 Martin Brassey: ‘The Law of Lease’ (1993) Annual Survey p188.
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[9] What distinguished Letaba Sawmills from the present case, according
to Blieden J, is that in the former
‘ ...each party … nominated its own “arbitrator” to state its case. In the
event of these two “arbitrators” not coming to an agreement a third
“arbitrator” would be jointly appointed and he would determine the matter
on the basis of the one or other of the two agreements presented to him…
[I]n the present case the “arbitrator” has been appoi nted with one
purpose, and one purpose only, and that is to determine disputes between
the parties’.
For the reasons that follow, in my view, the distinction sought to be drawn
by the court a quo between Letaba Sawmills and the instant case is more
illusory than real.
[10] The option granted to Tsogo Sun was one to lease all of the
properties, which as I already stated were clearly identified in the first
agreement. Well, what if Tsogo Sun w anted to exercise the option in
respect of a portion only of the agreed properties, asked the court a quo,
and no agreement could be reached be tween the parties as to the
properties (or portions thereof) to be leased? The ready answer to that
query, it is seems to me, is to be found in the agreement itself. Applying
the principle enunciated in Letaba Sawmills , that ‘dispute’ could be
determined by the arbitrator. But that did not constitute a ‘dispute’ within
9
the meaning of that expression, the court a quo postulated. In that, in my
view, the learned judge was wrong. The w ord ‘dispute’ must be interpreted
in its contextual setting ( Coopers and Lybrand and Others v Bryant 1995
(3) SA 761 (A)). The parties undertook to enter into good faith negotiations
to agree upon terms and conditions of a lease agreement. In default of
consensus between the parties the agreement provided for arbitration.
Failure by the parties to agree would constitute a dispute within the
meaning of that expression thus justifying a referral to arbitration.
(ii) Is the second agreement an unenforceable preliminary agreement
?
[11] In upholding the exception Blieden J stated: '[T]here simply is no
agreement between them. The fact that the words " good faith" have been
used to describe the negotiation process , takes the matter no further'.
Support for his conclusion, he believed, could be found in the dictum of
Schutz JA in Premier, Free State, and Others v Firechem Free State (Pty)
Ltd 2000 (4) SA 413 (S CA) para 35 (' Firechem') that '[A]n agreement that
parties will negotiate to conclude a nother agreement is not enforceable,
because of the absolute discretion vested in the parties to agree or
disagree’. That principle, it must be stated, falls far short of resolving the
issue that arises in the present case. The reliance by Blieden J on
Firechem is, in my view, misplaced. The contract under consideration in
10
Firechem contained no deadlock-breaking mechanism. In the present
case, the agreement prescribes what f urther steps should be followed in
the event of a deadlock between t he parties. The engagement between
the parties can therefore be analysed as requiring not merely an attempt at
good faith negotiations to achieve resolu tion of any dispute but also the
participation of the parties in a dispute resolution process that they have
specifically agreed upon.
[12] The duty to negotiate in good faith is known to our law in the field of
labour relations. There, as well, because of the public interest in ensuring
harmony in the workplace, deadlock- breaking mechanisms exist to ensure
that the negotiating process is legally meaningful. The analogy between
ordinary contract negotiations and collective bargaining in our labour law
regime is, to be sure, less than perfec t. In ordinary cont ract negotiations
there is usually no public interest in a successful outcome or in the process
of good faith negotiations itself that is comparable to the interest in
preventing labour strife.
2 In National Union of Mineworkers v East Rand
Gold and Uranium Co Ltd 1992 (1) SA 700 (A), this court held at 733I
2 Nevertheless, helpful comparisons can be made and useful analogies have been drawn by the U S
courts in the application of their Labor Relations Act. cf Prof Allan Farnsworth: ’Pre-contractual Liability
and Preliminary Agreements: Fair Dealing and Failed Negotiations’ (1987) 87 Columbia Law Review
p217 at 271
11
‘[T]he fundamental philosophy of the Act 3 is that collective bargaining is
the means preferred by the Legislature for the maintenance of good labour
relations and for the resolution of labour disputes’
and later at 734 D:
‘… the very stuff of collective bar gaining is the duty to bargain in good
faith’.4
The principle of fairness has come to be the overriding consideration in
labour relations and the lab our courts eventually held that in general terms
a failure to negotiate in good faith ma y amount to an unfair labour practice
with the consequences that attach to such a practice.5
[13] ‘[U]nlike some systems of law, 6 English law refuses to recognise a
pre-contractual duty to negotiate in good faith, and will neither enforce such
3 The Labour Relations Act 28 of 1956.
4 See also A. Basson: ‘Collective Bargaining and the Appellate Division’ (1992) 4 SA Merc LJ p97; and
SR van Jaarsveld and BPS van Eck: Principles of Labour Law (2000) p149.
5 Although the duty to bargain in good faith has not been expressly incorporated into the current Act, its
provisions patently seek to promote collective bargaining. Employers are obliged to consult and reach
consensus with workplace forums before implementing a wide range of decisions. See John Grogan:
Workplace Law 7ed (2003) p 309.
6 European courts have been more receptive than American ones to scholarly proposals for pre-
contractual liability based on a general obligation of good faith. German law has developed rules
regarding good faith negotiations. The doctrine of good faith plays a most important role in the emerging
field of secondary or auxiliary contract obligations in Germany. [The primary obligation of the parties is to
perform in terms of the contract. The secondary obligation specifies how the parties have to perform.]
Within that category courts have recognised an obligation on contracting parties to bargain in good faith
and to deal fairly with each other particularly where the parties have reached agreement on that question.
[Werner F. Ebke and Bettina M. Steinhauer: ‘The Doctrine of Good Faith in German Contract Law’ Jack
Beatson and Daniel Friedman: Good Faith and Fault in Contract Law (1995) p171.] Italian scholars have
mostly looked for inspiration to German doctrines on good faith. In France principles of good faith extend
to both the negotiation and performance of contracts despite the limited terms of the Code Civil. Although
the French Code Civil has been influential in Belgium, Belgian courts have relied more extensively than
their French counterparts on the principle of good faith in the performance of contracts. [Simon Whittaker
and Reinhard Zimmermann: ‘Good Faith in European contract law: surveying the landscape’
R.Zimmermann and S. Whittaker: Good Faith in European Law (2000) p 7.] French and Israeli law gives
12
a duty when it is expressly agreed nor imply it when it is not’. (Per Millet LJ
in Little v Courage Ltd (1994) 70 P. & C.R. 469 at 475.) Irish and Scots
courts have, by and large, followed the same approach as their English
counterparts.
[14] In the United States the enforc eability of agreements to negotiate in
good faith varies from state to state. Each state has its own separate and
relatively self-sufficient body of gen eral contract law. In the 1960s the
Uniform Commercial Code (UCC) 7 was introduced and adopted by the
American state legislatures. Se ction 205 of the ‘Restatement8 of Contracts
Second’9 like the UCC limits the duty of good faith to th e performance and
the enforcement of a contract already made. In general the requirement of
good faith in American law does not apply to contract negotiations.10 Some
courts, like the English courts, refu se on the ground of indefiniteness, to
enforce explicit agreement s to negotiate in good faith. Other courts
effect to an express contract to negotiate in good faith. [Nili Cohen:‘Pre-contractual Duties: Two
Freedoms and the Contract to Negotiate’ Beatson and Friedman op cit p25.]
7 Section 1-203 provides: “Every contract or duty within this Act imposes an obligation of good faith in its
performance or enforcement”.
8 The American concept of a “Restatement” represents an attempt by the American Law Institute, a
private organisation of scholars, judges and practitioners to formulate with some precision the leading
rules and principles in major fields of American law.
9 Section 205 provides: Duty of Good Faith and Fair Dealing – 'Every contract imposes upon each party
a duty of good faith and fair dealing in its performance and its enforcement'.
10 Robert S. Summers: ‘Good Faith in American Contract Law’ Zimmermann and Whittaker: op cit p118.
13
however have been willing to give effect to the expressed intentions of the
parties. The latter view has gained a substantial following.11
[15] Certainty, it would appear, is the touchstone of enforceability of
agreements to negotiate in good faith in Australia. 12 In Coal Cliff Collieries
(Pty) Ltd v Sijehama (Pty) Ltd (1991) 24 NSWLR 1, Kirby P stated at 26E -
27B:
‘From the foregoing it will, I hope, be clear that I do not share the opinion
of the English Court of Appeal 13 that no promise to neg otiate in good faith
would ever be enforced by a court. I re ject the notion that such a contract
is unknown to the law whatever its term. I agree with Lord Wright’s
speech in Hillas 14 that, provided there was cons ideration for the promise,
in some circumstances a promis e to negotiate in good faith will be
enforceable…. Nevertheless, … I believe that the proper approach to be
taken in each case depends upon the construction of the particular
contract:..’
[16] Kirby P then adverted to three situations. He stated of the first:
11 Prof Allan Farnsworth: op cit p264-9
12 Ian B Stewart: ‘Good Faith in Contractual Performance and in Negotiation’ (1998) 72 The Australian
Law Journal p370.
13 See Courtney and Fairbain Ltd v Tolaini Brothers (Hotels) Ltd and Another [1975] 1 W.L.R. 297 C.A.;
and Walford and Others v Miles and Another [1992] 2 A.C. 128 at 138.
14 In Hillas and Co Ltd v Arcos Ltd in (1932) 147 L.T. 503 at 515, Lord Wright stated: where the parties
agreed only to negotiate, the negotiations may be ‘fruitless and end without any contract ensuing; yet
even then, in strict clear theory, there is a contract (if there is good consideration) to negotiate …’
In Courtney and Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd and Another Lord Denning M.R. rejected the
views of Lord Wright in Hillas. In agreeing with Lord Denning, Lord Diplock described Lord Wright’s
dictum as bad law, ‘…although an a ttractive theory.’ Lord Denning held ‘[I]t seems to me that a contract
to negotiate, like a contract to enter into a contract, is not a contract known to the law.’
14
‘In many contracts it will be plain that the promis e to negotiate is intended
to be a binding legal obligation to wh ich the parties should be held. The
clearest illustration of this class will be cases where an identified third
party has been given the power to se ttle ambiguities and uncertainties…
But even in such cases, the cour t may regard the failure to reach
agreement on a particular term as such that the agreement should be
classed as illusory or unacceptably uncertain:… In that event the court will
not enforce the agreement.’;
of the second:
‘In a small number of cases, by re ference to a readily ascertainable
external standard, the court may be abl e to add flesh to a provision which
is otherwise unacceptably vague or uncertain or apparently illusory…’;
and, of the third:
‘Finally, in many cases, the promise to negotiate in good faith will occur in
the context of an “arrangement”(to use a neutral term) which by its nature,
purpose, context, other provisions or otherwise makes it clear that the
promise is too illusory or too vague and uncertain to be enforceable:…'.
The principles enunciated in Coal Cliff Collieries accord with our law. The
first and third situations alluded to by Kirby P are covered, respectively, by
Letaba Sawmills and Firechem.
[17] It cannot be said t hat a third party was making a contract for Tsogo
Sun and Transnet which they themselv es had not put into words. The
15
second agreement had settled all of the essential terms between the
parties and was immediately binding, al though fuller negotiations to settle
subsidiary terms were still within the contemplation of the parties in
accordance with the continuing relatio nship between them. Simply put, the
arbitrator was entrusted with putting the flesh onto the bones of a contract
already concluded by the parties. Ac cordingly there is no sound basis why
Transnet should not be held to the contractual obligation, it undertook. It
needs to be emphasised that on the facts here present a court would not
be making the contract for the parties thereby going beyond its adjudicative
role. In that sense it is the very ex ercise of the right to contract, which has
bound the parties to the negotiation in good faith, which they promised.
Thus, to enforce that undertaking is not to interfere in the parties’ freedom
to contract, but to uphold it ( Coal Cliff Collieries at 26 C-D). Nor for that
matter could it be suggested that the second agreement constituted an
agreement to agree, which was dependent on the absolute discretion of the
parties. For, what elevates this agreement to a legally enforceable one and
distinguishes it from an agreement to agree is the dispute resolution
mechanism to which the parties have bound themselves. The express
undertaking to negotiate in good faith in th is case is not an isolated edifice.
It is linked to a provision that the parties, in the event of them failing to
16
reach agreement, will refer su ch dispute to an arbitrator, whose decision
will be final and binding. The final and binding nature of the arbitrator’s
decision renders certain and enforceable, what would otherwise have been
an unenforceable preliminary agreement. It follows that the appeal must
succeed.
[18] In the result:
(a) The appeal is upheld with co sts such costs to include those
consequent upon the empl oyment of two counsel.
(b) The order of the court a quo is set aside and replaced by the
following:
'The exception is dismissed with costs including the costs of
two counsel.'
V M PONNAN
ACTING JUDGE OF APPEAL
CONCURRING:
HARMS JA
FARLAM JA
CAMERON JA
COMRIE AJA