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[2018] ZASCA 122
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Buffalo City Metropolitan Municipality v Nurcha Development Finance (Pty) Ltd and Others (378/2017) [2018] ZASCA 122; 2019 (3) SA 379 (SCA) (21 September 2018)
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THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 378/2017
In
the matter between:
BUFFALO
CITY METROPOLITAN
MUNICIPALITY APPELLANT
and
NURCHA DEVELOPMENT
FINANCE (PTY) LTD FIRST
RESPONDENT
TUSK CONSTRUCTION
SUPPORT
SERVICES (PTY)
LTD SECOND
RESPONDENT
NEW BOSS CONSTRUCTION
CC THIRD
RESPONDENT
Neutral
citation:
Buffalo
City v Nurcha Development Finance
(378/2017)
[2018] ZASCA 122
(21 September 2018)
Coram:
Lewis,
Seriti and Makgoka JJA, and Mokgohloa and Nicholls AJJA
Heard:
31
August 2018
Delivered:
21
September 2018
Summary:
Unequivocal
conduct on the part of Buffalo City in accepting a payment
instruction, entering into a construction contract with a
contractor
after acknowledging the instruction, and making payment in terms of
the instruction led to the inference that on a balance
of
probabilities, the City and the party issuing the instruction had
concluded a tacit contract.
ORDER
On
appeal from:
Eastern
Cape Division of the High Court, East London Circuit (Stretch J
sitting as court of first instance):
The appeal is dismissed
with costs.
JUDGMENT
Lewis
JA (
Seriti
and Makgoka JJA, and Mokgohloa and Nicholls AJJA
concurring)
[1]
Nurcha Development Finance (Pty) Ltd (Nurcha), the first respondent
in this appeal, is a non-profit company that is a wholly
owned
subsidiary of the National Urban Housing and Reconstruction Agency,
itself a non-profit company. The South African government
owns 50 per
cent of the shares in the holding company. It was established in the
1990s with the aid of the George Soros Foundation
for the purpose of
facilitating the provision of housing for the indigent and the
development of businesses for historically disadvantaged
people.
[2]
The general arrangement with the holding company was that Nurcha
would provide finances to emerging civil engineering contractors,
since would-be builders and developers had difficulty gaining access
to banking facilities. As a rule, because they had no credit
record,
they were ‘unbankable’. The model envisaged by the
holding company was that Nurcha would lend funds for development
and
construction to a contractor, which would be mentored by Tusk
Construction and Support Services (Pty) Ltd (Tusk), the second
respondent on appeal. Tusk would in turn administer the cash flow of
the project, advance the drawdown payments to the contractor
made in
terms of a building contract, initially for the payment of materials
and labour costs. For as long as progress payments
were made by the
building contract employer, Tusk maintained control of the
contractor’s finances so that loans would be
repaid to Nurcha,
but the profits made, if any, would be kept by the contractor.
[3]
The model required that bank accounts would be opened in the name of
the contractor concerned so that it could build up a credit
record.
In order to maintain its own security, Nurcha required that the
entity cede it’s right to payment under the building
contract
to Nurcha. This background is drawn from that sketched by Lopes J in
Nurcha
Finance Company (Pty) Ltd v eThekwini Municipality
,
unreported decision of the KwaZulu-Natal High Court, Durban, case
number 810/2011. It was confirmed by Mr H de Villiers, the managing
director of Tusk, when he testified for Nurcha.
[4]
In this matter, New Boss Construction CC (New Boss), the third
respondent on appeal, was awarded a contract by the Buffalo City
Metropolitan Municipality (the City), the appellant, for the
construction of structures on 323 sites in Duncan Village, East
London
in October 2010. The written construction contract was signed
in December 2010 for New Boss and for the City in January 2011.
[5]
A written agreement of loan between Nurcha and New Boss was signed
before then, by New Boss on 11 October and by Nurcha on 20
October
2010. The material terms of the loan agreement were that Nurcha would
advance bridging finance to New Boss to enable it
to perform in terms
of the building contract; Tusk would administer the loan and New Boss
would pay it a fee; New Boss would arrange
for all the income from
the project (progress payments) to be paid into a banking account in
its name; Tusk would administer that
account and have signing powers
in respect of it; and New Boss ceded its rights to money due to it by
the City to Nurcha as security
for the performance of its obligations
under the loan agreement.
[6] New Boss and Tusk
entered into a written ‘construction support agreement’
on 11 October 2010. The material terms
of this agreement were that:
Tusk would administer the building agreement and the designated
account which had been opened in the
name of New Boss; Tusk would
render administrative and support services to New Boss; and New Boss
would repay its loan to Nurcha,
and pay service fees to Tusk.
[7] On the same day, Mr N
E Lushozi, the member of New Boss representing it, signed what was
termed an ‘irrevocable payment
instruction’, which was
addressed to the City. Lushozi instructed the City to make all
payments due to it under the construction
contract into its account
(account holder New Boss Construction CC) at First National Bank. He
set out the bank account number
and stated in the second paragraph
(the format is not reproduced here):
‘
As the
Contractor has entered into a loan agreement with Nurcha Development
Finance (Pty) Ltd (“Nurcha”) and provided
security in
terms of which Nurcha has agreed to advance bridging finance to the
Contractor in respect of the abovementioned project,
and whereas
Nurcha has appointed Tusk Construction Support Services (Pty) Ltd . .
. as intermediary to, amongst other things, provide
financial,
administration and construction support services to the contractor in
respect of this project, this irrevocable instruction
and bank
account
may
only be changed with the written consent of Tusk
. . .’.
[8]
The letter made provision for an acknowledgment of receipt by the
City. On 14 October 2010, Mr Z Yako, who described himself
as a
‘Senior Accountant Bank Control’ signed the document
below the words ‘noted and accepted by employer’
and
stamped it as ‘Buffalo City Municipality’ ‘Assets
and Risk Bank Control’.
[9]
Work commenced in 2011 and the City paid into the dedicated account
on four occasions from January to May 2011. From June 2011
the City
made five progress payments into a different account, presumably at
the instance of New Boss. Negotiations with the City
about payment
into a different account yielded no solution. New Boss was in serious
financial difficulty and unable to perform
its obligations under the
loan agreement.
[10]
Nurcha thus instituted action in the Eastern Cape Division of the
High Court, East London Circuit (to which I shall refer for
convenience as ‘the high court’) against the City in
early 2012. It claimed some R3.8 million in damages for breach
of
contract. The contract alleged was that between Nurcha and the City
concluded by conduct over the period from October 2010 to
January
2011. Nurcha alleged that in a series of acts it and the City had
concluded a contract in terms of which the City undertook
to make any
payment to New Boss under the construction contract to a dedicated
account opened by Tusk in the name of New Boss.
The basis of the
contract was that ‘the parties conducted themselves in a manner
which was only consistent with there being
a valid and binding tacit
agreement in place’.
[11]
The material terms of the contract, said Nurcha, were that the City
accepted the irrevocable payment instruction and agreed
to make all
progress payments to New Boss into the account reflected on the
payment instruction signed for by Mr Yako for the City.
It accepted
that it would only make payments into a different account if Tusk had
given its written consent, which Tusk had not
done.
[12]
The City pleaded first that Nurcha’s claims lay against New
Boss in terms of the loan agreement, and not against it.
It asserted
that the cession in that contract to Nurcha was invalid as it did not
comply with the provisions of the
Local Government: Municipal Finance
Management Act 56 of 2003
, and that Mr Yako did not have the
authority to enter into any contract for the City. The City also
contended that no tacit contract
had been concluded by any official
of the City in the circumstances alleged by Nurcha.
[13]
Stretch J in the high court found that Nurcha had established a tacit
contract and that the City was obliged to pay R1.9 million
in
contractual damages to Nurcha. The City appeals against the order of
the high court with the leave of this court. It argues
that a tacit
contract was not established.
[14]
It should be said at once that Mr Yako testified that he had not read
the payment instruction but had taken it to be a document
setting out
payment details. His role at the City was to co-sign cheques
requested by other departments, such as housing. He had
no authority
to conclude a contract. It should also be said that Nurcha did not
sue as cessionary under the cession embodied in
the loan agreement:
the cession of the right to progress payments was Nurcha’s
security that payment would be made to it.
The action is
premised entirely on the alleged contract between Nurcha and the
City, in terms of which the City undertook to pay
amounts due to New
Boss into a designated account managed by Tusk. It was argued on
appeal in this way as well.
[15]
Nurcha does not rely on Yako’s authority to enter into a
contract as the sole basis for contending that the City and
Nurcha
entered into a contract. It relies on a series of events and acts
which, when considered as a whole, lead to the conclusion
that the
parties had intended to enter into a contract on the terms pleaded.
Nurcha argues that the City, by signing for the irrevocable
payment
instruction, acknowledged that Nurcha had financed the construction
contract; acknowledged that Tusk would act as intermediary
between
Nurcha and New Boss; accepted the payment instruction and
acknowledged that the instruction could be changed only with
the
consent of Tusk. And then, most importantly, the City complied with
that instruction for several months.
[16] The test for
establishing the intention of the parties to conclude a tacit
contract is now settled. In
Butters v Mncora
[2012]
ZASCA 29
;
2012 (4) SA 1
(SCA), where a universal partnership between
co-habitees was relied upon, Heher JA said (para 34):
‘
This appeal
is about an alleged tacit agreement. As in all such cases, the court
searches the evidence for manifestations of conduct
by the parties
that are unequivocally consistent with consensus on the issue that is
the crux of the agreement and, per contram,
any indication which
cannot be reconciled with it. At the end of the exercise, if the
party placing reliance on such an agreement
is to succeed, the court
must be satisfied, on a conspectus of all the evidence, that it is
more probable than not that the parties
were in agreement, and that a
contract between them came into being in consequence of their
agreement. Despite the different formulations
of the onus that exists
(see the discussion in
Joel
Melamed and Hurwitz v Cleveland Estates (Pty) Ltd
;
Joel
Melamed and Hurwitz v Vorner Investments (Pty) Ltd
[1984] ZASCA 4
;
1984 (3) SA 155
(A) . . . this is the essence of the matter.’
This
statement is in a minority judgment but the majority did not take
issue with the principle. It was only the application of
the
principle that was in dispute.
[17] As I see it, the
principle expressed by Heher JA is clear and puts to rest the
apparent conflict between two statements made
by Corbett JA in
Joel
Melamed (above) and Standard Bank of SA Ltd v Ocean Commodities Inc
1983 (1) SA 276
(A). In
Ocean Commodities
Corbett JA had held
that the test was as follows (at 292A-B):
‘
In order to
establish a tacit contract it is necessary to show, by a
preponderance of probabilities,
unequivocal
conduct which is capable of no other reasonable interpretation
than that the parties intended to, and did in fact, contract on the
terms alleged. It must be proved that there was in fact
consensus
ad idem
.’
(My
emphasis.)
[18] In
Joel Melamed
,
however, Corbett JA stated that although this was the ‘traditional
statement of the principle’ (at 164I) there had
been criticism
of the formulation since it appeared to indicate ‘a higher
standard of proof than that of preponderance of
probability as
regards the drawing of inferences from proven facts’ (at
165A-B). He went on to say (at 165C-E):
‘
While it is
perfectly true that in finding facts or making inferences of fact in
a civil case the court may, by balancing probabilities,
select a
conclusion which seems to be the more natural or plausible one from
several conceivable ones, even though that conclusion
is not the only
reasonable one, nevertheless it may be argued that the inference as
to the conclusion of a tacit contract is partly,
at any rate, a
matter of law, involving questions of legal policy. . . . [I]t could
be said that a tacit contract should not be
inferred unless there was
proved unequivocal conduct capable of no other reasonable
interpretation than that the parties intended
to, and did in fact,
contract on the terms alleged.’
However,
Corbett JA did not consider that the case was an appropriate one in
which to resolve the tension between the two tests,
nor did he
suggest what matters of legal policy might be relevant.
[19] In
Christie’s
Law of Contract in South Africa
(7 ed) by G B Bradfield a
‘synthesized approach’ is suggested (pp 100 -101).
‘
A synthesis
embracing both the no other reasonable interpretation test and the
balance of probabilities test . . . could be stated
as follows: In
order to establish a tacit contract it is necessary to prove on a
preponderance of probabilities, conduct and circumstances
that are so
unequivocal that the parties must have been satisfied that they were
in agreement. If the court concludes on the preponderance
of
probabilities that the parties reached agreement in that manner, it
may find the tacit contract established.’
[20]
In my view, we need not go to any great lengths to reconcile the ‘no
other reasonable inference’ test with the
‘balance of
probabilities test’. There appears to me to be no reason why
the onus of proof should be more burdensome
for the party alleging a
tacit contract than in other civil matters. I do not see why, as a
matter of legal policy, the onus should
be greater. And in
Butters
,
the court was unanimous in finding that the party alleging a tacit
contract need prove unequivocal conduct giving rise to an inference
of consensus on a balance of probabilities.
[21] In
Butters
,
Brand JA for the majority, in deciding whether a universal
partnership had been established, held that (para 18):
‘
Where the
conduct of the parties is capable of more than one inference, the
test for when a tacit universal partnership can be held
to exist is
whether it is more probable than not that a tacit agreement has been
reached.’
[22]
Accordingly I consider that we need to ascertain whether Nurcha has
shown on a balance of probabilities unequivocal conduct
on the part
of the City that proves that it intended to enter into a contract
with Nurcha that it would pay New Boss progress payments
into the
designated account managed by Tusk. There is no doubt as to
Nurcha’s intention to enter into such a contract.
It would not
have advanced funds to New Boss in terms of the loan agreement had it
not had the security that the City would make
progress payments into
the designated account. But what of the City’s conduct?
[23]
There is no dispute as to the sequence of events leading to the
conclusion of the construction contract between the City and
New
Boss. We know that the bid had been awarded to New Boss by the City
in early October. Nurcha and New Boss had entered into
the loan
agreement pursuant to that, New Boss signing the written agreement
acknowledging the way in which the loan would be administered
on 11
October 2010. The construction support services agreement had been
signed on the same day. The irrevocable payment instruction
was also
signed by New Boss on 11 October. It was delivered to the City and
signed for by Mr Yako on 14 October. The construction
contract was
signed by New Boss only after that, on December 2010, and by the City
in January 2011.
[24]
Thus at the time of concluding the construction agreement, officials
of the City knew precisely how the arrangement with Nurcha
and Tusk
was to proceed. And it must have intended to make payment into the
designated account administered by Tusk, and knew it
should not pay
into any other account without the written consent of Tusk. Indeed,
it acted in accordance with that instruction
over a period of five
months. That is unequivocal conduct manifesting the intention that it
was bound to comply with the instruction.
[25] Moreover, the
subsequent conduct of the City, after it had paid into a different
account, was acknowleged by it to be in conflict
with the payment
instruction. This is recorded in a letter written by Nurcha’s
legal adviser to the City, after a meeting
between Nurcha and City
officials in the housing department had been held. The letter, dated
12 August 2011, recorded that:
‘
[Y]ou
recognized the fact that there is documentation in place, signed and
acknowledged by [the City], regulating the payment of
the contractor,
which documentation was not considered when the contractor was paid
directly. We record that you confirmed that
you would amend the
banking details of the contractor to reflect the correct position as
a matter of urgency.’
[26]
The material facts alleged in the particulars of claim by Nurcha were
not disputed. It was only when the plea was filed that
the City
denied that it had undertaken to pay into the designated account. The
City did not lead any evidence to gainsay that of
Mr De Villiers of
Nurcha that the entire scheme had been agreed with officials of the
housing department in the City. Mr Yako could
not say what
arrangements were made by the housing department, but there would not
have been progress payments to be made without
the approval of that
department. In the circumstances it is not necessary to consider
whether the officials in question had the
authority – actual or
ostensible – to conclude the agreement to pay into a designated
account. They did so and there
was no evidence led to rebut the
evidence of De Villiers as to the nature of the contract with the
City and its approval by municipal
officials. There can be no better
evidence of a contract’s conclusion than the parties’
performance of their obligations
under it.
[27]
In the circumstances I consider that Nurcha has proved on a balance
of probabilities that there was a tacit contract between
it and the
City that all progress payments payable to New Boss would be paid
into the account designated by it, managed by Tusk.
Nurcha is
entitled to be paid what was due to it under the loan agreement in
the form of damages payable by the City, which was
in breach of the
contract.
[28] Accordingly the
appeal is dismissed with costs.
________________________
C
H Lewis
Judge
of Appeal
APPEARANCES
For
Appellant: R G Buchanan SC (with him S Swartbooi)
Instructed
by:
Makhanya
Attorneys, East London
Bezuidenhouts
Inc, Bloemfontein
For
Respondents: S D Wagener SC
Instructed
by:
SB
Coetzer Inc t/a Coetzer & Partners
Honey
Attorneys, Bloemfontein