The consequences of impossibility of performance

With the advent of the Covid-19 pandemic, phrases such as vis major, force majeure, and supervening impossibility have become the new ‘legal catchphrases’, says Baker McKenzie Johannesburg’s JJ van der Walt and John Bell. They examine the recent SCA judgment in Kooij and Others v Middleground Trading 251 CC and Another, where the court decided on whether the label attached to – and the terminology used in – a contract determined its nature and, if so, what the consequence would be in the context of impossibility of performance. Writing on the Legalbrief site, the authors note that in this case, the parties entered into a so-called ‘Rent and Rental Agreement’ in terms of which:

* Middleground Trading (A) would afford Wilma Kooij and the Daleen Kruger Trust (B) the right to access and use a specified portion of immovable property and prospect, mine, or harvest peat from the specified portion.

* B would pay A a ‘minimum rental amount’ of R15 000 per month ‘for the lease of the property’ as well as R25/m3 of peat extracted in excess of 600m3.

* The payment of R15 000 for the lease of the property and the granting of the rights, is a prepayment of the amount of peat extracted.

* Any form of vis major will be a valid reason for B not to perform its obligations, if it results in a permanent impossibility.

When a state department issued a compliance notice directing that the extraction of peat be stopped, B ceased paying the amount of R15 000, which led A to institute proceedings for payment of ‘arrear rental’. B argued that for as long as it could not legitimately carry out its peat extraction activities, it could not be required to pay the R15 000. The SCA was asked to decide what the nature of the agreement was (a lease agreement or an agreement affording the right to extract peat); and whether the notice qualified as vis major, resulting in permanent impossibility.

In its ruling, the SCA held that the nature of the performance of the contract was an undertaking on the part of A to afford B the right to extract peat and an undertaking on the part of B to compensate A for the peat extracted. According to Van der Walt and Bell, the SCA found the leasing of the property was ancillary to the right to extract in that it was leased for the purpose to extract peat. ‘The SCA relied on the principle that every contract must be given a commercially sensible meaning and, where more than one meaning is possible, a sensible meaning should be preferred to one that leads to “insensible or un-business-like results, or one that undermines the apparent purpose”.’ Even though the contract was named ‘Rent and Rental Agreement’, the court held that any interpretation in terms of which the contract is one of lease would be most insensible or un-business-like that undermines the apparent purpose of the contract, being ‘giving B the exclusive right to solely prospect, extract or mine for peat’. The SCA found that the compliance notice rendered the performance of B’s obligations permanently impossible and that it was not due to its own fault. ‘The notice constituted a form of vis major that rendered performance objectively and permanently impossible.’

Full analysis on the Legalbrief site

The SCA was also recently confronted with another case of contract interpretation. ‘Who knew that a divorce, the relevant settlement agreement, and a parcel of game could have provided for yet another case where the SCA had to interpret a contract?’ In their second analysis on the Legalbrief site, Van der Walt and Bell look at the recent case of LM and Others v TM, which involved ‘an accepted principle’ in SA law that parties are free to agree to and negotiate a ‘most inequitable’ result – provided that it is expressed in ‘clear and unambiguous language’. The authors note that in this case, A divorced from B and entered into a settlement agreement. B would pay A R5 500 000 in full and final settlement. The settlement amount was payable as follows: C would have purchased a parcel of game, for an amount equal to the settlement amount, and paid the purchase price (equal to the settlement amount) to A. However, B and C could not come to an agreement on the purchase price in respect of the parcel of game and C resolved not to purchase the game.

The SCA was called upon to determine whether the coming into existence or continuation of the obligation to pay the settlement amount conditional upon compliance with the payment method. According to Van der Walt and Bell, it held that the interpretation of a contract entails giving meaning to the words used in the contract, within the context in which the words were used, which includes the purpose of the contract. The court found that it was highly improbable that the parties could have intended that A’s right to payment would be entirely dependent on whether C would purchase the game or not. ‘One final nail in the proverbial coffin for B is the fact that the SCA held that, at best for B, the settlement agreement was ambiguous. However, this entitled the SCA to adopt an “equitable construction” of the settlement agreement.’ The authors point out that the principle ‘is that where an expression, term, or clause in a contract is capable of two constructions, and if there is nothing in the context, which points specially to one of them, it would be proper to apply the meaning that would avoid a manifestly inequitable result. Similarly, while a court is not entitled to superimpose on the clearly expressed intention of the parties its notion of fairness, the position is different when a contract is ambiguous. In such a case, the principle that all contracts are governed by good faith is applied and the intention of the parties is determined on the basis that they negotiated with one another in good faith.’

Full analysis on the Legalbrief site