South Africa: the SCA provides guidance on interpretation of contracts and vis major
In Kooij v Middleground Trading 251 CC (“Kooij”), the Supreme Court of Appeal (“SCA”) held that a compliance notice issued by the Department of Environmental Affairs (“DEA”), that required Middleground Trading 251 CC (“Middleground”) to cease its peat extraction operations on a farm (the “farm”) owned by the Daleen Kruger Trust (the “Trust”) constituted a supervening impossibility of a permanent nature.
Consequently, Middleground was discharged from performing its contractual obligations to the Trust.
The case is of interest for two reasons. First, it addresses the law on supervening impossibility, which has gained increased significance since the start of the Coronavirus (COVID-19) pandemic. Second, it provides guidance on the interpretation of contracts and, in particular, the extent to which the conduct of the parties subsequent to conclusion of the contact can be used to interpret a contract.
The agreement concluded between Middleground and the Trust provided, amongst other things, that:
- The Trust agreed to lease Middleground a portion of the farm "for purposes of giving it the exclusive right to solely prospect, extract or mine for peat and/ or to harvest peat on the property";
- Middleground would pay the Trust ZAR15 000 per month plus VAT, for the lease of the property;
- An additional amount would become payable if Middleground extracted above a certain amount of peat per month;
- The monthly payment was described as "a prepayment of the amount of [ZAR25 per cubic meter] which Middleground would owe to the Trust for peat extracted, and would ‘be taken into account against the amount that is due to [the Trust] for the peat that is extracted in terms of the agreement"; and
- Any form of vis major would be a valid reason for Middleground not to perform its operation in terms of the agreement, if it results in a permanent impossibility.
A few years after the conclusion of the contract, the DEA issued a pre-notice, and then a compliance notice, requiring that peat extraction operations on the farm be stopped. Middleground instituted an appeal against the DEA’s decision, and later a review of the decision to refuse the appeal. During this period, Middleground stopped harvesting peat and stopped making monthly payments to the Trust. As a result, the Trust instituted an action against Middleground in which it claimed that the parties had entered into a lease agreement, and that Middleground remain bound by its terms until the agreement was terminated by effluxion of time. Middleground’s primary defence was that, properly interpreted, the contract was not one of lease but was one in terms of which the Trust granted Middleground the right to prospect for and harvest peat on the farm.
Accordingly, Middleground argued that the DEA’s compliance notice constituted vis major that resulted in a permanent impossibility of performance. The Trust’s claim was dismissed in the Magistrates Court and High Court and it therefore appealed to the SCA.
The proper interpretation of the contract
The Trust contended that the parties conduct subsequent to the conclusion of the contract indicated that the monthly payments were due for the lease of the property and, since Middleground could still lease the property, even though it could not extract peat, performance under the contract remained possible.
The SCA pointed out that a court can, when interpreting a contract, have regard to the parties’ subsequent conduct in order to determine what they have intended. However, the use of such evidence is subject to the following three provisos:
- the evidence must be indicative of a common understanding of the terms and meaning of the contract;
- the evidence may be used as an aid to interpretation and not to alter the words used by the parties; and
- such evidence must be used as conservatively as possible.
After considering the evidence adduced by the Trust, the SCA held that such evidence failed to satisfy the first criterion outlined above, and therefore could not be relied upon to establish that the contract was one of lease. The SCA also held that, when considered as a whole, "it is evident that various provisions [of the lease] tend to show that the lease element was of less significance" In this regard, the SCA pointed, inter alia, to the fact that the monthly payments were described as "prepayments" for the peat that would be extracted in terms of the contract and to the fact that Middleground could cancel the contract if the peat reserves were depleted.
Supervening impossibility of performance
The SCA highlighted that "where performance of an obligation by a party to an agreement becomes impossible after the conclusion of the agreement, that party is discharged from liability if it was prevented from performing its obligation by vis major, but not if the impossibility was due to its own fault".
The SCA held that the DEA’s compliance notice constituted a vis major of a permanent nature, and that fault could not be imputed to Middleground because, inter alia:
- the Trust and Middleground had adopted the same stance in appealing the DEA’s decision; and
- the compliance notice indicated that the DEA was opposed to any peat extraction occurring on the Trust’s farm, and did not relate specifically to Middleground’s conduct in performing such extraction.
The Trust’s appeal was therefore dismissed.
The ongoing lockdown means that we will likely see an increasing number of cases in which the defence of vis major is relied upon. Kooij clarifies that a) the defence will not be open to a party when the impossibility is due to its own fault, b) whether the defence is available will depend, amongst others, on the proper construction of the contract, and c) government directions can constitute a vis major.
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