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Breach of contract by bona fide insisting on incorrect interpretation of the contract by Pierre Lombard

A contract party may commit breach of contract by insisting on the incorrect interpretation of a material term of the contract, even if acting in good faith (bona fide). This was decided recently by the Supreme Court of Appeal (“SCA”), in the case of Starways Trading 21 CC and Others v Pearl Island Trading 714 (Pty) Ltd and Another(232/2018) [2018] ZASCA 177, where the court held that incorrectly insisting on an incorrect interpretation may constitute repudiation of the contract.

The applicant in this case, Starways Trading 21 CC (“Starways”), is an importer of, inter alia, sugar. The other party (respondent), Pearl Island Trading 714 (Pty) Ltd (“Pearl”), is a wholesale supplier, packaging sugar and delivering it to a retailer (Shoprite), at a higher price.

On 14 July 2016, Starways and Pearl entered into a written contract in terms of which Starways sold 25 000 metric tonnes of imported sugar to Pearl (the Sugar Contract). The Sugar Contract provided that the first consignment of sugar would be delivered directly from the port to Pearl (the packaging company). Subsequent consignments would be delivered ex warehouse, Cape Town. The Sugar Contract also specified purchase prices ex warehouse.

As importer Starways was obliged to pay the import duty imposed on sugar in terms of the Customs and Excise Act 91 of 1964 (“the Act”). Starways no doubt calculated the purchase prices specified in the Sugar Contract by taking into account the import duty that it expected to pay. In the result these prices were inclusive of import duty. During the period 5 August 2016 to 16 September 2016, however, the import duty on sugar was reduced drastically. It was common cause that during this period the import duty decreased from the amount of R2 395 per metric tonne to R318,90 per metric tonne.

It is important to note that clause 12 of the Sugar Contract provided that the Sugar Contract shall be governed and construed under and in accordance with the laws of the Republic of South Africa.

Section 59 of the Act provides that contract prices may be varied to the extent of alterations in duty payable under the Act. Section 59(2) provides that whenever a duty is decreased on goods that are delivered in terms of a contract that was entered into before the decrease in duty became effective, the purchaser may, in the absence of agreement to the contrary, deduct from the purchase price a sum equal to the benefit of the decrease to the seller.

The application of s 59 to the Sugar Contract would have resulted in the reduction of the purchase price for the first consignment of sugar by some R18 million and of the total purchase price by some R51 million.

Pearl took the stance that the Sugar Contract did not include an agreement to the contrary as contemplated by s 59 and that it was therefore entitled to pay reduced purchase prices. Starways on the other hand contented that the term ex warehouse constituted an agreement to the contrary that entitled it to the benefit of the decrease in import duty.

Pearl regarded Starways’s insistence on this interpretation of the Sugar Contract as repudiation thereof. It maintained that its acceptance of the repudiation put an end to the Sugar Contract.

Agreement to the contrary:

Even if it is accepted that the expression ex warehouse altered the incidence of the risk to some degree, it needs to be borne in mind that Starways and Pearl expressly subjected the Sugar Contract to South African Law. In terms of the Sugar Contract the obligation to pay the import duty therefore rested only on Starways and would under no circumstances be transferred to Pearl. The advantages and disadvantages caused by fluctuation in the import duty, however, would be passed on to Pearl in the manner provided for in s 59 unless the parties agreed to the contrary.

The onus was on Starways to prove that the ordinary meaning of ex warehouse excluded the application of s 59 or that the term had to be ascribed a special or technical meaning to that effect. The ordinary meaning of ex warehouse is ‘out of or in front of the warehouse’. Extensive research on behalf of Starways did not unearth any authority to the contrary in South African Law. The attempt by Starways to prove that ex warehouse has a special or technical meaning in the industry failed. It follows that Starways did not prove that the term ex warehouse in the Sugar Contract had any other meaning. The term was used simply to indicate where delivery would take place. It served to distinguish between delivery directly from the port to Pearl and delivery at Starways’s warehouse in Cape Town.

Conclusion:

The SCA dismissed the appeal with costs. It held that unless excluded by agreement, the provisions of s 59 of the Act in the specified circumstances constitute terms of a contract of sale implied by law.

The SCA held that Pearl was entitled to a reduction of price in terms of s 59(2) and that Starways’s interpretation to the contrary was wrong. Finally, the court held that in light of the circumstances a reasonable person in Pearl’s position could rely on the repudiation and that Starways did not intend to perform the duties contracted for. Pearl was therefore entitled to cancel the Sugar Contract.