3 October 2018 by and Dispute Resolution Alert

A tender to pay does not constitute performance but...

In letters of demand, claimants normally call for specific performance failing which the agreement will be cancelled. Issues arise where the liability is admitted but the extent of such liability is disputed. In other words, what is the validity and legal effect of a tender to pay in lieu of actual payment in a contractual setting?

The High Court recently considered this issue in Origo International (Pty) Ltd v Smeg South Africa (Pty) Ltd (33541/2017) ZAGPJHC 412 (25 June 2018). Upon receipt of a letter of demand, Origo prepared a detailed reconciliation of the accounts and established that whilst it was indebted to Smeg, it owed a lesser amount than that demanded. Origo therefore admitted the lesser liability and tendered to pay it upon Smeg’s acceptance that the amount would be full and final settlement of the dispute. Subsequent to Origo’s tender of the lesser amount, Smeg proceeded to cancel the agreement. Origo approached the High Court for an order declaring Smeg’s purported cancellation invalid and that Smeg be ordered to comply with the agreement. The validity of the demand was not challenged.

The dispute between the parties concerned the correctness of the amount claimed. The issue was whether Origo’s tender constituted compliance with the demand. Origo contended that it made a proper tender in that it admitted and subsequent duly proved the amount of indebtedness, which disentitled Smeg to cancel the agreement. Smeg disputed that Origo made a proper tender and in any event, contended that a tender for payment does not constitute payment which is what Origo was required to do to avoid cancellation of the agreement pursuant to the demand.

The High Court was of the view that in order to qualify as a proper tender for payment, a tender must be unconditional. The court had little difficulty in accepting that the tender in question was unconditional.

The next issue that arose was whether a tender to pay constituted performance. The High Court held that a tender to pay is a promise or an undertaking to pay and accordingly does not constitute actual payment. It therefore followed that the tender did not constitute payment. Did that mean that Origo’s tender, although not constituting payment, did not have legal effect? The court found the opposite. By analogy, the court referred to the well-known offer to settle and tender procedure, provided for in Rule 34 of the Uniform Rules of Court and the effect thereof in the exercise of the court’s discretion in awarding costs.

On the facts in Origo International, the court held the tender had this effect: should it be found that the admitted amount (or the lesser amount subsequently paid) was in fact the true amount owing, Origo would be protected from the consequences of non-compliance set forth in the demand for payment, which was the cancellation of the agreement. The court therefore found that the validity of the cancellation was wholly dependent upon proof of the amount claimed and that failing such proof, Smeg’s purported cancellation ought to be declared invalid.

It is clear that cancelling an agreement in the face of a tender for payment, albeit not for the amount claimed, can have serious consequences. In light of the above, one must seriously consider the tender and consult legal representatives before taking any steps such as cancelling the agreement in those circumstances.

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