13 May 2020 by , and Corporate & Commercial Alert

The devil is in the detail: The battle between ordinary terms and suspensive conditions

A suspensive condition in an agreement refers to a certain action which must take place in order for such agreement to come into effect. A common example of a suspensive condition in a commercial agreement would be the requirement for the parties to obtain all requisite approvals from the applicable regulatory authorities for the implementation of the transaction forming the subject matter of the agreement.

Drawing the distinction between the ordinary terms regulating an agreement and a suspensive condition, is a challenge that was faced by the litigants in the recent judgment of Lomon Marè and Others v Trudie Marè. The Supreme Court of Appeal (SCA) was tasked with determining whether a provision set out in a settlement agreement constituted a suspensive condition which, on fulfilment, would give effect to an obligation by the appellants to make payment to the respondent, or whether the provision was simply a description of the method of payment agreed upon by the parties.

The appellants and the respondent had entered into a settlement agreement, in terms of which, amongst other things, the appellants would pay to the respondent an amount of R5.5 million for the full and final settlement of any claims held by the respondent against the appellants. The agreement stipulated that payment of the settlement amount would be made upon the sale, by the appellants, of various game (consisting of sable antelope and buffalo) to a third party purchaser, which third party purchaser would then make payment of the settlement amount to the respondent on behalf of the appellants. A breakdown in price negotiations between the appellants and the third party purchaser resulted in the cancellation of the proposed sale and the appellants alleged that such cancellation rendered performance in terms of the settlement agreement (i.e. payment of the R5.5 million to the respondent) impossible. It was on the back of this alleged impossibility that the appellants argued before the SCA, that their obligation to make payment in terms of the settlement agreement had become notional.

Evidently, the distinction between an ordinary term and a suspensive condition proved critical to ascertaining whether the obligation to pay in terms of the settlement agreement would be obviated by non-compliance with the provision in question. In reaching its decision, the SCA embarked on the interpretation of the settlement agreement, guided predominantly by the context under which the agreement was concluded, as well as its purpose. At the outset, the SCA reiterated the established law of contract principle that, where a party to a bilateral agreement commissions a third party to perform its obligations in terms of said agreement, the commissioning party remains liable to perform if the third party fails to do so.

Following an assessment of the facts and relevant case law, the SCA found that it could never have been the intention of the parties for the obligation to make payment to be qualified by the sale of the game, nor would such reasoning be applied by an “officious bystander” at the conclusion of the contract. The SCA held that the obligation to pay, at all material times, existed independently of the method of payment. It therefore follows that when the prescribed method of payment became “impossible”, the obligation to pay would inevitably survive it.

The SCA held that, at best for the appellants, the clause relating to payment was ambiguous and warranted interpretation equitable to both parties. It found that an interpretation in favour of the appellants would result in the respondent walking away empty-handed which, within the context of the agreement and the settlement provided for therein, would be most inequitable to the respondent. Accordingly, the SCA ultimately found in favour of the respondent and the appellants remained obliged to make payment of the settlement amount in terms of the agreement.

The decision of the SCA signifies the importance of clearly defined terms and conditions in agreements. Parties to agreements are advised to effectively and clearly communicate any and all suspensive conditions (i.e. as not being part of the terms and conditions of the agreement but rather a step or action which needs to take place before such terms and conditions come into effect), so as to avoid the unfavourable interpretation of their agreements in the unfortunate event of litigation.

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