8 December 2020 by and Dispute Resolution Alert

A bridge (and perhaps a shoe) too far…

Despite the ubiquitous application of preferential rights in various branches of our law, the residual rules regarding the nature and scope of the rights and remedies afforded to the grantee, as well as the duties of the grantor, remain somewhat uncertain. The Supreme Court of Appeal sought to provide some clarity in this regard, in the recent case of Brocsand (Pty) Ltd v Tip Trans Resources (Pty) Ltd and Others (Case Number 925/2019) [2020] ZASCA 144 (4 November 2020).

Genesis of the dispute

On 12 October 2010 Brocsand (Pty) Ltd (Brocsand) entered into a written agreement with Full Score Trading CC (Full Score) in terms of which, Brocsand was contracted to render mining services in respect of certain minerals located on a farm in Malmesbury (Red Hill Farm). Full Score was entitled to exploit the minerals pursuant to a mining right it had acquired in terms of the Mineral and Petroleum Resource Development Act 28 of 2002 (MPRDA). The agreement (Red Hill Agreement) afforded Brocsand the right to mine for laterite and sand until 30 October 2015, and upon expiry thereof, clause 3.2 conferred upon Brocsand, “the right of first refusal to enter into a new agreement as the holder for appointment as the exclusive contractor to render mining services in respect of the minerals” on Red Hill Farm.

On 30 January 2015, Tip Trans Resources (Pty) Ltd (Tip Trans), Global Pact Trading 370 (Pty) Ltd (Global Pact) and Full Score entered into a written agreement (Tripartite Agreement) in terms of which: 

(i)    Full Score appointed Tip Trans, as the mining contractor, to extract laterite and sand from the Red Hill Farm, and to procure it from Full Score (Red Hill segment); and

(ii)    Global Pact appointed Tip Trans, as the mining contractor, to extract sand from a farm in Doornkraal (Doornkraal Farm) and to procure it from Global Pact (Doornkraal segment).

Upon becoming aware of the conclusion of the Tripartite Agreement, Brocsand issued summons against Tip Trans, Full Score and Global Pact (defendants) averring, inter alia, that its preferential right had been breached. Brocsand contended that by proffering its unilateral declaration of intent to the defendants – in turn, invoking the Oryx mechanism – it had, as a result, “stepped into the shoes” of Tip Trans, and thus became party to a separate agreement (deemed contract) with Full Score and Global Pact on identical terms to that of the Tripartite Agreement.

Brocsand averred further that by virtue of the deemed contract, it was entitled to replace Tip Trans as the mining contractor in respect of both the Red Hill and Doornkraal segments of the Tripartite Agreement. Moreover, or so Brocsand’s argument went, should the Oryx mechanism be found wanting in any respect, the application of the doctrine of notice would bridge the gap that might otherwise have existed. In this regard, the kernel of Brocsand’s contention was that the defendants had purposefully concluded the Tripartite Agreement despite being privy to Brocsand’s preferential right and the sole purpose behind this was to circumvent its preferential right. Thus, Brocsand sought an order permitting it to mine on the Doornkraal Farm, in addition to damages for the loss of profit it had incurred during the period it had allegedly been precluded from mining.

Tip Trans contended that Brocsand had failed to disclose a cause of action with regard to the Doornkraal segment of the Tripartite Agreement, and thus excepted to Brocsand’s particulars of claim. Tip Trans’ core contention in this regard was that the purview of the rights conferred by the Red Hill Agreement, with respect to mining, only pertained to the Red Hill Farm and did not extend to the Doornkraal Farm. Moreover, neither Global Pact nor Tip Trans were party to the Red Hill Agreement and therefore, a mere invocation of the Oryx mechanism could not, on its own, create new contractual rights against Global Pact and Tip Trans with respect to the Doornkraal Farm.

Merits of the exception

The court thought it prudent to first consider the contents of the Tripartite Agreement. It intimated that the respective obligations contained in the Red Hill and Doornkraal segments of the agreement were evidently divisible. According to the court, the fact that the two segments of the Tripartite Agreement pertained to the exploitation of different minerals at different prices, made the fact of their divisibility all the more clear.

Turning to Brocsand’s preferential right, the court noted that it had a particular content, namely, the right to enter into a new agreement with Full Score to render mining services in respect of the laterite and sand on Red Hill Farm. Accordingly, common sense suggests that the content of the preferential right could not simply alter by virtue of the breach thereof – which led the court to question how exactly Brocsand could be said to have (ostensibly) obtained contractual rights against Global Pact, with respect to the minerals on Doornkraal farm.

The court proceeded to examine the justificatory claims put forward by Brocsand, namely, the doctrine of notice and the Oryx mechanism respectively. According to the court, the doctrine of notice claim was predicated on the argument that Tip Trans had actual knowledge of Brocsand’s preferential right and, despite this, deliberately concluded the Tripartite Agreement with the aim to frustrate it. As a result of the defendants’ common prior knowledge and concomitant mala fides, or so the argument went, Global Pact, inter alios, was fully subjected to the operation of the deemed contract and its consequences. Therefore, despite the absence of a prior contractual nexus between Brocsand and Global Pact, the doctrine of notice – according to Brocsand – bridged the gap which might have otherwise existed.

The court, however, was not persuaded by Brocsand’s contentions in this regard, noting that Brocsand had misunderstood the meaning and import of the doctrine of notice. The court remarked that the doctrine merely allowed the grantee to enforce its preferential personal right against the grantor, as well as against third parties who had knowledge of the right yet proceeded to frustrate it. In the ordinary course, the doctrine would allow the grantee to reclaim property that had been delivered to the third party who had knowledge of the grantee’s prior preferential personal right. However, the grantee’s enforcement of the personal right could not go further than the content of the obligation assumed by the grantor, under the contract giving rise to the preferential right. The court held that recourse to the doctrine of notice could not, on its own, confer upon Brocsand rights in respect of the Doornkraal Farm that did not previously exist. Consequently, contrary to Brocsand’s assumption, the doctrine of notice proved a bridge too far.

As far as Brocsand’s Oryx mechanism argument was concerned, the court was equally unconvinced. In a similar vein to its previous contention, Brocsand’s extended application of the Oryx mechanism rested squarely on the mala fides of the defendants, in relation to the conclusion of the Tripartite Agreement. The court noted that although the grantee is said to have “stepped into the shoes” of the third party when invoking the Oryx mechanism, the oft-quoted phrase ought not be taken literally. Rather, upon invoking the Oryx mechanism, a separate independent contract is concluded between the grantee and the grantor, but only within the confines of the subject matter of the preferential right. The court held that Brocsand’s assumption that recourse to the Oryx mechanism could contractually bind Global Pact, notwithstanding the absence of a prior contractual nexus was ill-founded. As a result, the court correctly upheld Tip Trans’ exception.

Conclusion

It is submitted that the court’s reasoning cannot be faulted. The mere fact that the conclusion of the Tripartite Agreement had breached the preferential right did not mean that all of the parties thereto were, as a consequence, contractually bound to an identical agreement with the grantee, when the preferential right itself only bound the grantor. The obvious point of departure should always be the content of the preferential right, as it determines both the obligation assumed by the grantor, and by corollary, the remedies available to the grantee.

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