Kovacs Investments 724 (Pty) Ltd v Marais (323/08) [2009] ZASCA 84 (20 August 2009)

This judgment deals with questions relating to tacit and oral waivers and variations of the terms of written agreements for the sale of land.  The Court confirmed that a variation in the manner of performance of a contractual obligation may discharge that obligation if the variation was accepted by the other contracting party and if the performance constitutes full compliance with the obligation.  

However, the question that arose here was what happens when the alleged mutual waiver of the manner of performance does not constitute full performance.  

The judgment clarifies the principles that apply when contracting parties allege that there was a waiver or tacit agreement to vary terms of the agreement and, as such, is a must read.

The Judgment can be viewed here.

Facts

In July 2005 Marais and Kovacs Investments 724 (Pty) Ltd (‘Kovacs’) entered into an agreement of sale in respect of immovable property situated at the Sanbel Centre, Bellville.  The agreement contained a suspensive condition in terms of which Kovacs was to obtain a loan (to be secured by a mortgage bond) in an amount of some R10,15 million by 15 August (‘the bond clause’).  The agreement noted specifically that the suspensive condition is inserted for the benefit of both the seller and purchaser and that it can only be waived or amended by mutual agreement between the parties.  In addition, the agreement provided that no variation or cancellation of the contract would be effective unless it was reduced to writing and signed by the contracting parties.  On the bond due date, Kovacs had obtained a loan for but fell short of the required amount by some R500000.

Four days later, Kovacs sent Marais a letter in which it advised that the suspensive condition had been fulfilled.  Both parties thereafter took steps to put the agreement into operation and Kovacs duly took possession of the property.   

In May 2007 (some 21 months later), Marais became aware of the fact that the suspensive condition was never met in that Kovacs did not manage to secure a loan for the full R 10,15 million as stipulated in the sale agreement.  Kovacs maintained that it had “substantially” complied with the suspensive condition in that the amount secured was only “slightly” less than the amount stipulated in the sale agreement.  It maintained further that even if it could be said that the suspensive condition was not met, Marais had by its conduct in the interim indicated that he had accepted that the suspensive condition had been met and that the agreement had therefore come into operation.

Marais applied to the Cape High Court (as it then was) for an order declaring that due to the non-fulfilment of the suspensive condition, the agreement had lapsed and never came into existence and the Court found in his favour.  Kovacs then appealed to the Supreme Court of Appeal.

In the SCA Kovacs alleged that both parties were aware, before the bond due date, that there was a “slight” shortfall in the amount of finance that was approved; that the parties nonetheless went ahead with implementation of the agreement. It follows that Marais hereby orally and/or tacitly accepted the sufficiency of the loan approval; that the condition had therefore been fulfilled. Marais can accordingly can be said to have waived the benefit of requiring compliance with the bond clause.

Marais, on the other hand, denies that there was a mutual waiver of the terms of the suspensive condition.  When he was advised in Kovacs’ letter that the condition had been fulfilled, he assumed that Kovacs had obtained a loan for the full amount as stipulated in the bond clause.  (It appears that Kovacs itself held the opinion that it had substantially fulfilled the condition and hence its assertion that the suspensive condition was met, albeit R 500 000 short of the stipulated amount.  Note in this regard that both Courts mentioned that a shortfall of R 500 000 cannot be dismissed as “slight” or “insignificant”, even though it may represent a small portion of the total loan stipulated.)

Held:

Tacit/Oral waiver of obligations under an agreement of sale for the purchase of land

• The Court confirmed that in our case law it has since long been accepted that provided obligations under a written agreement are to be complied with in full. Performance of one of the obligations in a different manner from that stipulated in the written agreement, and accepted by the other party, is however considered sufficient (or substantial) compliance to discharge the obligation.
• In such an instance actual performance is substituted for that which was initially contracted.
• Where the different manner of performance was at the request of one party and the other party tacitly or orally agreed thereto, then the fact of such performance may be proved by extrinsic evidence.  The agreement for a different manner of performance need not be in writing.

Tacit/Oral waiver of a suspensive condition

• A ‘subject to loan’ clause (suspensive condition) in an agreement for the sale of land may also be informally waived.  An example would be the facts in the matter of Van Jaarsveld v Coetzee: A and B entered into an agreement of sale which they made subject to B’s securing a loan with Bank C.  B failed to obtain a loan from Bank C, but instead managed to secure a guarantee from X for the full amount.  Here the Court held that the agreement had not lapsed as a result of the failure to obtain a loan from Bank C, but rather that it (the Court) must interpret the agreement in such a way to keep it extant.
• The Van Jaarsveld judgment demonstrates what is sometimes referred to as ‘substantial’ or ‘substituted’ performance.
• The Court noted though that in all the judgments where different performance was held to have constituted substantial or sufficient compliance with the terms of an agreement, there had been a different, but full, manner of performance of an obligation.
• The Van Jaarsveld judgment is therefore distinguishable from the present matter.  In Van Jaarsveld, the seller would have received the full amount due upon transfer.  In the present matter, however, Kovacs claims to have substantially performed when in fact it could only raise an amount less than stipulated in the suspensive condition.  Such a change in the quantum of the loan approved is not a mere waiver, but an amendment of the terms of the agreement and results in the contract being changed.  In this regard the Court noted that “where the provisions of a written agreement are altered, in the sense that a provision therein is deleted and an oral (or tacit) obligation substituted in its place, then no contract exists which covers both the original agreement and the amendment.  The amended agreement, therefore, would not comply with the provisions of the legislation which required an agreement for the sale of land to be in writing.”

Reducing the loan amount in a suspensive condition is a variation of the terms of the agreement

• Acknowledging that in this context questions arise as to whether a deviation from the performance of a written contract amounts to a variation, the SCA specifically noted that it did not have to make a finding on this aspect in the present matter.
• The reason therefore is that it regarded Kovacs’ allegations to constitute a variation of the terms of the agreement.  Kovacs alleged a mutual waiver of the terms of the suspensive condition which waiver constituted more than a mere deviation from the terms of the agreement.  Kovacs’ allegation purports to reduce the loan amount stipulated in the suspensive condition and provides no allegation as to an agreement as to how the outstanding balance would be paid.  As such, the alleged waiver constitutes a variation of the agreement which requires compliance with the provisions of the Alienation of Land Act.
• Accordingly the Court found that to uphold the alleged tacit agreement which purported to waive the ‘subject to loan’ clause, would be contrary to the provisions of section 2(1) of the Alienation of Land Act and the non-variation clause that was contained in the agreement between the parties.
• Kovacs’ appeal was accordingly refused.

Moral of the story: This case demonstrates that although a bond clause is usually included to protect the purchaser, it also has its own sting. If the bond clause obligation is not met in full, a seller who initially may have seemed to co-operate, can sink a deal as a result of the non-compliance.