Law of contract – the effect of thinking you’re right when you’re wrong

In the case of Starways Trading 21 CC and Others v Pearl Island Trading 714 (Pty) Ltd and Another (232/2018) [2018] ZASCA 177, a contractual dispute arose between Starways Trading 21 CC (Starways) (the seller) and Pearl Island Trading 714 (Pty) Ltd (Pearl) (the purchaser), in respect of payment of the purchase price in terms of the contract.

Starways contended that it was contractually entitled to payment of a certain purchase price (based on its incorrect interpretation of the contract) and demanded that Pearl make payment accordingly. Pearl regarded this insistence on the incorrect interpretation of the contract as a repudiation thereof. Pearl consequently gave notice to Starways that it accepted the repudiation and cancelled the contract.

Starways thereafter approached the Western Cape Division of the High Court, Cape Town (High Court) to enforce the contract against Pearl and the alleged contractual obligation for payment of a certain purchase price by Pearl.

The High Court dismissed Starways’ application and also refused leave to appeal. Starways was however granted leave to appeal by the SCA.

The SCA held that Starways’ interpretation of the contract (dealing with the purchase price payable by Pearl) was wrong, and that its insistence on this interpretation by demanding payment from Pearl of a certain purchase price, amounted to a repudiation of the contract.

In its judgment, the SCA noted the following:

1. It is well established that repudiation of an agreement takes place by unequivocal intimation, by word or conduct and without lawful excuse, that all or some of the obligations arising from the agreement will not be performed according to their true tenor;
2. The test that should be applied is an objective test, and the matter should be approached from the vantage point of the innocent party; and
3. The bona fide insistence on an incorrect interpretation of a material term of a contract may amount to the repudiation of the contract.

The SCA concluded that a reasonable person in the position of Pearl was entitled to accept that Starways would not perform its duties in terms of the objective and correct interpretation of the contract but would insist on its incorrect interpretation. Pearl was therefore entitled to cancel the contract by the acceptance of the repudiation.

This judgment demonstrates the importance of objectively interpreting the terms of a contract, from the vantage point of a reasonable person. The incorrect interpretation of a contract, notwithstanding that it may be bona fide, may lead to the severe consequence of an unintentional repudiation of the contract.