In summary, the High Court reiterated the judicial stance on contractual interpretation: that the inevitable point of departure (in interpreting a contract) is the language of the contract itself. This article highlights the court’s approach to contractual interpretation and how parties to contractual negotiations should approach drafting and concluding agreements with this in mind.

Key takeaways

• The wording of the contract is the agreement between the parties. Words must be given their ordinary grammatical meaning, unless to do so would result in absurdity.
• To avoid lengthy and costly (and unnecessary) litigation, the parties’ intention must be clarified to ensure that it is reflected in the contract during the negotiation phase. Identifying and resolving varying interpretations should be dealt with as the contract is drafted and before it is signed. In accordance with the parol evidence rule, the courts will not allow extrinsic evidence that contradicts or creates a variation of a term in writing that the parties intended to be completely integrated.
• In interpreting contracts, the courts strive to uphold the principle of pacta sunt servanda, which means that agreements must be kept.

Background

The parties entered into a sale agreement in 2019, in terms of which the plaintiff (as seller) sold assets and stock comprising its business to the defendant (as purchaser).

The agreement contained two indemnity clauses:

• Clause 9.1, the first indemnity clause, was an indemnity by the plaintiff in favour of the defendant for any liability or obligation of the plaintiff “which arose prior to the effective date, it being specifically recorded and agreed that the purchaser does not assume any of the seller’s liabilities incurred as at or prior to the effective date”.
• Clause 9.2, the second indemnity clause, was an indemnity by the defendant in favour of the plaintiff stating that, “in light of the fact that the purchaser is not taking on the employees of the seller, the purchaser indemnifies the seller against any claims brought by employees for compensation of whatsoever nature due to the termination”.

After the contract was signed, but before the “effective date” of the contract, two employees of the plaintiff were dismissed. The (former) employees referred the disputes to the Commission for Conciliation, Mediation and Arbitration (CCMA) against the plaintiff. During conciliation at the CCMA, the plaintiff and the disgruntled employees reached a settlement in respect of their claims and the plaintiff, in terms of this settlement, paid these employees R324,010 (in aggregate).

The plaintiff proceeded, under the second indemnity clause, to claim these amounts from the defendant. The defendant denied liability and the plaintiff instituted action in the court a quo. The court of first instance dismissed the plaintiff’s claim after allowing and considering extensive evidence regarding the intentions of the parties when entering into the agreement. It is against this decision that the plaintiff appealed.

Findings

De Wet AJ (with Erasmus J concurring) penned the court’s judgment, which upheld the plaintiff’s appeal. The court held that the case hinged upon whether the first indemnity clause or the second indemnity clause was applicable to the plaintiff’s claim and confirmed that the correct “vantage point” to start interpreting a contract is one located in the text of what the parties in fact agreed.

Using this approach, the court considered the first indemnity clause and second indemnity clause. It held that the first indemnity clause deals with an indemnity by the plaintiff in favour of the defendant for any general claims pertaining to loss, liability, damage, costs or expenses without prejudice to any rights of the plaintiff in terms of the agreement, whilst the second indemnity clause deals with an indemnity by the defendant in favour of the plaintiff against any claims brought by employees due to the termination of the business and “in light of the purchaser not taking on the employees of the seller”. The court, in contemplating the language of the first indemnity clause and second indemnity clause, held that it was clear that the employees’ claims fell within the ambit of the second indemnity clause, as the claims were brought by the employees as a result of them losing their employment due to the termination of the business and the fact that the defendant did not want to take over their employment contracts.

The payments made by the plaintiff for the employees’ claims were payments regulated by the (properly interpreted) second indemnity clause, which payments were covered by the indemnity provided by the defendant in favour of the plaintiff. The court noted that the second indemnity clause contained no ambiguity and if the correct approach was adopted by the court a quo, from the outset, the costs and legal resources employed in determining this relatively small claim would not have resulted.

Having regard to the above, the court ordered the defendant to reimburse the plaintiff the amount it paid in settlement of the employee claims.

Conclusion

The contextual approach to contractual interpretation is mostly settled, and the inevitable point of departure is the language of the provision itself. Wording in contracts must be clear and certain, and, in the event of a dispute, a court will not “veer down a slippery slide” of determining what the parties’ opinions were pertaining to the meaning of the clauses: the court will look at the wording itself.

It is therefore imperative that parties and their advisers ensure that the contractual parties’ intentions are reflected in the wording of the contract, and that it is drafted in clear, concise and unambiguous language.