AZC and Jasco Electronic Holdings Limited (Jasco) entered into a sale agreement on 26 September 2019 in terms of which AZC would purchase Jasco’s electrical business. The sale agreement was conditional upon AZC securing funding for the purchase of the business. On 27 February 2020, the IDC agreed to provide funding to AZC in terms of a loan agreement, which was subject to the registration of certain security, including a special notarial bond, and the IDC acquiring an equity interest in AZC.

On 26 March 2020, the IDC sent an email to AZC requesting a telephonic discussion seeking information about the impact of the COVID-19 pandemic on its clients and the measures taken to minimise its financial impact. In response, Kotane provided the IDC with a cash flow forecast which stated that the company required a short-term facility of R10 million at the end of May 2020 to ensure business continuity. Kotane also noted that there would be a shortfall as a consequence of a loss of trade due to the lockdown, and requested 12-month and 18-month payment holidays in respect of the two loans owing to the IDC.

On the eve of the registration of a special notarial bond (the final outstanding condition to the draw down of the funds under the loan agreement and the payment of the purchase price to Jasco under the sale agreement), the IDC instructed the withholding of the registration of the special notarial bond pending a review of the valuation of the Jasco business. Jasco cancelled the sale agreement on 22 June 2020, allegedly as a direct result of the IDC’s instruction and its frustration of the implementation of the sale agreement. In a letter dated 24 June 2020, the IDC communicated its reduced valuation of the business to AZC and stated that a new sale agreement would have to be presented to the IDC to enable it to reconsider the loan agreement.

It was AZC’s submission that the IDC’s conduct constituted a repudiation of the loan agreement in that, on the facts viewed objectively, a reasonable person placed in its position would conclude that proper performance of the funding agreements would not be forthcoming from the IDC.

The test for repudiation

The test for repudiation is an objective one and is not a matter of intention, but rather of perception. The Court relied on the case of Datacolour International (Proprietary) Limited v Intamarket (Proprietary) Limited [2001] 1 All SA 581 (A), which established the principles for determining a repudiation:

“Where one party to a contract, without lawful grounds, indicates to the other party in words or by conduct a deliberate and unequivocal intention no longer to be bound by the contract, he is said to ‘repudiate’ the contract…”

The question posed was whether the acts of the IDC objectively exhibited “a deliberate and unequivocal intention” not to be bound by the loan agreement.

The Court considered a number of facts that collectively and objectively weighed against Kotane’s allegation of a repudiation of the loan agreement. Firstly, that Kotane did not consider the instruction to delay of the registration of the special notarial bond as an act of repudiation at the time but instead consented and engaged with the IDC without objection.

Secondly, the effect of the letter from the IDC was to reduce the valuation of the Jasco business based on evidence demonstrating that trading circumstances had changed. The reduced loan amount offered by the IDC remained a significant amount vis-à-vis the purchase price, indicating that it was persisting with the transaction, albeit at a reduced amount. Furthermore, the other security for the loan had already been registered, and the equity investment by the IDC into AZC had finalised.

It was on these facts, amongst others, that the Court found that on a consideration of all objective evidence available, a reasonable person would not have concluded that the IDC indicated an unequivocal intention to no longer be bound by the loan agreement, and therefore that there had been no repudiation.

Conclusion

This case is a welcome reminder of the elements of a repudiation, as well as the importance of establishing those elements in light of all objective evidence available.