Contract Law: Crookes Brothers Ltd v Regional Land Claims Commission for the Province of Mpumalanga : The importance of interest clauses
Interest is a vital consideration when contemplating the provisions of a contract. This was made clear in the judgment of Crookes Brothers Ltd v Regional Land Claims Commission for the Province of Mpumalanga and Others. In this case, the parties had entered into an agreement of sale which included a clause providing that interest was to be levied against the Purchaser in the event that it did not make timeous payment. However, the Supreme Court of Appeal’s (“SCA”) interpretation and application of the clause reached farther than a plain reading of the provision.
Crookes Brothers Ltd was the seller of a package of agricultural properties to the National Government, facilitated by the Land Claims Commission, for R200 million. In the Agreement of Sale, and upon request from the conveyancers, the purchasers were to provide a written undertaking that they would pay the purchase price no later than 10 days after transfer. Further, if the purchasers failed to make payment within 10 days of transfer, they would be liable to pay interest on the outstanding amount at the prescribed rate of interest.
However, despite request from the conveyancers, the purchasers refused to provide the undertaking, claiming a constrained financial position precluded them from doing so. Eventually, 9 months later and after the institution of legal proceeding by the seller, the undertaking was given, the property transferred, and the purchase price paid. Although the purchasers eventually complied with the provisions of the agreement, the issue of interest was raised by the seller in court.
The seller claimed that interest should be levied against the purchasers as a result of their delay in providing the undertaking, which was in breach of the agreement. The purchaser argued that the interest clause only applied to a delay in payment of the purchase price once it was due, which was not the case here, and as a result the appropriate claim would be one for damages actually incurred.
In its unanimous judgement, the SCA held that there were two pertinent obligations on the purchasers. Firstly, the purchasers were to provide the undertaking when requested by the conveyancers. The provision of the undertaking would allow the conveyancers to cause the property to be transferred. Secondly, the Purchasers were to pay the purchase price no later than 10 days after transfer. According to the Court, the obligations were not independent obligations, and in fact the second was wholly dependent on the first. In delaying the furnishing of the undertaking, the payment of the purchase price was commensurately delayed.
As a result of the above, the Court held that the interest clause did in fact apply, as the payment of the purchase price was delayed by the failure to deliver the undertaking.
Further, the Court held that even in the absence of the interest clause from the agreement, the common law interest which applies to late fulfilment of an obligation sounding in money would have found application in this situation. This is as the liability to pay interest in such a situation is a consequential obligation which automatically attaches to the principal obligation by operation of law. In this situation, there is no judgement exercised by the court, and no other factors are brought to bear in determining the value of the amount awarded. The issue is simply whether a legal liability exists or not, and if it does, the rest is merely a mathematical calculation involving the prescribed rate, the amount outstanding, and the date on which it was due.
The Court was critical of the purchasers’ argument that as a result of the fact that the seller had remained in possession of the properties which formed the subject matter of the sale for the duration of the delay, they had actually not suffered any harm, and thus were not entitled to an award of damages.
Rather, the Court agreed with the seller that the period of delay had proved a difficult time for the seller. The properties represented a substantial portion of the assets held by the seller, and as a result of the uncertainty surrounding the fulfillment of the purchasers’ contractual obligations, the Seller could not effectively plan for its future, nor could it effectively employ the capital that was due to it. Further, the seller led evidence that in the period of delay, the market value of the properties increased by at least R30 million, a benefit which the purchasers would enjoy at the expense of the seller.
As a closing note, the Court was highly critical of the conduct of the government officials involved in the matter, noting that as a result of their conduct “the public purse is much poorer”, and that the litigation was “ill-conceived and unconscionable”.
As a result, the purchaser was ordered to pay interest on the purchase price from the projected date on which it would have become due had the undertaking been furnished in accordance with the agreement until the date of payment of the purchase price. Further, the purchasers were ordered to pay interest on the accumulated interest from date of payment of the purchase price until the date of payment of the interest amount.
In its judgement, the SCA reaffirmed the courts’ view that recognises the importance of interest to the functioning of the world of finance. From a reading of the judgement it becomes apparent that the courts have recognised this and are shaping the jurisprudence to ensure that when parties are unable to employ their capital in order to produce returns, they are in fact suffering harm. Even if the theoretical reasoning may seem strained, the courts seem to prefer to err on the side of protecting the effective employment of capital.
It is clear that the courts have recognised the importance of the ability to employ capital, and recognise that an inability to do so leads to harm. To this end, the SCA levied interest in a situation where a payment was not in itself due, but where the conduct of a party in failing to perform another, antecedent obligation led to a factual delay in payment. The courts’ stance on interest should be noted by parties to potential agreements, and those parties would do well to draft their agreements clearly, and with the knowledge that the courts may find distinct obligations to be linked to the extent that a delay in fulfillment of one obligation may be interpreted as the delay of consequential obligations as well.