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Courts Do Not Readily Import Tacit Terms Into Agreements

Courts Do Not Readily Import Tacit Terms Into Agreements

Agreements Must Be Honoured

In the recent case of Origin Global Holdings Ltd v Acorn Agri (Pty) Ltd [2021] ZAWCHC 141 (30 July 2021) the Western Cape High Court considered the interpretation of a Share Purchase Agreement (“SPA”) in an exception to particulars of claim. Origin Global Holdings Ltd (“Origin”) had brought an action against Acorn Agri (Pty) Ltd (“Acorn”) and Afrifresh Group (Pty) Ltd (“Afrifresh”), claiming payment of US$796,617 for their alleged breach of their obligations under the SPA.

The SPA was concluded on 3 September 2016, the parties to the agreement being Standard Chartered Private Equity (Mauritius) III Limited (“SCPE”), Acorn and Afrifresh (represented by a Mr Conradie), and Mr Conradie himself. In terms of the agreement SCPE sold 93% of the shares in Afrifresh to Acorn.

In terms of clause 9.1 of the SPA Acorn undertook to procure that Afrifresh would enter into negotiations with Conradie with a view to concluding an agreement between Afrifresh and Conradie in terms of which Afrifresh would supply produce to Conradie or his nominee. Clause 9.4 went on to state that if a supply agreement was not concluded on terms and conditions acceptable to Afrifresh and Conradie within 6 months after the effective date:

  • the purchaser (i.e., Acorn) undertook in favour of Origin that a loan of US$1,950,000, which the purchaser would hold against Origin pursuant to the terms of the agreement, would not be enforced by the purchaser and/or Afrifresh and the rights of the purchaser and/or Afrifresh in respect of the loan would be ceded outright and irrevocably to Origin, provided that Conradie had complied with certain obligations; and
  • Afrifresh would supply to Origin on market related terms a minimum of 500,000 units of fruit per year for two years from the signature date. The terms of the supply of fruit by Afrifresh to Origin would be consistent with past practice and at market related prices and on market related service provisions not materially different from industry norms.

In its claim Origin pleaded that a supply agreement could not be concluded within the 6 month period and as result clause 9.4 became operative. In particular, it was alleged that Acorn and Afrifresh were obliged to supply a minimum of 500,000 units of fruit per year for two years for the benefit of Origin at market related prices. The allegation that Acorn was subject to this obligation formed the basis of its exception to the claim. Acorn contended that the clause imposed no obligation on it to supply or procure the supply of fruit by Afrifresh. Therefore, the allegation that Acorn was in breach of any obligations in terms of the clause was not supported by the SPA, and the particulars of claim thus failed to disclose any cause of action against it.

Origin contended that the SPA, and in particular, clause 9.4, could be interpreted as imposing an obligation on Acorn to procure that Afrifresh supply a minimum of 500,000 units of fruit per year for two years for its benefit collectively on market related terms and conditions. This obligation arose, it said, by interpreting the clause as having a tacit term to this effect.

In dealing with the interpretation of clause 9.4 and whether it could be regarded as having a tacit term, the Court held that the clause provided comprehensively for the consequences of a supply agreement not being concluded within the six-month period. In such event Acorn forfeited its right to recover a loan from Origin and ceded its rights in the loan irrevocably to Origin. It was further held that the clause provided a negative consequence for the defendants in that the company whose shareholding it purchased (i.e., Afrifresh) undertook, as a fallback for the lack of a negotiated supply agreement, to supply fruit at a minimum amount of 500,000 units over two years for the benefit of Origin. Origin’s claim against Acorn was based upon a breach of this fallback position. What it sought, by way of the importation of the tacit term, was to add Acorn as a party co-liable with Afrifresh for the consequences of a breach of the clause.

The essential averment relied upon by Origin in support of the tacit term being established was that, in terms of the SPA, Acorn became the exclusive ‘corporate controller’ of Afrifresh, coupled with the submission that any liability arising from clause 9.4 should equally rest upon Acorn. In its judgment the court found that neither the averment nor the linked submission advanced Origin’s case for the tacit term sought to be imported into the SPA.

Courts do not readily import tacit terms as they do not make contracts for people. The Supreme Court of Appeal has previously stated that whether a contract contains a tacit term is a question of interpretation. Generally, a court would be very slow to import a tacit term in a contract particularly where the parties have concluded a comprehensive written agreement that deals in detail with the subject matter of the contract, and it is not necessary to give the contract business efficacy.

A plain reading of the clause showed that Afrifresh alone would supply the fruit if the negotiations for a supply agreement were unsuccessful. The court concluded that the mere fact that Acorn was the corporate controller of Afrifresh did not justify any imputation of co-liability to Acorn, particularly against the background that the clause already provided a substantial financial penalty for Acorn if the negotiations for a supply agreement were unsuccessful.

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