South African Forestry Co Ltd v York Timbers Ltd

• Jurisdiction: South Africa
• Judge: Streicher JA, Cameron JA, Brand JA, Jafta AJA and Patel AJA
• Judgment Date: 09 September 2004
• Citation: 2005 (3) SA 323 (SCA)
• Docket Number: 656/02
• Hearing Date: 20 August 2004
• Counsel: S J du Plessis SC (with him A N Oelofse and G T S Eiselen) for the appellant. F H Terblanche SC (with him J Wilson) for the respondent.
• Court: Supreme Court of Appeal

Brand JA:

[1] The outcome of this appeal will determine the fate of two contracts between the parties that were entered into more than 30 years ago. For present purposes, the terms of the two contracts were identical. In each case, the South African Government, as the one C contracting party, undertook to sell to the other contracting party softwood saw logs obtained from two government plantations in the Mpumalanga province. The contracts were referred to as the 'Witklip agreement' and the 'Swartfontein agreement' after the plantations from which the saw logs derived. In 1982, the respondent ('York') D took over all the rights and obligations of the other party in terms of both contracts. With effect from 1 April 1993, the government, in turn, transferred all its rights and obligations under the contracts to the appellant ('Safcol') pursuant to the provisions of s 4 of the Management of State Forests Act 128 of 1992. E

[2] In 1999, Safcol instituted action in the Pretoria High Court for an order declaring that the two contracts had been terminated. The Court a quo (De Vos J) found that Safcol had failed to make out a case for an order to that effect. This appeal is with the leave of the Court a quo. F

[3] The two contracts were entered into at a time when the South African Government decided, as a matter of policy, to encourage investment by the private sector in the sawmilling industry. One of the ways of giving effect to that policy was to enter into long-term agreements with sawmills to supply them with softwood logs from government plantations so as to provide investors with some security of tenure in a capital-intensive industry. In the contracts, the G government is described as the seller, and the other contracting party as the purchaser. The intention on the part of the seller to provide the purchaser with security of tenure was specifically recorded in clause 4.1 of the contracts. In the same vein, clause 4.2 went on to provide that the contract would, subject to certain terms and conditions, operate for an indefinite period. Safcol's first H contention as to why the unlimited duration of the two contracts had come to an end was that the contracts had lapsed through supervening impossibility, in that certain of their material provisions had become unworkable. In the alternative Safcol contended that the contracts had been validly cancelled by it on 10 November 1998 as a result of York's breach, either through repudiation of or through non-compliance I with its obligations in terms of clauses 3.2 and 4.4. Since the provisions of these two clauses also underlie Safcol's contentions based on supervening impossibility, it is necessary to refer to their contents and context in some detail. J

Brand JA

Relevant provisions of the contracts A

[4] Clause 3.2 was substituted in the two contracts during 1979 and 1982, respectively. It is to be read in conjunction with clause 3.1, which listed the prices of saw logs in the various classes at the inception of the agreements. It was obviously foreseen by the parties, however, that these prices would not remain static for the indefinite contract period. Consequently, clause 3.2 from the outset provided a B mechanism for future price revisions. Under the original clause 3.2, a deadlock in price negotiations would lead to advice being sought from the Board of Trade and Industries, and the automatic termination of the contracts in the event that agreement could still not be reached on the basis of such advice. The import of the subsequent amendment of clause 3.2 was to change the mechanism for price revision. In its amended C form, the relevant part of the clause reads as follows:

'Log prices shall be subject to revision provided that changes of price shall not take place more often than once every twelve months and provided further that:

(i)

The seller and the purchaser shall both agree to new prices; D

(ii)

New prices shall become effective on a date to be agreed upon by the seller and the purchaser, or, if no agreement in regard to such date can be reached within 30 days of the date on which new prices were agreed to, on 26 March of the year in which negotiations between the seller and the purchaser concerning such prices, commenced;

(ii)

Should no agreement be reached by the parties as to whether new prices are to be introduced or the existing prices retained, within E 120 days from the date on which negotiations concerning new prices were first initiated, the matter shall be referred to the Minister of Environmental Affairs, and if the Minister is of the opinion that no such agreement can be reached, the matter shall be referred to arbitration. F

. . .'

[5] Both clauses 3.2 and 4.4 are to be read in their contextual relationship with clauses 4.2 and 4.3. These two clauses provide that:

'4.2

The contract shall operate for an unspecified period but shall in any event and subject to clauses 3.2(c), 4.3, 4.4, 28.1 and 28.2 [clause 28 deals with breach of contract on the part of York] remain in force for an initial period of five years commencing G on [1 April 1968 and 1 April 1970, respectively] and shall remain in operation at the conclusion of the said initial period of five years for further successive periods of five years, provided that the parties shall have agreed mutually in advance as to the terms which shall apply during each successive period of five years. In the event of no agreement having been reached regarding the terms which are to apply in regard to any period of five years, the matter shall be H referred to the Minister of Forestry for a decision, and should his decision be acceptable to both parties, the contract shall continue for such period of five years on the terms and conditions of this contract as modified by the Minister. Should, however, the Minister's decision not be acceptable to the purchaser, the contract shall nevertheless continue for such a five-year period on the same terms and conditions I as laid down in this contract but it shall, unless otherwise agreed by the parties, terminate at the end of the five-year period concerned.

4.3

Notwithstanding the provisions contained in clause 4.2, the purchaser shall at any time have the right to cancel the contract by giving to the seller one year's written notice of his intention so to do.' J

Brand JA

[6] Clause 4.4 provides: A

'4.4

Should it at any stage, in the opinion of the Minister of Forestry, be in the interest of the wood industry or the country as a whole to terminate this contract, then the seller shall be entitled to cancel the contract on giving the purchaser written notice of at least five years. In the event of the contract being cancelled in terms of this clause, the payment of compensation subject to Treasury and, if necessary, Parliamentary authority, will be considered by the seller'. B

Factual background

[7] A proper understanding of the contentions advanced by Safcol on the basis of these clauses requires a somewhat more detailed exposition of the background facts. I start with the history of price revisions C pursuant to the provisions of clause 3.2. While the government was still administering the contracts, it sought an upward revision of prices practically every twelve months. After Safcol stepped into the shoes of the government in 1993, it did the same. The way in which negotiations for the increases sought were initiated was by means of a letter from the government and, subsequently, Safcol, setting out its D motivation for the price increases sought, as well as the new price structures proposed. The letter was sent to every individual sawmill that was a party to a long-term supply contract with the government, in the same terms as the ones involved in this case. At all relevant times, there were about 16 of them. These sawmill owners, including E York, organised themselves into an informal association called the South African Lumber Millers Association or SALMA. Although clause 3.2 of the respective contracts required an agreement to be reached with each individual contractor separately, negotiations were conducted between the government (later Safcol) and SALMA. F

[8] It was accepted by everybody concerned, albeit on an informal basis, that the price increases agreed upon between the government and SALMA would be regarded as a newly established ruling price which would not be deviated from unless a particular contractor could persuade the government that there was good reason why it should G pay less than the ruling price. Despite this common understanding that, as a matter of course, individual contractors would agree to the increases indicated by the new ruling price, York refused to do so in respect of the price increases agreed upon in 1991, 1992 and 1993. When Safcol took over the administration of the two contracts from the government with effect from 1 April 1993, it therefore inherited a H price dispute with York for three different periods. In the mean time, Safcol was obliged to supply York with saw logs at 1990 prices while all other long-term contractors were paying the increased prices. This obviously gave York a substantial edge on its competitors in the marketplace. I

[9] Safcol saw the solution to its problem in the reference to arbitration provided for in clause 3.2. In order to do so, however, it required an expression of opinion by the Minister of Environmental Affairs, or whoever was the Minister responsible for the Department of Forestry at the time ('the Minister'), that no agreement on the new prices could be J

Brand JA

reached by the parties. Consequently, Safcol approached the Minister with a motivated request to express an opinion to that A effect...