Law

PART 2
[update to our article: http://themislawchambers.co.za/agreements-agree-parties-obligation-negotiate-good-faith/ due to the legal position following a new case]

Agreements to agree (Pacta de Contrahenda) are generally regarded as a kind of contract which has the purpose of creating an agreement in the future. Parties to an agreement may not be able to agree on some of the terms of the agreement and to avoid any uncertainty, the parties may include a clause in the agreement in which they agree to negotiate in good faith and agree to conclude the outstanding terms on a future date. This so called “agreement to agree” would therefore form part of the concluded contract.

The position in our law regarding agreements to agree, in particular, whether an agreement to negotiate in good faith is enforceable was confirmed in the case of Makate v Vodacom (Pty) Ltd (CCT52/15) [2016] ZACC 13; 2016 (6) BCLR 709 (CC); 2016 (4) SA 121 (CC).The Constitutional Court in the Makate case held that a clause in a contract which obliges the parties to negotiate in good faith in the future is enforceable, “provided the contract makes provision for a deadlock-breaking mechanism in the event that the parties to the contract are unable to reach agreement as to any of the terms of the contract”.  

Following the decision in the Makate case, and on the contrary, the question now is whether a contract which contains a clause that obliges the parties to an agreement to negotiate in good faith but which makes no reference to a deadlock-breaking mechanism is enforceable? The Constitutional Court in the Makate case held “that this remains a grey are in our law”.

In the matter of Everfresh Market Virginia (Pty) Ltd / Shoprite Checkers (Pty) Ltd (CCT 105/10 [2011] ZACC 30; 2012 (1) SA 256 (CC); 2012 (3) BCLR 219 (CC), the Constitutional Court seemed to suggest that such a clause would be enforceable, taking into account the underlying notion of good faith and the value of Ubuntu in contract law. The Constitutional Court acknowledged the importance of infusing constitutional values in contract law, but that it could not decide whether or not to develop the common law in order to determine whether or not contract law should incorporate the value of good faith in the negotiations between parties to an agreement. The reason for this, is that the issue of developing the common law was not previously raised by the parties and that it was raised for the first in the Constitutional Court. The Court could therefore not determine this issue further.

Seemingly, the answer to the aforementioned question has been dealt with in the recent decision by the Supreme Court of Appeal handed down on 15 October 2020 in the matter of Seale and Others v Minister of Public Works and Others (899/2019) [2020] ZASCA 130 (15 October 2020).To note, this case deals with various aspects, inter alia, agreements to agree, acquisitive prescription, servitudal rights, notarial contracts, however, for the purposes of this article, we will only focus on the Supreme Court of Appeal’s findings in relation to the topic of agreements to agree and the enforceability of such agreements where no provision is made for a deadlock-breaking mechanism.

The facts are briefly as follows:

The appellants launched an application in the Gauteng Division of the High Court, Pretoria to seek a declaratory order enforcing certain servitudal rights of access over a strip of State land on the bank of the Hartbeespoort Dam in the Hartbeespoort area and the waterline and boundaries of adjacent properties. As a side note, this matter has a long history and dates back to 1918, more than a century ago.

A Mr Schoeman and some of his family members owned a portion of the farm Hartebeestpoort. The main water source for the aforesaid dam, the Crocodile river, traversed the farm. The owners of the farm and the Union Government at the time entered into a sale agreement in which the Government would purchase portions of the farm Hartebeestpoort (those portions which would be submerged by the dam) from the owners. Clause K of the sale agreement provided for the retention of the rights of access to the dam to Mr Schoeman, in three places which were to be mutually agreed upon by the parties. The agreement as to these three places, however, never took place, but Mr Schoeman still desired the registration of these rights.

The Government thereafter entered into a notarial contract with Mr Schoeman which envisioned the registration of a servitude. In addition, the Government retransferred a portion of land to Mr Schoeman that had been transferred pursuant to the sale agreement which was recorded in Cabinet Minute 3215. The Cabinet Minute was given effect to and the servitude was registered in the Deeds Office. In terms thereof, portion 43 of the farm Hartebeestpoort was transferred to Mr Schoeman and a right of access to the foreshore of the front of portion 43 was registered as a servitude.

Mr Schoeman and the other appellants sought a declaratory order for the registration of praedial servitudes of access to the dam for fishing and boating purposes. The appellants argued that their rights to obtain the registration of these servitudes arose from clause K in the sale agreement and the conclusion of the notarial deed. For reasons set out in the judgment, the Court held that clause K did not give rise to a right of a praedial servitude. The Court thereafter went on to deal specifically with agreements to agree.

Van der Merwe JA in the majority judgment held that “an agreement to agree without a deadlock-breaking mechanism is not enforceable” because it is dependent on the absolute discretion of the parties and/or because it is too vague and uncertain to be enforceable.

The Court held that in terms of clause K, the right of access to the dam could only be determined by a further agreement (an agreement to agree) in respect of the three places in which Mr Schoeman would have access to the dam. Clause K did not make provision for the identity of the locations of these three places. These three places still had to be mutually agreed upon by the parties. The Court noted that “both the language and context of clause K point to an intention to agree on a definite servitude” and “that the parties did not agree to a general servitude and merely made reference to a future agreement because they contemplated that defined places of access would eventually be agreed upon”. The Court went on to state that the material elements of the right of access would therefore only be determined by a further agreement. I accept that there was an implicit obligation on the parties to negotiate in good faith, but subject thereto, the further agreement was entirely dependent on the will of the parties. Clause K did not contain any provision that would regulate the position in the event of failure of the negotiations in respect of the proper identification of the three places”.  As a result, the Court held that clause K was unenforceable.

The appeal was thus dismissed with costs.

This Supreme Court of Appeal decision is therefore important because it seeks to brings clarity to a grey area of our law and the question left open in the Makate case and confirming that an agreement to agree (an agreement to negotiate in good faith) is not enforceable if there is no provision for a deadlock-breaking mechanism. Van der Merwe JA went further to note that “I fail to see how a mere agreement to agree (in good faith) can be enforced without a violation of the fundamental principle that a court may not make a contract for the parties”.

In light of the recent Supreme Court of Appeal judgment, when entering into agreements which make provision for parties to agree to certain terms of the agreement at a later date, it is therefore important to ensure that the parties agree to provide for a deadlock-breaking mechanism. This is to try and avoid any uncertainty in the event that a dispute may arise where one of the parties to the agreement refuses to negotiate the outstanding term on the future date and in order for the parties to be able to implement the terms of the agreement. Failure to do so may render such a clause unenforceable.

Megan Lewis
Associate
Hayes Incorporated

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