Essence

Debts arising from contractual terms become due and payable when they arise and prescription begins then, unless clearly intended otherwise by the parties.

Decision

Trinity Asset Management (Pty) Ltd v Grindstone Investments 132 (Pty) Ltd

(CCCT248/16) [2017] ZACC 32 (5 September 2017).  Disallowed the appeal.

Judges

Mogoeng CJ, Nkabinde ADCJ, Cameron J, Froneman J, Jafta J, Khampepe J, Madlanga J, Mhlantla J, Mojapelo AJ, Pretorius AJ and Zondo J.

Significance

Clarifies the true meaning of some contractual expressions, such as terms, conditions and time clauses.
Discussion by GilesFiles
In passages fully supported by the majority Froneman J helpfully explained why our law should distinguish between the following concepts.

Contractual terms or conditions

Terms of the contract (express, tacit or implied) determine the obligations contracting parties owe to each other.  The word ‘conditions’ is sometimes used in a wide sense.  It means a “provision of the contract, i.e. an accepted stipulation, as for example in the phrase ‘conditions of sale’”.

So the word includes arrangements as to time and manner of delivery and payment of the purchase price, the so called accidentalia of the contract.

Condition’ has a much more limited meaning when it means a true suspensive or resolutive condition.  It is then a qualification rendering the operation and consequences of the whole contract dependent upon an uncertain future event.  A suspensive condition defers the operation of the contract whereas a resolutive condition dissolves the contract after interim operation.

Time clauses

Time clauses relate to certain future events, even if uncertain, and are not conditions.  They are  contractual clauses granting debtors a period within which to discharge an obligation.  They could also restrict the operation of the contract to a certain time.

Contractual time clauses qualify obligations regarding future events that will occur, even if it is not certain when they will occur.

Conditions depend on whether uncertain future events will occur or not.

Demands placing defaulters in mora debitoris (debtor’s default)

Claims for performance arise when the contract is concluded if no time for performance is specified.  This is not changed by the need for a demand to place the debtor in breach.  So legally  a debtor does not have to be placed in mora before being sued for specific performance.

The rule that demand is necessary before creditors may claim relief resulting from the debtor’s mora, does not mean that demand is a condition precedent to their contractual right of action.

Where time for performance has not been specified the right of creditors at any time to demand specific performance is not undermined by the need for a demand placing a debtor in mora.

The right to demand the primary performance is not the same as the creation of a secondary obligation resulting from the breach of contract.

So the commencement of prescription is not the same as the commencement of mora through demand.

Court summary

The Court

[1] This is an application for leave to appeal against a decision of the Supreme Court of Appeal (hearing an appeal from the High Court of South Africa, Western Cape Division, Cape Town), which dismissed an application in which an order provisionally liquidating the respondent was sought.  In the three judgments that follow, the Court considers three primary questions:

(a)               Given the provisional nature of the proceedings, is the defence of prescription properly before this Court?

(b)              Does the parties’ contract point to an intention to defer the date when the debt became “due” and thus to delay the onset of prescription?

(c)               Did the applicant’s claim prescribe?

[2] The factual background and issues are set out in the first judgment by Mojapelo AJ.  All members of the Court concur in his exposition of the facts and issues.  The Court unanimously concludes, though for different reasons, that leave to appeal should be granted.  By a majority of ten judges to one, it further holds that the defence of prescription is properly before the Court.  Froneman J disagrees, on the basis that the parties failed to deal adequately with the “Badenhorst principle”.  He sets out his reasoning in the third judgment.[3] The Court, by a majority of six to five, finds that the parties to the contract did not intend to defer when the debt became due and hence to delay prescription.  The debt is found to have prescribed.  The appeal is consequently dismissed.  The second (majority) judgment is written by Cameron J with Khampepe J, Madlanga J, Mhlantla J and Pretorius AJ concurring.[4] Froneman J, the sixth member of the majority, concurs in the dismissal of the appeal first because of the Badenhorst principle.  He holds that, in the absence of a finding that the Badenhorst principle does not apply to disputed legal issues, there is no ground for faulting the High Court’s dismissal of the application for provisional liquidation.  The appeal must fail and the refusal of the provisional liquidation application in the High Court should be confirmed on this ground.[5] Second, however, if he is wrong in his view that the failure to deal adequately with the Badenhorst principle precludes final determination of the prescription issue, Froneman J concurs in the second judgment’s construction of the parties’ contract, with additional reasons.  Cameron J, Khampepe J, Madlanga J, Mhlantla J and Pretorius AJ concur in these additional reasons.

Quotations from judgment

Prescription

[154] The second judgment expresses agreement with the first judgment’s “exposition of the legal principles governing when a debt payable on demand is due”,[134] but disagrees with its application here, primarily because “the first judgment attaches undue significance to ‘due’ where it appears in clause 2.3 of the parties’ loan agreement”.

I cannot endorse the first judgment’s exposition of the legal principles governing when a debt payable on demand is due without qualification. And the content of that qualification also explains why my reason for holding that the debt here has prescribed goes beyond the treatment of the meaning of “due” in clause 2.3 of the loan agreement, even though I agree with the second judgment’s treatment of that meaning.

[155] The first judgment states the general principles in this way:

“In sum, the relevant principles may, in my view, be restated as follows. A contractual debt becomes due as per the terms of that contract. When no due date is specified then the debt is generally due immediately on conclusion of the contract. However, the parties may intend that the creditor be entitled to determine the time for performance and that the debt becomes due only when demand has been made as agreed. Where there is such a clear and unequivocal intention, the demand will be a condition precedent to claimability, a necessary part of the creditor’s cause of action, and prescription will only begin to run from demand. This, in my view, is not an incident of the creditor being allowed to unilaterally delay the onset of prescription. It is the parties, jointly and by agreement seriously entered into, determining when and under what circumstances or conditions a debt shall become due.” (My emphases.)

[156] The qualification I have to this statement relates to equating a “time for performance” stipulated in a contract with a “demand [that] has been made as agreed”, and then characterising this demand as “a condition precedent to claimability”. I would prefer to stay with the recognised distinction in our law between contractual terms or obligations, time clauses, demands to place defaulting contracting parties in mora debitoris (default on the part of the debtor), and suspensive conditions. From my perspective, the failure to distinguish between these different concepts creates uncertainty and also explains why the conclusion that the debt here has not prescribed is not sustainable.[157] Our law recognises that the terms of the contract – express, tacit or implied – determine the obligations parties to a contract owe to each other. To be distinguished from contractual terms or obligations are conditions:

“[T]he word ‘condition’ in relation to a contract, is sometimes used in a wide sense as meaning a provision of the contract, i.e. an accepted stipulation, as for example in the phrase ‘conditions of sale’.

In this sense the word includes ordinary arrangements as to time and manner of delivery and of payment of the purchase price, etc – in other words the so called accidentalia of the contract. In the sense of a true suspensive or resolutive condition, however, the word has a much more limited meaning, viz. of a qualification which renders the operation and consequences of the whole contract dependent upon an uncertain future event . . . . Where the qualification defers the operation of the contract, the condition is suspensive, and where it provides for dissolution of the contract after interim operation, the condition is resolutive.”

[158] Where a qualification relates to a certain future event, even though the time it will occur is not certain, it is not a condition, but a time clause:

“A term or time clause in a contract is a clause by virtue of which the creditor grants to the debtor a period within which the latter may discharge his obligation . . . or by which the operation of the contract is restricted to a certain time.”
A time clause is a contractual term which qualifies an obligation with reference to a future event which is certain to occur even if it is uncertain when the event will occur, unlike a condition where the qualification is dependent on whether an uncertain future event will occur or not occur.[141][159] Where no time for performance is stipulated in a contract the claim for performance arises upon conclusion of the contract and the need for a demand to place the debtor in breach does not change this. As Corbett J stated in Theron, “it is not the law that a debtor must be placed in mora before he may be sued for specific performance.”

Or as stated by Botha JA in Standard Finance Corporation:

“The rule that demand is necessary to entitle a plaintiff to costs or other relief to which he may be entitled in consequence of the debtor’s mora, does not mean that demand is a condition precedent to the plaintiff’s right of action under the contract.”

[160] The necessity of a demand to place a debtor in mora in relation to an obligation where no time for performance has been stipulated, does not detract from the conclusion that specific performance of the obligation is available at any time at the option of the creditor. The exigibility of the primary performance obligation in terms of the agreement stands apart from the creation of a secondary obligation flowing from the breach of contract. Therefore the commencement of prescription of the primary obligation stands apart from the commencement of mora through demand.

[161] Where does this leave clause 2.3 of the loan agreement? The clause is not a “condition precedent” or suspensive condition. It did not suspend the operation of the contract itself, because the loans were advanced. And it did not suspend the exigibility of repayment, because the lender could at any time make demand for repayment on 30 days’ notice.

[162] Nor is it a time clause “by virtue of which the creditor grants to the debtor a period within which the latter may discharge his obligation . . . or by which the operation of the contract is restricted to a certain time”.[145] To repeat: the lender could at any time demand repayment. Even if the 30-day demand clause was not a part of the loan agreement, the lender would still have had to place the borrower in mora. A mora demand for repayment must be reasonable, but parties may determine the reasonableness of the period by agreement. That is what happened here.

[163] The mora demand was a term of the contract, but it had nothing to do with the commencement of prescription. Specific performance for repayment of the loan could have been claimed by Trinity immediately upon conclusion of the loan agreement. That is when it became due. There is no underlying injustice in the sense that it was prevented by the clause from enforcing repayment of the loan at any time it wished to do so.

[164] The first judgment relies on Miracle Mile in support of its interpretation of the clause as one where the debt becomes due only when the creditor actually elects to accelerate payment at which point prescription begins to run. I have no difficulty with the principle that parties may contractually agree when prescription starts to run, and that in the case of acceleration clauses in instalment contracts that might only be when the acceleration clause is invoked, not when it is agreed to. But that deals with a situation where two different debts are involved: the normal monthly instalment that is due each month and in respect of which prescription starts to run; and the accelerated debt for the full amount. It makes good sense that the prescription periods will be different. But loans payable on demand do not create two separate debts and the rationale underlying the interpretation of the acceleration clause in Miracle Mile is absent here.

[165] I thus agree with the second judgment that the claim under the loan agreement has prescribed, also for these additional reasons.

Note: Footnotes omitted.