Innovent Rental & Asset Management Solutions (Pty) Ltd v Transnet SOC Ltd   

Qualifying proviso considered and SCA confirmed that a proviso must not be treated as an independent enacting clause.

‘The fallacy in counsel’s argument lay in describing clause 11.2 as a presumption, and treating it as an independent enacting provision when in substance it is a proviso to clause 11.1. The correct approach was set out as follows in Mphosi:
‘According to Craies Statute Law 7th ed at 218 –
“the effect of an excepting or qualifying proviso, according to the ordinary rules of construction, is to except out of the preceding portion of the enactment, or to qualify something enacted therein, which but for the proviso would be within it; and such proviso cannot be construed as enlarging the scope of an enactment when it can be fairly and properly construed without attributing to it that effect”.
In R v Dibdin [1910] P 57 (CA), Lord Fletcher Moulton at 125 in the Court of Appeal said:

“The fallacy of the proposed method of interpretation (ie to treat a proviso as an independent enacting clause) is not far to seek. It sins against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. It treats it as if it were an independent enacting clause instead of being dependent on the main enactment. The Courts … have frequently pointed out this fallacy, and have refused to be led astray by arguments such as those which have been addressed to us, which depend solely on taking words absolutely in their strict literal sense, disregarding the fundamental consideration that they appear in a proviso.”’ [para 13]

Essence

Qualifying proviso considered and SCA confirmed fallacy of treating proviso as an independent enacting clause as it sins against fundamental rule of construction.

Decision

(SCA 917/2018) [2019] ZASCA 106 (5 September 2019)

Disallowed the appeal with costs, including the costs of two counsel.

Judges

MJD Wallis JA (Mbha, Zondi, Van der Merwe and Mbatha JJA concurring)

Heard: 29 August 2019
Delivered: 5 September 2019

Related books

Darcy du Toit et al Labour Relations Law: A Comprehensive Guide 6ed 925 pages (LexisNexis 2015) at  438-439

Reasons

‘For those reasons Innovent’s contentions concerning the proper construction of clause 11.2 cannot be accepted. The full court was correct in its conclusion and in upholding Transnet’s appeal. I have my doubts as to the correctness of its substituting an order for absolution from the instance for the order granted by the trial court, but there was no cross-appeal, so that order must stand.” [para 18]

Discussion by GilesFiles

It must be just a matter of time before the labour courts appreciate that the proviso in LRA s 187(2) relating to age discrimination does not have the effect of being an independent authority allowing employers to termination employment simply based on reaching an agreed or usual or normal retirement age.  See also Du Toit et al Labour Relations Law: A Comprehensive Guide 5th edition (LexisNexis 2006) at page 394 fn 133 where specific reference is made to the judgment of Mphosi, referred to by MJD Wallis JA in the latest judgment.

Court summary

“Master rental agreement – termination by effluxion of time – obligations of lessee in regard to return of equipment – meaning of ‘decommissioned’ in rental agreement”

Quotations from judgment

Note: Footnotes omitted and emphasis added

[1] The appellant, Innovent Rental & Asset Management Solutions (Pty) Ltd (Innovent), finances the acquisition and leasing of equipment. On 17 February 2005 it concluded a Master Rental Agreement with the respondent, Transnet SOC Ltd (Transnet), under which it would acquire equipment in accordance with the specifications of Transnet and lease that equipment to Transnet in accordance with the terms set out in the rental schedule to the Master Rental Agreement. The agreement was subsequently revised when the first tranche of equipment was acquired and leased to Transnet. Subsequently five rental schedules were concluded in relation to additional equipment. All of those agreements have come to an end. Some of the equipment has been returned and the present dispute arises from the condition in which it was returned. Compensation has been agreed in respect of equipment not returned.

[2] The dispute revolved around the condition of the equipment that was returned and the provisions of the clauses of the Master Rental Agreement dealing with the return of equipment. The relevant clauses read as follows:

‘11.1 User shall, on termination of this agreement, return the equipment in good working order and condition, fair wear and tear excluded, together with all applicable documents, licences and insurance policies to Hirer’s nominated address at User’s cost and expense. Equipment must be securely packed and crated in a manner that protects the equipment against damage during transportation.
11.2 The equipment shall not be regarded as returned unless (where applicable) it is decommissioned in accordance with the original manufacturer’s specifications and appropriate certificates have been supplied.
11.3 If it is not possible for User to return the equipment to Hirer in accordance with the provisions of this agreement then the User must immediately at the expiration or earlier termination of the renting of the equipment in terms of this agreement and at the User’s cost deliver to Hirer replacement equipment approved by Hirer and of a similar nature to the equipment, provided that Hirer may in its sole discretion accept payment of an amount equal to the Residual Value of the equipment instead of delivery of such replacement equipment. …’

. . . . .

[10] Counsel for Innovent submitted that clause 11.2 contained a presumption that in all cases there needed to be decommissioning in accordance with the original manufacturer’s specifications. He sought to overcome the difficulty that it was common cause that the original manufacturer had done nothing of the sort, by taking the court on a tour of the background to the conclusion of the Master Rental Agreement. This, so he submitted, revealed that Transnet, through the various consultants and firms that it dealt with in regard to the design, manufacture and installation of the equipment, was solely responsible for the nature of that equipment. Innovent, as the financier of its acquisition, was entitled in the light of clause 11.2 to assume that Transnet would ensure that the manufacturer would specify the requirements for decommissioning. That it failed to do so could not be laid at Innovent’s door and meant that Transnet did not comply with its obligations under clause 11.2.

[11] The submission is based on a fundamental fallacy in the interpretation of contracts – one that the courts have time and again rejected. The starting point is clause 11.1. Under that clause Transnet was obliged to restore the equipment to Innovent on termination of the Master Rental Agreement in good order and condition, fair wear and tear excepted. If it did not do so, then Innovent were entitled to be compensated therefor in terms of clause 11.3. Similarly, if it returned the equipment, but it was not in good order and condition, Innovent were entitled to compensation under clause 11.3. In both instances the compensation could take the form of either replacement equipment or money.

[12] Clause 11.2 dealt with the different situation where the equipment had been returned in good order and condition, fair wear and tear excepted, but was equipment that, in addition to the conventional documents, licences and insurance policies referred to in clause 11.1, had to be decommissioned in accordance with specifications prescribed by the original manufacturer. Such equipment ‘shall not be regarded as returned’ unless those specifications were complied with and compliance had been appropriately certified. In other words, even though that equipment was returned in good order and condition, it would not be accepted as having been returned at all, unless there was compliance with the original manufacturer’s decommissioning specifications and that had been certified.

[13] The fallacy in counsel’s argument lay in describing clause 11.2 as a presumption, and treating it as an independent enacting provision when in substance it is a proviso to clause 11.1.

The correct approach was set out as follows in Mphosi:

‘According to Craies Statute Law 7th ed at 218 –

“the effect of an excepting or qualifying proviso, according to the ordinary rules of construction, is to except out of the preceding portion of the enactment, or to qualify something enacted therein, which but for the proviso would be within it; and such proviso cannot be construed as enlarging the scope of an enactment when it can be fairly and properly construed without attributing to it that effect”.

In R v Dibdin [1910] P 57 (CA), Lord Fletcher Moulton at 125 in the Court of Appeal said:

“The fallacy of the proposed method of interpretation (ie to treat a proviso as an independent enacting clause) is not far to seek. It sins against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. It treats it as if it were an independent enacting clause instead of being dependent on the main enactment. The Courts … have frequently pointed out this fallacy, and have refused to be led astray by arguments such as those which have been addressed to us, which depend solely on taking words absolutely in their strict literal sense, disregarding the fundamental consideration that they appear in a proviso.”’

[14] Counsel submitted that this construction was not commercially sensible, because in those circumstances Innovent, as the financier, would have no control over whether there was compliance with a formal decommissioning process laid down by the original manufacturer of the equipment. When, as occurred here, the equipment in final form as installed was purpose-built to fit the client’s needs, in accordance with specifications it had devised, it would be able to circumvent the potential exclusion in clause 11.2 by purposely ensuring that the original manufacturer did not specify any requirements for decommissioning.

[15] There are two answers to this.

  • The first is that there was no evidence that Transnet was aware of the provisions of clause 11.2 in a standard form contract at the time it was working with its advisers on the design and manufacture of the equipment, or thought that it was under any obligation to obtain decommissioning specifications from the original manufacturer. No such obligation was specified in that clause or in clause 3.2, which stated that Transnet specially selected the equipment.
  • The second is that if it was important to Innovent in every case, bearing in mind that it was accepted that the Master Rental Agreement was a standard form agreement that it used in relation to transactions of this type, it was open to it to include appropriate stipulations in its agreement to secure that situation, or at least make enquiries and demand production of the specifications before committing itself to providing the sought-for finance.

[16] Ms Coetzee explained in her evidence that Innovent’s business model relied on its receiving only modest rentals during the subsistence of the agreement, sufficient to cover the cost of its acquisition, and securing a profit at the end of the agreement by reselling, or again leasing, the equipment. However, far from that assisting Innovent, it demonstrated that the interpretation of clauses 11.1 and 11.2 set out above was correct. (I mention this evidence only to demonstrate that it provides a commercial background that is consistent with my construction of the clauses.) The business model provides the explanation for Innovent requiring that the equipment be returned in good order and condition, fair wear and tear excepted, together with all applicable documents – operating manuals would be an example – licences and insurance policies. Furthermore the equipment had to be securely packed and crated in a manner that protected it against damage during transportation. The background of the business model shows clearly that clause 11.1 was designed to facilitate Innovent earning its profit by reselling, or re-letting, the equipment on the second-hand market.

[17] Clause 11.2 fits neatly into that structure. If the manufacturer had specified decommissioning in a particular manner and after decommissioning the equipment was to be sold, a prospective purchaser would want to know that decommissioning had been undertaken as specified. The position would be no different from that of the purchaser of a second-hand motor vehicle wishing to be satisfied that the vehicle had been maintained in accordance with the manufacturer’s service manual.

[18] For those reasons Innovent’s contentions concerning the proper construction of clause 11.2 cannot be accepted. The full court was correct in its conclusion and in upholding Transnet’s appeal. I have my doubts as to the correctness of its substituting an order for absolution from the instance for the order granted by the trial court, but there was no cross-appeal, so that order must stand.

. . . . .