Court name
Supreme Court of Zimbabwe
Case number
SC 78 of 2005
Civil Appeal 315 of 2004

Watergate (Pvt) Ltd. v Commercial Bank of Zimbabwe (15/04) (SC 78 of 2005, Civil Appeal 315 of 2004) [2006] ZWSC 70 (11 January 2006);

Law report citations
Media neutral citation
[2006] ZWSC 70













REPORTABLE
ZLR (63)


Judgment
No. SC. 78/05


Civil
Appeal No. 315/04








WATERGATE
(PRIVATE) LIMITED v





COMMERCIAL
BANK OF ZIMBABWE








SUPREME
COURT OF ZIMBABWE


SANDURA
JA, ZIYAMBI JA & GWAUNZA JA


HARARE,
NOVEMBER 29, 2005 & JANUARY 12, 2006








R
Y Phillips
, for the appellant





J
B Colegrave
, for the respondent





SANDURA
JA: This is an appeal against a judgment of the High Court in
terms of which the appellant was ordered to pay to the
respondent the
sum of US$817 522.99, together with interest at the rate of
8.21% per annum. Alternative relief was granted
in the event that
the respondent was unable to recover payment in United States
dollars.






The
background facts in the matter are as follows. The appellant
(“Watergate”) had three accounts with the respondent (“the
Bank”), two being loan accounts and one being a foreign currency
account. At the relevant time Watergate was a farming company,
which carried on farming operations at Checkers Farm (“the farm”)
in Chipinge District, and grew tobacco and coffee that generated
foreign currency.





In
1998 the Bank provided Watergate with a short-term loan to finance
its crop expenditure on the farm. The loan, which was in
local
currency, was repayable from the proceeds of the crops, and was
secured by mortgage bonds registered over the farm. In addition,
the loan was renewable on an annual basis.





On
14 February 2000 Watergate wrote to the Bank expressing some
concern about the viability of its farming operations, in view
of the
rising interest rate on its overdraft with the Bank. Its total
indebtedness to the Bank was then $31 500 000.00.
In the
circumstances, Watergate asked for a loan with a rate of interest
lower than the rate that the Bank was then charging, which
exceeded
80% per annum.





Subsequently,
in March 2000 Mr Mark Muilder (“Muilder”), the Bank’s
agricultural finance planner, visited the farm in
order to discuss
Watergate’s request. Muilder suggested to Watergate that one
solution to its problems could be to convert its
existing loan into a
foreign currency denominated loan, which would be repaid from the
foreign currency earned by Watergate from
the sale of its coffee and
tobacco.





When
Muilder was reminded that it was the Government’s policy that
although the tobacco and coffee were sold in United States
dollars
the farmer was paid in local currency, he said that the Reserve Bank
of Zimbabwe (“the RBZ”) had a discretion in the
matter and could
waive the general rule. He added that once the loan was converted
into foreign currency the interest rate charged
by the Bank would be
much less.





Thereafter,
on 4 October 2000 Watergate wrote to the Bank requesting the
Bank to convert its loan into a foreign currency loan.
Following
that request and the exchange of further correspondence, the Bank
finally agreed to have Watergate’s loan converted
into a foreign
currency loan.





On
9 January 2001 Watergate’s loan, which was then about
$56 000 000.00, was converted into United States dollars.

Shortly thereafter, the sum of US$55 000.00, which was in
Watergate’s foreign currency account, was set off against the
foreign currency loan, leaving a balance of US$817 522.99, with
interest at 8.21% per annum.





Subsequently,
on 10 July 2001 the agreement to convert Watergate’s loan into
a foreign currency loan was reduced to writing.
Clause 6.2 of
the agreement provided that the loan was to be repaid in five monthly
instalments of US$200 000.00, with
the last instalment being
paid on 31 December 2001.





The
parties later agreed to add an addendum (“the addendum”) to
clause 6.2 in longhand, which reads as follows:





“Depending
on the Reserve Bank allowing 100% of coffee revenue being paid in US
dollars to this loan. If not, to be extended to 31/12/2002
as
agreed.”






Following
the above agreement, the Bank made an application to the RBZ on
behalf of Watergate, requesting the RBZ to permit Watergate
to use
the foreign currency earned from the sale of its coffee to repay the
foreign currency loan to the Bank. That application
was
unsuccessful. In terms of the addendum, the loan repayment period
was then automatically extended to 31 December 2002.






Subsequently,
on 10 July 2002 Watergate’s lawyers wrote to the Bank
acknowledging that the balance of the loan due and outstanding
was
US$817 522.99, but tendering payment in local currency in the
sum of $44 963 764.45 in full and final settlement
of
Watergate’s indebtedness to the Bank. That sum was alleged to be
the local currency equivalent of US$817 522.99 at the
then
prevailing exchange rate of one United States dollar to fifty-five
Zimbabwe dollars.





On
the same date, i.e. 10 July 2002, the Bank wrote to Watergate
and rejected the offer to repay the loan in local currency.
It
insisted that the loan should be repaid in terms of the agreement,
and threatened to institute legal proceedings against Watergate
if
Watergate did not repay the loan as agreed.





Thereafter,
after the exchange of further correspondence by the parties, it was
clear that the institution of legal proceedings
in order to resolve
the dispute was inevitable. Accordingly, on 17 July 2003 the
Bank filed a court application in the High
Court seeking an order
compelling Watergate to pay the sum of US$817 522.99 together
with interest at the rate of 8.21% per
annum.





On
6 October 2004 the Bank’s application was successful, and the
High Court granted the following order:






“In the result it is ordered –






1. (i) that judgment be and is
hereby granted in favour of the applicant in the sum of US$817 522.99
together with interest thereon
at the rate of 8.21% per annum to the
date of final payment.






(ii) that
in the event that for any reason whatsoever the applicant is unable
to recover payment in United States dollars it shall
be entitled to
recover the full amount or part thereof in Zimbabwean dollars at the
prevailing foreign exchange auction rate as at
the date of repayment
or enforcement.”






Aggrieved
by that order, Watergate appealed to this Court.






Two
issues arise for determination by this Court. The first is whether
the Bank was entitled to payment in United States dollars;
and the
second is whether Watergate was prevented from repaying the loan in
United States dollars by a supervening impossibility
that Watergate
had not foreseen, or in respect of which it was not at fault. I
shall deal with the two issues in turn.





Dealing
with the first issue, the legal position is that a party is entitled
to payment in a foreign currency if he can show that
a judgment in
that currency would most truly express his loss and, therefore, most
fully compensate him for that loss. That is
what this Court decided
in Makwindi Oil Procurement (Pvt) Ltd v National Oil Company of
Zimbabwe
1988 (2) ZLR 482 (SC).





In
the present case, I am satisfied that the Bank proved its entitlement
to payment in United States dollars. The agreement between
the
parties provided that the Bank would be paid in United States
dollars, and did not provide for payment in local currency.





Both
parties stood to benefit from that agreement. The Bank legitimately
expected that the loan would be repaid in United States
dollars,
which it needed and was entitled to hold in the ordinary course of
its business. On the other hand, Watergate stood to
benefit, in
that the period within which the loan was to be repaid was extended
to 31 December 2001, or 31 December 2002
if the RBZ did not
allow Watergate to pay the Bank all the foreign currency it earned
from the sale of its coffee. There was also
the added advantage
that the rate of interest charged by the Bank was low.





However,
as far as the Bank was concerned, it was the repayment of the loan in
foreign currency that was at the heart of the agreement.
Without
that, there would have been no reason for the Bank to enter into the
agreement. The loss sustained by the Bank as a result
of the breach
of contract by Watergate must, therefore, be in United States
dollars.





Consequently,
it is a judgment in foreign currency, i.e. United States dollars,
which would most fully compensate the Bank for that
loss. The
learned Judge in the court a quo, therefore, correctly
granted the application.





The
learned judge was fully aware of the possibility that the Bank might
not be able to recover payment in United States dollars.
He
accordingly ordered that in that event the Bank would be entitled to
recover the full amount or part thereof in Zimbabwe dollars,
applying
the prevailing foreign exchange auction rate at the date of repayment
or enforcement.





The
reasons for making such an order were set out by this Court in
Makwindi’s case supra. At 492 E-F GUBBAY JA
(as he then was) said:





“Fluctuations
in world currencies justify the acceptance of the rule not only that
a court order may be expressed in units of foreign
currency, but also
that the amount of the foreign currency is to be converted into local
currency at the date when leave is given
to enforce the judgment.
Justice requires that a plaintiff should not suffer by reason of a
devaluation in the value of currency
between the due date on which
the defendant should have met his obligation and the date of actual
payment or the date of enforcement
of the judgment. Since execution
cannot be levied in foreign currency, there must be a conversion into
the local currency for this
limited purpose and the rate to be
applied is that obtaining at the date of enforcement.”






I
now wish to deal with the second issue, which is whether Watergate
was prevented from repaying the loan in United States dollars
by a
supervening impossibility that it had not foreseen, or in respect of
which it was not at fault. This issue is important because
the
general rule is that the impossibility of performance is an excuse
for the non-performance of an obligation: impossibilum nulla
obligatio est
.





However,
whether or not the general rule applies in a particular case would
depend upon the circumstances of the case and the nature
of the
impossibility. In this regard, I can do no better than quote what
BOSHOFF JP said in Bischofberger v Van Eyk 1981 (2)
SA 607 (WLD). At 611 B-D the learned JUDGE PRESIDENT said:





“… when
the Court has to decide on the effect of impossibility of performance
on a contract, the Court should first have regard to the
general rule
that impossibility of performance does in general excuse the
performance of a contract, but does not do so in all cases,
and must
then look to the nature of the contract, the relation of the parties,
the circumstances of the case and the nature of the
impossibility to
see whether the general rule ought, in the particular circumstances
of the case, to be applied. In this connection
regard must be had
not only to the nature of the contract, but also to the causes of the
impossibility. If the causes were in the
contemplation of the
parties, they are generally speaking bound by the contract. If, on
the contrary, they were such as no human
foresight could have
foreseen, the obligations under the contract are extinguished.”





I
respectfully agree with the principles set out by the learned JUDGE
PRESIDENT. Those are the principles that ought to be applied
once
the existence of the impossibility has been established.





With
those principles in mind, I now proceed to examine the arguments
advanced on behalf of Watergate. They were two.





The
first argument was that Watergate failed to repay the loan to the
Bank in United States dollars, because the RBZ did not authorise
it
to pay to the Bank all the foreign currency it earned from the sale
of its coffee. In my view, this is not a valid argument,
because
the parties foresaw the possibility that the RBZ might not grant such
authority, and in fact made provision for that eventuality
by adding
the addendum to clause 6.2 of the agreement.





As
already indicated, the addendum provided that the agreement to repay
the loan in full by 31 December 2001 was dependent
upon the RBZ
permitting Watergate to pay to the Bank all the foreign currency it
earned from the sale of its coffee, and that if
the RBZ did not grant
such permission the final date of the repayment of the loan would be
extended to 31 December 2002.





There
must, therefore, have been another source from which Watergate
believed it would raise the foreign currency it had agreed
to pay to
the Bank, in the event that the RBZ did not permit it to pay to the
Bank the foreign currency it received from the sale
of its coffee.
Watergate does not say what that source was and why it did not obtain
the required foreign currency from that other
source and pay it to
the Bank. It was common cause that the proceeds from the sale of
tobacco were paid to the Bank in Zimbabwe
dollars as the Bank held a
registered stop order over the tobacco crop.





The
second argument advanced on behalf of Watergate was that by the time
the RBZ reversed its policy in August 2002 and allowed
companies to
use the foreign currency they earned to pay their foreign currency
loans, Watergate had already pledged the whole of
its coffee crop to
Zimbabwe Coffee Mill Limited (“the Coffee Mill”) in return for
financial assistance, because the Bank had
frozen its overdraft
facilities.





In
my view, this is not a valid argument, because it simply indicates
that Watergate had only itself to blame for its inability
to repay
the loan to the Bank in United States dollars. By pledging its
coffee crop to the Coffee Mill, Watergate deliberately
put it beyond
its power to repay the loan in United States dollars.





According
to Watergate, the arrangement with the Coffee Mill was that the
Coffee Mill advanced working capital to Watergate in return
for a
pledge of the coffee crop, which was later sold through the Coffee
Mill, and Watergate was paid, after the repayment of the
initial
loan, the net proceeds in local currency. If that averment is
correct, it was the Coffee Mill that benefited in foreign
currency
and Watergate must have been aware of that. The second argument
advanced on behalf of Watergate cannot, therefore, succeed.





Watergate
was, therefore, not prevented from repaying the loan in United States
dollars by a supervening impossibility that it had
not foreseen, or
in respect of which Watergate was not at fault. The maxim
impossibilium nulla
obligatio est
does
not, therefore, apply.





In
the circumstances, the appeal is devoid of merit and is, therefore,
dismissed with costs.














ZIYAMBI
JA: I agree.














GWAUNZA
JA: I agree.














Henning
Lock Donagher & Winter
,
appellant's legal practitioners


Kantor
& Immerman
,
respondent's legal practitioners