No. SC 82/06
Civil Appeal No. 88/06
CORPORATION LIMITED v
SUPREME COURT OF
SANDURA JA, MALABA
JA & GWAUNZA JA
HARARE, JULY 4, 2006 &
MAY 23, 2007
C E Puckrin SC,
with him A R Bhana, for the appellant
J C Andersen SC,
with him G Mitha-Valla, for the respondent
SANDURA JA: This is an appeal against a judgment of the High
Court in terms of which the appellant (Metallon), a South
African company, was ordered to pay to the respondent (Stanmarker),
a Zimbabwean company, damages for breach of contract in
the sum of
US$7 400 000.00, together with interest on that sum and
costs of suit. There is a cross-appeal by Stanmarker
in respect of
certain expenses incurred by Stanmarker which were excluded from the
costs awarded to it.
The background facts
are as follows. At the relevant time Independence Gold Mining
Zimbabwe (Pvt) Ltd (Independence), a
mining company registered
in terms of the law of Zimbabwe, owned five gold mines in the
country. These were Arcturus, How, Mazowe,
Redwing and Shamva.
Independence was a wholly-owned subsidiary of Cableair Ltd
(Cableair), and Cableair was a wholly-owned
Lonmin Plc (Lonmin). Both Cableair and Lonmin were
incorporated in the United Kingdom.
In 2001 Lonmin
decided to dispose of its shares in Cableair and, consequently, its
interests in Independence as well as the five
gold mines. Metallon
and Stanmarker, acting independently of each other, expressed
interest in the acquisition of all the shares
in Cableair and,
consequently, the five gold mines owned by Independence.
and Stanmarker decided that it was in their best interest to submit
to Lonmin a joint bid for the Cableair
shares (the shares).
Accordingly, they concluded an agreement which they termed Heads of
Agreement (the Heads) on 24 June
However, before that
date, on 20 June 2002, Metallon, acting through an associate
company, First Gold Proprietary Ltd (First
Gold), extended to
Lonmin the offer to purchase the shares for 12 million United
States dollars. In that offer First Gold
reserved its right to
nominate any person, company etcetera to replace it as the purchaser
of the shares. This provision would
have enabled Newco, a company
which was to be incorporated by the parties following the signing of
the Heads, to become the purchaser
of the shares, had the
negotiations between Lonmin and Metallon/First Gold been successful.
following the signing of the Heads by both parties, Metallon entered
into negotiations with Lonmin in respect of the
purchase of the
shares. However, by 24 September 2002 the negotiations had not
been successful and no agreement had been concluded.
26 September 2002 Metallon, acting through another associate
company, Pemberton International Investments Ltd
negotiated with Lonmin the purchase of the shares. The negotiations
culminated in a written agreement between
Lonmin and Pemberton, in
terms of which Lonmin sold the shares to Pemberton for 15.5 million
United States dollars. That agreement
was signed on 28 October
As a direct
consequence of the purchase of the shares by Pemberton, Stanmarker
sued Metallon for damages for breach of contract,
allegation being that Metallon had used Pemberton and acquired the
shares for itself in breach of the provisions of the
The learned Judge in
the court a quo found that Metallon had breached the
provisions of the Heads, and ordered it to pay Stanmarker damages for
breach of contract in
the sum of 7.4 million United States
dollars, together with interest thereon from 28 October 2002 to
the date of payment,
at the rates prevailing from time to time in the
United States of America. Aggrieved by that result, Metallon
appealed to this
In my view, the
learned Judges decision was based on three main findings. The
first was that the Heads constituted a partnership
and Stanmarker. The second was that clause 3.5 of the Heads
was legally binding on Metallon, and that Metallon
had breached its
legal obligations under that clause. And the third was that
Metallon had breached its legal obligation after 24 September
2002 to continue negotiating with Lonmin on behalf of Newco until the
negotiations were concluded or lawfully terminated.
will consider the three findings by the learned Judge in turn.
DID THE HEADS CONSTITUTE A PARTNERSHIP?
Before answering the question, I would like to set out the relevant
provisions of the Heads.
The status of the
Heads was set out in clause 2 which, in relevant part, stated as
2.1 The parties declare that they are prepared and intend to enter
into detailed written agreements incorporating inter alia the
terms and conditions set out below.
2.2 These Heads set out
the main principles upon which the parties will negotiate the
detailed written agreements referred to herein.
These Heads (save
for 2.3, 9, 10 and 11) accordingly do not constitute legally binding
rights and obligations on the parties hereto.
These Heads will fall
away and be of no force and effect upon the signing of the detailed
written agreements .
In my view, it is
clear from clause 2.2 of the Heads that the only legally binding
provisions of the Heads were clauses 2.3,
9, 10 and 11.
stated as follows:
The parties undertake with effect from the Signature Date and
until the expiry of three months thereafter that they will negotiate
with each other in good faith in respect of the detailed written
agreements and that, subject to 3.5, they will not negotiate with
Lonmin or any other person in respect of any matter relating to the
acquisition of all or part of the share capital, assets or business
of Independence or its immediate holding company.
Clause 9 stated
Stanmarker shall use its best efforts to procure that:
9.1 all interested parties, relevant government officials and
authorities are favourably disposed to Newcos acquisition of
or its holding company, such that the acquisition of
Independence or its holding company is not unduly hampered,
delayed in any manner whatsoever; and
9.2 the Zimbabwean government substantially reduces the current
Zimbabwean government dispensation referred to in 3.1 and Stanmarker
shall, upon request, inform, hold discussions with and provide
satisfactory evidence to Metallon of its progress in this regard.
Clause 10 stated
No party shall disclose to any person other than its professional
advisors and Lonmin any matter relating to these Heads or the
transactions contemplated herein, except with the prior written
consent of the other party.
Clause 11 stated
11.1 From the Signature Date and for a period of three months
thereafter, neither party shall, without the prior written consent
the other party, engage in or enter into discussions with any other
party with an interest in acquiring the share capital or business
Independence or its immediate holding company and/or engage in or
enter into discussions with any other party desirous of achieving
similar objectives than, or competing with, Newco.
11.2 Either party shall
procure that their respective shareholders and directors shall,
within 7 (seven) days of the Signature Date,
undertakings to the other party similar to those set out in 11.1,
And clause 3.5,
which was mentioned in clause 2.3 of the Heads, stated as
Metallon shall, on behalf of Newco, negotiate with Lonmin and make
an offer to acquire Independence or its immediate holding company
the amount of approximately 12 million US Dollars or such other
amount agreed upon between the shareholders;.
determining whether the Heads constituted a partnership between
Metallon and Stanmarker the only provisions to consider
2.3, 9, 10 and 11, i.e. the legally binding provisions. The rest of
the provisions are irrelevant because they were
not legally binding
on the parties, and the existence of the partnership was in dispute.
The essentials of a
partnership agreement were set out by STRATFORD AJA in Rhodesia
Railways and Ors v Commissioner of Taxes 1925 AD 438 at 465 as
I think we are safe if we adopt the essentials which have been
laid down in Pothier on Partnership . These essentials
are fourfold. First, that each of the partners brings something
into the partnership, or binds himself
to bring something into it,
whether it be money, or his labour or skill. The second essential
is that the business should be carried
on for the joint benefit of
both parties. The third is that the object should be to make
profit. Finally, the contract between
the parties should be a
Bester v Van Niekerk 1960 (2) SA 779 (AD) the fourth
essential, i.e. that the contract between the parties should be a
legitimate contract, was dropped,
on the ground that illegality as a
ground of invalidation was part of the general law of contract and
was not an essential peculiar
to partnership agreements. I entirely
agree with that decision.
Thus, in determining
whether the legally binding clauses of the Heads constituted a
partnership between Metallon and Stanmarker,
only three essentials
are relevant, i.e. the first three set out in Pothier on
I will start by
considering the second essential, i.e. that the business should be
carried on for the joint benefit of both parties.
is a crucial one.
After examining the
legally binding clauses of the Heads, I am satisfied that none of
them indicated that any business was to be
carried on for the joint
benefit of both parties during the relevant period, i.e. the period
extending from the date when the Heads
were signed by the parties to
the date when the detailed written agreements would have been
concluded or signed by the parties, had
that stage been reached.
The legally binding clauses, i.e. clauses 2.3, 9, 10 and 11, are
silent on this. It is pertinent to
note that clause 3.5 is not
one of the legally binding clauses, although it is mentioned in
clause 2.3. This issue will
be dealt with in greater detail
later on in this judgment.
In my view, the
finding that none of the legally binding clauses indicates that any
business was to be carried on for the joint
benefit of both parties
during the relevant period is fatal to the argument, which appears to
have been accepted by the learned Judge
in the court a quo,
that some sort of interim partnership existed between the parties
until the stage at which the detailed written agreements, referred
in clause 2 of the Heads, were concluded.
In the circumstances,
it is not really necessary for me to consider whether the other two
essentials of a partnership agreement,
i.e. the first and third
essentials set out in Pothier on Partnership, are present in
the legally binding provisions, because their presence would depend
upon there being a business to be carried on
for the joint benefit of
Quite apart from the
fact that the relevant provisions do not indicate that a business was
to be carried on for the joint benefit
of both parties, clause 2.2
of the Heads stated as follows:
These Heads set out the main principles upon which the parties
will negotiate the detailed written agreements referred to herein
The Heads were,
therefore, nothing more than a set of principles which formed the
basis of the negotiation and conclusion of a future
In addition, apart
from the bald allegation in its replication, filed long after the
trial had started, that the relationship between
it and Metallon
constituted a partnership, Stanmarker did not allege the existence of
a partnership either in its declaration filed
in April 2004 or in its
further particulars supplied in response to Metallons request for
further particulars filed in June 2004.
The main allegation
relied upon by Stanmarker was set out in para 10 of its
declaration as follows:
In breach of the agreement and during the period of three months,
the defendant made a bid for Independence for itself and pursued
negotiations with Lonmin for the acquisition of Independence without
the plaintiffs prior written consent, pursuant to which it
acquired ownership of the shares in Cableair and effective control of
Independence for itself to the exclusion of the plaintiff.
In short, the
allegation was that during the three month restraint period Metallon
had committed a breach of contract. No allegation
of a partnership
relationship was made.
On 3 June 2004
Metallon filed its request for further particulars to the
declaration. The further particulars sought by Metallon
5.1 Does the plaintiff rely on a duty on the part of the defendant
to act in good faith toward it or Newco?
5.2 What does the
plaintiff contend was the extent of such duty and where does it arise
In its further particulars filed on 15 June 2004 Stanmarker
responded as follows:
Ad paragraph 5.1
The plaintiff relies
both on the effective terms of the Heads of Agreement and the duty of
Ad paragraph 5.2
The duty arises ex
contractu and, in the alternative, is implied, based on the
nature of the agreement between the parties, and in the further
is implied by operation of the law.
In my view, if
Stanmarker genuinely believed that the parties had intended to create
and had created a partnership it would have
said so in its further
particulars when it dealt with the duty of good faith and where such
duty had arisen from.
In addition, the
allegation of a partnership was not made in the amendment to
Stanmarkers declaration which was sought and granted
in June 2005.
In the circumstances,
it seems to me that the allegation of the existence of a partnership
was an afterthought on the part of Stanmarker.
It was only made in
the replication filed in February 2006, after it had become clear
that the main allegation set out in para 10
declaration (i.e. that Metallon had breached the agreement during the
restraint period of three months) was unsustainable.
conclude that the Heads did not constitute a partnership between
Metallon and Stanmarker.
WAS CLAUSE 3.5 LEGALLY BINDING ON METALLON AND DID METALLON
BREACH ITS OBLIGATIONS UNDER IT?
The learned Judge in the court a quo answered both questions
in the affirmative. I respectfully disagree with him.
In concluding that
clause 3.5 was legally binding on Metallon the learned Judge
reasoned as follows:
It is true that clause 2.2 does not expressly mention
clause 3.5 as one of the legally binding obligations of the HOA
(Heads of Agreement). However, it must not be overlooked that
clause 3.5 is expressly mentioned in clause 2.3 and
it forms part of the binding obligations of the HOA.
Simply put, the
positive obligation to act in good faith created by clause 2.3
permeates and extends to the defendants mandate
in clause 3.5.
This means that the defendant had an express contractual obligation
to act in good faith, when negotiating
on behalf of the parties, in
relation to the acquisition of the Cableair shares.
In my view, it appears
that from very early in the negotiations the defendant failed to
disclose or communicate important information
and this stance was
maintained throughout the three months restraint period.
In other words, in my
view the defendant was in breach of its duty of good faith as created
by the agreement it entered into with
Mining (Pvt) Ltd v Metallon Corporation Ltd HH-36-2006 (not yet
reported) at pp 26-31 of the cyclostyled judgment.
As already stated, it
is clear from clause 2 of the Heads that the only legally
binding provisions of the Heads were clauses
2.3, 9, 10 and 11. If
the parties had intended clause 3.5 to be legally binding they
would have said so. The mere fact that
reference to clause 3.5
was made in one of the binding clauses (i.e. clause 2.3) did not
thereby convert clause 3.5
into a binding clause. Clause 3.5
was merely mentioned as an exception to the restraint set out in
Although the word
shall was used in clause 3.5, the word is not always used
in a peremptory sense. Its meaning would
depend upon the context in
which it is used. At times it could mean that there is a
requirement to do something, and at other times
it would not mean
that, although the word usually carries a peremptory connotation.
However, if the
manifest intention of the parties to an agreement so requires, a
departure from the peremptory connotation of the
word shall is
justified. That is so in the present case. The manifest intention
of the parties appears in clause 2.2,
from which it is clear
beyond doubt that the parties did not intend to make clause 3.5
In addition, to
regard the word shall in clause 3.5 as peremptory would
result in an absurdity and a contradiction within
the Heads, because
clause 3.5 is not one of the legally binding clauses set out in
In the circumstances,
Metallon was not legally obliged to negotiate with Lonmin for the
acquisition of the shares on behalf of Newco.
Accordingly, it did
not have any legal obligations in terms of clause 3.5.
It therefore follows
that the second question posed earlier, i.e. whether Metallon
breached its obligations under clause 3.5,
DID METALLON HAVE A LEGAL OBLIGATION AFTER 24 SEPTEMBER
2002 TO CONTINUE NEGOTIATING WITH LONMIN ON BEHALF OF NEWCO AND DID
BREACH SUCH OBLIGATION?
The learned Judge in the court a quo answered both
questions in the affirmative. I respectfully disagree with him.
In my view, the
learned Judge was influenced by his finding that the Heads
constituted a partnership. From that premise he proceeded
that Metallon was under a legal obligation, after the restraint
period expired on 24 September 2002, to continue with
negotiations which it had commenced with Lonmin during the restraint
period until the negotiations were finalised or lawfully
However, since I have
already determined that the Heads did not constitute a partnership,
the learned Judges reasoning is inapplicable,
and I need not
comment on its applicability to partnership transactions.
In my view, it is
very clear from clauses 2.3 and 11.1, both of which have already been
set out in this judgment, that the restraint
was for a period of
three months only, i.e. from 24 June to 24 September 2002.
After that period, neither party was precluded
from acquiring the
shares for itself to the exclusion of the other.
Metallon did not,
therefore, have a legal obligation after 24 September 2002 to
continue negotiating with Lonmin on behalf
of Newco. Consequently,
the second question falls away.
The appeal must,
therefore, be allowed, but the cross-appeal must be dismissed.
In the circumstances,
the following order is made
1. The appeal is allowed with costs of two counsel.
2. The order of the court a quo is set aside and the
following is substituted -
The plaintiffs claim is dismissed with costs of two counsel.
3. The cross-appeal is dismissed with costs.
MALABA JA: I
Gill, Godlonton &
Gerrans, appellant's legal practitioners
Immerman, respondent's legal practitioners