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Interpretation of Contracts

Interpretation of contracts is not always straight forward, and, can sometimes be very misleading. This could result in costly decisions made by the contract parties based on their “own” interpretation of contract clauses.

An error that it is very often made is where contract parties read clauses in isolation. Although some clauses are meant to serve a purpose in isolation, it is advisable that a contract, whether employment or other type of contract, is read as a whole.

 

In the matter of Theron v Premier of the Western Cape Province and Others, Unreported Case no 1310/2017, the dismissed employee (Theron) claimed damages on the basis that he’s fix term contract was terminated prematurely, and that the Employer interpreted a notice to terminate clause, incorrectly.

 

The pertinent facts of the case were as follow:

 

Theron had been employed, on a three-year fixed-term contract, as chief executive officer of the Western Cape Provincial Development Council (‘the Council’). Besides stipulating that the contract would terminate automatically on 30 June 2012, the contract had also made provision for its termination on one month’s written notice by either party and stated that the Council could terminate the contract summarily in the event of a breach by the employee. It also provided that the agreement could otherwise only be terminated for reasons relating to misconduct, operational requirements or incapacity.

 

The provincial statute, which had established the Council, was repealed by the Provincial Development Council Repeal Act 5 of 2011. The Council was, therefore, disestablished and ceased to exist on 5 December 2011, and Theron’s contract had accordingly been terminated on that date. He had been paid one month’s notice pay, together with outstanding leave, bonus and severance payments.

 

The employee had then claimed payment of the outstanding salary he would have earned until 30 June 2012 (the date his contract would have automatically terminated) from the department of the premier as that department had been charged with settling all liabilities of the Council in terms of the transitional arrangements in the Repeal Act.

 

Theron had, firstly, approached the CCMA, which found that it did not have jurisdiction as the premier had not been his employer and had, thereafter, instituted action in the high court. The high court had also dismissed his claim but had given him leave to appeal to the supreme court of appeal.

 

Findings of the Supreme Court of Appeal:

 

Clause 9 of the Employment Contract, headed ‘Termination’, read:

 

9.1       “Notwithstanding anything to the contrary in clause 5.1 herein contained, either party to this agreement may terminate it at any time during the currency thereof on giving one month’s notice in writing to the other party. The employer may, however, in its discretion accept a shorter period of notice.

 

9.2       The employer may terminate this agreement summarily or after notice of less than one month, as it may deem expedient, in the event of a breach of the terms of this agreement by the employee. The agreement may otherwise only be terminated for reasons relating to misconduct, operational requirements or incapacity.”

 

The supreme court of appeal referred to the principles dealing with the interpretation of contracts:

 

“It is clear that interpretation is a unitary exercise. It starts with the text to be interpreted, and considers it within the contract as a whole, and in context.”

 

In a more recent matter, The City of Tshwane Metropolitan Municipality v Blair Atholl Homeowners Association (2019 (3) SA 398 (SCA) Judge Navsa comments relating to this topic could be summarized as follow:

 

  • the courts task is to ascertain the objective meaning of the language chosen by the parties to express their agreement;
  • the court must consider the contract as a whole, depending on the nature, formality and quality drafting of the contract;
  • the court must give weight to the elements of the wider context in reaching a conclusion as to the objective meaning and interpret the contract in the light of the factual background known to the parties at, or before the date of the contract, excluding evidence of prior negotiations;
  • words in a document must not be considered in isolation; (“My emphasis”)
  • a restrictive consideration of words without regard to the context must be avoided;
  • words have to be interpreted sensibly and not have an un businesslike result;
  • all factors need to be considered holistically, similar to the unitary approach.

 

Returning to the matter in casu, the court stated that clauses 9.1 and 9.2 are not to be examined without reference to one another. Investigation as to the purpose for which these clauses were designed needs to be conducted objectively to attribute sensible meaning to all the parts.

 

By mouth of the SCA:

 

“If Theron’s construction were to be accepted, that sub-clause 2 qualified sub-clause 1, then little purpose would have been served by the latter. Only the employee would have had the right to terminate on one month’s notice. The employer would not have had the right to terminate on notice. It could terminate only on breach by the employee, with or without notice, and in the event that there had been misconduct or another incident mentioned in the second sentence, but not otherwise.

 

Could that have been intended by either Theron or the Council? Why would the Council have intended that Theron would have a right to terminate on notice but that it would not? It was highly unlikely that that would have been the case. And the words indicating that ‘either party … may terminate … on giving one month’s notice’ would have been entirely superfluous on this construction. So too would the provision in clause 9.2, that, in the event of breach by the employee, no notice, or less than a month’s notice, could be given to the employee, be superfluous.

 

On the other hand, if Theron’s construction was not accepted, what could the second sentence of clause 9.2 possibly have meant? It was hardly a model of clarity. It did not state which party could terminate in the event of misconduct (one assumes it was the employer) and whether it would be on notice, or pending an investigation of circumstances.”  

 

However, the supreme court of appeal considered the premier’s submission to be more coherent and plausible, i.e. termination for reasons relating to misconduct and other circumstances had been included to ensure that, where further investigations needed to be done, immediate notice did not have to be given. Accordingly, the premier had been entitled to terminate on notice to Theron and the appeal was dismissed with costs.

 

Conclusion

 

Interpreting contracts could be more important than one think, not only for sake of clarity but also to ensure consensus between the parties which is an integral essentialia of a contract.