The Supreme Court of Appeal (“SCA”) recently handed down a judgment in the matter between 68 Wolmarans Street Johannesburg (Pty) Ltd (“Wolmarans”) and Tufh Limited (“Tufh”) which emphasised the critical importance of upholding contractual obligations, even in challenging circumstances. At the heart of the dispute, Tufh alleged that Wolmarans had breached the terms of the loan agreement concluded between the parties and the mortgage bond, concluded as security for the obligations of Wolmarans under the loan agreement, by failing to pay the municipal service charges to the City of Johannesburg (“CoJ”). Despite making regular loan repayments under the loan agreement, Wolmarans' failure to pay these municipal service charges led to Tufh applying to court seeking payment of the outstanding amount under the loan agreement together with interest and costs as well as the foreclosure of the mortgage bond. Wolmarans had an obligation under the loan agreement and the mortgage bond to pay the municipal service charges.

Initially, the High Court dismissed Tufh's application, citing Wolmarans' ongoing dispute with the CoJ and questioning the fairness of penalising Wolmarans while it remained up to date with its loan repayments. However, the SCA overturned this decision, emphasising the fundamental principle of pacta sunt servanda. The principle of pacta sunt servanda states that, inter alia, obligations created in terms of an agreement must be honoured. The SCA asserted that Wolmarans' failure to pay undisputed charges to the CoJ on time could not justify leniency and highlighted the necessity of enforcing contractual obligations, regardless of any perceived harshness. It held that the acceleration of payment under the loan agreement and the foreclosure of the mortgage bond by Tufh as a result of a breach by Wolmarans of its obligations to pay the municipal service charges are neither unconscionable nor contrary to public policy. Consequently, the SCA ruled in favour of Tufh, allowing acceleration of the outstanding loan amount and the foreclosure of the mortgage bond.

Section 118(3) of the Local Government: Municipal Systems Act, No. 32 of 2000 (“the Municipal Systems Act”) played a pivotal role in determining the enforcement of contractual terms between Tufh and Wolmarans. This section grants municipalities preferential security for the recovery of debts owed to them as any amounts due for municipal service fees, property rates and other municipal taxes, levies and duties enjoy preference over any mortgage bond registered against a property.

In contextualising this judgment, the SCA emphasized the importance of section 118(3) of the Municipal Systems Act in safeguarding municipal’s interests, by stating that section 118(3) of the Municipal Systems Act enjoys preference over any mortgage bond registered against the property. Wolmarans' persistent failure to settle undisputed outstanding municipal service charges, despite benefiting from municipal services and collecting rental income from its tenants, reflected unfavourably on its conduct, as this behaviour undermined the security Tufh sought through the mortgage bond as it reduced the amount that could be recovered by Tufh pursuant to the foreclosure the mortgage bond.

The SCA highlighted that the CoJ's leniency in debt collection did not negate its preferential security rights under section 118(3) of the Municipal Systems Act. Wolmarans' failure to discharge its municipal obligations for over eight years demonstrated a disregard for contractual responsibilities.

In light of these considerations, the SCA concluded that Wolmarans had not demonstrated how enforcing the contractual terms, including acceleration of the loan agreement, would be unconscionable or contrary to public policy. The loan agreement was freely entered, and there were no indications of undue hardship imposed on Wolmarans by Tufh under the terms of the loan agreement.

The following are the SCA’s key considerations in this matter:

1. Upholding Contractual Obligations: The SCA reaffirmed the principle that parties must honour the terms of their agreements. Even if one party is fulfilling certain obligations, failure to meet others constitutes a breach of contract, leading to legal consequences;
2. Importance of Pacta Sunt Servanda: Pacta sunt servanda is a fundamental principle in our contract law, which emphasises the sanctity of contracts. It ensures predictability and stability in commercial relationships by holding parties accountable for their commitments;
3. Protection of security interests: The SCA’s decision highlights the importance of enforcing contract terms, particularly in cases where one party's non-compliance jeopardises the rights or security of the other party. A security holder (e.g. a lender who has secured a loan advanced to the borrower, through a mortgage bond) may foreclose on the mortgage bond if the borrower is engaging in a conduct which adversely affects the security or diminishes the value of the security; and
4. Extenuating Circumstances: While contractual obligations are paramount, courts may consider extenuating circumstances when evaluating disputes. However, the mere existence of challenges or disputes does not automatically excuse non-compliance with contractual terms.

Therefore, this matter serves as a reminder of the importance of adhering to contractual obligations in commercial transactions. It highlights the need for parties to carefully consider their commitments and fulfil them in good faith, while also recognising the legal consequences of non-compliance. By upholding the principles of pacta sunt servanda, businesses can foster trust, stability, and integrity in their dealings, contributing to a robust and reliable commercial environment.

Written by Thabang Shomang (Director) & Mduduzi Sibiya (Associate), Rams Attorneys