Capitec Bank Holdings Limited and Another v Coral Lagoon Investments 194 (Pty) Ltd and Others (470/2020) [2021] ZASCA 99 (09 July 2021)

In December 2006, Capitec Bank Holdings Limited (Capitec Holdings), Coral Lagoon Investments 194 (Pty) Ltd (Coral), and Ash Brook Investments 15 (Pty) Ltd (Ash Brook) entered into a subscription agreement. As part of this agreement, Coral subscribed for and was issued 10 million ordinary shares by Capitec Holdings. The purpose of the agreement was to increase Capitec Holdings' black shareholding to fulfill its black empowerment obligations under South African law.

Regiments Capital (Pty) Ltd held a significant interest in Ash Brook. On August 8, 2019, Regiments Capital and related parties (the Regiments Parties), Coral, and the Transnet Second Defined Benefit Fund (the Fund) entered into a settlement agreement. This agreement required the Regiments Parties to pay the Fund R500 million plus interest to settle claims of alleged fraud against the Fund by the Regiments Parties. The settlement amount was to be funded by the sale of 810,230 Capitec Holdings shares (the sale shares), with the proceeds used to discharge the settlement amount.

A condition of the settlement agreement was that the sale of the shares required the written consent of Capitec Holdings. Coral and the Fund sought Capitec Holdings' consent for the sale of the shares, but Capitec Holdings did not provide it. Consequently, Coral and Ash Brook filed an urgent application in the Gauteng Division of the High Court, Johannesburg, seeking a declaratory order that Capitec Holdings' withholding of consent was unreasonable and in breach of the subscription agreement and common law duties of good faith.

The High Court ruled in favor of Coral and Ash Brook, finding that Capitec Holdings' refusal to consent was in breach of its duties of good faith and reasonableness. Capitec Holdings was ordered to consent to the sale within two days.

Capitec Holdings appealed the High Court's decision, and the Supreme Court of Appeal was tasked with determining whether Capitec Holdings' consent was indeed required for the sale of the shares and if Capitec Holdings had breached any duties of good faith in its refusal to consent.

The Supreme Court of Appeal held that the subscription agreement between the parties did not require Capitec Holdings' consent for Coral to sell its shares to the Fund. The court found that the text of clause 8.3 of the subscription agreement, when read in the context of the entire agreement and its purpose, did not impose a consent requirement on Coral for the sale of its shares. The court emphasised that the interpretation of a contract must begin with the language of the provision itself, and that the language used must be understood within the context in which it is used and with regard to the purpose of the provision.

The judgment written delves into the interpretation of a subscription agreement between the parties. The judgment addresses the requirement of consent for the sale of shares, the duty of good faith, and the application of the parol evidence rule.

Interpretation of Subscription Agreement: The judgment begins by analyzing the text of the subscription agreement, specifically focusing on clause 8.3, which outlines the consequences of Coral selling its Capitec Holdings shares. The judgment emphasizes that the text of the agreement does not explicitly require Capitec Holdings' consent for such a sale.

Admissibility of Extrinsic Evidence: The judgment discusses the admissibility of extrinsic evidence, such as the parties' conduct post-agreement, in interpreting the contract. It references the Constitutional Court's decision in University of Johannesburg v Auckland Park Theological Seminary, which allows for a wide remit in admitting such evidence for context and purpose.

Application of Parol Evidence Rule: The judgment navigates the tension between the parol evidence rule and the admissibility of extrinsic evidence. It clarifies that while the parol evidence rule traditionally limits the admission of evidence that contradicts or varies a written contract, the recent jurisprudence leans towards admitting extrinsic evidence for context and purpose.

Duty of Good Faith: The judgment addresses the duty of good faith in contracts, highlighting that good faith underpins contractual relationships but does not stand alone as a substantive principle to alter contractual terms. It dismisses the argument that Capitec Holdings breached a duty of good faith by enforcing its contractual rights.

In summary, the judgment provides a detailed analysis of the interpretation of the subscription agreement, the admissibility of extrinsic evidence, the application of the parol evidence rule, and the limitations of the duty of good faith in contractual relationships.

Furthermore, the court held that the principle of good faith, while underlying the law of contract and informing its substantive rules, does not constitute an independent source of contractual obligation that can be used to impose new terms or alter the agreed terms of a contract. The court clarified that good faith is not a free-standing principle that can be directly invoked to interfere with contractual bargains or to decline to enforce contracts as agreed upon by the parties.

In summary, the core legal principle underlying the decision is that the interpretation of a contract must be grounded in the text of the agreement, considered in light of its context and purpose, and that the principle of good faith does not independently empower courts to modify or create contractual obligations not stipulated by the parties themselves.

In its reasoning process, the Supreme Court of Appeal of South Africa referred to amongst others Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] ZASCA 13; [2012] 2 All SA 262 (SCA); 2012 (4) SA 593 (SCA) and Beadica 231 CC and Others v Trustees, Oregon Trust and Others [2020] ZACC 13; 2020 (5) SA 247 (CC).

A contract must be grounded in the actual text of the agreement as agreed upon by the parties, rather than on external notions of what the contract should mean or on ethical considerations that are not reflected in the contract itself. It underscores the court's adherence to the principle that the starting point for contract interpretation is the language of the provision in question, and that the court's role is not to rewrite the contract or to impose its own views of fairness or ethical conduct onto the parties' agreement.

Conclusion and Order: The judgment concludes that Capitec Holdings was not required to give consent for the sale of shares by Coral, as per the terms of the subscription agreement. The appeal is upheld, and costs are awarded against Coral and Ash Brook, who opposed the appeal.