---

LL Case No 250/1986

and No 253/1986

IN THE SUPREME COURT OF SOUTH AFRICA APPELLATE DIVISION

In the matter between:

THOMAS CONSTRUCTION (PROPRIETARY)
LIMITED (IN LIQUIDATION) Appellant
and
GRAFTON FURNITURE MANUFACTURERS

(PROPRIETARY) LIMITED Respondent

CORAM: CORBETT, BOTHA, NESTADT JJA, NICHOLAS et

BOSHOFF AJJA
HEARD: 16 NOVEMBER 1987
DELIVERED: 18 FEBRUARY 1988

JUDGMENT

/BOTHA JA ...
BOTHA JA:-

The appellant is a company in liquidation.
Its joint provisional liquidators instituted legal pro=
ceedings against the respondent in the Natal Provincial
Division, by means of two separate cases, numbered 22/86
and 23/86 respectively. Case No 22/86 was an applica=
tion on notice of motion in which the appellant sought
judgment against the respondent for payment of R330 767,98
with interest and costs. Case No 23/86 was an action
for provisional sentence against the respondent in which
the appellant claimed payment of R59 538,60 with interest
and costs. The respondent opposed the application and
defended the action. The two cases were heard together
by NIENABER J, who dismissed both the application and the
action, in each case with costs. The appellant now
appeals against these orders, with the leave of the. Judge
a quo.

The two cases have been conjoined in this

/appeal ...

3.

appeal - conveniently, for the issues to be decided in both are in substance the same. What is at stake, in the broadest terms, is the right of the appellant to en= force payment of the amounts reflected as being due to it by the respondent in two interim certificates issued to it, prior to its liquidation, in terms of two separate building contracts between the parties, in the face of a defence raised by the respondent that the contracts had been duly cancelled by the respondent after the ap= pellant's liquidation.

The judgment of NIENABER J has been published in the Law Reports: see 1986 (4) SA 510. I shall refer to it as the reported judgment. The facts which gave rise to the litigation are set forth in the reported judgment; consequently all the details thereof need not be repeated here. For convenience the facts which are relevant for the purposes of this judgment can be sum= marized in the form of a chronological synopsis, as

/follows:...

4. follows:

1. Prior to its liquidation the appellant, as

the contractor, was engaged upon the perform= ance of construction and building work for the respondent, as the employer, pursuant to two separate contracts in writing between the parties. The one contract was administered on the respondent's behalf by a consulting engineer; the other by an architect. I

shall differentiate between the two contracts simply by referring to the one as "the first contract" and to the other as "the second con= tract". Except for the references in the first contract to the consulting engineer, as opposed to the references in the second con= tract to the architect, the conditions of contract governing the legal relationship between the parties in both instances were the same. Two clauses of the conditions

/of ...
5.

of contract are relevant: clause 22, under the heading "DETERMINATION BY EMPLOYER", and clause 25, under the heading "CERTIFICATES AND PAYMENTS". The relevant provisions of these clauses will be quoted later.

2. On 29 October 1985 the engineer issued an

interim certificate to the appellant in terms

of clause 25.1 of the first contract. It
certified that the "AMOUNT NOW DUE" by the

respondent to the appellant was the sum of

R330 767,98. Under clause 25.1, read with

the schedule referred to therein, the contrac=

tor became entitled to payment of the amount

stated in the certificate to be due to it,

within a period of 14 days after the date of

issue of the certificate.

3. On 4 November 1985 the architect issued an interim certificate to the appellant in terms of clause 25.1 of the second contract. It

/certified ...

6.

certified that payment was due by the respond= ent to the appellant of an amount of R59 538,60. In this instance, too, under clause 25.1 and the schedule referred to in it, the contractor became entitled to payment of the amount stated to be due to it, within a period of 14 days after the date of issue of the certificate. 4. On 8 November 1985 the engineer (in respect of the first contract) and the architect (in respect of the second contract) both gave writ= ten and registered notice to the appellant, calling upon it to proceed with the works in each case with reasonable diligence, in terms of clauses 22.1.2 and 22.1.3 of each contract. Under the latter sub-clause the contractor was required to comply with the notices with= in 14 days, failing which the employer became entitled to terminate the contractor's employ= ment under the contracts.

/5. ...

7.

5.	Also on 8 November 1985 the application for the winding up of the appellant was lodged with the Registrar of the Court a quo.
6.	On 12 November 1985 a provisional liquidation order was made in respect of the appellant.
7.	On the same date, 12 November 1985, the interim certificate referred to in para 2 above matured, in the sense that the 14 days' period for payment by the respondent of the amount certified in it expired; thereafter the payment was overdue.
8.	On 18 November 1985 the interim certificate referred to in para 3 above matured, in the same sense as just mentioned.
9.	On 22 November 1985 the 14 days' period with= in which the appellant was required to remedy its default, as mentioned in para 4 above, elapsed.
10.	On 26 November 1985 the respondent purported

/to ...
8.

to cancel both contracts. This was done by

means of a letter addressed by the respondent's

attorney to the joint provisional liquidators

of the appellant, in which it was recorded

that the respondent regarded both contracts

as terminated, inter alia on the ground of the

appellant's failure to remedy its breaches in

terms of clause 22. The letter also re=

corded that another contractor had been ap=
pointed to complete the works and that, in

terms of clause 22.3.4, no payment would be

made in respect of amounts certified until

the contracts had been completed. (This part

of the letter is quoted in the reported judg=

ment at 514 C.)

11. On 29 November 1985 the joint provisional

liquidators replied to the letter mentioned

in the preceding paragraph, in a letter writ= ten by one of them. In this letter the

/liquidators ...

9.

liquidators claimed that the contractor was entitled to be paid in respect of work which had been certified prior to the liquidation, notwithstanding the provisions of clause 22.3.4. This clause, it was said, was in= valid, because it purported "to vary on liqui= dation the provisions of the contract after liquidation." It was said also that there hadbeen "an accrued right to receive payment of the value of the certified work as at the date of liquidation" and that the company in liquidation was therefore "entitled to imme= diate payment of this overdue amount." (The relevant parts of this letter are quoted in the reported judgment at 514 E-H.) 12. On 12 December 1985 the joint provisional

liquidators elected not to proceed with the performance of the contracts. In a letter of that date the respondent was advised that the

/liquidators ...

10.

liquidators had received sufficient informa= tion to enable them to decide whether to affirm or to repudiate the contracts, and the respondent was "formally notified" that the contracts were "terminated". The claim for immediate payment in full in respect of certificates issued prior to the liguidation was repeated.

13.

On 18 December 1985 the appellant was finally liquidated.

14.

In January 1985 the legal proceedings to which reference was made in the opening paragraph of this judgment were initiated. The notice of motion in the one case, and the provisional sentence summons in the other, were both dated 7 January 1985. In the one case the cause of action relied upon was the interim certi= ficate issued on 29 October 1985 in respect of the first contract, and in the other it was

/the ...

11.
the interim certificate issued on 4 November
1985 in respect of the second contract. The
different forms of procedure adopted in the
two cases are accounted for by the differences
in the wording of the two certificates (see
the reported judgment at 512 H - 513 B).
15. In both cases the main defence put forward in
the opposing affidavits filed on behalf of
the respondent was that each of the contracts
had been duly cancelled by the respondent on
the ground of the appellant's breach of con=
tract,

The facts recited above, which are common cause, require further comment in one respect. The validity or otherwise of the respondent's purported can= cellation of the contracts has not been adverted to. In its opposing affidavits the respondent had made appro= priate allegations of fact, justifying the giving of notices to the appellant calling upon it to proceed with

/the ... .

12.

the works with reasonable diligence (as mentioned in para 4 above), and in regard to the appellant's failure to com= ply therewith, thus laying the factual foundation for the validity of the respondent's purported cancellation of the contracts (as mentioned in paragraph 10 above). In the replying affidavits filed on behalf of the appellant the deponent in each case stated that he did not admit the factual allegations to which I have referred, but he made no attempt to controvert them, saying merely: "I do not regard this dispute as material to the present proceedings". In these circumstances it is not open to the appellant to challenge the existence of the facts alleged by the respondent which entitled it to cancel the contracts. In argument before this Court counsel for the appellant correctly conceded as much. Accordingly the valid= ity of the respondent's cancellation of the contracts must be accepted, in so far as the facts relating to the appellant's breaches of the contracts are concerned. However, counsel for the appellant ,did challenge the validity of the cancel=

/lation ...

13.

lation on a different ground,which relates to the inter= pretation of clause 22.1.3 of the conditions of contract in each case. I shall deal with this presently.

It will be convenient at this stage to quote the relevant provisions of clauses 22 and 25 of the conditions of contract. I quote from the first contract:

"22. DETERMINATION BY EMPLOYER.

22.1 DEFAULT

If the Contractor shall make default in any of the following respects:

22.1.1 without reasonable cause wholly suspends the Works before completion;
22.1.2 refuses to proceed with the Works with reasonable diligence;
22.1.3 refuses or to a substantial degree per= sistently neglects, after notice in writing from the Consulting Engineer to remove defective work or improper mater= ials, then if such default shall continue for fourteen days after a written and registered notice to the Contractor from the Consulting Engineer specifying the same, the Employer may, without prejudice to any other rights herein contained, thereupon by written and registered notice determine the employment of the Contractor under this contract: Provided that notice hereunder shall not be given unreasonably or vexatiously, and such notice shall be

/void ...

14.

void if the Employer is, at the time of the notice, in breach of this contract.

22.2 INSOLVENCY OF CONTRACTOR.

If the Contractor's estate is sequestra= ted as insclvent, or if, being a company, it is placed in voluntary or compulsory liquidation, the Employer may, without prejudice to any other rights herein contained by written and registered notice determine the employment of the Contractor under this contract.

22.3 In either of the above cases the follow=
ing shall apply:

22.3.1 the Employer may employ and pay a Con=
tractor or other person or persons to
carry out and complete the Works, and

he or they may enter upon the site and

use all materials, temporary buildings, plant and appliances thereon, and may

purchase all materials necessary for the

purpose aforesaid;
22.3.2
22.3.3

22.3.4 until after completion of the Works under
this clause no payment shall be made to

the Contractor under this contract:

Provided that upon completion as afore=

said, and the verification within a

reasonable time of the accounts therefor, the Consulting Engineer shall certify the amount of expenses properly incurred by

the Employer, and if such amount added to

the monies paid to the Contractor before

such determination exceeds the total amount which would have been payable on due com= pletion, the difference shall be a debt

/payable ...
15.

payable to the Employer by the Contractor; and if the said amount added to the said monies be less than the said total amount, the difference shall be a debt payable by

the Employer to the Contractor.

25. CERTIFICATES AND PAYMENTS.

25.1 The Contractor shall be entitled to re= ceive from the Consulting Engineer in= terim certificates at intervals not greater than one calendar month, a pen= ultimate certificate and a final certi= ficate (as more fully set out hereunder), stating the amount due to him and to

payment of such amount by the Employer within the period set out in the attached schedule. The Consulting Engineer shall notify the Employer of the date and amount stipulated in each certificate at the time of issue thereof. If, after expiry of the aforementioned period, the amount so certified has not been paid to the Con= tractor, the Employer shall be liable, without prejudice to any right the Con= tractor may have to determine his employ= ment under this contract, to pay the Contractor interest on the amount so due, calculated at a rate of 2 per cent greater than the minimum lending rate charged by commercial banks to their clients, which interest shall accrue as from the due date for payment if the Contractor has presented the certificate for payment within the period stipulated herein, or the date of presentation of the certifi= cate by the Contractor, whichever date is

/the ...

16.

the later. 25.2.1 The amount so due as aforesaid shall,

in respect of each monthly certificate, be a reasonable estimate:

25.2.1.1 of the total value of the work duly
executed; and

25.2.1.2 of the materials and goods delivered
upon the site for use in the works;
assessed up to and including a date
not more than seven days prior to the
date of the said certificate, less
the amount to be retained by the Em=
ployer, as hereinafter provided, and
less any amounts previously certified
under this clause: Provided that such
certificate shall, subject to the pro=
visions of clause 25.2.2, only include

the value of the said materials and

goods as and from such time as they are

reasonably, properly and not prematurely brought upon the site, and then only if adequately stored and/or protected

against weather and other casualties."

For ease of expression I shall use "the contract" in the singular with reference to the first contract. What
is said in regard to the first contract applies equally to the second contract (with the notional substitution of "the architect" for the engineer). It is only when a difference
in the facts makes it necessary to distinguish between the two contracts that I shall deal with them separately.

/And ...

17.

And for ease of reference, with a view to the discussion of the contractual provisions which is to follow, I shall use the expressions "the contractor" and "the employer" interchangeably with "the appellant" and "the respondent" respectively.

I revert to the guestion of the validity of the cancellation of the contract. Counsel for the ap= pellant argued that the respondent's notice of cancella= tion of 26 November 1985 was a nullity, because of the concluding words of clause 22.1.3 and the fact that the empïoyer was, at the time of the notice, in breach of the contract. The breach relied on was the failure of the employer to pay the amount due to the contractor under the: interim certificate before the expiry of a period of 14 days from the date of the issue of the certificate, as it was obliged to do in terms of clause 25.1 read with the schedule referred to therein. In the case of the first contract payment was overdue after 14 November 1985

/and ...

18.

and in the case of the second contract payment was over=
due after 18 November 1985. Since the notice of can=
cellation was given only on 26 November 1985, counsel con=
tended, it was hit by the provision that

"such notice shall be void if the Employer is, at the time of the notice, in breach of this contract."

It is apparent that the argument depends for its validity
on the premise that the notice of cancellation falls with=
in the ambit of the expression "such notice". To deter=
mine whether that is so requires an analysis of the whole
of clause 22.1.3.

Clause 22.1.3 can be dissected into three
parts. The first part comprises the words (I guote the
essentiais only):

"refuses or neglects, after notice

to remove defective work or improper

materials,".

It is clear that in this part a form of default is defined,
which falls under the heading next to the number 22.1,

"DEFAULT", and which is governed by the opening words of

/clause ...

19.

clause 22.1:

"If the Contractor shall make default in any of the following respects:".

The first part of clause 22.1.3 is on a par with clauses 22.1.1 and 22.1.2, which define other forms of default. The second part of clause 22.1.3, which commences with the words

"then if such default"

and concludes with the words

"under this contract"

immediately before the proviso, was obviously intended, in my view, to be linked, not only with the first part of clause 22.1.3, but also with clauses 22.1.1 and 22.1.2 as well as with the opening words of clause 22.1. Logi= cally the second part of clause 22.1.3 should be separated from its first part by notionally beginning a new line with the words "then if such default . ..", so as to reflect

/that ...

20.

that the second part is connected with everything that precedes it in clauses 22.1, 22.1.1, 22.1.2 and the first part of clause 22.1.3. The words "such default" in the second part of clause 22.1.3 accordingly refer to any of the three forms of default mentioned in clauses 22.1.1 and 22.1.2 and in the first part of clause 22.1.3. Following upon those words, the second part of clause 22.1.3 mentions two notices. They are different in kind. The first is a notice from the engineer to the contractor, specifying the default in question. If such default continues for 14 days after the notice, then the employer may by a second notice determine the employment of the contractor under the contract. The effect of the second part of clause 22.1.3 is thus to confer upon the employer the right to cancel the contract, by notice, in the event of the contractor remaining in default in any of the three respects contemplated,for a period of 14 days after notice from the engineer specifying the default in question.

/Next ...

21.

Next, we come to the third part of clause 22.1.3, which is the proviso. For convenience I quote it again:

"Provided that notice hereunder shall not be given unreasonably or vexatiously, and such notice shall be void if the Employer is, at the time of the notice, in breach of this contract."

As a matter of syntax there can be no doubt, I consider, that the words "such notice" refer to the preceding words
"notice hereunder". Hence, in order to determine whether a notice of cancellation falls within the ambit of the proviso, the crucial enquiry is whether the expres= sion "notice hereunder" is to be interpreted as referring also to a notice of cancellation. I say also because it is clear that the expression does refer to a notice by the engineer specifying the default. (Whether or not the expression was intended to include a notice of the kind which is mentioned in the first part of clause 22.1.3 need not be considered; whatever answer

/may ...

22.

may be given to that question, it will not affect the reason=

ing which follows.) If the expression "notice here=
under" had stood alone, it might have included a notice
of cancellation. But it does not stand alone. It
appears in a context which effectively qualifies it:

"notice hereunder shall not be given unreasonably or vexatiously".

There is no difficulty in applying the broad concept in=
volved in the words I have emphasized to the first kind
of notice mentioned in the second part of clause 22.1.3,
viz a notice by the engineer specifying the default.
Having regard to the three forms of default defined in
clauses 22.1.1 and 22.1.2 and the first part of clause

22.1.3, one can readily visualize circumstances under
which it would be unreasonable or vexatious for the en=
gineer to require the contractor to purge his default with=

in 14 days. In that context, the proviso makes sense.
However, in relation to a notice of cancellation the posi=

tion is vitally different. If the engineer gives a

/proper ......

23.

proper notice, i e one that is not given unreasonably or vexatiously, and the contractor fails to rectify his de= fault, the employer acquires the right to cancel the con= tract. If he elects to exercise that right, and he does so by giving notice of cancellation, I am unable to imagine how there could ever be room for an enquiry as to whether the notice of cancellation was given unreasonably or vexatiously. The concepts of unreasonableness and vexatiousness are wholly foreign to the exercise of a right conferred by contract on one party to cancel the contract on the ground of a breach of it by the other party. In my view, therefore, the expression "notice hereunder" in the proviso to clause 22.1.3 cannot be in= terpreted as including a notice of cancellation given by the employer. Accordingly the expression "such notice" also does not include a notice of cancellation.

It follows that the attack by counsel for the appellant on the validity of the respondent's cancellation

of the contract fails.

/The ...

24.

The fundamental issue to be considered, then, is whether the appellant was entitled to enforce payment in terms of the interim certificate despite the cancel= lation of the contract by the respondent. I shall deal with this issue in two phases: first, I shall discuss the legal position between the parties without taking into account the fact of the appellant's liquidation; there= after, I shall consider the effect (if any) of the appel= lant's insolvency and liquidation on the legal position.

In the Court a quo, as appears from the re= ported judgment (at 511 H-I), NIENABER J took as the starting point of his analysis of the legal position a passage in the judgment of HOLMES JA in Crest Enterprises (Pty) Ltd v Rycklof Beleggings (Edms) Bpk 1972 (2) SA 683 (A) at 870 G-H, which is to the effect that a contractual right is enforceable after the rescission of a contract if, before the rescission, it was accrued, due and en= forceable as a cause of action "independent of any executory part of the contract". Focusing attention on the last-

/mentioned ...

25.

mentioned phrase, the learned Judge examined the question
whether that requirement was satisfied on the facts of
the case and came to the conclusion that it was not.
Thereafter the learned Judge (at 519 E-J) turned his at=
tention to the provisions of clause 22.3.4 of the condi=
tions of contract and found that those provisions were in
line with what he considered in any event to be the true
position according to the law of contract. I propose
to adopt a reverse approach. I shall first examine the
meaning and effect of the relevant provisions of the con=
ditions of contract and thereafter deal with the Crest
Enterprises case supra.

The consequences of the cancellation of the contract under inter alia clause 22.1.3 are provided for in clause 22.3. In terms of clause 22.3.1 the employer is entitled to employ and pay a third party to carry out and complete the works. Clause 22.3.4 contains the all-important provision, which merits quoting again:

"until after completion of the Works

/under ...

26.

under this clause no payment shall be made to the Contractor under this con= tract:".

I shall refer to the words quoted as the main provision of
clause 22.3.4. It is followed by a proviso, which regu=
lates the final accounting between the employer and the
contractor which is to take place after the completion of
the works by the third party. In brief, the difference
is to be calculated between (a) the sum of the expenses pro=
perly incurred by the employer and the monies paid to the
contractor before the determination of his employment, and

(b) the total amount which would have been payable on due
completion; such difference, depending upon whether from

the employer's point of view it constitutes a surplus or a

deficit, is to be paid by the employer to the contractor or

by the contractor to the employer, as the case may be.

On the face of it, the main provision of clause 22.3.4 would seem to constitute a valid defence in
favour of the respondent against the claim of the appellant. But counsel for the appellant argued to the contrary, on

/grounds ...

27.

grounds which will be adverted to presently. Fundamental to the arguments advanced on this score was the fact, much stressed by counsel, that the appellant's claim was founded solely upon the interim certificate issued by the engineer on 29 October 1985. (In the case of the se= cond contract the cause of action was the interim certi= ficate issued by the architect on 4 November 1985.) That certificate, however, was issued in terms of clause 25.1.
Under this clause the contractor was entitled to receive
from the engineer, inter alia, monthly interim certifi= cates, stating the amount due to him (as determined in accordance with the provisions of clauses 25.2.1, 25.2.1.1, and 25.2.1.2). Clause 25.1 provides further that the
contractor would be "entitled to payment of such

amount" within a certain period, which in this case was 14 days. The contract itself, therefore, expressly con= ferred on the contractor the right to be paid the amount stated to be due in the certificate. That being so, it cannot be doubted that any payment on a certificate would

/necessarily ...

28.

necessarily be a payment under the contract. That is the plain meaning and effect of the conditions of contract. For the purposes of interpretation the relevant provisions must, of course, be viewed in conjunction with one another. Since it is clear from clause 25.1 that payment on a cer= tificate is payment under the contract, it follows that payment on a certificate falls within the purview of the
words "payment under this contract" in the main pro=
vision of clause 22.3.4. Furthermore, since clause 25.1 provides in general terms for the payment of an amount due
on a certificate, while clause 22.3.4 provides specifically

that no such payment shall be made under particular circum=

stances, it follows, as a matter of simple logic, that
under the particular circumstances envisaged in clause

22.3.4 it is the specific provision of that clause that
must prevail over the general provisions of clause 25.1.
Accordingly, when the contract has been cancelled under
clause 22.1.3 and the employer has employed a third party

to complete the works under clause 22.3.1, as happened in

/this ...

29.

this case, clause 22.3.4 comes into operation, and, in terms of its main provision, until after completion of the works no payment shall be made to the contractor under the contract, which includes any payment on a cer= tificate already issued.

The conclusion just stated is based on an interpretation of the relevant provisions of the condi= tions of contract. The effect of the conclusion is that the main provision of clause 22.3.4 afforded the respond= ent a valid defence to the appellant's claim — prima facie at least, and subject to a consideration of the arguments advanced to the contrary by counsel for the appellant, to which I now turn.

The first and major contention of counsel for the appellant was that an interim certificate of the kind in question here provided the contractor with a self-sufficient right of action and a distinct cause of action

which could be enforced without any need for the contractor to go beyond the certificate or to rely on the contract

/under ...

30.

under which it was issued. For present purposes counsel's contention can be accepted as correct (c f S A Builders and Contractors v Langeler 1952 (3) SA 837 (N) at 842 F-H, and the apparent approval with which that case was referred to by TROLLIP JA in Mouton v Smith 1977 (3) SA 1 (A) at 5 C-G). I am unable, however, to see how the contention'can avail the appellant. The validity of the contractor's cause of action, as such, is not at stake. When it is said that the contractor can found a claim against the employer on the certificate standing by it= self, no more is being said than that a cause of action couched in;such a form is in order from the point of view of pleading, practice and procedure. To say that the contractor has a cause of action is not to say that the employer has no defence to it. Whether there is a defence is a different question, and it is that question which is material in this case. In the course of his argument counsel for the appellant said that the certifi= cate was "sacrosanct". That cannot be right. Counsel

/was ...

31 .

was elevating the recognition of a cause of action into a postulate that there could be no answer to it. At one stage counsel did accept that there could be a defence to a claim on a certificate, but submitted that it would be limited to cases of fraud and the like. There is no need, for the purposes of my judgment, to embark upon a general consideration of the nature or scope of the defences which would be available to an employer when sued on an interim certificate (c f Langeler's case supra at 843 A-B and Mouton's case supra at 5 F). We are concerned in this case with a defence which is squarely based upon an express provision (clause 22.3.4) of the very contract which caused the certificate to come into being (clause 25.1). The fact that the contractor when claiming on the certificate need not rely on the contract obviously does not preclude the employer from relying on the contract by way of defence to the claim. I can think of no reason in logic or in principle why a defence based on clause 22,.3.4 should not be a valid defence to the contractor's claim on

/the ...

32.

the certificate. To hold otherwise would be tantamount to conferring upon the certificate an independen't and absolute viability and enforceability, totally divorced from the contract under which it was issued, for which there is no warrant. I agree, therefore, with the reason stated by NIENABER J in para (b) at 520 C of the reported judgment for his conclusion that after cancel= lation of the contract the employer is not obliged to pay out on the certificate. (For clarity I should add that I agree also with the reason stated in para (a) at 520 B/C, but that is not germane to the present discussion.)

The remaining contentions of counsel for the appellant in the present context can conveniently be
grouped together, for they all relate to the nature of an interim certificate and the effect of a payment made in terms of it. The main thrust of this part of the argu= ment was that an interim certificate and payment made in terms of it related solely to the past performance of the contractor under the contract and had no connection with

/the ...

33.

the future at all, so that the remuneration certified and paid was remuneration for work actually done and materials actually supplied and nothing else. To sustain this line of argument counsel made submissions at variance with a number of views expressed by the learned Judge in the Court a quo. Thus, it was contended that payments under interim certificates were not to be regarded as advances on account of the ultimate contract price; that the sum certified was indeed to be regarded as compensation for a completed segment of the work; and that the sum certified was not to be treated as provisional and subject to adjust= ment and re-adjustment in later certificates. I have no hesitation in rejecting this entire line of argument, coupled with all the submissions made in support of it. Not only does it do violence to the fundamental nature of a building contract and the reciprocal obligations of the parties to such a contract; it flies in the face of the clear authorities cited and discussed by NIENABER J in the reported judgment at 516 F - 517 D and 519 D. I agree,

/with ...

34. with respect, with the views expressed by the learned Judge in the passages mentioned. Apart from that, no trace of counsel's contentions is to be found in the word= ing of the main provision of clause 22.3.4 itself. At one stage of his argument counsel was constrained to submit that the clause had to be interpreted subject to some limitation, such as by the notional addition to the main provision of the words "unless certified". Suffice it to say that there is no justification for reading any such limitation into the clause.

In the result the arguments advanced by counsel for the appellant do not detract from the view expressed earlier as to the effect of the main provision of clause 22.3.4, in the light of the conclusion arrived at concern= ing the interpretation of the relevant conditions of con= tract. In this context it follows, therefore, that the respondent's defence, based on the cancellation of the contract, was a valid defence to the appellant's claim.

/I ...

35.

I turn now to the case of Crest Enterprises supra, and the passage in the judgment of HOLMES JA in that case, to which I referred earlier. In argument before this Court counsel for the appellant was not con= tent to argue that the Court a quo had erred in relying on that passage for the purpose of coming to a conclusion against the appellant; counsel went further and argued that the passage provided positive support for a finding in favour of the appellant.

The passage in question (1972 (2) SA at 870
G-H) reads as follows:

"To sum up on this aspect, the rule in the Walker case,supra, is confined to cases where, prior to the rescission of a contract by one party's acceptance of the other's repudiation, there exists a right which is accrued, due, and enforce= able as a cause of action independent of any executory part of the contract."

NIENABER J held (at 516 A of the reported judgment) that
the principle embodied in this passage was not restricted
to rescission upon repudiation, but that it applied to all

/forms ...

36.

forms of breach culminating in cancellation. I agree, with respect. Nor was there any argument to the con= trary in this Court.

Counsel for the appellant sought to use this passage in favour of the appellant in the following way. He pointed to the words "prior to" in the expression "prior to the rescission of the contract" and urged that those words were of decisive importance. They meant,
he said, that the ascertainment of the existence of an accrued and enforceable cause of action was to be isolated entirely from both the fact and the consequences of the cancellation of the contract. He claimed that this was the way in which the Court applied the principle to the facts in the Crest Enterprises case, at 871 C-E and 872 B-D. Applying that approach to the facts of the present case, counsel said that one must look to the position "prior to" the cancellation of the contract on 26 November 1985, and no further. On 25 November 1985 the appellant had an accrued, due, and enforceable cause of action based

/on ...

37.

on the interim certificate, for payment of the amount stated in it. That, counsel said, was the end of the enquiry; the fact of the subsequent cancellation had to be ignored, as also the consequences of it, including the operation of clause 22.3.4. These matters were excluded from consideration, it was argued, because they fell out= side the limitation of the principle which is embodied in the words "prior to".

The argument has a superficial aura of plausi= bility about it, but it will not bear examination. In fact, I am satisfied that it is wholly untenable. A simple example can be used to demonstrate that it cannot
be right. Take the cas'e of a sale. A sells fixed pro=

perty to B for a purchase price of R20 000. The contract

provides that B is obliged to pay the full price on or

before 30 September, and that A will pass transfer by not

later than 30 November. B fails to pay on due date. On

26 November, say, the contract is cancelled, either by A's
exercise of a right of cancellation conferred by the

/contract ...

38.

contract, or by A's repudiation of it, for reasons unre= lated to B's non-payment, and B's acceptance of the repu= diation. Thereafter A sues B for payment of R20 000. If counsel's argument were right, A could enforce payment without being obliged to pass transfer, for "prior to" the cancellation A had an accrued, due and enforceable right to claim payment and, as counsel would have it, the subsequent cancellation and the consequences of it must
be ignored. Of course that is not the law, and HOLMES JA could not have intended to suggest that it was.

What, then, is the fallacy in counsel's argu= ment? In the first place it lies in the process of treating a dictum in a judgment as if it were a legislative enactment, subjecting it to close examination, then select= ing certain words in it and applying those words in a factual context not contemplated by the dictum. That process is always dangerous. In the present case it is fatally so, for the reasons following.

/In ...

39.

In the Crest Enterprises case HOLMES JA re= ferred to "the rule in Walker's case". Earlier in the judgment (at 869 H - 870 C) he had discussed the case of Walker's Fruit Farms Ltd v Sumner 1930 TPD 394. That was a case in which the plaintiff had for several months ren= dered services to the defendant under a contract, which was then repudiated by the defendant. The plaintiff ac= cepted the repudiation and sued for payment of moneys which had accrued and were due under the contract before the repudiation. In holding that the plaintiff was en=
titled to do so, GREENBERG J, in a passage of his judgment

quoted in the Crest Enterprises case at 870 A-B, drew a

distinctioh between the enforcement of the executory por= tion of the contract and the enforcement of a "right .... accrued" before the cancellation of the contract. HOLMES
JA was concerned with the sense in which GREENBERG J had
used the word "accrued". He found, for reasons given by
him, that the word was meant to convey "accrued, due and enforceable". The importance of this finding in the

/context ...

40.

context of that case becomes apparent when regard is had to the facts, as dealt with later in the judgment of HOLMES JA. The plaintiff had sued for transfer of pro= perty in terms of a contract which had been rescinded by virtue of a repudiation by the defendant and the plaintiff's acceptance of it. On an interpretation of the contract it was found that the plaintiff's right to claim transfer was not "complete and enforceable" until the plaintiff had
made a certain election and communicated it to the defend= ant (at 871 C-D) and had furthermore tendered payment of a certain amount to the defendant (at 871 i f - 872 A). It appeared that the plaintiff's particulars of claim, which had been attacked by means of an exception, lacked averments showing that the election had been made and communicated and the payment tendered before the rescis= sion of the contract — this was emphasized by HOLMES JA -and accordingly it was held that the plaintiff had not brought its claim "within the rule in the Walker case supra" (see at 871 D-E and 872 A-D). That was what the

/Crest ...

41.

Crest Enterprises case was about. In that setting the passage in the judgment of HOLMES JA which is under dis= cussion can now be viewed in its proper perspective. It is now clear why he said that the "rule" in the Walker case supra was "confined" to certain cases, and why he used the words "prior to the rescission". It is equally clear that the words at the end of the passage in question, "independent of any executory part of the contract", played no role at all in the actual decision of that case. For the purposes of the ratio decidendi those words might as well have been left out of the passage. But, of course, since the learned Judge of Appeal was seeking to formulate a principle in general terms, which was intended to be of general application, the words had to be added, for with= out them the reference to the "rule" in Walker's case would have been incomplete and the passage would have pre= sented a distorted picture of the legal position. It is important to note why the reference to the "rule" in Walker's case required the addition of the words "independent

/of ...
42.

of any executory part of the contract". In Walker's case the facts showed clearly, in my opinion, that the contract involved the performances of periodically ac= cruing obligations of such a kind that the performance of the plaintiff's obligation before the cancellation of the contract and the defendant's counter-performance for it, which it was sought to enforce, were obviously severable from the obligations under the executory por=

tion of the contract. There was no indispensable link nor any reciprocity between the obligations of the past and the obligations of the future. That is the context in which one must assess the words "independent of any executory part of the contract".

On the above analysis the interpretation which counsel for the appellant sought to place on the

passage in the judgment in the Crest Enterprises case is without foundation. The words "prior to the rescission" qualify the accrual of a due and enforceable right, but they bear no relation to the manner in which the criterion

/"independent ...

43.

"independent of any executory part of the contract" is to be applied. In particular, the words "prior to" do not bear the pregnant meaning assigned to them by counsel, viz that the principle embodied in the passage must be applied without reference to the fact and the consequences of the cancellation. They are incapable of bearing that meaning, for if they did, the criterion "independent of any executory part of the contract" would be emasculated, and the application of the principle stated in the passage would not only be futile, but would indeed violate funda= mental principles of the law of contract.

In my judgment, therefore, the passage in the
judgment in the Crest Enterprises case affords the appel= lant no avenue of escape from the fact that the contract has been cancelled or from the consequences of such can= cellation, which include the coming into operation of the main provision of clause 22.3.4 of the contract.

To round off this aspect of the case I.would

/add ...

44.

add that I agree, with respect, with the observation of NIENABER J, at 519 I-J of the reported judgment, that the express terms of the contract (contained particularly in the main provision of clause 22.3.4) are in line with the true position according to the law of contract, as it is stated by the learned Judge in his treatment of the appli= cation of the Crest Enterprises passage, at 517 D - 518 C of the reported judgment.

I proceed to deal with the second phase of
the enquiry: whether the fact of the appellant's liquida= tion has any effect on the legal position between the parties as discussed above. It was common cause that the appellant was liquidated because of its insolvency,
and that a concursus creditorum arose on 8 November 1985
when the application for the liquidation of the appellant was filed with the Registrar of the Court a quo.

In argument before this Court it was common cause that. the contract, which was not one of the kind spe= cifically dealt with in the Insolvency Act 24 of 1936, was

/not ...

45.

not terminated by the liquidation but remained in force
thereafter (see e g Bryant & Flanagan (Pty) Ltd v Muller and
Another NN O 1978 (2) SA 807 (A) at 812 H). The liquida=
tors could decide not to carry on with the execution of
the contract (as they eventually did, on 12 December 1985),
but such a decision constitutes a repudiation of the con=
tract; the statement, frequently encountered, that a
trustee or a liquidator in insolvency has a "right of
election" whether or not to abide by a contract does not
signify more than that the other party cannot exact spe=
cific performance against the trustee or the liquidator,
if the latter should decide to abándon the contract (c f
De Wet and Yeats, Kontraktereg en Handelsreg (4th ed) at
460, and Smith and Another v Parton N O 1980 (3) SA 724
(D) at 728 H - 729 D).

In the present case, however, the respondent's cancellation of the contract preceded the liquidator's decision to repudiate it. As I understood the argument of counsel for the appellant, he was not concerned with

/the ...

46.

the question whether the liquidation precluded the exer= cise of the respondent's right to cancel the contract, per se (c f Tangney and Others v Zive's Trustee 1961 (1) SA 449 (W) at 452 H - 453 F; Smith and Another v Parton N O supra at 729 D-G). His argument was directed at the consequences of such cancellation, which, he said, could not be countenanced without violating the principies which apply in a concursus creditorum. He stressed, in particular, the main provision of clause 22.3.4 and the method of final accounting prescribed in the proviso to ciause 22.3.4, the effect of which was summarized earlier in this judgment. On the facts, it appears from the

figures and calculations contained in the affidavits filed on behalf of the respondent that, in the case of the first contract, the estimated cost of completing the works was

about R936 000; if that sum is added to the monies already paid to the appeliant (some R466 000), the total arrived at would be approximately R114 000 less than the amount which would have been payable to the appellant on due compietion

/of ...
47.

of the contract (about R1 517 000). In the case of the
second contract similar calculations show an expected ultimate deficit of about R137 000, comparing the esti= mated cost of completion plus the amounts already paid to the appellant (together about R1 198 000) with the amount which would have been payable to the appellant on due completion by it (about R1 061 000).

Counsel for the appellant argued that the ap=
plication of the provisions of clause 22.3.4 would result

in the respondent obtaining a substantial preference over
other creditors of the appellant, which would be in con=

flict with the well-known passage in the judgment of INNES
J in Walker v Syfret N 0 1911 AD 141 at 166:

"The sequestration order crystallises the insolvent's position; the hand of the law is laid upon the estate, and at once the rights of the general body of creditors have to be taken into consideration. No trans= action can thereafter be entered into with regard to estate matters by a single cre= ditor to the prejudice of the general body. The claim of each creditor must be dealt with as it existed at the issue of the order."

On this basis counsel urged that the respondent could not

/be ...

48.

be allowed to retain, for its own, sole benefit, the amounts due to the appellant under the certificates, but was obliged to pay over those amounts into the general fund for the benefit of all the creditors. Otherwise, counsel said, the respondent would in effect reap the benefit of a set-off of its claim for damages for non-completion against the amounts due on the certificates, which is not permitted.

In my judgment counsel's argument is unsound and must be rejected, for the following reasons. In the context of the factual situation which falls to be con= sidered in this case, it is not correct to regard the respondent as a creditor in the appellant's insolvent estate. The respondent is in the position of a debtor. It is being sued by the appellant for performance of the contract. For reasons explained earlier, the fact that the appellant's claim is based on the certificate does not render it the less a claim for payment under the con= tract. The respondent is not seeking to enforce the

/contract ...

49.

contract; it is resisting a claim brought by the appel= lant, as creditor, for the enforcement of the contract. The liquidators, who are pursuing the claim, must take the contract as they find it. There is no way in which the liquidators can isolate one part of the con= tract, for the purpose of enforcing it, from the rest of
the contract, in terms of which the respondent need not perform. The concursus creditorum does not prevent the respondent from raising a defence founded upon the very contract upon which it is being sued for performance. It is not a case of the respondent being preferred over other creditors; it is a case of the liquidators not
being in a better position in relation to the enforcement
of the contract than the appellant itself would have been

but for the liquidation.

On the above analysis the case of Administra=

tor, Natal v Magill, Grant & Nell (Pty) Ltd (In Liquida=

tion 1969 (1) SA 660 (A) at 671 A - 672 D, on which counsel for the appellant relied in support of his

/argument ...

50.

argument, is distinguishable. In that case the employer had, after the contractor's liquidation, elected to make a direct payment to certain sub-contractors, which had the effect of conferring a benefit on those sub-contractors over other creditors of the contractor. The facts there are not comparable to the situation in the present case. In regard to the question of set-off, counsel relied on the cases of Consolidated Agencies v Agjee 1948 (4) SA 179 (N) at 190 and The Government v Thorne and Another N N O 1974 (2) SA 1 (A) at 9 E-G. Those cases are also distinguish= able, on the facts, from the situation in the present case. The respondent is not relying on any set-off. For the purposes of its defence to the appellant's claim, the res= pondent needs to go no further than the main provision of clause 22.3.4. That is sufficient to defeat the appel= lant's claim on the contract. The method of final ac= counting which is provided for in the proviso to the clause does not really enter into the picture at all, at least not at this stage of the proceedings. The appellant cannot

/enforce ...

51.

enforce a claim on the contract. It may have a claim in the nature of a quantum meruit, in which event the method of accounting envisaged in the proviso to clause 22.3.4 would, speaking broadly, come into play in any event. If, after the completion of the works, there is a deficit, the respondent would presumably have a concur= rent claim for payment of it against the insolvent estate of the appellant. If there is a surplus due to the contractor, the liquidators would presumably be able to claim payment of it. But there is no need to discuss these possibilities further, for they do not arise in these proceedings.

There is one final observation that I would make. In the discussion above I have assumed that the respondent's cancellation of the contract was not invali= dated by the fact of the appellant's liquidation. If an assumption were to be made to the contrary, the result would be no different. The liquidators' subsequent re= pudiation would come into play then. In the context of

/the ...

52.

the preceding events the respondent must be taken, ex
hypothesi, to have acguiesced in the repudiation. The
contract would then have been cancelled in that way, in
any event. That being so, the liguidators would not
have been able to enforce the contract by claiming pay=
ment on the certificates, for, by virtue of the applica=
tion of the principle in the Crest Enterprises case supra,
as discussed in the passages of the reported judgment re=
ferred to earlier, apart from the provisions of clause
22.3.4, the claim would also have been defeated by a
defence based on the cancellation of the contract.

In the result, therefore, the validity of the respondent's defence to the appellant's claims is not af=

fected by the appellant's liquidation.

The appeal is dismissed with costs, including the costs of two counsel.

A.S. BOTHA JA

CORBETT JA

NESTADT JA

NICHOLAS AJA CONCUR

BOSHOFF AJA

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