Exceptio Non Adimpleti Contractus (ENAC) PDF

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Law of Contract: ENAC summary for Prof Naude's section...

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EXCEPTIO NON ADIMPLETI CONTRACTUS (Defence of unfulfilled contract – enforcement remedy)

16 August 2016

1. INTRODUCTION Based on the principle of reciprocity – most contracts are reciprocal, obligations linked i.e. given in exchange for one another i) Conclusion of Contract Principle of reciprocity present at the conclusion of contract i.e. creation of obligation therefore if one obligation is void, the counter obligations will also be void (exception to principle of reciprocity: risk in context of contract of sale) ii) Termination of Obligation iii) Sequence of performance Presumption that reciprocal obligations must be performed simultaneously BUT in some contracts, rule that one party must perform first e.g. lease agreement – lessor must perform first, lessee pays afterwards (ex lege rules) employment contract – employee performs first, employee pays at end of month Exceptio: right to withhold performance where reciprocal obligation is not properly performed first - can withhold until performance rendered properly (applies to reciprocal obligations where parties must perform simultaneously or breaching party must perform first) 2. ORIGIN Roman Law – recognized right to withhold performance Middle Ages – name Exceptio developed 3. NATURE = enforcement mechanism/ defence that can be raised until other party performs properly Therefore party relying on the defence must provide breaching party with a chance to cure performance and remedy the breach 4. OPERATION Must establish that there are – i) Reciprocal obligations Grand Mines v Giddey 1999 (SCA) Land owner pays for coal that was mined by the other party, additional obligation to rehabilitate the land after mining Breach = failure to rehabilitate the land after mining completed Therefore miner did transfer the coal but failed to rehabilitate the land Owner withheld the payment for the coal

ISSUE: Was there reciprocity between the obligation to pay for the coal and the obligation to rehabilitate the land after mining? Court held – obligations not reciprocal, owner could not withhold payment if the coal had been delivered Divisible agreement/obligations? i.e. reciprocity only in respect of separate parts of contract ii) Parties must perform simultaneously/breaching party must perform first

5. RELAXATION OF EXCEPTIO Plaintiff delivers incomplete performance, defendant raises exception and does not want to pay anything so takes no further steps (does not cancel contract) merely keeps defective performance without paying for it party is utilizing the incomplete performance therefore inpossible to cure performance Solution: court has discretion to award a reduced contract price to the plaintiff who breached the agreement i.e. to relax the exception (innocent party cannot withhold the full amount, must pay a reduced price) BK Tooling v Scope Precision Engineering FACTS Service provider – Scope precision engineering Contract with client BK Tooling that certain services to be rendered Services: scope would hollow out certain moulds employed in tooling BK Tooling sub-contracted with Scope on behalf of third party Scope did not perform propertly – finished first set of molds, when second set given to third party by BK Tooling third party complained that the molds were not done proeprtly BK Tooling committed a breach (positive malperformance) in contract with third party BK therefore contracted with third party Auret to repair the molds, refused to pay Scope anything for the work done Scope sued BK for full amount due (R4800) , denied that work was defective BK raised exceptio but paid part of price (R1200) Court Held – Before dealing with exceptio and its relaxation, dealt with case on different basis i) Scope claim for specific performance (full contract price) Court found that BK tooling raised exception but did not cooperate with Scope’s requests to give back molds so that the performance could be repaired, rather contracted with a third party to fix the moulds Found that there is authority that where do not allow rectification by breaching party, plaintiff (Scope) can claim contract price but should deduct any saved expenses from the claim

But court found that there was no evidence of any saved expenses so Scope cannot rely on this principle as did not lead evidence to this effect ii) Then proceeded to deal with Scope’s alternative claim of quantum meruit i.e. value of the defective work Recognise exceptio as the point of departure but can lead to unfairness where defective performance retained and utilized by the party relying on defence Found that court should have discretion to relax the exceptio and award a reduced contract price to the breaching party in these circumstances Requirements for reduced contract price (onus on breaching party to prove) (1) Aggrieved party utilized defective performance (2) Fair to utilize equitable discretion to award breaching party reduced price i.e. to what extent is defective, is aggrieved party in good faith, chance provided to breaching party to cure (3) Amount by which the contract price should be reduced (normally repair costs) In this case, evidence of repair costs from Auret (R720) – Conclusion: court granted Scope a reduced contract price: original contract price minus price of repairs Costs Order? If plaintiff (breaching party) sues for payment of full price, must defendant always offer to pay a reduced price in order to avoid costs order against them? Not necessarily i.e. in situations where defendant still wants to rely on exceptio as a means to enforce the contract and require proper performance But if performance no longer possible such as in this case, then defendant should pay the reduced price otherwise risk a costs order against them if they lose Exceptio is an ABSOLUTE defence: i.e. available regardless of whether performance was substantially/partially incomplete/defenctive therefore irrespective of degree of performance already made if there is a breach, client can insist on proper and full performance

6. IF BREACH CANNOT BE CURED

Thompson v Scholtz (SCA) FACTS: Contract for sale of farm, transfer set to take place at a later date but seller had to provide buyer with temporary occution until transfer takes place in exchange for an occupation rent (similar to a lease agreement) Breach – seller failed to provide buyer with occupation of the farm house Therefore buyer raised the exceptio as a defence to the seller’s claim for the full occupational rent, refused to pay any rent

BUT continuing obligation Seller alleged that exceptio had to be relaxed, and claimed a reduced contract price (following precedent of BK Tooling) Court summarized BK Tooling as follows - Exceptio itself applies to all contracts not only services or reciprocal contracts and entitles the aggrieved party to withhold the full performance, breaching party must therefore perform fully - Court has discretion to grant a reduced contract price Understood BK Tooling to mean that cannot have a reduction in contract price unless breach can be rectified and the repair costs can be quantified NB: Therefore cannot apply to continuous obligations as breach cannot be repaired nor costs to repair quantified Cannot remedy breaches in the past - payment had to be made in respect of past payments, cannot be rectified as time has already passed in which occupation had to be given) Conclusion: Court ended up reducing the contract price but on another basis In lease agreements, where lessor does not give full use and enjoyment of the property – situation not dealt with on basis on BK Tooling principles of discretion to reduce contract price through courts discretion, Rather used another remedy specific to lesse in contract of lease = remission/proportional reduction of rent (analogous rememdy to one recognized in BK Tooling) BUT up to the lessee to show what this reduction should be (estimation in the hands of the innocent party relying on the exceptio, includes subjective elements) Whereas BK Tooling reduction mechanism involves calculation in the hands of the guilty party which is more objective estimation Therefore lessor still entitled to some payment but proportionally reduced, 25% deducted from the contract price (house worth approx. 25% of value of occupation) Costs? Lessee had costs order against him, had to pay 75% of lessors costs (relied on exceptio to not pay anything at all) – Shows that this rule operates outside of court, costs order against one if do not pay something and accept a reduced payment. Where repair of performance not possible and exceptio not available, have to accept reduced price. Tjakkie: This is not the correct interpretation of BK Tooling, court said that the cost of repairs would normally be the value of the reduction to the contract price but not always, recognized that could also look to the value of the performance Therefore does not need to be evidence of repair costs before the contract price can be reduced

Botha v Rich NO 2014 (CC) See paras 43-49 Ms Botha was in arrears with installments on sale of land

Court held that when she claimed for transfer on basis that half of installments paid, in principle the sellers could raise the exceptio as a defence to demand for transfer But linked principle of reciprocity (underlying exceptio) to good faith and fairness, as well as constitutional values (dignity of parties) Para 46 – bilateral contracts almost invariably co-operative ventures, honouring contract cannot be matter of each side pursuing their own self-interest without considering that of the other party Granted specific performance but made it conditional on the payment of the arrears by Botha...