The case of Capitec Bank Holdings Ltd and Another v Coral Lagoon Investments 194 (Pty) Ltd and Others is valuable as it succinctly sets out the rules relating to the interpretation of contracts.

In this case, the Supreme Court of Appeal (“SCA”) quoted, with approval, an earlier SCA judgment in Natal Joint Municipal Pension Fund v Endumeni Municipality. It reiterated when interpreting a contract, the language used, the context in which it is used and the purpose of the provision should be taken into consideration.

Judge Unterhalter added, however, that text, context and purpose should not be used in a mechanical fashion. He said that “It is the relationship between the words used, the concepts expressed by those words and the place of the contested provision within the scheme of the agreement (or instrument) as a whole that constitutes the enterprise by recourse to which a coherent and salient interpretation is determined. As Endumeni emphasised, citing well-known cases, ‘[t]he inevitable point of departure is the language of the provision itself'.”

Judge Unterhalter also quoted, with approval, the judgment of Comwezi Security Services (Pty) Ltd v Cape Empowerment Trust Limited, in which the SCA explained that, even in the absence of ambiguity, the conduct of the parties in implementing the agreement might provide clear evidence as to how reasonable persons of business construed a disputed provision in a contract.

The SCA highlighted that an issue that has long troubled courts is how to marry the expansive approach to interpretation adopted in the Endumeni case with the parol evidence rule, which remains an important principle and part of South African law.

The parol evidence rule provides that where parties to a contract have signed a written agreement and recorded that the document is a complete and accurate version of the agreement, extrinsic evidence is inadmissible to contradict, add to or modify the contract (save in exceptional circumstances such as fraud or duress). The SCA therefore considered how the expansive approach to interpretation laid down in the Endumeni case was to cohabit with the parol evidence rule.

The SCA referred to the recent Constitutional Court judgment in University of Johannesburg v Auckland Park Theological Seminary and Another and quoted with approval the following paragraph from the judgment:

“Let me clarify that what I say here does not mean that extrinsic evidence is always admissible. It is true that a court's recourse to extrinsic evidence is not limitless because ‘interpretation is a matter of law and not of fact and, accordingly, interpretation is a matter for the court and not for witnesses'. It is also true that “to the extent that evidence may be admissible to contextualise the document (since ‘context is everything') to establish its factual matrix or for purposes of identification, one must use it as conservatively as possible'. I must, however, make it clear that this does not detract from the injunction on courts to consider evidence of context and purpose. Where, in a given case, reasonable people may disagree on the admissibility of the contextual evidence in question, the unitary approach to contractual interpretation enjoins a court to err on the side of admitting the evidence. There would, of course, still be sufficient checks against any undue reach of such evidence because the court dealing with the evidence could still disregard it on the basis that it lacks weight. When dealing with evidence in this context, it is important not to conflate admissibility and weight.”

The SCA highlighted that in the University of Johannesburg case, the Constitutional Court rejected the text's plain meaning or its primacy because words without context mean nothing and context is everything. The Constitutional Court has given a wide remit to the admission of extrinsic evidence as to context and purpose, to determine the meaning of a contract. Suppose there are reasonable disagreements as to the relevance of extrinsic evidence. In that case, the court should favour admitting the evidence and the weight to be given to that evidence can be considered later.

Judge Unterhalter noted that the parol evidence rule is likely to become a residual rule because it is only possible to determine whether the extrinsic evidence  contradicts, alters or addd to a written contract once the court has determined the meaning of that contract.

While the factual background known to the parties before the contract was concluded may be of assistance in determining the meaning of the contract, South African courts' aversion to receiving evidence of the parties' prior negotiations and what they intended or understood the contract to mean should remain an important limitation on what evidence may be led and what is relevant to the context or purpose of the contract. The important principle, however, remains that interpretation is a matter strictly for the court and not what a witness considers a contract to mean.

Judge Unterhalter eloquently recorded in the judgment: “Most contracts, and particularly commercial contracts, are constructed with a design in mind, and their architects choose words and concepts to give effect to that design. For this reason, interpretation begins with the text and its structure. They have a gravitational pull that is important. The proposition that context is everything is not a licence to contend for meanings unmoored in the text and its structure. Rather, context and purpose may be used to elucidate the text.”

The SCA also reaffirmed the following:

  1. contracts freely and voluntarily entered into must be honoured because persons who engage with each other voluntarily and freely take responsibility for the promises they make and must be able to have their contracts enforced;
  2. the public policy doctrine to invalidate contract terms should be undertaken with circumspection but without a lack of courage or confidence in upholding constitutional value; and
  3. while good faith underlies the law of contract, good faith and fairness are not substantive free-standing principles that can be used to interfere with contractual bargains or to persuade a court not to enforce the contract. Good faith is, however, a value that a court may take into account when considering what public policy demands, particularly when a court considers whether the terms of a contract offends against public policy.

We anticipate that this judgment will become an often-quoted judgment in South African courts and will regularly be referred to when dealing with the objections to the leading of evidence when the interpretation of contracts are in dispute and when courts refer to the rules of interpretation of contracts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.