In the recent case of Twenty-Third Century Systems (Pty) Ltd and Another v SAP Africa Region (Pty) Ltd, the Supreme Court of Appeal ("SCA") had to consider whether a party to a contract that has repudiated the contract can later rely on the terms of the very same contract to defend a claim against it.
Twenty-Third Century Systems (Pty) Ltd, a Zimbabwe company, and Twenty-Third Century Systems Global (Pty) Ltd, a Botswana company, were sister companies and the unsuccessful appellants in this reportable judgment ("Twenty-Third").
Twenty-Third concluded various agreements with the respondent – SAP Africa Region (Pty) Ltd ("SAP Africa") – a company based in South Africa. SAP Africa is one of the prominent international providers of information technology. Twenty-Third was appointed as a service provider of SAP Africa's products in certain territories.
On 30 May 2016, Twenty-Third and SAP Africa concluded a suite of agreements ("the Agreement"). The Agreement endured from 30 May 2016 until its termination on 1 July 2019, when SAP Africa gave notice of its termination to Twenty-Third. In response to the notice, Twenty-Third informed SAP Africa that it repudiated the Agreement, which repudiation was accepted by Twenty-Third.
Thereafter, Twenty-Third brought an action against SAP Africa in the High Court of South Africa in terms of which they claimed payment for loss of profit in the amount of USD68 034 351.49 arising from the alleged repudiation and subsequent termination of the Agreement.
SAP Africa raised two special pleas in amplification of its denial of any liability. In the first, SAP Africa alleged that the loss of profit claim by Twenty-Third is precluded by the exclusion of damages clause contained in the Agreement. In the second, SAP Africa alleged that the claim by Twenty-Third was time-barred in terms of the Agreement.
In reply, Twenty-Third alleged that SAP Africa was precluded from raising the two special pleas since it repudiated the Agreement. In other words, its replicated point to the two special pleas was that SAP Africa cannot repudiate the Agreement and thereafter rely on the terms of the very same Agreement that it has repudiated.
The High Court upheld the two special pleas and found that the clauses in question survived the termination of the Agreement. Twenty-Third appealed to the SCA.
The SCA agreed with the High Court of South Africa and dismissed the appeal. In this regard, it held that although the performance of certain obligations may cease as a result of a party's repudiatory conduct, the act of repudiation itself does not terminate the contract. For example, clauses in a contract that give a party mechanisms to address the consequences of a terminated contract (i.e., an arbitration clause) survive.
In this regard, the SCA held as follows:-
"By accepting the repudiation, the innocent party brings to an end the duty of the parties to perform their primary obligations under the contract. The effect of bringing an end to the primary obligations is the activation of certain secondary obligations."
The SCA found that when Twenty-Third accepted the repudiation of SAP Africa, the primary obligations of the Agreement were extinguished, and secondary obligations were activated exactly at that point. The secondary obligations arising from the exclusion of damages clause and the time-bar clause survived the termination of the Agreement and precluded Twenty-Third from bringing an action against SAP Africa.
The importance of this judgment is that it reinforces the distinction between primary and secondary obligations arising from a contract. Simply put, primary obligations are those obligations that are directed at the performance of the contract. Secondary obligations are only activated when the primary obligations are no longer extant. They also survive the termination of an agreement to protect a party's rights.
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