In the recent Supreme Court of Appeal (SCA) case of Van der Merwe v Bonnievale Piggery (Pty) Ltd the court determined that where there is an interlinked contractual relationship for sale of products and the parties are unable to reach agreement on price, there is no consensus between the parties and the entire contractual arrangement between them ends.
During 2005 the parties entered into an oral business relationship in terms of which Bonnievale would supply pig carcasses to Van der Merwe on a continuing basis. As part of the business relationship, it was agreed that the pig carcasses would be supplied at “reasonable market related wholesale prices that would follow market fluctuations”.
The business relationship included several interlinked contracts including: (i) contracts for the sale of pig carcasses where the parties would negotiate the sale price before the conclusion of each contract of sale; (ii) an exclusive supply agreement; and (iii) a sole distributorship agreement. The business relationship, and with it the interlinked contracts, were of indefinite duration. For many years the parties managed to negotiate suitable prices for several sale agreements, however, in 2013 the parties could not reach consensus on price and the agreement between them came to an end.
Thereafter, Bonnievale instituted action against Van der Merwe for failing to pay for pig carcasses sold and delivered to Van der Merwe during January and February 2013. In response, Van der Merwe instituted a counterclaim for breach of contract on the basis that the Bonnievale would not accept a market related price for the pig carcasses. After the court a quo and, on appeal, the full bench of the High Court dismissed Van der Merwe’s counterclaim, he was given leave to appeal to the SCA.
The pertinent questions the SCA had to answer were:
- in light of the requirement that the price of the pig carcasses should be market related and adjusted in accordance with market fluctuations, did the inability of the parties to agree on a price constitute a breach of the sale agreement; and
- what effect did the parties’ inability to agree on a price for the pig carcasses have on the business relationship and the interlinking contracts?
The court first looked at the enforceability of a provision which states that goods will be sold at market related prices. The court looked at the manner in which the parties had interpreted the market related provision (in all previous years, Van der Merwe had agreed to Bonnievale’s prices even where these prices had not been reduced in accordance with market fluctuations) and determined that the market price was simply a standard against which the parties would negotiate prices rather than an objectively determinable standard or mechanism to resolve a deadlock.
In order for the market related requirement to have been enforceable, the parties would have needed to explicitly agree that should they not be able to reach consensus on the price of the carcasses, they would be sold at the prevailing market price. The court stated that in such circumstances, contracting parties could appoint a third party to determine what constitutes a reasonable market price to break a deadlock.
The SCA essentially reaffirmed the position that an “agreement to agree” is not enforceable unless it expressly includes enforceable provisions.
Regarding the effect that the unenforceability of the sales agreement had on the interlinking contracts, the SCA concluded that when there are interlinked contracts for the sale of products, and the parties are unable to reach agreement on price, there is no consensus between the parties and the entire contractual arrangement between them comes to an end.
Andrew Dutton
