Capitec Bank Holdings Limited and Another v Coral Lagoon Investments 194 (Pty) Ltd and Others

In December 2006, Capitec Bank Holdings Limited (Capitec Holdings), Coral Lagoon Investments 194 (Pty) Ltd (Coral) and Ash Brook Investments 16 (Pty) Ltd (Ash Brook) concluded a subscription of shares and shareholders agreement (the subscription agreement) to enable Capitec Holdings to increase its black shareholding for BEE compliance. Pursuant to this, Coral subscribed for 10 million ordinary shares in Capitec Holdings. In August 2019, Regiments Capital (which held 59.82% interest in Ash Brook) entered into a settlement agreement with the Transnet Second Defined Benefit Fund to settle fraud claims. The settlement required the sale of 810,230 Capitec Holdings shares (the sale shares), with proceeds to settle the Fund's claims. The settlement agreement stipulated as a suspensive condition that "the Capitec Consent having been duly obtained". Coral sought Capitec Holdings' consent to dispose of the sale shares to the Fund. Capitec Holdings did not give consent. Coral and Ash Brook brought an urgent application seeking a declarator that Capitec Holdings' withholding of consent was unreasonable and in breach of good faith duties, and seeking a mandatory order directing Capitec Holdings to give consent. The Fund also brought a counter-application asserting that no consent was required under the subscription agreement.

• Does clause 8.3 of the subscription agreement require Capitec Holdings' consent before Coral can sell its shares in Capitec Holdings?
• What is the correct approach to interpreting the subscription agreement and clause 8.3 in particular?
• What is the relevance and admissibility of the parties' past conduct in implementing the agreement for purposes of interpretation?
• What is the scope and application of the parol evidence rule in relation to extrinsic evidence of context and purpose?
• Does good faith in South African contract law constitute an independent, free-standing source of contractual obligations?
• Can a court order a party to give consent that is not required by a properly interpreted contract on the basis of good faith or fairness?
• Is the appeal moot given subsequent transactions and developments after the high court judgment?

The appeal was upheld with costs, including costs of two counsel. Paragraphs 4-8 of the high court order were set aside and replaced with an order dismissing the application under case number 30899/2019 and ordering the applicants (Coral and Ash Brook) and the first and second intervening parties (Rorisang and Lemoshanang) to pay the costs of the first and second respondents (Capitec Holdings and Capitec Bank), including costs of two counsel where employed.

The binding legal principles established are: (1) Where the plain language of a contract, understood in its textual and structural context, does not require consent for a particular action, a court cannot import such a requirement based on the parties' past conduct or on principles of good faith or fairness. (2) Good faith in South African contract law is not an independent, free-standing source of contractual obligations that can be used to alter, add to or vary the terms parties have agreed to; rather, good faith is an underlying principle that informs the substantive rules of contract law. (3) Courts cannot use good faith, justice or fairness as abstract principles to impose contractual duties that the parties did not agree to or to decline to enforce bargains freely entered into. (4) While extrinsic evidence of the parties' post-contractual conduct may be admissible as relevant to context for purposes of interpretation (following University of Johannesburg), such evidence must be weighed and cannot displace the clear meaning derived from the text, structure and purpose of the agreement where that evidence is equivocal. (5) The parol evidence rule, while somewhat residual in its operation under the current approach to interpretation, still operates to exclude evidence that contradicts, adds to or varies a written contract once the meaning of that contract has been properly determined through consideration of text, context and purpose. (6) The interpretation of contracts must commence with the text and its structure - context and purpose are used to elucidate the text, not to import meanings unmoored from the text. (7) Where parties have structured their agreement to differentiate the treatment of different categories of persons (e.g. by imposing prohibitions on some but merely consequences on others), courts should respect those distinctions in interpretation.

The Court made several important non-binding observations: (1) The practical consequence of the Constitutional Court's approach to interpretation in University of Johannesburg is that the parol evidence rule is likely to become largely residual, doing little more than identifying the written agreement whose meaning must be determined, because evidence claimed to contradict the agreement can be recharacterized as relevant to context. (2) Limits on admissible extrinsic evidence should include continued aversion to evidence of parties' prior negotiations and subjective intentions (outside rectification cases) and what witnesses consider a contract to mean - that remains a matter for the court. (3) The proposition that "context is everything" from Endumeni should not be used as a license to contend for meanings unmoored in the text and structure - it does not evidence skepticism that words and terms have meaning, but rather recognizes that words are understood in relation to context and purpose. (4) Endumeni has become a "ritualized incantation" often used to pursue "undisciplined and self-serving interpretations" - this is not what the case intended. (5) Most commercial contracts are constructed with a design in mind, and their architects choose words to give effect to that design - the text and structure have a "gravitational pull" that is important and should not be disregarded. (6) The relationship between the expansive approach to interpretation and the parol evidence rule poses challenges that continue to trouble courts drawing on the common law tradition. (7) A via media approach (admitting extrinsic evidence only if the contract is reasonably susceptible of the meaning for which evidence is tendered) may have merit but was not adopted given University of Johannesburg. (8) That a contract could be more ethically preferable or better for society does not permit judicial interpretation to make it so.

This case is of considerable importance for South African contract law for several reasons: (1) It provides important clarification on the interaction between the expansive approach to interpretation established in Natal Joint Municipal Pension Fund v Endumeni Municipality and the parol evidence rule, particularly in light of University of Johannesburg v Auckland Park Theological Seminary. (2) It authoritatively applies the Constitutional Court's decision in Beadica 231 CC v Trustees, Oregon Trust regarding the proper role of good faith in contract law, confirming that good faith is not a free-standing source of contractual obligations but rather a principle that informs substantive rules. (3) It emphasizes that courts cannot use concepts of good faith, fairness or justice to rewrite contracts or impose obligations parties did not agree to, reaffirming the centrality of freedom of contract. (4) It provides guidance on the admissibility and weight to be given to extrinsic evidence of the parties' post-contractual conduct in interpreting contracts. (5) It demonstrates the proper methodology for contractual interpretation, starting with the text and structure of the agreement, and warns against undisciplined interpretation that is unmoored from the text. (6) It clarifies that the plain meaning of clear contractual language should not be displaced without compelling contextual reasons, despite the unitary approach to interpretation.