Gardner v Margo

On 26 February 1998, Jan Abraham Joubert entered into a written mandate with Tony Ricky Gardner and OTR Mining Ltd whereby Gardner was instructed to act as Joubert's sole agent to sell 12,853,580 of Joubert's ordinary shares in OTR over a three-month period in tranches of approximately 4 million shares per month. The mandate stated that "the amount payable to" Joubert would be 40 cents per share. OTR guaranteed payment of R5,141,432 (being 12,853,580 shares x R0.40). At the time, OTR was experiencing severe financial difficulties, having recorded operating losses and facing mining authorization issues. Gardner sold 9.2 million shares (the "accounted shares") and paid Joubert R3,634,275 (being 9.2 million x R0.40, less R45,725 allegedly owing by Joubert to OTR). Of the total proceeds of approximately R10.2 million from these sales, Gardner paid approximately R6.2 million to OTR. The balance of approximately 3.65 million shares (the "unaccounted shares") were allegedly not sold. Joubert subsequently ceded all his rights under the mandate to Margo, who sued Gardner and OTR for: (1) payment of the balance of proceeds from the accounted shares; (2) payment for the unaccounted shares at the prevailing market price of R1.20 per share (or alternatively damages); and (3) payment under OTR's guarantee.

• What is the proper interpretation of clause 2 of the mandate - was Joubert entitled to only 40 cents per share or to the full proceeds of the shares sold?
• Were there oral terms to the mandate providing that proceeds in excess of 40 cents per share would be paid to OTR?
• Were the unaccounted shares in fact sold by Gardner?
• Was the guarantee given by OTR in contravention of section 38(1) of the Companies Act 61 of 1973, which prohibits a company from giving financial assistance for the purchase of its own shares?
• What rights, if any, did Margo acquire as cessionary of Joubert's rights under the mandate?

The appeal succeeded with costs. The High Court's order was set aside and replaced with: (1) judgment against Gardner for payment of R1,461,432 (representing 40 cents per share for the 3,653,580 unaccounted shares) plus interest at 15.5% per annum from 1 September 1998; (2) judgment against OTR as guarantor for the same amount and interest, liable only in the event and to the extent that Gardner fails to pay. The costs order in the High Court remained undisturbed.

In interpreting contracts, courts must apply the "golden rule" by giving language its grammatical and ordinary meaning unless this results in absurdity or inconsistency, having regard to: (1) the context and interrelation to the contract as a whole; (2) background circumstances explaining the genesis and purpose of the contract; and (3) extrinsic evidence regarding surrounding circumstances and subsequent conduct showing how parties acted on the document. A term will not be implied by law if it conflicts with the express terms of the contract. The onus of disproving alleged oral terms rests on the party denying their existence. Section 38(1) of the Companies Act 61 of 1973 prohibits financial assistance only when the direct object of the transaction is to assist another financially in purchasing shares; it is not contravened when the direct object is to give another that to which they are already entitled. An agent must keep the property of the principal separate from similar property and account for it. A guarantor's liability is secondary and arises only when and to the extent that the principal debtor fails to perform.

The court observed that the mandate was not simply a straightforward mandate to sell shares but rather reflected Joubert severing his ties with OTR, as evidenced by provisions regarding his retirement, retirement gratuity (the Mercedes Benz), and entitlement to proceeds from granite block sales. The court noted it was unnecessary to determine whether the payment to OTR was intended as compensation for losses allegedly caused by Joubert's negligence, as it was sufficient that the parties agreed OTR would receive the excess proceeds. The court commented on the "very messy" nature of Gardner's share transactions during the relevant period and his failure to properly segregate Joubert's shares from other OTR shares. The court implicitly criticized Gardner's evidence as unconvincing, particularly his attempt during re-examination to backtrack from his earlier confirmation of instructions given to his attorney. The court also noted that Joubert's denial of knowledge of the share price and OTR's financial difficulties was not credible given his position as co-founder, director, major shareholder, and mining director physically stationed at the mine.

This case is significant for: (1) its application of principles of contractual interpretation in commercial contexts, particularly the "golden rule" approach; (2) its treatment of the interaction between express and implied terms; (3) its clarification that subsequent conduct of parties can be relevant in interpreting potentially ambiguous contractual provisions; (4) its approach to proving or disproving alleged oral terms of a partly written, partly oral contract; (5) its interpretation of section 38(1) of the Companies Act 61 of 1973, distinguishing between the "direct object" and "ultimate goal" of a transaction, and confirming that providing security for what a person is already entitled to does not constitute prohibited financial assistance; and (6) its distinction between the liability of a guarantor and a co-principal debtor.