Hangar v Robertson

The three appellants were directors and shareholders (through family trusts) of Merlog Foods (Pty) Ltd, a wholesaler and distributor of frozen and chilled food products. The company was not as profitable as desired. The respondent, a retired successful businessman, was introduced to them in 2005 to help improve profitability. After negotiations, on 19 June 2006 the parties concluded a consultancy agreement. Under this agreement, the respondent would receive: (1) basic expenses of approximately R5,000 per week; (2) 10% of profit before tax exceeding R10 million per financial year; (3) 10% of the net increase in the value of the company above R24 million, to be awarded "at the time when value is realised, for example when the business is sold"; and (4) an option to purchase up to 10% of shares in the company based on a value of R24 million, with the option open until 30 June 2009. The relationship deteriorated due to personality clashes, and the contract was terminated on 22 December 2009. The respondent had not exercised his share option. By the time of termination, the company's value had substantially increased beyond R24 million. The respondent claimed payment of 10% of the increased value and 10% of profit before tax for 2009 and 2010. The appellants resisted, leading to litigation in the KwaZulu-Natal High Court.

• Whether the provision entitling the respondent to 10% of the net increase in value of the company was too vague to be enforceable
• Whether the share option clause and the value increase clause were alternative or cumulative forms of remuneration
• Whether the right to payment of increased value fell away when the contract was terminated without the business having been sold
• When the value of the company should be determined for purposes of the clause
• When payment of the increased value becomes due to the respondent
• The proper interpretation of the phrase 'awarded at the time when value is realised'

The appeal was dismissed with costs. The declaratory order of the High Court was upheld, declaring the appellants jointly liable to pay the respondent 10% of the increase in Merlog's value over R24 million (calculated using the agreed formula at termination date), with payment becoming due when either Merlog disposes of its business or the appellants dispose of or realise their direct or indirect interest in Merlog, whichever occurs first. Leave was granted to the respondent to set the matter down again when payment becomes due.

The binding legal principles established are: (1) In interpreting a contract, the court must consider the factual matrix and context in which it was concluded, including pre-contractual correspondence, to ascertain the parties' intention. (2) Commercial contracts seriously executed should not lightly be held unenforceable merely because parties failed to express themselves with complete clarity. (3) A provision deferring payment until "value is realised" operates to postpone the time of payment, not to determine the quantum of the amount payable; the amount can be determined at an earlier point in time (such as termination of the contract) with payment deferred until actual realisation. (4) Where multiple forms of remuneration are set out in a contract, they will be treated as cumulative unless the contract clearly provides they are alternatives. (5) Courts will not insert terms into a contract that the parties did not agree upon, even if such terms might appear sensible with hindsight. (6) A contract is not void for vagueness merely because the precise event triggering a payment obligation cannot be specified in advance, provided the court can determine when that event has occurred based on evidence presented to it.

Leach JA made observations about the unfortunate tendency of businessmen to conduct affairs involving substantial financial interests on the basis of crude and vague agreements, relying on "hope, good spirits, bona fides and commercial expediency" to make them work. The Court noted it was "truly astonishing" how often this occurs. The judgment also commented that "context is everything" in contractual interpretation may go too far, but does emphasize the importance of context. The Court expressed hope that the parties would show more common sense going forward and not require further litigation to determine when payment becomes due. Regarding costs, the Court reiterated that where a single counsel (even senior counsel) is employed, no special costs order is required as it is for the taxing master to determine a fair and reasonable fee on taxation, and the court should not fetter the taxing master's discretion by ordering "costs consequent upon the employment of senior counsel".

This case illustrates the courts' approach to interpreting commercial agreements that are not clearly or professionally drafted. It demonstrates that South African courts will strive to give effect to commercial contracts and not readily find them unenforceable for vagueness, provided the essential terms can be ascertained. The judgment emphasizes the importance of contextual interpretation, including examination of pre-contractual negotiations and correspondence to understand the parties' intention. It confirms that where parties include multiple forms of remuneration in an agreement, they will be treated as cumulative unless expressly stated to be alternative. The case also shows the court's willingness to imply reasonable terms to give business efficacy to an agreement, while being careful not to rewrite the parties' bargain. The judgment serves as a cautionary tale about the risks of informal commercial agreements, while confirming that courts will endeavor to enforce them according to the parties' true intention.