Southernport Developments (Pty) Ltd v Transnet Ltd

On 7 December 1998, Tsogo Sun Ebhayi (the appellant's predecessor) concluded a written agreement with Transnet (respondent) regarding the development of casino and hotel facilities on certain properties in Humewood. On 10 February 2000, the parties concluded a second 'bridging' agreement which provided that if Tsogo Sun's casino licence application failed, Tsogo Sun would have an option for three years to lease the properties on terms and conditions to be negotiated in good faith. The agreement further provided that if the parties could not agree within 30 days, the dispute would be referred to an arbitrator whose decision would be final and binding. Tsogo Sun's casino licence application was unsuccessful. When Transnet allegedly failed to enter into good faith negotiations, the appellant instituted action seeking an order requiring Transnet to negotiate in good faith and for disputes to be referred to arbitration. Transnet excepted to the particulars of claim on the basis that there was no enforceable agreement. The exception was upheld by Blieden J in the Johannesburg High Court, and the appellant appealed to the Supreme Court of Appeal.

• Whether the parties had agreed on the essential terms of a lease agreement sufficient to create an enforceable contract
• Whether an agreement to negotiate in good faith is enforceable in South African law
• Whether the inclusion of an arbitration clause as a deadlock-breaking mechanism renders an agreement to negotiate in good faith enforceable
• Whether the agreement constituted an unenforceable 'agreement to agree'

The appeal was upheld with costs (including costs consequent upon employment of two counsel). The order of the court a quo was set aside and replaced with an order dismissing the exception with costs including costs of two counsel.

An agreement to negotiate in good faith is enforceable in South African law when it is linked to a binding dispute resolution mechanism (such as arbitration) that will resolve any deadlock between the parties. Such an agreement is distinguishable from an unenforceable 'agreement to agree' because the final and binding nature of the arbitrator's decision renders certain and enforceable what would otherwise be uncertain. The essentialia of a lease are an ascertained thing and fixed rental only - other terms are not essential elements. Parties may validly delegate to a third party arbitrator the determination of disputed terms in a contract, and this principle extends beyond merely determining rental to other contractual terms. Where parties have bound themselves to negotiate in good faith with a deadlock-breaking mechanism, enforcing that undertaking upholds rather than interferes with freedom of contract.

The court made comparative observations about the treatment of agreements to negotiate in good faith in other legal systems: English, Irish and Scots law generally refuse to recognize pre-contractual duties to negotiate in good faith. In the United States, enforceability varies by state, with some courts refusing enforcement on grounds of indefiniteness while others give effect to parties' expressed intentions (the latter view gaining substantial following). European courts (particularly German, French, Italian and Belgian) have been more receptive to pre-contractual liability based on good faith obligations. Australian law, as exemplified in Coal Cliff Collieries, takes the view that certainty is the touchstone of enforceability, with enforceability depending on the construction of the particular contract. The court noted that the duty to negotiate in good faith is well-established in South African labour law as fundamental to collective bargaining, and while the analogy to ordinary contract negotiations is imperfect, useful comparisons can be drawn. The court also observed that the nature of use and enjoyment of leased property usually flows from the nature of the property itself and is often dictated by external factors such as zoning.

This case is significant in South African contract law as it establishes that an agreement to negotiate in good faith, when coupled with a binding arbitration mechanism for dispute resolution, is enforceable and does not constitute a vague or uncertain 'agreement to agree'. The judgment clarifies that parties may validly delegate to arbitrators the determination not only of rental but of other disputed terms in a lease or contract. It represents a departure from the strict English common law position that refuses to recognize pre-contractual duties to negotiate in good faith. The case also clarifies the essential elements of a lease agreement, confirming that only an ascertained thing and fixed rental are essentialia, while other terms (such as use, enjoyment, or period) are not. The judgment demonstrates the court's willingness to uphold freedom of contract where parties have genuinely bound themselves to a negotiation process with a clear mechanism for resolving deadlocks, rather than leaving matters to the absolute discretion of the parties.