Watergate (Private) Limited v Commercial Bank of Zimbabwe

Watergate (Private) Limited, a farming company operating in Chipinge District growing tobacco and coffee, had three accounts with Commercial Bank of Zimbabwe including two loan accounts and a foreign currency account. In 1998, the Bank provided Watergate with a short-term local currency loan to finance crop expenditure, secured by mortgage bonds and renewable annually. By February 2000, Watergate's total indebtedness was $31,500,000.00 with interest exceeding 80% per annum. In March 2000, the Bank's agricultural finance planner suggested converting the loan to a foreign currency denominated loan with lower interest, to be repaid from foreign currency earned from coffee and tobacco sales. On 9 January 2001, Watergate's loan (then about $56,000,000.00) was converted to US$817,522.99 (after set-off) with interest at 8.21% per annum. The written agreement of 10 July 2001 provided for repayment in five monthly instalments ending 31 December 2001, with an addendum extending repayment to 31 December 2002 if the Reserve Bank of Zimbabwe (RBZ) did not allow 100% of coffee revenue to be paid in US dollars. The RBZ application was unsuccessful. Watergate offered to pay in local currency at the prevailing exchange rate, which the Bank rejected. Watergate subsequently pledged its coffee crop to Zimbabwe Coffee Mill Limited for working capital after the Bank froze its overdraft facilities.

• Whether the Bank was entitled to payment in United States dollars rather than Zimbabwe dollars
• Whether Watergate was prevented from repaying the loan in United States dollars by supervening impossibility that it had not foreseen or in respect of which it was not at fault
• Whether the principle impossibilium nulla obligatio est (impossibility of performance excuses non-performance) applied to discharge Watergate's obligation
• What exchange rate should apply if payment in foreign currency could not be enforced

The appeal was dismissed with costs. The High Court order was upheld, granting judgment in favor of the respondent (Commercial Bank of Zimbabwe) in the sum of US$817,522.99 together with interest at 8.21% per annum to date of final payment, with alternative relief that if payment could not be recovered in United States dollars, the Bank would be entitled to recover in Zimbabwean dollars at the prevailing foreign exchange auction rate as at the date of repayment or enforcement.

The binding legal principles established are: (1) A party is entitled to payment in foreign currency if it can show that a judgment in that currency would most truly express the loss and most fully compensate for it; (2) Where parties agree to payment in foreign currency as an essential term of their contract, the creditor's loss from breach must be calculated in that foreign currency; (3) The doctrine impossibilium nulla obligatio est (impossibility excuses performance) does not apply where: (a) the causes of impossibility were in the contemplation of the parties and provided for in the contract; or (b) the debtor deliberately put performance beyond its power through its own subsequent actions; (4) Where a foreign currency judgment cannot be enforced in that currency, conversion to local currency must occur at the prevailing exchange rate at the date of enforcement, not the date of breach or judgment, to prevent the creditor suffering from currency devaluation; (5) Courts must examine the nature of the contract, the relation of the parties, the circumstances of the case, and the nature of the impossibility to determine whether impossibility of performance excuses non-performance.

The Court made observations about the principles governing when impossibility of performance excuses contractual obligations, citing with approval Bischofberger v Van Eyk 1981 (2) SA 607 (WLD): "If the causes [of impossibility] were in the contemplation of the parties, they are generally speaking bound by the contract. If, on the contrary, they were such as no human foresight could have foreseen, the obligations under the contract are extinguished." The Court also noted, without deciding, that Watergate must have had another source from which it believed it would raise foreign currency to repay the loan when the addendum was added (given the parties foresaw the RBZ might not grant permission), but Watergate failed to explain what that source was or why it did not use it. The Court observed that under the Coffee Mill arrangement, it was the Coffee Mill that benefited in foreign currency while Watergate received only local currency proceeds, suggesting Watergate was aware it was prejudicing its ability to repay the Bank when entering that arrangement.

This case is significant in Zimbabwean (and by extension South African) jurisprudence for clarifying the principles governing foreign currency obligations and the doctrine of impossibility of performance in contract law. It confirms that parties are bound by agreements to pay in foreign currency where that was the essential basis of the contract, and that a creditor is entitled to judgment in foreign currency where this would most truly express and compensate the loss. The judgment reinforces that the doctrine impossibilium nulla obligatio est does not apply where the alleged impossibility was foreseeable and provided for in the contract, or where the debtor deliberately rendered performance impossible through its own subsequent actions. The case also affirms the principle that where foreign currency judgments cannot be enforced in that currency, conversion should occur at the exchange rate prevailing at enforcement to protect creditors from currency devaluation. This provides important guidance on managing foreign currency risk in loan agreements and the limited scope of the impossibility defense in commercial contracts.