Suspensive conditions revisited in the Cape Royal case
South Africa’s law of contract provides several ways in which contracting parties can protect and enforce their contractual rights. The most essential principle of contract is party autonomy – parties to a contract are free to conclude what they have agreed to, and the courts have a duty to enforce this agreement as far as possible provided it is not against the law.
In the sale of immovable property, the contract (commonly known as an Offer to Purchase) will have common and special terms designed to ensure that the agreement is fulfilled.
Not everyone can afford to pay for an immovable property in cash, and in these cases the buyer will need to apply for a home loan from a bank. When it comes to a bond application, there is no guarantee that the loan will be granted by the bank. For the seller, the sale therefore remains uncertain until the loan is approved. To mitigate this risk and uncertainty, it’s become common practice for contracting parties to include a suspensive condition clause into their original contract.
As a general rule, a suspensive condition creates an obligation – i.e. the fulfillment of a specific future event, upon which application of the contract will continue. In the sale of immovable property, the effect of the suspensive condition is that:
- The agreement is suspended until such time as the bank loan is obtained.
- If the debtor fails to obtain a bank loan by the specified date, the sale agreement (subject to any contractual extensions) becomes null and void from its inception.
The Cape Royal case
What if the wording of the condition precedent does not reflect its nature? Can a party to a contract unilaterally waive performance of the condition? In the case of Noel Patrick McGrane and Cape Royal, the parties entered into an agreement of sale that included a condition precedent that the buyer obtain a bond in order to continue with the sale agreement. The buyer later paid in cash and therefore did not fulfill this condition’s requirements. This resulted in the seller repudiating the contract on the grounds that the buyer repudiated by not obtaining the loan, a condition which had to be strictly complied with and could not be waived.
The court first looked at the proper meaning of contract terms and found that the literal meaning of the words in the agreement when literally interpreted did not give rise to a condition that obligated the buyer to obtain a loan. The court said that:
The clause is not capable of the contrary interpretation that was contended for by the respondent namely that the appellant was obliged to obtain a loan. The words ‘[i]n the event of the Purchaser requiring a mortgage loan’, cannot be wished away and render the respondent’s interpretation untenable. The clause is clear. The condition precedent of obtaining a mortgage loan was for the benefit of the appellant and only arose if the appellant required finance.
The court went on to deal with the issue of whether a party can unilaterally waive the condition. It held that bond applications are primarily for the benefit of the buyer – and that regardless of whether the associated condition is suspensive, the condition is not intended to protect the seller. As such, a buyer has the right to waive the condition unilaterally i.e. the act of waiver does not require acceptance from another party.
This case highlights the importance of parties being aware of what they conclude and the terminology they use. Courts will give literal meaning to the words they have used, as they emphasise party autonomy and the principle of pacta sunt servanda (contractual freedom). It is therefore vital that correct contractual wording is used when concluding a sale agreement, as not everything with the word ‘condition’ qualifies it as a ‘suspensive condition’.
Written by Wessel de Kock
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