Where Do I Stand If My Contractual Pre-Emptive Right Is Dishonoured

Where Do I Stand If My Contractual Pre Emptive Right Is Dishonoured

It is not uncommon to see companies nowadays, in a thriving and competitive corporate world, trying to protect business interests and service relations with the specific aim of maximising the duration of secured profits at a reduced risk to the company. There are various methods of doing this, for example, confidentiality clauses, restraint provisions, Intellectual Property Rights protections, etcetera. In as much as quality control management is an attractive emblem for company portfolios, so too is loyalty. This, amongst other key ingredients, has featured in aggressively protective litigation.

A sterling example of how loyalty becomes a so-called ‘protectable Right’ is through the frequently-overlooked pre-emptive provisions, otherwise known as ‘Rights of first refusal.’ But, how does a contracting Party (who is also the benefactor of this Right) utilise this provision to protect itself?

If you are an aggrieved Party who has suffered from a breach of this Right, you (as the aggrieved Party) are able to invoke the notorious Oryx Principle, or ‘unilateral declaration of intent.’ Owing to its origin, the matter of Associated SA Bakeries (Pty) Ltd v Oryx Vereinigte Backereien (Pty) Ltd coined the following definition of this principle:[1]

&ldquo If a seller concludes a contract of sale with a Third Party to a pre-emptive Right, the Holder of the Right of pre-emption can, if they choose, unilaterally declare their intention (to purchase the property) and thereby automatically step into the shoes of the Third Party, thus binding the owner / seller to transfer the property to them on the same terms concluded with the Third Party.”[2]

Just by reading the above definition, as a businessman, one can already conceive many threats to the sanctity of commercial agreements if this principle were to be applied haphazardly. But, as I mentioned above, loyalty has understandably become key profitability, not only for shareholders’ interests but also for operational needs. Contracts such as this, which derive from long-standing honoured commercial relationships, have a significant need to be protected from internal misdemeanour or unwonted external influence.

In such a situation, not only are the Parties to the Agreement affected by these pre-emptive Rights, so too are Third Parties to the Agreement, especially if the latter had knowledge of those pre-emptive Rights prior to entering into its own agreements with the Grantor of those Rights. The Western Cape High Court deliberated on the question and delivered a judgment on the 5th of March 2018 on this very aspect, along with other issues key to the case.[ ] Without directly accusing any of the Parties of fraudulent behaviour, the Court relied on the civil principle developed in Oryx to protect an otherwise innocent Party in its battle to safeguard its loyalty to the Grantor of those Rights through specific performance. In other words, the holder of the Right (Enforcer) sought to remedy the breach which had resulted from external influence – the mistress to the marriage.

Salie-Hlophe J stated succinctly that the Oryx principle operates when “the Grantor of the Right concludes a contract with a Third Party in breach of the Right of first refusal and with the Third Party, having born knowledge of the Holder of the Right.” By necessary implication that Third Party (who would ordinarily not be sued as it is not Party to the Agreement) then becomes an “Accessory to the Primary Wrong: the Breach of Contract.” The rationale behind being able to cite such a Third Party in a civil action is borne from the test often employed by Courts on ‘Joinder’ disputes: is a person a necessary Party to those legal proceedings because it may be affected prejudicially by the judgment of those proceedings?

It is extremely important that the Court recognise this as being a protectable interest for the simple reason that such conduct, if done intentionally, seeks to not only obviate long-standing healthy business relationships, but also put a ‘spanner in the works’ of commercial certainty for businesses.

In my view, two sacred contractual principles underpinned this judgment: the first is the necessity of understanding Right to Contract (“pacta sunt servanda”) – the backbone of contracts in the first place. The second is the ever-present non-variation clause which demands that any changes to the Agreement be done by consensus and reduced to writing. In this case, both terms were present which gave little wiggle room to deny the existence, recognition, protection, and enforcement of the Right.

If you believe that you, or your business, may have become victim of breach in a manner similar to that which has been described above; the longer you wait to protect your Right, the lower are your chances of being able to demand equitable protection for your business Right.

 

Aleisha Oliver

 

Practising Attorney



[1] 1982 (3) SA 893 (A)

[ ] Infra 3 at [15]

[ ] Full Score Trading 145 CC v Brocsand (Pty) Ltd and others [2018] JOL 39637 (WCC)