Waiver vs non-variation: Which holds more weight when seeking to enforce 'abandoned' agreements?

Image source: nito500 – 123RF.com

Loan agreement

During 1994, Lubavitch experienced financial difficulties and struggling to service its mortgage loan with Nedbank, faced foreclosure.

Phoenix Salt, through its owners, the Krok brothers, took over the Nedbank loan on 29 August 1994 for a consideration of R5m plus interest calculated from 1 April 1994 until the date of payment. A loan agreement was entered into between Phoenix Salt and Lubavitch in terms of which the loan would be repayable 24 months after Phoenix Salt had demanded repayment of the outstanding balance.

In the same agreement, Golden Hands Property Holdings, a company owned by the Krok family, became surety and co-principal debtor to Lubavitch for the execution of Lubavitch’s obligations in terms of the loan agreement.

The senior Krok brothers resigned as directors of Phoenix Salt in November 2003. During their tenure, no attempt was made to enforce the agreement.

New ownership

On 25 July 2017, 23 years from the date of the loan, Phoenix Salt under new directorship, demanded repayment of the balance of the loan, making the debt due and payable on or before 26 July 2019.

Phoenix Salt maintained that the agreement was a straightforward loan agreement based on loan certificates from the auditors of Phoenix Salt for the period covering 1995 to 1998 and financial statements for the period 1995 to 2003 which reflected the transaction as a loan between Phoenix Salt and Lubavitch.

Significance of signature dates when enforcing security documents

Sakhile Mbele  21 Jun 2024

Waived right of recovery

In converse, Lubavitch, represented by Rabbi Lipskar, presented a completely different version. Rabbi Lipskar reported that the Krok Brothers wished to assist Lubavitch in fully settling the debt.

According to Rabbi Lipskar they formulated an arrangement to advance the funds to Lubavitch through Phoenix Salt to enable Lubavitch to settle the Nedbank debt. Golden Hands would the use the profits from the sale of the cluster development at the Orchards property to settle Lubavitch’s debt to Phoenix Salt and R2,429,440 was paid by Golden Hands as part-payment of Lubavitch’s debt.

Rabbi Lipskar also maintained that the Krok brothers had repeatedly reassured him that Lubavitch would never be expected to settle the debt, as the income from the cluster development sales would be used for that purpose.

Solomon Krok confirmed this version. Lubavitch submitted that the Krok Brothers, acting on behalf of Phoenix Salt, had waived its right of recovery against Lubavitch, which was not ousted by the non-variation clauses in the agreement.

Contracts: Signed and sealed... with an emoji?

Nicolene Schoeman-Louw  1 Sep 2023

Non-variation clause

Phoenix Salt argued that the evidence did not establish waiver and that it was not permitted by clauses 9.2 and 9.3 of the loan agreement, which state:

The issue before the SCA was whether Phoenix Salt, through the Krok Brothers, waived its right to claim the remaining loan amount from Lubavitch and, if so, whether the waiver was competent in the face of the non-variation clause.

Deliberate abandonment

The SCA considered that ‘a waiver denotes a voluntary abandonment of a known existing right, benefit or privilege which, if it were not for such waiver, the party would have enjoyed it. It should be a deliberate abandonment either expressly or by conduct plainly inconsistent with an intention to enforce such right’, whereas ‘a variation involves making changes to the terms of a contract, either through mutual agreement between the parties or through unilateral action by one party with the consent of the other.’

Considering the circumstances of the matter, the SCA concluded that 'the non-variation clauses in the loan agreement expressly refer to additions, variations, and cancellations of the agreement – but not waivers'.

Clause 9.2 precludes reliance on external terms and representations, while clause 9.3 requires written signature for alterations to the agreement itself.

Neither of the clauses address unilateral waiver of contractual rights. The non-variation clauses in the agreement did not prevent the Krok brothers, acting for Phoenix Salt, from orally waiving the right to claim repayment from Lubavitch.

How to navigate power imbalances in contract negotiations

31 Jan 2024

Process of interpretation

The SCA also considered the Constitutional Court’s confirmation in University of Johannesburg v Auckland Park Theological Seminary and Another:

...that the process of interpretation should not be divorced from the circumstances surrounding the contract. The relationship between the contracting parties and their conduct during the subsistence of a contract have a significant relevance in the process of interpretation. While surrounding circumstances should not be elevated over words of the contract, consideration of such evidence helps the decision maker to acquire an enhanced insight into the intention and the purpose of the contract.

The SCA held that the words and actions of the Krok Brothers and Rabbi, as contracting parties, before the signing and during the subsistence of the contract, demonstrated that the Krok Brothers had no intention to demand payment of the loan directly from Lubavitch.

They conducted themselves in a way that clearly showed that they abandoned their right to enforce the terms of the contract against Lubavitch. According to the SCA, the High Court’s finding that Phoenix Salt waived its right to call up the loan and to enforce payment was correct. Thus, in the circumstances the appeal was dismissed.