Beware – pre-contractual negotiations could affect your written contract

Interpreting contracts in South Africa has been no easy feat for our courts. When adjudicating not only do they have to consider legislation and public policy, but they also have to bear in mind that the law needs to be developed without overstepping boundaries and rights enshrined in our Constitution.

The parol evidence rule is a common law rule that disallows the admission of extrinsic evidence that a party may want to use to contradict, add to or modify the contents of a written contract during legal proceedings.

There have been recent cases in which the parol evidence rule was challenged. In the case of Natal Joint Municipal Pension Fund v Endumeni Municipality  it was held that courts should look at surrounding circumstances and the background to a contract when interpreting the contract and should not interpret a contract in a manner that could lead to an unsensible or unbusinesslike decision.[2] The Endumeni case, however, did not provide clarity as to what extrinsic evidence would be considered inadmissible when interpreting a contract.

In the case of Capitec Bank Holdings Limited and Another v Coral Lagoon Investments 194 (Pty) Ltd and Others the court held that the words of an agreement must be read with the context and the purpose.[3] The court used a wider approach to interpretation than in previous case law and stated that extrinsic evidence is admissible in order to interpret the contract. The judgment makes it clear that where the text and structure of an agreement does not provide clarity in respect of interpreting such agreement, then extrinsic evidence which gives context and purpose to such text and structure, thus aiding in the interpretation of the agreement,  may be produced as evidence.

The Capitec judgment serves as a warning to parties negotiating an agreement and drafters alike, that the documents produced during such proceedings may be admitted as evidence in respect of interpreting such agreement.

Author:            Caitlyn Emmanuel
Position:          Candidate Attorney