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When is a settlement not a settlement?

It regularly happens that, when a party to a contract breaches his or her obligations under that contract, the parties first attempt to settle the matter on an amicable basis, before resorting to litigation. This is a commendable approach, as it tends to preserve the relationship, saves costs, and saves time and energy, which may be focused on better things than litigation.

It happens from time to time, however, that the efforts to settle do not bear fruit, resulting in litigation. During that litigation, the defaulting party then sometimes states that the matter had been settled, barring any further litigation.

Similar facts were recently considered by the South African Supreme Court of Appeal in the matter of Gridmark CC v Razia Trading CC [2019] ZASCA 18. In this matter, Gridmark had sold a business to Razia, with the purchase price payable in a first lump-sum, with the balance payable in installments. Razia failed to make payment of the first installment, resulting in correspondence being exchanged between the parties. As a result, Razia offered to pay a reduced further lump-sum instead of the various installment payments. Gridmark replied thereto, stating that it would accept such reduced lump-sum payment, provided that the payment is received by a certain date. No payment was forthcoming within the time specified by Gridmark, and Razia instead made further offers, all of which were rejected by Gridmark. Gridmark advised that it would proceed to recover the full balance of the purchase price. Razia proceeded to make payment of the reduced lump-sum payment, after rejection of that offer by Gridmark.

When Gridmark issued summons against Razia in the magistrate’s court for payment of the outstanding balance of the purchase price, Razia raised a special plea to the effect that the matter had become settled, relying on the offer it made together with the subsequent payment in accordance with its offer. The magistrate upheld the special plea, thereby dismissing Gridmark’s claim. Gridmark lodged an appeal to the High Court, heard by two judges, who dismissed the appeal, finding that the settlement relied on by Razia indeed came into existence. Gridmark thereafter applied for, and was granted, special leave to appeal to the Supreme Court of Appeal, where the matter was heard by five judges.

In the Supreme Court of Appeal the judges held that the following principles were applicable:

  1. A settlement agreement is a contract like any other, therefore it consists of an offer made by one party, duly accepted by the other party.
  2. Importantly, the court stated that the acceptance of an offer of settlement should be –  
    • Absolute;
    • Unconditional; and
    • Identical to the offer.
  3. This means that, as stated by the court “The acceptance ought to be a mirror image of the offer in order to constitute a contract.”
  4. Any counter-proposal, i.e. a reply to an offer which seeks to add, subtract, or modify the offer, is a counter-offer. This means that the existing offer is rejected, and a new offer is on the table, open for acceptance or rejection by the original offeror. If the counter-offer is rejected, the parties do not revert back to the previous offer.

In light of the above principles, the court held that the reply by Gridmark, to the effect that payment of the reduced lump-sum payment would have to be made by a specific date, constituted a counter-offer, which was not accepted by Razia. As a result, no settlement came into existence. Therefore, Gridmark was entitled to judgment. The court accordingly overturned the decisions of the Magistrate’s and High Courts.

This decision illustrates the very important basic principles of when exactly a contract comes into existence: every contract, in its most basic form, constitutes of an offer made by one person, which offer is accepted by the other person. If the offer made is not accepted on the same terms, no contract comes into existence.

Furthermore, if a counter-offer is made, the original offer is destroyed. If the counter-offer is not accepted, there is no agreement, and the parties do not automatically fall back onto the original offer that was made.

Therefore, when parties are engaged in negotiations of any kind, it is important to keep these principles in mind, and serious consideration should be given to the possible consequences of not accepting an offer and rather making a counter-offer. If in doubt, rather seek legal advice prior to reply to an offer on the table.

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