DealMakers - Q2 2021 (August 2021)
The time-bar strikes back
by Ian Hayes, Brian Jennings and Vaughn Rajah
The impact of the SCA judgment in Samancor Holdings (Pty) Ltd and others v Samancor
The Supreme Court of Appeal recently held that the force of a time-bar may not always be with you. The judgment in Samancor Holdings (Pty) Ltd and Others v Samancor Chrome Holdings (Pty) Ltd and Another (357/2020) 2021 ZASCA 60 (24 May 2021) (Samancor) bears significance on the interpretation and operation of time-bar clauses in M&A transactions. The SCA dismissed an appeal against a High Court judgment granting an extension of time beyond a six-year time-bar to institute arbitration proceedings in terms of section 8 of the Arbitration Act 42 of 1965 (Arbitration Act).
The nucleus of the case was a sale of shares agreement. In terms of the agreement, the first appellant provided the respondents with an income tax indemnity from the Effective Date. The agreement contained a time-bar clause requiring a claim in respect of the income tax indemnity to be issued and served before the sixth anniversary of the Effective Date. The South African Revenue Service conducted an audit into the second respondent's tax affairs on a date subsequent to the sixth anniversary. The audit found that the first appellant had submitted a tax return late and had omitted an item of income when doing so. The ultimate consequence of this audit was the levying of additional tax, penalties and interest. This led the respondents to institute a claim against the first appellant. An arbitration appeal reversed the initial success of this claim, necessitating the respondents to issue High Court proceedings to have the period for initiating the arbitration proceedings extended in terms of section 8 of the Arbitration Act. The High Court granted the extension.
Section 8 of the Arbitration Act provides that the power to extend arises if the court opines that "in the circumstances of the case, undue hardship would otherwise be caused" (our emphasis). The SCA held that section 8 of the Arbitration Act is a statutory inroad into contractual autonomy, and that to hold that such autonomy should prevail unqualified would be inconsistent with the Act's "liberal" provisions. The circumstances of the case must determine whether or not hardship is "undue". Examples provided by the court included –
the terms of the time-bar clause and the broader contractual setting;
the extent of the claimant’s delay;
the explanation for the claimant’s failure to bring the claim timeously;
the extent of the claimant’s fault, if any, in relation to the delay;
whether the defendant caused or contributed to the non-compliance and, if so, the extent of the defendant’s fault in that regard;
the nature and importance of the claim; and
the extent of the prejudice, if any, suffered by the defendant in consequence of the delay.
An unreasonable delay in seeking the section 8 remedy may then be outweighed by any number of the above factors. In the Samancor case, it was considered relevant that the respondents could not have been aware of the claim until after the time-bar had expired. The court also stated that the section 8 remedy was only required as the first appellant had pursued the arbitration appeal, and that all issues other than the extension had already been ruled on in arbitration. On this basis, the court found that the first appellant had not suffered any litigation prejudice. The SCA emphasised that permitting time-barred arbitration to proceed prior to a section 8 application is by no means a path to the dark side of potentially opening the "floodgates" to this kind of behaviour; rather, such an approach turns on the specific facts of the case. To put it differently, the court did not find its lack of faith in the sanctity of contract disturbing.
The SCA concurred with the High Court in attributing fault to the appellants. The court ruled that had the tax return been timeously filed, the respondents would have known that the first appellant had erroneously omitted an amount from the tax return, would have been aware of the SARS audit findings and would have known that the omitted amount was to be added to their taxable income, all before the expiry of the time-bar, within enough time to institute the claim.
The court stated that where arbitration is concerned, all time-bar clauses are subject to section 8 of the Arbitration Act. It was held that the time-bar's contractual purpose of finality under pacta sunt servanda cannot override an assessment of whether undue hardship may result. The SCA accepted, as the High Court had done, that a court exercising its discretion in terms of section 8 may permissibly take into account the extent to which the parties, at the time of concluding their contract, could reasonably have foreseen that claims might only arise or become known after the expiry of the time-bar. In the present case, the parties may have foreseen that such claims might possibly only arise or become known after the expiry of the time-bar, but the evidence did not show that this would have been foreseen as likely. The foreseeability of such a possibility of a claim arising as a result, did not, in the present case, compel the SCA to overturn the High Court's decision.
Concerning time-bars not subject to arbitration, it is apparent that where there is no clear "statutory inroad" into the sanctity of contract, such as when section 8 of the Arbitration Act applies, the extent to which a court may intervene in or refuse to enforce valid contractual terms is restricted. The Constitutional Court, in Beadica 231 CC and Others v The Trustees for the time being of the Oregon Trust (CCT109/19)  ZACC 13 (17 June 2020), held that the basis for judicial intervention in this regard is not self-contained. A court, in deciding to overrule a clear, reasonable time-bar not subject to arbitration on the basis that it considers the enforcement to be unfair, unreasonable or unduly harsh, will have to do so through the prism of public policy. A party seeking a declaration that such a time-bar is unenforceable will also be encumbered with the burden of proving good reason for non-compliance with the time-bar, as well as to why the clause is contrary to public policy.
In summary, Samancor underscores that section 8 of the Arbitration Act is applicable to all time-bar clauses concerning arbitration. Drafters should note that a delay in launching proceedings is not a threshold test before a court, but rather part of a global assessment of the facts. Time-bar clauses in transaction agreements should be carefully drafted to take cognisance of this assessment. Factors to be considered include the attribution of fault in a delay in launching proceedings, prejudice suffered as a result of the delay, and the foreseeability of claims arising after expiry of the time-bar and section 8 of the Arbitration Act. Thus, the devil is in the detail for those seeking a new hope for the preservation of contractual autonomy in M&A agreements.
Hayes and Jennings are Directors and Rajah a Candidate Attorney in Corporate and Commercial | Cliffe Dekker Hofmeyr.