REPUBLIC OF SOUTH AFRICA

THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA

Reportable
Case Number  :  396 / 04

In the matter between

MAIZE BOARD
APPELLANT

and

JOHN JACKSON
RESPONDENT

Coram :
HOWIE P,  STREICHER,  VAN HEERDEN,  PONNAN  JJA  et

NKABINDE  AJA

Date of hearing :
5 SEPTEMBER 2005

Date of delivery : 19 SEPTEMBER 2005

SUMMARY

Contracts – simulation – lease and management agreements - evidence
establishing true nature of the transaction one for the sale of maize –
agreements simulated to conceal that intention to avoid the payment of Maize
Board levies.

___________________________________________________________________

J U D G M E N T
___________________________________________________________________

PONNAN  JA
[1] The dispute in this case turns upon the true nature of two
simultaneously concluded, separate, but interrelated written agreements.
As a general rule parties to a contract intend it to be exactly what it
purports to be. Not infrequently however, they may endeavour to
conceal its true character. In such a case, when called upon, a court
must give effect to what the transaction really is and not what in form it
purports to be.1

[2] The appellant, the Maize Board ('Maize Board'), is a control board
contemplated in s 25 of the Marketing Act 59 of 1958 ('the Act'), charged
with the responsibility of administering the Summer Grain Scheme ('the
Scheme').2  From 1944 onwards the marketing of maize was governed in
South Africa by what has been described in the evidence as a 'single
channel fixed price system'.  Simply put, the effect of that system was
that there was a single buyer and seller of all maize in the country – the
Maize Board.  A pre-season announcement by the Minister of
Agriculture ('the Minister') fixed both the producer and consumer prices
of maize.  The advantage of that system, so it was suggested, was that
there was price stability in the market place.

1 Zandberg v Van Zyl 1910 AD 302 at 309.
2 Although the Act has since been repealed, the Maize Board continues to exist by virtue of s 27(2) of
the Marketing of Agricultural Products Act 47 of 1996. The Summer Grain Scheme was established in
1979 in terms of s 14(1)(a) of the Act (see Michau v Maize Board 2003 (6) SA 459 (SCA) para 3).

[3] In terms of the Act and the Scheme, a levy, special levy and
general levy were imposed on maize.  Those levies, which were fixed by
the Minister, were payable by a producer of maize to the Maize Board in
respect of maize sold or utilised for any purpose otherwise than for his
own household consumption or to feed his own animals.3  During each
marketing season the consumer price was determined by adding the
levies to the producer price.4  The imposition of the levies caused
unhappiness amongst the consumers and producers of maize, who
sought to regulate their affairs in such a way as to attempt to circumvent
their levy obligations.5  The single channel system came to be replaced
during the 1995/6 marketing season with what was described in the
evidence as a free market system.  The free market system, as the
name suggests, permitted a maize producer to sell maize to a willing
purchaser at a mutually agreed price.

[4] Rainbow Chicken Farms (Pty) Ltd ('Rainbow'), which carries on
business as a breeder and producer of broiler chickens, is, according to
the evidence, the largest consumer of yellow maize in this country.  For

3 Although the earlier proclamations referred to 'farming operations' instead of 'feed his own animals',
nothing, it would appear, turns on that.
4 A production (or growing) season spanned the period 1st October to 30th September and the
corresponding marketing season the period 1st May to 30th September of the succeeding year.  Thus
maize produced during the 1992/3 production season (1st October 1992 – 30th September 1993)
would be marketed in the 1993/4 marketing season (1st May 1993 – 30th April 1994).
5 On 21 May 1987 Rainbow Chicken Farms (Pty) Ltd wrote to the Maize Board: ‘We now find that
various schemes to bypass the summer grain scheme are in operation and every week we are
approached by producers to do the same. We cannot continue to support the maize industry and
allow our competitors to steal a march on us.’.

each of the production seasons 1992/3, 1993/4 and 1994/5, Rainbow
entered into two written agreements with the respondent, a farmer in the
Bergville area of Kwa Zulu Natal.6  In terms of the first, an agreement of
lease, the respondent let to Rainbow certain portions of his farm.  In
terms of the second, styled a management agreement, Rainbow
employed the respondent as the manager of its maize farming
operations on the leased land.  Pursuant to those agreements, the
respondent produced and delivered to Rainbow, during the 1993/4,
1994/5 and 1995/6 marketing seasons, 1322.067, 2250 and 1453.936
tons of maize, respectively.

[5] The Maize Board instituted action against the respondent in the
Pietermaritzburg   High   Court   for   payment   of levies in the sum of
R576 439.63, alleging in paragraph 7 of its particulars of claim that:
'… the lease and management agreements were simulated and were concluded in
their terms with the intention:
7.1
of disguising that the Defendant in fact sold and Rainbow in fact purchased
the yellow maize produced on the land; and
7.2
of evading the payment of the levies referred to in paragraph 8 below, on the
basis that Rainbow was the "producer" of the crop for its own use and thereby
exempt from the said levies;

6 The only agreements produced in the court below related to the 1994/5 production season. Of that
the court below stated: ‘The parties have however only been able to trace the contracts for the
1994/1995 production season. The Court has been asked to infer that the contracts for the previous
two production seasons were in similar terms with only the figures, areas and amounts changing from
year to year. For the purposes of this judgment I am prepared to make that assumption.'

whereas in truth and in fact the Defendant was in respect of each such crop the
"producer" of it, as defined in the said Maize Marketing Scheme and therefore the
entity obliged to pay the levies.'
In dismissing the claim of the Maize Board, Hugo J concluded in the
court below that: ‘the Plaintiff has not succeeded in proving that the
agreements entered into between the Defendant and Rainbow were not
what they purported to be but that in fact that they were a simulated
agreement of purchase and sale’.  The present appeal is with the leave
of this court.

[6] The argument advanced on behalf of the respondent both before
this court as well as the court below is that Rainbow was feeding its own
chickens with maize produced on land leased by it.  It was accordingly,
so the argument went, utilising the maize 'to feed its own animals' and
was therefore exempt from liability for payment of levies.

[7] This court recently held (per Scott JA) in Michau v Maize Board
2003 (6) SA 459 para 4:
'[I]t has long since been established in cases such as Zandberg v Van Zyl 1910 AD
302, Dadoo Ltd and Others v Krugersdorp Municipal Council 1920 AD 530,
Commissioner of Customs and Excise v Randles, Brothers & Hudson Ltd 1941 AD
369 and more recently affirmed in Erf 3183/1Ladysmith (Pty) Ltd and Another v
Commissioner of Inland Revenue 1996 (3) SA 942 (A) that parties are free to
arrange their affairs so as to remain outside the provisions of a particular statute.

Merely because those provisions would not have been avoided had the parties
structured their transaction in a different and perhaps more convenient way does not
render the transaction objectionable.  What they may not do is conceal the true
nature of their transaction or in the words of Innes JA in Zandberg's case, supra, at
309, "call it by a name, or give it a shape, intended not to express but to disguise its
true nature".  In such event a court will strip off its ostensible form and give effect to
what the transaction really is.  But, while the principle is easy enough to state in the
abstract, its application in practice may sometimes give rise to considerable difficulty.
Each case will depend upon its own facts.  A Court will seek to ascertain the true
intention of the parties from all the relevant circumstances, including the manner in
which the contract is implemented.  The onus is upon the party who alleges that the
transaction is simulated.'

[8] A manifest intention to avoid the payment of levies would not, in
the absence of anything else, be sufficient to justify the claim by the
Maize Board that the agreements were simulated and that the true or
real nature of the contractual relationship between Rainbow and the
respondent was one of purchase and sale.  The true enquiry in a matter
such as this is to establish whether the real nature and the
implementation of these particular contracts is consistent with their
ostensible form.  In pursuit of that enquiry one must strive to ascertain,
from all of the relevant circumstances, the actual meaning of the
contracting parties. It therefore becomes necessary to examine in

greater detail the agreements in question and the manner in which they
were implemented.

[9] The agreements were signed simultaneously and were plainly
interdependent to the extent that the one would not have been
concluded in the absence of the other.  The parties restricted their own
power of subsequent variation by including a non-variation clause in
each agreement, as well as recording that it constituted the whole
agreement between them.

[10] Clause 6.2 of the Management Agreement provides:
'Should all the feed grown on the land during the growing season and delivered by
the manager average the minimum yield per hectare reflected in Schedule I or more
Rainbow shall pay to the manager over and above the basic remuneration a bonus
per hectare calculated in accordance with the formula reflected in Schedule I.'

[11] The formula for the calculation of the production bonus in
Schedule 1 of the agreement was described by the learned judge a quo
as one that ‘contains some twenty six different items resulting in a
somewhat complex reckoning of such a production bonus’.  Included in
the formula is an item ‘O’ which is described as ‘Factor’.  Neither ‘O’ nor
'Factor' are defined elsewhere in the agreement.  Nor is any value
attributed to either of them.  Moreover, each of the subsequent elements
‘Q’, ‘R’ and ‘S’ in the formula are dependent for their determination on

the value of the undefined ‘Factor O’. Absent a value for ‘O’, the complex
formula is rendered meaningless and can have offered no assistance to
Rainbow for the determination of the production bonus due to the
respondent.

[12] It is common cause that during the 1994/5 production season the
respondent failed by some 256 tons to achieve the minimum yield
specified in Clause 6.2 read with Schedule 1 and that he therefore did
not qualify for payment of the stipulated bonus.  He was nevertheless
paid a production bonus by Rainbow in the sum of approximately
R156 220. That in the face of the clear wording of Clause 6.2 that a
bonus to be determined in accordance ‘with the formula reflected in
Schedule 1’ was payable only in the event of the specified minimum
yield being achieved or exceeded.  As the minimum yield had not been
reached, not only did the respondent not qualify for payment of the
production bonus but the formula for the determination of the production
bonus, did not find application.

[13] On 21 September 1994 the respondent applied for a loan to the
Land and Agriculture Bank of South Africa. In a statement under oath in
support of that application, not only did the respondent not disclose the
existence of the lease and management agreements, which had been in
existence since at least the 1992/3 production season, but he asserted

that he farmed on his own properties.  A portion of one of those
properties was already at that stage the subject of the lease agreement.
He likewise failed to divulge in the application under the heading ‘Any
Other Income (Salary etc)’ any of the remuneration, rental or bonus due
to him in terms of the agreements. That he failed in a statement under
oath to make full disclosure of items that would in all probability have
enhanced his application is, in the absence of any explanation,
inexplicable.

[14] It was put by counsel for the respondent to the Maize Board’s
witnesses, with reference to an alleged overpayment of so-called 'fixed
costs' by Rainbow to the respondent - ‘I want to tell you the defendant
paid back … I’m telling you that as a fact. That will be his evidence.’
That clearly presaged the respondent being called as a witness.  And
yet, although in a position to do so, he deliberately refrained from
testifying about matters peculiarly within his knowledge or elucidating the
facts.  Should an adverse inference be drawn from his failure to testify
as was urged upon us?  Given the particular circumstances of the
litigation, this being the yardstick to be used, that, it would seem is the
most natural inference.  For this is not the kind of case where a dearth of
information would preclude a decisive inference.  Indeed on an analysis
of the evidence adduced by the Maize Board, a reasonable expectation

existed that the respondent would testify about the elusive ‘Factor O’,
the payments he received, his non-disclosure to the Land Bank, as well
as various other aspects that were alluded to by his counsel during the
cross-examination of the Maize Board’s witnesses.  The inescapable
conclusion must therefore be that because of the facts known to himself,
he could not benefit - and indeed might well have damaged his case - by
testifying. It follows on the facts here present that the respondent’s
silence must count against him. It would thus be fair to infer that he
failed to disclose the agreements to the Land Bank because, in truth,
they were illusory and not real.

[15] The provisions of the Management Agreement with regard to
payment were clearly disregarded by Rainbow and the respondent.
Properly construed, the computation and subsequent payment of the
production bonus by Rainbow to the respondent could hardly have
occurred in accordance with the tenor of the Management Agreement.  If
the production bonus was not due in terms of the agreement, why - it
must be asked - was it paid by Rainbow? Two hypothetical possibilities
come to mind. They appear to be exhaustive. First, it was a donation; or,
secondly, it was payment in terms of some other undisclosed
agreement. Given the nature of the relationship between Rainbow and
the respondent, it could hardly have been the first - commercial reality

excludes that possibility. It is to the second that one must look, as it,
inherently, sounds the more likely and must in my view be the true
explanation.  Support for the existence of an undisclosed agreement is
to be found in what was put by the respondent’s counsel to one of the
Maize Board’s witnesses.  Of ‘Factor O’ he stated ‘[it] … is an agreed
factor … It is not in the contracts, but it’s an agreed factor.’

[16] The payment, coupled with the established fact of delivery of
maize by the respondent to Rainbow, leads inexorably to the conclusion
that the undisclosed agreement was indeed one of purchase and sale of
maize.  I accordingly conclude that the underlying and disguised
transaction was one for the purchase and sale of maize and that the
agreements were simulated to conceal that intention.

[17] Ultimately what the parties achieved is that Rainbow paid less and
the respondent received more than would have been the case had the
sale been conducted under the auspices of the Maize Board.  I am
satisfied on all of the aforegoing that the Maize Board discharged the
onus of establishing that the true nature of the transaction between
Rainbow and the respondent was the purchase by the former of the
latter’s maize.  The respondent is thus liable to the Maize Board for
payment of levies. It follows that the appeal must succeed.

[18] In the result the following order is made:
1 The appeal succeeds with costs, such costs to include the costs of
two counsel.
2 The order of the court below is set aside and replaced with the
following:

'1
Judgment  is  granted  in  favour  of  the  Plaintiff  for  the  payment  of

R576 439.63 together with interest thereon at 15.5% per annum from

the dates when the levies ought to have been paid to date of payment.

The Defendant is ordered to pay the costs of the action, including the

costs of two counsel and Professor Hammes and Mr Smith are

declared to have been necessary witnesses.'

V M  PONNAN
JUDGE OF APPEAL
CONCURRING:
HOWIE  P
STREICHER  JA
VAN HEERDEN  JA
NKABINDE  AJA