Brief Summary

Suretyship — Enforceability of suretyship agreement — Applicant sought to enforce a suretyship against respondents for amounts loaned to a principal debtor — Respondents contended that the suretyship was unenforceable due to references to a different loan agreement — Court found that the suretyship was valid and enforceable as it covered all amounts due from the principal debtor, including those referenced in the certificate of balance — Respondents' claims of a genuine dispute regarding the amount owed were dismissed as unsubstantiated.

Comprehensive Summary

Summary of Judgment

Introduction

The matter was decided in opposed motion proceedings in the Western Cape Division of the High Court, Cape Town. The applicant, Avrum Finance (Pty) Ltd, sought monetary relief based on a suretyship allegedly securing the indebtedness of a principal debtor, Jongberg, to the applicant.

The respondents initially cited were six. The first and second respondents were natural persons who signed as sureties and co-principal debtors. The third to sixth respondents were cited in their representative capacities as trustees of the Corné Saaiman Trust (IT391/1989). During argument and on the papers (in reply), the applicant abandoned the relief against the trust respondents, and the court dealt substantively only with the claim against the first and second respondents.

The general subject-matter of the dispute was the enforcement of suretyship obligations and, in particular, the quantification of the amount allegedly due and payable under the suretyship. The dispute also implicated how the underlying loan transaction was described (as a “Seasonal Advance Loan Agreement” versus a “Production Loan Agreement”), and whether the applicant had proved the higher amount claimed through a certificate of balance.

Material Facts

It was common cause that the first and second respondents signed a suretyship in favour of the applicant. The suretyship was provided as security because the applicant agreed to advance monies to Jongberg (the principal debtor) from time to time. Under the suretyship, the respondents bound themselves jointly and severally as sureties and co-principal debtors for amounts due arising from monies lent and advanced by the applicant to Jongberg, including “any further amounts paid on behalf of Jongberg”. The sureties also warranted that they had a material interest in providing the suretyship and that it was entered into for their benefit.

The suretyship document contained definitions referring to a “Seasonal Advance Loan Agreement” and to a “Capital Amount” and “Loan Amount” as described in that agreement. The respondents relied on the fact that the monies were advanced under a document referred to as a “Production Loan Agreement”, contending that the suretyship was therefore not enforceable (or not enforceable as framed).

On 12 September 2018, the second respondent emailed the applicant’s representative enclosing the last page of the signed suretyship and requested urgent payments to be made on the principal debtor’s behalf. The email subject line referred to a “Seasonal Advance Loan Agreement”. On the same day, the first respondent emailed the applicant a copy of the signed Production Loan Agreement, with the cover email’s subject line referring to a “Signed Seasonal Loan Agreement”. The Production Loan Agreement contemplated advances (either directly to the principal debtor or to named third parties) up to a stated limit.

On 28 May 2019, Jongberg’s directors resolved to place it into business rescue. On 30 May 2019, the applicant informed the first respondent that the amount due was R402 180,33. On 10 June 2019, a director of the applicant signed a certificate of balance reflecting an amount owing of R570 373,76.

After the application was launched, the respondents delivered a Rule 35 notice seeking accounting documentation between the applicant and the principal debtor. The documentation was provided, and the judgment records that no substantive engagement with that documentation occurred on the papers before the court.

The respondents disputed the amount of R570 373,76, contending that at most (if anything) only R402 180,33 was owing. They also relied on the circumstance that, after the principal debtor entered business rescue, a claim for R570 373,76 was filed with the business rescue practitioner in the name of Unlimited Fruits (referred to as “Fruits”), and not in the name of the applicant. The same director who signed the certificate of balance signed that business rescue claim on behalf of Fruits.

The record further indicated additional payments to third parties described as payments to Zaiger (R78 406,77) and Custom Plum (about R89 789,66), which, when added to R402 180,33, equated to R570 373,76. However, the business rescue plan’s list of creditors reflected Zaiger and Custom Plum as having claims separately listed from the applicant’s claim. The applicant explained that it and Fruits were in the “same group of companies”, but the judgment noted that they are nonetheless distinct juristic entities.

Legal Issues

The court was required to determine, first, whether the suretyship was enforceable notwithstanding that it referred to a “Seasonal Advance Loan Agreement” while the underlying loan documentation was styled a “Production Loan Agreement”. This issue largely concerned the application of law to the common-cause factual matrix, including the construction of the suretyship and whether the respondents understood the secured obligation.

Secondly, the court had to decide whether the applicant had proved the quantum claimed against the respondents as sureties, namely whether the amount due was R570 373,76 as reflected in the certificate of balance, or only R402 180,33. This involved an assessment of whether the respondents’ challenge raised a genuine dispute on the papers and whether the certificate of balance sufficed as proof in the circumstances presented.

Thirdly, the court had to decide issues of costs, including whether attorney-and-client costs were competent on the documents relied upon, and what costs consequences should follow from the applicant’s abandonment of relief against the trust respondents.

Court’s Reasoning

On the enforceability point, the court was not persuaded by the respondents’ contention that the suretyship was unenforceable merely because it referred to a “Seasonal Advance Loan Agreement” rather than the “Production Loan Agreement”. The reasoning proceeded from the court’s view that there was, in substance, only one loan relationship in issue and that it was common cause that at least R402 180,33 had been lent and advanced by the applicant to the principal debtor. The court treated the suretyship as embracing the underlying advances to Jongberg, including amounts advanced directly to Jongberg or paid on its behalf, and accepted that the respondents were aware of the principal obligation they were securing.

The court recorded that the applicant sought, in the alternative, rectification of the suretyship to refer expressly to the Production Loan Agreement, but held this to be unnecessary given the common-cause indebtedness and the suretyship’s wording extending to further amounts paid on behalf of Jongberg.

In addressing the suretyship’s scope, the court referred to the principle that a surety’s liability is confined to the obligation undertaken in the suretyship, relying on authority for that proposition. The court found, however, that on the facts the respondents’ undertaking was directed at the loan advances made by the applicant to the principal debtor, and that the respondents had given the suretyship with knowledge of that principal debt.

On quantum, the court accepted that the applicant relied on a certificate of balance as prima facie proof of indebtedness for R570 373,76. The court noted that the calculation method was said to be reflected in the claim documents submitted to the business rescue practitioner, and that the claim (albeit in the name of Fruits) was accepted by the business rescue practitioner as correct.

Despite this, the court concluded that the material on the papers did not satisfy it that R570 373,76 was due to the applicant by the principal debtor (and therefore recoverable from the sureties). The judgment treated the respondents’ attack on the higher figure as relating to the difference between the earlier figure of R402 180,33 and the later higher amount. Although the additional third-party payments (Zaiger and Custom Plum) could mathematically explain the increase, the court considered the surrounding business rescue documentation and the manner in which the claim was presented as creating sufficient uncertainty on the papers as framed.

The court attached significance to the fact that the claim in business rescue was submitted in the name of Fruits, not the applicant, and that Fruits and the applicant, while asserted to be in the same group, remained separate legal persons. The court also noted that the contractual mechanism for proof of indebtedness by certificate of balance appeared in the Production Loan Agreement, and that the business rescue plan reflected Zaiger and Custom Plum as separate creditors from the applicant. These aspects were treated as undermining the court’s satisfaction that the applicant itself had established, on motion, that the higher amount was due and payable to it by the principal debtor.

However, the court was satisfied on the papers that R402 180,33 was “undoubtedly” due and payable by the principal debtor to the applicant and that the respondents, as sureties, were liable for that amount.

On costs, the court rejected the applicant’s request for attorney-and-client costs against the first and second respondents. The court reasoned that the attorney-and-client costs provision relied upon appeared in the Production Loan Agreement, not the suretyship, and thus did not justify such a costs order in these proceedings against the sureties. In relation to the abandoned proceedings against the trust respondents, the court agreed with the respondents’ position that each party should bear its own costs concerning that portion.

Outcome and Relief

The court granted an order against the first and second respondents, jointly and severally, for payment of R402 180,33 within 10 days of the order.

The court further ordered that the first and second respondents were liable for mora interest at the legal rate, calculated on R402 180,33.

As to costs connected with the abandoned relief against the third to sixth respondents (the trust respondents), the court ordered that each party bear its own costs.

As to the main application against the first and second respondents, the court ordered them, jointly and severally, to pay the applicant’s costs on the scale as between party and party, as taxed or agreed, and declined to award attorney-and-client costs.

Cases Cited

Trans-Drakensberg Bank v Guy 1964 (1) SA 790 (D) at 795–796

Legislation Cited

No legislation was expressly cited in the judgment.

Rules of Court Cited

Uniform Rules of Court, Rule 35

Held

The court held that the suretyship was enforceable against the first and second respondents in respect of the indebtedness proved on the papers, notwithstanding the suretyship’s reference to a “Seasonal Advance Loan Agreement” rather than the “Production Loan Agreement”. The court was satisfied that R402 180,33 was due and payable by the principal debtor to the applicant and that the respondents were liable for that amount as sureties and co-principal debtors.

The court was not satisfied, on the motion papers as formulated, that the applicant had proved that R570 373,76 was due and payable to it, given the complications arising from the filing of the business rescue claim in the name of a different juristic entity (Fruits) and the manner in which related amounts appeared in the business rescue documentation. The applicant therefore did not obtain judgment for the higher figure.

LEGAL PRINCIPLES

A surety’s liability is confined to the obligation undertaken in the suretyship; the surety is not liable beyond the terms of the undertaking, and the suretyship must be assessed with reference to the principal obligation it secures.

Where a contract provides for proof of indebtedness by way of a certificate of balance, such a certificate may constitute prima facie proof of the indebtedness claimed, but the court must still be satisfied on the motion papers, in light of the overall factual matrix, that the amount is properly established as due and payable by the debtor to the claimant.

A request for attorney-and-client costs requires an adequate contractual or legal basis applicable to the party against whom it is sought; a costs clause in an agreement not shown to govern the surety’s liability for costs will not, without more, justify an attorney-and-client costs order against the surety.

Where relief against certain respondents is abandoned, the costs consequences may be determined separately from the merits as between the remaining parties, and the court may direct that each party bear its own costs for that abandoned portion depending on fairness and the circumstances shown on the papers.

Avrum Finance (Pty) Ltd v Saaiman and Others (15035/2019) [2021] ZAWCHC 219 (29 October 2021)