Law Reports
Casey and Another v Firstrand Bank Ltd (608/2012) …

Casey and Another v Firstrand Bank Ltd (608/2012) [2013] ZASCA 131; 2014 (2) SA 374 (SCA) (26 September 2013)

81 Reportability

Banking and Finance

Brief Summary

Irrevocable letter of credit — Prescription of claim — Appellants sought a declaration that a debt secured by a standby letter of credit had prescribed, contending that the underlying debt's prescription affected the enforceability of the letter of credit — High Court dismissed the application — Appeal dismissed, but court found that interest claimed in excess of the in duplum rule was impermissible and ordered repayment of a specific amount to the appellants.

Full Judgment Text (Click to expand)

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[2013] ZASCA 131
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Casey and Another v Firstrand Bank Ltd (608/2012) [2013] ZASCA 131; 2014 (2) SA 374 (SCA) (26 September 2013)

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THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case No: 608/2012
Reportable
In the matter between:
PAUL CASEY
..............................................................................
FIRST
APPELLANT
KIMBERLEY ROLLER MILLS
(PTY) LTD
.............................
SECOND
APPELLANT
and
FIRSTRAND
BANK LTD
.....................................................................
RESPONDENT
Neutral
citation
:
Casey
v Firstrand Bank
(608/2012)
[2013]
ZASCA 131
(26 September 2013)
Coram
: Navsa ADP,
Tshiqi, Petse and Willis JJA and Swain AJA
Heard
: 12
September 2013
Delivered:
26
September 2013
Summary
:
Irrevocable
letter of credit – alleged prescription of claim –
contended that declaration that underlying debt prescribed
extends
challenges to enforceability of letter of credit – absence of
fraud – draw-down claim presented by beneficiary
to issuing
bank in accordance with its terms – bank obliged to honour
claim – high court dismissing claim for a declarator
that
draw-down claim prescribed and for repayment of proceeds –
appeal dismissed.
Order
On appeal from:
South
Gauteng High Court, Johannesburg (Spilg J sitting as court of first
instance):
1. The appeal is
dismissed save to the extent reflected in the orders that follow. The
order of the court below is set aside and
replaced with the following
order:
‘
(a)
It is declared that interest in excess of the amount of R980 008,
claimed by the respondent on the capital sum of R980 008

advanced by the respondent to the second applicant, contravenes the
in
duplum
rule.
(b) The respondent is
ordered to make payment to first applicant of the sum of
R1 284 187,49.
(c) The respondent is
ordered to pay the applicants’ costs, save that the applicants
are ordered to pay one half of the respondent’s
costs incurred
in the rule 35 application.’
2. The respondent is
ordered to pay the appellants’ costs in the appeal up to and
including 27 March 2013.
3. The appellants are
ordered to pay the respondent’s costs in the appeal incurred
after 27 March 2013.

JUDGMENT
_______________________________________________________________
Swain AJA (Navsa ADP,
Tshiqi and Petse JJA
concurring):
[1]
The first appellant, Mr Paul Casey (Casey) and the second appellant,
Kimberley Roller Mills (Pty) Ltd (Kimberley) unsuccessfully
applied
to the South Gauteng High Court (Spilg J) for an order declaring that
a debt owed by Kimberley to the respondent, Firstrand
Bank Ltd
(Firstrand) which was secured by a standby letter of credit, issued
by Casey’s bankers, the Bank of America, had
prescribed.
[2]
In addition, because the Bank of America had honoured the letter of
credit when called upon to do so by Firstrand, Casey and
Kimberley
sought a mandamus directing Firstrand to restore to Casey’s
account at the Bank of America, the draw-down on the
letter of credit
in the amount of US$420 000, as well as costs incidental to the
draw-down. Casey and Kimberley appeal against
the refusal of the
relief sought with the leave of the court below. They were
unsuccessful in that endeavour.
[3] The facts which are
common cause are as follows:
a
Casey
was a customer of the Bank of America and arranged for the
irrevocable standby letter of credit to be issued to Firstrand
as
security for banking facilities sought by Kimberley from Firstrand.
It appears that Casey was motivated by his friendship with
one Rauff,
a director of Kimberley from whom Firstrand also sought additional
security in the form of a suretyship.
b
The
irrevocable standby letter of credit was payable by the Bank of
America upon the demand of Firstrand stating that:
‘
Kimberley
Roller Mills (Pty) Ltd has not met his/its obligation to First
National Bank of Southern Africa Ltd in respect of the
facilities
granted by First National Bank of Southern Africa Ltd. Therefore USD
(Insert amount) is now due and payable under Nationsbank,
NA
irrevocable standby letter of credit no 972458.’
Nationsbank subsequently
became the Bank of America.
c
The
letter of credit was expressly made subject to the 1993 revision of
the Uniform Customs and Practice for documentary credits
of the
International Chamber of Commerce (UCP). This body of rules was
formulated by the International Chamber of Commerce to regulate
the
practice of irrevocable letters of credit. These rules provide in
article 9a that:
‘
An
irrevocable Credit constitutes a definite undertaking of the Issuing
Bank, provided that the stipulated documents are presented
to the
Nominated Bank or to the Issuing Bank and that the terms and
conditions of the Credit are complied with.’
Article 3 of the UCP
under the heading ‘Credits v Contracts’ provides as
follows:
‘
a:
Credits,
by
their nature,
are
separate transactions from the sales or other contract(s) on which
they may be based and banks are in no way concerned with
or bound by
such contract(s), even if any reference whatsoever to such
contract(s) is included in the credit. Consequently, the
undertaking
of a bank to pay, accept and pay Draft(s) or negotiate and/or to
fulfil any other obligation under the Credit,
is
not subject to claims or defences by the Applicant resulting from his
relationship with the issuing Bank or the Beneficiary.’
d As a consequence, in
June 1998 Kimberley concluded a one year term contract with Firstrand
in terms of which finance facilities
were granted to Kimberley up to
a maximum of R850 000 and the letter of credit was issued in the
sum of US$200 000. Between
1998 and 2000 the term of the 1998
agreement was extended for further one year periods until 5 March
2001.
e In March 2005 a further
one year term finance facility agreement was concluded. In 2006 this
was extended for another year to
31 March 2007. It seems however that
no funds were requested by, or advanced to Kimberley under the 2005
agreement.
f The total capital
amount advanced to Kimberley was the sum of R980 008, but with
the addition of interest grew to the sum
of R5 414 910.37.
g To cover the
indebtedness of Kimberley the letter of credit was increased from
time to time to the sum of US$420 000 and
the date of the letter
of credit was extended annually to 31 March 2011.
h Kimberley did not
discharge any of this indebtedness over the years and enjoyed the
benefit of the loan, it seems without any
demand for payment by
Firstrand. Problems understandably arose when Kimberley contended
that the debt had prescribed. Kimberley
nevertheless made without
prejudice offers to Firstrand, ostensibly because Kimberley had
enjoyed a banking relationship with Firstrand
extending for over a
century. This might explain the accommodating approach adopted by
Firstrand to Kimberley’s indebtedness
over the years. During
these negotiations Firstrand threatened to draw-down on the letter of
credit.
i On 28 October 2010
Firstrand carried out its threat and lodged a claim for a draw-down
on the letter of credit for its full face
value of US$420 000
stating that:
‘
Kimberley
Roller Mills (Pty) Ltd has not met his/its obligations to Firstrand
Bank Ltd, in respect of the facilities granted by
Firstrand Bank Ltd.
Therefore US$420 000 is now due and payable under Bank of America
irrevocable standby letter of credit number
972458.’
Bank
of America paid to Firstrand the sum of US$420 000 and Casey’s
US bank account was debited with the sum of US$420 000,
together
with banking charges in the sum of US$1050.
[4] Casey and Kimberley
contended that Firstrand was not entitled to claim payment in terms
of the letter of credit on the basis
that:
a Firstrand’s claim
for payment of the amount loaned and advanced to Kimberley had
prescribed;
b The amount of interest
claimed by Firstrand on the capital advanced to Kimberley was in
excess of that permitted in terms of the
in duplum
rule and
c
Firstrand’s certification to the Bank of America in terms of
the letter of credit that Kimberley had not met its obligations
to
Firstrand and that the sum of US$420 000 was due and payable,
was fraudulent. This was because Firstrand was aware that
the entire
claim had prescribed and that interest had been charged in excess of
that permitted in terms of the
in duplum
rule.
[5] In
Loomcraft
Fabrics CC v Nedbank Ltd & another
[1995] ZASCA 127
;
1996 (1) SA 812
(A) at
815G-J this court described the nature of irrevocable letters of
credit in the following terms:
‘
The
system of irrevocable documentary credits is widely used for
international trade both in this country and abroad. Its essential

feature is the establishment of a contractual obligation on the part
of a bank to pay the beneficiary under the credit (the seller)
which
is wholly independent of the underlying contract of sale between the
buyer and the seller and which assures the seller of
payment of the
purchase price before he parts with the goods forming the
subject-matter of the sale. The unique value of a documentary
credit,
therefore, is that whatever disputes may subsequently arise between
the issuing bank’s customer (the buyer) and the
beneficiary
under the credit (the seller) in relation to the performance or, for
that matter, even the existence of the underlying
contract, by
issuing or confirming the credit, the bank undertakes to pay the
beneficiary provided only that the conditions specified
in the credit
are met. The liability of the bank to the beneficiary to honour the
credit arises upon presentment to the bank of
the documents specified
in the credit, including typically a set of bills of lading, which on
their face conform strictly to the
requirements of the credit. In the
event of the documents specified in the credit being so presented,
the bank will escape liability
only upon proof of fraud on the part
of the beneficiary.’
[6]
Loomcraft
stressed the autonomous
nature of the obligation owed by the bank to the beneficiary under a
letter of credit (at 816B-C). An interdict
restraining a bank from
paying in terms of a credit would not be granted at the instance of
the bank’s customer save in the
most exceptional cases (at
816D). This included the case where it was established that the
beneficiary under the letter of credit
‘was a party to fraud in
relation to the documents presented to the bank for payment’
(at 817E-F). It was emphasised
that fraud on the part of the
beneficiary would have to be clearly established and although the
onus would be discharged by proof
on a balance of probabilities, as
in any case where fraud was alleged, it would not lightly be inferred
(at 817G-H).
[7]
The court below recognised the autonomy of the irrevocable letter of
credit and dismissed the application. However, regarding
the claim
that the interest exceeded the
in
duplum
rule,
it held that ‘[c]onsidering that the original debt was
reconstituted by voluntary agreement as a new capital advance,
it
does not appear that there is any scope for applying the rule’.
In this the court below erred which it recognised in granting
leave
to appeal. Where interest is capitalised and interest is charged on
interest, capitalised interest does not lose its character
as
interest and does not become part of the capital amount for the
purposes of the
in
duplum
rule.
See
Standard
Bank of South Africa Limited v Oneanate Investments (Pty) Ltd (in
liquidation)
[1997] ZASCA 94
;
[1998]
1 All SA 413
(SCA).
[8]
Recognising this, it was conceded in Firstrand’s heads of
argument dated 26 March 2013 (but apparently received by Casey
and
Kimberley’s attorneys on 27 March 2013) that Firstrand ought
not to have claimed more than the US$ equivalent of R980 008

plus interest thereon in an equivalent amount, regardless of the
advice it received to the contrary at the time. Firstrand accordingly

conceded on appeal,
an
order in terms of prayer 1.3 of the notice of motion in which a
declarator was sought that the interest claimed by the respondent
on
the advances contravened the
in
duplum
rule.
It was also conceded in argument that a further order should be
granted directing Firstrand to make payment of the amount
in
question. The claim of Firstrand was accordingly restricted to an
amount of R1 960 016 including interest and not
the sum of
R5 414 910.37.
[9]
Counsel were requested to agree upon an appropriate method for
calculating the amount to be paid to Casey. We were advised that
the
parties are in agreement that the amount in US$ which Firstrand was
not entitled to receive as at the date of payment,
being 2 November 2010 was
US$138 291.37. The parties, however, disagree upon the date when
this amount should be repaid. Casey
and Kimberley contend that this
amount should have been repaid on the date when the tender was
received namely 27 March 2013. On
that date the exchange rate was
9,2861 rands to the US$, with the result that Firstrand should be
ordered to pay the sum of R1 284 187.49
to Casey.
Firstrand, however, contends that the rand equivalent of US$ should
be calculated as at the date of judgment alternatively
payment,
at the exchange rate
prevailing on that date. Firstrand having conceded on 27 March 2013
that it was not entitled to this amount
should have made payment on
that date. It is accordingly equitable that the exchange rate should
be determined on that date, which
has the added advantage of
certainty.
[10]
On the merits it was submitted on behalf of Casey and Kimberley that
the court below erred in adjudicating the application
as if it was a
‘classic’ irrevocable letter of credit. By this was meant
the situation where a customer of the bank
issuing the letter of
credit to a beneficiary, seeks to thwart a claim by the beneficiary
for a draw-down on the letter because
of a dispute about the
performance of a contract secured by the letter of credit. It was
conceded that where the customer had sought
to restrain a bank from
honouring a draw-down claim, the courts stressed the autonomy of a
letter of credit and declined to intervene,
save
where the beneficiary was
party to a fraud in relation to the documents presented to the bank.
An interdict had not been sought
by Casey and Kimberley because the
letter of credit had been honoured. As counsel put it ‘the
horse had bolted’. In
the court below the initial speculative
approach adopted was to allege that the debt had prescribed to the
knowledge of Firstrand,
and that in claiming a draw-down on the
letter of credit, Firstrand had acted fraudulently. In addition, it
was argued that where
the customer acts against the beneficiary to
attack the validity of the draw-down,
on
the basis that the debt secured by the letter of credit had
prescribed and with it the entitlement to claim a draw-down based
on
that debt, the principle of autonomy did not find application. Put
differently, it was contended that the effect of a declarator
that
the debt had prescribed, was to extend the ambit of legitimate
challenges to a letter of credit beyond the narrow confines
of the
fraud exception.
[11]
Accordingly, so the argument went, the relief sought by Casey as the
customer of Bank of America was directed against Firstrand
as the
beneficiary under the letter of credit. The purpose was not to
interfere with the obligation on the Bank of America to honour

Firstrand’s draw-down claim, but to obtain a declarator that
Kimberley’s debt had prescribed and with it Firstrand’s

entitlement to claim a draw-down on the letter of credit.
[12]
The inherent flaw in this argument is that it seeks to equate the
legal standing of a letter of credit with a suretyship. As
pointed
out in
Loomcraft
and in articles 3 and
9(a) of the UCP,
a
letter of credit is wholly independent of the underlying contract
between the customer of the bank and the beneficiary. It establishes

a contractual obligation on the part of the issuing bank to pay the
beneficiary in accordance with its terms. An irrevocable letter
of
credit is not accessory to the underlying contract and is
distinguishable in law from a suretyship which is accessory to the

principal obligation. See
Absa
Bank Bpk v De Villiers
2001
(1) SA 481
(HHA).
[13]
The letter of credit was never furnished as surety by Casey for the
due compliance by Kimberley of its obligations to Firstrand.
Although
the letter of credit was expressly furnished as security for the due
performance of these obligations,
this
did not change its legal nature. The letter of credit was furnished
as security in addition to the suretyship of Rauff as required
by
Firstrand.
[14]
The distinction sought to be drawn on behalf of Casey and Kimberley
is without merit. The issue of the irrevocable letter of
credit by
the Bank of America in favour of Firstrand,
established
a contractual obligation on the Bank of America to pay Firstrand as
beneficiary, provided that the conditions specified
in the credit
were met. Reciprocal obligations in these terms were created by the
letter of credit between the Bank of America
and Firstrand. An order
declaring that Firstrand had no right to draw-down on the letter of
credit, must inevitably have as a consequence
that the Bank of
America was not obliged to honour this draw-down claim. Such an order
would infringe upon the autonomy of the
irrevocable letter of credit.
The argument was advanced
simply to circumvent the autonomy of the letter of credit.
[15]
It was also fallaciously submitted on behalf of Casey and Kimberley
that the claim did not challenge the validity of the letter
of credit
because it had been honoured. It was directed solely at Firstrand’s
receipt of the money,
to
which Firstrand was not entitled. This was a distinction without
merit. It was conceded that this was an enrichment claim which
had
never been advanced on the papers.
[16]
Whether the claim of Firstrand had prescribed is accordingly
irrelevant.
At
the time of the draw-down claim by Firstrand on 28 October 2010 the
validity of the letter of credit was beyond dispute, its
date having
been extended to 31 March 2011. It may be asked rhetorically why the
duration of the letter of credit was voluntarily
extended to this
date by Casey, if Kimberley contended that its liability to pay
Firstrand had prescribed. To claim a draw-down
on the letter of
credit Firstrand simply had to state that Kimberley had not met its
obligations in respect of the facilities granted
to it by Firstrand
and that a specified amount was due and payable to Firstrand.
Firstrand complied with the letter of credit,
obliging the Bank of
America to honour its undertaking and make payment. Kimberley
concedes that it did not repay any of the capital
loaned to it by
Firstrand,
nor
any of the interest which was payable. Whether the claim of Firstrand
had prescribed and the interest claim was in excess of
the
in
duplum
rule,
would only be of relevance if Firstrand acted fraudulently. It would
have to be established that Firstrand presented the draw-down
claim
to the Bank of America,
knowing
that it contained material representations of fact upon which it
would rely and which Firstrand knew were untrue. Mere error,

misunderstanding or oversight on the part of Firstrand, however
unreasonable, would not amount to fraud (
Loomcraft
at 822G-I). Counsel on
behalf of Casey and Kimberley when asked eschewed any reliance upon
fraud to challenge Firstrand’s
entitlement to draw-down on the
letter of credit.
[17]
Not dealt with in oral argument on appeal were the costs of an
application brought by Firstrand in the court below to compel

discovery of certain documentation by Casey,
in
terms of rule 35(14). Firstrand was awarded one half of its costs on
the basis that only half of the documents requested were
required by
Firstrand. In the application for leave to appeal Casey and Kimberley
alleged that the court had erred in making this
order. In the notice
of appeal an order was sought dismissing Firstrand’s rule
35(14) application with costs. This issue
was not referred to in the
heads of argument filed on behalf of Casey and Kimberley.
I agree with Firstrand’s
submission in its heads of argument that the order should stand on
the basis that the court below
exercised its discretion judicially.
1
[18]
The belated concession made on behalf of Firstrand that it was not
entitled to claim and receive payment of the interest which
exceeded
the
in
duplum
rule,
means that Casey and Kimberley should have succeeded before the court
below, in obtaining a declarator in these terms. This
would
constitute substantial success entitling them to an award of costs in
the court below as well as their costs of appeal up
to and including
the date of the tender being 27 March 2013. However, the lack of
success by Casey and Kimberley in the remaining
issues on appeal,
should result in an order that they pay Firstrand’s costs of
appeal incurred after 27 March 2013.
[19]
In the result the following order is granted:
1 The appeal is dismissed
save to the extent reflected in the orders that follow. The order of
the court below is set aside and
replaced with the following order:
‘
(a)
It is declared that interest in excess of the amount of R980 008,
claimed by the respondent on the capital sum of R980 008

factor escaped the attention of the lower Court, or unless the
discretion exercised has not been a judicial discretion’.
See
Molteno Bros v South African Railways
1936 AD 408
at 417.
2
Standard
Chartered Bank of Canada Limited v Nedperm Bank Limited
[1994] ZASCA 146
;
1994 (4)
SA 747
(A).
3
Bane
& others v D’Ambrosi
2010 (2) SA 539
(SCA) para 23.

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