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[2012] ZASCA 165
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Khula Enterprise Finance Ltd v Geldenhuys and Another (745/11) [2012] ZASCA 165 (21 November 2012)
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THE SUPREME
COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case No: 745/11
Reportable
In the matter between:
KHULA ENTERPRISE FINANCE LIMITED
..............................................
APPELLANT
and
LEON GELDENHUYS
.................................................................
FIRST
RESPONDENT
ANTON JAN ERASMUS
........................................................
SECOND
RESPONDENT
Neutral citation:
Khula
Enterprise Finance Ltd v Geldenhuys
(745/11)
[2012] ZASCA 165
(21
November 2012).
Coram:
Mthiyane DP, Navsa,
Heher, Cachalia and Petse JJA
Heard:
14 September 2012
Delivered: 21 November 2012
Summary: Principal and surety ─
discharge of surety from obligations undertaken under suretyship ─
prejudice to surety
─ not established that the prejudice
complained of caused by conduct of creditor.
Contract ─ breach ─
interpretation of contract ─ requirement to afford principal
debtor opportunity to remedy
breach overridden by cross-default
acceleration clause which operates in respect of multiple agreements.
________________________________________________________________
ORDER
________________________________________________________________
On appeal from:
North Gauteng
High Court, Pretoria (Botha J sitting as court of first instance):
1 The appeal is upheld with costs,
including the costs of two counsel, on the attorney and client scale,
which shall be borne by
the respondents jointly and severally the one
paying the other to be absolved.
2 The order of the high court is set
aside and in its place is substituted the following order:
‘
(a)
Judgment is granted in favour of the appellant against the
respondents jointly and severally as follows:
(aa)
as against the first respondent, payment of the sums of R912 388.10,
R500 000 and R675 000 together with interest
at a rate of 2
per cent per annum above the prime rate charged by Standard Bank of
South Africa Limited in respect of overdraft
facilities to its prime
customers from 2 August 2007 to the date of payment.
(bb)
as against the first and second respondents, jointly and severally,
payment of the sum of R789 700.74 together with interest
at a
rate of 2 per cent per annum above the prime rate charged by Standard
Bank of South Africa Limited in respect of overdraft
facilities to
its prime customers from 2 August 2007 to the date of payment.
(b)
The costs of the action on the attorney and client scale shall be
borne by the respondents jointly and severally the one paying
the
other to be absolved.’
________________________________________________________________
JUDGMENT
________________________________________________________________
PETSE JA (Mthiyane DP, Navsa, Heher
and Cachalia JJA concurring):
[1] The appellant, as plaintiff, sued
the first and second respondents as fourth and fifth defendants
respectively in the North
Gauteng High Court, based on deeds of
suretyship, for amounts owed by the principal debtor, Amavulandlela
Convenience Stores (Pty)
Limited (Amavulandlela) to the appellant
Khula Enterprise Finance Limited (Khula) which is wholly owned and
funded by the Department
of Trade and Industry. Amavulandlela went
into liquidation on 2 August 2007.
[2] The first respondent was sued on
the basis of his suretyship in respect of the first loan agreement
for three amounts totalling
R2 087 388.10, and his
suretyship in respect of the second loan agreement for R789 700.74.
The second respondent
was sued on the basis of his suretyship in
respect of the second loan agreement for R789 700.74. The
respondents admitted
having signed the deeds of suretyship upon which
they were sued, and in essence admitted the loan agreements.
[3] The respondents pleaded certain
defences in respect of which they attracted the onus. In this appeal
we are concerned with only
two of these defences: first, the
appellant’s action in respect of the second loan agreement was
instituted prematurely and
is therefore unenforceable; second, the
conduct of the appellant prejudiced the respondents as sureties and
they were therefore
released.
[4] The high court upheld the first
defence and it was therefore unnecessary to decide the second. The
appeal to this court against
that order is with leave of the court
below.
[5] It is convenient to deal with the
second defence first. The respondents pleaded in paras 17, 18 and 19
of their plea that:
(a) On 4 April 2007, Khula had frozen
Amavulandlela’s bank account with Standard Bank;
(b) Khula colluded with renegade
directors of Amavulandlela, Messrs Zulu and Kok, and on 6 June 2007
instructed Amavulandlela to
transfer an amount of R4 173 299.26
from the bank account of Amavulandlela to itself when Khula had no
authority to do so
and when the amount of R4 173 299.26 was
not due and payable; and
(c) the conduct of Khula rendered it
impossible for Amavulandlela to conduct its business and pay its
creditors in the normal course
of business resulting in Amavulandlela
being liquidated on 2 August 2007.
[6] Accordingly in the instant case,
in order for the respondents to successfully rely on Khula’s
conduct in its dealings
with Amavulandlela, which has the effect of
prejudicing them, they bore the onus of proving the prejudice upon
which they sought
to base their case for them to be released, whether
wholly or partially, from their contractual obligations as sureties.
(See
ABSA Bank Ltd v Davidson
2000 (1) SA 1117
(SCA);
Bock
& others v Duburoro Investments (Pty) Ltd
2004 (2) SA 242
(SCA) and
Bilsbury v Standard Bank of SA Ltd (Stannic Division)
2006 (3) SA 60
(E).)
[7] In argument before us the
respondents persisted that the freezing of the bank account was
instigated by Khula. The foundation
for this argument was the content
of a letter dated 2 April 2007 addressed to Khula by
Amavulandlela (at the instance of Zulu
and Kok) in which
Amavulandlela, inter alia, advised Khula that Zulu and Kok had a
meeting with Mr Johann of Standard Bank at which
they requested him
to ‘freeze’ Amavulandlela’s bank account at
Standard Bank until further notice pending the
outcome of discussions
with Khula. On 4 April 2007 Khula wrote a letter to
Amavulandlela, following a meeting held on 3 April
2007 between
Zulu and Kok representing Amavulandlela, and Khula, advising that it
was ‘in support of the decision to freeze
the Standard Bank
account’. The second respondent sought to argue that by placing
the word ‘freeze’ in quotation
marks the implication was
that Zulu and Kok had at that stage merely expressed a desire to
freeze the account and thus sought Khula’s
permission to do so,
and that the account would be frozen only if Khula had consented
thereto. In my view, the construction sought
to be placed on the word
‘freeze’ in Amavulandlela’s letter dated 2 April
2007 is, in the context, both artificial
and strained. Read as a
whole, the sentence leaves no room for any doubt of what it conveyed
to Khula ie that Amavulandlela had
requested Standard Bank to freeze
its account and further that it would discuss the frozen status of
the account with Khula. In
the interim the account was to remain
frozen.
[8] With respect to the payment of the
amount of R4 173 299.26 to Khula, the respondents, in this
court, limited their
case to the assertion that Khula colluded with
Zulu and Kok and instructed Standard Bank to pay this amount to
itself. This it
did despite the fact that it had no authority to do
so, especially since the amount of R4 173 299.26 was not
due and
payable by Amavulandlela, and its conduct placed
Amavulandlela in dire financial straits. These contentions are,
however, not borne
out by the evidence. On the contrary, the evidence
establishes that the payment was effected pursuant to a proposal made
by Zulu
to Khula, which the latter accepted by letter dated 4 June
2007 written by Ms Maggie Mazzullo, Khula’s Loss Control
Manager, to Zulu. In the same letter Mazzullo furnished Zulu with
Khula’s account details to which the transfer should be
effected. That Khula readily accepted such an offer is perfectly
understandable, for at that stage it was apparent that there was
dissension amongst Amavulandlela’s directors. The directors
were divided into two opposing factions. All of this occurred
when
Khula had lent and advanced substantial amounts of money to
Amavulandlela, thus placing Khula’s financial interests
in
jeopardy.
[9] The respondents further argued
that Samaf, a separate legal entity from Khula albeit also a
financier of small business enterprises
under the auspices of the
Department of Trade and Industry, should not have lent and advanced
moneys to Vusisizwe Retailer Development
(Pty) Ltd, a company, of
which Zulu and Kok were directors, in competition with Amavulandlela.
To my mind this argument need not
be explored for two fundamental
reasons. First, Samaf is a separate legal entity and its dealings
with Vusisizwe, complained of
by the respondents, were with a legal
entity distinct from Amavulandlela. That Zulu and Kok were directors
of Vusisizwe was, in
my view, of no consequence to the contractual
relationship between Khula and Amavulandlela. Second, the case
belatedly advanced
in oral argument in this regard was not pleaded
and does not avail the respondents so late in the day.
[10] It appears from the record that
the respondents may well have had a legitimate grievance against Zulu
and Kok. That in itself
is, however, no basis for them to complain
against Khula and to contend that they ought to be released from the
contractual obligations
undertaken in terms of the suretyship
agreements that they concluded with Khula. In summary, the
respondents did not establish
at the trial that Khula instigated the
freezing of Amavulandlela’s bank account. On the contrary, the
evidence established
that this occurred at the instance of Zulu and
Kok. Nor did Khula instruct Standard Bank to pay to itself the amount
of R4 173 299.26
which Khula could not have done as it was
not a party to the banker and customer contractual relationship
between Standard Bank
and Amavulandlela. What Khula did was merely to
accept the offer made to it by Zulu and Kok to repay the amount
concerned. Consequently
the defence founded on prejudice is without
merit and must fail.
[11] I turn to consider the second
defence which the high court upheld on the basis of its
interpretation of two clauses in the
loan agreements, namely 14.1 and
15. They read as follows:
‘
14.1
In the event of the Debtor failing to comply with its obligations in
terms of clause 9 above, Khula may, subject to clause
14.3, require
the Debtor by written notice addressed to the Debtor to remedy such
breach within 15 (fifteen) Business Days of the
date of such notice,
failing which all amounts outstanding may, at the option of Khula,
immediately become payable in full and
Khula may, without detracting
from any other rights which it may have in law or under this
Agreement: ─
.
. .
15
CROSS DEFAULT
In
the event that the Debtor also avails of any other Khula facility, or
is a Party to any other agreement entered into with Khula,
in terms
of which funds are advanced, or a credit guarantee is provided to the
Debtor, it is agreed that an event of default in
respect of anyone of
the facilities and/or agreements, will also automatically constitute
an event of default and breach in respect
of the remaining facilities
and/or agreements, and that the total cumulative outstanding balance
in respect of all facilities and/or
agreements, together with the
accrued interest will immediately become payable, notwithstanding
that the due date therefore may
not have arrived.’
[12] The questions to be decided
regarding this defence are: (a) whether the terms of clause 15 found
in each of the two agreements
override the terms of clause 14.1, and
(b) if so, whether it was obligatory for Khula, as the court a quo
found, to first send
a written notice ─ as provided for in
clause 14.1 ─ to Amavulandlela to remedy the breach within
fifteen days of the
date of such notice before Khula could sue
Amavulandlela and the respondents for all amounts outstanding at the
time of the breach.
[13] The high court took the view that
clause 14.1 of the loan agreements should be the focus of the enquiry
as it was dispositive
of the dispute between the parties. After
having considered the evidence and submissions on the point, it found
in favour of the
respondents. It went on to say that:
‘
[I]t
is immediately clear that the plaintiff never gave Amavula
[Amavulandlela] an opportunity to rectify the default alleged in
paragraph 12 of the particulars of claim. The letter of 26 June 2007
simply claimed the full balance owing in respect of all three
claims.
It is true that in terms of section 15 a default in respect of one
agreement would also constitute a default in terms of
the other
agreements, but the default that Amavula was entitled to rectify
within 15 days was the default in respect of the first
business loan.
. . . the failure to afford Amavula an opportunity to purge its
default is a fatal defect in plaintiff’s claim.’
It concluded that the letter of 26
June 2007, which purported to be a written notice in terms of clause
14.1, did not constitute
a proper demand in terms of clause 14.1 as
it ‘did not require Amavula [Amavulandlela] to purge its
default in respect of
arrear payments on the first loan’.
[14] In this court counsel for Khula
was constrained to concede that the letter of 26 June 2007 written on
behalf of Khula to Amavulandlela
was not a proper demand as
contemplated in clause 14.1 of the loan agreement. Nevertheless,
counsel argued, that as Amavulandlela
was in default of its repayment
obligations in relation to the first loan agreement (not having paid
the instalments due in March
and April 2007), such default triggered
the terms of clause 15 of the loan agreements and the full balance
then outstanding immediately
became due, owing and payable. This was
so, continued the argument, because clause 15 negates the need for
Khula first to place
Amavulandlela
in mora
or to comply with
the notice requirements of clause 14.1.
[15] Counsel for Khula pointed out
that:
(a) the terms of the loan agreements
were in substance admitted by the respondents;
(b) the dates upon which repayment of
the loans were to be effected by Amavulandlela were not in dispute;
and
(c) on the evidence accepted by the
court a quo the repayments in respect of the first loan were in
arrears as at 22 April 2007.
Consequently, concluded the argument,
Khula was justified in invoking the terms of clause 15 of the loan
agreements.
[16] It is opportune now to return to
the construction of the words of clause 15 of the loan agreements. In
Sassoon Confirming and
Acceptance Co (Pty) Ltd v Barclays National Bank Ltd
1974
(1) SA 641
(A) Jansen JA said:
1
‘
The
first step in construing a contract is to determine the ordinary
grammatical meaning of the words used by the parties. Very
few words,
however, bear a single meaning, and the “ordinary”
meaning of words appearing in a contract will necessarily
depend upon
the context in which they are used, their interrelation, and the
nature of the transaction as it appears from the entire
contract. It
may, for example, be quite plain from reading the contract as a whole
that a certain word or words are not used in
their popular everyday
meaning, but are employed in a somewhat exceptional, or even
technical sense. The meaning of a contract
is, therefore, not
necessarily determined by merely taking each individual word and
applying to it one of its ordinary meanings.’
(Citations
omitted.)
[17] This theme was taken further by
Joubert JA in
Coopers &
Lybrand v Bryant
[1995] ZASCA 64
;
1995 (3)
SA 761
(A) as follows:
2
‘
According
to the “golden rule” of interpretation the language in
the document is to be given its grammatical and ordinary
meaning,
unless this would result in some absurdity, or some repugnancy or
inconsistency with the rest of the instrument.’
(Citations
omitted.)
Later on the learned judge said:
3
‘
The
mode of construction should never be to interpret the particular word
or phrase in isolation (
in
vacuo
)
by itself . . . The correct approach to the application of the
“golden rule” of interpretation after having ascertained
the literal meaning of the word or phrase in question is, broadly
speaking, to have regard:
(1)
to the context in which the word or phrase is used with its
interrelation to the contract as a whole, including the nature and
purpose of the contract . . .;
(2)
to the background circumstances which explain the genesis and purpose
of the contract, ie to matters probably present to the
minds of the
parties when they contracted . . .;
(3)
to apply extrinsic evidence regarding the surrounding circumstances
when the language of the document is on the face of it ambiguous,
by
considering previous negotiations and correspondence between the
parties, subsequent conduct of the parties showing the sense
in which
they acted on the document, save direct evidence of their own
intentions.’
[18] Most recently in
Natal
Joint Municipal Pension Fund v Endumeni Municipality
2012
(4) SA 593
(SCA) at para 18 Wallis JA said the following concerning
interpretation of documents:
‘
The
present state of the law can be expressed as follows: Interpretation
is the process of attributing meaning to the words used
in a
document, be it legislation, some other statutory instrument, or
contract, having regard to the context provided by reading
the
particular provision or provisions in the light of the document as a
whole and the circumstances attendant upon its coming
into existence.
Whatever the nature of the document, consideration must be given to
the language used in the light of the ordinary
rules of grammar and
syntax; the context in which the provision appears; the apparent
purpose to which it is directed and the material
known to those
responsible for its production.’
At para 19 the learned judge
continued:
‘
.
. . from the outset one considers the context and the language
together, with neither predominating over the other.’
[19] The meaning of clause 15 of the
loan agreements is clear. Its terms provide that where Khula and
Amavulandlela are parties
to more than one loan agreement, which is
the case in this appeal, and Amavulandlela defaults in its repayment
in respect of any
one of the agreements, the cumulative outstanding
balance in respect of all agreements will immediately become payable
despite
the fact that the due date for any repayment may not have
arrived. The clear implication of this is that the terms of clause
14.1
have to yield to those of clause 15.
[20] At first I had considerable
difficulty with accepting the notion that in this case the terms of
clause 15 superseded those
of clause 14.1 whenever the principal
debtor defaults in respect of any one of the several agreements when
there is more than one
agreement. It appeared to me then that the
terms of clause 15 were onerous. But my uneasiness was dispelled when
a member of the
court enquired of counsel for the appellant, during
argument, as to what the justification for the case advanced on
behalf of the
appellants in relation to clause 15 would be. Counsel’s
response was that in circumstances where there is more than one loan
agreement the attendant risks for Khula were greater and that clause
15 was thus inserted to safeguard Khula’s interests
and to
minimise its exposure to its debtor. This justification is
compelling. Viewed from that perspective it is thus not hard
to
understand why there is this differentiation between a situation
where there is a single loan agreement and one where there
are
several agreements. In the latter situation the intention of the
parties must surely have been to ensure that Khula was, given
its
extensive exposure, not hamstrung by the constraints inherent in the
terms of clause 14.1. Thus, the counter-argument advanced
by counsel
for the respondents in their supplementary heads of argument is
untenable.
[21] Admittedly, there is a potential
conflict between clause 14.1 on the one hand and clause 15 on the
other. The former contemplates
an absolute obligation on Khula ─
if it desired to claim the full outstanding balance on default as
opposed to limiting its
claim to the arrear amount only ─ to
require Amavulandlela, by written notice, to remedy the breach (in
this instance by
paying the arrear amount) within 15 days from the
date of demand failing which the full balance outstanding would
immediately become
due and payable. But clause 15 provides ─ in
instances where there is more than one loan agreement in place ─
that
on default of payment in respect of any one loan agreement the
full outstanding balance in respect of all loan agreements becomes
immediately due and payable. The obvious way to resolve this
potential conflict between these two clauses is to interpret clause
15 in the manner contended for on behalf of Khula for the reasons
already explained.
[22] It follows, for all the
aforegoing reasons, that the court a quo erred in its conclusion that
‘. . . the fact that repayments
had to be made on specified
dates does not detract from the fact that the full balance of the
loan could only be claimed during
the existence of the loan agreement
if Amavula [Amavulandlela] had been given written notice in terms of
clause 14.1 to remedy
its default within 15 days and if it had failed
to do so’.
[23] In this appeal evidence adduced
at the trial clearly established that Amavulandlela had, at least,
fallen into arrears with
its repayments in respect of the first loan
agreement. Accordingly, the legal proceedings instituted against the
respondents to
recover the full outstanding balance were not
instituted prematurely.
[24] With respect to interest, it was
argued on behalf of Khula that it would ordinarily have been entitled
to interest on the capital
amounts from the date of service of the
summons on the respondents. However, the sheriff’s returns of
service of the summons
on the respondents were not part of the
record. Accordingly counsel for Khula argued that it would content
itself with interest
running from 2 August 2007, this being the date
on which appearance to defend was delivered on behalf of the
respondents. The respondents
did not advance any counter argument on
this score, and I see no reason not to accept Khula’s
submission.
[25] It follows that the appeal must
be allowed. The following order is made:
1 The appeal is upheld with costs,
including the costs of two counsel, on the attorney and client scale,
which shall be borne by
the respondents jointly and severally the one
paying the other to be absolved.
2 The order of the high court is set
aside and in its place is substituted the following order:
‘
(a)
Judgment is granted in favour of the appellant against the
respondents jointly and severally as follows:
(aa)
as against the first respondent, payment of the sums of R912 388.10,
R500 000 and R675 000 together with interest
at a rate of 2
per cent per annum above the prime rate charged by Standard Bank of
South Africa Limited in respect of overdraft
facilities to its prime
customers from 2 August 2007 to the date of payment.
(bb)
as against the first and second respondents, jointly and severally,
payment of the sum of R789 700.74 together with interest
at a
rate of 2 per cent per annum above the prime rate charged by Standard
Bank of South Africa Limited in respect of overdraft
facilities to
its prime customers from 2 August 2007 to the date of payment.
(b)
The costs of the action on the attorney and client scale shall be
borne by the respondents jointly and severally the one paying
the
other to be absolved.’
_________________
X M PETSE
JUDGE OF APPEAL
Appearances:
Appellant: André Gautschi SC
(with Lara Grenfell)
Instructed by:
D’Amico Incorporated,
Johannesburg
Lovius Block, Bloemfontein
Respondents: In person
1
At
646A-D.
2
At
767E-F.
3
At
767H-768D.