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[2011] ZASCA 205
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Van Oudtshoorn v Investec Bank Ltd (588/10) [2011] ZASCA 205 (25 November 2011)
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THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case no: 588/10
In the matter between:
D J VAN RHEEDE VAN OUDTSHOORN
…..................................
Appellant
and
INVESTEC BANK LIMITED
…....................................................
Respondent
Neutral citation:
Van Oudtshoorn v Investec
Bank Ltd
(588/10)
[2011] ZASCA 205
( 25 November 2011)
Coram:
LEWIS, MAYA, MHLANTLA, SERITI
and
WALLIS
JJA
.
Heard
: 8
November 2011
Delivered
: 25
November 2011
Summary:
Interpretation of power of attorney and
partnership agreement – authority of managing partner to
conclude instalment sale
agreement – need for rectification of
that agreement – authority of agent of undisclosed partner to
execute deed of
suretyship in respect of partnership obligations –
scope of that authority.
ORDER
On appeal from:
North Gauteng High Court,
Pretoria (Bosielo J sitting as court of first instance):
The appeal is upheld to the extent that the order of
the trial court is amended by the deletion of paragraph 1 thereof
and the
deletion of the words ‘on an attorney and client
scale’ in paragraph 4 thereof.
The appeal is otherwise dismissed, with costs.
JUDGMENT
WALLIS JA (LEWIS, MAYA, MHLANTLA and SERITI JJA
concurring)
[1] The incidence of income tax and the desire it
generates among some taxpayers to minimise their tax liability has
led over the
years to tax advisers developing and marketing various
schemes directed at minimising the tax liability of the participants.
As
the legislation under which income tax is imposed has become more
complex, the scope for developing such schemes has expanded. A
common
feature of these is that they exploit allowances, such as
depreciation or investment allowances, afforded to the taxpayer
under
the relevant legislation, to generate substantial losses, largely on
paper rather than in terms of actual expenditure, that
the
participants can then set off against their taxable income from other
sources.
[2] This case arises from one such
scheme
1
that sought to take advantage of the
generous allowances that the Income Tax Act 58 of 1962 then afforded
in respect of the depreciation
of aircraft. The scheme was structured
around a commanditarian partnership, in which the investors would be
the undisclosed partners.
The partnership would acquire an aircraft
with finance provided by the respondent, Investec Bank Ltd
(Investec), and charter it
to generate the income necessary to meet
the financing costs due to Investec. Unfortunately the income
generated from the chartering
operations was less than anticipated.
This led Investec to demand payment of what was due to it under the
financing arrangements
in respect of the aircraft. Payment was not
forthcoming and the scheme collapsed. Investec sued the participants
in the scheme
on various grounds.
2
In the case of Mr van Oudtshoorn, the
appellant, the claim was based on a deed of suretyship signed on his
behalf and binding him
as surety for the purchaser’s liability
under the instalment sale agreement described below in paragraph 13.
[3] Mr van Oudtshoorn disputed any liability to Investec
because he contended that he had not authorised the conclusion of the
agreements
required to give effect to the scheme. Whilst he accepted
that he agreed to participate in the scheme, he said that the
agreements
actually concluded were not those that he agreed to and
were concluded without authority. Investec disputed this and
contended
that in any event he had by his conduct, particularly in
claiming and receiving the tax benefits of participation in the
scheme,
ratified the agreements or waived his right to object to them
or was estopped from doing so. Bosielo J, in the trial court, upheld
the contention that he ratified the agreements concluded on his
behalf and on behalf of the partnership. He entered judgment against
Mr van Oudtshoorn in an agreed amount and ordered him to pay interest
and the costs of the trial on the attorney and client scale.
This
appeal is with his leave.
The agreements
[4] In order to appreciate the basis for Mr van
Oudtshoorn’s defence it is necessary to have regard to the
background to his
participation in the scheme and the different
agreements that were put in place in order to give effect to the
scheme. Ms Claire
Dillon, of the firm of Robin Beale & Associates
Ltd (‘RBA’), a firm of tax advisers, assembled the
scheme. In conception
it had the following elements. A commanditarian
partnership would be created to limit the potential exposure of the
individual
participants. The partners would be Cormorant Aviation
(Pty) Ltd (‘Cormorant’), a special purpose vehicle
created and
controlled by RBA, as the disclosed and managing partner
and the individual participants, who would be the undisclosed
partners,
each contributing a defined share to which their liability
was limited. The partnership would acquire an aircraft with financial
assistance from Investec. A management agreement would be concluded
with the company from which the aircraft was acquired, which
would
operate the aircraft on charter and maintain it on behalf of the
partnership. The scheme would endure for four years during
which the
participants would be able to claim in each year a depreciation
allowance of 25 per cent of the cost of the aircraft.
The
aircraft would then be sold at a price expressed in US dollars and,
as it was anticipated that the Rand would depreciate against
the
dollar, RBA predicted that the sale would generate a capital gain and
proceeds sufficient to discharge the debt to Investec.
In each tax
year it was anticipated that, with the benefit of the allowances for
depreciation, the partnership would show a loss
that would be
allocated to the partners and set off against their taxable income
from other sources. It is unnecessary to spell
out the potential tax
and investment advantages that would accrue to the participants.
[5] Ms Dillon had set up similar
schemes in the past. She was aware of a group of potential
participants based in Pietersburg.
3
In February 1995 they were looking
for a way to reduce their potential tax liabilities in the 1995 tax
year. There was accordingly
a measure of urgency about setting up an
aircraft scheme to meet their needs before the end of the tax year. A
problem arose when
the company she was dealing with in regard to the
acquisition of a suitable aircraft withdrew shortly before the end of
February.
She then approached Mr Ken Roseveare, a businessman
involved in the aircraft industry, with whom she had set up similar
schemes
in the past, to find out if his company had a suitable
aircraft. It did, but it was a considerably bigger aircraft than the
one
she had been considering and the price was almost double that of
the other aircraft. The participants she had identified were not
proposing to invest sufficient to pay more than about half this
higher price. To overcome the problem she persuaded Mr Roseveare
to
sell an interest in the plane to a partnership including the existing
group of participants, on the basis that she would then
find a
further group to acquire the balance. It seems that at the time she
had some inkling that other people in the Pietersburg
area were
interested in participating in such a scheme.
[6] Ms Dillon proceeded to set up an
en commandite
partnership called the Kite No 1
Partnership. The structure of the partnership was largely as
described above. Cormorant was the
managing partner and the
individual participants were undisclosed partners with their
liability limited in varying amounts. In
addition, and because the
partnership otherwise only had the resources to purchase an
approximate half share in the aircraft, Mr
Roseveare’s company,
Aerospace Express (Pty) Ltd (Aerospace Express), and a related
company, also became partners. Simultaneously
with the signing of the
partnership agreement the Kite No 1 partnership entered into an
agreement with Aerospace Express for
the acquisition of a 50.4 per
cent interest in the aircraft, a Hawker Siddeley. As the partnership
was to acquire the ownership
of the aircraft as a whole Aerospace
Express contributed its residual interest as its contribution to the
partnership.
4
The price for the 50.4 per cent
interest was payable by the end of April 1995. Finally, an agreement
to operate and maintain the
aircraft was concluded with Aerospace
Express.
[7] Procuring the signatures of all the participants
posed logistical problems. These were addressed by RBA procuring a
power of
attorney from each of the participants authorising it to
enter into the agreements on their behalf. In the result the
partnership
agreement was signed on behalf of each of the
participants in terms of these powers of attorney.
[8] Once the Kite No 1
Partnership was established, Ms Dillon set about finding potential
participants who would take part
in a scheme in respect of the
balance of the interest in the aircraft. Two people were identified,
a Dr van Zyl, who had participated
in an earlier scheme, and Mr van
Oudtshoorn. The latter was an attorney, specialising in third party
litigation, who had practised
as a partner in a well-known firm for
many years. He had been headhunted by the Multilateral Motor Vehicle
Fund – the predecessor
to the Road Accident Fund – and
was employed by them in a senior capacity. In February 1995 he turned
55 and some retirement
annuities in which he had invested matured. He
sought advice from his accountant, Mr Kruger, and a tax adviser, Mr
Boonzaaier,
concerning the investment of the funds that would accrue
from this. They recommended that he should invest in an aircraft and
Mr
Kruger advised that an amount of R1.625 million should be
invested. This amount could have come from Mr van Oudtshoorn’s
own resources, but he was advised that it was preferable that the
funds be borrowed in order to secure the maximum advantage from
the
investment. On 13 March 1995 he decided to accept this advice
and told his advisers to go ahead with the investment.
5
[9] Pursuant to this, RBA concluded
three agreements on 14 March 1995. The first was a partnership
agreement establishing the
Kite No 2 Partnership as a
commanditarian partnership, with Cormorant as the managing and
disclosed partner, and Aerospace
Express and its associated company,
Mr van Oudtshoorn and Dr van Zyl as the undisclosed partners. Ms
Dillon executed the deed of
partnership on behalf of Mr van
Oudtshoorn. There were two other agreements. In terms of the first
the partnership acquired from
Aerospace Express a 34.6 per cent
interest in the Hawker Siddeley plane.
6
In terms of the second Aerospace
Express would operate and manage the aircraft on terms identical to
the corresponding agreement
concluded for the Kite No 1 Partnership.
As with that partnership payment for the interest in the plane to be
acquired by the partnership
was to be effected by the end of April
1995.
[10] Both of the agreements for the
acquisition of the respective interests of the two partnerships in
the aircraft provided that
Aerospace Express would transfer it to
Cormorant and that ownership and risk in the aircraft would pass to
Cormorant. Under the
two operating agreements the aircraft was to
remain in the physical possession of Aerospace Express. Accordingly
the passing of
ownership to Cormorant could only take effect by means
of constructive delivery in the form of constitutum possessorium: the
seller’s
existing possession of the thing sold (the
merx
)
was converted into detention so that
possession in the legal sense was held by the purchaser.
7
In view of the express provisions of
the two purchase agreements there is no reason to doubt that
ownership of the aircraft passed
to Cormorant in terms of these
provisions. The precise date on which that occurred is immaterial.
[11] On 14 March 1995 Mr van Oudtshoorn met with Ms
Dillon and executed a power of attorney in favour of RBA. The terms
of that
power of attorney are central to his arguments about RBA’s
lack of authority to conclude agreements. It appointed any director
of RBA as his agent:
‘
...for the purposes of signing and
executing for me on my behalf and in my name place and stead just as
fully and effectively as
I could do if acting personally therein, the
following documents:
An agreement with third persons in terms of which I will be a partner
with such third persons for the purpose of acquiring a B
Ae HS748 2B
Aircraft (‘the aircraft’) pursuant to appointing an agent
to establish and conduct the business of chartering
the aircraft.
which is herein referred to as ‘the partnership agreement’,
and my attorney is hereby authorised and empowered to sign
and
execute the partnership agreement on such terms and conditions as my
attorney may think fit and further to make such variations,
modifications or alterations thereto in such manner as my attorney
may think fit, or just as fully effectively as I could do if
acting
myself.
Furthermore,
I hereby nominate, constitute and appoint my attorney
to be my lawful attorney and agent for the purpose of managing and
transacting
all of my business, property and affairs
, both
present and future, anywhere, and
which arises from or is
attributable to the partnership agreement or any matter or thing in
connection with the partnership agreement
(hereinafter referred to as
‘my business’)
.
And my attorney shall have full and unrestricted power and
authority to represent and act for me
and in my name and for my
account and benefit
in relation to the partnership agreement or my
business, and all matters and things affecting the partnership
agreement or my business,
without any limitation,
to all intents
and purposes as I might or could do if personally present and acting
therein.’ (Emphasis added.)
[12] The power of attorney continued with a provision
dealing with the power to conclude a management agreement in respect
of the
conduct and management of the business of chartering the
aircraft and went on as follows:
‘
And further, and without limiting the
generality of, and as part of the aforegoing my attorney shall have
full and unrestricted
power and authority to represent and act for me
for the purposes of concluding or entering into or signing for me and
on my behalf
and in my name, place and stead the following agreement:
An agreement of loan with Investec Bank Limited (‘the financial
institution’) in terms of which, inter alia, I shall
borrow
from the financial institution a sum equal to my capital contribution
to the partnership as specified in the partnership
agreement, subject
to normal banking requirements, including the requirement to pay
interest and any other usual bank charges,
and subject to the
provision of any additional security which the bank may require
including any deeds of suretyship, guarantees,
surety bonds, notarial
bonds and the like;
which is herein referred to as ‘the loan’ and my attorney
is hereby authorised and empowered to sign and to execute
the loan
agreement referred to above and any other agreement, undertaking,
deed, bond or document required from time to time by
the financial
institution in relation to, or necessary to give effect to, or
relating to, or incidental to the loan on such terms
and conditions
as my attorney may think fit, and, further, to make such variations,
modifications or alterations thereto in such
manner as my attorney
may think fit, all just as fully effectively as I could do if acting
personally myself.
AND GENERALLY my attorney shall have full and unrestricted power and
authority to do execute and suffer any such act, deed, matter
or
thing whatsoever, as my attorney may deem necessary or expedient in
or about my concerns pertaining to the partnership agreement
and my
business and the loan. AND I HEREBY GIVE AND GRANT to my attorney
power to appoint a substitute or substitutes, and at his
pleasure to
displace or remove and appoint another or others. And I hereby ratify
and agree to ratify whatsoever shall be done
or suffered by virtue of
these presents.’
[13] It had always been the intention of RBA to secure
finance from Investec to enable the partnerships to pay what was due
to Aerospace
Express under the purchase agreements. In other aircraft
schemes, undertaken with the assistance of other financial
institutions,
it had borrowed the money and provided security in the
form of a notarial bond over the plane. However, Investec preferred
the
security that ownership of the aircraft would give it, so in this
instance the financing was provided by way of an instalment sale
agreement concluded on 21 and 24 April 1995. The mechanics of this
transaction were the following. Aerospace Express provided an
invoice
in respect of the sale by it of the aircraft to Investec. The price
of R5 million was the total of the amounts owing under
the two
purchase agreements, plus the value of its own residual interest in
the aircraft which was transferred to Cormorant as
its capital
contribution to the two partnerships. Then Investec sold the aircraft
in terms of an instalment sale agreement to Cormorant
Aviation (Pty)
Limited ‘acting in its capacity as agent for The Kite
Partnership’. The price was R5 485 000 together
with interest
at a rate of 17.5 per cent per annum compounded and payable monthly
from 21 April 1995.
[14] In addition to the security that ownership of the
aircraft provided, Investec wanted further security in the form of
limited
deeds of suretyship from the investors in the two
partnerships. Ms Dillon executed these on behalf of the investors,
including
Mr van Oudtshoorn, acting in terms of the powers of
attorney provided by them to RBA. That is the basis upon which
Investec claimed
that Mr van Oudtshoorn had bound himself to it as
surety for his share of the indebtedness under the instalment sale
agreement.
I will return in due course to the terms of the deed of
suretyship executed on his behalf.
The defences
[15] Mr van Oudtshoorn originally
contended that he was not a partner in the Kite No 2 Partnership, but
this was based on the technicality
that the partnership deed was
signed before the power of attorney. At the outset of his
cross-examination he accepted that he had
been a partner in the
partnership and this issue became academic. His principal contentions
were that the method adopted to finance
the acquisition of the
aircraft was not what he had agreed to and that the execution of the
deed of suretyship on his behalf was
unauthorised. He said that the
power of attorney expressly contemplated that the finance would come
from a personal loan granted
to him by Investec and that he never
agreed to RBA concluding the instalment sale agreement or executing
the deed of suretyship
on his behalf. Whilst the power of attorney
referred to the possibility of Investec requiring security for any
loan granted to
him, including deeds of suretyship, he made the point
that this could not have included a deed of suretyship by him
personally
as one cannot stand surety for oneself.
8
[16] Apart from the primary objection
that the instalment sale agreement was, at least as far as he was
concerned, an impermissible
way of procuring finance to pay for the
acquisition of the aircraft, certain other objections, largely of a
technical nature, were
raised on his behalf. Thus the description of
the purchaser under the instalment sale agreement as Cormorant
‘acting in its
capacity as agent for The Kite Partnership’
was attacked as showing that contrary to the basis of the
partnerships, they
and not Cormorant were the purchasers under the
instalment sale agreement. This was said to lead to confusion on the
grounds that
there was no such entity as The Kite Partnership and led
to Investec seeking rectification of the agreement and the
suretyship,
to insert the words ‘No 1 and No 2’ after
‘Kite’ in the description of the purchaser and the
principal
debtor. It was also claimed that disclosure of the identity
of the ‘undisclosed’ partners was a breach of a
fundamental
principle underlying a partnership
en
commandite
. This
was said to lead to the partners being personally liable to Investec
under the instalment sales agreement. It was also contended
that as
ownership in the aircraft had passed to the partnerships in terms of
the two sale agreements it was impossible for Aerospace
Express to
sell it to Investec and pass ownership as contemplated by the
instalment sale agreement. All of these points were directed
at the
validity of that agreement.
Validity of the instalment sale agreement
[17] In advancing these arguments concerning the
validity of the instalment sales agreement, counsel was faced with a
conundrum.
His client had claimed and received the benefit of the
deduction from his taxable income of the losses incurred by him in
consequence
of his participation in The Kite No 2 Partnership. Those
losses had been incurred because the partnership had purchased an
interest
in the aircraft by means of the instalment sale agreement
and thereby became entitled to claim the depreciation allowance on
the
acquisition of an aircraft as well as the trading losses incurred
by the partnership, which would have included interest payable
to
Investec. If that agreement was invalid the status of these claims
was, at its lowest, put in doubt. Faced with those considerations
counsel accepted that RBA had indeed had authority in terms of the
deed of partnership to conclude the agreement and his other
contentions regarding its validity became muted. The various
challenges to its validity were in any event without merit and these
issues can accordingly be disposed of relatively simply.
[18] As regards the authority to finance the acquisition
of the aircraft by way of an instalment sale agreement, Cormorant’s
authority to do this flowed from the terms of the partnership
agreements. The material part of clause 5.2 provided that:
‘…
the managing partner shall be
responsible for the day to day management of the partnership business
and the financial management
of the partnership. The managing partner
shall have the authority to act and bind the partnership in respect
of all matters or
affairs which concern the partnership business
without reference to the other partners, and in exercising its powers
the managing
partner shall not be required to have regard to the
interests of any particular partner, but shall exercise its authority
with
regard to the general interests of the partnership as a whole
and of the partnership business.’
The two partnerships had incurred a liability to
Aerospace Express of a little over R4 million. Cormorant was obliged
under this
clause to arrange finance to enable these payments to be
made. There is nothing unusual in securing finance by way of an
instalment
sale agreement any more than by way of a bank overdraft or
a financial lease. The reason for doing so was explained in evidence
as being that it was the cheapest form of finance available. There
can be no doubt that Cormorant was authorised to conclude this
agreement and the challenge to its authority was misconceived.
[19] The first of the technical objections arose from
the fact that the agreement identified the purchaser as ‘Cormorant
Aviation
(Pty) Ltd acting in its capacity as agent for The Kite
Partnership’. The suggestion was that the agreement was
accordingly
not one between Investec and Cormorant, but one between
Investec and an entity that did not exist. This prompted the prayer
for
rectification to insert the words ‘1 and 2’ after
‘Kite’. The case was then conducted on the confusing
basis that such an amendment was necessary in respect of both the
instalment sale agreement and the deed of suretyship, where the
principal debtor was similarly described. Thereafter a considerable
amount of time in the trial was devoted to evidence in chief
and
cross-examination concerning particularly Ms Dillon’s
understanding, but also that of others, of the legal effect of
the
different agreements. This was further protracted by the fact that it
was often based on a misconception of both the law and
the meaning of
the documents. It was also unfair, because it was directed at a
witness who had never been admitted to practice
in South Africa and
who had severed her connection with this country and this business
some eleven years prior to her giving evidence.
[20] The correct position was that
Cormorant, as the managing partner, was appointed under the
partnership agreements to represent
the partnerships in all business
dealings. All the business of the partnerships was to be carried on
in its name. No other party
could represent the partnerships in any
way. In accordance with this the instalment sale agreement reflected
Cormorant as the purchaser
of the aircraft and added unnecessarily by
way of clarification that it was acting as agent for The Kite
Partnership. As Investec
was at all times party to the scheme no
doubt it inserted the reference to The Kite Partnership for easy
identification of the
transaction in its records. That, as the
unchallenged evidence showed, was the shorthand used by both
Cormorant and Investec to
refer to both partnerships and the use of
the expression here clearly encompassed both. It was accordingly
unnecessary to rectify
the instalment sale agreement in that regard
as, in the event of dispute, evidence could have been led to show
that the expression
was used in this sense.
9
The deed of suretyship fell to be
similarly construed and for the same reason did not need to be
rectified.
[21] The confusion arose because the
parties misconstrued the import of the statement that Cormorant was
acting ‘in its capacity
as agent’ for the partnership.
They thought that this meant that it was thereby binding the
partnership contrary to the express
provisions in the two deeds of
partnership that all business should be conducted in its name. That
ignored the salutary warning
penned by Professor J C de Wet in his
contribution on agency in
Lawsa
10
that:
‘
The expression “agency” is used
in such a wide variety of meanings that it cannot be regarded as a
term of art denoting
a specific branch of law.’
Over a century ago Lord Herschell sounded a similar
warning when he said:
‘
No word is more commonly and constantly
abused than the word “agent”. A person may be spoken of
as an “agent”
and no doubt in the popular sense may
properly be said to be an “agent”, although when it is
attempted to suggest that
he is an agent under such circumstances as
create legal obligations attaching to agency, that use of the word is
only misleading.’
11
In this case there was no reason to
believe that the addition of the phrase ‘acting in its capacity
as agent’ was intended
by either Investec or Cormorant to
convey anything beyond the fact that Cormorant was ‘acting in
the interest of another’
12
as it undoubtedly was. The
construction of the instalment sale agreement as one between Investec
and the partnerships, as opposed
to one between Investec and
Cormorant, was simply incorrect and occasioned a great deal of wasted
time, energy and costs.
[22] The alternative point that
Cormorant had acted beyond its authority by disclosing the existence
of the
en commandite
partnership and its
members to Investec, is also without merit. It flows from a
misconception of the legal effect of such disclosure.
Whilst it is so
that in general the foundation for a partnership
en
commandite
is that
the existence of the partnership and the identity of the partners,
save the disclosed or managing partner, should not be
disclosed, the
mere fact of disclosure does not serve to render the partnership or
the individual partners, as opposed to the disclosed
or managing
partner, liable on contracts concluded with that partner. Such
disclosure may be forced upon the managing partner in
the course of
performing its functions. Thus a request for finance addressed to a
financial institution is unlikely to be successful
when made in the
name of a shelf company, without disclosure of the financial worth
and commitments of those standing behind it.
That is what happened
here. Such disclosure does not infringe upon the reason for
anonymity, namely that third parties should not
be induced to deal
with the managing partner in reliance on the credit of the other
members of the partnership as members of the
partnership.
13
In the result the mere fact of
disclosure does not serve to render either the partnership or the
undisclosed partners liable on
the contracts concluded by the
managing or disclosed partner.
14
[23] The other technical point is of
even less merit. It is based on the proposition that Aerospace
Express had transferred ownership
in the aircraft to Cormorant and
therefore that it was unable to sell the aircraft to Investec and
Investec was unable to take
delivery of the aircraft. Quite where
this was thought to lead is unclear. However it is unnecessary to
consider that question
because the underlying premises are incorrect.
It is trite that a person can sell something that they do not own.
Many forms of
commodity trading or trading on stock exchanges would
be impossible were this not so. All that the seller is required to do
in
order to transfer ownership, which is usually an obligation under
the agreement of sale, is to procure that the owner of the
merx
delivers it by some form of delivery
recognised by our law to the purchaser.
[24] In this case Aerospace Express
sold the aircraft to Investec. As the basis of the sale was that
Investec would acquire ownership
of the aircraft, Aerospace Express
was obliged to cause Cormorant to deliver the aircraft to Investec in
a manner recognised by
law as sufficient to transfer ownership. To
the knowledge of all concerned the aircraft was never to leave the
physical possession
of Aerospace Express, so that all that was
required was an act on the part of Cormorant, accepted by Investec
and Aerospace Express,
that conveyed unequivocally that the aircraft
was now being held on behalf of Investec as owner. One need look no
further in that
regard than the execution and implementation of the
instalment sale agreement itself. Not only was the price for the
aircraft paid
by Investec to Aerospace Express, but that was done in
terms of an agreement with Cormorant which recorded that Investec had
purchased
the aircraft at Cormorant’s request and would be and
remain the owner until it received payment in full of what was due to
it. There was a clear intention by all three parties that Investec
would become owner of the aircraft, and this is reflected in
their
subsequent behaviour, because, when the scheme collapsed, Investec
sold the aircraft to Aerospace Express. That intention
was sufficient
to transfer ownership to Investec by attornment.
15
[25] For those reasons, the instalment sale agreement
was validly concluded and binding on Cormorant. The remaining
question is
whether the deed of suretyship executed by Ms Dillon on
behalf of Mr van Oudtshoorn is binding upon him. It is to that
question
that I now turn.
The validity of the suretyship
[26] Various issues arise under this head. The first,
pursued at the trial and in the heads of argument, arose from the
terms of
the power of attorney and concerned Ms Dillon’s
authority to execute the deed on behalf of Mr van Oudtshoorn. The
second
was whether, assuming she had such authority, the deed she
signed fell within the scope of that authority given the limited
capital
contribution of Mr van Oudtshoorn to the partnership. The
third arose from a request by the court addressed to the parties
before
the hearing to deal with the implications of s 6 of the
General Law Amendment Act 50 of 1956, which provides that a deed of
suretyship is valid only if reduced to writing and signed by or on
behalf of the parties. Flowing from this and the fact that Ms
Dillon
did not qualify her signature when she signed the deed it was
contended that there was non-compliance with the statutory
requirements for validity.
[27] The focus of the argument in the court below, and
in the heads, on the scope of Ms Dillon’s authority in terms of
the
power of attorney was on that part of it in which she was
authorised to conclude an agreement of loan on behalf of Mr van
Oudtshoorn.
The argument was that, as all that the power of attorney
did was authorise her to borrow money on his behalf and one cannot
stand
surety for oneself, the reference in that part to a suretyship
did not extend to the suretyship she executed, purportedly on his
behalf.
[28] That argument is correct as far
as it goes, but it falls short when consideration is given to the
terms of the power of attorney
as a whole. They vested in RBA the
power to conclude the partnership agreement and to manage and
transact Mr van Oudtshoorn’s
business arising from or
attributable to the partnership agreement or any matter or thing in
connection with that agreement. They
went on to give RBA ‘full
and unrestricted power and authority to represent and act for me and
in my name … without
any limitation’ in relation to the
partnership and his involvement therein. Bearing in mind that the
partnership would need
to raise finance to purchase the aircraft and
that Cormorant had the power to do so by means other than loans from
or obtained
by the partners, such a power was ample to allow the
attorney to provide, in the name of the partner, security by way of a
deed
of suretyship for the indebtedness of Cormorant. That is
reinforced by reference to the fact that the same power of attorney
authorised
RBA to borrow money on behalf of Mr van Oudtshoorn. To
authorise RBA to do that, whilst objecting to it providing security
for
the finance obtained by other less expensive means to acquire the
aircraft, smacks of straining at a gnat whilst swallowing a camel.
After all, suretyship is an accessory obligation,
16
so that it could not be more onerous
for Mr van Oudtshoorn than a loan would have been and it might well
have been less onerous,
if the scheme had been successful
financially. Accordingly Ms Dillon was authorised to execute the deed
of suretyship on behalf
of Mr van Oudtshoorn.
[29] The next issue is whether in
executing the deed of suretyship Ms Dillon exceeded her authority. It
will be recalled that Mr
van Oudtshoorn committed himself to a
capital contribution to the partnership of R1.625 million. The
deed of suretyship is
for a limited amount in that it provides that
the capital amount recoverable
thereunder is limited to R2 031 000, plus further sums for
interest, charges and costs
as may become due and payable by
Cormorant.
I
t
was argued that the effect of this was to bind him to pay an amount
in excess of the maximum amount that he could be called upon
to
contribute to the partnership; that this exceeded the authority
conferred by the power of attorney; and accordingly that the
suretyship having been given in excess of that authority was
unenforceable.
17
[30] At first blush the argument is
attractive but on closer examination I think it incorrect, because it
starts with Mr van Oudtshoorn’s
maximum capital contribution to
the partnership and ignores the fact that the obligation under the
deed of suretyship is one owed
to Investec. Once it is recognised
that there is nothing to prevent an undisclosed partner in an
en commandite
partnership from
accepting liability under a deed of suretyship to the financier of
the partnership’s business activities,
the amount of that
liability is not necessarily confined to the amount of that partner’s
maximum liability under the deed
of partnership. The true question is
then whether the power of attorney restricted Ms Dillon’s
authority to furnishing a
deed of suretyship limited to the amount of
the capital contribution.
[31] If one starts by looking at the power of attorney
in respect of the possible loan from Investec it makes it clear that
whilst
the capital amount of any loan is limited to the capital
contribution to the partnership, namely, R1.625 million, the actual
financial
commitment is considerably greater. This is because it
authorises the borrowing of the full amount of R1.625 million
‘subject
to normal banking requirements including the
requirement to pay interest and any other usual bank charges’.
According to
the evidence interest rates at the time on bank loans
were around 20 per cent. Accordingly a loan of this amount over the
four
years that the partnership would endure, with interest payable
annually, would involve a total commitment of nearly R2.9 million
in
all depending on how interest was calculated and how frequently
payments would be made. That suggests that the limitation now
contended for is not justified.
[32] A second feature is that the power of attorney
authorised the furnishing of ‘any additional security which the
bank may
require’ for any loan, including surety bonds or
notarial bonds. Obviously any such security would have to cover not
only
the capital amount of the loan but the entire indebtedness
however arising. As the purpose of security is to cover the financial
institution in the event of default it will necessarily be for more
than the total amount of the indebtedness. Whilst it is true
that Mr
van Oudtshoorn could not have furnished a suretyship for a loan to
himself, he could have provided security in some other
form such as
by a pledge, a cession of a life insurance policy or the proceeds of
the retirement annuities that triggered his involvement
in this
scheme, or a bond of some sort over movable or immovable property.
Bearing in mind the factors mentioned above it cannot
be said that
the power of attorney limited the authority to furnish security to
R1.625 million.
[33] The third and decisive point is that all this was
to be in accordance with ‘normal banking requirements’.
Mr McLeod,
from Investec, testified without challenge that it was
Investec’s practice at the time and that of a number of other
banks,
when accepting limited suretyships from a number of
individuals in respect of a global debt, to require that each
suretyship be
for the individual’s share of the debt plus 25
per cent. That is how the amount of R2.031 million was determined.
Accordingly
this suretyship was provided in accordance with normal
banking requirements at that time.
[34] Taking these factors together the authority given
to RBA under the power of attorney to execute a suretyship on behalf
of Mr van
Oudtshoorn was not restricted to one for R1.625
million. Whilst I accept that the amount of the capital contribution
to the partnership
was relevant to determine the scope of the
authority, the other factors show that the power extended to the
execution of a suretyship
on the terms that Investec demanded and
received. As it happens the agreed amount for which judgment was
entered was less than
R1.625 million.
[35] The final point arises from the terms of the
suretyship itself. It commences by saying:
‘
I/We, the undersigned,
Diederik Johan Van Rheede Van Oudtshoorn ID No: 4002255038004
do hereby bind myself/ourselves unto and in your favour as surety …
for and co-principal debtor/s jointly and severally
with
Cormorant Aviation (Pty) Ltd acting in its capacity as agent for The
Kite Partnership …’
The deed then contains the conditions of the suretyship
and towards the end contains a clause that commences:
‘
I/We hereby certify by my/our signature
appended below that when this Suretyship was signed by me/us …’
Lastly the deed records that it was ‘done and
signed’ by Mr van Oudtshoorn, giving his address, at
Johannesburg on 21
April 1995. The problem is that Mr van
Oudtshoorn’s signature appears nowhere on the deed, which is
signed on each page by
Ms Dillon, without any qualification.
[36] It was submitted (although not
raised in either the pleadings or the heads of argument) that this
rendered the suretyship non-compliant
with the statutory requirements
for the validity of a deed of suretyship. Whilst the deed purported
to have been signed by the
surety, another person had signed it,
without any indication that the signatory was doing so on behalf of
the surety. It was contended
that such an indication was essential to
the validity of the deed of suretyship. The position in this case is
no different, so
the argument ran, from that where two people
executed suretyships at the same time and by mistake each signed the
deed intended
for the other’s signature. It was argued that as,
on the face of it, neither deed would comply with the statute, both
would
be formally invalid. If that were indeed so and they were
formally invalid this could not be remedied by way of rectification.
18
[37] The only issue in the present
case is whether the deed of suretyship is formally valid. If it is
then the omission by Ms Dillon
to state that she was signing on
behalf of Mr van Oudtshoorn could be dealt with either by way of
evidence that she was in fact
authorised or by way of rectification,
it matters not which. I turn then to the issue of formal validity. It
was said in
Fowles
19
that whilst care must be taken not to
defeat the intention of the statute ‘the formality requirements
must not be allowed
to become an unnecessary stumbling block to
rectification and, consequently, to giving effect to the true
intention of the contracting
parties’. To that end one examines
the deed – for formal validity depends on its terms alone –
and if the document
is reasonably capable of an interpretation
consistent with validity it should be held to be formally valid.
20
If there is ambiguity, and it is
capable of being given a meaning consistent with validity, preference
must be given to that meaning
that renders it valid.
21
[38] Adopting that approach in this case, a fair reading
of the document would result in the reader saying that it reflected
two
possible situations. The one would be that Ms Dillon had signed
it in error for some or other reason and the other is that she was
signing on behalf of Mr van Oudtshoorn. Those are the only possible
explanations for her having signed the deed. If it mattered,
I would
be inclined to say that the latter is the more probable because
people do not usually sign formal documents of this type
by mistake,
which is something different from signing a document that contains a
mistake. However it is unnecessary to go that
far. Once the deed is
capable of both constructions, one of which renders it formally valid
and the other of which renders it invalid,
it is the former
construction that we must adopt. That being so this deed must be
construed as having been signed by Ms Dillon
on behalf of Mr van
Oudtshoorn, as indeed it in fact was. The contention that it does not
comply with the statute falls to be rejected.
[39] That serves to dispose of the
merits of the appeal in favour of Investec. It renders it unnecessary
to consider the contentions
based on estoppel, waiver and
ratification. I am concerned that the pursuit of these contentions
appears to have substantially
protracted the trial and, at least in
regard to the estoppel and waiver, appear to have had little prospect
of success on legal
grounds.
22
However the attempt to rely on
ratification, if necessary, has some support in English authority
under the Statute of Frauds.
23
As all three were said to depend on
the same facts it is impossible at this stage to determine whether
and to what extent the pursuit
of the other two arguments caused the
proceedings to take longer than they would otherwise have done and
both parties are at fault
in that regard. There was lengthy evidence
in chief and cross-examination of witnesses on legal issues,
frequently based on a flawed
understanding of the law by all
concerned. The cross-examination on behalf of both parties was
directed in virtually every instance
at seeking to expose the witness
as dishonest, when flawed recollection; exhaustion in the light of
the length of the proceedings;
24
errors in documents, combined with
misguided attempts to explain them in the light of misconceptions of
the law; and an endeavour
to present themselves in the best possible
light were more probable explanations. Such cross-examination has
been the subject of
previous adverse comment by this court.
25
[40] There is one further matter
flowing from the decision by Bosielo J to award costs against Mr
van Oudtshoorn on a punitive
scale. He did so because he regarded the
approach to the defence to have been unduly obstructive; because he
found his behaviour
in claiming the deduction of losses from his
participation in the scheme from taxable income in the determination
of his tax liability,
whilst contending that the contracts
underpinning the scheme were invalid, ‘morally reprehensible’;
and because in
some respects he regarded Mr van Oudtshoorn’s
evidence as dishonest. All of this he characterised as ‘a
serious abuse
of the court process’ flowing from a trial in
which, so he said, ‘he knew that he had no
bona
fide
defence.’
[41] With respect that last finding
is inconsistent with the subsequent grant of leave to appeal to this
court. It may be that the
defences were technical, as is often the
case in situations such as this, but that is not of itself a reason
to grant a punitive
costs order. The record shows that Mr van
Oudtshoorn was concerned from an early stage with the scheme’s
apparent failure
to live up to its promise and the impact this might
have on his retirement. He relied extensively in entering into the
scheme on
financial advisers and when problems arose he relied on
legal advisers he regarded as experts. Many of the points taken were
legal
points manifestly taken on legal advice from others. Litigants,
even those who are legally qualified, are entitled to rely on the
legal advice that they receive. When faced with a claim of the
magnitude of the present one I think that Kekewich J was correct
in
saying in
Blank v
Footman Pretty & Co
26
that ‘the defendant is entitled
to put his back against the wall and to fight from any available
point of advantage’.
27
I appreciate that those remarks
related to a defendant who was successful on some and not other
defences, but in principle it cannot
matter that all the defences
advanced fail. Something more is required before a punitive costs
order is made.
[42] In the result the following order is made:
The appeal is upheld to the extent that the order of
the trial court is amended by the deletion of paragraph 1 thereof
and the
deletion of the words ‘on an attorney and client
scale’ in paragraph 4 thereof.
The appeal is otherwise dismissed with costs.
M
J D WALLIS
JUDGE OF APPEAL
Appearances
For appellant: N G D Maritz SC
Instructed by:
Gildenhuys Lessing Malatji, Pretoria
Honey Attorneys, Bloemfontein
For respondent: Lucas J van Tonder
Instructed by:
Glyn Marais Inc, Johannesburg
Lovius-Block, Bloemfontein.
1
No
doubt mindful of the provisions of s 103 of the Income Tax Act, the
developers of the scheme preferred to refer to it as a
project. The
description of it as a scheme is more accurate and its use does not
carry any pejorative overtones.
2
The
original action cited 28 defendants but all bar the present
appellant settled with Investec during the course of the trial.
3
Now
Polokwane.
4
This
was not spelled out in the partnership agreement or the agreement of
purchase and sale in respect of the aircraft, but was
explained by
Ms Dillon in her evidence.
5
Ms
Dillon said in her evidence that she met with Mr van Oudtshoorn on
13 March 1995 when he gave her the go ahead for his participation
in
the scheme, but he denied this. It is unnecessary to resolve this
issue as on any footing the instruction to go ahead was
given on 13
March 1995.
6
This
left Aerospace Express with a 14.98 per cent interest in the
aircraft held via its interest in the two partnerships.
7
Goldinger’s
Trustee v Whitelaw & Son
1917 AD 66
at 73.
8
Nedbank
Ltd v Van Zyl
[1990] ZASCA 12
;
1990 (2) SA 469
(A) at 475E-I;
Inventive Labour
Structuring (Pty) Ltd v Corfe
2006 (3) SA 107
(SCA) para 9.
9
Hill
v Faiga
1964 (4) SA 594
(W) at 596H-597A.
10
1
Lawsa
2 ed para 175 where the statement in the original
edition is repeated.
11
Kennedy
v De Trafford
[1897] AC 180
at 188.
12
Professor
David M Walker,
The Oxford Companion to Law
sv ‘agency’,
at 40.
13
Van
der Keessel
Theses Selectae
(Lorenz translation) para 704;
Mmabatho Food Corporation (Pty) Ltd v Fourie en ʼn ander
1985 (1) SA 318
(T) at 322G-I.
14
Hall
v Millin & Hutson
1915 SR 78;
R v Siegel & Frenkel
1943 SR 13 at 15.
15
Lawsa
Vol 27 para 373.
16
Kilroe-Daley
v Barclays National Bank Ltd
[1984] ZASCA 90
;
1984 (4) SA 609
(A) at 622I-623G.
17
Du
Preez v Laird
1927 AD 21
at 28.
18
Magwaza
v Heenan
1979 (2) SA 1019
(A) at 1029A-C read with 1026A-D;
Intercontinental Exports (Pty) Ltd v Fowles
1999 (2) SA 1045
(SCA) paras 9 and 10.
19
Para
11.
20
Fowles
para 18.
21
Inventive
Labour Structuring (Pty) Ltd v Corfe
2006 (3) SA 107
(SCA) para
11.
22
Trust
Bank van Afrika Bpk v Eksteen
1964 (3) SA 402
(A) at 411H-412C;
Philmatt (Pty) Ltd v Mosselbank Developments CC
1996 (2) SA
15
(A) at 26G-I and the authorities collected in
Durban City
Council v Glenore Supermarket and Café
1981 (1) SA 470
(D) at 476B-478B.
23
Maclean
v Dunn and Watkins
[1828] EngR 612
;
4 Bing 722
at 727
[1828] EngR 612
; ;
130 ER 947
at 949.
24
The
trial took some 22 days of evidence and argument during which Ms
Dillon gave evidence and was cross-examined for 7 days and
Mr van
Oudtshoorn for 6. In the case of Ms Dillon she had travelled from
the USA for the trial and was under pressure to return,
which would
have added to her tiredness and stress.
25
Africa
Solar (Pty) Ltd v Divwatt (Pty) Ltd
2002 (4) SA 681
(SCA) paras
26 and 37.
26
Blank
v Footman Pretty & Co
(1888) 39 Ch D 678
at 685.
27
Cited
in
Nel v Nel
1943 AD 280
at 288.