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[2008] ZASCA 100
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Lynn & Main Incorporated v Brits Community Sandworks CC (348/2007) [2008] ZASCA 100; 2009 (1) SA 308 (SCA); [2009] 1 All SA 116 (SCA) (17 September 2008)
REPUBLIC
OF SOUTH AFRIC
A
THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
Case number:
348/2007
In
the matter between
:
LYNN
& MAIN INCORPORATED
Appellant
and
BRITS
COMMUNITY SANDWORKS CC
Respondent
Neutral
citation:
Lynn
& Main Incorporated v Brits Community Sandworks CC
(348/2007)
[2008] ZASCA 100
(17 September 2008)
Coram
:
MPATI
P, FARLAM, HEHER JJA, KGOMO and MHLANTLA AJJA
Heard
:
8
MAY 2008
Delivered
:
17
SEPTEMBER 2008
Summary:
Cession
– Deed of suretyship – interpretation – two
sureties binding themselves to creditor, each as surety for
payment
of debts of the other – clause in deed permitting creditor to
cede rights under suretyship ‘on written notice
to us’ –
cession of rights under deed not invalid for want of prior written
notice but ineffective as against surety
until written notice given.
_____________________________________________________________________
ORDER
________________________________________________________________________
On
appeal from:
High
Court, Pretoria (Du Plessis J sitting as court of first instance)
1 The
appeal succeeds with cost
s,
such costs to be taxed on the scale as between attorney and own
client.
2 The
order of the court
a
quo
is set aside and replaced with the following:
‘
The defendant is
ordered to pay to the plaintiff:
(a) the sum of R550
932.02;
(b) interest on the said
sum calculated at the prime interest rate plus 1% from date of
judgment to date of payment;
(c) costs of suit on the
scale as between attorney and own client.’
___________________________________
__________________________________
JUDGMENT
__________________________________
___________________________________
MPATI
P
(HEHER JA, KGOMO and MHLANTLA AJJA concurring):
[1]
This
appeal concerns the validity of a cession of rights under a
suretyship agreement. Pursuant to a number of instalment sale
agreements between them, a close corporation named Crocodile
Transport CC (Crocodile) became indebted to Citibank NA (Citibank)
in
various amounts. The agreements provided that Crocodile would be in
breach if, among other things, it is wound up, whether
provisionally,
or finally.
[2] On
1 March 2001 the respondent and Crocodile signed a written document
headed ‘CROSS SURETYSHIP/CROSS GUARANTEE’,
in terms of
which the one bound itself ‘as surety for and co-principal
debtor in solidum’ with the other to Citibank
‘for the
due and punctual payment of all amounts and performance of any
obligation of whatever nature which may now or in
the future become
owing’ by them to Citibank. The deed of suretyship thus binds
the one as surety for the other for debts
owed by them, respectively,
to Citibank. Clause 11 of the deed of suretyship provides:
‘
Citibank
may at any time,
on
written notice to us
,
cede its rights and/or delegate its obligations under this suretyship
to a third party, in which event the third party shall be
deemed to
have been substituted for Citibank under this suretyship, and in
particular this suretyship shall operate as a continuing
covering
security for all debts, from time to time owed by the Debtor to that
third party.’
(My
underlining.)
[3]
On 24 April 2001 Citibank ceded to the appellant all its rights,
title and interest in and to all book debts owed to it, all
claims
against any third party and all book debt security.
1
Subsequently, Crocodile was wound up and on 1 October 2002 the
Manager, Remedial Management of Citibank issued a certificate of
balance, certifying that the balance outstanding ‘in respect of
the facility entered into by [Crocodile] and [Citibank]’,
together with interest, totalled R1 970 485.30. Clause 7 of the deed
of suretyship provides that such certificate ‘shall
be
prima
facie
proof of the contents thereof . . .’.
[4] Having
received an advance dividend from the liquidators of Crocodile, the
appellant, as cessionary, instituted action in the
Pretoria High
Court against the respondent, as surety, under the deed of suretyship
for the indebtedness of Crocodile, for payment
of the sum of R550
932.02, being the balance still outstanding, together with interest.
In its plea the respondent,
inter
alia
,
denied ‘that the rights and/or obligations in terms of the
purported suretyship were properly ceded to the [appellant] in
that
[the respondent] was not notified in writing of such intended
cession’. It consequently averred that the appellant
had no
locus
standi
to claim payment from it of the amount allegedly still outstanding by
Crocodile.
[5] The
court
a
quo
(Du Plessis J) held that the words ‘on notice to us’ in
clause 11 of the deed of suretyship qualify the words ‘Citibank
may at any time cede’ and thus mean that Citibank ‘may
cede on written notice and conversely . . . that it may not
cede
otherwise than on written notice’. Du Plessis J concluded that
the words ‘plainly mean that notice is a prerequisite
for a
valid cession’. It being common cause, or at least not in
dispute, that no prior written notice of the cession had
been given
to the respondent, the learned Judge held that Citibank did not
validly cede its rights under the suretyship to the
appellant and
therefore dismissed the latter’s claim with costs. This appeal
is with his leave.
[6] It
is trite that a cession is a method by which incorporeal rights are
transferred from one party to another.
2
It is an act of transfer from a creditor, as cedent, to the
cessionary, of a right to recover a debt (vorderingsreg) from a
debtor.
3
Although it entails a triangle of parties, viz the cedent,
cessionary and debtor, the cession takes place without the
concurrence
of the debor.
4
The transfer of the right is effected by the mere agreement between
the transferor (cedent) and the transferee (cessionary).
5
Notice to the debtor is not a prerequisite for the validity of the
cession ‘but a precaution to pre-empt the debtor from
dealing
with the cedent to the detriment of the cessionary’.
6
[7] In
the instance of cession of a principal debt, payment of which had
been guaranteed by a surety, ‘the cessionary, by
reason of
cession of the principal debt or obligation, acquires rights in
respect of the surety agreement as well’.
7
A formal cession of the rights against the surety is unnecessary.
8
It follows, as a matter of logic, that since notice to the principal
debtor of cession of the principal debt is not a prerequisite
for the
validity of the cession, notice to the surety is also not a
prerequisite for the acquisition of the rights in respect of
the
surety agreement.
[8] But,
as was said in
Pizani
,
9
this
does not mean that in all cases the cessionary necessarily acquires
rights against the surety upon cession of the principal
debt or
obligation. The terms of the cession or surety agreement might limit
the surety’s liability. The surety might have
been agreeable,
for example, to guarantee payment of the principal debt on condition
only that no cession of the principal debt
would take place, or that
it may be ceded only to a particular category of persons or
institutions.
[9] T
he
question, then, in the present matter is: what is the purpose of
clause 11 of the deed of suretyship and, in particular, what
is the
meaning of the words ‘on notice to us’? Do these words
mean that in the absence of a notice of cession there
shall be no
valid cession of the rights and obligations in respect of the surety
agreement?
[10] As
has been mentioned above, the court
a
quo
held that the words ‘plainly mean that notice is a prerequisite
for a valid cession’. It reasoned that the preposition
‘on’
bears the meaning ‘immediately after (and because of or in
reaction to) as a result of’. The court
said:
‘
[Citibank’s]
entitlement to cede (may at any time cede) arises only after and as a
result of the written notice (on written
notice). If the clause is
not understood to mean that the parties intended to limit
[Citibank’s] right to cede by requiring
prior written notice,
the words “on written notice” serve no purpose at all.
It then simply restates the law ([Citibank]
may at any time cede) and
adds to it a notice requirement that has no purpose. That, . . .,
would not be the
correct interpretation of the clause because that would render the
words meaningless.’
The court concluded that
the words ‘Citibank may at any time on written notice to us
cede’ mean that ‘prior notice
is a prerequisite for a
valid cession’.
[11] I
do not agree that by clause 11 of the deed of suretyship the parties
intended to limit Citibank’s right to cede ‘by
requiring
prior written notice’. The clause clearly stipulates that
Citibank ‘may . . . at any time, cede’ its
rights and
obligations under the suretyship to a third party. That right (to
cede) Citibank always had: it could cede its rights
in respect of
the principal debt, in which event its rights and obligations under
the suretyship agreement would pass on to the
cessionary without a
separate or formal cession or any notice to the surety.
10
It may well be that the clause requires a formal cession of the
rights and obligations under the suretyship agreement, but it
is not
necessary to consider that issue. This is because there was in any
event a formal cession, in the Deed of Cession, of ‘all
book
debt security’ (defined as ‘any suretyship’).
[12] It
has been held, correctly so
in my view, that a cession of rights is ineffective as against a
debtor until such time as he has knowledge of it and that payment
by
him to the cedent, without knowledge of the cession, renders him
immune to a claim by the cessionary.
11
Put differently, for a cession to be effective as against a debtor,
the debtor must have had knowledge thereof, which would serve
to
pre-empt him from dealing with the cedent to the detriment of the
cessionary. Where the debtor pays the cedent without knowledge
of
the cession and the surety is subsequently sued for payment of the
debt, the surety would be entitled to plead that the debt
had been
discharged and this at a time when the debtor had no knowledge of the
cession, a defence which the debtor would have been
entitled to
raise. But such defence would not be grounded on absence of
knowledge of the cession on the part of the surety, but
of the
debtor. There is no common law rule that the acquisition of rights
under a suretyship agreement following a cession of
the principal
debt is ineffective as against the surety until such time as the
surety has knowledge of the cession. It follows
that the reasoning
of the court
a
quo
that if the words in issue mean that the cession in this case will
become effective upon the giving of notice thereof to the surety
then
the clause would simply be restating the law, cannot be supported.
[13] It
seems to me that the purpose of clause 11 of the deed of suretyship
and the meaning of the words ‘on notice to us’
may be
ascertained from a reading of the clause as a whole. The dictionary
meaning of the preposition ‘on’ in isolation
offers no
solution, in my opinion. A reading of the clause as a whole,
applying the plain meaning of the words therein, reveals
that a
consequence of the cession and a written notice thereof to the surety
is that the cessionary ‘shall be deemed to have
been
substituted for Citibank under the suretyship’. Further, the
suretyship shall, thereupon (‘in which event’),
‘operate
as a continuing covering security for all debts from time to time
owed by the Debtor to [the cessionary]’.
What the clause
envisages, it seems to me, is that upon cession and notice thereof to
the surety, the cessionary steps into the
shoes of Citibank as
creditor (‘shall be deemed to have been substituted for
Citibank’), not only in respect of the
current debt, but in
respect of debts from time to time owed to it by the debtor and which
will be secured by the continuing cover
of the suretyship.
[14] In
my view, therefore, the validity of the cession does not depend on
when or whether or not written notice of the cession
was given to the
surety. If the intention of the parties, when including the words
‘on written notice to us’ in the
suretyship agreement,
was to convey that prior written notice was a prerequisite for a
valid cession then they failed to make their
intention clear when
they could easily have done so. I can think of no reason, if that
were their intention, why the phrase should
not have read: ‘on
prior written notice to us’. Read as a whole, clause 11 of the
deed of suretyship provides that
the rights and obligations under the
suretyship may be ceded; that on the giving of written notice to the
surety the cession shall
take effect as against the surety, with the
cessionary being substituted for Citibank (cedent) and the suretyship
operating as
a continuing covering security for all debts from time
to time owed by the debtor to the cessionary. This, in my view, is
the
only logical and commercially sound meaning to be given to the
wording of the clause. Whether the surety receives notice of the
cession one day before or one day after it takes place cannot provide
the slightest practical benefit to the surety. Interpreting
‘on’
as ‘after’ or ‘a reasonable time after’
offers the surety a technical excuse for avoidance,
which, even
though the surety may have known for years of the cession, will
defeat the practical operation of the clause.
[15] It
was, however, submitted on behalf of the respondent that the summons
was in any event premature in the sense that until
such time as the
respondent had had notice of the cession, the cause of action was
incomplete and the appellant had no
locus
standi
to sue the former on the cession. To counter this contention counsel
for the appellant, relying on the very short reported judgment
of
Watermeyer J in
Eaton
Robins Ltd v Visser
,
12
argued that the summons and particulars of claim constituted valid
notice of the cession.
13
[16] In
my view, the objection is overly technical. The present is not a
matter where summons was issued at a time when there was
no cause of
action,
14
or where a statutory requirement had to be complied with prior to
service of summons.
15
It is not in dispute that the principal debt was due and payable.
The appellant, as cessionary, claimed and received a dividend
from
the liquidators of Crocodile. All that was required to validate a
claim (not the cession) against the respondent was a notice
to it of
the cession. In
Garb
v Leoper Investment (Pty) Ltd
16
the
plaintiff, as cessionary, sued the defendant for provisional sentence
on a mortgage bond, which provided,
inter
alia
,
that ‘the mortgagee shall not cede or assign this bond without
the written consent of the [United Building Society]’.
The
defendant objected,
in
limine
,
that there was not annexed to the summons a copy of the original
document evidencing the consent of the United Building Society.
Rule
9(3) of the Uniform Rules provided that ‘copies of all
documents upon which the claim is founded shall be annexed to
the
summons and served with it’. Nicholas J said:
‘
In
the present case, the written consent of the United Building Society
to the cession is a condition precedent
to
its validity, and without it the plaintiff can have no claim against
the defendant. Consequently that written consent is clearly
one of
the documents “upon which the claim is founded” within
the meaning of the Rule.
It
follows that the summons is defective in that it failed to annex a
copy of this document. Consequently the plaintiff is not
entitled,
without an amendment, to provisional sentence. Counsel for the
plaintiff has now applied for an appropriate amendment
to the
summons, to read as follows:
“
copies
of the said mortgage bond and cession and consent by the United
Building Society are annexed hereto marked ‘A’
and ‘B’
and ‘C’ respectively”,
and
has handed in a letter by the United Building Society, . . .
consenting to the cession.
Mr.
Nestadt
,
on behalf of the defendant, has not been able to point to any
prejudice which the defendant can suffer if the amendment is granted
subject to a postponement and an appropriate order for costs.’
17
In
Eaton
Robins
18
the terms of a mortgage bond provided that the capital amount should
become payable upon notice to the mortgagor, but did not contain
the
usual provisions with regard to foreclosure upon failure to pay
interest. Upon failure by the mortgagor to pay interest the
mortgagee sued for provisional sentence. Watermeyer J granted
provisional sentence, holding that the summons constituted sufficient
notice to the defendant calling up the bond.
[17] In
the present matter counsel for the respondent did not point to any
prejudice which the respondent would suffer if the summons
were to be
held to constitute sufficient notice of the cession. I am satisfied
that the summons did constitute sufficient notice
of the cession to
the respondent. The objection raised must therefore fail.
[18] There
was, however, another string to the respondent’s bow. It was
argued on its behalf that the words ‘on written
notice to us’
in clause 11 of the deed of suretyship mean that notice must be given
to both the respondent and Crocodile.
It is common cause that no
such notice was given to Crocodile.
[19] There
is no substance in this contention. The respondent and Crocodile
signed the deed of suretyship as sureties, one guaranteeing
payment
of the debt of the other. It is in their capacities as sureties that
notice of cession is required to be given to both.
But in this case
Crocodile is not a surety, but a debtor. The suretyship agreement
does not require that notice of cession be
given to the debtor.
[20] The
appellant’s counsel asked for costs on the scale as between
attorney and own client in the event that the appeal
succeeds. This
was in terms of clause 2 of the deed of suretyship. Counsel for the
respondent did not oppose this request. I
am aware that there have
been conflicting decisions as to the effect of such an order.
19
In view of the attitude of the parties it is not necessary for the
conflicting decisions on the point to be considered in this
case.
[21] I
make the following order:
1
The
appeal succeeds with costs, such costs to be taxed on the scale as
between attorney and own client.
2 The
order of the court
a
quo
is set aside and replaced with the following:
‘
The
defendant is ordered to pay to the plaintiff:
(a) the sum of R550
932.02;
(b) interest
on the said sum calculated at the prime interest rate plus 1% from
date of judgment to date of payment;
(c) costs of suit on the
scale as between attorney and own client.’
………………
L MPATI P
FARLAM JA dissenting:
[21]
I
have had the advantage of reading the judgment prepared in this
matter by the President of this court. In view of the fact that
I am
of the view that the appeal must fail it is necessary for me to state
my reasons.
[22] In my
view the important word in clause 11 of the deed of suretyship is
‘on’ and for the reasons that follow I
think it means, ‘a
reasonable time after’. It is reasonable to assume that the
words ‘on written notice to us’
were inserted for a
reason. Prior to the cession the surety knew who the creditor was and
was prepared to deal with it if the debtor
fell into default. When a
new creditor came on the scene, through the cession of the debt, it
would be important for the surety
to know who the new creditor was.
If it felt that it was not prepared to go on standing surety for the
debt or debts secured by
the suretyship, regard being had to the
identity of the new creditor, it could have taken steps to ensure as
far as it could, that
debts then outstanding were paid or paid the
debt itself and sought to recover what it had paid from the debtor
and thereafter
given notice of termination of its liability under the
suretyship.
[23] I think
that it is important to bear in mind that on the wording of the
clause the creditor’s power to cede is qualified
by the words
‘on written notice to us’. These words are accordingly
not only used in order to achieve the purpose set
out in the second
half of the clause, ie, to make the suretyship operate as a
continuing one in favour of the new creditor. I agree,
however, that
the language used is ambiguous. In my view it is appropriate in this
case to apply the rule of construction to which
Davis AJA referred in
Cairns
(Pty) Ltd v Playdon & Co Ltd
(1948
(3) SA 99
(A) at 122 (viz ‘that in case of doubt, a burden is
to be construed as lightly as possible’) as well as the
contra
proferentem
rule
(it is clear that the wording of the clause emanated from the
appellant). In this case both rules point to the same conclusion,
viz
that the appeal must fail.
[24] In my
opinion the appeal should be dismissed with costs.
……………
.
IG
FARLAM
JUDGE
OF APPEAL
Appearances:
For
appellant :
a
m s
tewart
sc
Instructed by
Lynn & Main
Pietermaritzburg
McIntyre van der Post
Bloemfontein
For
respondent
a
a l
ouw
sc
h
p d
van
w
yk
Instructed by
Haupt & Earle
Pretoria
Symington &
de Kok Bloemfontein
1
Book debt security is defined in the deed of suretyship, among other
things, as ‘any suretyship’.
2
Hippo Quarries
(Tvl)(Pty)Ltd v Eardley
[1991] ZASCA 174
;
1992 (1) SA 867
(A) at 873E-F;
Uxbury
Investment (Pty) Ltd v
Sunbury
Investments (Pty) Ltd
1963
(1) SA 747
(C) at 752A
.
3
Johnson v Incorporated
General Insurances Ltd
1983 (1) SA 318
(A) at 330H-331H.
4
Lawsa
2nd, vol 2, para 6.
5
Johnson v Incorporated
General Insurance
, fn 3 at
331H.
6
Lawsa
,
fn 4, para 6.
7
Pizani v First Consolidated
Holdings (Pty) Ltd
1979
(1) SA 69
(A)
at
76G-78E.
8
Ibid.
9
Ibid, at 78F-H.
10
Pizani
,
fn 7 at 78C-E.
11
Pillay v Harichand
1976 (2) SA 681
(D) at 684F-H.
12
1926 CPD 245.
13
The particulars of claim allege that ‘[d]espite notice of the
cession and demand,
alternatively
notice hereby given and demand hereby made, the Defendant has failed
. . . to pay . . .’.
14
For which see
Lebedina
v Schechter and Haskell
1931 WLD 247
, but contra
Barclays
Bank International Ltd v African Diamond Exporters (Pty) Ltd
1976 (1) SA 93
(W).
15
Compare
S.A.N.T.A.M.
Insurance Company Ltd v Vilakasi
1967 (1) SA 246
(A).
16
1969 (4) SA 534
(W).
17
At 537A-D.
18
Above fn 12.
19
See Erasmus
Superior Court
Practice
E12-24 (service
30, 2008).