BOE Bank v Grange Timber Farming Co (Pty) Ltd (252/2006) [2007] ZASCA 4; [2007] SCA 4 (RSA) (5 March 2007)

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[2007] ZASCA 4
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BOE Bank v Grange Timber Farming Co (Pty) Ltd (252/2006) [2007] ZASCA 4; [2007] SCA 4 (RSA) (5 March 2007)

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IN THE SUPREME
COURT OF APPEAL OF SOUTH AFRICA
NOT REPORTABLE
Case no: 252/2006
In the matter
between
BOE
BANK LTD t/a BOE CORPORATE
.....................
APPELLANT
and
THE
GRANGE TIMBER FARMING CO (PTY) LTD
.....................
1
ST
RESPONDENT
THORPE
INSURANCE BROKERS (PTY) LTD
.....................
2
ND
RESPONDENT
N.J.T.
PROPERTIES (PTY) LTD
.....................
3
RD
RESPONDENT
THE
GRANGE PROPERTY OWNING CO (PTY) LTD
.....................
4
TH
RESPONDENT
ROBIN
PATRICK THORPE
.....................
5
TH
RESPONDENT
Coram:
STREICHER, HEHER and JAFTA JJA
Heard:
16 FEBRUARY 2007
Delivered: 5 MARCH 2007
Summary: Contract – interpretation – loan agreement conferring
power of review
in media res
on creditor – time for
repayment.
Neutral
citation: This judgment may be referred to as
BOE
Bank v The Grange Timber Farming Co (Pty) Ltd
[2007]
SCA 4 (RSA).
_____________________________________________________________________
JUDGMENT
__________________________________________________________________
HEHER JA
HEHER JA:
[1]
This appeal concerns the interpretation of the repayment terms of a
written agreement of loan.
[2]
The appellant, a commercial bank (hereinafter ‘the bank’) sued
five defendants in the Durban magistrate’s court for payment
of
R6 201 739,74. It relied on the agreement concluded with
the first defendant supported by undertakings of suretyship
provided
by the other defendants. The proceedings against the second defendant
were adjourned
sine
die
in
view of its alleged insolvency. It took no part in the subsequent
trial or appeals. The original first, third, fourth and fifth
defendants are the respondents in this appeal and will hereinafter be
referred to as ‘the defendants’. The defendants put the
bank to
the proof of its claim. Evidence was led by the parties relating to
the substance and quantification of the claim and the
circumstances
surrounding the conclusion of the loan agreement. The magistrate
dismissed the claim with costs. An appeal to the Natal
Provincial
Division suffered the same fate. That court granted leave to appeal
against the whole of its judgment.
[3] The bank has
undergone various commercial transformations which are no longer in
issue. As NBS Bank Ltd it entered into the agreement
under
consideration on 19 June 1991. The agreement was an instrument in a
tax avoidance scheme devised by attorneys and accountants
and used,
in the present case, primarily in the interest of the fifth
defendant, Mr Thorpe, an insurance broker. He controlled the
first,
second, third and fourth defendants. Pursuant to the scheme the
fourth defendant acquired a farm near Underberg which it leased
to
the first defendant. The latter planted trees on the farm. The whole
enterprise was financed by the loan from the bank.
[4] The commencement
date of the agreement was 1 March 1991. The bank agreed to lend the
first defendant money from time to time to
enable it to conduct ‘The
Farming Operation’. This was defined in the agreement as ‘the
establishment upon the Property of
pine and/or eucalyptus
plantations, the general upkeep of such plantations and the eventual
cutting and disposal thereof’.
[5] Clause 6 of the
agreement provided as follows:
‘
6.1 The Borrower
shall repay its entire indebtedness including interest and other
charges to NBS Bank on the Repayment Date.
6.2
All payments in terms hereof shall be made to NBS Bank at its
domicilium
citandi et executandi
.
6.3
NBS Bank shall be entitled to require that the Borrower repay its
entire indebtedness including interest and other charges as
at the
Review Date by giving written notice to that effect at any time prior
to 1
st
September, 1998 in
which event NBS Bank’s obligations to fund the Farming Operation
for that period after the Review Date shall
cease.
6.4 The Borrower
shall be entitled, without notice, to repay its entire indebtedness
to NBS hereunder, or any portion thereof, at
any time during the
currency of this Agreement.’
The agreement
defined ‘The Review Date’ in clause 1.8 thereof as 29 February
1999 and ‘The Repayment Date’, in terms of clause
1.9, is 28
February 2007.
[6] The evidence
disclosed that, at the time of concluding the agreement, the bank and
Thorpe contemplated that the defined operation
would be the sole
business of the first defendant, that its sole source of income would
be the sale of felled timber and that the
probable time at which the
proceeds would become available would be early in 2007. The inference
is irresistible that that is why
the parties agreed in clause 6.1
that repayment of the entire indebtedness of the first defendant to
the bank was to take place on
28 February 2007.
[7] The bank duly
advanced moneys from time to time and the first defendant proceeded
to plant and cultivate the trees. By late 1998
the capital amounts
advanced by the bank were in the region of R3,5 million and the
accrued (and capitalized) interest had assumed
similar proportions.
[8] The bank took
advantage of the review provision (clause 6.3) of the agreement.
During August 1998 it sent a notice to the first
defendant which
contained the following demand:
‘
We refer you
specifically to clause 6.3 of the said agreement in terms of which
the Bank shall be entitled to call upon you to pay
the entire
indebtedness, including interest and other charges as at the review
date, provided written notice is given to you prior
to 1
st
September
1998. In terms of clause 1.8 of the said agreement, the review date
is the 29
th
February
1999.
We
hereby notify you that the Bank requires the entire indebtedness
including interest and other charges to be paid by the 29
th
February 1999. The
entire indebtedness, including interest and other charges, at the
review date, shall be the sum of R6 201 739,74,
calculated as
follows:-
CAPITAL
R3 100 869,87
INTEREST
R3
100 869,87
TOTAL
R6
201 739,74
’
[9] In calculating
the interest the bank capped it at the level of the capital (which it
would
otherwise have exceeded) in order to comply with the
in
duplum
rule
1
.
[10] There was no
dispute that the bank was entitled to invoke its review power even
though the first defendant had not breached the
agreement. By the
time that the appeal was argued before us the first defendant had
also conceded that the bank had properly and
timeously communicated
its election to it. The ambit of disagreement was limited to the
meaning and legal consequences of clause
6.3.
[11] The defendant’s
contention, which had found favour in both lower courts, was that the
exercise of the election brought the
bank’s obligation to advance
further moneys to an end but did not terminate the agreement as a
whole; according to the plain wording
the obligation to repay the
whole indebtedness on the date fixed by
clause
6.1 remained, no other repayment date being stated or implied in
clause 6.3. The plaintiff’s action
to
recover its debt was therefore premature.
[12] The bank’s
stand, by contrast, was that the exercise of the election terminated
the whole agreement and the full indebtedness
at the review date
became immediately due and payable.
[13]
The principles of interpretation appropriate to the resolution of the
dispute are those summarised by Joubert JA in
Coopers
& Lybrand v Bryant
2
:
‘
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, as stated by Rumpff CJ
supra
;
(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.
Delmas
Milling Co Ltd v Du Plessis
1955
(3) SA 447
(A) at 454G-H;
Van
Rensburg en Andere v Taute en Andere
1975
(1) SA 279
(A) at 305C-E;
Swart’s
case
supra
at
200E-201A and 202C;
Shoprite
Checkers Ltd v Blue Route Property Managers (Pty) Ltd and Others
1994
(2) SA 172
(C) at 180I-J;
(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.
Delmas
Milling
case
at 455A-C,
Van
Rensburg’s
case
at 303A-C,
Swart’s
case
at 201B,
Total
South Africa (Pty) Ltd v Bekker NO
[1991] ZASCA 183
;
1992
(1) SA 617
(A) at 624G,
Pritchard
Properties (Pty) Ltd v Koulis
1986
(2) SA 1
(A) at 10C-D.’
[14] The present
contract serves a commercial purpose and should be construed
pragmatically: altruism in the repayment of loan finance
is not a
characteristic which may reasonably be expected from a financial
institution.
[15] It is clear, as
I have indicated, that the parties expected that if the contract ran
its full term the repayment date and the
cutting of the timber would
sufficiently coincide to enable the first defendant to use either the
proceeds or the imminent prospect
to repay the loan. Clause 6.1
covered that eventuality.
[16] Clause 6.3
catered for an entirely different scenario. After less than eight
years of a sixteen year contract the bank was entitled
to reconsider,
without let or hindrance or the necessity to justify itself, its
participation in the farming operation. Circumstances
which might
influence it to decide to send the notice for which the clause
provides are obvious: deteriorating market conditions
(then and as
foreseen), loss of confidence in the farmer, a substantial
opportunity to invest elsewhere for which capital was needed
or
simply a perceived desire for liquidity. In any of these
circumstances a long delay in the opportunity to recover the
investment
in the farming operation might well be very
disadvantageous to the bank.
[17]
The parties also contemplated other circumstances where the contract
would come to a premature end and the first defendant would
nevertheless be able or obliged to find the resources to repay its
obligations immediately. Clause 6.4 provides one example and clause
11 (the breach clause) another. Both provide specifically for
repayment of the entire indebtedness before the defined repayment
date.
Clause 6.3 likewise deals with an interim ‘termination’ of
the first defendant’s obligations, in this case at the instance
of
the bank. After eight years of growth the standing timber might well
have been expected to provide a substantial basis upon which
to repay
the debt. There is no need to speculate, however. There is simply no
sufficient reason to treat the proceeds of the crop
at the repayment
date as the one and only source of income available to the farmer
throughout the duration of the contract and to
interpret the contract
as if the proceeds of the mature felled timber were a critical
determinant in relation to obligations arising
from early
termination, as the Court
a
quo
seems
to have done.
[18] In the light of
the considerations to which I have referred in paragraph 16 one may
fairly conclude that the bank was hardly
likely to have agreed to the
suspension of repayment for eight years after it had in effect
brought to an end its business relationship
with the first defendant.
The latter, on the other hand, while it would no doubt have welcomed
such a suspension, could hardly have
contemplated the possibility of
consensus in that regard. (Perhaps that explains why this particular
defence was only introduced
by amendment shortly before the trial.)
It seems to me that the purpose of clause 6.3 in the context of the
overall context of the
agreement is against the defendant’s
interpretation. For the reasons which follow, the plain wording of
that clause decisively
favours the bank’s interpretation.
[19] Clause 6.3 is
constructed in two distinct halves: the first confers on the bank an
election to claim repayment while the second
sets out the consequence
of the election. The notice which the bank must give need only set
out the election and say nothing about
the consequence (as the bank’s
notice quoted above did). A notice in such a form (and which contains
details of the entire indebtedness
at the review date) can, in my
view, only amount to a demand to pay the specified amount at that
date. Moreover, it would make no
sense to notify the debtor that the
entire indebtedness, including interest and other charges at the
review date is to be paid on
the defined repayment date eight years
hence. If the agreement continues in existence the capital amount
must, in any event, be repaid
on that date in consequence of clause
6.1. But the rest of the notice would not merely be superfluous but
also misleading, since
the obligation under clause 6.1 is to pay not
only the interest at the review date but also all the (substantial)
interest which
accrues after that date as provided for in clause 5 of
the agreement and the annual administration fee of R250 provided for
in clause
15.2.
[20] If clause 6.3
had been intended to have the effect for which the defendants contend
one cannot but conclude that it would have
been constructed very
differently. The emphasis would have been on the cessation of the
bank’s obligation to advance moneys for
the farming operation after
the review date and, if a mention of repayment had been deemed
necessary or desirable, that would surely
have been done by reference
to clause 6.1.
[21] A second aspect
of the language used by the parties is this. The bank’s obligation
to ‘fund’ the farming operation was
discharged at two levels. One
involved the advance of moneys, the other allowed the first defendant
to use the moneys for whatever
period the agreement allowed. Where,
therefore, clause 6.3 refers to the cessation of the funding
obligation, it embraces, in the
absence of any indication to the
contrary, both aspects of the obligation. If the defendant’s
interpretation is applied, the effect
of the election would be to
bring the bank’s obligation to make future advances to an end but
leave the funding obligation intact
in relation to moneys already in
the hands of the first defendant at the review date, a consequence in
conflict with the language
chosen by the parties.
[22] A final,
unambiguous, indicator of the parties’ intention is to be found in
clause 4.5 which reads as follows:
‘
The Borrower’s
Loan Account shall not exceed:-
4.5.1 the sum of
FIVE MILLION FIVE HUNDRED THOUSAND RAND (R5 500 000,00) for
the period terminating on the Review Date;
and
4.5.2
the sum of TWENTY ONE MILLION FIVE HUNDRED THOUSAND RAND (R21 500
000,00) during the period commencing on the Review Date
and
terminating on the Repayment Date
if
this Agreement has not been terminated by NBS Bank in terms of clause
6.3 herein
.
(My emphasis.)
Counsel
for the defendants in the appeal was driven to submit that the words
‘this agreement’ refer only to the agreement to advance
money.
That submission finds no home in logic or language. The italicized
words would be superfluous if the loan agreement did not
terminate on
the review date. Moreover the expression ‘this Agreement’
unequivocally refers to the agreement of loan as a whole
3
and there is no
reason to imply any qualification.
[23] Having regard
to the clear indications in the words used by the parties in clause
4.5.2 and the structure, purpose and language
adopted in clause 6, I
have no doubt that the bank’s interpretation of its rights and
obligations must prevail. The giving of notice
in terms of clause 6.3
had the effect of rendering the entire existing indebtedness on the
review date immediately due and payable.
The action was accordingly
not premature.
[24]
At the trial the defendants attacked the bank’s calculation of
their alleged indebtedness. Before us counsel for the bank conceded
that adjustments needed to be made to the amounts claimed to cater
for debits not proved in evidence, interest incorrectly added
and a
payment of R1,4 million made by a surety after the service of summons
in the magistrate’s court. Both counsel agreed that
the correct
amount for the purposes of any order by this Court in favour of the
bank is R4 371 065,40 (comprised in equal parts of
capital and
capitalized interest as at the date of issue of summons) plus
interest
a
tempore morae
at
the rate of 15,5% per annum from date of issue of summons to date of
payment. Counsel so agreed in the light of the fact that the
in
duplum
rule
is suspended
pendente
lite
from
the date of service of the initiating process until judgment. Once
judgment has been granted, interest may run until it reaches
double
the capital amount outstanding in terms of the judgment
4
.
[25] The agreement
also contains an acknowledgment by the first defendant that, in
the
event of the bank instructing its attorneys to recover any overdue
amount, the borrower will pay such legal costs as the bank
may incur
on an attorney and own client basis.
[26] In the result
the appeal succeeds. The following order is made:
1. The order of the
Natal Provincial Division dismissing the appeal with costs is set
aside and replaced with the following order:
‘
(a) The appeal
succeeds with costs, such costs to be taxed as between attorney and
own client.
(b) The respondents
are ordered jointly and severally to pay to the
appellant:
(i) the sum of R4
371 065,40;
(ii)
interest
a
tempore morae
thereon
at 15,5% per annum from date of service of the summons until date of
payment;
(iii) costs of suit
as between attorney and own client.’
2. The first, third,
fourth and fifth defendants jointly and severally are to pay the
costs of the appeal, such costs to be taxed
as between attorney and
own client.
__________________
J A HEHER
JUDGE OF APPEAL
STREICHER JA
)Concur
JAFTA JA )
1
As
to which see
LTA Construction Bpk v
Administrateur, Transvaal
[1991] ZASCA 147
;
1992 (1) SA
473
(A) and
Standard Bank of South
Africa Ltd v Oneanate Investments (Pty) Ltd
(
in
liquidation
)
[1997] ZASCA 94
;
1998 (1) SA 811
(SCA).
2
[1995] ZASCA 64
;
1995
(3) SA 761
(A) at 768A-E.
3
It
is used in this broad sense in many other clauses of the agreement
eg 5.4, 5.6, 7.1, 8.1, 10,14.1, 15.1, 17, 18, 19 and 20. There
is no
instance of restricted meaning.
4
Standard
Bank of SA v Oneanate Investments
,
above, at 834H-I.