HNR Properties CC and Another v Standard Bank of SA Ltd (485/02) [2003] ZASCA 135; [2004] 1 All SA 486 (SCA) (28 November 2003)

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HNR Properties CC and Another v Standard Bank of SA Ltd (485/02) [2003] ZASCA 135; [2004] 1 All SA 486 (SCA); 2004 (4) SA 471 (SCA) (28 November 2003)

THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
Reportable
Case no: 485/02
In the
matter between:
HNR
PROPERTIES CC &
ANOTHER
Appellants
and
STANDARD
BANK OF SA LTD Respondent
_____________________________________________________
Coram
:
SCOTT, NAVSA, NUGENT, LEWIS JJA et MOTATA AJA
Date of hearing
: 11 NOVEMBER 2003
Date of delivery
: 28 NOVEMBER 2003
Summary:
Suretyship agreement requiring release by creditor to
be in writing – meaning of requirement. Release by waiver or
estoppel constituting
a release other than in writing and therefore
ineffective.
_____________________________________________________
JUDGMENT
_____________________________________________________
SCOTT
JA/…
SCOTT JA:
[1] The respondent, Standard Bank of South Africa Ltd (‘the bank’),
instituted action in the High Court, Cape Town, against the
two
appellants in their capacity as sureties. They had previously on 29
July 1993 bound themselves in two separate deeds of suretyship
to the
bank for the due and proper payment by a company called HNR Computers
(Pty) Ltd of its indebtedness to the bank. The liability
of the first
appellant was limited to a maximum of R1 000 000 while that
of the second appellant was unlimited. The two
deeds of suretyship
were otherwise in identical terms. Clause 15 of both provided that
‘the surety shall not be released from any
liability of the surety
hereunder or from any of the debtor’s obligations unless such
release be in writing signed on behalf of
the bank by a duly
authorised signatory.’ Certain defences raised by the appellants in
their plea were not pursued in this Court.
The defence in which they
persist is that they were released by the bank from their obligations
in terms of their respective suretyship
agreements. In this regard,
they contend, first, that a letter dated 20 April 1998 signed on
behalf of the Bank, and referred to
in evidence as a ‘facilities
letter’, on a proper construction, constituted a written release
within the meaning of clause 15
of the deeds of suretyship. Second,
and in the alternative, they contend that they were released by
virtue of the conduct of the
bank coupled with a waiver of the
requirement that the release be in writing and third, in the further
alternative, that the bank
is estopped from relying on the terms of
clause 15 of the suretyship agreements. The trial Court (Foxcroft J)
held that the appellants
had failed to discharge the burden of
proving a release on any of the grounds advanced. Judgment was
accordingly granted in the sum
of R1 000 000 against the
first appellant and in the agreed sum of R11 759 456,20
against the second appellant,
together with ancillary relief. The
appeal is with the leave of the Court
a quo
.
[2] In this Court counsel for the appellants sought an amendment to
the plea which would have the effect of introducing a defence,
based
on the reliance theory of contract, that an agreement had been
concluded which provided for the release of the appellants from
their
obligations under the suretyship agreements. There was no suggestion
that the introduction of the defence at this stage would
cause
prejudice to the bank and the amendment was granted without
opposition.
[3] The facts are largely common cause. The second appellant, Mr
Rasheed Hargey, and his partner, Dr H Gajjar, established HNR
Computers
(Pty) Ltd (‘HNR’) in 1987. Initially the business of
HNR was confined to the importation of computer software but with the
passage
of time it increased the range of computer services offered
to its clients. It operated from premises in the Cape owned by the
first
appellant, HNR Properties CC. The latter was a property owning
corporation whose assets in 1993 were valued at R1 000 000. In that
year the business of HNR expanded rapidly and additional funding was
required. The bank afforded it overdraft and other facilities
and, as
security for HNR’s indebtedness to the bank, the deeds of
suretyship referred to above were signed on 29 October 1993.
On the
same day HNR ceded its book and other debts to the bank. Dr Gajjar
did not bind himself as a surety as he was about to become
a sleeping
partner in the business.
[4] By May 1994 the facilities afforded by the bank had been
increased to include a short term overdraft facility of R3 million,
a
facility of R7 million for ‘forward exchange contracts’ and a
facility of R3 million from the bank’s factoring division.
That
year and the next were difficult years for HNR and its financial
position was of great concern to the bank. It pressed for better
security. It wanted an unlimited suretyship from Gajjar but settled
for an agreement in terms of which the latter subordinated his
loan
account in favour of the bank in terms of a so-called backranking
agreement. In the meantime, Hargey had ceded his loan account
to the
bank.
[5] In about 1996 HNR moved its head office to Johannesburg, where an
employee, Kassiem Parak, had previously established a branch.
At
about the same time Hargey acquired Gajjar’s shareholding in HNR
and Parak became a 20 per cent shareholder in the company.
[6] Notwithstanding the move to Johannesburg, it was convenient for
HNR to maintain its account with the bank at the latter’s branch
in
Claremont, Cape. However, the bank appointed a Mr David Linnell to
liaise with HNR regarding its banking requirements. Linnell
was a
commercial manager in the bank’s relationship department whose main
function was to obtain business for the bank. In that
capacity he was
obliged to keep abreast of the affairs of clients and to liaise with
them. But he had no authority to grant overdraft
or other facilities,
nor did he have authority to release sureties. Only the credit
division of the bank had such authority. If facilities
were required,
Linnell would apply to that division on behalf of the client for the
facilities in question. If they were sanctioned,
he was authorised to
convey that information to the client. He would do so by letter
referred to as a ‘facilities letter’. Such
letters were also sent
to the client on a regular basis to confirm the facilities available
to them.
[7] In 1997 Hargey and Parak became involved in negotiations which
culminated in the sale of their entire shareholding in HNR to
a
company, Front Page Holdings (Pty) Ltd, which in due course changed
its name to Infiniti Technologies Ltd (‘Infiniti’) and
on 19
February 1988 was listed on the Johannesburg Stock Exchange. The
shareholders of four other computer companies concluded similar
agreements so that Infiniti became the holding company of a group of
computer companies including HNR.
[8] Clause 6.3 of the purchase agreement in terms of which the shares
of Hargey and Parak were sold to Infiniti, dealt with existing
guarantees. It provided that subject to certain exceptions, which are
irrelevant for present purposes, -
‘
all guarantees, sureties or indemnities provided by
the Vendor in a personal capacity to any third party for and on
behalf of the
company shall be fully discharged and/or satisfied by
the Purchaser within 30 business days of the listing date and the
Purchaser
shall provide written proof of such a discharge and/or
satisfaction to the Vendor upon request by the Vendor ……’
Hargey testified that prior to the conclusion of the agreement he had
given a draft to Linnell. Subsequently, early in February 1998,
Hargey and Mr Kevin Berthold met with Linnell, principally to discuss
the granting of a group facility for all the companies in the
Infiniti group. By that time Hargey had been appointed the chief
executive officer of Infiniti with effect from the date of listing,
19 February 1998. Berthold had become the financial director.
According to Hargey he made it clear to Linnell during the discussion
that ‘the suretyship issue should be sorted out from the bank’s
point of view and that Mr Berthold was going to handle it from
the
company’s point of view’. This evidence was confirmed by Berhold
who emphasized that it was made clear to Linnell that the
sureties
were to be released. Linnell was not a witness at the trial; he had
died shortly before it commenced.
[9] Subsequently Linnell and Berthold met on a number of occasions.
Their discussions centred around the terms of the group facility
and
it appears that little, if any, mention was made of the existing
securities held by the bank. Berthold’s attitude was that
since
Infiniti was a listed company it should not offer any of its assets
as security. He was also anxious to obtain an overdraft
and other
facilities not only from the respondent bank but also from a
competitor, Nedbank Ltd. It appears that ultimately he had
no option
but to agree to Nedbank taking a cession of the group’s book debts.
As far as the respondent bank was concerned, he was
prepared to offer
no more than unlimited interlinking suretyships by the subsidiaries
and ‘downward’ unlimited suretyships by
Infiniti in favour of the
subsidiaries. The events leading to the respondent bank ultimately
affording Infiniti a group facility
are briefly the following. By
letter dated 19 February 1998 Linnell sought approval from the credit
division of the bank for an overall
credit facility of R41 million.
Mr Charles Moon, who was then the assistant general manager of the
credit division, had little confidence
in Infiniti and the
application was rejected on 4 March 1998. It was reinstated and again
considered by the credit division. On 11
March 1998 Linnell wrote a
letter to that division further motivating the application. In it, he
‘suggested’ that facilities
be granted to Infiniti subject to
confirmation that all existing security be cancelled. According to
both Moon and Mr Anthony Walker,
then a manager in the credit
division, the suggestion was unacceptable and simply ignored. On 17
March 1998 the application was again
declined by Moon. On this
occasion, however, it was referred to a Mr Godlonton who was a senior
manager in the bank and who considered
the application in a capacity
akin to that of an arbitrator. He upheld Moon’s decision but
thought that with additional information
regarding the prospects of
the group the bank could ‘try and structure something around [the
application]’. On 23 March 1998
Linnell met with Hargey and
Berthold and on the same day addressed a further letter to the credit
division in which he sought approval
for a reduced facility. The
application was finally approved and on 17 April 1998 a letter,
referred to in evidence as a ‘sanction
letter’, was sent to
Linnell authorising the facilities that were to be afforded to
Infiniti. On the strength of this letter Linnell
addressed a
facilities letter dated 20 April 1998 to Infiniti in which he set out
the facilities to be granted to the group and recorded
the terms on
which they were to be so granted.
[10] The letter requires closer scrutiny. It commences with an
unnumbered paragraph which reads:
‘
we refer to our recent discussions and are pleased to
confirm our agreement to the following facilities which would be
subject to
the terms and conditions on the reverse side of this page
and those indicated elsewhere in this agreement.’
Paragraph 1, under the heading ‘types of facility’, records the
facilities granted. They are a group overdraft with a limit of
R17,5
million as well as facilities in respect of ‘Stannic liquidating
credit’ and ‘forward exchange contracts’. Thereafter
there is a
reference to the specific terms and conditions applicable to Stannic
facilities. Paragraph 2 is headed ‘Security’
and reads:
‘
Security offered/proposed
> Unlimited interlinking suretyships by all the
trading entities.
> Downward Unlimited suretyships by Infiniti
Technologies Limited in favour of the trading entities.’
Another relevant paragraph is headed ‘Availment’ and reads:
‘
In terms of normal practice, we shall only permit
drawdown of the facilities sought once all the security documents
have been signed
and found to be in order.’
The letter was signed by Linnell on behalf of the bank and
subsequently on 22 April 1998 by Hargey and Berthold on behalf of
each
of the five trading entities.
[11] According to Berthold, on receipt of the letter of 20 April 1998
and following a conversation with Linnell at the time, the
details of
which he could no longer recall, he was satisfied that he had
achieved his goal and that the sureties had been released.
However,
his conclusion in this regard was inconsistent with subsequent
events. Some difficulty was experienced in putting the interlocking
suretyships in place. This was finally achieved in November 1998.
Nonetheless, both before and after April 1998, HNR continued to
utilise its existing overdraft facilities on the strength of the
securities held by the bank. Indeed, during the period February
1998
to December 1998, and in pursuance of applications by HNR to the
bank, the former’s overdraft and other facilities rose from
R5
million to approximately R8.6 million. It is clear that the increases
were both sought and granted on the strength of the suretyship
agreements signed by or on behalf of the appellants. This was readily
conceded by Hargey. Berthold’s assertion that the facilities
were
afforded in pursuance of the interlocking securities which were not
yet in place, is clearly untenable.
[12] Little more need be said to complete the picture. Hargey stepped
down from his position as chief executive of Infiniti in August
1998
following a disagreement between the members of the board. He
remained on as non-executive chairman of the company until May
1999
when he resigned and ceased to have anything further to do with the
company. In the meanwhile, the fortunes of the group declined
rapidly
and it ultimately went into liquidation owing millions of rands.
[13] Against this background, I turn to the grounds advanced on
behalf of the appellants in support of their contention that they
were released as sureties. The first is that the facilities letter of
20 April 1998, properly construed, amounted to a release in
writing
within the meaning of clause 15 of the deeds of suretyship. Such a
release, it was argued, was apparent from a reading of
the first
(unnumbered) paragraph and paragraph 2 of the letter (both of which
are quoted in para 10 above) in the light of the background
circumstances. In short, counsels’ contention was that the security
referred to in paragraph 2 had to be construed as the exclusive
security for the group facility and that by implication any other
security which the bank may have held in respect of the indebtedness
of any of the trading entities had to be regarded as cancelled.
[14] At the outset it is necessary to say something about clause 15.
Being a provision in a suretyship agreement it must be construed
restrictively and in favour of the surety. But that does not mean it
must be construed in a manner other than sensibly. If the language
is
clear effect must be given to it.
[15] There can be little doubt as to the object of the clause. In
Tsaperas and Others v Boland Bank Ltd
[1995] ZASCA 150
;
1996 (1) SA 719
(A) at
724D-E Harms JA observed in relation to a similar provision:
‘
The object of a clause such as the one under
consideration is fairly obvious. It protects the creditor. It enables
the creditor to
determine its rights with reference to the documents
in its possession. The creditor does not have to rely on the memory
of employees
or ex-employees. It protects the creditor against
spurious defences and unnecessary litigation.’
I would add that the need for a provision such as clause 15 is all
the greater where the creditor, as in the present case, is a large
organisation comprising different divisions and employing a large
number of people. The surety, on the other hand, is unlikely to
be
prejudiced. Institutions such as banks do not lightly release
sureties while the debt of the principal debtor remains extant.
If
there is release, it is in the interest of both parties that it be
readily capable of proof.
[16] The clause, of course, requires that the release ‘be in
writing’. This does not mean that when construing the writing it
is
impermissible to have regard to background circumstances or, in the
event of ambiguity, surrounding circumstances. Nonetheless,
in every
case the intention to release must appear from the writing itself. It
may be explicit or implicit. But if the latter, the
intention to
release must be apparent from the writing on an ordinary grammatical
construction of the words used or, stated differently,
the release of
the surety must be a necessary implication of the words used. It is
therefore not permissible to import into the writing,
whether by
reference to background or surrounding circumstances or any other
source, an intention to release which is otherwise not
ascertainable
from the actual language of the document relied upon. If the position
were otherwise the very object of the requirement
of writing would be
frustrated.
[17] Returning to the facts, the letter of 20 April 1998 contains no
reference whatsoever to the existing suretyships, let alone
to the
release of the appellants as sureties. The security referred to in
paragraph 2 of the letter is security ‘offered/proposed’,
ie
security not yet in existence. That does not as a matter of
linguistic construction justify, in my view, the inference that
sureties
under any existing suretyship were released; nor does a
reference to background circumstances assist the appellants. As I
have said,
a release which is not in writing cannot be imported into
the writing from some other source.
[18] It is necessary to add that the evidence does not, in my view,
establish an intention on the part of the bank to release the
appellants as sureties. The matter was discussed at a meeting in
February 1998 between Linnell, Berthold and Hargey. Although the
latter wished to procure his release, no agreement was reached. This
was conceded by Berthold. Both he and Hargey were aware that
only the
credit division of the bank had authority to release sureties and
that Linnell had no such authority. It was also common
knowledge that
any such release had to be in writing. It is true that in a letter
dated 11 March 1998 addressed to the credit division,
Linnell
suggested that the existing security be cancelled. According to Moon
and Walker, the suggestion was simply ignored. Both
insisted that it
was never the bank’s intention to release the appellants as
sureties. This is hardly surprising. The bank was
increasing its
exposure considerably by granting the facility. The security offered,
namely interlinking suretyships, was described
by Berthold as
‘technical’. In these circumstances, the bank would not lightly
have abandoned the existing security it held in
respect of the debts
of one of the main trading entities of the group. The first ground of
appeal advanced on behalf of the appellants
must therefore fail.
[20] The further grounds upon which the appellants rely in support of
their contention that they were released as sureties are waiver,
estoppel and the reliance theory of contract. I shall deal with each
in turn. Clause 16 of the suretyship agreements provides as
follows:
‘
No cancellation or variation of this suretyship shall
be of any force or effect whatsoever unless and until it is recorded
in writing
signed by or on behalf of the Bank and the surety.’
In
SA Sentrale Ko-op Graanmaatskappy Bpk v Shifren en Andere
1964 (4) SA 760
(A) this Court held that a term in a written contract
providing that all amendments to the contract have to comply with
specified
formalities is binding. The principle has been consistently
reaffirmed, most recently by this Court in
Brisley v Drotsky
2002 (4) SA 1
(SCA). (A non-variation clause is not necessary in a
contract of suretyship by reason of the provisions of s 6 of Act 50
of 1956
-
Tsaperas and Others v Boland Bank Ltd, supra,
at
725B-C - but that does not detract from the legal force of such a
clause where it exists.) Courts have in the past, often on dubious
grounds, attempted to avoid the
Shifren
principle where
its application would result in what has been perceived to be a
harsh result. Typically, reliance has been
placed on waiver and
estoppel. No doubt in particular circumstances a waiver of rights
under a contract containing a non-variation
clause may not involve a
violation of the
Shifren
principle, eg where it amounts to a
pactum de non petendo
or an indulgence in relation to previous
imperfect performance. (For an interesting discussion on the topic,
see Dale Hutchison
Non-variation Clauses in Contract : Any Escape
from the Shifren Straitjacket (
2001) 118
SALJ
720.)
But
nothing like that arises in the present case.
[21] The appellants contend that they were released as sureties by
virtue of the conduct of the bank, coupled with a consensual
waiver
of the provisions of clause 15. In my view, a factual basis for such
a contention was not established on the evidence. But
even if it had
been, it would have amounted, in the circumstances of the present
case, to no more than a variation of clause 15 which
was not in
writing. This is precluded by clause 16. To hold otherwise, would be
to render the principle in
Shifren
wholly ineffective.
[22] The same applies to the appellants’ reliance on estoppel. In
their plea, the appellants alleged that Linnell had represented
to
Berthold that the appellants were released from their suretyship
obligations and that, relying on such a representation, the
appellants
had acted to their prejudice. The representation was
clearly not established and in argument counsel sought to rely on a
representation
based more generally on the bank’s conduct together
with the letter dated 20 April 1998. But even if there had been such
a representation,
it would not assist the appellants. Where a release
is required to be in writing, as in the present case, it may perhaps
be possible,
in limited circumstances, to frame an estoppel in such a
way as not to violate the
Shifren
principle. It is
unnecessary to consider what those circumstances would have to be.
What is clear is that an estoppel cannot be
upheld when the effect
would be to sanction a non-compliance with provisions in a
suretyship agreement of the kind contained in
clauses 15 and 16. It
follows that the appellants’ reliance on waiver and estoppel must
similarly fail.
[23] Finally I turn to the defence, based on the reliance theory of
contract, that the agreement recorded in the facilities letter
contained a term releasing the appellants from their obligations
under the suretyship agreements. The contention, shortly stated,
is
this : the facilities letter contained a representation that it was
the bank’s intention that the appellants would be released
as
sureties once the ‘proposed/offered’ security was in place; the
subsidiary companies (represented by Hargey and Berthold)
which
accepted the offer understood the facilities letter to reflect that
to be the intention of the bank; in so accepting the offer
they
intended to confer on the appellants the benefit of the agreement to
the extent that it related to the latter’s release; the
fact that
the declared intention of the bank, as reflected in the facilities
letter, was not its true intention, does not assist
it as the letter
was such as to lead the accepting parties reasonably to believe that
the declared intention was the bank’s actual
intention.
[24] The reasonableness of the accepting parties’ belief is
crucial to the success of the appellants’ submission. This is
apparent
from the following passage in the judgment of Botha JA in
Steyn v LSA Motors Ltd
1994 (1) SA 49
(A) at 61C-E:
‘
Where it is shown that the offeror’s true intention
differed from his expressed intention, the outward appearance of
agreement flowing
from the offeree’s acceptance of the offer as it
stands does not in itself or necessarily result in contractual
liability. Nor
is it in itself decisive that the offeree accepted the
offer in reliance upon the offeror’s implicit representation that
the offer
correctly reflected his intention. Remaining for
consideration is the further and crucial question whether a
reasonable man in the
position of the offeree would have accepted the
offer in the belief that it represented the true intention of the
offeror, in accordance
with the objective criterion formulated long
ago in the classic
dictum
of Blackburn J in
Smith v Hughes
(1871) LR 6 QB 597
at 607. Only if this test is satisfied can the
offeror be held contractually liable.’
For the purpose of this leg of counsels’ argument it is accordingly
unnecessary to consider, as a separate issue, the meaning to
be
attributed to the offer. It is enough, following the approach adopted
by Botha JA in the
Steyn
case (at 62B-E), to pose what is
ultimately the ‘decisive question’, namely whether a reasonable
person in the position of Hargey
and Berthold would have believed
without further ado that upon acceptance of the offer, the release of
the appellants as sureties
would be procured, whether then or
sometime in the future.
[25] It was common knowledge that in terms of clause 15 of the
suretyship agreements the release of the sureties had ‘to be in
writing signed on behalf of the bank by a duly authorised signatory’.
As I have said, the facilities letter contains no reference
whatsoever to the existing suretyships or to the release of the
appellants as sureties. In these circumstances a reasonable person,
in my judgment, would not simply have assumed that his or her
understanding of the offer was the correct one. The obvious and
reasonable
step to have taken was to obtain clarity on the issue. Had
this been done, any misunderstanding would have been removed. In the
event,
neither Hargey nor Berthold made any such inquiries. They
simply signed the acceptance. Hargey, in his capacity as chief
executive
officer of Infiniti, thereafter permitted HNR to continue
to utilise its overdraft facilities on the strength of the existing
suretyships.
[26] In the result, the bank cannot be held to the accepting parties’
understanding of the facilities letter regarding the release
of the
sureties. It follows that this defence, too, must fail.
[27] The appeal is dismissed with costs.
D G SCOTT
JUDGE OF APPEAL
CONCUR:
NAVSA JA
NUGENT JA
LEWIS JA
MOTATA AJA