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[1992] ZASCA 178
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Penderis and Gutman NNO v Liquidators Short-Term Business AA Mutual Insurance Association Ltd (93/91) [1992] ZASCA 178; 1992 (4) SA 836 (AD); [1992] 2 All SA 505 (A) (28 September 1992)
CASE NO: 93/91
C M PENDERIS AND SOLOMON GUTMAN NNO
APPELLANTS
and
THE
LIQUIDATORS SHORT-TERM BUSINESS,
AA MUTUAL INS ASS LTD
RESPONDENTS
HARMS, AJA:
Case No. 93/91 J VD M
IN THE SUPREME COURT OF
SOUTH AFRICA
(
APPELLATE DIVISION
)
In the matter between:
C M PENDERIS AND SOLOMON GUTMAN
NNO
Appellants
and
THE LIQUIDATORS SHORT-TERM
BUSINESS,
AA MUTUAL INSURANCE ASSOCIATION LTD
Respondents
CORAM
: BOTHA, GOLDSTONE, VAN DEN HEEVER, JJA et
VAN COLLER, HARMS, AJJA
HEARD
: 10 SEPTEMBER
1992
DELIVERED
: 28 SEPTEMBER 1992
JUDGMENT
HARMS, AJA:
During August 1985 Nightingale Lingerie Manufacturers (Pty) Ltd ("the
insured") concluded a
2
written contract of insurance ("the policy") with AA
Mutual Insurance
Association Ltd ("the insurer"). The
policy was for short-term cover against,
inter alia
,
destruction or damage caused by fire to the insured's
property. The premium was payable monthly by debit
order and, provided clause 13 of the policy,
"(i)f any bank debit order be dishonoured
for lack of funds
all cover
under this Policy shall cease with effect from 16h00 on the last day of the last
period for which premium has actually
been paid." [Emphasis added]
On 2 October 1985, the insurer duly presented for
payment the debit order for the month of October 1985 to
the insured's bank, First National Bank of South Africa
Ltd ("the Bank"). It was done through the system of
the Automated Clearing Bureau (Pty) Ltd. In short,
that system has the effect that the amount of the debit
order was automatically entered against the insured's
banking account and simultaneously credited to the
insurer's banking account. In the meantime during the
3
afternoon of 1 October, a fire occurred at the insured's premises and
destroyed its plant and equipment. The Bank's manager, Mr Pitt,
on learning of
the fire, panicked. The cause of his concern was that the insured had extensive
overdraft facilities; its account
was actually overdrawn in a sum in excess of
R343000; and the machinery destroyed by the fire was hypothecated in terms of a
notarial
general covering bond to the Bank as security for the overdraft. He
gave immediate instructions for the freezing of the overdraft
facilities and, as
a result thereof, the debit was reversed by first debiting the insurer's bank on
2 October by means of a debit
note sent to it and, secondly, crediting the
insured's account with the amount of the premium on the same day.
The insurer rejected the insured's claim, contending that the insurance cover
had ceased on 30 September because the debit order had
been "dishonoured
4
for lack of funds" within the meaning of clause 13 of the policy. The insured
subsequently issued summons during December 1985 against
the insurer for an
order declaring that the policy was of full force and effect at the time of the
fire and that the insurer was
liable to indemnify it in accordance with the
terms of the policy. In the alternative, it claimed an indemnity or damages from
the
Bank (who was cited as the second defendant) on the ground that it had
breached a tripartite agreement between the insured, the insurer
and the Bank in
terms of which the latter, allegedly, had undertaken to honour the debit order.
By the time the matter came to trial
both the insured and the insurer's
short-term business had been liquidated and their respective liquidators
substituted for them.
The claims against both defendants were dismissed and the
judgment of Herman J in the Court
a quo
was reported
sub nom Penderis
& Gutman NNO v Liquidators of the Short-
5
Term Business, AA Mutual Insurance Association Ltd, and Another
1991
(3) SA 342
(C). The references to that judgment will be to it as reported.
An
application for leave to appeal was dismissed by the learned trial Judge but
leave was granted, pursuant to a petition addressed
to the Chief Justice, in
respect of the insurance claim; as far as the claim against the Bank is
concerned, leave was refused. The
present appeal lies thus between the insured's
liquidators (as appellants) and the insurer's (as respondents).
Before considering the issues as they appear from the reported judgment, it
is necessary to note that, although the policy was only
concluded on 22 August
1985, its effective date was 1 July 1985 and even though the premiums for the
months July, August and September
were paid only on 6 September the insured had
had insurance cover from 1 July. This was so because,
6
even though the policy provided that the indemnification thereby given was
"(i)n return for the premium", payment of the premium was
not a condition
precedent for cover. That much is clear from clause 13. See in this regard
S
A Eagle Versekerinqsmaatskappy Bpk v Steyn
[1991] ZASCA 109
;
1991 (4) SA 841
(A) at 846 A - G.
It follows that the party who alleges a cessation of cover in terms of clause
13, must prove it. Cf.
Resisto Dairy (Pty) Ltd v Auto Protection Insurance Co
Ltd
1963 (1) SA 632
(A) 645 A - B. (It may be noted in passing that the
October premium was tendered to the insurer on 18 October but that the tender
was rejected.) The onus involves, in the present case, proof of dishonour
(non-payment) of the debit order as well as that it occurred
for lack of funds.
The Court
a quo
found, as far as the first issue is concerned, that the
debit order was not met (at p 345 B - E). The correctness of this finding
was
not challenged. It is tantamount to a finding that a
7
debit order is in the nature of an electronic cheque; that the book entries
were provisional; and that the Bank's timeous reversal
of the entries resulted
in non-payment. See also
Volkskas Bank Bpk v Bankorp Bpk (h/a Trust Bank) en
'n Ander
[1991] ZASCA 57
;
1991 (3) SA 605
(A) 612 E - 613 A.
That brings me to the crucial question whether the dishonour occurred for
lack of funds. In answering that question in the affirmative
the learned trial
Judge held in effect that once the Bank decided to freeze the account on 2
October, any resultant failure to honour
the debit order had to be for lack of
funds (at p 346 B - C); it did not matter what the Bank's motive was (at p 345 I
- J) ; it
was the duty of the insured to keep its account in funds (at p 346 G -
H); and that it was impractical to burden an insurer with
the obligation to
establish the reason for every dishonour (at p 346 E). I am in respectful
disagreement with these findings
8
since they entail that the words "for lack of funds" perform no function in
clause 13 and are thus meaningless. In the ordinary course
of events the
dishonour of a debit order would be the result of a lack of funds but that is
not necessarily the case. It may be the
result of a malfunctioning of the
electronic system or because of some negligence on the part of the Bank. There
is no reason to
believe that the insurer (who was the scribe of the contract)
did not intend to bear such risks, especially since it was the party
who
insisted upon payment of the premium by means of a debit order. Berman J
seemingly placed some reliance on the wording of a "warning"
at the foot of the
authorisation given by the insured to the insurer to submit debit orders to its
banker and to the Bank to honour
them (at p 346 H - I). The warning was to the
effect that if a debit order is not met, "all cover under the Policy will cease
from
16h00 on the last day
9
of the period for which premium has been paid"; in other words, the
qualification contained in clause 13 that the dishonour had to
be for lack of
funds was not part of the warning. This approach cannot be justified: it was
never part of the respondents' case that
the warning was a term of the insurance
contract; nor that it amended clause 13. I also fail to see on what basis it
could be used
to interpret clause 13. In conclusion on this aspect of the case,
there is no reason why the words "lack of funds" in the context
of clause 13
should not bear their ordinary everyday meaning namely an absence of funds in
the designated bank account. See Concise
Oxford Dictionary (1990) s v
lack
: "for
lack of
owing to the absence of (
went hungry for
lack of money
)."
The insured did not have its own funds in the designated account. It had,
however, an overdraft facility. The history of this facility
is not clear
10
because the appellants led no evidence thereanent and because the bank
manager was a confused and unreliable witness. It appears from
the Bank's
documents that, at least since 26 January 1984, the insured had some overdraft
facilities. The Bank was not satisfied
with the security provided and insisted
upon the provision of "firm supporting security" in order to cover in full the
overdraft
debt. During March 1984 it was agreed that, subject to the
registration of a notarial general covering bond ("the bond") for R150000
hypothecating all the insured's machinery at its factory, an overdraft facility
of R260000 would be granted for a period of 12 months.
The bond was registered
during April 1984. The overdraft was extended and we find that on 12 September
1985 (i e two weeks before
the fateful fire) a facility of up to R350000 was
granted until the close of business in December. A request by the insured for
the
release of some other security held by the Bank was
11
turned down.
When the debit order was presented on 2 October the facility
had not been fully utilised. It was withdrawn, at least temporarily,
when it was
frozen on 2 October. The question then is whether the Bank was entitled to
suspend it. This question is of vital importance
because if the Bank was not so
entitled the dishonour was not by reason of lack of funds but because of an
unjustified act by the
Bank who, as lender, was obliged to provide the necessary
funds and to discharge the insured's indebtedness to the insurer from the
funds
so furnished.
The respondents' contention (as stated at the pre-trial conference) was, and
remained, that the Bank was entitled to suspend the overdraft
once the
subject-matter of the bond had been destroyed by the fire; and since the
overdraft was no longer in force, no funds were
available to satisfy the debit
order;
12
consequently, there was a dishonour according to clause 13 and the insurance
cover ceased as from 30 September. Having regard to what
has been said above in
respect of the onus it was incumbent upon the respondents to prove the Bank's
entitlement to suspend the overdraft.
The Court
a quo
considered this
question in the context of the appellants' case against the Bank and held that,
as a matter of law, if an overdraft
facility is granted on the strength of
certain security, and the security is extinguished, a bank can without notice
terminate the
facility forthwith (at p 349 D - E; p 350 A). Reliance was placed
upon
Volkskas Bpk v Van Aswegen
1961 (1) SA 493
(A) for this proposition.
That is not what that case held. The learned Chief Justice (Steyn CJ) was at
pains to point out that he
was considering the provisions of the overdraft
agreement in issue (see especially at p 495 G - H; p 496 A - B; p 496 E - F; p
496
H; p 497 D) and that he was
13
accordingly not formulating rules of general application. The statement in
the judgment (at p 496 F) that the right to a notification
of the termination of
the overdraft was dependent upon a contractual term to that effect must also be
seen in the context of the
facts of that case. The Court was there concerned
with a term of the agreement which was in the nature of a resolutive condition
and in such a case the resolution of the contract normally takes place
automatically. The rule, as formulated in
Swart v Vosloo
1965 (1) SA 100
(A) 115 D - G is, however, that, since the termination of a contract has
important consequences, the party who is entitled to terminate
can only do so
(in the absence of a contrary provision) by communication his election to the
other party. See also
Miller & Miller v Dickenson
1971 (3) SA 581
(A)
587 H -588 A. (In parenthesis it may appear strange that I criticize a ruling or
finding made by the trial court in
14
the course of the case against the Bank since leave to appeal against that
part of the judgment was refused. It must be borne in mind
that those findings
are not
res judicata
as between the present parties because the
respondents were not privy to that part of the litigation. Also, as counsel for
the appellants
readily conceded, any appeal against that part of the case was in
any event doomed, for reasons which are irrelevant for present
purposes.)
It
is therefore necessary to determine the terms of the agreement relating to
termination or suspension of the overdraft. The respondents
did not plead any
such terms; their contention as formulated above does not refer thereto; they
did not, either through cross-examination
or evidence, attempt to prove any
relevant terms. They merely relied upon the evidence presented on behalf of the
appellants and
the Bank.
The appellants' witness, Mr Frith, was asked under
15
cross-examination about the agreement of March 1984 relating to the
registration of the bond and he confirmed that it was a condition
for the grant
of the R260000 facility. No other questions relevant to the present issue were
asked of him. In particular, it was
never put to him that the facility could
have been terminated (provisionally or permanently) with (or without) notice
upon the destruction
of the machinery. Mr Pitt was called on behalf of the Bank.
He alleged that the facility was extended on the condition stated. The
Bank's
right to terminate or suspend the facility, he said, arose from a banking
practice or ruling. As to the question whether the
Bank was obliged, before
exercising this right, to notify the insured, he gave contradictory evidence
with the result that the learned
trial Judge was not prepared to hold that his
evidence could assist the appellants in discharging their onus
vis-a-vis
the Bank (see p 349 H - J read with p 348 B -
16
G) And, save for the finding that the facility was extended on condition of
the provision of the bond (which was common cause), the
trial court made no
findings relating to the terms of the agreement.
The fact that the
respondents failed in duty to plead the agreement (including its terms, express
or tacit) on which they relied,
makes it virtually impossible to draw a fair
conclusion from contradictary and unreliable evidence. Can it be said that the
respondents
established that the Bank could suspend the facility without notice
where the only witness who dealt with the issue gave conflicting
answers to the
question? I believe not. If Mr Pitt's evidence was not good enough to discharge
the appellants' burden of proof, the
selfsame evidence could not suffice to
discharge the respondents'. That is especially so where those parts of Mr Pitt's
evidence
on which the respondents have to rely do not even purport to deal
with
17
contractual rights. But that is not the end of the matter. The supposed term
of the agreement upon which the respondents' case depends,
is not consistent
with the terms of the bond. The bond itself spells out in great detail the
circumstances under which the Bank was
entitled to act against the insured
without notice - and destruction of the goods is not one of them. Clause 1 of
the bond accords
that right in the event of any default by the insured in the
observance or performance of any of the conditions of the bond, or its
failure
to discharge any obligation or liability to the Bank. Clause 16 grants a similar
right,
inter alia
, if the Bank has reason to believe that its interests
are in any way imperilled by any act or omission on the part of the insured.
Loss of the goods hypothecated is not mentioned, the probable reason being the
provisions of clause 5. They obligate the debtor to
insure "such of the
machinery ... as the Bank may decide" against
inter
18
alia
fire, in which event the policy of insurance must be ceded to the
Bank to be held as collateral security. The Bank, arguably, could
have believed
that with insurance and a cession in place, the destruction of the hypothecated
goods would not in itself be a reason
to withdraw without notice the overdraft
facility. But, even if that were not the reason for the omission,
expressum
facit cessare taciturn
- see
Barnabas Plein & Co v Sol Jacobson &
Son
1928 AD 25
at 30
in fin
. It follows that the respondents did not
establish that the Bank was entitled to act as it did on 2 October and that the
appellants
are consequently entitled to the declaratory orders sought.
As far as costs are concerned, a few issues have to
be dealt
with. First, the appellants applied for
condonation for the late filing of
part of the record.
The respondents consented thereto and an order was
made
at the outset of the hearing granting the condonation
19
and ordering the appellants to bear the costs of the application. Second, the
registrar informed the appellants, prior to the hearing,
that certain relevant
documents were not included in the record. In reaction six new volumes were
filed whereas the practical way
would have been to insert the few missing papers
into the existing record. The appellant's Cape Town attorney, very properly,
readily
agreed himself to bear the costs wasted by this unnecessary duplication.
Third, it was submitted on behalf of the respondents that
the costs of two
counsel could not be justified. I disagree. The case was of sufficient
complexity to merit the decision to employ
two counsel. Lastly, the costs of the
application for leave to appeal to the Chief Justice as well as to the Court
a quo
were reserved for the Court hearing the appeal. In the light of the
outcome of the appeal, it follows that the respondents must bear
these
costs.
20
The order, consequently, is as follows:
1.
The appeal is
upheld.
2. Paragraph (a) of the order of the court
a quo
is amended to
read:
"(i) It is declared that the insurance policy, annexure "A"
to the particulars of claim, was of full force and effect on 1 October
1985 when
the fire occurred and that the first defendant is liable to indemnify the
plaintiffs in accordance with the provisions
of the policy. (ii) The first
defendant is ordered to pay the plaintiffs' costs in respect of the claim
against them."
21
3. Paragraph (d) thereof is amended by substituting for "first defendant" the
word "plaintiffs".
4. The appellants' attorneys are to bear, in terms of their undertaking, the
costs of the second record.
5. Subject to paragraph 4 and subject to the order relating to the condonation
application, the respondents are to pay the costs
of the appeal, including the
costs relating to the applications for leave to appeal, and on the basis that
the employment of two
counsel was justified.
22
L T C HARMS
ACTING JUDGE OF APPEAL
BOTHA, JA)
GOLDSTONE, JA) CONCUR VAN DEN HEEVER, JA) VAN COLDER, AJA)