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[2019] ZASCA 47
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FirstRand Bank Ltd v Nedbank Ltd (1249/17) [2019] ZASCA 47 (29 March 2019)
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THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 1249/17
In
the matter between:
FIRSTRAND
BANK
LTD APPELLANT
and
NEDBANK
LTD RESPONDENT
Neutral
citation:
FirstRand Bank Ltd v
Nedbank Ltd
(1249/2017) ZASCA 47 (29
March 2019)
Coram:
Cachalia, Mbha and Van der Merwe JJA
and Dlodlo and Rogers AJJA
Heard:
7 March 2019
Delivered:
29 March 2019
Summary:
Contract – interpretation of cancellation clauses in
Invoice Discounting Agreement and Security Cession – effects of
out and out cession considered – Invoice Discounting Agreement
bestowed full ownership in Nedbank for book debts delivered
to it
before its cancellation – cancellation of a contract not
affecting accrued rights under it.
ORDER
On
appeal from:
Gauteng Division of the
High Court, Pretoria (Baqwa J sitting as court of first instance):
1 The appeal is dismissed with costs,
including the costs of two counsel.
2 The cross-appeal is upheld with
costs, including the costs of two counsel.
3 The order of the high court is set
aside and replaced with the following order:
‘
The
application is dismissed with costs, including the costs of two
counsel.’
JUDGMENT
Mbha
JA (Cachalia and Van der Merwe JJA and Dlodlo AJA concurring):
[1]
This appeal concerns the effect of the cancellation of an Invoice
Discounting Agreement (IDA) concluded between the respondent,
Nedbank
Ltd (Nedbank) and FT Group Holdings (Pty) Ltd (FT) on 4 September
2012. The appeal turns on a proper interpretation of
the IDA, and a
Deed of Pledge and Cession (Security Cession), that was executed by
FT in favour of Nedbank on the same date.
[2]
In terms of the IDA, FT sold its ‘Existing Debts’ and
‘New Debts’, as defined in the IDA to Nedbank
in terms of
a discounting facility which increased from an initial R70
million to R100 million on 17 January 2013 and to
R200 million on 2
April 2013. The ‘existing debts’ were those to be listed
from time to time in schedules which FT
would deliver to Nedbank. The
right, title and interest in the ‘Existing Debts’ passed
to Nedbank on the ‘Effective
Date’ of the IDA, namely 19
September 2012. The right, title and interest in the ‘New
Debts’ passed to Nedbank
as and when the relevant schedules
were delivered to it. These cessions were out and out cessions that
vested full ownership of
the debts in Nedbank. Such vesting was not
dependent on whether on payment by Nedbank of the purchase price of
the debts though
in the present case there is no suggestion that
Nedbank did not pay the purchase price.
[3]
In terms of the Security Cession, FT ceded all its other claims, ie
all claims other than the book debts sold to Nedbank in
terms of IDA
as security for all debts owed by it to Nedbank. It is common cause
that the Security Cession was a cession in
securitatem
debiti,
the effect of which was that FT
retained the
dominium
of
those claims, ie a reversionary interest therein. Nedbank, on the
other hand, acquired a right over them akin to a pledge.
[4]
Nedbank later discovered that FT had defrauded it. It transpired that
FT had been double discounting: it had ceded the same
book debts to
other banks and had sold it inflated and fictitious claims. Thus on
11 May 2012, FT executed a written Cession of
Debts whereby it ceded
its book debts to the appellant, FirstRand Ltd (FirstRand), as
security for an overdraft and a term loan
facility (the FirstRand
Cession). It is common cause that the FirstRand cession constituted a
cession in
securitatem debiti
.
[5]
Upon discovery of this fraud, Nedbank cancelled the IDA. It gave
notice thereof in its founding affidavit in an application
for the
winding-up of FT, on 29 July 2013. FT was provisionally wound up on 6
August 2013 and the provisional order was made final
on 2 October
2013. At the time of cancellation of the IDA, Nedbank held unpaid
book debts purchased from FT with the aggregate
face value of R93
million.
[6]
FirstRand contended that when Nedbank cancelled the IDA, the R93
million worth of book debts that it had purchased and paid
for,
automatically reverted to FT (and subsequently to the liquidators).
On the other hand Nedbank, relying on the rule in
Walker’s
Fruit Farms Ltd v Sumner
,
[1]
providing
that cancellation of a contract did not affect accrued rights under
it, took the stance that as it had acquired full ownership
of those
book debts, its accrued right to those book debts was not affected by
the cancellation of the IDA.
[7]
FirstRand based its contention on the following provisions of the IDA
and the Security Cession. Clause 26 of the IDA provides:
‘
26.
CESSION IN SECURITATEM DEBITI
the
seller shall sign a cession agreement, in terms of which the seller
cedes: -
26.1.1
all its right, title and interest in and to its existing and future
claims and book debts that do not form the subject of
the sale as
contemplated herein, and
26.1.2
with effect from termination (for whatever reason) of this agreement,
all its right, title and interest in and to its existing
and future
claims and book debts that do form the subject of sale as
contemplated here to Nedbank in
securitatem debiti
for all its
obligations it may have or incur towards Nedbank. The parties confirm
that such rights are automatically ceded without
further notice.’
Clause
1.5 of the Security Cession provides:
‘
.
. . but excluding, for the duration of the Invoice Discounting
agreement entered/ to be entered between Nedbank and me/us, debts
sold to Nedbank on the terms of and pursuant to the said Agreement,
and subject to clause 29 hereof.’
Clause
29 of the Security Cession provides:
‘
In
the event of the termination of the Agreement referred to in clause
1.5 above, this cession and pledge shall be effective in
respect of
all debts, claims or amounts whatsoever owing or becoming due to
me/us.’
[8]
FirstRand’s application to the Gauteng Division of the High
Court, Pretoria (the high court) in terms of which it sought,
in the
main, an order that Nedbank pay to the liquidators of FT the proceeds
of FT’s current and future book debts in respect
of which
Nedbank had acquired full ownership, was dismissed. The high court
nonetheless granted FirstRand limited relief, in respect
of book
debts that were not in fact part of the FirstRand’s claim.
[9]
In dismissing FirstRand’s main relief for payment of the book
debts that FT delivered to Nedbank before 29 July 2013,
the high
court found that the language of clause 26.1 of the IDA and clause 29
of the Security Cession, was consistent with Nedbank’s
interpretation and irreconcilable with FirstRand’s.
[10]
This appeal, with leave of the high court, is against the dismissal
of FirstRand’s main relief. Nedbank cross-appeals
against the
limited relief that the High court granted to FirstRand. Pertinently,
the issue in this appeal concerns the fate of
the R93 million worth
of book debts that FT already sold and delivered to Nedbank and for
which it received payment from Nedbank
prior to termination of the
IDA.
[11]
FirstRand persists in contending that clause 26.1 of the IDA and
clause 29 of the Security Cession offer a justification for
a
departure from the
Walker’s Fruit Farm
rule. It contends
that these provisions had the following effect on the cancellation of
the IDA:
(a) All FT’s claims, including
the aforesaid R93 million worth of book debts sold and delivered to
Nedbank, were automatically
rendered subject to the Security Cession
and their
dominium
automatically reverted to FT.
(b) Whereas Nedbank had previously
acquired ownership of the book debts that it had purchased from FT,
it now merely held them in
pledge under the Security Cession.
(c) Effectively,
Nedbank not only lost its ownership of the book debts it had
purchased from FT, but it was left with a mere Security
Cession over
them that ranks after the FirstRand Cession.
[12]
The principles governing the interpretation of contracts are now
firmly established. Contracts must be construed by having
regard to
their language, context and purpose in what is a unitary exercise. A
sensible meaning is to be preferred to one that
leads to insensible
or unbusinesslike results or undermines the apparent purpose of the
contract.
[2]
The process
is objective and is aimed at what the parties must be taken to have
intended, having regard to the words they used in
the light of the
document read as a whole and of the factual matrix within which they
concluded the contract.
[3]
[13]
In accordance with these principles, it is necessary to consider the
language, context and purpose of the clauses under consideration.
A
striking feature of the context in which the two clauses must be
interpreted is that the IDA provided for the transfer of full
ownership of FT’s book debts to Nedbank, resulting in FT not
retaining any rights in such book debts. This is made clear,
as the
high court correctly found, by the following provisions of the IDA:
(a) Clause 3.1 states that FT
would sell its book debts to Nedbank and clause 6 determines the
purchase price Nedbank would
pay for them.
(b) Clause 3.2 says that FT’s
delivery of the book debts to Nedbank “shall constitute out and
out cession thereof and
Nedbank shall become the absolute holder of
such debts.” It adds that until FT repurchases a debt from
Nedbank, it shall
have no rights thereto, whatsoever.
(c) Clause 5.1 says FT cedes to
Nedbank ‘all its right, title and interest in and to’ its
existing debts.
(d) Clause 5.2 says that FT cedes ‘all
its right, title and interest in and to’ its future book debts
to Nedbank for
value received.
(e) Clause 5.7 expressly states these
cessions ‘will be out and out cessions’ and not ‘cessions
in
securitatem debiti’.
(f) In clause 9.1 the parties agree
‘that ownership of the Existing Debts will pass to Nedbank on
the Effective Date, notwithstanding
that the Purchase has been paid
or has not been paid in full by Nedbank to the Seller’.
(g) In clause 9.2 the parties agree
that ‘ownership of the New Debts will pass to Nedbank on
delivery thereof, notwithstanding
that the Purchase Price has not
been paid in full by Nedbank to the Seller’.
(h) Clause 12 provides:
‘
SCHEDULE
OF DEBTS, DELIVERY OF INVOICES AND MONTHLY CERTIFICATE
12.1
The Seller will on the Effective Date deliver to Nedbank a schedule
in such form as Nedbank may specify and (by way of electronic
download if required by Nedbank) notifying Nedbank of the existence
of all of the Existing Debts and thereafter from time to time
(but
not more than once every 7 days or at such other interval as Nedbank
may agree), the Seller will deliver further schedule
in respect of
the New Debts.
12.2
With each schedule, the Seller will deliver to Nedbank the original
or a copy of the Invoice referred to therein or computerised
listing
in a form acceptable to Nedbank or a combination thereof and proof of
delivery and any other documents which Nedbank in
its absolute
discretion may require together with such proof as Nedbank may
require of the performance of each of the contracts
giving rise to
the Debts, together with the terms of each such contract’. (My
emphasis.)
[14]
The high court accordingly found that it was apparent from the
clauses referred to, that the parties sought to make it ‘abundantly
clear’ that cessions of book debts to Nedbank in terms of the
IDA, were out and out cessions. Professor Christie describes
the
effect of such a cession as follows: -
‘
The
effect of an absolute cession will be examined first. It divests the
cedent of all the rights ceded, the extent and nature of
these rights
being a matter of interpretation of the contract of cession, and
vests them in a cessionary. . . .’
[4]
[15]
FirstRand particularly relies on clause 26.1.2 of the IDA for its
contention that book debts that had been sold and delivered
to
Nedbank under the IDA, became subject to the Security Cession. The
high court correctly found that this interpretation is incompatible
with the language of the clause. It only requires FT to cede to
Nedbank ‘all its right, title and interest in and to its
existing and future claim’.
[16]
This is so because on cancellation of the IDA, FT no longer had any
right, title or interest in its book debts that had been
delivered to
Nedbank. Its right, title and interest in these book debts were ceded
to and thereafter vested in Nedbank. FT therefore
could not cede
rights to Nedbank under the Security Cession that no longer vested in
it.
[17]
FirstRand’s interpretation of clause 26.1.2 is thus
incompatible with its language because its operation is confined
to
claims of which the right, title and interest still vest in FT.
Clause 26.1.2 cannot apply to FT’s book debts already
sold and
transferred to Nedbank. Although clause 26.1.2 deals with claims and
book debts that do form the subject of sale under
the IDA, they are
specifically qualified as claims and book debts that vest in FT. Thus
clause 26.1.2 applied only to FT’s
existing and future book
debts that had not yet been sold and delivered to Nedbank at the time
when the IDA was cancelled. These
of necessity must fall under the
Security Cession after the IDA has been cancelled and no longer
existed.
[18]
FirstRand’s interpretation of the Security Cession suffers from
the same defect. It provides that when the IDA is cancelled,
the
Security Cession is extended to all claims of whatever nature ‘owing
or becoming due to me / us’, that is, to FT.
Thus, it is quite
clear that this could not have included FT’s book debts that
had already been delivered to Nedbank. They
were, as the high court
correctly found, owing and due to Nedbank.
[19]
The purpose of clause 26.1 of the IDA and clauses 1.5 and 29 of the
Security Cession is clear and sensible. They recognise
the transfer
of FT’s book debts under the IDA. These book debts are
accordingly excluded from the Security Cession. Cancellation
of the
IDA clearly had only a prospective effect. It did not affect past
sales concluded under the IDA. They remained undisturbed
under the
Walkers’ Fruit Farm
rule.
[20]
FirstRand’s interpretation leads, as Nedbank submitted, to
quite bizarre results. It would mean that despite the fact
that
Nedbank cancelled the IDA as a result FT’s fraudulent conduct,
Nedbank would be stripped of the book debts that admittedly
then
vested in it, without requiring FT to repay the purchase price it had
received for them. Such absurd outcome could clearly
not have been
intended. The high court correctly found that Nedbank’s
interpretation ‘makes good business sense and
that it must
prevail over FirstRand’s interpretation that is unbusinesslike
to the point of being absurd’.
[21]
Clause 17.5 of the IDA also supports Nedbank’s interpretation.
It provides that upon the occurrence of certain listed
events,
including when Nedbank gives notice to terminate the agreement,
Nedbank would be entitled to demand that FT repurchase
all or any of
the debts at a repurchase price. Clause 18.6 of the IDA further
fortifies Nedbank’s interpretation. It provides
that in the
event of cancellation, FT’s obligations will continue in
respect of each debt purchased by Nedbank prior to such
cancellation
and remain of full force and effect until all amounts due to Nedbank
have been paid in full. These clauses are clearly
incompatible with
FirstRand’s interpretation that on cancellation of the IDA, all
book debts automatically revert to FT,
subject to a cession in
securitatem debiti
.
[22]
In attempt to avoid this difficulty, FT argued that clause 17.5 only
dealt with termination and not cancellation. In my view
clause 17.5
does not exclude termination as result of cancellation. In any event,
clause 18.6.5 puts this aspect beyond any doubt
by expressly
providing for the effect of cancellation. In light of what I have
stated above, this appeal must fail.
[23]
I now turn to consider Nedbank’s cross-appeal. Whilst the high
court was correct in its interpretation and findings regarding
the
IDA and the Security Cession, it is apparent that the learned Judge
mistakenly thought that Nedbank had laid claim to FT’s
book
debts beyond the R93 million worth of book debts.
[24]
It is however common cause that FirstRand’s claim was confined
to the book debts which FT had delivered to Nedbank in
terms of the
out and out cession. FirstRand never alleged that Nedbank laid claim
to any other book debts and did not seek to defend
the judgment of
the high court in respect of its finding in this regard.
[25]
As the high court correctly concluded that FirstRand’s claim to
the R93 million worth of book debts which FT had delivered
to Nedbank
before 29 July 2013, should fail, it ought to have dismissed
FirstRand’s application with an appropriate order
as to costs,
as Nedbank was entirely successful in its defence.
[26]
I accordingly make the following order:
1 The appeal is dismissed with costs,
including the costs of two counsel.
2 The cross-appeal is upheld with
costs, including the costs of two counsel.
3 The order of the high court is set
aside and replaced with the following order:
‘
The
application is dismissed with costs, including the costs of two
counsel.’
_______________
B H Mbha
Judge of Appeal
Rogers
AJA (Cachalia JA concurring):
[27]
I agree with my colleague Mbha JA’s judgment. I wish to add a
few words of my own on the significance of clause 17.5.4
of the IDA
in the interpretation of clause 26.1.2 thereof. Clause 17.5.4 is one
of several listed circumstances in which Nedbank
may require FT to
repurchase debts sold to and vesting in Nedbank. That circumstances
is ‘the giving of notice by Nedbank
to [FT] to terminate this
agreement’. Clause 17.5.4 shows unambiguously that, upon
termination of the IDA, the re-acquisition
by FT of the sold book
debts was not an automatic consequence. Nedbank had an election
whether to require FT to repurchase such
debts. Furthermore, if
Nedbank elected to require FT to repurchase the debts, re-cession
(and thus the re-vesting of title to the
debts in FT) would only take
place upon Nedbank’s receipt of the ‘Repurchase Price’
as defined. In that regard,
clause 17.6 provides:
‘
Nedbank
undertakes, upon receipt of the Purchase Price, to cede such Debt [ie
the repurchased debt] to [FT] and [FT] undertakes
to accept such
cession.’
This
is precisely what one would expect commercially – Nedbank would
not part with purchased book debts for which it had paid
without
getting the purchase price back from FT.’
[28]
If upon termination there is the election set out in clause 17.5.4,
there can be no question of debts automatically re-vesting
in FT
pursuant to clause 26.1.2. As my colleague has pointed out, FNB’s
counsel sought to escape the implications of clause
17.5.4 by arguing
that that clause only dealt with termination on notice, meaning –
counsel submitted – termination
on three months’ notice
in accordance with clause 25.3. There was a difference, he argued,
between termination on notice
and cancellation for breach.
[29]
Whatever merit this semantic distinction may have in other contexts,
I do not regard it as sound in relation to clause 17.5.4.
The
distinction urged by counsel would give rise to an unreasonable and
unbusinesslike result. Nedbank’s right to require
FT to
repurchase sold debts is clearly a valuable mechanism in its arsenal
of remedies. Why would this valuable remedy be available
to FT when
it terminates the IDA on three months’ notice but not when it
terminates the agreement on account of FT’s
breach? One would
regard the latter as an a fortiori case for the conferral of the
remedy. Indeed, one of the circumstances in
which Nedbank may require
FT to repurchase sold debts is if FT is in default or commits any
breach of the IDA (see clause 17.5.1).
This is perfectly
understandable. The parties could not have intended that Nedbank
would lose this right if it took the further
step of cancelling the
agreement on account of the default or breach in question.
[30]
It was also pointed out to counsel that the word ‘termination’
is the very word used in clause 26.1.2. He was then
driven to argue
that there was a distinction between ‘termination (for
whatsoever reason)’ in terms of clause 26.1.2
and termination
on notice in terms of clause 17.5.4, the former – but not the
latter – including cancellation. Again,
I do not regard the
distinction as sound in the present case. When a party cancels a
contract due to breach, it would be perfectly
natural to describe the
result as a termination of the contract. Furthermore, a decision to
cancel which is not notified to the
other party has no effect, in
other words notice of termination is a necessary element of
cancellation (
Swart v Vosloo
1965 (1) SA 100
(A) at 105G).
[31]
However, even if the distinction for which counsel argued were valid,
it would not remove the obstacle which clause 17.5 poses
to
FirstRand’s interpretation of clause 26.1.2. The interpretation
of the latter clause must apply uniformly to all forms
of
termination. The terminations contemplated in clause 26.1.2 are
terminations for whatsoever reason. Termination by giving three
months’ notice would be one such form of termination. So would
termination of the IDA by FT in accordance with the IDA’s
provisions (see clause 17.5.5). The interpretation of clause 26.1.2
has to be capable of sensible operation inter alia in circumstances
where the IDA has been terminated by Nedbank or FT as contemplated in
clauses 17.5.4 and 17.5.5. If – as must be the case
–
there is no automatic re-vesting of sold book debts where the IDA is
so terminated, clause 26.1.2 cannot be construed as
providing for
automatic re-vesting in any circumstances.
______________________
O L Rogers
Acting Judge of Appeal
APPEARANCES:
For
Appellant: D M Leathern SC (with him L Maintjies)
Instructed
by: Rorich Wolmarans & Luderitz Inc, Pretoria
Van
der Berg Van Vuuren Attorneys, Bloemfontein
For
Respondent: W Trengove SC (with him C Steinberg)
Instructed
by: Kim Warren Inc t/a KWA Attorneys
c/o
Manamela & Ass Inc, Pretoria
Hill
McHardy & Herbst Inc, Bloemfontein
[1]
Walker’s
Fruit Farms Ltd v Sumner
1930
TPD 394
at 401, as Greenberg J explains:
‘
No doubt it
is correct that, where there is repudiation and where the other
party elects to treat the contract as at an end, the
latter cannot
thereafter enforce the contract. But it appears to me that this only
applies to the executory portion of the contract;
but where a
certain right has accrued to the one party before the election, such
right is not affected after the election. He
treats the contract as
at an end as from the date when he makes his election; up to that
date the rights have come into existence
and can be enforced.’
See
also
Crest Enterprises v Rycklof Beleggings (Edms) Bpk
1972
(2) SA 863
(A) at 870;
Nash v Golden Dumps
1985 (3) SA 1
(A)
at 22.
[2]
Natal
Joint Municipal Pension Fund v Endumen
i
Municipality
2012 (4) SA 593
(SCA);
[2012] ZASCA 13
at para 18;
Picardi
Hotels Ltd v Thekwini Properties
[2008] ZASCA 128
;
2009 (1) SA 493
(SCA) para 5.
[3]
Bothma-Batho
Transport (Edms) Bpk v S Bothma & Seun Transport
(Edms)
Bpk
[2013] ZASCA 176
;
2014 (2) SA 494
(SCA) para 12.
[4]
G B
Bradfield
Christie’s
The Law of Contract in South Africa
7 ed at 543.