Brief Summary

Contract — Authority of agent — Whether attorney had authority to bind client — Dispute arose regarding an undertaking allegedly given by an attorney on behalf of the appellants to indemnify the first respondent for a shortfall in debt collection — Court a quo found that the attorney lacked authority to bind the first appellant, leading to dismissal of the claim against him — Appeal by second and third appellants against judgment in favor of the first respondent for payment of R63 323 — Legal issue centered on the interpretation of the undertaking and the burden of proof regarding the shortfall — Appeal upheld on the basis that the first respondent failed to prove the shortfall amount due under the undertaking.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings were an appeal to the Supreme Court of South Africa (Appellate Division) arising from an action in the South Eastern Cape Local Division. The dispute concerned the enforceability and effect of a written undertaking (originating from a telephonic agreement and confirmed by facsimile) in terms of which certain defendants allegedly bound themselves jointly and severally to make good a financial “shortfall” linked to the realisation of book debts in a corporate compromise.

The parties were, on appeal, the three original defendants (Colin Venter, David Cohen, and Bay Nominees (Pty) Ltd) as appellants, and Credit Guarantee Insurance Corporation of Africa Limited as first respondent. NT C Limited, originally not a party, was allowed to intervene during the trial as second plaintiff (second respondent on appeal). Although Colin Venter was cited as first appellant, the judgment noted that he did not note or prosecute an appeal; he nevertheless featured materially because the first respondent (first plaintiff) cross-appealed against the dismissal of the claim against him in the court a quo.

Procedurally, the first plaintiff instituted an action for payment (initially framed as R65 000) against all three defendants jointly and severally, relying on an alleged undertaking given by an attorney, Mr Myers, on their behalf. During trial, after an amendment to the defendants’ plea, the second plaintiff successfully applied to intervene as an alternative claimant, alleging that the undertaking was given in its favour. The trial court (Kroon J) granted judgment for the first plaintiff against the second and third defendants in a reduced amount, dismissed the first plaintiff’s claim against the first defendant for lack of proof of authority, dismissed the second plaintiff’s claim, and made several costs orders. Leave was granted for the defendants to appeal against the merits and certain costs orders, and for the first plaintiff to cross-appeal against the dismissal of its claim against the first defendant.

The general subject-matter of the dispute was a commercial arrangement connected to a section 311 compromise under the Companies Act 61 of 1973 in the liquidation of Contour Engineering (Pty) Ltd, and whether an ancillary undertaking to protect an insurer’s position was enforceable against the individuals and nominee company allegedly bound by it.

2. Material Facts

During 1987 Contour Engineering (Pty) Limited (“Contour”) became indebted to NT C Limited (the second plaintiff) in the amount of R65 057 for goods sold and delivered. As security for credit facilities, Contour signed a second cession of book debts in favour of the second plaintiff. Contour was placed in liquidation towards the end of 1987, and the second plaintiff proved a secured claim in the liquidation.

The second plaintiff was insured under a policy in terms of which Credit Guarantee Insurance Corporation of Africa Limited (the first plaintiff) indemnified it against bad-debt losses up to 75%. When the second plaintiff submitted a claim under the policy, the first plaintiff required it to sign a “cession of dividends” form, ceding to the first plaintiff the second plaintiff’s right to any dividend accruing in the liquidation. A copy was lodged with the liquidator, who noted the first plaintiff’s interest. It was common cause that, despite the cession of dividend, the second plaintiff retained the creditor status and the right to vote at meetings in the liquidation.

On 16 November 1988 the court ordered that meetings of creditors and members be convened to consider a compromise proposed by Bay Nominees (Pty) Ltd (the third defendant) under section 311 of the Companies Act 61 of 1973. Meetings were held on 7 December 1988, with the chairperson required to report to court on 14 December 1988. The offer of compromise included a provision directed at creditors holding cessions of book debts, and it contained a specific warranty and undertaking that the second plaintiff would receive a minimum of R30 000 from the realisation of book debts under its cession, with the proposer undertaking to make good any shortfall against that minimum upon demand.

The second plaintiff believed it would recover its full debt and recommended to the first plaintiff that they reject the compromise. The first plaintiff initially indicated acceptance but later decided to reject it and informed the second plaintiff accordingly. The second plaintiff attended the meeting on 7 December 1988 and voted against the compromise. Despite that opposition, the compromise was accepted by the requisite majority.

After the meeting, the liquidator and chairperson, Mr Van Zyl, testified that on Friday 9 December 1988 the first defendant (Colin Venter) contacted him, concerned that the dissenting vote might jeopardise court sanction of the scheme. Van Zyl and the first defendant went to see Mr Myers, the attorney acting for the liquidators and other parties interested in the section 311 arrangement. Myers attempted to telephone the first plaintiff; he initially could not reach it. Van Zyl left, leaving the first defendant with Myers. Van Zyl later heard on Monday 12 December 1988 that “a deal had been done”. Neither Myers nor the first defendant testified to explain the content of the “deal”.

The only direct evidence of the agreement’s conclusion and terms came from Mr Wallace, a manager employed by the first plaintiff, who spoke with Myers by telephone on 9 December 1988. According to Wallace, he and Myers reached an agreement on the terms of an undertaking. The terms were reduced to writing by an exchange of facsimiles on 12 December 1988, with the operative formulation recorded in a message sent by Mr McDonald (first plaintiff’s employee) to Myers on 12 December 1988. The key terms were that if collection of book debts did not realise R65 000 within six months of 7 December 1988, then “the offeror and” Colin Venter, David Cohen, and Bay Nominees (Pty) Ltd would make up any shortfall jointly and severally; and that the agreement withdrew opposition to acceptance of the compromise, with the shortfall to be paid within 30 days after expiry of the six-month period.

It was common cause that the plaintiffs in fact received no money from the collection of book debts. On the evidence of Van Zyl, book debts to the value of R66 430 were collected; after deducting his fee of R8 449, a net balance of R57 981 remained for distribution among secured cessionaries. Of that, R56 304 was paid to Standard Bank (as first cessionary), leaving a balance of R1 677 which was meant for the second plaintiff but was dealt with by set-off/credit in Van Zyl’s settlement with the second defendant.

A further fact, treated by the appeal court as significant, was that the first defendant did not testify, notwithstanding that matters relating to his involvement, interest, and instructions to Myers were peculiarly within his knowledge. The attorney Myers also did not testify, but the appeal court treated his absence differently given his position and availability to both sides.

3. Legal Issues

The central legal questions for determination were, first, whether the first plaintiff had proved the extent of the “shortfall” payable under the undertaking and how “shortfall” was to be interpreted in context. This primarily involved the application of law to fact through contractual interpretation, and the sufficiency of proof on quantification.

Second, the court had to decide whether there was consensus (a meeting of minds) between the contracting parties on the identity of the contracting principal, in light of evidence elicited during cross-examination suggesting that the first plaintiff may have acted “on behalf of” the second plaintiff. This raised a mixed question of fact and application of legal principles governing consensus and representation.

Third, the court had to determine whether the agreement was unenforceable as a “secret agreement” alleged to be contra bonos mores or contrary to public policy due to non-disclosure to creditors and the court in the section 311 proceedings. This required an evaluative judgment grounded in established public policy doctrine.

Fourth, on the cross-appeal, the court had to determine whether the first plaintiff proved that Myers had authority to bind the first defendant, and whether an adverse inference should be drawn from the first defendant’s failure to testify. This concerned fact-finding on authority, but was decisively shaped by legal rules about proof, probabilities, and adverse inference.

Finally, the court was required to consider several costs orders, including whether certain costs awards reflected proper exercises of discretion and whether one costs order was made per incuriam.

4. Court’s Reasoning

On the meaning and proof of the “shortfall”, the court accepted (without deciding conclusively) that the first plaintiff may have borne the onus to prove the shortfall. It nevertheless held that the onus was discharged. The undertaking was construed contextually and purposively, guided by authority that contractual language must be interpreted with regard to context and intended purpose. The court rejected the defendants’ interpretation that “shortfall” depended on the aggregate amount of book debts collected (net of sums due to Standard Bank) regardless of whether any money was paid to the plaintiffs. It reasoned that such an interpretation was commercially implausible: businesspeople would not sensibly intend a debt to be reduced merely by “collection” in the abstract, especially where the plaintiffs had no control over collection and disbursement. The more likely purpose was that the R65 000 obligation would be reduced by actual payments derived from the book debts, with the defendants to fund any remaining deficit. On that construction, the court considered that, because no money was paid over from book debts to the plaintiffs, the shortfall was established.

The court further held that the first plaintiff succeeded even on the defendants’ own interpretation. It accepted Van Zyl’s evidence on collections, expenses, and distributions, and upheld the trial court’s approach of deducting R1 677 from the claim to reflect the balance notionally available after Standard Bank’s entitlement, leading to judgment for R63 323. It refused to entertain a late argument that Van Zyl’s fee should not have been deducted, emphasising that the issue was not raised at trial, Van Zyl’s entitlement to the fee was not challenged in cross-examination, and the compromise terms contemplated payment from the “nett worth” of recoverable book debts, which suggested the deduction of expenses.

On consensus and the identity of the contracting party, the defendants argued that there was no agreement because the first plaintiff intended to contract on behalf of the second plaintiff, while the defendants intended to contract with the first plaintiff. The court approached this through credibility and probabilities. It endorsed the trial court’s acceptance of Wallace’s later evidence (after he was recalled) that his earlier concession under cross-examination was a mistake. The trial court’s credibility findings—especially the witness’s impression and explanation—were treated as significant and not lightly disturbed. The court also emphasised objective indicia: the facsimile messages referred to the first plaintiff and did not mention the second plaintiff as principal; there was no reason why a principal (if it were the second plaintiff) would not have been disclosed; and there was no evidence that the first plaintiff had a mandate to represent the second plaintiff in concluding the agreement. The court further noted that if Wallace had believed he was acting for the second plaintiff, he would in any event have lacked authority to do so on the evidence, which undermined the defendants’ contention that the agreement was formed on that footing. The court therefore agreed with the conclusion that there was consensus and that the undertaking was intended to be in favour of the first plaintiff as principal.

On the “secret agreement” and public policy, the court applied the established principles that public policy generally favours freedom of contract, and that invalidation on public policy grounds should occur only sparingly and in clear cases. It rejected the defendants’ argument that the agreement was contra bonos mores or unenforceable for non-disclosure. The court considered it significant that the agreement was concluded after the statutory meetings had been held; that there had been full disclosure of relevant known facts at the meetings; and that the agreement involved payment to the first plaintiff, which was not a creditor of Contour, from outside sources to which the creditors had no claim. It held that the agreement did not affect creditors’ rights and caused them no actual or potential prejudice. The court distinguished the matter from scenarios involving the purchase of a decisive creditor vote or a secret preference to one creditor, and concluded that disclosure would have made no difference because there was nothing improper or immoral in the agreement. The court also found it “ironic” for the second and third defendants to rely on their own alleged concealment, and noted there was no suggestion that the first plaintiff intended concealment or had a duty to disclose given it was not a creditor.

On the cross-appeal concerning the first defendant’s liability, the court accepted that the first plaintiff could not prove Myers’ authority merely through Myers’ own extra-judicial assertions or the content of the fax naming the first defendant, because those are not admissible bases to establish authority when authority is the very issue. However, the court placed substantial weight on probabilities arising from the first defendant’s conduct as described by Van Zyl: the first defendant’s concern about opposition jeopardising sanction, his initiative in approaching Myers, his involvement in proposing that “they” offer more money, and the inference that he identified himself with the offeror’s position. The court considered two competing hypotheses: that the first defendant acted merely for the second defendant who was abroad, or that he had his own stake in the third defendant and acted for both. The latter was regarded as more probable, particularly because it explained why Myers could bind the second defendant without dispute, and avoided the implausibility of an attorney undertaking obligations for two parties merely on the expectation of later ratification.

Crucially, the court treated the first defendant’s failure to testify as materially different from Myers’ absence. Because the first defendant could have provided decisive evidence on matters peculiarly within his knowledge, less evidence was required to establish a prima facie case calling for an answer. Applying authority on adverse inference and evidential burdens, the court held that the first plaintiff established a prima facie case of authority sufficient to require an explanation by the first defendant. Since no explanation was forthcoming, the prima facie case became conclusive, and the cross-appeal succeeded.

On costs, the court treated most costs issues as matters of discretion and was not persuaded to interfere where the trial court had exercised a judicial discretion in unusual procedural circumstances, particularly those arising from late amendments and the intervention. It did, however, correct one costs order conceded to have been made per incuriam, namely the inclusion of the second and third defendants in costs occasioned by the first plaintiff’s opposition to an amendment that concerned only the first defendant.

5. Outcome and Relief

The appeal against the merits judgment in favour of the first plaintiff against the second and third defendants for R63 323 plus interest was dismissed with costs. The appeal succeeded only to the limited extent of amending the costs order relating to the application to amend the plea dated 29 May 1992, so that the costs occasioned by the first plaintiff’s opposition to that amendment would be payable by the first defendant alone, while the balance of costs of that amendment application remained payable jointly and severally by all defendants.

The appeal against the costs order relating to opposition to the second plaintiff’s intervention was dismissed with costs. The appeal against the order requiring the second and third defendants to pay the second plaintiff’s trial costs was also dismissed with costs.

On the cross-appeal, the dismissal of the first plaintiff’s claim against the first defendant was set aside, and the cross-appeal was upheld with costs. The final result was that judgment for R63 323 with interest was entered in favour of the first plaintiff against all three defendants jointly and severally, and the second plaintiff’s claims against all defendants were dismissed. The costs orders were adjusted to reflect these outcomes as set out in the appellate order.

Cases Cited

Jaga v Dönges NO and Another; Bhana v Dönges NO and Another 1950 (4) SA 653 (A).

Swart en ’n Ander v Cape Fabrix (Pty) Ltd 1979 (1) SA 195 (A).

Public Carriers Association and Others v Toll Road Concessionaries (Pty) Ltd and Others 1990 (1) SA 925 (A).

Joel Melamed and Hurwitz v Cleveland Estates (Pty) Ltd; Joel Melamed and Hurwitz v Vorner Investments (Pty) Ltd 1984 (3) SA 155 (A).

Sasfin (Pty) Ltd v Beukes 1989 (1) SA 1 (A).

Botha (now Griessel) and Another v Finanscredit (Pty) Ltd 1989 (3) SA 773 (A).

Lew v Katz 1914 WLD 88.

Union Government (Minister of Railways) v Sykes 1913 AD 156.

Marine & Trade Insurance Co Ltd v Van der Schyff 1972 (1) SA 26 (A).

New Zealand Construction (Pty) Ltd v Carpet Craft 1976 (1) SA 345 (N).

Galante v Dickinson 1950 (2) SA 460 (A).

Titus v Shield Insurance Co Ltd 1980 (3) SA 119 (A).

Macu v Du Toit en ’n Ander 1983 (4) SA 629 (A).

Tuckers Land and Development Corporation (Pty) Ltd v Perpellief 1978 (2) SA 11 (T).

Legislation Cited

Companies Act 61 of 1973, section 311.

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that the undertaking was enforceable in favour of the first plaintiff and that the first plaintiff proved, at least, a shortfall of R63 323 under the undertaking. It held that consensus existed that the undertaking was in favour of the first plaintiff as contracting principal, and that the agreement was not void for being a “secret agreement” contrary to public policy or contra bonos mores in the circumstances proved.

On the cross-appeal, the court held that the first plaintiff established a prima facie case that the attorney Myers was authorised to bind the first defendant, and that the first defendant’s failure to testify justified treating that prima facie case as conclusive. Accordingly, the first defendant was also held liable jointly and severally with the other defendants.

The court further held that most of the challenged costs orders involved proper exercises of discretion and should not be disturbed, save that one costs order was corrected because it had been made per incuriam in so far as it imposed on the second and third defendants costs linked to opposition directed at an amendment concerning only the first defendant.

LEGAL PRINCIPLES

Contractual undertakings are interpreted contextually and may be given a purposive construction where the wording can bear more than one meaning, with attention to the commercial purpose the parties sought to achieve as reflected by the agreement and surrounding context.

Where a contract is attacked as contra bonos mores or contrary to public policy, public policy generally favours freedom of contract; the power to refuse enforcement on public policy grounds is to be exercised sparingly and only in clear cases. An agreement ancillary to statutory compromise proceedings will not be unenforceable merely because it was not disclosed, where it does not prejudice creditors’ rights and does not amount to buying a vote or granting a secret preference to a creditor.

In disputes about an agent’s authority, the principal cannot establish authority merely by relying on the agent’s own extra-judicial statements or representations about authority, including documents that merely repeat the agent’s assertions, because authority is the very fact in issue.

Where a party who could give decisive evidence on matters peculiarly within that party’s knowledge fails to testify, a court may accept that less evidence is required to establish a prima facie case; whether an adverse inference should be drawn depends on the circumstances, including the strength of the case calling for an answer. Probabilities and unexplained conduct may support a finding of authority where the party best placed to rebut it elects not to testify.

Costs orders are generally matters of judicial discretion and appellate interference is limited, but a costs order may be corrected where it is shown to have been made per incuriam, including where costs are mistakenly imposed on parties with no interest in the relevant interlocutory dispute.

Venter and Others v Credit Guarantee Insurance Corporation of Africa Ltd. and Another (88/94) [1996] ZASCA 50; 1996 (3) SA 966 (SCA); (13 May 1996)