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[2019] ZASCA 80
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De Vasconcelos and Others v Business Partners Ltd (637/2018) [2019] ZASCA 80 (31 May 2019)
THE
SUPREME COURT OF APPEAL
OF SOUTH
AFRICA
JUDGMENT
Reportable
Case
No: 637/2018
In
the matter between:
ROBERTO
CARLOS DE FREITOS DE VASCONCELOS FIRST
APPELLANT
PRIMOLITOS
CC SECOND
APPELLANT
PRIMOPLAS
CC THIRD
APPELLANT
PORTION
CONTROL PACKERS
CC FOURTH
APPELLANT
and
BUSINESS
PARTNERS
LTD RESPONDENT
Neutral
citation:
De
Vasconcelos & others v Business Partners Ltd
(637/2018)
[2019] ZASCA 80
(31 May 2019)
Coram:
Cachalia,
Mbha and Dambuza JJA and Davis and Plasket AJJA
Heard:
24 May
2019
Delivered:
31 May
2019
Summary:
Loan
and royalty agreements arising from loan; whether interest disguised
as royalty; whether royalty agreement
contra
bonos mores
;
whether
in
duplum rule
applies.
ORDER
On
appeal from:
Gauteng
Division of the High Court, Pretoria (De Vos J sitting as court of
first instance):
The
appeal is dismissed with costs, including the costs of two counsel.
JUDGMENT
Cachalia
JA (Mbha and Dambuza JJA and Davis and Plasket AJJA
concurring)
[1]
During 2009, Mr Roberto Carlos De Freitos De Vasconcelos (the first
appellant), representing Eastprop Property Trust (the Trust),
sought
to raise a loan to finance working capital for one of three close
corporations of which he was the alter ego. The businesses
operated
from a property the Trust owned in Wadeville, Johannesburg. The
property was initially bonded to Absa Bank in an amount
of R25
million. Absa later reduced their facility over the property to R18
million, which precipitated the Trust’s need for
further
capital. The first appellant then approached Business Partners
Limited (the respondent) on behalf of the Trust for assistance.
The
respondent finances small and medium enterprises where banks are not
willing to undertake the risk. Its business model is to
secure a
higher rate of return for its investment.
[2]
The Trust applied to the respondent for a loan of R10 million
initially but, after protracted negotiations over a period of
two
years, the latter agreed to lend it an amount of R8 million. To this
end the respondent entered into two written agreements
with the Trust
on 8 December 2011. In terms of the first, a loan agreement, the
respondent lent and advanced the R8 million to
the Trust, as
principal debtor. The loan would attract interest at one percentage
point above the prime lending rate, and would
be repayable in 84
instalments of R132 810, over a period of seven years. The loan
was secured by the first appellant, and
the three close corporations
(the second to fourth appellants) signing suretyships, in terms of
which they bound themselves to
the respondent as sureties and
co-principal debtors
in
solidum
for
an unlimited amount in respect of the Trust’s indebtedness.
[3]
The second agreement, styled a ‘royalty agreement’,
required the Trust to pay a ‘royalty’ to the respondent.
The value of the royalty was calculated at the higher of R12 896 964
or 24 per cent of the future market value of the Wadeville
property.
The royalty payment would become due and payable on 1 August 2019, at
the end of the seven year period for repayment
of the loan, but was
subject to an acceleration clause in the loan agreement if the Trust
failed to meet its repayment obligations.
The royalty was payable in
addition to repayment of the loan plus interest thereon.
[4]
The Trust breached its obligations under the loan agreement by
falling into arrears with its monthly instalments. The respondent
then issued summons for payment of the amount of R6 985 926.44 for
the outstanding balance due in terms of the loan agreement and
the
further amount of R12 896 964 provided for in the royalty agreement.
It also claimed interest on these amounts at the rate
of 10 per cent
per annum as from 25 July 2014.
[5]
During September 2015 the Trust settled the outstanding balance under
the loan agreement, which was then R5 239 115.94. The
trial proceeded
only against the first to fourth appellants, as sureties, for payment
of the amount then due under the royalty
agreement. They resisted
liability on several grounds. Invoking the common law rule against
usurious agreements, their principal
defence was that the royalty
agreement purported to levy an excessive interest payment for the
loan in an addition to the interest
that was payable under the loan
agreement, which was extortionate, oppressive or akin to fraud and
therefore,
contra
bonos mores
and unenforceable.
[6]
The North Gauteng Division of the High Court (De Vos J) upheld the
respondent’s claim and dismissed all of the appellants’
defences. The appellants now appeal against this order, with leave of
the high court.
The
Abandoned Defences
[7]
The appellants raised as a defence that the trustees of the Trust,
one of whom was the first appellant, who was instrumental
in
negotiating these agreements, were not authorised to sign the royalty
agreement on behalf of the Trust as the resolution from
which their
authority emanated was passed only after the agreement was signed.
The second to fourth appellants pleaded a similar
defence in respect
of the resolutions authorising the conclusion of the suretyships.
These spurious defences were abandoned at
the commencement of the
trial.
[8]
The Trust also disputed that the royalty agreement annexed to the
particulars of claim was the true agreement signed. This required
the
respondent to lead evidence to prove the agreement, which it did. The
evidence was uncontested and, during argument, this defence
too was
abandoned.
[9]
However, another defence was persisted with in the trial court: this
was that the royalty agreement, which imposed an obligation
on the
Trust to pay a royalty, was disguised to conceal its true purpose,
which was to extort additional and exorbitant interest
from the Trust
in order to circumvent the provisions of National Credit Act 34 of
2005 (the NCA). It was, so it was pleaded, therefore
a simulated
transaction and not a genuine one. This defence was doomed to failure
for two reasons: first, the NCA does not apply
to large agreements
where the principal debt exceeds R250 000 and the borrower is a
juristic person,
[1]
which this
agreement does; and secondly, the evidence did not establish any
fraudulent misrepresentation or dishonesty on the part
of the
respondent in concluding this agreement.
[2]
The trial court correctly dismissed this defence. The appellants do
not contest this finding.
The
Contra Bonos Mores
(Public Policy) Defence
[10]
The appellants persist with their common law defence, which, as I
understand the pleading, is that the royalty agreement is
contra
bonos mores
and unenforceable on the grounds that:
(a) The loan of R8
million was adequately secured by the loan agreement and interest in
an amount of R2.6 million was paid over
the period in the present
instance. Had the loan agreement run its course over the full period
of seven years the capital would
have attracted interest of R3.2
million;
(b) The royalty of
R12.896 964 million, which was calculated with reference to the value
of the Wadeville property, conferred no
benefit on or quid pro quo
for the Trust;
(c) The royalty was no
more than additional interest to the R3.2 million interest on the
loan agreement, which was not commensurate
with the risk undertaken
by the respondent;
(d) The respondent did
not fully disclose the extent, impact and implications of the royalty
to the first appellant before concluding
the loan and royalty
agreements;
(e) Had the Trust
realised that the royalty agreement required the payment of
additional interest it would not have concluded the
loan agreement;
(f) The respondent failed
to disclose the real interest rate payable by disguising it as a
royalty;
(g) The additional
interest is therefore usurious in the circumstances.
[11]
There was some debate in the high court and in this court as to
whether the two agreements are inseparable parts of a single
contract
or two separate contracts, one to secure the loan and the other to
levy additional interest, disguised as a royalty. But
nothing turns
on this. The loan agreement refers repeatedly to the royalty
agreement and must be read together with it. The two
agreements form
part of a single transaction. It matters not whether the payment
claimed under the royalty agreement is properly
described as a
royalty or interest payment. It remains a payment obligation incurred
for the loan. The only issue is whether this
obligation offends
public policy.
[12]
There is no statutory limitation on the amount of interest that may
be charged for repayment of the loan at issue in this appeal.
So, the
mere fixing of a high amount of interest for repayment of a loan
between contracting parties is not unlawful. The appellants
understand this and therefore rely, as I have mentioned, on the
common law rule against usurious contracts. Its effect is to render
an agreement or transaction usurious and invalid if shown to be
tainted by oppression, or extortion or something akin to fraud.
[3]
The appellants, upon whom the onus lies, must establish the facts in
this regard, as it would for any public policy challenge to
the terms
of a contract.
[4]
There is no suggestion that the rule is inimical to any
constitutional principle or value.
[5]
[13]
But this defence is built primarily on two sets of contradictory
allegations. It is apparent from the plea that the pivotal
allegation
is that the respondent ‘disguised’ the interest payment
as a royalty payment to induce the Trust to conclude
the contract.
This means – and can only mean – that the respondent
dishonestly described the interest payment as a
royalty to conceal
the true nature and extent of the obligation from the Trust.
[14]
The appellants also plead that the respondent was required to
disclose that the royalty was in truth an obligation to pay interest.
This is a different defence and rests on a duty of a contracting
party – the respondent in this case – to disclose
information within his or her exclusive knowledge that is not
reasonably ascertainable by the other party from a source other than
with whom he or she is contracting. Put simply, a party cannot take
advantage of another’s ignorance of facts that he or
she is not
reasonably expected to ascertain for himself or herself.
[6]
The courts have said that the duty to disclose the information and
the correlative right to have this information communicated
to him or
her is mutually recognised by honest contracting parties in the
circumstances.
[7]
[15]
The factual bases of the two defences differ fundamentally, but are
conflated in the appellants’ plea. Apart from this
problem, the
appellants also face an intractable obstacle with this part of their
pleaded case. The first defence – the allegation
that the
respondents ‘disguised’ interest as royalty – is
simply a case of a fraudulent misrepresentation, which,
as I have
pointed out, the appellants now expressly disavow. The second defence
– the duty to disclose – rests on the
allegation that the
respondent had a duty to disclose the true nature of the obligation
that the Trust had undertaken, which was
an obligation to pay
interest and not a royalty. But in the face of the high court’s
compelling finding that the first appellant
was fully aware of the
obligation he was undertaking in concluding the royalty agreement,
the appellants could hardly have persisted
with either ground,
separately or rolled up together, to support this defence. Unbowed,
they did.
[16]
In response to questions from the court as to whether the appellants
had shown any deception or fraud on the part of the respondents
to
establish its public policy defence, it was contended that it is not
necessary to go that far. All they needed, the argument
went, was to
establish that the respondent’s conduct was akin to fraud, or
otherwise extortionate or oppressive. Apart from
the fact that there
were no facts pleaded to support this contention, the evidence did
not even begin to show conduct of this nature
on the part of the
respondent. In fact it showed quite the opposite.
[17]
Mr Roger Hicksley, the respondent’s area manager, testified
that their business is to finance mainly small to medium
enterprises
where traditional banking institutions may not. Its commercial model
is take a risk with a client for a commensurate
return.
[18]
The first appellant had approached the respondent to fund the working
capital required for the business in Wadeville on several
occasions
and was personally involved in the negotiations with him regarding
the proposed loan. They discussed various other funding
options, most
of which were not viable. Importantly, all aspects of the structure
of the transaction, including the royalty payment,
with which the
first appellant was satisfied, were deliberated upon on several
occasions. The application was for a loan of R10
million initially
but only R8 million was eventually approved, almost two years later,
after a due diligence was done.
[19]
Mr Hicksley also testified that the respondent structures
transactions relating to royalties in various ways. This includes,
for example, taking equity in a company or determining an amount
based on turn-over, profit-sharing, the volume of fuel pumped
at a
filling station, or a percentage of the value of the property, as in
the present case. The royalty is therefore compensation
for the
additional risk the respondent undertakes for its investment in lieu
of a shareholding. It is not, he maintained, an additional
interest
charge. In this regard he maintained that it was explained to the
first appellant that the respondent would not only charge
interest on
the loan but determine a royalty payment based on the future value of
the property calculated over the period of the
two agreements, which
was set out in both agreements. The total return on the investment,
taking the transaction risk into account,
was 23.56 per cent,
including interest on the loan. The royalty portion was calculated as
a return for the unsecured portion of
the loan.
[20]
The first appellant, who holds a doctorate in business
administration, admitted that the principle of the royalty was
explained
to him. And that other possibilities, including the
respondent taking equity in the business or a share in the property,
were also
considered. He was also aware that the respondent worked on
a business model that differs from banking institutions. Importantly,
he was happy to accept an earlier proposal in terms of which the
royalty payable would have exceeded R16 million, for a higher
loan
amount. And he was also fully aware of the extent of the obligation
when the agreements were signed.
[21]
The evidence thus established firmly that the first appellant
approached the respondent without any inducement to enter into
the
transaction. He was aware of the interest rate that was payable on
the loan and could not but have also been aware of the terms
and
rationale for repayment of the royalty.
[22]
Whether one characterises this repayment obligation as a royalty
[8]
as it is described in the royalty agreement, or simply as additional
interest that was payable for the loan, as the appellants
insist it
is, is a matter lawyers may quibble about. The real issue is not how
one characterises the royalty agreement, but whether
the Trust
understood the nature and extent of the obligation it was
undertaking.
[23]
Of that there was simply no misapprehension in the first appellant’s
mind. Nor could there have been, as counsel for
the appellants
attempted to argue. It is abundantly clear from the terms of both the
loan and royalty agreements, and the evidence,
that there could have
been no doubt in the minds of the first appellant, or of the other
appellants, of the nature and extent of
the repayment obligations
that were undertaken in both the loan and royalty agreements in
return for the loan.
[24]
Whether or not the total obligation under the two agreements was
commensurate with the risk the respondent had undertaken is
also
immaterial. The respondent is not a money-lender. So it makes perfect
commercial sense that it would seek an additional payment
at the end
of the term of a contract in lieu of a shareholding to compensate for
its investment. The contention that the royalty
obligation was not
commensurate with the risk undertaken by the respondent for the loan
is not a ground for invalidating an agreement,
absent any taint of
extortion, oppression or something akin to fraud. This is so even if
one accepts, which I do not, that the
repayment may have been
excessive in the circumstances. The appellants’ real complaint
is that the Trust struck a bad bargain,
not an illegal one. That
unfortunately happens daily in commercial life. Having concluded two
agreements deliberately and seriously
with the intention to create
two sets of lawful obligations under the loan and royalty agreements,
the appellants must live with
both of them and cannot escape their
consequences by seeking refuge in a public policy defence that was
neither properly pleaded,
not established in the evidence.
[25]
I should add that if there was anything opprobrious about anyone’s
conduct in this matter, it was that of the first appellant,
not the
respondent. He entered into these agreements with open eyes, but then
dishonourably put up spurious defences in his attempt
to avoid their
consequences. These included taking issue with the authenticity of
the royalty agreement and the resolutions pertaining
to the
conclusion of the surety agreements. He tried to make a case of fraud
against the respondent initially only to abandon that
during the
trial when this defence became unsustainable. The high court was
therefore fully justified in criticising his conduct,
and rejecting
his attempt to avoid liability.
Whether
the
in Duplum rule
applies
[26]
The appellants have a further string to their bow. They plead,
relying on the
in
duplum rule
,
that the respondent is not entitled to claim interest on the capital
amount in excess of the equivalent of the outstanding capital
amounts. The
in
duplum rule
prevents
arrear interest accumulating beyond the outstanding capital amount.
[27]
The appellants’ main contention is that the Trust settled the
loan in full during September 2015 when the property was
sold. And
because the royalty payment is nothing but interest, no further
payments of the outstanding capital could accrue. The
alternative
argument is that the capital amount of R4 947 608.45 was
outstanding in September 2015 and as a consequence
the respondent is
not entitled to arrear interest in excess of double the capital
amount owing.
[28]
These contentions have no merit. It is apparent, from what I have
said in the previous section, that the appellants undertook
two
separate obligations under the loan and royalty agreements, albeit
that the
causa
for both was the loan. The agreements made a clear distinction
between the loan, which attracted a specific rate of interest, and
the royalty, which introduced an additional obligation for the risk
the respondent undertook in providing credit to the Trust.
That being
so, the repayment obligation under the royalty agreement cannot be
added to the interest payment that accumulated under
the loan
agreement. Payment of the royalty obligation, which becomes payable
immediately upon default, does not therefore constitute
arrear
interest that brings the
in
duplum rule
into play.
[29]
For these reasons the appeal is dismissed with costs, including the
costs of two counsel.
______________
A
Cachalia
Judge
of Appeal
Appearances
For
the Appellant:
P F Louw
SC (with him J Moorcroft)
Instructed
by:
David Kotzen Attorney c/o Andrea Rae Attorney,
Pretoria
Honey Attorneys,
Bloemfontein
For
the Respondent:
J
P Vorster SC (with him M T Shepherd)
Instructed
by:
Strydom Britz Mahulatsi Inc, Pretoria
Symington & De Kok,
Bloemfontein
[1]
Section 4(1) read with s 9(4) and s
7(1)
(b)
of
the NCA. The higher threshold was determined as R250 000 in
terms of GN 713,
GG
28893, 1 June 2006.
[2]
Roshcon (Pty) Ltd v Anchor Auto
Body Builders CC & others
[2014]
ZASCA 40
;
2014 (4) SA 319
SCA para 30.
[3]
African Dawn Property Finance 2
(Pty) Ltd v Dreams Travel and Tours CC & others
[2011]
ZASCA 45
;
2011 (3) SA 511
(SCA) para 20.
[4]
AB & another v Pridwin
Preparatory School & others
[2018]
ZASCA 150
;
2019 (1) SA 327
(SCA) para 27.
[5]
In
African
Dawn
fn 3 above para 29
this Court said that the rule is not inconsistent with
constitutional norms.
[6]
R H Christie
The
Law of Contract in South Africa
6
ed (2011) at 291.
[7]
ABSA Bank Ltd v Fouche
2003
(1) SA 176
(SCA) at 180J-181D; R H Christie
Law
of Contract in South Africa
6
ed (2011) at 289-291.
[8]
A royalty is usually described as a
benefit granted by a rights-holder to a user of the right. A
well-known example of a royalty
would be the payment a publisher
makes to an author of a book for its publication and dissemination.