About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Western Cape High Court, Cape Town
SAFLII
>>
Databases
>>
South Africa: Western Cape High Court, Cape Town
>>
2013
>>
[2013] ZAWCHC 61
|
|
Structured Mezzanine Investments (Pty) Ltd v Bestvest 153 (Pty) Ltd and Others (22698/2009) [2013] ZAWCHC 61 (31 January 2013)
IN THE HIGH COURT OF SOUTH AFRICA
WESTERN CAPE HIGH COURT, CAPE TOWN
REPORTABLE
CASE NO: 22698/2009
In the matter between:
STRUCTURED MEZZANINE INVESTMENTS
(PTY) LIMITED
...........................................................................................................
Applicant
(Registration No: 2007/006512/07)
and
BESTVEST 153 (PTY) LTD
...........................................................................
First
Respondent
(Registration No: 2006/006029/07)
ADAM ESSA
.............................................................................................
Second
Respondent
(Identity No: )
SHAIK COE
..................................................................................................
Third
Respondent
(Identity No: )
COESSA HOLDINGS (PTY) LTD
...............................................................
Fourth
Respondent
(Registration No: 2002/024551/07)
JUDGMENT AS CORRECTED IN TERMS OF RULE 42(1)(b) AND
DELIVERED ON THURSDAY 31 JANUARY 2013
______________________________________________________________________
GAMBLE, J:
INTRODUCTION
On 12 June 2012 judgment was handed down in an application for the
liquidation of the First Respondent herein, Bestvest 153 (Pty)
Ltd
(“Bestvest”) by Nedbank Limited, and a
counter-application by the directors of Bestvest for the company to
be placed under business rescue. That judgment has now been
reported: See
2012 (5) SA 497
(WCC).
The material facts and circumstances relevant to those cases (many
of which are applicable in this matter) are set out in the
reported
judgment and will not be repeated herein. In paragraphs 11 to 13 of
the Bestvest judgment reference is made to the so-called
“
SMI
payment application
” in which the Applicant herein (“SMI”)
sought (under case no. 22698/09) payment to it of the sum of
R8 317 827,04,
together with interest at the rate of 1,5%
per week calculated daily from 11 July 2009 to date of payment.
In the Bestvest judgment I indicated that the judgment in the
payment application would be delivered in due course. That judgment
now follows.
In arguing the payment application
Mr. Pretorius
, for SMI,
focused on the liability of Messrs. Essa and Coe and Coessa (Pty)
Ltd (“Coessa”) to SMI under a written
deed of suretyship
given by them to SMI in July 2008 for the obligations of Bestvest to
SMI. Since Bestvest has now being finally
wound up its liability to
SMI is to be determined as part of the winding-up process. That
state of affairs does not affect the
liability of the three sureties
as co-principal debtors with Bestvest to SMI.
THE SURETYSHIP
On 1 July 2008 Essa, Coe and Coessa executed a deed of suretyship in
favour of SMI. The document in question is a detailed one
running to
ten pages. It is signed by Essa and Coe in their personal capacities
and by Essa on behalf of Coessa.
Execution of the deed of suretyship is foreshadowed in clause 3.1.2
of the mezzanine finance loan granted by SMI to Bestvest,
and in
clause 4.1 of that loan, signature of the suretyship was agreed as a
suspensive condition for the loan. The mezzanine
loan agreement was
also signed on 1 July 2008 by Essa on behalf of Bestvest. It is
common cause that the mezzanine loan was repayable
by 11 July 2009,
and it is further not in dispute that Bestvest failed to fulfill its
obligations to SMI in this regard.
THE ISSUES
The execution of the suretyships
per se
was not disputed, nor
were any of the terms thereof placed in issue. Rather,
Mr. Möller
for the sureties, resisted judgment against his clients on a number
of limited, collateral issues. These can loosely be classified
as
follows:
7.1.
The existence of a factual dispute in regard to the extent of
Bestvest’s indebtedness to SMI. It was alleged that in
the
light of the fact that this dispute cannot be resolved on the papers,
that SMI cannot succeed. There was no request that the
disputed facts
be referred to oral evidence. Rather, it was said that the payment
application should fail.
7.2.
Next, there was resort to the provisions of the National Credit Act,
No. 34 of 2005 (“the NCA”), which it was alleged
was
applicable to the suretyship and had not been complied with prior to
the institution of this application.
7.3.
Finally, Bestvest claimed that SMI had breached the mezzanine
agreement by failing to advance funds to Bestvest when same were
due,
thereby effectively torpedoing the development.
DISPUTE OF FACT REGARDING THE QUANTUM OF SMI’S CLAIM?
Mr. Möller
argued with some apparent conviction that
there was a genuine dispute about the extent of the loan granted by
SMI to Bestvest.
In the founding affidavit of the payment
application Mr. Du Plessis, a director of SMI, gives the following
details of advances
made to Bestvest under the mezzanine loan:
8.1. 11 July 2008 - R2 809 944,00
8.2. 21 August 2008 - R1 262 596,33
8.3. 7 October 2008 - R 881 779,61
8.4. 24 October 2008 - R 153 160,01
8.5. 11 November 2008 -
R 98 515,02
R5 205 994,97
In the answering affidavit Coe says that SMI only advanced the sum
of R5 080 594,93 to Bestvest and refers to certain
payment
certificates and confirmation documents furnished by Investec Bank
in respect of electronic funds transfers to Bestvest,
all of which
are annexed to his affidavit in support of the allegation. The
effect of this amount of R2 684 544,00
in respect of the
amount referred to in sub-para 8.1 above is admitted. The shortfall
is the amount of R125 400,04.
In the replying affidavit Du Plessis repeated the allegations made
in the founding affidavit and SMI persisted in its contention
that
the sum of R5 205 994,97 had been advanced to SMI. Du
Plessis also confirmed (in a certificate issued in terms
of clause
14.2 of the deed of suretyship) that the sum of R8 317 827,04
was due to it by Bestvest as at 11 July 2009.
As I have said, this
is the amount claimed in the notice of motion in the payment
application. The difference between the amount
reflected in the
certificate and the amount advanced to Bestvest (as per para 8.1 to
8.5 above) was obviously interest, suggested
Mr. Pretorius
in
argument.
Counsel’s assertion is no doubt the most likely one in light
of the fact that the parties had agreed that the capital would
carry
interest at the rate of 1,25% per week (i.e. 65% per annum) with
effect from 11 July 2008. Indeed, in paragraph 44 of the
answering
affidavit Coe disputes the accuracy of the certificate in the
following terms:
“
The Applicant [SMI] does
not show how the interest claimed in the certificate has been
calculated. The allegations in this paragraph
are accordingly denied
in toto
.”
The calculation of interest in respect of the mezzanine loan is not
a straight forward exercise. Since the capital was being
advanced in
tranches, each amount so advanced would attract interest at the
agreed weekly rate from the date of each advance.
It is not a
question of simply taking the capital and calculating interest
thereon for a period of 52 weeks.
As the parties agreed, the certificate attached by Du Plessis would
constitute
prima facie
proof of the indebtedness of Bestvest
to SMI. One would ordinarily be entitled to assume that aparty
furnishing such a certificate
had either made the calculation
personally, or perhaps requested an employee of the money lending
company to do so.
Theproblem in the present case, however, is that whatever
calculation Du Plessis caused to be made in respect of the interest
component of the debt due by Bestvest, it was clearly based on the
capital sum which he claimed had been advanced (R5 205 994,97),
whereas Coe claimed that only R5 080 594,93 had been
advanced.
The
documents attached by Coe to the answering affidavit clearly support
his contention as to the sum of the various tranches
making up the
total capital advanced. In argument
Mr.
Pretorius
then sought to explain the difference of R125 400,04 with
reference to certain agreed additional charges that were payable
under the mezzanine loan. These included:
15.1
legal costs in the sum of R10 000,00 plus VAT incurred in the
registration of the agreement (clause 11.1);
15.2
bond registration costs in respect of the mortgage bond which was to
secure the loan (clause 11.2);
15.3
an administration fee of 1% plus VAT of the loan amount in connection
with the negotiation and preparation of the loan (clause
11.3); and
15.4
a project management fee payable in respect of SMI’s quantity
surveyor on the project in the sum of R45 000,00 plus
VAT
(clause 11.4).
Mr. Pretorius
then set about demonstrating the total of these
individual items by way of simple arithmetic calculation. The sum of
para’s
15.1 above (R11 400,00), 15.3 (R74 100,00)
and 15.4 (R51 300,00) was said to be R136 800,00. No
figure was
suggested for the bond registration costs (para 15.2
above) but
Mr. Pretorius
argued that on the other three
figures alone the difference between SMI’s allegation and
Bestvest admission (R125 400,04)
had been established. The
Court was therefore invited to accept Du Plessis’s allegations
as regards the amount of the loan
as being correct.
I regret to say that the matter is not as simple as all that. The
method of calculation of the weekly interest payable on the
mezzanine loan is a complex one, with individual calculations
required to be made on each advance, disbursement or other payment
made by SMI.
Insofar as Du Plessis’s certificate only constitute
prima
facie
proof of Bestvest’s indebtedness to SMI, I am
satisfied that the sureties have set out sufficient evidence to
challenge
the conclusiveness thereof. However, all that this does is
to place the amount R125 400,04 of SMI’s claim in issue.
The balance is common cause by virtue of the admissions contained in
Coe’s affidavit.
At the conclusion of his argument in reply
Mr. Pretorius
,
wisely in my view, sought judgment only in respect of the undisputed
capital sum together with interest to be calculated in
accordance
with the agreed formula. A draft order (with explanatory notes) was
subsequently furnished to the Court. This approach
removes the
disputed evidence regarding the quantum from the equation and
resolves the problem as to how that dispute is to be
approached.
THE NCA ARGUMENT
Mr. Möller
argued that the NCA was applicable to the
suretyships and since SMI was not registered as a credit provider
under that Act, he
contended that Section 40(1) read with Section
89(2)(d) of the NCA rendered the suretyships unenforceable.
Mr. Pretorius
pointed out that in the Respondents’
heads of argument
Mr. Möller
had conceded that the NCA
was not applicable to the mezzanine agreement. This was ultimately
confirmed by
Mr. Möller
in argument. The issue then was
a fairly crisp point – can an accessorial obligation under a
suretyshhip be subject to
the NCA when the principal obligation
under the main agreement is not?
I point out that in respect of the mezzanine loan in question, it
was common cause that the loan was not subject to the NCA because
the principal debtor (Bestvest) was a juristic person whose annual
turnover, or asset value, at the time of conclusion of the
loan
exceeded R1m. Further, it was accepted that the mezzanine loan
constituted a “
large agreement”
as contemplated
in Section 4(1)(b) of the NCA.
The point was dealt with in some detailby Satchwell J in
Carl Beck
Estates
1
.
The nub of the learned Judge’s reasoning is to be found in
para 21 of oher judgment.
2
“
[21] The second
respondent signed as surety and co-principal debtor. The right
enforceable by applicant against second respondent
arises from the
contract of suretyship. The contract between applicant and second
respondent is separate and distinct from the
bond agreement between
applicant and first respondent, although it is accessory to it. The
second respondent is not a consumer
and did not receive credit. He is
a guarantor of a consumer’s contractual relationship with the
applicant remains ancillary
to the main agreement between the
applicant and the first respondent.
[22] The authorities on this
point are clear. A surety who has bound himself as surety and
co-principal debtor remains a surety
whose liability arises wholly
from the contract of suretyship. Signing as surety and co-principal
debtor does not render a surety
liable in any capacity other than a
surety who has renounced the benefits of excussion and division
(
Maasdorp v
Graaff-Reinet Board of Executors
(1906-1909)
3 Buch AC 482
at 490;
Du
Plessis v Estate Teich Brothers
1914 CPD 48
at 50;
Neon
and Cold Cathode Illuminations (Pty) Ltd v Ephron
1978 (1) SA 463
(A) at 471). As De Villiers CJ stated, ‘the use
of the words’ ‘co-principal debtor’ does not
transform
the contract into any other than suretyship (
Maasdorp’s
case
supra
at p490).
[23] Second respondent could not
be and was not sued in his capacity as co-principal debtor, since his
liability to the bank remains
that of surety who has renounced
certain benefits. This position is correctly referred to by the
applicant in its summons.
[24] In the result, the second
respondent is sued as a guarantor to the obligations of the first
respondent in terms of a credit
transaction to which the NCA does not
apply.”
Carl Beck Estates
was followed in
Nedbank Limited v Wizard
Holdings (Pty) Ltd
3
.
In this Division Yekiso J came to a similar conclusion in another
matter involving SMI
4
without reference to
Carl Beck Estates
. In
Ribeiro and
Another v Slip Knot Investments 777 (Pty) Ltd
5
the Supreme Court of Appeal did not question the common cause
proposition by the parties in that case that –
“
..because the NCA did not
apply to the loan agreements by virtue of s4(2)(c) and s8(5), it did
not apply to the respondents’
accessory obligations
(guarantees) under those agreements either.”
In Project Law Prop
6
Willis J remarked as follows in regard to a similar matter involving
mezzanine finance
7
:
“
..(It) is trite that
sureties are
promissores
subsidiarii
, that
their obligations are accessory to that of the principal debtor. In
that judgment
8
I observed that
this entails,
inter
alia
, that a
surety has the same defences
in
rem
as the principal
debtor. I repeat my summary that, in plain English, the Latin
expressions in this paragraph mean that sureties
have the same
substantive defences as are available to the principal debtor, no
more and no less. Accordingly, I agree with Satchwell
J.”
In the
Davids
matter before Yekiso J (a case in which
Mr.
Pretorius
also appeared for SMI in an unopposed application for
payment under similar suretyships) the learned Judge approached the
issue
as follows in regard to the applicability of the NCA
9
:
“
[15] The respondents, by
virtue of the suretyship agreements signed by each of them, are
guarantors to the loan granted by
Zapton
by the applicant.
Since the provisions of the
National Credit Act do
not apply to the
principal debtor,
Zapton
,
equally, such provisions do not apply to the respondents, as
guarantors, by virtue of the provisions of
s4(2)(c)
of the
National
Credit Act, which
provides:
‘
(c) This Act applies to
the credit guarantee only to the extent that this Act applies to a
credit facility or credit transaction
in respect of which the credit
guarantee is granted.’
[16] The suretyship agreements
signed by each of the respondents constitute a credit guarantee as
contemplated in
s8(5)
of the
National Credit Act, which
provides:
‘
(5) An agreement,
irrespective of its form but not including an agreement contemplated
in sub-section (2), constitutes a credit
guarantee if, in terms of
that agreement, a person undertakes or promises to satisfy on demand
any obligation of another consumer
in terms of a credit facility or a
credit transaction to which this Act applies.’
Thus, since the provisions of the
National Credit Act do
not apply
to the principal debtor,
Zapton
, such provisions, equally do
not apply to the respondents. This is so because of the principal
debtor, in the instance of this
matter, being a juristic person, as
contemplated in the definition of the terms “
juristic
person
” in
s1
, and the loan agreement in question being a
large loan agreement, as contemplated in
s9(4)
of the
National Credit
Act. Clearly
, therefore, the provisions relating to the prescribed
maximum interest rates, as provided for in the National Credit Act,do
not
apply to
Zapton
and the respondents.”
Mr. Möller
appeared quite unteterred by this welter of
authority, and advanced an argument to the following effect. A
credit guarantee as
contemplated in
section 8(5)
of the NCA does not
encompass a suretyship. This was said to be, firstly, because the
legislature did not intend to include such
a well-known instrument
in modern commercial life as a suretyship under the definition of
“
credit guarantee
”. Given that the execution of a
deed of suretyship is statutorily prescribed by the General Law
Amendment Act 50 of 1956,
it was argued that such exclusion from the
definition of a “
credit guarantee
” was
intentional and designed to afford NCA protection to sureties. The
reason for this, so the argument went, is because
in terms of
sections 4(2)(c), the NCA is only applicable to credit guarantees in
circumstances where they are issued under credit
facilities or
credit transcations, which in turn are subject to the NCA.
Mr. Möller
argued that a surety is not liable to the
creditor in the same manner as a guarantor is, and referred to,
inter alia
, the 5
th
edition of
Caney
10
and a journal article by Professor
Lubbe
11
as support for the contention that the undertaking by a surety is
accessorial to a principal contract and in giving such an
undertaking the surety does not disturb the liability of the
principal debtor under the main agreement. It was said further that
the undertaking by a surety is that the obligation by the principal
debtor will be discharged, and in the event that it is not
discharged, the creditor will be indemnified.
Counsel then sought to construe a credit guarantee as a different
type of contract in which the primary obligation to pay the
debt of
another is undertaken by the credit guarantor to effect payment on
demand by the creditor and not upon breach by the
debtor.
On 23 May 2012 Binns-Ward J delivered a thoroughly reasoned judgment
in response to the very same argument advanced before him
by
Mr.
Möller
. That matter involved suretyships executed by,
inter
alia
, Messrs. Essa and Coe in favour of Standard Bank for the
indebtedness of Xaler Construction Company (Pty) Limited – one
of the companies involved in the construction of the development to
which this matter relates.
12
Argument in this matter concluded on 11 April 2012, judgment in the
winding-up was delivered on 12 June 2012 and counsel for
all three
parties appeared before me again in August 2012 when an application
for leave to appeal in the Bestvest liquidation
was heard and
refused. And yet,
Mr. Möller
did not alert the Court at
any stage to the fact that the same point fell to be determined in
the Xaler matter, nor did counsel
subsequently inform this Court of
the judgment of Binns-Ward J in the
Standard Bank
matter, or
the dismissal of an application for leave to appeal delivered by
Binns-Ward J on 14 June 2012.
Mr. Möller’s
failure
to do what was reasonably expected of him is no doubt attributable
to the fact that Binns-Ward J did not uphold the surety’s
argument in that matter. Nevertheless he was duty-bound to inform
this Court thereof and his failure to do so is deprecated.
I find the reasoning of Binns-Ward J in the
Standard Bank
matter persuasive
13
.
The following passages in his judgment provide a useful summary for
his rejection of
Mr. Möller’s
argument:
“
[16] Despite the fact
that it has been accepted in numerous judgments – including at
least one of the Supreme Court of Appeal
– that contracts of
suretyship to which the NCA doesapply qualify as ‘credit
guarantees’ within the meaning of
s8(5) of the NCA, counsel for
the defendants maintained doggedly that they were not. He did this in
order to avoid the consequences
of s4(1) read with s9(4) of the Act,
alternatively, of s4(2)(c) thereof. But needing for the purpose of
his argument to keep the
suretyships as credit agreements within the
scope of the Act, he therefore sought to bring them within the
categories of credit
facilities or credit transactions in terms of
s8(3) or 8(4)f of the Act. There is no merit in these arguments.
[17]…As pointed out by
counsel for the plaintiff, apart from any other consideration there
is nothing about the nature of
suretyship in general, or the deeds of
suretyship executed by the defendants in particular, which provides
for a
deferment
in respect of the sureties’ obligation
to pay as is required by s8(3)(a)(ii)(aa) or s8(4)(f) of the Act, and
which thus has
to be manifest as a term of the agreements, if the
defendants’ counsel’s argument were to hold good.
Accordingly, even
if one were to assume – against the weight of
authority – in favour of the defendants’ counsel’s
argument
that the contract of suretyship does not in any
circumstances qualify for categorization as a ‘credit
guarantee’ in
terms of s8(5) of the NCA, the result would be
that as it also did not qualify as a ‘credit facility’ or
a ‘credit
transaction’, a contract of suretyship would
not fall within the ambit of the Act as a credit agreement under any
circumstances.
The result on that approach – to which I should
make it clear I am unable to subscribe – would fatally
undermine the
achievement by defendants’ counsel of his
ultimate objective, which was to seek to demonstrate that the
suretyship agreements
entered into by the defendants were void for
non-compliance by the plaintiff with the requirements of s92(2) of
the NCA. Section
92(2) is of application only to contracts which fall
within the ambit of the Act.”
In light of the various authorities to which I have referred above,
and which I embrace, I am satisfied that there is no merit
in the
argument on the NCA point advanced in this matter by the sureties.
SMI’S ALLEGED BREACH OF THE MEZZANINE LOAN
The sureties alleged that SMI had failed to fulfill its obligations
under the mezzanine loan by refusing to advance to Bestvest
the full
amount thereof. This failure, it was said, constituted a breach of
that loan and it was contended that the sureties
were therefore not
liable to SMI.
It is common cause that SMI did not advance the full amount of the
loan (R6.5m) to, or on behalf of, Bestvest. SMI alleges, as
I have
shown above, that the total of the advance was R5 205 994,97, while
the sureties say that it is only R5 080 594,93.
The
difference of R125 400,04 is of no consequence on this leg of
the Respondents’ argument, which is based on a legal
issue
arising from certain of the provisions of the mezzanine agreement.
Clause 5 of the agreement relates to the amounts to be advanced by
SMI. The material sub-paragraphs read as follows:
“
5.1 The loan amount is to
be advanced as set out hereunder:
5.1.1. the amounts due by the
Borrower as set out in clause 11 of this Agreement are to be paid by
SMI for and on behalf of the
Borrower on the signature date. It being
acknowledged by the Borrower that the amounts as set out in clause 11
are paid by SMI
for and on behalf of the Borrower and at the
Borrower’s special instance and request;
5.1.2. the balance of the loan
amount (being the loan amount less the payments in terms of 5.1.1) or
a portion thereof, may be advanced
by SMI to the Borrower prior to
the payment date, provided that in respect of any advance as
contemplated in clause 5.1.2, the
Borrower furnishes SMI with written
notification, acceptable to SMI, which written notification shall
deal with/contain at least
the following:
a breakdown in respect of the amount being requested;
the purpose for which the amount is requested;
the date by when same is required;
confirmation that all pre-disbursement conditions as required by
SMI and as contained in the approval of the development bond by
Imperial Bank (dated 7 March 2008 and annexed hereto, marked “B”)
have been met (including pre-sales requirements
of not less than a
net amount of R22m); and
any other information which SMI may require.
5.2 It is agreed that the
determination of as to whether the notification referred to in 5.1.2
is acceptable shall be a subjective
decision, and shall be made
solely by SMI, and maybe subject to certain amendments being made to
the agreement at the instance
of SMI. Such decision shall not be
capable of being challenged.
5.3 For the avoidance of any
doubt it is specifically recorded that should SMI not be satisfied
with the information as provided
in 5.1.2 or should the agreement not
be amended in accordance with SMI’s requirements, then in such
event there shall be
no obligation on SMI to advance the loan amount,
or any part thereof.”
In the answering affidavit Coe makes the following generalized
allegations in relation to SMI’s breach:
“
[26] Insofar as the
Applicant may seek to rely on its sole discretion (as set out in
clause 5.2 of the loan agreement), to justify
the refusal of its
payment; it is respectfully submitted that the Applicant is not
entitled to express such an election within
impunity given the facts
and circumstances whereunder the agreement had been concluded, upon a
proper interpretation of the agreement.
[27] When a contract provides for the exercise of a unilateral
discretion in order to determine the performance of an obligation
by
or against a party, such discretion must be exercised
arbitrio
bono viri
.
[28] I submit that having regard to the context of the agreement
and the knowledge of the Applicant and the First Respondent upon
the
conclusion thereof, the Applicant is in law not entitled to act
unreasonably and/or with wanton disregard for the interests
of the
First Respondent.
[29] I respectfully submit that the discretion exercised by the
Applicant, if that is its approach, constitutes a breach of the
agreement in the sense that the Applicant acted unreasonably. By
reason of the aforegoing, the exercise of the discretion by the
Applicant in terms of clause 5 constitutes a breach of the legal duty
to act reasonably with the judgment of a good man.
[30] In any event further, the
decision to withhold the balance of the loan constituted a material
breach that had (
sic
)
resulted in the First Respondent suffering damages in an amount that
is escalating on a daily basis.
30.1. As set out herein above,
the crucial phase for the development of this project was during July
2008 to July 2009, during which
the level of pre-sales had to be
achieved in order to facilitate the Imperial Bank funding as more
fully set out herein above.
30.2. The total project value
amounts to R50m upon its completion and a conservative estimate of
profit arising from this would
be an amount of not less than R10m.
30.3. Applicant’s breaches
have resulted in a failure of the project to date, the liquidation of
a construction company, Xaler
Construction (Pty) Ltd (in
liquidation), huge delays with regard to the progress of building
work on the site and more significantly,
a reduction in sales and/or
pre-sales being achieved by the First Respondent.
30.4. In consequence and for the
reasons set out herein elsewhere, the Applicant is liable to the
First Respondent in damages as
a result of the loss of profits
suffered by the First Respondent consequent to (
sic
) the
Applicant’s breaches aforesaid.”
It is significant to note two things. Firstly, that no substance is
given to the bald allegation made by Coe that SMI acted unreasonably
in the exercise of the discretion it enjoyed under the agreement.
Secondly, the claim that SMI’s breach had resulted in
Bestvest
suffering damages which were escalating daily never went further
than that. No counter-claim (or separate action) for
damages was
ever lodged by Bestvest or the sureties.
In the replying affidavit SMI explained the manner in which it had
exercised its contractual discretion under the mezzanine loan
and
claimed that, in light thereof, it had not behaved unreasonably.
The right of a contracting party to determine prestation under an
agreement is not entirely without judicial controversy.
Mr.
Pretorius
referred the Court to the judgment of Van Heerden DCJ
in the
NBS Boland Bank
case
14
in which the learned Judge made certain observations in a series of
cases where there had been an attack on the rights of banks
to
unilaterally vary interest rates in mortgage loan agreements.
The learned Judge of Appeal, having conducted an extensive review of
the common law, foreign law and the relevant South African
case law
came to the following conclusion
15
:
“
[24] In sum I am of the
view that, save, perhaps, where a party is given the power to fix his
own prestation, or to fix a purchase
price or rental, a stipulation
conferring upon a contractual party the right to determine a
prestation is unobjectionable. Second,
as has been said above, there
is an additional reason for holding that the clause under discussion
is valid. Of course, in some
cases providing for discretional
determinations there may be no enforceable contract until the
determination is made. But when
made an unconditional contract comes
into being.
[25] All this does not mean that an exercise of such a contractual
discretion is necessarily unassailable. It may be voidable at
the
instance of the other party. It is, I think, a rule of our common law
that unless a contractual discretionary power was clearly
intended to
be completely unfettered, an exercise of such discretion must be made
arbitrio bono viri
(cf
Dharumpal Transport (Pty) Ltd v
Dharumpal
1956 (1) SA 700
(A) at 707A-B;
Moe Bros v White
1925
AD 71
at 77;
Holmes v Goodall and Williams Limited
1936 CPD 35
at 40;
Bellville-Inry (Edms) Bpk v Continental China (Pty) Ltd
1976 (3) SA 583
(C) at 591 G-H; and
Remini v Basson
1993 (3)
SA 204
(N) at 210I-J)….
[26] Reference may also be made to D17.2.77, where it is said that
where one party has to do work to the satisfaction of the other
party, the latter must exercise his discretion
arbitrium bono
vire.
[27] The discretionary powers vested in the mortgagees by the
relevant deeds must therefore be subject to this inherent limitation.
The attack made on behalf of the mortgagors concerned effectively
assumes that there is no such limitation. It is an erroneous
assumption.”
No explanation is given in the founding affidavit by Du Plessis as
to why SMI only advanced about 80% of the agreed amount of
the loan
to Bestvest. The only breach relied upon by SMI at that stage was
that Bestvest had failed to repay its indebtedness
as at 9 July
2009.
When the sureties raised (in their answering affidavit) the issue of
the failure to advance the full amount of the loan as a
contractual
breach on the part of SMI which exempted Bestvest from liability
under the mezzanine loan, SMI denied (in its reply)
any such breach.
It then set out its version of events in that affidavit.
SMI
referred to various clauses in the mezzanine loan which it said were
relevant to its decision not to advance further funding
– a
decision which it described as reasonable in the circumstances and
as being based on sound commercial considerations:
44.1
Firstly, SMI pointed out that the mezzanine loan was concluded on the
basis that Bestvest complied fully with the requirements
of Imperial
Bank Limited (the forerunner to Nedbank) incorporated in its mortgage
loan. However, it said, Bestvest failed to comply
with the
requirements of the Imperial loan and was obliged to renegotiate the
terms thereof with Imperial.
44.2
Then, said SMI, it called a meeting with Bestvest in February 2009 as
a consequence of its concern about Bestvest’s inability
to
repay the loan with Imperial. At that meeting it was agreed that SMI
would consider advancing further sums to Bestvest on the
fulfillment
of certain further conditions, which included approval from Imperial.
Mr. Pretorius
argued that, in the result, SMI exercised its
discretion not to make further advances to Bestvest
arbitrio
bonos viri.
The proposition was described thus by Du Plessis in
the reply:
“
17.10In considering any
further advances to the first respondent, the applicant accordingly
had to have regard to the viability
of the development especially in
light of the circumstances mentioned above, the ability of the first
respondent and the prospects
of the development being finalized
within the scheduled time or at all as well as (
sic
)
effect of the first respondent’s failure to comply with the
initial requirements set by IBL and the subsequent unilateral
renegotiations and consequent amendments to such requirements. One
such effect being that the applicant’s loan would not
be repaid
by the first respondent upon the release by IBL of its facility, as
initially agreed, but only once the development was
finalized and
accordingly causing the applicant to be forced to be reliant upon the
successful completion of the development, the
chances of which at the
time seemed rather bleak.”
It was further pointed out in the reply that, whatever the manner of
the exercise of its discretion may have been, at the time
that SMI
exercised its discretion not to advance any further monies to
Bestvest, the latter was already in breach of the provisions
of the
mezzanine loan.
Upon consideration of all the material facts, I am not persuaded
that there was anything untoward in SMI’s failure to advance
a
further approximately R1.5m to Bestvest. At that stage
(February-March 2009) the development was in very serious trouble.
Not only had the principal building contractor on the job (Xaler)
been liquidated, Bestvest could not meet its obligations to
Imperial
under the main loan agreement and as a consequence thereof had to
renegotiate the terms of its indebtedness to Imperial.
It evidently
did so without taking SMI into its confidence.
In my view, the refusal by SMI to advance more money to Bestvest at
that stage of its corporate demise was a prudent decision
and one
which responsible corporate executives would have taken. To do
otherwise would have been to throw good money after bad.
In the circumstances I am of the view that it has not been shown
that SMI exercised its discretion unreasonably thereby breaching
the
agreement. Having regard to the aforegoing there is therefore no
basis to refuse SMI relief against the sureties in terms
of their
deed of suretyship executed on 1 July 2008.
WASTED COSTS
SMI’s application for payment was postponed on a number of
occasions and on each such occasion costs were reserved for
later
determination. On each of those occasions the postponement was
attributable to the non-availability of a Judge to hear
the matter.
This is, of course, regrettable but the wasted costs caused by such
postponements were clearly not attributable to
SMI. In my view it
would be fair to all concerned that such costs be regarded as costs
in the cause.
Accordingly it is ordered that
:
Judgment is granted in favour of the Applicant against the Second,
Third and Fourth Respondents, jointly and severally, the one
paying
the other to be absolved, for:
payment of the sum of R2 684 543,96;
interest on the amount of R2 684 543,96 at the rate of 1.25%
per week, calculated from 11 July 2008 to 10 July 2009;
payment of the sum of R1 262 596,33;
interest on the amount of R1 262 596,33 at the rate of
1.25% per week, calculated from 21 August 2008 to 10 July 2009;
payment of the sum of R881 779,61;
interest on the amount of R881 779,61 at the rate of 1.25% per
week, calculated from 7 October 2008 to 10 July 2009;
payment of the sum of R153 160,00;
interest on the amount of R153 160,00 at the rate of 1.25% per
week, calculated from 24 October 2008 to 10 July 2009;
payment of the sum of R98 515,03;
interest on the amount of R98 515,03 at the rate of 1.25% per
week, calculated from 11 November 2008 to 10 July 2009;
interest on the total of the individual amounts calculated in para’s
1 to 10 above (“the total”) at the rate
of 1.5% per
week, calculated from 11 July 2009 to 1 November 2009, limited to a
total amount of R10 161 189,86;
interest on the total at the rate of 1.5% per week, calculated from
2 November 2009 to date of this judgment, limited to a total
amount
of R10 411 989,94;
interest on the total at the rate of 1.5% per week, calculated from
date of judgment to date of final payment, limited to a total
amount
of R10 161 189,86;
costs of this application on the scale as between attorney and own
client, including the wasted costs occasioned by the postponements
of the application on 16 May 2011, 12 August 2011, 19 October 2011
and 27 February 2012.
______________
P.A.L. GAMBLE
JUDGE :
P.A.L. GAMBLE
FOR APPLICANT :
Adv. J.F. Pretorius
INSTRUCTED BY :
Sim Botsi Attorneys
FOR 1
ST to
4
TH
RESPONDENTS :
Adv. A.P. Möller
INSTRUCTED BY :
M.L. Littleford and Associates
DATES
OF HEARINGS : 10 April 2012; 23 April 2012 and 14 May 2012
DATE
OF JUDGMENT : 10 December 2012
DATE
OF CORRECTED JUDGMENT
IN
TERMS OF RULE 42(1)(b)
DELIVERED
ON : 31 January 2013
1
Firstrand
Bank Ltd v Carl Beck Estates (Pty) Ltd and Another
2009 (3) SA
384 (T) 2009 (3) SA 384 (T)
2
P390H
3
2010
(5) SA 523
(GSJ) See also
Slip Knot Investments 777 (Pty) Ltd v
Project Law Prop (Pty) Ltd
[2011] ZAGPJHC 21 (1 April 2011)
4
Structured
Mezzanine Investments v Davids and Others
2010 (6) SA 622
(WCC)
5
2011
(1) SA 575
(SCA)
6
(See
para 10)
7
Mr.
Pretorius
informed the Court from the Bar that
Slip Knot
was a sister company of
SMI
.
8
The
learned Judge was referring to his earlier decision in
Stocker
and Another v The Workforce Group (Pty) Ltd
[2010] ZAGPJHC 111
(17 November 2010)
9
See
p628
10
Caney’s
The Law of Suretyship (5
th
ed)
11
G.F.
Lubbe,
Die Onderskeid tussen Borgtog en Ander Vorme van
Persoonlike Sekerheidstelling
(1984) 47 THRHR 383
at 385-6
12
See
Standard Bank of SA Ltd v Adam Essa and 2 Others
, case no.
18994/2009 delivered in the Western Cape High Court on 23 May 2012.
13
See
in particular paras 13-17 of the judgment.
14
NBS
Boland Bank Ltd v 1 Berg River Drive CC;Deeb and Another v ABSA Bank
Limited
;
Friedman v Standard Bank of S.A Limited
1999 (4)
SA 928
(SCA)
15
P936I