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[2014] ZAWCHC 17
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Nedbank Ltd v Puricare CC and Others (18922/2010) [2014] ZAWCHC 17 (18 February 2014)
THE
HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE DIVISION, CAPE TOWN)
Case
No: 18922/2010
DATE:
18 FEBRUARY 2014
In
the matter between:
NEDBANK
LTD
..................................................................
PLAINTIFF
And
PURICARE
CC
..................................................
FIRST
DEFENDANT
SALIVE
AIR CC
...........................................
SECOND
DEFENDANT
KENNETH
HARRIS
........................................
THIRD
DEFENDANT
OLIVE
ANN HARRIS
..................................
FOURTH
DEFENDANT
ALBERT
WIFFEN
............................................
FIFTH
DEFENDANT
RIAAN
KIRSTEN
.............................................
SIXTH
DEFENDANT
HEINER
DOMINICK
................................
SEVENTH
DEFENDANT
UWE
DOMINICK
..........................................
EIGHTH
DEFENDANT
CHARMAINE
LYNN DOMINICK
..................
NINTH
DEFENDANT
Coram:
ROGERS J
Heard:
5,6 & 10 FEBRUARY 2014
Delivered:
18 FEBRUARY 2014
JUDGMENT
ROGERS
J:
[1]
The plaintiff (‘Nedbank’) instituted action against the
first defendant (‘Puricare’) for an amount of
R1 450
037,12 plus interest allegedly owing on an overdrawn account. Nedbank
sought to hold the 2nd to 9th defendants jointly and
severally liable
as sureties. Subsequent to the institution of action Puricare went
into liquidation. Its liquidators were joined
but played no part in
the proceedings on the basis that Nedbank would not seek any relief
in the action against Puricare. The action
continued against the
sureties. On 4 February 2014, the day before the trial began, Nedbank
reached a settlement with the 2nd to
6th defendants. In terms of the
settlement, those defendants agreed to pay Nedbank an amount of R1
million on the basis that Nedbank
would release and discharge them
from any further liability as sureties. The trial was thus confined
to the liability of the 7th
to 9th defendants. Mr Vivier appeared for
Nedbank and Mr Badenhorst for the 7th to 9th defendants.
[2]
For convenience I shall refer to the 2nd to 6th defendants as the
Harris group and the 7th to 9th defendants as the Dominick
group. The
Dominick group comprise Uwe Dominick, his wife Charmaine and his
brother Heiner (I shall refer to them by their first
names to avoid
confusion). The Harris group were the original controllers of
Puricare, whose business was water purification and
agricultural
enhancement technologies.
[3]
In February 2009, at a time when Puricare’s business was in
straitened circumstances, the Dominick group were brought
in to
provide funding and managerial direction. The facility agreement on
which Nedbank sued was concluded in January 2010 at the
instance of
Uwe. By mid-February 2010 there had been a falling out between the
Harris group and the Dominick group. The Dominick
group exited but
retained an interest in the affairs of Puricare by virtue of the
suretyships they had signed and by virtue of
loan funding provided by
them.
[4]
When Nedbank subsequently sought repayment of the overdraft, Puricare
and the Harris group (who by now had sole control of Puricare)
contended that Uwe had acted without authority in concluding the
facility agreement of January 2010. The Dominick group, by contrast,
contended that Nedbank had acted, or allowed the Harris group to act,
in a manner which was prejudicial to the interests of the
Dominick
group as sureties and that the Dominick group was thus discharged
from their suretyship liability.
[5]
At the trial the issue between Nedbank and the Dominick group
remained the question whether the Dominick group had been discharged
from their suretyship liability by virtue of prejudicial conduct by
Nedbank. Because the onus on this question rested on the Dominick
group, they adduced evidence first, calling Uwe as their only
witness. Nedbank called Mr Patrick Schwartz, who was the bank’s
principal representative in its dealings with Puricare. The relevant
facts were largely common cause.
The
facts
[6]
At the time the Dominick group became involved in the affairs of
Puricare in February 2009, Puricare had three bank accounts.
On one
of these accounts there was an overdraft facility of R150 000. For
convenience I shall refer to this account as the overdraft
account.
The other two accounts were referred to in the evidence as the agri
account and the plastics account. There were no overdraft
facilities
on either of these two accounts. The agri account was used by
Puricare for its agricultural enhancement business. The
overdraft
account was used inter alia for the water purification business.
[7]
It was agreed that the Dominick group would obtain a 40% shareholding
in Puricare and would provide certain funding. The shareholders
resolved that Uwe and Heiner be appointed as directors. Although they
were not formally reflected as such in the register, Uwe
and Heiner
operated de facto as the managing director and operations director
respectively. The business flourished in the months
following their
arrival.
[8]
On 8 April 2009 Puricare provided Nedbank with a mandate in terms of
which the authorised signatories on the overdraft account
were to be
Uwe, Heiner and Belinda Fourie (Uwe’s sister-in-law).
[9]
Although the business prospered under the Dominicks’ control,
there was a cash flow difficulty because a considerable
part of
Puricare’s turnover was tied up in work in progress, mainly
public sector contracts. As a result, Uwe on 10 September
2009
negotiated a R350 000 increase in the facility on the overdraft
account, bringing the total facility to R500 000. This increase
was
for a three-month period, in the expectation that Puricare would
receive contract payments by December 2010. Uwe negotiated
this
temporary facility with Schwartz, with whom he had a pre-existing
cordial relationship by virtue of the fact that the Dominicks
had
other business with the bank.
[10]
The written facility contract of September 2010 was not adduced as an
exhibit but it was probably in substantially the same
terms as the
later facility agreements. It appears that the contract required the
5th to 8th defendants to sign suretyships limited
to an amount of
R510 000. Those suretyships were executed on 14 October 2009. They
were in identical form. I shall deal later
in this judgment with the
relevant terms of the suretyship contracts. By this stage Nedbank
already held unlimited suretyships
from the 3rd and 4th defendants
(Kenneth Harris and his wife) furnished in 1996, and an unlimited
suretyship from the 2nd defendant
(a close corporation controlled by
Harris and his wife) furnished in 1999.
[11]
The temporary increased facility expired on 10 December 2009. Because
Puricare had still not received the expected contract
payments, Uwe
negotiated an extension of the increased facility to 15 January 2010.
By that date the debtor payments had still
not been received but Uwe
was able to negotiate a further extension to 15 February 2010.
[12]
Towards the end of January 2010 Uwe realised that even the increased
temporary facility of R500 000 would not enable Puricare
to meet its
salary bill for the month and pay certain creditor payments which
were due. He thus approached Schwartz for additional
temporary
funding of R750 000, which would bring the total temporary facility
to R1,25 million. It appears from the email which
Uwe wrote to
Schwartz on 27 January 2010 that initially he had in mind that his
wife Charmaine (the 9th defendant) would borrow
the money from
Nedbank against the security of a property she owned and that she in
turn would on-lend the money to Puricare. However,
this was soon
changed to a proposal that Puricare itself obtain the additional
facility on the basis that Charmaine would provide
a suretyship
secured by a mortgage over her property. Based on information
supplied by Uwe, Schwartz wrote to his seniors on 28
January 2010 to
motivate approval for the additional facility. He said that
Puricare’s figures reflected that substantial
funds were coming
in and that there was plenty of work on hand. Uwe had offered
tangible security in the form of Charmaine’s
property. Schwarz
explained that Puricare’s problem was that payments from some
of the bigger debtors had been delayed, because
local authorities
were very slow in processing payment. He included an extract from an
email from Uwe to himself, which identified
three substantial debtors
from whom payment was expected.
[13]
Schwartz received approval to grant the temporary increase in the
facility. The new facility contract was signed by Uwe (for
Puricare)
and Schwartz on 29 January 2010. The additional facilities of R350
000 and R750 000 were stated to be temporary and would
expire on 15
February 2010. Apart from recording the required securities which had
already been part of the earlier facility contracts,
the agreement
stated that Charmaine was required to furnish a suretyship for R1,2
million and that a first mortgage bond was to
be passed over her
property. Charmaine signed her suretyship on the same day. Apart from
the amount of the limit, its terms were
identical to the suretyships
signed by Heiner and Uwe. The mortgage bond was registered on 2 March
2010.
[14]
The overdraft account reflects that on 28 January 2010 the overdrawn
balance was about R598 000. Following the grant of the
additional
facility, salary and SARS payments were made on 29 and 30 January
2010 which caused the overdrawn balance to increase
to about R1,194
million.
[15]
In the meanwhile, the relationship between the Harris group and the
Dominick group was becoming frayed. There were meetings
and
discussions among the shareholders over the period 1 to 4 February
2010. Uwe testified that the 6th defendant (Riaan Kirsten)
could not
understand why the profit reflected in the management accounts was
not translating into money in the bank. There were
veiled allegations
of impropriety against the Dominicks. There was also a breakdown in
the personal relationship between Kirsten
and Heiner. Attempts at
resolving differences failed, leading to a final parting of the ways
by about 15 February 2010. On that
day, the 5th defendant (Albert
Wiffen), who was now functioning as spokesperson for the Harris
group, addressed an email to the
Dominicks attaching a resolution
which Puricare’s shareholders had passed. The resolution
recorded that, due to ‘non-performance
and mismanagement’
by the Dominicks’ company, Cool Technology (Pty) Ltd, the
resolution of 30 March 2009 was revoked.
The latter resolution was
not placed before the court but presumably set out the terms on which
the Dominick group was to obtain
a stake in Puricare. The resolution
further stipulated that the Dominick group was to be denied access to
Puricare bank accounts
and premises and was to hand over all
equipment and information belonging to Puricare with immediate
effect.
[16]
Whether or not this decision by Puricare’s alleged shareholders
was valid is not an issue in the case before me. As a
fact, the
Dominick group accepted that their managerial involvement in Puricare
was at an end. However, they still had an interest
in Puricare’s
affairs, because they had advanced substantial funding to Puricare
and had given suretyships. Up to this time
the signatories on the
overdraft account were Uwe, Heiner and Fourie. Uwe had an electronic
banking profile which gave him electronic
access to all of the
accounts in which he had an interest, including those of Puricare,
and which also enabled him to effect transactions
electronically on
these accounts. With the parting of the ways, Nedbank created a new
electronic profile for the Harris group but,
probably due to an
oversight, Uwe’s profile was not amended. Uwe continued to
access the Puricare accounts electronically
in order to monitor the
flow of funds but he refrained, as from 15 February 2010, from
transacting on the accounts.
[17]
According to Schwartz, who was receiving information both from the
Harris group and the Dominick group, the Harris group sought
a
further extension of the additional facilities of R350 000 and R750
000, which was granted verbally on 15 February 2010 (the
date on
which those additional facilities expired in terms of the facility
contract of 29 January 2010). The verbal extension was
to 8 March
2010. Schwartz said that part of the Harris group’s motivation
for this request was that they were contesting
Uwe’s authority
to have concluded the facility contract of 29 January 2010. Unless
the facility was extended, Puricare would
be unable to trade. (One of
the questions in the present case is whether this verbal extension
was valid, having regard to the
non-variation clause in the facility
contract of 29 January 2010.)
[18]
On 16 February 2010 Uwe sent an email to Schwartz, informing him of
the irreconcilable differences between the shareholders
and that the
Dominick group would be exiting Puricare. He told Schwartz that
Puricare would require the current overdraft facilities
to continue
with its daily operations, adding:
‘
The
shareholders of Puricare [ie the Harris group will] need to sign the
suretyship for these facilities as we are not prepared
to do so after
our official exit from Puricare. This includes the R500k and the
R750k used by Puricare to fund current WIP [work-in-progress]
projects on hand.’
[19]
On 19 February 2010 Puricare (now under the sole control of the
Harris group) sent a notification to all its clients, advising
them
that all future payments should be made into the agri account, not
the overdraft account. At that date the overdrawn balance
of the
overdraft account was about R1,397 million. The intended effect of
this instruction was that payments from clients would
no longer go in
reduction of the overdraft but would instead be added to the credit
balance in the agri account. At the close of
business on 19 February
2010 the agri account had a credit balance of just under R30 000. For
as long as Nedbank allowed this state
of affairs to continue,
Puricare could fund payments from current cash inflows by way of the
agri account without reducing or needing
an increase in the overdraft
on the overdraft account. Nedbank appears to have facilitated the
payment of monies into the agri
account, because on 24 February 2010
it issued a document ‘to whom it may concern’, confirming
that Puricare conducted
the agri account.
[20]
Uwe, who was monitoring the transactions on the overdraft and agri
accounts, wrote to Schwartz on 5 March 2010 about what he
saw. On
that date the negative balance on the overdraft account was about
R1,4 million. Various debit orders were reflected as
unpaid items. On
the same day, the positive balance in the agri account was about R256
000, following a deposit on 3 March 2010
of R197 807 (this latter
payment apparently related to the agricultural enhancement side of
the business and would thus in the
ordinary course have gone into the
agri account). In his email, Uwe pointed out the balances on the two
accounts and also told
Schwartz that the so-called Harlem funds
(being one of the large contracts mentioned in Schwartz’s email
to his superiors
of 28 January 2010, payment in respect of which
Puricare had been expecting) were apparently to be paid early in the
following
week. He continued:
‘
I
request Nedbank to do the right thing and move the funds immediately
onto the [overdraft] account and simultaneously cancel the
R750k
facility signed by Charmaine Dominick. Puricare has not shown any
interest in resolving this matter.’
[21]
On 8 March 2010 a customer payment of R850 000 was deposited into the
agri account. Although at the time Uwe thought that this
was part of
the Harlem funds, the payment was in fact in respect of the Golden
Gate contract, one of the other large contracts
mentioned in
Schwartz’s email to his superiors of 28 January 2010. In the
ordinary course, that payment would have been made
into the overdraft
account. It was presumably made instead into the agri account
pursuant to Puricare’s customer notification
of 19 February
2010. The effect of this deposit was to swell the credit balance in
the agri account to about R1,1 million. At the
same time, the
negative balance in the overdraft account was about R1,4 million.
[22]
At some stage prior to 9 March 2010 there had been telephonic
discussions between Uwe and Schwartz in which the former had
discussed what he regarded as being the prejudicial position of there
being a credit balance in the agri account in circumstances
where
there was a large negative balance in the overdraft account,
particularly where expected debtor payments with reference to
which
Uwe had motivated the temporary increase in facilities were being
diverted by Puricare (under the Harris group’s control)
to the
agri account. My impression from Schwartz’s evidence is that he
himself appreciated the potential unfairness and that
the bank would
in the ordinary course have invoked its right (conferred by the
standard facility contract) to appropriate the credit
balance in the
agri account in reduction of the overdraft account. Uwe discussed
with him the possibility that he (Uwe) might use
his electronic
access to the bank accounts to effect inter-account transfers but
Schwartz advised against this, saying it might
get him into trouble.
[23]
Uwe sent an email to Schwartz on 9 March 2010. He attached to his
email Puricare’s customer notification of 19 February
2010. He
said that this notification clearly showed that Puricare (ie under
the control of the Harris group) had no intention of
reducing the
overdraft amount and was instead trading on the agri account,
concluding:
‘
I
need Nedbank to please move the funds onto the [overdraft] account
and cancel the overdraft facility signed by Charmaine and myself.’
A
few minutes later he sent a further email, saying that the Harlem
funds were now in the agri account (as noted, the funds were
in fact
in respect of the Golden Gate contract, but nothing turns on this).
[24]
On the same day Nedbank transferred an amount of R913 155 from the
agri account to the overdraft account. This caused the credit
balance
in the agri account to drop to R161 580 and the debit balance in the
overdraft account to be reduced to R500 000,27. Uwe
at the time
believed that Nedbank had acted on his request. Schwartz testified,
however, that this was not the case. The verbal
extension of the
additional facilities of R350 000 and R750 000 expired on 8 March
2010. Schwartz’s evidence was that in
discussion with the
Harris group the bank agreed a further extension of the additional
facility of R350 000 to 6 April 2010 but
that the further additional
facility of R750 000 had not been extended. This meant that the total
approved facility on the overdraft
account dropped on 8 March 2010 to
R500 000. The bank had thus caused an amount to be transferred from
the agri account which would
reduce the overdraft account to the new
approved limit of R500 000 (this was a right accorded by the standard
facility contract).
Given that the bank did not transfer the full
credit balance in the agri account and that the reduced balance in
the overdraft
account following the transfer was almost exactly R500
000, I do not have reason to doubt Schwartz’s version (which
Uwe in
the nature of things could not contradict).
[25]
Nedbank’s conduct in transferring the amount of R913 500 from
the agri account to the overdraft account was met with
resistance by
the Harris group. Reference was made in Uwe’s cross-examination
to a note made by Wiffen of a meeting which
the Harris group had with
the bank on 10 March 2010.
1
Schwartz did not give evidence specifically about this note and its
content was thus not proved. Nevertheless, the position of
the Harris
group as reflected in the note accords with the letter which their
attorneys, De Klerk & Van Gend, addressed to
Nedbank on 12 March
2010. In this letter the attorneys recorded their instructions as
being, among other things, that whereas the
facility letter for R500
000 had been authorised, Uwe had unlawfully and fraudulently
increased Puricare’s overdraft facility
by a further R750 000
by means of the facility letter of 29 January 2010; that Nedbank had
unilaterally recouped funds of approximately
R913 000 on 8 March
2010; and that this capital was required for the operations of the
company, without which Puricare would be
unable to trade and would
suffer damages. The attorneys demanded that the ‘unilaterally’
recovered sum of R913 000
be immediately made available to the
company, failing which their instructions were to approach the court
for urgent relief. The
attorneys also suggested that the matter could
be amicably resolved if Nedbank called up the security given by
Charmaine Dominick.
[26]
Schwartz testified that, following internal consideration of this
letter by the bank, he was instructed by the bank’s
legal
department to give effect to Puricare’s demand. He did this by
transferring a sum of R749 155 back from the overdraft
account to the
agri account, causing the overdraft balance to increase from about
R503 000 to R1,252 million and the agri account
credit balance to
increase from R189 997 to R939 152. Schwartz did not explain how the
precise amount of the re-transfer was calculated.
It seems that the
bank’s intention was to restore the overdraft balance from
about R500 000 to the previous limit of R1,25
million. Of this
overdrawn balance, R750 000 was in contention, so a similar amount
was made available to Puricare in cash by way
of the transfer back to
the agri account.
[27]
On 23 March 2010, less than a week later, Puricare caused the full
credit balance in the agri account, namely R735 990,61,
to be
transferred to an account at Absa, at which point Nedbank lost any
ability it might previously have had to appropriate that
sum in
reduction of the overdraft account. Schwartz testified that this
transfer was effected by Puricare electronically and that
he had not
been aware of Puricare’s intention to do so. He later learnt
that Puricare had decided to bank with Absa rather
than Nedbank.
[28]
Uwe testified that it was only on 24 March 2010 that he accessed the
Puricare accounts and saw the transactions of 17 and 23
March 2010.
He emailed Schwartz to inform him that Puricare had ‘now moved
the total funds from the Nedbank account to an
Absa account’.
[29]
On 12 April 2010 Nedbank sent letters of demand to Puricare and to
all the sureties.
[30]
On 29 April 2010 an amount of R280 269 was paid into the overdraft
account, reducing the overdrawn balance from about R1,29
million to
R1 million. Uwe testified that this was a payment in respect of a
municipal tender (the Leppell Water contract), a
tender which
Puricare had won when the Dominicks were still involved in the
business. He said that Puricare’s tender document
had specified
the overdraft account as the account into which payments should be
made. On the next day Nedbank transferred an amount
of R280 269 from
the overdraft account to the agri account. Schwartz testified that he
did so on the instruction of Puricare. He
was informed in that regard
by the Harris group that the customer had mistakenly made the payment
into the overdraft account instead
of the agri account. On the same
day Puricare transferred an amount of R282 000 from the agri account
to its Absa account.
[31]
The full agri account was handed up as exhibit B. It reflects that
after 30 April 2010 certain further payments were made into
the agri
account by various customers and that sums were transferred from the
agri account to the Absa account from time to time.
The intention of
the Harris group as it can be discerned from the pattern of
transactions seems to have been to ensure that no
substantial funds
remained for any length of time in the agri account. The last
customer payment into the agri account was in late
July 2010. A small
credit balance of R12 489 was transferred from the agri account to an
unidentified account on 18 October 2010,
and the agri account seems
then to have been closed.
[32]
Nedbank issued summons on 2 August 2010.
[33]
Puricare was placed in voluntary liquidation on 5 December 2011. I
was informed by counsel that although Nedbank and some of
the
sureties have proved claims in the liquidation of Puricare, there is
little prospect of a dividend.
[34]
Agreement was reached between Nedbank and the 7th to 9th defendants
that, inclusive of accumulated interest, the liability
of Puricare on
the overdraft account as at 24 January 2014 was R2 795 313,11
together with interest as from 25 January 2014 at
21% per annum. This
does not take into account the amount of R1 million paid by the
Harris defendants on 4 February 2014 pursuant
to the settlement
agreement.
The
pleaded case
[35]
Nedbank’s claim is based on the facility contract of 29 January
2010 and the suretyships signed by the Dominick defendants.
The terms
of the facility contract and the suretyships are not in dispute. The
defendants have not alleged that any of the terms
are invalid or
unenforceable.
[36]
During the course of the trial Nedbank amended its particulars of
claim to include the two verbal extensions of the overdraft
facility
on 15 February 2010 and 8 March 2010. The amendment was not opposed
but it was placed on record that the defendants would
amend their
plea to contend that the verbal extensions were unenforceable in the
light of the non-variation clause in the facility
contract. An
amended plea to that effect was duly handed up. The clause on which
the defendants place reliance is clause 17.1 of
the facility
contract, which provides that the offer of banking facilities
contained in the facility letter constitutes the whole
of the
agreement between Puricare and Nedbank and that ‘no amendment,
alteration, addition, variation or consensual cancellation’
will be of any force or effect unless reduced to writing and signed
by both parties.
[37]
The Dominick defendants’ defence is that they have been
released due to prejudicial conduct by Nedbank. (Certain other
defences mentioned in the plea were abandoned.) The prejudice
initially pleaded by those defendants did not entirely accord with
what Mr Badenhorst outlined in his opening address. The trial
proceeded, without objection, on the basis that the defence was as
outlined by Mr Badenhorst, subject to my direction that an amended
plea was filed without delay. The amended plea was handed up
at the
beginning of the second day’s proceedings.
[38]
The amended plea alleges in summary as follows:
[a]
There was a duty on Nedbank not to act in a manner that would be
prejudicial to the Dominik defendants in their capacity as
sureties.
[b]
Nedbank, despite having been informed that Puricare had no intention
of repaying the overdrawn facility, allowed Puricare to
transfer
funds from the overdrawn account to the agri account.
[c]
In particular, on 17 March 2010 Nedbank unilaterally transferred an
amount of R749 155 from the overdraft account to the agri
account,
despite the fact that at that time no overdraft facility existed,
alternatively the overdraft facility was only R150 000.
[d]
Furthermore, on 29 April 2010 an amount of R280 269, earmarked to
reduce the overdraft, was paid into the overdraft account
but on 30
April 2010 Nedbank unilaterally transferred the same amount from the
overdraft account into the agri account, despite
the fact that at
that time no overdraft facility existed, alternatively the overdraft
facility was only R150 000.
[e]
As a result of Nedbank’s prejudicial conduct towards them, the
Dominick defendants are entitled to release from the suretyships.
The
law relating to prejudice
[39]
Recent judgments of the Supreme Court of Appeal indicate that there
is no general principle that a surety is discharged from
liability
because the creditor has behaved in a manner prejudicial to the
surety’s interests. In Absa Bank Ltd v Davidson
2000 (1) SA
1117
(SCA) Olivier JA said that ‘[a]s a general proposition
prejudice caused to the surety can only release the surety (whether
totally or partially) if the prejudice is the result of a breach of
some or other legal duty or obligation’ (para 19). The
learned
judge of appeal went on to point out that the prime sources of a
creditor’s rights, duties and obligations are the
agreement
with the principal debtor and the deed of suretyship. If the
prejudice is caused by conduct falling within the terms
of those
agreements, the prejudice suffered is one which the surety ‘undertook
to suffer’. He went on to demonstrate,
on the facts of that
particular case, that the alleged prejudicial conduct was expressly
authorised by the terms of the suretyship.
The defence thus failed.
[40]
Despite some academic criticism of Davidson, the Supreme Court of
Appeal in Bock & others v Duburoro Investments Pty Ltd
2004 (SA)
242 (SCA) specifically subscribed to the legal position as set out in
Davidson (see para 21). Bock has also clarified
another controversial
aspect in this area of the law. Where the prejudicial conduct is not
authorised by the principal agreement
or suretyship, the prejudice
only operates as a defence pro tanto (see paras 22-26). If the
prejudicial conduct has not caused
the surety’s liability to be
greater than it otherwise would have been, there is no defence. If
the prejudice has increased
the surety’s liability by a
quantifiable sum which is less than the full debt claimed by the
creditor, he will only be released
to that extent. In Bock the court
assumed in favour of the sureties that the bank had dealt with shares
pledged by the principal
debtor in a manner contrary to the principal
agreement and that the sureties could thus in principle rely on such
conduct as prejudicial
conduct. However, on the facts it was not
shown that, if the bank had acted as it should have done under the
principal agreement,
the liability of the principal debtor, and thus
of the sureties, would have been any less. The defence thus failed.
[41]
The onus of proving prejudicial conduct rests on the surety; and it
seems that the surety is also required to prove the financial
extent
of the prejudice so as to establish whether his release is partial or
complete (see also Khula Enterprise Finance Limited
v Geldenhuys &
another
[2012] ZASCA 165
para 6), though I do not think in this case
that it is necessary to express a final view as to where the onus
lies in respect of
quantification.
[42]
Mr Badenhorst, in his written heads and in oral argument, referred to
the prejudice rule as delineated in Caney The Law of
Suretyship 4th
ed and in Spur Steak Ranches v Mentz
2000 (3) SA 755
(C) and Di
Giulio v First National Bank of South Africa Ltd
2002 (6) SA 281
(C).
However, the current position is more accurately (though somewhat
grudgingly) set out in the 6th ed of Caney at pp 205-207
with
reference to the judgements of the Supreme Court of Appeal discussed
above. The legal position as set out in Spur Steak Ranches
and Di
Giulio has been significantly attenuated by the Supreme Court of
Appeal’s decisions. In particular, Harms JA in para
21 of Bock
disapproved the statement in Di Giulio that there is a roving enquiry
into ‘justice, fairness, reasonableness,
good faith and public
policy’.
[43]
At common law, and subject to the express terms of the suretyship,
the surety may terminate an indefinite suretyship by giving
a notice
of withdrawal. However, a suretyship may contain a provision that the
surety will not be released on notice without the
consent of the
creditor. It has been held that such a clause is valid (see Botha
(now Griessel) & another v Finanscredit (Pty)
Ltd
1989 (3) SA 773
(A) at 781H-784B).
Evaluation
The
verbal extension of the overdraft facility
[44]
As mentioned, the Dominick defendants contend that the verbal
extensions of the facility contract of 29 January 2010 were
ineffective in the light of the non-variation clause contained in the
facility contract. They make this germane to their prejudice
defence
by contending that, at the time of the transfers out of the overdraft
account on 17 March 2010 and 30 April 2010, there
was no approved
facility on the overdraft account or alternatively a facility of only
R150 000. It is common cause that the transfers
out of the account on
17 March 2010 and 30 April 2010 occurred at times when the overdrawn
balance was substantially in excess
of R150 000.
[45]
On Nedbank’s own case, by the time of the transfer on 17 March
2010 the approved facility was only R500 000. On that
day the debit
balance was already slightly in excess of R500 000, and the transfer
out of the account caused the overdrawn balance
to exceed R1,252
million. On 30 April 2010 the approved facility (if it still existed
at all) was only R150 000. The overdrawn
balance at that time
exceeded R1 million. Accordingly, neither of those debits was in
accordance with the verbally extended overdraft
facility. However,
and as I shall presently explain, I do not think it assists the
Dominique defendants that the approved facilities
did not cover the
debits in question.
[46]
However, and to the extent that it might matter, I do not think the
verbal extensions were ineffective. There are two reasons
for this
conclusion:
[a]
The first is that because the non-variation clause limits the
parties’ freedom of contract, it should be restrictively
interpreted. On this basis, it was held in BLP Investments (Pty) Ltd
v Angel’s Precision Works (Pty) Ltd & others
1987 (4) SA
308
(C) that the renewal of a lease beyond its original period on the
same terms as the original written lease was not hit by the
non-variation
clause. The non-variation clause precludes the informal
variation of the rights and obligations of the parties during the
period
of their contract. It does not prevent them from concluding an
informal contract for a period after the expiry of the written
contract.
In the present case, therefore, it was open to Nedbank and
Puricare, upon the expiry of the facility recorded in the contract of
29 January 2010, to reach verbal agreement on an extension of the
overdraft on the same terms as in the facility contract.
[b]
In any event, the non-variation clause exists for the benefit of the
contracting parties, here Nedbank and Puricare. The persons
now
objecting to the verbal agreement are strangers to that contract.
According to Schwartz, both Nedbank and Puricare agreed to
the verbal
extensions, and neither of those parties has taken the point that the
verbal agreements are not enforceable.
[47]
I return now to why it does not matter that no approved facilities
were in place at the time of the transfers. A facility agreement
simply means that the bank is bound to honour debits to the amount of
the agreed facility until the agreement is validly terminated
or
lapses with the effluxion of time. The fact that a facility agreement
is not in place does not mean that a bank is not entitled
in its
discretion to honour a customer’s debit requests. The debits of
which the Dominick defendants complain, namely those
of 17 March 2010
and 30 April 2010, were made pursuant to the request of its customer,
Puricare. Nedbank was not obliged to honour
those requests; but if
the requests were authorised by Puricare (and there is no suggestion
that they were not, and all indications
are that they were), Puricare
could not complain if the bank chose to meet the requests. The
position was stated thus by Zulman
JA in Absa Bank Ltd v IW Blumberg
and Wilkinson
[1997] ZASCA 15
;
1997 (3) SA 669
(SCA) at 675H-676D:
‘
The
fact that the appellant [a bank] might have permitted the respondent
to draw cheques against uncleared effects, despite there
being no
agreement in this regard, would not excuse the respondent in law from
liability to make payment to the appellant. The
appellant was
perfectly entitled to choose to honour such cheques, notwithstanding
the fact that the effects earlier deposited
had not been cleared, and
to waive any benefit afforded to it in this regard by its agreement
with the respondent. It would be
strange indeed if it were
permissible for a customer of a bank to draw a cheque on the bank,
requesting the bank to honour the
cheque, and thereafter, when the
bank honoured the cheque despite the absence of an overdraft
facility, to then plead that this
would have resulted in an overdraft
facility which had not been agreed upon. In essence this is precisely
what the respondent is
contending for. It hardly lies in the mouth of
the respondent, who drew the two cheques in question against
uncleared effects,
albeit contrary to the agreement between the
parties, to be heard to complain that the bank should not have
honoured the cheques
and debited its account. Put differently, it is
the appellant, so it is suggested, who must bear the loss if the
uncleared effects
were not met. This cannot be so… . As
pointed out by Cozens-Hardy MR in Cuthbert v Robarts, Lubbock &
Co
[1909] 2 Ch 226
at 233:
“
If
a customer draws a cheque for a sum in excess of the amount standing
to the credit of his current account, it is really a request
for a
loan, and if the cheque is honoured the customer has borrowed
money.”’
[48]
I thus conclude that, insofar as the principal debt is concerned,
Puricare was liable for the full amount owing on the overdraft
account, including the indebtedness arising from the transfers of 17
March 2010 and 30 April 2010. Indeed, despite the emphasis
which Mr
Badenhorst in argument placed on the fact that the agreed facility
did not cover the transfers of 17 March and 30 April
2010, he
disavowed any suggestion that Puricare was not itself bound to pay
the full debit balance in the overdraft account. This
highlights, I
think, the futility of the defendants’ argument on this aspect.
An argument by a surety which focuses on non-compliance
by the
creditor with the contract between itself and the principal debtor is
really an argument that the surety is not liable because
the
principal debtor itself is not liable. Once it is accepted that the
principal debtor is liable to the creditor for the amount
claimed
from the surety, the focus switches to the suretyship, ie to the
question whether the suretyship itself covers that particular
indebtedness or whether there was a violation of any other term of
the suretyship.
Prejudicial
conduct
[49]
For obvious reasons the Dominick group wished, after 15 February
2010, to be released from their suretyships, and this desire
was
communicated to Nedbank. However, clause 17 of the suretyships
provided that a release upon notice from the surety to Nedbank
would
only come into effect upon receipt by the surety of written notice
from Nedbank acknowledging that the suretyship has been
terminated.
As noted earlier, such a clause is valid. Nedbank at no stage gave a
written notice acknowledging that the Dominick
group’s
suretyships had been terminated. Those suretyships have thus at all
times remained of full force and effect.
[50]
As to prejudicial conduct, they can be no doubt in a general sense
that the Dominick defendants were financially prejudiced
by Nedbank’s
conduct in transferring monies out of the overdraft account on 17
March and 30 April 2010 and by Nedbank’s
conduct in allowing
Puricare to operate a separate account with a credit balance and in
permitting a state of affairs in which
Puricare was able to transfer
money from the credit balance to another bank (as Puricare did on 23
March 2010 and on several occasions
thereafter until the agri account
was closed in October 2010). I can understand why the Dominick
defendants feel aggrieved.
[51]
However, and in accordance with Davidson and Bock, I have to
determine whether the Dominick defendants have established that
Nedbank’s conduct was in breach of a legal duty or obligation.
Those cases indicate that the sources, or at least the primary
sources, for the duties and obligations in question are the principal
agreement and the suretyship contract. If one or other of
those
contracts expressly authorises the conduct in question, cadit
quaestio. If there is no express provision covering the matter,
one
would need to consider implied or tacit terms. An enquiry into
implied terms might require a consideration of constitutional
values.
It is unnecessary, for purposes of this judgment, to go beyond the
express terms of the relevant contracts or to consider
what scope
there might be for the prejudice principle if the surety cannot show
that there is a term (express, implied or tacit)
which is breached by
the conduct in question.
[52]
The prejudicial conduct of which Nedbank is accused is allowing debit
transactions on the overdraft account on 17 March and
30 April 2010.
Although the amended plea does not go beyond these matters, I am
willing to assume in favour of the defendants that
I should also
consider Nedbank’s failure, from time to time after 17 March
2010, to set off credit balances in the agri account
against the
debit balance in the overdraft account. Nedbank undoubtedly had a
contractual right to apply such set-off. Clause 12.3.9
of the
standard facility letter provided that, where an event of default
occurred, Nedbank was entitled in its sole discretion
to set off the
indebtedness of Puricare to Nedbank against any amount standing to
the credit of Puricare in Nedbank’s books.
Even having regard
to the verbal extensions, an event of default had occurred by 8 March
2010, because the overdrawn balance on
that date was more than R1,4
million whereas the approved facility had dropped from R1,25 million
to R500 000 (see clause 1
2.2.1).
Nedbank was thus entitled on 9 March 2010 to transfer the amount of
R913 155 from the agri account to the overdraft account
in order to
bring the latter account within the R500 000 limit. And it would have
been entitled thereafter to appropriate further
credit balances from
the agri account from time to time.
[53]
The question, however, is whether Nedbank’s conduct in
transferring amounts out of the overdraft account to the agri
account
(thus increasing the overdrawn balance to the prejudice of sureties)
and in failing to appropriate credit balances in the
agri account by
way of set-off (a failure which was again to the prejudice of
sureties) was in breach of the terms of the principal
agreement or
suretyships. In essence, what Nedbank did was [a] to honour debit
requests made with due authority by Puricare, in
circumstances where
Nedbank was not obliged to honour those debit requests, given the
absence of a facility agreement of sufficient
magnitude; [b] to
decline to exercise a discretionary right of set-off.
(i)
The principal agreement
[54]
Insofar as the principal agreement is concerned, I have already
explained that in my view the absence of a facility agreement
does
not mean that a bank is not entitled to honour a duly authorised
debit request from its customer. If the debit request is
authorised
and if the bank in its discretion meets the request, the customer is
bound to repay the advanced sum. Nedbank’s
conduct in meeting
the debit requests which gave rise to the transfers of 17 March and
30 April 2010 was thus in accordance with
the contractual
relationship between customer and bank, and Puricare was obliged to
repay any resulting indebtedness. Mr Badenhorst
in argument referred
to this conduct by Nedbank as ‘unilateral’. Mr Badenhorst
may have meant that Nedbank’s
conduct was unilateral in
relation to the Dominick defendants (ie without their consent). But
Nedbank’s making of the transfers
was not unilateral insofar as
Puricare was concerned; Nedbank was acting at Puricare’s
request.
[55]
Similarly, and insofar as the principal agreement is concerned,
Nedbank was entitled but not obliged to exercise the right
of
set-off. The introductory portion of clause 12.3 expressly states
that Nedbank ‘may’ exercise the rights listed
therein ‘in
its sole discretion’.
(ii)
The suretyship agreements
[56]
The identical suretyship agreements signed by the Dominick defendants
provided (subject to the limits respectively of R510
000 and R1,2
million) that the surety would be liable for all amounts which
Puricare might then or in the future owe to Nedbank
arising in any
manner and from any cause whatsoever (clauses 1, 2 and 16).
[57]
Clause 3 provided that it would always be in Nedbank’s
discretion ‘to determine the extent, nature and duration
of any
banking facilities to be allowed to’ Puricare. Clause 5 stated
that Nedbank would be entitled, without prejudice to
its rights under
the suretyship, ‘to give time to, compound with, release from
liability or make any other arrangements’
with Puricare; and
that such action would not exonerate the surety from his or her
obligation. There was a renunciation inter alia
of the benefits of
excussion.
[58]
Clause 13 stipulated that the suretyship constituted the whole
agreement between the surety and Nedbank relating to the subject
matter thereof and that no amendment, alteration, addition, variation
or consensual cancellation would be of any force or effect
unless
reduced to writing and signed by both parties. Clause 14 provided
that no waiver of the terms and conditions of the suretyship
would be
binding unless expressed in writing and signed by both parties. In
terms of clause 15 the surety acknowledged that neither
Nedbank nor
any other person had made or given any ‘warranties, promises or
representations whatsoever’ to the surety
to procure the
undertaking of the suretyship.
[59]
There was no attack on the validity of any of these clauses. They are
very wide and permit the creditor to deal with the principal
debtor
in a manner which may very well prejudice the surety. (There are
other provisions in the suretyship which permit similar
conduct by
Nedbank in relation to co-sureties but they are not germane, since
the Dominick defendants do not complain of the way
in which Nedbank
has dealt with the Harris defendants as sureties.) Nedbank’s
conduct in giving effect to the debit requests
on 17 March and 30
April 2010 and its discretionary decision not to invoke set-off
involved an ad hoc extension of banking facilities
to Puricare. The
Dominick defendants acknowledged in their suretyships that the
determining of such facilities was always in Nedbank’s
discretion and also that Nedbank could give extensions of time to
Puricare, settle with Puricare for less than its full liability
and
even release Puricare from liability completely. Furthermore, the
Dominick defendants’ liability was not confined to
Puricare’s
indebtedness arising from the facility contract of 29 January 2010 or
from similar written facility contracts;
they were liable for any
indebtedness of Puricare howsoever arising. Once one finds (as I do)
that Puricare incurred an indebtedness
for which it became liable to
Nedbank, the Dominick defendants are liable as sureties, even though
their liability may have been
less if Nedbank had not honoured
Puricare’s ad hoc debit requests and had insisted on earlier
repayment by appropriating
credit balances in the agri account.
[60]
Although the Dominick defendants did not plead the existence of any
implied or tacit terms in the suretyship contracts, the
wide powers
which the suretyships confer on Nedbank may be subject to an implied
term that those powers should not be exercised
mala fide with a view
to harming the sureties and improperly benefiting the principal
debtor (cf Nedcor Bank Ltd v SDR investment
Holdings Co (Pty) Ltd
[2008] ZASCA 11
;
2008 (3) SA 544
(SCA) para 18). Since the content and limits of any
such implied duty were not the subject of argument, I express no
opinion on
that question.
[61]
I should say, though, that in my opinion Nedbank did not (in the
respects complained of) act mala fide, in the sense of acting
out of
spite to the Dominick defendants and without a genuine business
reason. The relationship between Uwe Dominick and Schwartz
was
cordial, and seems to have remained so despite the awkwardness
brought about by developments within Puricare in and after February
2010. The root of the problem was a falling-out between two groups of
shareholders. There were counter-accusations. The majority
shareholders (the Harris group), who as from 15 February 2010 became
the sole controllers of Puricare, disputed the additional
facility of
R750 000 which Uwe had organised on 29 January 2010. They accused the
Dominick faction of fraud and forgery. By way
of their attorneys’
letter of 12 March 2010, Puricare, under the control of the Harris
group, was threatening Nedbank with
interdicts and a claim for
damages if Nedbank treated the full overdrawn balance (exceeding
R1,25 million) as owing by Puricare
and if on that basis Nedbank
appropriated monies standing to the credit of the agri account or
insisted that payments made by Puricare’s
debtors remain in the
overdraft account.
[62]
The dilemma which Nedbank faced was not of its own making. It became
embroiled in a fight between warring partners within Puricare.
Although Nedbank at no stage conceded the invalidity of the facility
contract of 29 January 2010, and although Nedbank, when demanding
payment on 12 April 2010 and issuing summons on 2 August 2010,
insisted that the facility contract was duly authorised and binding,
Nedbank could not be certain, over the period March-April 2010, how
the competing allegations by the Harris group and Dominick
group
would ultimately pan out. Nedbank thus chose the path of caution,
allowing Puricare (now controlled by the Harris group)
to use cash
inflows for the ongoing operations of the company, rather than
appropriating them to the disputed overdraft. Although
Schwartz did
not say so, I have little doubt that in following this course Nedbank
drew comfort from the suretyships it held both
from the Harris group
and the Dominick group, and that but for the suretyships it would not
have shown Puricare the indulgence
it did. In the case of Harris, his
unlimited suretyship was supported by limited real security in the
form of a mortgage bond over
a property in George; and in the case of
Charmaine Dominick, her suretyship for R1,2 million was supported by
real security over
a property worth substantially more than R1,2
million. However, none of this shows that Nedbank was acting out of
spite or malice
or that it was motivated by anything other than its
own genuine business interests.
[63]
Mr Badenhorst submitted that Nedbank allowed the transfers to be made
out of the overdraft account at a time when it knew that
Puricare had
no intention of repaying the overdraft. To the extent that it
matters, I do not think the evidence goes this far.
Puricare and the
Harris group do not appear to have disputed Puricare’s
liability to the extent of R500 000; they were disputing
the
additional facility of R750 000. Even Puricare’s conduct in
transferring the credit balance in the agri account to the
new Absa
account (which according to Schwartz took Nedbank by surprise) does
not show that Puricare had no intention of repaying
any part of the
overdraft indebtedness. Puricare may well have effected the transfer
to Absa out of fear that if Nedbank appropriated
the credit balance
Puricare would be unable to continue trading.
[64]
Mr Badenhorst contended in argument that the transfers which Nedbank
made or allowed to be made from the overdraft account
to the agri
account on 17 March and 30 April 2010 were not made ‘in the
ordinary course of business’. However, the
defendants did not
plead that it was a term of the suretyships that the powers conferred
therein on Nedbank could be exercised
only ‘in the ordinary
course of business’ (whatever that may mean). Such a
qualification would be a material one, going
beyond the more limited
implied restriction that the powers in question should not be
exercised mala fide. Apart from the absence
of pleading, the notion
of ‘ordinary course of business’ in this context lacks
clear content. Nedbank might say that
it acted in the ordinary course
(ie as a prudent and cautious banker would ordinarily act), given the
unusual circumstances which
it faced.
Quantification
[65]
For the reasons I have set out above, I do not think that the
Dominick defendants established prejudicial conduct by Nedbank
which
was in violation of duty or obligation owed by Nedbank either under
the principal contract or under the suretyships.
[66]
If this conclusion were wrong, it would be necessary to determine the
extent, if any, to which the Dominick defendants were
prejudiced and
thus the extent of their release. Because of my conclusion on the
main issue, it is not necessary to determine that
question. I
observe, though, that it is by no means apparent that the Dominick
defendants would be released in full. Even if Nedbank
had declined to
make the transfers out of the overdraft account on 17 March and 30
April 2010, Puricare’s overdraft liability
would not have been
extinguished. After the transfer out of the overdraft account on 30
April 2010, the overdrawn balance was R1
302 578. If the transfers
out of the overdraft account of R749 155 and R280 269 on 17 March and
30 April 2010 respectively had
not been made, the overdraft balance
on 30 April 2010 would have been R273 154 (assuming all other entries
remained the same).
The Dominick defendants would, I think, be liable
at least for said amount of R273 154, together with interest as from
30 April
2010.
Conclusion
[67]
It follows from what I have said above that the prejudice defence
fails and that the Dominick defendants are, subject to the
limits of
their respective suretyships, liable for the residual indebtedness to
Nedbank after deducting the amount paid by the
Harris group in terms
of their settlement.
[68]
Nedbank is entitled to its costs, save for those costs attributable
to the lis between Nedbank and the 1st to 6th defendants.
Clause 1 of
the deeds of suretyship entitles Nedbank to costs on the scale
between attorney and client. There was a summary judgment
application
which, after the filing of affidavits by the Dominick defendants, was
refused by agreement with costs to stand over
for later
determination. Counsel were agreed that these should be costs in the
cause.
[69]
I make the following order:
[a]
Each of the 7th and 8th defendants is ordered to pay the plaintiff
the sum of R510 000 together with interest at 11,5 % per
annum,
calculated daily and capitalised monthly, from 27 July 2010 to date
of payment.
[b]
The 9th defendant is ordered to pay the plaintiff the sum of R1,2
million, together with interest at 11,5% per annum, calculated
daily
and capitalised monthly, from 27 July 2010 to date of payment.
[c]
The total amount recoverable from the said defendants in terms of the
aforesaid orders shall not, either individually or cumulatively,
exceed the total of the principal debt, calculated as follows: R2 795
313,11 plus interest thereon at the rate of 21% per annum
as from 25
January 2014 to date of payment and allowing a credit of R1 million
against the said total on 4 February 2014.
[e]
The 9th defendant’s immovable property, mortgaged by way of
mortgage bond B6072/2010, is declared specially executable.
[f]
The 7th to 9th defendants are directed, jointly and severally, to pay
the plaintiff’s costs of suit on the scale between
attorney and
client, including those in the summary judgment proceedings against
them reserved by this court’s order of 11
October 2010 but
excluding all costs relating to the proceedings between the plaintiff
and the 1st to 6th defendants.
ROGERS
J
APPEARANCES
For
Plaintiff: Mr P de B Vivier
Instructed by:
Fourie Basson & Veldtman
3rd Floor Toplin House
219 Voortrekker Road
Parow
For
7th – 9th Defendants: Mr D Badenhorst
Instructed
by:
Haycock
Attorneys
c/o BBM
Attorneys
5
Leeuwen Street
Cape
Town
1
In
the cross-examination it was assumed that the meeting occurred on 10
February 2010. This is clearly a typographical error in
the heading.
Wiffen signed the note under the date 10 March 2010, and reference
was made in the note to the disputed transfer
of R913 500 on 9
March 2010.