Category Archives: Contract

WHAT MAKES A SURETYSHIP VALID?

On 29 May 2015, in the case of Dormell Properties 282 CC v Bamberger[1], the Supreme Court of Appeal (SCA) set out the importance of, firstly, expressly pleading a suretyship clause in a plaintiff’s particulars of claim and, secondly, ensuring that the contract to which a deed of suretyship is annexed is duly signed by all parties thereto.

The case

There were two agreements of importance. The first agreement was a written offer to lease agreement concluded between Dormell and Edulyn, duly represented by Bamberger in his capacity as sole director, in terms of which Bamberger undertook to bind himself as surety for Edulyn’s obligations under a second agreement, being the agreement of lease.[2]

The first agreement

The first agreement was properly signed by the parties; however, the agreement of lease was only signed by Bamberger. Annexed to the agreement of lease was a deed of suretyship which Bamberger signed. The deed of suretyship and agreement of lease were annexed to Dormell’s particulars of claim as if this suretyship was the instrument that bound Bamberger as surety and co-principal debtor for the fulfilment of the obligations of Edulyn.[3]

In the court a quo, Savage AJ found that ‘a contract of suretyship requires a valid principal obligation with someone other than the surety as debtor and the liability of the surety does not arise until this principal obligation has been contracted (Caney [C F Forsyth and J T Pretorius Caney’s The Law of Suretyship in South Africa 6 ed (2010)] at 47)’.[4] In the SCA the appellant conceded that no express reference to the first suretyship clause was made in the particulars of claim, but argued, inter alia, that the omission caused no prejudice to Bamberger.[5]

The suretyship clause

Dormell’s cause of action was based on the deed of suretyship attached to the agreement of lease and not on the suretyship clause in the first agreement. To seek to change this now would amount to an amendment of the particulars of claim and the advancing of a case which was not initially pleaded. Bamberger therefore contended that he was not given the opportunity to raise any defence which he could have raised to the suretyship clause.[6]

The SCA set out that ‘the purpose of pleadings is to define the issues for the parties and the court. Pleadings must set out the cause of action in clear and unequivocal terms to enable the opponent to know exactly what case to meet. Once a party has pinned its colours to the mast, it is impermissible at a later stage to change those colours.’[7] Furthermore the court found that Dormell should have expressly alleged a valid contract of suretyship (i.e. that the terms of the deed of suretyship were embodied in a written document signed by or on behalf of the surety which identified the creditor, the surety and the principal debtor). Dormell had to allege the cause of the debt in respect of which the defendant undertook liability as well as the actual indebtedness of the principal debtor.[8]

In the Dormell case the deed of suretyship was invalid and enforceable because it was annexed to an agreement of lease which wasn’t signed by Dormell, and therefore the suretyship was in respect of a non-existent obligation. Dormell conceded that the suretyship pleaded was invalid, but argued that Bamberger would not suffer any prejudice if Dormell was allowed to rely on the suretyship in the first agreement instead. The court found that although it does have discretion regarding keeping parties strictly to their pleadings, it does not agree that this discretion reaches as far as to place a party in the disadvantageous position of not being permitted to raise any legal defence.[9]

In deciding the above, the court looked at whether Bamberger would have conducted his case materially differently, had Dormell’s case been pleaded properly. The court found that he would have, in that he would have been in the position to raise the defence of non-excussion (i.e. that Dormell should have first claimed the outstanding amounts owed from Edulyn and only if they could not pay this amount, should Dormell have claimed from Bamberger).[10] He had not raised this defence in his plea or at the trial because the deed of suretyship annexed to the agreement of lease in terms of which he had waived the defence of non-excussion (which was not signed by Dormell) was relied upon.[11]

Conclusion

The SCA therefore found that Bamberger would suffer prejudice if it were to allow Dormell to rely on the suretyship clause in the first agreement which was not relied upon in the particulars of claim.[12] It is therefore crucial to, firstly, expressly plead the details of a valid suretyship clause in a plaintiff’s particulars of claim and, secondly, to ensure that the contract to which a deed of suretyship is annexed is duly signed by all parties thereto. If you do not do you may find yourself in a situation where the courts will not allow you to enforce a valid suretyship.

[1] (20191/14) [2015] ZASCA 89 (29 May 2015)

[2] ibid para 1-3

[3] ibid para 5

[4] Dormell Properties 282 CC v Bamberger (20191/14) [2015] ZASCA 89 (29 May 2015) para 8

[5] ibid para 8

[6] ibid para 10

[7] ibid para 11

[8] ibid para 12

[9] Dormell Properties 282 CC v Bamberger (20191/14) [2015] ZASCA 89 (29 May 2015) para 15

[10] ibid para 19

[11] ibid para 20

[12] ibid para 21

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

COMBINED DEVELOPERS

Public policy trumping pacta sunt servanda (“agreements must be kept”) rule – is public policy dictating the future of the enforcement of clauses in commercial agreements? 

Acceleration clauses are commonly found in commercial agreements where one party (“the borrower”) is afforded a period of time to make payment of an amount or amounts due in terms of such agreements to the other party (“the lender”). This clause offers protection to the lender as it affords the lender the option to demand the balance of the unpaid debt, upon failure by the borrower to pay any amount on the due date for such payment.

Acceleration clauses have always been enforceable in our courts.  However, in the recent judgment of Combined Developers v Arun Holdings and others [2014] JOL 31897 (WCC), the Western Cape High Court had to determine the legality and enforceability of an acceleration clause having regard to the dictates of public policy.

The parties in Combined Developers entered into a written loan agreement in terms whereof Combined Developers, as lender lent money to Arun Holdings, the borrower. The agreement contained an acceleration clause, which provided that if the borrower fails to pay the lender any amount when due, together with mora interest at the floating interest rate to the lender within 3 business days after receipt of a written demand from the lender, an event of default shall be deemed to have occurred and the lender shall be entitled to recover from the borrower all amounts owing under the agreement, immediately due and payable upon deliverance by the lender of the aforesaid notice.

It was common cause that the borrower failed to pay an amount of R42,133.15 on or before the due date for such payment. The lender sent an email to the borrower, informing it of its failure to pay. The borrower paid the amount of R42,133.15, but omitted to pay the mora interest, which amounted to an insignificant amount of R86.57.

The lender argued that the borrower’s failure to pay the mora interest constituted an event of default as contemplated by the acceleration clause, which entitled the lender to claim from the borrower payment of the full outstanding amount of the loan, being an amount of R6.7 million and invoking the lender’s rights in terms of securities granted in its favour to secure payment in terms of the agreement.

The question the court was asked to determine was whether the enforcement of the acceleration clause in these circumstances was against public policy due to the severe consequence the enforcement would have for the borrower.

The lender, relying on the pacta sunt servanda (agreements voluntarily concluded should be adhered to) rule, argued that acceleration clauses are valid and strictly enforceable according to its terms and that a court has no equitable jurisdiction to relieve a debtor from the automatic forfeiture resulting from such a clause.

The court rejected this argument and found that even if the rule is a key principle in our law, testing the contents of an agreement against public policy is still the default position.

The court confirmed that the test is an objective one of determining whether the values of the constitution, which is an important source of the values of public policy, are breached by an interpretation of the clause as proposed by the lender.

The judgment confirmed that although a contractual provision itself may not run counter to public policy, the implementation thereof may be so objectionable that it is sufficiently oppressive to constitute a breach of public policy, in which case public policy can be invoked in justification of a refusal to enforce a provision.

The court found that it was apparent that the manner in which the lender wished to enforce the acceleration clause was contrary to public policy, due to the unconscionable result it had in demanding payment of R6.7 million for the failure on the part of the borrower to pay R86.57. There was no reasonable commercial need in enforcing this debt against the borrower and this could have been dealt with amicably and expeditiously, without instituting litigious proceedings, the court concluded.

The reasoning in Combined Developers was recently confirmed by the Constitutional Court, evidencing that our courts are moving towards a constitutionalised approach when interpreting contractual provisions. The Constitutional Court found that it would lead to a great injustice to enforce a contractual provision rigidly, by adhering to the pacta sunt servanda principle and indicated that the law of contract, based on the principle of good faith, contains the necessary flexibility to ensure fairness in commercial agreements. This confirmation does open the door to great uncertainty for contracting parties, whose rights and obligations in terms of commercial agreement will no longer be determined solely in accordance with the terms of the agreements.

Combined Developers is a warning also to contracting parties that although an acceleration clause itself is not a clause that is deemed to be against public policy, the implementation thereof could be against public policy. Contracting parties, in particular lenders, should therefore always act in good faith when drafting and implementing commercial agreements, as lenders may lose the protection acceleration clauses is intended to afford to them.

Authored by: Lucinde Rhoodie: Director: Dispute Resolution and Mari Bester: Candidate Attorney Dispute Resolution

www.cliffedekkerhofmeyr.com

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. (E&OE)

CONTRACTING WITH MINORS IN A DIGITAL CONTEXT

In this article, we examine whether contracts entered online by minors, using their parents’ credit cards, are legally binding in the specific context of social media such as Facebook.

Both Common law and legislation deal with the capacity of minors who enter into different types of contracts. According to the Children’s Act, 38 of 2005 a minor is a person between the ages of seven and 18 years. In terms of common law a minor does not have sufficient capacity to incur binding obligations under a contract and must obtain the assistance or consent of their guardian to do so. This consent can be given before the contract is concluded or thereafter, in which case it is seen as ratification of the contract. There are exceptions to this rule, which may be found in various pieces of legislation as well as in common law, such as contracts where the minor obtains only rights and no duties (e.g. a donation).

A minor can escape liability even when they have been bound in terms of the contract (i.e. where the guardian has assisted the minor in the conclusion of the contract, consented to or ratified the contract). This can be done where the contract was prejudicial to him or her at the time that it was concluded. The court may then, on application, set the contract aside and order that each party be placed in the same position as what they were in before the contract had been concluded.

Facebook is currently involved in an ongoing class-action lawsuit. In this lawsuit, a class of parents in America are pressing their claim that Facebook should change how it handles online transactions by minors.

Attorneys for the parents in the above case note that it is important that Facebook has knowledge of a user’s actual age but still treats children the same as adult users when it comes to taking their money.

One of the biggest issues here is that reciprocal performance, being the payment of money via credit or debit card and the child obtaining credits, takes place almost immediately. Therefore, if the parent were to be refunded, the minor would be unjustifiably enriched using the credits.

The system, that Facebook currently employs, is therefore problematic since it takes advantage of children who may not fully understand the contracts that they are entering into when they purchase game credits. Furthermore, should the parents be immediately refunded in the current system, it may lead to situations where the parent consents to the purchases and then after the child obtains the enjoyment from the credits, request that their accounts be credited due to a ‘lack of consent’.

It is therefore clear that this system of payment should be changed. We should obtain clarity on how to deal with this in South Africa once the class-action suit in America has been concluded and a solution has been reached. At present, it seems that there will be no alternative for parents whose children overspend or use their credit or debit cards, without permission. If your child has, a Facebook gaming habit it is a good idea to keep a close eye on your wallet until we have clarity on the recourse available to parents who find themselves in this situation.

Bibliography

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)