S v Dyantyi (ECJ 070/2005) [2005] ZAECHC 31 (8 September 2005)

FORM A

FILING

SHEET FOR EASTERN CAPE JUDGMENT

ECJ NO: 064/2005

PARTIES: MICHAEL JOHN BILSBURY

AND

THE STANDARD BANK

REFERENCE NUMBERS –

Registrar: CA 483/04

DATE HEARD: 24TH AUGUST 2005

DATE DELIVERED: 8TH SEPTEMBER 2005

JUDGE(S): JONES and PICKERING JJ

LEGAL REPRESENTATIVES –

Appearances:

for the State/Applicant(s)Appellant(s): IJ SMUTS

for the accused/respondent(s): J McCONNACHIE

Instructing attorneys:

Applicant(s)/Appellant(s):

NETTELTONS

Respondent(s): BOQWANA LOON & CONNELLAN

Reportable

In the High Court of South Africa

(Eastern Cape Division) Case No CA 483/2004

Delivered: 8/09/2005

In the matter between

MICHAEL JOHN BILSBURY Appellant

and

STANDARD BANK OF SOUTH AFRICA LTD Respondent

(STANNIC DIVISION)

SUMMARY: Principal and surety – discharge of suretyship obligation by reason of conduct by the principal prejudicing the surety – ‘prejudice’ caused by the creditor exercising his contractual or statutory rights or performing his contractual or statutory obligations is not prejudice which discharges the surety.

JUDGMENT

JONES J:

This is an appeal from the magistrates’ courts in East London. The respondent, whom I shall call the bank, sued for payment of R17 083-96 which was the amount owing in terms of a written agreement for the purchase and sale of a motor-vehicle by instalments. The defendants were a partnership, which was the purchaser of the vehicle, and its two partners and the appellant, who were sued as sureties. The appellant was not a partner. He stood surety for the partnership because his wife was one of the partners. He was the only defendant to contest liability, judgment by default having been taken against the others. His defence was that he had offered payment of the total balance of the purchase price under the instalment sale agreement in full and final settlement but that his offer was rejected by the bank, and that he was in consequence discharged from his liability as a surety. The magistrate rejected this defence and gave judgment against him as prayed. The appeal is against that order.

The sole question before the magistrate and the sole issue on appeal is whether the bank’s refusal of the appellant’s offer of payment prejudiced the appellant’s rights as surety with the result that he was discharged from his suretyship obligations.

The appellant’s offer of payment was made in the following circumstances. The partnership used the vehicle for the delivery of dairy products and farm produce. But its business did not prosper. It fell into arrears with its instalments from time to time with the result that the bank was obliged to call for payment. In January 2000 it was again in arrears. On 18 January 2000 the bank sent its agent to the principal debtor to demand payment, and, if it was not forthcoming, to request the partnership to sign a consent to the voluntary surrender of the vehicle to the bank and then to take it into his custody. The consent and consequent surrender of the vehicle would bring the provisions of section 12 of the Credit Agreements Act 75 of 1983 into operation. That section entitles and requires the bank to keep the vehicle for 30 days, during which time the partnership has the opportunity to pay the amount of the arrears and so become entitled to return of the vehicle. If the arrears were not paid within the 30 day period the bank would be entitled to sell the vehicle in execution and claim the outstanding amount, if any, then owing in terms of the instalment sale agreement.

The arrival of the agent prompted the appellant into action. He telephoned one Borain, the manager of the bank’s credit department at its head office in Cape Town, and made an offer to purchase the vehicle at the full outstanding balance owing in terms of the instalment sale agreement on condition that the bank did not repossess the vehicle. Borain said he would come back to him. The appellant immediately put his offer in writing and sent it telephonically by facsimile transmission to Borain. The written offer identifies the vehicle and the purchaser and then continues:

‘This vehicle is in arrears with Stannic and is to be repossessed today. My business is prepared to purchase this vehicle for the settlement amount.

However the Dairy business has been sold with the takeover date being 25 January 2000. This offer to purchase is therefore subject to the vehicle not being repossessed pending the sale thereof to [the appellant’s business].

Kindly contact me at 083 459 1835 to finalise this matter.’

Later that day the bank reverted to the appellant. It declined his offer ‘for business reasons’. The partnership decided to sign a consent to surrender the vehicle to the bank. The bank repossessed the vehicle. This obliged the partnership to make urgent alternative arrangements for the delivery of its milk. The appellant’s reaction to the bank’s refusal of his offer is set out in the following letter which was also sent to Borain’s office that day:

‘In view of your decision not to accept my offer to purchase the above vehicle for the full settlement figure, as surety on this account I have no option but to limit my liability which I hereby do and I will not be held liable for any shortfall that may arise on the eventual disposal of the vehicle.’

The bank’s response was the following e-mail from Borain:

‘The vehicle has been taken in Stannic’s custody, pending payment, within the prescribed 30 days, of the full arrears.

Should the arrears not be paid the vehicle will be sold and should a shortfall arise Stannic will look to the principal debtor and the sureties to settle the shortfall.

Your allegation [that] Stannic refused to accept your offer of settlement is not correct. The facts are that neither you or the principal debtor were in a position to pay the arrears or the settlement figure on demand and that the vehicle was taken into custody in terms of the signed custody surrender.

I trust that the above clarifies your legal responsibilities and look forward to receiving payment of the full arrears by cash or bank guaranteed cheque and the subsequent release of the vehicle to our client.’

In due course the bank sold the vehicle in execution. There was a shortfall of R17 083-96 which the bank claimed from the principal debtor and the sureties, including the appellant.

In his evidence about prejudice the appellant was somewhat confused. He said that his interest was to purchase the vehicle for the full outstanding amount. He was not interested in paying the amount of the arrears because the partnership had sold its business. He complained that the refusal of the offer denied him ‘the use of the vehicle which he could have got at a reasonable price’. Mr Smuts’s argument on his behalf was that the real prejudice to him as a surety was that the bank’s refusal of his offer amounted to a refusal to allow him to pay the principal debt, thereby extinguishing his liability as a surety, and that this is the kind of prejudice which discharges a suretyship obligation. He relied on Arenson v Bishop 1926 CPD 73 at 75. In my view this argument is unsound. The conclusion of prejudice is contrary to principle and wrong on the facts.

The most recent statement of principle is the judgment in ABSA Bank Ltd v Davidson 2000 (1) SA 1117 (A) where Olivier JA said at 1124 I-J:

‘As a general proposition prejudice caused to the surety can only release the surety (whether wholly or partially) if the prejudice is the result of a breach of some or other legal duty or obligation. The prime sources of a creditor’s rights, duties or obligations are the principal agreement and the deed of suretyship. If, as in this case, the alleged prejudice was caused by conduct falling within the terms of the principal agreement or the deed of suretyship, the prejudice suffered was one which the surety undertook to suffer’.

I would add another source of rights and obligations – it is the statute governing instalment sale agreements which provides for statutory obligations and corresponding rights. It follows from the above passage that where the alleged prejudice is occasioned by the exercise of a right or the performance of an obligation for which the principal contract, or the deed of suretyship, or the statute makes provision, it cannot be a breach by the creditor. It is authorized by law or by contract. It does not therefore cause the kind of prejudice which entitles a surety to his or her discharge. In this instance, the principal debtor was in default of payment. Both the contract and the statute authorize repossession of the vehicle in these circumstances. The bank chose the route of a signed consent by the principal debtor and the voluntary surrender of the vehicle. The consequences of this are sanctioned by section 12 of the Act. Any so-called prejudice flowing from the bank’s decision is not, in the words of the Davidson judgment, prejudice which is ‘the result of a breach of some or other legal obligation’ by the bank. The bank is, of course, under a legal obligation not to cause prejudice to the surety, for example by authorizing material alterations to the terms of the principal agreement which have the effect of increasing the risk of non-payment by the debtor. Nothing like

that has happened in this case. The bank has done nothing which is not in accordance with its ordinary rights and duties under the contract and the Act. It is not required to enter into additional contracts with the surety, or to subject itself to additional conditions, or to agree not to exercise its ordinary rights. Its duty to a surety does not require it to agree to confer upon the surety additional advantages for which the principal agreement or the deed of suretyship do not provide. Its refusal to enter into a further contract which confers an advantage on the surety by transferring to him an asset in return for the discharge of his obligation as a surety is not a breach of its obligation as creditor and it does not give rise to the kind of prejudice which entitles the surety to his discharge.

The appellant’s reliance on Arenson v Bishop 1926 CPD 73 is misplaced. The ratio of that judgment is that the landlord could not recover damages from a surety for wrongful holding over by the tenant because the surety guaranteed payment of rent, not damages. Gardiner AJP gave a second reason for his judgment which was based on the hypothesis that rent was claimable, when it was not. It was that the landlord could not recover rent from the surety after she had refused to accept the rent from the tenant on the ground that the lease had been terminated and she had sued for ejectment. This reason was not concurred in by Benjamin J, and does not appear to give consideration to the line of reasoning which was subsequently approved by Ramsbottom J in St Patricks Mansions (Pty) Ltd v Grange Restaurant (Pty) Ltd and another 1949 (4) SA 57 (W) that a landlord is entitled to refuse payment of rent if the payment is made subsequent to a breach entitling him to cancel, and he is in the process of exercising his election whether to cancel or not. Gardner AJP’s second reason only applies to the improper refusal of a valid tender of payment.

In any event, the position in Arenson v Bishop is different from the situation which arose in this case. On the facts, the bank has not wrongfully refused to accept payment of the principal debt. It refused an offer for future payment because it was subject to a condition which deprived the bank of its right to repossess, which made the offer on that account unacceptable. This did not cause prejudice to the appellant. It was at all times open to him as surety either to pay the amount of the arrears or to settle the outstanding amount of the capital debt. He did not require the bank’s acceptance of any offer before he could do so. He could simply have paid the debt. He was given the additional advantage of a 30 day period within which to make the necessary arrangements if he was unable to pay when demand was made by the agent. His evidence was that he could have raised the money within a short period of time. But he ultimately chose not to do so, with the result that he is now required to pay no more than what he undertook to pay in the deed of suretyship. The bank cannot be blamed for loss of the advantage to him of acquiring the vehicle as a quid pro quo for settling the principal debtor’s liability. That is a consideration which is extraneous to the contractual relationship between the parties and the obligations arising therefrom. It was an advantage which he could have secured for himself by concluding an agreement to that effect with the principal debtor in return for paying the debt. The bank is also not to blame for additional interest for which he might ultimately be liable because he did not pay the amount claimed on demand.

In the result the appeal is dismissed with costs.

RJW JONES

Judge of the High Court.

PICKERING J: I agree.

JD PICKERING