Specialized Bicycle Components South Africa (Pty) Ltd v Zascotorque (Pty) Ltd t/a Concept Cyclery and Others (20/12853) [2021] ZAGPJHC 114 (6 April 2021)

REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG LOCAL DIVISION, JOHANNESBURG

Reportable: No

Of interest to other judges: No

6 April 2021 Vally J

Case number: 20/12853

In the application of:

Specialized Bicycle Components South Africa (Pty) Ltd

Applicant

and

Zascotorque (Pty) Ltd t/a Concept Cyclery

First Respondent

Wayne Jeffery Plit

Second Respondent

Robert Noel Ambler-Smith

Third Respondent

Robin Brian Olbrich

Fourth Respondent

JUDGMENT

Vally J

[1] On 13 December 2011 the second respondent, Mr Wayne Jeffer Plit (Mr Plit), the third respondent, Mr Robert Noel Ambler-Smith (Mr Ambler-Smith), and the fourth respondent, Mr Robin Brian Olbrich (Mr Olbrich) acting for and on behalf of Zascotorque (Pty) Ltd (Zascotorque) concluded a ‘Credit Dealer and Brand Agreement’ (Credit Dealer Agreement) with Specialized Europe B.V (Specialized B.V). In terms of this agreement:

a. Zascotorque would maintain and operate a retail store for merchandising Specialized B.V’s products;

b. Specialized B.V would grant Zascotorque a revolving credit line of up to R2m which was to be used exclusively for the purchase of Specialized B.V products to be sold in the retail store;

c. Zascotorque would write down the credit line at ‘the greater of 10% of the credit line balance’ plus interest on a monthly basis or such amount necessary to ensure that the amount owing does not exceed the inventory of Specilaized B.V’s products held in Zascotorque’s store. Thus, Zascotorque would at all times hold stock in the store that would be equivalent in value to the outstanding balance on the credit line;

d. The credit line including all outstanding or accrued interest was to be settled by 31 October 2015;

e. If Zascotorque defaulted on a specific payment due then Specialized BV would have a right to call up the entire amount plus interest due on the credit line.

[2] The second, third and fourth respondents signed an ‘Unconditional Continuing Guaranty’ (the Guaranty) in terms of which they irrevocably, jointly, severally and unconditionally guaranteed to Specialized B.V that they would promptly pay on demand any monies Zascotorque owed to Specialized B.V, if Zascotorque defaulted on its obligations. It would remain in place until Zascotorque liquidated the debt in full or it was cancelled in writing.

[3] Clause 34 of the Credit Dealer Agreement is of particular importance in this matter. It provides that Zascotorque may not cede or assign any of its rights under the said agreement without the written consent of Specialized B.V, but Specialized BV may assign its rights and obligations to an affiliated company.

[4] Zascotorque opened two retail stores, one in Melrose Arch (the Melrose Store) and one in Cedar Square shopping centre (Cedar Store). It sold Specialized B.V’s products in both stores. Specialised B.V lent Zascotorque money to open the two stores. The opening of the stores was governed by written agreements concluded between Specialized B.V and Zascotorque.

[5] The Credit Dealer Agreement terminated in October 2015. It was replaced by two Concept Store Agreements, one for each store. In addition, Zascotorque and Specialized B.V concluded Retailer Agreements in order to prevent the entire amount owing on the Credit Dealer Agreement becoming due. The Retailer Agreements provide, inter alia:

a. Zascotorque would purchase stock from Specialized B.V on credit;

b. Zascotorque would pay all amounts due on the basis of the credit terms agreed between them, and the payments were to be without deductions, withholdings or set-off;

c. On termination of the Retailer Agreement all amounts owing become immediately due and payable and any amount not paid accrues interest at the prime rate plus 2%;

d. On termination of the Concept Store Agreements the outstanding amounts owing will continue notwithstanding the termination; and,

e. Zascotorque would be liable for all legal costs incurred in the course of recovering the amounts due, which costs are to be calculated on an attorney and client scale.

[6] On 22 August 2016 Specialized B.V sold its business as a going concern to Specialized Bicycle (Pty) Ltd (Specialized). The terms of this transaction were recorded in a sale of business agreement. Crucial terms involved Specialized B.V ceding and assigning all its rights and obligations of all its business to Specialized. In addition, Specialized is an affiliate of Specialized B.V.

[7] The Cedar Store closed in September 2018. Upon its closure, Zascotorque became indebted to Specialized for the total amount owing on the account of that store. The papers are silent on what the amount owing was as at the date of the closure of the store. At the same time there was an outstanding balance on the account of the Melrose Store. During January and February 2019, Mr Bobby Behan (Mr Behan) of Specialized penned emails[1] to Mr Plit and to a Mr Simba Mucheka (Mr Mucheka) of Zascotorque reminding them of the outstanding balances and asking them to propose a payment plan to liquidate both debts. An email sent on 1 February 2019 records that the outstanding balance at that time on the Cedar Store was R2 523 199.97 and on the Melrose Store was R1 574 503.69, making the total outstanding amount to be R4 097 703.66. Mr Behan informed them that Specialized wanted the debt to be fully liquidated by end of June 2019, and that if none was forthcoming Specialized would place the account of the Melrose Store on hold, meaning that no stock would be supplied on credit until a payment plan on the outstanding amounts was agreed upon.

[8] Later that day Mr Plit replied stating that he was very disappointed with the stance adopted by Specialized. He had lost a significant amount of money in the course of the business relationship between Specialized and Zascotorque- which includes a loss incurred by the closure of the Cedar Store. He had proposed that the outstanding balance on the Cedar Store be settled by Specialized taking back the excess stock at the Cedar Store, which proposal was rejected. He stated that if Specialized placed the Melrose Store account on hold, Zascotorque would terminate its relationship with Specialized. It would dump the stock – which is to the value of

approximately R8m – and resume business with a competitor brand.

[9] However, three months later, on 4 May 2019 Mr Plit penned a single sentence email to Mr Behan stating, inter alia, that his intention was to settle Zascotorque’s debt with Specialized ‘by end of June’. And then on 14 May 2019 Zascotorque unilaterally terminated the Retailer Agreement linked to the Melrose Store. The termination was communicated by Mr Plit via email to Mr Behan. Mr Plit wrote, inter alia:

‘I hope and trust that you are well. I write this email with much uneasiness. After all the pain, sacrifices and hardships that I’ve experienced throughout my relationship with Specialized over the last 15 years, the time has come to separate ways. …

This brings me to the subject matter of the outstanding account between Specialized and Zascotorque. We are currently holding a similar value of Specialized inventory to that which is outstanding on both the Melrose and Cedar accounts. This does include some older inventory that has been written down over time to what we believe is fair value. I would like to propose two options …’

[10] On 31 May 2019, the attorney for Zascotorque wrote to Mr Behan stating, inter alia, that:

‘4. It is further our instruction, that on 14 May 2019, our client addressed a formal correspondence to you, in your capacity as the representative of Specialized, wherein our client confirmed that Zascotorque (Pty) Ltd will no longer be trading as a Concept Store for Specialized and that the current arrangement will accordingly come to an end on 30 June 2019

5. In addition to the above, it is our instructions that an amount is currently owed to Specialized in lieu of stock, which was supplied to our client by Specialized in accordance with the agreements referred above. In this regard, it is our understanding that the amount in question is R4,872,288.47. For the sake of completeness, we confirm that the said stock pertains to stock purchased for our client's concept store situated in Melrose Arch, as well as our client's store situated in Cedar Square, during the time that the store in Cedar Square was still trading"

[11] The attorney’s letter acknowledges Zascotorque’s debt for R4,872,288.47 for stock received from Specialized.

[12] Specialized also lent Zascotorque money. The loan was for an amount of R1 466 666.67 for the rebuilding and furnishing of the Melrose Store. It was in terms of the Melrose Concept Store Agreement. Zascotorque has paid most of this money back. An amount of R111 252.00 remains outstanding.

[13] As the two debts became due and payable and despite demand, Zascotorque failed to pay, Specialized asks for an order jointly and severally requiring it and the three individual guarantors to pay the monies, the one paying the other to be absolved. Zascotorque and the three individuals oppose the relief sought. But first it is necessary to record and deal with an application by Zascotorque to strike-out the reference to inter-party correspondence between it and Specialized in Specialized’s papers.

Application to strike out any reference to correspondence

[14] Zascotorque claims that the correspondence which was exchanged by the parties was marked without prejudice, is therefore privileged and should, on that basis or for that reason, be excluded from the papers. It asks that all reference to the correspondence be struck from Specialized’s papers.

[15] Zascotorque does not dispute that it has to show that the correspondence occurred at the time when the parties fell into dispute with each other, the correspondence must include an admission of indebtedness and lastly, an offer that achieves a compromise.

[16] Zascotorque claims that because the correspondence contains a demand for payment which included a payment plan put up by Specialized, this indicates that the parties were in dispute at the time. There is no merit in this claim. The correspondence merely records the uncontested statement that Zascotorque is indebted to Specialized and that Specialized did not intend to financially paralyse Zascotorque by demanding full and immediate payment. It simply said that Specialized is willing to prevent so drastic a consequence by allowing Zascotorque to pay the full sum over time. There was no dispute between the parties, simply a noting of the indebtedness, a recognition that the sum owed is large and cannot be liquidated through a single payment without crippling Zascotorque, and a request that Zascotorque present a payment plan that Specialized could find acceptable. Zascotorque does not dispute any of this in the correspondence, or put up a version in its papers that would show that in its mind at the time it disputed the indebtedness in whole or in part. Further the correspondence does not contain an offer to achieve a compromise. Accordingly, the correspondence does not constitute legal privilege, notwithstanding its designation as ‘without prejudice’ communication. The designation in and of itself is not conclusive of whether the communication constitutes legal privilege.[2]

[17] Therefore, Zascotorque’s application to strike out the reference to the correspondence in Specialized’s papers has to fail.

Zascotorque’s defence on the merits

[18] Zascotorque claims that:

a. Specialized has failed to prove a valid cession. They say that as the Credit Dealer Agreement had terminated and was replaced by the two Concept Store Agreements, Specialized cannot rely on the cession as that cession only cedes and assigns rights and obligations in terms of the Credit Dealer Agreement. There is no cession or assignment of the rights and obligations in terms of the two Store Agreements.

b. If it is found that the cession and assignment resulted in the transference of all Specialized B.V’s rights and obligations to Specialized, then only Zascotorque is liable as the guaranty had terminated with the Credit Dealer Agreement.

[19] In challenging the cession Zascotorque points out that in terms of clause 34 of the Credit Dealer Agreement Specialized BV may only cede and assign its rights to an affiliated company. This is specified in clause 34 of the Credit Dealer Agreement which provides that

‘[Zascotorque] may not cede or assign any of its rights under this Agreement without the prior written consent of [Specialized B.V]. [Specialized B.V] may assign this Agreement to an affiliated company.’

[20] There is no doubt that Specialized is an affiliate company of Specialized B.V. and Specialized B.V did not require Zascotorque’s consent to assign its rights under the Credit Dealer Agreement to Specialized. The assignment is therefore valid. Zascotorque’s challenge thereto must fail.

[21] Further, the Credit Dealer Agreement was replaced by the two Store Agreements and clause 10 of those agreements provide that:

‘This agreement replaces any previous Distribution Agreements. Other Agreements such as in particular any earlier Agreements on loans of money remain unaffected.’

[22] In the light of this it is unsurprising that Zascotorque had admitted to the liability in the correspondence, and accordingly, I find that it is liable to Specialized in the for the amounts of R4,962,269.37 and R111,252.00 set out in the notice of motion and Zascotorque has not raised any dispute about the amount.

Liability of the second, third and fourth respondents

[23] Having found that the cession is valid it is necessary to examine whether the guarantee remains extant. The Guaranty was signed on the same day as the Credit Dealer Agreement. Zascotorque – as well as the other respondents, Mr Plit, Mr Ambler-Smith and Mr Olbrich – claim that as the Credit Dealer Agreement terminated so did the guarantee. The difficulty they face though is that the Guaranty is self-standing. It is not contingent upon the existence of the Credit Dealer Agreement. In any event, the

rights in terms of the Credit Dealer Agreement were assigned to Specialized, and each of the Concept Store Agreements specifically

stated that it replaces any previous distribution agreement. At the same time it left the agreements on loans of money intact.

[24] Zascotorque claims that the Guaranty was limited to an amount of R2 000 000.00. This contention, once again, is linked to the Credit Dealer Agreement. In terms of that agreement Zascotorque was granted a revolving facility of ‘up to R2 000 000.00’. As the Credit Dealer Agreement was signed on the same day as the Guaranty it was their intention to be bound for a maximum of R2 000 000.00. The difficulty they face though is that the Guaranty does not limit their liability at all. If it was their intention to only be bound to a limited extent, they should have specified that in the Guaranty, and if Specialized B.V was in agreement their liability would have been limited. As it stands, all they can point to is their unilateral understanding and intention, which unfortunately is of no assistance in the interpretation of the Guaranty itself. Thus, their contention falls to be rejected.

[25] In the result they are liable for the full sum owed by Zascotorque.

Interest

[26] The Store agreements provide for interest on outstanding amounts to be paid at the Prime Rate (prime rate) plus 2%. It is uncontested that the applicable prime rate is 9.5%. Specialized only seeks interest from the date of the service of the application and not from the date the debt was due. The date of service of the application is 23 June 2020. Zascotorque did not put up any resistance to the claim for interest. Accordingly, it should be granted.

Costs

[27] The agreement makes provision for Specialized to recover costs on an attorney and client scale should it be forced to take legal action. There is no reason not to enforce this provision.

Order

[28] The respondents are to pay, jointly and severally the one paying the other to be absolved,

a. to the applicant the amount of R4,962,269.37 plus interest thereon at the rate of 9.5% per annum from date of service of application to date of payment (both days inclusive);

b. to the applicant the amount of R111,252.00 plus interest thereon at the agreed rate of 8% per annum from 9 April 2019 to date of payment (both days inclusive);

c. the costs of the application on an attorney and client scale.

Gauteng High Court (Witwatersrand Local Division)

Date of hearing: 23 February 2021

Date of judgment: 6 April 2021

For the applicant: KD Iles

Instructed by: Werksmans Attorneys

For the respondents: D Van Niekerk

Instructed by: Enderstein Van der Merwe Inc

[1] Zascotorque complains about the inclusion of these emails and other correspondence between the parties on the grounds that they were designated as ‘without prejudice communication’ by the parties and is therefore protected by legal privilege. I do not agree with this and explain why later in the judgment.

[2] Jill v South African Eagle Insurance Co Ltd 1995 (3) SA 269 (N) at 275B-C