BACKGROUND AND SUMMARY
This case went on appeal to the Supreme Court of Appeal (the “SCA”) wherein the SCA upheld an appeal against the decision of the High Court of South Africa, Gauteng Division, Pretoria (the “Court”). The issue before the SCA was whether or not the suretyship covered the liabilities arising under two agreements, being the Sale Agreement and the Dealer Agreement.
On or about 17 October 2011, KMSA Distributors (Pty) Ltd (the “Respondent”) and Express Motor Trading 248 (Pty) Ltd (“EMT”) concluded a written sale of business agreement wherein the Respondent sold a business known as ‘Mean Machines’ to EMT (the “Sale Agreement”). Thereafter, on or about 27 July 2012, the Respondent and EMT concluded a second written agreement wherein the Respondent (as distributor) appointed EMT (as dealer) to act as an independent retail outlet for the Respondent’s products (the “Dealer Agreement”). Five documents were annexed to the Dealer Agreement including, inter alia, the deed of suretyship executed by Edmund Harold Moss and Francois De Lange (the “Appellants) in favour of the Respondent (the “Deed of Suretyship”).
In April 2013, the Respondent instituted arbitration proceedings against EMT claiming various amounts flowing from the Sale Agreement. Whilst arbitration proceedings were pending, EMT was placed under voluntary liquidation at the instance of the Appellants. Nevertheless, the arbitration proceedings continued and were subsequently settled with the liquidators of EMT admitting liability in the amount of R3, 000, 000 (three million Rand), which award was made an order of Court.
On 10 July 2015, the Respondent launched an application in the Court against the Appellants for payment of the amount of R3, 000, 000 (three million Rand) in terms of the Deed of Suretyship. The Court rejected the Appellants’ attempt to challenge the existence and enforceability of the principal debt against them and, furthermore, found that that the issue was res judicata.
In their opposition to the application, the Appellants contended that it remained open to them to challenge the enforceability of the principal debt as they were never party to the arbitration proceedings and, therefore, not bound by the settlement agreement concluded between the Respondent and EMT.
Further, the Appellants argued that on a proper interpretation of the Deed of Suretyship, its operation was restricted to the Dealer Agreement of which it was a part.
The abovementioned defences raised by the Appellants in the Court formed the basis of their appeal.
Further, having regard to the non-enforceability of the principal debt against them, it was submitted on their behalf that, on the common cause evidence, the Sale Agreement from which the debt allegedly originated, did not come into existence because none of the suspensive conditions were fulfilled.
In respect of the Appellants’ right to challenge the principal debt, the Respondent argued that in terms of the Deed of Suretyship, the Appellants bound themselves as sureties for debts other than the original debts, including performance under the settlement agreement, arbitration award and Court order.
Having regard to the issue in relation to whether or not the Deed of Suretyship covered obligations arising from the Sale Agreement, the Respondent contended that the Dealer Agreement and the Deed of Suretyship should be interpreted as 2 (two) separate agreements. The terms of the Deed of Suretyship were sufficiently wide to include liability under the Salle Agreement and, moreover, the provisions of clause 17 of the Dealer Agreement were legally impractical. Finally, the Respondent submitted that there was no privily of contract between the Appellants and the Respondent in relation to the Dealer Agreement.
As a starting point, the SCA confirmed that it is trite that the exercise of interpreting a suretyship contract invokes that same principles relating to the interpretation of contracts.
The SCA held that the interpretation of the Court ignored clause 17 of the Dealer Agreement, which expressed the clear intention of the parties in relation to the suretyship, in that it isolated the Deed of Suretyship, treating the undertakings given thereunder as independent commitments that were enforceable, either on their own or by being attached to any transaction between the parties, which is untenable. In this regard, the SCA held that a suretyship is, by its nature, an accessory contract and, as such, for there to be a valid suretyship there has to be a valid principal agreement. The SCA found that, in the circumstances, the Deed of Suretyship could not be independent of the Dealer Agreement.
Further, the SCA held that the words ‘under this agreement’ in clause 17 of the Dealer Agreement were a clear expression of the parties’ intention to limit the application of the Deed of Suretyship to any indebtedness arising under the Dealer Agreement.
Contrary to the submission of the Respondent that clause 17 of the Dealer Agreement was impractical, the SCA found that even if there was a conflict between clause 17 of the Dealer Agreement and the Deed of Suretyship, the relevant principle of interpretation is that where a contract is contained in more than one document and an inconsistency arises between them, such inconsistency must be reconciled, as would inconsistency within a single document.
Finally, the SCA held that the fact that the Appellants were not party to the Dealer Agreement was irrelevant to the interpretation of the Deed of Suretyship and, accordingly, they did assume obligations under the Dealer Agreement in terms of the Deed of Suretyship. Consequently, the SCA upheld the appeal.
It is trite that the exercise of interpreting a suretyship contract invokes that same principles relating to the interpretation of contracts.
A deed of suretyship is, by its nature, an accessory contract and, as such, for there to be a valid suretyship there has to be a valid principal agreement.
Where a contract is contained in more than one document and an inconsistency arises between them, such inconsistency must be reconciled, as would inconsistency within a single document.
Written by Khotso Mmatli and Kerry Theunissen