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Sealed Africa (Pty) Ltd v Kelly and Another (3957/04) [2005] ZAGPHC 69 (6 July 2005)

IN THE HIGH COURT OF SOUTH AFRICA
(WITWATERSRAND LOCAL DIVISION)
case no: 04/3957
In the matter of:

SEALED AFRICA    (PTY) LTD                                                     Applicant

and

BARRY CHRISTOPHER KELLY                                      First Respondent
MARK THATCHER                                                          Second Respondent



J U D G M E N T
______________________________________________________________________

EPSTEIN AJ

[1]      The Respondent’s are sued in this matter as guarantors in respect of a loan made by the Applicant to Airshield Holdings (Pty) Ltd (“Holdings”). The amount claimed is R5 million together with interest at the rate of 4% per annum from 20th November 2003 until date of payment.

[2]      The Applicant instituted its claim by way of motion proceedings. The cause of action is founded upon a loan agreement (“the loan agreement”) entered into by the Applicant and Holdings in terms of whereof the Applicant agreed to lend to Holdings the sum of R5 million repayable on or before 28th February 2005. A guarantee was signed by the First and Second Respondents on the same date as the loan agreement. It is not disputed that the loan agreement was entered into and that the guarantee was furnished. Further, it is common cause that the amount of R5 million was advanced to Holdings in terms of the loan agreement and that the loan has not been repaid.

[3]      The founding affidavit consists of some eight pages with about 37 pages of annexures. This is followed by an answering affidavit to which the Applicant replied. This in turn is followed by: (i) a supplementary affidavit filed on behalf of the Applicant, (ii) an answer by the Respondents to the Applicant’s replying affidavit, and (iii) a further replying affidavit from the Applicant to the Respondents’ answer to the first replying affidavit. In addition, issues relating to authentication in terms of Rule 63 of the Uniform Rules of Court were raised by the Respondents which resulted in further supplementary affidavits. In total, the affidavits in this matter run to 669 pages.

[4]      The filing of further affidavits after the replying affidavit has been filed is a matter for the discretion of the Court. In the absence of leave being granted by the Court for the filing of such affidavits, parties are not entitled to simply, by their own arrangement, file as many affidavits as they wish. See Union Finance Holdings Ltd vs I S Mirk Office Machines II (Pty) Ltd & Another 2001 (4) SA 842 (W). To allow the parties themselves to determine how many affidavits can or should be exchanged in a particular matter may, and often will, lead to an abuse of motion procedure, particularly in those cases where trial procedure was from the outset the appropriate choice. Parties who refuse to adhere strictly to the principles enunciated in Union Finance, supra, run the risk of having adverse and punitive costs orders awarded against them. I considered making a punitive costs order in this matter but the parties seem equally responsible for creating the voluminous affidavits exchanged and I have decided, in the circumstances of this matter, to refrain from making such order.

[5]     The answer to the founding affidavit contains evidence extraneous to the loan agreement and the guarantee, which evidence the Applicant contends is inadmissible.

[6]      The loan agreement specifies the purpose of the loan. It states: “The Borrower shall use the proceeds of the Loan to acquire the airothene business of Kohler Versapak, a division of Kohler Packaging Ltd (“Kohler”), pursuant to an Agreement in respect of the Purchase and Sale of Business between the Borrower & Kohler dated August 20, 2001 (the “Kohler Transaction”).”

[7]      The loan agreement provides that the loan shall be evidenced by a promissory note and that the loan shall be due and payable on 28th February 2002 provided that if the Kohler Transaction shall not have been consummated prior to the close of business on 31st August 2001, the loan agreement shall thereupon become immediately due and payable.

[8]      It is relevant that the loan agreement is signed not only by the Applicant and by the First Respondent on behalf of Holdings, but also by the First and Second Respondents as “guarantors”. Moreover, in section 5 of the loan agreement, both “the Borrower and the Guarantors jointly and severally” furnish certain warranties to the Applicant. The significance of this will become apparent later in this judgment.
[9]      Also relevant is paragraph [e] of section 7 of the loan agreement which provides as follows: “This Agreement and the Other Credit Documents set forth the entire understanding of the parties with respect to the subject matter hereof and thereof”.

[10]     The guarantee records the agreement of loan and also records that the Respondents are shareholders of the borrower, Holdings. The guarantee provides that the Respondents jointly and severally undertake that whenever Holdings does not pay any amount due under or connection with the loan agreement, the Respondents shall, jointly and severally, forthwith on demand by the Applicant, pay that amount as if the Respondents, instead of Holdings were expressed to be the principal obligor under the loan agreement.

[11]     The crux of the Respondents’ argument is the contention that the nature of the agreement between the Applicant and Holdings was far wider than a simple loan agreement. It is contended that there was a broader transaction to which I could and should have regard and, further, that the terms of this broader transaction are admissible. It is the Respondents case that this broader transaction was the acquisition by Holdings of the Airothene business of Kohler Versapak, Airothene being the brand name of Kohler’s polyethylene foam product in the protective packaging industry. The Respondents contend that the Applicant had made it clear that it was only prepared to participate in the joint venture with Holdings if, as a precursor thereto, Holdings was able to acquire the airothene business of Kohler. It is stated that it was indeed the Applicant that negotiated with Kohler the purchase consideration of R5 million. The First Respondent, who deposed to the answering affidavit, and which was confirmed by the Second Respondent, states in paragraph 4.1.5 that “The loan agreement being interim in nature, was only part of a much more comprehensive and extensive transaction and agreement between Holdings and applicant in terms whereof, inter alia, applicant was to acquire an equity interest in Airshield South Africa in which regard it is pertinent to note that the loan, for the reasons stated more fully below, was finalised as a matter of some urgency to facilitate and fund the initial acquisition of the Kohler business, which acquisition was, as above, a precursor to and condition of applicant’s further acquisition of an equity stake in Airshield South Africa”. Further in the affidavit, the First Respondent states in paragraph 6.5.6: It was therefore at the specific behest of Applicant (represented by Debry) that Holdings which had been in negotiation with Kohler for some months prior thereto in a different context altogether, finalised the agreement with Kohler for the acquisition of its Airothene business as a matter of some urgency. This, as I have already pointed out, was on the express understanding that Applicant would fund that acquisition and, in so doing and once the Kohler acquisition has been finalised and implemented, applicant would enter into a joint venture with Holdings relating to a company to be acquired for that purpose namely, a company Airshield South Africa and the Kohler business together with certain other of Holdings’ polyethylene foam interests would be transferred to Airshield South Africa. On implementation of the joint venture, applicant would convert its loan to Holdings to an equity interest in Airshield South Africa of some 17% therein whilst Holdings, as the other joint venture participant, would retain the remaining interest of some 83%”. The First Respondent states that in the months following the signature of the loan agreement the joint venture between the Applicant and Holdings was, to the Applicant’s knowledge, fully implemented with the consequence that the loan was thereby extinguished. This is denied by the Applicant.

[12]     The Applicant’s case is that the Respondents, as guarantors, are liable under the loan agreement to repay to the Applicant the full amount of the loan as a result of Holdings’ default in its repayment obligations. The Respondents, on the other hand, contend that there is no liability on their part for the reason that pursuant to the implementation of a broader joint venture agreement, the Applicant’s loan to Holdings was converted into an initial 17% equity interest in a subsidiary of Holdings. The Respondents submit that there is a material dispute of fact in regard to the broader joint venture agreement and its implementation which the Court should refer for the hearing of oral evidence. It would appear that the Respondents contend that the loan has in fact been repaid but in a manner not provided for in the loan agreement. The Applicant submits that this defence raised by the Respondents is based entirely on inadmissible evidence and is accordingly bad in law. Further, the Applicant submits that the Respondents’ allegations are vague and uncertain, but to the extent that factual allegations may be discerned there from, such factual allegations are simply false and do not raise real, genuine or bona fide disputes of fact.

[13]    The Applicant perceived that the Respondents may have been suggesting as a defence that there was an oral variation of the loan agreement. Whilst the loan agreement does not contain a non-variation provision, no case has been made out in the Respondents’ affidavit to the effect that there was an oral variation of the loan agreement, nor was it argued that there was a variation. I need therefore not dwell on this aspect any further.

[14]     Counsel for the Applicant argued that the Respondents did not as a defence seek rectification of the loan agreement. In response, counsel for the Respondents submitted that the Respondents are third parties and therefore strangers to the loan agreement. As such, it was submitted, they could not seek rectification of the loan agreement. For this proposition reliance was placed upon Theron vs Kriege 1926 CPD 51 at 53. I do not agree that this principle applies in casu where the Respondents are jointly and severally liable with the borrower, Holdings. Significantly, the loan agreement, as I said earlier, was signed by the Respondents and they were both clearly parties to it.

[15]     Counsel for the Applicant then referred to the fact that no error, whether common or unilateral, is relied upon or even suggested by the Respondents in their defence. Furthermore, the validity of the loan agreement is not in dispute and there is no suggestion of any misrepresentation. Ultimately, the Respondents rely upon oral negotiations or, at best, oral agreements, which are in conflict with the wording of the loan agreement. The Applicant submitted that this conflicts with the parol evidence rule and that the entire version regarding the broader transaction is inadmissible. See Union Government vs Vianini Ferro-concrete Pipes (Pty) Ltd 1941 AD 43 at 47; National Board (Pretoria) (Pty) Ltd & Another vs Estate Swanepoel 1975 (3) SA 16 (A) at 26 (C). Counsel for the Respondents disagreed and argued that the parol evidence rule does not apply as between a stranger to the agreement and a party to it. For this proposition reliance was placed upon Cohen vs Commissioner for Inland Revenue & Another 1948 (4) SA 616 at 624. However, I have already referred to the fact that the Respondents were certainly parties to the loan agreement and would therefore not fall within this exception to the parol evidence rule.

[16]     In seeking to introduce the evidence regarding the broader transaction, counsel for the Respondents relied upon Purchase vs De Huizemark Alberton t/a Bob Percival Estates 1994 (1) SA 281 (W). In that case the Court was dealing with the admissibility of a letter which the Court found was not a jural act reducing to writing the terms of any transaction between the parties” (page 284 A-B). However, in the same case, Mohamed J (as he then was) restated the principle that “when a jural act is incorporated in a document it is not generally permissible to adduce extrinsic evidence to contradict its terms and, therefore, that, when a transaction has been reduced to writing, the writing is regarded as the exclusive memorial of the transaction, and no other evidence may be given to contradict, alter, and to or vary its terms” (at 283 I – J). With reference to the letter in that case, the learned Judge found that it was no more than the narration by the writer of a preceding event and his interpretation thereof. The rule excluding parol evidence had no application in those circumstances. The learned Judge continued: “In any event, the parol evidence rule does not exclude evidence which throws light on the true nature of the transaction referred to in a written document” (at 284 C). Counsel for the Respondents in casu, relied upon this last statement, submitting that I am entitled to have regard to the broader transaction which throws light on the true nature of the loan agreement. In my view, a distinction must be drawn between evidence which throws light on the true nature of the transaction, on the one hand, and evidence which contradicts the written agreement, on the other. Whilst the parol evidence rule does not exclude evidence which throws light on the true nature of the transaction referred to in the written document, this is qualified by the inevitable inadmissibility of any evidence of a prior or contemporaneous oral agreement which contradicts or conflicts with the written terms, as in the present case.

[17]     Counsel for the Respondents also sought to introduce the evidence regarding the broader transaction with reference to National Board, supra, and in particular on the basis of the following dictum of Botha JA at page 26 H: “

The parol evidence rule only applies where the written instrument is or was intended to be the exclusive memorial of the whole of the agreement between the parties. (Capital Building Society v. De Jager and Others, 1963 (3) SA 381 (T) at pp. 382-3). The parties’ intention may be proved by reference to the prior negotiations between the parties (ibid). It is clear that the power of attorney was not intended to embody the whole of the agreement between Swanepoel and Brigish. The main agreement between them was the oral agreement that Brigish was to have Swanepoel’s general power of attorney for the limited purpose of acting for Swanepoel only during the latter’s absence overseas if the need therefor should arise. The written power of attorney was intended merely as proof of Brigish’s authority, and cannot extend that authority beyond the limits agreed upon between Swanepoel and Brigish”.

The National Board case concerned a power of attorney which was silent in regard to its duration. It was held that the parol evidence rule could not operate to exclude evidence as to the prior oral agreement between the parties which provided for its duration for such evidence did not add to, vary or contradict the general words of her power. That is a far cry from the facts in the present case where the Respondents seek to introduce evidence which does contradict and seek to vary the terms of the written loan agreement. It is clear in the present matter that the parties did intend the loan agreement to be the sole memorial between them. This is reaffirmed in paragraph (e) of section 7 of the loan agreement which I have quoted above.

[1
8]     Finally, the Respondent sought to introduce the evidence with reference to the principle in Philmatt (Pty) Ltd vs Mossel Bank Developments CC [1995] ZASCA 154; 1996 (2) SA 15 (A). I quote from the relevant portion of the judgment of F H Grosskopf JA at 22 I – 23 E:

The appellant’s first argument was that the parol evidence rule prevents the admission of extrinsic evidence. This rule was formulated as follows by Watermeyer JA in Union Government v Vianini Ferro-Concrete Pipes (Pty) Ltd 1941 AD 43 at 47: ‘Now this Court has accepted the rule that when a contract has been reduced to writing, the writing is, in general, regarded as the exclusive memorial of the transaction and in a suit between the parties no evidence to prove its terms may be given save the document or secondary evidence of its contents, nor may the contents of such document be contradicted, altered, added to or varied by parol evidence. (See National Board (Pretoria) (Pty) Ltd and Another v Estate Swanepoel 1975 (3) SA 16 (A) at 26A-D; Rielly v Sligson and Clare Ltd 1977 (1) SA 626 (A) at 637 C-D.) After pointing out that several writers on the law of evidence hold the view that these rules are not strictly rules of evidence the learned Judge proceeded as follows at 47: ‘Whatever may be the correct view as to the precise nature of the rules, it is clear that they do not prevent a party from setting up the case that the contract is not a presently enforceable contract inasmuch as it is conditional upon the happening of some event which has not occurred.’

It follows that the
integration rule does not preclude extrinsic evidence of a prior or contemporaneous oral agreement that the written contract shall not take effect except in a certain contingency. That much appears from the second passage from Union Government v Vianini Ferro-Concrete Pipes (supra) quoted above, and from the following remarks of Innes CJ in Stiglingh v Theron 1907 TS 998 at 1003; ‘But again, evidence is admissible of a separate oral agreement constituting a condition precedent to the attachment of any liability under the written instrument. This is an exception to the general principle, more apparent than real, because such evidence does not essentially tend to vary the document. Accepting its terms as they stand, it aims at suspending its operation. If the suspension fails or ceases, then admittedly the contract takes effect in accordance with its ordinary meaning. (See also Aymard v Webster 1910 TPD 123 at 129; Johnston v Leal (supra) at 938H and 946H). It remains problematical, however, to determine in what circumstances this exception to the parol evidence rule would apply, and when extrinsic evidence of a suspensive condition would be admissible. (See Thiart v Kraukamp 1967 (3) SA 219 (T) at 224A-226E; Hoffmann and Zeffertt The South African Law of Evidence 4th ed at 209 – 12.)

[19]     It is the Respondents’ case, that it was a term of the broader transaction, and therefore the loan agreement, that in the event of the joint venture between the Applicant and Holdings being implemented, the loan would be converted to an equity stake in Airshield South Africa and would thereafter be extinguished and discharged. In other words, it is the Respondents case that if the joint venture agreement was not implemented, then the loan would remain of force and effect. If on the other hand, it was implemented, the loan agreement would fall away. This is not in the nature of a suspensive condition but rather a resolutive condition. Counsel for the Respondents argued that the principle in Philmatt, whereby extrinsic evidence can be led of a prior or contemporaneous oral agreement that the written agreement shall not take effect except in a certain contingency, would also apply in the circumstances of the present matter where there was a prior or contemporaneous oral agreement of a condition which was resolutive. I do not agree. It is clear that in the Philmatt case (at 23 F) the Court was dealing with a suspensive condition and the problem of determining when extrinsic evidence of a suspensive condition would be admissible. In the Law of Contract, R.H. Christie, 4TH Edition, at page 224, the learned author states the following: ”If the condition is a true one it does not matter whether it is positive or negative in form, but it is difficult to see how evidence of a resolutive condition could ever be given without contradicting or varying the terms of the written document. This view is endorsed by the facts in the present matter. The condition which the Respondents seek to introduce is one whereby the agreement of loan, which has become operative, would fall away upon the happening of an event, namely the implementation of a joint venture agreement. This is different from a condition which does not vary the terms of the written agreement but simply stipulates that the written agreement shall not take effect except in a certain contingency. As stated by Innes CJ in Aymard vs Webster, 1910 TPD 123 at page 129: “Until the happening of that contingency, the contract remains in a condition of suspended animation; when the condition is fulfilled, it is of full force without any amendment or variation.”

[2
0]     A resolutive condition of the nature contended for by the Respondents, which by its very nature contradicts the terms of the written memorial, must be incorporated in the written document where the parties recorded each of the terms of their agreement. Evidence of a prior or contemporaneous oral agreement of a term whereby the loan agreement which has been implemented would fall away on the happening of a specific event, is excluded by the parol evidence rule.

[22]     I am satisfied that the Respondents have not established any defence to the Applicant’s claim. The Applicant is accordingly entitled to judgment.

[2
3]     The guarantee provides that the Respondents, jointly and severally, shall be liable to and shall reimburse the Applicant for all expenses (including legal and out-of-pocket expenses) on the attorney and own client scale. The Applicant has asked for costs to be awarded on the attorney and own client scale, including the costs of two counsel.

The Order I make is as follows:

1.      
The Respondents are ordered to pay to the Applicant the sum of R5 million, jointly and severally, the one paying the other to be absolved, together with interest thereon at the rate of 4% per annum from 30th November 2003 until the date of payment.

2.      
The Respondents are ordered to pay the Applicant’s costs on the attorney and own client scale, including the costs of two counsel.



_______________________
Epstein
AJ



Counsel for Applicant                      J Suttner SC
                                                               J Blou

Attorney for Applicant                    Werksmans Inc
                                                               Tel: (011) 535 8000
                                                               Fax:
                                                               Ref: Mr E Levenstein
                                                              


Counsel for Respondent                     N A Cassim SC
                                                               R M Pearse

Attorney for Respondent         
                 Webber Wentzel Bowen Inc        
                                                               Tel: (011) 530 5000
                                                               Fax:
                                                               Ref: Mr M Yudaken