THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case No:  745/11
Reportable
In the matter between:

KHULA ENTERPRISE FINANCE LIMITED

APPELLANT

and

LEON GELDENHUYS

FIRST RESPONDENT

ANTON JAN ERASMUS

SECOND RESPONDENT

Neutral citation:
Khula Enterprise Finance Ltd v Geldenhuys (745/11) [2012]
ZASCA 165 (21 November 2012).

Coram:

Mthiyane DP, Navsa, Heher, Cachalia and Petse JJA
Heard:

14 September 2012
Delivered:

21 November 2012

Summary:
Principal and surety ─ discharge of surety from obligations
undertaken under suretyship ─ prejudice to surety ─ not established that
the prejudice complained of caused by conduct of creditor.
Contract ─ breach ─ interpretation of contract ─ requirement to afford
principal debtor opportunity to remedy breach overridden by cross-default
acceleration clause which operates in respect of multiple agreements.

________________________________________________________________

ORDER
________________________________________________________________

On appeal from:   North Gauteng High Court, Pretoria (Botha J sitting as court
of first instance):
The appeal is upheld with costs, including the costs of two counsel, on the
attorney and client scale, which shall be borne by the respondents jointly and
severally the one paying the other to be absolved.
The order of the high court is set aside and in its place is substituted the
following order:
‘(a)
Judgment is granted in favour of the appellant against the respondents jointly
and severally as follows:
(aa)
as against the first respondent, payment of the sums of R912 388.10, R500 000
and R675 000 together with interest at a rate of 2 per cent per annum above the prime
rate charged by Standard Bank of South Africa Limited in respect of overdraft facilities to
its prime customers from 2 August 2007 to the date of payment.
(bb)
as against the first and second respondents, jointly and severally, payment of the
sum of R789 700.74 together with interest at a rate of 2 per cent per annum above the
prime rate charged by Standard Bank of South Africa Limited in respect of overdraft
facilities to its prime customers from 2 August 2007 to the date of payment.
(b)
The costs of the action on the attorney and client scale shall be borne by the
respondents jointly and severally the one paying the other to be absolved.’

________________________________________________________________

JUDGMENT
________________________________________________________________

PETSE JA (Mthiyane DP, Navsa, Heher and Cachalia JJA concurring):

[1] The appellant, as plaintiff, sued the first and second respondents as fourth
and fifth defendants respectively in the North Gauteng High Court, based on
deeds of suretyship, for amounts owed by the principal debtor, Amavulandlela
Convenience Stores (Pty) Limited (Amavulandlela) to the appellant Khula
Enterprise Finance Limited (Khula) which is wholly owned and funded by the
Department of Trade and Industry. Amavulandlela went into liquidation on 2
August 2007.

[2] The first respondent was sued on the basis of his suretyship in respect of
the first loan agreement for three amounts totalling R2 087 388.10, and his
suretyship in respect of the second loan agreement for R789 700.74. The second
respondent was sued on the basis of his suretyship in respect of the second loan
agreement for R789 700.74. The respondents admitted having signed the deeds
of suretyship upon which they were sued, and in essence admitted the loan
agreements.

[3] The respondents pleaded certain defences in respect of which they
attracted the onus. In this appeal we are concerned with only two of these
defences: first, the appellant’s action in respect of the second loan agreement
was instituted prematurely and is therefore unenforceable; second, the conduct
of the appellant prejudiced the respondents as sureties and they were therefore
released.

[4] The  high court upheld the first defence and it was therefore
unnecessary to decide the second. The appeal to this court against that order is
with leave of the court below.

[5] It is convenient to deal with the second defence first. The respondents
pleaded in paras 17, 18 and 19 of their plea that:
(a)
On 4 April 2007, Khula had frozen Amavulandlela’s bank account with
Standard Bank;

(b)
Khula colluded with renegade directors of Amavulandlela, Messrs Zulu
and Kok, and on 6 June 2007 instructed Amavulandlela to transfer an amount of
R4 173 299.26 from the bank account of Amavulandlela to itself when Khula had
no authority to do so and when the amount of R4 173 299.26 was not due and
payable; and
(c)
the conduct of Khula rendered it impossible for Amavulandlela to conduct
its business and pay its creditors in the normal course of business resulting in
Amavulandlela being liquidated on 2 August 2007.

[6] Accordingly in the instant case, in order for the respondents to
successfully rely on Khula’s conduct in its dealings with Amavulandlela, which
has the effect of prejudicing them, they bore the onus of proving the prejudice
upon which they sought to base their case for them to be released, whether
wholly or partially, from their contractual obligations as sureties. (See ABSA Bank
Ltd v Davidson 2000 (1) SA 1117 (SCA); Bock & others v Duburoro Investments
(Pty) Ltd 2004 (2) SA 242 (SCA) and Bilsbury v Standard Bank of SA Ltd
(Stannic Division) 2006 (3) SA 60 (E).)

[7] In argument before us the respondents persisted that the freezing of the
bank account was instigated by Khula. The foundation for this argument was the
content of a letter dated 2 April 2007 addressed to Khula by Amavulandlela (at
the instance of Zulu and Kok) in which Amavulandlela, inter alia, advised Khula
that Zulu and Kok had a meeting with Mr Johann of Standard Bank at which they
requested him to ‘freeze’ Amavulandlela’s bank account at Standard Bank until
further notice pending the outcome of discussions with Khula. On 4 April 2007
Khula wrote a letter to Amavulandlela, following a meeting held on 3 April 2007
between Zulu and Kok representing Amavulandlela, and Khula, advising that it
was ‘in support of the decision to freeze the Standard Bank account’. The second
respondent sought to argue that by placing the word ‘freeze’ in quotation marks
the implication was that Zulu and Kok had at that stage merely expressed a
desire to freeze the account and thus sought Khula’s permission to do so, and

that the account would be frozen only if Khula had consented thereto. In my view,
the construction sought to be placed on the word ‘freeze’ in Amavulandlela’s
letter dated 2 April 2007 is, in the context, both artificial and strained. Read as a
whole, the sentence leaves no room for any doubt of what it conveyed to Khula ie
that Amavulandlela had requested Standard Bank to freeze its account and
further that it would discuss the frozen status of the account with Khula. In the
interim the account was to remain frozen.

[8] With respect to the payment of the amount of R4 173 299.26 to Khula, the
respondents, in this court, limited their case to the assertion that Khula colluded
with Zulu and Kok and instructed Standard Bank to pay this amount to itself. This
it did despite the fact that it had no authority to do so, especially since the
amount of R4 173 299.26 was not due and payable by Amavulandlela, and its
conduct placed Amavulandlela in dire financial straits. These contentions are,
however, not borne out by the evidence. On the contrary, the evidence
establishes that the payment was effected pursuant to a proposal made by Zulu
to Khula, which the latter accepted by letter dated 4 June 2007 written by Ms
Maggie Mazzullo, Khula’s Loss Control Manager, to Zulu. In the same letter
Mazzullo furnished Zulu with Khula’s account details to which the transfer should
be effected. That Khula readily accepted such an offer is perfectly
understandable, for at that stage it was apparent that there was dissension
amongst Amavulandlela’s directors. The directors were divided into two opposing
factions. All of this occurred when Khula had lent and advanced substantial
amounts of money to Amavulandlela, thus placing Khula’s financial interests in
jeopardy.

[9] The respondents further argued that Samaf, a separate legal entity from
Khula albeit also a financier of small business enterprises under the auspices of
the Department of Trade and Industry, should not have lent and advanced
moneys to Vusisizwe Retailer Development (Pty) Ltd, a company, of which Zulu
and Kok were directors, in competition with Amavulandlela. To my mind this

argument need not be explored for two fundamental reasons. First, Samaf is a
separate legal entity and its dealings with Vusisizwe, complained of by the
respondents, were with a legal entity distinct from Amavulandlela. That Zulu and
Kok were directors of Vusisizwe was, in my view, of no consequence to the
contractual relationship between Khula and Amavulandlela. Second, the case
belatedly advanced in oral argument in this regard was not pleaded and does not
avail the respondents so late in the day.

[10] It appears from the record that the respondents may well have had a
legitimate grievance against Zulu and Kok. That in itself is, however, no basis for
them to complain against Khula and to contend that they ought to be released
from the contractual obligations undertaken in terms of the suretyship
agreements that they concluded with Khula. In summary, the respondents did not
establish at the trial that Khula instigated the freezing of Amavulandlela’s bank
account. On the contrary, the evidence established that this occurred at the
instance of Zulu and Kok. Nor did Khula instruct Standard Bank to pay to itself
the amount of R4 173 299.26 which Khula could not have done as it was not a
party to the banker and customer contractual relationship between Standard
Bank and Amavulandlela. What Khula did was merely to accept the offer made to
it by Zulu and Kok to repay the amount concerned. Consequently the defence
founded on prejudice is without merit and must fail.

[11] I turn to consider the second defence which the high court upheld on the
basis of its interpretation of two clauses in the loan agreements, namely 14.1 and
15. They read as follows:
‘14.1
In the event of the Debtor failing to comply with its obligations in terms of clause
9 above, Khula may, subject to clause 14.3, require the Debtor by written notice
addressed to the Debtor to remedy such breach within 15 (fifteen) Business Days of the
date of such notice, failing which all amounts outstanding may, at the option of Khula,
immediately become payable in full and Khula may, without detracting from any other
rights which it may have in law or under this Agreement: ─
. . .

CROSS DEFAULT
In the event that the Debtor also avails of any other Khula facility, or is a Party to any
other agreement entered into with Khula, in terms of which funds are advanced, or a
credit guarantee is provided to the Debtor, it is agreed that an event of default in respect
of anyone of the facilities and/or agreements, will also automatically constitute an event
of default and breach in respect of the remaining facilities and/or agreements, and that
the total cumulative outstanding balance in respect of all facilities and/or agreements,
together with the accrued interest will immediately become payable, notwithstanding that
the due date therefore may not have arrived.’

[12] The questions to be decided regarding this defence are: (a) whether the
terms of clause 15 found in each of the two agreements override the terms of
clause 14.1, and (b) if so, whether it was obligatory for Khula, as the court a quo
found, to first send a written notice ─ as provided for in clause 14.1 ─ to
Amavulandlela to remedy the breach within fifteen days of the date of such notice
before Khula could sue Amavulandlela and the respondents for all amounts
outstanding at the time of the breach.

[13] The high court took the view that clause 14.1 of the loan agreements
should be the focus of the enquiry as it was dispositive of the dispute between
the parties. After having considered the evidence and submissions on the point, it
found in favour of the respondents. It went on to say that:
‘[I]t is immediately clear that the plaintiff never gave Amavula [Amavulandlela] an
opportunity to rectify the default alleged in paragraph 12 of the particulars of claim. The
letter of 26 June 2007 simply claimed the full balance owing in respect of all three
claims. It is true that in terms of section 15 a default in respect of one agreement would
also constitute a default in terms of the other agreements, but the default that Amavula
was entitled to rectify within 15 days was the default in respect of the first business loan.
. . . the failure to afford Amavula an opportunity to purge its default is a fatal defect in
plaintiff’s claim.’
It concluded that the letter of 26 June 2007, which purported to be a written
notice in terms of clause 14.1, did not constitute a proper demand in terms of

clause 14.1 as it ‘did not require Amavula [Amavulandlela] to purge its default in
respect of arrear payments on the first loan’.

[14] In this court counsel for Khula was constrained to concede that the letter
of 26 June 2007 written on behalf of Khula to Amavulandlela was not a proper
demand as contemplated in clause 14.1 of the loan agreement. Nevertheless,
counsel argued, that as Amavulandlela was in default of its repayment
obligations in relation to the first loan agreement (not having paid the instalments
due in March and April 2007), such default triggered the terms of clause 15 of the
loan agreements and the full balance then outstanding immediately became due,
owing and payable. This was so, continued the argument, because clause 15
negates the need for Khula first to place Amavulandlela in mora or to comply with
the notice requirements of clause 14.1.

[15] Counsel for Khula pointed out that:
(a)
the terms of the loan agreements were in substance admitted by the
respondents;
(b)
the dates upon which repayment of the loans were to be effected by
Amavulandlela were not in dispute; and
(c)
on the evidence accepted by the court a quo the repayments in respect of
the first loan were in arrears as at 22 April 2007.
Consequently, concluded the argument, Khula was justified in invoking the terms
of clause 15 of the loan agreements.

[16] It is opportune now to return to the construction of the words of clause 15
of the loan agreements. In Sassoon Confirming and Acceptance Co (Pty) Ltd v
Barclays National Bank Ltd 1974 (1) SA 641 (A) Jansen JA said:1
‘The first step in construing a contract is to determine the ordinary grammatical meaning
of the words used by the parties. Very few words, however, bear a single meaning, and
the “ordinary” meaning of words appearing in a contract will necessarily depend upon

1 At 646A-D.

the context in which they are used, their interrelation, and the nature of the transaction
as it appears from the entire contract. It may, for example, be quite plain from reading
the contract as a whole that a certain word or words are not used in their popular
everyday meaning, but are employed in a somewhat exceptional, or even technical
sense. The meaning of a contract is, therefore, not necessarily determined by merely
taking each individual word and applying to it one of its ordinary meanings.’ (Citations
omitted.)

[17] This theme was taken further by Joubert JA in Coopers & Lybrand v
Bryant 1995 (3) SA 761 (A) as follows:2
‘According to the “golden rule” of interpretation the language in the document is to be
given its grammatical and ordinary meaning, unless this would result in some absurdity,
or some repugnancy or inconsistency with the rest of the instrument.’ (Citations
omitted.)
Later on the learned judge said:3
‘The mode of construction should never be to interpret the particular word or phrase in
isolation (in vacuo) by itself . . . The correct approach to the application of the “golden
rule” of interpretation after having ascertained the literal meaning of the word or phrase
in question is, broadly speaking, to have regard:
(1)
to the context in which the word or phrase is used with its interrelation to the
contract as a whole, including the nature and purpose of the contract . . .;
(2)
to the background circumstances which explain the genesis and purpose of the
contract, ie to matters probably present to the minds of the parties when they contracted
. . .;
(3)
to apply extrinsic evidence regarding the surrounding circumstances when the
language of the document is on the face of it ambiguous, by considering previous
negotiations and correspondence between the parties, subsequent conduct of the
parties showing the sense in which they acted on the document, save direct evidence of
their own intentions.’

2 At 767E-F.
3 At 767H-768D.

[18] Most recently in Natal Joint Municipal Pension Fund v Endumeni
Municipality 2012 (4) SA 593 (SCA) at para 18 Wallis JA said the following
concerning interpretation of documents:
‘The present state of the law can be expressed as follows: Interpretation is the process
of attributing meaning to the words used in a document, be it legislation, some other
statutory instrument, or contract, having regard to the context provided by reading the
particular provision or provisions in the light of the document as a whole and the
circumstances attendant upon its coming into existence. Whatever the nature of the
document, consideration must be given to the language used in the light of the ordinary
rules of grammar and syntax; the context in which the provision appears; the apparent
purpose to which it is directed and the material known to those responsible for its
production.’
At para 19 the learned judge continued:
‘. . . from the outset one considers the context and the language together, with neither
predominating over the other.’

[19] The meaning of clause 15 of the loan agreements is clear. Its terms
provide that where Khula and Amavulandlela are parties to more than one loan
agreement, which is the case in this appeal, and Amavulandlela defaults in its
repayment in respect of any one of the agreements, the cumulative outstanding
balance in respect of all agreements will immediately become payable despite
the fact that the due date for any repayment may not have arrived. The clear
implication of this is that the terms of clause 14.1 have to yield to those of clause
15.

[20] At first I had considerable difficulty with accepting the notion that in this
case the terms of clause 15 superseded those of clause 14.1 whenever the
principal debtor defaults in respect of any one of the several agreements when
there is more than one agreement. It appeared to me then that the terms of
clause 15 were onerous. But my uneasiness was dispelled when a member of
the court enquired of counsel for the appellant, during argument, as to what the
justification for the case advanced on behalf of the appellants in relation to clause

15 would be. Counsel’s response was that in circumstances where there is more
than one loan agreement the attendant risks for Khula were greater and that
clause 15 was thus inserted to safeguard Khula’s interests and to minimise its
exposure to its debtor. This justification is compelling. Viewed from that
perspective it is thus not hard to understand why there is this differentiation
between a situation where there is a single loan agreement and one where there
are several agreements. In the latter situation the intention of the parties must
surely have been to ensure that Khula was, given its extensive exposure, not
hamstrung by the constraints inherent in the terms of clause 14.1. Thus, the
counter-argument advanced by counsel for the respondents in their
supplementary heads of argument is untenable.

[21] Admittedly, there is a potential conflict between clause 14.1 on the one
hand and clause 15 on the other. The former contemplates an absolute
obligation on Khula ─ if it desired to claim the full outstanding balance on default
as opposed to limiting its claim to the arrear amount only ─ to require
Amavulandlela, by written notice, to remedy the breach (in this instance by
paying the arrear amount) within 15 days from the date of demand failing which
the full balance outstanding would immediately become due and payable. But
clause 15 provides ─ in instances where there is more than one loan agreement
in place ─ that on default of payment in respect of any one loan agreement the
full outstanding balance in respect of all loan agreements becomes immediately
due and payable. The obvious way to resolve this potential conflict between
these two clauses is to interpret clause 15 in the manner contended for on behalf
of Khula for the reasons already explained.

[22] It follows, for all the aforegoing reasons, that the court a quo erred in its
conclusion that ‘. . . the fact that repayments had to be made on specified dates
does not detract from the fact that the full balance of the loan could only be
claimed during the existence of the loan agreement if Amavula [Amavulandlela]

had been given written notice in terms of clause 14.1 to remedy its default within
15 days and if it had failed to do so’.

[23] In this appeal evidence adduced at the trial clearly established that
Amavulandlela had, at least, fallen into arrears with its repayments in respect of
the first loan agreement. Accordingly, the legal proceedings instituted against the
respondents to recover the full outstanding balance were not instituted
prematurely.

[24] With respect to interest, it was argued on behalf of Khula that it would
ordinarily have been entitled to interest on the capital amounts from the date of
service of the summons on the respondents. However, the sheriff’s returns of
service of the summons on the respondents were not part of the record.
Accordingly counsel for Khula argued that it would content itself with interest
running from 2 August 2007, this being the date on which appearance to defend
was delivered on behalf of the respondents. The respondents did not advance
any counter argument on this score, and I see no reason not to accept Khula’s
submission.

[25] It follows that the appeal must be allowed. The following order is made:
The appeal is upheld with costs, including the costs of two counsel, on the
attorney and client scale, which shall be borne by the respondents jointly and
severally the one paying the other to be absolved.
The order of the high court is set aside and in its place is substituted the
following order:
‘(a)
Judgment is granted in favour of the appellant against the respondents jointly
and severally as follows:
(aa)
as against the first respondent, payment of the sums of R912 388.10, R500 000
and R675 000 together with interest at a rate of 2 per cent per annum above the prime
rate charged by Standard Bank of South Africa Limited in respect of overdraft facilities to
its prime customers from 2 August 2007 to the date of payment.

(bb)
as against the first and second respondents, jointly and severally, payment of the
sum of R789 700.74 together with interest at a rate of 2 per cent per annum above the
prime rate charged by Standard Bank of South Africa Limited in respect of overdraft
facilities to its prime customers from 2 August 2007 to the date of payment.
(b)
The costs of the action on the attorney and client scale shall be borne by the
respondents jointly and severally the one paying the other to be absolved.’

_________________
X M PETSE
JUDGE OF APPEAL

Appearances:

Appellant:

André Gautschi SC

(with Lara Grenfell)

Instructed by:

D’Amico Incorporated, Johannesburg

Lovius Block, Bloemfontein

Respondents:

In person

THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

From:
The Registrar, Supreme Court of Appeal
Date:
21 November 2012
Status:
Immediate

Please note that the media summary is intended for the benefit of the media and does not
form part of the judgment of the Supreme Court of Appeal.

Khula Enterprise Finance Ltd v Geldenhuys

Today the Supreme Court of Appeal (SCA) upheld an appeal by the appellant and set
aside an order of the North Gauteng High Court, Pretoria.

The appellant sued the respondents based on deeds of suretyship, which the respondents
admitted having signed, for amounts owed to it. The respondents stood surety for the
principal debtor in respect of certain loan agreements which the principal debtor and the
appellant had concluded. The first respondent was sued on the first and second loan
agreements for various amounts totaling R2 877 088.84 and the second respondent was
sued on the second loan agreement for R789 700.74.

The respondents pleaded certain defences, two of which the SCA found necessary to
determine. The respondents raised firstly that the appellant’s action in respect of the
second loan agreement was instituted prematurely and therefore unenforceable and
second that the conduct of the appellant prejudiced the respondents as sureties and as a
result of which they ought to be released as sureties.

With regard to the first defence, the SCA held that that the evidence adduced at the trial
clearly established that the principal debtor had, at least, fallen into arrears with its
repayments in respect of the first loan agreement. Accordingly, the legal proceedings
instituted against the respondents to recover the full outstanding balance were not
instituted prematurely.

Moreover the SCA held that the respondents’ contention based on clause 14.1 of the
agreements, which required the appellant to give the principal debtor written notice
affording the latter 14 days to remedy a breach of the agreement before it could sue for the
full outstanding balance did not avail the respondents as clause 14.1 was overridden by
the cross-default acceleration terms of clause 15 which operates in respect of multiple
agreements.

The SCA held further that the respondents defence founded on prejudice is without merit
and had to fail. The SCA stated that there can be no question that had the respondents
established prejudice they would have been entitled to be discharged from their
contractual obligation as sureties, which from the evidence was not the case. The
respondents were therefore jointly and severally liable for the debts of the principal debtor.