On 5 September 2017, the Constitutional Court handed down a judgment in an appeal against the judgment and order of the Supreme Court of Appeal (SCA) in the matter between Trinity Asset Management (Pty) Limited v Grindstone Investments 132 (Pty) Limited 2018 (1) SA 94 (CC).
This matter involved the interaction between prescription and contractual freedom. More specifically, it raised the issue of whether a policy consideration of not allowing an inactive creditor to delay prescription should override the intention of the contracting parties to give the right to the creditor to determine the date of repayment by demand.
Factual Background to the Matter
On 1 September 2007, the parties entered into a written loan agreement, in terms of which Grindstone (Respondent) borrowed approximately R 3 050 000 (loan capital) from Trinity (Appellant). The loan capital was advanced in three separate tranches over the course of February 2008 and was immediately claimable from Grindstone. However, although immediately claimable, it was a term of the agreement that it would become payable within 30 days from the date of delivery of Trinity’s written demand.
During the course of December 2013, Grindstone was served with a letter of demand by Trinity, claiming payment in the amount of R 4 613 310.52 (which amount was inclusive of interest). Grindstone denied the debt and Trinity launched an application in the Western Cape High Court to provisionally liquidate Grindstone on the basis of an alleged inability to pay the debt. Grindstone raised several defenses thereto, the most prudent being that repayment of the debt had prescribed. Grindstone contended that the loan capital was lent and advanced in 2008, and being immediately claimable, accordingly prescribed in 2011. Such contention was founded in terms of the Prescription Act which provides that “a debt shall be extinguished after the lapse of three years” and that prescription “shall commence to run as soon as the debt is due”. In support thereof, Grindstone submitted that a debt repayable on demand is in law repayable immediately so that a formal demand is not necessary to complete the cause of action. Moreover, a creditor cannot delay the running of prescription by failing to take a step, which is in its power, to recover the amount owed.
Trinity challenged this defence on three grounds. Firstly, that it was never the intention of the parties for the loan capital advanced to become due and repayable immediately upon being advanced. Secondly, that it was never the intention of the parties that prescription would start running on the dates the loan capital was paid. Lastly, that Grindstone had not pleaded and proved both the date of inception and the date of completion of the period of prescription. In view thereof, Trinity submitted that the defence of prescription was not raised on bona fide and reasonable grounds.
The High Court found that a genuine dispute over the debt existed, and dismissed the application for liquidation accordingly. On appeal to the SCA, the issue of prescription was agreed between parties as the central issue in this matter. The majority upheld the decision of the High Court and held that the debt became due the moment it was advanced, notwithstanding the wording of the parties’ contract. In contrast, the minority reasoned that the loan agreement contemplated that a demand was an essential requirement for Trinity’s cause of action. While the minority agreed with the general principle that where no time for repayment is stipulated in an agreement then the debt is due immediately, in this matter the parties expressly agreed otherwise. This line of reasoning honours the principle of freedom to contract. Accordingly, the minority concluded that prescription would only begin to run from the date of demand. The matter was then ultimately taken on appeal to the Constitutional Court.
Application to the Facts at Hand
The Court made several remarks pertaining to both prescription and contractual freedom in arriving at its decision. In brief, the Court formulated the relevant principles as follows. A contractual debt becomes due as per the terms of that contract. Where no due date is specified, the debt is generally due immediately on conclusion of the contract. However, the parties may intend that the creditor be entitled to determine the time for performance, and that the debt becomes due only when demand has been made as agreed. Where there is such a clear and unequivocal intention, the demand will be a condition precedent to claimability, thus a necessary part of the creditor’s cause of action, and prescription will accordingly begin to run only from demand. The Court did not view this as an incident of the creditor being allowed to unilaterally delay the onset of prescription. Instead, it is the parties who by joint agreement determined when and under what circumstances or conditions the debt shall become due.
Accordingly, the majority judgment found that on a holistic reading of the loan agreement, the parties did not intend to delay when the debt would become due or when prescription would begin to run. The parties’ language in the contract did not signify an intention to delay. The parties simply meant to allow Grindstone 30 days to repay the debt once Trinity had issued demand, not to postpone the due date of the debt to an indeterminate future date. The debt thus became due, and prescription began to run, immediately on conclusion of the contract. In these circumstances, Grindstone raised a valid prescription defence, and the appeal was dismissed.
Accordingly, contracting parties would be well advised to consider the long terms implications of the contractual terms that they enter into, specifically with respect to the issue of prescription, where said contractual terms do not specify a fixed and readily ascertainable payment date.
Ashley Adriaans | Attorney | Dispute resolution: Litigation and Arbitration
Matthew Cannon | Candidate Attorney
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