All humans are legal persons, meaning that they have the capacity to acquire legal rights and incur legal duties. Legal personality is not only conferred upon natural persons, juristic persons, such as companies also have this status. Even though a juristic person has no physical constitution it similarly possesses the ability to acquire rights and incur obligations.

INTRODUCTION

As with natural persons, no juristic person is capable of being divided into further separate juristic personalities.  This much was confirmed in the case of Two Sixty Four Investments (Pty) Ltd v Trust Bank 1993 (3) SA W 384.

The principle of distinct indivisible personality is paramount for the operation of modern businesses. An instance of this in operation is evidenced by the use of the acronym “t/a“(“trading as”) is often noticed in the fine print of most business documents or indeed in its name. What this signifies is that whilst an entity might trade under a name which differs from its registered personality, it is legally indistinguishable from the juristic entity under that name.

Numerous companies in South Africa operate through trading divisions as opposed to subsidiaries. Trading divisions, however many there are, do not acquire separate legal personality or status from the entity of which they form part.  A subsidiary differs in that it has its own legal personality.

THE SUPREME COURT OF APPEALS CASE

In the recent Supreme Court of Appeals case of Kilburn v Tuning Fork (Pty) Ltd [2015] ZASCA 53 (27 March 2015), it was held that for purposes of enforcing a suretyship, a trading division of company somehow was divisible from the main entity.

The brief facts of the matter were as follows –

  • During 1993, McCarthy Limited concluded a dealership agreement (“the dealership agreement”) appointing Kilburn Auto Enterprises (Pty) Limited t/a Johannesburg Yamaha (“the Kilburn dealer”) whereby Kilburn as a Yamaha dealer with the right to purchase certain products from McCarthy.
  • During 2011, Tuning Fork (Pty) Limited t/a Yamaha (“Yamaha”) purchased the business of McCarthy as a going concern. The business which traded through 6 divisions imported and distributed Yamaha products, ranging from motor cycles to musical equipment.
  • Each division operated and concluded business independently of one another, selling different products to different customers, however all books of account of Yamaha were consolidated and Yamaha had a single accounting and credit control department.
  • During 2011, Mr Ian Kilburn (“Kilburn”) executed a suretyship (“the suretyship”) along with a credit application form for the Kilburn Dealer. The credit application was for a credit limit of R20,000 and was a cap on purchases with the After Market products division of Yamaha. The Kilburn Dealer had also concluded a separate credit application in respect of Yamaha’s Distributors division for a larger credit limit. The suretyship was for an unlimited amount and referenced “all and any indebtedness howsoever arising in favour of Yamaha”. The only reference in the suretyship to the After Market Product division was in the heading.
  • The Kilburn dealer fell into arrears in respect of the dealership agreement and was indebted to Yamaha for an amount exceeding R800 000,00 for goods sold and delivered. There was no indebtedness outstanding by the Kilburn Dealer to Yamaha in respect of the After Market Products divisions.
  • Yamaha instituted proceedings against both the Kilburn Dealer and Kilburn under the suretyship for the recovery of the indebtedness.

THE COURT RULING

Judgment was taken by default against the Kilburn Dealership. Kilburn opposed Yamaha’s application and denied his indebtedness to Yamaha as surety on the basis that the amount owing to Yamaha was owing to the Yamaha Distributors division and that no amount was due in respect of Yamaha’s After Market Products Division. The suretyship was never intended to cover the indebtedness of the Jilburn dealer to any other division of Yamaha.

In the Court a Quo, Judge Mbha, noting judgment in favour of Yamaha found that:

  • the ordinary or popular grammatical meaning of the Deed of Suretyship led one in no doubt insofar as the identity of the creditor was concerned:

“The identification of the principal debt is clear:  the second respondent (Mr Kilburn) clearly bound himself as surety and co-principal debtor, jointly and severally with Kilburn, for all its obligations of whatsoever nature and howsoever arising”

“In the absence of ambiguity or uncertainty in the language used in the Deed of Suretyship, there is no need to invoke the secondary rules of interpretation”;

  • even if the finding on the first ground was wrong, Kilburn would nevertheless be liable to Yamaha in that the contention that the After Market Products Division is separate and somehow distinct from its company was legally untenable.

Kilburn took the decision on appeal to the SCA on the basis that Judge Mbha had erred in that he had followed the “traditional” process of interpretation of contracts by finding that in the absence of ambiguity or uncertainty in the language used in the deed of suretyship, there was no need to invoke the “secondary rules of interpretation“. The appeal was premised on the argument that “relevant factual background” leading up to the signing of the suretyship needed to be considered in the interpretation as to the meaning of that agreement.

There has been an emerging trend in our case law to move away from the strict interpretation of the terms of contracts and to allow the context and surrounding circumstances of the conclusion of contracts to play a greater role in their interpretation.

The SCA held that the heading of the suretyship document evinced an intention to limit the application of the suretyship to debts of the After Market Products division.  The appeal was upheld.

The SCA in making its finding took the view that despite an apparent conflict between the heading and the body of the suretyship, and the established principle that if a heading of a contract conflicts with the body thereof, the wording of the body will prevail (Sentinal Mining Industry Fund and Another v Waz Props (Pty) Ltd and Another 2013 (3) SA132 (SCA)), the heading of the suretyship was capable of being read in conjunction with the body of the agreement so as to limit the ambit / application of the suretyship in line with Kilburn’s assertion as to its meaning.

Apart from confirming the new trend of a more inclusive interpretive process, what has also emerged as a consequence of this particular instance of the “inclusive” interpretation, is a situation which results in a distinction being drawn between a division and the juristic entity of which it forms a part.

This finding creates uncertainty and risk for companies which operate trading divisions.

CONCLUSION

It is therefore necessary, particularly in contracts or instruments for security to avoid any reference to “divisions” for fear of not being in a position to enforce their terms beyond the scope of the relevant division.  The consequences can be far reaching, so Yamaha has learned.

The starting point would necessarily be to ensure wording in contracts is beyond dispute.  If it can be avoided, it appears that references to trading divisions should be carefully scrutinised and sparingly used in the future.