Contracts are concluded on the basis that the parties are ad idem (of one mind) regarding the type of contract and the wording contained in such contract. An issue may arise where the words used in the heading and those contained in the body of the contract are capable of being interpreted in different ways. Will the court merely give effect to the wording used in the heading or body of the contract, or consider both the heading and body in the context of other surrounding factors? This was the issue that the court grappled with in Kilburn v Tuning Fork (Pty) Ltd 2015 ZASCA 53.
The brief facts are as follows: Kilburn Auto (Pty) Ltd (Kilburn Auto) concluded a dealership agreement with McCarthy (Pty) Ltd (McCarthy) which gave Kilburn Auto the right to exclusively purchase products from McCarthy's Yamaha Distributors division. Kilburn Auto was also a customer of one of McCarthy's other divisions being the After Market Products (AMP) division. McCarthy subsequently concluded a sale agreement with Tuning Fork (Pty) Ltd (TF) whereby it sold six of its divisions (including Yamaha Distributors and AMP), each operating under a different name, to TF.
In May 2011, the AMP division requested Kilburn Auto to complete new credit application forms and furnish AMP with security in the form of a deed of suretyship (Deed). The Deed was concluded and when submitted, read as follows: Deed of suretyship – Tuning Fork (Pty) Ltd t/a After Market Products.
Kilburn Auto breached the dealership agreement with TF for products bought under the Yamaha Distributors division. As the new owner of the Yamaha Distributors division, TF launched an application for payment of the outstanding amount, ancillary relief, and costs jointly and severally from Kilburn Auto as the principal debtor and Ian Kilburn as the surety.
In the court a quo, Kilburn Auto contended that its indebtedness relating to the purchase of the products under the AMP division had been discharged. The court, however, found in favour of TF's interpretation that the deed of suretyship had been widely worded and thus covered the purchase of any product under any of the entities. TF was the creditor and therefore had a claim against Ian Kilburn in his capacity as surety.
The SCA was called upon to decide whether TF, on a proper construction of the Deed, had a contractual right to recover, against Ian Kilburn in his capacity as a surety, the indebtedness that arose from the credit purchases from TF's Yamaha Distributors division.
TF made the following contentions:
- Where a heading and body of an agreement are in conflict, the body has to prevail as the parties' intention could be derived therefrom. The SCA accepted this but further pointed out that where the heading and body can be read together, this should be done.
- The words used in the heading are meaningless, superfluous and administrative. The SCA disagreed with this view as it goes against the rule of interpretation that every word must be given a meaning.
- The context in which the Deed came into being is a neutral factor and that when the words are read in isolation and in the context of the body of the Deed, they may be unclear. The SCA rejected this by stating that clarity is achieved when language is considered in light of the factual background, including the purpose of the Deed and the circumstances in which it was prepared. The Deed only came into existence because security was required for Kilburn Auto to purchase the goods on credit from the AMP division.
The SCA held that when effect was given to words in the Deed and all other circumstances are taken into account, the liability of Ian Kilburn as surety was limited to the credit purchases from the AMP division and accordingly, had been discharged. There was thus no conflict found between the heading and body of the Deed.
This case should encourage contracting parties to carefully consider the wording used in the entire contract, from the heading to the body, in order to prevent the court from having to interpret the contract in a manner that neither party intended.