Graf v Buechel

• Jurisdiction: South Africa
• Judge: Howie P, Schutz JA, Streicher JA, Cloete JA and Lewis JA
• Judgment Date: 27 March 2003
• Citation: 2003 (4) SA 378 (SCA)
• Docket Number: 150/2002
• Hearing Date: 13 March 2003
• Counsel: L A Rose-Innes SC (with E W Fagan) for the appellant. G D van Schalkwyk SC (with W de Haan) for the respondent.
• Court: Supreme Court of Appeal

Cloete JA:

Introduction F

[1] The present appeal concerns primarily the question whether a pactum commissorium in a contract of pledge can be enforced if the pledgor is not the pledgee's debtor; and also the question whether, if the value of the pledge is less than the debt, the contract should be regarded as being in the nature of a conditional sale and therefore valid. G

The facts

[2] The respondent, the applicant in the Court below, was the sole shareholder and director and the only loan account creditor of Western Seaboard Development (then a close corporation but later a company, and to which I shall refer as 'the company'). The company purchased immovable property with the intention of developing a H sectional title hotel on it. The appellant, the respondent in the Court below, lent the purchase price to the company against the security of a mortgage bond registered in his favour over the property. It was a term of the loan agreement that, if conditions relating to the development of the property were not met by a fixed date, the appellant I would become entitled to repayment of the capital amount lent and interest thereon. The conditions were not met.

[3] Subsequently the appellant, the respondent and the company entered into an agreement ('the extension agreement') in terms of which J

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the appellant granted the company an extension of time for payment of its indebtedness. In terms of the extension agreement, A the respondent and the company undertook to deposit with a firm of attorneys a number of documents, including the share certificates in respect of the issued share capital of the company; share transfer forms in respect of such shares signed by the respondent and blank as to transferee; a cession in respect of the respondent's claim on loan account against the company, duly signed by the respondent; B and a power of attorney authorising the appellant to pass transfer of the company's immovable property to himself or his nominee and to sign all relevant transfer documentation on behalf of the company. Further in terms of the extension agreement, the company and the respondent authorised the attorneys to release the documents to which I have C referred, to the appellant, if the company had not paid its indebtedness to the respondent timeously.

[4] Clause 9 of the extension agreement, which is central to the issues in this appeal, provided, inter alia:

'Election: D

In the event of default and on delivery of the documents Graf [the appellant] will be entitled, without prejudice to any other rights which Graf may have, either to acquire the company by transferring the shares in his own name or that of his nominee, and accepting cession of the loan claims, or alternatively to pass transfer of the immovable property to himself or his nominee. E

If Graf elects to take transfer of the immovable property, the transfer value of the property will be equal to the market value thereof as determined by David Newham, or in the event of David Newham being unable or unwilling to act, by Graham Alexander, or in the event of both of them being unable or unwilling to act, then such valuer as will be appointed by the President for the time being of the SA Council of Valuers whose decision, acting as expert and not as arbitrator, will be final and binding on the parties. F

Graf's claim against the company will be reduced by the said value of the immovable property. Transfer will be passed by Graf's conveyancers.'

[5] The company failed to repay its indebtedness to the respondent. It was in fact insolvent. A provisional order of winding-up was issued at the suit of the appellant on 26 April 1999 and a final order followed on 9 September of the same year. G

[6] On 7 May 1999 and in terms of clause 9 of the extension agreement, the shares of the company were transferred from the name of the respondent into the name of the appellant.

The issues H

[7] In the Court below the respondent sought in motion proceedings to undo the transfer on the basis that the provisions in clause 9 of the extension agreement permitting the appellant to acquire his shares and loan account, constituted a pactum commissorium and were therefore invalid. The learned Judge I (Selikowitz J) held in his favour and gave the following order (together with an order for costs):

'1.

Declaring that the portion of clause 9 of the agreement concluded between respondent, applicant and Western Seaboard Development (Pty) Ltd on 11 February 1999 which reads, 'to acquire the J

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company by transferring the shares in his own name or that of his nominee, and accepting cession of the loan claims' is a A pactum commissorium and accordingly invalid.

2.

Declaring that the transfer during May 1999 to respondent of 1 000 shares in Western Seaboard Development (Pty) Ltd in terms of clause 9 of the aforesaid agreement is invalid and of no force and effect.' B

The learned Judge subsequently granted leave to appeal to this Court against the order.

[8] On appeal the following two submissions which had been made by the appellant in the Court below, and which were rejected by the learned Judge, were repeated: C

(1)

that because the shares and loan account were 'pledged' [1] to the appellant by the respondent, and not by the appellant's debtor, the company, the provisions of clause 9 of the extension agreement permitting the appellant to take transfer of the shares and loan account did not D amount to an invalid pactum commissorium; and, in the alternative,

(2)

that because the value of the property pledged did not exceed the amount of the company's indebtedness to the appellant, clause 9 must be construed as a conditional sale.

Pactum commissorium E

[9] A pactum commissorium in the context of a pledge is an agreement that, if the pledgor defaults, the pledgee may keep the security as his own property. Such an agreement was prohibited in the Roman law by the Emperor Constantine early in the fourth century AD. The prohibition was perpetuated by the Emperor Justinian in F C 8.35(34).3, which reads:

'Quoniam inter alias captiones praecipue commissoriae pignorum legis crescit asperitas, placet infimari eam et in posterum omne eius memoriam aboleri. Si quis igitur tali contractu laborat, hac sanctione respiret, quae cum praeteritis praesentia quoque depellit[2]et futura prohibet. Creditores enim re amissa iubemus recuperare quod dederunt.' G

The passage may be translated as follows:

'Since amongst other harmful practices the severity of the lex commissorium in pledges is on the increase, it has been decided to invalidate it and abolish all memory of it for the future. If therefore anyone is oppressed by such a contract, he shall find relief by this decree, which annuls such provisions past and present H and proscribes them in future. For we decree that creditors shall give up the thing

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pledged and recover what they have given.' A

It is of importance for the purposes of the present appeal to note that the second sentence begins 'si quis' (if anyone) and not 'si debitor' (if a debtor).

[10] The prohibition against a pactum commissorium in a contract of pledge was very much part of the Roman-Dutch law. Grotius Introduction 2.48.41 (Maasdorp's translation 2nd B ed at 192) says:

'The effect of a mortgage is not that a creditor may retain the mortgaged property for himself, or sell it on his own authority; nay more, he may not even stipulate by contract for the right of forfeiture of the ownership in default of payment, but he must, after obtaining judgment, allow the sale to take place according to the legal process and thus recover what is due to himself.' C

Simon van Leeuwen Censura Forensis 1.4.8.7 (Barber and Macfadyen's translation at 54 - 5) says:

'The other is the pactum commissorium, by which it is agreed between the debtor and creditor that if the debtor does not pay on the stipulated day, the thing pledged should go to the creditor, and this is prohibited by law.' D

Voet in his Commentary on the Pandects 20.1.25 (Gane's translation vol 3 at 502) says:

'As regards a commissory agreement, it is true that it is correctly attached to a purchase; and that according to the opinion of some it was perhaps also tolerated of old in pledges and hypothecs. Nevertheless it is found to have been later discountenanced in the E latter by Constantine as being harsh and fraught with unfairness.'

Van der Keessel [3] says:

'Dis oorbekend dat die regsgevolg van 'n pand nie is dat die skuldeiser, by wanbetaling van die skuld, die pand vir hom behou nie; meer nog, selfs indien dit dmv 'n uitdruklike ooreenkoms beoog is, is so 'n lex commissoria deur die reg verwerp.' F

[11] The prohibition has also been received into the modern South African law [4] : Mapenduka v Ashington1919 AD 343; Sun Life Assurance Co of Canada v Kuranda (supra n 1); Vasco Dry Cleaners v Twycross1979 (1) SA 603 (A) at 611G. G

[12] The...