Authored by Patrick Bracher.
Modern concepts of interpreting contracts have influenced the way in which cessions are interpreted either as cessions in security (in securitatem debiti) or out-and-out cessions.
There are two forms of security cession. The first form is really a pledge, where the cedent retains ownership of the right and a reversionary interest in the subject matter of the cession which is usually an underlying contractual obligation, for instance in a lease or insurance policy. Upon the debt secured being discharged, the subject matter of the cession reverts to the cedent without any formality to be complied with because this reversionary interest always remained vested in the cedent.
The second form of security cession is a cession where an obligation is superimposed that the cessionary will re-cede the subject matter of the cession to the cedent on satisfaction of the secured debt.
On the other hand, an outright cession of a right of action divests the cedent of the asset permanently.
The question is whether the cedent is divested of rights in the subject matter of the cession altogether and in perpetuity. The determining factor is gathered from the intention of the parties and the purpose of the transaction. Form does not override substance. Even the cession in this matter, called an out-and-out cession with a statement that ownership was transferred to the cessionary, was not conclusive. If the transfer of ownership of the ceded right, properly construed, is subject to an obligation of the cessionary to recede the subject matter of the cession once the underlying debt is discharged, it is a cession in security, not an outright cession.
The court found that the cession of a life insurance policy of R4 million to the lessor under a lease was not an out-and-out cession despite being described as “totally/out-and-out” and despite giving a date on which the “rights had transferred”.
Great care is required in wording an outright cession. The intention of the parties and the purpose of the cession must be clearly stated.