Authored by Donald Dinnie and Jakop Mphofu.
The high court found that a guarantee requirement issued for purposes of mortgage bond cancellation did not extinguish a bank's separate contractual claim for litigation costs, and that security cessions remained operative despite no costs order had yet been granted.
A farming company entered into credit agreements with a financial services provider, which required security in the form of cession of a life policy and a cession of crops and crop proceeds. The rights under the credit agreements, together with the security, were later ceded to a state-owned development bank. The farming company defaulted and the bank instituted liquidation and recovery proceedings.
During negotiations, the farming company sold immovable property to a government department. A guarantee requirement was issued by the bank, setting out the amount needed to secure release of its mortgage bonds. The sum of approximately R7 million was paid in terms of the guarantee in December 2023 and the bonds were cancelled.
The farming company then sought declaratory relief that the security cessions had lapsed, arguing that payment of the guarantee sum settled the entire indebtedness, including any claim for litigation costs. The court disagreed. The guarantee requirement was a conveyancing document directed at quantifying the loan account balance for bond cancellation purposes. It contained no reference to the pending litigation, no settlement language, and no indication that the bank intended to abandon its contractual claim for enforcement costs. The phrase "all amounts, including administration or other fees" referred to amounts already debited to the loan account, not to future litigation costs that had not yet been determined.
On the separate question whether the security cessions had lapsed, the court held that the credit agreements contained a clause entitling the bank to recover legal costs actually incurred in enforcing its rights. That contractual obligation existed independently of any future costs order. A security cession may validly secure obligations whose quantum has not yet been finally determined. The security therefore remained operative until the contractual costs liability was discharged.
The court also dismissed a challenge to the validity of the on-cession of the life policy from the original cessionary to the bank. The policy required written notice to the insurer before the occurrence of the risk event, but the court held that non-compliance with that provision did not render the cession void. The clause regulated when the cessionary could claim from the insurer, not the validity of the transfer between cedent and cessionary.