ABSA Bank Limited v John Garrick Davidson

On 24 February 1989, Davidson, as director of Whistlers Interiors (Pty) Limited, signed an unlimited deed of suretyship in favour of Trust Bank (later succeeded by ABSA Bank) for all debts of Whistlers. Myburgh signed a similar suretyship. In August 1990, Davidson sold his shares in Whistlers to Myburgh, with an agreement that Myburgh would procure Davidson's release from the suretyship, but this never occurred. During October 1990 to April 1991, Myburgh (as authorized signatory) drew cheques and debit orders on the Whistlers account totaling R92,831.16 to pay for a Ferrari motor vehicle for his personal use. Trust Bank also increased Whistlers' overdraft limit from R150,000 to R300,000. Whistlers was provisionally liquidated on 12 April 1991 (made final on 6 May 1991). Myburgh later died and his estate was sequestrated. ABSA sued Davidson for R372,101.89 plus interest and attorney-client costs based on the suretyship.

• Whether Davidson was released from his suretyship obligations through estoppel based on alleged misrepresentation by the Bank
• Whether Trust Bank's conduct in debiting the Whistlers account for the Ferrari payments constituted prejudicial conduct releasing Davidson as surety
• Whether Trust Bank's increase of the overdraft limit without informing Davidson constituted prejudicial conduct releasing him as surety
• The scope and application of the 'prejudice principle' in the law of suretyship

The appeal succeeded with costs on the attorney-client scale, including costs for two counsel. The trial court's judgment dismissing the claim was set aside. Judgment was granted in favor of ABSA for: (1) R372,101.89; (2) interest at ABSA's prime rate plus 2% per annum capitalized monthly from 21 May 1992 to date of payment; and (3) costs of suit on attorney-client scale, including costs for two counsel.

A surety can only be released on the basis of prejudicial conduct by the creditor if such prejudice results from a breach of a legal duty or obligation. Where the alleged prejudicial conduct falls within the express terms of the principal agreement or the deed of suretyship, the prejudice is one which the surety undertook to suffer and cannot ground a defense. A surety who binds himself for unlimited amounts and agrees that the creditor has discretion to determine the extent, nature and duration of the principal debtor's obligations cannot complain of prejudice when the creditor exercises that discretion, even if the surety was not informed. The terms of the contract govern the rights and obligations of the parties.

The court expressed strong disapproval of the practice of placing 'bundles' of unproved and irrelevant documents before the court. Of 553 pages of exhibits placed before the court, only approximately 25 pages were relevant. The court referred to previous cases (Government of RSA v Maskam Boukontrakteurs (Edms) Bpk 1984 (1) SA 680 (A) and Louw v WP Koöperatief Bpk en Andere 1994 (3) SA 434 (A)) where it had expressed displeasure at this practice and warned that in appropriate cases costs de bonis propriis (personally against counsel) may be awarded. While no punitive order was made in this case because the matter was not raised with counsel during argument, the court strongly warned practitioners against this practice.

This case is significant in South African suretyship law for clarifying the limits of the 'prejudice principle'. It establishes that a surety cannot claim release based on alleged prejudicial conduct by the creditor where that conduct falls within the express terms of the principal debt agreement and the suretyship deed. The judgment reinforces the sanctity of contractual terms in suretyship agreements, particularly unlimited suretyships with wide discretionary clauses. It also demonstrates the strict requirements for establishing estoppel as a defense to suretyship liability, including the need to prove actual receipt of communications and the necessity of written cancellation where contractually required.