Botha v Iveco South Africa (Pty) Ltd

The appellant (Botha) was the sole shareholder of Duewest Properties (Pty) Ltd, which owned an immovable property. On 21 May 2003, Botha, Duewest and the respondent (Iveco) concluded a sale of shares agreement whereby Botha sold 100% of the shares and his loan account in Duewest to Iveco. The agreement contained warranties (clause 5) and an indemnity clause (clause 9). Botha warranted that as at the effective date (23 July 2003), the only liability of the company would be his loan account. In January 2004, Iveco discovered that Duewest owed R330,190.48 to the Inner West Municipality for duties and levies. Iveco notified Botha of the breach and allowed him extensions until 15 December 2005 to resolve the matter with the municipality. After unsuccessful attempts, Iveco eventually paid the outstanding amount on 17 July 2007, which had increased to R1,507,147.95 including penalties and interest. Summons was served on 17 September 2008, claiming the amount paid under the indemnity clause. Botha raised a special plea of prescription.

• When did prescription begin to run in respect of a claim based on an indemnity clause following a breach of warranty in a sale of shares agreement?
• Whether a debt under an indemnity clause becomes due and payable on the date of the breach of warranty or on the date of payment by the indemnified party?
• Whether the claim had prescribed when summons was served on 17 September 2008?

The appeal was dismissed with costs on the ordinary scale. Paragraph 2 of the order of the court a quo (which declared that prescription commenced running on 15 December 2005) was deleted.

In respect of a claim under an indemnity clause in a sale of shares agreement, prescription begins to run not from the date of the breach of the underlying warranty, but from the date on which the indemnified party makes payment in terms of the indemnity clause. The debt under an indemnity only becomes due and payable when the obligation to indemnify is triggered by payment, because one cannot 'recover' money without first paying it out. The cause of action for purposes of prescription is therefore the payment made under the indemnity, not the breach of warranty that gave rise to the indemnity obligation.

The court made obiter observations regarding the interpretation of costs clauses in indemnity agreements. It noted that clause 9.2.2, which provided for costs on an attorney-client scale, applied only to costs incurred by the purchaser in opposing claims by third parties, not to costs incurred in suing the seller. The rationale behind such clauses is that if the seller's tardiness causes the purchaser to incur costs vis-à-vis a third party claimant, the seller must reimburse those costs on an indemnity basis. The court also commented that there was 'some dispute' about whether the appellant had required the respondent to oppose the claims under clause 9.2.1, but that it was clear the appellant did not comply with its obligations under that clause, though this was not determinative of the appeal.

This case is significant in South African contract law and prescription law as it establishes the important distinction between when a breach of contract occurs and when a debt becomes due and payable under an indemnity clause. It clarifies that for prescription purposes in indemnity agreements, the debt only becomes due when the indemnified party makes payment, not when the underlying breach occurs. This has important implications for the calculation of prescription periods in commercial transactions involving warranties and indemnities. The case also provides useful guidance on the interpretation of indemnity clauses in sale of shares agreements and the meaning of 'recover' in contractual contexts.