Lynn & Main Incorporated v Brits Community Sandworks CC

Crocodile Transport CC (Crocodile) owed debts to Citibank NA (Citibank) arising from instalment sale agreements. On 1 March 2001, the respondent (Brits Community Sandworks CC) and Crocodile signed a cross-suretyship agreement, each binding itself as surety for the other's debts owed to Citibank. Clause 11 of the deed provided that 'Citibank may at any time, on written notice to us, cede its rights and/or delegate its obligations under this suretyship to a third party'. On 24 April 2001, Citibank ceded all its rights, title and interest in book debts to the appellant (Lynn & Main Incorporated). Crocodile was subsequently wound up. The Manager of Citibank certified on 1 October 2002 that the balance outstanding was R1,970,485.30. After receiving an advance dividend from Crocodile's liquidators, the appellant sued the respondent as surety for the balance of R550,932.02. The respondent denied that the cession was valid, arguing that it had not been notified in writing as required by clause 11, and therefore the appellant had no locus standi.

• Whether prior written notice to a surety is a prerequisite for the validity of a cession of rights under a suretyship agreement
• What is the proper interpretation of the words 'on written notice to us' in clause 11 of the deed of suretyship
• Whether the summons constituted sufficient written notice of the cession to the surety
• Whether notice was required to both the surety and the principal debtor

The appeal succeeded with costs on the attorney and own client scale. The order of the High Court was set aside and replaced with an order that the defendant (respondent) pay to the plaintiff (appellant): (a) R550,932.02; (b) interest at prime plus 1% from date of judgment to payment; (c) costs on the attorney and own client scale.

A clause in a deed of suretyship permitting the creditor to cede its rights 'on written notice' to the surety does not make prior written notice a prerequisite for the validity of the cession. Rather, the cession is valid upon agreement between cedent and cessionary, but is ineffective as against the surety until written notice is given to the surety. Upon cession of a principal debt, the cessionary automatically acquires rights in respect of the surety agreement without need for a separate or formal cession of those rights. Where written notice is required by the terms of a suretyship agreement, service of summons claiming payment under the cession may constitute sufficient written notice to the surety.

The court noted that it was aware of conflicting decisions regarding the effect of an order for costs on the attorney and own client scale, but did not need to consider those conflicts given the parties' agreement on the issue. The majority judgment commented that if the parties intended 'prior written notice' to be a prerequisite, they could easily have said so by using the word 'prior'. The majority also observed that there is no common law rule that acquisition of rights under a suretyship agreement following cession of the principal debt is ineffective against the surety until the surety has knowledge of the cession - ineffectiveness against the debtor for lack of notice does not extend to the surety in the same way. Farlam JA in dissent observed that the notice provision would allow a surety who was uncomfortable with the identity of the new creditor to take steps to terminate its liability or pay the debt.

This case is significant in South African law because it clarifies the law relating to cession of rights under suretyship agreements and the effect of notice provisions in such agreements. It establishes that a clause permitting cession 'on written notice' does not render the cession invalid for lack of prior notice, but merely renders it ineffective as against the surety until notice is given. The case reinforces the general principles that: (1) cession is effected by agreement between cedent and cessionary without need for debtor's or surety's concurrence; (2) notice to the debtor/surety is not a prerequisite for validity but for effectiveness against that party; (3) upon cession of a principal debt, rights against the surety pass automatically without separate cession. It also confirms that summons may constitute sufficient notice where required. The case demonstrates careful contractual interpretation in the context of suretyship law.