Lytton Investments (Pvt) Ltd v Standard Chartered Bank (Zimbabwe)

### Preamble
1
HH 793-18
HC 6532/15
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LYTTON INVESTMENTS (PVT) LTD

versus

STANDARD CHARTERED BANK (ZIMBABWE)

HIGH COURT OF ZIMBABWE

DUBE J

HARARE, 3, 4 October, & 28 November 2018

Continuous roll

L. Madhuku, for the plaintiff

D. Tivadar, for the defendant

DUBE J: The plaintiff claims that the defendant breached terms of a loan agreement entered into between the parties by failing to advance to the plaintiff the loan amount agreed to. It asserts that its failure to secure the agreed loan resulted in it failing to procure raw materials for its business activities causing loss in business opportunities and profits. The plaintiff claims damages in the sum of $320 000, 00 in order to place it in the position it would have occupied had the breach not occurred.

The defendant asserts that the plaintiff failed to comply with its obligation in terms of the facility by failing to abide by the deposit covenant. It avers that the facility was uncommitted and hence the defendant had no obligation to make available any part of the facility to the plaintiff and could decide otherwise in its discretion.	The plaintiff was in breach of the terms and conditions of the agreement making the defendant not liable to continue disbursing further funds. It denies that it breached the terms and conditions of the agreement between the parties. The defendant refutes that the plaintiff suffered any damages caused by the lack of funding as alleged or that it is liable to pay damages in the amount claimed.

The following issues were referred to trial,

What were the terms and conditions of the uncommitted facility between the

plaintiff and the defendant?

What is the meaning of the term “uncommitted facility”?

Whether or not the contra preferentum rule should not apply in the interpretation of the agreement.

Whether or not the defendant agreed to advance the sum of US$160 000 to the plaintiff.

Whether the defendant breached the agreement to advance the sum of US$160 000 to the plaintiff.

The quantum of the plaintiff’s damages, if any.

Whether or not the plaintiff breached he covenant to deposit US$45 000 per month, and if so, the consequence thereof.

What scale of costs should be awarded to the successful party?

The plaintiff called Justin Taonahama Samudzimu, its executive director as its first witness. His testimony is as follows. The plaintiff was offered a facility of $160 000, 00 made up of short term loans of $40 000, 00 for local inputs and $120 000, 00 for import invoice financing by the defendant for purchase of raw materials for manufacture. The agreement was that all their raw material suppliers would be paid for in order that they would be able to supply adhesives to customers. They submitted their import invoices required for production. Under $62 000, 00 was released to them. Only $21 802.50 for the inks was paid directly to suppliers by the defendant. They were told to be patient as the bank was processing payment. Then they were told that there were some hiccups and delays due to the bank experiencing challenges in the lead up to the elections. As time went on it became apparent that the defendant would not pay. The bank knew that without paper, you cannot prints labels and sell any product and that the amount was required to be paid up front. It would have been impossible to trade and supply customers without the critical raw materials. The money was required to be paid upfront and not a drawdown facility. The June pro forma invoices were submitted after the breach by the defendant in paying the first pro forma invoices. They paid management fees for the entire $160 000-00 having agreed that the entire amount would be availed. There would be no sense mortgaging their factory to the extent of $160 00-00 in exchange for receiving a small portion of that amount.

There were certain preconditions like the payment of a deposit of $45 000-00 into the cash flows agreed upon by the parties. The bank failed to pay their suppliers and hence they could not manufacture and sell and pay the deposit required from the proceeds of the sales. It is dishonest for the bank to say that because they did not bank the deposit they were not entitled to the rest of the disbursements. The bank knew their business and was aware that they had to manufacture and sell in order to raise the deposit.

The witness refuted that this was an uncommitted facility. Their understanding of the term ‘uncommitted’ is that if only the borrower signs the facility letter, no obligation arises. However, once the bank signs, they are bound and have to advance the money. Once the agreement was signed, by both parties the parties, became committed to the agreement and the agreement became binding. The bank is not committed until it signs the facility letter. The defendant cannot sign a contract and charge them and turn around and say that they don’t have to perform in terms of the contract because the facility is uncommitted.

Once the paper did not arrive, critical sales orders to customers whom they supply labels had to be cancelled, such as Tanganda and Tingamira who ordered from their competitors. The witness told the court that the plaintiff did not provide the court with any orders from any customer as it did not get any orders but simply directed them to their competitors. There is no proof that plaintiff wrote to customers advising them to go to its competitors. They lost a lot of sales, money and long term customers. Their brand was destroyed as staff members were poached by competitors together with key customers .The losses continue up to today as the bank has withheld their title deeds preventing them from borrowing from other institutions. The $320 000-00 they claim is the value of the agreed upon orders between the parties whose marginal income was lost due to non-performance. They have not factored in labour claims from staff which left, goodwill, damage to the brand and the continuing effect of the bank withholding their title deeds.	The witness conceded under cross-examination that the plaintiff had no proof of all the pro forma invoices the plaintiff claims it submitted.

The plaintiff called Kenneth Patrick McCosh a chartered accountant who did an accountant’s report of plaintiff’s damages. He used the loss schedules prepared by the plaintiff to come up with his report. He found that the assumptions used in the forecast losses have been consistently used. The losses are reasonable and consistently applied and are consistent with international standards. He did his own calculations and used historical results and financial calculations of the client. He used the client’s future order book to ascertain the reasonableness of the calculations. He also conducted interviews of client and obtained data from client’s accountant. The loss calculation identifies with the margin which would have been made had those materials been acquired .The cost of the raw materials plus the mark up on the finished products are equal to the loss of gross margin. Client suffered significant loss as a result of the failure by the bank to provide the necessary finance.

He prepared his report on 18 September 2018 having been instructed on 16 September 2016. It was suggested to him in cross examination that the plaintiff’s summary of evidence which makes reference to his findings, was filed on 14th May 2018 before he received instructions. His response was that his evidence will be what he stated and that the plaintiff had pre-empted him. The plaintiff should explain the anomaly.

Josephine Dzorani testified on behalf of the defendant. She is the relationship manager for the SME Banking Unit. She told the court that an uncommitted facility is a loan offered to a client though the bank where the bank is under no obligation to pay it in full. The plaintiff was required to put in a request in writing for raw materials. The facility was not given as a single draw drawn but in multiple drawings and therefore there was no breach by the defendant. Only $21 802.50 went towards purchase of the ink as the $40 000 was a short term loan. The only pro forma invoices submitted are the ones that were paid totalling $21 000.00. She does not remember any that were not paid. She could not confirm or deny that plaintiff did submit pro forma invoices for other raw materials like paper because there are other people who dealt with the plaintiff.

The reason why all the money was not disbursed is that the deposit covenant was not met due to issues with plaintiff’s debtors. When asked if it was to do with the uncommitted facility she answered no. Later she said it could be one of the reasons. The issue of the deposit covenant was to arise only after 31 May 2013 so that client could make money. By 31 May 2013 client had already accessed up to $62 000 .They expected the plaintiff to be already doing business which would enable the client to be servicing the loan. The plaintiff did not give the failure to pay invoices as the reason to pay the deposit.

The defendant challenged the plaintiff’s claim on the basis that it initially instituted a class action against the defendant in relation to the same issues. The application was rejected by the High Court and the plaintiff appealed the decision to the Supreme Court and was unsuccessful. The Constitutional Court is now seized with the matter and the matter has not been withdrawn. The defendant contended that it is abusive for the plaintiff to pursue the present matter whilst still pursuing the class action which is pending in the Constitutional Court. It urged the court to reject the plaintiff’s claim. The Constitutional Court is seized with the same issues but in a different matter. It has not disposed of the issues and there is no final decision on the issues. For as long as the Constitutional Court is not seized with the same case, there is no bar to this court proceeding with this matter.

It is common cause that in February 2012, the parties entered into a facility agreement and $40 000.00 remained owing under that facility. On 18 March 2013, the parties entered into a further loan facility of $160 000.00 broken down into two components, $40 000.00 short term loan for working capital made available immediately upon signing of the agreement for working capital such as wages and salaries and $120 000.00 being import invoice financing for procurement of raw materials, to be paid directly to suppliers. The defendant paid the $40 000.00 and an additional $21 802.50 for ink supplies, making a total of $61 802 .50 .A balance of about $98 000.00 remained. The plaintiff agreed to payment of a deposit to be paid by 31 May 2013. The central issue to be decided is whether the defendant’s failure to advance the balance of the loan facility amounts to breach of the loan agreement and if so the quantum of damages. The common cause facts resolve this dispute. The parties agree that there was a facility agreement between the parties and hence resolution of this dispute lies on an interpretation of the terms of the loan agreement.

The defendant’s position is that the entire sum was not disbursed because the plaintiff breached the obligation to pay a monthly deposit. Defendant contended that as the facility was uncommitted, it was no longer obliged to pay the balance due upon failure to comply with the deposit requirement. The plaintiff stated that the reason why it failed to pay the deposit was that it had lost its orders after the defendant failed to pay its invoices. The plaintiff insisted that the agreement between the parties contemplated that the plaintiff had to be funded first to procure raw materials and produce before the obligation to deposit $45 000.00 every month could kick in. The plaintiff maintained that the defendant breached the agreement by failing to release money for raw materials.

The Import Invoice Finance Facility provides on p 40 that the facility was to be utilised “in multiple drawings during the tenor of the facility’’. This was to be done by delivery of a “utilisation notice’’ to the bank. The utilisation was subject to availability of funds and was subject to certain other conditions which included that the invoice value was to be financed after presentation of an import invoice /preform invoice from the suppliers to be paid direct to suppliers. The parties agreed to a deposit covenant which was couched in the following terms,

“The customer is to deposit a minimum of USD45000.00 monthly into their Standard Chartered 	Bank operating account commencing 31 May 2013.’’

The facility was uncommitted and the Master Credit Terms (Uncommitted) provides as follows in clause 1.3 (d);

“Uncommitted: Regardless of any other provision of the Agreement, each Facility is 	uncommitted and accordingly it is made available to each designated Borrower at the Bank’s 	sole discretion. The Bank will have no obligation to make any utilization under, or make 	available any part of, any facility.’’

An uncommitted facility is defined in Investopedia as follows,

“an agreement between a lender and a borrower where the lender agrees to make short term 	funding available to the borrower; this is in contrast to a committed facility that involves 	clearly defined terms and conditions set forth by the lending institution and imposed on the 	borrower, uncommitted facilities are used to finance seasonal or temporary needs of business 	with fluctuating revenues, such as paying creditors to earn trade discount funds, single or 	once off transactions, meeting payroll obligations. Uncommitted facilities are generally less 	costly to arrange, compared to committed facilities, because the lender has no obligation to 	extend the loan when financing is made available. It is short term, and the credit risk is 	comparatively small”

David Adams in Banking and Capital Markets, 2017 published by College Law Publishing on p 19 defines the term ‘uncommitted’ as follows,

“The feature which distinguishes one type of loan from another is the way in which it 	allows the borrower to utilise credit…….a loan facility may be either ‘committed’ or  	‘uncommitted’. A facility is committed if the facility agreement , once executed, obliges the 	to advance monies at the borrower’s request(subject to the borrower complying with certain 	pre-agreed conditions.) If the facility agreement allows the bank more discretion before 	advancing any loan monies, the facility will be ‘uncommitted’.”

A facility agreement or a loan is either committed or uncommitted. What distinguishes a loan from another is the manner in which the borrower is to utilise the money loaned. A committed facility is one which sets out clearly defined terms and conditions of the facility. Once the facility agreement is signed, it obliges the lender which is usually a bank, to advance the loan at the borrower’s request once the borrower has complied with the agreed conditions. An uncommitted facility is an agreement between a lender and a borrower for a short loan facility. These are facilities which do not have clearly defined terms and conditions set by the lender. A lender will only pay money loaned under the facility where the borrower has met all the conditions of the facility before the funding agreed to can be released. The lender decides whether to advance the loan and the limit. The lender is not obliged to extend the loan upon request of the borrower and does so at its discretion. The facility may be withdrawn at any time. Examples of uncommitted facilities are overdraft and working capital facilities meant to solve a company’s short term cash flow problems.

The facility letter of 2013 facility was uncommitted. The term, ‘uncommitted’ is defined in the Master Credit terms as one made available at the Bank’s sole discretion .By signing the facility letter, the plaintiff agreed to be bound by its terms including the Master Credit terms which were part of the agreement. Mr Samudzimu’s understanding that ‘uncommitted’ meant that the Bank was not committed until the agreement was signed and the arrangement fee paid does not accord with the meaning of an uncommitted facility and the terms of the agreement. The definition of “uncommitted” has no bearing on the signing of the contract but rather the nature of the contract, that is, that it is of a temporary in nature and that the loaner has discretion over the disbursement of the money. The defendant had no obligation to extend the loan if all conditions of the loan were not met. His understanding that the agreement was uncommitted until it was signed does not make sense as an agreement does not become binding until signed.

The facility loan was required to be utilised in multiple drawings and was not a once off payment. Disbursements were required to be paid directly to the suppliers. Payment was subject to availability of funds and subject to the lender’s discretion. The plaintiff was required to present pro forma invoices from suppliers for payment. Mr Samudzimu’s understanding that the plaintiff would receive the entire facility in one go in March 2013 has no basis. The terms of the Import Invoice Financing Facility are clear on p 40 of exhibit 2 that the facility was to be utilised in multiple drawings. The terms of the facility did not provide for a facility of $160 000.00 but for a facility limit of that amount. The defendant was under no obligation to lend the entire facility of $160 000.00 all at once.

Whilst raw materials were critical for importation of key raw materials, the plaintiff was required to submit pro forma invoices for utilisation of the loan. The facility does not state that the deposit would only be paid after all the money was released. It states a date by which it was to be paid. It was assumed that by that date the plaintiff would have requested and received sufficient funds to enable it conduct its business and to pay the deposit. Mr Samudzimu maintained that all pro forma invoices that needed to be settled were submitted for payment in March 2013. The first import invoice was settled by the defendant in May 2013 ($21 802.50). The plaintiff testified that it requested $67 000.00 in June 2013 as a resubmission. The defendant’s witness’s evidence is that the non-payment of the $98 000.00 was due to the fact that no pro forma invoices  not  been presented . The plaintiff has not produced proof that it submitted pro forma invoices when it says it did. The call report dated 16 October 2013 records that pro forma invoices for $67 000.00 were only submitted for payment only in June 2013. There is no proof that the plaintiff submitted invoices for the balance of the raw materials in March 2013. The court cannot rely on the plaintiff’s say so especially in the face of a challenge regarding submission of the invoices. I believed the defendant’s witness that after payment of the initial $21 802.50, the other invoices were only submitted in June 2013, way after the requirement to pay the deposit had kicked in.

By the time they plaintiff made the next request for disbursement, the first deposit instalment was already due. The plaintiff ought to have requested the disbursements early so that it would receive raw materials from its suppliers and manufacture to enable it to do business and meet the deposit deadline by 31 May 2013.Through its own ineptitude, the plaintiff failed to request disbursements to suppliers on time. It is through no fault of the defendant that the plaintiff failed to request the money earlier. The defendant may have been aware that the money was required so that the plaintiff may be able to do business and pay back, however, the bank could not be expected to disburse the money without a utilisation notice and pro forma invoices being put in.

The call reports produced are for the period September 2013 to March 2014 which record the reasons for failure to pay the deposit. They record that the plaintiff was facing low sales and was  failing  comply with the requirement to pay the deposit. I see no reason why the defendant’s representatives would falsify the reports. Evidence led suggests that the plaintiff was facing financial challenges not because the defendant had failed to release money for purchase of raw materials. The plaintiff had problems with its debtors, its customers were facing liquidity problems, and it experienced thefts by employees. The plaintiff averred that it was receiving income from other accounts held with other banks but did not disclose the said bank accounts. The plaintiff was already struggling financially by the time it entered into this facility. This is evidenced by the failure to repay the 2012 facility. The call reports record that the customer complained that the bank failed to give it $67 000.00 it applied for in June 2013. Nowhere do they deal with the complaint that plaintiff did not receive the full amount in one go or that the defendant had failed to honour pro forma invoices submitted in March 2013. The plaintiff failed to meet the conditions of the loan and breached the deposit covenant.

The contra proferentum rule applies where there is an ambiguity in a contract. In Astra Steel and Engineering Supplies P/L v PM Manufacturing (Pvt) ltd HH393/12, the court explained the rule as follows,

‘’The contra proferentem rule alleged by the defendant which requires a written

Document to be construed against the drafter on the ground that it was for him to 	express. He in plain terms is invoked only where there is ambiguity in the use of a 	word or choice of expression leaving one unable to decide which of two meanings is 	correct. In Cole v Accident Assurance Co Ltd (1889) 5 TLR 736 at 737 lindley LJ 	said,

“…. One must not use the rule to create the ambiguity – one must find the ambiguity

first.

In casu I would say that by trying to invoke the rule, the defendant was trying to

create the ambiguity following failure to find the ambiguity first. The rule is

accordingly inapplicable in the instant case for exh 1 supported by the rest of the 	indicia alluded to supra admits of no ambiguity.’’

The facility terms are is clear that the facility was uncommitted and there is no ambiguity about the facility. The contra proferentem rule is inapplicable. The defendant’s own misunderstanding of the term ‘uncommitted’ does not makes the terms of the facility ambiguous.

The facility being uncommitted, the plaintiff could only receive the full loan amount if it met all the conditions of the facility. Once it failed to fulfil the deposit covenant, the defendant was entitled at its discretion, to refuse to disburse the balance under the loan. The fact that the plaintiff had registered a mortgage bond for the entire sum and paid administrative charges for the entire $160 .000.00 does not assist the plaintiff.  The facility required secuirity. The plaintiff fails to appreciate that the management fees were charges for the establishment of the facility rather than its utilisation. The plaintiff has failed to show that the defendant breached the agreement.

Even assuming that I am wrong in my view that the plaintiff failed to meet the requirements  of the facility entitling the defendant to decline to advance further monies, I am not satisfied that the defendant has proved its case for damages. The defendant’s expert witness was unable to explain how his conclusions could be set out in the plaintiff’s summary of evidence in May 2018 when he was instructed four months later on 16 September 2018 and made his report two days later. His conclusions have no basis because he failed to provide the documents he relied on. No one knows the instructions he received from the plaintiff. He seems to have relied on an email he received from the plaintiff but he did not disclose the document. He says that he relied on plaintiff’s order book setting out the plaintiff’s computations, profit margins and yet he did not produce this document. The plaintiff‘s witness also failed to disclose the order book it indicated it had. There is no documentary evidence of the plaintiff’s losses .The evidence of damages suffered by the plaintiff is not supported by any documents. The plaintiff’s computation cannot be checked against any documentation. The plaintiff’s own calculations remained a secret. The expert witness seemed to have adopted the plaintiff’s assumptions as they were. The court does not have evidence of the assumptions adopted. The expert witness unable to say that the assumptions he adopted were reasonable. It appears that no account was taken of the challenges the plaintiff was facing such as the thefts, bad debt and downturn in market.  He seemed to have adopted the plaintiff’s accounts as they were when they were never audited and hence not verified. No basis has been set for 40% gross margin. The plaintiff assumes that all funding would be reinvested in raw materials. There is no basis for that assumption especially when there were bad debts to be serviced. Samudzimu deferred to his witness for the assumptions. The assumptions remained unexplained. The plaintiff has failed to prove its claim for damages.

The plaintiff has not shown an entitlement to the relief sought. In the result I must find against the plaintiff.  No justification has been shown for a punitive award of costs.

Accordingly,

The plaintiff’s claim is dismissed with costs.

Mundia and Mudhara, plaintiff’s legal practitioners

Gill, Godlonton and Gerrans, defendant’s legal practitioners