CR5

• Cession – policy procured with a view to securing a bond on house – by mistake the proposed cession was never implemented – effect of failure to do so.

The office was asked to express a view on the following set of facts:

“S and her fiancé R purchase a property. The Bank finances the purchase. The bond confirmation letter contains a clause which requires S and R to take out life cover and cede the policy to the bank as security for the bond amount.

The life cover is take out on the lives of both S and R. Both parties are alternately the beneficiaries of the proceeds of the policy should one of them die.

S dies. It is discovered that – in error – the policy had never been ceded to the bank.

The bank decides to sue S’s estate for the balance due on the bond (Joint and several liability). The estate settles the amount owing on the bond.

R, as beneficiary inherits the proceeds of the policy.

The complainant – S’s mother – submits that the bank acted unjustly in claiming only from the estate and not from R. She further submits that the bank acted incorrectly in not having the policy ceded to the bank.

The complainant does not wish the estate to claim half the bond amount paid from R (R is allegedly a very difficult person).”

We responded as follows:

“The legal position seems to be reasonably clear:

i) R, as the nominated beneficiary, was entitled to the proceeds of the policy.

ii) The bank was entitled to sue S’s estate for the full amount of the debt because S and R were jointly and severally liable to it; S’s estate was accordingly obliged to meet the claim in full even though R was not joined when the Bank made its demand for payment.

iii) S’s estate may well have a right of recourse against R for repayment of his proportionate share of the debt. There may be some uncertainty whether this follows as a matter of law (cf van der Merwe et al: Contract General Principles 2nd edition 230) but it would be highly unlikely if this would not in any event follow from the express or tacit terms of the underlying agreement between R and S.

iv) The cession of the policy (the principal debt) was contemplated as security to cover S and R’s indebtedness to the Bank (the secured debt) should the secured debt not be paid.

v) The fact that the contemplated cession was never executed had no effect whatsoever on the secured debt as such; it simply meant that the Bank did not enjoy the potential additional security of being able to proceed against the insurer on the principal debt should S and/or R renege on the payment of the secured debt.

vi) Since the bank would in any event only have been permitted to invoke the cession in securitatem debiti if the secured debt was not paid and since it was, the issue of the cession on the facts of this case is really irrelevant.”

Two further questions were posed, namely whether the Bank can be criticised (a) for not having insisted that the cession be executed and for not acting in terms thereof and (b) for proceeding against S’s estate only.

As to (a): As stated earlier, the Bank’s failure to insist on a cession of the policy to it, did not prejudice S and R; it only prejudiced the Bank which thereby forfeited a security which it would otherwise have had if S and R’s debt had not been repaid. Even if the cession had been executed it would not have affected the situation since the Bank would only have been able to invoke the cession if the secured debt had not been paid which, in the event, it was.

As to (b): It was the Bank’s prerogative to decide from which of the two joint debtors it would demand payment. Unless there are extraneous circumstances affecting the equities of the situation, arising from the correspondence or negotiations between the Bank and the co-debtors, it does not seem to us that the Bank can be criticised for acting in terms of its rights.

In our opinion there is accordingly no basis in fairness for making a ruling against the Bank.

Far from the Bank acting inequitably, it seems to us that S’s mother’s attitude is unfair: she appears to blame the Bank for the failure of the estate to have called upon R to pay his share of the debt when a call was made upon the estate to pay the full debt. On the face of it the estate has a perfectly legitimate claim against R for claiming one half of the debt it paid. The estate’s hesitancy to proceed against R is no reason for visiting the estate’s payment of more than its proportionate share on the Bank. PMN