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[2014] ZASCA 72
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LA Health Medical Scheme v Horn and Others (385/13) [2014] ZASCA 72; [2014] 3 All SA 421 (SCA) (29 May 2014)
THE SUPREME COURT OF
APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case no: 385/13
In the matter
between:
LA HEALTH MEDICAL
SCHEME
.......................................................................................
Appellant
and
JOHANNES PETRUS
LOUW
HORN
..........................................................................
1st
Respondent
LYDIA
ADAMS
..............................................................................................................
2nd
Respondent
LENA
DOUW
..................................................................................................................
3rd
Respondent
KATHARINA SUSANNA
HOLTZHAUZEN
...............................................................
4th
Respondent
BELINDA
KARSTEN
....................................................................................................
5th
Respondent
BASIL PAUL
RUGHUBAR
...........................................................................................
6th
Respondent
DIANA
THERON
............................................................................................................
7th
Respondent
LOVINA ELIZABETH
YOUNG
...................................................................................
8th
Respondent
CAPE JOINT
RETIREMENT
FUND
..........................................................................
9th
Respondent
Neutral
citation:
LA Health Medical Scheme v Horn
(385/13)
[2014]
ZASCA 72
(29 May 2014)
Coram:
Navsa, Maya, Wallis and Saldulker JJA and Mathopo AJA.
Heard
:
15 May 2014
Delivered
: 29
May 2014
Summary:
Pension fund – interpretation of rules – fund
established for local authorities – employer not a local
authority
– membership of fund anomalous – redundancy or
retrenchment benefit negotiated by local authorities in collective
bargaining
forum – employer not party to those negotiations and
not agreeing to provide those benefits – rules of fund
incorporating
those benefits – in context rules applying only
to local authorities and not other employers.
ORDER
On
appeal from:
Western Cape High Court (Saldanha J, Baartman and
Louw JJ concurring, on appeal from the High Court (Erasmus J)):
1 The appeal is
upheld with costs.
2 The order of the
court below is altered to read:
‘
The appeal is
upheld with costs and the order of the court below is altered to one
dismissing the application with costs.’
JUDGMENT
Wallis
JA (Navsa, Maya, Saldulker JJA and Mathopo AJA concurring)
[1]
The
appellant, LA Health Medical Scheme (LA Health), operates a medical
scheme for local authorities in the Western Cape. The respondents
were formerly employed by it and, as a term of their contracts of
employment, were members of the Cape Joint Retirement Fund (the
Fund). On 1 January 2005 Discovery Health (Pty) Ltd (Discovery) took
over the administration of claims against LA Health.
[1]
In terms of the provisions of
s 197(2)
(a)
of the
Labour Relations Act 66 of 1995
the respondents were then
automatically transferred to Discovery. They contended that they
thereby became entitled to redundancy
or retrenchment benefits under
the rules of the Fund.
[2]
The claim was upheld by Erasmus J in the Western Cape High Court and
on appeal by the full court (per Saldanha J, with the concurrence
of
Baartman and Louw JJ).
[3]
The further appeal is with the leave of this court.
[2]
The
Fund was established in 1996 under the Local Authorities (Pension
Funds) Ordinance 23 of 1969 (Cape) as a successor to the Cape
Joint
Pension Fund. That fund was established for employees of local
authorities in what was originally the Cape Province, initially
in
terms of the Local Government Superannuation Ordinance 15 of 1943
(Cape). Ordinance 23 of 1969 defined a local authority and
the
definition expressly included LAMAF. The definition of ‘local
authority’ in the rules of the Cape Joint Pension
Fund likewise
expressly included LAMAF. The respondents’ membership of the
Fund was accordingly a concession and anomalous
because LA Health was
not itself a local authority, but such membership had been
permissible under the rules of its predecessor.
Apparently this
situation ended in 1994 as a result of the intervention of the
Commissioner for Inland Revenue.
[4]
However, existing members were permitted to retain their membership
of the Fund. This was catered for in the rules of the Fund
by
including in the definition of ‘local authority’ not
only local authorities properly so called, which constituted
the bulk
of employers of members, but also any other body ‘constituted
before 1995 and who is a participant of the FUND’.
[5]
In the result, on 31 December 2004, the respondents were members of
the Fund and LA Health was the employer for the purpose of
discharging the obligations imposed on employers under the rules. In
general it was to be treated on the same footing as employers
that
were local authorities and it would owe the same obligations to the
Fund as those employers. In terms of
s 13
of the
Pension Funds Act 24
of 1956
the rules of the Fund were binding upon LA Health as the
employer at the relevant time.
[3]
The issue between the parties is whether, on being transferred to the
employ of Discovery, the respondents were entitled to
the benefits
provided for in
rule 7.1A(1)
, which reads as follows:
‘
REDUNDANCY
OR RETRENCHMENT
The MEMBER'S
conditions of SERVICE provide for an additional
redundancy/retrenchment benefit to be paid by the LOCAL AUTHORITY.
Redundancy/retrenchment
benefit prior to 28 February 1999
If a MEMBER leaves
the SERVICE as a result of his having been declared redundant or
having been retrenched and he/she has at least
10 years’
SERVICE, he/she shall be entitled to:
(a) the MEMBER'S
SHARE;
Plus
(b) an amount
payable by the LOCAL AUTHORITY concerned, …
[The
rule sets out the benefits payable thereunder in tabular form
according to a sliding scale that runs from 1993 to 2006]
Redundancy/retrenchment
benefit from 1 March 1999
If a MEMBER'S
SERVICE is terminated owing to a reduction in, or reorganisation of
staff, or to the abolition of his post, or in
order to effect
improvements in efficiency or organisation (which includes
termination of SERVICE in order to establish equity
in the workplace
or to implement affirmative action programs), or as the result of his
having been declared redundant or having
been retrenched, on receipt
of advice from the LOCAL AUTHORITY, he shall be entitled to:
(a) the MEMBER'S
SHARE;
PLUS
(b) an amount
payable by the LOCAL AUTHORITY concerned (and for which it alone
shall be liable to the member), being the lesser
of;
(aa) the difference
between the age of 65 years and his age on his nearest birthday,
multiplied by 8%, multiplied by the MEMBER’S
SHARE:
OR
(bb) 100% of the
MEMBER’S SHARE.
…
This benefit will
change if the LOCAL AUTHORITY'S redundancy/retrenchment policy
changes in terms of a collective bargaining agreement.’
(My
insertion.)
[4] The relevant
part of the rule for present purposes was the second section headed
“Redundancy/Retrenchment benefit from
1 March 1999’.
As
is apparent from its terms, if the respondents’ claims were
valid, LA Health would be obliged to pay those claims. The
amount
involved was of the order of R3 million. The respondents’
situation, on being transferred to the employ of Discovery,
fell
within the language of this part of the rule, because their posts as
employees of LA Health had been abolished.
[6]
However, LA Health contended that the benefit was only available to
employees who could show that their contracts of employment
provided
for that benefit and the respondents’ contracts of employment
did not do so.
[5]
The
appeal turns on the proper interpretation of the rule. That involves
a consideration of the language of the rule read in the
light of its
context, apparent purpose and the factual background against which it
came into existence.
[7]
[6]
Central to the argument on behalf of LA Health were the introductory
words of the rule, namely:
‘
The MEMBER'S
conditions of SERVICE provide for an additional
redundancy/retrenchment benefit to be paid by the LOCAL AUTHORITY.’
It contended that the effect of these words was to refer to the
conditions of employment of the claimants in accordance with the
definition of ‘service’ in the rules and, as the
conditions of service of the respondents did not make provision for
the payment of these redundancy benefits, a necessary pre-condition
to their entitlement to the benefits was absent.
[7]
The respondents, for their part, contended that the introductory
words were no more than ‘a recordal of a factual situation’.
Building on this foundation they submitted that the reference in the
introductory words to an additional benefit referred to a
redundancy
or retrenchment benefit payable by the local authority in terms of an
obligation falling outside the ambit of the rules
of the Fund and not
to any part of the benefit embodied in the rule itself. Their
argument found favour with the court below which
concluded its
judgment by saying that:
‘…
inasmuch
as the first sentence of
Rule 7.1A(1)
amounts to no more than a
recordal of a factual situation as contemplated between the members
of the Fund and their respective
employers the respondents were
correctly found by Erasmus J to have been entitled to the benefit
under
Rule 7.1A(b)
of the Rules of the Pension Fund’
[8]
In dealing with these opposing contentions it is helpful to trace the
genesis of the rule. When the fund was established in
1996 it had a
rule 7.1(a)(1)
that consisted of that portion of the current rule
that appears under the heading ‘
Redundancy/retrenchment
benefit prior to 28 February 1999
’. In 1999 that rule was
replaced by the portion of the current rule that now appears under
the heading ‘
Redundancy/retrenchment benefit from 1 March
1999
’. It was also numbered as
rule 7.1(a)(1).
For some
unexplained reason, when the rules were consolidated in 2002, both
the original rule and the rule as amended in 1999 were
incorporated
in the consolidated rule, notwithstanding that the earlier version
had ceased to have any practical application. In
addition, the
headings were introduced, as were the introductory words on which LA
Health relies and the postscript that also has
a bearing on the
construction of the rule. The numbering was changed to
rule 7.1A(1)
[9]
It is
obvious that the background to the introduction in 1996 of the rule
in its original form was the massive restructuring of
local
authorities then taking place as a result of the advent of democracy
in South Africa. Unlike the previous dispensation, when
large areas
of the country did not fall within local authority boundaries, the
entire country was now included in local authority
areas and fell
within the jurisdiction of the newly established local government
structures.
[8]
In addition there was considerable consolidation of existing local
government structures to create new structures.
[9]
In the process problems arose in dealing with the placement of
existing staff in new positions within local authorities and
extensive
rationalisation of staff had to occur. To illustrate the
type of problem, prior to 1994 every local authority would have had a
town clerk and a town treasurer and other employees in various
positions at every level of employment. The transitional legislation
preserved their status as employees. The new consolidated local
authorities then found that at every level they had in their employ
a
number of people filling nominally the same post. Some of these would
be surplus to their needs and others would have to be suitably
placed
within new municipal structures. Not only did this have to be
resolved by way of rationalisation of staff but affirmative
action
policies had to be implemented to start overcoming the history of a
racially stratified workforce in the area of local government.
[10] In that process
of rationalisation there would inevitably be redundancies and
retrenchment. Bearing in mind that the Fund’s
members were
overwhelmingly employees of local authorities in the true sense,
rule
7.1(a)(1)
in its original form was manifestly directed at dealing
with that situation. The Fund itself was not in a position to assist
in
that regard, because it had not received the necessary
contributions from employers and members to fund redundancy or
retrenchment
benefits. All that it could do when a member lost their
employment and ceased to be a member was to pay the withdrawal
benefit
provided for in terms of
rule 7.1.
This involved paying the
withdrawing member their member’s interest, which would be
determined in accordance with
Rule 2.2.1.
[11]
Rule 7.1(a)(1)
dealt with this by incorporating a redundancy or
retrenchment benefit in the rules in addition to the withdrawal
payment. That
payment was to be funded entirely by the local
authority. The benefit provided that a person who was rendered
redundant or retrenched
would receive, in addition to the withdrawal
payment, an amount calculated as a proportion of the withdrawal
payment, but determined
in accordance with a sliding scale. The
effect of this scale was that the benefit would expire after 10
years, by which time it
was no doubt anticipated that the process of
restructuring local authorities would be complete and the need for
the benefit would
fall away.
[12]
The incorporation of this arrangement in the rules of the Fund
created considerable anomalies. Counsel for the Respondent accepted
that it was a peculiar situation. First, it is not apparent that the
payment of redundancy or retrenchment benefits was a permissible
function for a pension fund, given the purposes of a pension fund as
set out in the definition of a ‘pension fund organisation’
in
s 1
of the
Pension Funds Act 24 of 1956
. Second, unlike every
other benefit provided to members under the rules of the Fund, the
claim to receive this benefit lay only
indirectly against the Fund
itself, because the Fund was under no obligation to pay the benefit
to the member or to seek to recover
the amount of the benefit from
the employer. Unless the employer had paid the amount of the benefit
to the Fund the member had
no claim against the Fund. Third, the
origin of the rule lay therefore in an agreement or agreements
external to the Fund in which
local authorities agreed to pay and
fund these benefits. Lastly, that demonstrated that in reality, even
though the benefit was
ostensibly provided for in terms of its rules,
the Fund was no more than a conduit through which redundancy or
retrenchment benefits
were to be channelled from employers to those
employees who were rendered redundant and retrenched in the course of
the rationalisation
process. Presumably this course was chosen for
the income tax advantages it conferred on employees or because it
made available
to members alternative uses for their redundancy or
retrenchment benefits that would otherwise not have been available.
Be that
as it may, however, the Fund was the vehicle through which
these arrangements were implemented and it co-operated by amending
its
rules to accommodate them.
[13]
When the Rule was amended in 1999 it was thought necessary to broaden
its language somewhat, without altering any of the features
identified above. As worded at that stage it continued to refer to
the ongoing rationalisation of local authority staff structures
with
reference to a person’s service being terminated:
‘…
owing
to a reduction in, or reorganisation of staff, or to the abolition of
his post, or in order to effect improvements and efficiency
or
organisation (which includes termination of SERVICE in order to
establish equity in the workplace or to implement affirmative
action
programs)’.
This language, as is
apparent from referring to the early decisions mentioned in footnote
6, traces its origins to the rationalisation
of the public service at
the time of Union in 1910. However, the reference to a benefit being
payable on redundancy or retrenchment
was now stated in the
alternative to a termination arising from rationalisation and the
time limitation provided in the original
rule was removed.
Accordingly the rule now covered a wider area of operation than it
had originally done.
However,
the benefit over and above the member’s interest (which
member’s interest all members were entitled to on withdrawal
for any reason) continued to be funded by the employer and not the
Fund.
[14]
When
the rules were consolidated in 2002 the provision that the benefit
contained in the rule ‘will change if the local authority’s
redundancy/retrenchment policy changes in terms of a collective
bargaining agreement’ was added. This signalled clearly that
the contents of the rule in its various forms from 1996 onwards arose
from the process of collective bargaining between local authorities
and their employees through the medium of the South African Local
Government Bargaining Council, which was established on an interim
basis in 1997 and was registered in 2001.
[10]
SALGA represents all local authorities in this collective bargaining
forum. In the area where the Fund operated it was decided
to make use
of the Fund as a vehicle for channelling these benefits from
employers to retrenched employees, but that did not alter
or disguise
the fact that these were benefits that local authority employers
agreed to provide to their employees.
[15]
That
being so the immediate question is whether the rule so imported into
the rules of the Fund applied to employers, such as LA
Health, that
had played no part in this process and were not confronted with the
same problems. The respondents answer that question
in the
affirmative by relying upon the fact that the rules ostensibly apply
to all members of the Fund without distinction. In
argument they
pointed to the definition of ‘local authority’, which by
extension included LA Health under the broad
umbrella of that
expression, and contended that the obligations under the rule were
obligations placed on the local authorities
so defined. But that is
to overlook that the definition of local authority in
rule 1.7
applies only ‘where the context so requires’.
[11]
Does the context of this rule require us to apply the extended
meaning of ‘local authority’ to include LA Health as
a
local authority bound by the obligations under
rule 7.1A(1)?
In my
view it does not.
[16]
I have already set out the background context to the rule. Everything
in that background suggests that its concerns were with
the situation
of employees of local authorities in the conventional sense and not
in the extended sense of the definition. LA Health’s
continued
participation in the Fund was based on a fiction that it was a local
authority. Second, the fact that the Fund is merely
a conduit for the
payment of benefits that some employers had agreed to pay by virtue
of negotiations in another forum, indicates
that it was only intended
to apply to those employers who had made that commitment. It would be
strange, were the Fund’s
agreement to assist some employers to
provide benefits to employees in a redundancy or retrenchment
situation, to have as its consequence
that other employers, who had
not agreed to provide such benefits, nonetheless became subject to an
obligation to provide them.
Simply
put, in terms of the respondents’ view of the rules, LA Health
is required to pay a benefit to them because local authorities
have
agree to give that benefit to their employees. The concession of
participation in the Fund afforded to entities such as LA
Health
provided them with the means of offering pension fund membership to
their employees. It would require very clear provisions
in the rules
before it could be understood in addition to enable the Fund to
create obligations owed directly by those employers
to their
employees not flowing from their membership of the Fund.
[17]
Third the postscript, which provides that the rule will change if the
local authority alters its redundancy or retrenchment
policy by way
of a collective agreement, renders the rule unworkable if it is
sought to apply it to multiple employers with varying
redundancy and
retrenchment policies determined by way of collective agreements.
There is no difficulty with this provision if
the Fund is dealing
with local authority employers who all bargain collectively in the
same forum. However, once the possibility
of employer members
entering into different collective agreements with different trade
unions is introduced, one would never know
whether or not the rule
applied to a particular employer member. In this case the evidence
shows that LA Health’s conditions
of service, including a
‘Retrenchment/redundancy policy’ were introduced in 2003
and had been negotiated with a representative
trade union, although
there was some issue on the papers whether the respondents were
members of that trade union. Other than a
cryptic provision that the
employer ‘may provide’ that the affected employee be
retired in terms of the pension fund
rules, which the employer in
this case did not provide, there is no reference to the benefit in
rule 7.1A(1).
Does that agreement serve to exclude the operation of
the rule in this case? One cannot tell. If the collective agreement
made
provision for some severance benefit other than that contained
in the rule, would that operate to exclude the benefits under the
rule? Counsel was unable to say how the rule would work in that
environment. That illustrates that the postscript only makes sense
in
the context of the collective bargaining arrangements applicable to
local authorities.
[18]
Finally I return to the introductory words. The respondents contended
that they were a mere recordal of a factual situation.
I find this
difficult to understand. As a matter of fact they did not record
anything in relation to the conditions of service
of employees of LA
Health. When counsel was asked what significance the provision had if
what it recorded was factually incorrect,
he responded that the
recordal was then inconsequential. But that cannot be the case. It
results in these introductory words being
disregarded in the process
of interpretation of the rule and that is not permissible. The
introductory words only make sense if
they refer to the local
authorities that had agreed to provide these benefits to their
employees in terms of a collective agreement.
In that event the terms
of the collective agreement would have been incorporated in the
employees’ contracts of employment
by virtue of the provisions
of
s 23(3)
of the
Labour Relations Act.
[19
]
For those reasons it seems to me that when
rule 7.1A(1)
is viewed in
context the references to the ‘local authority’ in that
rule can only be construed as references to local
authorities
properly so called and not to other employer members of the fund
falling within the extended definition of that term
in para (b) of
the definition of ‘local authority’. That being so the
rule did not apply to LA Health and its employees
and the respondents
were not entitled when transferred to Discovery to claim a redundancy
or retrenchment benefit under the rule.
[20]
It was suggested in argument that this would leave employees of LA
Health, and any other members of the Fund who were similarly
situated, empty handed if they were retrenched. However, that is
incorrect. They would still be entitled to their member’s
share
in terms of
rule 7.1(1)
and that benefit was in fact paid to them.
The amounts were not insubstantial. The structure of
rule 7.1A(1)
, in
all the forms it took over the years, was that the retrenched member
would receive their member’s share plus the benefit
provided by
the local authority. This is the ‘additional’ benefit
referred to in the introductory words and it was
so understood by the
respondents who had all received their member’s shares on
withdrawal from the Fund. The relief they
sought in the notice of
motion was payment of the additional benefit provided under the rule,
which payment was to be funded by
LA Health.
Rule 7.1A(1)
did not add
anything to their existing entitlement to a member’s share as a
withdrawal benefit under
rule 7.1(1)
, nor did the lack of entitlement
to the additional benefit detract from the entitlement to the
withdrawal benefit.
[21]
For those reasons the appeal must succeed and the following order is
made:
1 The appeal is
upheld with costs.
2 The order of the
court below is altered to read:
‘
The appeal is
upheld with costs and the order of the court below is altered to one
dismissing the application with costs.’
M J D WALLIS
JUDGE OF APPEAL
Appearances
For
appellant:
R G Goodman SC
Instructed by:
Fairbridge
Arderne & Lawton Inc, Cape Town
McIntyre
& Van der Post, Bloemfontein
For
respondent:
A
Heyns (Heads of argument prepared by J Olivier SC and A Heyns)
Instructed by:
Jardim Bekker
Inc, Cape Town
Symington &
De Kok, Bloemfontein.
[1]
This coincided with a change in the identity of LA Health, which had
previously operated under the name LAMAF Medical Scheme,
but nothing
turns on this and it is convenient to refer to it by its current
name. LAMAF was established in terms of the
Local Authorities
(Medical Aid Fund) Ordinance 25 of 1967 (Cape).
[2]
The Fund is the Ninth Respondent in the appeal but it has throughout
abided the decision of the court.
[3]
An application by similarly situated employees that came before
Thring J in the same court failed.
[4]
At that time the receipts of pension funds were exempt from income
tax in terms of s 10
(d)
of
the Income Tax Act 58 of 1962. Paragraph
(a)
of
the definition of ‘pension fund’ in s 1 of that Act
included all pension funds serving employees of local authorities
so
that the Fund’s predecessor’s income and accruals were
automatically exempt from income tax. Other pension funds
enjoyed a
similar exemption if approved by the Commissioner, who was entitled
to impose conditions on that approval. Accordingly
a ‘mixed
membership’ fund having both local government and non-local
government employees as members enjoyed an exemption
from liability
for income tax without obtaining the approval of the Commissioner.
Unsurprisingly the Commissioner intervened
in that situation.
[5]
Para (b) of the definition of ‘LOCAL AUTHORITY’ in rule
1.7 of the Fund rules. There is nothing to indicate how many
employers, other than LA Health, fell into this category.
[6]
Manning
v Union Government
1922
AD 459
at 464;
Union
Government v Schierhout
1925
AD 322
at 334 (per Innes CJ) and 341 (per Solomon JA);
Telkom
SA Limited and others v Blom and others
2005 (5) SA 532 (SCA).
[7]
Natal
Joint Municipal Pension Fund v Endumeni Municipality
2012
(4) SA 593
(SCA) para 18.
[8]
Local Government Transition Act 209 of 1993
as amended especially by
the
Local Government Transition Act Second
Amendment Act 89 of 1995.
[9]
According to the website of SALGA (the South African Local
Government Association), the body established and recognised in
terms of s 163 of the Constitution as read with the
Organised Local
Government Act 52 of 1997
, there were previously over 900 local
authority bodies of various types in South Africa and this has now
been reduced to 278,
all of which are members of SALGA.
[10]
Prior to 1997 bargaining took place in the National Labour Relations
Forum.
[11]
This accords with ordinary principles in regard to the application
of a definition clause in a statute or other written instrument.
Town
Council of Springs v Moosa
1929
AD 401
at 417;
Hoban
v Absa Bank Ltd t/a United Bank and Others
1999
(2) SA 1036
(SCA) para 18.