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[2013] ZASCA 16
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Cape Empowerment Trust Ltd v Fisher Hoffman Sithole (200/11) [2013] ZASCA 16; [2013] 2 All SA 629 (SCA); 2013 (5) SA 183 (SCA) (20 March 2013)
Links to summary
THE SUPREME
COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
REPORTABLE
Case No: 200/11
In
the matter between:
CAPE EMPOWERMENT TRUST LIMITED
...............................................
APPELLANT
v
FISHER
HOFFMAN SITHOLE
................................................................
RESPONDENT
Neutral citation:
Cape
Empowerment Trust Ltd v Fisher Hoffman Sithole
(200/11)
[2013]
ZASCA 16
(20 March 2013).
Coram:
Brand, Maya, Cachalia,
Shongwe JJA and Swain AJA
Heard:
28 February 2013
Delivered: 20 March 2013
Summary: Negligent misstatement –
degree of negligence not relevant in considering whether or not
liability should be imposed
for consequent loss – wrongfulness
and legal causation not established.
________________________________________________________________
ORDER
________________________________________________________________
On appeal from:
Western Cape
High Court, Cape Town (appeal against judgment by Davis J, sitting as
court of first instance. Cross-appeal against
judgment of Binns-Ward
AJ, sitting as court of first instance):
1. The appeal is dismissed with costs
including the costs of two counsel.
2. The cross-appeal is upheld with
costs including the costs of two counsel.
3. The order made by Binns-Ward AJ is
set aside and replaced with the following:
‘
The
plaintiff’s claim is dismissed with costs including the costs
of two counsel.’
________________________________________________________________
JUDGMENT
________________________________________________________________
BRAND JA
(
MAYA, CACHALIA,
SHONGWE JJA and SWAIN AJA CONCURRING
):
[1] The appellant is Cape Empowerment
Trust Limited, a black economic empowerment company listed on the
Johannesburg Stock Exchange.
The respondent is Fisher Hoffman
Sithole, a partnership of auditors. In correspondence included in the
record on appeal, reference
is often made to the appellant as CET and
to the respondent as FHS. I find it convenient to use the same
descriptions. Proceedings
started when CET instituted a claim against
FHS in the Western Cape High Court for delictual damages, comprised
of wasted expenses
it claimed to have incurred, in the amount of just
under R17 million. In support of its claim CET relied on an alleged
negligent
misstatement by one of the partners in FHS, Mr Justin
Nield. As a result of the misstatement, so CET contended, it was
induced
to enter into a disadvantageous business deal that caused it
to incur the wasted expenses claimed.
[2] During the pre-trial proceedings,
CET applied for a separation of issues in terms of Rule 33(4).
Despite opposition by FHS,
the court a quo granted the separation
sought. In the event the court ordered that the issues pertaining to
FHS’s liability
on the merits were to be determined first,
while those relating to the quantum of CET’s claim stood over
for later determination.
The trial on the preliminary issues
commenced before Binns-Ward AJ in August 2004. After hearing evidence
for several days he gave
judgment, substantially in favour of CET, on
28 January 2005. In broad outline the judgment declared:
(a) That ‘subject to [CET]
establishing the element of legal causation in the second stage of
the trial, . . . [FHS] shall
be liable to [CET] for 70 % of the
amount of the financial loss . . . which the latter might prove
itself to have suffered as a
result of having relied on the negligent
misstatement by Nield . . .’
(b) That the costs of the preliminary
hearing be costs in the cause.
As a token of his displeasure
regarding the conduct of Nield, Binns-Ward AJ directed that a copy of
the judgment be forwarded to
the Public Accountants’ and
Auditors’ Board.
[3] The hearing at the second stage
took place before Davis J. Due to lengthy postponements of the
matter, his judgment was only
handed down on 2 March 2010. In this
judgment Davis J assumed, without deciding, that CET had succeeded in
establishing legal causation.
But he dismissed the claim on the basis
that CET had failed to prove that it had suffered any loss as a
result of Nield’s
negligent misstatement. CET’s appeal
against that judgment is with the leave of the court a quo. So is the
cross-appeal by
FHS against the judgment of Binns-Ward AJ. The issues
that arose in both the appeal and the cross-appeal are fairly
complicated.
They are primarily rendered so by the intricate
background facts, which I will endeavour to simplify, whenever
possible, in the
account that follows.
[4] On 23 August 1999 CET concluded a
written sale of business agreement with another listed company,
Paradigm Interactive Media
Ltd (Paradigm). Pursuant to the agreement,
a subsidiary of CET, H Investments No 194 (Pty) Ltd (H 194) purchased
a business from
Intella Ltd, a subsidiary of Paradigm. The business
sold comprised the businesses of four subsidiaries of Intella and the
share
capital of another (the Intella business). The only Intella
subsidiary that played any part in these proceedings was AMT
Technologies
(Pty) Ltd. Although H 194 and Intella were described as
the direct parties to the sale, it is apparent that they were used by
the
two listed companies as vehicles for purposes of the transaction.
Hence, for example, CET and Paradigm bound themselves as sureties
for
and co-principal debtors with their subsidiaries for due performance
of their obligations arising from the agreement, including
the
cancellation thereof. The purchase price agreed upon for the Intella
business was R147 million, of which R137 million was paid
after all
suspensive conditions had been fulfilled while the balance of R10
million became payable one year later. As it turned
out, the R10
million was never paid, while the payment of the R137 million was
structured in a very complicated way. But I will
come to that.
[5] During the negotiations which
preceded the conclusion of the sale agreement, Mr Shaun Rai, the then
chief executive officer
of CET, was informed by various directors of
Paradigm and Intella that the Intella business had made a substantial
loss during
the first eight months of the 1999 financial year, which
covered the period 1 July 1998 to 28 February 1999. However, so Rai
was
told by these directors, the business had experienced a
turnaround in fortune during the last four months, ie between 1 March
and
30 June of the 1999 financial year, mainly because of a lucrative
contract with a company, Ubunye (Pty) Ltd, which was involved
in the
minibus-taxi industry. The assurance of a profit found its way into
the sale agreement in the form of the following warranty
by the
seller to the purchaser: the [gross] profits from the ‘[Intella]
business for the period 1 March 1999 up to and including
30 June 1999
will not be less than R10 million (ten million rand). . . . ’
[6] Another warranty given by the
seller in terms of the agreement, which proved to be relevant, was
that ‘all accounts receivable
are good and collectable to the
full amount thereof . . .’. Why this turned out to be relevant
is that, on the accounting
information provided to CET, it was clear
that the guaranteed profit of R10 million was entirely dependent on
the collection of
a debt in excess of R10 million from Ubunye for the
installation of about 3 000 devices, referred to as fare
collection and
vehicle tracking systems, in minibus-taxis by AMT
Technologies as part of the Intella business. Though an invoice of
this amount
was ostensibly rendered to Ubunye on 30 June 1999 –
ie, on the very last day of the 1999 financial year – the debt
remained unpaid at the time of the sale agreement. I say ‘ostensibly
rendered’ because it later became apparent that
the invoice was
in fact created in October 1999 and backdated to 30 June. Moreover,
Rai discovered in about March 2000 that the
Ubunye debt was entirely
fictitious in that only a small number of the units had been
installed, not by AMT Technologies as part
of the Intella business,
but by another company in the Paradigm group, which was not included
in the sale.
[7] But, reverting to the sale
agreement; its operation was rendered subject to various suspensive
conditions. One of these was
that CET be allowed to complete a due
diligence investigation which its own auditors, Arthur Andersen, had
started prior to the
conclusion of the sale agreement. Another
suspensive condition was that the agreement be approved by CET’s
board of directors
before 15 October 1999 and in a general meeting of
its shareholders by 30 November 1999. As it happened, CET’s
board resolved
to approve the agreement on 20 September 1999, but the
approval by shareholders only occurred on 6 December 1999. This
happened
despite a reminder to CET on 22 November 1999 by Mettle
Limited, who acted as its corporate advisors, that it was of crucial
importance
to obtain the shareholders’ approval before 30
November 1999, because of the express provision in clause 4.3.2 of
the agreement,
that upon non-fulfilment of this suspensive condition
on due date, ‘this agreement will automatically fail and be of
no further
force and effect’. The consequence of all this was
that, by virtue of this clause – and, in any event, as a matter
of law – the agreement had lapsed on 30 November 1999 by reason
of the non-fulfilment of the suspensive condition. But according
to
Rai’s testimony, the directors of CET only became aware of this
after February 2000.
[8] In preparation of the shareholders
meeting of 6 December 1999, Rai requested an audit certificate by
FHS, as Intella’s
auditors, confirming the warranty that the
gross profits of the Intella business for the period March 1999 to 30
June 1999, were
not less than R10 million. According to Rai’s
evidence he made this request pursuant to an arrangement with the
representatives
of Paradigm to the effect that he would be content to
accept an audit certificate by FHS in lieu of the completion of the
due diligence
investigation by Arthur Andersen. Although apparently
unaware of this arrangement, Nield issued the certificate requested,
which
later matured into the
fons et origo
of the protracted
litigation leading up to this appeal. The certificate was
communicated to Rai in the form of an e-mail dated 3
December 1999.
It became known during the trial as the ‘profit certificate’
and it read:
‘
I
. . . advise that the after tax earnings for the Intella group for
the year ended 30 June 1999 as reported in the published results
of
Paradigm amounted to R9,141 million.
The
Intella group had incurred a substantial loss for the period 1 July
to 28 February 1999. Unfortunately I do not have the breakdown
between the two periods but I am satisfied that the after tax profit
of Intella group for the period 1 March 1999 to 30 June 1999
amounted
to in excess of R10 million.’
[9] We now know that the statement
conveyed by the profit certificate was wholly untrue. Since the
alleged profit was contingent
upon the fictitious Ubunye transaction,
the Intella business did not make a profit during any part of the
1999 financial year.
In fact it showed a substantial loss. Binns-Ward
AJ found that Nield was not only negligent but grossly negligent in
communicating
this misstatement. I do not think the finding of gross
negligence on the part of Nield can be faulted and I did not
understand
counsel for FHS to contend otherwise. In broad outline the
finding derived from evidence that in September 1999 a partner of
FHS,
Mr Butch Abbott, who was responsible for the audit of AMT
Technologies, the subsidiary of Intella which rendered the invoice of
R10 249 800 to Ubunye, raised very serious doubts and
pertinent questions about the validity of the claim. Since he
remained unpersuaded by the answers that he received from the
company, he refused to give an audit clearance for AMT Technologies.
All this was communicated to Nield, who was responsible for the
consolidated financials of Intella. So, for example, Abbott wrote
to
Nield on 30 September 1999, with reference to the Ubunye debt, that
‘we have no proof of what this debt was raised for
nor any
proof of its recoverability’. Nonetheless, Nield proceeded to
issue the profit certificate based on this doubtful
claim, apparently
without any further investigation. Since Nield did not give evidence
before Binns-Ward AJ, his conduct remained
unexplained. This is why I
believe the finding of gross negligence was justified.
[10] In March 2000 Rai found out that
the statement in the profit certificate confirming the R10 million
profit was untrue in that
the Ubunye claim, on which it was based,
was in fact wholly fictitious. It meant that on the face of it, Rai
was defrauded by the
directors of Paradigm and Intella. It also meant
that various warranties given to CET in the sale agreement remained
unfulfilled.
These included the warranty of a R10 million profit
during the last four months of the financial year as well as the
warranty that
‘all accounts receivable are good’. At more
or less the same time Rai was advised by CET’s attorney that
the
sale agreement had probably lapsed on 30 November 1999. The basis
of this advice was, of course, that the suspensive condition
pertaining to approval of the transaction by CET’s shareholders
remained unfulfilled on that day, which was the date stipulated
for
fulfilment by the agreement of sale. We now know that despite Rai’s
discovery that he had been defrauded, CET was precluded
from
recovering its losses under the warranties because of its own conduct
in allowing the agreement to lapse. Why CET did not
simply rely upon
restitution of what had been performed and, perhaps, instituted a
delictual claim based on fraud, is best understood
against the
background of the intricate structure devised by the advisors of
Paradigm and CET to effect payment of the purchase
price.
[11] Apparently CET did not have the
R137 million which became payable, in terms of the sale agreement, at
the end of February 2000.
Hence it issued shares in itself to the
value of this amount. These shares comprised of 72 million preference
shares and 65 million
ordinary shares at R1.00 per share. In further
execution of the transaction, CET entered into an underwriting
agreement with Paradigm
and a subsidiary of the latter, Bohumi
Corporate Finance (Pty) Ltd. In terms of this agreement Bohumi
subscribed to the 137 million
issued shares at the placement price of
R1.00, while Paradigm bound itself as surety and co-principal debtor
for due performance
of Bohumi’s obligations under the
agreement. In return for its services, CET undertook to pay Bohumi an
underwriting fee
of R6 million.
[12] Once the shares had been issued,
Bohumi paid the sum of R137 million to CET. CET in turn invested this
amount in preference
shares issued by Gauret Investments No 1 (Pty)
Ltd (Gauret 1), a subsidiary of PSG Investment Bank Limited (PSG). At
the same time
H 194, the designated purchaser in terms of the sale
agreement, borrowed an amount of R137 million from Gauret Investments
No 2
(Pty) Ltd (Gauret 2), another subsidiary of PSG. Gauret 2 paid
this amount in settlement of the purchase price under the business
sale agreement, not to Intella, the designated seller, but directly
to Paradigm. The loan was repayable by H 194 on 28 February
2005
while the preference shares were redeemable on the same date. Gauret
2 guaranteed performance by Gauret 1 under the preference
share
agreement while CET stood surety in favour of Gauret 2 for the
performance of H 194’s obligations under the loan agreement.
At
the same time CET and Gauret 2 agreed that on due date set-off will
be applied to extinguish the reciprocal obligations of all
parties in
terms of the various agreements.
[13] Shorn of all the elaborate
detail, so it seems to me, CET’s debt to Gauret 2 existed on
paper only and even as a paper
debt, it was intended to be cancelled
by the creation of another reciprocal paper debt so that the net
result was nil. Moreover,
the result of the web of agreements created
in the intricate structure, as I see it, was simply that Paradigm
received CET shares
in exchange for the Intella business. The reason
for all the scheming is not hard to find. As was highlighted in all
the proposals
pertaining to the scheme, it was aimed at securing a
tax advantage in a predicted amount of R13.4 million for CET.
Incidentally,
I agree with the submission by counsel for FHS that the
scheme displayed certain features now dealt with in s 80 A of
the
Income Tax Act 58 of 1962 which was introduced in 2006, under the
rubric ‘Impermissible tax avoidance arrangements’.
[14] Against this background I can now
revert to the question that instinctively arose, namely why CET did
not immediately latch
on to the opportunity to extricate itself from
the business sale agreement which had lapsed, at a time when Rai had
already established
the fraud. Rai’s answer to this question
was, in short, that the maze-like structure of agreements in which
CET entangled
itself did not allow it. In motivating this answer, Rai
explained that when CET sought to withdraw from the transaction,
Bohumi
claimed repayment of the R137 million on the basis that, if
the business sale agreement was invalid, the underwriting agreement
was equally so. When CET was unable to meet this demand, Bohumi
brought an application for the liquidation of the company. The
legal
advice Rai then received, so he said, was that CET was in no position
to ward off Bohumi’s application while it proceeded
with a
probably lengthy and uncertain process of seeking to recover the R137
million purchase price from Intella or Paradigm. However,
until the
purchase price could be recovered, CET was unable to meet Bohumi’s
claim. Binns-Ward AJ found this explanation
entirely acceptable
(paras 31 and 32). I shall presently return to the enquiry whether I
believe he was right in doing so.
[15] In this court counsel for CET
introduced a further argument as to why it was impossible for CET to
extricate itself from the
unfavourable business deal despite its
invalidity. According to this argument, the loan agreement with
Gauret 2 was perfectly valid
and could not be cancelled. Gauret 2 was
therefore in a position to reclaim the R137 million for which CET
stood surety. On the
other hand, CET was not entitled to obtain a
return of the amount it invested in Gauret 1 preference shares. The
validity of this
argument will also be considered at an opportune
stage. What is relevant at this stage, however, is that on 20 July
2000 Rai entered
into a settlement agreement, on behalf of CET and H
194, with Paradigm, Bohumi and Intella. The settlement acknowledged
that the
sale of business agreement and the underwriting agreement
had lapsed because of the non-fulfilment of suspensive conditions.
The
parties agreed, however, to reinstate these agreements with
retrospective effect to the date of their conclusion. Further terms
of the settlement agreement were:
(a) CET and H 194 retained the merx
under the sale of business agreement. Paradigm and Intella retained
the purchase price, but
Bohumi and Paradigm waived their right to
receive 72 million preference shares in CET in terms of the
underwriting agreement.
(b) Paradigm and Intella admitted that
they were liable to H 194 in respect of the Ubunye claim as a breach
of warranty and admitted
that the debt was collectable. In settlement
of this debt Paradigm undertook to return 15 million of the ordinary
shares received
by Bohumi in terms of the underwriting agreement.
[16] Subsequently, the parties to the
July 2000 settlement, together with certain other parties, concluded
two further settlement
agreements. The overall result of these
agreements included the following: CET transferred the shares in H
194 to a third party
and thus became separated from the Intella
business; CET received return of a further 21 million ordinary shares
that it had transferred
to Bohumi in terms of the underwriting
agreement; and CET paid an amount of R2,7 million to Gauret 2 in
overall settlement of the
Gauret transactions.
[17] At the second stage trial before
Davis J, CET formulated its claim for damages under the following
four headings, all comprising
of wasted expenses incurred:
(a) A so-called success fee paid to
Mettle Limited, who acted as the corporate advisor of CET in respect
of the Intella transaction,
in an amount of R1,5 million.
(b) An underwriting fee of R6 million
paid to Bohumi in terms of the underwriting agreement.
(c) A payment to Gauret 2 in terms of
the final settlement, in an amount of R2,7 million.
(d) An irrecoverable working capital
loan to H 194 in an amount of R6 241 095.
[18] During the cross-examination of
Rai before Davis J, it was, however, pointed out to him that
according to CET’s 2001
financial statements, the Intella
transaction showed an overall profit of R37,6 million. Rai’s
response to this line of questioning
was, in short, that although the
financial statements were approved by CET’s board of directors,
including himself, the statement
that the company had made any profit
from the Intella business – let alone a profit of R37,6 million
– was a mistake.
As a result, the trial was postponed and the
issue became the subject of an intense and lengthy debate. In the
course of this debate
CET presented the expert evidence of a
chartered accountant, Mr Desmond Hudgson. According to his testimony,
it appeared from a
study that he did of 25 journal entries which
formed part of the audit working papers of CET, that the R37,6
million profit derived
from sources unrelated to Intella and that
this profit was therefore wrongly attributed to the Intella business
in the financial
statements.
[19] In rebuttal of Hudgson’s
evidence, FHS relied on the testimony of another chartered
accountant, Mr Brian Abraham who
expressed criticism of Hodgson’s
methodology which he regarded as fundamentally flawed. In
consequence, so Abraham testified,
it could not be concluded that the
2001 financial statements were wrong in ascribing the profit of R37,6
million to the Intella
business. In the event Davis J preferred the
opinion of Abraham. This led him to the conclusion that the veracity
of the entry
in its own financial statements had not been adequately
disproved by CET and that any wasted expenses it might have incurred
had
thus been cancelled out by a profit derived from the same
transaction, or by application of what Davis J referred to as the
‘swings
and roundabout’ principle. In consequence, so
Davis J held, CET’s claim could not succeed, even if the
element of legal
causation in respect of the wasted expenses were to
be assumed.
[20] In turning to the appeal and
cross-appeal, logic dictates that I first deal with the judgment of
Binns-Ward AJ, which focused
on three of the elements of aquillian
liability (wrongfulness, fault and factual causation). With regard to
fault, I have already
referred – during my recital of the
background facts – to the finding that Nield was not only
negligent, but grossly
negligent in making the false statement
contained in the profit certificate. I have also indicated that, in
my view, that finding
cannot be faulted. The same goes, I think, for
his finding that factual causation had been established. It is well
known by now
that the enquiry into factual causation involves an
application of the so-called ‘but-for’ test. In
accordance with
this test, as Corbett CJ explained in
International
Shipping Co (Pty) Ltd v Bentley
1990 (1) SA 680
(A) at 700F-G:
‘
.
. . [O]ne must make a hypothetical enquiry as to what probably would
have happened but for the wrongful conduct of the defendant.’
In applying this test Binns-Ward AJ
held – and I believe rightly so – that had the profit
certificate reflected the
true financial position of the Intella
business, CET’s shareholders would not have approved the
transaction which would in
turn have caused the train of events to
come to an abrupt halt.
[21] The element of wrongfulness is
more problematic. Since we are dealing with pure economic loss –
as opposed to a loss
resulting from injury to person or property –
wrongfulness is not presumed. More is needed. Considerations of
public and
legal policy dictate whether FHS should be held legally
liable for the loss resulting from the misstatement or whether it
should
be afforded legal immunity (see eg;
Legal Transitional
Council of Delmas v Boshoff
2005 (5) SA 514
(SCA) para 19);
Telematrix (Pty) Ltd t/a Matrix Vehicle Tracking v Advertising
Standards Authority of SA
2006 (1) SA 461
(SCA) paras 13 and 14).
With reference to these considerations of policy some categories have
crystallised where legal liability
for pure economic loss will be
imposed as a matter of course (see eg
Telematrix
para 15;
Fourway Haulage SA (Pty) Ltd v SA National Roads Agency Ltd
[2008] ZASCA 134
;
2009
(2) SA 150
(SCA) para 21). But negligent misstatement by an auditor
is not one of those. On the contrary it was said in
Axiam Holdings
Ltd v Deloitte & Touche
2006 (1) SA 237
(SCA) para 18:
‘
It
is universally accepted in common-law countries that auditors ought
not to bear liability simply because it might be foreseen
in general
terms that audit reports and financial statements are frequently used
in commercial transactions involving the party
for whom the audit was
conducted (and audit reports completed) and third parties. In
general, auditors have no duty to third parties
with whom there is no
relationship or where the factors set out in the
Standard
Chartered Bank
case
[ie
Standard
Chartered Bank of Canada v Nedperm Bank Ltd
[1994] ZASCA 146
;
1994
(4) SA 747
(A)] are absent.’
[22] The policy based determination
whether legal liability should be imposed on an auditor for loss
resulting from a negligent
statement, must therefore be determined
with reference to the facts and circumstances of the particular case.
That much was appreciated
by Binns-Ward AJ. A policy consideration
that in his view weighed heavily in favour of imposing legal
liability in this case was
the gross nature of Nield’s
negligence. This appears from the following passage in his judgment
(para 109):
‘
In
Perre
v Apand [(Pty) Ltd
[1999] HCA 36
;
(1999)
198 CLR 180
(H C of A)], at para 132, McHugh J observed that
“because fault remains the basis of negligent liability [he
could]
see no reason why recklessness or gross carelessness should
not be a relevant factor in determining whether a duty of care was
owed”. In a South African context accepting this is to be so
would not be, as might at first blush appear, to confuse negligence
with wrongfulness. In many delictual cases the facts which establish
negligence are precisely the same as those which establish
wrongfulness. That characteristic does not detract from the
distinction between the legal elements and the necessity for the
success
of any claim under the Aquillian action that both be
established. . . . As Lewis JA said in
Premier,
Western Cape v Fair Cape Property Developers (Pty ) Ltd
2003
(6) SA 13
(SCA) at para [42] “The test for reasonableness goes
not only to negligence, but also to determine the boundaries of
lawfulness”.’
[23] Despite Binns-Ward AJ’s
express disavowal of confusion between negligence and wrongfulness, I
believe his reasoning demonstrates
the very confusion cautioned
against by the Constitutional Court when it said in
Le Roux v Dey
(Freedom of Expression Institute and Restorative Justice Centre as
amici curiae)
2011 (3) SA 274
(CC) para 122:
‘
In
the more recent past our courts have come to recognise . . . that in
the context of the law of delict: (a) the criterion of wrongfulness
ultimately depends on a judicial determination of whether –
assuming all the other elements of delictual liability to be
present
– it would be reasonable to impose liability on a defendant for
the damages flowing from specific conduct; and (b)
that the judicial
determination of that reasonableness would in turn depend on
considerations of public and legal policy in accordance
with
constitutional norms. Incidentally, to avoid confusion it should be
borne in mind that, what is meant by reasonableness in
the context of
wrongfulness has nothing to do with reasonableness of the defendant’s
conduct [which is part of the element
of negligence], but it concerns
the reasonableness of imposing liability on the defendant for the
harm resulting from that conduct.’
[24] Confusing wrongfulness and
negligence not only offends the sensitivities of the legal purists.
It has practical consequences.
In the law of delict in general and in
the context of negligent misstatements in particular, the element of
wrongfulness introduces
a measure of control. It serves to exclude
liability in situations where most right-minded people, including
judges, will regard
the imposition of liability as untenable, despite
the presence of all other elements of aquilian liability. If the test
for negligence
and wrongfulness is telescoped into one, the function
of the latter element as a measure of control is lost completely (see
eg
Roux v Hattingh
2012 (6) SA 428
(SCA) para 35). The problem
is demonstrated thus by Harms JA in
Telematrix
para 14:
‘
To
illustrate: there is obviously a duty – even a legal duty –
on a judicial officer to adjudicate cases correctly and
not to err
negligently. That does not mean that a judicial officer who fails in
the duty, because of negligence [or even gross
negligence], acted
wrongfully. Put in direct terms: can it be unlawful, in the sense
that the wronged party is entitled to monetary
compensation, for an
incorrect judgment given negligently [or even grossly negligently] by
a judicial officer, whether in exercising
a discretion or making a
value judgment, assessing the facts or in finding, interpreting or
applying the appropriate legal principle?
Public or legal policy
considerations require that there should be no liability, ie, that
the potential defendant should be afforded
immunity against a damages
claim, even from third parties affected by the judgment.’
[25] It therefore appears, in my view,
that Binns-Ward AJ was persuaded to impose liability on FHS by a
consideration that should
not be afforded any weight at all. In the
more recent past the courts and academic authors have attempted to
identify the relevant
policy considerations that come into play in
determining wrongfulness (see eg
Fourway Haulage
para 22;
Delphisure Group Insurance Brokers Cape (Pty) Ltd v Dippenaar
2010
(5) SA 499
(SCA) paras 24-26; Jonathan Burchell
The Odyssey of
Pure Economic Loss
in T J Scott and Daniël Visser
Developing
Delict
– essays in honour of Robert Feenstra – first
published as
Acta Juridica
2000 – 99 et seq; Max Loubser
and Rob Midgley (eds)
The Law of Delict in South Africa
Ch 8).
None of these authorities, incidentally, mention the degree of
negligence as one of these considerations and, for the reasons
given,
I believe rightly so. Two considerations they do mention as relevant
in the context of negligent misstatements are, first,
whether the
representation was made in a business context and in response to a
serious request and, secondly, whether the plaintiff
was dependent
upon the defendant to provide the information or advice sought.
[26] In this case the first of these
considerations seems to indicate the imposition of liability. It must
have been evident to
Nield that the confirmation of profits earned by
the Intella business was sought from him, as the auditor of the
business, for
consideration at the upcoming meeting of shareholders.
By reason of his earlier involvement in the transaction, he must also
have
known that the object of the meeting was to consider whether or
not the sale should be approved. I accept that Nield was unaware
of
the arrangement between the parties to the sale that CET would accept
Nield’s assurance in lieu of the contractually stipulated
due
diligence investigation. Nonetheless, he would have realised that the
information was sought for a serious purpose.
[27] On the other hand, the fact that
the correct information was available to CET from another source
appears to be a contra indication.
The available source was of course
the due diligence investigation by CET’s own auditors, Arthur
Anderson, for which it contractually
stipulated. It stands to reason
that if a comprehensive due diligence investigation had been
completed, Arthur Anderson would in
all probability have been able to
establish the true financial situation of the Intella business. After
all, the alleged profit
was entirely dependent on one transaction
with one debtor purportedly evidenced by a single invoice for more
than R10 million.
Rai’s explanation for his decision not to
insist on the completion of the investigation was that he decided
‘not to
waste any more of Arthur Anderson’s time and our
fees’. This explanation is unconvincing. In view of the amounts
of
money involved the additional fees to complete an investigation
already started could scarcely have been a serious consideration.
What is more, Rai, who is an auditor himself, could hardly have
thought that the terse unmotivated profit statement by Nield would
serve as a substitute for the protection that a comprehensive due
diligence investigation by CET’s own auditors would provide.
[28] But the consideration which, in
my view, weighs most heavily against the imposition of legal
liability on FHS in the circumstances
of this case is the one that
has become known, in the context of wrongfulness, as the plaintiff’s
‘vulnerability to
risk’. As developed in our law, under
the influence of Australian jurisprudence, vulnerability to risk
signifies that the
plaintiff could not reasonably have avoided the
risk of harm by other means. What is now well established in our law
is that a
finding of non-vulnerability on the part of the plaintiff
is an important indicator against the imposition of delictual
liability
on the defendant (see eg
Trustees, Two Oceans Aquarium
Trust v Kantey & Templer (Pty) Ltd
2006 (3) SA 138
(SCA)
paras 23-24;
Fourway Haulage
para 25;
Delphisure Group
Insurance Brokers Cape
para 25). The role of this consideration
is best illustrated, I think, by McHugh J in
Perre v Apand (Pty)
Ltd
[1999] HCA 36
;
(1999) 198 CLR 180
(H C of A)]
supra
para 118:
‘
Cases
where a plaintiff will fail to establish a duty of care [or,
wrongfulness in the parlance of our law] in cases of pure economic
loss are not limited to cases where imposing a duty of care would
expose the defendant to indeterminate liability or interfere
with a
legitimate acts of trade. In many cases there will be no sound reason
for imposing a duty on the defendant to protect the
plaintiff from
economic loss where it was reasonably open to the plaintiff to take
steps to protect itself. The vulnerability of
the plaintiff to harm
from the defendant’s conduct is therefore ordinarily a
prerequisite to imposing a duty. If the plaintiff
has taken or could
have taken steps to protect itself from the defendant’s conduct
and was not induced by the defendant’s
conduct from taking such
steps, there is no reason why the law should step in and impose a
duty on the defendant to protect the
plaintiff from the risk of pure
economic loss.’
[29] In this case we know that CET did
indeed cover itself against the risk that the Intella business may
not have attained the
profits represented by the sellers. It did so
by procuring an express warranty from the sellers to that effect. In
substance the
content of the warranty corresponded exactly with the
representation by Nield. The sellers were thus contractually bound to
CET
to make good the level of profits stated by Nield. Together with
the provision entitling the purchaser to conduct a due diligence
investigation, the profit warranty effectively shielded CET from any
adverse consequence of any misstatement of profit of the Intella
business by anybody, including Nield. On the face of it, CET was
therefore not vulnerable at all.
[30] But, as we also know, CET,
through its own conduct in allowing the agreement to lapse had
deprived itself of these contractual
remedies when the profit
statement proved to be false. To make matters worse, it did not use
the opportunity to extract itself
from the disadvantageous
transaction when it was advised that the sale had in fact lapsed by
demanding and tendering restitution
of what had been performed. On
the contrary, it affirmed the transaction in terms of an agreement of
settlement. On the face of
it, CET therefore appears to have been the
author of its own misfortune. Yet, Binns-Ward AJ nonetheless decided
to impose delictual
liability for the misfortune on FHS because he
accepted Rai’s explanation that CET had no option but to
conclude the settlement
agreement. It will be remembered that
according to this explanation, CET was faced with an application for
its liquidation by Bohumi
on the basis of the failure of the
underwriting agreement and CET’s consequent liability of R137
million, which it was unable
to settle while seeking to recover the
R137 million from Intella and Paradigm.
[31] However, unlike Binns-Ward AJ I
am not persuaded by Rai’s explanation, which relied largely on
the complexities of the
transaction. The reason for my scepticism is
that the transaction was not that complicated. When the sale and the
underwriting
agreement proved to be unenforceable, I believe the
position was simply this: Paradigm and its subsidiary, Intella, owed
CET and
its subsidiary H 194 R137 million in respect of the
purchase price paid to Paradigm in terms of the sale agreement. CET
in
turn owed another subsidiary of Paradigm, Bohumi, R137 million in
respect of the share subscription paid under the underwriting
agreement. In the result CET (and its subsidiaries) owed Paradigm
(and its subsidiaries) R137 million while the latter in turn
owed the
former a reciprocal debt of precisely the same amount. In this light
I do not believe that CET was in any real danger
of being wound-up at
the behest of a Paradigm subsidiary. Its defence was virtually
unanswerable. It would pay the subsidiary when
it was paid by
Paradigm.
[32] I remain equally unpersuaded by
the alternative explanation for CET’s predicament for being
compelled to conclude the
settlement agreement. This argument,
introduced by its counsel, rested, so it will be remembered, on the
proposition that the unenforceability
of the sale and the
underwriting agreement did not detract from CET’s liability for
R137 million to Gauret 2 under the loan
agreement. What this argument
loses sight of, I think, is that CET’s liability under the loan
agreement was mirrored by the
liability of Gauret 1 to CET under the
preference share agreement; that Gauret 2 stood surety for the
obligations of Gauret 1 under
that agreement; and that the parties to
all these agreements expressly stipulated that the reciprocal
obligations thus created
would be extinguished by set-off on 28
February 2005. In short, CET’s liability to Gauret 2 under the
loan agreement would
be cancelled out by the liability of the latter
to the former under the preference share agreement.
[33] In argument, CET’s counsel
submitted that this approach was too legalistic. Whatever the true
legal position might have
been, so the argument went, CET’s
position could very well appear far more bleak and intimidating from
Rai’s perspective
than what the perfect light of hindsight
might reveal. However, even on this assumption, there is a further
consideration why,
in my view, it would be unreasonable to impose
liability on FHS for CET’s loss. It is this: If Rai’s
explanation is
accepted at face value, the reason why CET could not
extricate itself from the disadvantageous business deal must be
ascribed to
the seeming complexity of the deal. But that complexity
was created by or on behalf of CET with the purpose of procuring a
substantial
tax benefit for itself. Translated into the language of
vulnerability, it would mean, as I see it, that CET rendered itself
vulnerable
to risk by allowing the agreement to lapse and by
reinstating the agreement in order to procure a tax benefit. The
answer to this
proposition offered by CET’s counsel was that,
at the time, the business deal was not illegal and thus not wrongful
in itself.
But I think this answer misses the point. The point is
that as a matter of policy it would, in my view, be unreasonable to
impose
liability on FHS for a loss to which CET had exposed itself,
and hence rendered itself vulnerable, while attempting to gain a tax
benefit. For these reasons I do not agree with the finding by
Binns-Ward AJ that CET had succeeded in establishing the element
of
wrongfulness. This means that the cross-appeal should succeed with
costs.
[34] This brings me to the appeal
against the judgment of Davis J. The first issue presented to him for
determination was whether
CET had succeeded in establishing the
element of legal causation. The second was whether CET had suffered
any loss at all. Because
Davis J decided the second issue in favour
of FHS, he assumed, without deciding, that CET would succeed on the
first. For reasons
that will soon become apparent, I find it
appropriate to adopt the opposite approach by considering the issue
of legal causation
– which is referred to by some as remoteness
of damage – at the outset.
[35] It has by now become quite well
settled that, in the same way as the element of wrongfulness, legal
causation is also determined
by considerations of legal and public
policy. This is so because broadly speaking wrongfulness – in
the case of omissions
and pure economic loss – on the one hand,
and legal causation on the other, perform the same function. They
both serve as
safety valves preventing the imposition of liability in
a particular situation which most right-minded people will regard as
untenable,
despite the presence of all other elements of delictual
liability (see eg
International Shipping Co
700H-701F;
Fourway
Haulage
para 31). Since wrongfulness and remoteness are both
determined by considerations of policy, a certain degree of
overlapping is
inevitable. It follows that, in my view, most of the
considerations that served to exclude a finding of wrongfulness in
this case
will also rule out a finding of legal causation. So, for
instance, I think it could be found with equal validity that because
CET’s
loss ultimately resulted from its own failure to
extricate itself from the transactions which gave rise to the loss
when it had
the opportunity to do so, not only was wrongfulness not
established, but neither was legal causation. Incidentally, I believe
that
this overlapping militates against the separation of issues in a
case such as this.
[36] Having said that, it is equally
apparent, on the other hand, that wrongfulness and remoteness are not
the same in all respects.
They involve two different elements of the
law of delict, each with its own characteristics and content. Even
where negligent conduct
resulting from pure economic loss is for
reasons of policy found to be wrongful, the loss may therefore, for
other reasons of policy,
be found to be too remote and therefore not
recoverable. This happened, for example, in
International Shipping
Co (supra).
Determination of remoteness also requires application
of yardsticks such as foreseeability and direct consequences which do
not
play a role in establishing wrongfulness (see eg
Fourway
Haulage
para 28). What has also become generally accepted is that
these yardsticks should not be applied dogmatically but, rather, in a
flexible manner. This means that if the application of any or all of
the known criteria should lead to a result which is untenable,
legal
causation will not be found (see eg
S v Mokgethi en Andere
1990
(1) SA 32
(A) at 40I-41D;
OK Bazaars (1929) Ltd v Standard Bank of
South Africa Ltd
2002 (3) SA 688
(SCA) para 23;
Fourway
Haulage
paras 33 and 34;
mCubed International (Pty) Ltd v
Singer and others NNO
2009 (4) SA 471
(SCA) paras 31-32).
[37] With regard to foreseeability CET
contended that the wasted expenses for which it claims resulted from
the implementation of
the business sale agreement and were thus
foreseeable by Nield when he made the misstatement on 3 December
1999. As far as the
statement goes, it seems to be correct. However,
what was not foreseeable by Nield, as I see it, is that CET would not
avail itself
of the contractual safety nets – a due diligence
investigation by its own auditors and the profit warranty –
that were
stipulated in its favour in terms of the business sale
agreement. On the contrary, the most likely inference, I think, is
that
if Nield were to have applied his mind to the potential
consequences of a misstatement, he would have thought that even if
his
statement proved to be untrue, CET would be adequately protected
by the safety nets for which it had stipulated. After all, these
safety nets were installed to provide precisely for that eventuality.
[38] If one were to adopt the direct
consequences criterion instead, the result would in my view be the
same. I say that because
I regard the settlement agreement as a
novus
actus interveniens
that broke the causal chain of events. But for
the settlement agreement, CET would not have incurred the losses it
now claims at
all if it had claimed restitution of its performance
under the lapsed agreement and perhaps claimed damages as a result of
the
fraud. At the same time, it is plain that the intervening event
of the settlement agreement was not of Nield’s doing. CET’s
argument in answer to these propositions was that, since it was
compelled to enter into the settlement agreement because of its
commercial predicament, that agreement cannot be regarded as a
novus
actus interveniens.
But I have already arrived at the conclusion
that, even if CET had found itself in this predicament – which
in my view it
had not – the predicament was in any event of its
own making. The consequence, as I see it, is that even if on a strict
application
of the direct consequences test there was no
novus
actus interveniens,
a flexible application of the test would
still lead to a finding that legal causation had not been
established.
[39] In the result I agree with the
ultimate conclusion arrived at by Davis J, albeit for different
reasons. This renders it unnecessary
to decide on the correctness of
his reasoning, since an appeal does not lie against the reasons for
judgment but against the substantive
order made by the court a quo
(see eg
Western Johannesburg Rent Board and another v Ursula
Mansions (Pty) Ltd
1948 (3) SA 353
(A) 355). It follows that, in
my view, the appeal should be dismissed and the cross-appeal should
be upheld, in both instances
with costs in favour of FHS. As to the
costs in the court a quo, Binns-Ward AJ made costs orders in respect
of interlocutory matters,
but ordered the costs of the proceedings
before him to be costs in the cause. Since FHS eventually achieved
overall success before
Davis J, he awarded the costs of all
proceedings, including those before Binns-Ward AJ, in its favour. In
the event I can see no
reason to disturb any of the costs orders made
by the court a quo.
[40] For these reasons:
1. The appeal is dismissed with costs
including the costs of two counsel.
2. The cross-appeal is upheld with
costs including the costs of two counsel.
3. The order made by Binns-Ward AJ is
set aside and replaced with the following:
‘
The
plaintiff’s claim is dismissed with costs including the costs
of two counsel.’
_______________
F D J BRAND
JUDGE OF APPEAL
APPEARANCES:
For
Appellant: R A Solomon SC
R
J Howie
Instructed
by: Thomson Wilks Inc
CAPE
TOWN
Correspondents:
McIntyre & Van der Post
BLOEMFONTEIN
For
First Respondent: A C Oosthuizen SC
M
Blumberg
Instructed
by: Norton Rose
CAPE
TOWN
Correspondents:
Webbers
BLOEMFONTEIN