Brief Summary

Contract — Interpretation of contract of employment — Tacit term — Employee's right to a hearing before liability for damages — The appellant, Johan de Lange, was employed by ABSA Makelaars and provided financial advice to clients, which led to claims for damages against him by ABSA after compensating the clients. The main issue was whether a clause in the employment contract required ABSA to afford de Lange a hearing before determining his liability for damages. The court held that the tacit term obliging ABSA to give de Lange a hearing was imported into the contract, thus the claims against him were dismissed.

Comprehensive Summary

Summary of Judgment

1. Introduction

This judgment concerns an appeal to the Supreme Court of Appeal against an order of the Western Cape High Court (Cape Town), which had upheld two “test case” claims brought by an employer against a former employee under a written contract of employment.

The appellant was Mr Johan de Lange, a former broker employed by the respondent. The respondent was Absa Makelaars (Edms) Bpk (ABSA), the employer. The dispute arose from ABSA’s attempt to recover amounts it had paid to clients who complained that they suffered loss due to De Lange’s allegedly incorrect or incomplete investment advice given during his employment.

The proceedings in the High Court were framed as a series of claims (15 in total) in which ABSA sought reimbursement from De Lange in terms of clause 16.6 of the employment contract. Following a special plea of prescription, ABSA abandoned claims 1 to 3. At the start of the trial, the parties agreed that only claims 4 and 10 would be determined as test cases, with the remaining claims to follow the result on those claims. The High Court upheld claims 4 and 10, and De Lange appealed with leave of that court.

The general subject matter of the dispute was the interpretation of the employment contract, specifically whether clause 16.6 entitled ABSA to impose liability on De Lange by forming an internal “opinion” that ABSA was legally liable to the client, and whether the clause (expressly or tacitly) required ABSA to give De Lange an opportunity to be heard before forming that opinion and paying compensation.

2. Material Facts

De Lange was employed by ABSA as a broker from 1995 to 2001. On 6 December 2001, the parties concluded a written contract of employment effective from 1 September 2000, which cancelled prior agreements subject to provisos not relevant to the appeal. The case turned on clause 16.6, which provided, in substance, that ABSA would not be liable for loss caused by the employee’s intentional or negligent incorrect or incomplete advice, but that if ABSA were held liable and paid loss or damage, ABSA would have a right of recourse against the employee for the amount paid if ABSA was of the opinion that it was legally liable.

While De Lange was in ABSA’s employ, he gave investment advice to clients including Mr Loubser (claim 4) and Mr and Mrs Honiball (claim 10). The clients later complained that the advice led to loss, and ABSA compensated them. ABSA then sought to recover from De Lange the amounts it paid, relying solely on clause 16.6.

In claim 4, Loubser consulted De Lange seeking a safe investment with monthly income. On De Lange’s advice, Loubser invested capital and took out an annuity policy and several endowment policies, with the endowment policies invested in overseas shares without diversification. By August 2003, Loubser believed his capital had been eroded and lodged a complaint with ABSA. ABSA’s investigator, Mr Van Reenen, interviewed Loubser but did not contact De Lange for his version. Van Reenen testified that he did not do so because De Lange was no longer employed and because he did not consider it part of his function; he also stated that if De Lange had still been employed, the investigation would have required obtaining a statement from him. Van Reenen further could not access Loubser’s ABSA client file as it was missing. He recommended compensation, and ABSA’s managing director, Mr Le Roux, accepted the recommendation and authorised payment of R81 208.55 to Loubser around 14 May 2004, without affording De Lange an opportunity to respond. This sum became the amount claimed from De Lange under claim 4.

In claim 10, the Honiballs sought advice regarding investing a lump sum pension payout to obtain monthly income while keeping capital intact. De Lange advised that the Honiballs cash in other investments and invest a total amount in annuity policies, using much of the monthly income to fund endowment policies invested in overseas shares without diversification. The Honiballs later complained that their capital was diminishing and demanded investigation and compensation. ABSA’s investigator, Ms Joubert, obtained information from the Honiballs and Sanlam and received handwritten pages from the Honiballs said to be in De Lange’s handwriting, but she did not seek De Lange’s explanation and did not seek clarification from the Honiballs about material she could not explain. She also did not access the Honiballs’ ABSA client files, despite acknowledging that such files should contain risk analysis relevant to suitability. Joubert recommended compensation, and Le Roux accepted the recommendation and authorised payment of R188 809.77 around 24 November 2004, again without giving De Lange an opportunity to be heard. That amount was claimed from De Lange under claim 10.

A critical fact relied on by the Supreme Court of Appeal was that it was common cause that the process advocated by De Lange—namely, allowing him to present his version before ABSA formed its opinion and imposed liability—was not followed in the investigations and decisions that led to payment of the two claims.

3. Legal Issues

The central legal question was whether clause 16.6, properly interpreted, incorporated a tacit term requiring ABSA, as part of forming the requisite “opinion” that it was legally liable to the client (and thus triggering recourse against the employee), to consider all relevant facts including De Lange’s version, and to observe the audi alteram partem principle by giving De Lange an opportunity to state his case before ABSA formed its opinion.

The dispute was therefore primarily one of law, namely contractual interpretation and the implication of a tacit term, with a strong component involving the application of legal principles to largely undisputed procedural facts (that De Lange was not heard before ABSA decided to pay and then sought recourse). It did not require the appellate court to resolve the underlying merits of whether the advice was in fact negligent or whether ABSA was truly legally liable to the clients; instead, it required determining whether the contractual mechanism that ABSA invoked could be exercised without the procedural step contended for by De Lange.

A subsidiary issue arose from the High Court’s approach to clause 16.6 as involving a discretionary decision akin to that made by a valuer or referee, and whether such classification meant that audi alteram partem was unnecessary. The Supreme Court of Appeal treated the decisive inquiry as the existence of the tacit term pleaded by De Lange; if present, it disposed of the claims.

4. Court’s Reasoning

The Supreme Court of Appeal approached the matter as one of contractual construction, focusing on whether clause 16.6 contained the tacit term pleaded by De Lange. It held that the High Court’s emphasis on classifying ABSA’s role as that of a “valuer/referee” rather than an arbitrator was not determinative. The appellate court stressed that the problem was not merely categorical: depending on circumstances, even a valuer may be obliged by a tacit term to hear both sides. More importantly, in this case ABSA was neither an arbitrator nor a valuer; ABSA was effectively called upon to judge an issue and create a liability against the employee by forming an internal “opinion” and then paying a client.

The court restated the established test for a tacit term as the “officious bystander” test, and relied on the principles articulated in City of Cape Town (CMC Administration) v Bourbon-Leftley & another NNO 2006 (3) SA 488 (SCA). A tacit term is not readily inferred; it must be a term that the parties would necessarily have agreed upon at the time of contracting if it had been suggested, and not merely a term that would be reasonable, convenient, or one that parties might have accepted after further discussion. The inquiry is fact-sensitive and driven primarily by the express terms and the surrounding circumstances at conclusion of the contract, with subsequent conduct potentially informative.

Applying those principles, the court reasoned that clause 16.6 did not “immediately exclude” the proposed tacit term. The clause allowed ABSA, by its own “opinion” on legal liability, to impose a potentially unlimited financial liability on the employee for amounts ABSA decided to pay to clients, thereby making procedural fairness and proper fact-gathering central to the clause functioning fairly and effectively. The court considered that importing the pleaded tacit term would ensure that clause 16.6 functioned efficiently and fairly, rather than enabling ABSA to unilaterally crystallise liability without input from the person to be charged.

A significant feature in the court’s reasoning was the existence and content of ABSA’s own internal documentation: the standard form used for reporting and recommending decisions to head office (to enable Le Roux to form the “opinion” contemplated in clause 16.6) provided for annexures that presupposed broker involvement, including items relating to consent to debit the broker’s account, an appeal by the broker, arrangements for repayment, and references to disciplinary steps and hearings. The court treated these aspects as indicating that, at the time of contracting, ABSA itself contemplated broker participation in the process leading to a clause 16.6 decision.

ABSA argued that if a tacit term existed, it would apply only while the broker remained employed, partly because clause 27 provided dispute-resolution mechanisms for employed brokers (including mediation/conciliation via the Commission for Conciliation, Mediation and Arbitration and arbitration through the Arbitration Foundation of Southern Africa). The court rejected this limitation, holding that neither clause 16.6 nor the contract as a whole justified such confinement, and that some contemplated documents (such as repayment arrangements and consent to debiting) could apply equally when the broker was no longer in ABSA’s employ. The fact that additional remedies existed for current employees did not, in the court’s view, warrant denying the procedural protection of a hearing to a former employee faced with liability created through the clause 16.6 mechanism.

The court also placed weight on surrounding circumstances and subsequent conduct. Evidence from Le Roux conceded that a “full investigation” would include examining both sides, and that this was what would reasonably be expected from an investigation. The court further noted the relevance of an email from ABSA’s head of legal services, Van Schalkwyk, which highlighted concerns that ABSA had not sought the broker’s version and that a court might hold this against ABSA; the email suggested the broker might have an explanation that could show ABSA need not have paid the client. Despite these concerns and despite the acknowledged importance of hearing both sides, Le Roux proceeded to approve payments without insisting that De Lange’s version be obtained.

The deficiencies in the investigations were also relevant in the court’s assessment. In both matters, the investigation did not include proper engagement with ABSA client files (in one case the file was missing; in the other case it was not accessed), despite acknowledgments that such files should contain risk analyses and reasons for recommendations. The court treated this as reinforcing the need for the implied procedural safeguard pleaded by De Lange, because ABSA’s “opinion” depended on an evidential foundation that could not be assumed to be complete without hearing De Lange and accessing relevant records.

Having regard to the express terms, the surrounding circumstances, and the subsequent conduct, the court concluded that the tacit term pleaded by De Lange could and should be imported into the contract. It considered the term necessary in the business sense to give efficacy to the contractual scheme, in the sense described in the authorities relied upon (including the classic statement in Reigate v Union Manufacturing Co 118 LT 479 as quoted with approval in South African jurisprudence).

Because it was common cause that ABSA did not comply with this tacit term when forming its opinion and paying the claims, the court held that ABSA’s claims—being based entirely on clause 16.6—ought to have been dismissed. This conclusion made it unnecessary for the court to deal with other arguments advanced on behalf of either party.

5. Outcome and Relief

The Supreme Court of Appeal upheld the appeal with costs.

It set aside the order of the Western Cape High Court and replaced it with an order that claims 4 to 15 are dismissed with costs. This reflected the parties’ agreement that claims 4 and 10 would serve as test cases, and that the remaining claims would follow their outcome.

Cases Cited

Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial Administration 1974 (3) SA 506 (A).

Botha v Coopers & Lybrand 2002 (5) SA 347 (SCA).

City of Cape Town (CMC Administration) v Bourbon-Leftley & another NNO 2006 (3) SA 488 (SCA).

Consol Ltd t/a Consol Glass v Twee Jonge Gezellen (Pty) Ltd 2005 (6) SA 1 (SCA).

Estate Milne v Donohoe Investments (Pty) Ltd & others 1967 (2) SA 359 (A).

Perdikis v Jamieson 2002 (6) SA 356 (W).

Reigate v Union Manufacturing Co 118 LT 479.

Richard Ellis South Africa (Pty) Ltd v Miller 1990 (1) SA 453 (T).

Wilkins NO v Voges 1994 (3) SA 130 (A).

Legislation Cited

No legislation was expressly cited in the judgment.

Rules of Court Cited

No rules of court were expressly cited in the judgment.

Held

The court held that clause 16.6 of the employment contract contained a tacit term requiring ABSA, before forming the opinion that it was legally liable to a client (and thereby triggering recourse against the employee), to take account of all relevant facts including the broker’s version, and to observe audi alteram partem by affording the broker an opportunity to be heard.

Because ABSA did not comply with this tacit term when it investigated and decided to compensate the clients in claims 4 and 10, ABSA could not rely on clause 16.6 to recover those amounts from De Lange. Consequently, the test case claims (and, by agreement, the remaining claims) fell to be dismissed.

LEGAL PRINCIPLES

A tacit term in a contract is inferred from what the parties must necessarily have agreed upon at the time of contracting, though left unstated; it is not readily imported merely because it would be reasonable or convenient, and courts are reluctant to supplement agreements on that basis.

The applicable test for a tacit term is commonly expressed through the officious bystander formulation, and the inquiry is grounded primarily in the express contract terms and the surrounding circumstances at conclusion of the contract, with subsequent conduct potentially indicating the presence or absence of the proposed term.

Where a contractual provision empowers one party to form an “opinion” that effectively creates liability for the other party (here, enabling ABSA to pay third-party claims and seek reimbursement from the employee), a tacit term may be necessary to ensure the clause operates with business efficacy and fairness, including requiring that the affected party be given an opportunity to present their version before that liability is imposed.

De Lange v ABSA Makelaars (Edms) Bpk (262/09) [2010] ZASCA 21; [2010] 3 All SA 403 (SCA) ; (2010) 31 ILJ 885 (SCA) (23 March 2010)