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[2010] ZASCA 173
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Sandlundlu (Pty) Ltd v Shepstone & Wylie Inc ([2011] 3 All SA 183 (SCA)) [2010] ZASCA 173; 63/10 (2 December 2010)
THE SUPREME COURT OF APPEAL OF
SOUTH AFRICA
JUDGMENT
Case No: 63/10
In the matter between:
SANDLUNDLU (PTY) LTD
............................................................................
Appellant
and
SHEPSTONE AND WYLIE INC
................................................................
Respondent
Neutral citation:
Sandlundlu v Shepstone & Wylie
(63/10)
[2010] ZASCA 173
(2 December 2010)
Coram:
NUGENT, HEHER, SNYDERS JJA AND R PILLAY AND K PILLAY
AJJA
Heard:
8 November 2010
Delivered: 2 December 2010
Summary:
Damages for breach of contract – factual
causation – general damages
ORDER
On appeal from the Kwa-Zulu Natal High Court (Durban) (Nicholson J
sitting as court of first instance).
The appeal is dismissed with costs.
The cross appeal is dismissed with costs.
JUDGMENT
SNYDERS JA (Nugent, Heher JJA, R Pillay & K Pillay AJJA
concurring)
[1] This is an appeal and a cross appeal from a decision of Nicholson
J sitting as court of first instance in the Kwa-Zulu Natal
High Court
(Durban). The appellant successfully sued the respondent, its former
attorney, for damages flowing from the respondent’s
conceded
negligent failure to insert the orally agreed monthly rental in a
written lease agreement signed by the parties thereto.
The court
below granted leave to appeal to this court to both parties.
[2] The appellant was the owner of prime real estate in Port Edward
on which a hotel business, the Estuary Hotel, was conducted.
The
appellant’s only shareholders, Mr and Mrs Reardon, wanted to
develop a vacant part of the property adjacent to the hotel,
but
required funding to do so. At about the same time they happened to
meet Dr Kotter (Kotter), an Austrian businessman and the
majority
shareholder in Biz Afrika 987 (Pty) Ltd (Biz Afrika). Kotter showed
interest in the hotel business and the planned development
and Mr
Reardon (Reardon) saw an opportunity to acquire finance through
Kotter’s involvement. They started negotiating an
involved
series of transactions. At all material times an attorney, Mr
Breytenbach (Breytenbach), from the respondent’s firm
acted for
the appellant and attorney Mr Michaelides (Michaelides) acted for
Kotter and the companies that he controlled.
[3] Their negotiations envisaged, amongst other things, the
sub-division of the appellant’s land to accommodate the hotel
business and the future development on separate pieces of land, a
sale of the property on which the hotel was situated, a lease
of the
hotel business and the taking over of existing liability in respect
of several mortgage bonds. The details of the negotiations
are
irrelevant. It is sufficient to state that, ultimately, as part of an
elaborate scheme of transactions it was envisaged that
Biz-Afrika
would lease the hotel business from the appellant and that Slip Knot
Investments 43 (Pty) Ltd (Slip Knot) would buy
the sub-divided land
on which the hotel business was being conducted.
[4] As a first step in the execution of the envisaged transactions
the appellant leased to Biz-Afrika the Estuary Hotel. A lease
was
drafted by Michaelides. It was common cause that the oral agreement
that preceded the written draft was for a monthly rental
of R50 000
which was to escalate at a rate of 12 per cent per annum. In October
2000, when Breytenbach presented the draft lease
prepared by
Michaelides to Reardon for signature, the monthly rental was
reflected as R4 500 with an escalation of 10 per cent
per annum.
Reardon noticed this mistake, pointed it out to Breytenbach, who
urged Reardon to nonetheless sign the lease on the
strength of an
undertaking that he, Breytenbach, would in due course and before
signature of the lease on behalf of Biz-Afrika,
amend the amount to
reflect the orally agreed rental. Reardon obliged, signed the lease
and initialled next to the rental amount
and escalation that
Breytenbach had undertaken to amend.
[5] Biz-Afrika took possession of the hotel business during June
2000, prior to signature of the lease. At the end of November
2000 it
paid an amount of R300 000 to the appellant. The appellant contended
that the payment constituted the orally agreed rental
for the period
June to November 2000.
[6] Breytenbach never amended the rental and escalation as per his
instruction or his undertaking. On 18 October 2001 he forwarded
the
written lease, signed by Reardon, to Michaelides, for the latter’s
signature. This resulted in the written agreement
of lease having
been signed by both parties for a monthly rental of R4 500 with a 10
per cent per annum escalation and not for
the orally agreed rental of
R50 000 with a 12 per cent per annum escalation.
[7] No rental, not even R4 500 per month, was ever paid after
November 2000. On 29 January 2002 the appellant and Slip Knot signed
an agreement of sale in terms whereof the appellant sold the land on
which the hotel business was situated to Slip Knot. This agreement
was cancelled by the appellant during August 2002 as a result of Slip
Knot’s failure to cooperate in taking transfer of the
property.
[8] Arbitration proceedings were launched by the appellant to effect
a rectification of the lease agreement to reflect the rental
orally
agreed. Despite Biz-Afrika’s opposition to the rectification
sought it was granted on 4 February 2005. On 7 June 2005
the
appellant cancelled the lease agreement due to Biz-Afrika’s
failure to pay rental. It then proceeded to seek Biz-Afrika’s
eviction by way of application proceedings, which was also opposed.
After an unsuccessful attempt to appeal an eviction order granted
during December 2005, the appellant successfully evicted Biz-Afrika
during April 2006. On 9 May 2007 Biz-Afrika was liquidated.
The
appellant recovered no rental.
[9] The appellant relied on Breytenbach’s failure to correct
the rental amount in the lease agreement as a breach of his
mandate
for a damages claim. The breach of mandate was conceded in the
following words in the respondent’s plea:
‘
The
Defendant admits that Breytenbach:-
(a) failed to amend Clauses
4.1.1 and 4.1.2 so as to reflect a monthly rental of R50 000.00 and
an escalation of 12% per annum on
the rent payable;
(b) forwarded the agreement of
lease, a copy of which is annexure “D1” hereto, to
Michaelides, which agreement reflected
an amount of R4 500.00 per
month as rental for the first year with an escalation of 10% per
annum as a rental payable;’’
[10] The appellant alleged that its damages included:
(a) R6 159 267.74 representing the total of rental of R50 000 per
month escalated at 12 per cent per annum over the period 1 December
2000 until April 2006 with interest at the rate of 15.5 per cent per
annum accruing monthly as and when the monthly rental became
due and
payable;
(b) Legal fees, including attorney and client costs, for the
arbitration proceedings in the amount of R450 000 together with
interest
on that amount at 15.5 per cent per annum from the date of
service of summons until the date of final payment. During the course
of the proceedings this issue was limited by agreement to the
question whether the respondent was liable to pay the attorney and
client costs or only party and party costs.
[11] The court below granted the appellant damages for the loss of
rental income restricted to March 2002, the likely date upon
which
registration of transfer of the property in terms of the sale of
January 2002 would have been effected. It awarded the appellant
interest at 15.5 per cent per annum as damages calculated, not
monthly, but from the date of service of summons. The court issued
a
declarator that the appellant was entitled to be paid its attorney
and client costs in respect of the arbitration proceedings.
The
appellant was awarded its costs of suit.
[12] The appellant seeks to increase the damages awarded to include
rental for the full period until the eviction of Biz-Afrika
in March
2006 and interest calculated from each month as the rental became
due, owing and payable. The respondent’s main
contention in the
cross appeal is that the factual cause of the loss was the dishonest
conduct of Michaelides and not the negligence
of Breytenbach. It
seeks the replacement of the order of the court below with an order
that the appellant’s claim be dismissed
with costs. Insofar as
this court finds that Breytenbach’s negligence was the sole
cause of the loss suffered by the appellant
and that the damages are
recoverable in law, the respondent does not take issue with the award
of damages made by the trial court
and only seeks an amendment of the
declarator by the court below to restrict the award in relation to
the costs of the arbitration
proceedings to party and party costs.
[13] A plaintiff who enforces a contractual claim
arising from the breach of a contract needs to prove, on a balance of
probability,
that the breach was a cause of the loss.
1
[14] In
International Shipping Co (Pty) Ltd v Bentley
1990 (1)
SA 680
(A) at 700F-G Corbett CJ explained the practical enquiry in
the following terms:
‘
The
enquiry as to factual causation is generally conducted by applying
the so-called “but-for” test, which is designed
to
determine whether a postulated cause can be identified as a
causa
sine qua non
of
the loss in question. In order to apply this test one must make a
hypothetical enquiry as to what probably would have happened
but for
the wrongful conduct of the defendant. This enquiry may involve the
mental elimination of the wrongful conduct and the
substitution of a
hypothetical course of lawful conduct and the posing of the question
as to whether upon such an hypothesis plaintiff’s
loss would
have ensued or not. If it would in any event have ensued, then the
wrongful conduct was not a cause of the plaintiff’s
loss;
aliter
,
if it would not so have ensued.’
[15] Nugent JA in
Minister of Safety and Security v Van
Duivenboden
2002 (6) SA 431
(SCA) para 25 pointed to the
conceptual difficulties that arise when the enquiry is made:
‘
There
are conceptual hurdles to be crossed when reasoning along those lines
for, once the conduct that actually occurred is mentally
eliminated
and replaced by hypothetical conduct, questions will immediately
arise as to the extent to which consequential events
would have been
influenced by the changed circumstances. Inherent in that form of
reasoning is thus considerable scope for speculation
which can only
broaden as the distance between the [breach] and its alleged effect
increases. No doubt a stage will be reached
at which the distance
between cause and effect is so great that the connection will become
altogether too tenuous, but, in my view,
that should not be permitted
to be exaggerated unduly. A plaintiff is not required to establish
the causal link with certainty,
but only to establish that the
wrongful conduct was probably a cause of the loss, which calls for a
sensible retrospective analysis
of what would probably have occurred,
based upon the evidence and what can be expected to occur in the
ordinary course of human
affairs rather than an exercise in
metaphysics.’
[16] During the hearing counsel for the respondent developed his
argument on factual causation. He no longer relied only on
Michaelides’
dishonesty, but also that of Kotter and undisputed
facts which he submitted indicated that the appellant would not have
recovered
any rental from Biz-Afrika. These facts are:
(a) Kotter, the mind behind Biz-Afrika, was dishonest. He paid no
rental, not even the rental he contended was payable, from December
2000. Michaelides, on the instructions of Kotter resisted the
rectification of the agreement whilst being fully aware that their
basis for doing so was dishonest. On the same basis they resisted
eviction, appealed the eviction order when it was ultimately
granted
and Michaelides surreptitiously tried to obtain an order suspending
the order of eviction;
(b) The appellant has failed to recover any portion of the rental
liability for the relevant period;
(c) Biz-Afrika was, from the inception of the lease, not conducting
the hotel business efficiently or profitably and there probably
would
not have been funds to meet any claim for arrear rental;
(d) Ultimately Biz-Afrika was hopelessly insolvent to the extent that
no dividend resulted from its liquidation on 9 May 2007,
illustrating
that recovery of rental from it would not have been possible.
[17] On these facts counsel for the respondent asked this court to
infer that the appellant probably would have been unable to
recover
any rental from Biz-Afrika irrespective of whether the agreement of
lease contained the correct rental. He submitted that
if Breytenbach
had presented Michaelides and Kotter with an agreement that reflected
the agreed rental of R50 000 they probably
would not have signed that
agreement. The respondent’s contentions favour speculation that
does not take account of other
relevant facts and considerations.
[18] When Reardon was faced with the draft written lease agreement
for the incorrect rental he telephoned Michaelides who then
confirmed
that the agreement should have reflected the rental as R50 000 per
month. Despite this verbal concession, Biz-Afrika’s
opportunity
to be dishonest was hugely increased, if not created, when it was
asked to complete the signing of a lease for rental
of R4 500 per
month. One of the very reasons for instructing an attorney to see to
the conclusion of a written agreement that reflects
the true bargain
between parties is to avoid dishonesty, be that of an attorney or his
or her client. The appellant’s position
was hugely eroded in
that it did not have a written agreement in support of its claim for
arrear rental against a non-paying or
dishonest lessee. It had to
seek rectification of the written agreement before it could enforce
its claim. Further transactions
were envisaged which were Reardon’s
means to alleviate his financial burden and realise his future plans
which he chose not
to put at risk by pursuing the rectification
straight away. During the early stages of the lease, as is evident
from the payment
of R300 000 to the appellant during November 2000,
Biz-Afrika had access to money. That it was hopelessly insolvent five
years
later does not mean there were no resources available to cover
a rental liability for at least some period after November 2000.
[19] Considering all the facts, it is probable that if Breytenbach
had not failed to execute his mandate there would not have been
the
opportunity for Biz-Afrika to rely on the written lease agreement in
support of its dishonest contention, there would have
been no need to
pursue a rectification of the agreement before it could have been
enforced and the appellant would probably have
taken steps to enforce
payment of the significant monthly rental at a much earlier stage. If
it did it is probable that it would
have made some recovery. The
facts singled out by the respondent do not show that there are no
such probabilities. Consequently
it is probable that Breytenbach’s
failure did cause loss to the appellant.
[20] This conclusion does not entitle the appellant to all the
damages it suffered. The general rule in relation to contractual
damages is that the appellant is entitled to be put in the position
it would have been in if the respondent executed its mandate
properly. The general rule suggests that some line needs to be drawn
to ensure that the respondent should not be caused undue hardship.
The line is drawn with regard to broad principles of causation and
remoteness. In
Holmdene Brickworks (Pty) Ltd v Roberts
Construction Co Ltd
1977 (3) SA 670
(A) at 687 C-F the rationale
for the rule in regard to an award of damages for breach of contract
was eloquently stated as follows:
‘
The
fundamental rule in regard to the award of damages for breach of
contract is that the sufferer should be placed in the position
he
would have occupied had the contract been properly performed, so far
as this can be done by the payment of money and without
undue
hardship to the defaulting party . . . . To ensure that undue
hardship is not imposed on the defaulting party the sufferer
is
obliged to take reasonable steps to mitigate his loss or damage. . .
. and, in addition, the defaulting party’s liability
is limited
in terms of broad principles of causation and remoteness, to (a)
those damages that flow naturally and generally from
the kind of
breach of contract in question and which the law presumes the parties
contemplated as a probable result of the breach,
and (b) those
damages that, although caused by the breach of contract, are
ordinarily regarded in law as being too remote to be
recoverable
unless, in the special circumstances attending the conclusion of the
contract, the parties actually or presumptively
contemplated that
they would probably result from its breach. . . .‘
[21] The actual test to be applied was stated as follows in
Thoroughbred Breeders’ Association v Price Waterhouse
2001 (4) SA 551
(SCA) at 581G-I:
‘
That
approach, postulating as it does not a likelihood (at the upper end
of the scale) of the harm complained of occurring but (at
the lower
end) a realistic possibility thereof, appears to me to be sensible
and sound. Parties cannot contemplate what they cannot
foresee. In
the end it will usually turn on the degree of foreseeability of the
kind of harm incurred . . . . What matters to the
law is, of course,
not infinite but reasonable foreseeability. Leaving aside a typical
situation (such as, for instance, a circumstance
which was
foreseeable by only one of the parties or only at the time of breach
and not
also
at the
time of contract), what is required to be reasonably foreseeable is
not that the type of event or circumstance causing the
loss will in
all probability occur but minimally that its occurrence is not
improbable and would tend to follow upon the breach
as a matter of
course.’
[22] The appellant’s claim is for damages
that flowed naturally and generally from the breach, the so-called
(a)-leg of
Holmdene
.
The appellant seeks to increase the damages in respect of lost rental
over a longer period than was awarded by the trial court,
to include
the full period until Biz-Afrika was ultimately evicted. The
respondent’s principal attack was not that the appellant
did
not suffer damages, only that its negligence was not the cause of any
damages suffered. In the event of failure on that point
it confined
its cross appeal to the scale of costs to be awarded in relation to
the arbitration proceedings. It is therefore only
necessary to
consider whether the trial court should have awarded damages for loss
of rental beyond March 2002.
[23] At the time of the conclusion of the sale in January 2002 it was
evident that the relationship between Reardon and Kotter,
and
therefore the companies they controlled, was soured, cash flow was
problematic for all the parties and the contemplated future
transactions were at risk. It is improbable that in those
circumstances the appellant would have been successful in recovering
rental of R50 000 per month until 2006. The evidence does not
establish as a probability that damages were sustained after the
period fixed by the trial court.
[24] Insofar as the attorney and client costs of
the arbitration proceedings to effect a rectification are concerned,
the test to
be applied, as set out above, leads to the conclusion
that those costs were within the contemplation of the parties as a
reasonably
foreseeable result of including the wrong rental in a
written lease agreement. On behalf of the respondent it was submitted
that
attorney and client costs are not ‘incurred necessarily
and are therefore not recoverable as damages’. The submission
is inappropriate for two reasons. First, it does not apply the
correct test for the assessment of damages set out above. Second,
the
authorities on which it is based deal with a very different scenario
of a party seeking costs as damages in subsequent proceedings
when
those costs were not awarded in initial proceedings between the same
parties.
2
The respondent has not explained why party and
party costs would have been in the contemplation of the parties at
the time and not
attorney and client costs.
[25] Insofar as the interest on the monthly rental is concerned, the
trial judge correctly dealt with the matter and there is no
need to
repeat the findings. The essence of it is that the payment of
interest on arrear rental was not part of the lease agreement
and
there was no proof that a demand was ever made that could have
activated the payment of mora interest. The court below accepted
the
date of service of summons as the date of demand and allowed
interest, as damages, from that date.
[26] The appeal is dismissed with costs.
The cross appeal is dismissed with costs.
APPEARANCES:
For
appellant: J G Wasserman SC (with him C L H Harms)
Instructed by De Villiers, Evans and Petit, Durban,
Matsepes Inc., Bloemfontein.
For
respondent: P J Olsen SC (with him G R Thatcher)
Instructed
by Deneys Reitz Attorneys, Durban,
Webbers,
Bloemfontein.
1
The
test for factual causation is the same in delictual and contractual
cases, see
Vision Projects (Pty) Ltd v
Cooper Conroy Bell & Richards Inc
1998
(4) SA 1182
(SCA) at 1191I-J.
2
So
me
of the authorities relied upon are
Union
Discount Co Ltd v Zoller
[2001] EWCA Civ 1755
;
[2002] 1 All
ER 693
(CA) and
Rothschild v Van Wyk
1916 TPD 270.