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[2011] ZASCA 128
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Venfin Investments (Pty) Ltd v KZN Resins (Pty) Ltd t/a KZN Resins (642/2010) [2011] ZASCA 128; [2011] 4 All SA 369 (SCA) (15 September 2011)
Links to summary
THE SUPREME COURT OF
APPEAL OF SOUTH AFRICA
JUDGMENT
Case No: 642/2010
In
the matter between:
VENFIN INVESTMENTS
(PTY) LTD
…............................................................
Appellant
v
KZN
RESINS (PTY) LIMITED t/a KZN RESINS
…......................................
Respondent
Neutral citation:
Venfin Investments v KZN Resins
(642/2010)
[2011] ZASCA 128
(15 September 2011).
Coram:
BRAND
JA, PONNAN JA, SNYDERS JA, MALAN JA AND THERON JA
Heard:
16 August 2011
Delivered:
15 September 2011
Summary: Appellant’s
claim in convention based on cession of rights by third party in
terms of alleged oral agreement –
factual issue whether
agreement entered into decided against appellant – counterclaim
based on the debts owing to respondent
by same third party –
proposition that appellant liable for these debts in terms of s 156
of
Insolvency Act 24 of 1936
, alternatively, pursuant to the terms of
the cession – both issues decided against respondent.
________________________________________________________________
ORDER
On appeal from:
KwaZulu-Natal High Court (Durban) (Van der Reyden J sitting as court
of first instance):
1. The appeal is upheld.
The order of the court a quo is set aside and replaced with the
following:
“
(a)
The plaintiff’s claim is dismissed with costs, including the
costs of two counsel.
(b) The defendant’s
counterclaim is dismissed with costs, including the costs of two
counsel.”
2. The respondent is
ordered to pay the appellant’s costs of appeal including the
costs of two counsel, but the costs pertaining
to the record is
restricted to 10 per cent thereof.
3. The cross-appeal is
dismissed with costs.
JUDGMENT
________________________________________________________________
BRAND JA
(PONNAN JA, SNYDERS JA, MALAN JA AND THERON JA concurring):
[1] This appeal has its
origin in a business relationship between the respondent, KZN Resins
(Pty) Ltd (KZN) and another company,
Fibalogic (Pty) Ltd, that went
awry. Fibalogic is now in liquidation, but during its corporate
lifetime it was a manufacturer of
electric water heaters, commonly
known as geysers, that were made of fibreglass. Between 2000 and 2002
KZN supplied Fibalogic with
resin used in this manufacturing process.
Litigation started on 12 September 2002 when Fibalogic instituted an
action in the KwaZulu
High Court (Durban) against KZN for an amount
in excess of R26 million. Broadly stated, Fibalogic’s cause of
action was for
its loss resulting from geysers that were returned to
it because of defects, for which KZN allegedly undertook to pay
compensation
in terms of an oral agreement.
[2] KZN delivered a plea
in which it disputed the oral agreement. It also instituted a
counterclaim for about R2 million which it
alleged was the balance of
the purchase price of resin sold and delivered to Fibalogic. After
the close of pleadings, Fibalogic
ceded its claim against KZN to the
appellant, Venfin Investments (Pty) Ltd (Venfin). As part of the
cession agreement Venfin indemnified
Fibalogic against any claim by
KZN for goods sold and delivered. Thereafter, Fibalogic was placed
under liquidation and Venfin
was formally substituted as the
plaintiff in the ongoing proceedings.
[3] When the matter
eventually came before Van der Reyden J he was asked, by agreement
between the parties, to order a separation
of issues. In terms of the
separation order he consequently granted, three specified areas of
dispute were to be determined at
the outset while all other issues,
including those relating to the quantum of the claim and the
counterclaim, stood over for later
determination. The three specified
areas of dispute were formulated thus:
(a) The issues relating
to the oral compensation agreement relied upon by Venfin for its
claim in convention, as defined in paragraph
9 of Venfin’s
particulars of claim read with paragraph 8 of KZN’s plea (the
first issue);
(b) The issue arising
from KZN’s counterclaim as to whether the indemnity furnished
by Venfin to Fibalogic – in terms
of their cession agreement –
is governed by
s 156
of the
Insolvency Act 24 of 1936
, so as to
render Venfin liable for KZN’s claim against Fibalogic for
resin sold and delivered to the latter (the second issue);
and
(c) The issues raised by
KZN’s counterclaim as to whether the cession agreement by
itself had the effect of transferring and
imposing on Venfin,
Fibalogic’s liability for the resin sold and delivered to it
(the third issue).
[4] Evidence in the
preliminary proceedings was led in two tranches during February and
August 2008. Judgment was delivered about
15 months later on 24 March
2010. In terms of the judgment the court a quo decided the first and
third issues in favour of KZN
and the second issue in favour of
Venfin. In consequence, the claim in convention was dismissed while
the counterclaim succeeded
pursuant to the court’s findings on
the third issue. In both instances, costs were awarded in favour of
KZN, save for the
costs resulting from the second issue, which were
ordered against it. Venfin’s appeal to this court against the
judgment
on the first and third issues is with the leave of the court
a quo. So is KZN’s cross-appeal against the costs order on the
second issue. I propose to deal with the three issues individually.
The first issue –
did KZN agree to compensate Fibalogic for damages resulting from
defective geysers
?
[5] The outcome of this
issue turns exclusively on the correctness of the court a quo’s
findings with regard to a dispute
of fact between the parties.
Venfin’s version of the facts was summarised thus in paragraph
9 of its particulars of claim,
to which reference is pertinently made
in the formulation of this issue:
‘
On
or about 23 November 2001, at Paarl, Fibalogic, represented by its
Managing Director Mr Dawie Thirion, and [KZN], represented
by its
Chairman Mr Salim Kajee, both of who were duly authorized thereto,
concluded an oral agreement, the material terms of which
included the
following:
KZN
would compensate Fibalogic for the costs incurred by Fibalogic in
respect of all returns in excess of the Fibalogic’s
norm of
returns, which norm was 2% of the number of units produced by it;
such
costs would include the cost of the replacement water heater
(geyser) and Fibalogic’s labour and travelling costs.
The
agreement was confirmed on 26 November 2001 by Fibalogic’s Mr
Thirion in a letter to KZN’s Mr Kajee, a copy of which
is
annexed marked “A”.’
[6] Annexure A, which was
destined to play a prominent role at the hearing before Van der
Reyden J, reads in relevant part:
‘
Dear
Salim
We
refer to our meetings of 16, 22 and 23 November 2001.
After
analysing all the variables we are all in agreement that there is a
difference in performance between the resins supplied
by you and the
resins previously used.
We
have discussed and shown you from our analyses the norm expected from
a resin as used in our back-up layer on our tanks. We believe
that
the main question remains unanswered as to the difference between
your resin and the one previously used.
.
. .
Summary
of the meeting, dated Friday, 23 November 2001:
.
. . ;
KZN
Resins will compensate Fibalogic the difference between the agreed
norm (of two per cent of production) and the actual rate
experienced. This will include the cost of the geyser as well as the
labour/travelling cost. (Warrantee costs);
KZN
Resins will continue to subsidise the additional lay-up costs on the
150 litre tank. . . .
Whilst
we appreciate and accept your offer as outlined above, we however are
still of the opinion that the reason(s) in variation
of performance
must be found and we will run independent tests to answer this.
Regards
D
Thirion
CC
F G Rupert
D
Reid’
[7] KZN did not respond
in writing to Annexure A until 8 July 2002, in circumstances that
will presently transpire. On that date
Mr Salim Kajee conveyed a
letter to Mr Dawie Thirion by telefax in which he essentially denied
the agreement relied upon by Venfin.
Paragraph 8 of Venfin’s
plea (which is also referred to in the formulation of this issue)
echoed that denial. In relevant
part it reads:
‘
Ad
paragraph 9
Save
that the Defendant admits that on or about 23
rd
November 2001, and at Paarl, Mr
Thirion and Mr Kajee had a discussion and that the Plaintiff wrote a
letter dated 26
th
November 2001 (annexure “A”
to the Particulars of Claim) to KZN, KZN denies each allegation in
paragraph 9 and:
specifically
denies that it concluded an oral agreement with Fibalogic either in
the terms alleged or at all;
specifically
denies that annexure “A” correctly reflects or records
the matters discussed at the meeting between Mr
Thirion and Mr Kajee
on the 23
rd
November 2001.’
[8] At the hearing,
Venfin’s version was supported by the evidence of Fibalogic’s
erstwhile managing director, Thirion.
For its denial of that version,
KZN in turn, relied on the testimony of two witnesses. Kajee, the
former chairman of KZN, and Mr
Donald Reid, who was the technical
director of Fibalogic at the time. The factual dispute about the
conclusion and the terms of
the alleged oral agreement that emerged
from the pleadings, maintained its course throughout the hearing.
Yet, there were large
areas of common ground, as appears from the
following background, which I find most convenient to narrate in
chronological fashion.
[9] Reid was involved
with Fibalogic from its inception and he remained a shareholder and
the technical director of the company
throughout its existence, until
it was eventually wound up in July 2003. His testimony therefore
provides a convenient starting
point to the chronological narrative.
As a marine engineer by training, Reid came up with the idea of
manufacturing corrosion free
fibreglass geysers involving a chemical
compound called vinyl-ester resin. After he patented his invention,
he incorporated the
company, Fibalogic, together with a business
partner and then ceded the patent to the company. At the outset, the
tanks of the
geysers, which were manufatured in three capacities of
100 litres, 150 litres and 200 litres, were made of vinyl-ester only.
This
compound was obtained from a supplier, NCS, under the trade name
Derakane. During about 1996, Reid and his partner sold 50 per cent
of
their shares in Fibalogic to Venfin, a company in the Rembrandt
stable. In the course of time, their shareholding was, however,
‘watered down’ to about one per cent, while Venfin owned
the rest.
[10] After Venfin became
involved – or, as Reid put it, ‘when the accountants came
in’ – it was decided,
as part of a cost cutting exercise,
to change the tanks of the geysers from a single composition to a
dual lay-up system involving
different kinds of resin. While the
inner layers, which came into direct contact with water, still
consisted of vinyl-ester, the
outer layers were manufactured out of
the substantially cheaper isopthalic resin. At that time both the
vinyl-ester and the isopthalic
resins were supplied by NCS. During
January 2000 Fibalogic decided on a further cost cutting exercise by
reducing the number of
outer layers by one on its 100 and 150 litre
cylinders, well-knowing that this would reduce the mechanical
strength of these tanks.
The number of layers on the 200 litre
cylinders remained the same.
[11] Thirion holds a
university degree in commerce. He joined Fibalogic as its managing
director in April 2000. He was head-hunted
for that position by
Venfin, because Fibalogic was consistently running at a loss and it
was hoped that Thirion could turn that
situation around. During the
second half of 2000, NCS proposed a substantial increase in its price
for isopthalic resin. In consequence,
Fibalogic started looking for
an alternative supplier. Eventually it decided on KZN. From 13
October 2000 Fibalogic thus procured
its isopthalic resin from KZN
while NCS continued to supply its vinyl-ester. KZN manufactured the
isopthalic resin in accordance
with Fibalogic’s specifications.
Every batch destined for delivery to it was analysed by the South
African Bureau of Standards
(SABS) and the analysis recorded in a
certificate which accompanied the delivery. On occasion when
Fibalogic was not satisfied
by the certificate that the batch
conformed to its specifications, it was returned to KZN.
[12] There had always
been returns of hot water cylinders to Fibalogic because of defects.
In the past these returns averaged about
1.36 per cent of cylinders
manufactured. After October 2000 there was, however, a marked
increase in this rate of return. It rose
from the previous average of
1.36 per cent to well in excess of the industry norm of 2 per cent.
The increase was particularly
pronounced with regard to the 150 litre
cylinders. The consequences of the increase were serious and
Fibalogic’s very existence
was threatened, unless the problem
could be resolved. Thirion in particular was under severe pressure
from the Venfin representatives
on the Fibalogic board of directors
to resolve the problem of increased returns.
[13] At that stage no-one
knew what the cause of the failures was or who was responsible for
these failures. The reason for the
uncertainty was that the hot water
cylinders consisted of about 220 components, including different
kinds of resin, glass fibre
matting, heating elements, thermostats,
etc, which were procured from a number of different sources.
Moreover, there were various
stages of manufacturing where things
could go wrong, for instance when the resin in liquid form was mixed
with the chemical catalysts.
At the trial it was common cause between
all witnesses, including Thirion, that with the benefit of hindsight,
the problem could
be ascribed to the change in design from a single
lay-up consisting of vinyl-ester only to a dual lay-up of vinyl-ester
on the
inside and isopthalic resin on the outside of the cylinder.
This was empirically established by Thirion himself. After the
liquidation
of Fibalogic, he became the manager of the company that
took over the business of manufacturing geysers. According to his
evidence
that company solved the problem of excessive returns by
reverting to the original, single lay-up design. But this much was
not
appreciated by those involved in 2001.
[14] During 2001 Thirion
and Reid suspected that the increased rate of returns was
attributable to the use of KZN’s resin,
purely because the
increase coincided with the change in their supplier from NCS to KZN.
KZN, on the other hand, regarded Fibalogic
as a substantial client,
with potential to grow even further. Hence it was keen to assist
Fibalogic in resolving its compelling
difficulties. As part of its
attempts to do so, KZN offered, in August 2001 to provide additional
resin without cost for an extra
outer layer on the 150 litre geysers.
It will be remembered that during January 2000 Fibalogic reduced the
number of outer layers
on its 100 and 150 litre geysers as part of a
cost saving exercise. With regard to the 200 litre cylinders, the
number of layers
remained the same. Since the returns were more
pronounced with regard to the 150 litre cylinders than with reference
to the larger
200 litre ones, it was thought that the problem might
have been caused by the reduction of one outer layer. Consequently,
Fibalogic
decided to re-introduce the additional outer layer on the
150 litre cylinders. Agreement was then reached that Fibalogic would
supply the glass fibre matting for the extra layer while KZN would
provide the resin for that layer free of charge. According to
Kajee
this resulted in a discount of about 5 per cent in the price of resin
sold. The extra layer was apparently introduced from
about 14 August
2001.
[15] The hope was that
the additional layer would resolve the problem in due course. Yet it
did not immediately reduce the pressure
on Thirion. This is borne out
by the minutes of the Fibalogic board meeting of 31 October 2001
which recorded that ‘the chairman
expressed his concern over
[the costs of product failure] and demanded that it be brought under
control’. The product failure,
so the minutes stated, ‘includes
the failure of suppliers’ products, valves, thermostats and
elements’.
[16] This led to the
crucial meeting which was held on 22 and 23 November 2001. It was
attended by Thirion and Reid on behalf of
Fibalogic and by Kajee on
behalf of KZN, though Reid was not present on the 23
rd
. At
the meeting Thirion again stressed that the return rate had increased
from an average of 1.36 per cent to over 2 per cent,
from about the
time that Fibalogic changed to KZN resin in October 2000. He also
said that in the circumstances his perception
was that the resin
supplied by KZN was responsible for the problem and that, if KZN
should refuse to shoulder that responsibility,
he would have to
change the supplier of isopthalic resin. At the same time, everybody
concerned believed that the re-introduction
of the additional outer
layer to the 150 litre cylinders on 14 August 2001 would stem the
tide of increased returns, though the
exact source of the problem
remained unknown.
[17] The narrative thus
far is essentially common cause in the sense that it was put forward
by one side and either admitted or
not denied by the other. The sharp
dispute, which goes to the heart of the case, turns on Kajee’s
reaction at the meeting.
Thirion’s side of the controversy
echoed the contents of his letter of 26 November 2001 to which I have
referred extensively
(in para 6 above). According to that version
Kajee agreed at the resumed meeting on 23 November 2001 that KZN
would compensate
Fibalogic for its loss incurred, calculated on the
basis of the difference between the agreed industry norm of 2 per
cent and the
actual rate of return experienced, including labour and
travelling costs. Kajee’s version, on the other hand, was that
it
became clear to him during the course of the meeting that Thirion
had expected KZN to pay for the returns above 2 per cent of
production.
Though he did not share the belief that KZN’s resin
was to blame, he suggested that Fibalogic should look to KZN’s
insurer for compensation. He explained to Thirion, so Kajee
testified, that Fibalogic had product liability cover for R2.5
million
and that if KZN’s resin should prove to be the cause of
the problem, the insurer would have to pay. In fact, Kajee testified,
he offered to assist Fibalogic in initiating a claim against KZN’s
insurer.
[18] According to Kajee
one of the main reasons why he would not admit liability on behalf of
KZN, as alleged by Thirion, originates
from the very terms of that
insurance policy. He had been cautioned by KZN’s insurance
broker, so Kajee said, that in terms
of the policy, any admission of
liability by him would entitle the insurer to repudiate the claim.
Thirion denied that Kajee ever
suggested that Fibalogic should
initiate a claim against KZN’s insurer. Reid on the other hand
remembered that he did. Because
Reid was not present on 23 November
2001 he was not able to comment on the direct conflict between
Thirion and Kajee as to whether
the latter undertook responsibility
for Fibalogic’s problem. Yet he testified that, from his expert
knowledge of the industry,
he would not have expected the supplier of
the resin to effectively guarantee the entire geyser against failure.
His reason for
this view was that there were too many variables
beyond the supplier’s control that could cause the failure.
[19] After the meeting
Thirion then wrote the by now familiar letter of 26 November 2001
(quoted in para 6 above) in which he recorded
his version of Kajee’s
undertaking. According to Thirion he wrote the letter with the
assistance of Reid who is more fluent
in English than him. This is
denied by Reid. What is common cause is that Thirion did not receive
any written response to this
letter from Kajee until nearly one year
later. Kajee’s version is that when he received the letter he
telephoned Reid to
find out what was going on. From Reid’s
reaction it was obvious to him that Reid knew nothing about the
letter, but that
he agreed with Kajee that the alleged undertaking on
behalf of KZN was never given. According to Kajee, he then telephoned
Thirion
who told him, in essence, to ignore the contents of the
letter. He therefore found it unnecessary to respond in writing. In
his
testimony Reid confirmed, not only that Kajee had telephoned him
about the letter, but also that he was present when Thirion received
a telephone call from Kajee. On his part, Thirion emphatically denied
that he ever received the alleged telephone call from Kajee.
[20] Thirion’s
version as to Kajee’s undertaking is supported to some extent
by the minutes of a meeting of the Fibalogic
board on 29 November
2001. According to these minutes Thirion reported, inter alia, that
‘failures on geysers due to the
resin being used led to
negotiations with KZN Resins. They undertook to pay the amount of
plus minus R300 000 to Fibalogic
and in future to compensate
Fibalogic for the difference between the agreed failure norm (2 per
cent of production) and the actual
failure rate. This will include
the costs of the geyser as well as the labour/travelling costs’.
Of further significance
is the fact that Reid attended that board
meeting and that he did not repudiate or query Thirion’s
account. The support that
Thirion’s version derives from the
minutes is somewhat marred by his reference to an amount of R300 000
which he did
not mention in his letter or in his evidence about the
terms of the agreement.
[21] Kajee’s
version, on the other hand, that he suggested a claim against KZN’s
insurer, derives support from at least
three documents. First there
is a note in Thirion’s own handwriting about a conversation
between him and Kajee on 7 December
2001 which clearly related to a
compensation claim by Fibalogic which had been referred to KZN’s
insurer. The second document
is a letter by KZN’s insurance
broker to its insurer dated 28 January 2002. The letter confirms
‘advice of a potential
product liability claim’ against
the insured, KZN, by Fibalogic and that ‘the insured have done
their best themselves
without admitting liability, to negotiate with
Fibalogic’. Thirdly, there are the minutes of the Fibalogic
board meeting
of 27 February 2002 which recorded a report by the
management of Fibalogic that KZN ‘had various meetings with
their insurer
and that we have to lodge our claim directly against
[KZN]. We are now processing all the existing information and will
lodge our
claim at month end’.
[22] It is common cause
that Kajee then tried to persuade KZN’s insurer to pay
Fibalogic’s claim; that the insurance
assessor investigated the
claim and brought out a report; and that the claim was eventually
repudiated by the insurer. While giving
evidence Thirion was very
upset by a comment in the assessor’s report that at one stage
during the contract period there
was a problem with KZN’s test
equipment which affected the quality of its resin delivered to
Fibalogic, about which the latter
was never informed.
[23] After November 2001,
Thirion started to deduct from amounts payable to KZN for resin sold
and delivered the compensation to
which Fibalogic was in his view
entitled in terms of their alleged agreement. This gave rise to a
demand by KZN’s accountant
for payment of the outstanding
amounts. In response, Thirion wrote a letter to Kajee on 28 June 2008
in which he referred to their
alleged compensation agreement of
November 2001. In this letter he added that he could understand why
Kajee would not admit the
agreement in writing for ‘fear of
committing to an unknown quantum or to jeopardise any future
insurance claims you may incur’
but that this did not detract
from the fact of the agreement. In reply to this letter Kajee, for
the first time in writing denied
the compensation agreement on 8 July
2002.
[24] On the crucial
dispute of fact as to whether the compensation agreement was ever
entered into, the court a quo essentially
accepted the version of
Kajee and Reid in preference to that of Thirion. On appeal Venfin
contended that the court had misdirected
itself in doing so. Its
first argument in support of this contention relied on Kajee’s
failure to respond to Thirion’s
letter of 26 November 2001,
until nearly one year later. In the light of the decisions in
McWilliams v First Consolidated Holdings (Pty) Ltd
1982 (2) SA
1
(A) at 10E-G and
Hamilton v Van Zyl
1983 (4) SA 379
(E) at
388F-G, so Venfin’s argument went, the court a quo should have
held that, as a matter of law, Kajee’s failure
to respond
amounted to an admission of the allegations in Thirion’s
letter. As I see it, the flaw in this argument is that
it rests on a
misunderstanding of the cases upon which it seeks to rely. Neither
McWilliams
nor
Hamilton
sought to lay down any
principles of law. They reflected conclusions based on the
application of logical reasoning to the facts
of those cases.
[25] The flaw in Venfin’s
argument can be illustrated, I think, by supposing an admission on
the part of Thirion that Kajee
had telephoned him to deny the
allegations of an agreement when he received the letter. In these
circumstances any attempt to construe
Kajee’s failure to
respond in writing as an admission of the letter, would clearly be
untenable. The fact that Thirion denied
the telephone conversation
deposed to by Kajee makes no difference in principle. The denial
brings about the enquiry whether Kajee’s
version should be
accepted. It does not, as Venfin’s argument would have it,
exclude that enquiry as a matter of law. The
mere fact that the
letter was written does, of course, lend some support to Thirion’s
version. That support is, however,
somewhat detracted from by his
assertion that he, as a university graduate, required the assistance
of Reid to write a letter in
simple English. The assertion became
even more suspicious when it was denied by Reid, who had no apparent
reason to do so, if it
were true.
[26] Venfin’s
second line of argument in support of the professed misdirection by
the court a quo, focussed on the court’s
alleged unwarranted
criticism of Thirion and the proposition that, on the contrary,
Thirion was a better witness than Kajee and
Reid. In the course of
this argument the testimony of all three witnesses was subjected to a
detailed analysis; alleged unsatisfactory
aspects in the evidence of
Kajee and Reid, particularly in cross-examination, were accentuated;
alleged strong points in Thirion’s
evidence were underscored;
and the flaws in his evidence explained. Not unexpectedly, this gave
rise to what essentially amounted
to a mirror image of the same
argument on behalf of KZN. According to this argument it was Thirion
who was the unsatisfactory witness
while the flaws in the evidence of
Reid and Kajee were explained, and so forth. I find it unnecessary to
give an account of this
rather painstaking exercise. I am prepared to
accept that there is some merit in the criticism against the evidence
of Kajee and
Reid on the one hand and that of Thirion on the other.
It also seems to me that the contents of the documentary evidence
referred
to, including the correspondence, were at best inconclusive.
Yet, despite all this, I find Thirion’s version to militate so
strongly against the inherent probability that the contrary version
of Kajee, as supported by Reid, should in my view be preferred.
In
what follows I propose to motivate this finding.
[27] At the time of the
November meeting the cause of Fibalogic’s problems had not been
identified. That much is indeed underscored
by the comment in the
last paragraph of Thirion’s letter of 26 November 2001 that
‘the reason for the variation of
performance must [still] be
found’. Though both Thirion and Reid suspected KZN’s
resin, their suspicions remained unsubstantiated
by their own
extensive search for the cause. Reid, who has no apparent reason to
side with KZN, expressed the considered view as
an expert in the
field, that he would not expect the manufacturer of resin to take
responsibility for all failures of geysers for
which there was a
myriad of potential causes. Yet, on Thirion’s version, this is
exactly what Kajee undertook to do despite
his awareness of the
myriad of potential causes. Moreover, he undertook to do so out of
the blue and without any demure. According
to Thirion, Kajee did not
even seek to qualify or limit his undertaking in any respect. Even if
the increased failure resulted
from some cause entirely unrelated to
the quality of KZN’s resin, the latter would, according to
Thirion, be liable in full
after returns had reached the 2 per cent
level.
[28] What must also be
borne in mind, is that KZN’s resin was made up according to
specifications provided by Fibalogic and
certified to be in
accordance with these specifications by the SABS. In the
circumstances one would expect Kajee to argue that,
even if KZN’s
resin was found to be the cause of the increased failure rate, the
problem could lie with the specifications.
Yet, according to Thirion,
Kajee did not even try to raise this argument. In fact, he raised no
argument at all. He simply undertook
to pay. Added to all this, it
flies in the face of probabilities, I think, that Kajee would not
even try to establish the amount
of the liability KZN would have to
pay. He simply undertook to pay an indeterminate amount. In addition,
according to Thirion,
he undertook to do so for an unfixed period in
the future.
[29] With regard to the
duration of the undertaking, Fibalogic alleged in its pleadings that
KZN agreed to pay compensation in respect
of all geysers manufactured
between 13 October 2000 and 14 August 2001. As I understand it, the
first mentioned date was when Fibalogic
started to use KZN’s
resin while 14 August 2001 is the approximate date when it decided to
revert to an extra outer layer
on its 150 litre geysers. Yet,
whatever the origin of these limitations, they are not set out in the
letter of 26 November 2001.
Moreover, they do not accord with
Thirion’s evidence that, according to his understanding,
Kajee’s undertaking would
apply for as long as Fibalogic
purchased resin from KZN. On the contrary, in cross-examination he
expressly disavowed the limitation
alleged in Venfin’s
pleadings.
[30] In argument counsel
for Venfin seemed to accept that an undertaking by Kajee for an
indefinite period in the future was inherently
improbable. They
therefore reverted to the limitations alleged in Venfin’s
pleadings. When they were reminded that these
allegations were
pertinently disavowed by Thirion in evidence, their answer was that
the limitations should be regarded as incorporated
into the agreement
by way of a tacit term. However, as explained by Corbett AJA in
Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial
Administration
1974 (3) SA 506
(A) at 531-532, a tacit term is an
unexpressed provision of a contract derived from an inference as to
what both parties must have
intended. In this light, it is simply not
open to a party who expressly denied that he ever intended a
particular term to form
part of a contract, to contend that the term
must be inferred. Put somewhat differently; according to the
celebrated officious
bystander test, a tacit term can only be
incorporated if it can confidently be said that, if at the time of
the contract the officious
bystander were to ask the parties about
the existence of that term, they would both have said ‘of
course it forms part of
our contract; it is so obvious we did not
even trouble to say that; it is too clear’ (see eg
Botha v
Coopers & Lybrand
2002 (5) SA 347
(SCA) para 23). That being
so, a party who had expressly denied the existence of a particular
term can hardly suggest that the
same term was so obvious he did not
even find the need to express it.
[31] The submission to
the contrary by Venfin’s counsel, that the inherent
probabilities in fact favoured Thirion’s
version, rested on the
following three arguments:
(a) Kajee regarded
Fibalogic as a substantial client with the potential to grow even
further and he knew that if he should refuse
to give the undertaking,
KZN would probably lose that client.
(b) In August 2001, as
part of the attempts to address the problem of increased returns, KZN
agreed to supply Fibalogic, free of
charge, with resin for an
additional outer layer to its 150 litre cylinders. It was anticipated
by everybody, including Kajee,
that the additional layer would solve
the problem of the increased rate of returns in respect of cylinders
manufactured after that
date. This would substantially reduce KZN’s
potential liability in terms of the undertaking.
(c) Kajee was aware of
the fact that at some stage in the past KZN’s test equipment
was faulty and that it consequently delivered
substandard resin for
which it was responsible.
[32] I shall deal with
these three arguments individually. First, there is the argument
based on the fact that Fibalogic was a substantial
client of KZN. I
believe the answer to the argument is that, despite this fact, it
remains improbable that Kajee would risk the
potential commercial
suicide of KZN in order to retain the business of one client, albeit
a substantial one. Moreover, Kajee knew
KZN was insured against
product liability. If KZN was responsible, the insurer would probably
pay. In the event, KZN would retain
Fibalogic as a client without
incurring any financial risk. In this light it is far more likely
that Kajee would refer Fibalogic
to his insurer. Conversely, these
circumstances render it improbable in the extreme that Kajee would
shoulder liability on behalf
of KZN without even referring the matter
to the insurer. This is particularly so where Kajee appreciated that
his admission of
liability may provide the insurer with a ground for
repudiation which would frustrate his obvious way out.
[33] As to the argument
based on Kajee’s anticipation that the problem had been solved
in respect of geysers manufactured
after August 2001, I believe the
answer is at least twofold:
(a) First, this argument
would fly in the face of the appellant’s further argument that
Kajee’s undertaking was somehow
limited to geysers that were
manufactured prior to the introduction of the additional outer layer
in August 2001. If Kajee only
undertook liability for geysers that
were manufactured prior to that date, his anticipation that, in
respect of geysers manufactured
after that date there would be no
more returns, would have no effect on the extent of KZN’s
liability.
(b) Second, and more
significantly, if the problem had indeed been solved by the extra
layer, it would mean that the increased failure
rate in geysers
manufactured prior to August 2001 had nothing to do with KZN’s
resin. I say this because we know that the
extra layer had been
removed by Fibalogic in January 2000 as part of a cost saving
exercise. If the reinstatement of the extra
layer thus resolved the
problem, it would follow that the problem was caused by a deliberate
design change by Fibalogic which had
nothing to do with KZN. Taken to
its logical conclusion, acceptance of Venfin’s argument under
consideration would therefore
mean that Kajee undertook liability for
failures of geysers while anticipating an event that would
conclusively absolve KZN from
responsibility for those failures. If
anything, this renders Thirion’s version even more untenable.
[34] As to the third
argument based on Kajee’s knowledge that at some stage in the
past the resin delivered to Fibalogic was
not up to the required
standard, the answer is, in my view, quite obvious. At best for
Fibalogic one could in those circumstances
expect Kajee to accept
liability for the batch or batches of resin delivered that were not
up to standard. It would still raise
the rhetorical question why he
would accept liability for failed geysers which could not have been
manufactured with those batches
of defective resin.
[35] Finally, it seems to
me that even if Venfin had been successful in establishing the
compensation agreement, it would have been
confronted with another
obstacle which appears to be insurmountable. It is this. On Thirion’s
version it was a tacit term
of the agreement that KZN would not be
liable once it was positively confirmed that KZN’s resin was
not to blame. At the
same time Thirion agreed with Reid’s
expert opinion that, with hindsight, the problem of increased returns
was caused by
a design change and entirely unrelated to KZN’s
resin. The answer to this problem proffered by Venfin’s counsel
was
that causation was not in issue at the preliminary stage. I am
not persuaded by that answer. Once the essential element of causation
had been eliminated on the undisputed facts at the preliminary stage,
as I believe it was, it must follow that there is nothing
left to
proceed to a next stage. It is the end of the matter.
[36] For these reasons I
believe this court should endorse the court a quo’s ultimate
finding on the first issue, namely,
that Venfin had failed to
establish the compensation agreement upon which it relied for its
claim. Moreover, I believe that even
if the agreement had been
established, the claim could not succeed. It follows that in my view
the claim in convention was rightly
dismissed. This brings me to the
court a quo’s finding on the third issue which was the basis
upon which KZN’s counterclaim
was upheld.
The third issue –
did the cession agreement between Venfin and Fibalogic have the
effect of transferring KZN’s claims
against the latter to the
former
?
[37] It will be
remembered that Venfin never incurred any direct liability towards
KZN. The counterclaim against Venfin for resin
sold and delivered to
Fibalogic was founded, in the main, on the provisions of
s 156
of the
Insolvency Act 24 of 1936
, to which I shall presently return.
In the alternative, the counterclaim against Venfin relied on the
provisions of a cession agreement
between Fibalogic and Venfin which
was entered into after the close of pleadings in the action between
KZN and Fibalogic and shortly
before the liquidation of the latter.
It was on this basis that the counterclaim succeeded in the court a
quo.
[38] The pertinent
clauses of the cession agreement provided:
‘
12.1
It is recorded that the company [Fibalogic] is currently involved in
a legal dispute with KZN, one of its creditors. The company
has
instituted action against KZN in the amount of . . .
The
company hereby cedes . . . its claim against KZN to the seller
[Venfin] which cession the seller hereby accepts.
12.5
The seller hereby indemnifies the company against any loss,
liability, damage (excluding consequential damage), cost or expense
of any nature whatsoever which the company may suffer or incur as a
result of any claim made against the company by KZN for goods
and/or
services provided to the company . . . (“
indemnified loss
”).
12.8
The seller shall be obliged to pay to the company the amount of any
indemnified loss suffered or incurred by the company as
soon as the
company is obliged to pay the amount thereof.’
[39] The reasons given by
the court a quo for upholding KZN’s counterclaim on the basis
of this cession are rather terse.
From these terse reasons it would
appear, however, that the court was swayed by three considerations.
First, that a cession cannot
impose a greater burden on the debtor or
weaken the debtor’s position, the debtor, in this context,
being KZN. Second, that
at the time of the cession the directors of
Fibalogic were aware of its precarious financial position and that
the cession was
entered into with the purpose of frustrating KZN’s
counterclaim against Fibalogic. Third, that in terms of clause 12.5
of
the cession agreement, Venfin effectively stepped into the shoes
of Fibalogic by undertaking responsibility for KZN’s claim.
[40] I do not believe
that any of these three considerations can be sustained. As to the
first, it is indeed a trite principle that
a cession cannot weaken
the debtor’s position. However, any attempt to do so would
affect the validity of the cession. It
would not in itself afford the
debtor any rights against the cessionary. But, be that as it may, I
cannot see how the cession under
consideration can be said to have
weakened KZN’s position in any respect. KZN retained whatever
claim it had against Fibalogic.
The fact that after liquidation it
only had a concurrent claim did not result from the cession. It
resulted from the liquidation.
In the absence of the cession
agreement, KZN’s position would have been no better. Lastly, in
any event, the court a quo
found, under the rubric of the first
issue, rightly in my view, that Fibalogic had no claim against KZN,
which means that KZN did
not even qualify as a debtor of the cedent.
[41] As to the second
consideration, there is no evidence that the cession was entered into
in order to frustrate KZN’s claim.
On the contrary, the cession
formed part of a much larger transaction involving, in the main,
Venfin’s sale of its shareholding
in Fibalogic to a third
party. In any event, if that was the purpose of the cession, that
purpose had not been achieved. As I have
said, KZN’s position
with regard to its claim against Fibalogic, remained exactly the
same. Assertions of a potentially frustrated
reliance on set-off by
KZN, raised by its counsel in argument, were inapposite. Set-off is a
shield not a sword. Absent a valid
claim by Fibalogic against it, KZN
required no shield.
[42] The answer to the
third consideration based on clause 12.5 of the cession, is that the
provisions of the clause are exclusively
for the benefit of
Fibalogic. They bestowed no right on KZN. As a matter of law,
Fibalogic’s obligations to KZN could only
have passed to Venfin
by way of a delegation, which would require a tripartite agreement
between the creditor (KZN), the debtor
(Fibalogic) and the assignee
(Venfin). No agreement of delegation was either pleaded or
established in evidence by KZN. It follows
that in my view the court
a quo had erred in allowing the counterclaim on the basis that it
did. This brings me to the second issue.
The second issue –
did the indemnity furnished by Venfin to Fibalogic render it liable
to KZN for Fibalogic’s indebtedness
under
s 156
of the
Insolvency Act 2
4 of 1936
?
[43] It will be
remembered that the issue arose from KZN’s allegation that
Venfin was liable to it for the debt of Fibalogic
by virtue of
s 156.
It remains to be said that, because Fibalogic was wound up for
inability to pay its debts, s 339 of the Companies Act 61 of
1973 rendered the provisions of the law relating to insolvency,
applicable. The court a quo dismissed KZN’s claim based on
s 156 with costs. The adverse costs order, in turn, gave rise to
the cross-appeal. The provisions of s 156 read as follows:
‘
Insurer
obliged to pay third party’s claim against insolvent
156.
Whenever any person
(hereinafter called the insurer) is obliged to indemnify another
person (hereinafter called the insured) in
respect of any liability
incurred by the insured towards a third party, the latter shall, on
the sequestration of the estate of
the insured, be entitled to
recover from the insurer the amount of the insured’s liability
towards the third party but not
exceeding the maximum amount for
which the insurer has bound himself to indemnify the insured.’
[44] Venfin’s
answer to the claim, which found favour with the court a quo, was
that s 156 applies only to the liability
of an insurer –
properly so called – to a third party under a policy of
(indemnity) insurance. Since Venfin is not
an insurer properly so
called, Venfin argued, the section finds no application. KZN’s
reposte to that answer was that the
wide wording of s 156 does
not warrant the restriction on its application that Venfin’s
argument seeks to impose. In
support of this counter argument, KZN
referred to the wide wording of the section – ‘
any
person
’ who is obliged to indemnify ‘
another
person
’ in respect of ‘
any liability
’.
The references to ‘insurer’ and ‘insured’ in
the section, so KZN’s argument went, were clearly
for ease of
reference only. The legislature might as well have used any other
term such as ‘the indemnifier’, in its
stead. Had the
legislature intended to impose the limitation contended for by
Venfin, so KZN’s argument proceeded, it would
have referred
specifically to the situation where ‘an insurer’ was
obliged to indemnify ‘an insured’ in
terms of ‘any
contract of insurance’. In further support of its argument, KZN
referred, by way of comparison, to corresponding
legislation in
England (the Third Party (Rights Against Insurer) Act 1930, s 1)
and in Australia (the Bankruptcy Act 1966,
s 117) where the statutory
measures akin to our s 156 are expressly reserved for contracts
of indemnity insurance.
[45] Though these are
undoubtedly weighty arguments, difficulties flow from the reference
to ‘insurer’ and ‘insured’.
It is true that
on the face of it, the use of these terms could be understood as
merely for ease of reference. But they are well
recognised terms of
art. What is more, a contract of indemnity is wide enough to cover an
indemnity insurance policy. In the parlance
of natural science,
indemnity contracts can thus be described as the genus of which
indemnity insurance is one of the species.
The effect, as I see it,
is this: by referring to the person liable as ‘the insurer’
instead of, for example, the ‘indemnifier’,
or for that
matter, a neutral term such as ‘the pumpkin’, the
legislature appears to limit the wide meaning of ‘any
person’
or ‘any indemnifier’ to the specific form of indemnity
provided by an insurance policy. Stated somewhat
differently, the
definition of the genus by reference to one of the species renders
the section capable of the limited interpretation
that it only
applies to that species. In addition, the heading of the section also
directs the focus at the species. By all accounts,
the section is
therefore ambiguous. The loose and imprecise language used left its
meaning uncertain.
[46] History seems to
support the limited interpretation contended for by Venfin. Section
156 has been in existence, in unamended
form, for 75 years. Over that
period the section has been uniformly referred to, both in judicial
pronouncements and in insolvency
textbooks, in the context of
insurance contracts only (see eg
Le Roux v Standard General
Versekeringsmaatskappy Bpk
2000 (4) SA 1035
(SCA);
Coetzee v
Attorneys’ Insurance Indemnity Fund
2003 (1) SA 1
(SCA); E
Bertelsman et al
Mars The Law of Insolvency in South Africa
(9
ed) para12.16; Meskin
Insolvency Law
, para 5.3.2.2). But, as
was rightly pointed out by KZN, it has thus far not been pertinently
held that the section has no application
outside the ambit of
insurance contracts. The reason for the restriction in the practical
application of the section may be, as
suggested by KZN, that
coincidentally the decided cases only dealt with factual situations
which involved insurance policies. The
conclusion appears to be
justified, however, that over a period of 75 years, commercial
practice in this country survived without
the extension of s 156
beyond insurance policies.
[47] From a purposive
perspective, the question is what goal was s 156 intending to
achieve? With reference to insurance policies,
the effect of s 156
had been explained by this court against the background of the
position in common law (see eg
Le Roux v Standard General
Versekeringsmaatskappy Bpk supra
1046J-1047G). At common law, a
contract of indemnity brings about a contractual link between the
indemnifier and the indemnified.
There is no privity of contract
between the indemnifier and the third party. That also holds true for
an indemnity brought about
by an insurance policy. The third party
therefore has no direct claim against the insurer, even if the
insured should be sequestrated
before it could settle the third
party’s claim. In the absence of s 156, the third party
would in that event have to
prove a claim against the insolvent
estate of the insured and be content with whatever dividend is paid
to concurrent creditors.
The insured’s rights under the policy,
on the other hand, would vest in the trustee who would claim from the
insurer for
the benefit of the general body of creditors. Section 156
allows the third party, as it were, to leapfrog the
concursus
of
creditors and to claim the full amount of the insurance policy
directly from the insurer.
[48] The underlying
purpose of the mechanism created by s 156 is best understood
when it is borne in mind, as pointed out by
J P van Niekerk (‘The
Scope of Application of
Section 156
of the
Insolvency Act: Within
or
Beyond the Realm of Indemnity (Liability) Insurance Contracts?’
(2010) 22
SA Merc LJ
453 at 461) that it was ostensibly
introduced at the time when compensation for motor vehicle accidents
was dependent on the negligent
driver having liability insurance
cover. In this situation there was a clear need to protect the
victims of motor vehicle accidents
in the event that those against
whom they had their claims became insolvent.
[49] One thing that is
clear about the meaning of
s 156
, however, is that it is not
limited to motor accident insurance, but that it at least extends to
all liability insurance policies.
In this light, KZN argued, the
policy consideration as to why the third party should be allowed to
leapfrog the insolvent estate
of an insured, apply with equal force
to an indemnity provided otherwise than by way of insurance. I do not
believe, however, that
this is necessarily so. In the present
context, the essential elements of an indemnity insurance policy, as
I see it, are these:
(a) The insurer
undertakes, in return for the payment of an agreed premium, to pay a
certain amount to the insured in the uncertain
event of the latter
incurring liability of a circumscribed kind to a third party.
(b) The insurance is, at
least partly, for the benefit of the third party and not for the
benefit of the insured’s creditors
who fall outside the
circumscribed category.
(c) The policy is a
discreet contract of which the undertaking by the insurer constitutes
the main purpose.
[50] Analysed in this way
it is apparent that the application of the common law principles
would in the event of the insured’s
sequestration destroy the
whole purpose of the indemnity insurance. Though the insurer still
has to pay, the third party, who was
intended to benefit, is left
with the cold comfort of a concurrent claim. Conversely, other
creditors who were not intended to
benefit from the insurance will
receive a windfall by sharing in the proceeds of the policy. The same
considerations of policy
do not necessarily apply outside the field
of insurance. As I see it, this is illustrated by the facts of this
case. Venfin received
no separate benefit in exchange for the
indemnity it gave. The undertaking to indemnify Fibalogic in the
event of a claim by KZN,
was not the main purpose of a separate
agreement. It formed part of a much larger transaction. The
undertaking was not intended
for the benefit of KZN – with whom
Venfin and Fibalogic were already at loggerheads at the time –
but solely for the
benefit of Fibalogic. In terms of clause 12.8
(referred to in para 38 above) Venfin’s liability would only
arise once Fibalogic
was actually obliged to pay. Because KZN did not
proceed with its claim against Fibalogic, the liquidator of the
latter will not
have any claim against Venfin. In sum, the
application of common law principles to these facts therefore leads
to an end result
which accords with the purpose of the undertaking.
Venfin, who received no separate benefit for giving the undertaking,
does not
have to pay. The other creditors of Fibalogic receive no
windfall. KZN, who was not intended to benefit from the undertaking,
is
no worse off. Its position is the same as that of any other
unsecured creditor against the company in liquidation. Conversely, if
Venfin were to be held liable to KZN under
s 156
, it would mean
that the section bestowed a windfall of security on KZN for which it
had never bargained nor paid.
[51] Lastly, from a
policy perspective, I find it significant that in the other
jurisdictions referred to by KZN in argument, legislative
measures
akin to our
s 156
are limited to indemnities brought about by
insurance policies. In those countries the legislatures therefore
concluded that policy
considerations do not require these measures to
extend beyond the sphere of insurance. Apart from considerations of
policy, I am
swayed towards the interpretation of
s 156
contended for by Venfin by a departure from the well recognised
premise that an ambiguous statutory provision, such as this, must
be
construed in a way that causes the least interference with common law
principles.
[52] This leads me to the
conclusion that the court a quo was right in dismissing KZN’s
claim based on
s 156
and by ordering it to pay the costs
resulting from this issue.
[53] A further
consequence of the finding that KZN’s reliance on
s 156
was unfounded is that its counterclaim should have been dismissed
with costs. As I see it, the result of all this is that, while
the
appeal should be partly successful – to the extent that it
results in the dismissal of KZN’s counterclaim –
the
cross-appeal should fail. In both cases I can see no reason why costs
should not follow the event and why it should not be
inclusive of the
costs of two counsel. Save for the following reservation: I believe
that, but for the unsuccessful part of Venfin’s
appeal relating
to the dismissal of its claim in convention, no more than 10 per cent
of the record would have been required for
the proper adjudication of
the matter by this court. In this light, Venfin’s costs
pertaining to the record recoverable from
KZN should, in my view, be
restricted to 10 per cent.
[54] The following order
is made:
1. The appeal is upheld.
The order of the court a quo is set aside and replaced with the
following:
“
(a)
The plaintiff’s claim is dismissed with costs, including the
costs of two counsel.
(b) The defendant’s
counterclaim is dismissed with costs, including the costs of two
counsel.”
2. The respondent is
ordered to pay the appellant’s costs of appeal including the
costs of two counsel, but the costs pertaining
to the record is
restricted to 10 per cent thereof.
3. The cross-appeal is
dismissed with costs.
………………………
.
F D J BRAND
JUDGE OF APPEAL
Counsel
for Appellants: J G Dickerson SC
A
Smalberger
Instructed
by: Edward Nathan Sonnenbergs
DURBAN
Correspondents:
Matsepes Inc
BLOEMFONTEIN
Counsel
for Respondent: G Harpur SC
U
Lennard
Instructed
by: Lockhat & Associates
DURBAN
Correspondents:
Lovius Block Attorneys
BLOEMFONTEIN