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[2017] ZAFSHC 163
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Oosthuizen v Castro (2858/2012) [2017] ZAFSHC 163; [2017] 4 All SA 876 (FB); 2018 (2) SA 529 (FB) (18 September 2017)
IN
THE HIGH COURT OF SOUTH AFRICA,
FREE
STATE DIVISION, BLOEMFONTEIN
Reportable:
YES
Of
Interest to other Judges: YES
Circulate
to Magistrates: NO
Case
number: 2858/2012
In
the matter between:
OOSTHUIZEN,
MARISA
VOGEL
Plaintiff
and
CASTRO,
JOSE FRANSISCO
Defendant
And
CENTRIQ
INSURANCE COMPANY LTD
Third Party
HEARD
ON:
9 & 10 MAY 2017
JUDGMENT
BY:
DAFFUE, J
DELIVERED
ON:
18 SEPTEMBER 2017
I
INTRODUCTION:
[1]
The following warning of Schutz JA in
Durr
v Absa Bank Ltd & Another
1997
(3) SA 448
(SCA) at 453 D applies
in
casu
as
well. The learned Judge of Appeal said:
“
Hindsight
is not vouchsafed the common man as he picks his course through
life. This must be kept constantly in mind in a
case like this
one, where all is so obvious now.
[2]
In casu,
the
court is confronted with mainly two issues, the one relatively
evident although the warning
supra
will be
heeded, but the other is far more vexed and contentious. The
case is about the loss sustained by a widow who invested
a large sum
of money on the advice of a financial services provider (“FSP”)
and an insurance company’s obligation
to indemnify the FSP.
I shall interchangeably refer to FSP and broker, the reason being
that the term broker, or insurance
broker, is used by authors on
insurance law and in many judgments. The terms
“
financial
services provider”
or
“
intermediary
services”
were
seldom if ever used prior to the promulgation of the
Financial
Advisory and Intermediary Services Act, 37/2002 (“the FAIS
Act”).
[3]
A Sharemax investment that turned out to be lamentably bad triggered
the litigation.
II
THE PARTIES:
[4]
Plaintiff is Marisa Vogel Oosthuizen, a female presently residing in
Langebaan, Western Cape, formerly from the Vrede district
in the Free
State Province. She has been represented in the proceedings
before me by Adv JF Mullins SC, duly instructed by
Honey Attorneys,
Bloemfontein.
[5]
Defendant is Jose Fransisco Castro, a FSP duly licensed to act as
such in accordance with the FAIS Act with business and residential
address in Vrede, Free State Province. Adv PJJ Zietsman
appeared for defendant, duly instructed by Blair Attorneys,
Bloemfontein.
[6]
The third party is Centriq Insurance Company Ltd (“the
insurer”), who provided professional indemnity insurance
to
defendant as a member of the Financial Intermediaries Association of
South Africa. Advv CE Watt-Pringle SC and C Bester
appeared for
the insurer, duly instructed by Andre Muller & Associates, c/o
McIntyre & Van der Post, Bloemfontein.
III
THE PLEADINGS:
[7]
I shall briefly set out the allegations contained in the pleadings,
but wish to emphasise that it soon became apparent during
the hearing
that only two aspects remained in contention as set out in paragraph
2
supra.
The
particulars of claim:
[8]
It is plaintiff’s case that she and defendant entered into a
written agreement in terms of which defendant advised her
generally
in respect of investment, and in particular to invest R2 million in
the form of an investment offered by Sharemax Investments
(Pty) Ltd
(“Sharemax”) in respect of a scheme described as THE
VILLA RETAIL PARK HOLDINGS 2 held in a company, THE
VILLA RETAIL PARK
HOLDINGS 2 LTD (“The Villa”).
[9]
As a result of the failure of the Sharemax investment and no
prospects of making any recovery, plaintiff claimed damages in
the
form of loss of capital of R2 million together with
mora
interest
on the capital amount from date of investment, less an amount of
R1 400.00 received, alternatively R2 838 600.00
being
the capital of the investment and a yield based on 7%
per
annum
over a
period of six years, together with
mora
interest
from 27 July 2016 to date of payment and costs as between attorney
and client.
[10]
Plaintiff’s claim is based on defendant’s alleged breach
of his contractual duties in several instances, some of
which are the
following:
1.
Defendant failed to act honestly and fairly in the interest of
plaintiff in recommending the Sharemax
investment;
2.
Defendant misrepresented to plaintiff that media criticism of
investments in Sharemax was motivated by
envy insofar as the
criticism was intentional, negligent and not honest and fair;
3.
The Sharemax investment was not in keeping with plaintiff’s
risk profile which required minimal
risk whereas the investment in
Sharemax was an investment of very high risk;
4.
Defendant failed to furnish objective financial advice to plaintiff
appropriate to her needs and interest;
5.
Defendant knew that plaintiff required a safe investment, but advised
her to make the Sharemax investment
when he ought to know by taking
reasonable care that the Sharemax investment was a very high risk
investment;
6.
Defendant failed to exercise the degree of skill, care and diligence
to be expected of an authorised
financial services advisor furnishing
investment advice.
Defendant’s
plea
:
[11]
Defendant admitted the agreement relied upon by plaintiff and that he
had given financial advice of a general nature, but pleaded
that
plaintiff elected to make the investment in Sharemax notwithstanding
the fact that he had drawn her attention to a recent
negative article
pertaining to Sharemax in the Rapport newspaper. Any alleged
breach of contract was denied.
The
third party notice
:
[12]
Although defendant’s plea was filed on 8 October 2012, it filed
a notice in terms of Rule 13 of the Uniform Rules of
Court some two
and a half years later,
i.e.
on 30 February 2015 only. A
formal application for condonation and joinder of the insurer was
required. An appropriate
order was made on 5 March 2015, but
the costs were reserved for later adjudication. Defendant
claimed indemnity from the
insurer and in so doing relied on the
written insurance contract entered into between him and the insurer.
The
third party’s defence:
[13]
The insurer admitted the contract between it and defendant and that
it undertook to indemnify defendant against losses arising
out of
inter alia
any legal liability arising from claims made
against the defendant and reported to the insurer during the period
of insurance in
connection with the business of defendant by reason
of any negligent act, error, or omission committed in the conduct of
the business
by the defendant. However, it denied liability to
indemnify defendant, averring that defendant’s claim fell
within
the parameters of the exclusion clause contained in the
insurance contract with specific reference to clause 3(ii).
[14]
Clause 3(ii) of the insurance contract relied upon by the insurer
reads as follows:
“
The
Insurers shall not indemnify the Insured in respect of any loss
arising out of any claim made against them
1…….
2…….
3
(i)……
(ii)
in respect of any third party
claim
arising from or contributed to by depreciation
(or failure to appreciate)
in
value of any investments
,
including securities, commodities, currencies, options and futures
transactions,
or
as a result of any actual of alleged representation, guarantee or
warranty
provided by or on behalf of the Insured
as
to the performance of any such investments.
It is agreed however that
this
Exclusion shall not apply
to any loss due solely
to
negligence on the part of the Insured
or
Employee of the Insured
in
failing to effect a specific investment
transaction
in
accordance with the specific prior instructions of a client
of the Insured.”
(emphasis
added)
IV
AGREEMENTS AND INTRODUCTORY SUBMISSIONS:
[15]
Mr Mullins presented me with written introductory submissions in
terms of Rule 39(5) in support of his opening argument.
I do
not intend to deal with those submissions at this stage, but will do
so when the evidence and arguments are evaluated
infra
.
[16]
I was provided with five bundles marked exhibits “A” to
“E”, being the trial bundle, a photo bundle,
a bundle
containing extracts of newspapers articles, an insurance bundle and
an experts’ bundle respectively. The usual
status applied
to the documents contained in the bundles,
i.e.
that they are what they purport to be without admitting the contents
thereof to be true and correct.
[17]
Mr Mullins mentioned that the defendant could not concede liability
in respect of plaintiff’s claim as a result of condition
5 of
the insurance contract entered into between him and the insurer which
provides that the insured shall not make any admission
in respect of
any claim against him without the written consent of the insurer.
However, defendant would not contest plaintiff’s
evidence.
Therefore the third party was invited to waive such condition so that
the trial could continue in order for the
court to adjudicate whether
the insurer is liable to indemnify defendant and nothing else.
This invitation was declined.
[18]
Mr Mullins made it clear that in the event of the insurer not be
prepared to waive condition 5, plaintiff will ultimately ask
punitive
costs against the insurer. Mr Zietsman confirmed that defendant
could not, and therefore did not, concede liability,
but that
defendant would not contest his liability any further. Mr
Watt-Pringle stated that the third party only heard that
morning that
defendant would not put up a defence against plaintiff’s claim,
but that the insurer was not prepared to waive
condition 5.
[19]
The parties handed me a written agreement in respect to the
quantum
of plaintiff’s damages which agreement I made an order of court
by consent. The full agreement reads as follows:
“
The
parties (Plaintiff; Defendant; Third party) agree as follows on the
Plaintiff’s
damages
as against the Defendant:
1.
They
agree that the capital investment is lost, i.e. that there are no
prospects of recovery thereof;
2.
They
agree further that the Plaintiff has suffered damage (if breach of
contract or of duty of care is proven, which is still in
dispute) as
follows:
2.1
The
capital of R2 000 000,00;
2.2
With
reference to paragraphs 26 and 27 of the Rule 36(9)(b) summary of Mr
Heystek (pp 34 - 35 of the Experts Bundle), the return
which the
Plaintiff would have made had she invested the capital in a
relatively safe investment for the mean period of 6 years,
at the
mean rate of the returns mentioned by Mr Heystek (6% - 8%), i.e. 7%
less
the R1 400,00 received on 3 August 2010.
3.
Questions
of mora interest are for the court to determine.”
V
COMMON CAUSE FACTS:
[20]
I shall deal with some of the documents referred to under this
heading again when I evaluate the evidence infra, but for purposes
of
providing the reader with a background, I deem it necessary to refer
to documentary evidence which is not in dispute.
Plaintiff’s
evidence is largely uncontested insofar as she was not cross-examined
at all by defendant’s counsel and
Mr Watt-Pringle on behalf of
the insurer merely tried to obtain concessions from her in support of
the insurer’s defence
against defendant, i.e. to hopefully show
that the defendant’s conduct fell within the purview of the
exclusion clause.
The following is therefore common cause:
1.
Plaintiff obtained a diploma in higher education where after she
taught for approximately twelve years.
2.
In 2001 she married a farmer, Mr Oosthuizen and one child, Benjamin,
was born out of the marriage.
3.
On 13 March 2010 Mr Oosthuizen (‘the deceased”) was
killed in a shooting incident, leaving
the plaintiff a widow with the
two and a half year old Benjamin.
4.
A policy on the life of the deceased paid out to plaintiff, the
proceeds being the amount of R3.4 m of
which she set aside R2 m
to invest for the future, kept R300 000,00 as a reserve fund and
used the balance to purchase
calves.
5.
She was in a bad emotional state, being confronted with lack of money
immediately after the death of
her husband and prior to the pay-out
of the policy. The executor of the deceased’s estate even
cancelled payment of
the medical aid premiums and she had to borrow
money from her brother to take care of herself and her son. On
27 July 2010,
i.e. four and a half months after she was widowed, she
had a meeting with defendant who advised her how to invest the amount
of
R2 m.
6.
Plaintiff did not have any experience at all regarding financial
products and relied on defendant whom
she trusted as he was the
deceased’s broker prior to his death.
7.
During the consultation and after accepting the advice given by
defendant, he filled out various forms
which were signed by plaintiff
and counter-signed by defendant. These are not in contention
and were also attached to the
particulars of claim as Annexures ”A”
– “E”. The following appears from the one
document under
the heading “
Behoefte
Ontleding”
(in
English: Needs Analysis).
“
1.5.1
Indien wel, hoeveel inkomste benodig u?: Maksimum met lae
risiko. (
Maximum
with low risk.)
(T
he
answer is in defendant’s handwriting
.)
“
8.
Enige addisionele oorwegings wat in ag geneem moet word ten opsigte
van u beleggings?
Om ‘n veilige hoë inkomste
belegging aan te gaan. (
To
make a safe high income investment). (The answer is again in
the handwriting of defendant.)
8.
The “
Advies
en Tussengangersooreenkoms”
(Advice
and Intermediary Agreement) stipulates as follows and I merely quote
the provisions specifically relied upon by counsel:
“
4.2
Waarborge (indien van toepassing):
4.2.1
Die kliënt verstaan dat die beleggings kapitaal nie gewaarborg
is nie.
Die
adviseur sal egter die beste van sy vermoë doen om ‘n
veilige belegging namens die kliënt te maak
.
(
The
advisor shall do his best to make a safe investment on behalf of the
client.)
4.4.3
Hierdie
portefeulje se oogmerk is om hoër beleggingsopbrengste te behaal
oor die langtermyn, wat hoër beleggingsrisiko
teweegbring
(potensiële verliese oor die kort termyn) en dus nie met meer
stabiele portefeuljes vergelyk kan word nie;
4.4.4
Die kliënt verstaan dat, om die beleggingsopbrengs te behaal is
dit nie moontlik om die beleggerskapitaal
of teikenopbrengs te
waarborg nie.”
9.
Plaintiff testified that she made it clear to defendant that she
could not risk losing even two
cents as the money was earmarked for
her son’s upbringing.
10.
She was referred to an article that appeared in the Rapport newspaper
that was severely critical of investments
in Sharemax Products, but
was comforted by defendant that several people were merely jealous
and that the criticism did not hold
any water. She was informed
that the investment was
“
in
property”
and
that
“
property
cannot disappear”
.
11.
Defendant did not explain any other investment products to plaintiff
and emphasized that the recommended investment
was so good that he
did not even want to introduce other financial instruments and/or
investments to her.
[21]
Several prominent writers on financial matters, including the award
winning journalist, the late Mr Deon Basson, criticised
the Sharemax
investment strategy over many years. As early as 26 May 2004
Basson wrote for the Beeld, an Afrikaans daily
newspaper, based on
queries received from investors who invested in Sharemax schemes and
had lost their capital. He warned
against property syndication
schemes such as Sharemax and PIC and any person reading financial
magazines and the business sections
of newspapers will know what
eventually happened to these schemes. Another negative article
was written in Moneyweb of 22
November 2007. Noseweek published
an article in January 2008, mainly relying on the late Mr Basson’s
investigations
wherein he referred to the apparent lack of
transparency in respect of Sharemax property syndications. Mr
Vic de Klerk, an
eminent author on investment products, wrote an
article in Finweek of 8 July 2010, a weekly publication which every
FSP should
read, under the heading “
House
of cards collapsing”
.
He specifically targeted investments in The Villa and wrote,
based on prospectuses received, that Sharemax as promotor had
received R1.44bn from the public over two years and that another
R2.25bn was needed to complete the shopping mall, hopefully by
the
end of September 2011. He also referred to the instructions of the
Registrar of Banks to Sharemax to discontinue its method
of financing
which was in violation of the Banks Act as deposits were taken from
investors. The cut-off date was 15 July
2010. De Klerk
had the following advice for FSP’s:
“
To
the marketers of the shares on behalf of Sharemax – of course,
you’re all registered with the Financial Services
Board (FSB) –
also just a small warning. The Reserve Bank and the registrar
aren’t too happy with the product
you’re offering.
Everyone knows that now,… For your own future careers it may
just be a good thing to mention
that to your clients, even if it
reduces your chances of earning that attractive 6% commission.”
Mr
Jacques Pauw also wrote a similar article for the City Press of 25
July 2010 and he and Ms Anna-Maria Lombard’s article
to the
same effect appeared in the Rapport of 24 July 2010, the article
which defendant was well aware of, stating that tens of
thousands of
investors might have lost their investments in Sharemax. In his
evidence the financial expert, Mr Magnus Heystek
confirmed the
figures received and still needed to complete the shopping complex.
This was never contested.
[22]
It is significant to mention some of defendant’s responses to
plaintiff’s request for further particulars for purposes
of
trial, especially bearing in mind the fact that he decided neither to
testify, nor to cross-examine plaintiff:
1.
In response to a question whether or not defendant offered any
comment or observation regarding the newspaper
article in the Rapport
he replied as follows:
“
2.1
Ja. Verweerder het gesê dat die eiseres nie daaroor hoef
te bekommer nie, aangesien hy reeds met Sharemax in verbinding
getree
het, asook dit met sy konsultant bespreek het en dat hulle aan
hom bevestig het dat dit net nog ‘n aanslag soos
vele vantevore
was en dat geen van die inligting waar en korrek is nie.”
2.
At
the end of paragraph 3 of the reply defendant responded as follows:
“
Deur
al die ondervinding en die vertroue sedert 2003 in berekening te
bring, tesame met die maatskappy se rekord, was daar min,
indien
enige, opsies wat kon kers vashou by Sharemax.”
3.
Plaintiff requested further answers from
defendant in her rule 33(4) questionnaire served on 14 June
2013,
about three years after the investment was made. Even at that
stage, and notwithstanding the benefit of hindsight,
defendant
reiterated that an investment in Sharemax was a low risk investment,
bearing in mind the history of Sharemax, and also
that it was a safe
investment.
[23]
It is common cause that plaintiff invested an amount of R2 m as
advised by defendant and that, save for an amount of R1 400.00
that she received in August 2010, she received no further interest
and/or dividends and that the total amount of the capital has
been
lost.
[24]
Defendant was appointed as representative of the Unlisted Securities
South Africa FSP Network (Pty) Ltd (t/a USSA) in order
to render
financial services regarding unlisted securities such as the
financial instruments provided by Sharemax.
Defendant is also licensed as a FSP with the Financial Services Board
in terms of s 8 of the FAIS Act with effect from 10 June
2008.
[25]
Defendant entered into a professional indemnity insurance contract
with the insurer, one of the insured events being professional
indemnity to the limit of liability of R2.5m per claim, subject to
payment of an excess in the amount of R10 000.00.
It is
this contract that contains the exclusion clause referred to
supra
and which clause is the real bone of contention in the matter.
[26]
Mr Magnus Heystek, an eminent business and investment journalist and
investment strategist, gave expert evidence in respect
of several
aspects; in particular whether the conduct of defendant complied with
that which could be expected of a financial advisor
(or FSP as I
throughout this judgment refer to these persons) in the
circumstances, and if not, what type of investment a reasonable
financial advisor ought to have suggested in the circumstances.
His expert summary provided in terms of Rule 36(9)(b) was
presented,
largely as his evidence in chief as agreed to by counsel, whereupon
he was cross-examined by Mr Watt-Pringle with the
apparent intention
to show that so-called safe investments are not necessary safe, with
reference to
inter
alia
banking
institutions that have been liquidated, causing investors to lose
money. I do not intend to say anything more about
Mr Heystek
evidence at this stage, but shall deal with it more fully during my
evaluation of the evidence.
VI
LEGAL PRINCIPLES AND AUTHORITIES:
[27]
I intend to firstly mention the legal principles and authorities
pertaining to the liability of a financial advisor or broker,
throughout herein referred to interchangeably as a broker or a FSP.
The
locus
classicus
is
Durr
supra
.
The
Durr
-judgment
preceded the FAIS Act by several years, but notwithstanding that, the
principles set out in
Durr
are
still relevant and to a great extent accepted by the legislature if
the wording of the FAIS Act is considered. In
Durr
Schutz JA said the following on p 455 I-J:
“
Just
about everything that Stuart told the Durrs about Supreme was wrong,
not that he knew it, but because he had allowed himself
to be misled,
as many others also had been, by a series of deceits.”
The
broker assured the plaintiff, Ms Durr, that the investment was
entirely safe.
[28]
Schutz JA dealt with the duties of a financial advisor or broker such
as the defendant
in
casu
in
no uncertain terms at pp 460 F - 462 D and I quote selectively:
“
What
did the law expect of Stuart and ABSA?
Imperitia
culpae adnumeratur
,
says
D
50.17.132
- lack of skill is regarded as culpable. That much is accepted by the
respondents. But how much skill, they say.
We have shown all the
skill that an 'ordinary' or 'average' broker, or a bank employing
such a one, need show. What more can be
asked of us?
Two
questions arise in this case. (1) In general, what is the level of
skill and knowledge required? (2) Is the standard required
in judging
that level that of the ordinary or average broker at large, or is it
that of the regional manager of the broking division
of a bank
professing investment skills and offering expert investment advice?
The
answer to the first question is found in the judgment of Innes CJ
in
Van Wyk v Lewis
1924 AD 438
at 444 with
reference, as it happens, to medical practitioners:
'It
was pointed out by this Court, in
Mitchell
v Dixon
(1914
AD at 525), that "a medical practitioner is not expected to
bring to bear upon the case entrusted to him the
highest
possible degree of professional skill, but he is bound to employ
reasonable skill and care". And in deciding what
is reasonable
the Court will have regard to the general level of skill and
diligence possessed and exercised at the time by
the
members of the branch of the profession
to
which the practitioner belongs. The evidence of qualified surgeons or
physicians is of the greatest assistance in estimating
that level.'
(Own
emphasis.)
'But
the decision of what is reasonable under the circumstances is for the
Court; it will pay high regard to the views of the profession,
but it
is not bound to adopt them.'
(At
448.)
However,
the second question is less easy - whether the standard is set by the
broking community at large or by a much smaller group
of which Stuart
is a representative. The Court below opted for the wider and
therefore less strict test, …
(which
the SCA criticised and eventually rejected)
In
his evidence Stuart affirmed that he was content that his conduct be
measured against the standard of an expert financial and
investment
advisor.
(When
examining the testimony of the expert witness called by Stuart and
Absa, Schutz JA continued as follows:)
He
(the
average broker)
would
not ask for financial statements, and if provided with them would not
be able to read them; he would not know that a
prospectus is
required for a public offer, or how a prospectus differs from glossy
marketing material; he would take a 'secured
debenture' certificate
at face value; he would be misled by misleading brochures
and advertisements such as were issued by
Supreme; and,
critically for this case, he would not have the skills to analyse or
assess 'institutional risk'. This expression
is used to denote the
soundness or creditworthiness of a prospective debtor. It is used by
Wessels in contrast to
'product
risk'. A 'product' is part of a broker's stock in trade, like an
endowment policy or a fixed deposit. That falls within
the 'typical
broker's' sphere of competence. But institutional risk is quite
beyond him. This means, in plain English, that
if he is advising a
client to lend money to a new debtor, he lacks the skill to assess
the debtor's creditworthiness. That provokes
the immediate question
whether he should recommend the debtor, without warning his client of
his own incapacity.”
At
p 464 A Schutz JA proceeded as follows:
“
I
conclude that the appropriate standard is that of the regional
manager of the broking division of a bank professing investment
skills and offering investment advice.”
[29]
At p 469 E Schutz JA referred to the
“
warning
signs, if not flashing lights.”
Finally,
at p 469 H-I the learned judge commented as follows in respect of the
broker in that matter:
“
Either
he had to forewarn the Durrs where his skills ended, so as to enable
them to appreciate the dangers of accepting his advice
without more
ado, or he should not have recommended Supreme.
What
he was
not
entitled
to do was to venture into a field in which he professed skills which
he did not have and to give them assurances
about the soundness of
the investments which he was not properly qualified to give.”
(emphasis
added)
[30]
Jackson & Powell
On
Professional Liability
8
th
ed at para 15-022 mention the following pertaining to the reasonable
care and skill to be exercised by a broker:
“
In
common with other providers of relevant services acting in the course
of business, a provider of financial services will be under
an
implied if not express contractual duty to exercise reasonable care
and skill in carrying out the services required of him.
The
standard of care and skill will be, at least in most respects, that
to be expected of a like provider engaged to provide the
relevant
services.”
[31]
Simpson (Gen Ed) Professional Negligence and Liability (Informa,
2016) state the following at para 12.55:
“
The
contract between the advisor and the client will include an implied
term if not an express one, that the advisor will carry
out his
mandate and the tasks associated with it with reasonable skill, care
and diligence. He must exercise that degree
of skill, care and
diligence that would be exercised in the ordinary and proper course
of a similar business and employ the skill
usual and necessary in the
business for which he receives payment.”
[32]
As mentioned, since
Durr
the FIAS Act has been promulgated, the date of commencement being 15
November 2002. I quote the following relevant parts
of s 16 of
the FAIS Act:
“
Principles
of code of conduct
1.
A
code of conduct must be drafted in such a manner as to ensure that
the clients being rendered financial services will be able
to
make informed decisions
,
that their reasonable financial needs regarding financial products
will be appropriately and suitable satisfied and that for those
purposes authorised financial services providers, and their
representatives,
are
obliged by the provisions of such code to
(a)
act
honestly
and fairly, and with due skill, care and diligence
,
in the interests of clients and the integrity of the financial
services industry;
(b)
……
..
(c)
seek
from clients appropriate and available information regarding their
financial situations, financial product experience and objectives
in
connection with the financial service required;
(d)
act
with circumspection and treat clients fairly in a situation of
conflicting interests;
(e)
comply
with all applicable statutory or common law requirements applicable
to the conduct of business.
2.
A
code of conduct must in particular contain provisions relating to –
a.
the
making
of adequate disclosures of relevant material information
,
including disclosures of actual or potential own interests, in
relation to dealings with clients;
b.
…
c.
avoidance
of
fraudulent
and
misleading
advertising, canvassing and marketing
;
d.
…
.
e.
…
eA.
…
f.
…..”
(emphasis
added)
[33]
A code of conduct has been promulgated as well as several amendments
thereto to give effect to the provisions of s 16 of the
FIAS Act.
I do not think it is necessary to deal with any of the provisions
contained in the Code. I believe it is
necessary to record that
registration in terms of FAIS is now required for persons venturing
into the business of insurance brokers
and financial advisors.
Much more professionalism is now required by the legislature, all in
the interest of the public,
than was the case when
Durr
was
decided.
[34]
“
Advice”
is
defined in s 1 of the FIAS Act to mean
“
subject
to subsection 3(a), any recommendation, guidance or proposal of a
financial nature furnished, by any means or medium, to
any client or
group of clients –
a.
in respect of the purchase of any financial
product; or
b.
in respect of the investment in any financial product; or
c.
…
d.
…
and
irrespective of whether or not such advice
i.
is
furnished in the course of or incidental to financial planning in
connection with the affairs of the client, or
ii.
results
in any such purchase, investment, transaction, variation, replacement
or termination, as the case may be, being effected;”
Section
1(3)(a) of the FIAS Act stipulates what is not included under the
definition of
“
advice”
,
but this does not take the matter any further for purposes hereof.
[35]
After having set out the relevant applicable principles in respect of
the duties and responsibilities of FSP’s, it is
necessary to
have regard to the rules of construction of contracts in general and
insurance contracts in particular.
Several recent
judgments of the Supreme Court of Appeal should be referred to.
In
an oft-quoted judgment Wallis JA summarised the current state of our
law regarding the interpretation of documents, including
contracts,
as follows in
Natal
Joint Municipal and Pension Fund v Endumeni Municipality
2012
(4) SA 593
(SCA) at para [18]:
“
Interpretation
is the process of attributing meaning to the words used in a
document, be it legislation, some other statutory instrument,
or
contract, having regard to the context provided by reading the
particular provision or provisions in the light of the document
as a
whole and the circumstances attendant upon its coming into
existence. Whatever the nature of the document, consideration
must be
given to the language used in the light of the ordinary rules of
grammar and syntax; the context in which the provision
appears; the
apparent purpose to which it is directed; and the material known to
those responsible for its production. Where more
than one meaning is
possible, each possibility must be weighed in the light of all these
factors. The process is objective, not
subjective. A sensible meaning
is to be preferred to one that leads to insensible or unbusinesslike
results or undermines the apparent
purpose of the document.”
Thus,
the matter must be approached holistically and context and language
must be considered together with neither predominating
over the
other.
See
also
Bothma-Batho
Transport (Edms) Bpk v S Bothma en Seun Transport (Edms) Bpk
2014
(2) SA 494
(SCA) at paras [10]-[12].
[36]
In
BP
Southern Africa (Pty) Ltd v Mahmood Investments (Pty) Ltd
[2010]
2 All SA 295
(SCA) Lewis JA stated the following in a unanimous
judgment at para [11]:
“
It
is settled law that the contractual provision must be interpreted in
its context, having regard to the relevant circumstances
known to the
parties at the time of entering into the contract …. It is
also clear that the position must be given a commercially
sensible
meaning …”
In
Novartis
v Maphil
[2015]
ZASCA 111
, 3 September 2015, the same learned judge of appeal stated
the following at para [28]:
“
[28]
The passage cited from the judgment of Wallis JA in
Endumeni
summarizes the state of the law as it was in 2012. This court did not
change the law, and it certainly did not introduce an objective
approach in the sense argued by Novartis, which was to have regard
only to the words on the paper. That much was made clear in
a
subsequent judgment of Wallis JA in
Bothma-Botha
Transport (Edms) Bpk v S Bothma & Seun Transport (Edms) Bpk
[2013] ZASCA 176
;
2014 (2) SA 494
(SCA), paras 10 to 12 and in
North
East Finance (Pty) Ltd v Standard Bank of South Africa Ltd
[2013] ZASCA 76
;
2013 (5) SA 1
(SCA) paras 24 and 25.
A
court must examine all the facts - the context - in order to
determine what the parties intended. And it must do that whether
or
not the words of the contract are ambiguous or lack clarity. Words
without context mean nothing.”
(emphasis
added)
[37]
E R Hardy Ivamy,
General Principles of Insurance Law,
6
th
ed identified and discussed thirteen rules of construction of
insurance contracts. I do not intend to deal with all
the rules
mentioned and discussed as many are recognisable in the South African
law reports and the judgments quoted in this judgment,
but merely
wish to deal with the rule that the written words in an insurance
contract should be given more effect than the printed
words. The
author relies on several English judgments and continued as follows
at p 361-2:
“
But
when there is a conflict between the printed and the written clauses,
greater consideration will be paid to the written clauses.
The
written words are the immediate language and terms selected by the
parties themselves
for the expression of their meaning; the printed words, on the other
hand, are a general formula adapted equally to their case
and that of
all other contracting parties upon similar occasions and subjects.
…. The printed words are not necessarily
intended to
stand as part of the contract in any particular case since, through
carelessness or in the hurry of business, the parties
may have
omitted to delete the superfluous or inapplicable words from the form
or to alter the printed words so as to make them
conform exactly to
the contract which they intended to make.
At
the same time, the print must be construed with the writing as far as
possible; it is not to be rejected if not repugnant
to or
inconsistent with what is written.
If,
however, the writing shows it to be inapplicable, the print must be
disregarded”
(emphasis
added)
[38]
Birds
et
al
Macgillivray
on Insurance Law
13
th
ed, 2015, deal with construction of contracts in chapter 11 and
inter
alia
make the point that
“
the
literal meaning of words must not be permitted to prevail where it
would produce an unrealistic and generally unanticipated
result as,
for example, where it would unwarrantably reduce the cover which it
was the purpose of the policy to afford…”
and
furthermore, the construction of an insurance policy should avoid
unreasonable results.
[39]
I have touched upon the construction of insurance contracts as
mentioned in the English authorities and the latest judgments
of the
South African Supreme Court of Appeal pertaining to interpretation of
contracts in general. The
locus
classicus
on construing insurance contracts in South Africa still remains the
unanimous judgment authored by Smalberger JA in
Fedgen
Insurance Limited v Leyds
1995
(3) SA 33
(AD) where the learned judge of appeal remarked as follows
at p 38A-E:
“
The
ordinary rules relating to the interpretation of contracts must be
applied in construing a policy of insurance. A court must
therefore
endeavour to ascertain the intention of the parties. Such intention
is, in the first instance, to be gathered from the
language used
which, if clear, must be given effect to. This involves giving the
words used their plain, ordinary and popular meaning
unless the
context indicates otherwise…. Any provision which
purports to place a limitation upon a clearly expressed
obligation to
indemnify must be restrictively interpreted …., for it is the
insurer's duty to make clear what particular
risks it wishes to
exclude….. A policy normally evidences the contract and an
insured's obligation, and the extent to which
an insurer's liability
is limited, must be plainly spelt out. In the event of a real
ambiguity the
contra
proferentem
rule,
which requires a written document to be construed against the person
who drew it up, would operate against the insurer
as drafter of
the policy….”
(authorities
relied upon excluded from quotation)
[40]
There is uncertainty and a serious difference of opinion between
counsel for plaintiff and defendant on the one hand and counsel
for
the insurer on the other hand about the real meaning to be attributed
to the exclusion clause
in
casu
.
Therefore, relevant authorities must be considered, although counsel
were
ad
idem
that
there are no reported judgments on all fours with the facts
in
casu
.
[41]
Exclusion clauses are not unusual in insurance contracts. Some
authorities in this regard shall be referred to.
Enright
and Jess
Professional
Indemnity Insurance Law,
2
nd
ed, 2007, stipulate at p 524 that a
“
form
of exclusion clause might exclude claims arising from the giving of
any express or implied warranty or guarantee relating to
the
financial return of any investment or portfolio of investments.”
Such
an exclusion clause may make proper commercial sense, be consistent
with and not repugnant to the purpose of insurance contracts
.
This
will be addressed during the course of this judgment.
[42]
Simpson
Professional
Negligence and Liability supra
states the following at para 5.171:
“
An
excess clause or deductible is a clause whereby the insured is to
bear the first part of any loss, expressed as an amount of
money or
as a percentage of loss … As such clauses are seen as an
exclusion of liability drafted by the insurer, they will
be construed
strictly against the insurer.”
[43]
Hardy Ivamy
supra,
again
with reference to several English authorities, expressed himself as
follows at p 286:
“
Since
exceptions
are inserted in the policy mainly for the purpose of exempting the
insurers from liability for a loss which, but for the exception,
would be covered by the policy, they
are
construed against the insurers with the utmost strictness. It
is the duty of the insurers to accept their liability in
clear and
unambiguous terms.
(emphasis
added)
[44]
Colinvaux’s
Law
of Insurance,
6
th
ed
,
(Editor
R Merkin) makes the following submission based on English authority
at pp 324-325:
“
As
the
main
purpose of a liability policy is to permit the assured to recover for
negligence,
the policy presumes that there will have been some misconduct on the
assured’s part. Consequently, in the absence of
any
express provision restricting the insurer’s liability, the
assured will be able to recover unless his liability is attributable
to an intentional criminal act on his part. The mere fact of
criminality is not sufficient to prevent recovery:
the
courts have recognised that the true beneficiary of a liability
policy is the third party victim
,
and have, with notable exceptions, allowed the assured to recover
despite the criminal nature of his conduct.”
(emphasis
added)
[45]
As stated in
Fedgen
v Leyds supra
and
other authorities quoted, exclusion clauses must be restrictively
interpreted. In
Impact
Funding Solutions Ltd v AIG
Europe
Insurance Ltd
[2017] Lloyd’s Rep IR 60 (SC), the English Supreme Court found
that exclusion clauses do not necessarily have to be narrowly
construed; that they must be given a proper meaning. A narrow
meaning will often be given in the event of ambiguity or if
the
context suggests this. Lord Hodge who was part of the majority
stated the following at p 63:
“
An
exclusion clause must be read in the context of the contract of
insurance as a whole. It must be construed in a manner
which is
consistent with and not repugnant to the purpose of the insurance
contract. There may be circumstances in which
in order to
achieve that end, the court may construe the exclusions in an
insurance contract narrowly.”
[46]
Mr Watt-Pringle relied on the New Zealand Court of Appeal judgment in
Trustees
Executors Ltd v QBE Insurance (International) Ltd
[2010] NZCA 608
delivered on 14 December 2010, (“QBE”)
which he had come across the night before the oral arguments were
submitted
to me. The exclusion clause in that judgment was also
the bone of contention. That court, after having found that it
did not have sufficient evidence to evaluate the different
contentions of the parties, stated at paragraph [46] of the judgment
that the interpretation of the particular policy should take place at
a full trial, but then continued to make preliminary comments
in the
hope that the parties might come to a settlement. The court
made it clear that its comments
“
are
not intended to bind any court in any subsequent proceedings.”
[47]
At paragraph [51] in QBE the court consided, with reference to the
clause
“
depreciation
(or failure to appreciate) in value of any investments”,
that
“
depreciation”
did
not mean loss in value from whatsoever cause and proceeded:
“
It
cannot have been the mutual intention of the parties to exclude all
coverage for Trustees Executors’ investment business.”
[48]
The court continued at paragraph [53] in QBE as follows:
“
Our
inclination would thus be to categorise the Exclusion clause as
excluding what can be broadly described as losses arising from
investment forces.
The
Exclusion
clause
therefore would not apply
,
for example, to issues relating
to
the negligent
documentation
of mortgages
.
We recognise that other situations may not be so clear-cut.
There may be an issue as to the construction of the words
“contributed to” in the Exclusion clause
.
It may be that these words should not be interpreted in a
manner
which would rob the cover under the Policy of meaning
.
Thus, there may be an issue as to whether every investment movement
or failure of any investment to appreciate, however
slight, should
engage the exclusion,
even
where the occasion
for
the claim is clearly negligence
.”
At
paragraph [58] the court continued:
“
The
question might be whether the loss in value of the Fund was caused by
negligence or by investment forces or both.
It
may be that the relevant mortgages
,
because of breaches of the investment guidelines,
were
from inception
,
of
lesser value and thus any loss totally related to negligence
.
The comments we make at [53] are relevant if any loss is a
combination of negligence and investment forces.”(
emphasis
added)
[49]
In QBE the exclusion clause did not contain a similar proviso as
in
casu.
VII
EVALUATION OF THE AUTHORITIES, COUNSEL’S SUBMISSIONS AND THE
EVIDENCE:
The
case against defendant
[50]
When I evaluate the role played by defendant in advising plaintiff
how to invest her funds I shall keep in mind the words of
Schutz JA
in Durr
supra
quoted at paragraph [1] of this judgment.
I hasten to say that the insurer did not try to show that defendant
was not liable
to plaintiff. The insurer had a single strategy;
a one-pronged line of attack: to show that the consequences of
defendant’s
action and/or advice fell squarely within the
parameters of the exclusion clause. I shall deal with this
issue in detail
infra.
[51]
The evidence presented by and on behalf of plaintiff is largely
undisputed, especially in respect of the first issue,
i.e.
whether
a case has been made out to hold defendant liable.
[52]
Plaintiff was vulnerable in July 2010 when defendant advised her.
She was a widow with a two and a half year old boy.
Her husband
passed away in tragic circumstances some four months earlier.
She experienced financial and emotional difficulties.
She had
no experience of financial products and/or the financial market.
She received the proceeds of an insurance policy
and wanted to make a
safe investment as the money was earmarked for her son’s
upbringing. Defendant was her deceased
husband’s broker
and she trusted him fully to advise her in respect of the investment
of the sum of R2m.
[53]
During the meeting with defendant when several forms –
Annexures ”A” to “E” to the particulars
of
claim - relating to the investment were filled out for signature,
plaintiff emphasised that she could not afford to lose two
cents.
Defendant suggested the Sharemax investment and said it was an
investment
“
in
property”
and
“
property
cannot disappear”
.
This was Sharemax’ slogan all along when the articles of
financial journalists referred to
supra
are
considered. Defendant made it clear that he did not even want
to suggest any other investments as the proposed investment
was “baie
veilig – extremely safe”. He referred plaintiff to
a bad copy of a newspaper article containing
negative comments about
Sharemax investments, but informed her that she had nothing to be
concerned of as “hulle is jaloers
- they are jealous.”
Plaintiff accepted defendant’s assurance immediately without
even reading the article.
In this regard it is to be noted that
according to the pleadings defendant admitted informing plaintiff
that she did not have to
be concerned as he had spoken to Sharemax as
well as his consultant. This was not good enough.
Defendant should have
spoken to independent auditors, attorneys or
financial analysts. He should have insisted on financial
statements, such as
income and expenditure accounts, cash flow
analyses and a balance sheet. He should have inspected the
shopping complex.
If he did that, he would know that the
investment could not possibly have an income stream at that stage or
even in the foreseeable
future.
[54]
The investment that defendant induced plaintiff to make was a
property syndication investment. The Sharemax investment
was
known as The Villa. The company used as the investment vehicle
was registered in 2010 only. This should have been
a serious
concern as well. The Villa shopping complex was in the process
of being built.
Ex
facie the
photographs
handed in as Exhibit B, the buildings were still incomplete when the
photographs were taken nearly six years later in
January 2016.
Mr Heystek explained the potential dangers of property syndication
and also made the point that insofar as
the companies involved were
unlisted, there was a lack of disclosure making it difficult for
financial analysts to make meaningful
comparisons. Accordingly,
as testified to by him, a FSP
“
should
not advise an investment in something which he is not himself able to
fully understand.”
[55]
Mr Heystek mentioned that defendant clearly did not explain the risks
and pitfalls of property syndication to plaintiff.
According to
his experience properties are often sold at high valuations to the
companies that form the vehicle for property syndications,
allowing
the promotors to make huge profits upfront. High marketing
costs and commissions are paid, whilst the income stream
from the
underlying assets might be unpredictable and uncertain.
[56]
In casu
several
financial journalists and others warned investors over a prolonged
period. Defendant, having been aware of the criticism,
should
have either himself investigated the reliability of the investment or
made enquiries from independent and reliable sources.
It is
amazing that defendant could think for one moment that interest could
lawfully accrue from the investment from the first
month. I
wonder where he thought the magical origin of the income stream would
derive from. No doubt, a simple
investigation or even an
inspection of the half-built shopping complex would have been an
eye-opener. He should have realised
that enormous costs would
have to be incurred to complete the project. In fact, it was
explained by Mr De Klerk in Finweek
of 8 July 2010
supra
what
was received and what was still needed to complete the project.
Another R2.25 was required from the public before any
income could be
earned lawfully. The half-built shopping complex could not earn
any income for some time – it was obviously
dependent on being
completed, the signing of lease agreements and eventual and actual
occupation by tenants – but the investment
provided for income
to be paid to investors from the start. This is apparently what
defendant believed would happen.
In fact the first (and only)
payment of R1 400.00 was made to plaintiff in August 2010.
No doubt, defendant failed to
present the true facts to plaintiff to
afford her an opportunity to make an informed decision.
[57]
I agree with Mr Heystek’s testimony that all initial payments –
at least until income is eventually received from
tenants -
would have to be paid out of funds put in by investors themselves.
Investors therefore paid their or
other investors’ interest.
There were no other sources of income during the construction phase
of The Villa.
The underlying property – the half-built
shopping complex could not produce income on a monthly basis as
investors and plaintiff
in particular expected. Defendant was
in breach of his fiduciary duty towards plaintiff in that he did not
take reasonable
steps to satisfy himself of the safety of the
Sharemax investment. I am also in agreement with Mr Heystek,
accepting the
ruling in 2013 of the Ombud for Financial Services, Ms
Bam, that The Villa
“
bear
uncanny characteristics to a so-called Ponzi Scheme.”
[58]
If the totality of the evidence is considered, defendant should have
seen the red flashing lights, but not only that, he needed
to heed
and advise plaintiff differently. Defendant offered wrong and
unsuitable advice to plaintiff, either through incompetence
and/or
ingenuousness and/or negligence, or for the lure of a small fortune.
It is common cause that he earned a commission
of R120 000.00
for an afternoon’s effort. This is an enormous amount of
money and not market-related. It
is a well-known phenomenon
that promotors in these types of schemes make use of high commissions
to attract brokers and so-called
financial advisors to do business.
In the process pensioners, widows and other vulnerable people’s
savings and inheritances
are being collected, often to be lost when
the house of cards collapses. Defendant should have known that a
return on an investment
in The Villa was a pie in the sky. His
inexplicable, but obviously poor advice is indicative of lack of
skill, care and diligence
and did not commensurate with the
commission received. The parallels between the facts
in
casu
and
those in
Durr
are
remarkable. Defendant failed to make enquiries himself as did
the broker in
Durr,
but
notwithstanding this he assured plaintiff that the investment was
“
entirely
safe,”
as
did the broker in
Durr.
Schutz
JA said on p 455 I-J of
Durr
that
just about everything that the broker told Durr was wrong, not that
he knew it, but because he had allowed himself to be misled
by a
series of deceits. Defendant did not say much to plaintiff, but
what he said was false.
[59]
Defendant acted contrary to the provisions of s 16 of the FAIS Act
and the Codes of Conduct published since then in accordance
with the
provisions of s 15 and what the law expects of FSP’s when he
provided the financial advice that led to the R2 m
investment.
A defence was raised in the pleadings, but defendant elected not to
testify in support of the pleaded defence.
Although plaintiff’s
evidence is not contradicted, it does not mean that it should
necessarily be accepted. However,
I am satisfied that, if
considered with the documents – Annexures “A” –“E”
of the particulars
of claim, particularly the handwritten parts, and
Mr Heystek’s version, defendant did not act as could have been
expected
of a reasonable FSP. Mr Watt-Pringle did not contend
differently and I have reason to believe that he accepted that
plaintiff’s
case against defendant had been proven on a balance
of probabilities.
[60]
Much more may be said of the defendant’s actions and/or
inactions, but I conclude by finding that defendant was negligent,
and even dishonest, when he advised plaintiff, by placing no credence
on the negative articles in the press and failing to objectively
investigate the criticism. He failed to exercise the degree of
skill, care and diligence which one is entitled to expect
from a
FSP. The facts
in
casu
are
very similar to that in
Durr
supra
and
the result should be the same.
The
third party action
[61]
Mr Watt-Pringle submitted that the insurer was perfectly entitled to
limit the ambit of its liability and that it has done
so in clear and
unambiguous language. The insurer chose what risks it was
prepared to accept. The policy and the exception
make perfect
sense. He also agreed that a
“
businesslike”
interpretation
is to be preferred, but submitted that the resort to restrictive
interpretation only arises if the exclusion sought
to be relied upon
is ambiguous.
[62]
Mr Watt-Pringle extracted facts during cross-examining from both
plaintiff and Mr Heystek in order to try and persuade the
court that
the defendant’s claim for indemnification against the insurer
falls within the parameters of the exclusion clause
and that it
should therefore be dismissed. As submitted, he did this
to contextualise certain factual issues.
[63]
Mr Watt-Pringle submitted that the exclusion clause is triggered by
two provisions, firstly, that the plaintiff’s claim
against
defendant arises from or
“
is
contributed to by depreciation (or failure to appreciate) in value”
of
the investment undertaken by defendant on her behalf or pursuant to
his advice; and secondly, the investment was undertaken by
defendant
on plaintiff’s behalf or pursuant to his advice
“
as
a result of [an] actual or alleged representation, guarantee or
warranty provided by or on behalf of the insured as to the
performance
of”
the
investment.
[64]
Mr Watt-Pringle submitted that, regarding the first scenario,
plaintiff’s shares became worthless. According to
him her
claim
“
does
not have to arise from, but need only be ‘contributed to’
by the depreciation or failure to appreciate in value
of an
investment”.
Therefore
the application of the exclusion was triggered. Secondly,
plaintiff testified that the investment in The Villa had
been made on
the strength of defendant’s representations as to the
performance of the investment. She indicated that
she could not
afford to lose two cents of her capital. Therefore, Mr
Watt-Pringle submitted that plaintiff relied on a representation
which is in line with a representation, guarantee or warranty
provided by defendant as the insured as to the performance of the
investment, thus triggering the provision of the exclusion clause.
The fact that this was not pleaded is immaterial
according to him.
The court must consider the facts testified to. Mr Watt-Pringle
also argued that, absent such averment,
defendant would be able to
rely on the written documents signed by plaintiff when the investment
was made, indicating the uncertain
nature of the investment and the
heightened risk occasioned by the expectation of above inflation
returns. The argument continued
as follows:
“
The
common element in both triggering provisions is that, broadly
speaking, the underwriter is not prepared to underwrite either
the
performance of an investment or the veracity of any representation,
guarantee or warranty as to the performance of the investment,
which
results in a claim against the financial intermediary.”
[65]
Mr Watt-Pringle heavily relied upon the
QBE
judgment
of the New Zealand Court of Appeal quoted quite extensive
supra.
He
submitted that it is of considerable persuasive value in the context
of this case. He submitted that it represents the
only
definitive judicial pronouncement where an exclusion clause worded in
similar language was considered by a court in circumstances
where a
claim was made on a financial advisor by an investor who suffered a
loss as a result of an investment having been rendered
worthless.
In
QBE
the court dismissed the appeal, but made it clear that its findings
were preliminary. It reiterated that its preliminary
comments
were not intended to bind any court in any subsequent proceedings.
[66]
Mr Watt-Pringle submitted that the proviso to the exception explains
when only indemnity should be granted. The loss
must be solely
as a result of the negligence of the insured (or his/her employee) in
failing to effect a specific investment transaction
in accordance
with the specific prior instructions of the insured’s client.
The effect hereof, according to him, is
obvious. If I may give
an example based on his submission: the client instructed the FSP to
buy shares in Capitec Bank in
say 2008, but the FSP negligently, for
example because of finger-trouble, pressed the wrong button on his
computer and bought shares
in African Bank instead, and it turned out
eight years later that Capitec’s shares quadrupled, but African
Bank’s shares
became worthless, then the insurer shall be
liable to indemnify the FSP.
[67]
Unlike as Mr Mullins contended, to which I shall turn
infra,
Mr
Watt-Pringle submitted, based on evidence extracted from Mr Heystek,
that the policy at hand is a standard policy providing for
all sorts
of cover to a wide range of FSP’s. Therefore cover
against claims based on investment advice is but one of
a number of
insured events.
[68]
Mr Watt-Pringle accused Mr Mullins for not trying to interpret the
exclusion clause. The clause is not repugnant to the
purpose of
the insurance contract if the judgment In
QBE
is
considered. It is also not
“
unbusinesslike”.
According
to him we are confronted with a depreciation in the value of an
investment. If plaintiff continued to receive income,
the
parties would not have been at court.
[69]
Mr Mullins, as could be expected, differed completely from Mr
Watt-Pringle. He made the point that the insurer who relies
on
the exclusion must prove that the exclusion applies. He
submitted that the cross-examination of plaintiff and Mr Heystek
was
unsuccessful in that the attempt to show that a representation was
made or a guarantee was provided by defendant failed.
This is
not the case of the plaintiff in the pleadings. Plaintiff never
claimed on the strength of a representation, guarantee
or warranty,
but in any event, the written terms of the agreement between them
preclude such claim. According to Mr
Mullins, plaintiff’s
claim is not one arising from or contributed to by depreciation or a
failure to appreciate in value
of the Sharemax investment. He
also submitted that to suggest that would be to stretch the words
“
arising
from or contributed to by depreciation”
far
beyond their intended meaning, in a way that would rob the cover of
all meaning. He emphasised that “
plaintiff’s
claim on the pleadings and in evidence is that defendant owed her
proper advice, that what she required was a
relatively safe and
low-risk investment, and that the Sharemax investment was anything
but that. Her claim is not for an
investment return of
inflation plus 2% or something of that nature. Nor could she
ever have lawfully claimed that, given
the terms of Annexures ”A”
to “D” of the particulars of claim.”
[70]
Mr Mullins was taken by surprise as he was unaware of the
QBE
judgment
until provided with a copy thereof by his opponents, but he tried his
best to distinguish it from the facts
in
casu
during
his oral submissions. He also pointed to the
dicta
at paragraphs [51] and [53] as well as [44] and [45].
[71]
Mr Mullins indicated that Mr Watt-Pringle studiously avoided the
handwritten statements on Annexure “D” of the
particulars
of claim. This document outlined plaintiff’s requirements
as mentioned
supra.
These
handwritten notes bolster plaintiff’s evidence to the effect
that she could not lose any of the capital. As required
by the
authorities
supra
(inter alia Mahmood Investments)
contractual
provisions must be read in context, having regard to relevant
circumstances known to the parties at the time of entering
into the
contract.
[72]
I considered Mr Watt-Pringle’s submissions carefully, but am of
the view that he placed too much emphasis on the wording
of the
exclusion clause and in doing so, disregarded the purpose of the
insurance contract entered into between defendant and the
insurer.
The heading of the policy is instructive. It reads:
“
Professional Indemnity Insurance for Members of the
Financial Intermediaries Association.”
Seven insured
events are tabulated, which may appear at first blush to bolster Mr
Watt-Pringle’s argument that to disallow
defendant indemnity
would not be repugnant to the purpose of the insurance contract.
I have a different view. I shall
explain
infra.
I
refer to Colinvaux’s
Law of Insurance, supra
and wish to
emphasise that the main purpose of an indemnity policy is to permit
the insured to recover for negligence. As
the author states, an
indemnity policy presumes that there will have been some misconduct
on the insured’s part.
[73]
Brokers and financial advisors are now regulated by legislation as is
the case with, for example, attorneys. Professional
Indemnity
Insurance for FSP’s is now a reality. Insurers are
comforted in that they know that FSP’s who apply
for indemnity
insurance are professional people who have to pass stiff
examinations before they may become registered as
FSP’s
in terms of the FAIS Act. Also, insurers do not have to provide
indefinite cover and may limit their potential
liability as happened
here. The other insured events in the particular policy, except
the first, to wit Professional Indemnity,
apply to any employer who
wants to insure against such events. It is not uncommon in the
market place for a shop owner to
take out insurance in respect of
employee dishonesty, computer crime, defamation and like issues.
However, the shop owner
will not take out professional indemnity
insurance. FSP’s on the other hand, most definitely
need cover insofar
as they often have to give advice that may later
be found to have been given negligently. The chances of being
sued for huge
amounts for wrong and/or negligent advice by far exceed
financial losses pertaining to the other insured events. It is
thus
not a valid argument to submit that defendant will not be robbed
of cover if the exclusion clause is interpreted in the way contended
for by the insurer.
[74]
The insurer has
undertaken
to indemnify defendant against losses arising out of any legal
liability
arising from claims first made against the defendant and reported
during the period of insurance
for
breach of duty
in connection with his business
by
reason of any negligent act, error, or omission
,
committed in the conduct of the defendant’s business. I
refer to the first paragraph under Insured Events on page
2 of the
policy. The insurer admitted this in its plea. This
issue must be the starting point of any considerations
in respect of
the exclusion clause, although I accept that the policy must be
considered as a whole together with the circumstances
attendant upon
its coming into existence. As said by Lewis JA in
Novartis
supra
:
“
A
court must examine all the facts – the context – in order
to determine what the parties intended. And it must
do that
whether or not the words of the contract are ambiguous or lack
clarity. Words without context mean nothing.”
The
context is undoubtedly clear: defendant needed indemnity to
safe-guard him against losses in the event of a breach of duty by
reason of any negligent act, error or omission. He received
such cover as is apparent from the clause referred to
supra.
However,
in the exclusion clause not a word is said about negligence, error or
omission, save insofar as the proviso stipulates
that the insured
will be covered if a specific investment instruction of a client is
not carried out due to the insured’s
negligence. It is
highly unlikely that such an event may occur, but in any case, it
cannot be argued that the insurer should
not be held liable for the
insured’s negligence, error or omission on the strength of this
proviso.
[75]
In my view the exclusion clause must be interpreted restrictively so
that it makes business sense,
i.e.
in the
eyes of both insurer and insured. It cannot be applicable where
the insured advised a client to invest in a scheme
that was a
hopeless “investment” from the onset, contrary to
legislation and probably a fraudulent and unlawful Ponzi
scheme.
The purpose of the first leg of the exclusion is to prevent an
insured from claiming indemnification if his client
has filed a claim
because his/her investment had not grown by, for example 20% over a
three year period as expected, but only by
15%, or remained static,
or worse, depreciated by 5 or 10%. We all know that financial
markets are volatile, that several
unforeseen market forces may
affect investments and therefore, it would be “businesslike”
for the insurer to exclude
indemnification in such events.
Surely, it cannot be expected of a prudent insurer to become
embroiled in litigation between
the client and the insured FSP in
such instances. The same applies to the second leg. An
eager FSP should not be heard
to admit that he/she has represented or
guaranteed to an investor that a particular investment will increase
by 100% in a year’s
time. The insurer will be fully
entitled to rely on the exclusion clause and refuse to indemnify the
insured if the representation
later appears to be off the mark.
Again, this is not what occurred
in
casu.
[76]
I find the example provided by Mr Watt- Pringle pertaining to the
negligent buying of wrong shares contrary to the client’s
instructions as if that is the only way in which a FSP will have
indemnity cover to be repugnant to the purpose of the insurance
contract. The FSP must be entitled to indemnification, bearing
in mind that the ultimate beneficiary is the client who got
wrong
advice as
in
casu.
Defendant
breached all principles upon which a skilled and honest FSP is
supposed to conduct himself. It is not a case of
depreciation
of an investment as the “
investment”
was worthless from beginning to end. The R2m “invested”
was not enough to pay the interest of the
thousands of “investors”
that became involved in the scheme prior to plaintiff.
Obviously, not enough “investors”
joined the scheme after
plaintiff for her to receive any “income’ after August
2010. The plaintiff’s claim
is also not based on a
failure to appreciate. Plaintiff does not rely on any
representation, guarantee or warranty as to
the performance of the
investment, notwithstanding Mr Watt-Pringle’s valiant effort to
extract facts during cross-examination.
This was not the case
that defendant had to meet or what the insurer had to deal with in
the third party action.
VIII
CONCLUSION:
[77]
In conclusion I find that plaintiff has made out a proper case
against defendant in respect of the merits of her claim.
The
quantum
has been settled, save for the simple calculation to
be made in respect of the expected return on capital which Mr Mullins
has calculated
and which is not in dispute. There shall
therefore be judgment in favour of plaintiff in respect of the
capital of the claim
and interest as requested.
[78]
Mr Mullins requested an order in terms whereof the plaintiff’s
costs be paid jointly and severally by defendant and the
third
party. Obviously, defendant is liable for plaintiff’s
party and party costs, but the situation in respect of
the third
party and plaintiff is different, there being no
lis
between
them. Mr Mullins warned at the start of proceedings that he
intended to do so as he believed that the insurer should
have
consented to defendant admitting liability. In doing so, he
would have closed his case and the effects of the exclusion
clause
could have been argued without reference to oral evidence. Mr
Watt-Pringle’s client was not prepared to adhere
to this
request and it became apparent why. The insurer elected to
extract evidence during cross-examination, thereby hoping
to show
that defendant’s claim for indemnification falls within the
parameters of the exclusion clause. I am of the
view that the
insurer cannot be blamed for the stance taken, especially considering
that counsel could not find any relevant South
African authority on a
similar exclusion clause and the insurer’s counsel eventually
had to rely on New Zealand authority.
[79]
I also find that defendant is entitled to be indemnified by the
insurer, subject to the limit of R2.5m and deduction of the
excess of
R10 000.00, and an appropriate order shall be made. The
insurer shall pay the costs of the defendant, he being
the successful
party in the third party action, such costs to include the costs of
the joinder application which were reserved.
IX
ORDERS:
[80]
Therefore the following orders are made:
1.
Defendant is ordered to pay to plaintiff the capital
amount of R2 000 000.00 and interest calculated
to 27 July
2016 in the amount of R718 600.00.
2.
Defendant shall pay
mora
interest on the amount of
R2 718 000.00 to plaintiff at the rate of 10.5% per
annum,
calculated from 28 July 2016 to date of payment thereof, both
dates included.
3.
The third party shall indemnify defendant
against defendant’s liability to plaintiff,
subject to the
limit of R2 490 000.00, in respect of defendant’s
capital and costs together with interest thereon
at the rate of 10.5%
per
annum
from date of judgment to date of payment.
4.
Defendant is ordered to pay plaintiff’s taxed or agreed party
and party costs, such costs
to include the following:
4.1
the costs of Senior Counsel;
4.2
the reasonable qualifying, preparation, reservation and travelling
and accommodation costs of Mr M Heystek, including costs
of and
associated with his rule 36(9)(b) summary;
4.3
plaintiff’s travelling costs to and from Bloemfontein and her
accommodation costs in Bloemfontein in order to testify.
5.
The third party is ordered to pay defendant’s
costs in respect of the third party
action as well as the costs
relating to the application to join the third party.
_____________
JP
DAFFUE, J
On
behalf of plaintiff:
Adv JF Mullins SC
Instructed
by:
Honey Attorneys
Bloemfontein
On
behalf of defendant: Adv
PJJ Zietsman
Instructed
by:
Blair Attorneys
Bloemfontein
On
behalf of 3
rd
party:
Adv CE Watt-Pringle SC and Adv C Bester
Instructed
by:
Andre Muller & Associates
c/o McIntyre & Van
der Post
Bloemfontein