Barloworld Capital (Pty) Ltd t/a Barloworld Equipment Finance v Napier NO (509/04) [2006] ZASCA 47; [2007] 1 All SA 301 (SCA); 2006 (5) SA 384 (SCA) (30 March 2006)

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Barloworld Capital (Pty) Ltd t/a Barloworld Equipment Finance v Napier NO (509/04) [2006] ZASCA 47; [2007] 1 All SA 301 (SCA); 2006 (5) SA 384 (SCA) (30 March 2006)

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IN THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
REPORTABLE
CASE NO 509/04
In the matter between
BARLOWORLD CAPITAL (PTY)LTD trading as
BARLOWORLD EQUIPMENT FINANCE
Appellant
and
RS NAPIER NO
Respondent
________________________________________________________________________
CORAM: HOWIE P, ZULMAN, CAMERON, NAVSA et JAFTA JJA
________________________________________________________________________
Date Heard:
17 February 2006
Delivered:
30
March 2006
Summary: Insurer informed of third party interest in insured
property before paying proceeds of policy – whether on facts bound
by contract or trade usage to pay third party before paying insured.
Neutral
citation: Barloworld Capital Pty Ltd v Napier NO [2006] SCA 48 (RSA)
________________________________________________________________________
J U D G M E N T
________________________________________________________________________
HOWIE P
HOWIE P
[1] This appeal concerns the short term insurance
industry and the implications of the practice of noting an owner’s
interest in
property insured at the instance of an instalment sale
purchaser. The specific issue is whether a request by the seller of
such property
to the insurer to note its interest imposed on the
insurer in the circumstances discussed below, an obligation, on pain
of damages,
to pay the seller the amount still owing to it by the
insured before paying any balance to the latter.
[2] The
appellant finance house (the seller) sold a mechanical excavator on
instalments (the sale), with reservation of ownership
until final
payment. It was an express term of the sale that the buyer would
insure the equipment and have the interest of the seller
noted on the
relevant policy. The buyer effected the insurance but failed to
procure the noting of the seller’s interest on the
policy. The
insurance contract was concluded between the buyer (the insured) and
certain underwriters at Lloyds (Lloyds). Before
final payment by the
insured under the sale the equipment was irreparably damaged in
circumstances obliging Lloyds to agree to pay
out the insurance
proceeds. Prior to payment Lloyds was informed of the seller’s
interest. The insured then owed the seller R839
925 but the proceeds
of the policy were paid to the insured.
[3] In
a trial before the High Court at Johannesburg the seller sued Lloyds
(in the person of its South African representative as
nominal
defendant) for contractual damages in the sum of the insurance
proceeds which it asserted should have been paid to it. The
claim was
based on an alleged contract between the seller and Lloyds and, in
the alternative, on an alleged trade usage, in breach
of either of
which Lloyds paid the proceeds to the insured rather than to the
seller. The learned trial Judge (Goldblatt J) found
against the
seller, holding that neither the alleged contract nor the trade usage
relied on had been proved. With his leave the seller
appeals.
[4] The
alleged contract is pleaded in terms which I would summarise thus. In
November or December 2000 the seller (represented by
either Mr
Franklin, its General Manager, or Mr Knight, its Managing Director)
asked Lloyds or one or other of its authorised representatives
(Equity Loss Adjusters or Leppard and Associates (Pty) Ltd or
Chesterfield Insurance Brokers Ltd) to note its interest on the
policy,
which Lloyds or its representatives duly did. In the
circumstances an agreement was concluded between the seller and
Lloyds, a material
term of which was that Lloyds would pay the seller
the outstanding amount due on the sale before it paid anything to the
insured.
[5] The
alternative claim asserts that Lloyds’ obligation first to pay the
insured’s creditor arose from a trade usage which was
‘universally
and uniformly observed ... long established, notorious, reasonable
and certain’. The obligation is triggered ‘in
the event,
inter
alia,
of the owner of the insured property
requesting the
insurer to note its interest
in such property’. (My
underlining.) Lloyds became so obliged, it is further alleged,
because it, or its representatives referred
to, were
asked to note
the seller’s interest
or, alternatively, were ‘
made aware
’
of it. (One presumes that the insurer’s becoming so aware was an
event within the ambit of the words
‘inter alia’
in the
earlier cited part of the pleading, in other words that the alleged
obligation arises, for present purposes, if there is either
a request
to note the interest or merely an awareness of the interest.)
[6] Extensive
expert evidence was led concerning the alleged trade usage. Before
discussing such evidence it is necessary to determine
the facts. Due
to overlapping they pertain to both the main and alternative claims.
[7] In
advance of the trial the seller furnished certain particulars. They
may be summarised as follows. A written request to note
the seller’s
interest was made to Equity Loss Adjusters (Equity) who ‘accepted
and/or noted’ it as Lloyds’ authorised representative.
The
request was also ‘accepted and/or noted’ by Leppard and
Associates (Pty) Ltd and Chesterfield Insurance Brokers Ltd on behalf
of Lloyds. The pleader goes on to say that in any event ‘it is not
necessary for the request to be “accepted”’. As to the
agreement, the subject of the main claim, the seller alleged that it
was concluded ‘on the noting of the (seller’s) interest’.
(Leppard and Associates is Lloyds’ authorised broker in South
Africa and Chesterfield Insurance Brokers is a United Kingdom firm
through which Leppard and Associates obtains access to the
underwriters at Lloyds.)
[8] It
will be apparent that in contradistinction to the insured’s
obligation to the seller to have had the seller’s interest
noted on
the policy, the trade usage alleged by the seller which obliged the
insurer first to pay the seller, arose from no more
than the latter’s
request to take note of its interest and/or the insurer’s knowledge
of the interest.
[9] Also
in advance of the trial certain facts were agreed. They were as
follows. Leppard and Associates was Lloyds’ agent in concluding
the
insurance agreement. Leppard and Associates also had authority to
appoint loss adjuster, Equity, to investigate and assess the
insured’s claim on the policy. However, because the claim was above
R500 000, Leppard and Associates had to process the claim
but
could not settle it – that was for Lloyds alone. The loss in
respect of the excavator occurred in June 2000. Lloyds accepted
liability in August 2000 and instructed Equity, pursuant to its
investigations, to make recommendations to Lloyds as to an
appropriate
settlement amount. In September 2000 the policy was
cancelled. By that time the insured had lodged claims in respect of
other machines
as well and Lloyds considered the insured too bad a
risk to continue insuring. On 17 November 2000 the insured’s
attorney,
Mr O’Brien, threatened litigation against Lloyds if the
insured’s claim was not paid in seven days. On 20 November
Equity
reported to Leppard and Associates that the seller’s
interest had not been disclosed to Lloyds and that Mr Knight was
unaware that
it had not been noted on the policy. He ended by saying
that Knight would provide Equity with settlement amounts (ie amounts
still
owing to the seller on the damaged equipment.). On 23 November
Mr Franklin, having learnt that the insured had claims pending in
respect of equipment sold to it by the seller, and that the insured
was negotiating with Equity, directed a letter to Equity furnishing
settlement amounts and asking it to ensure that the insurer ‘notes
our interest (in the excavator)’.
[10] On
28 November Mr O’Brien wrote to Equity pointing out that it had
known all along of the insured’s relationship with the
various
finance houses that had financed the acquisition of the machines in
respect of which the insured was claiming. He went on
to say that
there was no legal basis ‘as between insurers and our client’ to
note the interest of any finance house. He concluded:
‘Please note
that any payment to third parties will not absolve your client
[referring to Lloyds] from their obligations to our
client’.
[11] On
11 December Equity wrote to Leppard explaining that O’Brien did not
only want to avoid payment being made by Lloyds to a
finance house
such as the seller but in fact wanted payment to the insured to be
made to him directly. ‘The impression gained’
said Equity, ‘was
that he appeared wary of the fact that his client may not have funds
to pay him.’ Equity went on to report
that O’Brien had advised
that summons had been issued but that he wanted to settle out of
court and ‘We informed Mr O’Brien
that ... this would be a matter
between himself and Insurers attorneys.’
[12] On
15 December Equity wrote to Leppard and Associates in connection with
the insured’s claim in respect of another excavator
and furnished
the seller’s banking details. At that stage Lloyds was
contemplating paying the seller in respect of the excavator
with
which this case is concerned but was uncertain whether to do so in
view of O’Brien’s demand for payment and his insistence
that no
third party be paid. On 2 January 2001 O’Brien wrote to Equity
repeating his demand and setting out his view that
if Lloyds paid a
finance house it risked having to pay the insured as well. The upshot
was that legal advice was sought on Lloyds’
behalf from attorneys
Deneys Reitz as to who the recipient of payment should be.
[13] On
11 January Deneys Reitz advised that payment be made to O’Brien on
the insured’s behalf. On 22 January that advice was
implemented. On
24 January 2001 Equity wrote to the seller advising that Lloyds were
given legal advice to pay the insured direct
‘as your interests had
not been noted on their policy prior to the events from which the
claims arose’.
[14] Oral
evidence for the seller was given by Knight and three witnesses,
Messrs Van der Meer, Gallimore and Rothman, who were called
to give
expert evidence as to the alleged trade usage. For Lloyds evidence
was given by Mr Leppard, managing director and chief underwriter
of
Leppard and Associates, and Mr Parmenter, a member of the Lloyds
consortium that insured the excavator.
[15] In
so far as the main claim is concerned the vital evidence is really
that of Leppard and Parmenter. This is because the seller,
apart from
reliance on the correspondence and in particular the request by
Knight that its interest be noted, was not in a position
to know how
that request was dealt with. Indeed, the argument advanced by the
seller’s counsel on appeal was that the agreement
alleged as the
basis of the main claim was admittedly not established by direct
evidence but had rather to be inferred from passages
in the
correspondence read with excerpts of Parmenter’s evidence.
[16] It
will be recalled that the essential allegation made by the seller in
this regard was that Lloyds noted the seller’s interest
on the
policy. In the plea this was denied. The denial was affirmed by clear
evidence by Leppard and Parmenter. The latter said he
had taken note
of the request but that the policy had been cancelled before the
request was made. (He accepted that cancellation
did not bar a claim
by the insured.) Asked if noting could occur in the case of a
cancelled policy, he said he did not know. Although
he could not see
a difficulty, he said he would take legal opinion on the issue. That
his ‘taking note’ was not the same ‘noting’
that was
requested, or at least was not implementation of what he understood
the request to mean, was explained in Parmenter’s
later evidence.
He said that had there been noting on the policy it would have been
done by Leppard and Associates. What usually
happened was that a
request for noting came from an insured’s broker and, if assented
to, resulted either in an endorsement on
the policy or some written
confirmation of the noting of the interest. The request could,
however, come from a finance house, with
the same consequence.
Neither Leppard’s nor Parmenter’s credibility was in issue either
at the trial or on appeal. They said
they did not intend any
contractual nexus between Lloyds and the seller.
[17] In
an endeavour to overcome the hurdle constituted by their evidence
counsel for the seller contended as follows. Parmenter took
cognisance of the seller’s request; there was no response by Lloyds
or on its behalf indicating a refusal to note the seller’s
interest; the seller’s bank details were obtained; payment to the
seller was at least in contemplation at some point; and Equity’s
letter of 24 January 2001 to the seller, in saying that its interest
had not been noted before the events from which the claim arose,
implied that it had been noted subsequently. The most probable
inference to be drawn, said counsel, was that noting on the policy
had in fact occurred.
[18] Even
cumulatively those factors do not warrant the inference sought to be
drawn. Firstly, whatever weight one could have afforded
them had
Parmenter not testified, his denial that there was noting on the
policy, or even an acceptance of the request, stands as
a credible,
uncontradicted answer. Secondly, it is important to point out that by
the time the request was received in late November
2000 Lloyds faced
a number of claims by the insured, as well as O’Brien’s threat to
sue Lloyds if payment was not made to the
insured. Even if Lloyds did
contemplate paying the seller rather than the insured, O’Brien’s
strenuous insistence created uncertainty
as to what Lloyds should do,
so much so that legal advice was eventually sought. Added to that,
the seller’s bank details were
under consideration not in relation
to this claim but another. Then, as regards Equity’s letter of 24
January 2001, Equity was
never Lloyd’s authorised representative in
respect of any action taken that is material to this case. And
whatever construction
its phraseology permits
in vacuo
, when
read in factual context it cannot support the conclusion desired by
the seller. It is simply not feasible that Parmenter or
any
representative of Lloyds would, from 23 November 2000 onwards,
have agreed to pay the seller when faced with the insured’s
demand
for payment as voiced by O’Brien and in the state of uncertainty
which led in the end to resort to legal advice.
[19] Reverting
to the terminology of the main claim, there was no request made to
note the seller’s interest on the policy and no
such notation took
place. However much it might be thought that Lloyds ought to have
responded to the request, even if simply to
decline it, non-reaction
to the request cannot on the facts of this case amount to acceptance.
[20] The
seller set much store by the decision in
Marine and Trade
Insurance Company Ltd v J Gerber Finance Pty Ltd.
1
There, the owner of a mechanical loader leased to a construction
company and newly insured by the appellant at the lessee’s
instance,
wrote to the insurer requesting that its interest be noted
on the policy and that acknowledgment of the endorsement be furnished
to it. This was at a stage when insurance on the loader which had
been taken out by the owner with the same insurer was about to
be
cancelled in view of the new insurance. The owner emphasised the need
for endorsement before such cancellation took place. The
request was
acceded to and a copy of the relevant portion of the policy
containing a detailed notation was furnished to the owner.
In due
course the loader was damaged beyond repair. The insurer paid the
insured the proceeds of the policy. The lessee was still
indebted to
the owner but was liquidated. The owner could recover no dividend and
so sued the insurer for damages, alleging that
a binding agreement
had come into existence by reason of the notation at the owner’s
request. Apart from the facts outlined above
it was proved that it
was the practice in the appellant’s office to note a third party’s
interest on its policies and by virtue
of such notation to pay such
third parties the amount due to them by the insured when the latter
claimed on the policies.
2
This court considered this practice an important part of the facts
known to the owner and insured and an indication of their common
purpose.
3
It was held that they intended to contract with one another and had
reached ‘full
consensus
’.
4
[21] This
brief recital of the salient features of the
Marine and Trade
case reveals the extent to which the present facts fall short of
proving what was established in that matter. Whilst it may indeed
be
accepted that Knight’s request was aimed at securing payment to the
seller of what the insured still owed, there was, as I have
said, no
request (as pleaded) for notation on the policy and no consent by
Lloyds to effect such notation. In addition, Parmenter’s
lack of
knowledge or experience of noting on a cancelled policy disentitles
one from drawing the inference that he must have effected
such
notation.
[22] It
follows that the main claim could not succeed.
[23] Turning
to the alternative claim based on what I have called trade usage, the
seller’s expert witnesses said that it was a
long-standing practice
in the industry, when an owner of insured property asked the insurer
to note its interest, to pay the owner
out of the proceeds of the
policy any outstanding amount due to it by the insured in respect of
the property, prior to paying the
insured. The practice was
universally observed and well-known. It served to give protection to
the finance house without prejudicing
the insured and involved the
former being able to expect with certainty that it would be paid
first. Broadly, Leppard and Parmenter
were in agreement with that
evidence.
[24] For
present purposes there is no need to observe what distinctions there
are said to be in law between custom, usage or practice.
5
If the evidence established that an insurer’s mere receipt of a
request to note or its mere knowledge of a third party owner’s
interest imposed on it, without contract, an enforceable obligation,
on pain of damages, first to pay the owner, then the alternative
claim will have succeeded.
[25] It
must be emphasised that the alternative claim does not rest on a term
of the insurance agreement (express or tacit) or on
a tacit contract
between the insurer and the seller. No such contractual foundation
was pleaded or sufficiently investigated at the
trial to enable one
to deal with the matter as if either had been pleaded.
[26] In
so far as the seller sought assistance from the
Marine and Trade
case also in regard to the alternative claim, I fail to see how such
assistance can be derived from it. That case concerned the
established
practice of a particular insurer. It was not pleaded on
the basis of a universal trade usage. And, as indicated already, a
contract
was found to have been proved, at the commencement of the
insurance, for express notation on the policy with proof of notation
being
furnished to the owner.
[27] The
learned trial Judge found against the seller on this issue because,
so he held, the trade usage proved was clear enough as
far as it went
but that none of the witnesses had encountered the problem raised by
the present facts which was whether an insurer
who knew of a seller’s
interest was obliged to pay it in the absence of prior noting and in
the face of express opposition by the
insured.
[28] In
attacking that finding counsel for the seller argued that if the
problem had never arisen it was because the proven usage
provided
clarity as to how insurance proceeds were to be paid out, even in a
situation such as the instant one.
[29] It
seems to me that the stark implications of the seller’s contention
go a long way to demonstrating its untenableness. The
contention is
this: although the insured has a contractual obligation to pay the
insured, which is untrammelled by any rival contractual
obligation to
the seller such as existed in
Marine and Trade
, the insured
nevertheless incurs an enforceable obligation to the seller to pay
the latter by reason of mere acquisition of knowledge
of the seller’s
interest.
[30]
In my view the evidence goes no further than showing that the usage
provides an effective arrangement, (whether one calls it
a convention
or practice is immaterial,) as long as there is in effect tripartite
consensus, express or implied, that the insurer,
even though not
contractually bound to the seller, will pay the latter first. If it
is the insured who discloses the seller’s interest
this would imply
his consent that the debt to the seller be discharged first. If it is
the seller who gives the insurer the requisite
information, as here,
the opportunity for the insurer to ascertain the insured’s attitude
will usually arise. Parmenter indicated
clearly enough that if there
appeared to be a dispute, actual or potential, between insured and
seller he would urge that it be sorted
out before paying either. In
other words the insured’s objection to first paying the seller
would be a stumbling block to unquestioning
implementation of the
usual practice.
[31] I
find nothing in the evidence which warrants the conclusion that as a
matter of trade usage an insurer, by mere acquisition
of knowledge of
the seller’s interest, becomes bound, as if by contract, to pay the
latter ahead of the insured.
[32] Counsel
for the seller sought support in Van der Meer’s evidence for the
contention that the insurer’s knowledge of the seller’s
interest
imposes a legal obligation on the latter. I fail to find such
support. In one passage the witness said no more than that
he could
not say whether what burdened the insurer was a moral obligation but
it was a practice. In another passage he relied on
an instance where
the policy itself saddled the insurer with the obligation where it
knew of the third party’s interest.
[33] In
the result I think that the trial Court was correct in its
conclusion. It does not seem to me that this outcome impedes
efficiency
and clarity in the industry. A third party such as the
seller can always take self-evident steps to ensure that the buyer or
lessor
complies with its obligation to have the former’s interest
noted on the policy. Secondly, it can take cession of the policy.
Thirdly,
it can bring the situation within the ambit of the
Marine
and Trade
decision. Finally it can stipulate that the
buyer/lessor procures in the insurance contract an obligation on the
insurer first to
pay the third party.
[34] The
appeal is dismissed with costs, such costs to include the costs of
two counsel.
_______________
CT HOWIE
PRESIDENT SCA
CONCUR:
Zulman
JA
Cameron
JA
Navsa
JA
Jafta JA
1
1981
(4) SA 958
(A)
2
At
966F.
3
At
967A.
4
At
967E.
5
See
generally, Christie,
The Law of Contract
, 4
th
, 184
ff.