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[2007] ZAWCHC 79
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Singer NO and Others v m Cubed International (Pty) Limited and Another (1310/05) [2007] ZAWCHC 79 (9 November 2007)
IN
THE HIGH COURT OF SOUTH AFRICA (CAPE OF GOOD HOPE PROVINCIAL
DIVISION)
CASE
NO: 1310/05
in
the matter between:
LEON
JOHN SINGER NO.
First
Plaintiff
ANDRIES
OLIVIER N.O.
Second
Plaintiff
FRANK
WILLIAM MUGGLESTON N.O.
Third
Plaintiff
and
m
CUBED INTERNATIONAL (PTY) LIMITED
First
Defendant
m
CUBED LIFE LIMITED
Second
Defendant
JUDGMENT:
DELIVERED ON 9 NOVEMBER 2007
MANGA
AJ:
[1]
The plaintiffs are the trustees of the Leon John Singer Family Trust
("the Singer Trust").
[2]
The defendants are m Cubed international (Pty) Limited and m Cubed
Life Limited, the fatter carrying on business as a life insurance
company. The defendants are associated companies in that they are
both wholly-owned subsidiaries of m Cubed Holdings Limited.
I shall
use the term "m Cubed" to describe the group of companies
trading under that name, including the two defendants.
I shall also
from time to time refer to the defendants singularly as "m Cubed
International" and "m Cubed Life".
[3]
The Singer Trust has sued the defendants for damages purportedly
suffered as a consequence of two alleged misrepresentations
made by
persons acting on behalf of the defendants. Two witnesses,
viz.
Leon
Singer ("Singer"), the first plaintiff, and Carl Liebenberg
("Liebenberg"), testified on behalf of the
Singer Trust.
The defendants closed their case without calling any witnesses.
[4]
Singer has a considerable property portfolio, with the properties
being housed in various close corporations and trusts. He
is also a
member of a management corporation known as Progressive Housing
Investments CC, which manages the property portfolio.
[5]
In August 2001 Singer met Liebenberg, at the time a financial adviser
with Origin. Origin was a private banking division of
FirstRand Bank
Limited ("FirstRand") which specialised in high net-worth
clients. Prior to the meeting, Singer had been
advised by the second
plaintiff, Eric Olivier ("Olivier"), who was also the
accountant for his business interests, and
by Nathan Gordon
("Gordon") of Bass Gordon & Willis, who were Singer's
auditors, that it would be advisable for him
to diversify his
investments. At that time Singer had no offshore investments other
than the individual allowance permitted by
the South African Reserve
Bank ("the Reserve Bank"). His individual allowance and the
individual allowances of his family
members had been placed in a
trust established in
Guernsey.
[6]
Shortly thereafter Singer invested an amount of R1 million offshore.
The investment was made by the Singer Trust and was done
through the
rn Cubed group of companies.
[7]
Singer discussed with Liebenberg the possibility of investing
considerably greater funds offshore and an amount of between R35
million and R50 million was discussed. The underlying motive for the
offshore investment was in order to benefit from what was
seen as the
declining value of the South African rand. Liebenberg had attended an
m Cubed presentation in August 2007, at which
presentation m Cubed's
ability to invest money offshore in structures different from the
typical structures or investment options
was explained.
[8]
As a consequence of this presentation Liebenberg approached m Cubed's
representative in Cape Town, John Lester ("Lester")
about
the possibility of a substantial offshore transaction. Lester
referred Liebenberg to Dave Cosgrove ("Cosgrove"),
who
headed up m Cubed's international division - the division that did
structured offshore investments for high net-worth individuals.
At
the time Cosgrove was a director of m Cubed International. Shortly
thereafter he also became a director of m Cubed Life.
[9]
A meeting was duly arranged for 20 September 2001, with Cosgrove to
fly to Cape Town to meet with Singer.
[10]
At the meeting held on 20 September, Cosgrove presented Singer with
advice, as had been requested by Liebenberg in a fax sent
to Cosgrove
on 12 September 2001. Singer was accompanied at the meeting by
Liebenberg, Olivier, Gordon and Peter Moody ("Moody"),
Singer's office manager.
[11]
The essence of the structure offered by Cosgrove on behalf of m Cubed
was as follows:
(i)
m
Cubed Life was in possession of a facility which constituted a
foreign
direct investment allowance granted by the Reserve Bank to
life insurance
companies;
(ii)
Singer
(or an entity nominated by him) could make an investment with
m
Cubed Life through a rand-denominated linked endowment policy
which
would be issued by m Cubed Life;
(iii)
m
Cubed Life would then convert the rands received into United
States
dollars using its foreign direct investment allowance and
immediately place
these into an interest-bearing dollar account or
into a dollar money-market
fund;
(iv)
the
investment would be limited to the range of offshore
investments
offered by m Cubed Capital Assurance PCC Limited ("m
Cubed Capital"),
another company in the m Cubed group,
registered in Guernsey;
(v)
the
investment could however be made in an offshore life insurance policy
("the
life policy"), with the entity issuing the life policy in turn
investing in one or more of the aforesaid range of
investments; and
(vi)
the life policy would be owned by m Cubed Life.
[12]
A further meeting took place on 11 October 2001, at which the three
trustees of the Singer Trust - Singer, Olivier and the
third
plaintiff, Frank Muggieston ("Muggleston") - were present,
as well as Liebenberg and Moody and, representing m
Cubed, Cosgrove
and Lester. Shortly before the meeting, Gordon had raised with Singer
the risk of m Cubed Life's insolvency, saying
that m Cubed was not
Old Mutual. At the meeting, therefore, the institutional risk of
insolvency was raised with Cosgrove, who
immediately proposed a
revised version of the structure previously proposed by him. In the
revised version, there was to be the
addition of an offshore trust as
a special purpose vehicle ("the SPV") to acquire the life
policy and then to cede it
to the investor (Singer or an entity
nominated by him)
in
securitatem debiti.
The
cession by a third party would serve to protect the investor against
the risk of m Cubed's insolvency.
[13]
The agreed-upon revised structure was as follows:
(i)
the
Singer Trust would be the entity through which Singer would make
the
investment;
(ii)
the
Singer Trust would invest the amount of R10 million with m Cubed
Life
in a single premium endowment plan;
(Hi)
m Cubed Life would issue to the Singer Trust ten endowment policies
of R1 million each;
(iv)
m
Cubed Life would invest the R10 million received from the Singer
Trust
by way of a capital subscription in the SPV, to be known as
the Samson
Shield Trust;
(v)
the
SPV would in turn apply for and be issued a R10 million life
insurance
policy by SelectLife Linked ("SelectLife"), a
cell of m Cubed;
(vi)
the
life insured would be Singer, and the beneficiary of the SelectLife
life
insurance policy ("the SelectLife policy") in the
event of the death of Singer
would be the existing offshore trust
in which Singer's and his family's
foreign allowance had been
invested;
(vii)
SelectLife
would invest the R10 million in the m Cubed Minimum Return
Fund;
and
(viii)
the
SPV, acting through its trustees, would cede the SelectLife policy
to
the Singer Trust
in
secuhtatem debit!
in
order to provide the Singer Trust
with security against the loss
of the R10 million invested with m Cubed Life
in the event of m
Cubed Life's insolvency.
[14]
Subsequent to the meeting, Liebenberg encapsulated the new structure
-absent the cession - in a schematic attended by notes.
The schematic
and accompanying notes were sent to Cosgrove on 15 October 2001, and
a response was received from Corinna Harvey
("Harvey") of m
Cubed on the same day,
inter
alia
explaining
the nature and effect of the cession. She attached a draft of the
cession to this response.
[15]
Further negotiations and discussions followed, and there was a
lengthy delay before Singer, on behalf of the Singer Trust,
on 19
March 2002 signed an m Cubed Life application form in order to
implement the investment of R10 million. There can be little
doubt
that the prime motivation for Singer making the investment in March
2002 was a substantial discount on fees offered by Liebenberg.
The
application form stated that the funds were "to be invested in
the SPV and subsequent structure as per the agreed proposal".
The schematic was referred to, and annexed. Although the schematic
did not include the cession, it was not disputed by m Cubed
that the
cession was an intrinsic part of the
"structure
as per the agreed proposal".
I
shall
refer to the structure as per the agreed proposal hereafter as "the
structure".
[16]
Although Singer is a man of some considerable means, most of his
assets (or the assets owned by entities of which he is the
effective
controller) are held in fixed property and Singer chose not to
liquidate any of his fixed properties to finance the investment
but
chose rather to borrow the amount of R10 million from Origin. There
was no compelling reason for Singer to finance the transaction
in
this manner.
[17]
The way in which this financing worked was that various properties
were sold or transferred to the (newly-created) Dalezbro
Trust (not
the Singer Trust), which in turn used them as security to obtain a
loan facility of R40 million from Origin. The Dalezbro
Trust in turn
loaned the R10 million required for the investment to Singer in his
personal capacity, and Singer then advanced the
R10 million onto the
Singer Trust, for investment offshore.
[18]
The structure was never implemented. The R10 million borrowed by the
Singer Trust was paid to m Cubed Life, which duly issued
a
rand-denominated linked endowment policy to the Singer Trust. The SPV
was not created before, at the earliest, 20 May 2002. On
the
probabilities it never opened a bank account. There is also no
evidence that m Cubed Life invested the R10 million by way of
a
capital subscription in the SPV. Instead, m Cubed Life was itself
issued with the SelectLife policy. The United States dollar
equivalent of the R10 million investment at that time was $865
800,67. The SelectLife policy was moreover never ceded to the Singer
Trust - even after what appears to have been an erroneous endorsement
of the SelectLife policy by m Cubed Life to the SPV on 6
November
2003.
[19]
On 7 October 2003 m Cubed's in-house lawyer, one Brett Landman
("Landman"), informed Singer at a meeting that the
structure could not be implemented, as, in m Cubed's considered
opinion, it would be illegal to do so.
[20]
Prior to this meeting, and despite much frustration with the apparent
ineptitude of m Cubed and an ongoing battle to obtain
documentation
and sensible responses from m Cubed, the trustees of the Singer Trust
were for most of the period between 19 March
2002 and 7 October 2003
under the impression that the structure had been implemented and that
the Singer Trust was secured against
the risk of m Cubed Life's
insolvency. The only times when they knew that the security was not
in place would have been for a number
of weeks after 19 March 2002,
when there were delays in establishing the SPV and in having the
cession signed and for a few days
after 16 September 2002, when they
were told that the original cession had not been signed by the
trustees of the SPV but that
a new cession would be signed by them.
[21]
In fact and on 27 May 2002 Cosgrove and Harvey represented in a
letter to the Singer Trust that the cession of the SelectLife
policy
was in place. This was untrue: m Cubed Life rather than the SPV was
at the time the owner of the policy, the cession had
not been signed
by the trustees of the SPV and there had been indications, albeit at
an earlier stage, that the trustees of the
SPV would not sign the
cession. This problem,
viz.
that
the proposed trustees of the SPV would not sign the cession, was
never communicated to Liebenberg or the Singer Trust. The
cession
was, as a fact, never signed.
[22]
I am satisfied, on the probabilities, that the principal reason for
the cession not having been signed by the trustees of the
SPV was
that the structure fell foul of the conditions under which m Cubed
were permitted to externalise funds offshore under what
was
colloquially referred to as its
"asset
swap"
facility.
This was effectively said by m Cubed to the Reserve Bank in
representations made to the Reserve Bank in February 2004
and to
which I refer below.
[23]
On 26 February 2004 the Singer Trust terminated the investment and
an amount of R6 115 041.74 was subsequently paid to the
Dalezbro
Trust after being redeemed from offshore. The reason that this amount
was repaid and not the original R10 million was
principally due to
the strengthening of the rand since 19 March 2002.
[24]
The Singer Trust claims, as its principal claim, payment of damages
for negligent misrepresentation regarding the legality
of the
structure, which misrepresentations induced the Singer Trust to make
the investment through m Cubed. The damages consist,
first, of the
difference between R10 million and R6 115 041.74, i.e. R3 884 958.26;
and, secondly, of the interest payable by the
Singer Trust to Singer,
being equal to the compound interest payable by the Dalezbro Trust to
FirstRand, and which amounted as
at the time when summons was served
to R3 881 017.47.
[25]
The Singer Trust also has an alternative claim, which arises only in
the event that the claim based on negligent misrepresentation
of the
structure fails. It arises from Cosgrove and Harvey's allegedly
fraudulent, alternatively negligent, misrepresentation regarding
the
cession on 27 May 2002, the Singer Trust's case being that, but for
that misrepresentation, it would have immediately terminated
the
investment As at 27 May 2002 the converted rand value of US$865
800.67 was R8 662 164.54. As a result of the misrepresentation,
therefore, the Singer Trust lost the difference between that amount
and the amount of R6 115 041.74 eventually repaid to it, i.e.
R2 547
122.80.
[26]
Both the first and the second claims are against m Cubed Life and
m Cubed International jointly and severally, alternatively
against m
Cubed International. The defendants, In addition to denying the
essential elements of the Singer Trust's alternative
claims, have
alleged contributory negligence on the part of the trustees of the
Singer Trust in relation to the main claim.
[27]
The
first alleged misrepresentation was purportedly made during the
negotiations which led to the
agreement
between
the Singer Trust and the defendants about an investment structure for
Singer to invest offshore, and was allegedly to the
effect that the
agreed investment structure
"was
lawful, was fully in accordance with the relevant foreign exchange
requirements of the Reserve Bank, and had the Reserve
Bank's
approval.
[28]
The Singer Trust further alleged in relation to this claim that:
(i)
the
representation(s) were false;
(ii)
the
representation(s) were negligently made (in that persons making
the
alleged representations supposedly could, and should, have
determined
the true legal position);
(iii)
the
persons making the alleged misrepresentations "were
under
a legal
duty to the Trust not to misrepresent the true position"]
(iv)
but
for such purported representations, the Singer Trust would not
have
agreed to the proposed investment structure and invested any
money with
the Defendants; and
(v)
as a consequence of making the investment - which involved placing
R10 million in linked endowment policies with m Cubed Life
- the
Singer Trust has suffered a loss of R3 884 958.26 (being the
difference between the R10 million invested and the amount ultimately
received back from the investment after it was unwound), plus
interest on the funds borrowed to make the investment.
[29]
In order to succeed with this claim the Singer Trust must establish
the following:
(i)
That
there were representations of the kind alleged;
(ii)
That
the representations were statements of fact or opinions which
would
sustain an action;
(iii)
That
the representations were wrong;
(iv)
That
the maker of the misrepresentations acted wrongfully;
(v)
That
the misrepresentations were made negligently; and
(vi)
that
the misrepresentations were the cause, both factually and legally,
of
any loss suffered by the Singer Trust.
[30]
Three instances of representations were alleged in the pleadings,
viz,
the
representation by Cosgrove at the meeting of 20 September 2001 that m
Cubed
Life
stii! had funds that could be invested offshore in terms of the
allowance granted to life insurance companies by the Reserve
Bank; an
e-mail addressed to Liebenberg and copied to Singer on 6 November
2001 in which it was stated that
"[t]he
funds are being externalised through the license [sic] of m Cubed
Capital Life Limited, for which we received specific
Reserve Bank
approval;
and
a fax sent to Liebenberg on 5 March 2002 and signed by Cosgrove and
Harvey in which it is stated that
"the
funds will be send [sic] offshore via the m Cubed Life license
[sic]".
[31]
Mr
Fagan,
who
appeared for the Singer Trust, submitted that these representations
were borne out by the evidence and that such representations
were
false. He also submitted that m Cubed owed a duty of care to the
Singer Trust not to misrepresent the true position and he
argued that
the misrepresentations were wrongfully made.
[32]
In his evidence in chief, Singer was notably not asked to specify
what the purported representations on which the Singer Trust
relied
consisted of, or when, where or how they were made. The high water
mark of Singer's evidence on this score essentially involved
him
reading out a passage from the Singer Trust's attorney's letter of
demand and confirming that the statements there were, as
far as he
knew, correct. The relevant portion of the letter of demand reads as
follows:
'7
/7
doing
so
}
and at various times during negotiations, Mr Dave Cosgrove and other
members of your organization represented that this was a lawful
mechanism that could be used in conjunction with the asset swap in
order to give our client the required protection. Mr Cosgrove
also
confirmed that the investment structure, including the protective
mechanism, had recently been utilised by other large investors"
[33]
When pressed in cross-examination to provide details of the kinds of
representations that were being referred to in this letter,
Singer
was unable to do so. He was unable to recall any examples of alleged
representations or misrepresentations off the top of
his head and
when invited to locate alleged representations in the exhibit bundle,
he was not readily able to do so. Ultimately
he only referred to two
documents,
viz.:
(i)
The
minutes of the
20
September
2001
meeting
with Cosgrove,
Liebenberg, Moody, Olivier and Gordon. The
structure was not however
discussed at that meeting, nor were any
representations made by
Cosgrove other than in respect of the use
of the life policy as a so-called
"wrapper". In effect,
all that was represented at this meeting was that
m Cubed had
Reserve Bank approval to transfer funds offshore using its
life
insurance licence. This was what was known as asset swapping and
it
was not suggested before me that this representation was false.
(ii)
The
next document referred to by Singer was the notes of the
"PHI
Investment
Schematic"
which
had been prepared by Liebenberg a couple
of days after a meeting
held with Singer, Olivier, Moody, Liebenberg,
Cosgrove and Lester
held on
11
October
2001.
Those
notes (which
included various
"questions
which arise out of the above structure")
did
not
however refer to any particular representation or statement of
legality by Cosg rove.
[34]
I agree with the submission made by Mr
Farlam,
who
appeared for the defendants, that what was apparent from Singer's
evidence, when viewed in its totality, was that the Singer
Trust did
not rely on any particular representation of legality by Cosgrove or
any other representative of m Cubed. The Singer
Trust either simply
assumed that the structure was legal, or never actually gave it any
thought at all.
[35]
As a consequence 1 find that the Singer Trust's main claim thus falls
at the first hurdle as the Singer Trust has not established
the
misrepresentation alleged in its particulars of claim. It follows, as
a matter of logic, that the interest as damages claim
also fails.
[36]
1 now turn to deal with the alternative claim.
[37]
In terms of
Liiiicrap,
Wassenaar and Partners v Pitkington Brothers (Pty) Ltd
1985
(1) SA 475
(A) an extension of Aquilian liability to allow a claim
for pure economic loss is not justified where satisfactory and
adequate
contractual remedies are available to a plaintiff. In the
present case, the investment was made on 19 March 2002 and in my view
the making of the investment constituted a contract with m Cubed
Life.
[38]
In
Trustees,
Two Oceans Aquarium Trust v Kantey & Tempter (Pty) Ltd
2006
(3) SA 138
(SCA) Brand JA said this concerning
LiiJicrap
(at
147C-D);
"The
point underlying the decision in
Lillicrap
was
that the existence of a contractual relationship enables the parties
to regulate their relationship themselves, including provisions
as to
their respective remedies. There is thus no policy imperative for the
law to superimpose a further remedy"
[39]
The essential question in
Lillicrap
was
therefore whether in the factual circumstances of that case there
should be an extension of Aquilian liability to allow the
plaintiff
to claim damages from the defendant.
[40]
Mr
Fagan
submitted
that an extension of the
actio
legis Aquiliae
is
not required where the delictual claim is one that is already
recognised, such as a claim for damages arising from a negligent
misstatement. Nevertheless, the same policy considerations presumably
do arise, which include the concern expressed by Grosskopf
AJA in
Lillicrap
about
the difficulties that might arise if the delictual and contractual
standard of damages were not to coincide (at 500G-501B).
[41]
What
Lillicrap
does
not say, is that the mere fact of a contract between two parties
precludes the one from suing the other in delict. Indeed,
the
contrary is expressly stated (at 500H):
"This
does not of course mean that the law may not impose additional
obligations by way ofnaturalia arising by implication
of law, or, as
I have indicated above, those arising ex delicto independently of the
contract"
[42]
The
misrepresentation relied on by the Singer Trust for the alternative
cfaim was made after the contract was concluded and related
to
whether or not certain of the agreed upon terms had been implemented
by m Cubed.
[43]
There can be little doubt that in such circumstances m Cubed's
representatives had a duty to tell the Singer Trust the truth
and the
fact that the contract had been concluded and investment had been
made did not therefore change the nature of the relationship
between
m Cubed and the Singer Trust in so far as the making of
representations was concerned. As
Mr
Fagan
correctly
submitted, it would be highly artificial to seek to insert into the
contract an implied term that m Cubed Life would not
make fraudulent
or negligent misrepresentations to the Singer Trust.
[44]
Mr
Farfam
contended,
however, that the Singer Trust had failed to establish, on a balance
of probabilities, that had the Singer Trust known
the true position,
as at 27 May 2002, it would have immediately terminated its
investment and claimed repayment of the money invested.
[45]
In my view, the evidence has clearly established that, as at 27 May
2002, the cession
in
secuhtatem debiti
was
not in place and, indeed, the structure could never have been
lawfully implemented.
[46]
As I have already said, it was m Cubed's in-house lawyer, Landman,
who stated at the meeting held on 7 October 2003 that the
structure
was in contravention of exchange control regulations.
[47]
Furthermore, as appears from submissions which m Cubed made to the
Reserve Bank in February 2004, m Cubed conceded that the
structure
constituted a breach of the Exchange Control Regulations and that the
implementation thereof would be unlawful.
[48]
Whilst it was alleged by the Singer Trust that the misrepresentations
made by Cosgrove and Harvey on 27 May 2002 were fraudulent
I am, for
present purposes, prepared to accept that they were not fraudulently
made. However, Cosgrove and Harvey certainly knew
that not only had
the cession not been signed but knew, or ought to have known, that
there were problems with the implementation
of the structure. They
were under a duty to communicate this to the Singer Trust and their
failure to communicate the fact that
the cession
in
securitatem debiti
was
not in place was both wrongful and negligent. The structure was
proposed and agreed upon because Singer wished to be protected
against the risk of m Cubed's insolvency. If he could not be
protected against this risk he would not have made the investment.
[49]
In the circumstances I am satisfied that had the Singer Trust been
aware of the true position,
viz.
that
the cession had not been signed and the structure could not be
implemented (or at the very least, that there were problems
with
implementation), it would have immediately cancelled the contract and
terminated the investment.
[50]
The Singer Trust's entitlement to terminate the investment in May
2002 stemmed from m Cubed's failure to implement the structure
and
did not arise from any pre-contractual misrepresentation inducing the
Singer Trust to make the R10 million investment. This
entitlement to
terminate the contract would have flowed as a consequence of m
Cubed's inability to implement the structure agreed
upon. In those
circumstances the Singer Trust would not have enjoyed any claim
against the defendants arising from the fact that
it may have
incurred a useless interest liability by borrowing R10 million in
order to make the investment. In other words, it
would not have
enjoyed any claim against the defendants for the interest paid on the
R10 million borrowed from Origin. As a consequence,
the alternative
"interest
as damages"
claim
falls away and ! do not need to express my further views in regard
thereto.
[51]
Had the Singer Trust terminated the investment at the end of May 2002
it would have received an amount of US$865 800.67 or
R8 662 164.54.
The difference between this amount and the amount which was
eventually repaid is in the amount of R2 547 122.80
and I am
satisfied that the Singer Trust has established that it suffered
damages in this amount as alleged in its alternative
claim.
[52]
One final point remains. The Singer Trust sued both m Cubed
International and m Cubed Life for misrepresentations made on their
behalf by Cosgrove and Harvey. I am satisfied, on a balance of
probabilities, that although the letter of 27 May 2002 was written
on
an m Cubed International letterhead, Cosgrove, at the very least,
represented both m Cubed International and m Cubed Life and
that they
are jointly and severally liable for the damages sustained by the
Singer Trust as a consequence of Cosgrove's representations.
[53]
In the result I make the following order:
The
first and second defendants are ordered, jointly and severally, to
pay to the plaintiffs, in their capacities as trustees
of the Leon
John Singer Family Trust, an amount of R2 547 122.80 as damages;
Interest
is awarded on the said damages at the rate of 15.5% per annum
calculated from the date of service of summons to the date
of final
payment;
The
first and second defendants are ordered, jointly and severally, to
pay the plaintiffs' costs of suit, including the cost of
two counsel
where two counsel were employed.
MANCA,
A J