Thatcher and Another v Katz and Another (5516/05) [2006] ZAWCHC 4; 2006 (6) SA 407 (C) (9 February 2006)

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[2006] ZAWCHC 4
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Thatcher and Another v Katz and Another (5516/05) [2006] ZAWCHC 4; 2006 (6) SA 407 (C) (9 February 2006)

Reportable
in
the high court of South Africa
(cape
of good hope provincial division)
Case
No 5516/05
In
the matter between:
CHARLES
MANNING THATCHER
First
Appellant
MICHAEL
NEIL McCABE
Second
Appellant
and
SIMON
KATZ
First
Respondent
SAMUEL
KATZ
S
econd
Respondent
judgment:
delivered 9 february 2006
Griesel
J:
Introduction
During
February 2002, the respondents in this appeal (
plaintiffs
),
Mr Simon Katz (
Katz Snr
)
and his son, Mr Samuel Katz
(
Katz Jnr
), invested amounts of R500 000 and R300 000
respectively in a pyramid scheme conducted by one Ms Amanda
Martinson (
Martinson
) in Klerksdorp. They did so through the
intercession of the
XYZ Syndicate
, which was co-managed by
the
appellant
s, Messrs Charles Thatcher
(
Thatcher
) and Michael McCabe (
McCabe
) (
defendants
).
A short while later, the scheme imploded – as all similar schemes
inevitably do, sooner or later. Faced with the uncertain
prospect of
a meagre dividend from Martinson’s insolvent estate, the
plaintiffs sought to hold the defendants liable for their
losses.
The
plaintiffs’ claims were based on a variety of alternative causes
of action, both delictual and contractual. The claims in
delict were
based upon intentional mis­representation and non-disclosure;
alternatively negligent misrepresent­ation. The
claim in
contract was advanced on the basis of a breach by the defendants of
their contractual obligations,
inter alia
to have taken ‘all
prudent measures…to reduce the risk to an acceptable level for all
the members of the syndicate’.
The
trial judge (Bozalek J) held in favour of the plaintiffs on the
basis of negligent mis­rep­resentation. He accordingly
granted judgment in their favour in the amounts of R453 746,87
and R281 248,12
1
respectively, together with
mora
interest and costs. With
leave of the trial judge, the defendants now appeal against the
whole of the aforesaid judgment.
Factual
Background
It
appears from the evidence that the defendants were two of the early
investors in Martinson’s scheme. They initially invested
with
Martinson through an investment syndicate operated by one Mr
Coetzee, a Potchefstroom attorney. They both enjoyed handsome
returns of some 10% per month on their investments and in late 2000
they decided, with the consent of Martinson, to form their
own
syndicate, the abovementioned XYZ Syndicate, in Cape Town.
The
XYZ Syndicate grew substantially, both in respect of the number of
its members and the extent of its investments with Martinson.
By the
time the plaintiffs made their investments on 8 February 2002, there
were some 32 members with total investments exceeding
R18 million.
The
plaintiffs came to hear about the scheme from an acquaintance. They
contacted Thatcher, who paid them a visit at their Bishopscourt
home
during July 2001 and explained the basis and the operation of the
scheme to them as follows: Investors would lend money to
Martinson,
who would allegedly utilise such funds in order to finance a
micro-lending scheme that was operated through a ‘registered
money-lending company’, variously known as ABC Financial Services
Pty (Ltd) or ABC Cash Plus and Financial Services Pty (Ltd).
The
investments were used to make small loans to mineworkers employed by
Anglo-American Mines in the Potchefstroom /­ Klerksdorp
area.
These loans were for a period of 30 days and did not exceed R1 500
per borrower. Repayment of the loans was administered
by mine
management and effected by means of deductions from the borrowers’
monthly remuneration. Thatcher and McCabe travelled
to Klerksdorp on
a monthly basis to deal with Martinson and to collect money owing to
the XYZ Syndicate. The lending operation,
according to Thatcher, was
legitimate and lawful.
Attracted
by what they had heard, the plaintiffs, on 8 February 2002, invested
R500 000 and R300 000 respectively in the
scheme through
the XYZ Syndicate, represented by the defendants. A short while
later, the scheme began to collapse. Apart from
one interest payment
of R30 000 made to Katz Snr, neither plaintiff ever saw his
investment again.
By
July 2002, Martinson’s estate had been sequestrated and two
companies which she controlled had been liquidated. An inquiry
in
terms of s 417 of the Companies Act, 61 of 1973, revealed
chaotic and grossly incomplete financial records. It also emerged,
to the dismay of investors in the scheme, that Martinson’s company
was not a registered money lending company. Moreover, no loans
had
ever been made to mine­workers. In fact, no evidence of any
income-generating activities by Martinson or any of her companies
could be found. Her ‘business’, it transpired, was nothing but a
massive pyramid scheme, with Martinson merely ‘recycling’
the
monies invested with her back to some investors at lavish rates of
interest. The liquidators anticipated claims of R157 million
being filed by investors against Martinson’s estate.
It
is thus apparent that most of the key representations made to the
plaintiffs by Thatcher were false. The essence of the defences
raised by the defendants to the plaintiffs’ claims was an
admission of certain of the representations, coupled with the
allegation
that plaintiffs were made aware at all times that the
information contained in the representations was forthcoming from
Martinson
and that Thatcher believed in the truth thereof. Any
negligence on the part of the defendants was denied and it was
further denied
that either plaintiff suffered any damages as a
result of any act or omission by the defendants.
The
Judgment
a quo
In
a full and comprehensive judgment, Bozalek J analysed the
evi­dence and made favourable credibility findings in favour
of
Katz Jnr, preferring his evidence to that of the defendants. In the
absence of mis­direction on fact by the trial judge,
the
presumption is that his conclusion in this regard is correct. An
appellate court will only reverse such a conclusion where
it is
convinced that it is wrong.
2
In the present case, the credibility findings are well-motivated and
amply supported by the evidence on record. Bearing in mind
this
strict test, I have not been persuaded that there are any grounds
for interference on appeal with the credibility findings
of the
trial judge.
As
to the question of liability, the trial judge found (a) that
the plain­tiffs had failed to establish their cause of
action
based on intentional or fraudulent misrepresentation;
3
(b) that they had succeeded, however, in establishing the
requisites for a claim based on negligent mis­rep­resentation;
4
and, hence, (c) that it was not necessary to consider the claim
based on contract.
5
With
regard to the requirements for liability for negligent
misrepre­sentation, the trial judge followed the approach laid

down by the Appellate Division in
Bayer SA (Pty) Ltd v Frost,
6
where it was authoritatively held that there could, in principle, be
an action for damages for negligent mis­repre­sentation
which had induced a party to enter into a contract.
The
trial judge thereupon embarked upon a detailed analysis of the
various requirements for delictual liability in this context
and
concluded that the plaintiffs had succeeded in establishing all
those requirements. On appeal before us, each of those findings
of
the trial judge was assailed
on behalf of
the
defendants. In particular, counsel for the defendants argued that
the plaintiffs had failed to establish the element of unlawfulness
as there was no legal duty resting on the defendants.
The
question of delictual liability in a contractual setting has long
been a vexed issue in our law, especially insofar as the element
of
wrong­fulness is concerned.
7
In the leading case of
Lillicrap, Wassenaar & Partners v
Pilkington Brothers (Pty) Ltd
,
8
the Appellate Division opted for a ‘cautious approach’ with
regard to an extension of Aquilian liability for pure economic
loss
in a contractual context. Grosskopf AJA, writing for the
majority, held that there was no need to extend Aquilian liability
in the light of the fact that, while the contract between them
persisted, each party had adequate and satisfactory remedies if
the
other were to have breached such contract. He continued:
‘
Moreover,
the Aquilian action does not fit comfortably in a contractual setting
like the present. When parties enter into such a contract,
they
normally regulate those features which they consider important for
the purpose of the relationship which they are creating.
…
Apart
from defining the parties’ respective duties (including the
standard of performance required,) a contract may regulate other
aspects of the relationship between the parties. Thus, for instance,
it may limit or extend liability, impose penalties or grant
indemnities, provide special methods of settling disputes (eg by
arbitration) etc. A Court should therefore in my view be loath to
extend the law of delict into this area and thereby eliminate
provisions which the parties considered necessary or desirable for
their own protection. The possible counter to this argument, viz that
the parties are in general entitled to couch their contract
in such
terms that delictual liability is also excluded or qualified, does
not in my view carry conviction. Contracts are for the
most part
concluded by businessmen. Why should the law of delict introduce an
unwanted liability which, unless excluded, could provide
a trap for
the unwary?’
The
same ‘cautious approach’ to the extension of Aquilian liability
in a contractual setting was re-asserted in the recent decision
of
the Supreme Court of Appeal in
Trustees for the time being of Two
Oceans Aquarium Trust v Kantey & Templer
(Pty) Limited
,
9
where Brand JA held, with reference to
Lillicrap’s
case,
supra
:
‘
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.’
In
the
Bayer
case,
supra,
on which the trial judge placed
particular reliance, Corbett CJ articulated the policy
considerations for granting delictual
relief to a contracting party
based on a negligent misstatement as follows:
10
‘
In
my opinion, the law should provide adequate protection for persons
induced to contract by a negligent misstatement ema­nating
from
the other contracting party
and not incorporated as a term of the
contract
; and in many instances this can only be done by granting
the party concerned compensation for conse­quential loss suffered
as
a result of the misstatement.’
(my
emphasis)
It
follows
a fortiori
,
in my opinion, that where a
misstatement has been made, which misstatement
has been
incorporated as a term of the contract, no need for a delictual
remedy exists.
In
the present case I am of the view – for reasons which will emerge
presently – that, in accordance with the notion of party
autonomy,
the specific provisions in the contract entered into between the
parties should take prece­dence over the more general
duties
owed in delict. This implies that the scope of a delictual duty of
care in this context should not be more extensive than
that provided
for under the relevant contract.
11
One could go further and add that the Constitution requires the
court to follow this approach: as Cameron JA explained in
Brisley v Drotsky
,
12
the Constitution prizes dignity and autonomy and, in appropriate
circumstances, these standards find ex­pression in the liberty
to regulate one’s life by freely engaged contractual
arrange­ments.
13
Contractual
Claim
Having
regard to the provisions of the agreement in question, I am
satisfied that the plaintiffs have an adequate remedy based on
their
contract. I accordingly find it unnecessary to come to any definite
finding with regard to the question whether or not the
trial judge
was correct in finding for the plaintiffs on the basis of delictual
liability.
Pursuant
to the meeting between the plaintiffs and Thatcher in February 2002,
each of them signed a ‘lending agreement’ with
the XYZ
Syndicate, recording the conditions governing the loan as follows:
‘
1. The
mechanics of the portfolio into which the funds are lent have been
described to the lender in which emphasis was placed on
the high risk
of the portfolio.
The
management of the syndicate does not act in a fiduciary capacity but
as co-investors who will to the best of their ability keep
the
investor informed of the progress of his loan.
The
management of the syndicate has made no implied or express
warranties due to the high risk of the portfolio except to state
that they themselves have considerable capital invested in the
portfolio and therefore run the same risks as the syndicate.
The
lender has been informed that all prudent measures have been taken
by the operators of the portfolio to reduce the risk to an
acceptable level for all the members of the syndicate
.
(my emphasis)
The
interest rate applicable to the loan is at present 6% per month. The
loan is made for a period of 12 (Twelve) months. The lender
has the
option of withdrawing the interest monthly or reinvesting it. In the
latter event the reinvestment will be for the remainder
of the term
of the initial loan.
There
are no financial or other guarantees backing the loans made by the
members of the syndicate.
The
interest may be reduced as a result of statutory requirements
relating to the portfolio.
Should
a member of the syndicate wish to redeem the loan after the initial
12-month period or any time thereafter, a 60-day notice
period is
required.
The
lender is required to attend to his/her own tax liabilities
pertaining to this loan.
It
is a requirement of the syndicate that each lender remains discreet
regarding the investment activities of the syndicate, due
to the
pressure being applied by various banking institutions to enter into
the same field of lending.
The
management of the syndicate state categorically that all lending
activities are completely legitimate
.
(again my
emphasis)
All
interest withdrawals will be made as soon as possible after
month-end.’
Notwithstanding
the disclaimers and disavowal of liability expressed in the
agreement, the two clauses that I have underlined contain
express
warranties on which the plaintiffs, in my view, are entitled to
rely. The fact that the warranty in clause 3 purports to
be given
on
behalf of
the ‘operators of the portfolio’, in contrast
with the ‘management of the syndicate’ in clause 10, does not
assist the defendants:
even if it were to be accepted, for purposes
of argument, that the ‘operators of the portfolio’ are different
from the ‘management
of the syndicate’, the plaintiffs have
established on a clear balance of probabilities that the warranty
was breached. As a fact,
no prudent measures had been taken to
reduce the risk to an acceptable level for the members of the
syndicate – neither by the
defendants nor by Martinson and her
cohorts, who ‘operated’ the portfolio. From the defendants’
side, the position was aptly
summed up by Thatcher, who candidly
admitted in his evidence that, with hindsight, they ‘should have
done many things’ to ensure
that the lending operation was what it
purported to be and that the risk was reduced to an acceptable
level. He did not offer any
explanations ‘for any stupidity I was
involved in’, adding that Martinson had established her
bona
fides
and they trusted her: ‘With hindsight now, we look
silly
.
But at that stage we trusted her.’
14
With
regard to the warranty contained in clause 10, no attempt was made –
either at the trial or on appeal – to establish the
legitimacy of
the lending activities; on the contrary, it was common cause at the
trial that Martinson’s scheme was ‘now obviously
known to be a
fraud’.
15
There was some debate during argument before us (albeit somewhat
tentative) as to the question whether the plaintiffs are entitled,
on appeal, to rely on the warranty contained in clause 10 in view of
the fact that it was not expressly pleaded in the particulars
of
claim
qua
warranty. In my view, such omission does not
preclude reliance thereon at this stage: first, the content of the
warranty was adequately
pleaded as one of the representations made
by Thatcher during his negotiations with the plaintiffs.
16
Secondly, counsel for the defendants were unable to indicate how
their defence or conduct of the trial would have differed, had
clause 10 in fact been pleaded as a warranty. (This is hardly
surprising in view of the concessions referred to above.)
In
these circumstances, I am satisfied that there has been full
investigation of this matter at the trial and there is no reasonable
ground for thinking that any further examination of the facts might
lead to a different conclusion on this issue. In my considered
opinion, the plaintiffs are accordingly entitled to rely on both
warranties.
17
Having
come to this conclusion, it is clear beyond any doubt, based on the
evidence accepted by the trial judge, that both those
warranties
have been breached.
Second
Defendant’s Liability
As
a final fall-back position, there was some debate as to McCabe’s
liability. This was advanced on the basis that McCabe had
no
dealings, directly or indirectly, with the plaintiffs until
mid-2002, by which stage their monies had already been invested
and
lost. This argument may be disposed of very briefly.
In
regard to the relationship between the defendants, the evidence was
that they worked together as joint managers of the XYZ Syndicate.
At
their first meeting with Thatcher, the plaintiffs were informed that
the Syndicate was controlled and administered by the defendants
jointly. Both of them approached potential investors to solicit
funds and either one of them would sign the standard contract

agreement between the Syndicate and the investor. Who happened to
deal with a particular investor, who would travel to Klerksdorp
and
who would sign whatever document needed to be signed by the
management of the Syndicate was dictated by convenience. The
defen­dants
also testified that they split the monthly
‘administration fee’ of R20 000 equally between them.
Furthermore,
in his evidence, McCabe did not repudiate any of the representations
made by Thatcher to the plaintiffs; on the contrary,
his account of
the workings of the Syndicate corresponded, in broad outline, with
that given by Thatcher. Both defendants were
also represented by the
same legal team at the trial and relied on the same defences.
The
trial judge held McCabe liable on the principles of vicarious
liability on the basis of their ‘
de facto
partnership’
and as joint wrongdoers. These findings were criticised during
argument before us
on behalf of
McCabe. In
view of my finding that it is not necessary to rely on delictual
liability, these arguments become irrelevant. Having
found that the
plaintiffs are entitled to rely on the provisions of their contract
with the Syndicate, it is clear that the defendants
were joint
parties to such contract. This much was made clear by McCabe in his
own evidence, where he explained that the agreement
was drafted by
Thatcher
on behalf of
both
of them,
because neither of them wanted to accept responsibility for the
money of other investors in the Syndicate.
18
It is clear, therefore, that it was the intention that both
defendants would be parties to the agreements concluded with
investors
and that both could invoke the provisions of the agreement
for their own protection. It follows, as night follows day, that
both
of them must also jointly accept such liability as may
flow from the agreement.
Conclusion
For
the reasons set out above, I am of the view that there is no merit
in the appeal. In the result, I would dismiss the appeal
with costs.
B
M Griesel
Judge
Hlophe
JP:
I agree. It is so ordered.
J
M Hlophe
Judge President
Allie
J:
I agree.
R
Allie
Judge
1
The reason for reducing the
quantum
of the claims was so as
to take account of the contingency of a dividend accruing to the
plaintiffs from Martinson’s estate.
2
See eg
R v Dhlumayo
1948 (2) SA 677
(A) at 706 §8.
3
Record pp 1813–1814.
4
Record pp 1815–1825.
5
Record p 1830.
6
[1991] ZASCA 85
;
1991 (4) SA 559
(A).
7
Cf eg Annél van Aswegen
The concurrence of contractual and
delictual liability for damages: factors determining solutions
1997
Acta Juridica
75
et seq
; Dale Hutchison & Belinda
van Heerden
The tort/contract divide seen from the South African
perspective
1997
Acta Juridica
97
et seq
; Anton
Fagan
Rethinking wrongfulness in the law of delict
122 (2005)
SALJ
90
et seq.
8
1985 (1) SA 475
(A) at 500F–501B and 501E–G.
9
SCA Case No 545/04, 25 November 2005, para 18 (not yet reported).
10
At 569F–G.
11
Cf Hutchison & Van Heerden
op cit
at 110–1; 112.
12
2002 (4) SA 1
(SCA) para 94.
13
See also
Napier v Barkhuizen
(SCA Case No 569/04, 30 November
2005, paras 12 and 13 (not yet reported)).
14
Record pp 860–861.
15
Record pp 1000–1001.
16
Particulars of claim, para 6.14: ‘The investment was perfectly
legitimate, lawful and did not fall foul of legislation concerning
usury.’
17
Cf
Middleton v Carr
1949 (2) SA 374
(A) at 385–6. See also
Herbstein & Van Winsen
The Civil Practice of the Supreme
Court of South Africa
4
th
ed (1997) 525 and
authorities referred to therein.
18
Cf eg Record pp 497, 578–580, 584.