RCG Trade & Finance (Pty) Ltd v Rowland (3955/2001) [2002] ZAFSHC 22 (12 December 2002)

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[2002] ZAFSHC 22
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RCG Trade & Finance (Pty) Ltd v Rowland (3955/2001) [2002] ZAFSHC 22; [2003] 1 All SA 732 (O) (12 December 2002)

IN
THE HIGH COURT OF SOUTH AFRICA
(ORANGE
FREE STATE PROVINCIAL DIVISION)
Case
No.: 3955/2001
In
the matter between:
RCG
TRADE & FINANCE (PTY) LTD
Plaintiff
and
MOORES
ROWLAND
Defendant
CORAM:
MUSI, J
HEARD
ON: 11 NOVEMBER 2002
JUDGMENT
BY: MUSI, J
DELIVERED
ON: 12 DECEMBER 2002
[1]
This is judgment on an exception taken by the defendant to Claim "A"
of the plaintiff’’s particulars of claim. It
is necessary to
briefly set out the facts alleged in the particulars of claim. The
introduction to the heads of argument filed on
behalf of the
excipient gives a concise summary of such facts and I shall, for the
sake of convenience, simply adopt that with some
modifications where
necessary.
[2]
The facts alleged are shortly the following:
"2.1 The plaintiff is a finance
company;
2.2 The
defendant is a firm of accountants and auditors;
2.3 The defendant was the auditor of
Peldins (Pty) Ltd ("Peldins"), and in that capacity
prepared and issued the 1996-8
annual financial statements for
Peldins under cover of an unqualified audit report;
2.4 The financial statements were in
fact false;
2.5 The
defendant negligently failed to detect that falsity;
2.6 The defendant knew or could
reasonably have been expected to know when it prepared the financial
statements that:
2.6.1 they would be used by Peldins to
induce existing and prospective trade creditors and financiers to
maintain credit facilities
or extend further credit;
2.6.2 those
creditors and financiers would use their claims against Peldins as
security in connection with the granting to them of
financial
assistance by other parties.
2.7 The plaintiff relied upon the
Peldins 1996 and 1997 financial statements when it:
2.7.1 acquired by cession the claims
of Trade Upfront (Pty) Ltd against Peldins;
2.7.2 lent money to Peldins.
2.8 But for the misstated financial
statements, the plaintiff would not have done so, and would have
recovered both the amounts paid
to Trade Upfront and those advanced
to Peldins.
3. The plaintiff pleads that in the
circurmstances of the defendant "owed a duty of care to existing
and prospective creditors
and financiers of Peldins including the
plaintiff."
4. The
exception is taken on the grounds that:
4.1 in law, these facts are
insufficient to establish a duty of care, at common law and having
regard to section 20(9) of the Public
Accountants and Auditors Board
Act 80 of 1991 ("the PAAB Act");
4.2 alternatively,
they are insufficient to do so at least in regard to the alternative
premise in para 9.2 of the particulars of
claim (ie that the
defendant did not know but could reasonably have been expected to
know the things alleged in paragraph 9.2 of
the particulars of
claim)."
[3]
The essence of the exception is that the averments contained in the
plaintiff’s particulars of claim will not, if proved, establish
what they seek to prove, namely, a duty of care owed by the defendant
to the plaintiff. It is an assertion that the facts pleaded
do not
disclose one particular element/requirement of a delict, namely,
unlawfulness. This is so because this is a claim for compensation
for
economic loss suffered as a result of negligent misstatement, which
was given full recognition in our law in
ADMINISTRATEUR,
NATAL v TRUST BANK VAN AFRIKA BPK
1979 (3) SA 824
(A).
Unlawfulness is established when it is found in the particular
circumstances of the case that the author of the false statement owed
a duty to the recipient thereof not to make such false statement.
ADMINISTRATEUR, NATAL
(
supra
)
also made it clear that a finding that there is a duty of care can
only be made by the Court based on the particular facts and
circumstances
of each case. (See also
BAYER
SOUTH AFRICA (PTY) LTD v FROST
[1991] ZASCA 85
;
1991 (4) SA 559
(A) at 568D
;
MINISTER OF POLICE v
EWELS
1975 (3) SA
590
(A)
. This case deals
with the duty to act positively in order to render an omission
unlawful, but the principle is the same).
[4]
This raises the question of whether a decision can be made on the
existence or not of a duty of care even before evidence is led
and
the full facts and circumstances of the case known. The question can
best be answered with reference to available case law. The
Courts
have in the past considered the various factors that have to be taken
into account in considering the issue. In the particular
class of
cases like the present one dealing with the liability of accountants
and auditors (banks issuing credit references in respect
of their
clients fall in this category, but I shall refer only to accountants
and auditors for the sake of convenience) arising out
of the
negligent misstatement of the financial position of their clients on
which the creditors of the clients have relied to their
financial
detriment, two factors seem to have crystallised into basic
requirements for the existence of the duty of care. These are:
4.1
The proximity of relationship between the auditor and the creditor of
his client (hereinafter referred to as the third party).
There has to
be a direct link or at least a reasonably close link between the two;
4.2
Knowledge on the part of the auditor that the report would be relied
upon for the purpose of credit assessment. It would suffice
if the
auditor could reasonably have been expected to have had such
knowledge. Thus in cases where the duty of care was found to
exist
these two factors are a common denominator. (Compare
INTERNATIONAL
SHIPPING CO (PTY) LTD v BENTLEY
1990
(1)
SA 680
(A) at 694B-G;
STANDARD
CHARTERED BANK OF CANADA v NEDPERM BANK LTD
[1994] ZASCA 146
;
1994
(4) SA 747
(A) at 770C-I;
STANDARD
BANK OF SOUTH AFRICA LTD v OK BAZAARS (1929) LTD
2000 (4) SA 382
(W) at 397-8
especially at
398H;
SIMAN
AND CO v BARCLAYS BANK
1984 (2) SA 888
(A) at 913H;
BAYER
SOUTH AFRICA (PTY) LTD v FROST
(
supra
)
at 575A-C
).
[5]
It will be noted that in some of the cases only one of the two
factors is referred to in so many words, but the presence of the
other is nonetheless discernible. For example in
STANDARD
BANK OF SOUTH AFRICA LTD v. OK BAZAARS
(
supra
)
emphasis is laid on the closeness of the relationship (at
p.397
)
but it is clear that the defendant in that case was also aware that
the report would be relied upon for the particular purpose of
assessing credit. Sometimes these factors are not specifically
mentioned in the cases but are nonetheless present (
BAYER
SOUTH AFRICA
(
supra
)
;
SIMAN AND CO
.
(supra)
).
Proximity of relationship and knowledge do not always operate
independently of each other but may be conjunctive: the nature and
context of the relationship between the relevant parties may provide
a basis for the inference of knowledge that the incorrect information
would be communicated to and relied upon by the recipient thereof for
the particular purpose. Conversely, knowledge of the purpose
for
which the report was furnished may provide a strong basis for the
establishment of a reasonably close relationship between the
parties.
A typical example of this is to be found in
STANDARD
CHARTERED BANK OF CANADA v NEDPERM
(
supra
)
.
In that case
Nedperm
was requested to and issued a credit reference in respect of its
client
Triomf
.
Although it did not know specifically of the involvement of
Standard
Chartered
it knew that
the report was sought for the purpose of a credit assessment of its
client and this knowledge played an important role
in the Court’s
finding that
Nedperm
could reasonably have been expected to know that one or the other
creditor of
Triomf
would rely on its report and that
Standard
Chartered
was likely to
be the one. This conjunction appears to be what is referred to in
English case law as proximity. See
STANDARD
CHARTERED BANK OF CANADA
(
supra
)
at
772
for an exposition of English law in this regard. This appears to be
the context in which the term "proximity" is used in
NPC
ELECTRONICS LTD v S TAITZ KAPLAN & CO
1998 (1) All SA 390
(W).
[6]
In the latter case MacArthur, J considered both English and South
African case law on the point and held that unlike English law,
in
South African case law foreseeability of damage is not a requirement
for the existence of a duty of care and he concluded at p.404e:
"In
the result I have come to the view that proximity and knowledge is a
pre-requisite to liability (see also Milner,
Negligence
in Modern Law
p.39)."
The
facts in that case were briefly as follows: The defendant was a firm
of accountants and auditors who had issued unqualified audit
reports
on the financial statements of their client, a group of companies
called the Stan Group, which group was a subsidiary of
an investment
holding company called Milstan. The audit reports were found to have
been misstated due to the negligence of the defendant.
National
Panasonic, which had been a supplier of goods and creditor of the
Stan Group, had relied on the false reports when it made
available to
the Stan Group additional credit facilities and suffered financial
loss when it could not recover the money owed to
it by the Stan Group
due to the liquidation of the latter. The plaintiff company, which
had stepped into the shoes of National Panasonic,
then sued the
defendant on the basis that the defendant owed it a duty of care not
to issue the false reports. The Court having stated
the pre-requisite
for liability as above, found that although the defendant knew that
National Panasonic was a major trade creditor
of the Stan Group,
there was no evidence to suggest that it was reasonably foreseeable
that the published audited results would be
relied upon to make a
credit decision. There could therefore be no duty of care.
[6]
In his heads of argument Mr Plewman, for the excipient, referred to
the relevant English and South African case law and submitted
that it
can be deduced from the cases that for a plaintiff to succeed it must
be shown that the auditor:
"(1)
Specifically
contemplated that his report would be presented to a
particular
bank
, and
(2)
that it would be used by it in order to decide whether to advance a
specific further loan
at a particular time."
He
elaborated on this in argument before me and cited
NPC
ELECTRONICS
(
supra
)
.
In essence, his submission is to the effect that the proximity
requirement of English law has been adopted by our Courts and
referred
especially to the comments of Corbett, CJ in the
NEDPERM
-
case
(supra)
at 773 where he came to the conclusion that even if English law were
to be applied to the facts of that case a duty of care would
be found
to exist. It should be noted, though, that Corbett, CJ did not
thereby signify that the requirements of English law were
being
adopted. Otherwise Mr Plewman’s formulation of the pre-requisites
is open to the following criticism:
(a)
If it is found that the auditor specifically contemplated that his
report would be presented to a particular bank, that would
establish
a link between the parties, but such formulation would exclude
inferring the link from the circumstances of the case. Again
the
Standard Chartered
Bank
-case (
supra
)
provides a good illustration. Certainly
Nedbank
,
in that case, did not specifically contemplate that its report would
be presented to
Standard
Chartered Bank
. The
requisite link was established inferentially from the circumstances
of the case.
(b)
Audit reports are normally issued once a year and would remain in
circulation for the next 12 months or so, at any rate until
new
reports are issued. During that period a company could engage in a
multitude of transactions. It surely will be absurd to expect
the
auditor to know about each and every one of those transactions, some
of which may not have been contemplated at the time the
report was
compiled. Otherwise it would mean that the company would have to seek
the auditor’s concurrence in respect of each and
every transaction
that it proposes to enter into. In my view the cardinal consideration
is whether the auditor knew of the specific
purpose for which the
reports would be relied upon. If he was aware that his reports would
be relied upon for purpose of assessing
his client’s
creditworthiness and they are thus relied upon by a third party to
its financial detriment, then the auditor would
be liable to such
third party irrespective of whether he knew of the specific
transaction, assuming of course that the requisite
link between the
third party and the auditor has also been established. Mr Plewman’s
submission in this regard would have the effect
of replacing the
common law requirements with the more stringent pre-requisites
provided for in section 20(9) of the Public Accountants
and Auditors
Act, No. 80 of 1999. See
NPC
ELECTRONICS
(
supra
)
at
405d-e
for an interpretation of that section.
Mr
Meyer for the plaintiff, argued, on the other hand, that the
existence or not of a duty of care is a matter to be determined with
reference to the facts and circumstances of each case; that the
factors referred to above are but some of the factors that have to
be
taken into account. He submitted that the plaintiff has in its
particulars of claim alleged facts which, if established by the
evidence, will establish liability.
[7]
In my view it is discernible in the cases cited above that for a duty
of care to be inferred the following must at the very least
be
present:
(a)
A direct link or a reasonably close relationship between the auditor
and the third party.
(b)
That the auditor knew or could reasonably be expected to have known
that the report would be relied upon for the purpose for which
it was
actually used. This does not mean that other factors do not play a
role in the matter nor that the approach that various factors
must be
considered in order to determine whether the duty of care exists in
the circumstances of each case has been abandoned. Indeed,
the other
factors may be crucial in the establishment of the basic
requirements. It is to be noted also that the existence of these
basic factors generally has the effect of minimizing or even
eliminating the risk of limitless liability with the result that
considerations
of public policy often do not come into play. Hence in
the cases where the duty of care was found to exist it was also found
that
considerations of public policy would not militate against
imposition of liability. Public policy considerations may, however,
still
play a crucial role in respect of legal causation, in
particular whether the loss is too remote or not. (Cf.
INTERNATIONAL
SHIPPING CO
(
supra
)
at 700i.)
[8]
Turning to the facts of the instant case, the relevant averments are
set out in paragraphs 9.1 and 9.2 of the plaintiff’s particulars
of
claim. In paragraph 9.1 it is averred that the defendant knew that
Peldins, defendant’s client, would rely on the financial
statements
and report to induce existing and prospective trade creditors to
advance credit to it and that such creditors would in
turn rely
thereon for the purpose of deciding whether to advance credit to
Peldins. In paragraph 9.2 it is averred that the defendant
could
reasonably have been expected to know that the statements and reports
would be used for the purposes referred to in paragraph
9.1. These
averments would, if proved, indeed establish that the defendant knew
that the statements and reports would be relied upon
for purpose of
assessing the creditworthiness of Peldins. But they do not disclose
who is the third party that would rely or was
likely to rely thereon.
There is no hint of any relationship between the plaintiff and the
defendant. In effect the particulars of
claim aver that the defendant
owed a duty of care to creditors of Peldins generally and the
plaintiff is being cited as one of such
general body of creditors.
That raises the spectre of limitless liability that the Courts have
previously warned against and would
fall far short of the
requirements for the existence of a duty of care.
If
the averments made in paragraph 9.1 and 9.2 stood alone, one may have
been inclined to be cautious in the hope that the evidence
may yet
establish a link between the parties, but the particulars of claim go
further and disclose the basis for the averments in
the form of the
circumstances set out in paragraph 9.3. Such circumstances do not,
however, provide an indication of any link whatsoever.
Paragraph
9.3.3 is instructive:
"Creditors
and financiers of the nature of those described above would, in
accordance with normal and acceptable business practices
refer to and
consider the contents of Peldins financial statements in the process
of deciding whether or not to extend or curtail
credit facilities to
Peldins;"
This
is clearly the foundation of the plaintiff’s claim as presently
framed.
[9]
The provisions of section 19(9) of Act 80 of 1991 cannot avail the
plaintiff either. Section 20(9)(b) provides that the auditor
is
liable only if it is proved,
inter
alia
, that he knew that the
third party would rely upon the certificate, the report, the
statement or the account for the purpose of entering
into a specific
transaction with the third party. By the third party is not meant
third parties generally, but the specific party
that actually relied
on the report. Furthermore, the auditor must know that the report
would be relied upon for the purpose of entering
into a specific
transaction. See
NPC
ELECTRONICS (
supra
)
.
All these things have not been alleged in the plaintiff’s
particulars of claim.
I
hold therefore that the particulars of claim in respect of Claim "A"
do not disclose a cause of action.
It
was agreed in argument that if I should uphold the exception, I could
grant the plaintiff leave to amend its particulars of claim.
[10]
The following order is made:
1.
The exception is upheld with costs.
2.
The plaintiff is granted leave to amend the relevant portion of its
particulars of claim within 30 days of this judgment.
H.M.
MUSI, J
On
behalf of Plaintiff:
Adv.
R. Meyer SC Instructed by: Lovius-Block Attorneys
On
behalf of Defendant:
Adv.
T. Plewman Instructed by: Claude Reid Incorporated