REPUBLIC OF SOUTH AFRICA
IN THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
Reportable
Case Number : 373 / 03
In the matter between
MUTUAL AND FEDERAL LIMITED APPELLANT
and
RUMDEL CONSTRUCTION (PTY) LIMITED RESPONDENT
Coram : HARMS, FARLAM, CONRADIE JJA, PATEL et PONNAN AJJA
Date of hearing : 24 AUGUST 2004
Date of delivery : 21 SEPTEMBER 2004
SUMMARY
Insurance – contract works damaged by cyclone – insu rer's contention rejected that contractor not liable
to repair damage and hence had no insurable interest in works – claim not excluded by special exception
relating to defective design of contract works.
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J U D G M E N T
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CONRADIE JA et PATEL AJA
[1] During the week of 21 to 28 Febr uary 1997 tropical cyclone Lizette
inundated Nampula Province in Mozambi que. Over a long distance it severely
damaged roads that the respondent (‘the contractor’) was about to hand over to
its employer, the Mozambican Director ate of National Roads and Bridges (‘the
employer’). The storm damage led to an insurance claim that the appellant (‘the
insurer’) repudiated. The insurer lost before Gildenhuys J in the Johannesburg
High Court. The court found the insure r liable and ordered it to pay to the
contractor R2.5m plus what ever value added tax might have been paid by the
contractor. It is against this award that the insurer, with leave of the trial court,
appeals. The contractor, also with leave, cross-appeals against the failure of the
trial court to award it interest on this amount.
[2] The contractor’s claim was made under an insurance policy in terms of
which the insurer indemnified both the contractor and the employer in respect of
fortuitous physical destruction of or da mage to works to be undertaken by the
contractor in these words:
'THE COMPANY HEREBY AGREES subj ect to the terms exceptions limits
and conditions contained herein or indorsed hereon that if during the Period of
Insurance or during any fu rther period in respect of which the Insured shall
have paid and the Company shall have accepted the premium required any part
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of the Property Insured shall be lost de stroyed or damaged as referred to in
Part 1 hereof…the Company will i ndemnify the Insured as provided
hereinafter.'
Part 1 circumscribes the indemnity:
'The Company will by payment or at it s option by repair or reinstatement
indemnify the Insured in respect of fo rtuitous physical lo ss or destruction of
the Property Insured arising from any cau se (other than as provided in the
General Exceptions or in the Exceptions to this Part contained hereinafter)
whilst at the Situation of the Contract.'
[3] The property insured comprised two rural roads in Nampula province, the
one from Liupo via Corrane to Nampula and the other from Momo Junction to
Nametil. The description of the works in the schedule to the insurance contract
is worth recording:
'Contract no. bid 107/0b/94: opening of rural gravel roads and rehabilitation and
constructions of bridges in Nampula province'.
[4] The contractor sought an indemn ity for the repair costs of 101,88
kilometres of the road works that ha d sustained storm damage. The insurer
raises two defences. First it maintains that a proper construction of the building
contract leads to the conclusion that the contractor was not liable to repair the
roads. It therefore did not have an in surable interest in their restoration and
could only validly have insure d the works up to the extent of its interest, that is
to say, for loss or damage that it was obliged to make good at its own expense.
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Second it maintains that the roads were defectively designed and that the
damage suffered therefore fell outside the policy indemnity.
[5] For the first defence the insurer relies on the terms of the construction
contract contained in clauses 10 and 11 thereof:
'10 Contractor’s Risk
10.1 All risks of loss or of damage to physical property and of personal injury
and death which arise during and in c onsequence of the pe rformance of the
Contract other than the excepted risks are the responsibility of the Contractor.
11 Employer’s Risk
11.1 The Employer is responsible for th e excepted risks which are (a)…the
risks of war…,or (b) a cause due solely to the design of the Works, other than
the Contractor’s design.'
[6] We assume in favour of the insure r the correctness of its proposition that
the contractor insured only its interest in the works. On this assumption it
would not be liable to repa ir damage to the works caused solely by their design
by someone other than the contractor. The roads were not designed by the
contractor but by the employer. But th e damage to the roads was not caused
solely by their design. The damage was caused by an unusually heavy
downpour. The contractor was therefore re sponsible for their repair. Clause 11
was meant to safeguard the contractor ag ainst the cost of remedial work to a
defective design by someone other than hi mself. To try to invoke it in the
context of an insurer's liability for storm damage is to misconstrue its scope and
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purpose.
[7] The insurer's obligation to indemnif y in the insurance policy is subject to
the usual general exceptions to liability su ch as damage or loss due to war and
confiscation. They do not concern us but special exceptions 4 and 5 to Part 1
do:
'The indemnity expressed in this Part shall not apply to or include
4. Loss destruction or damage due to:-
(a) wear and tear rust mildew or deterioration
(b) insects larvae or vermin of any kind
(c) acts of the Insured or his competen t or authorized agent or representative
which are contrary to the recognized rules of engineering or to any legislation or
regulations issued by an authority
(d) cessation of work whether total or partial
5. (a) repairing replacing reinstating or making good any part of the Property
Insured which is defective in material workmanship plan or specification…
(b) re-design improvement betterment or alteration on the occasion of repair
replacement or reinstatement of loss or damage
(c) defective design.'
[8] The insurer submits that the word ‘des ign’ is used in the policy in relation
to the suitability of the roads for thei r intended purpose. We would not quarrel
with that. The intended purpose of th e project was the emergency opening of
roads in Nampula province. It was intende d that what remained of road links in
the province after the civil war should be rehabilitated. It is common cause that
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the roads were low cost, high risk, high maintenance, low volume, all weather
roads the main purpose of which was, in words borrowed by the insurer’s expert
from a CSIR report on that kind of road in Kwa-Zulu Natal 'to get the people
out of the mud'. The roads were built according to a desi gn philosophy 'as low
as you can go for a public road' according to one of the contractor’s experts and
were meant to be degraded by the weather and repaired by regular maintenance.
[9] The insurer’s expert on road cons truction repeatedly said that the
drainage, but also other aspects of the construction such as the wearing layer on
the road, should have been better designe d. Much stress was laid on how flood
returns – the statistical frequency with which a storm of a particular severity
might be expected to recur – ought to ha ve been calculated and incorporated in
the design. Only then would the design not have been defective.
[10] In effect the appellant’s argument amounts to this: that if the respondent
hoped to be entitled to an indemnity unde r the policy for storm damage to the
works, it was not good enough for it to cons truct, as it did, the works to the
satisfaction of the employer: it had to c onstruct the works to the satisfaction of
the insurer.
[11] What standard of design the insu rer demanded before it would pay, did
not become clear during the trial. Its expert criticized various aspects of the
drainage, but did not state to what sta ndard it should have been designed. He
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thought that the drainage should have b een designed to withstand the impact of
cyclone Lizette but since we do not know what the return period of Lizette was
that does not set an ascertainable desi gn standard. Without having established a
standard the insurer could not maintain that the design was defective.
[12] Moreover, there is no suggestion that the insurer did not know the nature
of the unsophisticated contract works it was insuring. It cannot now as a
prerequisite to accepting liability demand that they should have been of a higher
quality than the employer was prepared to pay for.
[13] There is no acceptable evidence that the roads, for what they were, were
poorly designed. The employer was represented on site by its resident engineer,
Mr AJ Kruger. He worked for a firm of consultants, Provia/Van Wyk and
Louw International, enga ged by the employer to supervise the construction of
the roads. The project was so unsophisti cated and the funding so restricted that
Kruger himself, guided by the contract documents, was obliged to design
drainage works for the contactor as th e roads progressed. He did this by
directing the installation of drains, culv erts and drifts, using as guidelines his
own observations of the topography, evidence of previous flood levels and local
knowledge of flow patterns and soil c onditions. He did not work to a
statistically calculated flow return pe riod. There is no suggestion that such
information was available for Nampula province, but even if it had been,
technological advances in road design were largely irrelevant to the rudimentary
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drainage structures that were all the employer could afford. The contention that
the design of the contract works was defective accordingly fails.
[14] The trial court failed to award the c ontractor interest. Such interest was
claimed on the damages at the legal rate of interest according to law. Since the
prayer for interest was not dealt with in the court’s order the contractor after
judgment brought an application for supple mentation of the order to include the
interest.
[15] The trial court was not at the close of the case addressed on the
contractor’s entitlement to interest but the particulars of claim clearly
accommodated the payment of mora inte rest as envisage d by the Prescribed
Rate of Interest Act 55 of 1975 and the claim was not abandoned.
[16] The application was opposed by the insurer who maintained that the
interest claim had been compromised when the quantum of damages was agreed
between the parties. However, Gildenhuys J was not willing to amend his order
to include an award of interest on the essential ground that he was functus
officio. No doubt in coming to this conclusion he was mindful of the
requirements of Rule 42 of the Unifor m Rules of Court and the common law
exceptions to the well-established rule that once a court has pronounced a final
judgment or order it has itself no authorit y to correct, alter or supplement it (see
Firestone South Africa (Pty) Ltd v Genticuro AG 1977 (4) SA 298 (A) at 306G-
9
308A).
[17] We however are at large to order interest to run on the amount awarded,
although the issue of interest wa s not dealt with in the court a quo, if we are of
the view that the contractor is entitled to it ( Kudu Granite Operations (Pty) Ltd
v Caterna Ltd 2003 (5) SA 193 (SCA)). We c onsider that the probabilities do
not favour the conclusion that the contractor settled the interest claim.
[18] First, on 31 October 200 2, while the contractor’s counsel was leading the
evidence of a Mr McDowell, who had b een called to establish the quantum of
the contractor’s loss, the parties reache d a settlement and agreed the loss at R2
500 000. Insurer’s counsel informed the court that in view of the settlement of
the quantum it was no longe r necessary to proceed with the evidence of
McDowell. The words used by the insurer’s counsel were ‘quantum of the total
loss suffered by the plaintiff is R2,5 million’. Although language is not an
instrument of mathematical precision th ere is no ambiguity in these words. If
the quantum included interest the onus rested on the insurer’s counsel to clarify
this since as a general rule a claim fo r damages would attr act interest, if not
before then after judgment.
[19] Secondly, this interpretation is strengthened by the insurer’s counsel
informing the court that the agreement was subject to the right of the insurer ‘to
identify three components of the total lo ss, these being damage to and fixing of
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drains, damage to and fixing of culverts and washaways, and general damage to
the rest of the road.’ After eviden ce and arguments were concluded and
judgment reserved, the insurer's attorney informed the trial judge that the insurer
did not ‘intend proceeding with any apportionment of the settlement amount
amongst the three components of the loss as envisaged in the agreement reached
in court’.
[20] Lastly, that this is what the par ties must have envisa ged is further borne
out by the fact that after quantum was agreed the insurer admitted that the
contractor had made a formal demand on 14 October 1997. If the interest claim
had been compromised it would have been unnecessary for the parties to agree
on the date of demand. The admission wa s clearly sought and made in order to
fix a date from which interest might be considered to run in accordance with the
provisions of section 2A(1) and 2A(2)(a) of the Prescribed Rate of Interest Act
55 of 1975:
[21] The relevant provisions of this Act are:
‘1 Interest on a debt to be calculated at a prescribed rate in certain circumstances
(1) If a debt bears interest and the rate at wh ich the interest is to be calculated is not
governed by any other law or by an agreemen t or a trade custom or in any other
manner, such interest shall be calculated at the rate prescrib ed under subsection (2)
as at the time when such interest begins to run, unless a court of law, on the ground
of special circumstances relating to that debt, orders otherwise.
.....
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2A. Interest on unliquidated debts
(1) Subject to the provisions of this secti on the amount of every unliquidated debt as
determined by a court of law, or an arbi trator or an arbitr ation tribunal or by
agreement between the creditor and the debtor, shall bear interest as contemplated in
section 1.
(2) (a) Subject to any other agreement between the parties the interest contemplated in
subsection (1) shall run from the date on which payment of the debt is claimed by
the service on the debtor of a demand or summons, whichever date is earlier.
(b)…..’
[22] In terms of the Act the contractor would be entitled to interest on the sum
awarded by the court a quo at the prescribed rate from the date of summons or
from the date of the earlier demand provided that the demand was in writing and
set out the creditor’s claim ‘in such a manner as to enable the debtor to
reasonably assess the quantum thereof’.
[23] The letter of demand with its anne xure clearly sets out the loss suffered
by the contractor and minutely describe s the manner in which it was computed.
It was on the basis of this letter of de mand that the insurer had earlier made a
(wholly inadequate) settlement offer to th e contractor. It obviously did not then
consider that it was unable to assess the loss and that was also not argued in this
Court. It was not disputed that the a pplicable prescribed rate of interest is
15,5% per annum.
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[24] 1 The appeal is dismissed with co sts, which include the costs of two
counsel.
2 The cross appeal succeeds with co sts. The order of the trial court is
amplified by the insertion therein of a paragraph (bbis) reading:
‘(bbis) interest on the amount of R2 500 000 at the rate of
15,5% per annum is to be pa id by the defendant as from
14 October 1997.’
J H CONRADIE
JUDGE OF APPEAL
C N PATEL
ACTING JUDGE OF APPEAL
CONCURRING:
HARMS JA
FARLAM JA
PONNAN AJA