Brief Summary

Contracts — Breach of contract — Wrongful appropriation of funds — Appellant claimed against the CC and its members for the proceeds of cheques collected from the United Building Society (UBS) — Trial court found the CC had wrongfully appropriated the cheques but dismissed the claim against the bank, ruling no theft was proven — Full court affirmed that the CC acted with theftuous intent but dismissed the appeal due to lack of evidence regarding the UBS's knowledge of ownership — Supreme Court of Appeal upheld the dismissal, concluding that the cheques were not stolen under s 81(1) of the Bills of Exchange Act as ownership had likely transferred to the CC upon collection.

Comprehensive Summary

Summary of Judgment

1. Introduction

This was an appeal in the Supreme Court of Appeal concerning a delictual/statutory recovery claim arising from the misappropriation of cheque proceeds. The proceedings ultimately focused on a claim under section 81(1) of the Bills of Exchange Act 34 of 1964, which provides a remedy to the true owner of a crossed, “not negotiable” cheque that has been stolen or lost and thereafter paid in circumstances not rendering the drawee bank liable.

The parties were Basil Read Sun Homes (Pty) Ltd (the appellant) and Nedperm Bank Limited (the respondent). The respondent’s involvement arose because it had taken over the assets and liabilities of SA Permanent Building Society (“SA Perm”) under section 55 of the Mutual Building Societies Act 24 of 1965, and SA Perm had become a possessor of the disputed cheques after their misappropriation.

The procedural history began with an action instituted in December 1989 in the Witwatersrand Local Division against four defendants: Sun Homes CC (“the CC”), the CC’s two members (Mrs PM de Beer and Mr WH Jeffrey), and the present respondent (cited as the fourth defendant at trial). After a lengthy trial, Mahomed J dismissed the statutory claim against the respondent (claim D) but granted judgment against the CC (claim A) and against the CC and its members (claim C). The appellant’s appeal to a Full Court succeeded on the finding of theftuous intent but was nonetheless dismissed on the basis that the appellant had not proved that the United Building Society (“UBS”) remained the true owner of the cheques. The appellant then appealed to the Supreme Court of Appeal with special leave.

The general subject-matter of the dispute concerned the unauthorised collection of cheques drawn by a building society in favour of the appellant, the diversion of those cheques into accounts controlled by the CC, and whether the statutory remedy in section 81(1) could be enforced (via cession from UBS) against the collecting/possessing bank (through its successor, Nedperm Bank Limited).

2. Material Facts

The appellant, previously dormant within the Basil Read group, commenced construction of housing units on certain erven in Ennerdale extensions during 1986. It concluded an agreement with the CC (an estate agency) under which the CC undertook to sell the housing units on the appellant’s behalf and, materially, to facilitate purchasers’ loan applications by completing and submitting documentation to building societies.

In the ordinary course, once a loan application was successful, UBS issued a guarantee to pay the appellant against registration of transfer (and the associated mortgage bond). When transfer was registered, UBS drew a cheque for the relevant amount in favour of the appellant as payee. The appellant’s bookkeeping was handled by Mrs van Vuuren, who had written to UBS specifying authorised drivers who could collect cheques for the appellant.

During Mrs van Vuuren’s leave (mid-December 1986 to early January 1987), twelve cheques drawn by UBS in favour of the appellant did not reach the appellant’s office. It later emerged that the CC had caused these cheques to be collected from UBS and eventually deposited them into six accounts opened at SA Perm, ostensibly in the appellant’s name but effectively controlled by the CC. The CC then utilised the funds for its own purposes. The total amount involved in relation to these twelve cheques was R292 496,31.

For purposes of claim D (the section 81(1) claim), it was common cause at trial (either proved or admitted) that immediately prior to the collection of each cheque, UBS was the true owner; the cheques were crossed and bore the words “not negotiable”; after collection and appropriation SA Perm became a possessor and gave value; the drawee banker paid the cheques without incurring liability to the true owner; if UBS acquired a section 81(1) claim it would be for R292 496,31; UBS ceded any such claim to the appellant; and SA Perm’s assets and liabilities were taken over by the respondent under section 55 of the Mutual Building Societies Act.

The two disputed factual issues at trial were whether the cheques were stolen and whether, after collection, UBS remained the true owner. The trial court found that the CC and its members unlawfully obtained possession and appropriated the proceeds, but held that theftuous intent had not been proved and therefore dismissed claim D. The Full Court, on appeal, found that the cheques were collected with theftuous intent, but dismissed the appeal on the basis that the appellant had not disproved a possibility that ownership passed to the CC if UBS had been induced to hand over the cheques on the representation that the CC was entitled to them in its own right.

3. Legal Issues

The central legal questions before the Supreme Court of Appeal were whether, on the facts and probabilities accepted or inferred, the twelve cheques were “stolen” within the meaning of section 81(1) of the Bills of Exchange Act 34 of 1964, and whether UBS remained the true owner after parting with possession of the cheques.

These questions involved a combination of factual inference and application of legal standards to the facts. The court had to assess what inference should be drawn, in the absence of direct evidence, about the nature of the representation made to UBS when the cheques were collected, and the legal consequences for transfer of ownership in the instruments.

A further legal issue raised in argument was whether a cheque obtained by false pretences could qualify as “stolen” for purposes of section 81(1). Although this point was initially pressed in the respondent’s heads, it became substantially narrowed by a concession made at the hearing, linked to whether ownership passed.

4. Court’s Reasoning

The Supreme Court of Appeal approached the matter by evaluating the probabilities regarding the circumstances under which UBS parted with possession of the cheques, particularly because there was no direct evidence from the individual who collected the cheques (likely the second defendant or a CC employee, Heyneman) or from any UBS employee involved in handing them over.

The court attached significance to the CC’s own stance in the litigation. It was clearly the case advanced by the CC and its members (in an affidavit opposing summary judgment and in their plea) that the cheques had been collected on behalf of the appellant. The second defendant’s trial evidence was also treated as inconsistent with any suggestion that she represented to UBS that the CC was entitled in its own right to the cheques; she in fact rejected the proposition that the cheques were collected on behalf of the CC. From this, and the overall probabilities, the court considered it unlikely that the CC collector represented entitlement in the CC’s own right.

The court also relied on the objective features of the instruments and the commercial setting. The cheques were drawn in favour of the appellant as payee and were crossed and marked “not negotiable”. The court reasoned that it was improbable that UBS would have handed over such cheques with the intention of transferring ownership to the CC, because a third party could acquire only limited rights in such instruments, and only after delivery to the payee and endorsement. This made it unlikely that UBS intended to pass ownership to the CC upon delivery to the collector.

On the probabilities, therefore, the court inferred that UBS handed over the cheques on the basis (expressly or impliedly) that the collector was authorised to collect them on behalf of the appellant, and that UBS intended to transfer ownership to the appellant. However, because the appellant had not authorised the second defendant or Heyneman to collect the cheques, the appellant did not become owner upon such delivery. The consequence was that ownership remained vested in UBS, which accordingly also remained the true owner after the cheques were taken.

In relation to the meaning of “stolen” in section 81(1), the court noted the respondent’s concession at the hearing that if ownership did not pass to the CC, the cheques were “stolen” within the subsection. The court accepted that concession as correct in the circumstances it found. It held that even if the initial obtaining of possession involved false pretences, the case at least involved a situation where only possession (not ownership) was obtained by such means, and the subsequent appropriation of the cheques for the CC’s own purposes constituted simple theft. On that footing the cheques were stolen for purposes of section 81(1), with reference to S v Haarhoff 1970(1) SA 253 (A).

Having found that the statutory requirements were satisfied on the common cause facts (crossed “not negotiable” cheques; payment by the drawee in circumstances not rendering it liable; possession after theft by a party who gave value; quantification; and cession of the UBS claim to the appellant), the court concluded that claim D should have succeeded. The respondent’s liability followed from its takeover of SA Perm’s assets and liabilities under section 55 of the Mutual Building Societies Act.

On costs, the court exercised a discretionary judgment by disallowing recovery of costs associated with substantial portions of the appeal record that were unnecessary for deciding the appeal (including transcripts of opening address and argument in the trial court and papers related to the application for leave to appeal).

5. Outcome and Relief

The Supreme Court of Appeal upheld the appeal and set aside the Full Court’s order, substituting it with an order upholding the appeal to the Full Court and granting judgment on claim D against the fourth defendant (the respondent) for R292 496,31, together with interest at 12% per annum from the date of service of the combined summons on the fourth defendant.

The court further ordered that any sum recovered from the first, second, or third defendants (the CC and its members) in respect of the judgment on claim C must be deducted from the capital amount payable by the fourth defendant under claim D, thereby preventing double recovery of the same capital amount.

The appeal succeeded with costs, including the costs of two counsel, but the costs order expressly excluded costs relating to specified unnecessary pages of the appeal record.

Cases Cited

Basil Read Sun Homes (Pty) Ltd v Nedperm Bank Ltd 1997 (2) SA 610 (W)

S v Haarhoff 1970 (1) SA 253 (A)

Basil Read Sun Homes (Pty) Ltd v Nedperm Bank Ltd (86/97) [1998] ZASCA 97; 1999 (1) SA 831 (SCA); [1999] 1 All SA 285 (A)

Legislation Cited

Bills of Exchange Act 34 of 1964, section 81(1)

Mutual Building Societies Act 24 of 1965, section 55

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that, on the probabilities, UBS parted with possession of the twelve crossed “not negotiable” cheques in circumstances indicating an intention to transfer ownership to the appellant, not to the CC. Because the appellant had not authorised the CC or its employee to collect the cheques, ownership did not pass to the appellant upon delivery and therefore remained with UBS, which remained the true owner.

The court further held that the cheques were stolen for purposes of section 81(1) because, even if possession was initially obtained by false pretences, ownership did not pass to the CC and the CC’s later appropriation of the cheques constituted simple theft within the statutory framework. As SA Perm became a possessor after the theft and gave value, and UBS’s statutory claim was ceded to the appellant, the appellant was entitled to judgment against the respondent (as successor to SA Perm’s liabilities) for the amount of the loss, with interest and costs, subject to a deduction mechanism to prevent double recovery.

LEGAL PRINCIPLES

Section 81(1) of the Bills of Exchange Act 34 of 1964 provides a statutory cause of action enabling the true owner of a crossed cheque bearing the words “not negotiable”, which has been stolen or lost, to recover the resulting loss from a person who became a possessor after the theft or loss and who gave consideration for it (or took it as a donee), where the drawee banker paid the cheque in circumstances not rendering it liable to the true owner.

In determining “true ownership” and whether a cheque was “stolen” for purposes of section 81(1), the court may draw inferences from probabilities where there is no direct evidence of the representations made when possession was obtained. The form of the instrument (including being made payable to a named payee and being crossed “not negotiable”) and the commercial context may inform whether it is probable that the drawer intended to transfer ownership to a third party upon delivery.

Where possession of a cheque is obtained without the transfer of ownership, and the possessor thereafter appropriates the cheque for its own purposes, that appropriation can constitute simple theft, supporting the conclusion that the cheque was “stolen” within the meaning of section 81(1), even if the initial obtaining of possession involved false pretences and irrespective of how the conduct might have been charged criminally.

Basil Read Sun Homes (Pty) Ltd v Nedperm Bank Ltd. (86/97) [1998] ZASCA 97; 1999 (1) SA 831 (SCA); [1999] 1 All SA 285 (A) (20 November 1998)