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[2010] ZAWCHC 84
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Burnett v Deloitte & Touch and Another (4254/2008) [2010] ZAWCHC 84; 2010 (5) SA 259 (WCC) (20 April 2010)
REPORTABLE
IN THE HIGH COURT OF
SOUTH AFRICA
WESTERN CAPE HIGH
COURT, CAPE TOWN
CASE NO: 4254 /
2008
(RELATED CASE NO:
10452 / 2004)
In the matter between:
RUSSEL ERIC
BURNETT
Plaintiff
versus
DELOITTE
& TOUCHE
1
st
Defendant
ROBYN CAMPBELL
2
nd
Defendant
JUDGMENT : 20
APRIL 2010
BOZALEK J:
[1]
This matter comes before the Court pursuant to an order in terms of
Rule of Court 33(4) that the first and second defendant's
special
plea of prescription be determined prior to the remaining issues in
the matter.
[2] No evidence was led,
the parties having instead agreed that the defence would be
adjudicated as a stated case as contemplated
in Rule 33(1). The
agreed facts are ascertained by reference to a document in which the
defendants sought and obtained certain
admissions from the plaintiff
for the purposes of the hearing, cross referenced to the pleadings
and affidavits in this action
as well as in earlier litigation
involving the parties.
THE
RELEVANT FACTS
[3] Plaintiff claims
damages as against first defendant, a partnership of public
accountants and auditors, alternatively, as against
second defendant
who at the material time was either a partner or an employee of
first defendant. The claim arises out of the
alleged breach of an
agreement on the part of one or both defendants in terms whereof
second defendant was required to make a
determination of the value
of the equity and shareholders loan account in a company previously
purchased by plaintiff.
[4] The background facts
are that during October 2002 plaintiff purchased the shares and loan
account in the company from one
Mr. Andrew Fyfe ("Fyfe")
paying him R1m on account.
[5] A dispute arose
between plaintiff and Fyfe over the sale agreement with plaintiff
contending that Fyfe and his auditors had
grossly misrepresented the
company's financial position and that he, plaintiff, had relied upon
these misrepresentations in purchasing
the business.
[6] The dispute was
referred to arbitration, the hearing of which commenced in mid-2004
before senior counsel. In November 2004
the matter was settled by
what may be called the first settlement agreement. In essence this
provided that an independent determination
would be made of the
value of the equity and shareholders loan account in the company as
at 30 September 2002. It was agreed
that the purchase price as
between plaintiff and Fyfe would be adjusted to accord with the
value so determined. Second defendant
was duly appointed by
plaintiff and Fyfe as the referee who would perform the valuation in
accordance with an agreed procedure.
[7] On or about 12
November 2004 second defendant handed down a valuation of the
combined equity and the shareholders loan account
("the first
valuation") in the sum of R1 370 000.00 The effect of this
valuation was that plaintiff became liable to
pay the differential,
R370 000.00, to Fyfe.
[8] Plaintiff was
immediately aggrieved by the valuation and within weeks his legal
representatives were formally contending in
correspondence that
second defendant's determination was tainted by various procedural
irregularities and that it fell to be
set aside.
[9] By no later than 13
December 2004, apart from the procedural irregularities, plaintiff
was further of the view that the valuation
was unreasonable,
irregular and wrong; furthermore, that it was so grossly excessive
in relation to the true value of the business
that it bore no
reasonable relationship thereto or to what a willing buyer would pay
to a willing seller. Plaintiff was further
of the view that the
valuation was arbitrary and one at which no reasonable referee
conducting the determination fairly could
reasonably have arrived.
[10] On 13 December 2004
plaintiff instituted an action in this Court, under case no. 10452 /
2004, against Fyfe and the present
defendants to set aside the first
valuation. Those proceedings culminated on 26 February 2007 with the
conclusion of an agreement
("the second settlement agreement")
providing that the first valuation would be set aside and the shares
and loan account
in the business would be re-valued. That agreement
was made an order of court.
[11] In terms of the
order of court the first valuation was set aside and declared not to
be binding on the parties. Furthermore,
another referee was to be
appointed to determine the value of the equity and shareholders loan
account in the company and a mechanism
was set in place for the
appointment of such a person.
[12] This valuation was
effected by a Mr. Warren Watkins ("Watkins") on 1 June
2007 when he valued the shares and shareholders
loan account at R94
586.00. In consequence of this valuation ("the second
valuation"), plaintiff became entitled to
payment from Fyfe of
the sum of R900 000.00 odd, being the difference between the R1m
paid on account to Fyfe and the second
valuation. In terms of
further provisions of the second settlement agreement, plaintiff
also became entitled to payment by Fyfe
of the costs of the
arbitration proceedings, the costs of second defendant as a referee,
various other costs as well as the payment
of interest by Fyfe on
the amounts owing to plaintiff.
[13] Fyfe refused to pay
any such monies and instead launched an action in July 2007 against
plaintiff and Watkins to set aside
the second valuation. In response
plaintiff launched, under case 11161 / 2007, an application against
Fyfe and all other interested
parties for the second valuation to be
made an order of court.
[14] Those proceedings
culminated on 24 August 2007 with the conclusion of a third
settlement agreement as between plaintiff and
Fyfe which disposed of
all the issues in the existing litigation. In settling with Fyfe,
plaintiff accepted payment of the sum
of R1.5m, a sum considerably
less than his full claim, allegedly because Fyfe was unable to pay
any greater amount. In October
2007 Fyfe made payment to plaintiff
of his obligations in terms of the third settlement agreement
whereupon plaintiff withdrew
his action against him.
[15] On 7 March 2008
plaintiff instituted the present action against defendants for
damages representing the amount plaintiff
had been unable to recover
from Fyfe, including the difference between what plaintiff would
have received from Fyfe had defendants
initially effected the first
valuation 'correctly', the costs of the second valuation exercise by
Watkins and the costs wasted
in the earlier litigation. In his
particulars of claim plaintiff relies, as part of his cause of
action, upon the setting aside
of the first valuation, the second
valuation and Fyfe's alleged inability to pay more than R1.5m in
settlement of plaintiff's
claims. In their special plea Defendants
aver that plaintiff's claims became due by no later than 12 November
2007, being three
years after second defendant handed down the first
valuation. Summons having only been served in March 2008, defendants
aver
that in terms of the provisions of Chapter 3 of the
Prescription Act no 68 of 1969
, plaintiffs' claims had prescribed.
THE DEFENDANTS' CASE
[16]
On behalf of the defendants it was contended in argument that
prescription began running in respect of plaintiff's damages
claim
by no later than 13 December 2004, the date on which plaintiff
instituted his first action against Fyfe and defendants.
By this
date, it was contended, plaintiff had obtained an informal valuation
from yet another firm of accountants which concluded
that the shares
and loan account had a nil value and had himself concluded that the
initial valuation was wrong both for substantive
and procedural
reasons. Accordingly, it was argued, by December 2004 in
satisfaction of the requirements of
s 12
of the
Prescription Act 68
of 1969
, plaintiff had knowledge both of the debtor of and the
breach/es of the underlying agreement upon which he relied.
[17] It was further
contended, with reference to the pleadings both in the first and in
the present action, that, in seeking damages
from defendants,
plaintiff had relied on the same breaches of contract initially
cited. Notwithstanding that any loss suffered
by plaintiff may have
occurred at a date later than the breach/es of contract, at worst
for him he should have interrupted prescription
within the three
year period by instituting action and suing for a declarator that
defendant/s were liable to him for any damages
he had sustained.
Seen from another perspective, it was argued, any action instituted
by plaintiff against defendants for damages
immediately after the
first valuation could not have been the subject of a successful
exception.
PLAINTIFF'S CASE
[18]
Plaintiff approached the matter from a different perspective,
namely, that this Court was not simply dealing with an action
for
breach of contract but, crucially, one arising from the
malperformance of contractual obligations within the context of
arbitral proceedings. It was contended that essential elements of
plaintiff's cause of action were the setting aside of the first
valuation and the making of the favourable second valuation. It was
argued that there was a substantial difference between a
simple
contractual claim and one arising from malperformance of contractual
obligations in an arbitral context.
[19] Until such time as
an arbitral award was set aside (or abandoned) it was binding upon
and enforceable against the parties
thereto. In the circumstances,
prescription had not begun to run, at the very earliest, until
plaintiff succeeded in setting
aside the first valuation pursuant to
the order of court obtained on 26 February 2007. In fact, it was
contended, prescription
had not begun to run prior to the second
valuation, namely 1 June 2007, since before this step plaintiff
would have been unable
to establish he had suffered damages.
Somewhat tentatively, it was further suggested that prescription had
begun to run even
later, when plaintiff established that Fyfe was
financially unable to pay the full damages he had suffered.
Whichever was the
correct date, the action had been instituted
within three years of setting aside of the first valuation in
February 2007 and
therefore, by any reckoning, the special plea of
prescription had to fail.
[20] In the alternative,
it was contended there were purely contractual grounds why the
"debt" had not become due within
the meaning of the
Prescription Act before
June 2004. Amongst these were the fact that
plaintiff, having incurred an unfavourable arbitration award by
reason of the first
valuation, had not suffered damages but merely
the loss of a suit.
DISCUSSION
[21]
S 12(1)
and (3)
of the
Prescription Act provide
, respectively, that:
"Prescription
shall commence to run as soon as the debt is due. "
and:
"A debt shall
not be deemed to be due until the creditorhas knowledge of the
identity of the debtor and of the facts from
which the debt arises:
Provided that a creditor shall be deemed to have such knowledge if
he could have acquired it by exercising
reasonable care".
[22] Before 1984, the
wording of
s 12(3)
excluded contractual causes of action from the
deeming provisions with resultant anomalies. An example thereof was
Electricity
SupplyCommission v Stewarts and Lloyds of SA (Pty) Ltd
1
a
matter involving an action for breach of contract after a defective
pipe was installed. It was held that the breach was committed,
and
thus prescription began running, when the work containing the
defective pipe was handed over and not when the pipe malfunctioned,
with the consequence that the time at which the plaintiff became
aware of the breach and of such loss was not relevant in
ascertaining
the date that the debt arose.
[23] Notwithstanding the
statutory amendment it has long been recognised that prescription
does not commence to run until the
creditor has knowledge of all
facts giving rise to the debt.
Thus in
Wessel's
Law of Contract in South Africa
2
nd
Edition at para 2780 the learned author states:
"It is therefore
essential to the defence of prescription that the creditor should
have been entitled to bring his action
at the moment from which the
debtor claims that prescription runs in his favour."
[24] In
Truter
and Another v Dyssel
2
it was
held that under
s 12
of the Act, prescription of a debt began
running when the debt became due and the debt became due when the
creditor acquired
knowledge of the facts from which the debt arose.
In other words, the debt became due when the creditor acquired a
complete cause
of action for the recovery of the debt or when the
entire set of facts upon which he relied to prove his claim was in
place.
It was held further that, for the purposes of prescription,
"cause of action" meant every fact which it was necessary
for the plaintiff to prove in order to succeed in his claim. It did
not comprise, however, every piece of evidence which was
necessary
to prove those facts.
[25] In
Extinctive
Prescription
Juta
& Co Ltd (1996), Loubser, the author deals with the question of
the onset of prescription in contractual claims and,
more
specifically, with the issue of whether the date of breach
invariably constitutes the onset of prescription. He states in
this
regard:
"Occurrence of
loss will not necessarily coincide with the conduct that constitutes
breach of contract. Where the act constituting
the breach creates
the potential of loss, but it is not yet possible to determine the
extent of the loss or, for that matter,
whether loss will occur at
all, the debt should not be considered due for the purposes of
prescription".
3
Dealing with the
contention that the contemplation of damages is sufficient,
Professor Loubser states at page 84:
"the mere
potential of future loss is in itself not sufficient for a cause of
action to arise."
[26] Similar
sentiments were expressed in
Swart
v Van der
Vyver
4
where
the court stated:
"Of
skadevergoeding verskuldig is, asookdie vraag waarin dit bestaan, is
regsvrae, terwyl die bepaling of skatting van die
omvang daarvan 'n
feitelike vraag is. (Domat, Les loix civiles dans leur ordre
naturel, Strahan se vertaling I.III.V, para. 1890-1891).
Die blote
feit dat kontrakbreukgepleeg is gee nie noodwendig 'n eis om
skadevergoeding nie. Om skadevergoeding te kan verhaalmoet
bewys
word dat skade gely is. Steenkamp v Juriaanse,
1907 T.S. 980
op bl.
986. "
[27] The central issue
in the present matter is when the plaintiff acquired knowledge of
the identity of the debtor and the facts
in terms of which the debt
arose. There is clearly no all-encompassing answer as to when
prescription begins in relation to a
claim for contractual damages
since the particular circumstances of each case will play a
determinative role. I am in agreement
with Mr. Kirk-Cohen, who
appeared on behalf of plaintiff, that the fact that the breach took
place in the context
of
an arbitral dispute between plaintiff and Fyfe is fundamental to an
analysis of the issue.
[28] The process of
arbitration is an important and valued element of our legal system.
It recently underwent constitutional scrutiny
in
Lufuno
Mphaphuli and Associates (Pty) Ltd versus Andrews and Another
5
and
received a seal of approval. The majority of the court held that the
values of the Constitution would not necessarily best
be served by
interpreting
s 33(1)
of the
Arbitration Act 42 of 1965
, which sets
out the limited number of grounds upon which a court of law may set
aside an arbitral award, in a manner that enhances
the power of
courts to set aside private arbitration awards. The Court stated:
"Indeed, the
contrary seems to be the case. The international and comparative
lawconsidered in this judgment suggest that
courts should be careful
not to undermine the achievement of the goals of private arbitration
by enlarging their powers of scrutiny
imprudently".
6
The above
dictum
of
O'Regan ADCJ, concurred in by the majority of the Court, underscores
the respect given by the courts to the process of private
arbitration and, by extension, to arbitral awards flowing therefrom.
[29] Although plaintiff
had knowledge of the alleged breaches of the underlying agreement by
December 2004, his cause of action
encompasses
more than simply such a breach or breaches. In his particulars of
claim plaintiff specifically pleads the setting
aside of the first
valuation by an order of court and the making of the second
valuation of the equity and shareholders loan
account in the
company. Until such time as plaintiff set aside the first valuation,
it continued to bind him and Fyfe. The continuing
existence of the
binding valuation would, I consider, have been a complete answer to
any action for damages instituted by plaintiff.
The special plea of
prescription ignores this critical fact by focussing solely on
plaintiff's rejection of the first valuation
based upon the alleged
breaches of the underlying agreement.
[30] It is thus an
essential element of plaintiff's cause of action that the first
valuation complained of had first to be set
aside. This is
illustrated by the fact that, in the absence of the arbitral
process, plaintiff could merely have treated second
defendant's
malperformance as a repudiation and terminated the contract. That
option was not open to plaintiff in the present
matter since the
breach or breaches took place in an arbitral context and plaintiff
could not rely on them as the basis for a
damages claim until the
arbitral valuation was set aside. As Mr. Kirk-Cohen submitted, it is
no answer to an adverse arbitration
award to contend merely that an
arbitrator (or valuator) has breached the underlying arbitration
agreement. All other things
being equal, in the absence of
sufficient grounds to set aside the award it remains final and
binding on the parties to the agreement.
Were it otherwise, a party
aggrieved by an adverse arbitration award could simply sue the
arbitrator
ex
contractu.
Acceptance
of such a proposition would, in my view, undermine the foundations
of the law and practice of arbitration.
[31] It is indeed so
that, as Mr. Goddard, who appeared for the defendants, pointed out,
as far as the alleged underlying contractual
breaches are concerned,
the particulars of the action instituted by plaintiff in 2004 and
the present action are similar in many
respects. However, this fact
in itself has limited significance. In the first action the relief
sought, relying on these alleged
breaches, was the setting aside of
the arbitral award. In the present action plaintiff's claim for
damages is based upon the
defendants' alleged contractual breaches
and the consequent setting aside of the arbitral award.
[32] I conclude that
prescription did not commence running in the present matter until,
at the earliest, the first valuation or
arbitration award was set
aside on 26 February 2007. It follows from this finding that the
special plea of prescription must
fail since the present action was
instituted within a period of three years from that date.
[33] In the light of
this finding it is unnecessary for me to consider whether
prescription could not have commenced running any
earlier than 1
June 2007 when the second valuation was made. Similarly, I need not
consider the more doubtful proposition that
there was a yet later
date before which prescription could not have commenced running,
namely, when it came, or should have come,
to plaintiff's knowledge
that he would be unable to recover his full claim from Fyfe.
[34] For these reasons I
consider that the special plea of prescription must fail, with costs
following the result. Counsel advised
that from time to time two
counsel had acted for the plaintiff and in the result the following
order is made:
The special plea of
prescription is dismissed with costs, such costs to include the
costs of two counsel where so employed and
to be payable by first
and second defendants jointly and severally, the one paying the
other to be absolved.
BOZALEK J
JUDGE OF THE HIGH
COURT
1
Reported initially at
1979 (4) SA 905
(W) and then on appeal at
1981
(3) SA 340
(A).
2
[2006] ZASCA 16
;
2006 (4) SA 168
(SCA).
3
At page 78.
4
1970 (1) SA 633
(A) 643 B - D
5
2009 (4) SA 529
(CC).
6
At page 235.