Hodgson and Others v Imperial Tobacco Co and Others – High Court Queen's Bench Division

Judgment given in February 1999

In a class action on behalf of 52 plaintiffs against Imperial Tobacco Co and Others, whose products account for approximately 80% of all cigarettes sold in the UK, the plaintiffs alleged that they were suffering from lung cancer. The allegation was supported by medical opinion that the lung cancer had been caused by smoking.

The Judgment

Of the 52 plaintiffs, 10 were selected by agreement between the parties to act as "lead plaintiffs" on the basis that they were representative of the group and that their selection would enable the litigation to proceed in an efficient and economic manner. It was common cause that 8 of the 10 had not commenced action within three years of them having knowledge of their cause of action as provided in Section 14(1) of the Limitations Act 1980 (the equivalent of our Prescription Act). Their claims had therefore prescribed.

One of the ten plaintiffs subsequently discontinued her action and it was accepted that one of the plaintiff's claims had not prescribed. Thus the remaining eight plaintiffs came before the Court on application under a section of the Limitations Act which provided that a Court may allow actions which had become prescribed to proceed for reasons of equity. It was argued that it would be equitable to allow the actions to proceed having regard to:

• whether or not the plaintiff would be prejudiced by the limitation (including the prospects of success and the quantum); and

• whether the defendant may be prejudiced.

There is no similar equity provision in our law but the Court's approach to the issues of prejudice and addiction to tobacco is of interest.

Prior to the issuing of summons, a local firm of solicitors had placed advertisements in various newspapers calling for any people who believed that they were suffering from lung cancer to approach their firm, who undertook to investigate the possibility of compensation being awarded to the sufferers. Out of the approximately 300 potential plaintiffs who approached the firm, 52 claims with the best prospects of success were selected by the solicitors. The firm then unsuccessfully applied for legal aid on behalf of the 52 plaintiffs. The claims thereafter proceeded on the basis of conditional fee arrangements.

The allegations contained in the particulars of claim for the eight plaintiffs were similar:

There was a duty of care on the defendants (the tobacco company) to minimise the risk to the plaintiffs' health by making cigarettes as safe as practicably possible as soon as possible. (Bearing in mind in this case most of the plaintiffs smoked from the mid-1950s to the 70s or 80s).

The defendants should have known by the mid-1950s that there was a link between smoking and lung cancer. The defendants were in breach of their duty of care by failing to reduce the tar yields in all cigarettes manufactured and distributed by them and that they failed to conduct research and development which would have given them technical skills to reduce these levels.

The defendants had failed to place warnings on packages to warn the plaintiffs about the tar.

The court had to assess whether or not it would lead to substantial injustice if the provisions of the act were applied and the claims were barred.

The plaintiffs' medical and smoking histories were all remarkably similar and followed the same general pattern. The following example illustrates the general scenario:

Mr Patrick O'Connell, originally from the county of Donegal:

• started smoking at the age of 14;

• was a labourer on mines in Ireland and Scotland;

• smoked up to 20 cigarettes a day;

• had switched to filter-tipped cigarettes in the mid-1970s;

• increased his consumption when he switched and drew more heavily on filter-tipped cigarettes to gain satisfaction;

• in 1974 or 1975 he attempted to give up;

• finally gave up in 1978;

• was diagnosed 10 years later with lung cancer;

• admitted he had some difficulty giving up, but was not addicted in the true sense of the word;

• in 1988 he had an operation, a right lower lobectomy;

• appeared to have been cured of cancer at the time of the trial;

• had substantial claims for loss of earnings.

The Court found that Mr O'Connell and the seven other plaintiffs had issued their summonses out of time (approximately 50 years late). In addition he found that in all instances their summonses had only been issued in response to the prompting by the firm of solicitors and further that the plaintiffs had all known of the dangers of smoking and yet had continued to smoke. On the basis of its finding that the plaintiffs had knowledge of the dangers and yet continued to smoke, the Court held that the plaintiffs should have issued their summonses as soon as they became aware of the damage which had been caused to their health.

In the premises the Court refused to allow the claims to proceed under the equity provisions of the Limitations Act.

Ejection from Premises

2nd May 2000

Shrosbee NO v Simon (1999(2) SA 488)

The applicant applied to the court to have the respondent ejected from premises.

Simon and Shrosbree had entered into a contract for the latter to rent certain immovable property from the former. Subsequently, Simon breached a term of that contract.

In terms of the contract this breach entitled Shrosbree to cancel the agreement by giving the respondent "notice of the cancellation". Shrosbree sent Simon a letter informing him of the cancellation.

The court had to decide whether or not the letter sent by the applicant constituted a valid Notice of Cancellation in terms of the contract; and if not, whether or not the Notice of Motion would serve as a Notice of Cancellation as contemplated in the contract.

The court held that on its reading of the letter it did not constitute a "Notice" of cancellation as envisaged in the contract because the content of the letter did not address the issue of cancellation specifically.

As to whether or not the Notice of Motion could serve as Notice of cancellation, the court held that it could not. The court said that this was clear from the wording of the contract.

The word "Notice" in the contract had to be interpreted to mean "an express, extra-judicial announcement made by the applicant to the respondent".

On the facts, no such Notice had been given to the respondent, and thus the contract was fully operative. Accordingly, the court dismissed the application for ejectment as Simon was in lawful possession of the premises.

Disclaimers For Recreational Amenities

4th May 2000

Durban Water Wonderland (Pty) Limited v Botha and Another

1999(1) SA 982 SCA

The matter before the Supreme Court of Appeal was an appeal against the controversial decision of Durban's Water Wonderland (Pty) Limited v Botha and Another 1997(3) SA 245 (N).

A notice at a fun fair stated that the amenities provided had been "designed and constructed to the best of our ability for your enjoyment and safety". It added "(n)evertheless we regret that the management, its servants and agents must stipulate that they are absolutely unable to accept liability or accept responsibility for injuries or damage of any nature whatsoever whether arising from negligence or any other cause howsoever ..." The court a quo had held that the notice did not say that persons entering the premises did so at their own risk or that the proprietors would not be responsible or liable, for damages or loss suffered.

The court a quo further found that in considering the meaning to be given to such an exemption clause, the Courts could and should have regard not only to the wording but also to the context in which the wording was used and in so doing ascertain the intention of the parties.

As to the context, the court a quo held that it was dealing with a busy fun fair which undoubtedly entertained hundreds of visitors each day and any reasonable person would assume that the proprietors were insured. In these circumstances it was further held that it would be imminently reasonable for the insurer and the proprietor to decide that they would not accept liability but would require claimants to prove their claim and to bring this to the attention of their patrons, which the court held the notice did so.

On appeal, the Supreme Court of Appeal had to decide, inter alia, whether or not on a proper construction of the notice the appellant was exempt from liability.

Scott JA held that it was immediately apparent from the language employed in the disclaimer that any liability founded on negligence in the design or construction of the amusement amenities fell squarely within its ambit. In this instance the ground of negligence relied upon arose from the injury to the first respondent and her young daughter when they were flung from a ride at the appellant's amusement park, as a result of a mechanical failure in the machinery.

The court held that in this instance the negligence relied upon was clearly related to the design or construction of the ride and it followed that the respondent's cause of action was one which fell within the ambit of the disclaimer.

Turning to the court a quo's reasoning that the notice was capable of meaning no more than that the management and its servants and agents would not accept liability but would require a claimant to prove his or her claim in a court of law, Scott JA held that such a deduction was far fetched in that the obvious consequence of such a construction would be that the notices would serve no purpose as the appellant would in any event always have the right to require any claim against it to be proved in a competent court.

Furthermore, the appellant could never have intended the notices to have the meaning assigned to them by the court a quo, nor could any patron have reasonably thought that it was what they intended to convey.

Scott JA further found that the use of the words such as "do not accept liability" or "unable to accept liability" meant that liability would not be incurred.

The language was found to be capable of only one meaning and that, in short, was that the appellant would not be liable for injury or damage suffered by anyone using the amenities, whether such injury or damage arose from negligence or otherwise.

In arriving at its conclusion the Court re-affirmed our law that a disclaimer clause which is clear and unambiguous is enforceable provided it meets certain requirements, inter alia that the party who seeks to rely on the disclaimer must take reasonable steps to bring the notice to the attention of the other party.

Test For Materiality: Warranties, Misrepresentations And Material Non-Disclosures

16th May 2000

The Clifford Decision and new insurance legislation

Despite widespread judicial and academic debate, new insurance legislation has failed to correct the artificial distinction between misrepresentations and non- disclosures.

There is more to Schutz JA's decision in Clifford v Commercial Union Company of South Africa 1998 (4) SA 150 (SCA) than initially meets the eye. While the substance of the judgement concerns itself with the duty of disclosure under insurance law and whether or not an insurer is entitled to repudiate liability on the basis of false replies to questions in a proposal form, of far more significance is Schutz JA's obiter dicta on the test for materiality under section 63(3) of the Insurance Act, 27 of 1943. Schutz JA's comments can be seen as an attempt to place the law surrounding section 63(3) onto the solid ground of consumer protection which the legislature had intended it to occupy. While word from the judiciary is still awaited in this regard, section 53(2) of the Short-term Insurance Act, 53 of 1998 and section 59(2) of the Long-term Insurance Act, 52 of 1998 have not proven to be the saviours everyone had hoped for.


The widespread debate surrounding the interpretation to be afforded to section 63(3) of the old Insurance Act is well documented. The result of a legislative response to a wave of public outcry which followed the unjust results inherent in a strict application of warranties by insurers (eg the infamous decision of Jordaan v New Zealand Insurance Company Limited 1968 (2) SA 238 (E)), the section aimed at preventing insurers from relying on immaterial warranties in order to repudiate liability under insurance contracts.

Prior to the section's inclusion in the Insurance Act, 27 of 1943, insurers sought to reduce their exposure by including warranties in policies, in which the insured warranted the truth and materiality of the insured representations and assented to their inclusion as essential terms of the policy.

The reality of this was that all an insurer needed to do to escape liability was prove the incorrectness of the insured's statement. That done, a breach of warranty was present and the insurer accordingly had a contractual right to repudiate liability.

Warranties as such had the effect of promoting trivialities to materialities and in so doing allowed insurers to raise trivial misstatements which had no impact on the assessment of risk or in inducing the issuing of the policy on the terms on which it was issued.

Insurers were thus able to escape liability on the basis of trivial misstatements in the same manner as if there had been a material misstatements which had impacted on risk assessment or premium determination.

The amendment of the Act and the inclusion of section 63(3), aimed at protecting innocent parties against repudiations by insurers which were based on inconsequential inaccuracies or trivial misstatements in insurance proposals.

Originally it was thought that section 63(3) entrenched the common law requirements of materiality as a defining criterion applicable to all misrepresentations, including those contained in a warranty. This sentiment was echoed in Mutual and Federal Insurance Company Limited V Oudtshoorn Municipality 1985 (1) SA 419 (A) at 435 which stated that the test to be applied in determining the materiality of the misstatement was that of the reasonable person, i.e. the average prudent person.

This purely objective test was, however, softened by the AD four years later in Presidents Versekeringsmaatskappy Bpk v Trust Bank van Afrika Bpk 1989 (1) SA 208 (A) at 216. The AD is then of the opinion that a court should determine whether or not a reasonable man would appreciate that the information should be conveyed to a prospective insurer so as to enable the insurer itself to decide whether or not to accept the risk or to charge a higher premium than usual.

Common consensus at the time was that this largely objective test was thought to apply to both misrepresentations by omissions (ie a failure to disclose) and commissions (ie an inaccurate disclosure).

However Kriegler AJA's decision in Qilingele v SA Mutual Life Assurance Society 1993 (1) SA 69 (A) marked an important departure from this commonly held perception. The judgement raised significant academic interests and comment.

The learned Judge stated that the objective test for materiality, as outlined in Oudtshoorn Municipality, only applied to cases where the ground for repudiation was a failure of the common law duty to disclose material facts. As such the Oudtshoorn Municipality test did not apply to cases of misrepresentation falling within the ambit of section 63(3), be they common law misrepresentations or breaches of warranty. Thus Kriegler AJA, supported by a unanimous Appellate Division bench, held that the test for materiality under section 63(3) was subjective, i.e. that the evidence of a particular insurer is not only relevant but may prove to be crucial. More importantly, Kriegler AJA drew a distinction between a misrepresentation by omission and one by commission. The effect of this was that section 63(3) governed the realm of misrepresentation while the scope of the Oudtshoorn Municipality materiality test was restricted to those instances of a failure of the common law duty to disclose.

The spin-off effect of the Qilingele decision for consumers was just as unsatisfactory because the rationale behind the enactment of section 63(3) was to compensate for the way in which the test of the "reasonable insurer" unduly favoured insurers over consumers. According to Kriegler AJA's Qilingele judgement all that is required for an insurer to repudiate liability under a policy is that that particular insurer must state that he considers the misrepresentation material to the assessment of the risk underwritten.

Thus the opinions of other insurers or the market itself would, for the most part, be irrelevant. These arguments are further reasons to agree with the widely held contention that from a consumer point of view, the Qilingele decision was unsound.

Yet despite adverse academic comment, Kriegler AJA's Qilingele legacy lived on in decisions such as Theron v AA Life Assurance Association Limited 1995 (4) SA 366 (A) and Espach v Lloyd's of London 1996 CLR 603(W).

The Clifford Decision

Schutz JA in the Clifford decision decided to revisit the issue. While the facts of Mrs Clifford's predicament never actually brought the test for materiality under section 63(3) before the Supreme Court of Appeals (the successor to the Appellate Division), Schutz JA nevertheless seized the opportunity to express his sentiments on the issue.

Briefly, the facts before the court were that Mrs Clifford's Mercedes 500 SL, valued at approximately R530 000 and insured by Commercial Union, had been stolen. Commercial Union however repudiated liability under the policy on the basis of incorrect statements made in the proposal form by Mrs Clifford's common law husband who was acting as her agent.

In the proposal form, which contained the usual type of warranty, i.e. that all statements and particulars were true, correct and complete, and contained all information known to the proposer affecting the risk to be insured, and that the proposal form would be the basis of the contract and would be incorporated into it), Mrs Clifford's agent stated, inter alia, that the year of manufacture of the car was 1993. This was clearly incorrect as the car had in fact been imported into South Africa as early as 1991.

In coming to its conclusion the court relied on the principle that risks could only be repudiated where they were assumed by an insurer on the strength of "significant", as opposed to "inconsequential" or "trivial", misstatements.

A comparison had to be made between how the risk would have been assessed had the insurer known the true facts as opposed to an assessment distorted by the falsehood. A disparity was significant if the insurer, had it known the truth, would probably have declined the risk or would probably have undertaken it on different terms.

The court held, after expounding upon the Oudtshoorn Municipality decision and the distinction drawn in Qilingele, that whichever test of materiality one adopted, subjective or objective, it was clear that had the insurer known the true facts it would not have issued a policy reflecting the car as a 1993 model.

While there was little likelihood of Mrs Clifford succeeding in her appeal, the real value to be attached to Schutz JA's judgement does not lie in the Supreme Court of Appeal's dismissal of the appeal but in the learned judges analysis of the merits of the Qilingele distinction between misrepresentations by omissions and commissions. Schutz JA stated that the test for materiality contemplated in section 63(3) had to be the objective reasonable person test and not the subjective test as entrenched by Kriegler AJA's Qilingele decision. In other words, whether objectively the insurer regarded the misstated fact as material and was induced thereby to assess the risk in a certain way.

The learned Judge, in addition, stated that while Oudtshoorn Municipality was expressly concerned with non disclosure and section 63(3) referred to an incorrect "representation", a distinction between the two was of no consequence, as our law did not recognise the artificial distinction between falsity by silence and falsity by express statements.

In formulating his view, Schutz JA criticised the dicta of both the Qilingele and Theron decisions to the extent that they advocated the subjective materiality test. Schutz JA further cited with approval Didcott J's decision in Pillay v South African National Life Assurance Company Limited 1991(1) 5A363(D) at 367A- E which conferred the common law test on the materiality as referred to in section 63(3).

While Schutz J A's dicta must be applauded, it does come with the following caveats:

• Schutz J A's obiter dicta are nothing more than that and bore little relation to the issue before that court

• His learned colleagues on the bench, while not disagreeing with him, declined to endorse his excursus on the topic

and as such;

• Kriegler AJA's Qilingele test, approved by a unanimous decision of the AD, remains the law in this regard until overruled.

New Insurance Legislation

It was generally believed that the legislature, in drafting the new Short-term and Long-term Insurance Acts, which had the effect of replacing their outdated predecessor, would go back to basics. Unfortunately the legislature has failed to clarify the controversy surrounding section 63(3). The substance of section 63(3) has simply been recast as section 59(2) of the Long-term Act and section 53(2) of its Short-term counterpart. In addition to this, the controversy surrounding non-disclosure and misrepresentation has been further fuelled by inclusion of section 48 in the Long-term Insurance Act.

Having no equivalent in the Short-term Act, section 48, in essence requires that an insurer, at the conclusion of the policy, must identify those material representations which may in future form the basis of an avoidance of liability in terms of section 59(1) and such summary is deemed to be exhaustive of those matters material to the risk assessment (section 48(2)) in the absence of contrary evidence.


Despite judicial and academic comment the legislature has not clarified the matter and until it does, or until the Supreme Court of Appeal deals with the matter directly, the uncertainty will unfortunately prevail.

Apportionment Of Damages

12th May 2000

Thoroughbred Breeders' Association of South Africa v Price Waterhouse

1999 (4) SA 968 (W)

In the past the Apportionment of Damages Act 34 of 1956 has only been applied to apportion liability for damages between wrongdoers responsible for causing harm to another in delictual actions. In this case the Court decided that the Act also applied where the claim was based on a breach of contract.

During January 1994 Price Waterhouse performed its audit of the TBA's financial statements for the year ended 31 October 1993. The TBA alleged that when it did so, it breached the contract in force between the parties by failing to detect:

• That substantial amounts of cash had not been deposited for long periods during the year

• That a promissory note belonging to the TBA with a face value of R138 864 had been encashed

The TBA alleged that the undeposited cash was stolen by its then financial manager, Mr Mitchell, and that Mitchell encashed the promissory note and used its proceeds to cover other thefts.

It was common cause that after the audit in respect of the year ended 31 October 1993, Mitchell stole R1 389 801 from the TBA before his activities were discovered.

The TBA contended that if Price Waterhouse had carried out the audit for the October 1993 year properly, Mitchell's activities would have been uncovered. He would then have been dismissed and the thefts between February and November 1994 would not have taken place.

Price Waterhouse denied that it breached its contract with the TBA and raised a defence that the TBA knew that Mitchell had a criminal record, having been convicted on 3 counts of theft in 1985 and sentenced to imprisonment.

The Court considered the evidence and found that when Price Waterhouse performed its audit, the clerk responsible for examining the bank reconciliation statements had overlooked long outstanding deposits, or at least had failed to recognise the significance of money remaining undeposited for long periods of time. The investigation of unusual reconciling items was in the court's opinion superficial and inadequate, resulting in the danger of the misappropriation of cash not being detected.

Regarding the promissory note, the court found that Price Waterhouse's clerk had noted the date of the promissory note as 8 February 1993, but had failed to question the significance of its being reflected as an asset in the TBA's financial statements after the date of maturity when it would in the ordinary course have been deposited into the TBA's bank account.

The terms of the auditing contract were never reduced to writing. However, it was common cause that the parties impliedly or tacitly agreed that the audit would be conducted in accordance with generally accepted auditing standards, and that Price Waterhouse "would perform the audit with the due professional care required of an auditor in public practice, and would not act negligently."

The Court considered at length the expert testimony of the witnesses called by the TBA and Price Waterhouse, and concluded that "The auditor must question an apparent anomaly in the material he tests, and in this case the long outstanding deposits and the apparently overdue promissory note were clearly such anomalies which the audit clerk viewed and failed to appreciate." The Court found that both in regard to the outstanding deposits and the promissory note, Price Waterhouse had been negligent and had committed a breach of contract. Price Waterhouse however alleged that the TBA had failed to prove that they had, in performing the audit, been the cause of the TBA's loss.

The Court found that there had been "so much calling for explanation, that the level of suspicion of the reasonably astute auditor ought to have been so high that a thorough investigation was called for" and if this had happened, Mitchell's theft would have been uncovered and ultimately he would have been dismissed. The thefts committed by Mitchell between February and November 1994 would then not have taken place.

The next step in the enquiry into causation was to test whether or not the TBA's or Price Waterhouse's breaches were the predominant or effective or real cause of the damage suffered. The Court found that the TBA had discovered during Mitchell's probationary period of employment that he had been convicted and imprisoned for theft.

The TBA council had nevertheless decided to employ him, without informing any other employees of his criminal record. As the financial manager, Mitchell handled an annual turnover of approximately R40 million predominantly in cash and cheques in negotiable form.

There was no monitoring of Mitchell and despite having certain systems in place regarding the signing of cheques, in practice Mitchell was given the power to decide which cheques to issue.

The Court concluded that there was "no doubt that in acting as it did the TBA acted negligently, and that this negligence contributed causally in no small measure to its own loss. There were therefore, broadly speaking two causes of the loss suffered: Price Waterhouse's breaches which constitute deviations from the standard of the reasonable auditor and amount therefore to negligence, albeit in a contractual setting, and the TBA's negligence."

The Court found that the TBA had been negligent in relation to its employment of Mitchell. The Court concluded that both Price Waterhouse's and the TBA's negligence had caused the loss in question but that "the highly irresponsible employment of a convicted thief in so vulnerable an area of the TBA's business and with so little check on his behaviour was the predominant, effective or real cause of the loss suffered.

"It follows, applying the common law, that the TBA's claim must fail because its own negligence in employing Mitchell as it did was the causa causans of its loss."

The Court enquired whether the TBA's claim was at least partly saved by the provisions of Chapter 1, headed "Contributing Negligence", of the Apportionment of Damages Act. The long title of the Act reads as follows:

"To amend the law relating to contributory negligence and the law relating to the liability of persons jointly or severally liable in delict for the same damage, and to provide for matters incidental thereto."

The Court interpreted the reference to delict in the long title as applying only to Chapter II headed "Joint and several wrongdoers" and found that the words "contributory negligence" in the long title seemed appropriate to the facts.

The Court found that it is bound to give effect to the clear and unambiguous meaning of a section, unless this would lead to absurdity, inconsistency or inequity.

The Court found further support for applying the Act in a contractual setting in Chapter III headed "General" –

"S4(1 ) The provisions of this Act shall not

(a) operate to defeat any defence arising under a contract;

(b) operate to increase the amount of damages beyond any maximum prescribed in any agreement or any law applicable in respect of any claim for damages."

which it noted seemed to envisage a contractual nexus between the parties, and a term of an agreement that impacts on the operation of the Act.

The Court applied the provisions of section 1(1)(a) to the facts in the following way:

"The TBA has suffered damage "caused partly by (its) own fault": this fault lay in its failure to act reasonably by continuing to employ Mitchell as it did in the circumstances reflected above: the TBA's damage has been caused "partly by the fault of any other person", being Price Waterhouse who have carried out their contractual obligations negligently; in the absence of the section the TBA's claim would have been "defeated by reason of the fault of the claimant", the TBA: and the application of the section ensures that that claim "shall not be defeated by reason of the fault of the claimant" Ð the TBA. There is of course nothing to prevent me from reducing the TBA's claim to such extent as I deem just and equitable having regard to the degree to which the TBA was at fault in relation to the damage."

The fact that this interpretation of the Act leads to a "fair and equitable result" lends further support for the judge's view that "there is no conceivable reason why I should be astute to interpret the Act otherwise."

Two Courts in which apportionment had previously been raised in a contractual setting refused to apply the Act. They did so on the basis of historical arguments that the Act was not intended to apply to claims based on contract and for the reason that a contract may also be breached without any negligence, while the Act refers to fault which normally envisages a degree of blameworthiness.

The Court dealt with the historical argument, stating that it does not appear that the Act was not intended to apply, and that in any event "whatever the historical intention may have been the words have a clear meaning to which effect must be given."

The Court was less clear in its approach to the question whether or not the Act only applies to negligent breaches of contract.

The Court stated that:

"it is not necessary for me to express the view on whether "fault" is to be understood in its legally technical sense of blameworthiness or in its ordinary wider sense, in which event it may include a breach of contract in the absence of blameworthiness."

Nevertheless, the judge expressed the view that there was no difficulty in applying of the Act "to only certain breaches of contract". In the final analysis the Court apportioned the fault on an 80/20 basis and awarded the TBA 20% of its loss, based on its view that the "ambit of a statute's application is surely a question of construction and if the language is clear the fact that such application fails neatly to observe divisions of current academic legal theory surely does not create any difficulty at all."

Whether or not this judgment will be overruled by the Supreme Court of Appeal remains to be seen. For the moment, however, the Apportionment of Damages Act offers relief to claimants, who through their own negligence, and the negligence of another, have suffered loss.

Loans, Liability And Close Corporations

15th May 2000

Du Plessis NO v Oosthuizen en 'n ander

1999(2) SA 191 (O)

This case dealt with the question of whether creditors who made money available to a close corporation by means of a loan could be held personally liable for that close corporation's debts or obligations in circumstances where the business of the close corporation was carried on in a reckless and fraudulent manner.

The plaintiff in this case, the liquidator of the close corporation, attempted to show that the respondents, being creditors of the close corporation, were party to the reckless and fraudulent carrying on of the business, which finally led to its liquidation.

The facts of the case were that the creditors loaned money to the close corporation which was to be used as capital to pay for the acquisition of produce which the close corporation then sold. The proceeds of the re-sale of the produce would be used to maintain the capital as well as to re-pay the creditors.

In summary, the liquidator alleged that the creditors carried on the business, had the day to day management of, and were in control of, the close corporation. He argued that the creditors were accordingly sufficiently involved in the management of the business to be aware of the reckless carrying on thereof by the members, and were therefore personally liable for the debts and obligations of the close corporation.

These allegations were, of course, denied by the respondents who argued that even though they made large sums of money available to the close corporation and attended some of its informal meetings, they were only creditors of the close corporation and were not involved in the management, nor the carrying on of the business of the close corporation.

The court considered the statutory principle (set out in section 64 of the Close Corporations Act 69 of 1984) that a person who was knowingly a party to the reckless and fraudulent carrying on of the business of a close corporation could be held liable for the debts or obligations of that close corporation. In determining whether or not the respondents were knowingly a party to the reckless and fraudulent carrying on of the business, the court re-affirmed that the test to be applied was the standard of the reasonable business person with the knowledge and experience of the respondents. The concept "knowingly" indicated actions accompanied by a full knowledge of the facts, while "reckless" indicated gross negligence with an indifference to the consequences of an act. Mere errors in judgement had to be excluded from consideration.

On an analysis of the facts before it, the court found that it was doubtful that the creditors could have been expected to be on the alert for indications of reckless management by other individuals, considering their positions and limited experience as businessmen. The creditors had not at any stage been members of the close corporation. They had not acquired a members' interest through their loans to the close corporation, and they had not had any control over the management or activities of the close corporation.

The court found that merely making a loan to a business to enable it to continue its operations, and their failure to attend informal meetings, could not in itself be considered a positive step in the management of the business.

As the creditors had not participated in the management of, or the carrying on of the business of the close corporation, there was no basis on which to hold the creditors liable for the debts or obligations of that close corporation.

Employees And Stolen Cheques

9th May 2000

Bond Equipment (Pretoria) (Pty) Limited v ABSA Bank Limited

1999 (2) SA 63 (W)

The main point to be decided in this case was whether or not Bond Equipment was vicariously liable in law to ABSA for the actions of one of its employees. An employee had stolen certain cheques made out in favour of Bond Equipment and deposited them into an account held by the employee with ABSA.

A Bond Equipment employee had unlawfully deposited cheques into the account of Bond Equipment (Pretoria) and the opportunity to steal the cheques had arisen during the course and scope of the employee's employment with Bond Equipment.

The court held that ABSA, as collecting banker, owed the true owner of the cheques a duty of care to ensure that it did not negligently collect payment of the cheques for the benefit of anyone not entitled thereto.

The court also found that Bond Equipment had become the true owner of the cheques.

Had the drawer of the cheques remained the true owner, and had the employee of Bond Equipment then stolen the cheques, Bond Equipment would have been vicariously liable to the true owner for the theft of the cheques. In this case, however, the cheques had been stolen from Bond Equipment and, once stolen, Bond Equipment was not in a position to control the employees dealing with the cheques.

On the question of vicarious liability, the court relied on Mhlongo & Another v Minister of Police 1978 (2) SA 551(A) at 567G. "[The element of control has always been regarded as a factor of prime importance in determining the existence or otherwise of a master and servant relationship]."

The court upheld Bond Equipment's claim and found ABSA liable for the face value of the stolen cheques.

The material contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. We accept no responsibility for any loss or damage, which may arise from reliance on information contained in this article.