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South Africa: Supreme Court of Appeal |
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IN THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
Case No: 645/97
THE DAVID TRUST First Appellant
THE MEYEROWITZ TRUST Second Appellant
THE
EVA TRUST Third Appellant
THE MYRO CHARITABLE TRUST Fourth Appellant
THE BORCHERDS QUARRY
PROPERTY
HOLDINGS TRUST Fifth Appellant
THE BOQUINAR PROPERTY
HOLDINGS
TRUST Sixth Appellant
THE TAXPAYER PARTNERSHIP Seventh Appellant
THE 2BQ HOLDINGS
TRUST Eighth Appellant
and
AEGIS INSURANCE COMPANY LIMITED First
Respondent
THE GENERAL REPRESENTATIVES OF
LLOYDS OF
LONDON IN SOUTH AFRICA Second Respondent
CORAM : HEFER, SMALBERGER, NIENABER, MARAIS JJA, MTHIYANE AJA
DELIVERED : 31 MARCH 2000
Insurance - professional indemnity policy - accountants accepting
mandate to administer and invest funds of clients in a money market - theft
by
partner - firm sequestrated - liability of the insurers to clients in terms of s
156 of the Insolvency Act - mora interest - unliquidated claims - Act 55
of 1975
NIENABER JA/
NIENABER JA :
[1] Section 156 of the
Insolvency Act 24 of 1936 provides as follows:
“Whenever any person (hereinafter called the insurer) is obliged to indemnify another person (hereinafter called the insured) in respect of any liability incurred by the insured towards a third party, the latter shall, on the sequestration of the estate of the insured, be entitled to recover from the insurer the amount of the insured's liability towards a third party but not exceeding the maximum amount for which the insurer has bound himself to indemnify the insured.”
This section was invoked by the
appellants in an action instituted by them as plaintiffs in the Witwatersrand
Local Division of the
High Court of South Africa against the defendants, now
the respondents. The “third parties” for the purpose of
the
section were the plaintiffs; the “insured” was a partnership of
chartered accountants, Katz Salber & Company
(henceforth referred to simply
as “Katz Salber”); and the “insurers” were the two
defendants. The plaintiffs'
claims were for the indemnification of losses
alleged to have been suffered by them when one of Katz Salber's partners, one
Lombard,
embezzled funds, including those entrusted to and administered by Katz
Salber on behalf of the plaintiffs.
[2] In order to bring themselves within
the four corners of the section the plaintiffs had to satisfy four requirements
identified
by the court a quo and accepted as correct by the parties,
viz:
1. that Katz Salber had incurred a liability to the plaintiffs;
2. the quantum of that liability;
3. that the defendants were obliged in terms of the policy to indemnify Katz Salber in respect of that liability; and
4. the amount which the defendants would have been obliged to pay Katz Salber.
[3] The court a quo held that the
plaintiffs succeeded in establishing the first but not the third of these
requirements and that the plaintiffs' claims
accordingly had to be dismissed
with costs. This is an appeal, with leave of the court below, against that
order.
[4] The plaintiffs are seven trusts and one partnership, all of them
represented both in their dealings with Katz Salber and in these
proceedings by
Mr D Meyerowitz. All were clients of Katz Salber of long standing. The
association between Meyerowitz and Katz Salber
dates back to 1961 when he
entrusted the business affairs of a company, The Taxpayer (Pty) Limited, to Katz
Salber. Katz Salber,
according to Meyerowitz, was
“mandated to run that company completely in every respect as my accountant, except for the fact that we would be producing the magazine and liaising with the printer.”
Katz Salber, for an agreed
fee, sent out invoices to subscribers, collected and banked the income in a bank
account in the name of
the client, paid all accounts, made all the necessary
disbursements, prepared draft financial statements, completed and submitted
income tax returns and paid them - in short, Katz Salber to all intents and
purposes administered the funds of the company. The
company was eventually
succeeded by the partnership which now figures as the seventh appellant. From
time to time during the succeeding
years other trusts, not all of them trading
entities, but in all of which Meyerowitz happened to have some or other
interest, joined
the Katz Salber stable on the same footing. The overall
arrangement, according to the evidence, remained the same in all cases.
Surplus
funds were retained in separate banking accounts held in the name of the various
plaintiffs and at the determination of
their trustees.
[5] At some stage,
probably during 1988, Katz Salber began placing surplus monies of all their
clients, not only those in which Meyerowitz
had an interest, in a “money
market” operation. This involved the pooling of the funds of different
clients into a single
account, held in Katz Salber's name, at a bank which,
during the later stages of the operation, happened to be Investec Bank. A
second account, at Trust Bank, was used as a convenient vehicle for paying out
monies, when required, to clients of Katz Salber,
including the plaintiffs.
This was an arrangement not only more convenient to Katz Salber but it also
enabled it to negotiate more
favourable rates of interest for its clients by
means of a “wholesale investment” of all the funds at its disposal.
Katz Salber's remuneration no longer consisted of an agreed fee, as before, but
of a commission of 6% on the interest thus earned
in the money market. All of
this happened with the knowledge and approval of Meyerowitz and his various
co-trustees. In all other
respects Katz Salber continued to perform the same
service for all the plaintiffs as before. It was not part of Katz Salber's
function
to advise the various plaintiffs on their investments. The funds
remained at their disposal and were paid over to them by Katz Salber
whenever
requested to do so.
[6] Unbeknown to the other partners of Katz Salber,
Lombard, over a period of about five years, systematically siphoned off these
funds and used the proceeds for his own speculative purposes. During the entire
period of embezzlement Lombard nevertheless continued
meticulously to prepare
fictional separate monthly financial statements for each individual client,
calculating and allocating interest
(less the 6% commission) as if these funds
remained physically present in the bank - a charade that was not exposed until
1994 when
Meyerowitz called for a cheque for R150 000 from the funds of one of
the trusts. Only then was it discovered that, far from standing
at over five
million rand, the account at Investec contained a paltry R9 000. The deceit was
not discovered earlier since no-one
at Katz Salber had thought it fit to verify
the phantom statements by instituting appropriate inquiries at the bank. Katz
Salber
was unable to make good the shortfall. It was duly sequestrated. So
were the estates of each of the three partners. Lombard was
convicted of theft
and sentenced to a period of imprisonment.
[7] Katz Salber had taken out
professional indemnity insurance. The policy which was in force at the relevant
time was underwritten
to a proportion of 80% by the first and 20% by the second
defendant.
[8] The policy provides that the insurers
“are bound (each for their own proportion as indicated) to indemnify the Insured in terms of the attached Schedule and the Annexures thereto up to the Limits of Indemnity stated in the schedule.”
The limit
of indemnity was R1 500 000
“in the aggregate for all claims made during the Period of Insurance (including Underwriters' costs and expenses)”
with a
deductible of R5 200 in respect of each claim.
[9] Four clauses, relating
to the indemnification as such, are of relevance to the third of the
requirements of s 156 of the Insolvency
Act, referred to in par [2]. The
enquiry is, stated with reference to the terms of the policy, whether Katz
Salber would have
been liable to each of the plaintiffs in respect of
claims falling within the meaning of any of the four clauses; if
yes, the
defendants, by the same token, would have been liable to Katz Salber and would
thus be liable to the plaintiffs. The issue
then is whether any of the four
clauses relied on by the plaintiffs are wide enough in their terms to cover such
claims and the liability,
if any, which Katz Salber, as a result of Lombard's
malfeasance, would have incurred to each of the plaintiffs. The court a
quo resolved that issue in favour of the defendants.
[10] The relevant
clauses are the following:
“SECTION 1
Against any claims first made on the Insured during the Period of Insurance for any alleged or actual:
1.1 negligent act, error or omission;
1.2 breach of
contract amounting to breach of duty in the practice of the profession by the
Insured ...;
1.3 ...
1.4 ...
1.5 ...
1.6 failure unintentionally and
in good faith to account for monies had and received;
1.7 ...
wherever or whenever committed or alleged to have been committed in the conduct of the Profession by or on behalf of the Insured...
SECTION 2
Against any legal liability in connection with any claim first made on the Insured during the Period of Insurance by reason of any dishonest or fraudulent act or omission of any past or present partner, director or employee of the Insured.”
The policy contains a comprehensive
definition of the “Profession ” to which I shall refer in greater
detail later in
this judgment.
[11] The plaintiffs' case is pleaded as
follows:
“5. 5.1 At all material times the insured in the conduct of their profession and in terms of oral, alternatively tacit, agreements with the Plaintiffs, for reward:
(a) kept the accounts of the trusts and partnership aforesaid;
(b) collected and banked the income received by the said trusts and
partnership;
(c) disbursed amounts payable by the said trusts and
partnership;
(d) invested surplus funds of the said trusts and
partnership.
5.2 It was an implied, alternatively a tacit, term of the agreements between Plaintiffs and the insured that the insured would carry out the abovementioned obligations honestly and with reasonable diligence, care and skill.
6. 6.1 One Brian Lombard, a partner of the insured, acting within the scope of his authority as partner, dishonestly, fraudulently and unlawfully misappropriated funds administered and/or invested by the insured for and on behalf of the said trusts and partnership in the conduct of its profession.
6.2 The monies so misappropriated by the said Lombard had been entrusted to, or received by, the insured as part of the work undertaken and services performed by the partners in the course of their profession as accountants.
7. As a result of the aforesaid misappropriations the said trusts and partnership suffered losses in the following amounts:
7.1 The David Trust R 48 182,31
7.2 The Meyerowitz Trust R 5 164,59
7.3 The Eva Trust R101
774,68
7.4 The Myro Charitable Trust R 17 227,67
7.5 The Borchards Quarry Property
Holdings Trust R 13 009,20
7.6 The Boquinar Property
Holdings
Trust R 47 567,87
7.7 The Taxpayer Partnership R214 180,29
7.8 The
2BQ Holdings Trust R 33 198,29
8. In the premises, the insured became liable in law to the relevant trustees and partners to make good the losses set out in paragraph 7 above.
9. That the said Lombard was able to misappropriate the said funds and did so misappropriate them, was made possible by the fact that:
9.1 the insured was negligent by failing to institute proper controls and checking procedures in regard to the handling of money; alternatively
9.2 the insured was
negligent in controlling and safeguarding the monies; alternatively
9.3 the
insured was in breach of contract with the Plaintiffs amounting to breach of
duty in the practice of the profession by failing
to account and pay over the
monies entrusted to them or received by them in the course of their profession;
alternatively
9.4 the insured was in breach of trust in that the partner
entrusted to the Plaintiffs' funds as aforesaid, failed to exercise the
due care
and diligence required in order to safeguard the funds;
alternatively
9.5 the insured failed, albeit unintentionally and in good
faith, to account for such monies entrusted to it by the Plaintiffs.
10. 10.1 In about October 1994 the aforesaid misappropriations were discovered and the Plaintiffs have claimed repayment of the aforesaid amounts from the insured.
10.2 The insured failed to repay the aforesaid amounts to the Plaintiffs and on 30 November 1994 the insured was finally sequestrated by order of the Supreme Court of South Africa (Cape of Good Hope Provincial Division).
11. 11.1 The insured has complied with all its obligations in terms of the Insurance Agreement.
11.2 By reason of the aforegoing, First and Second Defendants are liable to indemnify the insured in respect of the amounts claimed by the Plaintiffs.
11.3 In the premises, and
in terms of the provisions of Section 156 of the Insolvency Act No. 24 of 1936,
the Plaintiffs are entitled
to recover their aforesaid losses directly from the
Defendants, up to the amount of the limit of Defendants'
indemnity.”
[12] The claims are cast primarily in the form of
breach of contract, but the contentions of counsel for the defendant
notwithstanding,
I believe that the language of the pleadings is broad enough to
encompass delictual claims as well. In their plea the defendants
deny knowledge
of the factual allegations made and deny the legal
conclusions.
[13] Meyerowitz, Katz and Lombard all testified to the facts
pleaded. In the absence of cross-examination or testimony by the defendants
to
the contrary their evidence was accepted by the trial court.
[14] The
question, then, is whether the facts so found served to render Katz Salber
liable to the plaintiffs in the respects set out
in one or more of the clauses
quoted above. The answer, according to the plaintiffs, is in the affirmative in
respect of all four
clauses; according to the defendants none of the clauses
fits the facts.
[15] I commence with s 2 since it highlights loss due to the
dishonesty of a partner. It indemnifies Katz Salber against “any
legal
liability ... in connection with any claim ... by reason of any dishonest or
fraudulent act ... of any ... present partner
...”. According to the
plaintiffs Katz Salber incurred “legal liability” “by reason
of” the “dishonest
... acts” of Lombard, one of its partners.
Counsel for the defendants, in response, advanced two arguments of principle
why
s 2 was said not to assist the plaintiffs.
[16] The first ground is that
the “legal liability” for purposes of s 2 must be directly, and not
only indirectly, related
to the “dishonesty” on the part of the
partner concerned; or, to phrase it differently, the dishonesty must be an
element
in the plaintiffs' cause of action. In the instant case Lombard's
dishonesty, in the absence of an allegation of a “duty of
care”
existing independently of contract, is not an essential averment in the
plaintiffs' cause of action; that cause of action,
according to counsel, was
Katz Salber's failure to refund the plaintiffs' investments; the cause of
action would have remained exactly
the same even if Katz Salber's inability to
repay was due not to Lombard's defalcations but, say, to a general
maladministration
on Katz Salber's part, or to the collapse of some of its
other investments, or because of suretyships to which it had committed
itself,
or to some other comparable extraneous factor.
[17] The second ground, not
unrelated to the first, is that the loss the plaintiffs suffered was incurred
not so much “by reason
of” Lombard's dishonesty as it was incurred
by reason of Katz Salber's insolvency. If the thefts, for instance, had been
discovered
earlier, when Katz Salber was still able to meet the plaintiffs'
claim for repayment from its own funds, the plaintiffs would not
have suffered
their losses; even if Katz Salber refused to pay on demand the plaintiffs would
have been able to obtain and execute
judgments against it. That demonstrates,
so it was contended, that the real cause of the plaintiffs' loss was not
Lombard's dishonesty
but Katz Salber's insolvency. The point is also made by
the trial court, that it would be absurd to conclude that “the cover
would
activate only when the theft was large enough to cause insolvency”. The
defendants did not insure Katz Salber against
its own insolvency. Hence, so it
was reasoned, the plaintiffs cannot visit Katz Salber's insolvency on
them.
[18] There may be merit in the argument that s 2 cannot be invoked
without identifying the causa of the “legal liability” but it
is not necessary for my purpose to investigate whether it does so in a delictual
sense
for in the circumstances of this case s 1.2 of the policy, I believe,
adequately caters for the plaintiffs' circumstances. Admittedly
the plaintiffs'
complaint against Katz Salber is founded on Lombard's dishonesty; s 2 of the
policy identifies a partner's dishonesty
in express terms and s 1.2 does not.
But that does not mean, because dishonesty is mentioned in the one section in a
delictual context,
that it is necessarily excluded from the other in a
contractual context. I accordingly turn to s 1.2.
[19] It was not disputed
that Katz Salber committed a breach of its contractual arrangements with each of
the plaintiffs. The debate
centred on the nature of Katz Salber's obligations
to each plaintiff and hence on the nature of its breach. It is on that issue
that I find myself in respectful disagreement with the reasoning and the
conclusions reached by the court a quo.
[20] The contract is one of
mandate. The mandate given by each plaintiff to Katz Salber was to invest and
administer funds entrusted
to it by the plaintiff concerned and collected by it
from the plaintiff's debtors. These funds were to be invested in a bank, in
this case Investec and Trust Bank respectively. It is one of the
naturalia of each such contract, as it is of contracts of mandate in
general, that the mandatory is obliged, first, to perform his functions
faithfully, honestly, and with care and diligence and, secondly, to account to
his principals for his actions (cf De Wet and Van
Wyk, Die Suid-Afrikaanse
Kontraktereg en Handelsreg, 5th ed. Vol 1 386; 17 LAWSA (first
reissue) par 11, and the common law authorities quoted therein).
[21] In
paragraph 5.2 of the particulars of claim, quoted in par [11] above, the
plaintiffs pleaded that it was an implied alternatively
a tacit term of the
agreements that Katz Salber would carry out its duties “honestly and with
reasonable diligence, care and
skill”. Counsel for the defendant disputed
the existence of such a term on the basis that it lacked business efficacy. The
criticism misses the point that the term arises by operation of law (cf
Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial Administration
1974 (3) SA 506 (A) 531D-H), but even if the matter were to be approached on the
footing of a tacit term properly so called its implication
is in my opinion so
self-evident as to go without saying. Whatever the true basis, the reality of
such a term cannot be denied.
[22] Katz Salber committed breaches of its
mandate. It did so, in the first place, by its failure to perform its duties
honestly
(by the misappropriation of money entrusted to it by the plaintiffs) or
diligently (by its failure in either not preventing such
misappropriation or at
the very least in not discovering it sooner). One does not know from Lombard's
evidence whether he intercepted
the money before, or withdrew it after,
investing it in Investec. Most of it appears to have been advanced by him to
his own clients
for financing highly speculative ventures, such as a pop
concert. That this constituted a breach of Katz Salber's agreement with
each of
the plaintiffs admits of no doubt. The breach consisted in the dishonest manner
in which Lombard dealt with the funds as
well as in Katz Salber's lack of
diligence and consequent inability to requisition payment from Investec for an
accounting and repayment
to the plaintiffs. The plaintiffs did not agree to
invest their funds in Katz Salber. They invested them in Investec through the
good offices of Katz Salber. Consequently it would be an inaccurate
oversimplification to characterise Katz Salber's breach simply
as the failure to
repay on demand deposits made to Katz Salber by the plaintiffs. The breach was
not exclusively the failure to
refund. If the bank, for instance, had failed
there would also have been a failure to refund but no breach of mandate - for
Katz
Salber would then have done what it was supposed to do: invest the money
in a bank approved by the plaintiffs. The breach here
consisted of Katz
Salber's deviation from the terms of its mandate, ultimately resulting in its
failure to refund to the plaintiffs
the investments made through
it.
[23] Katz Salber's inability to requisition payment from Investec was a
direct consequence of its failure to perform its mandate honestly
and
diligently. If Lombard had not stolen the money there would have been no
shortfall and Katz Salber would have been able to obtain
the funds from Investec
to repay the plaintiffs; if the thefts had been discovered earlier, before the
shortfall reached a point
where Katz Salber was no longer able to absorb it, the
plaintiffs would also have been repaid. In neither situation, in the absence
of
a claim from the plaintiffs against Katz Salber, could there have been a claim
by Katz Salber against the defendants under the
policy. But once the stage was
reached where Katz Salber was faced by claims which, as a result of theft, it
was no longer able
to meet, it is idle to suggest, as was done, that the
plaintiffs' loss was due to Katz Salber's insolvency and not to Lombard's
dishonesty.
This is the same point counsel sought to make (referred to in par
[17] above) apropos of s 2 of the policy. There the loss was
attributed to
“legal liability” in general, unrelated to any particular cause of
action whereas the loss here is directly
related to a particularised cause of
action, duly pleaded and established. There may well have been a claim by Katz
Salber under
the policy even if it had not been driven to insolvency. But it is
not necessary to express a firm view on the point because the
insolvency did
result from Lombard's dishonesty. While it is true that both before and after
the thefts the plaintiffs had the
same claim for an accounting by Katz Salber,
it was the thefts (and its non-discovery at an earlier stage) that rendered the
plaintiffs'
claims against Katz Salber factually irrecoverable.
[24] It is
this breach of contract by Katz Salber, founded on the failure of its duty to
administer its mandate honestly and diligently,
that brings the matter prima
facie within the compass of s 1.2 of the policy. As such it would be
comparable to some or other loss suffered by a client of an accountant
by reason
of a vital error made by the accountant in compiling his client's financial
statements.
[25] Three reasons (all of them interrelated) were, however,
advanced, as I read the judgment of the court a quo and understood the
submissions on behalf of the defendants, why s 1.2 was said not to assist the
plaintiffs in those circumstances.
These are:
1) The relationship between
Katz Salber and each of the plaintiffs was purely that of debtor and creditor
“rather like that
between a bank and a customer”; the funds were
not held in trust as separate funds in respect of which Katz Salber acted as
mere agents; Katz Salber's obligations towards the plaintiffs were merely to
pay on demand the equivalent sum, with interest, invested
with it; the policy
being a professional indemnity and not a fidelity policy, Lombard's defalcations
were wholly irrelevant to the
plaintiffs' causes of action; Katz Salber's
breach (the failure to effect payment on demand) is accordingly not the kind of
breach
of contract contemplated by the clause; hence it is not covered by the
policy.
2) Katz Salber's breach of contract, having regard to the definition
of the “profession” in the policy, did not amount
to a “breach
of duty in the practice of the profession” and “in the conduct of
the profession” as accountants;
the clause accordingly did not
apply.
3) Because Katz Salber's actions “amounted to banking” in
terms of the definition of “the business of a bank”
in s 1 of the
Banks Act 94 of 1990 (“the acceptance of deposits from the general public
... as a regular feature of the business
in question;”), “[p]rima
facie the action of Katz Salber contravened s 11 of the Banks Act”; and
because it is
against public policy to allow anyone to insure himself against
his own criminal conduct, so it was reasoned by the court a quo, the
breach of contract in question was not one contemplated by s 1.2 of the policy.
(Counsel for the defendants put the argument
on a different footing: because
Katz Salber's “money market activities” were “arguably”
a contravention
of the Banks Act, such conduct could not qualify as being
“in the conduct of the profession” within the meaning of
the
policy.)
[26] The entire line of reasoning seems to me to be based on a
single postulate: that Katz Salber functioned vis-à-vis the
plaintiffs as a deposit-taking institution. If that postulate is wrong, as I
believe it is, the conclusion can likewise not
be correct. The postulate is
wrong because the plaintiffs did not invest their monies with or in Katz Salber;
they entrusted their
funds to Katz Salber to invest in certain pre-approved
institutions. Katz Salber acted merely as the medium or agency through which
the investments were effected elsewhere, admittedly in Katz Salber's own name.
Katz Salber had no licence to invest the monies in
speculative ventures, as
Lombard sought to do. When asking for repayment the plaintiffs were accordingly
not asking for a repayment
of a deposit made with Katz Salber, but for an
accounting by Katz Salber in terms of its mandate with each of the plaintiffs.
This
situation differs completely from that described in Fuhri v Geyser NO
and Another 1979 (1) SA 747 (N), a case much relied on by the court a
quo, where money was held by an attorney in his trust account.
[27] The
contention that this was not what is commonly known as a fidelity policy can
likewise not be sustained. What risks the policy
covers remain a matter of
interpretation and it cannot be labelled in advance of its interpretation. What
it covers depends upon
the terms. In any event, the word
“liability” is actually used in Miscellaneous Provision 2 of the
policy. The provision
reads:
“All claims regardless of their number or the identity of the claimants, arising from the same act, error, omission or breach or arising from or contributed to by the dishonesty or infidelity of any one person, or any number of persons acting in collusion, shall be regarded as one claim under this Certificate.” (My emphasis.)
[28] What the court a
quo did, to the exclusion of all else, was to tug at a single strand from
the entire fabric of the relationship between the plaintiffs
and Katz Salber.
One facet of that relationship was Katz Salber's agreement to accept and collect
money from the plaintiffs and
their debtors for investment not in Katz Salber
itself, but in institutions approved by the plaintiffs. Katz Salber's service,
however,
went far beyond that point: it was not simply to invest their money
in the money market. Historically and factually Katz Salber
offered them a
conspectus of accounting services of which the payment of surplus funds into the
money market pending their own decision
to withdraw it, was but a single aspect.
That service, broadly speaking, consisted of administering the funds of all the
plaintiffs,
keeping accounts, collecting and banking income, making
disbursements, investing surplus funds in the money market with Investec,
preparing draft annual financial statements, preparing and submitting income tax
returns, paying the Receiver of Revenue, and so
forth. Katz Salber did not
simply act as the plaintiffs' debtor and their relationship was not simply that
of debtor and depositor.
Their relationship was one of mandate into which the
plaintiffs entered with Katz Salber qua accountants.
[29] Next there
is the issue whether Katz Salber's breach of contract amounted to “a
breach of duty in the practice of the profession”
and “in the
conduct of the profession” as accountants within the definition of the
“profession” in the policy.
[30] The policy contains a
comprehensive definition of the profession of accountants. It commences with
the words: “'PROFESSION'
shall mean all work undertaken or services
performed or advice given by the Insured in the course of their profession as
Accountants
in connection with ... ” and then follows a wide-ranging
catalogue of professional activities. These include accounting, auditing,
bookkeeping, taxation, secretarial services, management accounting,
administration of trusts, administration of companies, collection
of money on
behalf of clients, signing of cheques for effecting payments on behalf of
clients, accounting and audit requirements
of statutes, “and any other
service which would normally be undertaken in the course of their professional
capacity as accountant”.
[31] According to the court a quo this
definition, save perhaps for the phrase “collection of money on behalf of
clients”, cannot be said to “include
the taking of deposits against
the obligation to pay on demand and the payment of interest”. But with
respect that is again
singling out one activity (inaccurately described as the
taking of deposits, as if the investments were made in Katz Salber) out
of an
interlocking series of services rendered to the plaintiffs by Katz Salber. In
my view the services rendered by Katz Salber
can properly be described as
“work undertaken or services performed ... in the course of their
profession as Accountants ...
in connection with” the activities listed.
The phrase “in connection with” is a wide one. It is not, in my
opinion,
essential that every aspect of their work, such as the acceptance of a
mandate to invest surplus funds with an approved financial
institution, should
be separately listed if, as in this case, it is incidental to or connected with
activities which are so listed.
Moreover, both Katz and Lombard testified that
the services performed by Katz Salber for the plaintiffs were services normally
undertaken
by Katz Salber for their clients in their professional capacity as
accountants. This evidence was not challenged or countered on
behalf of the
defendants on the basis that it would be unprecedented or even uncommon for an
accountant to accommodate his clients
in this manner.
[32] The theft by a
partner of Katz Salber of funds ultimately destined for the plaintiffs, and the
failure by Katz Salber to detect
and avoid such thefts, were breaches of
contract committed by Katz Salber in its capacity, and in the course of its
business, as
accountants. These were breaches amounting, in the words of the
court a quo, to “professional failures” or, in the wording of
the clause, to breaches “of duty in the practice of the profession
...
committed in the conduct of the Profession by or on behalf of the Insured
...”
[33] Once it is appreciated that the plaintiffs were not investing
in Katz Salber and that Katz Salber was not receiving deposits
from the
plaintiffs but was executing its mandate to invest surplus funds in Investec, it
controverts the “prima facie” conclusion of the court a
quo that Katz Salber was in effect operating a banking service by accepting
deposits from the general public in contravention of banking
legislation. Katz
Salber was not acting as a banker; it was acting as an accountant offering its
clients a comprehensive service
which included investing surplus funds for them.
In any event on the evidence the plaintiffs, as a select group, did not qualify
“as members of the general public” for purposes of the Banks Act,
1990. There was, in my opinion, nothing illegal or
improper in the service
which Katz Salber offered its clients. The point that Katz Salber sought to
insure itself against its own
criminal conduct is misconceived.
[34] Cases
such as Goddard & Smith v Frew [1939] 4 All ER 358 (CA), cited by the
court a quo, and West Wake Price & Co v Ching [1956] 3 All ER
821 (QB), and Walton v National Employers' Mutual General Insurance
Association Ltd [1974] 2 Lloyds LR 385, cited by counsel for the defendants,
may well be relevant to a consideration of clauses such as s 1.1 and
1.6 of the
policy but are of little guidance where the terms of the mandate are different
and the policy concerned does not contain
a clause resembling s 1.2.
[35] I
conclude, therefore, that Lombard's embezzlement of funds invested by the
plaintiffs through the intercession of Katz Salber,
which in turn led to Katz
Salber's inability to refund these investments when called upon to do so,
brought the matter squarely within
the four corners of s 1.2 of the policy. The
plaintiffs would have had a claim for their losses against Katz Salber; Katz
Salber
in turn would have had a claim on the policy against the defendants; and
by virtue of s 156 of the Insolvency Act the plaintiffs
now have a claim against
the defendants.
[36] Because of the conclusion I have reached on s 1.2 of the
policy it is not necessary to consider the pertinence of s 1.1 and 1.6
thereof.
[37] That then leaves for decision the quantum of the plaintiffs'
respective claims on which the court a quo, because of the line it took,
expressed no views. The losses suffered by the plaintiffs as a result of Katz
Salber's breaches of
mandate are particularised in the pleadings. The accuracy
and computation of the amounts so detailed, which included capitalised
interest,
have not been disputed by or on behalf of the defendants. Nor is it disputed
that a pro rata deduction of R650 per plaintiff
in respect of
“deductibles” is to be made in terms of the policy.
[38] From the
analysis above it is apparent that the plaintiffs' claims against Katz Salber
are not for performance in terms of the
mandate but for damages for the breach
thereof. Since damages are calculated to compensate the plaintiffs fully for
their losses
any dividend allocated to them by virtue of the liquidation of Katz
Salber would, to that extent, amount to a duplication in compensation.
Counsel
for the plaintiffs confirmed that any dividends paid to them would be refunded
to the liquidator for distribution to the
general body of Katz Salber's
creditors.
[39] The plaintiffs' claims against Katz Salber, being for
damages, are unliquidated. And since the plaintiffs' claims against the
defendants in terms of s 156 of the Insolvency Act are of a like quality to
their claims against the defendants, these too are unliquidated.
Prior to 1997
the plaintiffs would have been entitled to claim mora interest only from
the date of judgment (Administrateur, Transvaal v J D van Niekerk en Genote
BK 1995 (2) SA 241 (A) 245H-J). With effect from 11 April 1997 the
Prescribed Rate of Interest Amendment Act 7 of 1997 (which amended
the
Prescribed Rate of Interest Act 55 of 1975), sanctioned, inter alia, the
recovery of mora interest on amounts awarded by a court which, but for
such award, were unliquidated. Once judgment is granted such interest
“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
the
earlier” (s 2A(2)(a); and see The MV Sea Joy 1998 (1) SA 487 (C)
505F-507H; Adel Builders (Pty) Ltd v Thompson 1999 (1) SA 680 (SE)
688G-691C). The word “demand” in s 2A(2)(a) is defined to mean a
written demand setting out the
creditor's claim in such a manner as to enable
the debtor reasonably to assess the quantum thereof (s 4 of the principal Act).
Demand
was made on the defendants on 14 November 1994. It was not suggested in
argument that such demand did not comply with the requirements
of the
sub-section. Nor was it suggested that it would be inequitable if the defendants
were to be held liable for the payment of
mora interest from the date of
demand. In terms of sub-section 2A(5) of the Act, as amended, a court is
granted the power to “make
such order as appears just in respect of the
payment of interest on an unliquidated debt, the rate at which interest shall
accrue
and the date from which interest shall run”. The section is
doubtless intended, amongst other things, to ameliorate instances
of inequity
which may occur where a debtor is required to pay mora interest on, for
instance, damages for breach of contract at a rate in excess of what his
contract provided or from a date before
the amending Act came into operation
when “he did not know and could not ascertain the amount which he had to
pay” (Victoria Falls & Transvaal Power Co Ltd v Consolidated
Langlaagte Mines Ltd 1915 AD 1 at 32). In this case the amounts of the
plaintiffs' various investments were readily ascertainable and these investments
earned no real interest for the respective plaintiffs from a date well in
advance of their letter of demand. In the circumstances
it seems to me to be
just that mora interest at the appropriate legal rate of interest should
be awarded from that date.
[40] The plaintiffs have asked that Meyerowitz,
Katz and Lombard be declared necessary witnesses. No reason has been advanced
why
the request, now that the plaintiffs are to succeed, should not be
granted.
[41] The following order is made:
1. The appeal against the order of the court a quo is allowed with costs, including the costs of two counsel.
2. The following order is substituted for the order made by the court a quo:
“1) Judgment is granted against the first defendant as to 80% and against the second defendant as to 20% in the amounts set out hereunder:
A) In favour of the first plaintiff: R47 532,31;
B) In favour of the second plaintiff: R4 514,59;
C) In favour of the third plaintiff: R101 124,68;
D) In favour of the fourth plaintiff: R16 577,67;
E) In favour of the fifth plaintiff: R12 359,20;
F) In favour of the sixth plaintiff: R46 917,87;
G) In favour of the seventh plaintiff: R213 530,29;
H) In favour of the eighth plaintiff: R32 548,29.
2) Interest a tempore morae on the respective amounts calculated at the appropriate legal rate of interest as from 14 November 1994 to date of payment.
3) The witnesses Meyerowitz, Katz and Lombard are declared to be necessary witnesses.
4) Costs, including the costs of two counsel, against both defendants jointly and severally.”
............................
P M NIENABER
JUDGE OF APPEAL
Concur :
Hefer JA
Smalberger JA
Marais JA
Mthiyane AJA
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