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IN THE HIGH COURT OF SOUTH AFRICA

(EASTERN CAPE DIVISION)

CASE NO: 430/2000

DATE DELIVERED: 29 May 2002

IN THE MATTER BETWEEN:

COLLEEN ESTELLE POULTNEY PLAINTIFF

AND

ABSA BROKERS (PTY) LTD FIRST DEFENDANT

JANUS BYLES SECOND DEFENDANT

CLAIM FOR DAMAGES – ALLEGED FAILURE BY EXPERT FINANCIAL ADVISOR TO COMPLY WITH REQUIRED STANDARD OF SKILL IN GIVING ADVICE – CLAIM IN CONTRACT, ALTERNATIVELY DELICT.

JUDGMENT

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KROON, J:

INTRODUCTION:

[1] On 16 May 1997 the plaintiff, by way of an outright cession, divested

herself of all her right, title and interest in a certain life insurance policy (“the policy”)

taken out by her with an insurance company (“the Old Mutual”), for a consideration of

R463 353,00. In doing so, she acted on the advice of the second defendant. It is not in

dispute that at all material times the second defendant was acting on behalf of the first

defendant.

[2] The plaintiff alleges that the advice given to her by the second defendant

was bad and that in giving her the advice the second defendant, and through

him, the first defendant, acted in breach of a contractual obligation to furnish her

with proper advice, alternatively, negligently and in breach of a duty to furnish her

with proper advice.

[3] The plaintiff alleges further that the breaches referred to occasioned her

loss and she seeks to hold the defendants jointly and severally liable in respect

thereof, her claim being founded in contract, alternatively, in delict.

THE PARTIES

[4] The plaintiff carries on business, inter alia, as a farmer on the farm

Aylesbury (“the farm”) in the Grahamstown district.

[5] The first defendant is a company which carries on business throughout the

country, inter alia, as financial and/or investment advisers and it renders financial

and investment advice to its clients.

[6] At all material times the second defendant was in the employ of the first

defendant as a financial and investment advisor.

[7] As indicated in para. [1] above, it is not in dispute that the first defendant is

vicariously responsible for the conduct of the second defendant which is the

subject of these proceedings.

BACKGROUND:

[8] The following facts are either common cause or not in dispute:

(1) The policy contained the following endorsement under the heading

of “Additional Conditions”:

“This policy may be converted to an endowment assurance upon terms and conditions that will be quoted by OLD MUTUAL on request”.

2. In addition to the policy the plaintiff was also the owner of a number

of other insurance policies taken out with another insurance company (“the Sanlam policies”).

2. The policy as well as the Sanlam policies were ceded to the Trust

Bank (“the bank”), a division of Absa Bank, as security in respect of the overdraft facility extended by the bank to the plaintiff. The policy documents were held by the bank.

2. As at the beginning of 1997 the plaintiff was experiencing financial

difficulties in her farming enterprise; inter alia, the overdraft was in excess of R300 000,00 (subsequently increasing to over R470 000,00) and the plaintiff’s expenses exceeded her income.

2. She and her son (“Llewellyn”) took stock of the situation and sought

advice as to how same should be addressed. They approached a Mr Neave of Port Alfred who was associated with a firm of financial/investment advisors styled Blue Ink Investments. His advice was that the plaintiff should endeavour to cut expenses, realise certain of her assets and to invest the proceeds on the stock market where a better return could be achieved, in the region of 20% - 30% per annum. The assets that were mentioned were the insurance policies and certain properties. No firm decision on the policies was taken, however, as further information required to be obtained.

2. For the sake of completeness it may be recorded that some of the

properties referred to were in fact sold in due course, but others not because the offers received therefor were considered to be too low.

2. Llewellyn was able to secure details of the surrender and maturity

values of the Sanlam policies. Old Mutual, however, refused to disclose such details in respect of the policy, on the grounds that the policy that had been ceded to the bank.

2. The plaintiff and Llewellyn attended on the manager of the

Grahamstown branch of the bank, a Mr Pietersen, and, after informing him of the advice received from Neave, told him, inter alia, that they needed to know the value of the policy. Pietersen told them that he was not knowledgeable in the matter of insurance policies, but that he would enlist the assistance of an expert (i.e., the second defendant) and arrange to bring him to the farm to speak to the plaintiff. That in fact occurred about a week later. (Precisely what Pietersen conveyed to the second defendant what was required of him, will be considered later in another context).

2. The precise details of the discussion that took place on the farm will

be canvassed later, but at this stage it may be recorded that the second defendant informed the plaintiff, inter alia, that the surrender value of the policy was R460 000,00 – according to the second defendant he had secured a computer print-out which reflected that figure – and later that there was a possibility that he could find a buyer for the policy at a price higher than the surrender value. He left the farm, inter alia, with an undertaking that, with the concurrence of the plaintiff, he would look into the aspect of the sale of the policy.

2. The second defendant contacted his regional manager who put him

onto a Mr Huisamen of Port Elizabeth as being a person who might be interested in the purchase of the policies. The second defendant contacted Huisamen and at the latter’s request supplied him with the numbers of the policy and the Sanlam policies. Huisamen subsequently reverted to the second defendant to advise him that he was not interested in the Sanlam policies, but that he was prepared to purchase the policy for the sum of R463 353,00. The plaintiff was advised of this development. This was within a matter of days of the meeting on the farm. A meeting with Huisamen in Pietersen’s office was arranged for the next morning, 16 May 1997. Present were the plaintiff, Llewellyn, Pietersen, Huisamen and the second defendant. The upshot was that the plaintiff accepted the offer made by Huisamen and documents to give effect to the transaction were signed by the plaintiff, including the written outright cession. (It appears that the plaintiff’s signature on the document was wrongly dated 15 May 1997). The name of the cessionary was not filled in at that stage and the relevant space was left blank.

2. The plaintiff’s bank account was credited with the amount of the

consideration paid by Huisamen.

(12) On 16 May 1997 a Mr van Zyl paid, by cheque, the sum of R950

000,00 to Huisamen as the price payable by the former in respect of his purchase of the policy from the latter. Van Zyl in turn sold the policy to a Mr Boogertman who paid him, by cheque dated 16 May 1997, the total sum of R1 042 482, 00 made up as to R1 020 063,00 in respect the purchase price of the policy and R22 419,00 in payment of the total monthly premiums due on the policy for the following eleven months. Van Zyl in turn paid this latter sum to Old Mutual in discharge of the premium obligation in respect of that period. Boogertman’s name was then inserted as the cessionary in the outright cession and he signed same in that capacity on 22 May 1997. In fact, the negotiations between Huisamen and van Zyl on the one hand and between van Zyl and Boogertman commenced on an earlier date in that the defendants formally admitted the correctness of a statement contained in an affidavit by Boogertman that he was approached by van Zyl “op 15 Mei 1997 of op ʼn dag kort voor daardie datum”.

(13) Boogertman exercised the option referred to in (1) above. The result thereof was that the maturity value of the policy as at 5 May 1998 was R1 199 196,14. At his option that sum was transferred on the said date for his benefit into the Old Mutual’s Guarenteed Capital Fund.

THE PLAINTIFF’S CONTENTION

[9] The plaintiff contends in essence that instead of the advice referred to in paras. [1]

and [2] above the proper advice that, in terms of the contractual relationship between the

parties and/or the duty owed to her by the defendants, should have been given to her, and

which the defendants ought to have qualified themselves to give, was that the option

referred to in para. [8] (1) was available to her, and details of what the exercise of that

option would have entailed and the results thereof should have been furnished to her. She

should also have been advised what the policy, with that option available, was truly

worth. Had the above occurred, she would have exercised the option (and reaped the

benefits that Boogertman did) or she would have sold the policy for its true value,

represented by the sum of R1 020 063,00 paid by Boogertman therefor. Her claim is

accordingly in the sum of R735 843,14 (being the difference between the sum of R1 199

196,14 that accrued to Boogertman as owner of the policy and the sum of R463 353,00

received by her from Huisamen for the policy ), alternatively in the sum of R557 277,00

(sic - read R556 710,00) (being the difference between the sum of R1 020 063,00 -

wrongly reflected in the particulars of claim as R1 020 630,00 - paid by Boogertman for

the policy and the said sum of R463 353,00).

THE DEFENDANTS’ CONTENTION:

[10] The defendants contend in essence that having regard to the nature of the dealings

between the parties the obligations of the defendants did not extend beyond informing the

plaintiff of the surrender value of the policy and, in accordance with her instruction,

surrendering same, if no buyer therefor could be found; that the plaintiff was thereafter

introduced to a buyer, Huisamen, who was prepared to pay her more for the policy than

the surrender value, and the plaintiff thereupon sold the policy to him.

CERTAIN DISPUTES OF FACT:

[11] The nature of the mandate that was given by the plaintiff to the second defendant,

and through him, the first defendant, the disputes between the parties thereanent and the

ambit of the duty that was imposed on the defendants by the mandate, will be considered

later under other headings. At this stage, the discussion will be restricted to certain

other limited aspects.

[12] As already recorded in para. [8] (9) above, it is common cause between the parties

that the second defendant left the meeting on the farm on the understanding that he would

endeavour to find a buyer for the policy.

[13] The first dispute between the parties on this aspect appears from the following: The second defendant alleged that the plaintiff’s instruction to him was that if he could find a buyer for the policy at a price higher than the surrender value of the policy, that route would be followed, but that any buyer should be found by 15 May 1997, failing which the policy should be surrendered. The plaintiff testified that there was no such deadline set (and Llewellyn said he did not remember that a deadline was set); there was no great urgency attaching to the matter although, of course, it could not drag on indefinitely.

[14] An allied dispute concerned what the second defendant said concerning the price that might be secured from a possible buyer for the policy. According to him, he had no idea of what price could be obtained and he accordingly proffered no indication in that regard. The plaintiff and Llewellyn both testified that he indicated that the price a buyer would pay would not be substantially more than the surrender value, possibly in the region of R5 000,00 or R10 000,00 more.

[15] The third dispute touches on the events when the plaintiff was advised that a buyer for the policy had been found and when the meeting with Huisamen took place. The second defendant’s testimony was that he telephoned the plaintiff to advise her that a buyer had been found and advised her of the price that was being offered, and when, on the next day, she attended the meeting with Huisamen, she merely accepted the offer without demur, presumably on the basis that she was happy to be receiving a few thousand rand more than the surrender value of the policy, as he had conveyed it to her previously. He, the second defendant, made no comment on the acceptability of the offer. The plaintiff testified that it was Pietersen who telephoned her and he merely advised her that a buyer had been found and asked her to attend the meeting the following day. It was at the meeting that she first heard what was being offered. Her reaction was to ask whether she could not be paid a higher price. Huisamen responded by making the statement that she was “playing hardball” with her. In this evidence she was supported by Llewellyn. The plaintiff further testified that the second defendant intervened with the comment that she was already getting more than what the policy was worth. Llewellyn was unable to confirm this last aspect.

[16] An aspect indirectly related to the above is the question what the surrender value of the property in fact was. As already recorded, the second defendant advised the plaintiff that the surrender value was R460 000,00 (according to Llewellyn the second defendant had mentioned “R460 000,00 odd”), which, according to the second defendant, was what was reflected on the computer print-out he had obtained. At the hearing, Mr de Kock, a senior legal adviser in the employ of Old Mutual, who had access to the relevant file, testified that he had given instructions for the surrender value of the policy as at 15 May 1997 to be calculated. The result was the figure of R463 353,00 (which, it may be noted, was the price paid by Huisamen for the policy). That figure, so de Kock’s evidence continued, would have been operative for the whole of the month of May, but would have increased on 1 June 1997. A further witness, Mr Stroebel, a financial adviser practising in Grahamstown (whose role in the matter will be elucidated below), testified that after he had become involved in the matter he requested Old Mutual to favour him with what he referred to as an “inligtingstrokie” setting out certain details of the policy. The document is exhibit “B”. It reflects that as at May 1997 the surrender value of the policy was R463 353,00.

[17] This last aspect may conveniently be considered first. It is common cause that the computer print-out which the second defendant alleged reflected the figure of R460 000,00, was not produced by him to the plaintiff when he met with her on the farm. It was also not produced at the hearing. (Incidentally, in an affidavit in response to a Rule 35 (3) notice delivered by the plaintiff the second defendant averred that at no stage had he had any document in his possession reflecting the value or potential value of the policy). In the light of the evidence of de Kock and Stroebel, the testimony of the second defendant is open to serious question. It is, however, unnecessary for any positive finding in that regard to be made.

[18] On the other aspects referred to I have little difficulty in preferring the evidence of the plaintiff and Llewellyn above that of the second defendant. The former two each gave their evidence in a staightforward manner, without contradictions of any note, and no cognizable criticism is to be levelled at their demeanour. I immediately record, however, that I have not lost sight of the severe limitations on demeanour as an indicator of reliability or the lack thereof. Nevertheless, they impressed me as credible witnesses. The second defendant on the other hand proved himself to be an evasive and contradictory witness. He did not come across as a credible witness. Notwithstanding the financial problems that the plaintiff was experiencing, and these should not be understated, I am not persuaded on the evidence that matters were so pressing as to move the plaintiff to set 15 May 1997 as a deadline for finalising the matter of the disposition of the policy. It is not improbable that the plaintiff and Llewellyn would have wanted some indication of what higher price a sale of the policy, as against the surrender thereof, might yield, and I find the suggestion that they made up the evidence that the second defendant did give the indication they allege, and they thereby sought to mislead me, an unpalatable one. It is not improbable that at the meeting with Huisamen the plaintiff would have sought to explore the possibility of securing a higher price, and their attributing to Huisamen the comment that she was “playing hardball” has a ring of truth. As to the plaintiff’s allegation that the second defendant interjected that she was already getting more than the policy was worth, it seems that there might well have been reasons why he would have wanted the deal to go through. It was he, after all, who had secured Huisamen’s presence at the meeting. After the transaction, some two weeks later, Huisamen telephoned him to inquire where his, the second defendant’s, share should be paid in. He was in fact paid a commission of R25 000,00. Although he testified that he was not aware that any commission in respect of the deal would be forthcoming and he had not stipulated for any, one would query whether he did not in fact entertain expectations on that score. That he was keen for the deal to go through, is further illustrated by the fact that, despite his relationship with the plaintiff, he made no enquiries of Huisamen as to how he had arrived at the figure offered and he himself took no steps to check its fairness; instead, so he claimed, he accepted the figure merely because he accepted that Huisamen was a man versed in such matters.

THE INTERVENTION OF STROEBEL:

[19] Stroebel testified that during May 1997 a client of his sought his advice in respect of the purchase of the Sanlam policies that had come onto the market. Having previously been attached to the bank in Grahamstown he was aware that the plaintiff’s portfolio included the policy. He telephoned the plainfiff to inquire whether the policy was not for sale. He was told that it had already been sold and on his further query was informed what consideration had been received. He thereafter contacted Old Mutual and was favoured with the “inligtingstrokie” referred to earlier in this judgment. The further information reflected thereon was that declared bonuses on the policy had amounted to R747 902,22. He reverted to the plaintiff and advised her that she had been “taken for a ride”, and that without essaying an accurate assessment of the value of the policy, he would estimate, solely on the basis of the declared bonuses, that it was at least R750 000,00 to R800 000,00.

[20] The plaintiff, understandably upset at receiving this intelligence, consulted her attorney. He in turn addressed Huisamen on the matter. The attorney received a response from Huisamen’s father, also an attorney, dated 4 June 1997 (apparently confirming an earlier conversation between them),. Therein any liability on the part of Huisamen to the plaintiff was rejected, but it was recorded that Huisamen snr had, for reasons that need not be set out, advised his son that as a gesture of goodwill he should consider making an ex gratia payment to the plaintiff; that an offer of R100 000,00 had been accordingly been made; that it had been rejected; that Huisamen was nevertheless still prepared to negotiate a reasonable agreement. The plaintiff opted not to pursue the matter with Huisamen.

LEGAL PRINCIPLES:

[21] The following dictum is contained in the judgment of Malherbe J in Stander v Raubenheimer 1996 (2) SA 670 (O) at 675B - D:

“In sy verweerskrif het verweerder erken dat hy stilswyend onderneem het om

‘in die uitoefening van sy pligte as makelaar redelike en behoorlike sorgsaamheid en kundigheid aan die dag te lê’.

Hierdie erkenning is in ooreenstemming met wat regtens van ‘n professionele versekeringsmakelaar verwag word en wat soos volg omskryf word deur Ivamy in General Principles of Insurance Law 5de uitg op 516:

‘It is the duty of the agent, in the exercise of the authority entrusted to him, to act with reasonable and proper care, skill and diligence.

If he is a professional agent, such as a broker, the standard by which the duty is to be measured is that of persons of experience and skill in his profession and in the place where he was employed to perform it . . . .

Whether he has actually acted with the required degree of skill depends in each case on the circumstances.’

Hierdie passasie is met goedkeuring aangehaal in Gordon v AA Mutual Insurance Association Ltd 1988 (1) SA 398 (W) en ek vereenselwig my met eerbied daarmee”.

In Durr v Absa Bank Ltd And Another [1997] 3 ALL SA 1 (A) the following two passages (per Schutz JA) appear:

At 9d - 10d:

“Imperitia culpae adnumeratur, says D 50.17.132 - lack of skill is regarded as culpable. That much is accepted by the respondents. But how much skill, they say. We have shown all the skill that an “ordinary” or “average” broker, or a bank employing such a one, need show. What more can be asked of us?

Two questions arise in this case. 1. In general, what is the level of skill and knowledge required? 2. Is the standard required in judging that level that of the ordinary or average broker at large, or is it that of the regional manager of the broking division of a bank professing investment skills and offering expert investment advice?

The answer to the first question is found in the judgment of Innes CJ in Van Wyk v Lewis 1924 AD 438 at 444 with reference, as it happens, to medical practitioners:

“It was pointed out by this Court, in Mitchell v Dixon (1914 AD at p 525), that ‘a medical practitioner is not expected to bring to bear upon the case entrusted to him the highest possible degree of professional skill, but he is bound to employ reasonable skill and care’. And in deciding what is reasonable the Court will have regard to the general level of skill and diligence possessed and exercised at the time by the members of the branch of the profession to which the practitioner belongs. The evidence of qualified surgeons or physicians is of the greatest assistance in estimating that level” (own emphasis).

………

“But (at 448) the decision of what is reasonable under the circumstances is for the Court; it will pay high regard to the views of the profession, but it is not bound to adopt them.”

For the purposes of this case I do not think that anything need be added to this statement. (Scott LJ in Mahon v Osborne [1939] 1 ALL ER 535 (CA) at 549D-E was to say of Innes CJ’s judgment that it was one “of which I should like humbly to express my admiration”.) However, the second question is less easy - whether the standard is set by the broking community at large or by a much smaller group of which Stuart is a representative. The Court below opted for the wider and therefore less strict test, accepting a submission that “[Stuart] was at all relevant times a member of the broking profession and as such his conduct should be evaluated on the basis of the general level of care, skill and diligence which might reasonably be expected of a typical, ordinary or average broker.”

This conclusion was reached notwithstanding that the respondents had made the following statements in their plea:

“[Absa and Stuart]” offered expert financial planning and investment advice to the public.”

“[Absa] invited the public to make use of such services.”

“The investors made use of the services offered by [Absa] and asked for and received investment advice from [Stuart].”

“[Stuart] gave the investors expert financial planning and investment advice.”

“[Absa and Stuart] would exercise the degree of skill and care which is required of a reasonable competent and careful investment advisor when giving advice to clients.”

In his evidence Stuart affirmed that he was content that his conduct be measured against the standard of an expert financial and investment advisor. The respondents’ case was not, therefore, that they be measured by the standards of any old broker, but that of an expert of the kind stated. However, the evidence was rather differently presented, and the Court below acted on that evidence.”

(The evidence referred to related to the knowledge and skills expected of the “average or typical broker”).

At 12b-e:

“In dealing with the question whose standard is the relevant one, I have dealt with the opinions of the experts and some of the facts at some length. That is because in real life negligence is not a mere legal abstraction, but must be related to particular facts. However, as a matter of law set in the present factual context, I am of the opinion that the relevant standard is not that of the “average or typical broker” as he has been defined. To accept that standard would be to allow a definition chosen by a witness for his own purposes to dictate the result, making the enquiry as to what is required of a particular kind of broker pointless. What is actually needed is first to determine what skills the particular kind of broker needs to exhibit which must depend in large part on what skills he is held out to possess. If this were not so then the reasoning advanced by the respondents would justify the neurosurgeon being judged by the standards of the general practitioner. That would be contrary to the reference by Innes CJ in Van Wyk v Lewis (above) at 444 to “the branch of the profession to which the practitioner belongs”.

I conclude that the appropriate standard is that of the regional manager of the broking division of a bank professing investment skills and offering expert investment advice.

[22] Mr Smalberger, who appeared for the defendants, submitted, however, that the room for the application of the principles set out above was dependent on the precise nature of the mandate which the adviser in question is requested to undertake. Thus, if the mandate to the defendants embraced no more than what is set out in para. [10] above, there was no obligation on the defendants to do anything more or to proffer any further advice. (It should be recorded that, as will appear below, it was further the defendants’ case that the second defendant was also to “assist” in the matter of what new investments, secured with the proceeds of the policies, would be acceptable replacement security for the plaintiff’s overdraft with the bank. That aspect is not, however, embraced within the dispute between the parties).

[23] I accept the validity of the principle that the nature of the mandate given to an adviser can have a hearing on the ambit of the matters in respect of which he is required to observe the requisite standard of skill. C.f. Lenaerts v JSN Motors (Pty) Ltd And Another 2001 (4) SA 1100 (W) at 1108H - 1109D where the statement in an English case, that the precise extent of an insurance intermediary’s duties must depend in the last resort on the circumstances of the particular case, including the particular instructions he has received from his client, was referred to with approval. It remains, however, one of the naturalia of contracts of mandate in general, that the mandatory is obliged to perform his functions faithfully, honestly and with care and diligence. See David Trust v Aegis Insurance Company Ltd [2000] ZASCA 108; 2000 (3) SA 289 (A) at 298G-H (para. [20]). A further observation may be made: In Randeree and Others v W.H. Dixon & Associates and Another 1983 (2) SA 1 (A) at 4E, after a reference to van Wyk’s case, approval was expressed of the following dictum in Paris v Stepney Borough Council [1950] UKHL 3; 1951 AC 367 at 382:

“If there is proof that a precaution is usually observed by other persons, a reasonable and prudent man will follow the usual practice in like circumstances.”

Counsel’s further submission with reference to the alleged mandate recorded in para. [10] above, will receive consideration in due course.

THE MANDATE GIVEN TO THE DEFENDANTS:

[24] At the outset it should be recorded that Pietersen was not called by either side as a witness, the parties having agreed that by reason of ill-health he was not available to testify. (A similar agreement was reached in respect of van Zyl).

[25] The first important aspect to note is that at all material times the policy documents were in the hands of the bank, in fact at its Cape Town office, and the second defendant knew that the plaintiff was not aware of its provisions (other than, so it is to be inferred, that her life was insured thereunder and that the premium she was paying was the stipulated one), and further that any advice that Neave had given to the plaintiff was not, and could not have been, given with reference to the provisions of the policy.

[26] When the plaintiff and Llewellyn approached Pietersen, he was told that they had a plan to rearrange their finances, that Neave had advised them, inter alia, to realise the plaintiff’s insurance policies and invest the proceeds in the stock market, that they were considering that course and that they therefore had to know the value of their policies. Pietersen was favoured with a list of the plaintiff’s assets, and her income and expenditure, as also her annual financial statements (in fact of the partnership between her and her now late husband). As already recorded, Pietersen said he would bring an expert to see the plaintiff, as the plaintiff put it, a “fundi” (a Xhosa word meaning expert) in his field, i.e., that of insurance policies, of which Pietersen was not knowledgeable.

[27] The second defendant confirmed that when Pietersen contacted him, he was advised of the plaintiff’s plan to surrender the policies she had ceded as security to the bank and apply the proceeds to investments in shares. Pietersen wished him to assist in the matter of substitute security for the bank.

[28] When Pietersen brought the second defendant to the farm, he was, on the evidence of the plaintiff and Llewellyn, introduced to them as a financial adviser with the first defendant. They understood his function was to furnish financial advice. This evidence was not the subject of challenge.

[29] As to what was conveyed to the second defendant on the farm, Llewellyn’s evidence proceeded as follows: The whole general plan of realising assets and cashing in of policies was discussed with him. In response to the second defendant’s reference to a possible sale of the policy, he was advised that if that course would take a long time and then not yield much more than a surrender of the policy, the latter course would be preferable, because the plaintiff could make more money out of equities (the corollary of which was an unequivocal intimation that the plaintiff wished to realise as much on the policy as possible). The second defendant left the meeting with the instruction that a buyer should be found for the policy, failing which the surrender course should be followed. In accepting that the surrender of the policy was an acceptable option, they placed reliance on the second defendant. The fate of the proceeds of the policy was discussed. The second defendant’s attitude was that some 50% thereof should be invested in unit trusts, which he would arrange, rather than in equities, because the former was a less risky investment and was accepted as security by the bank at a lesser discount than shares. That attitude was accepted (and in fact that is what subsequently took place).

[30] Llewellyn further testified that at the subsequent meeting with Huisamen one of the documents signed by the plaintiff was an affidavit (exhibit “A 34-35”), which was read out to the plaintiff by Pietersen. Paragraph 11 thereof read as follows:

“The following options have been explained to me as regards the policy, namely:

- the option to convert and increase the premium due in terms of the policy;

- to continue paying premiums without change to policy for the remainder of the term;

- to surrender the policy and to withdraw the current surrender value thereof.

That the plaintiff did in fact have the first option explained to her, did not, however, feature in Llewellyn’s evidence and it was never suggested to him under cross-examination that that had in fact occurred. On the other hand, Llewellyn did state that it was not explained to the plaintiff that an option available (i.e., the one exercised by Boogertman) was a conversion in terms of which the premiums would remain the same and a pay-out in excess of R1 million within twelve months would be provided for. Had that option been explained, he would have advised his mother to take it.

[31] Cross-examination of Llewellyn sought and secured confirmation that because of the advice received from Neave, the surrender of her policies was an option accepted by the plaintiff, particularly in respect of the policy, which had no maturity value, was not producing any return and, by virtue of the circumstances of her children, no longer necessary, together with an acceptance thereof that the proceeds be dealt with as suggested by the second defendant. The proposition put to Llewellyn that the second defendant had been asked by Pietersen to accompany him to the farm in order to advise the plaintiff on an investment to be ceded to the bank in place of the policies, in the context a suggestion that the second defendant’s function was restricted thereto, was rejected by Llewellyn. He pointed out that Pietersen had said that he would bring the second defendant to the farm to advise the plaintiff on her financial plan, that “our entire business plan” was orally put to Pietersen and the second defendant, that the possible repayment of the overdraft was discussed, that there was agreement that that course not be followed, and that the investment and alternative security provision referred to in para. [29] above was decided upon. When asked what financial advice other than information concerning the surrender value of the policy he and the plaintiff were seeking, his response was that they were “open to any advice to increase income and reduce expenses”, and he added that Pietersen had said he would like to bring a financial expert out “so that we could go over everything”. During the meeting on the farm he pointed out that they were running at a loss of approximately R10 000,00 per month and that they had assets which they thought could be better utilised (clearly upon realisation at best advantage), and wished to put money into the stock exchange. He did, however, at that stage concede the correctness of the proposition that the only thing to be discussed at the meeting was the surrender value of the policy and the alternative security to replace the policies (an answer that requires, however, to be viewed in the light of the totality of his evidence). No other challenge to Llewellyn’s evidence was made.

[32] The evidence in chief of the plaintiff was in substance confirmatory of that given by Llewellyn. It will suffice to highlight the following testimony given by her: At the meeting on the farm she told the second defendant that she wanted to know how much the policy was worth and wished to put the proceeds thereof into the stock market. Part of the instructions with which the second defendant left the farm was to sell the policy. At no stage was she advised of any conversion option. Had she known thereof and that she could realise in excess of R1 million within twelve months she would not have sold.

[33] Under cross-examination she confirmed that when, at the meeting, she asked the second defendant what the value of the policy was she was referring to the surrender value, which she specifically mentioned, because that was the only value she thought the policy had. No other relevant aspects not covered with Llewellyn were canvassed with the plaintiff during cross-examination.

[34] The evidence of the second defendant on the issue presently under discussion will now be considered. In examination in chief he testified as follows: When Pietersen contacted him he was told that the plaintiff wished to surrender the policies she had ceded to the bank as security and to invest the proceeds on the stock market. He was asked to assist in determining the security to be furnished in replacement of the policies. At Petersen’s request he also secured a print out reflecting the surrender value of the policy. At the meeting on the farm the plaintiff and Pietersen first discussed her financial position and the security the bank held. He told the plaintiff what the surrender value of the policy was. She said that on the advice of Neave she wished to surrender the policy because she could get a better return on the stock market. The question of alternative security was then discussed. Towards the end of the meeting he mooted the possibility that the policy could be sold and he received instructions to explore that avenue.

[35] Under cross-examination, however, his concessions included the following: While he sought to protest that he did not see what he said to the plaintiff as advice and that she was already strongly sold on the idea of surrendering the policy, he acknowledged that what she wanted was to receive the maximum amount of money for investment by her. Restatements of this last answer were to the effect that the plaintiff wanted as much for the policy as possible. (A subsequent attempt to withdrew this concession was unpersuasive). Although the averment had not been put to the plaintiff under cross-examination, he claimed that on a number of occasions he had said to her that surrendering the policy was possibly not the most advantageous course (because, as he explained, in 90% of the cases the policy holder would lose) (i.e., he was in fact giving her advice, in regard to which he acknowledged that he considered he was obliged to advise her as to what was in her best interest). It was in pursuance of the discharge of that obligation that he advised her of the possibility that the policy could be sold. He acknowledged further that his mandate, when leaving the farm, to endeavour the sell the policy embraced securing the best price therefor, and that if he had done what was necessary to fulfil the mandate, the plaintiff would have received considerably more.

[36] In the light of the above evidence, the determination of the nature and ambit of the mandate which the second defendant, and through him the first defendant, had from the plaintiff is a matter of ready resolution. In my judgment, the conclusion is inescapable that the mandate was to ensure that the plaintiff received proper advice as to the most advantageous manner of dealing with the policy, and, specifically, in the matter of the sale of the policy, as to the best price that she could obtain therefor.

THE CONTENT OF THE DEFENDANTS’ OBLIGATION/DUTY IN THE LIGHT OF THE MANDATE:

[37] (1) In their plea the defendants, in addition to admitting that at all material times the first defendant carried on business as set out in para. [5] above and that at all such times the second defendant acted on its behalf, also admitted (restated):

“that the first defendant publicly professed to have expert knowledge and skills in respect of its trade as financial and investment advisers”.

(2) In response to a Rule 35 (3) notice filed by the plaintiff calling for the production of documents of a certain nature, the first defendant stated that its expertness in respect of “life assurance, life assurance broking, financial investments and financial advice, and the like” was admitted, and was not an issue between the parties.

(3) Similarly, the second defendant, in response to a similar notice, stated as follows:

“Ek erken dat ek kundig is met betrekking tot lewensversekering, finansiële beleggings en beplanning asook die verskaffing van finansiële advies.”

(4) In the course of his evidence the second defendant, on a number of occasions, conceded that he had given himself out to be an expert in financial investments and in life insurance matters, including conversion options in policies and the sale of second-hand policies (although he did, unpersuasively, endeavour on an equal number of occasions to seek to withdraw or qualify that concession). That the first defendant also so held itself out, flows from what is set out above and its representation by the second defendant in the dealings with the plaintiff.

[38] The allegation of the plaintiff in her particulars of claim in respect of her claim ex contractu may be restated as follows:

“It was a term (express, implied or tacit) of the agreement (i.e., the mandate) that the defendants would perform the mandate and render the advices in good faith in a proper and professional manner, without negligence and with such care, diligence and knowledge as can reasonably be expected of a careful and prudent financial adviser in a financial institution professing financial and/or investment skills and offering financial and/or investment advice.”

[39] In similar vein, the restated allegation in respect of the plaintiff’s claim ex delicto may be worded as follows:

“There was a legal duty on the defendants to exercise such care, diligence and knowledge as can reasonably be expected of a careful and prudent financial/investment adviser of a financial institution professing financial and investment skills in advising the plaintiff, and to do so without negligence.”

[40] Having regard to the nature of the mandate in question, the features recorded in para. [37] above, and the authorities referred to in paras [21] and [23] above, there can be no valid quarrel with either of the averments set out in the preceding two paras, and I did not understand Mr Smalberger to suggest the contrary.

[41] What is the standard of skill applicable? Again, having regard to the same features referred to in the previous para., and transposing the approach in Durr’s case to the present, the standard to be applied is not that of the “average or typical” insurance/financial adviser, but that of an adviser employed as an expert by a company, with country-wide branches, professing insurance and investment skills and offering expert advice thereanent; i.e., the higher test. I would record that even if the lesser test of the standard of the average or typical adviser were to be applied, the conclusion in the matter would still be the same: the conduct relevant for the purposes of the present matter, identified below as having been the conduct that would reasonably have been expected of an adviser on the stricter test referred to above, would also reasonably have been expected of the average or typical adviser.

[42] On the score of the conduct that was to be expected, the plaintiff tendered the opinion evidence of two witnesses: Stroebel and Prof. Havenga. The latter is an expert on insurance law, which he teaches at the University of South Africa, and in the practice of insurance intermediaries. His expertise is not to be doubted. I am satisfied, too, that Stroebel was qualified to express the opinions that he did.

[43] Before adverting to the opinion evidence given by these two witnesses, I should record that in terms of their other testimony, it was not uncommon at the relevant time, i.e., May 1997, firstly, for life assurance policies such as the one presently at issue, to contain provisions for conversion options, and, secondly, for there to be trafficking in such policies. There was no challenge to them on the first aspect and no serious challenge on the second aspect. In his own evidence the second defendant initially admitted that he was aware that conversion options were commonly found in such policies. His subsequent endeavours to backtrack from that admission by suggesting, e.g., that such provisions were a “rare verskynsel”, or even that at that time he was quite unaware that policies contained conversion options, lacked persuasion. On his own showing, too, he was aware of the practice in terms of which such policies were the subject of purchase and sale, although there, too, he endeavoured to water down the concession in much the same manner. The further unchallenged evidence of Stroebel was that of the second hand life policies on the market, the type within which the policy fell was, by reason of its bonus structure, the most attractive and sought after.

[44] Further, on the second defendant’s own admission he could readily have ascertained from Old Mutual whether the policy in fact provided for conversion options and what the effect of the exercise of such options would have been and, secondly, that in the matter of finding a purchaser for the policy, the first defendant had a country-wide network of persons versed in that field, whom he could readily have consulted.

[45] It was the evidence of both Stroebel and Prof. Havenga that, as a first fundamental step, an adviser should undertake what was referred to as a “needs analysis”. In this regard Prof. Havenga referred to the code of conduct of the then Institute of Life and Pension Advisers of Southern Africa (ILPA) (now the Financial Planning Institute). A needs analysis embraces not only a thorough analysis of the client’s applicable affairs and actual financial needs, but also a determination, by the application of the adviser’s knowledge and skills, of which services would best fulfil the client’s particular needs (ILPA code, para. 2.2). To be read therewith are the provisions of para. 2.9 of the code which required, inter alia, that the advantages and limitations of any service offered to a client should be explained to him or her so that an informed decision thereanent might be made.

[46] It was their view that the obligation to embark on a needs analysis would be imposed on the adviser even were the client’s instructions to the former simply to be to ascertain the surrender value of a policy and to surrender the policy at that value - on the basis that it is the duty of the adviser to investigate whether the instruction actually corresponds to the client’s needs. This proposition was challenged by Mr Smalberger. In my judgment, there is much to be said for the view of the two witnesses, as reflecting the duty on the adviser to show good faith and to bring the required degree of skill and expertise to bear on the execution of a client’s instructions. It is, however, unnecessary to resolve this question, in the light of the finding set out earlier as to the ambit of the mandate given by the plaintiff to the defendants.

[47] In the present matter, the second defendant was apprised of the needs of the plaintiff, viz., to convert the policy into cash for investment to provide a return as income (subject to the bank’s requirement in regard to replacement security). It is the second part of the duty of an adviser, referred to in para. [45] above, that is important for present purposes, viz., the determination of which services would best fulfil the client’s needs. I agree that that duty was imposed on the defendants: it is in fact a restatement of the mandate described in para. [36] above.

[48] Mr Smalberger conceded during argument that if the mandate were found to be as set out in para. [36] above, then, both in contract and in delict, the defendants were under the obligation/duty to do what is set out in the paras. that follow, and, secondly, that the obligation/duty was not complied with. That was a correct and responsible attitude to adopt.

[49] In execution of the mandate to ensure that the plaintiff received proper advice as to the most advantageous way to deal with policy, the first steps - indeed, I would say the elementary steps - for the second defendant to have taken, were to secure a copy of the policy, determine what provisions it contained in respect of the manners of dealing with the policy and to ascertain by proper and adequate inquiry and investigation what same entailed and what the results thereof would be. The results of such investigations should have been the premise of his advice to the plaintiff. If in fact, as he seemed to contend at some stages in his evidence, despite his admission that he gave himself out to be an expert, he was unaware that such steps could and should be taken, his lack of knowledge was culpable; he should not have accepted the mandate and should instead have referred the plaintiff to another adviser. This was the view, which I find acceptable, of both Stroebel and Prof. Havenga. To be read therewith is the prescription in clause 2.11 of the ILPA code to the effect, inter alia, that a member will not purport to a client that he or she has knowledge or skills that he or she does not in fact have, and the prescription in clause 2.6 of the code that a member will not make any statement or suggestion to a client in respect of any service unless he or she has assurance that the statement is reasonably true.

[50] If, in the result, and after the required investigations had revealed what could be done with the policy, the decision was that the policy should be sold, the second defendant ought to have undertaken the necessary, adequate, investigations to determine the true value of the policy so as properly to be in a position to advise the plaintiff as to the best price that she could realise for the policy.

THE FAILURE TO DISCHARGE THE OBLIGATION/DUTY:

[51] That the second defendant (and through him, the first defendant) failed, unreasonably, to take the steps referred to in the preceding two paras. is beyond question. On his own showing, he made no endeavour to ascertain the terms of the policy or to refer the plaintiff to an adviser who could do so. Similarly, on his own showing, he made no endeavour to ascertain the true value of the policy and put himself in a position properly to furnish the plaintiff with advice as to what the sale price should be, nor did he refer the plaintiff to another adviser capable of doing so. His stance that he contented himself with securing a price in excess, albeit marginally, of the surrender value of the policy (as he alleged it was) simply does not wash, and speaks volumes of his incompetence. Even in this regard, it may be added, the question arises why, notwithstanding that the mere fact that Huisamen was prepared to offer a price which was in excess of the alleged surrender value should have rung the alarm bells and caused him to revisit the value of the policy, he took no steps to satisfy himself as to the reasonableness and acceptability of the offer, which he himself admitted in fact formed part of his duty. His ready, and blind, acceptance, of the amount offered, on the basis that Huisamen was a person who dealt in such policies, was not only naïve, but manifestly negligent.

THE EFFECT OF THE NON-COMPLIANCE WITH THE OBLIGATION/DUTY:

[52] Had the second defendant taken the steps adverted to above, the plaintiff:

(1) would have opted to take the conversion route herself: the prospect of receiving just on R1,2 million in eleven months time, albeit that premiums (in a total sum of some R22 500,00) would have had to be paid, was manifestly a far more advantageous course than to sell the policy for an immediate price of R463 353, 00;

alternatively,

(2) would have decided to retain the policy, with all its benefits, and borrow thereon against the amount of the declared bonuses, an option which the second defendant testified would have been open to her, but in respect of which he offered no advice to her;

alternatively,

(3) would have sold the policy for a sum considerably in excess of the figure of R463 353,00 which she in fact did receive for it : as will be shown below, that figure had no pretence to representing the true value of the property.

[53] The defendants accordingly wrongfully occasioned the plaintiff damage.

THE QUANTUM OF THE PLAINTIFF’S DAMAGE:

[54] There was some debate during argument as to the effect of the offer of R100 000,00 made by Huisamen to the plaintiff, and rejected by her, specifically with regard to the question whether the plaintiff’s claim against the defendants fell to be reduced by that amount, on the principle that a plaintiff is required to mitigate his or her damages. The contention to that effect was but faintly pressed by Mr Smalberger. The answer to the question must be in the negative. Leaving aside such aspects as the absence of a reference to this contention in the defendants’ plea and the difficulty in holding that the matter had been fully thrashed out at the hearing, the short counter to the contention is that the offer was not made in settlement of the plaintiff’s claim for damages against the defendants and, absent any proposal by Huisamen that the agreement between him and the plaintiff be amended, in contradistinction to an offer to make an ex gratia payment, the matter was, vis-à-vis the defendants, res inter alios acta, a point counsel conceded he could not counter.

[55] Mr Smalberger’s first submission was that the plaintiff’s damage should be assessed with reference to the figure of R750 000,00 to R800 000,00 (later conceded to have possibly been R700 000,00 to R800 000,00) said to have been the sum conveyed by Stroebel to her as the price which the policy could have fetched. The submission cannot be upheld. In the first place, Stroebel was at pains to point out that that was the minimum price (on the basis to which he had regard - as to which, see below) that could have been obtained for the policy. Secondly, Stroebel made it clear that the figure he mentioned to the plaintiff was based solely on the amount of the bonuses declared on the policy, as reflected on the “inligtingstrokie” referred to earlier in this judgment, without regard being had to any other factors bearing on the value of the policy.

[56] Counsel contended that it would not be appropriate to assess the damage with reference to the figure of R1 199 196,14 which accrued to Boogertman on 5 May 1998 in that, firstly, account would have to be had of the premiums that were payable on the policy up until that date, and, secondly, some discounting of the figure referred to would have to be effected to arrive at the “present value” as at 16 May 1997. The submission was correct.

[57] In the course of his evidence Stroebel proffered as an estimate of what a proper discount might have been, a figure of between 15% to 20%. The former percentage would result in a value of R1 020 000,00, approximately the price in fact paid by Boogertman for the policy. The latter percentage would result in a figure of R960 000,00, marginally higher than the figure in fact paid by the intermediate buyer, van Zyl. Counsel submitted, however, that it would not be correct to accept either of these figures in that, even on the premise that the second defendant had done all that was required of him, a buyer for the policy would still have had to be found, and, if I correctly understood the import of the argument, to take account of possible difficulties in this regard, a lesser figure should be adopted.

[58] In my view there are a number of answers to this contention. First, the practice of disposing of what was referred to a second hand policies to purchasers interested therein was a common one. Second, Stroebel’s unchallenged evidence was that purchasers of such policies were reasonable readily available; he himself had certainly never experienced problems in finding such buyers. Third, the first defendant had a country-wide network of offices whose resources could have been tapped by the second defendant, and again it was the unchallenged evidence of Stroebel that such a company should not have experienced problems in finding a buyer. Fourth, on the evidence there were in fact three purchasers standing in line to purchase the policy, and each did so on the same day. Fifth, counsel conceded, correctly, that there was no suggestion that the sale to Boogertman was anything but a transaction at arms length, and the inference is that it was precisely that. The further inference is that van Zyl was able to purchase the policy for R950 000.00 in that the seller to him (Huisamen) was making a handsome profit, and that he purchased with a view to immediately reselling to Boogertman. The price paid by the latter is one fairly to be regarded as having been arrived at in the open market, the market value represented by a price agreed upon by a willing buyer and a willing seller.

[59] I hold therefore that the plaintiff’s damage should be assessed with reference to the price paid by Boogertman for the policy. The difference between that price and the sum actually received by the plaintiff, is accordingly the measure of the damage suffered by the plaintiff, i.e., the sum of R556 710,00.

ORDER:

[60] There will accordingly be judgment for the plaintiff against the first and second defendants, the one paying the other to be absolved, as follows:

1. Payment of the sum of R556 710,00 as and for damages;

2. Payment of interest on the said sum calculated from the date of service of

summons until the date of payment;

3. Payment of the plaintiff’s costs, such costs to include:

1. the qualifying expenses of the witnesses Mr Stroebel and Prof.

Havenga;

2. the costs attendant on the declaration of the plaintiff as a necessary

witness;

3. the costs attendant on the employment of two counsel.

______________________

F. KROON

JUDGE OF THE HIGH COURT

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