---

REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG LOCAL DIVISION, JOHANNESBURG

CASE NO: A5030/2015

Reportable: No

Of interest to other judges: No

In the matter between -

VIP CONSULTING ENGINEERS

(PTY) LTD                                                                      Appellant (First Defendant a quo)

and

EKURHELENI METROPOLITAN

MUNICIPALITY                                                                      Respondent (Plaintiff a quo)

 

JUDGMENT

 

Headnote

Appeal against a decision rejecting a plea of prescription – plaintiff the Employer in construction project, defendant the supervising Engineer

The critical question was when the plaintiff knew all the relevant facts – reliance on a letter by plaintiff responding to defendant’s report that defendant had wrongly overpaid a contractor a huge sum; the plaintiff had stated that it would hold defendant liable for any losses that might occur

Held: the letter was not evidence of the plaintiff’s full knowledge of a cause of action – at the time there was no certainty any losses would be incurred, merely the risk – only when losses were determined was plaintiff in a position to issue summons – knowledge that defendant was in breach did not axiomatically mean damages had been incurred.

Meaning of ‘debt’ and ‘cause of action’ in context of prescription addressed

 

SUTHERLAND J:

Introduction

[1] The controversy in this appeal is about the failure of the appellant (VIP) to successfully avert the claim of the respondent (Ekurhuleni) on grounds of prescription. The case a quo was dealt with on VIP’s special plea of prescription pursuant to an agreement in terms of Rule 33(4).

[2] The critical question of fact upon which the case turns is the determination of when Ekurhuleni became aware of the debt and on that basis when the debt became due, as contemplated in s12(3) of the Prescription Act 68 of 1969:

A debt shall not be deemed to be due until the creditor has knowledge of the identity of the debtor and of the facts from which the debt arises: Provided that a creditor shall be deemed to have such knowledge if he could have acquired it by exercising reasonable care.

VIP relies on a single fact to establish that moment; ie an exchange of correspondence: a letter from VIP to Ekurhuleni on 18 August 2010, and a letter in response from Ekurhuleni to VIP on 23 August 2010. VIP’s case is that these letters evidence an awareness by Ekurhuleni, at that time, of its claim against VIP. It is common cause that summons was issued more than three years after 23 August 2010.

[3] Wright J a quo held that the debt did not fall due at that moment. It is that finding which is challenged on appeal.

 

The relevant events

[4] Ekurhuleni is a significant local authority engaged in several public works.  To this end it contracts with private businesses to carry out such works. Furthermore, Ekurhuleni requires expertise to oversee such projects. VIP is a provider of such services, the most critical of which, in terms of a written contract between the parties on 12 February 2007, was the issuing of progress certificates from time to time upon which Ekurhuleni incurred an obligation to pay sums to the relevant contractor.

[5] VIP provided such a service to the respondent in respect of several projects, one of which was that undertaken by Niloti Construction and Carpentry CC (Niloti), the second defendant in the action, who, nevertheless, took no part in the appeal. Niloti was supposed to have completed the works by 30 June 2010, and a period of one year thereafter was allowed to address any defects and finishing.

[6] For the purposes of the decision a quo and on appeal, it is taken for granted that Niloti defaulted on its obligations. The gravamen of the dispute between VIP and Ekurhuleni is whether VIP fulfilled its obligations in properly protecting the respondent’s interest as regards Niloti’s performance.

[7] On 19 August 2010 VIP sent the 19^th progress certificate to Ekurhuleni. It stated that Niloti had been paid R8,810,455.59 more than could be verified as due to it at that date. VIP stated in that letter that the certificate was a ‘correction of previous payment certificates’. It was also stated that Niloti ‘must’ refund the sum stated. An explanation was offered of how such a debacle could occur. First, there was a statement of the obvious; ie, ‘...incorrect quantities of completed work included in previous payment certificates and incorrect calculation of the CPA’. Second, Ekurhuleni was informed that VIP had on 13 July told Niloti that it could not ‘reconcile’ the certified work and had ‘requested’ Niloti to ‘submit details and supporting documents for any incidents or events that could entitle it to additional payment’.

[8] From this letter it is plain that what Ekurhuleni was told was that errors had occurred and that Niloti had been asked to justify any entitlement to further payment, or by implication, acquiesce in the ‘correction’ and placing its account with the respondent in credit.

[9] Ekurhuleni, having digested this news, replied four days by letter on 23 August. The text shows dissatisfaction with VIP’s oversight of the project. The spectre of fruitless expenditure was addressed head-on. The letter states:

“ …[Ekurhuleni] is keeping [VIP] responsible for the fact that the [Ekurhuleni] may incur fruitless expenditure based on the fact that in terms of your appointment [VIP] is responsible for verifying and certifying the accuracy of the bill of quantities as well as the work measured and completed before any claims are submitted to [Ekurhuleni]…[Ekurhuleni] will thus hold [VIP] responsible for any fruitless expenditure it may occur (sic: incur) due to the incorrect certification of certificates.”

[10] The letter goes on to ‘require’ VIP to take steps to avoid fruitless expenditure being incurred, including a detailed plan of how in relation to the parties’ contractual rights that objective might be achieved and a request for a draft of a letter that the Ekurhuleni ought to send to Niloti. In addition, Ekurhuleni, mindful of the possible adverse effects on the appellant, urges VIP to contact its insurers.

[11] In my view, the tentative tenor of the exchange is palpable. Nothing is stated about cancellation of Niloti’s contract. Indeed, Ekurhuleni’s stance is to pursue ‘contractual’ remedies, whatever that might have been understood to mean. Any ambiguity is cleared up by subsequent events.

[12] Subsequent to this exchange of correspondence it is apparent that Niloti, albeit ineptly, carried on. On 1 March 2011 VIP reported to Ekurhuleni on progress.  The letter repeats some of the history, including further exculpation for the overpayment. Importantly, it is noted that on 27 August 2010 Ekurhuleni issued a ‘notice of intent to terminate the contract’. Plainly this was not itself a termination, and indeed, a termination did not follow.

[13] Instead, on 15 September 2010, a three-cornered meeting was convened. At that meeting a pragmatic arrangement was struck to let Niloti carry on.  Notably, Niloti disputed the accuracy of the ‘corrected’ certificate. Niloti was thereupon given the opportunity to submit an action plan and to submit its perspective of what payment it had earned so that an accurate certificate could be agreed.  The plan was indeed submitted and in terms thereof a fresh date to complete the works was set: 10 February 2011. VIP recommended acceptance of this plan.

[14] Alas, Niloti, despite these arrangements, did not make good on its undertakings. Thus, it came to pass on 1 March 2011, that VIP, in the course of its responsibilities, recommended to Ekurhuleni to cancel the contract, appoint another contractor and demand payment from Niloti of the overpayment.

[15] Ultimately, as regards VIP, Ekurhuleni terminated their contract on 16 August 2012.

[16] In due course, summons was served against both VIP and Niloti on 6 September 2013, approximately two and a half years after the 1March 2011 letter was sent by VIP to Ekurhuleni. The particulars of claim alleges breaches of contract during the period December 2008 to November 2009, also in the form of fraud and collusion between Niloti and VIP in respect of which a  claim of damages in the sum of R6,844,866.43 is made.

[17] A special plea was filed alleging awareness by Ekurhuleni of the breach by VIP on 23 August 2010, evidenced by the correspondence already addressed and that accordingly, the respondent had knowledge of its ‘cause of action’ at that time, and because it had served a summons more than three years thereafter, the claim had prescribed.

Evaluation

[18] The simple issue is this: even if it is accepted that on 23 August 2010, Ekurhuleni knew that VIP had breached its contractual obligations, did Ekurhuleni, at that time, have knowledge of ‘the facts from which the debt’ arose and accordingly, was the ‘debt’ due at that time?

[19] A mere breach of a material term of a contract does not per se result in a financial loss at that very moment. Indeed, as the correspondence plainly shows, both parties were aware of a potential loss, not a loss that had occurred.  Moreover, the respondent, taking for granted it had an election to cancel the contract of both defendants, did not exercise that election. Indeed, the tenor of Ekurhuleni’s letter is to demand specific performance from VIP. It is axiomatic that if Niloti made good on the work in respect of which it had inappropriately already been paid, no loss would result, despite VIP’s failure hitherto to perform its duties effectively. Moreover, VIP’s letter held out the possibility that the credit on the account might be abated by Niloti producing appropriate proof.

[20] Indeed, if the respondent had desired to sue VIP on 23 August what would it have sued for? It had yet to incur the threatened loss. No action can lie for losses not actually suffered. Nestadt J in Sandown Park (Pty) Ltd  v  Hunter Your Wine & Spirit Merchant (Pty) Ltd and Another 1985 (1) SA 248 (W) at 252H held that it was a basic legal principle that:

‘The mere fact that there has been a breach of contract will not normally entitle the aggrieved party to damages; he must have actually suffered them.’

[21] So much, in my view, is obvious and the subsequent conduct of the parties puts it beyond doubt. Indeed the capricious selection of the August correspondence to the exclusion of the further conduct of the parties is misleading. On a holistic appreciation of the course of events, August 2010 is not of such monumental importance after all because although there was awareness at that time of a breach by VIP, there was not, nor could there be, awareness of an actual debt. No less important is the absence of a basis to infer from the correspondence that Ekurhuleni had any whiff of awareness in August 2010 of any facts that might afford a belief that collusive fraud had been perpetrated by VIP and Niloti. Indeed Ekurhuleni’s subsequent conduct fortifies the inference that it could not have had that knowledge at that time.

[22] The absence of awareness is not related to any question of an uncertain quantum, an aspect which is a distraction from the real point. Rather it is that there could be no awareness that a loss had occurred, as distinct from knowledge of a risk that a loss might, even probably would, materialise, because no loss had been sustained at that time.

[23] Not for the first time has an argument about prescription stumbled over terminology. The phrase ‘cause of action’ is wily creature that thrives in the wilds of semantic obscurities. What is relevant to this enquiry is the debt. The eliding of the concept of ‘debt’ and ‘cause of action’ has long been recognised as a source of confusion and mischief. They are not synonyms.

[24] The meaning of ‘debt’ in relation to prescription was addressed by Harms JA in Drennan Maud & Partners  v  Pennington Town Board [1998] ZASCA 29; 1998 (3) SA 200 (SCA) at 212 F – J where he stated that a ‘debt’ as contemplated by the Prescription Act ‘….does not refer to the cause of action, but more generally to the claim’; and further that ‘In deciding whether a debt has become prescribed, one has to identify the debt, on, put differently, what the ‘claim’ was in the broad sense of that word’.

[25] In Standard Bank of SA v Oneanate Investments ( In Liquidation) [1997] ZASCA 94; 1998 (1) SA 811 (SCA) at 826J, Zulman JA remarked that: ‘… the concept of a ‘debt’ for the purposes of the [prescription] act ,is wider than the technical term ‘cause of action’…”. Lastly, in CGU Insurance v Rumdel 2004 (2) SA 622 (SCA) at [6] Jones AJA held:

“….It is important to bear in mind that the courts are now specifically concerned with prescription of a 'debt' within the meaning of the 1969 Act. The Act does not define 'debt' and 'there is . . . a discernible looseness of language' in its use thereof with the result that 'debt' means different things in different contexts. For this reason 'debt' in the context of s 15(1) must bear 'a wide and general meaning'. It does not have the technical meaning given to the phrase 'cause of action' when used in the context of pleadings (Standard Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd (in Liquidation)).In Evins v Shield Insurance Co Ltd Trollip JA made a point of the distinction between 'debt' and 'cause of action', and describes the latter in the following way: 

'''Cause of action'' is ordinarily used to describe the factual basis, the set of material facts, that begets the plaintiff's legal right of action and, complementarily, the defendant's ''debt'', the word used in the Prescription Act.'

The debt is not the set of material facts. It is that which is begotten by the set of material facts….”

[26] The debt which Ekurhuleni sues for is its ultimate loss on the construction contract. VIP’s job was to secure Ekurhuleni’s interests in the performance of that contract. VIP failed to do so. On the available evidence, that loss did not occur in August 2010, although it had to have been appreciated that Ekurhuleni had been exposed to a risk by reason of VIP’s breaches. The fact of a debt was apparent in March 2011, once it had become prudent to terminate Niloti’s appointment. Moreover, in stark contrast to the stance put up by VIP in the litigation, it is apparent from the correspondence that this was VIP’s belief at the relevant times too.

[27] In my view the court a quo was correct in its appreciation of the circumstances, and the invocation of the dictum by Schutz JA in Minister of Public works & Land affairs   v  Group Five Building Ltd 1999 (4) SA 12 ( SCA) at 25E-H is wholly apposite:

“In terms of s 12(1) of the Prescription Act 68 of 1969 prescription commences to run as soon as a debt is due. A debt is deemed not to be due until the creditor has knowledge of the facts from which the debt arises: s 12(3).

If the employer's claim in this case began to prescribe only some time after the date on which the employer gained such knowledge, then the date of gaining knowledge, which is to be taken to be 30 May 1991, would be irrelevant. My conclusion is that that is in fact the case. I accept the employer's argument that the earliest possible such date is 3 December 1991, which falls within the prescriptive period. The basis of the argument is that the employer would not have been entitled to bring its damages claim merely upon the defective work originally delivered being discovered. This is so, as it is of the nature of a building contract such as this one that the defaulting party usually has an opportunity and indeed a duty to put right initially defective work. Clause 6(7), already mentioned, entitles the employer's engineer to require defective work to be done over, and under the subcontract the contractor has the same right against the subcontractor. These are not the only provisions that are relevant, but it is unnecessary to refer to more. The subcontractor's breach, once committed, is not set in stone. The relevant engineer can require the works to be broken up and the breach to be remedied. But a stage is reached when the defaulter is entitled to no more chances. That is the very earliest stage at which the employer's damages claim could conceivably have become due.” (Emphasis supplied)

[28] On the facts of this case, the debt was not due in August 2010. Ekurhuleni was not aware then of all the facts giving rise to the debt, and an awareness of an actual debt occurred, probably, not earlier than February-March 2011.

[29] Accordingly the appeal falls to be dismissed with costs.

 

The Order

[30] The appeal is dismissed with costs.

 

_______________________________

Sutherland J (with whom Van Oosten and Makume JJ Concur)

 

_______________________________

Van Oosten J

 

_______________________________

Makume J

 

Hearing: 25 July 2016

Judgment delivered: 4 August 2016

For Appellant:

Adv A Den Hartog,

instructed by Harvey Nossel.

For Respondent:

Adv L M Mkhize,

instructed by Nkosi Nkosana.

---