---

IN THE HIGH COURT OF SOUTH AFRICA

DURBAN AND COAST LOCAL DIVISION

Case No. 6146/1998

In the matter between :

SPRINGGOLD INVESTMENTS (PTY) LTD PLAINTIFF

and

GUARDIAN NATIONAL INSURANCE COMPANY LTD DEFENDANT

Judgment

___________________________________________________

Patel J

[1] The plaintiff is SPRINGGOLD INVESTMENTS (PROPRIETARY) LIMITED, (“the plaintiff”). The plaintiff carries on business in Pietermaritzburg as manufacturers of edible oil and fats. The defendant is GUARDIAN NATIONAL INSURANCE COMPANY LIMITED (“the defendant”), a registered insurer.

[2] On 31 March 1989 FEEDMILL DEVELOPMENTS (PROPRIETARY) LIMITED (hereinafter referred to as “the insured”) duly ceded to MERCHANT TRADE FINANCE LIMITED (hereinafter referred to as “Merchant Trade”) all its right, title and interest in and to all claims of whatsoever nature which the insured may have, or at any time thereafter acquire, against all persons whomsoever and whatsoever, without exception, as a continuing covering security for the due payment of every sum of money which might then, or at any time thereafter, be owing by the insured to Merchant Trade from whatsoever cause arising.

[3] The insured was wound-up and in terms of a written agreement concluded on 29 and 30 September 1999, the joint Liquidators of the insured duly sold to the plaintiff all claims which the insured had against its insurers.

[4] In terms of a written agreement concluded on 5 October 1999, Merchant Trade:

4.1. disposed of its interest in the claim which is the subject matter of this action to the plaintiff;

4.2. duly ceded to the plaintiff all its right, title and interest in and to such claim.

The plaintiff thus acquired locus standi to sue the defendant. This is not in dispute.

[5] At all material times and, in particular, on 22 July 1996:

1. the insured was the owner of, alternatively had in its custody and under its control and was responsible for, a quantity of 1248.914 metric tons of edible palm oil (‘the oil” or “palm olien”);

2. the said oil was according to the plaintiff stored in two storage tanks constructed for that purpose at the insured’s Pietermaritzburg premises, 8 Chesterfield Road, Willowton, Pietermaritzburg. It might be pointed out that these 2 storage tanks formed part of a set of three tanks.

[6] On 22 July 1996 steam leaked into the oil from heating coils situated in each of the two tanks. The oil in each of the two tanks was damaged and rendered unfit for the use in the manufacture of margarine. It was alleged by the plaintiff that the introduction of steam into the oil was caused by malicious damage to the heating coils carried out by a person or persons, whose identity is to the plaintiff unknown. This risk is covered by the policy. The claim in the alternative that a malfunction of the heating coil system caused the damage was abandoned by the plaintiff. As a consequence of the aforegoing the plaintiff suffered damages in the sum of R1 664 779, 62. It is the plaintiff’s contention that since the risk is covered by the policy, the defendant is obliged to pay to it the aforesaid damages less the applicable excess. The quantum of the plaintiff’s claim before the deduction of excess was agreed to be R1 460 330.00. The plaintiff therefore claims from the defendant the payment of this amount less the deduction of the excess together with interest thereon at the prescribed rate of 15.5% per annum from 2 December 1997 (or such other date as is deemed just) in terms of the provisions of Act 55 of 1975. It was not in dispute that fresh water in the form of steam from the heating coils had seeped into the tanks and this was the source of the contamination.

[7] In terms of the relevant provisions of the policy the defendant undertook to compensate the plaintiff in respect of damage caused to all property owned by or leased by the plaintiff. It is not in dispute that the oil was such insured property. In terms of the “All Risk Exclusion” clauses, the defendant would not be liable if:

“Loss of or damage to that part of any property caused directly and solely by:

1. its undergoing a heat or drying process;

…

6. defective workmanship thereon;

…

4.8. wear and tear;

…

10. contamination or pollution;

…

20. inherent or latent defect.”

[8] Clearly the onus rests on the defendant to establish the exception upon which it relies. To this end it is necessary to properly analyse the evidence because if the plaintiff gets past what the defendant contends to be a proper construction of the aforesaid exceptions, the question of onus will not play any significant role. Can it be said that upon a proper assessment of the evidence before the court the contamination of the oil was caused by sabotage as is constrained for by the plaintiff? If it was not so caused, cadit quaestio, the action falls to be dismissed. I might mention that the defendant relied in the main on the exclusion set out in 4.10 namely, “contamination or pollution” exclusion.

[9] The technique employed in the interpretation of contract of insurance is no different from the interpretation of any other contract. Joubert JA summarises this technique well in Coopers & Lybrand and others v Bryant [1995] ZASCA 64; 1995 (3) SA 761 (A) at 767E – 768E:

“According to the ‘golden rule’ of interpretation the language in the document is to be given its grammatical and ordinary meaning, unless this would result in some absurdity, or some repugnancy or inconsistency with the rest of the instrument … The mode of construction should never be to interpret the particular word or phrase in isolation (in vacuo) by itself … The correct approach to the application of the ‘golden rule’ of interpretation after having ascertained the literal meaning of the word or phrase in question is, broadly speaking, to have regard:

1. to the context in which the word or phrase is used with its interrelation to the contract as a whole, including the nature and purpose of the contract …;

2. to the background circumstances which explain the genesis and purpose of the contract, i.e. to matters probably present to the minds of the parties when they contracted …;

3. to apply extrinsic evidence regarding the surrounding circumstances when the language of the document is on the face of it ambiguous, by considering previous negotiations and correspondence between the parties, subsequent conduct of the parties showing the sense in which they acted on the document, save direct evidence of their own intentions ...”

Joubert JA envisages four steps of interpreting a document. In establishing a proper meaning of the words a court must look at (a) its grammatical and ordinary meaning, (b) the context within the contract, (c) the wider context and (d) extrinsic evidence of the surrounding circumstances.

[10] It is common cause that the plaintiff’s complaint is that the oil has been contaminated. The word “contaminate” is defined in the New Shorter Oxford Dictionary as (among other things) to “make impure by ….mixture”, and the word “contamination” is then defined as (again, among other things) “the action of making impure …. something which contaminates”. In this case, the introduction of the water from heating coils became mixed with the oil, to the extent that they could not conveniently be separated and moreover the introduction of the water made the oil rancid and unmerchantable. In casu it is clear that the cause of complaint is damage caused by contamination.

[11] The next question which arises is the proper construction of the exception relating to contamination. The issue is whether there was:

“Loss of or damage to that part of any property caused directly and solely by contamination.”

It is not in dispute as pointed out earlier that the water contamination was the direct cause of damage. That is indeed the plaintiff’s case.

[12] I am in agreement with the submission made by Counsel for the defendant that the literal meaning of the words “caused … solely by” cannot be correct. I agree with him that all effects have a multiplicity of causes, in the sense that many are the sine qua non of the effect. The more natural meaning, which flows from the coupling of the word “solely” with the word “directly” (in the phrase “directly and solely”) is “on its own”. This would restrict the exception to those circumstances where there is not mixed damage, but only damage caused by contamination. The defendant thus would not be entitled to raise the exception where contamination occurs in conjunction with any other damage. Thus construed, the word “solely” indicates that for the exception to operate, it must cause damage on its own, that is to say unaccompanied by some other concurrent phenomenon also causing damage.

[13] Counsel for the defendant properly conceded that it would be difficult for the defendant to resist the proposition that if the holes in the heating coils were caused by sabotage, those acts of sabotage were not the proximate cause of the damage to the oil. Damage to the oil by water must have been the intended consequence. Such damage would flow ineluctably the moment the steam was turned on. The immediate consequence would be contamination and the “damage” would follow as an immediate consequence of that without any break in the chain of causation. In light of this concession it would be jejune for me to traverse the problematic relating to the proximate cause of damage which often bedevils cases of this nature. The onus to establish that the damage to the heating coils was malicious rests on the plaintiff.

[14] In order to discharge the onus the plaintiff led evidence of two experts, Mr Adam Peter Maitland Nimmo, and Mr Robert Bodger, both mechanical engineers. According to both these witnesses the damage to the heating coils in Tank No. 1 was caused deliberately and therefore maliciously. Counsel for the defendant reminded me that in analysing the evidence of these two experts, I must have regard to the salutary warning in the case of Dingley v The Chief Constable, Strathclyde Police 2000 SC (HL) 77 at 89, which was quoted with approval in Michael and Another v Linksfield Park Clinic (Pty) Ltd and Another 2001 (3) SA 1188 (SCA) at paragraph [40]:

“(o)ne cannot entirely discount the risk that by immersing himself in every detail and by looking deeply into the minds of the experts, a Judge may be seduced into a position where he applies to the expert evidence the standards which the expert himself will apply to the question of whether a particular thesis has been proved or disproved – instead of assessing, as a Judge must do, where the balance of probabilities lies on a review of the whole of the evidence.”

[15] Mr Nimmo, a professional engineer of standing, testified that he had considerable experience in the field of welding. His expertise permitted him to supervise welders and to decide whether the welding was of an acceptable standard. In 1996 he had occasion to inspect the heating coils in the storage tanks in order to investigate and shed light on the cause of contamination. In tank 1(one) he did not find any sign of any repair work on any of the welds. He found holes on the join between the deposit material of the filler used in the weld and the parent material of the pipe as viewed from the outside in the vicinity of any of the welds in tank one. He also had the occasion to examine the holes internally. According to Mr Nimmo these holes were not caused by corrosion nor was it caused by any natural erosion. Further these holes were not caused by a weakness in the weld itself nor caused by fatigue or any other common failure. It was further not caused by an over-pressure of steam. In his opinion the holes were caused deliberately by the external application of heat via a welding torch. The suggestion in cross-examination that the damage was caused by an inexperienced welder in attempting to effect repairs was convincingly refuted by Mr Nimmo.

[16] Mr Robert Bodger, a professional mechanical engineer and a lecturer at the University of Kwa-Zulu Natal, whose area of speciality is engineering design and fracture fatigue gave similar evidence. He had been dealing with welding joints for many years since it is part of the design course in teaching welding. This witness was called to comment on a report prepared by his erstwhile colleague, Mr J K Bartholomew, who had died since preparing a report. He had studied Bartholomew’s report and according to him the photographs were sufficiently clear for him to express a view by closely looking at the photographs accompanying Bartholomew’s report. In his opinion the holes or the craters could only have been made after the welding was completed. He was confident that the holes in the heating coils were man-made. He was further of the opinion that the holes or craters were due not to corrosion or any other type of fault that one might find in a welded joint. He gave cogent explanation to back up his position. I do not think it necessary to repeat his evidence since the same is on the record save to say that he refuted the suggestion made under cross-examination that corrosion may have been the cause of the damage. He was satisfied with the quality of the welding and similarly rejected the further suggestion under cross-examination that the holes in the coils may have been the product of a botched attempt to repair the welds.

[17] In light of the evidence of these two professionals the opinion expressed by Mr Anthony Escott-Wilson is not persuasive. Mr Escott –Watson, while expressing the opinion that the cause of the holes was perhaps a failure of the welds, admitted that this was nothing more than a theory and that he did not know what the cause was. In any event he was not qualified as an expert in this field to express an opinion. Bearing in mind the salutary warning adverted to by counsel for the defendant I am persuaded that the holes had been deliberately and maliciously caused by persons whose identity is unknown.

[18] In reaching this conclusion I am alive to the fact that the plant was securely guarded. Further there may have been easier methods than the one used to sabotage the plant. Although it may have been difficult and time consuming to obtain access to the tanks, it is not improbable that the damage may have been caused shortly after the tanks were pressure tested by the very persons who did the welding and subsequent repairs. Considering the evidence of Mr Haroun Essack and especially his demeanour in court, and without wanting to be uncharitable to him, he would in my view not have been an easy task master to work with. Just like necessity, perversity is also a mother of invention. The defendant has not alleged that the insured itself was responsible for the damage to the heating coils, nor is this relied upon as a ground for avoiding liability under the policy. No evidence was, in any event, led to support any such contention, nor was it put to Mr Haroun Essack that this had occurred.

[19] I turn now to the question of fraud. It is the defendant’s contention as set out in para 16 bis of its plea that the plaintiff directly or through its agent made the following representations which were untrue, namely;

(a) that the failure of the heating coils occurred simultaneously in all three of the insured’s tanks whilst the particulars of claim refers to two of these three tanks;

2. the purpose of alleging that all three tanks were simultaneously affected was to reinforce the assertion upon the basis of which the insured then claimed under the policy, namely, that the bursting of the pipes was the product of one sudden event caused by an extraneous factor such as “water hammer” or malfunction of pressure reading valves;

(c) further that on the 24 March 1997 during a visit by the defendant’s representative, Dr Garforth, a loss adjustor, it was represented to him that oil in all three tanks had been affected by the event giving rise to the claim under the policy and that it was not possible for Garforth to inspect the interior of any tank, as all three tanks were then in operation.

It is the defendant’s contention that the above representations were made with the express purpose of reiterating the claim as to the occurrence of a sudden extraneous event causing damage, thereby avoiding the application of any of the exceptions to the defendant’s liability under the policy and further avoiding Garforth’s inspection of the interior of any tank. It is defendant’s contention that these statements were to the knowledge of the insured false and expressly made in order to obtain a benefit under the policy.

[20] Counsel for the plaintiff has in his heads conveniently set out for me the applicable law for which I am grateful. I take the liberty of setting out the same. Even where there is no forfeiture clause similar to Clause 22 in the policy, the English law recognises a rule in terms of which the insured is effectively penalised for fraud in the making of a claim (see Manifest Shipping Co Ltd v Uni-Polaris Co Ltd and Others, The Star Sea [2001] 1 All ER 743 (HL) at 764, paragraph 62). The position in English law in such circumstances was considered by the Supreme Court of Appeal in Schoeman v Constantia Insurance Co. Ltd 2003 (6) SA 313, where Marais, J.A said the following in paragraph [12]:

“The penalty (for making a false statement as to part of the claim) is that the claim is forfeited even although it was in all other respects a valid claim which, but for the fraudulent conduct, would have to be paid. The penalty may extend even further and entail the termination or avoidance of the policy with prospective effect by the insurer. Whether the rule rests upon the fraud amounting to a breach of a continuing duty to observe the utmost good faith which characterises the entry into a contract of insurance in English law, or whether it rests simply upon considerations of public policy and a special need to provide a robust, if draconian, sanction to deter insurance fraud may still remain a question”.

[21] No term of the kind contained in Clause 22 of the policy is, however, implied ex lege in South African law. (see Videtsky v Liberty Life Insurance Association of Africa Ltd 1990 (1) SA 386 (W), Schoeman v Constantia Insurance Co. Ltd supra and South African Eagle Insurance Co Ltd v KRS Investments CC 2005 (2) SA 502 (SCA). If the defendant is entitled to escape liability on the grounds of fraud then, its right to do so must be found within the four corners of Clause 22. Clause 22 is what is commonly known as an exemption clause and its application to the facts of this case will have to be determined. This in turn involves the proper construction of that clause and the principles of interpretation which are of application thereto.

[22] While it is clear that there is no general principle that exemption clauses should be construed differently from other provisions in a contract, the Courts are wary of contractual exclusions since they deprive parties of rights that they would otherwise have had at common law. (see Van der Westhuizen v Arnold 2002 (6) SA 453 (SCA) at paragraphs [37] to [40]. It is a well recognised principle of interpretation of insurance policies that the Courts should lean towards upholding the policy rather than producing a forfeiture (see Kliptown Clothing Industries (Pty) Ltd v Marine and Trade Insurance Co of SA Ltd 1961 (1) SA 103 (A) at 106/7 and Pereira v Marine & Trade Insurance Co Ltd 1975 (4) SA 745 (A) at 752F-H). So too, if the clause concerned is ambiguous, the policy must be interpreted contra proferentem (see Kliptown supra, Pereira supra and Fedgen Insurance Ltd v Leyds 1995 (3) SA 33 (A): dictum at 38B – E)

[23] Also, in determining whether or not the clause is ambiguous, recourse should be had to the principle expressed as follows by Miller J.A in Lehmbeckers Earthmoving & Excavators Ltd v Incorporated General Insurances Ltd [1984] ZASCA 47; 1984 (3) SA 513 (A) at 520 I:

“But it not infrequently happens that the parties use simple words, in themselves unambiguous, but which cannot readily or reasonably be applied in their literal sense to all the situations to which their agreement was directed. In such cases an element of ambiguity arises from the fact that "an absolutely literal interpretation" may be wholly or substantially impracticable, or productive of startling results which could hardly have been intended. (See MacGillivray and Parkington (ibid para 1040 at 437 - 8).) "Therefore", say the learned authors, "some gloss on the words becomes essential and their surface plainness is seen to be illusory".

[24] In avoiding liability the defendant relies on Clause 22 which reads:

“If any claim under this insurance be in any respect fraudulent means or device be used by the insured or anyone acting on his behalf to obtain any benefit under this insurance or if any lss (sic) or damage be occasioned by the wilful act or with the connivance of the insured all benefit under this insurance in respect of …… (sic) claim shall be forfeited.”

This clause as it is worded, makes no sense as certain words appear to have been omitted from it. Counsel for the plaintiff submitted that without inserting the words “or if any fraudulent” between the words “fraudulent” and “means” in the second line, it is not possible to interpret clause 22 as covering the situation pleaded for by the defendant in paragraph 16 bis (b) of its plea. It was further submitted that on this basis alone the defendant’s reliance on fraud must fail. I do not agree with this submission since the very clause is reproduced, without spelling or errors and omissions, in the same policy. It would be disingenuous not to allow the insurer to rely on clause 22 merely because of inelegant and negligent draughtsmanship since Mr Haroun Essack a man of commerce must have known what that clause meant.

[25] To interpret clause 22 “absolutely literally” as giving the defendant the right to avoid liability under the policy even if the benefits sought to be obtained was one to which the insured was entitled, would produce startling results which could hardly have been intended.

The defendant has to prove that:

(a) the misrepresentations relied upon by it in paragraph 16 bis of its Plea were made;

(b) these were fraudulent in the sense of having been made knowingly and with the intention of obtaining a benefit under the policy

[26] I was unimpressed with Garforth’s evidence. If indeed he could not get access to the tank in order to inspect one would have expected this to feature prominently in his first report. There is a dispute on the evidence, as to whether Garforth was told that all three of the tanks had been repaired, which as a matter of fact was not the case and that it was not possible for him to inspect any of the tanks as they contained oil. I agree with the submission made by Counsel for the plaintiff that it is inherently improbable that the plaintiff would have made the representations constrained for in paragraph 16 bis of the defendant’s plea particularly in circumstances where the claim had been repudiated on the ground of contamination, and where, in fact, Garforth’s examination of the tanks could have been to its advantage.

[27] Similarly the attempt by Garforth to suggest that he, and accordingly the defendant was misled into believing that the oil which is the subject of the claim was stored in all three tanks (rather than two) does not survive scrutiny. The defendant knew long before the letter, Exhibit “A80/1”, was received and the meeting held on 24 March 1997 had taken place, that the oil in question had been stored in only two of the said tanks. This was the tenor of Escott-Wilson’s evidence. His initial report was given to the defendant’s representatives in which it was clearly stated that the oil in question was stored in two tanks only.

[28] None of the experts initially involved in the investigation were certain as to the exact cause of the contamination and the phenomenon of the “water hammer” was nothing more than speculation. In light of the knowledge which, by then, the defendant clearly had, no good purpose would have been served by the plaintiff attempting to mislead it into believing that the oil was being stored in all three tanks. In my view the defendant has accordingly failed to discharge the onus resting on it on this issue.

[29] Apropos the question of excess, I have accepted that the damage to the heating coils in both tanks was caused maliciously. It is therefore overwhelmingly likely that this occurred as one incident and accordingly, that the excess is limited to R25, 000 (Twenty five thousand rands).

[30] I now turn to the question of the interest payable. It is common cause that demand was made on or before 2 December 1997. The question therefore arises whether interest should accordingly run from that date in accordance with the provisions of Section 2A (2) (a) of the Prescribed Rate of Interest Act 55 of 1975 (“the Act”). Counsel for the defendant did not make any submissions in his address to the contrary. I might state that I invited counsel for the defendant to file further heads on this aspect if he was disposed to do so. There was no explanation given by the plaintiff as to why there was such an inordinate delay in bringing the matter to court.

[31] Section 2A (2) (a) lays down the general position, that is interest runs from the date of demand or summons. However, if a plaintiff seeks interest from an earlier time then the Court must invoke the provisions of s (5) and exercise its discretion. Section 2A (5) of the Act provides as follows:

“Notwithstanding the provisions of this Act but subject to any other law or an agreement between the parties, a court of law, or an arbitrator or an arbitration tribunal may 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 approach to be adopted by this Court in the exercising of its discretion is set out in Adel Builders (Pty) Ltd v Thompson 2000 (4) SA 1027 (SCA) at 1032H-J, wherein Howie JA remarked as follows:

“Acting in terms of ss (5), it was open to the Court, in fixing the date from which interest was to run, to give effect to its own view of what was just in all the circumstances…The discretion afforded by s 2A (5) was of the nature referred to in a long line of cases in this Court from Ex parte Neethling and Others 1951 (4) SA 331 (A) onwards. Plainly, if parties wish certain facts and circumstances to be weighed in the exercise of such a discretion they must establish them. But there are no facta probanda. No enquiry arises as to whether a necessary fact has been successfully proved. Similarly, absence of proof does not result in failure on any issue. Indeed, there are no evidential issues to attract any onus.

Similarly, in MV Gladiator; Samsun Corporation t/a Samsun Line Corporation v Silver Cape Shipping Ltd, Malta [2007] ZASCA 92; 2007 (2) SA 401 (D) at 412 I, Southwood AJ stated that “in exercising its discretion the section expressly states that the Court must make an order which is ‘just’, that is, it must exercise its powers in a way that is fair to the parties”.

In the exercise of my discretion, I propose that interest shall run from the date of demand.

[32] In the premises I make the following order. Judgment is granted in favour of the plaintiff for:

(a) payment of the sum of R1, 435, 330.00;

(b) interest on the aforesaid sum at the rate of 15.5 % per annum from 2 December 1997 to date of payment;

2. costs of suit, such costs to include the qualifying fees of all or any expert employed by the plaintiff and in respect of whom due notice was given in terms of Rule 36 (9) of the Uniform Rules.

PATEL J

DATE OF HEARING : FRIDAY, 7^TH SEPTEMBER 2007

DATE OF JUDGMENT : THURSDAY, 8^TH MAY 2008

COUNSEL FOR PLAINTIFF: ADV. B A ACKER SC

INSTRUCTED BY : SHEPSTONE & WYLIE

PLAINTIFF’S ATTORNEYS

SCOTSWOOD

35 ALIWAL STREET

DURBAN….4001

(REF.: Mr S F Chetwynd-Palmer/SPRI 7.1)

COUNSEL FOR DEFENDANT : ADV. P J OLSEN S.C.

INSTRUCTED BY : DENEYS REITZ ATTORNEYS

DEFENDANT’S ATTORNEYS

4^TH FLOOR, THE MARINE

22 GARDINER STREET

DURBAN….4001

(REF.: Mr C Woolley/78/GNI/8403)

Tel. No: 031 – 3678810

---