---

CASE NO. 189/2006

IN THE HIGH COURT OF SOUTH AFRICA

(BOPHUTHATSWANA PROVINCIAL DIVISION)

In the matter between:

PREMIER FOODS LIMITED APPLICANT

and

DTS DISTRIBUTORS CC RESPONDENT

______________________________________________________________________

JUDGMENT

______________________________________________________________________

MOGOENG JP.

[1] This application came before my brother Landman on 10 February 2006 on an urgent and ex parte basis. A rule nisi was granted and its effect was to authorise the Sheriff of this Court to attach and remove certain goods, belonging to the Applicant, which were in the possession of the Respondent. On the return date, 09 March 2006, the matter was postponed to 16 March 2006. Eventually, it came before me on 23 March 2006 for an order either confirming or discharging the rule nisi.

[2] The background to this application is that the Applicant and the Respondent have had a business relationship since 2002. The last written contract in terms of which they conducted their business relationship was concluded on 29 December 2004. It was intended to operate from 01 December 2004 to 30 November 2005. The Respondent says in its Answering Affidavit that this contract was superseded by an oral agreement which would be terminable upon reasonable notice being given. In its Replying Affidavit the Applicant makes mention of an oral variation of the written contract which is broadly similar to the oral version mentioned by the Respondent except that it made no provision for cancellation.

[3] The broad terms of the agreement between the parties is that the Respondent would keep the Applicant’s food products in its warehouse and distribute them to any of the Applicant’s customers in the North West Province who would have placed an order for them through the Applicant. This means that it is the Applicant who generally went about soliciting business deals from potential buyers such as Metro Cash and Carry (“Metro”) and Shoprite Checkers and having done so, the Respondent would be notified to deliver the kind and quantity of the goods ordered. The Respondent was, in turn, handsomely rewarded for that.

[4] For the purpose of record-keeping, the Applicant installed its computers with its own software at the Respondent’s business premises to be utilised in the issuing of invoices relating to the distribution of its merchandise by the Respondent. These computers were all linked to the Applicant’s Head Office computer network, presumably for monitoring purposes.

[5] The procedure followed was that whenever the Respondent were advised, by the Applicant, to deliver the goods to a specified store, the Respondent would generate an invoice through the Applicant’s computer and send it to the relevant customer before distribution could take place. Only thereafter would the actual delivery of the stock take place. The arrangement was that, when the stock was delivered, the store to which such delivery was made, was expected, as a matter of course, to generate an acknowledgment of receipt through its own computer. Such an acknowledgement is referred to as a Goods Received Receipt (“GRR”). This practice was followed from the inception of the parties’ contractual relationship in 2002 until some time in 2005. No concerns were raised by any party regarding how each discharged its obligations.

[6] In the course of June/July 2005 the Respondent, on its version, did not receive the normal GRR’s from several Metro stores to which it had delivered the goods. Unsuccessful attempts were made to obtain correct GRR’s. Eventually, this was brought to the attention of the Applicant and their credit control supervisor, Ms Ackerman, advised the Respondent’s Ms Visagie to credit those unpaid invoices and issue them again. The re-issuing of the invoice is denied whereas the crediting thereof is admitted as normal practice whenever GRR’s cannot be secured.

[7] Applicant says that it discovered on 26 January 2006 that the Respondent was running a fraudulent scheme. The fraud lies in the Respondent issuing invoices to Metro, crediting them and then re-issuing them once again. This is said to have resulted in an aggregate loss of R468 000.00 to the Applicant. The questionable GRR’s came to the attention of the Applicant in October 2005. The Applicant discovered in January 2006 that the invoices relating to the questionable GRR’s were re-issued in November 2005.

[8] On 30 January 2006 the Applicant sent one of its officials to conduct an audit of the Respondent’s accounting in respect of the Applicant’s business in the North West Province. All the books and documents were given to him by the Respondent. Some discrepancies were picked up and some handwritten entries were made in some of the controversial GRR’s. From these observations as well as the re-issued invoices the Applicant concluded that the Respondent:

1. had been conducting dishonest transactions and thereby defrauding the Applicant;

2. had been exercising a rolling invoice scam by generating false or fabricated invoices against orders which were never made by any of the Applicant’s customers, and then selling the products to unknown customers for its own financial gain.

This is the thrust of the Applicant’s case against the Respondent.

[9] Consequent upon the conclusion being reached by the Applicant, that the Respondent was not only dishonest but had actually been defrauding the Applicant, the Applicant’s attorneys wrote a letter of termination dated 31 January 2006 to the Respondent which, inter alia, said:

“The agreement expressly terminated on 01 December 2005. In any event, your conduct in executing the agreement has been comprehensively unacceptable involving, amongst others, dishonest transactions in respect of the recording of invoices and the like to our client’s customers. In the circumstances, and to the extent that the agreement or any aspect thereof may have survived the automatic termination, the agreement or such aspect, as the case may be, is hereby terminated with immediate effect.”

[10] On 03 February 2006, the Respondent’s attorneys wrote back and said that the written contract sought to be cancelled, terminated in or about June 2005 and was replaced by an oral agreement the material terms of which were set out in some detail. That oral contract could be terminated by either party on reasonable notice. The Respondent’s letter went on to say that there had, therefore, been no cancellation of the existing agreement, which is an oral agreement. It also expressed concern about what it says are defamatory accusations of dishonesty levelled against the Respondent by the Applicant. The Respondent also sought to explain away the Applicant’s concerns. The Respondent wrote yet another letter dated 08 March 2006 cautioning the Applicant that it is breaking the material terms of the contract by its failure to use its services, and by instead using the distribution services of an alternative distributor. The Respondent threatened to take the matter to Court for an order enjoining the Applicant to use its services.

[11] The next step taken by the Applicant was to launch an urgent application, which was heard on 10 February 2006. As I said in the introduction, the Respondent was not notified of the application. It was only after the order had been granted and when the Sheriff had to remove the Applicant’s goods which were in the possession of the Respondent, that the latter apparently became aware of the application and the order.

[12] One issue arises from this application and it is basically whether or not the Applicant did cancel the agreement. The granting of the rule nisi and the confirmation thereof in this matter, depends on whether or not there was a valid cancellation of the agreement. All other things are ancillary. In determining this issue, it has to be decided whether or not fraud was committed by the Respondent and whether or not the Applicant’s letter of 31 January 2006 did effectively bring the contract to an end.

[13] The case against the Respondent is premised on fraud as set out in paragraphs 7 and 8 above. What is particularly striking about these allegations of fraud is that:

1. none of the people responsible for notifying the Respondent of orders placed by the Applicant’s customers has said, that the Applicant never told the Respondent to deliver the goods to which the doubtful invoices relate. It is Mr van den Berg who says so in passing without any substantiation whatsoever;

2. Mrs Ackerman, who admittedly authorised the crediting of the questionable invoices, never questioned the legitimacy of the invoices on the basis that the order to which the invoices purported to relate were never placed by the Applicant’s customers;

3. none of the affected customer stores were individually asked by the Applicant to depose to affidavits to the effect that they either never placed the orders to which the invoices relate or that they never received the goods in question on the date to which the original questionable GRR’s relate. They were also not asked what kind GRR’s they issue when their computers are down. We only have an affidavit from someone based at the Head Office of all Metros denying the Respondent’s allegation that it delivered the goods in question. The Court was not told whether his Head Office computers would be able to capture all transactions at all Metros even if there is a power outage or computers at those stores are down. It is not known whether he spoke to those stores or how he arrived at this conclusion;

4. the Respondent never sought to conceal any of the records and documents on which the allegations of fraud against it are based. On the contrary, we are told that they were all given to Mr Odendaal of the Applicant; and

5. no attempt was made to explore the possibility, together with the Respondent, whether an employee of the Respondent or the stores are dishonest or whether this is simply a mistake which could be explained away if both parties devoted some time and effort to a genuine attempt to get to the bottom of the matter.

[14] A number of possibilities arise from the available facts, but the probable one is that either the Respondent’s Ms Visagie or the Applicant’s Ms Ackerman individually or together made a mistake with regard to the re-issuing of the credited invoices. No facts were advanced to back up the Applicant’s allegation that the Respondent sold its goods to some unknown customers. The totality of the facts before me does not suggest that fraud was committed. I say so because, not only was the Applicant notified of the problem by the Respondent itself, but the Respondent knew that whatever transaction it processed through the Applicant’s computer, the Applicant had access to that information. The Respondent knew that the Applicant, through its linked computer system, had automatic access to all the invoices, and would expect to be paid for the goods which the invoice says will be delivered and demand prove of delivery. It would have been highly idiotic of the directors of the Respondent to think that this would not be picked up. But assuming that fraud was committed, not all the information that is necessary to enable me to arrive at this conclusion was given to me.

[15] Fraud could not, therefore, have been the valid basis for the cancellation of the agreement that existed at the time when letters of cancellation were given by the Applicant to the Respondent. The Applicant was only entitled to give the Respondent a reasonable notice of cancellation of the agreement, in order for that cancellation to be valid.

[16] I say so because the Respondent’s version of the contract in terms of which the parties related appears to be the correct one, to wit, that the written contract ended in June 2005 and was replaced by an oral agreement in terms of which cancellation would be on reasonable notice. The contract on which the Applicant relies is of dubious validity for at least two reasons. When it gave notice of cancellation of the written contract to the Respondent, the contract, even in the Applicant’s own version had come to an end by the effluxion of time. In its Replying Affidavit, the Applicant somewhat changed its position to say that the written contract have been varied orally. This cannot be correct because sub-clause 25.4 of the written contract states that “No addition to, variation, or agreed cancellation of this Agreement shall be of any force or effect unless in writing and signed by or on behalf of the parties.”. The written contract could not, therefore, have been varied verbally. This leads me to another question.

[17] Since the Applicant sought and obtained an order from this Court on an ex parte urgent basis, on the grounds that it had cancelled whatever had survived the automatic termination of its written contract with the Respondent, and no such written contract was in existence when the letter of cancellation was sent to the Respondent, what was cancelled? Since the provisions of clause 25.4 belie any suggestion of an oral variation, what is it or what kind of a contract is it that the Applicant specifically sought to cancel? It would be remembered that it is on the strength of the cancellation that the application was launched. It does not look like the Applicant itself is sure of the contract which it had cancelled, as a result of which cancellation it was granted the rule nisi. On its own vague version, no contract was cancelled. It appears that it did not even cancel the oral agreement relied on by the Respondent since it did not mention it in its founding papers.

[18] In the absence of the cancellation of the agreement in terms of which the parties actually did business together, then no reason existed for granting the rule nisi. Assuming that this is a situation where the Applicant could be said to have purported to cancel the oral agreement, relied on by the Respondent, at the time when it had no adequate ground or reason for doing so and that it thereby repudiated the contract, the Respondent has elected to hold the Applicant to the contract and not to cancel it. The result thereof is that both parties are still bound by the oral agreement the terms of which were outlined by the Respondent.

[19] This then means that the Applicant’s notices of cancellation of the agreement did not amount to the actual cancellation of the existing agreement.

[20] Applicant also sought to rely on the nature of the agreement, that of agency, as the kind of contract that allows the Applicant, as the principal, to cancel without giving reasonable notice. It is not necessary to deal with this issue in any detail suffice it to say that the rule nisi was not sought and obtained on the basis that the nature of the parties’ agreement was that of agency and that the Applicant cancelled the agreement with immediate effect because it is entitled to do so as the principal in an agency agreement. The basis for the cancellation was that fraudulent transactions were performed by the Respondent and as a result of that fraud, there was no need to give a reasonable notice. The Applicant’s application stands or falls by its founding affidavit. It is too late to change or to add a fundamentally different ground to the original ground for seeking the order. Had the Applicant always intended to rely on agency, then it would not have had to work so hard, trying to prove fraud or dishonesty as it did.

[21] This Court was not given any sound reason why the application for the interim order, with its serious implications for the Respondent, had to be proceeded with on an ex parte basis. The Applicant knew all the facts that it relied on for that application by 30 January 2006 already. It is not clear what had suddenly rendered the matter so urgent on 10 February 2006 that the Respondent could not even be notified of the application. On the papers, this appears to be more of a case of a mistake by the Respondent failing to ensure that the customers give it correct GRR’s on the spot, or following this up with the leadership of each store promptly and a possible misunderstanding with regard to the re-issuing of invoices than a case of fraud. There are also problems relating to the cancellation itself. No case for the confirmation of the rule nisi was made out. The rule, therefore, stands to be discharged.

[22] The Respondent has asked for costs on a punitive scale. I am not satisfied that a case was made out for costs on that scale. After all, it is not that the Applicant took these steps for no rhyme or reason. The Respondent had given the Applicant cause to be concerned.

[23] Accordingly, the following order is made:

“The rule nisi is discharged with costs.”

__________________

M.T.R. MOGOENG

JUDGE PRESIDENT OF THE HIGH COURT

APPEARANCES

DATE OF HEARING : 23 MARCH 2006

DATE OF JUDGMENT : 06 APRIL 2006

COUNSEL FOR APPLICANT : ADV H. LEVER SC

COUNSEL FOR RESPONDENT : ADV B. LEECH

ATTORNEYS FOR APPLICANT : MINCHIN & KELLY INC.

(Ins. by Mervyn Taback Inc.)

ATTORNEYS FOR RESPONDENT : SMIT STANTON INC.

(Ins. by Werksmans Attorneys)

---