---

REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA

(CAPE OF GOOD HOPE PROVINCIAL DIVISION)

CASE NO 7176/O2

DATE: 28 JANUARY 2015

Reportable

In the matter between:

CAPE EMPOWERMENT TRUST LIMITED.........................................................................Plaintiff

And

FISHER HOFFMAN SITHOLE............................................................................................Defendant

Matter heard: 17-20, 23-26, 30 August 2004; 27, 29, 30 September 2004

Judgment delivered: 28 January 2005

JUDGMENT

BINNS-WARD AJ:

Introduction

[1] Cape Empowerment Trust Ltd, a listed black economic empowerment company, claims just under R10 million in damages from the erstwhile Cape Town partnership of auditors and accountants, Fisher Hoffman Sithole (‘FSH’), in compensation for the loss it sustained as a result of allegedly having been induced, by the negligent misstatements made by one of the partners in respect of the profits supposedly earned by a business of a company in the Paradigm group, to ratify and approve a contract that it had concluded for the purchase by one of its subsidiaries of that and other connected businesses.

[2] Consequent upon the watershed judgment in Administrateur, Natal v Trust Bank van Afrika Bpk 1979 (3) SA 824 (A), an action for damages is available in delict under the extended lex Aquilia to a plaintiff who can establish (i) that the defendant, or someone for whom the defendant is vicariously liable, made a misstatement to the plaintiff; (ii) that in making the misstatement the person concerned acted (a) negligently and (b) unlawfully; (iii) that the misstatement caused the plaintiff to sustain loss (generally referred to as ‘pure economic loss’); and (iv) that the damages claimed represent proper compensation for such loss[1].

[3]  The claim in the current case was formulated consistently with the aforementioned broadly outlined cause of action.  Pursuant to an order made in terms of rule 33(4) by a judge in the Third Division, as amended by agreement between the parties immediately before the plaintiff commenced to lead evidence, only the issues in (i), (ii) and (iii) of the aforegoing formulation fall to decided at this stage of the action, it being assumed for that purpose that the plaintiff has suffered a loss of the nature alleged in its particulars of claim.  The questions of whether such a loss has in fact been sustained and, if so, its quantum have been stood over for determination, if necessary, in a second stage trial.  It was acknowledged by the plaintiff’s counsel during argument[2] that the question of legal, as distinct from factual, causation also falls to be decided, if necessary, in the second stage.

[4]        The narration of the facts will be assisted by first identifying the principal entities and personalities involved, as well as certain of the subject matter to which labels were attached during the trial, which I have adopted in the judgment.

4.1        Paradigm Interactive Media Ltd, which later changed its name to Paradigm Capital Holdings Ltd (‘Paradigm’), was a company also listed on the Johannesburg Securities Exchange.  It controlled a number of subsidiary companies.  It was a party, qua guarantor in respect of the seller’s obligations, to the agreement in terms of which the Intella business was purchased by a subsidiary of the plaintiff.

4.2        Intella Ltd (‘Intella’) was a wholly-owned subsidiary of Paradigm.  Intella owned the ‘Intella business’ and, qua seller, it was a party to the agreement in terms of which the Intella business was sold to a subsidiary of the plaintiff. .

4.3        The ‘Intella business’ comprised the businesses of AMT Technologies (Pty) Ltd  (‘AMT’), Infotrunk (Pty) Ltd, Voice & Data (Pty) Ltd and Everycard Data Switch (Pty) Ltd, and the entire issued share capital of (and Intella's claims against) United Technologies (Pty) Ltd (a wholly owned subsidiary of AMT).

4.4        The ‘Ubunye debt’ was an amount of either R10 249 800, or R10 262 224 (the difference is explained later), which was recognised in the accounting information provided to the plaintiff as attributable income (gross profit) in the hands of AMT (and therefore in the Intella business) during the 1999 financial year, more particularly during the period 1 March to 30 June 1999.  The income was ostensibly derived from an ‘irrevocable order’ placed with AMT by Ubunye on 31 May 1999 for the purchase of 3106 contracts for the installation of tracking and fare collection systems in minibus taxis.  The ostensible transaction was supported by an invoice (‘the Ubunye Invoice’), ostensibly rendered by AMT on 30 June 1999).  I have used the adjectives ‘ostensible’ and ‘ostensibly’ because, as will be described in more detail later, the evidence bore out the plaintiff’s contentions that the written order dated May 1999 and the invoice dated June 1999 were in fact created in October 1999 and backdated.  The order had also in fact been placed with Taxi Link or Taxi Mate, both of which were entities in the Paradigm group, but neither of which formed part of the Intella business[3].  The non-existence of the Ubunye debt as an asset in the Intella business was fundamental to the plaintiff’s claim.  The characterisation of the Ubunye debt as income in the Intella business underpinned the independent reporting account’s report and the profit certificate issued by the defendant in October and December 1999, respectively.  The alleged negligent misstatements upon which the plaintiff relies in the action were contained in these documents.

4.5        The ‘Safrican loan’ consisted of a loan of R3 million by the insurance company, Safrican, to Fullimput 35 (Pty) Limited, a company in the Paradigm group, which traded under the name of Londalozi.  Although the transaction had nothing to do with AMT, the R3 million was recorded in AMT's financial statements as income accrued during the 1999 financial year and was accepted as such when the FSH independent reporting accountant’s report was compiled and also when Nield (see paragraph 4.8, below) made a statement confirming the extent of the profits of the Intella business, during December 1999. 

4.6        H Investments No 194 (Pty) Ltd (H194) was at all material times a wholly-owned subsidiary of the plaintiff company.  It was a party, as purchaser, to the agreement in respect of the acquisition of the Intella business.

4.7        Mr Shaun Rai (‘Rai’) was a director and the chief executive officer of the plaintiff company. He was the principal witness in the trial.

4.8        Mr Justin ‘(Billy)’ Nield (‘Nield’) was a partner in the defendant firm.  He is the person alleged to have been responsible for the negligent misstatements on which the action has been founded.  It was common cause that Nield acted at all material times in the course and scope of his capacity as a partner in the defendant.  Nield was registered as an accountant and auditor in terms of the Public Accountants' and Auditors' Act 80 of 1991.  He was also the ‘engagement partner’ responsible for the audit of the Paradigm Group in the relevant period for the purpose of the consolidated financial statements required in terms of the Companies Act.  In this capacity he interacted with the auditors responsible for the audits of the various subsidiary companies in the group- for the purpose of this case his interaction with the Johannesburg partnership of FSH, which was responsible for the audit of AMT was the most material.

4.9        Mettle Limited (‘Mettle’) was the so-called ‘corporate adviser’ to the plaintiff in respect of the implementation of the agreement.  A corporate adviser, in the relevant sense, is responsible to its client for the logistical management of the implementation of the agreement.  Owing to the nature of the agreement and the character of certain of the principals to the agreement as listed companies, certain formalities had to be observed, including the requirements of the Johannesburg Securities Exchange (‘the JSE’).

4.10           Bohumi Corporate Finance (Pty) Ltd (‘Bohumi’) was a subsidiary of Paradigm. It was also the corporate adviser to Paradigm for the purposes of the agreed transaction.

[5]        On 23 August 1999, the plaintiff, H194, Paradigm and Intella concluded a sale of business agreement. 

[6]        In terms of the agreement, H194 purchased the Intella business from Intella. The agreement provided for the payment of a purchase consideration in a maximum amount of R147 million.  I say a ‘maximum amount’ because the agreement provided various formulae in terms of which the price fell to be adjusted downwards in the event of the profit warrantees provided in the contract not being met.  R137 million was payable 90 days after the ‘closing date’  -i.e. 10 days after the last suspensive condition had been fulfilled or waived  - and the balance of R10 million would be payable one year after closing date.

[7]        One of the profit warranties by Intella in the agreement (it was contained in clause 2.15 of appendix 2 to the agreement[4]) warranted that the profits earned by the Intella business for the four month period from 1 March 1999 up to and including 30 June 1999  (‘the warranty period’) would not be less than R10 million (‘the warranted profits’).

[8]        In terms of a suspensive condition, the contract was subject to approval by the boards of directors of the plaintiff and Intella.  The plaintiff’s board resolved to approve the agreement at a meeting held on 20 September 1999. 

[9]        Amongst the other suspensive conditions was one requiring the approval of the agreement by the shareholders of the plaintiff at a general meeting.  For this purpose, and in compliance with JSE requirements, on 12 November 1999, the directors of the plaintiff issued a circular to shareholders.  In the circular, the directors of the plaintiff stated that they believed that the agreement was fair and reasonable and to the benefit of the plaintiff's shareholders;  that, qua shareholders, they intended to vote at the general meeting in favour of approving the agreement;  that they had considered all statements of fact and opinion in the circular and considered them to be correct;  and that they accepted full responsibility for the accuracy of the information in the document.

[10]     During October 1999, also in compliance with JSE requirements, a so-called independent reporting accountant's report was rendered and incorporated as an appendix to the aforementioned circular to the plaintiff's shareholders.  As mentioned, Nield of FSH was responsible for the report.  It is apparent from the report itself, and this was confirmed more than once during the course of Rai’s evidence (the witness variously used the terms ‘mandated’ and ‘engaged’), that it was prepared by FSH on the plaintiff’s instruction.

[11]     The following statements in the report were alleged by the plaintiff to have been false and to have been made negligently by Nield:

11.1        That the attributable income[5] of the Intella business for the financial year ended 30 June 1999 was R9 141 000.

11.2        That there were no material events in the Intella business subsequent to 30 June 1999 which were not in the ordinary course of business.

11.3        That the pro forma financial information in the reporting accountant's report had been extracted from the audited financial statements of the relevant companies whose businesses formed part of the Intella business, inter alia, for the financial year ended 30 June 1999

[12]     The statements described in paragraphs 11.1 to 11.2, above were false, according to the plaintiff, in that-

12.1        Having regard to ‘the Ubunye debt’ and ‘the Safrican loan’ (described in summary above), the Intella business had in fact made a loss during the 1999 financial year.

12.2        By October 1999 the Ubunye debt, being an element of the reported attributable income of the Intella business which was fundamental to the represented gross profit earned by the business (without it, the business would have shown a loss), had not been paid.  The plaintiff contended that this fact ought therefore to have been mentioned in the reporting accountant’s report, and the financial statements qualified accordingly.

12.3        The statement that the pro forma financial information in the reporting accountant's report had been extracted from the audited financial statements of the relevant companies whose businesses formed part of the Intella business was, in part, not true, because no audited financial statements existed for the financial year ended 30 June 1999 in respect of AMT, Voice & Data (Pty) Ltd and Everycard Data Switch (Pty) Ltd.

[13]     The independent reporting accountant's report did not purport to be product of an audit exercise.  It did, however, state that the pro-forma financial information contained within it had been extracted from the audited financial statements of the relevant companies for various financial years including that ended June 1999; all of which, according to the report, ‘were reported on without any audit qualification’.  The report pointed out that the review of the relevant financial statements ‘did not constitute an audit and accordingly may not reveal all material facts’.  It furthermore recorded that the financial statements that had been reviewed had been prepared ‘on the historical cost basis and in accordance with Generally Accepted Accounting Practice’.  Paragraph 5 of the report, s.v. ‘Directors’ Responsibility’ stated ‘The directors of Cape Empowerment Trust are responsible for the preparation of the circular of which this report forms part and all the information contained therein.’

[14]     A meeting of the plaintiff’s shareholders was convened on 6 December 1999 to consider the approval of the sale of business agreement.  The date of the shareholders’ meeting had been mentioned in the introduction to the independent reporting accountant’s report.

[15]     In preparation for the meeting, Rai requested a certificate from FHS, whom he understood had by then completed the annual audit of Intella in respect of the relevant period, to confirm that the warranted profits for the abovementioned warranty period had been not less than R10 million. 

[16]     In this respect it should be mentioned that prior to the actual conclusion of the contract, but plainly in anticipation of the signature of a deed of agreement, a financial due diligence investigation of the proposed transaction by accountants Arthur Andersen had been undertaken at the instance of the plaintiff.  Prior to the signature of the agreement, Arthur Andersen produced a financial due diligence report, which was qualified as having been compiled on the basis of unaudited management accounts. 

[17]     The agreement also provided expressly for a further right of due diligence investigation by the purchaser.  In that connection, the plaintiff had intended that Arthur Andersen’s mandate be extended to provide assurance on the basis of audited accounts.  Early during the course of that investigation, however, Arthur Andersen had complained about the absence of properly written up accounting records in the Intella business.  Rai had discussed this problem with Messrs Pheiffer, Havenga and Alberts of Paradigm/Intella.  They had explained the difficulty as being in part due to the indisposition of the relevant financial manger and his recent replacement as financial officer by Pheiffer.  Paradigm’s representatives had also countered by themselves complaining that Arthur Andersen’s investigations were interfering with the efficiency of the Intella statutory annual audit, which was reported then to be in the process of completion.  In the circumstances it was agreed between the plaintiff and Paradigm/Intella’s representatives, in or about September 1999, that the plaintiff would be content to accept an audit certificate from Intella’s auditors in lieu of a second due diligence investigation by Arthur Andersen. 

[18]     The request made by Rai for the auditor’s certificate before the shareholders’ meeting was predicated on this subsequent agreement.  Indeed, during his evidence under cross-examination, Rai indicated that, at the time, he had been under the mistaken belief that the provision of the certificate was required to satisfy an unfulfilled suspensive condition in the agreement -the belief presumably arose as a consequence of its relationship in his mind with the due diligence investigation which its provision replaced.  Significantly, however, there was no evidence to indicate that FSH or Nield was ever informed of the agreement that an audit certificate from Intella’s auditors would take the place of the contractually stipulated due diligence investigation.

[19]     The plaintiff’s request for the certificate was conveyed in an email, dated 1 December 1999, from Ms Sharron McPherson of Mettle to Mr Werner Alberts of Bohumi.  Alberts forwarded it to Nield.

[20]     The email setting out the request had the subject line ‘CET-Intella Transaction-Suspensive Conditions’[6]. The body of the message went as follows:

‘Dear Werner

In preparation for the meeting of the shareholders of Cape Empowerment Trust on Monday, 6 December 1999, I am preparing a schedule of remaining items that need to be addressed beforehand.  As you may know, in section 2.15 of Appendix 2 to the sale of business agreement, Intella warrants to Cape Empowerment Trust that the reportable profits earned from the Intella business for the period 1 March 1999 through 30 June 1999 will not be less than R10 million.

Kindly have Fisher Hoffman Sithole prepare a certificate confirming the foregoing and forward it to me at your earliest convenience.  As always, please feel to reach me (sic) on my cell at ….if you have any questions concerning this matter.

With regards

Sharron L. McPherson’

[21]     Nield responded to the request by sending an email message to Ms McPherson.  The plaintiff’s representatives referred to this email during the trial as ‘the profit certificate’.  No particular significance attaches to the label and it is convenient to adopt it.  Nield’s email, under the subject line ‘Intella Earnings’, read:

‘Dear Sharon (sic),

I refer to your Email to Werner Alberts and advise that the after tax earnings for the Intella Group for the year ended 30 June 1999 as reported in the published results of Paradigm amounted to R9,141 million.

The Intella Group had incurred a substantial loss for the period 1 July to 28 February 1999. Unfortunately, I do not have the breakdown between the two periods but I am satisfied that the after tax profit of the Intella Group for the period 1 March 1999 to 30 June 1999 amounted to in excess of R10 million.

Regards

Billy Nield’

[22]     Rai testified that it was contextually apparent that when he referred in the profit certificate to the ‘Intella Group’, Nield meant thereby to refer to the Intella business.  The defendant’s counsel did not attempt to contradict this interpretation, correctly so.

[23]     The statement in the profit certificate that the Intella business had made a profit in excess of R10 million during the relevant period was incorrect for the reasons already referred to in paragraph 11.1 and 12.1, above.  It should be explained that Rai had been informed by various directors of Paradigm and Intella during the negotiations preceding the conclusion of the agreement that the Intella business had been loss-making (to the extent of about R600 000[7]) during the first part of the 1999 financial year, but that it had experienced a turnaround in fortunes connected with a contract to supply fare and route monitoring equipment to the taxi industry.  Accordingly, a reported profit of R9,141 million for the year would not be inconsistent with an after tax profit of R10 million during the last four months of the year.

[24]     The information set out in Nield’s emailed profit certificate gave the plaintiff’s directors and shareholders no information that could not already be deduced by them from the pro-forma financial information included in the independent reporting accountant’s report, described above, read with the information contained in appendix 4 to the sale of business agreement.  Its significance, however, was the character ascribed to it by its recipients: namely, that it was considered to be an independently warranted indication of the achieved profit confirmed by audit.

[25]     Unbeknown to the plaintiff, because its directors and advisors had not been sufficiently astute to the detailed provisions of the agreement, the approval of the agreement by the members in general meeting occurred after the stipulated time for the fulfilment or waiver of the suspensive conditions had elapsed.  Accordingly, the approval was ineffectual in law because the agreement had automatically failed through want of timeous fulfilment of certain of the suspensive conditions.  All the parties to the agreement nevertheless proceeded to implement the agreement as if it were valid and effective.

[26]     At the end of February 2000, the first R137 million payment in respect of the purchase price was paid and the plaintiff, through H194, formally took over the Intella business.  The mechanics of the financing and payment of the purchase price were somewhat complex.  It is not necessary to describe them in all their detail.  Of importance, the purchase price was not paid to Intella, as contemplated in the agreement;  instead, at the request of Intella, the money was paid to Paradigm.  The funds to make the payment were borrowed by H194 from a company in the PSG Bank stable, referred to in evidence as Guaret No.2.  The plaintiff guaranteed the repayment of the loan by H194.  Suffice it to say that the financing structure included a subscription by Bohumi, as underwriter, for various ordinary and preference shares in the plaintiff company at a placement value of R137 million.  The latter transaction occurred in terms of what was referred to as ‘the underwriting agreement’.  The only relevance of this (which will emerge later) is that it created a potential liability by the plaintiff to Bohumi in the event of the agreement being cancelled, or in the event of it seeking restitution on the basis of the agreement actually having lapsed.  The plaintiff would be unable to financially unscramble the egg upon such an event because after the payment of the purchase price to Paradigm, Intella, the seller to which H194 would have to look for repayment, was left effectively as an empty shell.  Bohumi, of course, was a stranger to the sale of business agreement.

[27]     It was only after the plaintiff took over the Intella business that Rai, sometime in March or April 2000, first came to suspect that the Ubunye debt might be fictitious.  He and his fellow directors had at all material times been aware that the debt remained unpaid and that there might be problems in obtaining payment.  Nevertheless, the fact that the business which ostensibly gave rise to the Ubunye debt had been done was regarded by them as affording a valuable entrée to what they perceived would be the lucrative line of business that could attend the renewal (‘recapitalisation’) of the informal taxi fleets in the country, which had been announced by government.  At a meeting in early 2000 with members of SATACO (the South African Taxi Council), Rai enquired as to how the 3000 or so fare collection and vehicle tracking devices supposedly supplied in terms of the Ubunye transaction were performing.  He was informed that nothing approaching that number of units had been installed.  As a consequence of this disturbing news, as well as his disquiet at unexpected cashflow problems which had manifested in the acquired business (the detail of which it is unnecessary to describe), Rai asked Mr. Pheiffer, now chief financial officer of H194[8], to furnish him with the source documentation vouching the transaction.  It was in this context that Rai first saw the Ubunye invoice, dated 30 June 1999. 

[28]     Rai was able to confirm that only a small quantity of the units had actually been installed.  Many of the units, or parts of them - the operation of the fare collection and vehicle tracking devices was integrated in such a way that the unit could work only if both parts were fitted - were still in the storeroom.  According to Rai, whose evidence in this regard was subsequently confirmed by Mr Berne van der Laar, who had been employed by Paradigm in late 1999 through to February 2000 to crisis manage the business of Taxi Link, sufficient units to actually fulfil the Ubunye order had in fact never been purchased.  Payment had not been made for the units which had been delivered and the supplier was unwilling to make further deliveries without settlement.  Furthermore, to the best of van der Laar’s knowledge, Taxi Link was the only company in the Paradigm group that was involved in the business of supplying the relevant units to the taxi industry; although he did understand that the installation team had come to the company from AMT.  An analysis of the available relevant accounting records by Mr Hudgson, an accountant called by the plaintiff to give evidence as an expert, confirmed that the taxi unit business had been conducted by H120 Investments (Pty) Ltd trading as Taxi Link. 

[29]     Anomalously, however, the audit working papers in respect of the group audit of Intella indicated a provision of about R10 million in respect of revenue anticipated in respect of future sales, apparently in respect of taxi units, in AMT.  This provision had been included in the calculation of AMT’s income for the financial year ended 30 June 1999.  The inclusion of the provision as attributable income in the Intella financials was not in accordance with acceptable accounting standards, as determined by the Institute of Chartered Accountants.  The provision could validly have been treated as income if the accounting practice of the company had been to treat income as having accrued when invoices were issued (a basis reported in the Arthur Andersen due diligence report, produced for the plaintiff on 2 August 1999, as indeed being the practice in the Intella business).  In the present case, however, where the indications are that the relevant invoice had in fact not been issued and the goods had not been delivered, the inference is compelling that the provision, and its inclusion as income in the hands of AMT, was contrived as a basis to support the turnaround in fortunes represented to the plaintiff by the representatives of Paradigm and Intella in the negotiations which preceded the sale of business agreement.  The objective indications certainly lend credence to the report which Mr van der Laar said he received from Pheiffer in January or February 2000, when the latter showed him the Ubunye invoice.  According to van der Laar, Pheiffer had explained that the invoice had been ‘created to generate an inflated value in a set of books which would enable a business transaction’.

[30]     The plaintiff company, upon discovering some of the aforementioned facts, immediately took the matter up with Paradigm.  Negotiations ensued, in which the plaintiff was represented by an attorney.  It was only at that stage, according to Rai, that the plaintiff’s directors first became conscious of the fact that the sale of business agreement had actually lapsed as a consequence of the non-fulfilment within the stipulated time period of certain of the suspensive conditions to which the agreement had been subject.

[31]     A number of settlement proposals were exchanged between Paradigm and the plaintiff.  Rai testified that the settlement proposal most attractive to the plaintiff was an effective cancellation of the transaction with the parties being put back into the position they were prior to the implementation of the agreement.  However, before this proposal could be advanced further, the plaintiff was informed that it ‘was no longer on the table’ and Bohumi instituted an application for the compulsory winding up of the plaintiff company.  If, as appeared to be the case, the agreement in respect of the purchase of the Intella business had failed, so had the underwriting agreement in terms of which Bohumi had acquired certain shares in the plaintiff.  The plaintiff was in no position to hold off Bohumi’s claim while it proceeded with a probably lengthy and uncertain process of seeking to recover the R137 million purchase price from Intella or Paradigm.  However, until the purchase price could be recovered it was unable to meet Bohumi’s claim.

[32]     Caught in a commercial pincer movement, the plaintiff company concluded, realistically it would seem, that it had no alternative in the circumstances, if it were not to perish, but to settle with the Paradigm interests even if the terms of the settlement were not exactly favourable.  The result was a settlement agreement, which was entered into in July 2000 between Paradigm, Bohumi, Intella (all represented by Michael Tracy Forster, the group managing director of Paradigm) and the plaintiff and H194 (both represented by Rai). 

[33]     The settlement agreement acknowledged that the sale of business agreement and the underwriting agreements had lapsed due to the non-fulfilment of the suspensive conditions and provided for the ‘reinstatement’ of the lapsed agreements with retrospective effect, subject to certain amendments.  The parties to the agreements recorded that the suspensive conditions to which the sale agreement and the underwriting agreement had been subject were deemed to have been fulfilled, alternatively to have been waived.  Paradigm and Intella admitted being liable to H194 in respect of the Ubunye claim as a breach of warranty and admitted that the debt was not collectable.  Paradigm settled this claim by delivering, on behalf of Intella, 15 million ordinary shares in the plaintiff company to H194’s nominee.  (Paradigm had acquired these shares pursuant to the underwriting agreement in the context of the implementation of the sale agreement at the end of February 2000.).  Bohumi waived the fee to which it had been entitled under the underwriting agreement.

[34]     A copy of the settlement agreement was annexed to the defendant’s plea.  The defendant relies on the settlement agreement to contend that had the plaintiff rather resciled from the sale of business agreement, or declined to agree to its ‘re-instatement’, it would not have suffered the loss which it now seeks to recover.  This is a factual causation argument which I shall consider later.

[35]     Although the evidence in this respect was not as clear as it might have been, it would seem that it was only sometime during 2001 that the plaintiff gave the first indication of any intention to recoup damages from the defendant.  Proceedings were commenced only in late August 2002.

[36]     It is convenient at this stage to say something about the nature of the loss in respect of which the plaintiff seeks compensation from the defendant.  Its characterisation is relevant because it has a bearing on the wrongfulness element of the claim, in other words it bears on the decision as whether to whether or not the defendant had a duty in law not to cause the loss.  The existence of the alleged duty cannot be determined in isolation from the nature of the loss which its breach is alleged to have caused. 

[37]     The damages were described at paragraph 24 of the particulars of claim as:

‘The loss on Intella investment in the financial statements of plaintiff for the year ended 29 February 2000, which were audited, approved and certified by the defendant, copies of the relevant pages of the said financial statements are annexed ... marked D.’

The relevant part of annexure D to the particulars of claim consists of a note to the group income statement in the plaintiff's relevant financial statement.  The relevant entry in the note is, 'Loss on Intella investment'.  This rather cryptic description is explained in note 26, which is also part of annexure D to the particulars of claim.  Note 26 contains a cross reference to the aforementioned note 6 and reads:

‘26. Subsequent events.

The company has reached a settlement agreement with Paradigm Capital Holdings Limited, Bohumi Corporate Finance (Pty) Limited, and Intella Limited, in respect of a sale of business agreement dated 23 August 1999 and an underwriting agreement of 30 September and 8 October 1999. In terms of a settlement agreement the sale and underwriting agreements are reinstated and deemed to be valid, subject to certain amendments.  The major effect of the amendments is that Paradigm Capital Holdings Limited and Bohumi Corporate Finance (Pty) Limited have waived their rights to receive the preference shares of R72 million and the renounceable letters of allocation in respect of the preference shares issued in terms of the sale agreement.  In addition to the above, the parties have resolved all uncertainties regarding the Intella transaction, by cancelling the transaction effective 1 March 1999.  The resultant effect of this decision is that Cape Empowerment Trust Limited has lost R9,9 million, which has been disclosed in an income statement (refer to note 6).’

Inasmuch as those allegations do not make the actual make-up of the loss entirely clear, Mr Gautschi SC, who, together with Mrs Guidozzi, appeared for the plaintiff, informed me during argument that the damages claim was made up of the sum of various items of wasted expenses which the plaintiff had sustained as a consequence of the conclusion of the sale agreement.  One item of such expenditure, which was referred to in passing during the evidence, was a R2 million ‘success fee’ which had been paid by the plaintiff to Mettle[9].  There was no request for trial particulars from the defendant in respect of the make up of the damages claim[10]; however, the written heads of argument put in by the defendants’ counsel confirmed that they understood the nature of the loss to be as described to me by Mr Gautschi[11].  It must be understood that this judgment is predicated on the nature of the loss claimed being as described to me by the plaintiff’s counsel[12]. 

The approach to the determination of wrongfulness

[38]     Although it was denied on the pleadings that Nield had been negligent in the making of the relevant statements, the defendant’s counsel did not advance any argument against the cogency of the evidence of the expert witnesses called by the plaintiff to say that he had been.  Instead, they focussed their argument on the elements of wrongfulness and causation.  I think that their approach was the correct one in the circumstances.  For reasons that will be explained, it will be necessary nevertheless to consider the respects in which Nield was negligent in some detail later.

[39]     Whether or not the making of a negligent misstatement causing financial loss occurs in circumstances which render its making unlawful depends on all the particular circumstances of the case and in essence the decision whether to grant or withhold a remedy in delict is made on grounds of legal policy.  Claims in delict (or tort) for pure economic loss are recognised in other common law jurisdictions and it is clear from a consideration of reported judgments, not only in South Africa, but also in England, Australia, New Zealand and Canada following on Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] AC 465; [1963] 2 All ER 575 (HL)[13] that the importance, as a matter of legal policy, of keeping extra-contractual liability for negligent misstatement within reasonable bounds has been generally recognised[14].  Notwithstanding the peculiar basis of the claim in South African law under the extended Aquilian action, it is accepted that the approaches adopted in foreign common law jurisdictions in respect of determining the existence of a legal duty of care and delineating the limits of delictual liability for pure economic loss may usefully be considered[15].  In a matter like this, where the extent of the extra-contractual liability of accountants and auditors for negligent misstatement arises for determination, the question of how and in what circumstances liability should attach has enjoyed close attention and public interest in other jurisdictions, particularly during the last 15 years or so, and a consideration of the approaches to the problem adopted there is undoubtedly instructive, particularly as the claim arises in respect of an area of professional enterprise or activity where a trend towards the development of global norms is not only desirable, but inexorable – and the relevant legal policy considerations are likely to be very similar, if not the same as in South Africa.

[40]     Indeed in Standard Chartered Bank of Canada v Nedperm Bank Ltd [1994] ZASCA 146; 1994 (4) SA 747 (A) (which concerned a claim based on the negligent misstatement by a commercial bank as to its customer’s creditworthiness which resulted in the plaintiff extending a line of credit and consequently suffering loss upon the customer’s financial collapse – a matter with implications distinctly analogous to those which arise in the current case[16]), Corbett CJ, while making it clear that the case was not being decided on the basis that an English court might, nevertheless used the approach exemplified in Caparo Industries plc v Dickman and Others [1990] UKHL 2; [1990] 2 AC 605; [1990] 1 All ER 568 (HL) and certain subsequent English judgments as a measure of confirmation of the conclusion he had reached independently applying the principles and tests discernible from the judgments in Administrateur, Natal, supra; Siman & Co (Pty) Ltd v Barclays National Bank Ltd 1984 (2) SA 888 (A) at 913F-914C; International Shipping Co (Pty) Ltd v Bentley 1990 (1) SA 680 (A) at 694D-I and Bayer South Africa (Pty) Ltd v Frost [1991] ZASCA 85; 1991 (4) SA 559 (A)  at 568D-F, 574I-575D.

[41]     While he did not pretend to overlook its mixed fortunes in the different common law jurisdictions, Mr Gautschi, submitted that it would be appropriate to approach the determination of the element of wrongfulness using the two stage test famously described by Lord Wilberforce in Anns v. Merton London Borough [1977] UKHL 4; (1978) AC 728 at 751-2 [17], with its implication that if a relationship of sufficient proximity exists between alleged wrongdoer and the person who suffered damage that, in the reasonable contemplation of the former, carelessness on his or her part may be likely to cause damage to the latter, a prima facie duty of care is established which, in the context of a second stage enquiry, requires a determination of whether any considerations should be found to negative, reduce or limit the scope of the prima facie established duty..  The influence of the test can be seen in Siman & Co, supra, and in International Shipping, supra[18].  The ‘Anns test’ would also appear to have been accepted as an appropriate approach by the trial court in Pilkington Brothers (SA) (Pty) Ltd v Lillicrap, Wassenaar and Partners 1983 (2) SA 157 (W) at 167F-168D – although the essence of the judgment on appeal in Lillicrap, Wassenaar and Partners v Pilkington Brothers (SA) (Pty) Ltd 1985 (1) SA 475 (A) would support the criticism of the test expressed in the High Court of Australia by Brennan J in Sutherland Shire Council v. Heyman (1985) 157 CLR 424 (1985) 60 ALR 1 [19](a case concerning the alleged liability of a local authority to pay compensation to a subsequent owner in respect of the construction defects allegedly arising out of its failure to ensure that a building was erected strictly in accordance with the plans approved by the local authority in terms of a statutory power), to which I shall return below.  The ‘Anns test’ has been abandoned as an adequate or self-contained approach in the land of its birth, as appears from the further development (described below) of the approach to determining whether a duty in law not to negligently occasion pure economic loss to another should attach.  The ‘Anns’ test has, however, been reaffirmed by the Canadian Supreme Court on a number of occasions and it continues to be used in New Zealand.  In Cooper v. Hobart, [2001] 3 S.C.R. 537, 2001 SCC 79, the operation of the ‘Anns’ test in Canada was, however, explained in a way which made it apparent that much more than foreseeability of harm was included in that Court’s conception of the first leg of the two-stage Anns test enquiry.  And more recent decisions in New Zealand[20] suggest that there too, a more nuanced approach is adopted than the originally stated Anns test would imply.

[42]     In Bank Of Credit And Commerce International (Overseas) Limited (In Liquidation) and Others v Price Waterhouse and Another[21], (‘the BCCI case’) (a judgment on exception in respect of a claim in tort by the liquidators of a company against the company auditors) a useful summary is provided of the various approaches, distilled into three categories, which the English courts have adopted since about 1990, in what Sir Brian Neill (sitting in the Court of Appeal) described as ‘the search for a principle or test by which the existence or presence of liability [for pure economic loss] in any particular circumstances can be tested’.  He demonstrated that in English law the search has followed three separate but parallel paths:

 (i) the so-called ‘threefold test’ enunciated by Lord Griffiths in Smith v. Eric S. Bush[22] which focuses on three questions:

(a) Was it reasonably foreseeable that the plaintiff would suffer the kind of damage which occurred?

(b) Was there sufficient proximity between the parties?

(c) Was it just and reasonable that the defendant should owe a duty of care of the scope asserted by the plaintiff? [23]

(ii) the ‘assumption of responsibility’ test expressed by Lord Goff in Henderson v. Merrett Syndicate Ltd [24] as a responsibility in law ‘rest[ing] upon a relationship between the parties [voluntarily accepted or undertaken] which may be general or specific to the particular transaction, and which may or may not be contractual in nature’ and further explained by Lord Browne-Wilkinson in White v. Jones[25], ‘.... the assumption of responsibility referred to is the defendants' assumption of responsibility for the task, not the assumption of legal liability. Even in cases of ad hoc relationships, it is the undertaking to answer the question posed which creates the relationship. If the responsibility for the task is assumed by the defendant he thereby creates a special relationship between himself and the plaintiff in relation to which the law (not the defendant) attaches a duty to carry out carefully the task so assumed’.  (In Pinshaw v Nexus Securities (Pty) Ltd and Another 2002 (2) SA 510 (C) at 535B, Comrie J remarked  ‘The English law doctrine of the assumption of personal responsibility, and reasonable reliance thereon, is not part of our law and accordingly the doctrine as such does not afford a solution. The doctrine is the product of a troubled juridical history, it has not been unqualifiedly received in Canada or Australia, and I think we are better off without it. Nonetheless, questions of proximity, professed skills and reliance thereon are not irrelevant policy considerations in our law when determining the issue of wrongfulness.’  (To which I would add, as may be deduced from Sir Brian Neill’s conclusions set out below[26], that the ‘doctrine’ would not appear to apply mechanically, or as an unequivocal basis for the attachment of liability even in English law where, as I understand, a wide and indeterminate range of factors peculiar to the individual case fall to be considered to decide whether the criteria for satisfying the test should be held to have been satisfied.))

(iii) ‘the incremental approach’, which I understand to be the gradual development of established categories of case where the existence of a duty in law is implied; the rationale for this approach being the general undesirability of judicial development of the common law occurring radically, rather than in measured steps in general accord with established guiding principles.  The philosophy expressed in this approach finds resonance in the judicial approach to extension of remedies in our own law.  Compare, for example, Wagener v Pharmacare Ltd; Cuttings v Pharmacare Ltd 2003 (4) SA 285 (SCA), at paragraph [30]; Lillicrap, Wassenaar and Partners v Pilkington Brothers (SA) (Pty) Ltd 1985 (1) SA 475 (A) at 504A-G.  The origin of this third ‘path’ is attributed in the BCCI judgment to a passage in Brennan J’s judgment in the High Court of Australia in Sutherland Shire Council, mentioned earlier.  At the relevant passage, the learned judge signified his disapproval of the conceptual approach inherent in the two stage approach stated by Lord Wilberforce in Anns, supra.  In that context, Brennan J said:

‘Of course, if foreseeability of injury to another were the exhaustive criterion of a prima facie duty to act to prevent the occurrence of that injury, it would be essential to introduce some kind of restrictive qualification - perhaps a qualification of the kind stated in the second stage of the general proposition in Anns.  I am unable to accept that approach.  It is preferable, in my view, that the law should develop novel categories of negligence incrementally and by analogy with established categories, rather than by a massive extension of a prima facie duty of care restrained only by indefinable "considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed”’.

The judgments in Administrateur, Natal, Bayer South Africa (Pty) Ltd v Frost and Standard Chartered Bank of Canada, supra, have established recognition in South African law of the category of delictual claim in issue in this case and the incremental approach therefore does not arise for application.  I have described it at more length than is probably appropriate partly for completeness and partly because the discussion afforded a convenient basis to describe the rejection of the Anns test, which Mr Gautschi, albeit in a different context, invited me to apply.

[43]     Sir Brian Neill concludes his historical survey of the bases on which the existence or not of a duty of care has been determined by the English courts in respect of claims in tort for compensation for pure economic loss by making the following observations:

‘7.19 The fact that all these approaches have been used and approved by the House of Lords in recent years suggests:

(a) that it may be useful to look at any new set of facts by using each of the three approaches in turn, though it may be noted that in some cases, such as Henderson (supra), the use of the incremental approach may be sufficient to show that responsibility has been undertaken.

(b) that if the facts are properly analysed and the policy considerations are correctly evaluated the several approaches will yield the same result. In this context I should refer to the speech of Lord Hoffmann in Stovin v. Wise [1996] UKHL 15; [1996] AC 923. In the course of his speech Lord Hoffmann made reference to the two-stage test (the precursor of the three-fold test) proposed by Lord Wilberforce in Anns v. Merton L.B.C. [1977] UKHL 4; [1978] AC 728. At 949 Lord Hoffmann continued:

"This [the two-stage test] involves starting with a prima facie assumption that a duty of care exists if it is reasonably foreseeable that carelessness may cause damage and then asking whether there are any considerations which ought to 'negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed or the damages to which a breach of it may arise'.. Subsequent decisions in this House and the Privy Council have preferred to approach the question the other way round, starting with situations in which a duty has been held to exist and then asking whether there are considerations of analogy, policy, fairness and justice for extending it to cover a new situation: see for example Lord Bridge in Caparo (supra) ... It can be said that, provided that the considerations of policy etc. are properly analysed, it should not matter whether one starts from one end or the other.

On the other hand the assumption from which one starts makes a great deal of difference if the analysis is wrong. The trend of authorities has been to discourage the assumption that anyone who suffers loss is prima facie entitled to compensation from the person (preferably insured or a public authority) whose act or omission can be said to have caused it. The default position is that he is not."  [27]

7.20 The threefold test and the assumption of responsibility test indicate the criteria which have to be satisfied if liability is to attach. But the authorities also provide some guidance as to the factors which are to be taken into account in deciding whether these criteria are met. These factors will include:

(a) the precise relationship between (to use convenient terms) the adviser and the advisee. This may be a general relationship or a special relationship which has come into existence for the purpose of a particular transaction. But in my opinion counsel for Overseas was correct when he submitted that there may be an important difference between the cases where the adviser and the advisee are dealing at arm's length and cases where they are acting "on the same side of the fence."

(b) the precise circumstances in which the advice or information or other material came into existence. Any contract or other relationship with a third party will be relevant.

(c) the precise circumstances in which the advice or information or other material was communicated to the advisee, and for what purpose or purposes, and whether the communication was made by the adviser or by a third party. It will be necessary to consider the purpose or purposes of the communication both as seen by the adviser and as seen by the advisee, and the degree of reliance which the adviser intended or should reasonably have anticipated would be placed on its accuracy by the advisee, and the reliance in fact placed on it.

(d) the presence or absence of other advisers on whom the advisee would or could rely. This factor is analogous to the likelihood of intermediate examination in product liability cases.

(e) the opportunity, if any, given to the adviser to issue a disclaimer.’[28]

 

Cf. Standard Chartered Bank of Canada, supra, at 769I-771A.

[44]     The conclusions as to the current approach in English law to the determination of the existence of a duty of care apparent in the aforegoing summary in the BCCI case support the view that there is now in general no obvious difference between it and the policy based evaluation which underlies the determination of wrongfulness in the South African law of delict in respect of acts or omissions causing pure economic loss; cf. Pretorius en Andere v McCallum 2002 (2) SA 423 (C) at 427D-E, where Conradie J remarked: ‘Volgens Anns was voorsienbare skade verhaalbaar tensy daar beleidsoorwegings teen die toestaan van regshulp bestaan het. Beleidsoorwegings word egter sedert Murphy[29] voorop gestel sodat die posisie in die Engelse reg nou is soos dit nog altyd by ons was dat 'n regsplig nie uit blote voorsienbaarheid ontstaan nie, maar uit 'n gebalanseerde beskouing van al die oorwegings wat in 'n bepaalde geval 'n remedie wenslik of onwenslik sou maak. (Administrateur, Natal v Trust Bank van Afrika Bpk 1979 (3) SA 824 (A); Lillicrap, Wassenaar and Partners v Pilkington Brothers (SA) (Pty) Ltd 1985 (1) SA 475 (A) te 504E - G.)’.  This makes a comparison between (to adopt Sir Brian Neill’s terminology) the ‘factors’ which are considered most material in determining whether the relevant ‘criteria’ have been satisfied in the common law jurisdictions all the more helpful in matters where the factual bases of claim are comparable- it being emphasised, however, that the exercise provides only a useful assurance mechanism, not a formula or ‘unifying criterion’[30], for which, in respect of policy based decision making, a search is quite futile.

[45]     In the present case both sides sought to offer attractive short cuts which, if accepted, would avoid the need to make a value judgment, based on all the facts, as to whether the defendant’s negligent misstatements were wrongful in the relevant sense.  The defendant’s counsel relied on the judgment in Lillicrap, Wassenaar and Partners v Pilkington Brothers (SA) (Pty) Ltd 1985 (1) SA 475 (A) to argue that in the circumstances a delictual remedy should not be recognised.  The plaintiff’s counsel, consistently with the pleaded case, relied on the provisions of s 20(9) of the Public Accountants and Auditors Act 80 of 1991 (‘the PAAA’) as a providing a complete basis in public policy to stigmatise the defendant’s negligent misstatements as wrongful.

The effect of the judgment in Lillicrap

[46]     It is convenient to deal firstly with the argument based on the Lillicrap judgment advanced by Mr Oosthuizen SC, who (with Mr Selikowitz) appeared for the defendant.  He submitted that the negligent misstatements made in the independent reporting accountant’s report were made in a contractual context and that there was no need in the circumstances, as a matter of policy, to recognise a delictual remedy co-existent with the contractual remedies which would be available for any negligent failure by FSH to properly fulfil its contractual obligations[31].  The second negligent misstatement (i.e. the profit certificate) was, so the argument went, ‘part of the same contractual engagement’ because there had been ‘no second and separate engagement of Nield for purposes of performing any audit or review work for purposes of the …email’[32]

[47]     By way of a preface to the discussion of this argument it is appropriate to point out two things: firstly, the plaintiff’s particulars of claim unambiguously plead a claim in delict based on negligent misstatement – the pleading does not allege a contractual relationship between the plaintiff and the defendant at all; secondly, the defendant’s plea also does not invoke reliance on any contractual provision governing the parties’ mutual relationship to exclude or limit the general duty in law alleged by the plaintiff.

[48]     As a matter of general principle there is no obstacle to the recognition of co-existent contractual and delictual remedies in the sense of a modern concursus actionum.  That much was expressly acknowledged in the Lillicrap judgment, where Grosskopf AJA, writing for the majority, observed (at p.496G-I):

‘In modern South African law we are of course no longer bound by the formal actiones of Roman law, but our law also acknowledges that the same facts may give rise to a claim for damages ex delicto as well as one ex contractu, and allows the plaintiff to choose which he wishes to pursue. See Van Wyk v Lewis 1924 AD 438; Hosten (op cit at 262); R G McKerron Law of Delict 7th ed at 3; J C van der Walt in Joubert The Law of South Africa vol 8 para 5 at 7 - 11. The mere fact that the respondent might have framed his action in contract therefore does not per se debar him from claiming in delict. All that he need show is that the facts pleaded establish a cause of action in delict. That the relevant facts may have been pleaded in a different manner so as to raise a claim for contractual damages is, in principle, irrelevant.’[33]

[49]     At p.499I of the judgment in Lillicrap, Grosskopf AJA quoted the following passage written by J C van der Walt in LAWSA vol 8 para 5 :

‘The same conduct may constitute both a breach of contract and a delict. This is the case where the conduct of the defendant constitutes both an infringement of the plaintiff’s rights ex contractu and a right which he had independently of the contract.’

The emphasis signified in the underlined words was supplied in the judgment; the clear implication being that a concurrence of actions in contract and delict can properly arise where the act relied upon would constitute the negligent breach of a duty in law on the actor (or non-feasor, as the case might be) irrespective of the existence of the contract, of which it (coincidentally) also might constitute a breach.

[50]     Lillicrap’s case was decided on an exception taken by the defendant in the action to the plaintiff’s particulars of claim.  The case concerned a claim pleaded in delict for compensation for pure economic loss.  The defendant was a firm of structural engineers with which the plaintiff had had a contractual relationship in respect of the provision of professional services.  In the appeal judgment (at 501C) Grosskopf AJA described the pleading of the claim thus: ‘In the present case, the [plaintiff] repeatedly emphasized in its pleadings that it was its detailed requirements, as laid down in the contract between the parties, which defined the ambit of the appellant's obligations.’

[51]     The pertinent grounds of the exception taken in Lillicrap were that the facts pleaded by the plaintiff, in support of its allegation that the defendant owed the plaintiff the alleged duty in law, did not give rise to such a duty, more particularly in the light of -(i) the contractual relationship between the plaintiff and the defendant set out in the particulars of claim; and (ii) the assignment of the agreement by the plaintiff to the main building contractor (my emphasis).

[52]     The Appellate Division, upholding the appeal in Lillicrap against the dismissal of the exception in the court of first instance, decided for reasons of policy that it was inappropriate to extend the Aquilian action to the duties subsisting between the parties to a contract of professional service where the negligence relied upon by a plaintiff seeking to recover damages for pure economic loss consists in the breach of a term in a contract.  See Holtzhausen v Absa Bank Limited SCA case no. 280/03; judgment dated 17 September 2004 (as yet unreported).  In other words, the decision in Lillicrap, being a hearing on an exception, turned on the manner in which the claim had been pleaded[34].  The decision does not imply that the plaintiff in that case could not have reformulated its claim to properly plead an action in delict[35].

[53]     On the pleadings, the present case does not bring itself within the ambit of the policy basis for excluding delictual relief in the Lillicrap case[36].  Insofar as the plaintiff relies on the alleged negligent misstatements in the independent reporting accountant’s report, the first question which falls to be answered in this case is has it been established that FSH was under a duty in law to the plaintiff not to make such misstatements.  The existence of a contractual relationship between the parties can have a bearing on the answer, but is not by itself determinative of the question.

[54]     It is difficult to conceive of a rational basis to exclude the operation of a duty in law which an accountant or auditor would owe to a third party not to make a negligent misstatement simply because the accountant has a contract to render professional services to the representee.  On the contrary, the only basis I can think of to justify such an exclusion would be if the terms of the contract were to provide for it; and even then, depending on the context, the exclusion might fail because of a conflict with public policy or boni mores.  The defendant did not seek in this case to rely on any provision in, or incident of its contract with the plaintiff that might have relieved it of any duty which it otherwise had in law not to make a negligent misstatement to the plaintiff, which if made extra-contractually would have rendered it liable in damages. 

[55]     As mentioned, the defendant’s counsel sought to characterise the profit certificate as an extension of the defendant’s contractual appointment by the plaintiff as the reporting accountant.  It was an argument advanced to extend the effect of their reliance on the Lillicrap judgment.  There was no merit in the argument.  As observed earlier, the request for the profit certificate was in fact addressed by the plaintiff in the context of the arrangement it had made with the sellers in lieu of obtaining a further due diligence report as contemplated in terms of the sale of business agreement.

[56]     In my judgment, the defendant’s reliance on Lillicrap was misplaced.

Does the PAAA afford a sui generis statutory delictual remedy?

[57]     Turning to the other short cut offered by counsel, Mr Gautschi argued that the provisions of s 20 of the PAAA impose duties in law on accountants and auditors, the breach of which would constitute wrongfulness for the purposes of the plaintiff’s delictual claim against the defendant.  In this respect the plaintiff pleaded that Nield was registered as an accountant and auditor in terms of the PAAA and alleged that the defendant was liable for the damages it had sustained as a consequence of relying on the misstatements ‘both in terms of section 20(9) of the [PAAA] and under the common law’.  It is also convenient to dispose of this contention in advance of the more general consideration of the alleged wrongfulness of the defendant’s conduct that is ultimately unavoidable.

[58]     It is appropriate in considering the provision relied upon by the plaintiff to have regard to the section as a whole.  Section 20 of the PAAA provides:

‘(1) No person acting in the capacity of auditor to any undertaking shall, without such qualification as may be appropriate in the circumstances, pursuant to any audit carried out by him in that capacity, certify or report or express an opinion to the effect that any financial statement, including any annexure thereto, which relates to such undertaking, presents fairly, or gives a true and fair view of, or reflects correctly, the affairs of such undertaking and the results of its operations, or the matters dealt with in such financial statement or annexure, as the circumstances may require, unless-

(a)        he has carried out such audit free of any restrictions whatsoever;

(b)        proper accounting records in one of the official languages of the Republic have been kept in connection with the undertaking in question, so as to reflect and explain all its transactions and record all its assets and liabilities correctly and adequately;

(c)        he has obtained all information, vouchers and other documents which in his opinion were necessary for the proper performance of his duties;

(d)        he has, in the case of an undertaking regulated by any law, complied with all the requirements of that law relating to the audit of that undertaking;

(e)        he has by means of such methods as are reasonably appropriate having regard to the nature of the undertaking in question, satisfied himself of the existence of all assets and liabilities shown on such financial statement or annexure;

(f)         he is satisfied, as far as is reasonably practicable having regard to the nature of the undertaking in question and of the audit carried out by him, as to the fairness or the truth or the correctness, as the case may be, of such financial statement or annexure;

(g)        any matter referred to in subsection (5) had, at the date on which he so certified or reported, or expressed such opinion, been adjusted to his satisfaction.

(2) No accountant or auditor shall, when acting otherwise than pursuant to an audit, certify or report, or express an opinion, without such qualification as may be appropriate in the circumstances, to the effect that any account, financial statement (including any annexure thereto) or other document relating to the business or financial affairs of any undertaking, presents fairly, or gives a true and fair view of, or reflects correctly, the matters dealt with therein, unless he has mutatis mutandis complied with the provisions of subsection (1) (a), (c) and (f).

(3) If any accountant or auditor or his partner or any person employed by him or his partner or any person working under his supervision and control or under the supervision and control of his partner, was responsible for keeping the books, records or accounts of an undertaking, except to the extent of making closing entries or assisting with any adjusting entries or framing any balance sheet, account, statement or other document from existing records, such accountant or auditor shall, in certifying or reporting on anything in connection with the business or financial affairs of such undertaking, indicate that, as the case may be, he or his partner or a person employed by him or his partner or a person working under his supervision and control or under the supervision and control of his partner was responsible for keeping such books, records or accounts.

(4) Any certificate required to be given or report to be made or opinion to be expressed by an accountant or auditor in his capacity as accountant or auditor pursuant to any assignment carried out by him, shall be given or made or expressed within a period of four months after the date on which the assignment was completed, and if such accountant and auditor is unable to give an unqualified certificate or make an unqualified report or express an unqualified opinion, he shall within the said period give that certificate or make that report or express that opinion subject to such qualifications as he may deem necessary and may, if he considers it advisable, endorse on that certificate, report or opinion the reasons for any such qualification.

(5) (a) If any person acting in the capacity of auditor to any undertaking is satisfied or has reason to believe that in the conduct of the affairs of such undertaking a material irregularity has taken place or is taking place which has caused or is likely to cause financial loss to the undertaking or to any of its members or creditors, he shall forthwith despatch a report in writing to the person in charge of that undertaking giving particulars of the irregularity, at the same time drawing the attention of such person in charge to the provisions of paragraphs (b) and (c) and requesting him to acknowledge receipt of such report in writing.

(b) Unless within 30 days after an auditor has despatched such a report, he has been satisfied that no such irregularity has taken place or is taking place or that adequate steps have been taken for the recovery of any such loss so caused or for the prevention of any such loss likely to be so caused, he shall forthwith furnish the board with copies of the report and of any acknowledgement of receipt thereof and reply thereto and such other particulars as he may deem fit.

(c) The board may disclose any information supplied to it in terms of paragraph (b) to any attorney-general or the Registrar of Banks or any officer in the public service or any member or creditor of the undertaking concerned or any juristic person of whom the undertaking is a member or who has control over the undertaking or who has the power to take disciplinary steps against the undertaking, or to the committee of any stock exchange on which shares of the undertaking are listed, or, if the board believes it to be in the best interests of the public, to any other person, institution or body.

(d) For the purpose of determining whether any irregularity contemplated in this subsection has taken place or is taking place, an auditor may carry out such investigation as he may deem fit.

(e) Nothing in this subsection contained shall be construed as conferring upon any person any right of action against an auditor which, but for the provisions of this subsection, he would not have had.

(6) (a) If any person who was acting in the capacity of auditor to any undertaking immediately prior to its sequestration or liquidation (whether provisional or final), is satisfied or has reason to believe that at or before the date of the sequestration or liquidation a material irregularity in the conduct of the affairs of such undertaking was taking place or had taken place which had caused or was likely to cause financial loss to the undertaking or to any of its members or creditors, and such person did not comply with the provisions of subsection (5) (a) in respect of such irregularity before the said date, he shall forthwith despatch a report in writing, giving particulars of such irregularity, to the person appointed as trustee or provisional trustee, or as liquidator or provisional liquidator, as the case may be, of such undertaking, and at the same time supply copies of such report to the person in charge of such undertaking and to the board.

(b) If any person who was acting in the capacity of auditor to any undertaking immediately prior to its sequestration or liquidation (whether provisional or final) and who has not taken action in terms of subsection (5) (a) or despatched a report in writing in terms of paragraph (a) of this subsection, is at any time requested in writing to do so by the person appointed as trustee or provisional trustee or as liquidator or provisional liquidator, as the case may be, of such undertaking, he shall forthwith inform the person so requesting whether or not a report in writing is required by paragraph (a) of this subsection, and in the event of his informing the person so requesting that such report is so required, he shall forthwith despatch the report to him, and at the same time supply copies of such report to the person in charge of such undertaking and to the board.

(c) The provisions of subsection (5) (c) shall mutatis mutandis apply with reference to any information supplied to the board in terms of paragraph (a) of this subsection, and the provisions of subsection (5) (e) shall mutatis mutandis apply with reference to any provision of this subsection.

(7) An auditor shall, in performing any duty referred to in subsections (5) and (6), have regard to all the information which comes to his knowledge in his capacity of auditor to any undertaking and all the information which comes to his knowledge from any other source.

(8) If a person who has been registered as an accountant and auditor in terms of this Act-

(a) fails to perform any duties devolving upon him in the capacity of an auditor to any undertaking with such degree of care and skill as in the opinion of the board may reasonably be expected; or

(b) is negligent in the performance of such duties,

the board may, whether or not such auditor is liable to be or has been criminally charged or has been convicted in respect of such failure or negligence, inquire into the circumstances, and if such failure or negligence is proved to its satisfaction, impose upon that person any of the punishments prescribed under section 13 (1) (h) which it may deem fit: Provided that no such person shall incur liability to punishment by the board by reason of any opinion expressed by him in good faith as to the value or amount of any asset or liability appearing on the balance sheet in respect of the undertaking in connection with which the audit was carried out, or by reason of his having declined to express any opinion thereon, if the board is satisfied that, having regard to the nature of such asset or liability or any other circumstances, he could not reasonably have been expected to express an authoritative opinion.

(9) Any person registered as an accountant and auditor in terms of this Act shall, in respect of any opinion expressed or certificate given or report or statement made or statement, account or document certified by him in the ordinary course of his duties-

(a) incur no liability to his client or any third party, unless it is proved that such opinion was expressed or such certificate was given or such report or statement was made or such statement, account or document was certified maliciously or pursuant to a negligent performance of his duties; and

(b) where it is proved that such opinion was expressed or such certificate was given or such report or statement was made or such statement, account or document was certified pursuant to a negligent performance of his duties, be liable to any third party who has relied on such opinion, certificate, report, statement, account or document, for financial loss suffered as a result of having relied thereon, only if it is proved that the auditor or person so registered-

(i) knew or could in the particular circumstances reasonably have been expected to know, at the time when the negligence occurred in the performance of the duties pursuant to which such opinion was expressed or such certificate was given or such report or statement was made or such statement, account or document was certified-

(aa) that such opinion, certificate, report, statement, account or document would be used by his client to induce the third party to act or refrain from acting in some way or to enter into the specific transaction into which the third party entered, or any other transaction of a similar nature, with the client or any other person; or

(bb) that the third party would rely on such opinion, certificate, report, statement, account or document for the purpose of acting or refraining from acting in some way or of entering into the specific transaction into which the third party entered, or any other transaction of a similar nature, with the client or any other person; or

(ii) in any way represented, at any time after such opinion was expressed or such certificate was given or such report or statement was made or such statement, account or document was certified, to the third party that such opinion, certificate, report, statement, account or document was correct, while at such time he knew or could in the particular circumstances reasonably have been expected to know that the third party would rely on such representation for the purpose of acting or refraining from acting in some way or of entering into the specific transaction into which the third party entered, or any other transaction of a similar nature, with the client or any other person.

(9A) Nothing in subsection (9) contained shall be construed as conferring upon any person any right of action against an auditor which, but for the provisions of that subsection, he would not have had.

(10) For the purposes of paragraph (b) of subsection (9) the fact that an auditor or a person referred to in that paragraph performed the functions of an accountant or auditor shall not in itself be proof that he could reasonably have been expected to know that-

(a) his client would act as contemplated in subparagraph (i) (aa) of the said paragraph (b); or

(b) the third party would act as contemplated in subparagraph (i) (bb) or (ii) of the said paragraph (b).

(11) The provisions of paragraph (b) of subsection (9) shall not affect-

(a) any liability of an auditor or a person referred to in that subsection which arises from-

(i) a contract between a third party and such auditor or person; or

(ii) any statutory provision; or

(b) any disclaimer of liability by an auditor or a person referred to in that subsection.

(12) For the purposes of subsection (9), (10) or (11)-

'client' means the person for whom an auditor or a person referred to in subsection (9), or his firm, has performed the duties concerned;

'third party' means any person other than the client concerned, and includes any member of a client which is a company or external company (as defined in section 1 of the Companies Act, 1973 (Act 61 of 1973)) or which is any other juristic person.’

[59]     Section 20 of Act is the modern incarnation of an equivalent, but much more concise provision in s 26 of the Public Accountants' and Auditors' Act 51 of 1951.  Counsel for the plaintiff were unable to cite any case in which the provisions of s 26 of the 1951 Act or s 20 of the PAAA had been used as a basis for a delictual claim in damages against an accountant or auditor.  In my view the provisions of s 20(9A) of the PAAA (which was inserted into the PAAA in terms of s 2 of Act 70 of 1993), make it clear that the provisions of s 20(9) do not by themselves create a basis for a delictual claim based on the negligent breach of a statutory duty.  The provisions of s 20 articulate what the legislature has seen fit to define as the standards to which the accountants’ and auditors’ profession is required to adhere in the performance of its duties.  The content of these standards recognises the proprietary importance of statements, reports and certificates issued by accountants and auditors in their professional capacity, not only to those responsible for employing them and paying their fees, but also to third parties[37].  The provisions of sub-secs 20(9)-(12) of the PAAA were plainly formulated with regard not only to acknowledging the established potential bases in law in respect of the liability by accountants and auditors for fraud[38] and negligence, but significantly, also with regard to recognising the need to confine the potential liability of accountants and auditors for negligence within reasonable bounds. 

[60]     The limitations expressed in sub-secs 20(9), (9A) and (10) of the PAAA are consistent with the policy based limitations on delictual liability generally expressed in negligent misstatement cases using, for convenience, labels such as foreseeability, proximity, assumption of responsibility, reliance and reasonableness.  It is unlikely that the congruence between the limiting factors in the statutory provisions and the bases for constraint that may be distilled from the cases on negligent misstatement in a delictual context, both here and in the common law jurisdictions was not by design.  The provisions of s 20(9) of the PAAA do not afford an alternative to the facts-sensitive, policy-based enquiry that is necessary to determine the existence of a duty in law in all delictual claims in respect of pure economic loss.

Should a remedy be extended to the plaintiff on the facts?

[61]     The plaintiff’s reliance on the profit certificate undermines the basis for its contention that the negligent misstatements contained in the appendix to the circular to shareholders, circulated earlier, were causal of the damages claimed.  It is implicit in the nature of the damages claim that had it not been for the relevant misstatement the contract for the purchase of the Intella business would not have been concluded.  It is the plaintiff’s case that the request for the profit certificate was an earnestly sought assurance that the proposed contract was viable.  The turn-around in fortunes that a R10 million profit during the last four months of the financial year would signify was described by Rai as a critical indicator of the worth of the proposed acquisition, at least on the terms agreed upon.  Had the profit certificate reflected the actual rather sorry position, the shareholders would not have approved the contract and the lapsed agreement would not have been implemented.  The earlier misstatements would be rendered causally irrelevant, save to the extent of their concatenating effect with the later one.  On the evidence, the misstatement in the profit certificate was the effectual sine qua non in relation to the loss for which the plaintiff claims compensation.  Therefore whatever claim hypothetically might have been available in other circumstances to the plaintiff arising from any negligent misstatements by the defendant in the report prepared by it in its capacity as reporting accountants, it is actually unnecessary to consider them because of the intervention of the request for and the consequent provision of the profit certificate.

[62]     The profit certificate having been requested by the plaintiff from the defendant in the latter’s capacity as Intella’s auditors in terms of the Companies Act, it is useful as a point of departure to remember that an auditor’s duties are owed primarily to a company’s shareholders by way of providing an independent and objective assessment of the directors’ stewardship of the company’s affairs.  See Powertech Industries Ltd v Mayberry and Another 1996 (2) SA 742 (W), citing Lord Bingham’s speech in Caparo, supra[39].  It does not follow that a company’s auditor will be liable to third parties for negligent misstatement even if it was foreseeable that such third parties might rely on the information and suffer loss as a result.  A clear example is provided by a consideration of the result in Peach Publishing Limited v Slater & Co.; Slater & Co v Sheil and others [1997] EWCA Civ 1012; [1998] PNLR 364, a case in which the facts are comparable in certain respects with the present one and which illustrates how the courts use the determination of the element of wrongfulness (or as the English put it ‘the existence of a duty of care’) as a tool to keep liability within reasonable and practicable bounds.

[63]     Peach Publishing was a company established by a certain Mrs Land for the purpose of acquiring the business of a company referred to as ASA.  The draft sale agreement, which was concluded on the basis of ASA’s projected profits for the 1990 calendar year, contained a warranty in respect of the correctness of the management accounts used to support the profit projection.  Mrs Lands had requested management accounts to be produced in the form of a profit and loss account to the end of October 1990 and a balance sheet dated 31 October 1990.  The information in these accounts, which had been prepared by Slater & Co- ASA’s accountants and auditors since 1972, supported the viability of the achievement by ASA of the projected profits.  There was also provision in the proposed agreement for a so-called ‘disclosure letter’, which was intended to provide support for the contractual warranties.  Two paragraphs of the disclosure letter caused consternation and threatened to put an end to the negotiations.  The paragraphs pointed out that the management accounts requested by the purchaser had been prepared within a limited space of time and had not been audited.  It was expressly stated ‘[f]or avoidance of doubt no warranties are given as to the accuracy of the Management Accounts’.  It was further pointed out in the disclosure note that the management accounts had not been prepared in a manner consistent with the historically audited accounts of the company.  Mrs Land was advised by her solicitors that these paragraphs in the disclosure note rendered the relevant warranty in the draft agreement worthless.  A meeting between the principals to the proposed agreement ensued, at which they were attended by their respective professional advisers.

[64]     During the course of the meeting Mrs Land pressed the accountant from Slater & Co for an assurance that she could rely on the management accounts.  It was stressed by her that they had after all been prepared by him and that he was familiar with the financial affairs of ASA.  The purpose of obtaining the assurance was to enable the seller to furnish an acceptable warranty that the management accounts were accurate.  Eventually, and evidently reluctantly, the accountant indicated that that warranty could be given, thereby appearing to endorse the reliability of the management accounts.

[65]     After the meeting, however, the accountant wrote to his client, the seller, stating that in his view it was inappropriate for him to certify the management accounts, or for the seller to give the relevant warranty.  On the day after that he wrote again to the seller expressing his misgivings about the merits of the sale as a whole.  Two days after that the sale agreement, including the warranty and an appropriately worded disclosure letter, was signed.

[66]     The sale having thereafter been executed, it was discovered that the profit projections were significantly overstated and that the management accounts produced prior to the conclusion of the agreement were inaccurate in material respects.  The purchaser instituted proceedings against the seller, which were settled, partly on the basis of an undertaking by the seller to assist the purchaser in a claim against the accountants.  An action in tort was then instituted by the purchaser against the accountants based on an alleged negligent misstatement.  The trial proceeded in two stages, the first being in respect of the issue of liability in law and the second in respect of damages.  An action was also instituted against the accountants by the former shareholders of ASA for a declaration that on account of their negligence the accountants were not entitled to recover the fees that had been raised in connection with the preparation of the management accounts, disclosures made in connection therewith, or advice furnished relating to giving of the warranty.

[67]     The plaintiffs in both actions succeeded against the accountants in the trial court.  The damages claim by the purchaser was dismissed at the second stage, however, because the judge found that the purchaser had in fact not sustained any damage recoverable in tort in the sense that notwithstanding that it would not have concluded the agreement had it been aware of the facts it had nevertheless acquired the business at less than fair value, and had therefore not suffered a diminution in its patrimony.

[68]     On appeal by the accountants to the Court of Appeal, the trial court’s findings against the accountants in respect of their liability to the purchaser for negligent misstatement were reversed[40], but the judgment against the accountants in favour of the shareholders of ASA was confirmed.  In upholding the appeal against the first stage judgment in favour of the purchaser, the Court of Appeal (Morritt LJ) pointed out (with reference to the analysis undertaken by Neill LJ in James McNaughton Paper Group Ltd v Hicks Anderson & Co. (1991) 2 QB 113[41] from 125) that, in contrast to the position exemplified in the New Zealand decision in Scott Group Ltd v McFarlane [1978] 1 NZLR 553[42], (a) a restrictive approach was adopted in England in respect of extending the liability of the negligent maker of a misstatement ‘beyond the person directly intended by the maker of the statement to act upon it; (b) that in deciding whether a duty of care exists in any case it is necessary to take all the circumstances into account; (c) that notwithstanding (b), it is possible to identify certain matters which are likely to be important in most cases in reaching a decision as to whether or not a duty [of care] exists’.  Allowing for a ‘substantial measure of overlap’ these matters could be addressed under the following ‘headings’ [these coincide materially with the issues summarised later by Sir Brian Neill in the BCCI case, quoted above at para [43], but the detail included here makes them worthy of setting out in full]: 

(1) The purpose for which the statement was made

In some cases the statement will have been prepared or made by the “adviser” for the express purpose of being communicated to the “advisee”, to adopt the labels used by Lord Oliver [in Caparo]. In such a case it may often be right to conclude that the advisee was within the scope of the duty of care. In many cases, however, the statement will have been prepared or made, or primarily prepared or made, for a different purpose and for the benefit of someone other than the advisee. In such cases it will be necessary to look carefully at the precise purpose for which the statement was communicated to the advisee.

(2) The purpose for which the statement was communicated

Under this heading it will be necessary to consider the purpose of, and the circumstances surrounding, the communication. Was the communication made for information only? Was it made for some action to be taken and, if so, what action and by whom? Who requested the communication to be made? These are some of the questions which may have to be addressed.

(3) The relationship between the adviser, the advisee and any relevant third party

Where the statement was made or prepared in the first instance to or for the benefit of someone other than the advisee it will be necessary to consider the relationship between the parties. Thus it may be that the advisee is likely to look to the third party and through him to the adviser for advice or guidance. Or the advisee may be wholly independent and in a position to make any necessary judgments himself.

(4) [omitted as irrelevant to this case][43]

(5) The state of knowledge of the adviser

The precise state of knowledge of the adviser is one of the most important matters to examine.  Thus it will be necessary to consider his knowledge of the purpose for which the statement was made or required in the first place and also his knowledge of the purpose for which the statement was communicated to the advisee. In this context knowledge includes not only actual knowledge but also such knowledge as would be attributed to a reasonable person in the circumstances in which the adviser was placed. On the other hand any duty of care will be limited to transactions or types of transactions of which the adviser had knowledge and will only arise where “the adviser knows or ought to know that [the statement of advice] will be relied upon by a particular person or class of persons in connection with that transaction:” per Lord Oliver in the Caparo case [1990] UKHL 2; [1990] 2 A.C. 605, 641.  It is also necessary to consider whether the adviser knew that the advisee would rely on the statement without obtaining independent advice

(6) Reliance by the advisee

In cases where the existence of a duty of care is in issue it is always useful to examine the matter from the point of view of the plaintiff. As I have ventured to say elsewhere the question “Who is my neighbour?” prompts the response “Consider first those who would consider you to be their neighbour.” One should therefore consider whether and to what extent the advisee was entitled to rely on the statement to take the action that he did take. It is also necessary to consider whether he did in fact rely on the statement, whether he did use or should have used his own judgment and whether he did seek or should have sought independent advice. In business transactions conducted at arms’ length it may sometimes be difficult for an advisee to prove that he was entitled to act on a statement without taking any independent advice or to prove that the adviser knew, actually or inferentially, that he would act without taking such advice.’

[69]     Related to the above questions, the Court of Appeal considered it important to consider whether the facts showed an assumption of responsibility for the task by the maker of the statement.

[70]     The Court of Appeal encapsulated all the aforegoing considerations into a simple question:  ‘whether having regard to all the circumstances of the case and looking at the matter objectively it can be said that [the accountant] undertook responsibility to [the purchaser] for the substantial accuracy of the Management Accounts.’  On an analysis of the facts, the Court concluded that notwithstanding that the accountant’s statement had been made at the meeting in answer to questions directed at him by the purchaser and might on the face of it have been characterised as being a statement directly made by him to the purchaser, consistently with an assumption of responsibility, the circumstances were such that on proper analysis it was apparent that the accountant had acted only as adviser to the seller and objectively did not assume responsibility for the accuracy of the management accounts to the purchaser.

[71]     It is interesting to contrast the Appeal Court’s conclusions against those of the trial court.  The trial court’s reasoning was described in the Appeal Court judgment by Morritt LJ as follows:

‘After reaching the conclusion, which I have already quoted, that [the accountant] did make a statement to the effect that the Management Accounts were essentially reliable subject to the qualification that they were not audited and having considered the law Rimer J [the trial judge] addressed the question whether a duty of care was owed by [the accountant] to Peach.  He thought that although in certain respects the issue whether [the accountant] owed a duty of care to Peach in making the statement he did might appear straightforward there were two features which made it less so. The straightforward features were (i) the accounts had been prepared by [the accountant]; (ii) [the accountant] at least knew that they were being considered by Peach in connection with its proposed acquisition of ASA; (iii) Mrs Land had asked for a direct statement from [the accountant] as to their reliability; (iv) [the accountant] knew that Mrs Land was likely to place some reliance on his statement; and (v) if the statement was made without due care and the accounts were misleading Peach would be likely to suffer damage. The two features which he thought made the case less straightforward were (vi) as he found as a fact, the main aim of Mrs Land in pressing [the accountant] to commit himself with regard to the quality of the accounts was to achieve the giving by the vendors of a warranty about them for which she had been pressing but which, on advice, the vendors were refusing to give; and (vii) the fact that Mrs Land had been advised by Ernst & Young, in addition [a firm of solicitors], who had been instructed specifically to review and advise her on the Management Accounts.

Having considered all these factors Rimer J expressed his conclusion on the question of a duty of care at pages 76 to 77 of his judgment in the following terms.

“Having considered both of these points [sc.(vi) and (vii)] I have come to the conclusion that they do not, either separately or collectively, justify the conclusion that Mr Slater did not owe a duty of care to Peach in making the statement relied upon.’

[72]     In its subsequent judgment in Electra Private Equity Partners v KPMG Peat Marwick and Others [1999] EWCA Civ 1247; [2000] PNLR 247, the Court of Appeal (Auld LJ) described ‘actions of negligence against auditors and other professional advisers engaged by a third party’ as ‘a notable example of facts-sensitive cases where the law is still in a state of transition’.  Reference was made to the remarks of Chadwick LJ in Coulthard v Neville Russell [1998] PNLR 276 at 298 to the effect that it is ‘an area in which the law is developing pragmatically and incrementally.  It is pre-eminently an area in which the legal result is sensitive to the facts.’  Lord Justice Auld referred to the case of Peach Publishing Ltd v Slater as an ‘example of the scope for difference of judicial views in this field even after full examinations of the facts at trial and on appeal’[44]. 

[73]     It is of interest to note the policy considerations that influenced the Appeal Court’s approach to its analysis of the facts in Peach Publishing.  These are evident from the following remarks:  ‘The underlying transaction, though not without its complications, was a straightforward sale by the holders of all the shares in ASA to Mrs Land’s nominated purchaser, Peach.  Both vendors and purchasers had their own advisers, including solicitors and accountants, and Mrs Land was herself both professionally qualified and an experienced businesswoman. The maxim “Caveat Emptor” remains as applicable in such a transaction as ever; one party does not just rely on what he is told by the opposite party or his adviser[[45]].  It is true that Mrs Land wanted reliable accounts and that her advisers, Ernst & Young did not have direct access to the books or personnel of ASA.  It is also true that the Management Accounts were drawn up by [the accountant] so that they might be produced by [the seller] to Mrs Land for her consideration in connection with the purchase by her of the shares in ASA. All this must have been obvious to [the accountant]. But no purchaser in the position of Mrs Land would rely on such accounts without more.  He would want his own advisers to check their accuracy and have them backed by the warranty of the vendors; the less able his advisers are to check the accuracy of the accounts for themselves the more he will require protection in the form of warranties. This is what [the purchaser’s solicitor] very sensibly advised Mrs Land when sending her the draft Acquisition Agreement on 13th November.’

[74]     Similar policy based sentiments were mentioned by the High Court of Australia in Perre v Apand Pty Ltd 1999 HCA 36 ((1999) [1999] HCA 36; 198 CLR 180; [1999] 73 ALJR 1190).  At para 118 - 120, McHugh J said:

118.Cases where a plaintiff will fail to establish a duty of care in cases of pure economic loss are not limited to cases where imposing a duty of care would expose the defendant to indeterminate liability or interfere with its legitimate acts of trade. In many cases, there will be no sound reason for imposing a duty on the defendant to protect the plaintiff from economic loss where it was reasonably open to the plaintiff to take steps to protect itself. The vulnerability of the plaintiff to harm from the defendant's conduct is therefore ordinarily a prerequisite to imposing a duty. If the plaintiff has taken, or could have taken steps to protect itself from the defendant's conduct and was not induced by the defendant's conduct from taking such steps, there is no reason why the law should step in and impose a duty on the defendant to protect the plaintiff from the risk of pure economic loss.

119.In Esanda Finance Corporation Ltd v Peat Marwick Hungerfords[46], an important factor in denying a duty of care was that the plaintiffs were sophisticated investors well able in the circumstances to protect themselves. On the other hand, this Court found a duty in Hill v Van Erp[47] and in Pyrenees Shire Council v Day[48] partly because of the defendant's control (and knowledge) and relative inability of the plaintiffs to protect themselves.

120……. Pecuniary losses are one of the ordinary risks of business and, for that matter, ordinary life. Business people frequently take, or are easily able to take, steps to minimise their business or economic losses. Taking these steps will often be a more efficient way of dealing with the risk of these losses than requiring defendants to have regard to the risk that others may suffer economic loss. The economic efficiency of a society requires that the person best able to deal with or avoid the consequences of an economic risk from a cost view should be responsible for the risk and its consequences.’ [49]

These considerations raise the question as to where the loss should in fact fall when persons enter into ill-conceived commercial transactions.  Should an accountant who is not engaged or remunerated by the party which sustains the loss, but which did the deal with a view to making large profits, be held liable for the loss when matters go awry because he made a statement negligently, or should the principal party, which stood to make the profit, take the loss itself when it failed to employ its own advisors or undertake prior investigations which were reasonably available to it?  How astute should the courts be to provide an extra-contractual scapegoat for the loss-maker when such commercial deals go wrong?  In Smith v Eric S Bush, supra, which concerned a delictual claim by the purchaser against a building surveyor based on the negligent misstatement of the surveyor in a valuation certificate furnished to the prospective mortgagee as to the soundness of a house being purchased by the mortgagee’s client, where the certificate was not only relied upon by the purchaser, but also, in accordance with custom, paid for indirectly by the purchaser, Lord Jauncy of Tullichettle, having noted that the surveyors knew from the outset (i) that the report would be shown to the purchaser, (ii) that the purchaser would probably rely on the report in deciding to proceed with the sale without obtaining an independent valuation, (iii) that in the circumstances if the valuation was excessive having regard to the actual condition of the house the purchaser would be likely to suffer loss and (iv) that the purchaser had paid the prospective mortgagee (a building society) a sum of money to defray the surveyor’s fee, and having concluded on the basis of those facts that the surveyor had assumed ‘delictual obligations’ towards the purchaser, said ‘It is critical to this conclusion that the surveyors knew that [the purchaser] would be likely to rely on the valuation without obtaining independent advice.’ (my emphasis)  Lord Jauncy went on to observe[50]:

‘In both Candler v Crane Christmas & Co…and Hedley Byrne & Co Ltd v Heller & Partners Ltd.., the provider of the information was the obvious and most easily available, if not the only available source of that information. It would not be difficult therefore to conclude that the person who sought such information was likely to rely on it. In the case of an intending mortgagor the position is very different since, financial considerations apart, there is likely to be available to him a wide choice of sources of information, to wit independent valuers to whom he can resort, in addition to the valuer acting for the mortgagee. I would not therefore conclude that that the mere fact that a mortgagee’s valuer knows his valuation will be shown to an intending mortgagor of itself imposes on him a duty of care to the mortgagor.  Knowledge, actual or implied, of the mortgagor’s likely reliance on the valuation must be brought home to him.  Such knowledge may be fairly readily implied in relation to a potential mortgagor seeking to enter the lower end of the housing market but non constat that such ready implication would arise in the case of a purchase of an expensive property whether residential or commercial.’[51] (my emphasis)

The appropriateness of an advisee relying on the advice of a particular advisor was mentioned in Standard Chartered Bank of Canada, supra, at 770D, with reference to the ‘uniquely[52] placed’ position of the advisor to furnish the advice relied upon.  The implication was that there was no-one else from whom the plaintiff could reasonably have obtained or confirmed the information.  Compare also Indac Electronics (Pty) Ltd v Volkskas Bank Ltd [1991] ZASCA 190; 1992 (1) SA 783 (A) at 799H, where it is implicit that the Appellate Division considered that a claimant’s ability to take steps to protect itself was a relevant consideration in determining whether a defendant should be held to have owed the claimant a legal duty to act.

[75]     I have covered this ground in perhaps laborious detail because some of the argument by the defendant’s counsel and some of the cross-examination of the plaintiff’s principal witness, Rai, appeared to be inspired by something of the policy considerations that I have mentioned with especial reference to Peach Publishing and Perre v Apand, even if the connection was not expressly articulated.  I also considered the exercise worthwhile in the context of the plaintiff’s counsel’s assertion that it was difficult to conceive of a clearer case of liability in delict for negligent misstatement than the present.  The cases to which I have referred highlight the need in matters like this to avoid the temptation to arrive at any conclusion glibly.  In Caparo, Lord Oliver, having observed that a category of delict based on negligent misstatement could be identified displaying common features from which it is possible to find at least guidelines by which a test for the existence of the relationship which is essential to ground liability can be deduced, said ‘One must, however, be careful about seeking to find any general principle which will serve as a touchstone for all cases, for even within the limited category of what, for the sake of convenience, I may refer to as “the negligent statement cases”, circumstances may differ infinitely and, in a swiftly developing field of law, there can be no necessary assumption that those features which have served in one case to create the relationship between the plaintiff and the defendant on which liability depends will necessarily be determinative of liability in the different circumstances of another case.’

[76]     Liability by the defendant to the plaintiff certainly does not follow merely because the plaintiff’s corporate advisor requested a certificate that the profit contractually warranted by the defendant’s principal had been achieved and the defendant negligently gave a fallacious reply, referring to the published results of Paradigm and offering a rather anecdotal basis for the author’s stated satisfaction that the after tax profit of the ‘Intella Group’ (sic) for the period 1 March 1999 to 30 June 1999 amounted to in excess of R10 million.’  The content of the relevant email correspondence does not in my view necessarily indicate that the defendant undertook responsibility in a relevant sense for the accuracy of the opinion it offered; nor does it necessarily follow that as a matter of policy, having regard to the plaintiff’s contractually stipulated remedies against the seller and its ability to undertake its own investigations prior to confirming the sale, that the defendant should be found in breach of a duty of care towards the plaintiff because the plaintiff relied on the opinion.  Principle demands that a cautious examination of all the circumstances be undertaken before a conclusion is made.  The determination made upon such an examination will frequently entail, as it does in this case, weighing countervailing indications some of which point in favour of recognising the breach of a legal duty and others against allowing a remedy in delict.

[77]     Because Nield was not called to give evidence, it is not known how he, personally, characterised the email request passed on to him from Ms McPherson[53].  It would however have been evident to him from the text of the email from Ms McPherson that the information requested was sought for consideration at the upcoming meeting of the shareholders of the plaintiff company on 6 December 1999.  By reason of his prior involvement in the preparation of the independent reporting accountant’s report annexed to the circular to the plaintiff’s shareholders, he must also have known that the object of the meeting was to consider whether or not to approve the sale of business agreement.  As far as one can discern from the evidence there is nothing to suggest that Nield was aware that the assurance being sought from him was regarded by the plaintiff as being in lieu of the contractually stipulated second financial due diligence investigation available to the plaintiff.  Nevertheless Nield must have, or at least should have appreciated that the information was being sought for a serious purpose related to what he knew to be the business of the meeting.  He should also have realised that if there were reason to suspect the reliability of the relevant content of the financial information pertaining to the Intella business his assurance that the warranted profit had been attained would encourage an endorsement of the agreement by the shareholders, whereas were he to point out what was suspect a decision to approve the agreement would be less certain.  He therefore must, or should have foreseen that his answer to the enquiry would be relied upon in the making of the investment decision. 

[78]     I do not consider that it is of any consequence that Nield’s emailed reply added nothing to the information already furnished in the independent reporting accountant’s report.  His answer was clearly fresh advice, even if its substance amounted to no more than a reiteration of what he had reported previously.  He certainly had the opportunity to reconsider his earlier position before responding to the enquiry.  That he should indeed reasonably have done so is apparent if regard is had to what he should have appreciated were the unsatisfactory circumstances attending his earlier advice, which I shall describe below.

[79]     Nield should moreover have foreseen that if the warranted profits had not been attained, the implication to the intending purchaser would be that the business had not achieved a significant turnaround in its business fortunes that the warranted profit figure would suggest.  Having regard to his knowledge of the contract he must have known that an assurance that the warranted profits had been attained would be a material inducement to the plaintiff’s shareholders to proceed with the agreement.  He also should have foreseen that if the plaintiff proceeded with the transaction on the basis of a misapprehension as to the actual state affairs it might suffer economic loss as a consequence.  It does not require any specialised insight to understand that the attainment of a warranted profit of the character in question on the facts bore not only on the issue of the accrual of the relevant revenue, but also on the viability of the business as a going concern.

[80]     In my view it was unnecessary for the purpose of determining whether in the circumstances Nield incurred a duty in law to the plaintiff not to make a negligent misstatement in answer to the enquiry by Ms McPherson that he should have foreseen the precise nature of the loss which might be suffered by the recipient of his advice.  It is sufficient in the present context that he should have appreciated the possibility of the plaintiff suffering economic loss of any nature which could be reasonably and directly linked to a decision to acquire the Intella business[54].  The question as to whether any particular loss under that general heading should be recoverable is a discrete enquiry within the context of the necessary subsequent decision as to whether or not Nield’s wrongfulness should be held to have been sufficiently causally connected with it.

[81]     In the circumstances, when Nield replied to the email enquiry, he should have appreciated that he had a duty to take care as to the accuracy and correctness of the import of his reply.  An objective consideration of the circumstances would certainly justify the imposition of at least a moral duty on him to have taken care.  He was asked a serious question and he undertook to answer it.  In my view, therefore the first two criteria of the so-called threefold test have been satisfied and, superficially at least, so has the ‘assumption of responsibility’ test.  Using those tests as a guide, it remains to be determined whether in the circumstances, as a matter of policy a remedy in delict should be afforded to the plaintiff.

[82]     Mr Oosthuizen pointed to a number of factors which militate against the recognition of a claim in the circumstances.  He highlighted the provisions of the sale of business agreement that afforded the directors of the plaintiff the opportunity to investigate for themselves the inner workings of the Intella business, including the provision for a second due diligence exercise.  He submitted that if the directors did not avail themselves of the mechanisms provided it should affect the policy decision as to whether the defendant should be held liable for any negligent misstatement by Nield.  As mentioned, parts of the passages from Perre v Apand, Peach Publishing and Eric Bush, which I quoted earlier, afford some support for his argument. 

[83]     Rai’s evidence certainly suggested a remarkable diffidence by the plaintiff in respect of exercising the rights of independent access and investigation that I would have thought appropriate on the part of any commercial investor before commitment to the expenditure of a sum of up to R147 million.  There was also evidence of an unseemly laxness on the part of the plaintiff in the lead up to the confirmation of the sale.  For example, the failure to appreciate that the shareholders’ meeting was to be held after the expiry of the period for the fulfilment of the suspensive conditions, this notwithstanding a letter from Mettle to Paradigm, copied to Rai, dated 22 November 1999 pointing out the need to extend the expiry date, and the apparent ignorance by Rai, when he testified, that Arthur Andersen had undertaken both a commercial and a financial due diligence investigation prior to the signature of the sale of business agreement.  It was also peculiar that the plaintiff had not investigated the interrelationship of AMT, Taxi Link and Ubunye in respect of the important sale of tracking device units, as the AMT-Taxi Link connection in this respect had been alluded to in the Arthur Andersen due diligence report and constituted a very material transaction.  It was also very unbusinesslike of the plaintiff’s directors not to call for and consider the audited financials in respect of AMT Voice and Data and Everycard Data Switch referred to in the independent reporting accountant’s report- an omission to which I shall return. 

[84]     Rai’s explanation for the decision to forego any detailed financial investigation of the Intella business was that the directors were satisfied that the plaintiff could rely on the professionalism and expertise of Paradigm’s auditors to adequately investigate the financial information provided by the sellers.  They saw no need to duplicate the exercise by insisting that Arthur Andersen proceed to complete a second due diligence.  The decision to approach the matter in that way was taken in the circumstances described earlier.  The taking of the decision to forego an independent investigation by Arthur Andersen was perhaps imprudent, especially in the context of the indications that the accounts of the Intella business were in a state of disarray, but the statutory recognition afforded to the status and standards of the accountants’ and auditors’ profession, including the duty to assiduously maintain a position of independence, are such that the decision cannot be described as reckless or even negligent.  I am in any event dissuaded, because of various other aspects of the case, which I shall describe below, from making any policy-based decision, towards which I might otherwise have been inclined, to withhold a remedy in delict in respect of the defendant’s negligent misstatement on account of the plaintiff’s failure to employ its own forensic auditors and be more proactive in itself investigating the potential risks of the transaction.

[85]     The misdirected apparent reliance by Nield on ‘the published results’ of Paradigm manifested negligence of a gross nature in the circumstances.  The Safrican loan and the Ubunye amounts considered individually, and even more so collectively, constituted material transactions in the accounts of AMT and were essential ingredients in any determination of the reported attributable profit of the Intella business in the 1999 financial year.  The Ubunye amount represented 112% of the attributed profit.  Anyone with the most basic appreciation of auditing would recognise that the materiality of the transactions deserved investigation and confirmation in the context of any relevant audit.  To the extent necessary, this, to my mind rather axiomatic proposition, was confirmed by both the expert accounting witnesses called by the plaintiff.  The evidence makes it clear that upon appropriate enquiry, the fallaciousness of recognising the two transactions in the income of AMT would have been exposed. 

[86]     The issue of the Ubunye amount had in fact been identified in the key issues memorandum prepared in respect of the AMT audit.  (A key issues memorandum is one prepared towards the end of a company audit and identifies unresolved issues requiring to be addressed by the person in charge of the audit.)  In the case of the AMT audit, the memorandum was submitted to Mr Abbott by an audit manager under a cover sheet dated 29 September 1999.  (Mr ‘Butch’ Abbott was a partner in the Johannesburg partnership of FSH, which was independent of, albeit associated with the Cape Town partnership of which Nield was a member.  Abbott was directly responsible for the audit of AMT, but had to work in liaison with Nield as the auditor in overall charge of the consolidated audit of the group financials.)  The relevant entry in the key issues memorandum read: ‘Up until date no information was provided for the debtor Ubunye to the amount of R9 949 800 that was provided for at year-end.  They keep on telling us that the relevant partner’s (sic)[55] involved knows all the details of the transaction, although I indicated to them I that I still need to verify the balance as at year-end for recoverability.  I was promised a debtors confirmation on 14 September to confirm this balance.’

[87]     No doubt after consideration of the key issues memorandum, Mr Abbott was not prepared to certify the accounts until that and other identified issues had been satisfactorily explained.  In a letter to Nield, dated 30 September 1999, addressed to the latter in his capacity as the engagement partner in respect of the audit of either the Paradigm and/or Intella consolidated financials, Abbott wrote

‘Dear Billy

Following our conversation of today I cannot give audit clearance on the following company until the issues as stated below have been cleared to our satisfaction.

AMT TECHNOLOGIES (PTY) LTD

1….

2….

3…An amount of R9 949 800 was raised as a debtor (sic, ?debt) for Ubunye.  We have no proof of what this debtor (sic) was raised for nor any proof of its recoverability.  This needs to be forthcoming.’

[88]     The letter from Mr Abbott unambiguously highlighted two aspects of the Ubunye debt about which he was not satisfied.  They were the very existence of the relevant transaction and, assuming that was established, the recoverability of the debt related to it[56].

[89]     The defendant saw fit not to offer any explanation of how Nield responded to this information.  It is apparent, however, that only four weeks later, in the face of it, he issued the independent reporting accountant’s report, to be annexed to the circular to the plaintiff’s shareholders, which purported to be predicated amongst other things on a review of the audited statements of AMT for the 1999 financial year, which he most surely should have known did not exist -quite probably because of unresolved issues raised by Abbott.  The discovered documentation (all of which was admitted to be what it purported to be) showed that the lack of a verifiable basis for the Ubunye transaction continued to be a bone of contention during October 1999.

[90]     That Mr Abbott’s concerns were followed up with Intella is borne out by the provision of various documents to Nield and Abbott under cover of a telefax addressed to both of them in Cape Town and Johannesburg, respectively, on 7 October 1999.  The coversheet named Pheiffer and Rorden McGregor as the senders.  It is clear that a copy of Abbott’s 30 September letter to Nield was passed on to the management of Intella.  The relevant documentation provided under cover of the telefax, in an endeavour to satisfy Abbott’s outstanding enquiries in respect of the Ubunye transaction consisted of the following:

91.1          A copy of a letter from Pheiffer to Nield dated 30 June 1999 which read:

‘AMT Technologies (Pty) Ltd

Calculation of Vehicle Tracking Income

Attached please find Agreement from The Greater Pretoria Metropolitan Taxi Council for the rollout of Vehicle Tracking Systems for approximately 18000 Taxis.

Based on this AMT has booked a conservative portion of the relative gross profit calculated as follows         :

Number of Units                      3106

Selling price/unit                     R6,500

Cost price unit                         R3,200

Gross profit/unit                      R3,300

Total gross profit R10,249,800

Warranty provision R300,000

Total Ubunye/Taxilink Debtor as per balance sheet at 30 June

R9,949,800

Collectability

Saambou Bank has agreed to participate in the funding of the scheme as per attached letter.

Vendors of AMT have pledged ten million CET shares from their vendor settlement to secure the debt.

Yours faithfully

ALLEN PHEIFFER’

91.2 The attached agreement referred to in the above letter, consisted of a letter, dated 26 November 1998, under the letterhead of the Greater Pretoria Metropolitan Taxi Council, to Taxi Mate (Pty) Ltd, which read:

‘This agreement is entered into between the Greater Pretoria Metropolitan Taxi Council (GPMTC) & Taxi Mate (Pty) Ltd, a wholly owned subsidiary of Paradigm Interactive Media Limited.

This serves to confirm that the GPMTC has ratified and approved the rollout of the following:

Colour Coding System

Taxi Vehicle Tracking

Taxi Fare Collection

For the Pretoria area which involves approximately 18 000 registered taxi’s (sic).

The rollout will be phased in with Items 1 & 2 above starting with immediate effect. The rollout of Item 3 above will start in the second quarter of 1999.

The entire process and the fee structure is accepted by the GPMTC.

The GPMTC undertakes to instruct its membership to install the technology on the agreed dates as per the rollout program (sic).

We look forward to a very successful implementation of this Taxi Project and an ongoing Joint Venture with you.

Yours faithfully  etc.

The letter was signed by S.L. Kutumela, Chairman GPMTC and countersigned by Gary Down of ‘Paradigm Interactive Media’.  Both signatures were witnessed.

91.3          The attached letter from Saambou Bank, referred to in Pheiffer’s 30 June letter to Nield, was undated.  It was addressed to Mr T. Richards, Managing Director, Taxi Link and was signed by someone described as Senior Manger, Personal Loans.  The letter read:

‘We have pleasure in confirming that Saambou Bank has agreed to participate in the funding of the scheme subject to the following conditions:

The pilot scheme may commence provided that Saambou Bank is provided security to the value of 80% of its exposure and that the said security is in place and in a judiciary (sic) enforceable condition.  This implies that the number of units financed will be dependant on the security provided, but limited to 400 units initially.

Once the Khula guarantee as security is in place and enforceable, the pilot scheme will terminate.

Trusting that this clarifies the position.’

[91]     Unsurprisingly in my view, the documentation forwarded to Nield and Abbott by Intella on 7 October 1999 did not satisfy Abbott.  He responded on the same day by fax, marked for the attention of Pheiffer and McGregor:

‘Dear Alan and Rorden

AMT Technologies (Pty) Ltd – JUNE 1999 AUDIT QUERIES

Following on your fax to me this morning, I have the following comments.

Soné Kok [an audit manager working under Abbott] will be visiting your offices to clear all our audit queries with you early next week.  I will not dwell on the less material ones but do have the following queries in respect of the Ubunye transaction.

1. Is there no other agreement than the one page document you faxed to me?

2. Why have we only raised the gross profit on the transactions:

Surely there are sales in terms of the roll out procedures- and we will need to see sales invoices, delivery notes, P.O.D’s[[57]] etc.

3. Why is there no cost of sales raised? Surely we had to purchase or manufacture the units to be sold in terms of the roll our procedure.

4. There is nothing in the agreement that you faxed to me to state number of units, selling price, etc.

5. In terms of collectability you refer to the Saambou letter-

a) It is undated;

b) It talks of a “pilot scheme”

c) It limits units to 400

d) It mentions a Khula guarantee which we have not had sight of;

e) Saambou is requiring security to the value of 80% of its exposure- where has this security been given.

6. You state that the vendors of AMT have pledged ten million C.E.T. shares-

a) We need to verify a value for these shares;

b) We need to have sight of the pledge.

7. What is the relationship between Ubunye and The Greater Pretoria Metropolitan Taxi Council as this is who the agreement is signed with.

If you could please have these answers ready, Soné will check them out when she arrives on Monday or Tuesday.

Kind regards

I.G. ABBOTT’

[92]     On 11 October 1999, Mr Werner Alberts of Bohumi telefaxed Mr Abbott saying that while he understood that ‘a normal audit report cannot be issued’ in respect of the Intella accounts he requested an audit report in respect of Intella’s results as at 28 February 1999 so as to satisfy the seller’s obligation to provide such ‘effective date financial statements’ in terms of clause 13 of the sale of business agreement.  (The Ubunye transaction would not present a problem in respect of the audit of such financials if it postdated 28 February 1999.)

[93]     It is not entirely clear what happened after that.  A somewhat cryptic handwritten memorandum, dated 19 October 1999, from a person identified only as ‘René’ to Mike Forster, CEO of Paradigm, which was copied to Werner Alberts, indicates that some discussion must have occurred between various personalities in the Paradigm group about how to ‘resolve the AMT issue’.  The memorandum was headed ‘AMT/TAXILINK/TAXIMATE’.  Whatever the detail of these discussions it would appear from the memorandum that they involved at least Messrs Forster, Havenga, Alberts and Gary Down.  The memorandum mentioned the ‘delivery’ by AMT of a R7 million after tax profit ‘based largely on the sale of ± 2000 taxi units to Ubunye (equivalent to R10 million before tax)’.  It went on to state ‘Fisher Hofman (sic) (FHS) are concerned about the recoverability of the amount of R10 million + require the Intella directors to confirm that payment will be made.’  Paragraph 5 of the memorandum mentions that the ‘Ubunye deal collapsed + subsequent negotiations were held with Gary Down to dispose of Taxi [in context it appears that ‘Taxi’ was an abbreviated reference to Taxi Link and Taxi Mate]’.  Further on, the author of the memorandum wrote ‘It is unlikely that the R10 million Ubunye debtor will be settled…’.  A structured proposal was sketched which, if accepted, would amongst other things enable ‘the directors of Intella to sign the letter required by FHS’.  The structured proposal would appear to have had as one of its objects the confirmation of the sale of business agreement with the plaintiff.  Acceptance of the proposal, so the memorandum states will ensure inter alia ‘[T]hat the CET deal proceeds + we receive R75 m (the bulk hopefully in cash)’.  (Interestingly, and probably not co-incidentally, R75 million is close to the minimum price to which the R137 million sale of business price fell to be reduced if the future profit warranties in terms of the sale agreement were not achieved.)

[94]     On the following day, 20 October 1999, Werner Alberts sent a telefax to Abbott and Mickey Giles, another partner in FSH ‘re Ubunye Debtor’.  It stated ‘Please find attached letter of undertaking, which will be signed by all the parties by tomorrow. Could you please confirm whether this will be sufficient to accept the recoverability of the Ubunye debtor.’  The attached letter of undertaking would appear contextually in all probability to have been ‘the letter required by FHS’ referred to in the previously mentioned cryptic memorandum.  It comprised an undertaking by Messrs Forster, Havenga and Glass to pay up to R10,25 million to AMT in the event of ‘non-payment of the amount due by Ubunye in the ordinary course of business’.

[95]     It seems unlikely that Mr Abbott had suggested the idea of the letter of undertaking as a solution to the difficulty raised by his audit queries.  The copy of the telefax from Alberts apparently received by Abbott bears an emphatic negative endorsement.  The word ‘No!’ was writ large in pen below the typescript of the letter.  Below that, the following handwritten note was also endorsed on the telefax: ‘On discussion with David Rose [the senior partner in FHS, Johannesburg] it was agreed that we did not have adequate evidence of this debtor being valid. David to discuss with Billy Nield.  We
[?]however cannot sign off on this basis.’  The finger points to Nield as having been the originator of the idea of a letter of undertaking from the directors of Intella, although I cannot find this as a proven fact.

[96]     The events described above demonstrate that the AMT auditors had run up a red flag warning in respect of the Ubunye transaction.  Some of its questionable features had been highlighted.  It is probable that the concerns of the Johannesburg office would have been unequivocally conveyed by the senior partner, Mr Rose, to Nield, the engagement partner on the group audit. 

[97]     Despite the negative response to it by Messrs Abbott and Rose, the undertaking, signed by Forster, Glass and Havenga, was telefaxed to Nield on 25 October 1999, under cover of a note from Werner Alberts (this time under a Paradigm rather than a Bohumi letterhead).  As one of the plaintiff’s accounting expert witnesses remarked, it appeared as if at that stage, Mr Abbott was being ‘bypassed’.  There is nothing to indicate that Nield expressed any reservation about it.  Indeed, in his evidence at the liquidation enquiry of Taxi Link, in September 2001, Nield testified that he had insisted on the provision of the guarantees- whether in the context of producing the independent reporting accountant’s report, or auditing the consolidated financials of Paradigm was not clear.  At the enquiry, Nield also testified that the ‘technical department’ at ‘his Johannesburg office’ had approved the concept of the undertakings as establishing adequate proof of the recoverability of the Ubunye amount.  As apparent from my description above, the documentation put in during the trial contradicted this assertion.

[98]     Apart from as an attempt to ward off Mr Abbott’s probing enquiries, the ulterior purpose of the provision of the letter of undertaking adumbrated in the cryptic memorandum described earlier, emerges clearly from a minute by Werner Alberts of Bohumi to ‘the Board of Directors’ of Paradigm dated 1 March 2000.  The relevant parts of it read

‘1. INTRODUCTION

MT Forster (“Forster”), BJ Havenga (“Havenga”) and P Glass (“Glass”) (collectively “the undertakers”) signed an undertaking on 20 October 1999 in terms of which they guaranteed the recoverability of a third party trade debt owing to one of the group's subsidiaries.  The purpose of this note is to motivate the release of the undertaking, following the unconditional implementation of the sale of Intella business to CET.

2.WORDING OF THE UNDERTAKING

[The wording of the undertaking described above was set out]

3.BACKGROUND TO THE UNDERTAKING

During the audit of Paradigm’s 1999 results Fisher Hoffman Sithole raised certain concerns relating to the recoverability of the amount owing by Ubunye. It was initially proposed that Paradigm should provide the necessary undertaking for recoverability since AMT sold the Ubunye debtor to Cape Empowerment Trust (“CET”) with effect from 1 March 1999 as part of the sale of the Intella business.  In fact the recoverability of the Ubunye debtor was warranted in the sale agreement.  However, the transaction was still subject to shareholders approval at the time and thus, from an audit point of view, Paradigm could not warrant its own debtors.  In order to bridge the timing gap between the audit opinion date and the date upon which the transaction would become unconditional, the undertakers offered to provide the undertaking contained in paragraph 2 above.  The transaction was approved by the shareholders of Paradigm on 26 November '99 and by CET shareholders on 4 (sic) December 1999.  All outstanding conditions were fulfilled by 28 February 2000. Consequently, the warranty given by Paradigm as to recoverability of the Ubunya debt is now effective and the undertaking by the undertakers are not longer required.

It is therefore proposed that the board of directors resolve to release Forster, Havenga and Glass from the undertaking.’

[99] The provision of the undertaking, apparently to vouch the ‘collectibility’ of the debt (but useless to the purchasers of the Intella business, drawn as it was in favour of AMT, the company -the shares in which were not subject of the sale of business agreement) nevertheless left the questions raised by Abbott as to the very existence of the debt unanswered.  In this respect, the existence of a relevant invoice would obviously afford some measure of confirmation.

[100]  Earlier on 25 October 1999, a copy of an evenly dated invoice purporting to be from AMT Technologies (Pty) Ltd to Ubunye[58] was also telefaxed to an unidentified number, 4632030.  An invoice dated 25 October 1999, however, did not provide particularly reassuring evidence of income accrued by AMT prior to 30 June 1999.  The difficulty might appear to be met by the discovery of an identical invoice dated 30 June 1999.  The invoice number on both versions of the document was 200166.  Mr Hudgson, an accountant who gave opinion evidence for the plaintiff, identified a number of features in the documentation which indicated that the invoice bearing the date 30 June 1999 had been backdated.  First of all, the invoice number was sequentially higher than the cut off number identified earlier by the AMT audit team in the ordinary course as the last invoice issued on 30 June 1999, the last date of the audit period.  There were a number of other perhaps less obvious features which tended to confirm the backdating hypothesis:  (i) the amount of the invoice (R10 262 224) differed from the amount of the provision of R10 249 800 which had consistently been mentioned in documents which predated 25 October 1999 (including, amongst others, the letter from Pheiffer to Nield dated 30 June 1999, quoted in paragraph 91.1, above, in which the unit selling price of the 3106 units ostensibly sold was given as R6500 against a cost price of R3200 giving a gross profit of R3300 per unit- whereas the invoice suggested a selling price of R9000 per unit with costs per unit of R5696 per unit);  (ii) the agenda for the issues to be raised at the Paradigm audit committee meeting on 30 September referred to the Ubunye debt in the sum of R9 949 800 (being R10 249 800 less a warranty cost provision of R300 000);  (iii) the minutes of the audit committee meeting reflected the Ubunye debt in an amount consistent with that reflected on the agenda document and  (iv) the internal memorandum dated 19 October 1999, discussed above, referred to the sale of approximately 2000 units.  Over and beyond those that I have mentioned, Mr Gautschi identified some additional pointers to the backdating of the invoice.

[101]  It is clear that the Ubunye order, ostensibly dated 31 May 1999 was also produced between 25 and 27 October 1999, no doubt in the context of the need to provide some basis for an audit confirmation of the existence of the Ubunye debt. 

[102]  The Ubunye invoice dated 25 October 1999, described above, appears to have been telefaxed as one of three pages transmitted at 13h06 on 25 October 1999 to fax number 4632030.  One of the other pages sent at the same time was an unsigned document, dated 31^st May 1999, purporting to be an order ‘for the purchase of 3106 contracts relating to vehicle tracking and fare collection systems developed for the Greater Pretoria Metropolitan Taxi Council at a contract price (after deducting the cost of goods, thereto which will be for our account) R3 304[59] per contract.’  The order purported to be made on AMT Technologies (Pty) Ltd by ‘Ubunye Investments Limited’ and was typed under the letterhead of a company bearing that name with registration number 98/18560/06.  At the foot of the letter the names of two persons were indicated as directors of the company.

[103]  The order and invoice referred to in the preceding paragraph fall to be assessed in the context of a document bearing the date 26 October 1999, purporting to be a letter from AMT to ‘Ubunye Technologies’, which reads:

‘Dear Sirs

Our auditors require that we have the following confirmation:

The purchase of 3106 contracts relating to vehicle tracking and fare collection systems developed for the Greater Pretoria Metropolitan Taxi Council at a contract price (after deducting the cost of goods, thereto which will be for our account) R3 304 per contract.

The total amount was due and payable at 30 June 1999.

Arrangements are being made in respect of financing the transaction and the units.

Whilst we await the final decision on technology selected for the recapitalisation program by government and we have undertaken that our open system has sufficient flexibility to accommodate the systems chosen on the finalisation of the recapitalisation program you have granted us permission to continue roll out within the Taxi Industry in South Africa.

Kindly fax this reply directly to our auditors, Fisher Hoffman Sithole at (021) 423 3898 for the attention of Mr JM Nield.

Yours truly

[A signature decipherable as ‘A Pheiffer]

pp Gary Down’ [my underlining]

At the foot of the letter provision was made for an acknowledgment of receipt of the letter by one Mr L.J. Boweni

[104]  On 27 October 1999, Paradigm telefaxed a copy of a document purporting to be an order by Ubunye on AMT for 3106 tracking and fare collection units, dated 31 May 1999, to Nield.  The document faxed to Nield, however, was slightly, but nevertheless significantly, differently worded to that described in paragraph [102], above.  It was also printed under a letterhead of Ubunye Investments Ltd.  This document, however, purported to be signed on behalf of something labelled ‘Ubunye Technologies’, and carried a signature strikingly similar to that appearing against the acknowledgment of receipt of the aforementioned 26 October 1999 letter, purportedly by L.J. Boweni.  At the foot of the printed letter form were printed the names of three persons as directors of the company.  The order faxed to Nield also differed from that faxed on 25 October 1999 to 4632030 in that it included additional wording, including the underlined wording in the text of the letter purportedly from Gary Down to Ubunye dated 26 October 1999, quoted in the preceding paragraph.  One can only speculate as to at whose instance the wording in the 26 October 1999 document came to be inserted in the amplified order letter.  The provision in both order letter documents that the ‘effective date’ of invoicing should be not later than 30 June 1999 is unusual.  Its only apparent purpose would be to give effect to the request in the 26 October 1999 letter from AMT that confirmation be given that ‘the total amount was due and payable at 30 June 1999’.

[105]  The matters just described strongly supports the argument that the order letter was manufactured in late October 1999. 

[106]  In the circumstances which had arisen before 25 October 1999, any accountant and auditor in Nield’s position should have been cautious about accepting the veracity of an invoice produced so late in the day[60].  It would have been a simple matter to expose the dubiousness of the document by reference to the cut off in the invoice numbers. 

[107]  Nield should also have been astute to the rather strange characteristics of the order letter telefaxed to him on 27 October, more particularly in the light of the fact that a copy of the letter by AMT to Ubunye dated 26 October 1999 was provided to him at the same time.  In addition, Nield had been present at the pre-planning audit meeting for the Paradigm company audits on 20 April 1999 at which the anticipated sale of 5000 taxi units to Ubunye was predicted by year end through Taxi Link (Pty) Ltd and mention was made for the provision of warranty costs at year end because of the risks involved and the newness of the technology.  There was no suggestion in the minute of the meeting that AMT would be in any way involved in receipt of the relevant income.

[108]  In the circumstances, it is quite extraordinary that Nield was able to produce the independent reporting accountant’s report in the manner he did, reporting (without qualification) the attributable income of the Intella business in the amount of R9 141 million- a figure that could only be arrived at by including the Ubunye provision as income in AMT.  The circumstances are such that this incident of the report cannot have been a mere error, the product perhaps of a careless mistake or oversight.  The material that has been described above shows that Nield must have been aware of the bases upon which the existence and recoverability of the Ubunye debt were highly questionable.  One can only speculate as to why in the face of those indications he gave his professional endorsement to the transaction as being good on the face of it.  It may well have been, as suggested by Mr Gautschi, that he was anxious to please the directors of Paradigm, with whom he appears to have had a close working auditor-client relationship[61], in the context of their desire to obtain confirmation and implementation of the sale of the Intella business[62] and that he allowed this to overwhelm his sense of judgment.  Certainly, his willingness to issue the profit certificate in December does support the notion that Nield was willing to put himself on the line in support of achieving the confirmation Paradigm was seeking of the sale of the Intella business agreement.  Whatever the reason, his conduct deviated so materially from what would have been expected of a professional accountant and auditor that to characterise his negligence as gross would not overstate matters.  There is no evidence that his issue of the profit certificate was preceded by any exercise different to that which had preceded his issue of the reporting accountant’s report.  There is no basis to distinguish the degree of culpability attendant on both actions.

[109]  In Perre v Apand, supra, at para 132, McHugh J observed that ‘because fault remains the basis of negligence liability, [he could] see no reason why recklessness or gross carelessness should not be a relevant factor in determining whether a duty of care was owed’.  In a South African context accepting this to be so would not be, as might at first blush appear, to confuse negligence with wrongfulness.  In many delictual cases the facts which establish negligence are precisely the same as those which establish wrongfulness.  That characteristic does not detract from the distinction between the legal elements; and the necessity for the success of any claim under the Aquilian action that both be established.  As any determination in delict whether a breach of a legal duty of care has occurred in particular circumstances involves weighing what the legal convictions of the community would expect and judicially determining the public’s sense of what the law ought to be, it seems logical to recognise that recklessness or gross negligence on the part of the alleged wrongdoer could be a factor (not in itself, but in the context of the conspectus of the facts of the particular case) influencing the decision whether or not to afford a remedy to the person who has suffered loss as a consequence[63].  As Lewis JA said in Premier, Western Cape v Faircape Property Developers (Pty) Ltd 2003 (6) SA 13 (SCA) at para [42], ‘The test for reasonableness goes not only to negligence, but also to determine the boundaries of lawfulness.’

[110]  In the present case, the grossness of Nield’s negligence, judged in the context that I have described, has materially influenced my decision to hold that that a remedy should be afforded to the plaintiff if it is able to establish its damages and prove that Nield was legally causal of them.  In reaching this decision it was also of importance that Nield’s negligent misstatements were made not in a situation where reliance on them by the plaintiff, with deleterious consequences if they were inaccurate, was only foreseeable; they were made in circumstances in which reliance on them must have been actually intended.  These features of the case outweigh the effect of the plaintiff’s failure to take measures to independently investigate the commercial desirability of the proposed transaction.

Factual Causation

[111]  Having found that the plaintiff has succeeded in establishing that Nield acted wrongfully and negligently in making the misstatements in the report and the profit certificate it remains to address the question of factual causation.  In this respect for the reason mentioned earlier[64] it is necessary to treat only with the effect of the profit certificate.

[112]  Mr Oosthuizen emphasised the fact that the directors of the plaintiff had resolved to confirm the sale of business agreement on 20 September 1999 before either of the misstatements by Nield was made and that the voting pool which was likely to determine the result of the shareholders’ meeting had also given its mandate to Rai to vote in support of approval of the agreement before the independent reporting accountant’s report was released in October.  He also argued that the written minute of the resolution adopted at the shareholders’ meeting suggested that it had been fabricated after the event to support the plaintiff’s case that it had relied on the misstatements.

[113]  In my view the first leg of the argument, although supported by the evidence, does not detract from the factually causal effect of Nield’s statements on the decision to approve the sale of business agreement.  Until the satisfaction of all the relevant suspensive conditions by acceptance of the motion in favour of the agreement at the shareholders’ meeting, there was nothing to prevent the voting pool from altering its mandate, or the directors from reversing their decision to recommend approval of the agreement to the shareholders. 

[114]  There was substance in Mr Oosthuizen’s sceptical analysis of the wording of the shareholders’ resolution.  The minute of it was drafted by Mr Theodore Rai (Rai’s brother and fellow director) in October 2000, a long time after the shareholders’ meeting, and the wording did tend to bear out Mr Oosthuizen’s suggestion that its text had been drafted with proceedings by the plaintiff against the defendant in mind.  There is no reason to doubt, however, that Nield’s email was tabled at the shareholders’ meeting.  There were a number of persons present at the meeting who could have been called by the defendant as independent witnesses to refute the evidence of Rai in this respect if it were not true, but no-one was called.  The certificate having been especially called for shortly before the meeting, and the stated purpose for requesting it having been for the shareholders’ meeting, the conclusion that regard would indeed have been had to its content when it was provided would accord with the inherent probabilities.

[115]  As already mentioned, I am satisfied that had the profit certificate stated that the Intella business had continued to make a loss during the period March-June 1999, it is unlikely that the shareholders’ vote would have gone in favour of approving the agreement.  While it was so that the directors of the plaintiff were well aware at the time that the recoverability of the Ubunye debt was questionable[65], the achievement of a turn-around in the profitability of the business, even if it were only on paper, was an important factor in the minds of the plaintiff’s management as a critical indicator of the future viability of the business as a going concern; if true it would show that operationally, increased business was being done in terms of the roll out process which had been represented. 

[116]  With reference to certain of the documentation discovered by the plaintiff, some of it very late in the day, only after Rai had completed giving evidence, Mr Oosthuizen contended that the plaintiff’s directors were fully aware of all the material facts concerning the Intella business.  He pointed, amongst other things, to the receipt by Rai of interim results for the Intella group after the signature of the agreement; to the minutes of meetings of the plaintiff’s board of directors showing that Rai had reported ‘in detail’ in support of the finalisation of the Intella acquisition; to an Intella Technologies document purporting to show the after tax profits of the Intella business for the period March-June 1999 in the amount of R12,75 million and to a letter from Havenga of Intella to Rai dated 1 November 1999 about matters such as head office overheads and strategic future acquisitions and ‘unbundling’ ‘non-IT assets’ etc.  He said these indicators of involvement and knowledge by Rai and the other directors supported his argument that the plaintiff had not been reliant on the profit certificate when the shareholders’ meeting voted in favour of approving the sale of business agreement.  I do not agree.  The documentation to which I was referred did not contain any material which would have rendered a request for and a reliance upon an audit confirmation of the relevant financial information superfluous.

[117]  As mentioned earlier, it was also argued on behalf of the defendant that the causal effect of Nield’s misstatement, if any, had been overridden by the failure of the sale of business agreement through non-fulfilment of the suspensive conditions within the contractually stipulated period.  In my view there is no merit in this argument.  It is clear that had the parties’ applied their minds to the lapsing of the agreement they would have done whatever was necessary to reinstate it.  The lapsing of the agreement was wholly incidental to the issuance of the profit certificate by Nield.  There is nothing to suggest that Nield was conscious of the lapsing of the agreement or that he thought that the advice furnished by him in his December email was unimportant or would not be relied upon for the purpose of approving the agreement.

[118]  Similarly, in my judgment, the conclusion of the settlement agreement in the circumstances described above did not interrupt the causal effect of Nield’s act.  The settlement agreement, as I have already remarked, was essentially an act of survival by the plaintiff.  The conclusion of the agreement was in fact a disadvantageous consequence of the sale of business agreement which would not have occurred had Nield correctly reported on the financial position of the Intella business.  The contention that the plaintiff could have avoided suffering any loss by cancelling or repudiating the agreement took no account of the realities created by the implementation of the contract after Nield had issued the profit certificate.

[119]  Assuming, as I must at this stage of the trial, that the plaintiff has suffered the damages it seeks to recover, I find that the plaintiff has established the element of factual causation by the defendant.

Contributory Negligence

[120]  The defendant pleaded in the alternative to its principal defence, which denied any liability in respect of the plaintiff’s claim, that the plaintiff had failed to take reasonable steps to mitigate its damages by exercising the breach of warranty remedies under the sale of business agreement and, in the further alternative, that the plaintiff was contributorily negligent in the following respects: (i) that the directors of the company were or should have been aware of the material aspects of the Ubunye transaction alleged in paragraph 10.1 of the plaintiff’s particulars of claim and that the Intella business made an after tax loss in the year ended June 1999 and that no audited financial statements for the 1999 financial year existed for AMT, Voice & data and Everycard Data Switch, whose  businesses formed part of the Intella business[66]; (ii) That the directors of the plaintiff company had failed to exercise reasonable care and prudence and that their failure caused them not to ascertain the relevant facts and report them to fellow directors and the shareholders and (iii) by concluding the settlement agreement.  The mitigation of damages issue has been reserved for the second stage of the trial consequent upon the order made in terms of rule 33(4).

[121]  I have already dealt with the circumstances in which the settlement agreement was concluded.  In my view there is no merit in the allegation of contributory negligence predicated on the conclusion of that agreement.

[122]  The evidence did indeed show that the plaintiff was aware of some of the questionable characteristics of the Ubunye transaction- notably the fact that the debt had not been paid and that there might be difficulty in obtaining its payment.  In the context of this knowledge it was somewhat puzzling that the plaintiff pleaded Nield’s failure to draw attention to this in the reporting accountant’s report as having been negligent in a relevant respect.  This incident of the transaction did not appear at the trial to have much bearing on the plaintiff’s actual complaint, which went to the non-existence of the debt rather than its non-payment.  Save for that to which I shall speak in the succeeding paragraph, I do not consider that the defendant succeeded in proving what the plaintiff could reasonably have established concerning the existence of the Ubunye debt prior to the implementation of the agreement.  The evidence led in this trial has suggested fraudulent conduct[67] in respect of the representations made by various of the representatives of Paradigm/Intella before and after the signature of the sale of business agreement.  In my view, prospective purchasers in the position of the plaintiff cannot reasonably be expected to treat in business transactions, of whatever magnitude, on the basis that the other parties might be defrauding them.  On the evidence discussed earlier, it is clear that various representatives of Paradigm/Intella appear not to have been above devices such as the fabrication of orders and invoices in order to purport to substantiate non-existent transactions.  In the circumstances it has not been proved that reasonable enquiries by the directors of the plaintiff would have exposed the fiction of the Ubunye transaction, or the reported profits which depended on it.

[123]  I do, however, consider that the directors of the plaintiff should have called for and considered the relevant financial statements referred to in the independent reporting accountant’s report.  I was not impressed by the answer given by Mr Rai under cross-examination to the effect he was not interested in looking at the financials because the plaintiff was buying the Intella business, not the companies through which it was conducted.  I consider that the directors should have considered the financials prior to the issue by them of the circular to shareholders in which reference to the financial statements was made.  Nield’s report formed part of the circular and, it will be recalled, the directors stated that they had considered all statements of fact and opinion in the circular and considered them to be correct.  Rai, as an experienced businessman and himself a qualified auditor and accountant, would be well aware that financial statements contain important information about the financial health of a company’s business and that the notes to a balance sheet or income statement can materially influence the interpretation of the reported figures.  The reason for a second due diligence exercise provided for in the sale of business agreement was at least in part because the first financial due diligence report had of necessity been based on unaudited accounts.  Rai had subsequently been informed that the accounts of the relevant entities were in a state of disarray.  I would have thought that the reasonable director in his position would be anxious to see whether the audited financials contained any note referring to this or any indication that it might have affected the audit.  The plaintiff’s directors’ failure to call for and consider the relevant audited financial statements, reported by Nield as being in existence, evinced conduct falling short of that of notional reasonable men in their position.  Had they done so, the non-existence of the statements would have been exposed and it is unlikely that they would have been content subsequently to rely on the casually expressed profit certificate produced by Nield in December.  I accordingly conclude that the plaintiff’s negligence in this respect contributed to its loss.

[124]  It is therefore necessary to determine, having regard to the circumstances of the case, the respective degrees of negligence of the parties for the purpose of deciding upon a just and equitable apportionment in terms of the Apportionment of Damages Act 34 of 1956.  It is on the basis of a comparison between the respective degrees of negligence of the parties that a determination falls to be made as to how far the fault or negligence of each combined with the other to bring about the damage in issue[68].  In my judgment the relevant conduct of Nield deviated from the norm of the bonus paterfamilias by a considerably greater margin than did that of the plaintiff’s directors.  I consider that the defendant should be liable for seventy percent of the sum of any damages that might be awarded to the plaintiff in the second stage of the trial.

Costs

[125]  Finally, there remains the question of costs.  Both sides submitted supplementary written argument after judgment had been reserved.  I record that I have had regard to these additional submissions.

[126]  The defendant brought an application in terms of rule 35 to compel further discovery by the plaintiff.  The application was heard on the day that the trial was set down to commence and the day following that.  The parties had agreed that I would be assisted in understanding the issues of relevance raised by the discovery application if I were to hear the plaintiff’s counsel’s opening address before argument.  That took up the first day.  The costs of the application were reserved.  The main reason for reserving costs was to enable me to decide them in the context of what happened during the hearing.  I had indicated during the argument of the application that it would be open to the plaintiff to renew its application in respect of any relief refused by me initially, if the circumstances warranted it.

[127]  At the time I gave judgment on the application to compel further discovery, I said that I would furnish amplified reasons later, to do justice to the detailed argument addressed to me by both sides.  Upon reconsideration, and meaning no disrespect thereby to the efforts of counsel, I have concluded that the reasons I gave at the time were sufficient in the circumstances.  I should point out, however, that it became apparent to me later that in giving reasons for my ruling I had wrongly characterised the nature of the damages which I understood the plaintiff to be claiming.  With the benefit of hindsight, I am able to say that had I correctly appreciated the make-up of the damages at the time it would not have affected the result.

[128]  The defendant achieved some measure of success in the application, but I think that Mr Gautschi was correct to characterise it as minimal and of little substance.  That said, during the subsequent trial, the plaintiff produced and made available many documents, which it should have discovered in the ordinary course had it approached its discovery obligations with the conscientiousness that was incumbent on it.  I have decided that it would be just in the circumstances that each party bear its own costs in the discovery application. 

[129]  The trial was adjourned at the close of proceedings on 30 August 2004 at the request of Mr Oosthuizen, who understood that Mr Gautschi was about to close his case.  Mr Oosthuizen indicated that there were various unidentified issues that he wished to consider before commencing with the defendant’s case, some of which entailed the possibility of an amendment of the pleadings.  As I was unavailable after 31 August 2004, the trial would in any event have had to be postponed on that day for completion later.  Mr Gautschi opposed the postponement, but when its inevitability became apparent he asked that I reserve the issue of deciding liability for any wasted costs attendant on it.

[130]  When the issue was argued at the conclusion of this stage of the trial, Mr Gautschi pressed for an order that the defendant be directed to pay the wasted costs attendant on the early postponement on 30 August.  When I enquired what such wasted costs might comprise, as between party and party, he was unable to identify any.  I have been unable to conceive of what such costs might be myself.  There will be no order as to costs in respect of the postponement on 30 August 2004.

[131]  The plaintiff’s counsel argued that if the plaintiff was successful, as it has been, in respect of the issues reserved for separate determination in this stage of the trial, it should be awarded costs of suit in respect of this stage of the hearing. I was referred to several reported judgments in which this course has been followed.  In certain types of case the course proposed by the plaintiff’s counsel might well be appropriate.  An example would be a bodily injury compensation case where the issues of liability and quantum are separated and the issue of liability is determined in favour of the claimant in the first stage.  In most of such cases it is certain that a damages award will follow, either after a second stage trial or by agreement.  Those characteristics do not apply in the present case.  Success in the first stage of the trial does not necessarily imply that the plaintiff will ultimately be successful in the action.  It is not just a question of quantum of damages that is unresolved at this stage.  There is no basis at the conclusion of the first stage trial to predict what the plaintiff’s prospects are of establishing the element of legal causation. 

[132]  In the circumstances, the costs of the hearing before me shall be ordered to be costs in the cause.  Because the second stage of the trial may take place before another judge it is appropriate, however, to indicate that should the plaintiff succeed in the action, any costs order made in its favour should include the qualifying fees of Messrs Hudgson and Pinnington.  Messrs Rai and van der Laar were necessary witnesses.  I should also indicate for the possible benefit of the judge who makes the costs order at the end of the second stage of the trial that I consider that the employment of two counsel by both sides for the purpose of the first stage of the trial was appropriate.

Investigation into Nield’s conduct

[133] I consider that the Nield’s conduct in relation to the issue of the independent reporting accountant’s report and the ‘profit certificate’ merit investigation by his professional body.  See s 20(8) read with s 13(1)(h) and ss 23 and 24 of the PAAA.  An order will be made directing that a copy of this judgment be forwarded for the attention of the Public Accountants' and Auditors' Board.

Orders

[134] The following orders are therefore made:

(a) It is declared that subject to the plaintiff establishing the element of legal causation in the second stage of the trial, and subject to the fate of the defendant’s mitigation of loss defence, the defendant shall be liable to the plaintiff for 70 per cent of the amount of the financial loss alleged in the particulars of claim, which the latter might prove itself to have suffered as a result of having relied on the negligent misstatement by Nield in respect of the attributable income of the Intella business for the period 1 March 1999 to 30 June 1999.

(b) The costs of the first stage of the trial shall be costs in the cause.

(c) Each party shall bear its own costs in the application by the defendant to compel further and better discovery.

(d) In respect of the question of costs reserved on 30 August 2004, there shall be no order as to costs.

(e) The Registrar is directed to forward a copy of this judgment to the Public Accountants' and Auditors' Board pursuant to the remarks made in paragraph [133], above.

(f) The issues reserved for the second stage are postponed for hearing on a date to be determined by the Registrar.

A.G. BINNS-WARD

ACTING JUDGE OF THE HIGH COURT

---