Thoroughbred Breeders' Association v Price Waterhouse

• Jurisdiction: South Africa
• Judge: Nienaber JA, Marais JA, Olivier JA, Farlam JA and Brand AJA
• Judgment Date: 01 June 2001
• Docket Number: 416/99
• Court: Supreme Court of Appeal

Nienaber JA:

Introduction A

[1] This is a case of a client suing its auditor for damages for breach of contract. The complaint is that the auditor, in the course of a routine annual audit, failed to realise that the client's own financial manager, a man with a criminal record for theft of which the B client but not the auditor was aware, had been systematically stealing from it in the past and, if undetected, would be likely to continue to do so in the future.

[2] The appellant, the plaintiff in the Court below, hereinafter referred to simply as 'TBA', is a statutory juristic person registered in terms of s 18 of the Livestock Improvement Act 25 of C 1977. It is a non-profit making association of breeders of thoroughbred horses, as its name implies. Membership of TBA is a precondition for the registration of horses to be entered into the stud book maintained by the Jockey Club of South Africa, the body administering horse racing in this country. TBA has some 700 - 800 members, scattered throughout the country, who are predominantly farmers. TBA furthermore acts as D auctioneer and sales agent for the sale of thoroughbred horses and it derives its income principally from membership fees and from the commissions it earns on auctions and sales.

[3] In 1991 TBA appointed one John Mitchell as its financial manager. During his three months probationary period it was discovered E that he had been convicted in 1985 of theft and sentenced to a period of imprisonment of eight years of which he served approximately 18 months. Even though he withheld this information from TBA when applying for the position (and indeed supplied false information to it about his F employment during the period of his incarceration) it was nevertheless resolved by TBA's council (a) to confirm his employment, (b) to monitor his activities in future, (c) not to disclose his past history to other members of the staff, and accordingly (d) not to minute the discussion and the resolution. G

[4] Mitchell's performance was in fact monitored for the first 18 months or so of his employment and proved to be entirely satisfactory. Indeed, he was highly regarded by his co-employees and the council alike for his competence in significantly improving the manner in which TBA's financial affairs were conducted. By all accounts he was the dominant figure in TBA's entire management team. H

[5] Since the early 1970s Messrs Richardson Reid acted as auditors to TBA and prepared its annual financial statements. The responsible partner was a Mr Reid. It was part of the modus operandi of Richardson Reid to do what was described in the trial as a 'reperformance' of the annual year-end bank reconciliation. This I was described by TBA expert witness, Wainer, as 'a redoing of the task that has already been done by the entity being audited'.

[6] During 1990 Richardson Reid amalgamated with Price Waterhouse Meyernel (as it was known at the time the trial commenced), a J

Nienaber JA

partnership of public accountants, hereinafter referred to simply as A 'PW'. PW was the defendant in the Court below and is the respondent in this Court. Reid continued to be responsible for the audit of the TBA's books of account but, following PW's new procedures, he no longer caused a reperformance of the year-end bank reconciliations to be done. What Reid did not know, since he was never told and could not have discovered it from the appropriate minutes, was B that Mitchell had a record of proven dishonesty.

[7] The last set of financial statements prepared under the supervision of Reid was for TBA's financial year ending October 1993. The actual field work was done by three audit clerks in January 1994. Their work was initially reviewed by the audit manager, Greyling, but C ultimately by Reid himself. The core of TBA's case against PW is that there were a series of discrepancies in TBA's books of account which ought to have alerted the auditing team, but did not, that something was amiss; that, if these matters had been pursued as they should have been, Mitchell's misdemeanours would have been discovered in January 1994; and that the thefts he committed thereafter with the D consequent losses to TBA would have been averted.

[8] It was only during November 1994 that it was discovered that Mitchell had consistently stolen large sums from TBA. He had done so by a process described in the trial as 'teeming and lading' or 'rolling E over'. This consisted of misappropriating cash or cheque payments made by members or customers of TBA and using them to 'clear' earlier defalcations, thereby ostensibly 'balancing' the books for the time being. When Mitchell was confronted he immediately confessed to the fact but not necessarily to all the details of his embezzlement. At that stage it was believed that the thefts had commenced after October F 1993, ie after the period on which PW had focused for purposes of its last audit. PW, more particularly Reid, was thereupon commissioned to investigate and prepare a full report on the extent of Mitchell's thefts. This he did. He uncovered a massive series of thefts which he quantified as being of the order of R1 697 929,28. G Mitchell was dismissed. TBA obtained summary judgment against him based on Reid's report. (An amount in the vicinity of R100 000 was recovered from him.) At the same time and at TBA's insistence he was prosecuted, convicted and again imprisoned.

TBA's complaint H

[9] During the course of these investigations it became apparent that Mitchell had also stolen considerable sums during 1993, later estimated to be about R300 000. It was this disclosure, that Mitchell's thefts predated the 1993 audit, that became the source of the present proceedings against PW. PW, it was common cause, was contractually bound to exercise reasonable care in the execution of its audit and not I to do the work negligently. The allegation is that it failed in that respect; that had the work been done properly, Mitchell's theft would have been uncovered in January 1994; and that all the direct losses suffered by TBA due to Mitchell's subsequent thefts and his inability to repay were accordingly J

Nienaber JA

for the defendant's account. The factual basis of TBA's quantification of its claim, much to PW's indignation, A was Reid's special report commissioned by TBA after the thefts were initially discovered in November 1994.

PW's defence

[10] PW in its plea denied that it was negligent and accordingly that it committed a breach of contract vis-à-vis TBA. In the B alternative it denied that any breach it may have committed was a cause of TBA's loss. The true cause of the TBA's loss, so it alleged, was TBA's own negligence, first, in employing Mitchell; secondly, in retaining him as its financial officer after discovering that he had a criminal record; thirdly, in failing to inform PW thereof; and C fourthly, in failing, due also to its own admittedly inadequate and lax internal controls, to properly supervise and control Mitchell's activities. It was furthermore alleged by PW in its plea that the parties at all material times contemplated and agreed that PW's appointment was made on the basis that it would not be liable to TBA D 'for any loss suffered by the latter as a result of the defendant's breach of contract, if the plaintiff's own negligence was the primary cause, or alternatively a material cause, or alternatively a cause of its loss'. As a final alternative it was pleaded that TBA's claim was liable to be reduced because TBA was itself negligent, because its negligence was a contributory cause of its loss and because the Apportionment of Damages Act 34 of 1956 (the E Act) was applicable to its cause of action.

The issues and the Court a quo's findings thereon

[11] The first major issue before the Court a quo (Goldstein J sitting in the Witwatersrand Local Division of the High Court) was whether PW was negligent (and hence committed a breach of F contract) in not being sufficiently alert in conducting its October 1993 audit. The Court a quo held that it was and since it was common cause that TBA had suffered a loss (the quantification of which was eventually settled between the parties), the next major issue was whether such negligence was the cause of such loss. And that issue posed the next two, namely whether TBA was not itself negligent and, if G so, whether such negligence was not the true cause of its loss. The Court a quo found that TBA was indeed negligent and that its negligence was the real and dominant cause of its loss. Despite that finding Goldstein J held that TBA was not non-suited because the claim was partly rescued by the Act, even though it was not framed in delict H but in contract. It further held that TBA was 80% to blame for its own loss and that the damages it was otherwise entitled to recover had accordingly to be reduced by that percentage. The judgment has been reported as Thoroughbred Breeders' Association of South Africa v Price Waterhouse 1999 (4) SA 968 (W). I

[12] The parties had earlier agreed on the quantification of Mitchell's misappropriations of cash receipts and cheque payments as being R1 389 801,90. The Court a quo deducted R143 403,44, in respect of moneys stolen before 31 October 1993. In the result the Court a quo calculated that TBA was entitled to R1 246 398,46 less 80%, resulting J

Nienaber JA

in an award of R249 279,69. Both parties were in agreement before us that the amount of R143 403,44 was wrongly A deducted and that, consistently with the Court a quo's apportionment of liability, the sum should have been R277 960,38 (being 20% of R1 389 801,90).

[13] TBA disputed, as a matter of law, the finding that...