Constantia Insurance Co Ltd v Compusource (Pty) Ltd

• Jurisdiction: South Africa
• Court: Supreme Court of Appeal
• Judge: Howie P, Farlam JA, Brand JA, Lewis JA and Van Heerden JA
• Judgment Date: 30 March 2005
• Citation: 2005 (4) SA 345 (SCA)
• Hearing Date: 07 March 2005
• Docket Number: 143/04
• Counsel: J R Gautschi SC (with him T J Bruinders SC) for the appellant. B K Pincus SC (with him G Elliott) for the respondent.

Constantia Insurance Co Ltd v Compusource (Pty) Ltd
2005 (4) SA 345 (SCA)

2005 (4) SA p345

Citation	2005 (4) SA 345 (SCA)
Case No	143/04
Court	Supreme Court of Appeal
Judge	Howie P, Farlam JA, Brand JA, Lewis JA and Van Heerden JA
Heard	March 7, 2005
Judgment	March 30, 2005
Counsel	J R Gautschi SC (with him T J Bruinders SC) for the appellant.; B K Pincus SC (with him G Elliott) for the respondent.

Flynote : Sleutelwoorde B

Insurance — Policy — Formation of — Policy for payment of legal expenses in litigation — Post-dispute insurance — Insured agreeing to policy presented as 'no win — no premium' policy — Policy containing clause permitting insurer to increase premium or cancel policy at any time — Representative of insured not aware of existence of C clause — Had he been so aware, he would not have agreed to policy — Matter accordingly one of dissensus — Reasonable person would have foreseen that prospective insured who did not peruse policy with care could well have missed the full implications of clause — In circumstances reasonable person would have enquired from insured's D representative whether he appreciated meaning of clause — Insured could not be held bound by provisions of a clause to which its representative did not and could not reasonably have been thought to agree.

Headnote : Kopnota

The respondent took out two policies, referred to as PDL policies, with the appellant. PDL policies, like many others, cover the E insured party's legal expenses incurred in litigation, but are novel in that they provide cover when the dispute giving rise to the litigation or even the litigation itself has already ensued. In the present case the policies were issued through the agency of an insurance broker (LPS). The litigation in question concerned a claim F for damages of R590m by the respondent against another company, CQP, based on the repudiation by the latter of a joint venture agreement between them. At some stage the dispute between the parties was referred to arbitration. Prior to such reference, however, the respondent had been ordered by the Cape High Court to furnish security for CQP's costs in the sum of R800 000. The respondent was not in a position to pay the security and approached LPS, who G presented a possible solution as a policy in terms of which the premium could be fully deferred as well as a 'no win - no premium' possibility. LPS provided the respondent with a quotation for the insurance of CQP's taxed costs to the limit of R800 000. The quotation provided as follows: '2.2 In the event of a judgment containing an adverse award of costs, the insurers would be liable up to the limit of indemnity and no premium would be payable.' H The respondent accepted the quotation and on the basis of it obtained a bank guarantee for CQP's costs. The respondent then took out a further policy for its own costs in the arbitration to a limit of R1 million for which the premium payable on the 'no win - no payment' basis was R769 000. The respondent was unable to pay this amount and the appellant then required an inception fee of R57 000. As the respondent was unable to pay even I this amount it was deferred on payment of a 'facilitation fee' of R25 000. The respondent's legal team subsequently became less optimistic of a favourable outcome for their clients, a view that was confirmed by an independent senior counsel. In the circumstances the appellant cancelled the policy in terms of clause 3.2.2. The respondent settled with CQP on less than favourable terms and the appellant claimed J

2005 (4) SA p346

the full premium from the respondent, basing its claim on clause 3.5 (read with clause 3.3) of the policy. These A provided as follows: '3.3 If any fact or evidence or other matter is discovered . . . which materially adversely affects or might materially adversely affect the insured's prospects of success in the proceedings . . . the insurers may: 3.3.1 Determine in their sole discretion the increase in the premium that the insured shall be obliged to pay . . . or 3.3.2. issue a notice to the insured cancelling forthwith the policy. . . .3.5 If . . . the insurers B exercise the option granted by clause 3.3.2, the premium as stated in the schedule shall have been fully earned. For the purposes of this clause 3.5, the cancellation date shall be seven days from . . . the date of the insurer's cancellation notice.' The respondent's managing director, who had been involved at all times in arranging the policy, was unaware of the existence of this provision. Although he realised that the quotations he had received were subject to the C provisions of the standard policy when he accepted them and although he might even have read clause 3.5 at the time, he never appreciated the impact of this clause. When he received the 'welcome pack' from the broker, the respondent's managing director came to the conclusion, having 'skim read' the questions and answers document that was included in the pack and glanced at the specimen policy included, that D the policy was the same as the 'questions and answers' in terms of the topics covered. He did not study or try to understand all the detailed provisions of the standard policy because he assumed that it would not deviate in any material respect from what was explained to him by the broker, the overriding feature of which was the 'no win - no pay' premium. If he had been aware of it he would never have agreed to insurance policies that were subject to E those terms. The appellant accepted, impliedly, that the respondent's managing director did not actually intend to bind his principal to the provisions of clause 3.5. Its case was that since he had accepted quotations that were expressly subject to the terms of the appellant's standard PDL insurance policy, it was not open to the respondent to rely on a subjective lack of intent to be bound by the provisions of that clause. The respondent relied on the F contention that they were unaware of the clause when they entered into the agreement and that both the appellant's representatives had failed in their legal duty to alert them to its existence. It alleged misrepresentation by the appellant's representatives in the form of an omission, namely the non-disclosure of clause 3.5. This defence was G upheld in the High Court. On appeal to the Supreme Court of Appeal,

Held, that the true issue was not one of misrepresentation by omission but was one of dissensus: the appellant's representatives had thought that the respondent had agreed to clause 3.5 read with clause 3.3.2, whereas in fact it had not. The reason for this misapprehension was that the respondent's managing director had, by accepting the quotations that were made subject to the H provisions of a standard policy, including clause 3.5, created the impression that he had agreed to clause 3.5. Under these circumstances the principal would, despite this lack of actual consensus, be bound to the provisions of the clause if the appellant's representatives were reasonable in their reliance on the impression created by the managing director. If a reasonable person in their position would have realised that he, despite his apparent expression I of agreement, did not actually consent to be bound by the clause, this clause could not be said to be part of their agreement. (Paragraph [16] at 353G - I.)

Held, further, that the appellant's representatives laboured under the genuine misapprehension that the respondent's managing director had in fact agreed, on behalf of the respondent, to be bound by the provisions of clause J

2005 (4) SA p347

3.5 read with clause 3.3.2 and that that misapprehension was caused by the conduct of the A respondent's managing director. (Paragraph [18] at 354E - F.)

Held, further, that the reasonable person considering the full picture would have borne in mind that PDL insurance in general, and the appellant's standard policy in particular, were novel in this country. Even if it could therefore be said that clauses 3.3.2 and 3.5 were not unusual in policies of this kind, they would still be B unexpected to the uninitiated in this specialised field. What would also have weighed heavily with the reasonable person was the very fact that the policies were sold to the respondent on the basis that no premium would be payable unless the respondent won the arbitration with costs. This gave rise to an expectation on the part of the respondent's managing director that the respondent would be able to pay the premium out of the capital award in its favour while C its own costs would be paid by CQP. (Paragraph [20] at 355B - D.)

Held, further, that a reasonable person would have foreseen that a prospective insured who failed to peruse the policy with care might well have missed the full implications of this clause. (Paragraph [22] at 356E.)

Held, further, that the reasonable person would have enquired from the respondent's managing director whether he D appreciated the meaning of the clause, and that their failure to adopt this approach had as a consequence that the respondent could not be held bound by the provisions of a clause to which its representative did not and could not reasonably have been thought to agree. The appeal accordingly had to be dismissed. (Paragraph [23] at 356F - G/H.) E

The decision in the Johannesburg High Court in Compusource (Pty) Ltd v Constantia Insurance Co Ltd confirmed on appeal.

Cases Considered

Annotations

Reported cases

Absa Bank Ltd v Fouche 2003 (1) SA 176 (SCA): referred to F

Callery v Gray (Nos 1 and 2) [2002] UKHL 28 ([2002] 3 All ER 417 (HL)): referred to

Callery v Gray; Russell v Pal Pak Corrugated Ltd [2001] EWCA Civ 1117 ([2001] 3 All ER 833 (CA)): referred to

McCann v Goodall Group Operations (Pty) Ltd 1995 (2) SA 718 (C): referred to G

Smith...