David Trust and Others v Aegis Insurance Co Ltd and Others

• Jurisdiction: South Africa

David Trust and Others v Aegis Insurance Co Ltd and Others
2000 (3) SA 289 (SCA)

2000 (3) SA p289

Citation	2000 (3) SA 289 (SCA)
Case No	645/97
Court	Supreme Court of Appeal
Judge	Hefer JA, Smalberger JA, Nienaber AJ, Marais JA, Mthiyane AJA
Heard	March 3, 2000
Judgment	March 31, 2000
Counsel	K A B Engers SC (with him T S Emslie) for the appellants.; T Plewman for the respondents.

Flynote : Sleutelwoorde

Insurance — Liability of insurer — Cause of loss — Partnership of accountants mandated to run business affairs of plaintiffs — Partner stealing moneys invested on behalf of plaintiffs — Partnership E sequestrated due to claims arising from thefts — Partnership insured against loss arising from dishonesty or breach of professional duty — Insurers repudiating liability on ground that plaintiffs' loss not caused by dishonesty but by sequestration of partnership — Partnership's inability to pay plaintiffs moneys owed to F them direct consequence of failure to perform mandate honestly and diligently — Plaintiffs' loss accordingly not due to insolvency but to dishonesty of partner and accordingly covered by insurance policy.

Insurance — Liability of insurer — Interpretation of contract — What risks policy covers is matter of interpretation and cannot be labelled in advance of its interpretation — What is covered depends upon terms of policy. G

Insurance — Liability of insurer — Interpretation of contract — Policy covering breach of duty in practice of profession of accountants — Profession specifically defined in policy — Definition also including services performed in connection with activities specified in policy — Phrase 'in connection with' a wide one — Not essential that every aspect of work should be separately listed in policy if it is H incidental to or connected with activities which were listed.

Headnote : Kopnota

The appellants had entrusted their business affairs to a partnership of chartered accountants, KS. KS was mandated to effectively run the business. Included in the service performed by KS was the investing of surplus funds with certain banks, which was to be I payable to the appellants on demand. One of the partners of KS, one L, had dishonestly siphoned off moneys from the appellants' funds. When KS was unable to pay an amount requested by one of the appellants, L was found out and KS was ultimately liquidated and the appellants were unable to recover the total sum of the moneys entrusted to KS. In terms of s 156 of the Insolvency Act 24 of 1936 J

2000 (3) SA p290

the appellants claimed from the respondents under insurance policies that KS had taken out with A the respondents. The insurance policies covered, inter alia, a loss resulting from a 'breach of contract amounting to breach of duty in the practice of the profession by the insured' (ie KS).

The respondents resisted the claims, inter alia, on the grounds that: the loss to the appellants was occasioned not by L's or KS's dishonesty or actions, but by the insolvency of KS; since the relationship between KS and each of the plaintiffs had been purely that B of debtor and creditor with the funds not held in trust as separate funds in respect of which KS acted as mere agents and the insurance policy was a professional indemnity and not a fidelity policy, KS's breach (the failure to effect payment on demand) was accordingly not the kind of breach of contract contemplated by the clause and hence it was not covered by the policy; KS's breach of contract, having regard C to the definition of the 'profession' in the policy (which included accounting, auditing, bookkeeping, taxation, secretarial services, management accounting, administration of trusts, administration of companies, collection of money on behalf of clients, signing of cheques for effecting payments on behalf of clients, accounting and audit requirements of statutes, and any other service which would normally be undertaken in the course of their professional capacity as D accountant), had not amounted to a 'breach of duty in the practice of the profession' and 'in the conduct of the profession' as accountants and the clause accordingly did not apply; and because KS's actions 'amounted to banking' the actions of KS were illegal and because it was against public policy to allow anyone to insure himself against his own criminal conduct, the breach of contract in question was not one contemplated by the policy (alternatively such conduct E could not qualify as being 'in the conduct of the profession' within the meaning of the policy).

Held, that the contract between the plaintiffs and KS had been one of mandate. The mandate given by each appellant to KS had been to invest and administer funds entrusted to it by the appellant concerned and collected by it from the appellant's debtors. These funds were to be invested in a bank. It was one of the F naturalia of each such contract, as it was of contracts of mandate in general, that the mandatory was obliged, first, to perform her or his functions faithfully, honestly and with care and diligence and, secondly, to account to her or his principals for her or his actions. KS had committed breaches of its mandate. It had done so, in the first place, by its failure to perform its duties honestly (by the misappropriation of money entrusted to it by the appellants) or G diligently (by its failure in either not preventing such misappropriation or at the very least in not discovering it sooner). The breach consisted in the dishonest manner in which L dealt with the funds, as well as in KS's lack of diligence and consequent inability to requisition payment for an accounting and repayment to the appellants. The appellants had not agreed to invest their funds in KS but had invested them in a bank through the good offices of KS. H Consequently it was an inaccurate oversimplification to characterise KS's breach simply as the failure to repay on demand deposits made to KS by the appellants. The breach had consisted of KS's deviation from the terms of its mandate, ultimately resulting in its failure to refund to the appellants the investments made through it. (Paragraphs [20], [21] and [22] at 298G - H, 299B - C, C/D - E and F.) I

Held, further, that KS's inability to requisition payment from the bank had been a direct consequence of its failure to perform its mandate honestly and diligently. If L had not stolen the money there would have been no shortfall and KS would have been able to obtain the funds from the bank to repay the appellants; if the thefts had been discovered earlier, before the shortfall J

2000 (3) SA p291

reached a point where KS had no longer been able to absorb it, the appellants would A also have been repaid. In neither situation, in the absence of a claim from the appellants against KS, could there have been a claim by KS against the defendants under the policy. But once the stage had been reached where KS was faced by claims which, as a result of theft, it had no longer been able to meet, it was idle to suggest that the appellants' loss was due to KS's insolvency and not to L's B dishonesty. It was the breach of contract by KS, founded on the failure of its duty to administer its mandate honestly and diligently, that brought the matter prima facie within the compass of the policy. (Paragraphs [23] and [24] at 299F/G - I and 300B - B/C.)

Held, further, that the appellants had not invested their moneys with or in KS; they had entrusted their funds to KS to invest in certain pre-approved institutions. KS had acted merely as the medium or agency through which the investments had been effected elsewhere. When C asking for repayment the appellants had accordingly not been asking for a repayment of a deposit made with KS, but for an accounting by KS in terms of its mandate with each of the appellants. (Paragraph [26] at 300J - 301B/C.)

Held, further, that the contention that the policy in the present matter had not been what was commonly known as a fidelity policy could likewise not be sustained. What risks the policy covered D remained a matter of interpretation and it could not be labelled in advance of its interpretation. What it covered depended upon the terms. In any event, the policy covered all claims 'arising from or contributed to by the dishonesty or infidelity of any one person'. (Paragraph [27] at 301C/D - D.)

Held, further, that historically and factually KS had offered the appellants a conspectus of accounting services E of which the payment of surplus funds into the money market pending their own decision to withdraw it had been but a single aspect. KS had not simply acted as the appellants' debtor and their relationship had not simply been that of debtor and depositor. Their relationship had been one of mandate into which the plaintiffs entered with KS qua accountants. (Paragraph [28] at 301G and H - I.) F

Held, further, that the services rendered by KS could properly be described as work undertaken or services performed in the course of their profession as accountants in connection with the activities listed in the policy. The phrase 'in connection with' was a wide one. It was not essential that every aspect of their work, such as the acceptance of a mandate to invest surplus funds with an approved financial institution, should be separately listed if, as in the G present case, it was incidental to or connected with activities which were so listed. The theft by a partner of KS of funds ultimately destined for the appellants and the failure by KS to detect and avoid such thefts, were breaches of contract committed by KS in its capacity, and in the course of its business, as accountants. (Paragraphs [30] and [31] at 302D - E/F and G.)

Held, further, that, once it was appreciated that the appellants had not been investing in KS and that KS was not...