Price Waterhouse Coopers Inc and Others v National Potato Co-Operative Ltd

• Jurisdiction: South Africa
• Judge: Harms JA, Cameron JA, Conradie JA, Lewis JA and Southwood AJA
• Judgment Date: 01 June 2004
• Citation: 2004 (6) SA 66 (SCA)
• Docket Number: 448/02
• Hearing Date: 11 May 2004
• Counsel: W H G van der Linde SC (with him F G Barrie) for the appellants. C E Puckrin SC (with him G W Alberts and W C Maritz) for the respondent.
• Court: Supreme Court of Appeal

Southwood AJA:

[1] The question which arises in this appeal is whether an alleged champertous agreement between the respondent co-operative (the plaintiff in the Court below) and a third party to finance the I respondent's action against a firm of accountants, the appellants (the defendants in the Court below) may be relied upon by the appellants as a defence to the respondent's claim. In this judgment, I shall refer to the appellants, individually and collectively, as 'Price Waterhouse' and to the respondent as 'the Co-operative'. J

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[2] The salient facts as they emerged from the Co-operative's A evidence (Price Waterhouse did not tender any) are as follows: The Co-operative is a primary agricultural co-operative registered in terms of the Co-operatives Act 91 of 1981. During 1997 the Co-operative appointed Collett, Du Toit & Associates (Pty) Ltd (CDA) to investigate certain irregularities allegedly committed by the Co-operative's then general manager, Mr Boonzaaier. Mr David Collett, a chartered B accountant, was to conduct the investigation for CDA.

[3] Late in 1997, CDA submitted a draft preliminary report to the Co-operative's board of directors. In this report Collett listed the irregularities which he had found and expressed the view that Mr Boonzaaier was heavily involved in the commission of these C irregularities. The report also referred to other matters which, in Collett's opinion, should have been detected and reported by the auditor. In November 1997, and apparently because of this report, Price Waterhouse resigned as the Co-operative's auditor at the annual general meeting. D

[4] CDA continued to investigate the irregularities but by April 1998 the focus of the investigation had changed to the viability of a claim against Price Waterhouse. On 27 March 1998 Collett gave his findings to a senior advocate and requested him to furnish an opinion on the Co-operative's prospects of success if it were to institute an action against Price Waterhouse. E

[5] The cost of CDA's investigation put a strain on the Co-operative's financial position and the Co-operative's management advised the board not to proceed with the investigation. The board chose instead to investigate alternative means of financing the litigation. Its initial proposal was to find a third party to finance F the litigation in exchange for a share of the proceeds of a successful action. The proposal contemplated that the third party would contribute an amount of R1,5 million to the cost of prosecuting the action and the third party and the Co-operative would share the proceeds of a successful claim.

[6] On 17 April 1998, after consulting a number of the G Co-operative's members who apparently supported the action contemplated, the Co-operative's board of directors resolved to sell the Co-operative's claim against Price Waterhouse to Unitrade 40 (Pty) Ltd (which later changed its name to Farmers Indemnity Fund (Pty) Ltd and will henceforth be referred to as 'FIF'). FIF had been incorporated on 29 October 1997 as a shelf company. From 30 H October 1997 until 13 May 1998 FIF's 100 shares were held by the Gerne Trust of which Mr Buitendag, the Co-operative's then attorney and its present attorney of record, was the beneficiary.

[7] On 13 May 1998 the Co-operative entered into a written I agreement (the 'sale agreement') with FIF in terms of which it sold its right, title and interest in the claim against Price Waterhouse to FIF for 50% of the gross proceeds of a successful claim or settlement of the claim. The agreement recorded that as at 31 March 1998 the Co-operative had already contributed an amount of R1,1 million to pay for legal advice J

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and the cost of CDA's investigation and that it would A be liable for all costs incurred up to 30 April 1998. The parties agreed that the Co-operative's contribution would be deemed to be R1,5 million and that FIF also would contribute R1,5 million to pay for the costs of the investigation, the legal costs and the expert's fees and qualifying expenses necessary to institute the action against Price B Waterhouse and bring the claim to finality. The parties also agreed that FIF would be liable for costs incurred after 1 May 1998, but that if the costs incurred after 1 May 1998 exceeded R1,5 million, the additional costs would be borne equally by FIF and the Co-operative.

[8] The preamble to the sale agreement recorded, and FIF and the C Co-operative pertinently agreed, that the Co-operative was selling its claim to FIF because it was not able to finance the litigation contemplated against Price Waterhouse and regarded the sale as an alternative method of financing the action.

[9] In the sale agreement the Co-operative and FIF also agreed D on how the shares in FIF were to be held. Members of the Co-operative were to be entitled to take up one-third of the shares, Euro-Africa Investments (Pty) Ltd (Euro-Africa), a company controlled by a financier, Mr P S Schledorn, was to be entitled to take up one-third of the shares and members of the Co-operative or other persons would be E entitled to take up the remaining one-third of the shares on a 'first come, first served' basis. If the Co-operative's members did not take up their allotted one-third of the shares within 30 days of signature of the agreement the remaining shares could be taken up by any other person or body on a 'first come, first served' basis.

[10] The sale agreement provided that initially FIF's board F would consist of four directors: one appointed by the Co-operative; one by Euro-Africa, one was to be a member of the Co-operative and one was to be appointed by the shareholders taking up the remaining one-third G of the shares. The first four directors were Mr D J Pieterse (appointed by the Co-operative - also its chairman); Mr B C J van Rensburg (a member of the Co-operative - also its vice-chairman); Mr P S Schledorn (appointed by Euro-Africa) and Mr W J A Labuschagne (on behalf of the first come, first served shareholders - also a member of the Co-operative's board). H

[11] The agreement recorded that FIF purchased the claim on the strength of research done in connection with the claim, that the claim appears from the Co-operative's records and that FIF would prosecute the claim at its own risk. The parties agreed that the Co-operative would co-operate fully with FIF for the purposes of the action and that I FIF would appoint the professional team to conduct the litigation.

[12] On 12 May 1998 Mr Buitendag resigned as director of FIF and Messrs Pieterse, Van Rensburg and Labuschagne were appointed as directors. On 14 May 1998 FIF changed its main object and principal J

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business to the acquisition of claims for litigation. It gave A as the reason for this change that it would enable FIF to acquire a claim from the Co-operative for litigation.

[13] On 17 April 1998 FIF increased its authorised share capital of 1 000 one rand shares to 2 000 one rand shares. On 14 May 1998 FIF further increased its authorised share capital to 2 000 000 one rand shares. FIF did this so that it could issue shares B to obtain the funds to finance the litigation.

[14] In May 1998, the Co-operative's members were invited to subscribe for shares in FIF. In August 1998, 1 664 400 shares were issued to 15 shareholders. According to the documents in the record C these included four of the Co-operative's members, Mr Pieterse (the chairman - 100 000 shares); Mr Van Rensburg (the vice-chairman - 185 000 shares); Mr J D van der Merwe (a director - 5 000 shares) and Mr G J van Rooyen (100 000 shares). Euro-Africa (which later became NAK Financial Assistance (Pty) Ltd) took up 750 000 shares. D

[15] The Co-operative's board was still concerned about the arrangements made to finance the action and decided to obtain legal advice on the question. In December 1998 a senior advocate advised the Co-operative's attorney, Mr Buitendag, that the sale agreement was champertous, accordingly against public policy and invalid and that it E did not achieve its objective. He advised Mr Buitendag that the agreement should be cancelled and the claim ceded back to the Co-operative; that the claim should remain with the Co-operative; and that the Co-operative should be the plaintiff in the action. He also advised that a new agreement should be entered into in terms of which FIF would finance the litigation in return for 50% of the proceeds of F the litigation. He expressed the view that although the suggested arrangement could be a pactum de quota litis it would not necessarily be objectionable. However, he warned that the proposed arrangement could be attacked, apparently because it might be seen to be of a 'gambling character'. His concern was that if the Co-operative's action failed, FIF would get nothing, whereas if it G succeeded FIF would get 50% of the proceeds. His view was that Price Waterhouse would not be able to rely on the arrangement as a defence (to an action instituted by the Co-operative) but that the agreement could create problems if a dispute arose between FIF and the Co-operative. During February 1999 this advice was conveyed to the H Co-operative's board, which was also informed that in accordance with the advice new agreements were being prepared to protect the investors' interests.

[16] In October 1999 the Co-operative and FIF entered into two agreements: an agreement in terms of which they cancelled the sale I agreement and an agreement in terms of which FIF undertook to provide financial assistance to the Co-operative to enable the Co-operative to pursue its claim against Price Waterhouse ('the assistance agreement'). In the assistance agreement the parties recorded that the estimated cost of litigation to recover the claim amounted to R1,5 J

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