Pricewaterhousecoopers Inc v National Potato Co-Operative Ltd

• Jurisdiction: South Africa
• Judge: Wallis JA, Fourie AJA and Koen AJA
• Judgment Date: 04 March 2014
• Citation: 2015 JDR 0371 (SCA)
• Docket Number: 451/12
• Court: Supreme Court of Appeal

Wallis JA (Fourie and Koen AJJA concurring):

[1]

Four firms (the second to fifth appellants, to which I will refer collectively as PWC) acted as auditors of the first respondent, the National Potato Co-operative Ltd (NPC) from 1984 to 1997. Whether they breached their contractual obligations as auditors, thereby causing NPC to suffer damages, is the issue in this appeal. NPC alleged that the annual financial statements of NPC, throughout that period, failed to make adequate provisions for bad and doubtful debts that had arisen through on-going reckless mismanagement of its affairs in regard to the extension of credit to its members. [1] They said that PWC should have identified this reckless mismanagement in the course of the audits and either insisted on changes to the financial statements to reflect the true position, or disclosed the under-provisions in their auditors' reports. If they had done so, NPC alleged that remedial measures would have been instituted. Instead NPC was obliged to write off substantial sums as bad debts causing it to suffer loss, which it sought to recover from PWC. Botha J upheld its claims and judgment was entered against the four different firms of auditors in varying amounts totalling R62 884 905,45. Interest was ordered to run on that amount at a rate of 15,5 per cent per annum from 15 December 2000 and a number of costs orders were made in NPC's favour. The main appeal lies against the judgment holding PWC liable in damages and

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against the quantum of the damages. It is brought with the leave of the trial court, although the judge limited the grounds for that appeal by excluding issues that PWC wished to raise, such as prescription. This court removed those limitations after argument and in addition it granted leave to appeal against certain costs orders granted by the trial court. [2]

[2]

The core issue set out above, simply stated as it is, engaged the high court in a hearing on the merits of the claim for 264 days and a further hearing on quantum for 31 days. In addition we were informed that the hearing was due to continue on 121 additional days but was, for one or other reason, stood down. Two judgments were produced on the merits running to nearly 1100 pages. Over and above those judgments there was a separate hearing on costs and a separate judgment on that issue. A number of interlocutory applications were dealt with separately, both before the trial commenced and during it. The case has already engaged the attention of this court on four prior occasions, once on the propriety of NPC receiving funding from an outside source in order to pursue this litigation, [3] twice on issues relating to the provision of security [4] and, as already mentioned, most recently on the scope of this appeal. We are now confronted with a record that has been abbreviated when viewed against the size of the trial bundle, but is still some 85 000 pages long. The heads of argument, together with the core bundles presented by the parties and the bundles of authorities, add another 5 000 pages. This material was provided to us on computers loaded with appropriate software to enable us to work with it. The court has been specially constituted to hear the appeal

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without disrupting the ordinary work of the SCA and to that end sat in the week prior to the commencement of the court term. [5]

[3]

It is appropriate at the outset for us to express our gratitude to the attorneys and counsel for the efforts they have made to enable the appeal to be disposed of with reasonable expedition. However, it is also appropriate to echo a recent comment by Lord Toulson, [6] that the case assumed a complexity that we do not think was necessary, as a result of the manner in which it was conducted, and, in consequence, the trial court, for which we have sympathy, was led into a forest relatively impenetrable to light. I will deal with these matters at a later stage when addressing the issue of costs.

History of the litigation

[4]

Summons was issued on 16 November 1999. The initial particulars of claim were struck out on exception and fresh particulars were delivered in December 2000. These ran to 450 pages and referred to 304 files containing more than 100 000 pages of documents. The trial commenced before Hartzenberg J in 2002, but, during the course of the cross-examination of the first witness, he granted an amendment to the plea raising the funding issue. This was eventually resolved in NPC's favour in June 2004. The trial was then set to resume in October 2005 and two pre-trial meetings were held with Hartzenberg J on 9 June 2005 and 19 July 2005 at which an agreement was made to separate the merits and the assessment of any damages payable to NPC. Hartzenberg J recused

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himself, at the instance of NPC, before the trial recommenced and it then proceeded before Botha J on 4 October 2005. Shortly before the commencement of the hearing before Botha J, the particulars of claim were substantially amended to abandon certain claims and amend others.

[5]

On 24 January 2011 Botha J delivered his judgment on the merits. The first part of 943 pages contained his synopsis of the evidence led before him. The second part, a mere 123 pages, set out his reasons. He made an order upholding two claims arising from the writing off of bad debts and declaring the four firms of auditors liable to compensate NPC for damages represented by the amounts written off by NPC in respect of a number of specified debtors. The other claims by NPC were dismissed. One of those is the subject of a cross-appeal by NPC. The appellants' initial attempt to appeal against the declaratory order immediately after it was handed down and before the quantum was assessed was set aside as an irregular step. That decision and the concomitant costs order are challenged as a subsidiary issue in the appeal.

[6]

In a judgment delivered on 14 December 2011 Botha J quantified the liability of PWC in terms of the declaratory order. He dealt with the costs of the action and various interlocutory applications in a separate judgment delivered on 14 March 2012. PWC seeks to overturn the declaratory order and the consequential award of damages and asks for the dismissal of the claim with costs on the attorney and client scale.

[7]

There are in addition several subsidiary appeals. The first relates to the limited order for costs made in favour of PriceWaterhouseCoopers Inc, the first appellant (PWC Inc), which was not the auditor at any of the relevant times and against which no award of damages was made. The

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judge confined his order for costs in its favour to costs up to the earliest time when it could have taken exception to the claims against it, without defining when that time was. PWC Inc says that it could not except to the claim against it, as it was based on factual allegations that were never proved. Accordingly it seeks its costs of the trial.

[8]

The declaratory judgment annexed a schedule of the bad debts written off for which the court held the auditors to be liable in damages. After judgment NPC applied for two amendments to the claim, which were granted over the opposition of PWC and PWC Inc. The grant of those orders involved a significant enhancement of the award of damages, and forms the subject of the appeal against quantum if the main appeal fails. There are separate appeals in relation to the two costs orders arising from those amendments. The appeals against the subsidiary costs orders are dealt with in the judgment of Koen AJA. Lastly there is a general appeal by PWC against the overall costs order made by the trial judge.

The parties

[9]

NPC was an agricultural co-operative constituted in terms of the Co-operatives Act 91 of 1981 (the Act) and active among potato farmers. It was originally established in 1963 under the name Transvaal Potato Co-operative Ltd (TPC). During the period from 1983 to 1997, which is when the breaches of contract allegedly occurred, it twice merged with other co-operatives but, other than resulting in the change of its name to NPC in 1989, on each occasion the merged entity continued to operate in the same form. It was not suggested that the mergers had any bearing on the issues in this case. In 2000, whilst retaining its identity, it effectively merged with Northern Transvaal Co-operative Ltd, which has conducted NPC's business operations on an agency basis since then. By that time the bulk of

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its membership had left. It has not been a going concern since 1997. In substance it exists solely for the purpose of pursuing this claim. It is convenient to refer to it throughout as NPC notwithstanding the fact that it was operating under a different name at the earliest stage of the period in dispute.

[10]

The second respondent, IMF (Australia) Ltd (IMF), is a listed company in Australia that carries on business as a litigation funder and since 28 January 2009 has provided NPC with funding to pursue this litigation. It did so on the basis that, if the litigation succeeded it would be fully reimbursed for its costs and paid a management fee for its services in regard to the conduct of the litigation. In addition it would receive a proportion, exceeding fifty five per cent, of the gross proceeds of the litigation. Potentially, depending upon the gross amount recovered, it could be the sole beneficiary of a judgment in favour of NPC. Counsel for NPC and IMF informed us that this would very likely be the case. It was joined as a party at the instance of the auditors with a view to obtaining a costs order against it if its defence...