Thoroughbred Breeders' Association v Price Waterhouse

• Jurisdiction: South Africa

Thoroughbred Breeders' Association v Price Waterhouse
2001 (4) SA 551 (SCA)

2001 (4) SA p551

Citation	2001 (4) SA 551 (SCA)
Case No	416/99
Court	Supreme Court of Appeal
Judge	Nienaber JA, Marais JA, Olivier JA, Farlam JA and Brand AJA
Heard	May 2, 2001; May 3, 2001
Judgment	June 1, 2001

Flynote : Sleutelwoorde E

Accountant — Auditor — Auditing contract — Nature of — Duties of auditor — Negligent failure by auditor, in auditing books of F company, to appreciate significance of (and pursue) unusual features and discrepancies in company's books — Doing so would have led to discovery that company's financial manager involved in large-scale thefts from G company — Financial manager appointed despite fact that company aware that he had previous conviction for theft — Company suing auditor for damages for breach of contract for losses suffered because thefts continued for further period after audit — Auditor not informed of financial manager's criminal past — Court finding that auditor H negligent in aspects of conduct of audit and hence in breach of its contract with company — Company's loss flowing 'naturally and generally' from auditor's breach and thus not too remote — However, company itself careless in failing to properly supervise activities of financial manager despite its awareness that he had previously been convicted of theft — Both sets of carelessness contributing to loss — Apportionment of Damages Act 34 of 1956 not applicable to' I contractual claim for damages and accordingly not available to auditor to counter or curtail company's claim — Claim allowed in full.

Accountant — Auditor — Duty of care during audit — Material item — What constitutes — Material item one constituting audit risk demanding separate J

2001 (4) SA p552

verification — Materiality not to be judged in isolation — Not depending merely on magnitude of item relative to whole but on actual A or potential implications relative to other items or to future — Item which might not ordinarily be classified as material may become material because it stands out, or ought to do so, as being anomalous, irregular or illegal and as such demands further investigation — This particularly the case where item may be indicative of flaw in system, of recurring irregularity or of dishonesty. B

Contract — Remedies on breach — Damages — Test for contractual remoteness reiterated and discussed.

Contract — Remedies on breach — Damages — General and special damages discussed and distinguished — Clear that 'contemplation' of parties minimum requirement common to both forms of damages. C

Contract — Remedies on breach — Damages — Remoteness of — Quaere: Whether 'supple test' applied by Supreme Court of Appeal in recent years in fields of crime, delict, insurance and estoppel not also appropriate in cases of breach of contract — Matter one for future consideration by SCA.

Contract — Remedies on breach — Damages — General damages — General damages D those which flow 'naturally and generally' from breach and which law presumes parties 'contemplated as probable result of breach' — 'Probable' not meaning likelihood (at upper end of scale) but (at lower end) realistic possibility of harm complained of occurring — Foreseeability of kind of harm incurred usually pivotal — What must be reasonably foreseeable not that type of event or circumstance causing loss will in all probability occur but at minimum E that its occurrence not improbable and would tend to follow upon breach as matter of course.

Contract — Remedies on breach — Damages — Measure of — Overdraft interest paid on increased overdraft resulting from negligent failure of auditor to discover theft of moneys from client — Such damages not amounting to F general damages as they could not be said to flow naturally from auditor's breach — Doubtful also whether they would amount to special damages.

Contract — Remedies on breach — Damages — Causation — Plaintiff contributing to loss by own carelessness — 'All or nothing principle' of law of delict not applicable in contractual context — Defence of preponderance of fault on part of plaintiff not available in contract — Plaintiff should succeed where able to prove that breach of G defendant a cause of loss even if he himself careless in failing to take reasonable precautions to avoid it — Careless plaintiff non-suited where (1) term of contract to that effect, (2) his own carelessness sole cause of loss, or (3) defendant's negligence, comparatively speaking, so negligible as to be discountable as significant cause of loss. H

Contract — Remedies on breach — Damages — Apportionment of Damages Act 34 of 1956 not applicable to contractual claims.

Interest — A tempore morae — Reiterated that such interest may only be calculated from date of receipt of letter of demand or, where no letter of demand sent, from date of service of summons. I

Costs — Attorney and own client costs — Supreme Court of Appeal having accepted in principle, but without pertinent consideration, that order for attorney and own client costs, as opposed to attorney and client costs, in appropriate cases competent — Issue of competence of order for attorney and own client costs one for future consideration by SCA. J

2001 (4) SA p553

Headnote : Kopnota

The Supreme Court of Appeal has in recent years developed a new model for causation, sometimes referred to as the 'flexible' or A 'supple' test (involving the use of a composite legal yardstick) in fields such as crime, delict, insurance and estoppel, and the question arises whether this test would not also be appropriate in cases of breach of contract. This issue should be addressed when the opportunity arises. (Paragraphs [51] and [52] of Nienaber JA's judgment at 582E - I/J and para [1] of Marais JA, Farlam JA and Brand AJA's judgment at 597D - E.) B

Although the Full Bench of the Cape Provincial Division in Law Society of the Cape of Good Hope v Windvogel 1996 (1) SA 1171 (C) expressed the view that an order for attorney and own client costs is not appropriate since it is not generically different from an order for attorney and client costs, there are considered decisions to the contrary in other Divisions. Moreover in Sentrachem Ltd v C Prinsloo 1997 (2) SA 1 (A) and Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd and Others 1995 (4) SA 790 (A) the Supreme Court of Appeal appears to have accepted in principle, but without pertinent consideration, that an order for attorney and own client costs would in appropriate circumstances be competent. This is an issue for future consideration by the Supreme Court of Appeal. (Paragraph [92] of Nienaber JA's judgment at 596F - I.) D

The appellant, a body not for gain that obtained its income mainly from membership fees and commissions earned at horse auctions, had employed the respondent firm as its auditors since 1990. During January 1994 the respondent had audited the appellant's financial statements in respect of the year ended 31 October 1993 (the 1993 audit). The appellant alleged that the respondent had in doing so breached the E auditing agreement between them by failing to detect (1) that a promissory note with a face value of R138 864 belonging to the appellant had been encashed and the proceeds stolen; and (2) that several substantial sums of cash (in all totalling R143 403,44) had not been deposited for long periods. The undeposited cash had been stolen by the appellant's financial manager, one M, who had F subsequently encashed the promissory note to cover the thefts. It was common cause that M had after the 1993 audit gone on to steal a further R1 389 801,90 from the appellant before his activities were uncovered. The core of the appellant's case was that, had the respondent properly (that is, with the exercise of reasonable care and not negligently) carried out the 1993 audit, M's activities in respect of the promissory note and the undeposited cash would have been G discovered, and his subsequent defalcations and the resultant losses to the appellant prevented. The appellant accordingly instituted a claim in a Local Division for damages in the amount of R1 389 801,90 plus interest. The respondent denied breaching the audit agreement, alternatively it denied that any breach it might have committed had caused the loss, and raised various other defences based on the fact H that the appellant had been aware that M had a previous conviction for theft but had nevertheless employed him in a senior financial position without proper supervision, and thus only had itself to blame. It also pleaded that the appellant's claim had to be reduced because its contributory negligence meant that the Apportionment of Damages Act 34 of 1956 (the Act) was applicable to its cause of action. It appeared that, despite having examined the appellant's bank reconciliations for I outstanding deposits, the audit clerk had failed to notice certain long-outstanding cash deposits or, if he had noticed them, failed to recognise their significance. (The sums involved ranged between R1 140 and R52 700 and had remained outstanding between two and six months.) The payee had discounted the promissory note (maturity date 8 February 1993) with a bank, J

2001 (4) SA p554

which had in turn discounted it with the appellant, which had paid R108 500 for it. It was entered as an asset A in the appellant's books (in particular, it was invested in appellant's so-called 'Futurity Programme', which had its own bank account and books), but the proceeds, although paid into the appellant's sales account, had been misapplied by being credited to the appellant's debtors' accounts. The result was that on 31 October 1993 (the end of the appellant's financial year) the note was no longer in the possession of the appellant and had thus ceased to be B an asset of...