Talking Point April 2015

A succinct discussion of selected topical, legal matters

Dear Friends and Colleagues

I take great pleasure in submitting the April 2015 edition of Talking Point to you.

If one mentions (Marcus Tullius) Cicero (106 BCE – 43 BCE), many of the more experienced lawyers think with some dread of his poems in Latin exams.  Yet, Cicero was much more than a linguist and orator.  He was also one of the leading legal scholars of his day, and a politician.  Cicero, a Sceptic as a politician, was quite derogatory to the Epicureans of his day.  It is perhaps an irony of history that the ‘rediscovery’ of Epicurean texts and Cicero’s works played such an important part in the Renaissance and subsequent Enlightenment.

Some of the famous Cicero quotes could be from 2015:

Times are bad.  Children no longer obey their parents, and everyone is writing a book.”

The authority of those who teach is often an obstacle to those who want to learn.”

Six mistakes mankind keeps making century after century:

–       Believing that personal gain is made by crushing others;

–       Worrying about things that cannot be changed or corrected;

–       Insisting that a thing is impossible because we cannot accomplish it;

–       Refusing to set aside trivial preferences;

–       Neglecting development and refinement of the mind;

–       Attempting to compel others to believe and live as we do.

I list the variety of topics in this issue below: limits to the duties of legal practitioners, internet defamation; conveyancers and money-lenders; hedge funds; divorce and trusts, and “man’s inhumanity to man”.

As always, I would greatly appreciate your feedback on Talking Point. Please email me at charlt@walkers.co.za.

Regards
Charl Theron

In this issue:

LEGAL MATTERS

Risky business and an attorney’s duty

Charl Talking PointJerome small

by Charl Theron and Nosipho Madikiza

In Kandola v Mirza Solicitors LLP, a decision of the High Court of Justice in England on 22 February 2015, Mr Kandola, a businessman dealing in property, claimed damages against the law firm (of solicitors – the equivalent of attorneys) who had advised him with regard to a property transaction, alleging that he should have received better legal advice regarding the risks involved in a particular transaction.

Kandola wished to purchase certain plots from a Mr Siddiqui, a business partner of his nephew.  The nephew and Siddiqui also informed Kandola of their involvement in a profitable opportunity to buy and on-sell an unrelated property development.  They agreed that Kandola’s deposit for the plots would be used to finance the purchase price of the property development, on the basis that repayment would be secured by a solicitor’s undertaking, to be given by Siddiqui’s solicitor.

Upon receipt of the undertaking by Siddiqui’s solicitor, Mirza Solicitors advised Kandola against the financing transaction, noting that Kandola would have no way of enforcing payment against Siddiqui’s solicitor.  In addition, Mirza Solicitors was not prepared to act on behalf Kandola in relation to the financing agreement, and so notified Kandola and Siddiqui’s solicitor.

Kandola instructed Mirza Solicitors to assist with the purchase of the plots only.  However, without informing Mirza Solicitors, he proceeded with the financing agreement.

When the time came to pay the deposit for the plots into the account of Siddiqui’s solicitor, Mirza Solicitors again advised Kandola against the financing agreement, highlighted the risks involved (including on bankruptcy of Siddiqui), and the unusual conditions (mortgages and other charges over the plots), and required Kandola to sign a waiver confirming that he had been advised against proceeding with the purchase of the plots.  Kandola was insistent on proceeding.

It later transpired that a bankruptcy petition (sequestration application) had been filed against Siddiqui, even before the deposit was paid.

When contacted to repay the deposit, Siddiqui’s solicitor advised that his undertaking was void due to non-acceptance, and that the money had already been paid to Siddiqui.  Siddiqui’s solicitor absconded shortly thereafter.

Kandola’s main allegation was that Mirza Solicitors had been negligent by not conducting a bankruptcy search before releasing the deposit to Siddiqui’s solicitor.  The Court found in favour of Mirza Solicitors:

In part that is because the decision whom to trust in business is a commercial decision for the client to take and not the solicitor. In part it reflects the submission… that just because a solicitor (or other professional) could take a particular step does not mean that it is his duty to do so. His duty is always defined by his retainer. If he advises his client of a risk, it is a matter for the client to decide whether he wishes to take that risk…

A South African Court may well come to the same finding with regard to similar facts.

Defamatory internet comments revisited

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by Amien Hoosain and Simonne Dahl

In Talking Point October 2013 we discussed a South African case concerning the repercussions of defamatory comments on Facebook.

In Bussey Law Firm PC and Timothy Bussey v Jason Page, a decision of the High Court of Justice in England on 3 February 2015, Bussey Law Firm (a law firm based in Colorado, USA) and Timothy Bussey (the principal of the law firm) sued Page (a resident of England) for defamatory comments (such as “Scumbag Tim Bussey, pays for false reviews, loses 80% of his cases.”) made by Page on Bussey’s Google Maps profile.

Bussey’s Google Maps profile, prior to the defamatory comments, contained a number of positive reviews and the firm was rated as “excellent”.  The Court found that, in addition to being defamatory, Page’s comments also directly undermined the positive reviews.

Page admitted the comments came from his Google account, but he denied that he made the comments, and postulated a number of hypothetical explanations for how a third party could have posted the comments from his account.  The Court found these explanations to be obscure and defying probability.  In respect of motive, Bussey established that Page had previously advertised (on Twitter) a willingness to post feedback or testimonials for $5 each.

The court held that the comments were calculated to cause serious harm to the reputation of both the law firm and Bussey personally.  Page was found liable for damages of £45 000 in respect of the firm, and £25 000 in respect of Bussey.  Lucky for Page, the plaintiffs voluntarily capped the collective damages on £50 000.

As we have previously warned, it is imperative to ensure that access to one’s social media accounts is adequately protected, and that one’s online comments are fair.

His master’s voice

Charl Talking Point Nox small

by Charl Theron and Nox Malumbete

In Stupel & Berman v Rodel Financial Services, a judgment of the Supreme Court of Appeal (SCA) on 27 February 2015, the Court had to decide whether the appellant, a law firm, was justified in revoking an undertaking it gave to pay monies to the respondent, a money-lender.

The law firm was appointed by the seller as conveyancer to register transfer of an immovable property.  While awaiting transfer, the seller obtained bridging finance from the money-lender in terms of two discounting agreements.  Both these agreements consisted of a schedule and a terms and conditions document.  The schedules also contained undertakings signed by the law firm.  In terms of the undertakings, the law firm confirmed that it had received instructions from the seller to repay the money-lender from the proceeds of the sale.

A dispute arose between the seller and the purchaser.  Following on misinformation regarding the status of the dispute, the money-lender cancelled the discounting agreements, and demanded immediate payment.  The seller then countermanded its instruction to the law firm to repay the money-lender from the proceeds of the sale.  The law firm informed the money-lender accordingly.

The seller failed to repay the money-lender, and the latter sued successfully; but to no avail, as the seller had no assets.  The money-lender then sued the law firm in the High Court, Johannesburg, averring that the latter was not entitled to withdraw the undertaking to pay the money-lender.  The money-lender won.  The Court held that, under a payment construction dating from Roman Law times (adjectus solutionis causa), the law firm (as debtor) was obliged to perform its obligation to pay the sale proceeds to the seller (as creditor) by making payment to the money-lender (the adjectus).

The law firm appealed to the SCA, with success.  The reliance on the adjectus construction was misdirected.  This case concerned the law of agency.  The seller was not a “creditor”; it was a principal.  The law firm was not a “debtor”; it was an agent of the seller.  The undertaking that the law firm gave to the money-lender was given as an agent of the seller (the principal).  The principal was entitled to cancel the law firm’s mandate, which it did.  On such cancellation, the law firm was obliged to withdraw its undertaking to the money-lender.

The law firm was fortunate that the exact wording of the documents concerned was in its favour.  Other law firms, in similar circumstances, have had to pay.  These so-called discounting agreements in respect of the proceeds of property related transactions are generally credit agreements, and not true discounting agreements.  Often, these arrangements debase the attorney/client relationship in favour of a money-lender, and conveyancers may be better off not getting involved in such arrangements.

The structuring of a hedge fund

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by Jerome Veldsman 

In Talking Point January 2014, we reported on South Africa stepping up regulation of hedge funds, and bemoaned this being done in a fragmented manner.  The FSB/Treasury has now stipulated the legal framework for hedge funds.

By notice under the Collective Investment Schemes Control Act (CISCA), a hedge fund must comply with certain provisions of CISCA, and is defined (simplified) as an arrangement –

– in pursuance of which members of the public are invited/permitted to invest; and

– which –

–     uses any strategy which could result in the arrangement incurring losses greater than its aggregate market value at any point; and

–     includes in such strategy leverage (borrowing money) and/or net short positions (‘overselling an asset’, meaning selling more of an asset than one owns, physically and synthetically).

Such definition will also apply for purposes of the Income Tax Act.  The same “flow through” tax dispensation that applies to collective investment schemes is to apply to duly registered and regulated hedge funds.

By further notice under CISCA, a hedge fund must adhere to a number of requirements, including that it must be structured as –

–     a trust arrangement under CISCA; or

–     an en commandite partnership.

This may present problems for hedge funds constituted under the Trust Property Control Act.

There are two types of hedge funds:

–     one for qualified investors (a person who invests a minimum of R1 million per hedge fund, and is finance savvy, or has a professional advisor); and

–     one for retail investors (an investor who is not a qualified investor).

It remains unclear whether (or to what extent) the notices under CISCA ‘override’ other legislation, such as –

–     section 11(1) of the Banks Act, which prohibits an unregistered person taking deposits from the public;

–     section 8(3) of the Companies Act, which prohibits an unregistered person carrying on business for gain; and

–     the conditions under which pension funds may invest in hedge funds.

The FSB has issued a determination (effective as of 17 April 2015) of the operational, seed, and position risk capital to be maintained by hedge fund collective investment scheme managers.

Trust assets not on the table

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by Gunnar Dahl and Bianca Patrick

Under the Divorce Act, in respect of certain marriages out of community of property entered into before 1988, a Court may in appropriate instances on divorce order a redistribution of assets (in the discretion of the Court), essentially to compensate a homemaker who concomitantly was not a high earner.

In the 2005 judgment of Badenhorst v Badenhorst, the Supreme Court of Appeal (SCA) held that, in respect of such a marriage (out of community), the assets of a discretionary trust created during the marriage, and managed as the alter ego of the husband, must commercially be taken into account as assets of the husband, and subject to redistribution in favour of the wife.

WT & Others v KT, a decision of the SCA on 13 March 2015, dealt with the question whether, or not, assets of a discretionary family trust were to be regarded as part of the assets of the joint estate of the parties married in community of property.

The trust concerned was established prior to the marriage, and the matrimonial home was registered in the name of the trust.  The husband, but not the wife, was a beneficiary of the trust.  The trust was managed as the alter ego of the husband.

The wife succeeded in the court of first instance, the High Court in Johannesburg.  The High Court regarded the Badenhorst case as authority for a Court having a discretion in divorce proceedings as to whether, or not, assets belonged to a particular party.  Exercising such discretion, the High Court found that the assets of the trust were in fact the husband’s personal assets; and hence also formed part of the assets of the joint estate.

The SCA disagreed.  The reliance upon the Badenhorst case was misdirected.  Such case dealt with the provision in the Divorce Act providing for discretionary redistribution only in relation to certain marriages out of community of property.  In contrast, when assessing the proprietary consequences of a divorce following a marriage in community of property, a court is generally confined merely to directing that the assets of the joint estate be divided in equal shares; and has no comparable discretion to make a redistribution.

Under the Trust Property Control Act, trust property does not form part of the personal property of a trustee.  Accordingly, the matrimonial home (and other assets of the trust) did not form part of the joint estate of the parties.

We have, based on case law, formulated trust deed provisions to militate against the risk of trust assets being dragged into divorce matters

The Zong Incident

For local temporal context, the Zong incident occurred during the French Period at the Cape, and when King Cetshwayo was the king of the Zulus.  It is sobering to reflect on what was considered acceptable conduct a mere four or so generations ago.

The British slave ship Zong departed on 6 September 1781 from São Tomé, an island off the west coast of Africa, on a voyage to Jamaica.  The ship carried more than 400 African slaves.  The owners had taken out (at the time) standard insurance on the lives of the slaves, as cargo.  Due to a navigational error, the Zong sailed past Jamaica.  The error was discovered about 10 days later.  Crew members and slaves were suffering from malnutrition, dysentery, and other diseases.  The crew threw approximately 140 slaves overboard, and they all perished.  Only 208 slaves survived the voyage.

The owners claimed compensation from their insurers for the loss of the slaves thrown overboard.  The insurers repudiated the claim, and the matter went to court.  The trial before a jury started on 6 March 1783.  The ship logbook and almost all documentary evidence had been lost.  The only witness to give evidence was a passenger at the time on the Zong.  His version was that it had been an absolute necessity to throw the slaves overboard, as the crew feared all the slaves would die if they did not do so, because the ship did not have enough water on board to keep all the slaves alive for the voyage back to Jamaica.  The jury found in favour of the ship owners, as, under the law of maritime insurance at the time, slaves were considered as cargo, and loss arising from cargo jettisoned to save the remaining cargo could be claimed from the insurer.

A few days later, new evidence apparently came to light, amongst other matters questioning the water shortage on the Zong, alleging negligence on the part of the captain, and an economic incentive for the killings.  The latter was that the insurance claim per slave would exceed the market value per slave in Jamaica.  The insurers appealed, with success, and the first verdict was set aside, allowing for the matter to be heard afresh.  The belated law report of the appeal (as Gregson v Gilbert) is incomplete.  There is no record of a second trial ever taking place.

Initially, reports of the brutality and inhumanity aboard the Zong had little effect on British public opinion.  But over time, the Zong massacre became an important topic in abolitionist literature, and remains an important topic in film today.  The 2013 British period drama film Belle is based on the Zong incident.