Talking Point December 2016


A succinct discussion of selected topical, legal matters

Dear Friends and Colleagues

I take great pleasure in submitting the December 2016 edition of Talking Point to you.  This edition and previous 2016 editions are also on our website at http://walkers.co.za/.  This is scheduled to be the final edition for 2016.  Accordingly, I use this opportunity to wish you joy and peace over the festive season and throughout 2017.

As a break from referring only to dead and/or very famous people in introductions, I introduce you to a not (yet) famous American academic, author, economist, and blogger – Arnold Kling (1954 –), who is taking on established thought patterns in economics.  He received a PhD in economics from Massachusetts Institute of Technology, worked as an economist in the Federal Reserve System in the 1980s, and currently describes himself as an independent scholar.

Kling calls his new concept in economics “Patterns of Sustainable Specialization and Trade” (and has published a recent book – available on Kindle – with a similar title).  Essentially, his concept is an application of complexity theory to macroeconomics, as an alternative to the traditional mechanistic view of the economy as one big machine.  He has a wit typical of many economists:

  • Anyone who believes that we can afford collectively what we cannot afford individually is delusional.”

  • I think that the main issue with inequality is not the gap between the rich and the poor.  It is the gap between the earnings of top business leaders and the salaries of academics and journalists.”

  • When the government pays, health care’s lack of affordability becomes a self-fulfilling prophecy.  In health care, as in other things, government is the high-cost producer.

  • What we should be comparing is not the existing market configuration with an ideal based on a simple model, but the market process of error correction with the political process of error correction.”

  • …  Insiders use overt political drama as symbols that placate the masses while using covert political activity to plunder them.  …  Outsiders are dazzled by the symbols while insiders grab the substance.”

  • I have come to believe that politicians are in the business of ‘marketing’ their product to the public, by exaggerating threats and over-selling government solutions.

As always, I would greatly appreciate your feedback on Talking Point. Please email me at charlt@walkers.co.za.  We would like to refresh our newsletter in 2017, and will be grateful for your suggestions (criticisms will also be welcome).

Regards

Charl Theron

Chairman

In this issue:

  • Oppressive tax collection

    • I’m not worried about a tax revolt.  We have a transparent tax system and citizens can approach Parliament to air their views regarding proposed taxes.” (Finance Minister Pravin Gordhan on 28 October 2016).  Perhaps the Minister should read the law reports, and learn about how SARS actually goes about tax collection.  We report on a disturbing case, labelled with judicial restraint as a “somewhat unfortunate matter“.  And this is not a unique example.
  • Beware of tax windfalls

    • We discuss a VAT case that illustrates the cliché: If it is too good to be true, then it is probably false.  Any vendor who invoices non-residents for goods/services in instances where there is some local angle to the goods/services ought to take note.
  • How not to bake a cake

    • The dos and don’ts of human rights law are challenging when they are in conflict with one another.  There has to be a winner and a loser, and the latter usually feels aggrieved.  We discuss a recent foreign case dealing with conflict between do live out your religious faith and don’t discriminate.
  • The finality of a settlement agreement

    • Parties to a settlement agreement accept an element of risk that their bargain might not be as advantageous to them as litigation might have been.  This element of risk is inherent in the very concept of compromise.  We discuss a recent case dealing with the limited grounds on which a settlement agreement can be set aside.
  • To settle or not to settle

    • Legal disputes are a fact of life in today’s economic and regulatory environment.  Our combined experience of resolving disputes runs into centuries.  We discuss some considerations (without revealing any trade secrets) regarding settlement agreements.
  • Racial quota policies

    • We report on the most recent case on policies for the promotion and achievement of equality in respect of race in the workplace.
  • The “next generation” of POPI

    • The Protection of Personal Information Act (POPI) has been law since 2013, but is at present not fully operative.  We discuss some developments in the European Union regarding protection of personal information that may have local implications.
  • The Christmas controversy

    • In honour of the approaching festive season, we report on an annual USA controversy involving candle holders, reindeer, trees, and more.  In the USA, even the salutations “Happy Holiday” and “Merry Christmas” are politically loaded, with many taking offence at one or the other.  This is one American “tradition” we really can do without.

LEGAL MATTERS

Oppressive tax collection

Jerome casualby Jerome Veldsman

The Ferme générale, the tax collectors on behalf of the French monarch in the Ancien Régime (the three centuries preceding the French Revolution) were despised by the populace, and suppressed subsequent to the Revolution.  On 8 May 1794, 28 of Ferme générale’s former members were guillotined.

BMW South Africa v SARS, a judgment of the High Court, Pretoria on 21 October 2016, dealt with tax collection.

SARS made a finding that BMW had not paid VAT levied by BMW to SARS for the period October 2011 to February 2012.  BMW immediately provided proof of due payment, but SARS was not interested.  To add insult to injury, SARS levied penalties and interest (almost R16 million), compelled immediate payment thereof (tax collection works on the basis of “pay now, dispute later“), and refused to discuss the matter further.  For many a taxpayer, that would have been that.  But BMW could afford to litigate.

SARS eventually admitted defeat, and consented to an order setting aside the finding of non-payment and the penalties and interest, and a punitive costs order.  However, SARS disputed its liability to pay interest on the amounts, despite the Tax Administration Act clearly providing for such liability.  The Court held: “There is no merit in that submission“.  SARS had to pay, including interest – with taxpayers’ money, of course.

Beware of VAT ‘windfalls’

Jerome casualSimonne - smallby Jerome Veldsman and Simonne Dahl

Under the Value-added Tax Act, in general, a VAT vendor:

– must charge VAT (at the standard rate of 14%) on goods and services provided to its customers (referred to as “output tax”), and pay the charged output tax to SARS; and

– is entitled to a refund from SARS of the VAT paid by the vendor in respect of goods and services acquired by the vendor (referred to as “input tax”).

Some services:

– are exempt from VAT, including certain financial and educational services; and

– in respect of some services VAT is charged at 0% (zero rated), including services rendered to non-resident IF the non-resident is not in South Africa at the time the services are rendered.

If a vendor finds itself in the ‘favourable’ position of not levying output tax (and not paying output tax to SARS), but nevertheless claiming input tax from SARS, the vendor will be well advised to seek a second opinion.  XO Africa Safaris CC v SARS, a judgment of the Supreme Court of Appeal (SCA) on 3 October 2016, dealt with a vendor in such a position.

XO arranged tour packages in South Africa for foreign (non-resident) tour operators (referred to as “FTOs” in the judgment), which the FTOs on-sold to their own (non-resident) customers (the tourists).  In respect of the tourists when ‘on safari’ in South Africa:

– XO purchased the bulk of the relevant services, such as accommodation, entertainment, meals, and travel, from other vendors; and

– XO also provided some of the services, essentially ‘babysitting’ the tourists by checking up on the local facilities and ‘trouble shooting’ deficiencies and mishaps.

XO ‘charged’ the FTOs VAT at 0%, so XO did not pay any output tax to SARS.  However, XO claimed from SARS the input tax (at 14%) that the other (local) vendors charged XO.

SARS audited XO in November 2010, noted the VAT mismatch, and held XO liable for output tax on the invoices rendered to the FTOs, during 2008, 2009, and 2010.  In effect, SARS required XO to pay output tax as if such invoices had included VAT at 14% – with penalties and interest of course.

XO objected.  SARS persisted.  XO appealed to the Tax Court, Cape Town, and lost.  XO then appealed to the SCA, and lost again:

… XO was providing materials and services consisting of accommodation, meals, entertainment, gifts, transport and the like …  That is what XO undertook to provide to the FTOs; that is what it was paid to provide and that is what it provided.  The fact that in order to perform its obligations towards the FTO’s it in turn had to acquire those goods and services from local suppliers was neither here nor there.  Its contract was to provide those goods and services.  ….  And it provided those goods and services, not directly to the FTO, but to other persons who were in [South Africa] at the time that the goods and services were provided.  That served to exclude these services from the class of services that enjoy zero rating …

 

How not to bake a cake

Jerome casualby Jerome Veldsman 

Lee v Ashers Baking Company (and its two owners), a judgment of the Court of Appeal in Northern Ireland on 24 October 2016, dealt with conflicting human rights.

On 9 May 2014, Lee, a gay man, placed an order with the bakery for a customised cake with the headline caption “Support Gay Marriage“, for an event on 17 May.  On 12 May, the two owners, husband and wife, informed Lee that, as the bakery was a “Christian business”, it could not fulfill the order.  Lee was given a full refund, and he was able to secure a similar cake from another bakery in time for the event.

On 6 November, Lee sued.  The owners’ evidence was that it was their Christian belief that sexual relations between persons should only take place within a monogamous heterosexual marriage and that marriage should only be between a man and a woman.  Accordingly, it would be sinful for them to say or do anything which has the intention or effect of promoting homosexual sexual relations or same sex marriage.

The relevant do live out your religious faith statute (European Convention on Human Rights): Everyone has the right to freedom of thought, conscience, religion, and freedom of expression.  The latter right includes freedom to hold opinions and to receive and impart information and ideas without interference by public authority.

The don’t discriminate statute (Equality Act (Sexual Orientation) Regulations 2006): It is unlawful for any person concerned with the provision of goods, facilities, or services to the public to discriminate on the grounds of sexual orientation against a person who seeks to obtain or use those goods, facilities, or services by refusing or deliberately omitting to provide him or her with any of them.

Lee won.  “The [bakery and its owners] are caught by the legislation because they are providing … discriminatory services.  Anyone who applies a religious aspect or a political aspect to the provision of services may be caught by equality legislation, not because the legislation treats their religious belief or political opinion less favourably but because that person seeks to distinguish, on a basis that is prohibited, between those who will receive their service and those who will not.  The answer is not to have the legislation changed and thereby remove the equality protection concerned.  The answer is for the supplier of services to cease distinguishing, on prohibited grounds, between those who may or may not receive the service.  Thus the supplier may provide the particular service to all or to none but not to a selection of customers based on prohibited grounds.  In the present case the [bakery and its owners] might elect not to provide a service that involves any religious or political message.  What they may not do is provide a service that only reflects their own political or religious belief in relation to sexual orientation.”

How would this case be decided in South Africa?  Lee would probably also win.  May a local supplier “elect not to provide a service that involves any religious or political message“?  Under the Consumer Protection Act (with very limited exceptions), a supplier may not treat any person differently than any other, in a manner that constitutes unfair discrimination on any of the usual constitutional grounds, including religion, conscience, and belief.  In our religious and politically conscious society, a local supplier may be well advised not to test the position.

The finality of a settlement agreement

Amien smallBianca by Amien Hoosain and Bianca Patrick

Slabbert v MEC for Health and Social Development of Gauteng, a judgment of the Supreme Court of Appeal (SCA) on 19 September 2016, dealt with the finality of a settlement agreement (also referred to as a “compromise agreement”).

Ms Slabbert’s son suffered devastating injuries at birth in a provincial hospital.  She averred that the medical staff had been negligent, and sued the MEC on behalf of her son for damages.  Literally ‘on the doorsteps of court’, the parties entered into a settlement agreement that the MEC would be liable for 90% of the damages that Slabbert could prove.

Just before the trial on the quantum of such damages, the MEC applied to the High Court, Pretoria to have the settlement agreement set aside, based on averred new evidence that only came to light after the settlement agreement had been concluded.  The MEC was successful, and Slabbert appealed to the SCA.

The SCA described a settlement agreement as creating: “new rights and obligations as a substantive contract that exists independently from the original cause.  The purpose of a compromise is twofold: (a) to bring an end to existing litigation and (b) to prevent or avoid litigation.

The SCA set out the grounds on which a settlement agreement may be set aside:

– If one of the parties committed fraud in respect of the agreement.

Justus (justifiable) error, meaning an error of a party in entering into the agreement so severe that the parties could not have reached true consent.  And an error relating to motive or to the merits of the dispute is not a justus error.

– If the parties to the agreement laboured under a common mistake.

The SCA stated that a unilateral mistake on the part of one party does not allow for such party to withdraw from a settlement agreement, and quoted the following with approval from a textbook:

However material the mistake, the mistaken party will not be able to escape from the contract if his mistake was due to his own fault.  This principle will apply whether his fault lies in not carrying out the reasonably necessary investigations before committing himself to the contract that is, failing to do his homework.

As, at best for the MEC, she had made a unilateral mistake, Slabbert won.

As an aside, a party who endeavours to rely on justus error must prove lack of consensus and that its error was reasonable and excusable under the circumstances.  There are many examples in the law reports of parties failing to do so, and very few examples of parties succeeding.

 

 

To settle or not to settle

Gunnar casual 2Jerome casualby Gunnar Dahl and Jerome Veldsman 

A compromise once lawfully struck is very powerfully supported by the law, since nothing is more salutary than the settlement of lawsuits.” (Ulrik Huber (1636 – 1694), cited recently in Slabbert (refer to the article The finality of a settlement agreement in this edition).

These are truisms of unknown origin:

A bad settlement is often better than a good trial.

A good settlement is one that makes both parties equally unhappy.”

The only winners in lawsuits are the lawyers.

However, real life is more complicated than truisms.

Ideally, one should assess whether, or not, to settle, and settlement terms, on an overview of the entire relevant factual matrix.  In practice, a party is unlikely to know all the relevant facts; and vital facts may be solely within the knowledge of one’s opponent.  Of course, this cuts both ways.  One of the best strategies is an upfront dispassionate determination of –

– the relevant facts, to the extent reasonably possible; and

– the applicable legal rules.

There are many impediments to a reasonable settlement.  Not least, egos and personality clashes.  In our experience, mediation can assist with settlement, but it is not a panacea for parties who simply do not want to settle.  The commencement of litigation is not a bar to subsequent settlement.  Indeed, displaying willingness and ability to litigate may make settlement more attractive (to one’s opponent).  The cost, delay, and effort of litigation can make settlement more attractive (to both parties).  One benefit of commencing litigation is the discovery process, so as to better assess the quality of the opponent’s case.

To “litigate on principle” is generally a bad idea.  Commercially (for both parties), perhaps the primary benefit of a settlement is the exchange of certainty for uncertainty.  One should constantly assess the risk and benefit of settlement.  Such approach shows strength, not weakness.  Unless one’s opponent is patently and persistently acting in bad faith, settlement as an option should remain on the table, despite the usual rhetoric to the contrary.

A legal “gladiator fight to the death” is often not in a client’s best interest.  “[T]he proper function of legal [practitioners] includes the giving of proper legal advice after having considered the facts of the case in an objective and dispassionate manner.  Indeed, an inability to be able to distance himself properly from the facts of his cases or to be able to consider them objectively and dispassionately has been held to constitute a proper basis for the removal of [a legal practitioner] from the roll.” (Bosch v Van Vuuren (2012)).

Legal dramas on film and TV are not a reliable frame of reference.

 

Racial quota policies

Amien casualJerome casualby Amien Hoosain and Jerome Veldsman 

In the October 2016 edition of Talking Point, we mentioned SA Restructuring & Insolvency Practitioners Association v Minister of Justice & Constitutional Development, a judgment of the Western Cape High Court, Cape Town on 13 January 2015.  In SA Restructuring, the Judge referred to American jurisprudence, and mentioned the following definition of a quota:

A quota would impose a fixed number or percentage which must be attained, or which cannot be exceeded, and would do so regardless of the number of potential applicants who meet necessary qualifications.  …  By contrast, a goal is a numerical objective, fixed realistically in terms of the number of vacancies expected, and the number of qualified applicants available in the relevant job.”

SA Restructuring concerned the policy that seeks to regulate the appointment of insolvency practitioners.  The Court of first instance held that the policy constituted an unlawful quota.  The government appealed SA Restructuring to the Supreme Court of Appeal (SCA), and the SCA delivered judgment on 2 December 2016.  The appeal was dismissed.

Under the policy being evaluated, insolvency practitioners must be appointed consecutively in the ratio A4:B3:C2:D1, on a rotational basis.  In amplification, the first four appointments must be from category A, the next three from category B, the next two from category C, then one from category D.  And then the process must restart with the first four appointments from category A, and so on.

Now the categories (simplified):

A

African, Coloured, Indian, and Chinese females

B

African, Coloured, Indian, and Chinese males

C

White females

D

African, Coloured, Indian, Chinese, and White males and females

And within a category, appointments must proceed down the alphabetical list until the end is reached, and then start again at the top.

The SCA held that the policy constituted an unlawful quota: 

– The rigid appointment process, without provision for discretionary exceptions, is arbitrary.

– Such process is also capricious because it has been formulated with no reference to its impact when applied in reality.

As to the latter point, at present, in descending order, the majority of insolvency practitioners are (1) White males, followed by (2) African, Indian, Coloured, and Chinese males, followed by (3) White females, and lastly (4) African, Indian, Coloured, and Chinese females.  So, the smallest category in number by far (African, Indian, Coloured, and Chinese females), would receive the bulk (just over 4 out of 10) of appointments.  It would be impossible for such category to cope with all such work.  And it is conceivable that not even one practitioner from such group may reside in some rural areas.  What then?  The policy does not provide an answer.

Unfortunately, like in the previous Constitutional Court cases, the SCA failed to provide a coherent definition of what a “quota” actually is.  It is detrimental to legal certainty that the two top Courts fail to articulate the measure against which they evaluate racial based policies.

Will the government succeed with an appeal to the Constitutional Court?  On several subjects, including racial quotas, the latter Court is unpredictable.  Hopefully, the government will heed the criticism by the SCA of the manner in which the policy was devised, and go back to the drawing board.  This is not a good test case.

 

The “next generation” of POPI

Jerome casualby Jerome Veldsman 

First, a word on the terminology:  Almost worldwide, the person (anyone of us, or a juristic person) whose personal information (or data) is being protected is referred to as a “data subject“.  One is reminded of “Newspeak” in George Orwell’s novel Nineteen Eighty-Four.

The Data Protection Directive of the European Union (EU) has been the POPI equivalent in the EU since 1995, regulating the processing of personal data within the EU.

On 27 April 2016, the European Commission adopted the General Data Protection Regulation (GDPR).  The GDPR will replace the current Directive, when the former comes into operation on 25 May 2018.

Unlike the current Directive, the GDPR will have extraterritorial jurisdiction, meaning that it will also apply beyond the borders of the EU.  The GDPR will also apply to persons based outside the EU, if such a person processes personal data of data subjects who are in the EU – 

– where the processing activities are related to the offering of goods or services to such data subjects irrespective of whether connected to a payment or not; and

– when it is related to the monitoring of the behaviour of such data subjects (including internet use profiling) as far as their behaviour takes places within the EU,

unless the processing is occasional, does not include processing, on a large scale, of special categories of personal data, and is unlikely to result in a risk for the rights and freedoms of individuals, taking into account the nature, context, scope, and purposes of the processing.

Summarised, the “special categories” of personal data are data revealing race or ethnic origin, political opinions, religion or beliefs, trade-union membership; the processing of genetic data or data concerning health or sex life; and processing of data relating to criminal convictions and offences.

It is generally accepted that USA technology companies are targeted by this extraterritorial jurisdiction.  Some South African companies may also have to pay attention.

 

The Christmas controversy

The first part of the First Amendment to the USA Constitution is known as the “Establishment Clause” – “Congress shall make no law respecting an establishment of religion” – and is an annual “Christmas present” for constitutional lawyers and the media.  Skoros v City of New York, a judgment of the Second Circuit Court of Appeals in 2006, commenced with: “No holiday season is complete, at least for the courts, without one or more First Amendment challenges to public holiday displays“.

This “Christmas controversy” concerns the Christmas/December/Holiday activities and displays in and around government buildings (including schools) and related matters.  After hearing about ten cases, and producing rather garbled judgments, for the last decade, the Supreme Court (the apex Court) has simply not granted leave to appeal on this subject.

The Americans argue annually over questions such as: Which of the following symbols are secular or religious –

– a Christmas tree (the use of which originated in medieval central Europe);

– a kinara (a candle holder used during Kwanzaa – a holiday created in 1966 to celebrate African heritage in African-American culture);

– a menorah (a candle holder used for Hanukkah – a Jewish celebration);

– a nativity scene (a visual depiction of Christ’s birth in Bethlehem);

– reindeer (incorporated into Christmas celebrations subsequent to an 1823 poem);

– Santa Claus (the Americanisation of “Sinterklaas” – a traditional story Dutch settlers introduced to the USA in the 1800s); and

– a star and crescent (a symbol associated with Islam – appropriated from the Ottoman Empire around 1453).

The corresponding (but quite different) South African constitutional rule is section 15(2) of the Constitution:

Religious observances may be conducted at state or state-aided institutions, provided that –

(a)    those observances follow rules made by the appropriate public authorities;

(b)    they are conducted on an equitable basis; and

(c)     attendance at them is free and voluntary.

Section 15(2) of the Constitution has yet to lead to interesting litigation.