Talking Point February 2015

A succinct discussion of selected topical, legal matters

Dear Friends and Colleagues

In case you missed the press announcements, I mention that Walkers recently entered into a formal co-operation agreement with Eversheds in Johannesburg and Durban.  We are delighted with this association with a firm of Eversheds’ ability and reputation.  The respective firms will continue to trade under their own names, but will work together closely with a view to them, and their clients, benefiting from their combined skills, expertise, and resources.

I take great pleasure in submitting the February 2015 edition of Talking Point to you.  This is the first edition for 2015.

Oliver Wendell Holmes (1841 – 1935) was an American jurist, and perhaps the most famous Justice of the USA Supreme Court of all time.  He was in his 91st year when he retired from the Court.  He wrote 852 majority opinions, and 72 minority opinions.  He was also a leading legal theorist, and is still often cited in many jurisdictions, including South Africa.  As an example, in Le Roux v Dey (2010), the well-known case about Pretoria school boys electronically publishing manipulated photos of teachers, the Supreme Court of Appeal relied on two Holmes maxims:

“The life of the law has not been logic; it has been experience.”

“General propositions do not decide concrete cases.”

Many Holmes quotes deal with life in general.  Some of my favourites are:

One’s mind, once stretched by a new idea, never regains its original dimensions.”

Speak clearly if you speak at all, carve every word before you let it fall.”

Sin has many tools, but a lie is the handle which fits them all.”

For the simplicity on this side of complexity, I wouldn’t give you a fig.  But for the simplicity on the other side of complexity, for that I would give you anything I have.”

I list the variety of topics in this issue below; they include affirmative action, business rescue, a jurisdiction issue, the rights of an unmarried biological father, VAT, and the ‘McLibel’ cases.

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

Some relief for a delinquent VAT vendor

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by Jerome Veldsman and Bianca Patrick

In Director of Public Prosecutions, Western Cape v Parker (12 December 2014), the Supreme Court of Appeal (SCA) considered whether a VAT vendor who fails to pay VAT over to SARS is (also) guilty of common law theft.

In the Regional Magistrate’s Court:

  • •     The vendor was charged with failing to submit VAT returns to SARS, and pleaded guilty to the charge.
  • •     He was also charged with common law theft for failing to pay VAT over to SARS, and pleaded guilty to the charge.

 

He was sentenced to suspended imprisonment and a fine for failing to submit VAT returns, and to 5 years’ actual imprisonment for the common law theft.  He appealed against the sentence to the High Court.  Prior to hearing the appeal, the High Court, with reference to previous case law, requested the parties to address the Court on the correctness of the finding of guilty on the common law theft charge.  In consequence, the vendor also received leave to appeal the guilty finding (despite his prior guilty plea).

The High Court set aside the guilty verdict for common law theft (and the 5 years’ imprisonment), on the basis that the VAT that the vendor had collected from customers (and not paid over to SARS) belonged to the vendor, and not to SARS (one cannot steal your own property).

The State appealed to the SCA on the question of law.  The reason it gave for the appeal was that a failure to pay VAT is punishable with a maximum sentence of two years’ imprisonment, whereas a conviction for theft would pave the way for much sterner sanctions.  One of the exceptions to the rule that one cannot steal your own property is if you hold the property in trust for another.  SARS argued that a vendor was an agent of SARS, and in a position of trust vis-à-vis SARS.  The SCA did not agree, and held that a vendor is a (mere) debtor of SARS.  Accordingly, the vendor stayed out of jail.

We think an amendment to the VAT Act is imminent, probably to increase the maximum sentence for delinquent VAT vendors.

 

An unmarried biological father and his child

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by Roxanne Ker and Taryn Herbert

In KLVC v SDI (12 December 2014), the Supreme Court of Appeal (SCA) considered the requirements for a biological father, who has never been married to or in a permanent life partnership with the child’s biological mother, to acquire full parental rights to and responsibilities for the child.

Whilst the father was abroad, the mother, without informing the father, removed the child from Durban and relocated to England.

The father applied to the English court, in terms of the Hague Convention on the Civil Aspects of International Child Abduction, 1980, for the child’s return to South Africa.  The English court referred the matter to a South African court for determination of the question whether under South African law the mother’s removal of the child without the father’s approval was wrongful.

The KwaZulu-Natal High Court held that, on the facts, the father had met all the requirements in section 21(1)(b) of the Children’s Act of 2005 to acquire full parental rights to and responsibilities for the child, and answered the question in the affirmative.

In terms of section 21(1)(b), regardless of marital status and living arrangements, a biological father acquires full parental rights to and responsibilities if –

  • •     he consents to being identified as the child’s father;
  • •     he contributes, or has attempted in good faith to contribute, to the child’s upbringing for a reasonable period; and
  • •     he contributes, or has attempted in good faith to contribute, towards the child’s maintenance for a reasonable period.

The mother appealed.  The SCA interpreted section 21(1)(b), and held: A court has to consider a wide range of circumstances because the language used (“contributes“, “attempted in good faith“, “reasonable period“) is deliberately broad.  A court must consider all the relevant factual circumstances of the case, exercise a value judgment, and come to a conclusion.

The SCA concurred with the High Court’s finding, and found against the mother.

Generally, in a family-like dispute involving a child, a court makes an order that the parties must pay their own legal costs, as they are considered to be acting in the best interests of the child.  However, the SCA found this case to justify a departure.  The SCA used language such as that the mother “adopted a deliberately difficult and obstructive approach throughout this litigation“, but the subtext seems to be that this was ‘jilted lover litigation’.

Suretyships can be less than sure – Revisited

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by Amien Hoosain and Matt van Eden

In Talking Point August 2013, we discussed High Courts giving contrary findings on whether (or not), a “haircut” under a business rescue plan concomitantly released sureties for the debts of the company.

In New Port Finance Company v Nedbank (1 December 2014), the Supreme Court of Appeal (SCA) provided a (provisional) answer.

The debtor company ran into financial difficulties, and went into business rescue in terms of the Companies Act.  One creditor then went after the surety, and obtained judgment against the surety, before a business rescue plan was adopted.

The surety did not pay, and the creditor brought an application to liquidate the surety.  In the meantime, a business rescue plan had been adopted.  The surety argued that execution of the judgment (and the liquidation proceedings) should be halted, pending the outcome of the business rescue plan; as their liability to the creditor would be much less if the business rescue plan succeeded.  The High Court found the argument unconvincing.

The surety appealed.  The SCA held that the judgment against the surety fixed the exact amount of the latter’s liability to the creditor.  In any event, the deed of suretyship contained standard clauses expressly excluding the argument made by the surety.

The SCA also briefly dealt with the effect of a business rescue plan, and mentioned that the liability of a surety may be unaffected by the business rescue, unless the business rescue plan itself made specific provision for the situation of sureties.  However, the foregoing will not be the last word on the matter.

We advise clients rather to require guarantees as security.  A guarantee is a separate and independent undertaking by the guarantor to pay, and can survive a defect in the underlying principal debt.

We mention that, if a suretyship is subject to the National Credit Act, the outcome may be different.

VAT and international jazz festivals

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by Jerome Veldsman and Simonne Dahl

ABC (Pty) Ltd v Commissioner, SARS (6 January 2015), is a judgment in which the High Court, Cape Town set aside the decision of the tax court upholding unreasonable behavior by SARS.

The taxpayer staged jazz festivals in Cape Town, and concluded a written sponsorship agreement in terms of which the sponsor paid money towards and provided goods and services for the festival; and in return, the taxpayer provided branding and marketing to the sponsor.  The agreement was, in effect, a barter transaction, and VAT was not accounted for separately in the agreements.

Under the Value Added Tax Act, in respect of a barter transaction, VAT is payable on the open market value of the relevant goods or services.  The taxpayer and SARS were in agreement on the open market value of the goods or services under the sponsorship agreement.  However, the taxpayer tried without success to get a tax invoice from the sponsor.

In terms of section 16(2)(f) of the VAT Act, if a taxpayer cannot obtain a tax invoice, the taxpayer may nevertheless substantiate its claim for a deduction in respect of input tax with documentary proof “as is acceptable to the Commissioner“.

The only documentary proof the taxpayer could provide was the sponsorship agreement.  SARS regarded such documentary proof as unacceptable.  Yet, SARS was comfortable calculating the output tax payable by the taxpayer from the content of the sponsorship agreement.  The Judge was not impressed:

If the documents were good enough for the Commissioner to assess the appellant’s output tax liability, it is impossible to conceive, having regard to the character of the particular transactions, why they should not also have been sufficient for the purpose of computing the input tax which should have been deemed to have been levied by the sponsors.”

SARS then advanced three additional arguments in an attempt to counter the foregoing.  All three were dismissed, one simply with: “There is nothing in the argument“.

The taxpayer won, with SARS to pay its legal costs – with our tax money of course.

Contractual exclusion of the jurisdiction of South African Courts

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by Belinda van der Vyver and Nosipho Madikiza

In State Bank of India v Denel (3 December 2014), the Supreme Court of Appeal (SCA) upheld an exclusive foreign jurisdiction clause.

Denel (a South African company) applied to the High Court, Johannesburg for an interdict to prevent its (South African) bank (Absa) from paying out on a guarantee issued in favour of two Indian banks.  The application was successful, and State Bank of India appealed.

The written agreement contained the following clause:

“This counter guarantee shall be governed by and construed in accordance with the Indian laws and is subject to the exclusive jurisdiction of courts in India.”

The SCA held in such regard:

 “In my view, this constitutes a complete ouster of the jurisdiction of a South African court to deal with the question whether or not the demand complied with the terms of the counter guarantee. … If a South African court were to assume jurisdiction by granting interdictory relief with regard to this counter guarantee, it may place Absa in an untenable position if the Indian banks, as they would be entitled to do, were to approach an Indian court for relief. Absa may then be faced with two conflicting decisions. I therefore conclude that the court a quo did not have the necessary jurisdiction to grant interdictory relief in regard to this warranty counter guarantee.”

 This is indeed a strange finding.  Perhaps that is so because State Bank of India did not mention its jurisdiction ouster argument in the High Court, and raised it at a late stage in the SCA proceedings.  There is no mention in the judgment of an in-point 2012 SCA judgment (Foize Africa v Foize Beheer), in which it was held that:

It can now be regarded as well settled that a foreign jurisdiction or arbitration clause does not exclude the court’s jurisdiction.  Parties to a contract cannot exclude the jurisdiction of a court by their own agreement …

In addition, the judgment does not deal with section 34 of the Constitution (the right to have any dispute that can be resolved by the application of law decided in a fair public hearing before a court).  The Constitutional Court may in future overturn State Bank of India v Denel.

 

Racial quotas – Revisited

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by Jerome Veldsman and Mox Malumbete

In the Talking Point November 2014, we discussed SAPS v Solidarity obo Barnard, a Constitutional Court judgment dealing with the Employment Equity Act, which promotes preferential treatment and numerical goals for designated groups, but prohibits quotas.

In Barnard, Moseneke ACJ, writing for the majority, held that Barnard was not an appropriate case to analyse the terminology.  He did observe that the primary distinction between a numerical goal and a quota lies in the flexibility of the standard, a quota amounts to job reservation, and a numerical goal serves as a flexible guideline.  Moseneke ACJ also held that the implementation of a valid employment equity plan may amount to job reservation if applied too rigidly.

Barnard, was revisited in the High Court, Cape Town in South African Restructuring and Insolvency Practitioners Association v Minister of Justice and Constitutional Development and Others (13 January 2015).

The Association challenged the new appointment policy determined by the Minister for application by the Master of the High Court in appointing insolvency practitioners (liquidators), when a High Court liquidates a company (or sequestrates a natural person).

The policy set out four categories of persons, according to race and gender, listed practitioners alphabetically in the categories, and prescribed the ratio in which they should be appointed – effectively a roster system.  The Court held that the policy constituted an inflexible race and sex-based appointments process, and declared the policy invalid.

The judgment provides some guidance on the distinction between a numerical goal and a quota.  The Judge quoted the following from a USA case:

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.”

This case is possibly authority that race-based quotas are not constitutionally permissible for any affirmative action measures.  However, the debate is far from over.

The McLibel saga

McDonald’s Corporation v Steel & Morris was an English lawsuit for libel filed by McDonald’s against two environmental activists over a pamphlet critical of the company.

It all began in 1986 with the publication of a small circulation pamphlet containing allegations such as that McDonald’s:

      sells unhealthy, addictive fast food, and exploits children with its advertising;

      alters its food with artificial chemistry, and poisons customers with contaminated meat; and

      exploits its workers and bans unions.

McDonald’s had a long history of strong-arming its critics into apologising, but Helen Steel and David Morris were not to be cowed.  In 1990, McDonald’s brought libel proceedings against them.  Legal aid was not available for libel cases, and Steel and Morris had limited resources.  They defended themselves.  The case went on for 7 years, and the judgment in 1997 required more than a thousand pages.  In law, McDonald’s nominally won, but it suffered vast bad publicity and embarrassment.

Steel and Morris appealed.  The appeal hearing lasted 23 days.  McDonald’s again nominally won, but not without confirmation by the Court that statements such as the following were fair comment:

If one eats enough McDonald’s food, one’s diet may well become high in fat etc., with the very real risk of heart disease“.

Steel and Morris’ attempt to appeal further in England failed.  So, this time with legal representation, they filed a case with the European Court of Human Rights, against the UK government, contesting the policy that legal aid was not available in libel cases, and the nature of UK libel laws.  They also argued that the lack of legal aid had breached their right to freedom of expression and to a fair trial.

On 15 February 2005, the ECHR ruled in favour of Steel and Morris, finding that the original case had breached the right to a fair trial and the right to freedom of expression.

Technically, Steel and Morris’ ultimate victory in the ECHR was against the UK government, and not against McDonald’s.  However, in the court of public opinion, McDonald’s suffered perhaps the worst loss by a food vendor in modern times.