Meer Hardware CC v Nedbank Limited and Others (7321/06) [2008] ZAKZHC 39 (11 June 2008)

IN THE HIGH COURT

OF SOUTH AFRICA

NATAL PROVINCIAL DIVISION

7321/06

MEER

HARDWARE CC PLAINTIFF

versus

NEDBANK

LIMITED FIRST DEFENDANT

NDOSI

BUILDERS SECOND DEFENDANT

RESERVED JUDGMENT

Delivered on: 11 June 2008

NTSHANGASE, J

[1] In this action plaintiff claims for payment of an amount of R774791.94 against first and second defendants the one paying the other to be absolved for goods sold and delivered as against second defendant, and as against first defendant, for damages suffered by the plaintiff as a consequence of People’s Bank’s representations made to the plaintiff in regard to the sale and delivery to second defendant of such goods on credit. The amount claimed stands as the debit balance on second defendant’s account with plaintiff. It has remained unpaid notwithstanding proper demand.

[2] As against first defendant the plaintiff’s case is that during the periods December 2003 to February 2004, alternatively on or about 23 March 2005 and on or about 23 August 2005 first defendant represented to the plaintiff that second defendant held a bank account with People’s Bank; and that proceeds from the eMondlo Secondary School building project were processed through the said bank account. The basis of the plaintiff’s claim, as I understand it, is that, relying on the truth of first defendant’s representation, provided at the request and behest of second defendant, that the second defendant was then in a good financial position to be safely trusted to purchase goods on credit, plaintiff sold and delivered goods on credit to the second defendant when such representation was false in that the second defendant was then not in a sound financial position and could not be safely trusted with supplies of goods on credit. In the alternative, plaintiff pleaded that the representation or report from the first respondent was material and was made with the intention of inducing plaintiff to act thereon, as a consequence thereof and relying on the truth thereof the plaintiff sold and delivered further goods on credit to the second defendant causing plaintiff to suffer damages when second defendant failed to pay therefor, and that in that regard first defendant was

negligent in its failure to enquire into and to pay regard to the second respondent’s financial position before, and for purposes of making the representations. The second defendant confessed to judgment in the matter. The trial proceeds against first defendant on the question whether or not the first defendant is to be held liable to the plaintiff for damages in an amount to be proved. Prior to the commencement of the trial the parties agreed to separate the issue of liability from that of quantum.

The facts

[3] The first defendant took over the rights and obligations, assets and liabilities of People’s Bank in terms of section 54 of the Banks Act 94 of 1990 on or about 1 February 2005 and it is on that basis that the claim is brought against it.

[4] The goods in question were delivered to second defendant when it, in collaboration with an entity called Amakhabaludaka Construction cc which was in the same line of business as itself, formed what they called “Ndosi Builders Associates/Amakhabaludaka JV” and undertook a project to erect a new eMondlo Secondary School at a cost of approximately R9-million. KP Cele [“Cele”] represented the second defendant and Zweli Madlala [“Madlala”] represented Amakhabaludaka in the joint venture. Collaboration with another business entity was suggested to second defendant by People’s Bank which held second defendant’s account, in view of the huge size of the project. Second defendant engaged a financial consultant, Dean Groenink from “FINCON” [“Groenink”] also on the advice of People’s Bank, whose function, as required by People’s Bank, was to manage the joint venture’s cash flow and, for that purpose, he was to be a compulsory signatory with either Cele or Madlala on the cheques drawn from the account of second defendant. People’s Bank, as the second defendant’s main banker, provided overdraft facilities of R1.5-million to second defendant. At some stage such overdraft amounted to R1.7-million. The overdraft facility was to assist provide the necessary funds to commence operations on the contract. It appears that “Ithala” may have financed the Government for the project for, what is clear is that Ithala was to make payments for work done by second defendant into second defendant’s People’s Bank account in terms of progress in the erection of the school. People’s Bank provided a performance guarantee of R1-million to Ithala to serve in the event of any performance default by second defendant.

The basis of the claim against first defendant

[5] The plaintiff led evidence of Idris Cassim Meer [“Meer”] the sole member of plaintiff to show that People’s Bank made representations to it to supply second defendant with goods on credit with a confirmation that People’s Bank would make arrangements for payments to plaintiff in respect of such goods, and that such representations and confirmation were made orally and in writing.

Meer testified that he was approached by Cele and Madlala early in 2004 with a request to be allowed to purchase material on credit

after their initial cash purchase of bricks. He required them to provide a guarantee as, in terms of plaintiff’s policy for

purchases on credit in excess of R100 000, a guarantee or a cession had to be provided. They needed to provide it as they were to open a credit account involving purchases of millions of rands’ worth of material for the project, ninety-nine per cent of which was to be acquired from plaintiff, according to Meer’s evidence.

The oral representations

[6] When Meer asked Cele and Madlala for a guarantee, he was referred to People’s Bank which he then telephoned. He does not know now who he spoke to nor does he recall the date on which he did so, but he “would say it was before May 2004.” He stated that it could have been Catherine Pillay [“Pillay”] at People’s Bank to whom he spoke, as the person to whom he had spoken to on numerous occasions. His evidence is that she said “they are good for R1.5-million.” She said also that plaintiff must supply the material as they were backing second defendant and she could not foresee a problem because they would be paid monies from different stages of the contract, and that they were handling their account. On being asked about the credit limit Meer said “basically she said I could supply to the value of R1.5-million.” He re-iterated that he was told that “they were good for R1.5-million” and he added: “In other words Ndosi Builders had a facility of some sort, of finance to the tune of R1.5-million.” That was the oral representation and confirmation about payment according to Meer. The alleged oral representation and confirmation are denied. There are difficulties in the presentation of Meer’s evidence in that regard as he could not even recall the person to whom he spoke and who would have made the alleged representation on behalf of People’s Bank which would immediately have been followed by the alleged first letter of written representations. In that regard Meer could take the case of the plaintiff no higher than that “it could have been Catherine Pillay” as she was the person to whom he had spoken on numerous occasions. I find no acceptable evidence of the existence of any such – oral – representation.

The representations and confirmations in the first letter

[7] In his evidence in regard to representations made in writing Meer stated that when he received the oral telephonic representations from People’s Bank he asked for a letter to confirm such representations. People’s Bank faxed it to him. He was unable to provide the date on which it was faxed to him. He said: “it could have been in December, I do not know when it was but it was early in 2004, not 2003.” Elsewhere in his testimony he said that it was some time before May 2004. What was pleaded is that it was “during or about December 2003.” Asked as to who it was at People’s Bank who had sent it to him, his answer was that he could not recall the name of such person nor the person who had signed and faxed it to him. Although elsewhere in his evidence he says “she (Catherine) thereby faxed me the letter”. There is an evident uncertainty about these matters. He stated that

he does not now have possession of the letter; he stated that People’s Bank in it said –

“that they are handling the account of Ndosi Builders and we should supply goods to the value of R1.5-million, they would pay us – they would actually make sure that we would get payments.”

My emphasis seeks to highlight a slight shift in his evidence under cross-examination in what follows:

“Basically the letter stated to my recollection, Ndosi Contractors held an account with Nedbank or People’s Bank and People’s Bank were handling the finances and I could supply material to the value of R1.5-million.”

Still on the issue of the contents of the letter he said –

“In simple terms I understood it to be that the bank was backing them and payments would be made via the bank,”

which differs from what he elsewhere stated the letter’s contents to be, that is, that –

“they would pay us, they would make sure that we would get payments.”

That was Meer’s impression and recollection about the contents of the letter allegedly faxed to him and which was no longer in his possession. It is clear that Meer was unable to provide the exact contents of the letter allegedly sent to him by People’s Bank.

[8] It is disputed on behalf of the first defendant that any such letter was written. Apart from the uncertainties highlighted earlier in regard to the authorship and transmission of the letter and the fact that the stated contents of such letter experienced some measure of mutation at various stages of his testimony, which deprived his testimony of proof of an accurate account of its exact contents, there are various other difficulties which obviously do not aid the case of the plaintiff in proving the existence of such a letter. One such difficulty is Meer’s failure to provide a satisfactory explanation why, in plaintiff’s attorneys letter of demand dated 27 January 2006 addressed to the Business Development Manager of People’s Bank, reference is made to no other letter than one referred to as follows:

“On or about 23 March 2005 you issued a letter of confirmation in favour of our client a copy of which is annexed hereto confirming that you would process payment from an account held with your Nedbank, Smith Street branch and that it was safe for our client to supply goods to Ndosi Builders and JV Amakhabaludaka Construction Partnership.”

The letter continues:

“On the strength of your said letter our client sold and delivered goods to the said partnership, rendering an amount due and payable in favour of our client in the sum of R774 791.94.”

[9] Closely aligned with this, in the catalogue of plaintiff’s difficulties in proving the existence of the letter, is one other difficulty which arises from Meer’s failure to provide a satisfactory reason why the plaintiff, who would have been armed with a letter by first defendant guaranteeing payment, plaintiff did not sue the first defendant as the “backer” of second defendant, for well over six months after cessation of supplies of material to second defendant, when the debt had soared to R774000, anxious as Meer was to recover such amount as plaintiff itself, according to Meer had cash flow problems and when second defendant’s payments had become erratic – a reason given by Meer for stopping supplies to second defendant, which in itself would all the more be reason to make demand and sue first defendant for payment.

[10] In response to a question under cross-examination by Mr Camp who appeared for first defendant as to why plaintiff’s attorney did not in any way refer to a previous letter of guarantee in the letter of demand, Meer stated –

“I cannot answer for him. He is the attorney. I am not the attorney; it is his job.”

Meer also said –

“He is the only one who could answer that question, not me.”

As far as he was concerned he had given his attorney “the whole file with the credit application form, with the invoices and whatever pertained to the account.” It smacks of an attempt to blame unfairly his attorney for the loss of the letter or for failure to refer to such letter. It is not clear why he did not, under cross-examination, repeat what he had earlier stated, that is, that the letter was mislaid, a fact which he had discovered when he started to look through the file for the account when “(he) started taking legal action,” and he added that “that was the only time (he) discovered that the first letter was not there.” It attracts the inevitable conclusion that no such letter existed and it does not assist dispel, in whoever it may repose, a perception that the evidence in regard to the existence of the first letter may be no more than a disingenuous afterthought. I find no acceptable evidence of the existence of such a letter.

[11] Even if the letter were found to have existed, the actual contents of the letter would have been lost to us. The loss would deny us the act of not only reading the letter, but also the act of determining from its contents whether or not it was capable of being construed as pleaded by the plaintiff. The only person to depose to its contents, Meer, according to his evidence, “understood it to convey that the bank was backing (second defendant) and payments would be made via the bank.” [my emphasis]. That, in my view, is no undertaking of liability by the bank; nor can it reasonably be construed as an assumption of liability by the bank.

The letter of 23 March 2005

[12] I deal now with the letter of 23 March 2005 also relied upon by the plaintiff in its claim against the first defendant. Meer testified that in the initial dealings with the second defendant payments on account of goods sold and delivered on credit were received without difficulty, but later became erratic. He telephoned Pillay to inform her about this. She re-assured him that payments would in due course be received once progress payments from Ithala were made into second defendant’s account. In September 2004 the debit balance brought forward on the second defendant’s account was R710 792.79. After returning some goods to plaintiff and making payment of R50 000 the balance on account was brought down to R631 694.79. Thereafter, from September 2004 plaintiff stopped supplies to second defendant. Elsewhere in error Meer said he stopped supplies in 2005. When Madlala came to plaintiff’s office to ask plaintiff to supply goods again on credit, Meer refused. He telephoned Pillay to inform her of his decision and the reason for it. She re-assured Meer that there were funds and she told him that there were problems with progress certificates on the project. She subsequently faxed him a letter dated 23 May 2005 to re-assure him that plaintiff would be paid. It is Exhibit “A5”.

[13] It is not in dispute that Pillay was apprised of the problems with payment and that she wrote the letter, Exhibit “A5”. The first part of the letter reads:

“We hereby confirm that the bank account for the abovementioned client is held at Nedbank, Smith Street Branch. Proceeds from the contract for New Mondlo Secondary School is processed to this account as stated per contract.”

I think, from the testimony of Meer, his understanding of that part of the letter was reasonable and largely correct, although to that understanding I do not find it proper to add, as did Meer in his testimony in which he stated his understanding to be that –

“they are handling – basically running the account, and obviously they would know the finances of Ndosi Builders.”

The letter does not say so. Meer properly understood the letter as conveying that People's Bank held the bank account of the plaintiff and that into it the proceeds from the contract would be deposited.

The next paragraph reads:

“You may continue to supply the abovementioned client and we confirm that the payment will be arranged through ourselves accordingly.”

The last paragraph of the letter reads:

“We trust that you find the above in order.”

It is Meer’s evidence that on the strength of that letter, he resumed supplies to the second defendant. He later stopped again, but plaintiff resumed supplies after Archibald Mazibuko, also a Business Development Manager of People’s Bank approached Meer with a request to do so for the sake of completion of the work. Mazibuko estimated the cost of the goods required then at R15 000. Meer required Mazibuko to make the request in writing. They discussed the status of the account. Mazibuko confirmed that he sent to plaintiff Exhibit “A9”, the letter of 23 August 2005. The letter reads:

“In an effort to see the project completed, we hereby ask that you allow our clients to collect these items.”

The items are reflected in the letter. The letter reads further:

“We have been informed that a claim for work done this month will be processed into their account by the end of the month. We hereby

undertake to ensure that payment for the abovementioned items will be made from this money.”

Meer permitted resumption of supplies on credit and second defendant made purchases to the extent of R20 084.10. In his evidence Mazibuko confirmed that the letter contained an undertaking from the bank, but he was at pains to explain that the undertaking was in respect of payment which was to be made from the final payment. Of course this is not what the letter he wrote says. It clearly refers to payment to be made from monies to accrue on a claim “for work done this month.” He said to his knowledge the money in respect of those purchases as well had not been paid.

[14] Reverting to the letter of 23 March 2005, the major controversy attaches to the second paragraph which Meer, according to his testimony, understood as conveying that –

“You may continue to supply because there was a history behind it and we were supplying from the onset and because of the situation that I was not getting monies, it was a matter of concern and further it re-assured me that I can continue to supply”, after he had earlier stopped supplies.

He also understood it as conveying –

“that the bank will pay for the material that is going to be supplied, or that has already been supplied.”

Meer also stated his understanding of “the payment will be arranged” as conveying that –

“They have got the funds on the account of Ndosi Builders and they would arrange the payments to us; they would pay us for the material on their account.”

Meer also said –

“In layman’s terms to me the bank is telling me: give the goods, we will pay you.”

Such was Meer’s understanding of the letter. He also pointed out in evidence that he otherwise would “never have supplied them that much of material.”

[15] Pillay, the author of the letter of 23 March 2005 who assumed the position of Business Development Manager in July 2004 explained how it came about that such letter was written and provided her side of what People’s Bank by that letter sought to convey. I find it necessary to quote what she said in her evidence-in-chief for what will follow as my view of what it was intended to convey to Meer:

“Mr Cele being the client had approached me for a letter in favour of ACE Hardware in respect of him ordering more supplies and to assure him (sic) or to provide comfort in terms of payments that will be made. So what Mr Cele wanted really was to be able to get or receive more supplies.”

She also stated that it was for plaintiff to be informed that second defendant still had the bank account and that payments would be arranged through the account. Asked as to who would arrange for the payments through the account she stated –

“The client would in conjunction with the bank arrange for payment to be made.”

[16] When she was questioned about the meaning of “payment would be arranged through ourselves accordingly” she said –

“That would be when Ithala would make payment that we will, with the client arrange payment accordingly in respect of him continuing to supply our client to continue work.”

The letter to Meer did not say payment would be made when Ithala made payments.

[17] Mr Pretorius was at pains to elicit stable answers from Pillay. When asked a simple question she would waffle and drift away from the desired responses. I will burden this record to show her answer to some specific questions as an example:

Q “Did Cele say to you Ace Mica won’t supply me, or I want to buy more from them, but they want a letter that will assure them that they are going to receive payment? Is that what he told you? What did he tell you?”

A “In terms of what he said that he wants to carry on, the project still needs to carry on. In terms of ordering more supplies, he needs to get supplies from ACE because of obviously, the account at a certain level at a certain time required some kind of assurance that payment will still be arranged through People’s Bank; so Cele wanted the bank to give that kind of assurance that payment will be arranged through ourselves.”

She made vain attempts in her evidence generally to explain away the contents of the letter in a manner which would have made it a worthless piece of paper for any purpose. As a witness her performance was unsatisfactory. She was also evasive. Actually a reasonable reader would not accord the contents of the letter the meaning she assigned to it.

[18] The letter postulated an ability to pay as well as a certainty based on that ability that payments would be made to the plaintiff. Several deposits of money were made by Ithala into second defendant’s account held with first defendant after 23 March 2005. Why was payment not made to plaintiff if, as was stated by Pillay the letter of 23 March 2005 is to be understood as saying that payments to plaintiff would be made once monies were received from Ithala? Of course, as was earlier stated, the letter does not say to plaintiff that payments would be made subject to receipt of monies from Ithala. Archibald Mazibuko, who was also People’s Bank Business Development Manager from October 2003 to November 2005, stated that no payments were made to plaintiff because no cheques were received from second defendant. The letter did not say to plaintiff “subject to cheques being received payments would be made.” Cheques may have been drawn after receipt of monies after 23 March 2005 to discharge other debt commitments of second defendant. It was incumbent upon People’s Bank to examine the second defendant’s account to inform itself of the financial status of the second defendant and to ascertain, for purposes of fulfilling its undertaking to arrange for payments in terms of its letter’s confirmation, whether in the prevailing circumstances and in the light of second defendant’s other financial commitments, second defendant “would (still), in conjunction with the bank arrange for payments to be made” as per Pillay’s version of what the letter of 23 March 2005 sought to convey.

[19] Pillay stated that when Cele approached her in September 2004 with a request for a guarantee to be issued to plaintiff, “because of payments that were due and possibly pressure placed on him” she told him that she could not provide him with the guarantee as the second defendant could not provide security to the bank for it. The bank none the less decided to issue an effective ‘surrogate’ in lieu of the guarantee by its letter of 23 March 2005.

[20] At the time that the letter was written and sent to plaintiff Pillay knew that Groenink, a compulsory co-signatory to second defendant’s cheque account who managed the joint venture’s account had cancelled his contract with the second defendant. She had been notified of this by Groenink by letter, Exhibit “E5” dated 14 September 2004. People’s Bank’s letter was sent to induce plaintiff to release material on credit in an adverse climate known to the bank when, in Pillay’s own words “with Dean not being present any longer, there was, (what Pillay euphemistically referred to as) “a bit of mismanagement on the client’s side. So I understand he could have been placed under tremendous pressure from creditors, asking for payment.” She knew as at 23 March 2005 that the second defendant was under pressure from plaintiff for payments to be made for material supplied to it.

[21] In the face of all of this the bank failed to ascertain the second defendant’s financial status before, and for purposes of the issue of the letter, to establish whether it was proper to encourage plaintiff to supply further goods on credit and it also failed to establish whether it would still be in a position to honour its undertaking to arrange for payments to be made to the plaintiff in the light of the circumstances then prevailing. The bank failed to adhere to the standard of care legally required of it. The unlawful causing of damage thereby was reasonably foreseeable and preventable by taking steps to guard against the occurrence of damage to the plaintiff. It was negligent, as, in the prevailing circumstances, a banker would not reasonably have furnished such a representation. It misled the plaintiff to act to his peril. All of this equally applies also in respect of material supplied in response to the letter, Exhibit “A9” which followed upon and was in essence a re-iteration of a request no different from that of the letter of 23 March 2005 with its undertaking which, as at time of issue of Exhibit “A9” had not been revoked.

[22] At the time the letter was issued, People’s Bank had a comprehensive and intimate knowledge of second defendant’s financial affairs and business activities on the project. There can be no dispute that it did know. That disposes of a possible argument that a letter which stated no limit of supplies to be made was too open-ended to be reasonably relied upon, and that therefore plaintiff could not properly rely on it. There would also be no merit in the argument that the plaintiff should have conducted its own enquiry of the second defendant’s credit risk profile, as the bank itself, by its letter of 23 March 2005 effectively displaced scepticism and a rooting of any negative risk profile of second defendant Meer could have harboured.

[23] The plaintiff’s case is that but for the representation issued by People’s Bank the plaintiff would have continued to withhold

supplies of material on credit and would not have suffered the loss which it has suffered on account of second defendant’s failure to pay and plaintiff’s inability to recover the amount due in respect of goods sold and delivered on credit. The letter of 23 March 2005 was clearly designed to lull the plaintiff with a false sense of comfort. It had that effect on the plaintiff. Indeed Pillay’s own evidence was that Cele approached her for a letter to “ACE Hardware”… to assure him (sic) or to provide comfort in terms of payments that will be made.” It was clearly a letter written and designed to induce plaintiff to release further supplies of material to second defendant while it sought, by crafty use of language to provide the bank with an escape route in case it would need to escape to evade liability in the event of any default by second defendant. It indeed induced plaintiff to release further supplies of material on credit to defendant. How else would any reasonable person understand a letter which said – “you may continue to supply the abovementioned client and confirm that the payment will be arranged through ourselves accordingly?” So, not only did the letter say “you may continue to supply”, it also secured the aspect of payment for what was to be supplied. Its effect to induce is manifest in the fact that plaintiff released material only upon receipt thereof after cessation of supplies which had endured for a considerable period of time from September 2004. Meer is correct in saying that but for the letter, he would never have released the material. He was, as was desired, lulled into a false sense of comfort which induced him to release material in an adverse climate known to the bank.

[24] To Meer a reading of “you may continue to supply the abovementioned client” conveyed and was reasonably understood by him as conveying that second defendant could be regarded as good for its normal commitments in the course of business. To Meer it was an important document from second defendant’s own banker. It was no less important to People’s Bank whose Catherine Pillay described how they sat and discussed what was going to be stated in it; she drafted the letter and thereafter had it taken to her area manager “who passed it before it went out.” Such a letter was not issued to serve an idle purpose. It was made upon a serious request to serve a serious purpose and to be as effective as what a ‘formal guarantee’ would have been. If no purpose was to be served the bank would have exercised the option available to it which would have been to decline to furnish it. It was a negligent misrepresentation on the part of the bank which it was under legal duty not to make, once it decided to write the letter. It would reasonably have realised that plaintiff would rely on it. In my view it was in fact intended that he do so. According to

Pillay’s evidence it was to seek resumption of supplies for their client. It is not difficult to perceive that the bank had its own material interest in providing a favourable representation in respect of second defendant as it was no less in the bank’s interest than in any other parties’ interests that the project be completed, failing which the bank itself would be placed in peril of loss of all or part of its R1-million guarantee to Ithala which it had provided for due performance of second defendant on the contract.

For the foregoing reasons, in particular given the fact that plaintiff had, for a considerable period of time decided to withhold supplies from second defendant and would, according to his evidence, have continued to do so, but relented only upon receipt of the letter of 23 March 2005, the representation it contained, I find, was linked sufficiently or directly to the loss suffered by the plaintiff which was, in my view, reasonably foreseeable at the time the letter was sent to plaintiffs, for legal liability to ensue.

Order

In the result I make the following order:

The first defendant is liable and directed to compensate plaintiff for any proved or agreed damages suffered consequent to the sale and delivery of goods to second defendant pursuant to letters, Exhibits “A5” and “A9” dated 23 March 2005 and 23 August 2005 respectively.

The first defendant is directed to pay plaintiff’s costs of suit in relation to the issue of liability.

The case is adjourned sine die for determination of the issue of quantum of plaintiff’s damages.

Date of Hearing: 12 March 2008

Date of Judgment: 11 June 2008

Counsel for the plaintiff: Adv C Pretorius

Instructed by: GJ Vonkeman Attorneys, Vryheid

c/o Tatham Wilkes Inc.

Counsel for the first defendant: Adv A Camp

Instructed by: Strauss Daly Inc.

c/o Stowell & Company