National Health Laboratory Service v Van Vuuren (2010/41313) [2020] ZAGPJHC 212 (10 September 2020)

REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA,

GAUTENG LOCAL DIVISION, JOHANNESBURG

CASE NO: 2010/41313

In the matter between:

NATIONAL HEALTH LABORATORY SERVICE Plaintiff

and

MARINA MAGDELENA LLOYD JANSE VAN VUUREN Defendant

J U D G M E N T

LAMONT J:

[1] During January 2006, the plaintiff employed the defendant as a junior registrar. The parties concluded a written agreement setting out the applicable terms and conditions. The defendant, after she had worked for two years and during January 2008, was promoted to the position of senior registrar. During April 2010, the plaintiff was employed as a specialist pathologist. During July 2010 the defendant resigned with effect from August 2010.

[2] During, the course of the defendant’s employment with the plaintiff, she was obliged to both work and study. The plaintiff provided the study facilities for the defendant. The defendant was extremely successful in her studies and qualified one year early. One of the terms of the original contract was that if the defendant did not work for a period of two years after the completion of the training and qualification as a specialist, she would reimburse the plaintiff for the training costs. The parties valued the amount to be paid at R2 million.

[3] The plaintiff instituted action claiming the amount of R2 million from the defendant. The defendant defended the action. One of the bases of the defence was that the term was contained in the 2006 contract and not in the later contracts. Hence, so it was submitted, the term had ceased to be effective. This issue was decided against the defendant finally in the Supreme Court of Appeal (National Health Laboratory Service v Mariana Lloyd-Jansen van Vuuren [2015] ZASCA 20).

[4] This matter comes before me on trial to consider the question of damages.

[5] The issue to be determined is whether or not the damages agreed constitute a penalty alternatively an excessive penalty as contemplated by the provisions of the Conventional Penalties Act 15 of 1962 (CPA).

[6] The parties agreed that the onus of proof lay upon the defendant. The defendant admitted that documents appearing in the trial bundle - volumes one and two - were to be regarded as true and correct. The defendant closed its case without leading any other evidence. The plaintiff closed its case.

[7] The terms of the clause containing the penalty are: –

“3.4 On completion of the requirements for registration as a specialist with the HPC SA the employee shall continue to work for the NHLS as a specialist pathologist for a period of two years following specialist registration. For the purposes of this agreement registrar training is deemed to be worth R2 million, irrespective of the time spent in training, the sum of which shall be worked off over a two-year period… Should the employee complete the first full twelve months of the period, the employee’s indebtedness to the NHLS shall be reduced… Should the employee not complete the two – year post – specialist registration, working requirement, the employee shall pay back to the NHLS the amount owing in a single lump sum prior to resignation. The employer may at its discretion cancel the indebtedness of the employee, at any time.”

[8] The defendant was employed as a junior registrar from 1 February 2006 to 31 March 2008 thereafter as a senior registrar from 1 April 2008 to 31 March 2010 and specialist pathologist from 1 April 2010 to date of resignation.

[9] The defendant was registered as a specialist pathologist prior to 30 April 2010.

[10] The plaintiff produced a document, which reflects its calculation of the cost of training. The defendant at the trial produced no evidence stating that it had none. It did not challenge or in any way suggest that the figures produced by the plaintiff were inaccurate. The defendant was reliant on the figures produced by the plaintiff. The defendant, in its calculations, omitted to take into account costs accounted for by the plaintiff. Hence, the totals produced by counsel are not the same although the same figures were used. In my view, the defendant should have considered the costs accounted for the plaintiff. No explanation was given as to why those costs, which were contained in the set of common cause facts, were omitted by the defendant.

[11] The monetary value of the plaintiff’s prejudice comprises:

Salary Component: Registrar:

11.1 The defendant took four years and two months (1 February 2006 to 1 April 2010) to complete the full Health Professions Council of South Africa (HPCSA) registration as a specialist pathologist. Due to the insufficient accuracy of the figures and in the defendant’s

favour, no provision is made in the calculation below for annual increases between years one and two, and three, and four respectively.

11.2 Registrars spend their time as follows:

Junior Registrars (Year one – two):

11.2.1 Academic: 83% (consisting of clinical training, attending formal teaching, research and half of administration); and

11.2.2. Operations: 17% (consisting of consulting and diagnostic tasks, provision of teaching and training and half of administration).

11.3 Senior Registrars (Year three – five):

11.3.1 Academic: 48.5% (consisting of clinical training, attending formal teaching, research and half of administration); and

11.3.2 Operations: 51.5% (consisting of consulting & diagnostic tasks, provision of teaching and training and half of administration).

[12] The proportion of the cost to the plaintiff for training a registrar paid out as a salary for time spent in academic activities can be seen in block A in the table below. The course was concluded one year early and there is an adjustment accordingly.

Salary Component: Pathologist costs:

[13] The bulk of Teaching and Training of registrars is conducted by Senior Pathologists who spend 27% (consisting of the provision of teaching and training and half of administration) of their time on Teaching and Training related activities. They teach four people and the cost of 27% falls to be abated accordingly. This set of calculations excludes research supervision. The proportion of the cost to the plaintiff of training a registrar by providing a pathologist to train can be seen in block B in the table below.

Operational Impact:

[14] In the absence of any clear national quantification of the actual impact of postgraduate health professional education, other than salaries per se, a figure of 35% of the total salary package is recommended as a baseline figure by the National Department of Health to provide for time delays, capital expenditure, increased bed occupancy, consumable loss, academic administration overheads etc. as part of training. The proportion of the cost to the plaintiff of training can be seen in block C in the table below.

Scientific attendance:

[15] Provision is made for two local NHLS-supported scientific events over a full contract for example, conferences. These events must be over 3 days, with due consideration of registration fees, flights, transport, accommodation and subsistence and travel expenses. An individual event is estimated at R9500 per event, equating to an estimated R19000 over a 5-year contract. The proportion of the cost to the plaintiff can be seen in block D in the table below.

Research Support:

[16] Research support, as per the plaintiff’s policy, is estimated at R25000 over the duration of the contract. The proportion of the cost to the plaintiff for research support can be seen in block E in the table below.

Calculation

Quantification of Registrar Training A: Salary Component: Registrar Period Package Overtime A% Academic TCTC Year 1 280 680 103 852 384 532 83,0% 319 161 Year 2 280 680 103 852 384 532 83,0% 319 161 Year 3 395 439 146 312 541 751 48,5% 262 749 Year 4 395 439 146 312 541 751 48,5% 262 749 Year 5 (Feb and March) 65 907 24 385 90 292 48,5% 43 792 Total 1 207 613 B: Salary Component: Pathologist Period Package HPCSA RATIO TT% Academic TCTC Year 1 1 739 505 1 to 4 27% 117 417 Year 2 1 739 505 1 to 4 27% 117 417 Year 3 1 739 505 1 to 4 27% 117 417 Year 4 1 739 505 1 to 4 27% 117 417 Total 469 666 C: Operational Impact Period Academic OH% OH TCTC 4 Years 1 207 613 35% 338 124 Total 338 124 D: Scientific attendance 19 000 E: Research Support 25 000 GRAND TOTAL 2 059 403

[17] The defendant worked for five months of the 24-month period she would have had to have worked to pay for the training she received. It is fair that she be given credit for that period. This amounts to 5/24 of the costs amounting to R2, 059 million namely R428,958.00.

Fairness is a relevant criterion.

[18] The defendant’s case is based on the CPA. The stipulation in clause 3.4 of the contract is a penalty stipulation. Section 1 of the CPA provides:

‘(1) A stipulation, hereinafter referred to as a penalty stipulation, whereby it is provided that any person shall, in respect of an act or omission in conflict with a contractual obligation, be liable to pay a sum of money or to deliver or perform anything for the benefit of any other person, hereinafter referred to as a creditor, either by way of a penalty or as liquidated damages, shall, subject to the provisions of this Act, be capable of being enforced in any competent court.

(2) Any sum of money for the payment of which or anything for the delivery or performance of which a person may so become liable, is in this Act referred to as a penalty.’

[19] In terms of clause 3.4, the defendant must work for the plaintiff for a period of 24 months after being appointed by the plaintiff as pathologist, so that the plaintiff can recover its training costs. If the plaintiff does not work for such period of 24 months, she must pay R2 million as deemed training costs, no matter what the actual training costs may be.

[20] The plaintiff is not claiming damages for breach of contract. The plaintiff’s claim is founded on the penalty.

[21] The contract concluded between the plaintiff and the defendant is, at its core and essence, a contract of employment.[1] Clause 3.4 in such a contract is what is called a ‘training bond’. Syrex (Pty) Ltd v Ramfolo[2] considered a similar contractual stipulation.[3] It was accepted that the provision was a penalty stipulation as contemplated by the CPA and was thus subject to moderation in terms

of section 3 of the Act.[4] It was held as follows:[5]

“… clause 14.7.2 of the contract of employment was introduced as a weapon in terrorem. The clause was inserted to force the Respondent to stay with the Applicant for, at least, one year or else face liability of an amount three times her monthly cost to company salary”

[22] The basis for the moderation of the training bond in this case is section 3 of the CPA, which reads:

‘If upon the hearing of a claim for a penalty, it appears to the court that such penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the court may reduce the penalty to such extent as it may consider equitable in the circumstances: Provided that in determining the extent of such prejudice the court shall take into consideration not only the creditor's proprietary interest, but every other rightful interest which may be affected by the Act or omission in question.’

[23] In the new constitutional dispensation, as held in Beadica 231 CC and Others v Trustees, Oregon Trust and Others:[6]

‘..pacta sunt servanda is not the only, nor the most important principle informing the judicial control of contracts. The requirements of public

policy are informed by a wide range of constitutional values. There is no basis for privileging pacta sunt servanda over other constitutional rights and values. Where a number of constitutional rights and values are implicated, a careful balancing exercise is required to determine whether enforcement of the contractual terms would be contrary to public policy in the circumstances.’

[24] In many respects, training bonds in employment contracts are similar to restraint of trade covenants. As with restraint undertakings, such provisions are subject to moderation by the Court on the basis of reasonableness and fairness. As held in Sunshine Records (Pty) LTD v Frohling and Others[7]:

‘… a court may inter alia have regard to matters such as whether the restraint clause was calculated to be unduly oppressive or designed to act in terrorem, and whether partial enforcement would not operate harshly or unfairly towards the person bound by the restraint.

[25] In Reddy v Siemens Telecommunications (Pty) Ltd[8] it was held:

‘A court must make a value judgment with two principal policy considerations in mind in determining the reasonableness of a restraint. The first is that the public interest requires that parties should comply with their contractual obligations, a notion expressed by the maxim pacta servanda sunt. The second is that all persons should in the interests of society be productive and be permitted to engage in trade and commerce or the professions. Both considerations reflect not only common-law but also constitutional values …’

[26] In performing this evaluation, the Court is given a wide discretion, based on what is fair and equitable, and may consider any rightful

interest of any of the parties in exercising such discretion. The Court has a duty to conduct this exercise, even mero motu.[9] In Marlow Projects CC v Janse van Rensburg and Others[10] the Court held:

‘Considering as to whether the penalty amount should be reduced, section 3 provides that "the Court may reduce the penalty to such an extent as it may consider equitable in the circumstances". This confers the Court not only with the power but with the duty as well to investigate the relationship between the penalty and the prejudice suffered by the defendant. The learned author says the Court may mero motu investigate such damage. It is further stated that "to consider whether the penalty is out of proportion to the prejudice suffered by the creditor (defendants) section 3 does not confine the Court to an investigation of the creditor's financial loss nor to such prejudice as was in the contemplation of the parties at the time of contracting"’

[27] Section 3 of the CPA, was considered in Western Bank Ltd v Meyer; Western Bank Ltd v De Waal; Western Bank Ltd v Swart and Another[11] where it was held:

‘… the Legislature has not provided any yardstick by which the "proportion" is to be measured, or to be determined. It is a matter left entirely to the discretion of the Court which, so it seems to us, should only interfere if, bearing in mind that an object of a penalty clause is to compel the debtor to implement his obligations under the contract by providing harsh consequences should he default, it nevertheless is of the opinion that the penalty is unduly severe to an extent that it offends against one's sense of justice and equity …’

[28] There is no requirement that the penalty stipulation must be grossly or excessively disproportionate to the prejudice suffered in order for intervention and moderation to the justified. Section 3 of the CPA imposes no such requirement. In Western Credit Bank Ltd v Kajee[12] it was held:

‘If the penalty is out of proportion to the prejudice, the Court will reduce the penalty to such extent as it may consider equitable in the circumstances. The words 'out of proportion' do not postulate that the penalty must be outrageously excessive in relation to the prejudice for the Court to intervene. If that had been intended, the Legislature would have said so. What is contemplated, it seems to me, is that the penalty is to be reduced if it has no relation to the prejudice, if it is markedly, not infinitesimally, beyond the prejudice, if the excess is such that it would be unfair to the debtor not to reduce the penalty; but otherwise, if the amount of the penalty approximates that of the prejudice, the penalty should be awarded.’

[29] In Murcia Lands CC v Erinvale Country Estate Home Owners Association[13] the court added:

‘It seems to me that the question of whether the penalty was “out of proportion” to the prejudice can be assessed in three ways: by looking at comparable situations where the desired result was achieved; by looking at the size of this penalty and the penalties in general in relation to the income and expenditure of the defendant; and by exercising one’s sense of fairness and justice’

[30] If the court believes that the penalty provision is disproportionate to the prejudice, then the court is empowered to reduce it to whatever sum the court, in its discretion, deems appropriate as equitable and fair. In Murcia Lands[14] it was stated:

‘… What is equitable is what is fair. We are dealing here with an equitable exception to the general rule that parties are bound to the terms of their contractual undertakings. It seems to me that it is fair to all concerned that in deciding this question the court should make use of the best information available to it at the time when it hears the matter, rather than restricting itself to the circumstances at the time of the breach.’

[31] The actual prejudice to the plaintiff is the costs incurred by it for training the defendant, and then only receiving the benefit of her specialist services for a period of 5 months instead of the full 24 months after she completed registration. The 24-month potential penalty was ameliorated by the 5 months the defendant worked. This value to the plaintiff of the defendant’s work must be weighed against the deemed costs in the penalty stipulation, and then moderated based on what is fair and equitable.

[32] Applying all of the above principles to the facts it is fair, just and equitable that the penalty stipulation in clause 3.4 of the contract be moderated and reduced, in order to correspond with the actual training costs incurred by the plaintiff, as proven by way of the common cause facts, less the five months service the defendant rendered to the plaintiff as a specialist pathologist. This establishes the penalty at R1,630,445.00 (19/24X2,059,403).

[33] The plaintiff is entitled to be paid that amount together with interest at the prescribed rate from date of judgment. The amount was illiquid until judgment and not readily calculable.

[34] In my view, costs should follow the event. The defendant fought tooth and nail and made no tender to protect herself.

[35] I accordingly make the following order:

1. The defendant is to pay to the plaintiff the sum of R1,630,445.00.

2. Interest on the said sum of 8,75% per annum from date of judgment to date of payment.

3. Costs of suit.

______________________________________________

C G LAMONT

JUDGE OF THE HIGH COURT OF SOUTH AFRICA

GAUTENG LOCAL DIVISION, JOHANNESBURG

COUNSEL/ATTORNEY FOR THE PLAINTIFF: Adv. R.S. Shepstone

PLAINTIFF’S ATTORNEY: Lawtons Africa

COUNSEL FOR THE DEFENDANT: Att. S. Snyman

DEFENDANT’S ATTORNEY Snyman Attorneys

DATE/S OF HEARING: 03 September 2020

DATE OF JUDGMENT: 10 September 2020

[1] See Smit v Workmen's Compensation Commissioner 1979 (1) SA 51 (A) at 61A; Grogan Workplace Law (10th edition) in part B at page 29 – 30.

[2] (2015) 36 ILJ 2132 (LC).

[3] In the Syrex case, the clause in the employment contract provided that: ‘It is recorded and agreed that the total value of the in-occupation probationary training contemplated by this agreement, which includes time, expertise and actual disbursements expended by the company, shall be in the amount of three times the employee's monthly cost to company salary’. The employment contract in Syrex then provided that in exchange for the training provided by the company to the employee the employee agreed to serve the employer

for a minimum period of at least one year as an employee of the company, and if the employee left before then, the training costs were payable to the employer. The clear comparison to the matter in casu is immediately apparent.

[4] See paras 25 and 32 of the judgment.

[5] Id at para 28.

[6] 2020 (5) SA 247 (CC) at para 87. See also para 72: ‘It is clear that public policy imports values of fairness, reasonableness and justice. Ubuntu, which encompasses these values, is now also recognised as a constitutional value, inspiring our constitutional compact, which in turn informs public policy. These values form important

considerations in the balancing exercise required to determine whether a contractual term, or its enforcement, is contrary to

public policy’. See also Bondev Midrand (Pty) Ltd v Madzhie and Others 2017 (4) SA 166 (GP) at para 41.

[7] 1990 (4) SA 782 (A) at 796F.

[8] 2007 (2) SA 486 (SCA) at para 15.

[9] See Western Bank Ltd v Meyer; Western Bank Ltd v De Waal; Western Bank Ltd v Swart & Another 1973 (4) SA 697 (T) at 699E-F; Syrex (supra) at para 33.

[10] [2015] JOL 34231 (GNP) at para 32.

[11] 1973 (4) SA 697 (T) at 699H-700A.

[12] 1967 (4) SA 386 (N) at 391B-D.

[13] [2004] 4 All SA 656 (C) at para 37.

[14] Id at para 50.