South Africa: High Courts - Gauteng

In the matter between:

SOUTH AFRICAN FORESTRY COMPANY LIMITED

Applicant

And

MOMENTUM LIFE ASSURERS LRTD

RAND MERCHANT BANK ASSET MANAGEMENT

First Respondent Second Respondent

JUDGMENT

HARTZENBERG, J

[1] The applicant ("plaintiff') applies, in terms of Rule 28(4) of the Rules of

Court, for leave to amend its particulars of claim. The respondents ("defendants")

object to the proposed amendment, on the basis that the amended particulars of claim

will be vague and embarrassing. This is the second proposed amendment. The

defendants gave notice of objection to the original particulars of claim.

When,

thereafter, the plaintiff, on two occasions attempted to amend them, they again gave

notice of objection alleging that the proposed amendment will render them vague and

embarrassing. The defendants persist with the objection.

[2] The plaintiff had a medical aid fund for its employees ("the plaintiff's

fund"). On the advice of the second defendant, who was also authorised to act on

behalf of the first defendant, the plaintiff, who looked for an income tax free

investment, agreed to invest the capital of its fund with the first defendant. A written

policy was issued, on 17 August 1995. At that time the definition of "benefit fund" in

the Income Tax Act was wide enough to include the plaintiffs fund. Paragraph (c) of

the definition in section 1 of "benefit fund" read:

"Any fund (other than a pension fund, provident fund or retirement annuity

fund) which, in respect of the year of assessment in question, the commissioner

is satisfied is a permanent fund bona fide established for the purpose of

providing sickness, accident or unemployment benefits for its members, or

mainly for such a person and also for the purpose of providing benefits for the

dependents or nominees of deceased members. "

[3] Paragraph (c) was deleted with effect from 1 January 2000 in terms of the

Taxation Laws Amendment Act, 30 of 1998.

The result was that the plaintiff s

contributions to the fund were no longer a general deduction allowed under section

11(1) of the Income Tax Act and the plaintiffs fund's receipts and accruals were no

longer tax exempt under section 10(1)(d)(ii) of the Income Tax Act.

[4] The first defendant as a long term insurer was obliged in terms of section 29

of the Income Tax Act to establish four separate funds. For the purposes of this

judgment it is only necessary to refer to the "untaxed policyholder fund" created in

terms of the provisions of section 29(4)(a). That was the fund in which the plaintiffs

fund was invested. It is also necessary to mention that after the investment of the

plaintiff s fund in that fund, those monies became an asset of the first defendant.

Should any tax have become payable the entity liable for payment thereof, was the first

defendant.

[5] The plaintiffs main claim is for performance by the first defendant in terms

of the policy contract between the plaintiff and the first defendant of an amount of

approximately R3,8 million. It has a conditional alternative claim against the second

defendant, which is not relevant for the purposes of this judgment. In a nutshell its case

against the first defendant is that the whole basis for the investment was that it had to be

tax free¹. It is then alleged that the agreement between the parties does not provide that

the first defendant will be entitled, in case of a change in the tax liability of funds like

the plaintiff s fund, to deduct tax so paid by it, from the plaintiff s fund.

The

allegation proceeds that the first defendant did deduct the R3,8 million tax paid by it, by

cancelling 588,510.350 units and that it was not entitled to do so. In the process the

plaintiff actually negates a possible defence which the first defendant may raise i.e. that

on a proper construction of the contract it must be entitled to deduct the tax paid from

the plaintiff s fund.

[6] Salient features of the policy are:

6.1 That the plaintiffs fund is to make contributions to the first defendant but

that in terms of an agreement between the first defendant and the second

¹ In the particulars of claim factual averments to substantiate such basis are made.

defendant, the second defendant will manage the administration of the

plaintiff's fund.

6.2 Contributions made by the plaintiff's fund were to be invested in the

Johannesburg Stock Exchange but would be kept apart and would be known as

the "Investment portfolio” ².

6.3. All investment income would form part of the Investment portfolio but all

expenses with regard to the purchase and sale of the investments, were to be

debited to the investment portfolio (the plaintiff's fund) ³

6.4 The plaintiff's fund would be liable to pay an investment managing fee on

an agreed basis⁴.

6.5 The plaintiff would be entitled to terminate the policy on seven days' notice

and to payment of the market value of the investment⁵

6.6 The first defendant was entitled, unilaterally, to amend the provisions of the

policy after one calendar month's written notice. The plaintiff, however, would

be entitled to terminate the policy in terms of the provisions of clause 10 if it

considered the amendment prejudicial to it, in which case the amendment would

not come into effect. The specific clause further provides:

"Should the statutory authorities introduce measures which affect the

policy, or should the fund cease to be an approved fund for the purposes

of income tax legislation, Momentum Life may make such amendment to

the policy as it considers appropriate. Momentum Life shall notify the

fund of such amendments in writing.” ⁶

² Clause 4.1 and 5.1.

³ Clause 5.2

⁴ Clauses 7.1 and 7.2

⁵ Clause 10.1

⁶ Clause 11.3

[7] The plaintiff alleges that the first defendant only gave notice of one

amendment to the provisions of the policy. The amendment changed the period of

notice of termination of the policy from 7 days to one calendar month. It further

provided, that the market value of the plaintiffs fund was to be calculated at the expiry

of the period.

[8] In paragraph 10 of the proposed particulars of claim the plaintiff states that

on a proper interpretation of the policy against the stated background facts it provided

for certain express, implied and tacit terms. In paragraph 10.10 it is stated that neither

the expenses in clause 5.2 nor the management fee in clause 7.1 provide that the first

defendant can deduct its tax liability from the plaintiffs fund. In paragraph 10.11 the

plaintiff alleges that the first defendant was not entitled to cancel some of the plaintiff s

units to recover the income tax. In paragraph 10.12 the plaintiff states that it was a tacit

term of the policy that the plaintiff would not recover income tax on income earned on

the plaintiffs fund and paid by it without amending the policy as provided for in the

policy.

[9] In my view the plaintiff s claim is clear. The plaintiff says that the first

defendant deducted the income tax which became payable by it, in respect of income

and accruals earned by its (the plaintiffs) fund contrary to the provisions of the policy.

Although in terms of the policy the parties foresaw a possible change in the tax status

of the plaintiff s fund they did not stipulate how such a change was to be dealt with

other than to give to the first defendant the unilateral right to change it as it wished

subject to the plaintiff s right to terminate the policy if it regarded the amendment

prejudicial to it. There is no express term in the policy that the first defendant could

deduct the tax. It can be argued that there was a clear failure by the parties to deal with

an aspect which they had in their contemplation and that the officious bystander would

have had a ready answer if asked what would happen in case of payment of tax by the

first defendant. Obviously the first defendant thinks that he would have said that it is

unfair that the first defendant is to pay tax on the plaintiffs income. In my view it is

equally possible that that he might have said that a change in the tax status will have

serious repercussions and that it is for the first defendant to address the issue by giving

notice of an amendment of the policy to alert the plaintiff of the change, to afford it an

opportunity to decide if it wanted to terminate the policy or not and that in the case of a

failure by the first defendant to do so it would not be entitled to saddle the plaintiff with

any tax paid by it.

[10] I agree with Mr. du Plessis that the particulars of claim, if amended will not

be vague or embarrassing. The defendants know exactly what the plaintiff s case is. I

agree with Mr. du Plessis that the first two objections on the ground that the particulars

of claim are vague and embarrassing must be seen in the context of the alleged

development of the negotiations between the parties. If they want to, they can plead.

[11] The defendants' real complaint is the third ground of objection which really boils

down thereto that the particulars of claim will not disclose a cause of action against the

first defendant. Although that is, strictly speaking, not the basis of the objection, I am

of the view, that if there is merit in the argument, that the court must deal with it. On

that basis I cannot agree with Mr. van der Linde that the contract is clear and

unambiguous. The parties did not expressly agree how a possible future payment of tax

by the first defendant was to be handled. It would be wrong, at this stage, to declare

7

categorically that the agreement clearly provided that the first defendant would be

entitled to debit the plaintiff s fund with the tax. There is room that a court may find

that the terms alleged by the plaintiff were indeed tacit terms of the agreement. In order

to be able to do so the court will have to be fully informed about the background facts,

through evidence. In my view, the plaintiff s proposed particulars of claim constitute a

useful basis from which the parties can define the exact issues i.e. what were relevant

background facts and what not and whether the agreement is clear and unambiguous or

whether there are tacit terms which are to be incorporated in the agreement. As I have

already indicated, there is even scope for a situation where the defendants will have to

have a tacit term inferred, to the effect that they were entitled to debit the plaintiff s

fund with the tax.

1. The Plaintiff s particulars of claim are amended in accordance with the

Plaintiff s second notice of intention to amend its particulars of claim, dated

25 October 2006.

2. The Defendants are ordered to pay the costs occasioned by their opposition

to the application.

J}HARTZENBERG

THE HIGH COURT

Date of Hearing:

08/05/2007

Representation

For the Applicants:

Adv. S Du Plessis (SC)

Attorneys:

Roestoff Venter & Kruse

For the Respondents: Adv. S W H G Van cler Linde (SC)

Adv. D G Leibowitz

Attorneys:

Friedland Hart & Partners