REPUBLIC OF SOUTH AFRICA

THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Case No:  642/2010

In the matter between:

VENFIN INVESTMENTS (PTY) LTD

Appellant

v

KZN RESINS (PTY) LIMITED t/a KZN RESINS

Respondent

Neutral citation:
Venfin Investments v KZN Resins (642/2010) [2011] ZASCA
128 (15 September 2011).

Coram:
BRAND JA, PONNAN JA, SNYDERS JA, MALAN JA AND
THERON JA

Heard:
16 August 2011

Delivered:
15 September 2011

Summary:
Appellant’s claim in convention based on cession of rights by
third party in terms of alleged oral agreement – factual issue whether
agreement entered into decided against appellant – counterclaim based on
the debts owing to respondent by same third party – proposition that
appellant liable for these debts in terms of s 156 of Insolvency Act 24 of
1936, alternatively, pursuant to the terms of the cession – both issues
decided against respondent.

________________________________________________________________

ORDER

On appeal from:
KwaZulu-Natal High Court (Durban) (Van der Reyden J
sitting as court of first instance):
1.
The appeal is upheld. The order of the court a quo is set aside and
replaced with the following:
“(a)
The plaintiff’s claim is dismissed with costs, including the costs of
two counsel.
(b)
The defendant’s counterclaim is dismissed with costs, including the
costs of two counsel.”
2.
The respondent is ordered to pay the appellant’s costs of appeal including
the costs of two counsel, but the costs pertaining to the record is restricted
to 10 per cent thereof.
3.
The cross-appeal is dismissed with costs.

JUDGMENT
________________________________________________________________

BRAND JA (PONNAN JA, SNYDERS JA, MALAN JA AND THERON JA
concurring):

[1] This appeal has its origin in a business relationship between the
respondent, KZN Resins (Pty) Ltd (KZN) and another company, Fibalogic (Pty)
Ltd, that went awry. Fibalogic is now in liquidation, but during its corporate
lifetime it was a manufacturer of electric water heaters, commonly known as
geysers, that were made of fibreglass. Between 2000 and 2002 KZN supplied
Fibalogic with resin used in this manufacturing process. Litigation started on 12
September 2002 when Fibalogic instituted an action in the KwaZulu High Court
(Durban) against KZN for an amount in excess of R26 million. Broadly stated,
Fibalogic’s cause of action was for its loss resulting from geysers that were

returned to it because of defects, for which KZN allegedly undertook to pay
compensation in terms of an oral agreement.

[2] KZN delivered a plea in which it disputed the oral agreement. It also
instituted a counterclaim for about R2 million which it alleged was the balance of
the purchase price of resin sold and delivered to Fibalogic. After the close of
pleadings, Fibalogic ceded its claim against KZN to the appellant, Venfin
Investments (Pty) Ltd (Venfin). As part of the cession agreement Venfin
indemnified Fibalogic against any claim by KZN for goods sold and delivered.
Thereafter, Fibalogic was placed under liquidation and Venfin was formally
substituted as the plaintiff in the ongoing proceedings.

[3] When the matter eventually came before Van der Reyden J he was asked,
by agreement between the parties, to order a separation of issues. In terms of
the separation order he consequently granted, three specified areas of dispute
were to be determined at the outset while all other issues, including those
relating to the quantum of the claim and the counterclaim, stood over for later
determination. The three specified areas of dispute were formulated thus:
(a)
The issues relating to the oral compensation agreement relied upon by
Venfin for its claim in convention, as defined in paragraph 9 of Venfin’s
particulars of claim read with paragraph 8 of KZN’s plea (the first issue);
(b)
The issue arising from KZN’s counterclaim as to whether the indemnity
furnished by Venfin to Fibalogic – in terms of their cession agreement – is
governed by s 156 of the Insolvency Act 24 of 1936, so as to render Venfin liable
for KZN’s claim against Fibalogic for resin sold and delivered to the latter (the
second issue); and
(c)
The issues raised by KZN’s counterclaim as to whether the cession
agreement by itself had the effect of transferring and imposing on Venfin,
Fibalogic’s liability for the resin sold and delivered to it (the third issue).

[4] Evidence in the preliminary proceedings was led in two tranches during
February and August 2008. Judgment was delivered about 15 months later on 24
March 2010. In terms of the judgment the court a quo decided the first and third
issues in favour of KZN and the second issue in favour of Venfin. In
consequence, the claim in convention was dismissed while the counterclaim
succeeded pursuant to the court’s findings on the third issue. In both instances,
costs were awarded in favour of KZN, save for the costs resulting from the
second issue, which were ordered against it. Venfin’s appeal to this court against
the judgment on the first and third issues is with the leave of the court a quo. So
is KZN’s cross-appeal against the costs order on the second issue. I propose to
deal with the three issues individually.

The first issue – did KZN agree to compensate Fibalogic for damages resulting
from defective geysers?
[5] The outcome of this issue turns exclusively on the correctness of the court
a quo’s findings with regard to a dispute of fact between the parties. Venfin’s
version of the facts was summarised thus in paragraph 9 of its particulars of
claim, to which reference is pertinently made in the formulation of this issue:
‘On or about 23 November 2001, at Paarl, Fibalogic, represented by its Managing
Director Mr Dawie Thirion, and [KZN], represented by its Chairman Mr Salim Kajee, both
of who were duly authorized thereto, concluded an oral agreement, the material terms of
which included the following:
9.1 KZN would compensate Fibalogic for the costs incurred by Fibalogic in respect of all
returns in excess of the Fibalogic’s norm of returns, which norm was 2% of the
number of units produced by it;
9.2 such costs would include the cost of the replacement water heater (geyser) and
Fibalogic’s labour and travelling costs.
The agreement was confirmed on 26 November 2001 by Fibalogic’s Mr Thirion in a letter
to KZN’s Mr Kajee, a copy of which is annexed marked “A”.’

[6] Annexure A, which was destined to play a prominent role at the hearing
before Van der Reyden J, reads in relevant part:

‘Dear Salim
We refer to our meetings of 16, 22 and 23 November 2001.
After analysing all the variables we are all in agreement that there is a difference in
performance between the resins supplied by you and the resins previously used.
We have discussed and shown you from our analyses the norm expected from a resin
as used in our back-up layer on our tanks. We believe that the main question remains
unanswered as to the difference between your resin and the one previously used.
. . .
Summary of the meeting, dated Friday, 23 November 2001:

. . . ;

KZN Resins will compensate Fibalogic the difference between the agreed norm (of
two per cent of production) and the actual rate experienced. This will include the
cost of the geyser as well as the labour/travelling cost. (Warrantee costs);

KZN Resins will continue to subsidise the additional lay-up costs on the 150 litre
tank. . . .
Whilst we appreciate and accept your offer as outlined above, we however are still of the
opinion that the reason(s) in variation of performance must be found and we will run
independent tests to answer this.
Regards
D Thirion
CC
F G Rupert

D Reid’

[7] KZN did not respond in writing to Annexure A until 8 July 2002, in
circumstances that will presently transpire. On that date Mr Salim Kajee
conveyed a letter to Mr Dawie Thirion by telefax in which he essentially denied
the agreement relied upon by Venfin. Paragraph 8 of Venfin’s plea (which is also
referred to in the formulation of this issue) echoed that denial. In relevant part it
reads:
‘Ad paragraph 9
Save that the Defendant admits that on or about 23rd November 2001, and at Paarl, Mr
Thirion and Mr Kajee had a discussion and that the Plaintiff wrote a letter dated 26th

November 2001 (annexure “A” to the Particulars of Claim) to KZN, KZN denies each
allegation in paragraph 9 and:
(a)
specifically denies that it concluded an oral agreement with Fibalogic either in the
terms alleged or at all;
(b)
specifically denies that annexure “A” correctly reflects or records the matters
discussed at the meeting between Mr Thirion and Mr Kajee on the 23rd
November 2001.’

[8] At the hearing, Venfin’s version was supported by the evidence of
Fibalogic’s erstwhile managing director, Thirion. For its denial of that version,
KZN in turn, relied on the testimony of two witnesses. Kajee, the former chairman
of KZN, and Mr Donald Reid, who was the technical director of Fibalogic at the
time. The factual dispute about the conclusion and the terms of the alleged oral
agreement that emerged from the pleadings, maintained its course throughout
the hearing. Yet, there were large areas of common ground, as appears from the
following background, which I find most convenient to narrate in chronological
fashion.

[9] Reid was involved with Fibalogic from its inception and he remained a
shareholder and the technical director of the company throughout its existence,
until it was eventually wound up in July 2003. His testimony therefore provides a
convenient starting point to the chronological narrative. As a marine engineer by
training, Reid came up with the idea of manufacturing corrosion free fibreglass
geysers involving a chemical compound called vinyl-ester resin. After he
patented his invention, he incorporated the company, Fibalogic, together with a
business partner and then ceded the patent to the company. At the outset, the
tanks of the geysers, which were manufatured in three capacities of 100 litres,
150 litres and 200 litres, were made of vinyl-ester only. This compound was
obtained from a supplier, NCS, under the trade name Derakane. During about
1996, Reid and his partner sold 50 per cent of their shares in Fibalogic to Venfin,
a company in the Rembrandt stable. In the course of time, their shareholding

was, however, ‘watered down’ to about one per cent, while Venfin owned the
rest.

[10] After Venfin became involved – or, as Reid put it, ‘when the accountants
came in’ – it was decided, as part of a cost cutting exercise, to change the tanks
of the geysers from a single composition to a dual lay-up system involving
different kinds of resin. While the inner layers, which came into direct contact with
water, still consisted of vinyl-ester, the outer layers were manufactured out of the
substantially cheaper isopthalic resin. At that time both the vinyl-ester and the
isopthalic resins were supplied by NCS. During January 2000 Fibalogic decided
on a further cost cutting exercise by reducing the number of outer layers by one
on its 100 and 150 litre cylinders, well-knowing that this would reduce the
mechanical strength of these tanks. The number of layers on the 200 litre
cylinders remained the same.

[11] Thirion holds a university degree in commerce. He joined Fibalogic as its
managing director in April 2000. He was head-hunted for that position by Venfin,
because Fibalogic was consistently running at a loss and it was hoped that
Thirion could turn that situation around. During the second half of 2000, NCS
proposed a substantial increase in its price for isopthalic resin. In consequence,
Fibalogic started looking for an alternative supplier. Eventually it decided on KZN.
From 13 October 2000 Fibalogic thus procured its isopthalic resin from KZN
while NCS continued to supply its vinyl-ester. KZN manufactured the isopthalic
resin in accordance with Fibalogic’s specifications. Every batch destined for
delivery to it was analysed by the South African Bureau of Standards (SABS) and
the analysis recorded in a certificate which accompanied the delivery. On
occasion when Fibalogic was not satisfied by the certificate that the batch
conformed to its specifications, it was returned to KZN.

[12] There had always been returns of hot water cylinders to Fibalogic because
of defects. In the past these returns averaged about 1.36 per cent of cylinders

manufactured. After October 2000 there was, however, a marked increase in this
rate of return. It rose from the previous average of 1.36 per cent to well in excess
of the industry norm of 2 per cent. The increase was particularly pronounced with
regard to the 150 litre cylinders. The consequences of the increase were serious
and Fibalogic’s very existence was threatened, unless the problem could be
resolved. Thirion in particular was under severe pressure from the Venfin
representatives on the Fibalogic board of directors to resolve the problem of
increased returns.

[13] At that stage no-one knew what the cause of the failures was or who was
responsible for these failures. The reason for the uncertainty was that the hot
water cylinders consisted of about 220 components, including different kinds of
resin, glass fibre matting, heating elements, thermostats, etc, which were
procured from a number of different sources. Moreover, there were various
stages of manufacturing where things could go wrong, for instance when the
resin in liquid form was mixed with the chemical catalysts. At the trial it was
common cause between all witnesses, including Thirion, that with the benefit of
hindsight, the problem could be ascribed to the change in design from a single
lay-up consisting of vinyl-ester only to a dual lay-up of vinyl-ester on the inside
and isopthalic resin on the outside of the cylinder. This was empirically
established by Thirion himself. After the liquidation of Fibalogic, he became the
manager of the company that took over the business of manufacturing geysers.
According to his evidence that company solved the problem of excessive returns
by reverting to the original, single lay-up design. But this much was not
appreciated by those involved in 2001.

[14] During 2001 Thirion and Reid suspected that the increased rate of returns
was attributable to the use of KZN’s resin, purely because the increase coincided
with the change in their supplier from NCS to KZN. KZN, on the other hand,
regarded Fibalogic as a substantial client, with potential to grow even further.
Hence it was keen to assist Fibalogic in resolving its compelling difficulties. As

part of its attempts to do so, KZN offered, in August 2001 to provide additional
resin without cost for an extra outer layer on the 150 litre geysers. It will be
remembered that during January 2000 Fibalogic reduced the number of outer
layers on its 100 and 150 litre geysers as part of a cost saving exercise. With
regard to the 200 litre cylinders, the number of layers remained the same. Since
the returns were more pronounced with regard to the 150 litre cylinders than with
reference to the larger 200 litre ones, it was thought that the problem might have
been caused by the reduction of one outer layer. Consequently, Fibalogic
decided to re-introduce the additional outer layer on the 150 litre cylinders.
Agreement was then reached that Fibalogic would supply the glass fibre matting
for the extra layer while KZN would provide the resin for that layer free of charge.
According to Kajee this resulted in a discount of about 5 per cent in the price of
resin sold. The extra layer was apparently introduced from about 14 August
2001.

[15] The hope was that the additional layer would resolve the problem in due
course. Yet it did not immediately reduce the pressure on Thirion. This is borne
out by the minutes of the Fibalogic board meeting of 31 October 2001 which
recorded that ‘the chairman expressed his concern over [the costs of product
failure] and demanded that it be brought under control’. The product failure, so
the minutes stated, ‘includes the failure of suppliers’ products, valves,
thermostats and elements’.

[16] This led to the crucial meeting which was held on 22 and 23 November
2001. It was attended by Thirion and Reid on behalf of Fibalogic and by Kajee on
behalf of KZN, though Reid was not present on the 23rd. At the meeting Thirion
again stressed that the return rate had increased from an average of 1.36 per
cent to over 2 per cent, from about the time that Fibalogic changed to KZN resin
in October 2000. He also said that in the circumstances his perception was that
the resin supplied by KZN was responsible for the problem and that, if KZN
should refuse to shoulder that responsibility, he would have to change the

supplier of isopthalic resin. At the same time, everybody concerned believed that
the re-introduction of the additional outer layer to the 150 litre cylinders on 14
August 2001 would stem the tide of increased returns, though the exact source of
the problem remained unknown.

[17] The narrative thus far is essentially common cause in the sense that it was
put forward by one side and either admitted or not denied by the other. The sharp
dispute, which goes to the heart of the case, turns on Kajee’s reaction at the
meeting. Thirion’s side of the controversy echoed the contents of his letter of 26
November 2001 to which I have referred extensively (in para 6 above). According
to that version Kajee agreed at the resumed meeting on 23 November 2001 that
KZN would compensate Fibalogic for its loss incurred, calculated on the basis of
the difference between the agreed industry norm of 2 per cent and the actual rate
of return experienced, including labour and travelling costs. Kajee’s version, on
the other hand, was that it became clear to him during the course of the meeting
that Thirion had expected KZN to pay for the returns above 2 per cent of
production. Though he did not share the belief that KZN’s resin was to blame, he
suggested that Fibalogic should look to KZN’s insurer for compensation. He
explained to Thirion, so Kajee testified, that Fibalogic had product liability cover
for R2.5 million and that if KZN’s resin should prove to be the cause of the
problem, the insurer would have to pay. In fact, Kajee testified, he offered to
assist Fibalogic in initiating a claim against KZN’s insurer.

[18] According to Kajee one of the main reasons why he would not admit
liability on behalf of KZN, as alleged by Thirion, originates from the very terms of
that insurance policy. He had been cautioned by KZN’s insurance broker, so
Kajee said, that in terms of the policy, any admission of liability by him would
entitle the insurer to repudiate the claim. Thirion denied that Kajee ever
suggested that Fibalogic should initiate a claim against KZN’s insurer. Reid on
the other hand remembered that he did. Because Reid was not present on 23
November 2001 he was not able to comment on the direct conflict between

Thirion and Kajee as to whether the latter undertook responsibility for Fibalogic’s
problem. Yet he testified that, from his expert knowledge of the industry, he
would not have expected the supplier of the resin to effectively guarantee the
entire geyser against failure. His reason for this view was that there were too
many variables beyond the supplier’s control that could cause the failure.

[19] After the meeting Thirion then wrote the by now familiar letter of 26
November 2001 (quoted in para 6 above) in which he recorded his version of
Kajee’s undertaking. According to Thirion he wrote the letter with the assistance
of Reid who is more fluent in English than him. This is denied by Reid. What is
common cause is that Thirion did not receive any written response to this letter
from Kajee until nearly one year later. Kajee’s version is that when he received
the letter he telephoned Reid to find out what was going on. From Reid’s reaction
it was obvious to him that Reid knew nothing about the letter, but that he agreed
with Kajee that the alleged undertaking on behalf of KZN was never given.
According to Kajee, he then telephoned Thirion who told him, in essence, to
ignore the contents of the letter. He therefore found it unnecessary to respond in
writing. In his testimony Reid confirmed, not only that Kajee had telephoned him
about the letter, but also that he was present when Thirion received a telephone
call from Kajee. On his part, Thirion emphatically denied that he ever received
the alleged telephone call from Kajee.

[20] Thirion’s version as to Kajee’s undertaking is supported to some extent by
the minutes of a meeting of the Fibalogic board on 29 November 2001.
According to these minutes Thirion reported, inter alia, that ‘failures on geysers
due to the resin being used led to negotiations with KZN Resins. They undertook
to pay the amount of plus minus R300 000 to Fibalogic and in future to
compensate Fibalogic for the difference between the agreed failure norm (2 per
cent of production) and the actual failure rate. This will include the costs of the
geyser as well as the labour/travelling costs’. Of further significance is the fact
that Reid attended that board meeting and that he did not repudiate or query

Thirion’s account. The support that Thirion’s version derives from the minutes is
somewhat marred by his reference to an amount of R300 000 which he did not
mention in his letter or in his evidence about the terms of the agreement.

[21] Kajee’s version, on the other hand, that he suggested a claim against
KZN’s insurer, derives support from at least three documents. First there is a
note in Thirion’s own handwriting about a conversation between him and Kajee
on 7 December 2001 which clearly related to a compensation claim by Fibalogic
which had been referred to KZN’s insurer. The second document is a letter by
KZN’s insurance broker to its insurer dated 28 January 2002. The letter confirms
‘advice of a potential product liability claim’ against the insured, KZN, by
Fibalogic and that ‘the insured have done their best themselves without admitting
liability, to negotiate with Fibalogic’. Thirdly, there are the minutes of the Fibalogic
board meeting of 27 February 2002 which recorded a report by the management
of Fibalogic that KZN ‘had various meetings with their insurer and that we have to
lodge our claim directly against [KZN]. We are now processing all the existing
information and will lodge our claim at month end’.

[22] It is common cause that Kajee then tried to persuade KZN’s insurer to pay
Fibalogic’s claim; that the insurance assessor investigated the claim and brought
out a report; and that the claim was eventually repudiated by the insurer. While
giving evidence Thirion was very upset by a comment in the assessor’s report
that at one stage during the contract period there was a problem with KZN’s test
equipment which affected the quality of its resin delivered to Fibalogic, about
which the latter was never informed.

[23] After November 2001, Thirion started to deduct from amounts payable to
KZN for resin sold and delivered the compensation to which Fibalogic was in his
view entitled in terms of their alleged agreement. This gave rise to a demand by
KZN’s accountant for payment of the outstanding amounts. In response, Thirion
wrote a letter to Kajee on 28 June 2008 in which he referred to their alleged

compensation agreement of November 2001. In this letter he added that he could
understand why Kajee would not admit the agreement in writing for ‘fear of
committing to an unknown quantum or to jeopardise any future insurance claims
you may incur’ but that this did not detract from the fact of the agreement. In
reply to this letter Kajee, for the first time in writing denied the compensation
agreement on 8 July 2002.

[24] On the crucial dispute of fact as to whether the compensation agreement
was ever entered into, the court a quo essentially accepted the version of Kajee
and Reid in preference to that of Thirion. On appeal Venfin contended that the
court had misdirected itself in doing so. Its first argument in support of this
contention relied on Kajee’s failure to respond to Thirion’s letter of 26 November
2001, until nearly one year later. In the light of the decisions in McWilliams v First
Consolidated Holdings (Pty) Ltd 1982 (2) SA 1 (A) at 10E-G and Hamilton v Van
Zyl 1983 (4) SA 379 (E) at 388F-G, so Venfin’s argument went, the court a quo
should have held that, as a matter of law, Kajee’s failure to respond amounted to
an admission of the allegations in Thirion’s letter. As I see it, the flaw in this
argument is that it rests on a misunderstanding of the cases upon which it seeks
to rely. Neither McWilliams nor Hamilton sought to lay down any principles of law.
They reflected conclusions based on the application of logical reasoning to the
facts of those cases.

[25] The flaw in Venfin’s argument can be illustrated, I think, by supposing an
admission on the part of Thirion that Kajee had telephoned him to deny the
allegations of an agreement when he received the letter. In these circumstances
any attempt to construe Kajee’s failure to respond in writing as an admission of
the letter, would clearly be untenable. The fact that Thirion denied the telephone
conversation deposed to by Kajee makes no difference in principle. The denial
brings about the enquiry whether Kajee’s version should be accepted. It does
not, as Venfin’s argument would have it, exclude that enquiry as a matter of law.
The mere fact that the letter was written does, of course, lend some support to

Thirion’s version. That support is, however, somewhat detracted from by his
assertion that he, as a university graduate, required the assistance of Reid to
write a letter in simple English. The assertion became even more suspicious
when it was denied by Reid, who had no apparent reason to do so, if it were true.

[26] Venfin’s second line of argument in support of the professed misdirection
by the court a quo, focussed on the court’s alleged unwarranted criticism of
Thirion and the proposition that, on the contrary, Thirion was a better witness
than Kajee and Reid. In the course of this argument the testimony of all three
witnesses was subjected to a detailed analysis; alleged unsatisfactory aspects in
the evidence of Kajee and Reid, particularly in cross-examination, were
accentuated; alleged strong points in Thirion’s evidence were underscored; and
the flaws in his evidence explained. Not unexpectedly, this gave rise to what
essentially amounted to a mirror image of the same argument on behalf of KZN.
According to this argument it was Thirion who was the unsatisfactory witness
while the flaws in the evidence of Reid and Kajee were explained, and so forth. I
find it unnecessary to give an account of this rather painstaking exercise. I am
prepared to accept that there is some merit in the criticism against the evidence
of Kajee and Reid on the one hand and that of Thirion on the other. It also seems
to me that the contents of the documentary evidence referred to, including the
correspondence, were at best inconclusive. Yet, despite all this, I find Thirion’s
version to militate so strongly against the inherent probability that the contrary
version of Kajee, as supported by Reid, should in my view be preferred. In what
follows I propose to motivate this finding.

[27] At the time of the November meeting the cause of Fibalogic’s problems
had not been identified. That much is indeed underscored by the comment in the
last paragraph of Thirion’s letter of 26 November 2001 that ‘the reason for the
variation of performance must [still] be found’. Though both Thirion and Reid
suspected KZN’s resin, their suspicions remained unsubstantiated by their own
extensive search for the cause. Reid, who has no apparent reason to side with

KZN, expressed the considered view as an expert in the field, that he would not
expect the manufacturer of resin to take responsibility for all failures of geysers
for which there was a myriad of potential causes. Yet, on Thirion’s version, this is
exactly what Kajee undertook to do despite his awareness of the myriad of
potential causes. Moreover, he undertook to do so out of the blue and without
any demure. According to Thirion, Kajee did not even seek to qualify or limit his
undertaking in any respect. Even if the increased failure resulted from some
cause entirely unrelated to the quality of KZN’s resin, the latter would, according
to Thirion, be liable in full after returns had reached the 2 per cent level.

[28] What must also be borne in mind, is that KZN’s resin was made up
according to specifications provided by Fibalogic and certified to be in
accordance with these specifications by the SABS. In the circumstances one
would expect Kajee to argue that, even if KZN’s resin was found to be the cause
of the increased failure rate, the problem could lie with the specifications. Yet,
according to Thirion, Kajee did not even try to raise this argument. In fact, he
raised no argument at all. He simply undertook to pay. Added to all this, it flies in
the face of probabilities, I think, that Kajee would not even try to establish the
amount of the liability KZN would have to pay. He simply undertook to pay an
indeterminate amount. In addition, according to Thirion, he undertook to do so for
an unfixed period in the future.

[29] With regard to the duration of the undertaking, Fibalogic alleged in its
pleadings that KZN agreed to pay compensation in respect of all geysers
manufactured between 13 October 2000 and 14 August 2001. As I understand it,
the first mentioned date was when Fibalogic started to use KZN’s resin while 14
August 2001 is the approximate date when it decided to revert to an extra outer
layer on its 150 litre geysers. Yet, whatever the origin of these limitations, they
are not set out in the letter of 26 November 2001. Moreover, they do not accord
with Thirion’s evidence that, according to his understanding, Kajee’s undertaking
would apply for as long as Fibalogic purchased resin from KZN. On the contrary,

in cross-examination he expressly disavowed the limitation alleged in Venfin’s
pleadings.

[30] In argument counsel for Venfin seemed to accept that an undertaking by
Kajee for an indefinite period in the future was inherently improbable. They
therefore reverted to the limitations alleged in Venfin’s pleadings. When they
were reminded that these allegations were pertinently disavowed by Thirion in
evidence, their answer was that the limitations should be regarded as
incorporated into the agreement by way of a tacit term. However, as explained by
Corbett AJA in Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial
Administration 1974 (3) SA 506 (A) at 531-532, a tacit term is an unexpressed
provision of a contract derived from an inference as to what both parties must
have intended. In this light, it is simply not open to a party who expressly denied
that he ever intended a particular term to form part of a contract, to contend that
the term must be inferred. Put somewhat differently; according to the celebrated
officious bystander test, a tacit term can only be incorporated if it can confidently
be said that, if at the time of the contract the officious bystander were to ask the
parties about the existence of that term, they would both have said ‘of course it
forms part of our contract; it is so obvious we did not even trouble to say that; it is
too clear’ (see eg Botha v Coopers & Lybrand 2002 (5) SA 347 (SCA) para 23).
That being so, a party who had expressly denied the existence of a particular
term can hardly suggest that the same term was so obvious he did not even find
the need to express it.

[31] The submission to the contrary by Venfin’s counsel, that the inherent
probabilities in fact favoured Thirion’s version, rested on the following three
arguments:
(a)
Kajee regarded Fibalogic as a substantial client with the potential to grow
even further and he knew that if he should refuse to give the undertaking, KZN
would probably lose that client.

(b)
In August 2001, as part of the attempts to address the problem of
increased returns, KZN agreed to supply Fibalogic, free of charge, with resin for
an additional outer layer to its 150 litre cylinders. It was anticipated by everybody,
including Kajee, that the additional layer would solve the problem of the
increased rate of returns in respect of cylinders manufactured after that date.
This would substantially reduce KZN’s potential liability in terms of the
undertaking.
(c)
Kajee was aware of the fact that at some stage in the past KZN’s test
equipment was faulty and that it consequently delivered substandard resin for
which it was responsible.

[32] I shall deal with these three arguments individually. First, there is the
argument based on the fact that Fibalogic was a substantial client of KZN. I
believe the answer to the argument is that, despite this fact, it remains
improbable that Kajee would risk the potential commercial suicide of KZN in
order to retain the business of one client, albeit a substantial one. Moreover,
Kajee knew KZN was insured against product liability. If KZN was responsible,
the insurer would probably pay. In the event, KZN would retain Fibalogic as a
client without incurring any financial risk. In this light it is far more likely that Kajee
would refer Fibalogic to his insurer. Conversely, these circumstances render it
improbable in the extreme that Kajee would shoulder liability on behalf of KZN
without even referring the matter to the insurer. This is particularly so where
Kajee appreciated that his admission of liability may provide the insurer with a
ground for repudiation which would frustrate his obvious way out.

[33] As to the argument based on Kajee’s anticipation that the problem had
been solved in respect of geysers manufactured after August 2001, I believe the
answer is at least twofold:
(a)
First, this argument would fly in the face of the appellant’s further
argument that Kajee’s undertaking was somehow limited to geysers that were
manufactured prior to the introduction of the additional outer layer in August

2001. If Kajee only undertook liability for geysers that were manufactured prior to
that date, his anticipation that, in respect of geysers manufactured after that date
there would be no more returns, would have no effect on the extent of KZN’s
liability.
(b)
Second, and more significantly, if the problem had indeed been solved by
the extra layer, it would mean that the increased failure rate in geysers
manufactured prior to August 2001 had nothing to do with KZN’s resin. I say this
because we know that the extra layer had been removed by Fibalogic in January
2000 as part of a cost saving exercise. If the reinstatement of the extra layer thus
resolved the problem, it would follow that the problem was caused by a
deliberate design change by Fibalogic which had nothing to do with KZN. Taken
to its logical conclusion, acceptance of Venfin’s argument under consideration
would therefore mean that Kajee undertook liability for failures of geysers while
anticipating an event that would conclusively absolve KZN from responsibility for
those failures. If anything, this renders Thirion’s version even more untenable.

[34] As to the third argument based on Kajee’s knowledge that at some stage
in the past the resin delivered to Fibalogic was not up to the required standard,
the answer is, in my view, quite obvious. At best for Fibalogic one could in those
circumstances expect Kajee to accept liability for the batch or batches of resin
delivered that were not up to standard. It would still raise the rhetorical question
why he would accept liability for failed geysers which could not have been
manufactured with those batches of defective resin.

[35] Finally, it seems to me that even if Venfin had been successful in
establishing the compensation agreement, it would have been confronted with
another obstacle which appears to be insurmountable. It is this. On Thirion’s
version it was a tacit term of the agreement that KZN would not be liable once it
was positively confirmed that KZN’s resin was not to blame. At the same time
Thirion agreed with Reid’s expert opinion that, with hindsight, the problem of
increased returns was caused by a design change and entirely unrelated to

KZN’s resin. The answer to this problem proffered by Venfin’s counsel was that
causation was not in issue at the preliminary stage. I am not persuaded by that
answer. Once the essential element of causation had been eliminated on the
undisputed facts at the preliminary stage, as I believe it was, it must follow that
there is nothing left to proceed to a next stage. It is the end of the matter.

[36] For these reasons I believe this court should endorse the court a quo’s
ultimate finding on the first issue, namely, that Venfin had failed to establish the
compensation agreement upon which it relied for its claim. Moreover, I believe
that even if the agreement had been established, the claim could not succeed. It
follows that in my view the claim in convention was rightly dismissed. This brings
me to the court a quo’s finding on the third issue which was the basis upon which
KZN’s counterclaim was upheld.

The third issue – did the cession agreement between Venfin and Fibalogic have
the effect of transferring KZN’s claims against the latter to the former?
[37] It will be remembered that Venfin never incurred any direct liability towards
KZN. The counterclaim against Venfin for resin sold and delivered to Fibalogic
was founded, in the main, on the provisions of s 156 of the Insolvency Act 24 of
1936, to which I shall presently return. In the alternative, the counterclaim against
Venfin relied on the provisions of a cession agreement between Fibalogic and
Venfin which was entered into after the close of pleadings in the action between
KZN and Fibalogic and shortly before the liquidation of the latter. It was on this
basis that the counterclaim succeeded in the court a quo.

[38] The pertinent clauses of the cession agreement provided:
‘12.1
It is recorded that the company [Fibalogic] is currently involved in a legal dispute
with KZN, one of its creditors. The company has instituted action against KZN in
the amount of . . .
12.2
The company hereby cedes . . . its claim against KZN to the seller [Venfin] which
cession the seller hereby accepts.

12.5
The seller hereby indemnifies the company against any loss, liability, damage
(excluding consequential damage), cost or expense of any nature whatsoever
which the company may suffer or incur as a result of any claim made against the
company by KZN for goods and/or services provided to the company . . .
(“indemnified loss”).
12.8
The seller shall be obliged to pay to the company the amount of any indemnified
loss suffered or incurred by the company as soon as the company is obliged to
pay the amount thereof.’

[39] The reasons given by the court a quo for upholding KZN’s counterclaim on
the basis of this cession are rather terse. From these terse reasons it would
appear, however, that the court was swayed by three considerations. First, that a
cession cannot impose a greater burden on the debtor or weaken the debtor’s
position, the debtor, in this context, being KZN. Second, that at the time of the
cession the directors of Fibalogic were aware of its precarious financial position
and that the cession was entered into with the purpose of frustrating KZN’s
counterclaim against Fibalogic. Third, that in terms of clause 12.5 of the cession
agreement, Venfin effectively stepped into the shoes of Fibalogic by undertaking
responsibility for KZN’s claim.

[40] I do not believe that any of these three considerations can be sustained.
As to the first, it is indeed a trite principle that a cession cannot weaken the
debtor’s position. However, any attempt to do so would affect the validity of the
cession. It would not in itself afford the debtor any rights against the cessionary.
But, be that as it may, I cannot see how the cession under consideration can be
said to have weakened KZN’s position in any respect. KZN retained whatever
claim it had against Fibalogic. The fact that after liquidation it only had a
concurrent claim did not result from the cession. It resulted from the liquidation.
In the absence of the cession agreement, KZN’s position would have been no
better. Lastly, in any event, the court a quo found, under the rubric of the first
issue, rightly in my view, that Fibalogic had no claim against KZN, which means
that KZN did not even qualify as a debtor of the cedent.

[41] As to the second consideration, there is no evidence that the cession was
entered into in order to frustrate KZN’s claim. On the contrary, the cession
formed part of a much larger transaction involving, in the main, Venfin’s sale of
its shareholding in Fibalogic to a third party. In any event, if that was the purpose
of the cession, that purpose had not been achieved. As I have said, KZN’s
position with regard to its claim against Fibalogic, remained exactly the same.
Assertions of a potentially frustrated reliance on set-off by KZN, raised by its
counsel in argument, were inapposite. Set-off is a shield not a sword. Absent a
valid claim by Fibalogic against it, KZN required no shield.

[42] The answer to the third consideration based on clause 12.5 of the cession,
is that the provisions of the clause are exclusively for the benefit of Fibalogic.
They bestowed no right on KZN. As a matter of law, Fibalogic’s obligations to
KZN could only have passed to Venfin by way of a delegation, which would
require a tripartite agreement between the creditor (KZN), the debtor (Fibalogic)
and the assignee (Venfin). No agreement of delegation was either pleaded or
established in evidence by KZN. It follows that in my view the court a quo had
erred in allowing the counterclaim on the basis that it did. This brings me to the
second issue.

The second issue – did the indemnity furnished by Venfin to Fibalogic render it
liable to KZN for Fibalogic’s indebtedness under s 156 of the Insolvency Act 24 of
1936?
[43] It will be remembered that the issue arose from KZN’s allegation that
Venfin was liable to it for the debt of Fibalogic by virtue of s 156. It remains to be
said that, because Fibalogic was wound up for inability to pay its debts, s 339 of
the Companies Act 61 of 1973 rendered the provisions of the law relating to
insolvency, applicable. The court a quo dismissed KZN’s claim based on s 156
with costs. The adverse costs order, in turn, gave rise to the cross-appeal. The
provisions of s 156 read as follows:
‘Insurer obliged to pay third party’s claim against insolvent

156.  Whenever any person (hereinafter called the insurer) is obliged to indemnify
another person (hereinafter called the insured) in respect of any liability incurred by the
insured towards a third party, the latter shall, on the sequestration of the estate of the
insured, be entitled to recover from the insurer the amount of the insured’s liability
towards the third party but not exceeding the maximum amount for which the insurer has
bound himself to indemnify the insured.’

[44] Venfin’s answer to the claim, which found favour with the court a quo, was
that s 156 applies only to the liability of an insurer – properly so called – to a third
party under a policy of (indemnity) insurance. Since Venfin is not an insurer
properly so called, Venfin argued, the section finds no application. KZN’s reposte
to that answer was that the wide wording of s 156 does not warrant the restriction
on its application that Venfin’s argument seeks to impose. In support of this
counter argument, KZN referred to the wide wording of the section – ‘any person’
who is obliged to indemnify ‘another person’ in respect of ‘any liability’. The
references to ‘insurer’ and ‘insured’ in the section, so KZN’s argument went, were
clearly for ease of reference only. The legislature might as well have used any
other term such as ‘the indemnifier’, in its stead. Had the legislature intended to
impose the limitation contended for by Venfin, so KZN’s argument proceeded, it
would have referred specifically to the situation where ‘an insurer’ was obliged to
indemnify ‘an insured’ in terms of ‘any contract of insurance’. In further support of
its argument, KZN referred, by way of comparison, to corresponding legislation in
England (the Third Party (Rights Against Insurer) Act 1930, s 1) and in Australia
(the Bankruptcy Act 1966, s 117) where the statutory measures akin to our s 156
are expressly reserved for contracts of indemnity insurance.

[45] Though these are undoubtedly weighty arguments, difficulties flow from
the reference to ‘insurer’ and ‘insured’. It is true that on the face of it, the use of
these terms could be understood as merely for ease of reference. But they are
well recognised terms of art. What is more, a contract of indemnity is wide
enough to cover an indemnity insurance policy. In the parlance of natural
science, indemnity contracts can thus be described as the genus of which

indemnity insurance is one of the species. The effect, as I see it, is this: by
referring to the person liable as ‘the insurer’ instead of, for example, the
‘indemnifier’, or for that matter, a neutral term such as ‘the pumpkin’, the
legislature appears to limit the wide meaning of ‘any person’ or ‘any indemnifier’
to the specific form of indemnity provided by an insurance policy. Stated
somewhat differently, the definition of the genus by reference to one of the
species renders the section capable of the limited interpretation that it only
applies to that species. In addition, the heading of the section also directs the
focus at the species. By all accounts, the section is therefore ambiguous. The
loose and imprecise language used left its meaning uncertain.

[46] History seems to support the limited interpretation contended for by
Venfin. Section 156 has been in existence, in unamended form, for 75 years.
Over that period the section has been uniformly referred to, both in judicial
pronouncements and in insolvency textbooks, in the context of insurance
contracts only (see eg Le Roux v Standard General Versekeringsmaatskappy
Bpk 2000 (4) SA 1035 (SCA); Coetzee v Attorneys’ Insurance Indemnity Fund
2003 (1) SA 1 (SCA); E Bertelsman et al Mars The Law of Insolvency in South
Africa (9 ed) para12.16; Meskin Insolvency Law, para 5.3.2.2). But, as was rightly
pointed out by KZN, it has thus far not been pertinently held that the section has
no application outside the ambit of insurance contracts. The reason for the
restriction in the practical application of the section may be, as suggested by
KZN, that coincidentally the decided cases only dealt with factual situations
which involved insurance policies. The conclusion appears to be justified,
however, that over a period of 75 years, commercial practice in this country
survived without the extension of s 156 beyond insurance policies.

[47] From a purposive perspective, the question is what goal was s 156
intending to achieve? With reference to insurance policies, the effect of s 156
had been explained by this court against the background of the position in
common law (see eg Le Roux v Standard General Versekeringsmaatskappy Bpk

supra 1046J-1047G). At common law, a contract of indemnity brings about a
contractual link between the indemnifier and the indemnified. There is no privity
of contract between the indemnifier and the third party. That also holds true for
an indemnity brought about by an insurance policy. The third party therefore has
no direct claim against the insurer, even if the insured should be sequestrated
before it could settle the third party’s claim. In the absence of s 156, the third
party would in that event have to prove a claim against the insolvent estate of the
insured and be content with whatever dividend is paid to concurrent creditors.
The insured’s rights under the policy, on the other hand, would vest in the trustee
who would claim from the insurer for the benefit of the general body of creditors.
Section 156 allows the third party, as it were, to leapfrog the concursus  of
creditors and to claim the full amount of the insurance policy directly from the
insurer.

[48] The underlying purpose of the mechanism created by s 156 is best
understood when it is borne in mind, as pointed out by J P van Niekerk (‘The
Scope of Application of Section 156 of the Insolvency Act: Within or Beyond the
Realm of Indemnity (Liability) Insurance Contracts?’ (2010) 22 SA Merc LJ 453 at
461) that it was ostensibly introduced at the time when compensation for motor
vehicle accidents was dependent on the negligent driver having liability insurance
cover. In this situation there was a clear need to protect the victims of motor
vehicle accidents in the event that those against whom they had their claims
became insolvent.

[49] One thing that is clear about the meaning of s 156, however, is that it is
not limited to motor accident insurance, but that it at least extends to all liability
insurance policies. In this light, KZN argued, the policy consideration as to why
the third party should be allowed to leapfrog the insolvent estate of an insured,
apply with equal force to an indemnity provided otherwise than by way of
insurance. I do not believe, however, that this is necessarily so. In the present

context, the essential elements of an indemnity insurance policy, as I see it, are
these:
(a)
The insurer undertakes, in return for the payment of an agreed premium,
to pay a certain amount to the insured in the uncertain event of the latter
incurring liability of a circumscribed kind to a third party.
(b)
The insurance is, at least partly, for the benefit of the third party and not
for the benefit of the insured’s creditors who fall outside the circumscribed
category.
(c)
The policy is a discreet contract of which the undertaking by the insurer
constitutes the main purpose.

[50] Analysed in this way it is apparent that the application of the common law
principles would in the event of the insured’s sequestration destroy the whole
purpose of the indemnity insurance. Though the insurer still has to pay, the third
party, who was intended to benefit, is left with the cold comfort of a concurrent
claim. Conversely, other creditors who were not intended to benefit from the
insurance will receive a windfall by sharing in the proceeds of the policy. The
same considerations of policy do not necessarily apply outside the field of
insurance. As I see it, this is illustrated by the facts of this case. Venfin received
no separate benefit in exchange for the indemnity it gave. The undertaking to
indemnify Fibalogic in the event of a claim by KZN, was not the main purpose of
a separate agreement. It formed part of a much larger transaction. The
undertaking was not intended for the benefit of KZN – with whom Venfin and
Fibalogic were already at loggerheads at the time – but solely for the benefit of
Fibalogic. In terms of clause 12.8 (referred to in para 38 above) Venfin’s liability
would only arise once Fibalogic was actually obliged to pay. Because KZN did
not proceed with its claim against Fibalogic, the liquidator of the latter will not
have any claim against Venfin. In sum, the application of common law principles
to these facts therefore leads to an end result which accords with the purpose of
the undertaking. Venfin, who received no separate benefit for giving the
undertaking, does not have to pay. The other creditors of Fibalogic receive no

windfall. KZN, who was not intended to benefit from the undertaking, is no worse
off. Its position is the same as that of any other unsecured creditor against the
company in liquidation. Conversely, if Venfin were to be held liable to KZN under
s 156, it would mean that the section bestowed a windfall of security on KZN for
which it had never bargained nor paid.

[51] Lastly, from a policy perspective, I find it significant that in the other
jurisdictions referred to by KZN in argument, legislative measures akin to our
s 156 are limited to indemnities brought about by insurance policies. In those
countries the legislatures therefore concluded that policy considerations do not
require these measures to extend beyond the sphere of insurance. Apart from
considerations of policy, I am swayed towards the interpretation of s 156
contended for by Venfin by a departure from the well recognised premise that an
ambiguous statutory provision, such as this, must be construed in a way that
causes the least interference with common law principles.

[52] This leads me to the conclusion that the court a quo was right in
dismissing KZN’s claim based on s 156 and by ordering it to pay the costs
resulting from this issue.

[53] A further consequence of the finding that KZN’s reliance on s 156 was
unfounded is that its counterclaim should have been dismissed with costs. As I
see it, the result of all this is that, while the appeal should be partly successful –
to the extent that it results in the dismissal of KZN’s counterclaim – the cross-
appeal should fail. In both cases I can see no reason why costs should not follow
the event and why it should not be inclusive of the costs of two counsel. Save for
the following reservation: I believe that, but for the unsuccessful part of Venfin’s
appeal relating to the dismissal of its claim in convention, no more than 10 per
cent of the record would have been required for the proper adjudication of the
matter by this court. In this light, Venfin’s costs pertaining to the record
recoverable from KZN should, in my view, be restricted to 10 per cent.

[54] The following order is made:
1.
The appeal is upheld. The order of the court a quo is set aside and
replaced with the following:
“(a)
The plaintiff’s claim is dismissed with costs, including the costs of
two counsel.
(b)
The defendant’s counterclaim is dismissed with costs, including the
costs of two counsel.”
2.
The respondent is ordered to pay the appellant’s costs of appeal including
the costs of two counsel, but the costs pertaining to the record is restricted
to 10 per cent thereof.
3.
The cross-appeal is dismissed with costs.

……………………….
F D J BRAND
JUDGE OF APPEAL

Counsel for Appellants:

J G Dickerson SC

A Smalberger

Instructed by:

Edward Nathan Sonnenbergs

DURBAN

Correspondents:

Matsepes Inc

BLOEMFONTEIN

Counsel for Respondent:

G Harpur SC

U Lennard

Instructed by:

Lockhat & Associates

DURBAN

Correspondents:

Lovius Block Attorneys

BLOEMFONTEIN

THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

From:
The Registrar, Supreme Court of Appeal
Date:
15 September 2011
Status:
Immediate

Please note that the media summary is intended for the benefit of the media and does not
form part of the judgment of the Supreme Court of Appeal.

VENFIN INVESTMENTS V KZN RESINS

The Supreme Court of Appeal (SCA) today partly upheld an appeal by Venfin Investments
(Venfin) against an order of the KwaZulu-Natal High Court, Durban and dismissed a cross-
appeal by KZN Resins (KZN).

Fibalogic (Pty) Ltd, a manufacturer of geysers, had instituted action against KZN for an
amount of R26 million for its loss resulting from a marked increase in the defective geysers
returned to it. It attributed this increased rate of returns to the use of KZN’s resin in the
manufacturing process. Fibalogic alleged that KZN had agreed to compensate it for
damages it had suffered. Fibalogic subsequently ceded its claim against KZN to Venfin and
as part of the cession agreement, Venfin indemnified Fibalogic against any claim by KZN
for goods sold and delivered to Fibalogic. Venfin was formally substituted as plaintiff in
the ongoing proceedings after Fibalogic was placed under liquidation. KZN had instituted a
counterclaim against Fibalogic for about R2 million which it alleged was the balance of the

purchase price of resin sold and delivered to Fibalogic. It counterclaimed this amount from
Venfin after the latter was substituted as plaintiff in the proceedings. The counterclaim was
founded, in the main, on the provisions of section 156 of the Insolvency Act 24 of 1936. In
the alternative, the counterclaim relied on the provisions of the cession agreement entered
into between Fibalogic and Venfin.

The high court dismissed Venfin’s claim against KZN. It also dismissed KZN’s
counterclaim based on section 156 of the Insolvency Act with costs, hence the cross-appeal.
However, the high court upheld the counterclaim based on the provisions of the cession
agreement between Fibalogic and Venfin.

The SCA dismissed Venfin’s appeal against the order dismissing its claim against KZN. It
endorsed the high court’s finding that Venfin had failed to establish the compensation
agreement upon which it relied for its claim. However, the SCA upheld Venfin’s appeal
against the order upholding the counterclaim based on the provisions of the cession
agreement. It held in this respect that Fibalogic’s obligations to KZN could only have
passed to Venfin by way of assignment, which would require a tripartite agreement
between the ceditor (KZN), the debtor (Fibalogic) and the assignee (Venfin). No agreement
had either been pleaded or established by KZN. It followed, the SCA held, that the high
court had erred in allowing the counterclaim on the basis that it did. In dismissing the cross-
appeal, the SCA held that section 156 applies only to the liability of an insurer– properly so
called– to a third party under a policy of indemnity insurance. The undertaking by Venfin
to indemnify Fibalogic in the event of a claim by KZN, the SCA held, was not intended for
the benefit of KZN but solely for the benefit of Fibalogic, ie KZN was not a third party
under a policy of indemnity insurance . Consequently, the SCA held that the high court was
right in dismissing KZN’s counterclaim based on section 156 and by ordering it to pay the
costs resulting from this issue.