THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Not reportable
Case No: 1238/2016
In the matter between:
MERCHANT COMMERCIAL FINANCE (PTY) LTD          APPELLANT
and
KATANA FOODS CC                                                         RESPONDENT
Neutral citation: Merchant Commercial Finance (Pty) Ltd v Katana Foods CC
(1238/2016) [2017] ZASCA 191(20 December 2017)
Coram:
Leach, Tshiqi and Swain JJA and Makgoka and Ploos van Amstel
AJJA
Heard:
22 November 2017

Delivered: 20 December 2017
Summary: Fraudulent scheme causing a factoring business to make payments
by factoring fictitious sales – respondent’s director falsely verifying in a series
of transactions that goods had been sold and delivered to respondent – in last
three transactions such verification not made before payments made – prior
conduct having lulled appellant into making such payments – causation proved
in regard to loss suffered by reason of last payments.

________________________________________________________________
ORDER
________________________________________________________________
On appeal from: Gauteng Division of the High Court, Johannesburg (Moshidi
and Matojane JJ and Hawyes AJ, sitting as a court of appeal):
The appeal succeeds, with costs.
The order of the court a quo is set aside and is replaced by the following:
‘(a)
The appeal succeeds with costs.
(b)
The order of absolution granted by the trial court is set aside and is
substituted with the following:
(i)
The defendant is to pay the plaintiff the amount of R404 557,26
together with interest thereon a tempore morae to date of payment;

(ii)
The defendant is further to pay the plaintiff’s costs of suit.’
________________________________________________________________
JUDGMENT
________________________________________________________________
Leach JA (Tshiqi and Swain JJA and Makgoka and Ploos van Amstel AJJA
concurring)
[1] The appellant, a private company which described itself, probably
somewhat inaccurately, as carrying on a factoring business, was the victim of a
fraudulent scheme concocted between one of its clients and a person in the
employ of the respondent, Katana Foods CC (Katana). As a result of this
scheme, which in modern dictum would be described as a ‘scam’, the appellant
paid various amounts which it was unable to recover. When the truth was out, it
sued the respondent for its loss. Its claim related to but three of a number of

invoices it had ‘factored’ as described more fully below, it having been paid in
full in respect of the remaining factored invoices, albeit not by the person who
was obliged to do so.

[2] When the matter came to trial in the Gauteng Division, Johannesburg the
trial court (Satchwell J) concluded that although the payments had been made,
the appellant had failed to establish that this was due to fraud on the part of the
respondent, and granted an order absolving the respondent from the instance.
An appeal to a Full Court (Matojane J, Moshidi J and Hawyes AJ) was similarly
unsuccessful. This further appeal is with special leave granted by this Court.

[3] Factors are agents whose ordinary course of business is to sell or to
dispose of goods to which they have been entrusted with the possession and
control by their principals. The distinctive characteristic of this form of agency
is that it is customary for the factor to have the authority to sell and alienate, or
pledge in its own name, the goods to which it has been entrusted, or to give
credit to the purchaser.1 The appellant, however, carried on business in a
somewhat different way. Essentially its scheme of business was as follows.
It entered into written agreements with clients, referred to as the ‘supplier’  in
terms of which it purchased and took cession of the claims the supplier had
against its customers in respect of goods sold and delivered to them.
The customer thereafter had to pay those debts to the appellant, and the
appellant would pay the supplier the amount of its invoice value, less a factoring
charge and any amount of interest that may have become due on its account.
The appellant’s standard factoring agreement included a provision2 that the
appellant would maintain a current account in its books relating to all

1 A J Kerr ‘Estoppel and the Rei Vindicatio: Brokers, Factors and Agents for Sale’ (1977) 94 SALJ 260 at 265;
E Kahn Contract and Mercantile Law Vol II p 869 note (b).
2 Clause 4.7.

transactions relating to the supplier, and would pay interest at an agreed rate on
the amount by which the current account was in credit from time to time but
would charge interest should the current account be in debit.

[4] On 15 May 2006, the appellant entered into a factoring agreement with
Black Ginger 81 (Pty) Ltd (Black Ginger) a private company which traded
under the name BKN Sales & Distribution. In terms of this agreement, the
appellant purchased and took cession of claims that Black Ginger had against its
customers at the commencement date of the factoring agreement or which came
into existence during the subsistence of the agreement, relating to sales made by
Black Ginger to its customers on credit in the ordinary course of its business.

[5] Katana, a customer of Black Ginger, then applied in writing to open an
account with Black Ginger in order to purchase goods on credit. This form
included details such as Katana’s VAT registration number, contact details,
physical trading address and details of its directors, one of whom was a
Mr David Rahman. This application was made available to the appellant to
enable it to perform its own credit check on Katana. It did so and agreed to
factor invoices for goods to be sold by Black Ginger to Katana on credit,  up to
a value of R750 000.

[6] Consequently, on 17 July 2006, the appellant notified Katana that
pursuant to its application it had entered into a factoring agreement with Black
Ginger, and that the debts reflected in invoices rendered by Black Ginger to
Katana were ceded to the appellant to whom payments were to be made. The
letter reads as follows:
‘SUPPLIER: Black Ginger 81 (Pty) Ltd T/A BKN Sales

We wish to inform you that in order to effect certain economies and to assist the future
development and growth of their company, the above supplier has availed themselves of the
factoring services rendered by [the appellant] . . .
In order to facilitate procedures, we advise as follows:
1.  ORDERS
All enquiries and orders should be addressed to your supplier as before.
2.  INVOICES AND STATEMENTS
Although invoicing will continue to be done by the supplier, invoices will record that the debt
has been ceded to [the appellant] who will be responsible for issuing monthly statements and
to whom payments must in future be made.
3.  PAYMENT
The debt reflected in the statements which will be rendered to you will be owing to [the
appellant] to whom payments must be made on due date. Only payment to [the appellant]. . .
will constitute a valid discharge of your present and future indebtedness . . ..’

[7] Pursuant to these events and the factoring agreement, in June 2006 the
appellant factored the first invoice raised by Black Ginger in respect of goods
ostensibly sold and delivered to Katana on credit. On 19 June 2006,
Mr Rahman, who as I have mentioned was a director of Katana but was also its
buying officer, confirmed to a verification clerk employed by the appellant that
the goods reflected on the invoice had indeed been purchased and received by
Katana and that the latter would pay the appellant the amount owing on the
invoice. This verification followed the standard verification process adopted by
the appellant. The information provided was captured on Katana’s debtor’s
account by the verification clerk and confirmed in the letter faxed to Katana
Food.

[8] This was the first of a series of transactions involving the appellant
factoring sales purportedly made by Black Ginger to Katana. On a further ten
occasions thereafter until 18 April 2007, Mr Rahman confirmed to the
appellant’s verification clerks that goods reflected on Black Ginger invoices had
been sold on credit to Katana for factoring by the appellant and delivered to
Katana. In each and every instance after Mr Rahman had confirmed that the
goods had been sold and received, the appellant send verification letters to
Katana.

[9] All appeared to be going swimmingly, especially as the appellant was
paid in full in respect of all the invoices that it had factored in this way up to the
last three invoices numbered 105156, 105551 and 105332. These, too,
Mr Rahman confirmed related to goods Katana had bought on credit from Black
Ginger and were to be factored by the appellant as usual. This confirmation was
given by him in respect of the first of these invoices on 3 May 2007 and the last
two on 31 May 2007. However, in June 2007 a cheque deposited in the
appellant’s bank account as payment on an outstanding amount with reference
to Katana’s debtor’s account with the appellant, was returned unpaid by the
bank. It was then discovered that the cheque in question had been drawn on
Black Ginger’s account and not paid by Katana as it should have been. This led
to the appellants first suspending and then terminating Black Ginger’s factoring
facility.

[10] After attempting unsuccessfully to recover payment of the last three
invoices from it, the appellant resorted to launching an application to wind-up
Katana. In opposing this application, Katana let the cat out of the bag. From its
answering affidavit deposed to by Mr C Vassarotti, its managing member, it
appeared that in each and every one of the instances where the appellant had

factored invoices in respect of sales made by Black Ginger to Katana, all such
sales were fictitious and had never taken place; and that Mr Rahman had falsely
confirmed that Katana had purchased and received the goods in question.

[11] Mr Vassarotti explained that the manager of Black Ginger, Mr Preggy
Nurasiaha, had entered into what he termed an ‘arrangement’ with Mr Rahman
to the effect that Black Ginger would raise fictitious invoices reflecting goods
ostensibly sold and delivered to Katana, but would later issue Katana  with
credit notes to the value of the invoices. Mr Vassarotti stated that he had
become aware of this scheme in August 2006 and had immediately instructed
Mr Rahman to cease this activity. However, unbeknown to him, Mr Rahman
had not done so but had continued with his so-called ‘arrangement’ with
Mr Nurasiaha until May 2007 when the last invoices (ie those which are the
subject of the present dispute) were factored.

[12] It was on the strength of these fraudulent invoices that the appellant had
made payments to Black Ginger believing that such amounts were due under the
factoring agreement. In pursuance of this fraud, a total of 13 fictitious invoices
were factored by the appellant and payments exceeding R3 million were made
to Black Ginger. In all instances the repayments purportedly made to the
appellant in respect of the amounts factored were in fact made not by Katana
but by Black Ginger. In this way, save for the last three invoices which remain
unpaid, the appellant was paid all the amounts that it was entitled to receive had
the invoices been valid.

[13] The total loss suffered by the appellant flowing from the last three
invoices, including factoring charges and interest, amounts to R404 557,26.

It was not disputed in this court that such amount had in fact been lost by the
appellant pursuant to the scam of which it had been a victim. And although it
was initially pleaded by Katana that Mr Rahman had not acted within the course
and scope of his employment with Katana at the time of his so-called
‘arrangement’ with Mr Nurasiaha of Black Ginger, it was ultimately accepted
that he had.  The respondent, however, contended that both of the courts below
had been correct in finding that the appellant had not shown that fraud on the
part of Mr Rahman had caused it to factor the three unpaid invoices.

[14] In order to consider the respondent’s argument in this regard, it is
necessary to describe the circumstances under which the appellant came to
factor and make payments in respect of those invoices. Katana was but one of
Black Ginger’s clients in respect of which the appellant had agreed to provide
factoring services. On 2 May 2007, the appellant received a schedule of
invoices having a total value of R888 652,37 offered to it by Black Ginger for
factoring. This contained a number of invoices from various clients. One of
these was invoice 105156 dated 12 April 2007. It related to goods to the value
of R261 459 purportedly sold and delivered by Black Ginger to Katana.
Immediately before this schedule was received, an amount of R15 781,04 was
then available to Black Ginger in its current account with the appellant.
However, on the strength of the schedule, and after a calculation done in
longhand on Black Ginger’s account, a payment of R650 000 was made to
Black Ginger, the appellant’s Managing Director, Mr Philippou, having
authorised such payment by affixing his signature on the appellant’s daily
payout schedule. This payment included the amount that the appellant
calculated was due to be paid to Black Ginger  in respect of invoice 105156.
It was only on the following day, after such payment had been effected, that a
verification clerk of the appellant contacted Mr Rahman and obtained his

verification (which was of course false) that the goods reflected in invoice
105156 had in fact been purchased and received by Katana.

[15] Whilst the respondent argued, quite correctly, that payment in respect of
invoice 105156 was therefore made before Mr Rahman fraudulently stated that
the goods to which it referred had been sold and delivered to Katana, its further
contention that the payment was before the invoice had even been received by
the appellant seems not to be correct. Analysis of the documentation shows that
the invoice had in fact been received and ‘captured’ – the expression used at the
trial – in the appellant’s bookkeeping process on 2 May ie the day before the
R650 000 payment was made. That payment was thus made on the strength of a
number of Black Ginger’s invoices to various clients delivered to the appellant,
including invoice 105156 issued to Katana.

[16] I turn to invoices 105331 and 105332, both of which are dated
24 May 2007. The former, relating to 7 200 gift sets at a total purchase price of
R131 328 and the latter relating to 12 000 packets of Elastoplast Clear Strips
having a purchase price of R150 753,60 were amongst a batch of invoices taken
into account to advance an amount of R186 000 to Black Ginger. This was done
on the strength of an undertaking given by Black Ginger to supply the appellant
with invoices totalling R267 304,94. When, on 30 May 2007, the invoices duly
arrived at the appellant, supported by a schedule marked 100, they totalled a
slightly higher amount than had initially been indicated (R293 083,09). In any
event, the invoices so delivered included invoices 105331 and 105332.
The payment of R186 000 made on 25 May 2007 was authorised by Mr Craig
Naim, one of the appellant’s directors. Then on 30 May 2007, a further payment
of R165 000 was made to Black Ginger. In doing so, the appellant paid out all
available funds against invoices that were factored by Black Ginger with the

appellant, including invoices 105331 and 105332. It was, however, only on
31 May 2007, that a verification clerk of the appellant contacted Mr Rahman
who verified, once again falsely, that the goods reflected on invoices 105331
and 105332 had indeed been purchased and received by Katana.

[17] As appears from the above, invoice 105156 to the value of R261 459 was
factored and included in the payment of R650 000 made to Black Ginger on
2 May 2007. Invoices 105331 and 105332, to the value of R131 328 and
R150 753,60, respectively, were factored in favour of the appellant as part of
the payments of the amounts of R186 000 and R165 000 paid on 25 May and
30 May 2007. And importantly, all these invoices were factored and payments
made to Black Ginger in their regard before Mr Rahman had been contacted by
the verification clerks of the appellant to confirm that goods had been purchased
and delivered. Moreover, neither Mr Philippou nor Mr Naim were called to
explain in evidence why they had authorised the payments before verification
had taken place.

[18] These facts led to the appellant’s claim failing, both in the trial court and
in the court a quo.  In her judgment in the trial court, Satchwell J stated that
Mr Rahman had ‘made no misrepresentations prior to payment’ of the three
unpaid invoices, and only did so after payment had been made. She went on to
state that the payments that were made had not been induced by any ‘specific
misrepresentation’ made by Mr Rahman ‘on these particular dates’.
Her approach was approved by the court a quo, which went on further to state:
‘It would I think not be correct for the court to infer without more that previous instances of
misrepresentations in the ordinary course of business induced [the appellant] to accept that
the last three invoices were genuine invoices issued in the normal course of business as

payment was a result of an exercise of a discretion by the manager or a director who elected
not to give evidence.’

[19] I turn to consider whether these conclusions are sustainable. There can of
course be no liability if it is not proved, on a balance of probabilities, that the
conduct of Katana, or more correctly Mr Rahman, caused the appellant’s loss.
Essentially the issue is one of causation, namely, can the fraudulent statements
made by Mr Rahman in respect of the previous invoices be said to have caused
the loss suffered in respect of the last three unpaid invoices? In this regard  it is
well established  that in order to succeed the appellant had to establish both
factual and legal causation as set out in cases such as International Shipping Co
(Pty) Ltd v Bentley 1990 (1) SA 680 (A) at 700F-G and Minister of Safety and
Security v Van Duivenboden 2002 (6) SA 431 (SCA) para 12. If there is a lack
of factual causation, that is the end of the matter.  But if there is, it becomes
necessary to consider legal causation, namely whether the act complained of is
sufficiently closely linked to the loss suffered for legal liability to be imposed.3

[20] The test frequently employed in determining the issue of factual causation
is the so-called ‘but-for’ test, explained in International Shipping by Corbett CJ
as follows:4
‘In order to apply this test one must make a hypothetical enquiry as to what probably would
have happened but for the wrongful conduct of the defendant. This enquiry may involve the
mental elimination of the wrongful conduct and the substitution of a hypothetical course of
lawful conduct and the posing of the question as to whether upon such a hypothesis plaintiff’s
loss would have ensued or not. If it would in any event have ensued, then the wrongful
conduct was not a cause of the plaintiff’s loss; [otherwise] it would not so have ensued.’5

3 Cf mCubed International (Pty) Ltd & another v Singer & others NNO 2009 (4) SA 471 (SCA) para 22.
4 At 700F-G.
5 International Shipping at 700H.

[21] In applying the ‘but-for’ test, it is important to apply common sense to the
facts.6 In addition, it is not a question of deciding upon formulaic
quantifications and percentages. As this Court said in Van Duivenboden:7
‘A plaintiff is not required to establish the causal link with certainty, but only to establish that
the wrongful conduct was probably a cause of the loss, which calls for a sensible
retrospective analysis of what would probably have occurred, based upon the evidence and
what can be expected to occur in the ordinary course of human affairs rather than an exercise
in metaphysics.’

[22] Turning to the question of legal causation (or remoteness of damage as it
is sometimes called), the issue is one to be determined by considerations of
policy. It serves as a measure of control to ensure that liability is not extended
too far. It recognises that liability should not be imposed where, despite the
other elements of delictual liability being present, right-minded persons,
including judicial officers, will regard it as untenable to do so.8 In determining
whether damage is too remote, tests involving foreseeability, proximity, direct
consequences, all of which are relevant, ‘should not be applied dogmatically,
but in a flexible manner so as to avoid a result which is so unfair or unjust that it
is regarded as untenable.’9

[23] The conclusion of the courts below that the appellant had failed to
establish factual causation as the fraudulent misrepresentations made by
Mr Rahman in respect of previous instances were irrelevant to the enquiry in
regard to three invoices at the heart of this appeal, has to be considered in the

6 See eg Kakamas Bestuursraad v Louw 1960 (2) SA 202 (A) at 220B-C, Siman & Co (Pty) Ltd v Barclays
National Bank Ltd 1984 (2) SA 888 (A) at 917H-918A and Minister of Finance & others v Gore NO 2007 (1)
SA 111 (SCA) para 33.
7 Para 25.
8 See eg Fourway Haulage SA (Pty) Ltd v SA National Road Agency Ltd 2009 (2) SA 150 (SCA) para 31 and
mCubed International v Singer 2009 (4) SA 471 (SCA) para 27.
9 Per Brand JA in Fourway Haulage para 34.

light of these principles. I find myself unable to agree with those courts process
of reasoning. Had the three unpaid invoices stood alone and been the sole false
transactions which Black Ginger had perpetrated upon the appellant with the
assistance of Mr Rahman, it may have been different. But in my view, it is
artificial to approach the matter by quarantining those invoices from what had
gone on before and viewing them in isolation. They formed the last of a series
of fraudulent activities designed to induce the appellant to make payments to
Black Ginger which it would otherwise not have made.

[24] This course of on-going conduct succeeded. Not only did Mr Rahman’s
actions cause the appellant to factor the previous invoices on behalf of Black
Ginger but it made him a party to Black Ginger establishing a course of
business which clearly lulled the appellant into accepting the bona fides of
invoices it submitted for factoring. That is the most obvious and probable
conclusion to be drawn from the facts, as we know that as soon as the appellant
had a whiff that all was not well with Black Ginger’s account, it immediately
shut it down.

[25] In these circumstances, it seems to me to matter not that neither
Mr Philippou nor Mr Naim testified to explain why they were prepared to
authorise the payments that were made in May 2007. The inferences are
obvious and by reason of the history of Black Ginger’s account (which
ultimately all turned out to have been nothing but fraud in which the
respondent’s Mr Rahman played a substantial part) they had no reason to
suspect that they were about to become the victims of a scam in that the
invoices were irregular and fictitious.

[26] Similarly, it does not lie in the respondent’s mouth to attempt to distance
itself from whatever representations may have been made by Black Ginger in
respect of these three invoices. As confirmed by Mr Rahman’s subsequent
conduct in verifying the correctness of the invoices, they, too, fell within the
ambit of the scheme. Put somewhat differently, the false representations
Mr Rahman had made previously in regard to all the invoices Black Ginger had
factored by reason of his misrepresentations as to the truth, led to the three
unpaid invoices being similarly factored.

[27] Furthermore, had Mr Rahman not previously made the previous series of
false representations in regard to the goods reflected in the earlier invoices, the
entire fraudulent scheme would have collapsed. Consequently if at any stage
prior to the three unpaid invoices having been issued, he had come clean and
not made the false representations which he did, they would not have been
factored and the loss claimed by the appellant would not have been suffered.
The ‘but-for’ test was clearly satisfied in respect of factual causation and the
courts below erred in concluding otherwise.

[28] In these circumstances the fact that Mr Rahman had only verified the
three unpaid invoices after they had been factored and paid does not mean that
the appellant’s claim had to fail. His previous fraudulent misrepresentations
were in themselves sufficient to cause of the harm suffered by the appellant in
factoring the last invoices, which were responsible for the loss.

[29] So, too, did the court a quo err in its specific finding that should it have
erred in respect of factual causation, legal causation had not been established.
I find its judgment on this issue to be somewhat confusing. It stressed that the

enquiry as to factual causation was distinct from that as to legal causation or
remoteness. But then it accepted that if factual causation was proven, the loss
that was suffered was too remote as factual causation had not been shown!
This conflated the two distinct enquiries as to factual and legal causation.
Accordingly, it failed to give any cogent reason for holding that legal causation
had not been established should there have been factual causation. Essentially it
held no more than that factual causation had not been proved, and for the
reasons already given, in that it erred.

[30] In any event, the damage which the appellant presently claims was clearly
foreseeable throughout the ongoing fraudulent scheme to which Mr Rahman
was a party. In fact that scheme seems to have been clearly designed to induce
the appellant into believing that all invoices delivered to it by Black Ginger
were genuine. It is, in my view, untenable to suggest that in these circumstances
the damage which was ultimately suffered was too remote from the earlier
utterances made by Mr Rahman in fraudulently deceiving the appellant into
making the payments that it did. It was a direct and readily foreseeable
consequence of his fraud. The fact that Black Ginger’s representatives
participated in the scheme, and were themselves guilty of fraud, does not
exculpate Mr Rahman.

[31] Accordingly, in my view, there can be no question but that the appellant
established both factual and legal causation on the part of the actions of
Mr Rahman which led to the loss that is the subject of the appellant’s claim.
Both the trial court and the court a quo erred in reaching the contrary
conclusion. They ought to have held the respondent liable to the appellant in
respective of its loss of R404 557,26 suffered in respect of the three unpaid

invoices the appellant had factored in May 2007. The appeal must therefore
succeed and there is no reason for costs not to follow the event.

[32] The following order will issue:
The appeal succeeds, with costs.
The order of the court a quo is set aside and is replaced by the following:
‘(a)
The appeal succeeds with costs.
(b)
The order of absolution granted by the trial court is set aside and is
substituted with the following:
(i)
The defendant is to pay the plaintiff the amount of R404 557,26
together with interest thereon a tempore morae to date of payment;

(ii)
The defendant is further to pay the plaintiff’s costs of suit.’

_______________
L E Leach
Judge of Appeal

Appearances:

For the Appellant:
F Van Zyl SC
Instructed by:
Werksmans Attorneys, Cape Town

Lovius-Block, Bloemfontein

For the Respondent:
H A Van der Merwe

Instructed by:

Jeff Donenberg and Co, Parktown North

Webbers, Bloemfontein