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The recent case of KPMG Chartered Accountants (SA) v Securefin LTD and Another 2009 (4) SA 399 (SCA), discussed the admissibility of evidence in the form of an interpretation of contract by an ordinary or expert witness. The case sets precedent by stating that the interpretation of contract is a matter of law and not that of fact, and thus a matter for the court and not that of witnesses. A witness (an expert or otherwise) may not testify as to the meaning of a contract.

 

A summary of the facts is essential despite their complexity. Securefin alleged that KPMG had breached contract and that they had suffered damages for which KPMG was liable.

 

In January 1998 Old Mutual (a life assurance society without shareholders) decided to demutualise viz. to become a company with shareholders listed on the JSE. Free assets of about R29.3 billion were to be converted into share capital and the shares were to be allocated to its members (the policyholders) free of charge.

 

A policyholder could either surrender the policy for a surrender value or they could assign the policy to a third party. These policies allowed for re-engineering; a process whereby the policy conditions could be amended in certain ways; such as the insured amount could be increased or decreased, the premium amounts could be changed, the maturity dates could be altered etc… It was therefore possible to create value by re-engineering the policy purchased.

 

KNA Insurance and Investment Brokers (KNA), created by a Mr. Alexander, were created to re-engineer these policies. Mr. Alexander went into business with Mr. Kirsch who realized the financial benefits and thought it prudent to create an offshore vehicle for these purposes. This vehicle was Securefin LTD, the subsequent First Respondent, who also sought the assistance of BHF Bank.

 

The Bank would advance money to Securefin with security in the form of a cession of the re-engineered policies. The Bank insisted of an overview procedure for which they sought the assistance of KPMG.

 

It later transpired that Mr. Alexander (KNA) was a swindler who manipulated the scheme and caused the Respondents to loose US$40 Million. Based on the fact that KNA was liquidated and Mr. Alexander was in prison, Securefin sought the recovery from KPMG.

 

There were two contracts that were in existence between these two parties; the procurement contract and the verification contract.

 

The Procurement Contract:

This contract was between KNA and Securefin. KNA was to be the procurement agent for Securefin, earning a commission on each re-engineered policy. The policies procured had to be capable of being re-engineered and were to be assignable to Securefin. They also had to have a maturity date no later than the 1^st of January 2001.

 

Clause 5 stated that Securefin would pay to KNA the ‘tranche consideration’ within 5 days after the receipt of a verification certificate. A ‘tranche consideration was defined as… “the sum of (i) the total acquisition price of the policies; (ii) agent’s commission plus VAT; and (iii) all future premiums discounted to present-day values.” 

KPMG had to perform the verification procedures in order to provide the verification certificates. Verification certificate was defined to mean two certificates: the one was to be given by KPMG to Securefin and the bank and had to be ‘in accordance with Appendix C’. The other, for which no form was prescribed, was to be ‘a certificate verifying the cost to Securefin of the tranche consideration.’

The inconsistencies are the result of the changes that were brought about during the preparation of the various drafts. The contract made perfect business sense and anticipated that KPMG as verification agent would perform two functions that are relevant to these proceedings. The first was that it would accept delivery from KNA of a policy tranche consisting of policies with maturity dates of not later than 1 January 2001. Furthermore, it had to verify the cost to Securefin (ie, the amount due to KNA) for each tranche, which required the verification of the tranche consideration.

 

The Verification Contract:

On the 26^th of June 1998 KPMG sent a letter to Securefin dealing with KPMG’s appointment as verification agents for the acquisition by KNA of Old Mutual policies on behalf of Securefin.

It was common cause that this letter amounted to an offer by KPMG to act as Securefin’s verification agent and that this offer was duly accepted by Securefin.

 

It was what this letter contained that was significant:

Under the heading ‘background information’ the letter recorded the fact of conclusion of the procurement contract which, as annexure A, formed an attachment. The letter mentioned that the procurement contract required that KPMG perform certain procedures and report on certain aspects of the policy acquisitions. It accepted that KPMG was obliged to perform the specific procedures in accordance with clauses 5.1, 5.2 and 5.3 of the procurement contract and contained the further undertaking that KPMG would ‘carry out certain other procedures’ in order to provide Securefin with confirmation of nine facts. In order to ‘satisfy’ these aspects KPMG undertook to perform the ‘detailed audit procedures’ set out in a document compiled by KPMG, namely annexure B to the letter.

The letter also recorded KPMG’s understanding that it had to report to Securefin on the verification of the nine points. A pro forma report that would deal with those aspects was attached as annexure C, which also contained an example of a draw down report which was to be used to verify at a given date the total maturity value of the verified batches in Rand terms. Annexure C did not deal with the certification of the cost to Securefin of the tranche consideration, and did not purport to incorporate the second certificate required in terms of the definition of ‘verification certificate’.

KPMG’s Defences for the breach of contract resulting in Securefin’s Loss:

The annotation defence:

The issue was the identification of the correct version of the verification contract. A Mr. Delaney, who was not a chartered accountant, but held a senior position at KPMG, wrote the letter and compiled the annexures. KPMG alleged that Mr. Delaney lacked the authority to bind them. They also alleged, which Delaney testified, that he noticed a mistake in the final procurement contract concerning the maturity date of the policies to be procured. As mentioned, it provided that KPMG had to ensure that all the policies in a tranche had to mature before 1 January 2001. Delaney thought, so he said, that they had to mature after that date.

Securefin stated that the fact that the policies failed to mature before the 1^st of January 2001 amounted to a breach.

The court held that Securefin were reasonable to accept the verification letter without re-reading annexure A (procurement contract) and that the defense had no factual basis.

 

The Appendix C Argument:

KPMG argued that the verification contract was invalid based on the fact that the procurement contract required it to provide a certificate in terms of “Appendix C” not “Annexure C”, and that there was no such appendix. It was common cause, on the evidence, that the “annexure C” was intended to be “Appendix C”. It was held that this defense had no basis.

 

The Justus error Defense:

KPMG were obliged to verify the acquisition price and the issue arose based on the fact that they failed to do so independently. Clause 5.1 of the Procurement Contract required them to provide verification certificates, one of which would relate to tranche considerations payable to KNA.

Instead of determining the acquisition price independently, they merely took KNA’s word for it.

Mr. Alexander (who was later found for fraud) therefore provided information so that Securefin would overpay KNA, to his financial gain.

 

Their defence was that Mr. Delaney was reasonable in not knowing the terms of this clause as it was not in the draft contracts, and nobody informed him of the fact that there had been changes to the drafts. This defense did not hold up as there were many convincing reasons put forward to the court giving reason to believe that Mr. Delaney was in fact aware of such changes.

 

The meaning of ‘Verify’:

Much of the evidence in court dealt with the interpretation of the verification contract. Each party had expert witnesses who testified for fourteen days on the interpretation of the contract.

The judge found that it was necessary to say something about the role of evidence, and more particularly, expert evidence in matters concerning interpretation. He began by stating that the integration (or parol evidence) rule remains part of our law. However, it is frequently ignored by practitioners and seldom enforced by trial courts. That if a document was intended to provide a complete memorial of a jural act, extrinsic evidence may not contradict, add to or modify its meaning. He went on to say that interpretation is a matter of law and not of fact and thus a matter for the court and not for the witnesses. Furthermore that rules about the admissibility of evidence in this regard do not depend on the nature of the document, whether contract or statute. As well as that one must use evidence used to contextualize a contact as conservatively as possible. “The time has arrived for us to accept that there is no merit in trying to distinguish between ‘background circumstances’ and ‘surrounding circumstances’. The distinction is artificial and, in addition, both terms are vague and confusing. Consequently, everything tends to be admitted.”

He substantiated his stance with use of the following authority:

Trollip JA in Gentiruco AG v Firestone (SA) (Pty) Ltd quoted with approval from a speech of Lord Tomlin in British Celanese Ltd v Courtaulds

‘The area of the territory in which in cases of this kind an expert witness may legitimately move is not doubtful. . . . He is entitled to explain the meaning of any technical terms used in the art. . . . He is not entitled to say nor is counsel entitled to ask him what the [document] means, nor does the question become any more admissible if it takes the form of asking him what it means to him as an [expert].’

Lord Tomlin spelt out the disadvantages of allowing expert evidence on interpretation:

‘In the first place time is wasted and money spent on what is not legitimate. In the second place there accumulates a mass of material which so far from assisting the Judge renders his task the more difficult, because he has to sift the grain from an unnecessary amount of chaff. In my opinion the trial Courts should make strenuous efforts to put a check upon an undesirable and growing practice.'

 

“The Amendment”:

In 1998 KPMG stated that they received a letter from Securefin stating that the completed reports (certificates) had to be handed to KNA for onward transmission to Securefin and the Bank. This instruction conflicted with the terms of the verification contract which required KPMG to report directly to Securefin.

KPMG alleged that this was an amendment. Securefin, however denied writing it and saw it as further fraud by KNA (Mr. Alexander).

 

The significance being that if is was not an amendment then the failure of KPMG to give direct reports resulted in a breach of contract.

The Judge agreed with the court a quo that Securefin did not write the letter and that nonetheless KPMG had formally accepted, and that the defense was correctly dismissed.

 

The appeal was thus dismissed with costs; and KPMG was found to have breached contract and was thus liable to pay the damages to Securefin. Amongst the above mentioned defenses, it becomes clear that the most significant was that of the interpretation of the contract (the meaning of the word ‘verify’); in that this case sets precedent by stating that the interpretation of contract is a matter of law and not that of fact, and thus a matter for the court and not that of witnesses. A witness (an expert or otherwise) may not testify as to the meaning of a contract.

 

 

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