The Constitutional Court has refused to grant a financial services provider leave to appeal against the High Court’s finding that the FSP was negligent when it advised a couple to invest in two Sharemax property syndication schemes.
The applicants, Koch & Kruger Brokers CC and Deon Kruger, brought the application on the grounds that their right to have a dispute resolved by the application of law in a fair public hearing had been violated. This right is afforded by section 34 of the Constitution.
The gist of the matter was that the applicants asked the High Court to rule on a preliminary, or “separated”, issue: whether the FAIS Ombud’s investigation into the couple’s complaint justified the finding that the applicants were the factual and legal cause of the clients’ financial loss.
The applicants argued that the High Court violated their section 34 right by dealing with the entire case instead of the separated issue.
They argued that the High Court further infringed their section 34 right by failing to apply binding legal principles to the question of negligence.
Additionally, they claimed that a point of law of public significance had emerged because of the conflict between the High Court’s ruling in their case and the finding in Symons NO v Rob Roy Investments CC t/a Assetsure. In the latter case, the High Court in Pietermaritzburg held that the collapse of the property syndication schemes was caused by the intervention of the South African Reserve Bank (Sarb).
The respondents in the Constitutional Court matter were the FSCA; the FAIS Ombud; Justice Yvonne Mokgoro, in her capacity as the then chairperson of the Financial Services Tribunal; the Tribunal; and the clients, George and Lucille Baben.
The Constitutional Court’s judgment recorded that the Babens were 81 and 74 years old, and George Baben was seriously ill, when the application was filed last year. They had been without their pension for the past 10 years, and their reserves had been depleted.
Events leading up the High Court review application
In August 2008 and September 2009, the Babens invested R780 000 in two property syndication schemes through Sharemax Investments (Pty) Ltd, on Kruger’s advice.
The Babens received monthly interest payments until August 2010.
In September 2010, the Sarb instructed Sharemax to stop accepting further money and to repay all the existing investors. The monthly payments ceased, and the property syndication schemes collapsed.
In December 2012, the Babens filed a complaint with the FAIS Ombud, alleging the applicants had misled them about the safety and regulatory compliance of their investment in Sharemax. They also claimed the applicants had not provided them with the necessary documentation to evaluate the investment.
In October 2018, the Ombud upheld the complaint and awarded the Babens compensation of R780 000 plus interest of 10% a year from the date of the determination to the date of payment.
The applicants applied to the Ombud for leave to have the determination reconsidered by the Tribunal. The Ombud denied them leave. Subsequently, they sought leave from the chairperson of the Tribunal, who also rejected their application, in April 2019.
The applicants launched review proceedings in the High Court in Pretoria to have the Ombud’s determination set aside and replaced with a decision dismissing the Babens’ complaint. Alternatively, they sought the review and setting aside of the chairperson’s dismissal of their application for leave to have the matter reconsidered by the Tribunal.
The review application was based on various grounds in terms of section 6 of the Promotion of Administrative Justice Act (PAJA). The grounds were:
- The Ombud and the chairperson of the Tribunal were biased or there were suspicions of bias;
- Their actions were procedurally unfair;
- Their decisions were materially influenced by an error of law;
- Their decisions were taken for ulterior purposes;
- Irrelevant considerations were taken into account and relevant considerations were ignored;
- They took their decisions in bad faith and acted arbitrarily and capriciously; and
- Their decisions were unconstitutional and unlawful.
The separated issue
Before the hearing in the High Court, counsel for the applicants proposed that the court be asked to determine a preliminary issue. This issue was whether the Ombud’s investigation into the Babens’ complaint justified the Ombud’s determination or the chairperson’s ruling that the applicants were the factual and legal cause of the Babens’ financial loss.
In its judgment handed down in November 2021, the High Court formulated the separated issue as whether the Babens’ financial loss was caused by the applicants’ breach of agreement or by the intervention of the Sarb.
The judgment recorded both parties’ arguments in relation to the separated issue.
The High Court concluded that the applicants were negligent in advising the Babens to invest in Sharemax, and they failed to exercise the degree of skill, care, and diligence expected from an FSP.
It attributed the loss suffered by the Babens to the applicants’ breach of contract.
The applicants’ attempts to obtain leave to appeal and reconsideration were unsuccessful in both the High Court and the Supreme Court of Appeal.
Imprecise formulation
The applicants filed for leave to appeal in the Constitutional Court in August 2022. The Chief Justice issued directions in April 2023, calling for submissions on two key questions:
- The formulation of the separated issue and whether argument went beyond this issue; and
- The relevance of the separated issue to the review application.
The submissions showed that the separated issue was not precisely defined, and the exact scope of arguments was unclear, the Constitutional Court said in a unanimous judgment.
Rule 33(4) of the Uniform Rules of Court entitles a court to try issues separately in appropriate circumstances.
Justice Owen Rogers, who wrote the apex court’s judgment, said the present case was “an object lesson in what can go wrong” when a separated issue is not precisely formulated and recorded in an order made in terms of rule 33(4).
The High Court did not formally make an order according to rule 33(4) but allowed an informal request for argument on the separated issue conveyed orally by counsel.
Justice Rogers said the lack of precision in the formulation of the separated issue was “most unsatisfactory”.
Ombud, not the High Court, determines the merits
But how the High Court’s formulation of the separated issue was understood was irrelevant because the court should not have agreed to decide it in the first place.
What the parties seemed to have overlooked is that the High Court case was a PAJA review directed at decisions of the Ombud and the Tribunal chairperson, not an action for damages by the Babens against the applicants, Justice Rogers said.
He said the submissions suggested the parties “remain confused” as to how the separated issue was relevant to the grounds of review.
“At the risk of stating the obvious”, Justice Rogers said, the Ombud had the statutory jurisdiction, and thus the statutory duty, to determine the Babens’ complaint. If the Ombud determined the complaint without committing a review irregularity, the Ombud’s determination on the merits was binding, subject only to reconsideration by the Tribunal.
The Ombud’s finding on whether the applicants breached their mandate and whether the Babens’ loss was attributable to that breach was definitive.
The applicants were entitled to argue in the High Court that the Ombud’s finding on these matters should be set aside because of one or more review irregularities. If such a review succeeded, the matter would be remitted to the Ombud for determination afresh, because it was for the Ombud, not the High Court, to determine the merits of the complaint.
A finding by the High Court that an assumed breach of contract by the applicants did or did not cause the Babens’ loss would be irrelevant, because it is not the High Court’s opinion on that question that matters.
If the High Court concluded, as it did, that the loss was caused by the applicants’ assumed breach, but if the Ombud did not reach a proper decision on that question, the High Court’s view could not save the Ombud’s determination from being impeached on review. Conversely, if the High Court found, as applicants contended, that their assumed breach did not cause the Babens loss, that would not lead to the conclusion that the Ombud’s determination should be set aside on review.
Nothing has been resolved
Justice Rogers said that nearly two years after the “misconceived” preliminary issue was argued, all the parties have to show for it is a judgment that does not resolve any ground of review.
“All the issues in the review still remain to be argued and determined […] I trust that the parties will now proceed without delay to argue the review in the High Court,” the judge said.
He said it was not in the interests of justice to grant leave to appeal, even if the applicants had reasonable prospects of showing that the High Court’s determination on the causation issue was wrong, “a matter on which I express no opinion. Our decision on the causation issue would be no more useful in the review proceedings than the High Court’s.”
Regarding the applicants’ contention that the High Court failed to apply binding legal principles, he said their “real complaint” was that the evidence did not justify the High Court’s finding. The applicants had not pointed to any legal principles that were misstated by the High Court.
Further, the differing conclusions reached in this case and Symons did not point to the existence of an arguable point of law. Even before the High Court’s judgment in the present case, there were differing outcomes in Sharemax litigation, including the judgments in Oosthuizen (where the investor succeeded) and Symons (where the investor failed).
The Constitutional Court refused leave to appeal and ordered the applicants to pay the costs the Babens incurred in responding to the submissions requested by the Chief Justice.
