The decision by the Supreme Court of Appeal in the matter between Old Mutual Unit Trust Managers (OMUT) and Living Hands clarifies important legal principles governing the responsibilities of financial institutions, particularly in the context of collective investment schemes.
As we reported on Thursday, OMUT won its appeal against a High Court order that it must pay more than R1.7 billion in damages to the Living Hands Umbrella Trust.
Read: SCA upholds Old Mutual’s Living Hands appeal
The SCA’s judgment confirms that financial institutions must act in the best interests of investors and exercise proper care and diligence, but, significantly, it clarifies that this duty does not extend to preventing all possible harm that may result from a client’s actions.
Contrary to the High Court’s judgment, the SCA found that OMUT did not owe a direct statutory duty to the trust and its beneficiaries. Instead, its obligations were primarily owed to the trust administrator, Living Hands (Pty) Ltd, which was the client with which OMUT had a contractual relationship.
Background to the appeal
The Living Hands Umbrella Trust (previously, the MATCO Trust) held trust assets on behalf of beneficiaries of deceased members of the Mineworkers Provident Fund. The trust held funds for the members’ dependants, most of whom are widows, orphans, guardians of minors, and breadwinners.
In 2002, OMUT was appointed as an investment adviser to the trust administration company, Mantadia Asset Trust Company, in respect of the trust funds under management. OMUT designed the investment portfolio and was contracted to buy, sell, and switch units in the portfolios forming part of collective investment schemes on Mantadia’s instruction.
In 2004, Fidentia Holdings acquired Mantadia, which was renamed Living Hands (Pty) Ltd, and the trust was renamed the Living Hands Umbrella Trust. Fidentia Asset Management (FAM), a wholly controlled subsidiary of Fidentia, was appointed as the trust’s discretionary investment manager.
FAM called up the trust’s entire investment portfolio held with OMUT. Before paying out the funds, OMUT raised concerns with the trust’s administrator and FAM about the validity, scope, and intended impact of FAM’s instructions to liquidate the trust portfolio and transfer the funds to FAM.
After numerous correspondences, and instructions from the trust’s administrator, OMUT paid more than R1.13 billion to the trust’s account, which had come under Fidentia’s control. From the date of receipt of the payments from OMUT, the trust paid more than R1.2bn into bank accounts held by Fidentia and its controlled companies.
Fidentia used the funds to defray business expenses and to acquire property and private equity investments for the Fidentia group. All assets bought were held in the names of Fidentia-owned companies, without any indication that they were held on behalf of the trust.
Fidentia was placed into final curatorship in 2007 following an investigation by the then Financial Services Board into the group. As part of the curatorship process, the plaintiffs recovered some R403.8 million, of which R272.6m was distributed to the plaintiffs after deducting expenses.
Living Hands, the administrator and sole corporate trustee of the Living Hands Umbrella Trust, instituted action in the High Court to recover damages of R861 222 095 (amended during the trial to R854 640 000) from OMUT. The second and third plaintiffs were two trustees of the trust.
The plaintiffs’ claim was based on delict, arising from an omission, for pure economic loss. The plaintiffs alleged that OMUT acted wrongfully when it repaid the funds to Living Hands because it:
- had knowledge of the trust’s business and the vulnerable nature of the trust’s beneficiaries;
- breached duties imposed on it by the Collective Investment Schemes Control Act (CISCA), the Trust Property Control Act, the Financial Institutions (Protection of Funds) Act, and sections 27 and 28 of the Constitution; and
- knew or reasonably ought to have known that Fidentia had taken control of the trust, and it had come under the control of individuals who may not act in the best interests of the beneficiaries.
Although the plaintiffs argued that the loss suffered was a result of Fidentia’s wrongdoing, they alleged that OMUT did not take sufficient steps to safeguard the funds before implementing the transfer to the trust’s account that was under the control of Fidentia. This should have included OMUT’s satisfying itself that FAM would preserve the funds for the benefit of the beneficiaries and act in a prudent and honest manner when managing the funds.
In July 2022, the High Court found that OMUT owed a direct duty of care to the trust under section 71 of CISCA that ranked higher than its contractual obligations towards the trust administration company. It ordered OMUT to R854 650 643 as damages and R854 650 643 as interest according to the in duplum rule – more than R1.7bn in total.
The central issue raised by the appeal to the SCA was whether the plaintiffs established the elements of delictual liability: wrongfulness, negligence, and causation.
OMUT acted as a reasonable investment manager
The plaintiffs alleged that OMUT culpably failed to take steps to prevent the loss caused to the trust and its beneficiaries by the misappropriation of the funds by “the Fidentia wrongdoers”.
The SCA, in a decision penned by Judge Ashton Schippers, said Living Hands intentionally misappropriated the funds and consequently was the author of its own misfortune. Yet, it asked that liability for damages be imposed on OMUT because OMUT negligently enabled the misappropriation by repaying the funds to Living Hands in accordance with the OMUT agreement and Living Hands’ authorised instruction.
“The proposition needs merely to be stated to appreciate its absurdity,” Judge Schippers said.
He said OMUT acted as any reasonable investment manager would have done. It ensured that the instruction from Living Hands was properly authorised, and then acted upon it as it was contractually bound to do.
“OMUT had no duty to involve itself in the inner workings of the trust, and it was not permitted to refuse to comply with a duly authorised instruction to call up the funds. On this basis alone, the plaintiffs failed to prove wrongfulness. Aside from this, it is clear from the evidence that OMUT could not, and did not, foresee that if the funds were repaid to the first plaintiff, they would be dissipated to the prejudice of the trust and its beneficiaries. Rather, the evidence points the other way,” the judgment stated.
No breach of statutory duties
The SCA concluded that OMUT did not breach its statutory duties.
Section 71 of CISCA did not extend beyond OMUT’s contractual relationship with MATCO/Living Hands. It did not impose a duty on OMUT to act in the best interests of the trust and its beneficiaries. Instead, OMUT’s obligations were to treat the assets as trust property and deal with them according to CISCA, the deed, and in the best interests of the investor (Living Hands).
OMUT’s obligations under CISCA were to Living Hands – not to the trust and its beneficiaries. Consequently, the High Court’s interpretation that section 71 imposed on OMUT a legal duty to deal with money or assets in the best interests of the trust, which “ranks higher” than its contractual obligations to Living Hands, was incorrect.
Similarly, the Protection of Funds Act and the Trust Property Control Act did not impose a duty on OMUT to avoid harm to the trust and its beneficiaries. They require financial institutions to act with utmost good faith and proper care towards the principal (Living Hands), but not to second-guess lawful instructions from the principal or anticipate the principal’s misuse of funds.
The nature of the harm and how it occurred – the loss of the funds because of Living Hands’ own theft and fraud after it had issued a duly authorised instruction to OMUT to release the funds – were simply not contemplated by the constitutional and statutory provisions on which the plaintiffs relied.
“They do not envisage that a financial institution in the position of OMUT should be required to compensate beneficiaries whose interests the principal failed to protect. A contrary interpretation would not only produce manifestly absurd results, but also result in the imposition of liability to an indeterminate class that cannot be justified in principle,” Judge Schippers said.
The plaintiffs failed to prove there was a legal duty on OMUT not to cause the financial loss, on account of the contractual relationship arising from the OMUT agreement and the provisions of the trust deed. “There was no contractual relationship between OMUT and the trust and its beneficiaries. That relationship was between the first plaintiff, a trust administration company, and OMUT.”
OMUT could not have foreseen the fraud
Addressing the element of negligence, the SCA said the authoritative test was outlined by the Appellate Division in Kruger v Coetzee (1966), which requires a defendant to foresee the reasonable possibility of their conduct causing harm and to take reasonable steps to prevent such harm.
The SCA said the plaintiffs did not provide any evidence to support their allegation that OMUT was negligent due to improper supervision of its staff. There was also no evidence showing that OMUT failed to act with the necessary skill, care, and diligence in the interests of the investor (Living Hands).
There was no basis for the plaintiffs’ claim that OMUT failed to notify regulatory bodies or conduct due diligence on Fidentia and FAM. There was nothing to report to any regulatory body at the time.
OMUT could not have reasonably foreseen that the funds would be misappropriated by the Fidentia wrongdoers. There was no indication or reasonable possibility that OMUT could have anticipated the fraud.
OMUT acted as required by carrying out the instructions from its client, Living Hands, according to the OMUT agreement. The SCA emphasised that OMUT was merely the management company executing the instructions provided by its client.
Chain of causation was broken
The SCA concluded that OMUT was not the legal cause of the plaintiffs’ loss. Legal causation involves determining whether the link between the negligent act and the harm is sufficiently close for liability to ensue. The court considered factors such as reasonable foreseeability, directness, and the presence of an intervening act. It found that the fraudulent conduct by Fidentia was an unforeseeable, intervening act that broke the chain of causation.
The SCA found that the loss was too remote to be recoverable from OMUT. When OMUT transferred the funds, it could not have reasonably foreseen that the Fidentia wrongdoers would commit fraud. The loss suffered by the plaintiffs was not the type of harm that OMUT could have anticipated.
Holding OMUT liable for the loss would be unreasonable and contrary to legal policy. The purpose of the remoteness rule is to limit liability to harm that is reasonably foreseeable and directly linked to the defendant’s conduct. OMUT’s actions did not meet this threshold.
