PSG Wealth accepted it had a duty to protect the money of the plaintiff, JG, against fraud. However, it pleaded that its contracts with JG included a tacit term to the effect that it would not be liable for loss where the client’s computer system was hacked because of his negligence.
Read: Financial services firm caught in email fraud must reimburse client
PSG Wealth also denied that it breached the express terms of the contracts with JG (the “advice agreement” and the “product agreement”).
Alternatively, it pleaded estoppel, a legal principle that prevents someone from arguing something or asserting a right that contradicts what they previously said or agreed to by law.
The reasons Judge Denise Fisher rejected these defences are set out below.
Did the contracts include a tactic term?
Judge Fisher made the following observations about the tacit term:
- A tacit term is an unexpressed provision of the contract that derives from the common intention of the parties as inferred by the court from the express terms of the contract and the circumstances.
- A tacit term cannot be imported into a contract on any question to which the parties have applied their minds and for which they have made express provision in the contract.
- Thus, PSG Wealth, the defendant, would have to show that its express duty to protect its client against fraud was conditional on the client taking certain steps.
- A test commonly applied by the courts to determine the basis of which a tacit term can be imported into a contract is known as the “officious bystander test”, which emerged from the famous dictum of Lord Justice Frank Scrutton in the case of Reigate v Union Manufacturing Co (Ramsbottom) Ltd and Elton Cap Dyeing Co Ltd in 1918.
- Lord Justice Scrutton stated: “A term can only be implied if […] it is such a term that it can confidently be said that if at the time the contract was being negotiated someone had said to the parties, ‘What will happen in such a case?’, they would both have replied, ‘Of course so and so will happen; we did not trouble to say that; it is too clear.’”
- PSG Wealth sought to import a proviso into the fraud protection. It would have the term read that it must protect the funds and not pay them to an illegitimate source provided that, if the client does not take reasonable steps to make his computer system inviolable to hacking, the protection will not apply.
- “To import such a proviso into these protections would be counter-intuitive. The protection against technological fraud would be meaningless if the client had to assume an obligation to prevent hacking of its system. After all, the defendant is paid handsomely for the services provided, which include the providing of fraud protection.”
- The onus was not on JG to show that he did all he could to protect his email. “PSG Wealth relies on the tacit term and the breach thereof. It is thus for the defendant to formulate the term, to show what steps should have been taken in compliance with the term and that these steps were not taken.”
Did PSG Wealth comply with the express terms of the agreement?
Judge Fisher also rejected PSG Wealth’s defence that it complied with the express terms of the agreement.
“The deficiencies in the checking process were clear. The defendant ignored its own protocols. The checking machinery yielded the result that the account was not verified as being legitimate. The defendant, however, took the decision to override this information. This was notwithstanding that PSG client services pointed out that it had identified a risk that the account was not that of the plaintiff and that it would not bear this risk,” she said.
“At very least, one would expect that the information relating to the bank account which was conveyed by client services would have triggered a further and more careful scrutiny of the letter provided as verification of the account.”
The fact that the requested bank statement was not provided should have raised a concern.
“Responsible and careful attention” to the purported letter as against the bank account check would have revealed that the account was less than three months old, whereas the letter stated that the account was opened in 2002 – it had been held by the plaintiff for more than 15 years. “This is a glaring anomaly,” Judge Fisher said.
In her view, the fact that the account was newly opened would indicate that it might have been opened for a nefarious purpose, she said.
Estoppel defence
PSG Wealth based its defence of estoppel on two grounds:
- JG’s system was hacked and thus he, through his negligence, allowed the misrepresentations to be made; and
- When he was telephoned by JvS, an employee of PSG Wealth, JG failed to question the statement that money was to be paid into his account, thus creating the impression that he had sought such payment.
Did the client’s negligence facilitate the fraud?
PSG Wealth, relying on the case of Mosselbaai Boeredienste (Pty) Ltd v OKB Motors CC, argued that, because the indications were that the fraud emanated from the hacking of JG’s computer, JG should bear the loss.
Judge Fisher said that apart from the fact that Mosselbaai cannot be construed as an authority for the general proposition that if the fraud emanates from one party’s system, that party must bear the loss, the facts of that case were different from those in the present matter.
“In Mosselbaai, there was direct evidence that the fraud had been perpetrated internally on the appellant’s system in that the password and user-names were not changed for years and were widely known by current and ex-staff members. There was no outside or remote accessing of the system. There was also no contractual protection accorded to either party.”
Judge Fisher said the case for estoppel by facilitation must fail on two bases:
- PSG Wealth had not established that anything JG did or failed to do resulted in the hacking, and it was just as probable that the details of the email addresses of clients were obtained from the PSG Wealth’s system.
- JG had no duty to protect his email system. On the contrary, he was protected by a contract that put the duty to prevent fraud of this nature on PSG Wealth.
“Even if it had been shown by the defendant that the plaintiff was negligent, this does not absolve the defendant of his admitted contractual obligations. The proximate cause of the loss was not the hacking; it was the failure to employ the necessary and contractually prescribed vigilance when monies held in trust were sought to be paid into a different account,” she said.
Did the phone call constitute seeking confirmation?
Judge Fisher said JvS characterised the phone call she made to JG 8 October 2019 as a “courtesy call”.
The call could not be construed as seeking confirmation that money was to be transferred from JG’s investment account into a different bank account from the one on record with PSG Wealth, she said.
JG was informed that payment would be made into his account. “The plaintiff was not alarmed by this, as he probably would have been had he been told that payment was to be made out of his investment account into a FNB account.”
JG’s confirmation on a query from his FSP that money could be paid into his account could not be construed as a representation.
“The situation would be different if the telephone communication was directed at confirming the plaintiff’s new bank account details. Had this been done and the plaintiff, for some reason, confirmed the account to be his, it would arguably be the case that the defendant must be found to have taken all reasonable steps to verify the account and that it was thus not in breach of its contract. The case would thus not be decided on the question of the plaintiff’s negligent misrepresentation but in contract.”
The onus was on PSG Wealth to show that the representation was clear and unequivocal and that JvS reasonably understood the representation to mean that JG’s money could be paid into a new bank account.
“The test for representation by conduct is whether the representor should reasonably have expected that the representee may be misled and whether the representee acted reasonably in construing the representation. The defendant failed to establish these aspects on the facts,” Judge Fisher said.
