Frances Obakeng London and Others v Department of Transport, Roads and Public Works, Northern Cape and Others

The four appellants were shareholders of Canton Trading 159 (Pty) Ltd, which entered into a public-private partnership fleet agreement with the first respondent (Department of Transport, Roads and Public Works, Northern Cape) in January 2009. Clause 32.1 of the agreement required the Department's prior written consent (not to be unreasonably withheld) for Canton to cede its rights to a financier. Canton needed to enter into a Finance Direct Agreement (FDA) with a financier to fulfill its obligations under the agreement. The Department refused to consent to the FDA. Canton was subsequently liquidated and the appellants' shares became worthless. The appellants instituted a delictual claim for damages of approximately R27 million against the respondents, claiming loss of dividends they would have received but for Canton's liquidation. The liquidators of Canton confirmed they would not pursue any claims against the Department. The Department challenged the particulars of claim on various grounds through special pleas and later an application under rule 33(4) seeking determination of whether the particulars disclosed a cause of action.

• Whether the appellants' particulars of claim disclosed a cause of action in delict
• Whether shareholders can sue a third party in delict for loss suffered when the alleged wrong was committed against the company
• Whether the issue raised by the Department's rule 33(4) application was res judicata having been determined in earlier proceedings concerning special pleas
• Whether the Department owed a separate and distinct legal duty to the shareholders independently of its contractual duty to the company
• The requirements for establishing a claim for pure economic loss in South African delict

1. The appeal was dismissed with costs. 2. The period of 20 days allowed by the high court for amendment of the plaintiffs' particulars of claim (if so advised) would run from the date of this judgment (30 October 2019).

A shareholder cannot sue a third party in delict for pure economic loss (loss of dividends or diminution in share value) arising from a wrong committed against the company, unless the shareholder can establish in the pleadings that: (1) the shareholder suffered loss separate and distinct from that suffered by the company; and (2) that loss was caused by a breach of a legal duty independently owed to the shareholder (not merely the duty owed to the company). Mere conclusions of law in pleadings are insufficient - specific factual averments establishing the separate duty and distinct loss are required. The principle that a company is a legal persona distinct from its shareholders means that ordinarily only the company can sue to recover loss caused to it by breach of a duty owed to it; shareholders are precluded from suing to recover such loss in their personal capacity.

The court noted, obiter, its view that the Department should properly have raised the issue by way of exception under rule 23(1) rather than by application under rule 33(4), though it acknowledged that the objects of these two rules sometimes overlap. The court also observed that one critical factor in determining whether to recognize a remedy for pure economic loss is whether such recognition would result in "indeterminate liability". The court emphasized that in contrast to cases of physical harm, conduct causing pure economic loss is not prima facie wrongful and wrongfulness must be positively established, being recognized thus far only in limited categories of cases like intentional interference in contractual relations or negligent misstatements. The court also noted that shareholders may bring derivative actions in certain circumstances to avoid oppression, though this was not the basis of the appellants' case.

This case reinforces fundamental principles of South African company law regarding the separate legal personality of companies and the restrictions on shareholders suing in their personal capacity for wrongs done to the company. It clarifies that shareholders cannot claim in delict for pure economic loss (such as loss of dividends or diminution in share value) resulting from a breach of duty owed to the company, unless they can establish: (1) they suffered loss separate and distinct from that suffered by the company; and (2) that loss arose from a breach of a legal duty independently owed to them as shareholders (not merely their capacity as the company's representatives). The judgment also provides important guidance on pleading requirements for such exceptional shareholder claims - conclusions of law are insufficient; specific factual averments establishing the independent duty are necessary. The case is significant for its application of the rule in Foss v Harbottle and the principles from Johnson v Gore Wood in the South African context, confirming that these principles form part of South African law notwithstanding the company law distinction between the two jurisdictions.