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South African Law • Jurisdictional Corpus
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KPMG Chartered Accountants (SA) v Securefin Limited and Another

Citation(644/07) [2009] ZASCA 7 (13 March 2009)
JurisdictionZA
Area of Law
Contract LawLaw of Evidence
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Professional Negligence

Facts of the Case

Securefin Limited, a Jersey-incorporated company, entered into a scheme to purchase and re-engineer Old Mutual endowment policies before demutualisation in January 1998. The scheme involved purchasing policies from policyholders who wanted to terminate their policies, re-engineering them by changing maturity dates and insured amounts to increase value. KNA Insurance & Investment Brokers (Pty) Ltd was appointed as procurement agent to acquire policies for Securefin. BHF Bank AG agreed to finance the acquisitions, requiring security in the form of a cession of the re-engineered policies and insisting that KPMG Chartered Accountants (SA) verify the transactions. On 12 June 1998, Securefin and KNA entered into a procurement contract which required policies to mature before 1 January 2001 (the date the bank loan facility would terminate). On 26 June 1998, KPMG sent a letter to Securefin undertaking to act as verification agent. The letter attached the procurement contract as Annexure A and set out KPMG's obligations including verifying tranche consideration. The agreement required KPMG to verify the acquisition price of policies, calculate commissions, and verify and discount future premiums. David Alexander, the moving force behind KNA, manipulated the scheme through false information causing losses of approximately US$40 million. KPMG failed to independently verify acquisition prices, instead accepting KNA's word. Alexander provided false information resulting in Securefin overpaying KNA. Securefin sued KPMG for breach of contract, alleging KPMG failed to verify that policies matured before 1 January 2001 and failed to independently verify acquisition prices.

Legal Issues

  • Whether KPMG was contractually obliged to ensure policies matured before 1 January 2001
  • Whether the verification contract was void due to error (iustus error) regarding the obligation to verify acquisition prices
  • Whether KPMG was entitled to rely on information from KNA rather than independently verifying acquisition prices
  • The admissibility of expert evidence in the interpretation of contracts
  • Whether an alleged amendment to the verification contract was validly concluded

Judicial Outcome

The appeal was dismissed with costs, including the costs of three counsel. The declaratory order of the court below in favor of the respondents was upheld.

Ratio Decidendi

The binding legal principles established are: (1) A person who signs a document is presumed to know its contents; this presumption is rebuttable but requires credible evidence beyond mere assertion. (2) In contract interpretation, the parol evidence (integration) rule prohibits extrinsic evidence from contradicting, adding to, or modifying the meaning of a document intended as a complete memorial of a jural act. (3) Contract interpretation is a matter of law for the court, not a question of fact for witnesses. (4) Expert evidence is inadmissible on the question of what a contract means; experts may explain technical terms but may not be asked what a document means to them or be cross-examined on the meaning of documents. (5) Evidence to establish context or factual matrix of a contract must be used 'as conservatively as possible'. (6) A professional verification obligation requires independent verification of facts and cannot be discharged by merely accepting information from the party whose activities are being verified without independent corroboration. (7) An acceptance of a contractual offer must be unqualified and comply with the terms of the offer; a party cannot accept only part of an indivisible offer.

Obiter Dicta

The court made several important observations: (1) Trial courts are justified in ignoring provisional objections to evidence if they interfere with the flow of the case, but substantive objections that could affect the scope of evidence should be decided immediately, not postponed. (2) The distinction between 'background circumstances' and 'surrounding circumstances' is artificial and both terms are vague and confusing; the terms 'context' or 'factual matrix' ought to suffice. (3) The court criticized the practice of leading extensive expert evidence on contract interpretation, noting it was 'sadly and at some cost ignored by all' and that the debate 'imploded during oral argument' when no party ultimately relied on such evidence. (4) The court quoted with approval Lord Tomlin's observation from 1935 that allowing expert evidence on interpretation results in wasted time, wasted money, and accumulation of material that makes the judge's task more difficult, observing that 'in 1935, but the chaff is still heaping up, the undesirable practice keeps growing and courts make no effort to curtail it.' (5) The court noted that whether a tacit term can be inferred depends on interpretation of the document and not on evidence. (6) The court observed that the procurement contract 'made perfect business sense' despite some inconsistencies resulting from changes during preparation of various drafts, and it was unnecessary to 'deconstruct' the document when it was not alleged to be void for uncertainty.

Legal Significance

This case is significant in South African law for establishing important principles regarding the admissibility of evidence in contract interpretation. The judgment reinforces that: (1) the parol evidence rule remains part of South African law and should be enforced; (2) interpretation is a matter of law for the court, not for witnesses, whether expert or factual; (3) expert witnesses may not testify on what a contract means to them or be asked to interpret contractual provisions; (4) the distinction between 'background circumstances' and 'surrounding circumstances' is artificial and the terms 'context' or 'factual matrix' should be preferred; (5) context should be used 'as conservatively as possible' in interpretation. The case also emphasizes the presumption that a person who signs a document is presumed to know its contents, rebuttable only with credible evidence. The judgment serves as a strong judicial criticism of the 'growing practice' of leading extensive expert evidence on contract interpretation, warning that trial courts should 'make strenuous efforts to put a check' on this practice. The case is also important in the law of professional negligence, establishing that professional verification obligations require independent verification and cannot be discharged by merely relying on information provided by the party whose activities are being verified.

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