Old Mutual Unit Trust Managers Limited v Living Hands (Pty) Ltd and Others

The Living Hands Umbrella Trust (the Trust) held investments worth approximately R1.24 billion in collective investment schemes managed by OMUT. The Trust's sole trustee was Living Hands (Pty) Ltd (the first plaintiff), which assumed this role after purchasing Mercantile Asset Trust Company's administration business in 2002. On 5 October 2004, Fidentia Holdings purchased the entire share capital of the first plaintiff for R93 million. On 15 October 2004, Fidentia Asset Managers (FAM), a subsidiary of Fidentia Holdings, attempted to liquidate R150 million of the Trust's investments. OMUT refused this instruction pending proper authorization from its client. On 19 October 2004, Fidentia Holdings became the first plaintiff's sole shareholder and appointed new directors. The first plaintiff then instructed OMUT to call up its entire investment portfolio with immediate effect. Between 22 October and 10 November 2004, OMUT paid out all funds totaling R1,130,319,447.32 to the first plaintiff's designated bank account as contractually required. Following this transfer, the first plaintiff paid the funds to Fidentia Holdings and its subsidiary, where they were misappropriated by the 'Fidentia wrongdoers' who ran a Ponzi scheme. In February 2007, the Western Cape High Court placed FAM and Fidentia Holdings under curatorship. Curators recovered R403,806,196.00 but incurred expenses of R100,071,674.00, leaving a distribution of R272,689,727.00 to the plaintiffs. The plaintiffs as trustees claimed the balance of approximately R854,654.00 from OMUT in delict, alleging OMUT negligently failed to safeguard the funds and prevent their misappropriation.

• Whether OMUT owed a legal duty to the Trust and its beneficiaries to safeguard funds after receiving a duly authorized instruction from its client to call up investments
• Whether OMUT acted wrongfully in paying out the funds in accordance with its contractual obligations to the first plaintiff
• Whether OMUT was negligent in failing to take steps to prevent the misappropriation of funds by the first plaintiff's directors
• Whether OMUT's conduct was the factual and legal cause of the loss suffered by the Trust
• Whether statutory provisions in CISCA, the Protection of Funds Act, the Trust Property Control Act, and sections 27 and 28 of the Constitution imposed a delictual duty on OMUT to safeguard the funds
• Whether the court should impose liability for pure economic loss in circumstances where the primary cause of loss was criminal conduct by the controlling mind of the plaintiff

1. The appeal is upheld with costs, including the costs of three counsel. 2. The order of the court below is set aside and replaced with the following: 'The plaintiffs' claim is dismissed with costs, including the costs of three counsel.'

A financial institution that complies with a duly authorized instruction from its client to call up investments and pay out funds in accordance with contractual obligations does not act wrongfully or negligently, and does not cause loss, where the loss results from subsequent misappropriation of those funds by the client's own directors. The statutory duties imposed on managers of collective investment schemes by CISCA, the Protection of Funds Act, and the Trust Property Control Act are owed to the investor/client with whom the manager has a contractual relationship, not to ultimate trust beneficiaries. These statutory provisions do not impose a duty on the manager to safeguard funds against misappropriation by the client itself after those funds have been lawfully paid out pursuant to a valid instruction. Where pure economic loss is claimed based on an omission, wrongfulness must be positively established by showing that the defendant owed the plaintiff a legal duty not to cause the harm. This requires consideration of statutory interpretation, policy considerations, foreseeability, and whether it is reasonable to impose liability. The court will not impose delictual liability where: (1) parties have delineated their relationship contractually; (2) the nature and manner of harm (theft by the plaintiff's own agents) is not contemplated by relevant statutes; (3) the harm was not foreseeable; (4) the plaintiff is the author of its own misfortune; and (5) imposing liability would be unreasonable and contrary to public policy. For factual causation in omission cases, the plaintiff must prove that but for the omission, the loss would not have occurred. Speculative assertions about what regulatory authorities might have done are insufficient. For legal causation, loss is too remote where it results from unforeseeable intervening criminal conduct by the plaintiff itself.

The court observed that FAM was entitled to manage the portfolio as it was an approved portfolio manager under the Stock Exchange Control Act and Financial Markets Control Act, and fell into a category of entities whose details were substantially known and credentials approved by the Financial Services Board, allowing it to follow a shortened application process under the FAIS Act. The court noted the 'extraordinary feature' of the case where the undisputed primary cause of loss was criminal conduct by individuals comprising the controlling mind of the plaintiff itself. The court commented that the proposition that liability should be imposed on OMUT when funds were repaid in accordance with the agreement and a duly authorized instruction 'needs merely to be stated to appreciate its absurdity.' The court made general observations about the purpose of the Protection of Funds Act being to enable the Registrar to protect funds and trust property, and about the standard of conduct required under section 2 being focused on duties owed to the entity on whose behalf funds are held and administered. The court noted ironically that the Trust Deed protected trustees against loss except for personal dishonesty or gross misconduct, yet the first plaintiff sought to impose liability on OMUT without any dishonesty or misconduct on OMUT's part. The judgment contains broader statements about contractual autonomy and the law's hesitation to 'scrub out the lines' parties have laid down in their contractual dealings by superimposing delictual liability, referencing the constitutional recognition of contractual autonomy in Barkhuizen.

This case provides important guidance on the limits of liability for pure economic loss in South African law, particularly for financial institutions. It confirms that: (1) There is no general right not to be caused pure economic loss and wrongfulness must be positively established. (2) Contractual boundaries should be respected and courts should hesitate before superimposing delictual liability where parties have delineated their relationship contractually. (3) Statutory provisions do not automatically create delictual duties—interpretation must consider whether the statute contemplates civil liability, the nature and manner of harm, and policy considerations. (4) Financial institutions do not owe duties to ultimate beneficiaries beyond their contractual counterparties unless clearly established by statute or policy considerations. (5) The author of its own misfortune cannot impose liability on others who acted in accordance with lawful contractual instructions. (6) Intervening criminal conduct by the plaintiff itself breaks the chain of causation. The case reinforces the reluctance of South African courts to expose defendants to liability in an indeterminate amount for an indeterminate time to an indeterminate class, particularly in pure economic loss cases. It also demonstrates the proper application of the Steenkamp factors in assessing wrongfulness in statutory breach cases.