THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Reportable
Case no: 385/13

In the matter between:

LA HEALTH MEDICAL SCHEME

Appellant
and
JOHANNES PETRUS LOUW HORN

1st Respondent
LYDIA ADAMS

2nd Respondent
LENA DOUW

3rd Respondent
KATHARINA SUSANNA HOLTZHAUZEN

4th Respondent
BELINDA KARSTEN

5th Respondent
BASIL PAUL RUGHUBAR

6th Respondent
DIANA THERON

7th Respondent
LOVINA ELIZABETH YOUNG

8th Respondent
CAPE JOINT RETIREMENT FUND

9th Respondent

Neutral citation: LA Health Medical Scheme v Horn (385/13) [2014]
ZASCA 72 (29 May 2014)
Coram:
Navsa, Maya, Wallis and Saldulker JJA and Mathopo AJA.
Heard:
15 May 2014

Delivered: 29 May 2014
Summary: Pension fund – interpretation of rules – fund established for
local authorities – employer not a local authority – membership of fund
anomalous – redundancy or retrenchment benefit negotiated by local
authorities in collective bargaining forum – employer not party to those
negotiations and not agreeing to provide those benefits – rules of fund
incorporating those benefits – in context rules applying only to local
authorities and not other employers.

ORDER

On appeal from: Western Cape High Court (Saldanha J, Baartman and
Louw JJ concurring, on appeal from the High Court (Erasmus J)):
1 The appeal is upheld with costs.
2 The order of the court below is altered to read:
‘The appeal is upheld with costs and the order of the court
below is altered to one dismissing the application with costs.’

JUDGMENT

Wallis JA (Navsa, Maya, Saldulker JJA and Mathopo AJA
concurring)
[1] The appellant, LA Health Medical Scheme (LA Health), operates a
medical scheme for local authorities in the Western Cape. The
respondents were formerly employed by it and, as a term of their
contracts of employment, were members of the Cape Joint Retirement

Fund (the Fund). On 1 January 2005 Discovery Health (Pty) Ltd
(Discovery) took over the administration of claims against LA Health.1 In
terms of the provisions of s 197(2)(a) of the Labour Relations Act 66 of
1995 the respondents were then automatically transferred to Discovery.
They contended that they thereby became entitled to redundancy or
retrenchment benefits under the rules of the Fund. 2 The claim was upheld
by Erasmus J in the Western Cape High Court and on appeal by the full
court (per Saldanha J, with the concurrence of Baartman and Louw JJ).3
The further appeal is with the leave of this court.

[2] The Fund was established in 1996 under the Local Authorities
(Pension Funds) Ordinance 23 of 1969 (Cape) as a successor to the Cape
Joint Pension Fund. That fund was established for employees of local
authorities in what was originally the Cape Province, initially in terms of
the Local Government Superannuation Ordinance 15 of 1943 (Cape).
Ordinance 23 of 1969 defined a local authority and the definition
expressly included LAMAF. The definition of ‘local authority’ in the
rules of the Cape Joint Pension Fund likewise expressly included
LAMAF. The respondents’ membership of the Fund was accordingly a
concession and anomalous because LA Health was not itself a local
authority, but such membership had been permissible under the rules of
its predecessor. Apparently this situation ended in 1994 as a result of the
intervention of the Commissioner for Inland Revenue.4 However, existing

1 This coincided with a change in the identity of LA Health, which had previously operated under the
name LAMAF Medical Scheme, but nothing turns on this and it is convenient to refer to it by its
current name.  LAMAF was established in terms of the Local Authorities (Medical Aid Fund)
Ordinance 25 of 1967 (Cape).
2 The Fund is the Ninth Respondent in the appeal but it has throughout abided the decision of the court.
3 An application by similarly situated employees that came before Thring J in the same court failed.
4 At that time the receipts of pension funds were exempt from income tax in terms of s 10(d) of the
Income Tax Act 58 of 1962. Paragraph (a) of the definition of ‘pension fund’ in s 1 of that Act
included all pension funds serving employees of local authorities so that the Fund’s predecessor’s
income and accruals were automatically exempt from income tax. Other pension funds enjoyed a
similar exemption if approved by the Commissioner, who was entitled to impose conditions on that

members were permitted to retain their membership of the Fund. This
was catered for in the rules of the Fund by including in the definition of
‘local authority’ not only local authorities properly so called, which
constituted the bulk of employers of members, but also any other body
‘constituted before 1995 and who is a participant of the FUND’.5 In the
result, on 31 December 2004, the respondents were members of the Fund
and LA Health was the employer for the purpose of discharging the
obligations imposed on employers under the rules. In general it was to be
treated on the same footing as employers that were local authorities and it
would owe the same obligations to the Fund as those employers. In terms
of s 13 of the Pension Funds Act 24 of 1956 the rules of the Fund were
binding upon LA Health as the employer at the relevant time.

[3] The issue between the parties is whether, on being transferred to
the employ of Discovery, the respondents were entitled to the benefits
provided for in rule 7.1A(1), which reads as follows:
‘REDUNDANCY OR RETRENCHMENT
The
MEMBER'S
conditions
of
SERVICE
provide
for
an
additional
redundancy/retrenchment benefit to be paid by the LOCAL AUTHORITY.
Redundancy/retrenchment benefit prior to 28 February 1999
If a MEMBER leaves the SERVICE as a result of his having been declared redundant
or having been retrenched and he/she has at least 10 years’ SERVICE, he/she shall be
entitled to:
(a)
the MEMBER'S SHARE;
Plus
(b)
an amount payable by the LOCAL AUTHORITY concerned, …

approval. Accordingly a ‘mixed membership’ fund having both local government and non-local
government employees as members enjoyed an exemption from liability for income tax without
obtaining the approval of the Commissioner. Unsurprisingly the Commissioner intervened in that
situation.
5 Para (b) of the definition of ‘LOCAL AUTHORITY’ in rule 1.7 of the Fund rules. There is nothing to
indicate how many employers, other than LA Health, fell into this  category.

[The rule sets out the benefits payable thereunder in tabular form according to a
sliding scale that runs from 1993 to 2006]
Redundancy/retrenchment benefit from 1 March 1999
If a MEMBER'S SERVICE is terminated owing to a reduction in, or reorganisation of
staff, or to the abolition of his post, or in order to effect improvements in efficiency or
organisation (which includes termination of SERVICE in order to establish equity in
the workplace or to implement affirmative action programs), or as the result of his
having been declared redundant or having been retrenched, on receipt of advice from
the LOCAL AUTHORITY, he shall be entitled to:
(a)
the MEMBER'S SHARE;
PLUS
(b)
an amount payable by the LOCAL AUTHORITY concerned (and for which it
alone shall be liable to the member), being the lesser of;
(aa)
the difference between the age of 65 years and his age on his nearest birthday,
multiplied by 8%, multiplied by the MEMBER’S SHARE:
OR
(bb)
100% of the MEMBER’S SHARE.
…
This benefit will change if the LOCAL AUTHORITY'S redundancy/retrenchment
policy changes in terms of a collective bargaining agreement.’ (My insertion.)

[4] The relevant part of the rule for present purposes was the second
section headed “Redundancy/Retrenchment benefit from 1 March 1999’.
As is apparent from its terms, if the respondents’ claims were valid, LA
Health would be obliged to pay those claims. The amount involved was
of the order of R3 million. The respondents’ situation, on being
transferred to the employ of Discovery, fell within the language of this
part of the rule, because their posts as employees of LA Health had been
abolished. 6 However, LA Health contended that the benefit was only
available to employees who could show that their contracts of

6 Manning v Union Government 1922 AD 459 at 464; Union Government v Schierhout 1925 AD 322 at
334 (per Innes CJ) and 341 (per Solomon JA); Telkom SA Limited and others v Blom and others 2005
(5) SA 532 (SCA).

employment provided for that benefit and the respondents’ contracts of
employment did not do so.

[5] The appeal turns on the proper interpretation of the rule. That
involves a consideration of the language of the rule read in the light of its
context, apparent purpose and the factual background against which it
came into existence.7

[6] Central to the argument on behalf of LA Health were the
introductory words of the rule, namely:
‘The
MEMBER'S
conditions
of
SERVICE
provide
for
an
additional
redundancy/retrenchment benefit to be paid by the LOCAL AUTHORITY.’
It contended that the effect of these words was to refer to the conditions
of employment of the claimants in accordance with the definition of
‘service’ in the rules and, as the conditions of service of the respondents
did not make provision for the payment of these redundancy benefits, a
necessary pre-condition to their entitlement to the benefits was absent.

[7] The respondents, for their part, contended that the introductory
words were no more than ‘a recordal of a factual situation’. Building on
this foundation they submitted that the reference in the introductory
words to an additional benefit referred to a redundancy or retrenchment
benefit payable by the local authority in terms of an obligation falling
outside the ambit of the rules of the Fund and not to any part of the
benefit embodied in the rule itself. Their argument found favour with the
court below which concluded its judgment by saying that:
‘…inasmuch as the first sentence of Rule 7.1A(1) amounts to no more than a recordal
of a factual situation as contemplated between the members of the Fund and their

7 Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) para 18.

respective employers the respondents were correctly found by Erasmus J to have been
entitled to the benefit under Rule 7.1A(b) of the Rules of the Pension Fund’

[8] In dealing with these opposing contentions it is helpful to trace the
genesis of the rule. When the fund was established in 1996 it had a rule
7.1(a)(1) that consisted of that portion of the current rule that appears
under the heading ‘Redundancy/retrenchment benefit prior to 28
February 1999’. In 1999 that rule was replaced by the portion of the
current
rule
that
now
appears
under
the
heading
‘Redundancy/retrenchment benefit from 1 March 1999’. It was also
numbered as rule 7.1(a)(1). For some unexplained reason, when the rules
were consolidated in 2002, both the original rule and the rule as amended
in 1999 were incorporated in the consolidated rule, notwithstanding that
the earlier version had ceased to have any practical application. In
addition, the headings were introduced, as were the introductory words on
which LA Health relies and the postscript that also has a bearing on the
construction of the rule. The numbering was changed to rule 7.1A(1)

[9] It is obvious that the background to the introduction in 1996 of the
rule in its original form was the massive restructuring of local authorities
then taking place as a result of the advent of democracy in South Africa.
Unlike the previous dispensation, when large areas of the country did not
fall within local authority boundaries, the entire country was now
included in local authority areas and fell within the jurisdiction of the
newly established local government structures. 8 In addition there was
considerable consolidation of existing local government structures to

8 Local Government Transition Act 209 of 1993 as amended especially by the Local Government
Transition Act Second Amendment Act 89 of 1995.

create new structures.9 In the process problems arose in dealing with the
placement of existing staff in new positions within local authorities and
extensive rationalisation of staff had to occur. To illustrate the type of
problem, prior to 1994 every local authority would have had a town clerk
and a town treasurer and other employees in various positions at every
level of employment. The transitional legislation preserved their status as
employees. The new consolidated local authorities then found that at
every level they had in their employ a number of people filling nominally
the same post. Some of these would be surplus to their needs and others
would have to be suitably placed within new municipal structures. Not
only did this have to be resolved by way of rationalisation of staff but
affirmative action policies had to be implemented to start overcoming the
history of a racially stratified workforce in the area of local government.

[10]  In that process of rationalisation there would inevitably be
redundancies and retrenchment. Bearing in mind that the Fund’s members
were overwhelmingly employees of local authorities in the true sense,
rule 7.1(a)(1) in its original form was manifestly directed at dealing with
that situation. The Fund itself was not in a position to assist in that regard,
because it had not received the necessary contributions from employers
and members to fund redundancy or retrenchment benefits. All that it
could do when a member lost their employment and ceased to be a
member was to pay the withdrawal benefit provided for in terms of rule
7.1. This involved paying the withdrawing member their member’s
interest, which would be determined in accordance with Rule 2.2.1.

9 According to the website of SALGA (the South African Local Government Association), the body
established and recognised in terms of s 163 of the Constitution as read with the Organised Local
Government Act 52 of 1997, there were previously over 900 local authority bodies of various types in
South Africa and this has now been reduced to 278, all of which are members of SALGA.

[11] Rule 7.1(a)(1) dealt with this by incorporating a redundancy or
retrenchment benefit in the rules in addition to the withdrawal payment.
That payment was to be funded entirely by the local authority. The
benefit provided that a person who was rendered redundant or retrenched
would receive, in addition to the withdrawal payment, an amount
calculated as a proportion of the withdrawal payment, but determined in
accordance with a sliding scale. The effect of this scale was that the
benefit would expire after 10 years, by which time it was no doubt
anticipated that the process of restructuring local authorities would be
complete and the need for the benefit would fall away.

[12] The incorporation of this arrangement in the rules of the Fund
created considerable anomalies. Counsel for the Respondent accepted that
it was a peculiar situation. First, it is not apparent that the payment of
redundancy or retrenchment benefits was a permissible function for a
pension fund, given the purposes of a pension fund as set out in the
definition of a ‘pension fund organisation’ in s 1 of the Pension Funds
Act 24 of 1956. Second, unlike every other benefit provided to members
under the rules of the Fund, the claim to receive this benefit lay only
indirectly against the Fund itself, because the Fund was under no
obligation to pay the benefit to the member or to seek to recover the
amount of the benefit from the employer. Unless the employer had paid
the amount of the benefit to the Fund the member had no claim against
the Fund. Third, the origin of the rule lay therefore in an agreement or
agreements external to the Fund in which local authorities agreed to pay
and fund these benefits. Lastly, that demonstrated that in reality, even
though the benefit was ostensibly provided for in terms of its rules, the
Fund was no more than a conduit through which redundancy or
retrenchment benefits were to be channelled from employers to those

employees who were rendered redundant and retrenched in the course of
the rationalisation process. Presumably this course was chosen for the
income tax advantages it conferred on employees or because it made
available to members alternative uses for their redundancy or
retrenchment benefits that would otherwise not have been available. Be
that as it may, however, the Fund was the vehicle through which these
arrangements were implemented and it co-operated by amending its rules
to accommodate them.

[13] When the Rule was amended in 1999 it was thought necessary to
broaden its language somewhat, without altering any of the features
identified above. As worded at that stage it continued to refer to the on-
going rationalisation of local authority staff structures with reference to a
person’s service being terminated:
‘… owing to a reduction in, or reorganisation of staff, or to the abolition of his post,
or in order to effect improvements and efficiency or organisation (which includes
termination of SERVICE in order to establish equity in the workplace or to implement
affirmative action programs)’.
This language, as is apparent from referring to the early decisions
mentioned in footnote 6, traces its origins to the rationalisation of the
public service at the time of Union in 1910. However, the reference to a
benefit being payable on redundancy or retrenchment was now stated in
the alternative to a termination arising from rationalisation and the time
limitation provided in the original rule was removed. Accordingly the
rule now covered a wider area of operation than it had originally done.
However, the benefit over and above the member’s interest (which
member’s interest all members were entitled to on withdrawal for any
reason) continued to be funded by the employer and not the Fund.

[14]     When the rules were consolidated in 2002 the provision that the
benefit contained in the rule ‘will change if the local authority’s
redundancy/retrenchment policy changes in terms of a collective
bargaining agreement’ was added. This signalled clearly that the contents
of the rule in its various forms from 1996 onwards arose from the process
of collective bargaining between local authorities and their employees
through the medium of the South African Local Government Bargaining
Council, which was established on an interim basis in 1997 and was
registered in 2001. 10  SALGA represents all local authorities in this
collective bargaining forum. In the area where the Fund operated it was
decided to make use of the Fund as a vehicle for channelling these
benefits from employers to retrenched employees, but that did not alter or
disguise the fact that these were benefits that local authority employers
agreed to provide to their employees.

[15] That being so the immediate question is whether the rule so
imported into the rules of the Fund applied to employers, such as LA
Health, that had played no part in this process and were not confronted
with the same problems. The respondents answer that question in the
affirmative by relying upon the fact that the rules ostensibly apply to all
members of the Fund without distinction. In argument they pointed to the
definition of ‘local authority’, which by extension included LA Health
under the broad umbrella of that expression, and contended that the
obligations under the rule were obligations placed on the local authorities
so defined. But that is to overlook that the definition of local authority in
rule 1.7 applies only ‘where the context so requires’.11 Does the context

10 Prior to 1997 bargaining took place in the National Labour Relations Forum.
11 This accords with ordinary principles in regard to the application of a definition clause in a statute or
other written instrument. Town Council of Springs v Moosa 1929 AD 401 at 417; Hoban v Absa Bank
Ltd t/a United Bank and Others 1999 (2) SA 1036 (SCA) para 18.

of this rule require us to apply the extended meaning of ‘local authority’
to include LA Health as a local authority bound by the obligations under
rule 7.1A(1)? In my view it does not.

[16] I have already set out the background context to the rule.
Everything in that background suggests that its concerns were with the
situation of employees of local authorities in the conventional sense and
not in the extended sense of the definition. LA Health’s continued
participation in the Fund was based on a fiction that it was a local
authority. Second, the fact that the Fund is merely a conduit for the
payment of benefits that some employers had agreed to pay by virtue of
negotiations in another forum, indicates that it was only intended to apply
to those employers who had made that commitment. It would be strange,
were the Fund’s agreement to assist some employers to provide benefits
to employees in a redundancy or retrenchment situation, to have as its
consequence that other employers, who had not agreed to provide such
benefits, nonetheless became subject to an obligation to provide them.
Simply put, in terms of the respondents’ view of the rules, LA Health is
required to pay a benefit to them because local authorities have agree to
give that benefit to their employees. The concession of participation in
the Fund afforded to entities such as LA Health provided them with the
means of offering pension fund membership to their employees. It would
require very clear provisions in the rules before it could be understood in
addition to enable the Fund to create obligations owed directly by those
employers to their employees not flowing from their membership of the
Fund.

[17] Third the postscript, which provides that the rule will change if the
local authority alters its redundancy or retrenchment policy by way of a

collective agreement, renders the rule unworkable if it is sought to apply
it to multiple employers with varying redundancy and retrenchment
policies determined by way of collective agreements. There is no
difficulty with this provision if the Fund is dealing with local authority
employers who all bargain collectively in the same forum. However, once
the possibility of employer members entering into different collective
agreements with different trade unions is introduced, one would never
know whether or not the rule applied to a particular employer member. In
this case the evidence shows that LA Health’s conditions of service,
including a ‘Retrenchment/redundancy policy’ were introduced in 2003
and had been negotiated with a representative trade union, although there
was some issue on the papers whether the respondents were members of
that trade union. Other than a cryptic provision that the employer ‘may
provide’ that the affected employee be retired in terms of the pension
fund rules, which the employer in this case did not provide, there is no
reference to the benefit in rule 7.1A(1). Does that agreement serve to
exclude the operation of the rule in this case? One cannot tell. If the
collective agreement made provision for some severance benefit other
than that contained in the rule, would that operate to exclude the benefits
under the rule? Counsel was unable to say how the rule would work in
that environment. That illustrates that the postscript only makes sense in
the context of the collective bargaining arrangements applicable to local
authorities.

[18] Finally I return to the introductory words. The respondents
contended that they were a mere recordal of a factual situation. I find this
difficult to understand. As a matter of fact they did not record anything in
relation to the conditions of service of employees of LA Health. When
counsel was asked what significance the provision had if what it recorded

was factually incorrect, he responded that the recordal was then
inconsequential. But that cannot be the case. It results in these
introductory words being disregarded in the process of interpretation of
the rule and that is not permissible. The introductory words only make
sense if they refer to the local authorities that had agreed to provide these
benefits to their employees in terms of a collective agreement. In that
event the terms of the collective agreement would have been incorporated
in the employees’ contracts of employment by virtue of the provisions of
s 23(3) of the Labour Relations Act.

[19] For those reasons it seems to me that when rule 7.1A(1) is viewed
in context the references to the ‘local authority’ in that rule can only be
construed as references to local authorities properly so called and not to
other employer members of the fund falling within the extended
definition of that term in para (b) of the definition of ‘local authority’.
That being so the rule did not apply to LA Health and its employees and
the respondents were not entitled when transferred to Discovery to claim
a redundancy or retrenchment benefit under the rule.

[20] It was suggested in argument that this would leave employees of
LA Health, and any other members of the Fund who were similarly
situated, empty handed if they were retrenched. However, that is
incorrect. They would still be entitled to their member’s share in terms of
rule 7.1(1) and that benefit was in fact paid to them. The amounts were
not insubstantial. The structure of rule 7.1A(1), in all the forms it took
over the years, was that the retrenched member would receive their
member’s share plus the benefit provided by the local authority. This is
the ‘additional’ benefit referred to in the introductory words and it was so
understood by the respondents who had all received their member’s

shares on withdrawal from the Fund. The relief they sought in the notice
of motion was payment of the additional benefit provided under the rule,
which payment was to be funded by LA Health. Rule 7.1A(1) did not add
anything to their existing entitlement to a member’s share as a withdrawal
benefit under rule 7.1(1), nor did the lack of entitlement to the additional
benefit detract from the entitlement to the withdrawal benefit.

[21] For those reasons the appeal must succeed and the following order
is made:

1 The appeal is upheld with costs.
2 The order of the court below is altered to read:
‘The appeal is upheld with costs and the order of the court
below is altered to one dismissing the application with costs.’

M J D WALLIS
JUDGE OF APPEAL

Appearances

For appellant:
R G Goodman SC
Instructed by:
Fairbridge Arderne & Lawton Inc, Cape Town
McIntyre & Van der Post, Bloemfontein

For respondent:
A Heyns (Heads of argument prepared by J Olivier SC
and A Heyns)

Instructed by:

Jardim Bekker Inc, Cape Town

Symington & De Kok, Bloemfontein.