THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Not-Reportable

Case no: 1035/2018
In the matter between:

FRANCES OBAKENG LONDON
FIRST APPELLANT
MOTSAMI PETRUS RANTHO
SECOND APPELLANT
MALEBOGO LOUIS MOKWENA
THIRD APPELLANT
NTHABISENG CONSTANCE KEMANE
FOURTH APPELLANT

and

DEPARTMENT OF TRANSPORT, ROADS
AND PUBLIC WORKS, NORTHERN CAPE
FIRST RESPONDENT
PREMIER OF THE NORTHERN CAPE
SECOND RESPONDENT
MEMBER OF THE EXECUTIVE COUNCIL
OF THE NORTHERN CAPE FOR
TRANSPORT, ROADS AND PUBLIC WORKS
THIRD RESPONDENT

Neutral citation:  London & others v Department of Transport, Roads and Public Works,
Northern Cape & others (1035/2018) [2019] ZASCA 144 (30 October 2019)

Coram:
Petse DP, Cachalia, Tshiqi and Mokgohloa JJA and Tsoka AJA

Heard:
11 September 2019

Delivered:
30 October 2019

Summary:
Delict – action for damages by shareholders – necessary averments – alleged
breach of contractual duty owed to a company resulting in its liquidation – shareholders
suing the other contracting party for damages representing loss of dividends – no allegation
in particulars of claim that shareholders’ loss separate and distinct from that suffered by the
company and caused by breach of a legal duty independently owed to shareholders –
exception that particulars of claim not disclosing a cause of action rightly allowed by high
court.

ORDER

On appeal from: Northern Cape Division of the High Court, Kimberley (Vuma AJ sitting as
court of first instance):
The appeal is dismissed with costs.
The period of 20 days allowed by the high court for the amendment of the plaintiffs’
particulars of claim, if so advised, will run from the date of this judgment.

JUDGMENT

Petse DP (Cachalia, Tshiqi and Mokgohloa JJA and Tsoka AJA concurring):

Introduction
[1] The four appellants, who are business persons residing in Kimberley, Northern Cape,
instituted a delictual claim for damages in the order of R27 million against the three
respondents in the Northern Cape Division of the High Court, Kimberley (the high court).
The first respondent is the Department of Transport, Roads and Public Works of the
Northern Cape (the Department). The second respondent is the Premier of the Northern
Cape (the Premier) and the third respondent is the Member of the Executive Council for
Transport, Roads and Public Works of the Northern Cape (the MEC). Since their interest in
this litigation is identical, I shall refer to them collectively as the Department.

[2] The litigation between the parties has a long and tortuous history. This appeal is the
fourth legal skirmish in which the parties have become embroiled. The first three of those
skirmishes happened in the high court.

[3] The appellants’ claim (described in more detail below) is said to arise from a legal
duty owed to them by the Department following an alleged breach of its contractual
obligations to an entity known as Canton Trading 159 (Pty) Ltd (Canton), in which the

appellants were shareholders. Canton was subsequently liquidated and the appellants’
shares rendered worthless.

Factual background
[4] It is necessary to recount the facts relating to the history of this dispute in order to
understand the issues in this appeal. In February 2012, the appellants instituted an action
against the Department. The particulars of claim, amongst others, made the following
averments:
‘9
On or about 27th January 2009 at Kimberley the company and the first defendant entered
into a public-private partnership fleet agreement (the agreement); a copy of the agreement
is annexed hereto marked A.

. . .
10.3
Clause 32.1 of the agreement provided as follows:
Neither party shall be entitled to assign or otherwise transfer the benefits or obligations of all
or any part of this agreement without the prior written consent of the other party, which
consent shall not be unreasonably withheld. Notwithstanding the aforesaid, the private party
may cede its rights under this agreement to its principal financing bank (principal financier)
as security for performance by the private party of its obligations to such principal financier
in respect of loan funding to be made available by the principal financier in respect of this
agreement, provided that the private party receives prior written approval of DTRPW/User
Departments and such written approval shall not be unreasonably withheld by DTRPW/User
Departments.
The company could not fulfil its obligations in terms of the agreement unless it was able to
assign or otherwise transfer the benefits or obligations of all or any part of the agreement to
a financier or cede its rights under the agreement to a financier as security for the
performance by the company of its obligations to such financier in respect of loan funding to
be made available by the financier in respect of the agreement.
The company was able to obtain such finance from the financier, provided that the company
entered into an agreement with the financier referred to as a Finance Direct Agreement
(FDA), which would afford security to the financier.
In terms of clause 32.1 of the agreement the company was not entitled to enter into such a
FDA without the consent of the first defendant, which consent was not to be unreasonably
withheld.
The first defendant refused to give such consent to the FDA.

It was clear that the Department had no reasonable basis for withholding such consent. By
letter dated 10th May 2010 Attorneys Weavind & Weavind, acting on behalf of Nissan, sent a
letter to the Premier of the Northern Cape, pointing out that the Department was obliged in
terms of the agreement to consent to the terms of the FDA so that the finance could be
released. The aforesaid Attorneys actually threatened to take legal action against the
Department if they did not comply with their obligations. I will cause a copy of such letter to
be annexed hereto marked “C”.

. . .
In view of the agreement and the availability of finance, the company at all material times
operated a viable and profitable business. However the refusal of the Department to comply
with its obligation to consent to the FDA prevented the company from finalising the grant of
finance to it and this eventually caused the winding up of the company. However at all
material times prior thereto the business of the company was in operation in a successful
and effective manner and substantial profits were generated.
In so refusing the first defendant acted unreasonably.

. . .
19.3
The plaintiffs’ shares in the company were rendered worthless.

. . .
21.3
The company would have made a profit as follows:
21.3.1
2011 – R257 761.
21.3.2
2012 – R7 917 803.
21.3.3
2013 – R5 046 323.
21.3.4
2014 – R6 921 497.
21.3.5
2015 – R8 944 108.

. . .
The plaintiffs would have received such profit as a dividend in accordance with their
shareholding in the company.

. . .
In the premises the first defendant was under a duty of care to the plaintiffs not to refuse its
consent to the FDA unreasonably.
In acting as set out in 14 and 15 above, the first defendant acted wrongfully and unlawfully
and in breach of such duty of care.
In the premises the first defendant is liable to the plaintiffs for the damages suffered by the
plaintiffs, being the dividends which the plaintiffs would have received as set out in 20 above.’
I have quoted liberally from the appellants’ amended particulars of claim for reasons that
will become apparent later.

[5] The Department raised two special pleas to the particulars of claim. The first was that
the appellants had no locus standi in judicio (legal standing) to institute the action. The
foundation for this special plea was that the agreement upon which the appellants relied
was between the Department and Canton – not the appellants – and that only Canton’s
liquidators had legal standing to sue. The second was a special plea of non-joinder. The
basis therefor was that since Canton had been liquidated, and in the absence of an
allegation that the liquidators had refused to institute action against the Department, the
liquidators were therefore necessary parties who should have been joined as either co-
plaintiffs or co-defendants.

[6] In order to meet the Department’s special pleas the appellants amended their
particulars of claim by alleging that Canton’s liquidators had refused ‘after being requested
to do so to institute the action against the [Department]’; and further that the liquidators
would not be instituting any claims against it.

[7] In June 2014, Williams J heard argument on the special pleas. The learned Judge
delivered her judgment on 6 February 2015, dismissing both special pleas. She held that
the confirmation by the liquidators that they would not be pursuing any claims against the
Department was dispositive of the first special plea relating to legal standing. As to the
special plea of non-joinder, she held that the liquidators had unequivocally indicated that
they would not be pursuing any claims against the Department. The learned Judge thus
concluded that the liquidators had waived their right to be joined in the proceedings.1
Consequently, she dismissed both special pleas with costs.

[8] The Department then brought a substantive application under rule 33(4) of the
Uniform Rules of Court2 for the trial court to determine a separated issue, which was whether
the appellants’ particulars of claim disclosed a cause of action. In support of this application

1 See in this regard: Amalgamated Engineering Union v Minister of Labour 1949 (3) SA 637 (A).
2 Uniform Rule 33(4) reads:
‘If, in any pending action, it appears to the court mero motu that there is a question of law or fact which may
conveniently be decided either before any evidence is led or separately from any other question, the court
may make an order directing the disposal of such question in such manner as it may deem fit and may order
that all further proceedings be stayed until such question has been disposed of, and the court shall on the
application of any party make such order unless it appears that the questions cannot conveniently be decided
separately.’

the deponent to the founding affidavit – who was the attorney for the Department – averred
that:
‘9.1
The Plaintiffs’ claim is a derivative action.
9.2
The claim against the Defendants should have been pursued by the company Canton
Trading 159 (Pty) Ltd and not by the four shareholders.
9.3
The shareholders’ claim is not against other shareholders [which] makes it impossible for the
Plaintiffs to enable the company to claim from a third party, but is rather a claim directly by
shareholders against a third party.
9.4
The contractual relationship was one between the company and the Defendants and not
between the shareholders and the Defendants.
9.5
Insofar as the claim constitutes a delictual claim, the injury was against the company and not
against the shareholders.
From the Plaintiffs’ Particulars of Claim it is apparent that there is a second ground for
Plaintiffs not making out a cause of action and for the following reasons:
10.1
The Plaintiffs rely in the Particulars of Claim on a contract between the company Canton
Trading 159 (Pty) Ltd and the Defendants in paragraph 9 of the Particulars of Claim. In
paragraph 27 the Plaintiffs stated that the First Defendant was under a duty of care to the
Plaintiffs not to refuse its consent to the Finance Direct Agreement unreasonably.
10.2
It is impermissible and it does not disclose a cause of action where the parties are in a direct
contractual relationship for a party to rely on an action based on delict and a breach of duty
of care and to base its claim on the actio legis aquiliae instead of relying on their contractual
remedies.’

[9] The appellants opposed the Department’s application on several grounds. The thrust
of their opposition was that the particulars of claim did disclose a cause of action and that
in any event the Department ought to have raised that point by way of an exception. The
appellants further asserted that the separated issue now raised by the Department had been
decided by Williams J and was therefore res judicata (matter already adjudicated).

[10] The rule 33(4) application came before Matlapeng AJ, who lamented the fact that the
Department invoked rule 33(4) when the proper course was to except to the particulars of
claim under rule 23(1). Nevertheless, he found that the objects of rules 33(4) and 23(1)
sometimes overlap. Thus, notwithstanding his reservations with the course adopted by the
Department, the learned Judge granted the application and directed that the separated

question – whether the appellants’ particulars of claim, as amended, disclosed a cause of
action – be determined first.

[11] Vuma AJ later heard argument on this question and gave judgment on 22 June 2018.
She answered the separated question in favour of the Department and granted the
appellants leave to amend their particulars of claim within 20 days from the date of her order.
With the leave of the high court, the appellants now appeal to this court against that part of
the order.

[12] Before us counsel agreed that what the Department raised by utilising rule 33(4) was,
in truth, an exception to the appellants’ amended particulars of claim. The implication of this
is that it is incumbent upon the Department to demonstrate that the pleading in question is
excipiable on every interpretation that can reasonably be ascribed to it.3 Consequently, the
appellants are confined to the allegations made in the particulars of claim, apart from any
further facts that the parties agree may be taken into account. In this case there are no
additional agreed facts. This then explains the extensive reference (in para 4 above) to the
appellants’ amended particulars of claim.

[13] What this court is called upon to determine, therefore, is first, the exception and,
secondly, whether the high court was precluded from considering the exception because
the issues raised were res judicata, having been determined by Williams J on 6 February
2015. It is convenient to deal with the res judicata issue first.

[14] The pleas of res judicata or issue estoppel may be raised by a defendant in a later
suit against a plaintiff who is demanding the same thing in respect of: (a) the same cause
of action; (b) for the same relief; and (c) between the same parties.4 Issue estoppel, was
described as follows in Boshoff v Union Government.5
‘“Where the decision set up as a res judicata necessarily involves a judicial determination of some
question of law or issue of fact, in the sense that the decision could not have been legitimately or

3 See in this regard: Theunissen en Andere v Transvaalse Lewendehawe Koöp Bpk 1988 (2) SA 493 (A) at
500E-F.
4 National Sorghum Breweries Ltd (t/a Vivo African Breweries) v International Liquor Distributors (Pty) Ltd
[2000] ZASCA 70; 2001 (2) SA 232 (SCA) para 2 and the authorities cited therein (per Olivier JA).
5 Boshoff v Union Government 1932 TPD 345 at 350-351.

rationally pronounced by the tribunal without at the same time, and in the same breath, so to speak,
determining that question or issue in a particular way, such determination, though not declared on
the face of the recorded decision, is deemed to constitute an integral part of it as effectively as if it
had been made so in express terms . . . .”’

[15] The Constitutional Court has most recently affirmed the requirements for res judicata.
It held that res judicata is a legal doctrinal shield that precludes continued litigation after a
final court order ‘on the same case, on the same issues and between the same parties’.6
The Constitutional Court went on to explain that issue estoppel is an extension of res
judicata to cases where the same issue has arisen between the same parties. The inquiry
into the ‘same issue’ entails determining whether an issue of fact or law was an essential
element of the previous judgment.7

[16] In Smith v Porritt & others8 Scott JA explained issue estoppel thus:
‘Following the decision in Boshoff v Union Government 1932 TPD 345 the ambit of the exceptio rei
judicata has over the years been extended by the relaxation in appropriate cases of the common-
law requirements that the relief claimed and the cause of action be the same (eadam res and eadam
petendi causa) in both the case in question and the earlier judgment. Where the circumstances
justify the relaxation of these requirements those that remain are that the parties must be the same
(idem actor) and that the same issue (eadem quaestio) must arise. Broadly stated, the latter involves
an inquiry whether an issue of fact or law was an essential element of the judgment on which reliance
is placed. Where the plea of res judicata is raised in the absence of a commonality of cause of action
and relief claimed it has become commonplace to adopt the terminology of English law and to speak
of issue estoppel. But, as was stressed by Botha JA in Kommissaris van Binnelandse Inkomste v
Absa Bank Bpk 1995 (1) SA 653 (A) at 669D, 670J-671B, this is not to be construed as implying an
abandonment of the principles of the common law in favour of those of English law; the defence
remains one of res judicata. The recognition of the defence in such cases will however require careful
scrutiny. Each case will depend on its own facts and any extension of the defence will be on a case-
by-case basis. (Kommisaris van Binnelandse Inkomste v Absa Bank (supra) at 670E-F.) Relevant
considerations will include questions of equity and fairness not only to the parties themselves but
also to others. As pointed out by De Villiers CJ as long ago as 1893 in Bertram v Wood (1893) 10

6 Mkhize NO v Premier of the Province of KwaZulu-Natal & others [2018] ZACC 50; 2019 (3) BCLR 360 (CC)
paras 36-37; S v Molaudzi [2015] ZACC 20; 2015 (2) SACR 341 (CC) para 19.
7 Mkhize NO, fn 6, para 37.
8 Smith v Porritt & others [2007] ZASCA 19; 2008(6) SA 303 (SCA) para 10.

SC 177 at 180, “unless carefully circumscribed, [the defence of res judicata] is capable of producing
great hardship and even positive injustice to individuals”.’

[17] Reverting to the facts of this case the question must then be: is it correct that the
issue raised in the Department’s rule 33(4) application is in essence the same as that raised
in the Department’s special pleas. It is as well to recall that in relation to the rule 33(4)
application the crux of the complaint was whether the particulars of claim disclosed a cause
of action. As to the special pleas, the first contested the appellants’ locus standi and the
other raised the issue of non-joinder, the latter being a dilatory plea.

[18] I proceed to consider the first of these special pleas. Locus standi has been held to
be both a procedural matter and a matter of substance. In essence, it is about the sufficiency
and directness of interest in the litigation to determine whether the party that initiates legal
proceedings can be accepted as a litigating party.9 The sufficiency of the interest is always
dependent upon the particular facts of each case and no fast and hard rules may be laid to
answer that question. The general rule is that it is for the party initiating proceedings to
allege and prove locus standi.10 Put differently, a party that institutes proceedings must have
a direct and substantial interest in the relief claimed.11 And as it was explained in Jacobs, ‘a
direct and substantial interest’ means a legal interest in the subject matter of the suit.

[19] As to the plea of non-joinder, it suffices to state that the law is by now well-settled.
And as Corbett J put it in United Watch & Diamond Co12 ‘[t]he right of a defendant to demand
joinder of another party and the duty of the Court to order such joinder or to ensure that
there is waiver of the right to be joined are limited to cases . . . where the other party has a
direct and substantial interest in the issues involved and the order which the court might
make’.

[20] With that prelude I turn to consider the contentions of the parties in relation to res
judicata or its extended form, namely issue estoppel. In this regard the appellants’ counsel

9 See: Wessels en andere v Sinodale Kerkkantoor Kommissie van die Nederduitse Gereformeerde Kerk, OVS
1978 (3) SA 716 (A) at 725H; Cabinet of the Transitional Government for the Territory of South West Africa v
Eins 1988 (3) SA 369 (A) at 388B-E.
10 See: Jacobs en ‘n ander v Waks en ‘n andere 1992 (1) SA 521 (A) at 534D.
11 United Watch & Diamond Co (Pty) Ltd & others v Disa Hotels Ltd & another 1972 (4) SA 409 (C) at 417E.
12 Above at 415E-H.

submitted that the judgment of Williams J made a definitive finding that the appellants’
particulars of claim disclosed a cause of action. And that the claim pursued by the appellants
was not a derivative action but a delictual one arising from a breach of a legal duty owed to
the appellants.

[21] In response, counsel for the Department contended that Williams J was called upon
to adjudicate two issues only, namely (a) the appellants’ legal capacity to institute the action
concerned, and (b) whether Canton’s liquidators should have been joined as necessary
parties, nothing more. Counsel for the Department is quite right. A reading of the learned
Judge’s judgment makes plain that she determined only two issues. First, she found that
the appellants’ claim was not a derivative action and that in the light of the liquidators’
unequivocal indications that they would not be pursuing any claims against the Department,
the appellants clearly had legal standing to pursue their claim.

[22] Secondly, as to the non-joinder point, she reasoned that the liquidators had waived
their right to be joined as parties to the action. This was because of their stance that they
would not be pursuing any claims against the Department. It is thus fallacious to argue, as
the appellants’ counsel do, that because Williams J found that: (a) the appellants had locus
standi; (b) were not pursuing a derivative claim; and (c) the liquidators were not necessary
parties, this meant that their particulars of claim disclosed a cause of action. The learned
Judge’s judgment said nothing about the appellants’ cause of action. This is hardly
surprising because that issue had no bearing whatsoever on what was before her. I
therefore cannot agree with the contentions advanced on the appellants’ behalf on that
score. Consequently, it follows that the appellants’ reliance on res judicata and issue
estoppel is misconceived.

[23] I now come to the crux of this appeal, which is whether the appellants’ amended
particulars of claim disclose a cause of action. Arising from this is an aspect that merits
emphasis. It is this. The litigation between the protagonists was precipitated by the
Department’s refusal to consent to the cession of Canton’s rights under the agreement to
its financiers. The appellants say that this refusal led to the liquidation of Canton. They
assert further that that refusal was unreasonable and that Canton’s liquidation rendered

their shares in Canton worthless, thus making the Department liable to them in delict for the
loss of dividends they would have received from Canton but for its liquidation.

[24] There is no dispute between the parties that there was no privity of contract between
the appellants, as shareholders of Canton, and the Department. Consequently they sought
to frame their claim in delict for the loss they suffered. As is apparent from their particulars
of claim, the appellants founded their claims upon an alleged breach of a ‘duty of care’
(properly, a legal duty) owed to them as shareholders of Canton by the Department not to
unreasonably withhold its consent for the cession of Canton’s rights under the agreement
to its financier, which would give rise to a foreseeable loss to them.

[25] It is trite that an incorporated company is a legal persona which is distinct from its
members.13 As Corbett CJ put it, albeit in a different context, in The Shipping Corporation
of India Ltd v Evdomon Corporation & another:14
‘It seems to me that, generally, it is of cardinal importance to keep distinct the property rights of a
company and those of its shareholders, even where the latter is a single entity, and that the only
permissible deviation from this rule known to our law occurs in those (in practice) rare cases where
the circumstances justify the “piercing” or “lifting” the corporate veil.’

[26] It bears mentioning that the appellants’ case is not founded on the ‘permissible
deviation’ as identified by Corbett CJ in Evdomon Corporation above.

[27] The appellants’ claim is for pure economic loss.15 Although the Lex Aquilia was
previously limited to cases of bodily injury or physical damage to corporeal things, its scope
was later extended to certain instances of pure economic loss.16 In such cases the courts
will examine the alleged legal duty and the unlawful conduct relied upon in order to
determine whether a remedy should be extended to a particular pure economic loss situation

13 Dadoo Ltd & others v Krugersdorp Municipal Council 1920 AD 530 at 550.
14 The Shipping Corporation of India Ltd v Evdomon Corporation & another 1994 (1) SA 550 (A) at 566 C-D.
15 As to what the concept of ‘pure economic loss’ entails, see Telematrix (Pty) Ltd t/a Matrix Vehicle Tracking
v Advertising Standards Authority SA 2006 (1) SA 461 (SCA) para 1; J Neethling, J M Potgieter & J C Knobel
Visser Law of Delict 6 ed (2010) at 290.
16 See, for example, Van der Walt ‘Delict’ in Joubert Law of South Africa vol 8 paras 13 and 14.

on a case by case basis.17 One of the critical factors to bear in mind in this regard, would be
whether recognition of the remedy would result in ‘indeterminate liability’.18

[28] It is equally important not to lose from sight of what Ponnan JA said in Itzikowitz v
Absa Bank Ltd:19
‘It is well-established that in contrast to cases of physical harm, conduct causing pure economic loss
is not prima facie wrongful. As it was recently put by the Constitutional Court in Country Cloud
Trading CC v MEC, Department of Infrastructure Development, Gauteng [2014] ZACC 28; 2015 (1)
SA 1 (CC) para 23:
“So our law is generally reluctant to recognise pure economic loss claims, especially where it would
constitute an extension of the law of delict. Wrongfulness must be positively established. It has thus
far been established in limited categories of cases, like intentional interferences in contractual
relations or negligent misstatements, where the plaintiff can show a right or legally recognised
interest that the defendant infringed.”’

[29] In essence, the Department’s response to the appellants’ pleaded cause of action is
the following: First, if any wrong was committed at all, that wrong was not to the appellants,
whose shareholding in Canton remained unaffected by the alleged breach of legal duty, but
against Canton. Secondly, the Department owed a contractual duty in terms of the
agreement not to the appellants but to Canton. Thirdly, in the appellants’ amended
particulars of claim there is no allegation that the loss allegedly suffered by them was
separate and distinct from that suffered by Canton, and arose from a breach of a legal duty
independently owed to them as shareholders.

[30] I propose dealing first with the law relating to the relationship between an
incorporated company and its shareholders. In Johnson v Gore Wood & Co (a firm),20 after
considering the authorities on the recoverability of damages by shareholders, the
relationship between a company vis-á-vis its shareholders in respect of wrongs committed
against the company was succinctly captured by Lord Bingham in the following terms:

17 For which see Herschel v Mrupe 1954 (3) SA 464 (A) at 478 C-G; 490 G-H; Administrateur, Natal v Trust
Bank van Afrika Bpk 1997 (3) SA at 833 in fine.
18 See, for example, Union Government v Ocean Accident & Guarantee Corporation Ltd 1956 (1) SA 577 (A)
at 584 G-H and 587 A.
19 Itzikowitz v Absa Bank Ltd [2016] ZASCA 43; 2016 (4) SA 432 (SCA) para 8.
20 Johnson v Gore Wood & Co (a firm) [2001] 1 All ER 481 (HL) at 503.

‘(1) Where a company suffers loss caused by a breach of duty owed to it, only the company may
sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no
other to make good a diminution in the value of the shareholder’s shareholding where that merely
reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss
which would be made good if the company’s assets were replenished through action against the
party responsible for the loss, even if the company, acting through its constitutional organs, has
declined or failed to make good that loss. So much is clear from Prudential Assurance Co Ltd v
Newman Industries Ltd (No 2) [1982] 1 All ER 354 esp at 266-267, [1982] Ch 204 esp at 222-223 .
. . . (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the
shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do
so), even though the loss is a diminution in the value of the shareholding. . . . (3) Where a company
suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct
from that suffered by the company caused by breach of a duty independently owed to the
shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but
neither may recover loss caused to the other by breach of the duty owed to that other.’

[31] In this court, Wallis JA, with reference to the English decision in Foss v Harbottle,21
and in relation to the principles underlying company law, said:22

‘It is a curious feature of this case that we are asked to apply a rule, or more accurately a
combination of rules, of ancient origin that has been abolished in the country of its birth. The rule
has two components. The first recognises that a company is a separate legal entity from its
shareholders and, accordingly, in the ordinary course, any loss caused to the company must be
recovered by the company, and not by its shareholders on the basis of the diminution in the value
of their shares or the loss of dividends they had anticipated. The second recognises the need for
exceptions to this principle in order to avoid oppression and permits a shareholder to recover loss
caused to the company by way of what is termed a derivative action. In certain circumstances it also
permits recovery of the shareholder‘s own loss.

A helpful summary of the rule and its different elements is to be found in the following
passage from the leading case of Prudential Assurance Co Ltd v Newman Industries Ltd and Others
(No 2) (Prudential Assurance):
“The classic definition of the rule in Foss v Harbottle is stated in the judgment of Jenkins LJ in
Edwards v Halliwell [1950] 2 All ER 1064 at 1066 – 7 as follows. (1) The proper plaintiff in an action
in respect of a wrong alleged to be done to a corporation is, prima facie, the corporation. (2) Where
the alleged wrong is a transaction which might be made binding on the corporation and on all its

21 Foss v Harbottle (1843) 2 Hare 461.
22 Gihwala & others v Grancy Property Ltd & others [2016] ZASCA 35; 2017 (2) SA 337 (SCA) paras 107-110.

members by a simple majority of the members, no individual member of the corporation is allowed
to maintain an action in respect of that matter because, if the majority confirms the transaction, cadit
quaestio; or, if the majority challenges the transaction, there is no valid reason why the company
should not sue. (3) There is no room for the operation of the rule if the alleged wrong is ultra vires
the corporation, because the majority of members cannot confirm the transaction. (4) There is also
no room for the operation of the rule if the transaction complained of could be validly done or
sanctioned only by a special resolution or the like, because a simple majority cannot confirm a
transaction which requires the concurrence of a greater majority. (5) There is an exception to the
rule where what has been done amounts to fraud and the wrongdoers are themselves in control of
the company. In this case the rule is relaxed in favour of the aggrieved minority, who are allowed to
bring a minority shareholders' action on behalf of themselves and all others. The reason for this is
that, if they were denied that right, their grievance could never reach the court because the
wrongdoers themselves, being in control, would not allow the company to sue.”

The parameters of the rule are apparent from this passage. It precludes shareholders from
suing in their own right where the claim is one in respect of a wrong done to the company causing it
to suffer loss. That is so even where the result is to diminish the value of the shareholder‘s shares
or deprive them of a dividend and the company has declined or failed to take steps to recover the
loss. On the other hand, where there is no wrong to the company, but only one to the shareholder,
there is no reason to bar the shareholder from suing. That is so even if the measure of the
shareholder‘s loss is the diminution in value of their shareholding. Those two propositions appear
clearly from the speeches of Lord Bingham of Cornhill and Lord Millett in [Johnson v Gore Wood &
Co (a firm)].

There is a third case described by Lord Bingham in Gore Wood in the following terms:
“Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers loss
separate and distinct from that suffered by the company caused by a breach of a duty independently
owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed
to it but neither may recover loss caused to the other by breach of the duty owed to that other.”’

Discussion
[32] In the present case counsel for the appellants submitted that the claim sought to be
advanced by the appellants, fell squarely in the third category described in Gore Wood23
above. In support of this proposition, counsel strongly relied on a New Zealand decision in
Christensen v Scott.24 There the court was considering an exception taken to the plaintiffs’

23 Gore Wood, fn 14 above, at 502.
24 Christensen v Scott [1996] 1 NZLR 273 at 277.

claim on the grounds that the claim did not fall within one of the exceptions recognised in
Foss.25 The exception was dismissed. The court held that where there is a separate, distinct
and independent duty owed to a shareholder by professional advisors who were advising
both the company and the shareholders and a breach of that duty occurs, resulting in a loss
to shareholders, such loss may be recovered by the shareholders. The fact that the same
loss may also have been suffered by the company, the court reasoned, did not mean that it
was not at the same time personal loss suffered by the shareholders.

[33] The Christensen case does not assist the appellants. On the contrary it is against
them because there the professional advisors were advising both the company and
shareholders simultaneously, and therefore owed a legal duty to both separately.

[34] Counsel for the appellants also contended that, on the allegations pleaded in the
appellants’ amended particulars of claim, it was clear that the Department owed a legal duty
to the appellants independently of the legal duty owed to Canton. The basis for this
submission was that, in negotiating the agreement between the Department and Canton,
the latter was represented by the appellants who were, to the Department’s knowledge,
Canton’s shareholders. This argument cannot be sustained for at least two reasons. First,
a company is an artificial person and must perforce act through natural persons. Secondly,
as already indicated above, our law has always drawn a distinction between a company, as
a juristic person, and those who control and direct its affairs. The truth of the matter is that
the appellants’ contention entirely overlooks this distinction in order to construct a basis to
sue the Department for having refused to grant the consent contemplated in clause 32.1 of
the agreement.

[35] Before us, counsel for the appellants was pertinently asked to identify specific
paragraphs in the amended particulars of claim containing explicit averments to the effect
that the appellants were owed a separate and distinct legal duty by the Department, ie
independently of the contractual obligation it owed to Canton. Counsel could make
reference only to paragraph 27 (quoted in para 4 above) of the particulars of claim. However,
paragraph 27 contains no allegations of any kind but merely conclusions of law.

25 Foss v Harbottle, fn 21 above.

[36] Thus, absent any pertinent allegations in the appellants’ particulars of claim that their
loss was separate and distinct from that suffered by Canton, and arising from a legal duty
independently owed to them, the pleadings simply do not disclose a cause of action. This
must be so because, in the ordinary course, shareholders are precluded from suing to
recover loss caused to a company of which they are members arising from a breach of a
duty owed to the company.

[37] It therefore follows that the exception taken to the appellants’ particulars of claim was
rightly upheld by the high court. In the result the following order is made:
The appeal is dismissed with costs.
The period of 20 days allowed by the high court for the amendment of the plaintiffs’
particulars of claim, if so advised, will run from the date of this judgment.

_________________
X M Petse
Deputy President

APPEARANCES

For Appellants:
N Segal

Instructed by:

Adrian B Horwitz & Associates., Kimberley

McIntyre van der Post, Bloemfontein

For Respondents:
J G Rautenbach SC

Instructed by:

Mjila and Partners, Kimberley

Claude Reid Inc., Bloemfontein