THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA

Reportable
Case no: 303/04

In the matter between:

AXIAM HOLDINGS LIMITED
Appellant

and

DELOITTE & TOUCHE
Respondent

_______________________________________________________

Coram:
Howie P, Navsa, Cloete, Heher et Jafta JJA

Date of hearing: 16 May 2005
Date of delivery: 1 June 2005

Summary:
Auditor ─ duty to third parties ─ s 20(9) of Act 80 of 1991 ─ exception to
claim based on negligent misstatement by omission ─ held to be sustainable on the
pleadings ─ premature to decide question of wrongfulness.

_______________________________________________________
JUDGMENT
(Dissenting pp 19-27)
_______________________________________________________

NAVSA JA:

[1] The appellant company appeals against the upholding, in part,
of a two-fold exception taken to its particulars of claim in an action it
instituted in the Johannesburg High Court. In this action, it claimed
damages amounting to R241 069 222-43, arising out of the alleged
negligent audit by the respondent of the financial statements of the
Business Bank Limited (TBB) for the financial year ending 31 March
1999. I shall, for the sake of convenience, refer to the appellant as
Axiam and the respondent as Deloitte.

[2] A company in the PSG group, to which I shall refer as the PSG
bank, ceded the right to recover the damages in question to Axiam.
The essence of Axiam’s main claim, to which exception was taken, is
set out in the five paragraphs that follow.

[3] For the financial year ending on 31 March 1999 TBB appointed
Deloitte, a partnership which conducts business as public
accountants and auditors, to act as its auditor within the meaning of
ss 274 and 282 of the Companies Act 61 of 1973. Deloitte conducted
an audit and prepared and completed TBB’s annual financial

statements for that financial year (the 1999 statements) and on 1 July
1999 issued an auditor’s report that included the following certificate:
‘We conducted our audit in accordance with the statements of South African
Auditing Standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance that the annual financial statements are free of
material misstatements. . .
In our opinion, these annual financial statements fairly present, in all material
respects, the financial position of the company at 31 March 1999 and the results
of its operations and cash flow for the period then ended in accordance with
generally accepted accounting practice and in the manner required by the
Companies Act.’

[4] The 1999 statements failed to present fairly the financial
position of TBB. They misrepresented TBB’s nett worth ─ reflecting a
nett profit before tax of R29 266 176-00 whereas, in fact, TBB
suffered a nett loss of R77 899 201-00. This inaccurate information
resulted from what is set out hereafter. Deloitte failed to include a bad
debt of R68 888 000-00 in the income statement. This amount was
reflected as goodwill. In addition, non-existent income in an amount
of R10,3 million was included in the financial statements as profit.
Furthermore, an irrecoverable or non-existent bad debt of
R27 977 377-00 was wrongly reflected as a loan to a shareholder.

[5] Deloitte, in conducting the audit and completing the financial
statements, did not, inter alia, do so with the requisite professional
and reasonable skill and care and failed to comply with Generally
Accepted Accounting Practice (GAAP). Had Deloitte done so the
1999 statements would have accurately represented TBB’s financial
position, alternatively, would have contained a qualified audit opinion.
Thus, Deloitte, in conducting the audit and certifying the 1999
statements, was negligent.

[6] During February 2000 two companies within the PSG group,
one of which was the PSG bank, concluded linked agreements with
TBB in terms of which shares in TBB were purchased and its
business financed. At that time Deloitte was aware of the negotiations
and that the 1999 statements and audit opinion would be relied on by
the two companies in that process. Prior to 22 February 2000 (the
date on which the agreements were concluded) Deloitte knew,
alternatively, could in the circumstances reasonably have been
expected to know, that the two companies, in deciding to conclude
the agreements, would rely on the 1999 statements and Deloitte’s
audit opinion and knew, alternatively, could in the circumstances
reasonably have been expected to know, that the 1999 statements

contained the misstatements and misrepresentations referred to
above.

[7] In the premises Deloitte owed the two companies a duty, prior
to 22 February 2000, to warn them that the 1999 statements and the
audit opinion were incorrect, alternatively to warn them that it had not
conducted the audit properly and that they should not rely on the
1999 statements and the audit opinion. Deloitte failed to issue the
warnings. Such failure was negligent and constituted a representation
within the meaning of s 20(9)(b)(ii) of the Public Accountants’ and
Auditors’ Act 80 of 1991 (the PAA Act), that the financial statements
were accurate and fairly presented the financial position of TBB at the
end of March 1999. In consequence of Deloitte’s breach of the
aforesaid duty PSG bank paid TBB an amount of R241 069 222-34,
in terms of the agreements referred to earlier, none of which it has
been able to recover. As stated earlier the right to recover this
amount was ceded to Axiam.

[8] Deloitte’s exception was based on the following:

(i)   the conclusion that Deloitte owed the two companies a duty in law
does not follow on either of the premises set out in the italicised part
of para [6] above;
(ii) its failure to warn PSG is insufficient in law to constitute a
representation within the meaning of s 20(9)(b)(ii) of the PAA Act.

[9] Schwartzman J, in the court below, considered the bases of the
exception and concluded that in the main they were sound. He issued
an order in the following terms:
'18.1 The exception to the extent only that it is based on the Defendant’s
knowledge of the facts set out in paragraphs 12.1 and 12.2 of the Particulars of
Claim is dismissed.
18.2 The exceptions are in all other respects upheld.
18.3 The Plaintiff is given twenty days within which to amend its Particulars of
Claim.
18.4 The Plaintiff is to pay the costs of this application.’
The material parts of paras 12.1 and 12.2 are italicised in para [6]
above.

[10]  In justifying the order set out in para 18.1 of his judgment, the
learned judge stated that a deliberate concealment of material facts
known to the defendant, in circumstances where it could be expected

to speak, could conceivably impose a duty to ensure that PSG bank
did not suffer foreseeable harm. In rejecting the alternative basis of
the claim set out in para [6] above, the learned judge stated as
follows:
‘. . . PSG bank cannot found a cause of action based on the proposition that what
is in essence being alleged is the Defendant’s continuing misconduct that
commenced in July 1999 with its negligent audit and which continued through to
February 2000. The flaw in this submission is that in July 1999, the Defendant
did not owe PSG Bank a duty of care, and that in February 2000, the Defendant
did not owe PSG Bank a duty to speak.’

[11] Much time was spent by the learned judge in the court below
and by counsel before us in discussing English law and applying dicta
in English judgments dealing with liability for negligent misstatement
inducing a contract and causing economic loss, rather than following
the course of applying our law on the issue.1 This is not to say that
there is no useful purpose in having regard to English law and to the
law in other common law countries for reassurance that we are not
out of step with global norms as applied in the commercial world.

1 See Standard Chartered Bank of Canada v Nedperm Bank Ltd 1994 (4) SA 747 (A) where
Corbett CJ (following on Administrateur v Trust Bank van Afrika Bpk 1979 (3) SA 824 (A), Siman
& Co (Pty) Ltd v Barclays National Bank Ltd 1984 (2) SA 888 (A), International Shipping Co (Pty)
Ltd v Bentley 1990 (1) SA 680 (A) and Bayer South Africa (Pty) Ltd v Frost 1991 (4) SA 559 (A))
set out, with customary clarity, the factors to be taken into account in considering whether a party
acted in breach of a legal duty.

However, we should not lose sight of what was stated by this Court in
Minister of Safety and Security v Van Duivenboden 2002 (6) SA 431
(SCA) at para [16]:
‘…what is ultimately required is an assessment, in accordance with the prevailing
norms of this country, of the circumstances in which it should be unlawful to
culpably cause loss.’

[12] In applying the principles set out in the Standard Chartered
Bank case, supra, one would be loath, at exception stage, to hold that
it is inconceivable that an auditor who knew of the misstatement in
the 1999 statements and audit opinion and who also knew that the
two companies in the PSG group, in concluding the agreements,
would rely on the correctness thereof would not have a duty to speak.
These are circumstances which approximate fraud. In this regard the
judgment of Schwartzman J cannot be faulted.

[13] The essential allegations in the alternative claim are as follows:
1.
Deloitte could in the circumstances reasonably have been
expected to know that the 1999 statements and the audit opinion
were inaccurate and did not fairly present TBB’s financial position;

2.
Deloitte could reasonably have been expected to know that the
two companies would, in concluding the agreements, rely on the
correctness of the 1999 statements and the audit opinion;
3.
In the premises Deloitte owed the two companies a duty to
warn them of the inaccuracies and of its failure to properly conduct
the audit of the 1999 statements;
4.
Deloite had breached this duty by not so warning the two
companies;
5.
The failure to warn the two companies constituted a
representation within the meaning of s 20(9)(b)(ii) of the PAA Act to
the effect that the 1999 statements were correct as certified by the
audit report and opinion;
6.
In
consequence
of
the
representation
aforesaid,
the
agreements were concluded and the amount of R241 069 222-43
was paid over for which Deloitte is now liable.

[14] Section 20(9) provides:
‘(9)
Any person registered as an accountant and auditor in terms of this Act
shall, in respect of any opinion expressed or certificate given or report or
statement made or statement, account or document certified by him in the
ordinary course of his duties ─

(a)
incur no liability to his client or any third party, unless it is proved that such

opinion was expressed or such certificate was given or such report or

statement was made or such statement, account or document was

certified maliciously or pursuant to a negligent performance of his duties;

and
(b)
where it is proved that such opinion was expressed or such certificate was

given or such report or statement was made or such statement, account or

document was certified pursuant to a negligent performance of his duties,

be liable to any third party who has relied on such opinion, certificate,

report, statement, account or document, for financial loss suffered as a

result of having relied thereon, only if it is proved that the auditor or person

so registered ─
. . .
(ii)
in any way represented, at any time after such opinion was expressed or

such certificate was given or such report or statement was made or such

statement, account or document was certified, to the third party that such

opinion, certificate, report, statement, account or document was correct,

while at such time he knew or could in the particular circumstances

reasonably have been expected to know that the third party would rely on

such representation for the purpose of acting or refraining from acting in

some way or of entering into the specific transaction into which the third

party entered, or any other transaction of a similar nature, with the client or

any other person.’
(Emphasis added).
It is important to note that s 20(1) of the PAA Act sets out the
standard of diligence required of an auditor before reporting or
providing an opinion that financial statements fairly reflect the affairs
of any undertaking. 2  Section 20(9)(a) refers to a negligent
performance of duties by an auditor ‘in respect of an opinion
expressed…or report or statement…’

[15] Our
law
now
firmly
recognises
that
a
negligent
misrepresentation will give rise to delictual liability provided all the
necessary elements of such liability are satisfied. It was submitted on

2 In terms of s 20(1) no auditor shall certify or report or express an opinion that any financial
statement presents fairly or gives a true and fair view of the affairs of an undertaking unless ─
‘(a)
he has carried out such audit free of any restrictions whatsoever;
(b)
proper accounting records . . . have been kept in connection with the undertaking in

question, so as to reflect and explain all its transactions and record all its assets and

liabilities correctly and adequately;
(c)
he has obtained all information, vouchers and other documents which in his opinion were

necessary for the proper performance of his duties;
(d)
he has, in the case of an undertaking regulated by any law, complied with all the

requirements of that law relating to the audit of that undertaking;
(e)
he has by means of such methods as are reasonably appropriate having regard to the

nature of the undertaking in question, satisfied himself of the existence of all assets and

liabilities shown on such financial statement . . .;
(f)
he is satisfied, as far as is reasonably practicable having regard to the nature of the

undertaking . . . and of the audit carried out by him, as to the fairness or the truth or the

correctness, as the case may be, of such financial statement . . .;
(g)
any matter referred to in subsection (5) had, at the date on which he so certified or

reported or expressed such opinion been adjusted to his satisfaction.’

Subsection (5) deals with the position where an auditor has reason to believe that in the conduct
of the undertaking a material irregularity has taken place or is taking place. For present purposes
it is not necessary to consider those provisions any further.

behalf of Axiam that there can in law be a misrepresentation by
silence. That is undoubtedly so. See McCann v Goodall Group
Operations (Pty) Ltd 1995 (2) SA 718 (C) at 722F-726D. Silence or
inaction as such cannot constitute a misrepresentation unless there is
a duty to speak or act.

[16] It was submitted for Deloitte that, on the alternative basis set
out in para [6] above, what was sought to be established was liability
for an audit opinion, the inaccuracy of which Deloitte was, on the
facts premised for this exception, unaware of and therefore under no
duty to warn about. It was submitted further, that Schwartzman J was
correct in upholding the exception on the basis set out in para [10]
above.

[17] It is clear from the essentials of Axiam’s alternative claim that it
relies on a negligent misstatement by omission (during the period
1 July 1999 to 22 February 2000) to the effect that Deloitte’s prior
(negligent) certification was correct. This cannot be faulted either
notionally or conceptually. Deloitte’s prior audit report and opinion
would thus not have been completed in accordance with s 20(1) of
the PAA Act. Section 20(9)(b)(ii) enables a third party to sue an

auditor if, after such a negligent certification, it represents in any way
that it was correct. The claim presently under discussion is in
accordance with these provisions and is not against fundamental
principles.

[18] It is true that decisions by courts on whether to grant or
withhold a remedy for negligent misstatement causing economic loss,
are made conscious of the importance of keeping liability within
reasonable bounds. It is universally accepted in common law
countries that auditors ought not to bear liability simply because it
might be foreseen in general terms that audit reports and financial
statements are frequently used in commercial transactions involving
the party for whom the audit was conducted (and audit reports
completed) and third parties. In general, auditors have no duty to third
parties with whom there is no relationship or where the factors set out
in the Standard Chartered Bank case are absent.

[19] In considering whether a defendant representor such as
Deloitte acted unlawfully in relation to a third party, ie in breach of a
legal duty, the nature, context, purpose of the statement and
knowledge thereof are considered and so is the relationship between

the parties. 3  In the Standard Chartered case these factors were
considered at the end of a trial after all the circumstances of the case
were revealed by the evidence.

[20] The important factual implication in para 12.2 of the particulars
of claim is that a reasonable person in the defendant’s position would,
at the second, or later, stage of the alleged events, have known of the
defects in the report. On that basis one is justified in saying that the
conclusion could well be drawn at the trial that, possessed of such
knowledge, the reasonable person would not have kept silent but
have expressed at least a reservation as to the reliability of the report.
Although the application of the criterion of a reasonable person
concerns the negligence aspect of liability, from which the legal duty
element is quite separate, the provisions of s 20(9)(b)(ii) of the Act
provide a clear pointer that a negligent representation falling within its
terms is indeed wrongful.

[21] Whether the representation by silence alleged in this case does
fall within the section’s terms depends on whether there was a duty to
speak. In other words the duty relied on for there having been a

3 See the Standard Chartered Bank case, supra, at 770.

representation will be the same duty relied on for the allegation of
wrongfulness.

[22] As to the existence of that duty, a court apprised of all the
factors and circumstances referred to in Minister of Law and Order v
Kadir 4 at 318H-I could find, on the framework of the allegations made
in the particulars of claim, and on final evaluation, that the
defendant’s ignorance of its negligent report is no bar to concluding
that it bore the alleged duty.   It must be remembered that we are
dealing with a situation where the legal convictions of the community
could well consider it unacceptable that an auditing firm which issued
a seriously negligent report should escape the legal duty to speak
with care concerning that report simply because it was, possibly even
negligently, ignorant of the negligence of its report. And what is more,
in circumstances in which the latter negligence was something it
ought to have known of. Reliance on the case of Universal Stores
Limited v OK Bazaars (1929) Limited 5 is misplaced. Two factors
distinguish that case. One is that the wrongful conduct in ignorance of
which the alleged representation occurred was that of the representor

4 1995 (1) SA 303 (A)
5 1973 (4) SA 747 (A)

itself. It could well be the conclusion on trial that the representation
compounds the negligence of the earlier audit and report. The second
factor consists of the statutory provisions of s 20(9)(b)(ii).

[23] It cannot therefore be found on exception that the defendant’s
alleged omission to speak was not wrongful (cf Indac Electronics
(Pty) Ltd v Volkskas Bank Ltd at 801D 6).

[24] The court below was faced with an exception to a claim which
on the face of it was sustainable. It was premature to decide whether
a legal duty could be said to exist.

[25] In the English case of Andrews & Others v Kounnis Freeman (a
firm) 2000 Lloyd’s Rep PN 263 (p654) Jonathan Parker LJ stated:
‘In my judgment, however, only rarely will the court be in a position to determine
the question of the existence or otherwise of a duty of care owed by professional
advisors on a strike out application. As Chadwick LJ said in Coulthard v Neville
Russell [1998] 1 BCLC 143 at 155 “. . . The liability of professional advisors
including auditors for failure to provide accurate information or correct advice can,
truly, be said to be in a state of transition or development. As the House of Lords
has pointed out repeatedly this is an area in which the law is developing
pragmatically and incrementally. It is pre-eminently an area in which the legal

6 1992 (1) SA 783 (A)

result is sensitive to the facts. . . .” In my judgment these observations apply with
equal force in the instant case. Although the judge in the instant case could see
no realistic prospect of any further facts emerging at a trial, I am far from
persuaded that once subjected to the scrutiny of a full trial the factual background
will remain quite as stark as the Judge found it to be.’
(Emphasis added).
The attitude of our courts in relation to deciding matters of this kind
on exception is not dissimilar. See Indac Electronics (Pty) Ltd v
Volkskas Bank Ltd, supra, at 801A-B. Counsel could not refer us to,
nor could we find, any judicial pronouncement on an auditor’s liability
for negligence subsequent to a negligent report or opinion in
circumstances such as those of the present case. In my view this
makes it all the more necessary to establish the full factual matrix
before a final pronouncement is made.
[26] For the reasons set out above I make the following order:
The appeal is upheld with costs including the costs of two counsel.

The order of the court below is substituted as follows:
‘1.
The exceptions are dismissed with costs.’

_________________
M S NAVSA
JUDGE OF APPEAL

CONCUR:

HOWIE
P
JAFTA
JA

CLOETE JA:
[27] I have had the advantage of reading the judgment of my
colleague Navsa JA. I respectfully disagree with the conclusion
reached, essentially because Axiam has not in my view alleged facts
which prima facie establish a breach of a legal duty.

[28] Section 20 of the Public Accountants’ and Auditors’ Act, 80 of
1991 specifies the powers and duties of auditors. Subsection (1)
deals with the position pursuant to an audit. The subsection begins:
‘No person acting in the capacity of auditor to any undertaking shall, without such
qualification as may be appropriate in the circumstances, pursuant to any audit
carried out by him in that capacity, certify or report or express an opinion to the
effect that any financial statement, including any annexure thereto, which relates
to such undertaking, presents fairly, or gives a true and fair view of, or reflects
correctly, the affairs of such undertaking and the results of its operations, or the
manner dealt with in such financial statement or annexure, as the circumstances
may require, unless ─’
and there follow seven paragraphs setting out what the auditor must
do.

[29] A negligent failure by an auditor to perform the statutory
obligations spelled out in s 20(1) gives rise to the spectre of potential

limitless liability for pure economic loss to persons who rely to their
detriment on the certificate, report or opinion given by the auditor. It
was obviously to meet this problem that subsection (9) was included
in s 20. The provisions of that subsection are quoted in para [14] of
the judgment of Navsa JA. The essential question on appeal is
whether Axiam made allegations, in that part of its particulars of claim
under attack in this appeal, which bring it within the ambit of s 20(9)
and more particularly, s 20(9)(b)(ii). The facts alleged by Axiam are
set out in paras [2] to [7] of the judgment of Navsa JA; Deloitte’s
exeption, in para [8]; and the allegations relevant to the claim which is
the subject matter of the appeal (the alternative claim), in para [13].
The correctness of the decision of the court a quo to dismiss the
other part of the exception (to the main claim) was not debated before
this court and I prefer to say nothing in that regard.

[30] Axiam’s case is that the representation required by s 20(9)(b)(ii)
was constituted by Deloitte’s silence at a time when it was ignorant of
its own negligence but constructively aware thereof (ie it could by the
exercise of reasonable care have acquired the knowledge). Silence
does not constitute a representation in the absence of a duty to

speak. As is said in Spencer Bower’s The Law of Actionable
Misrepresentation 3rd ed by AK Turner para 90 at 103:
‘It is not silence, or reticence, which in itself can amount to a misrepresentation. It
must be concealment, or suppressio veri. And these terms import the existence
of a duty. A man cannot be said to conceal what he is not bound to reveal,
suppress what he is under no duty to express, or keep back what he is not
required to put forward.’
Axiam has alleged that ‘prior to 22 February 2000’ Deloitte could
reasonably have been expected to know of the mistakes and unfair
presentation in the 1999 financial statements. If this allegation means
that Deloitte would at the time of the audit have become aware of the
mistakes and unfair presentation had the audit been performed
properly, the allegation is irrelevant because the section requires a
representation to have been made thereafter. If the allegation means
that Deloitte could have been expected to have become aware of the
mistakes and unfair presentation subsequently, that allegation, by
itself, is in my view insufficient to establish a duty to speak. It is
illogical to impose without more a duty to speak on an auditor where
he (she) had no reason to believe what he had done, may have been
negligent. You cannot disclose what you do not know; and to hold a
person liable for what that person ought to have known, is to equate

constructive knowledge with actual knowledge. In Universal Stores
Limited v OK Bazaars (1929) Limited 1973 (4) SA 747 (A), this court
refused to impose a legal duty where the knowledge of the party on
whom the legal duty was sought to be imposed did not have actual
knowledge. The facts in that matter were as follows:
Bosch, an employee of the plaintiff (OK Bazaars), had fraudulently altered
cheques and ‘negotiated’ the cheques to the defendant bank. The plaintiff paid its
creditors the amount of the debts in respect of which cheques had been drawn. It
then, as the true owner of the cheques, sued the defendant for such amount
under s 81(1) of act 34 of 1964 as a person who had been in possession of the
cheques after the theft or loss. The defendant pleaded that the plaintiff was
estopped by reason of its own negligence from pursuing its claim. The
defendant’s case was based on a misrepresentation by the plaintiff,
accompanying each cheque, that Bosch had a good title to each cheque. For this
representation by the plaintiff the defendant sought to rely on the conduct of the
plaintiff, including carelessness inter alia in the running of its affairs, particularly
in not timeously detecting Bosch’s dishonesty and allerting the defendant to the
situation.
Rumpff JA said at 761G-H:
‘The first question that arises is whether the plaintiff’s failure to alert the
defendant would constitute a breach of a legal duty to speak in the
circumstances. Generally speaking, and depending on the relationship between

the parties, there would be a duty to speak if it is considered reasonable in the
circumstances that the party who may act to his detriment should be warned by
the other party.’
After dealing with what the position might be if the plaintiff’s
employees had actual knowledge which could be imputed to the
plaintiff, the learned judge of appeal continued at 762E-G:
‘According to the plea, and the particulars for trial, defendant does not allege that
plaintiff had actual or imputed knowledge of Bosch’s frauds. It relies on
constructive knowledge, i.e. the knowledge which plaintiff would have had, were
it not for its own negligence. If the plaintiff was ignorant of Bosch’s fraudulent
modus operandi, it would have been under no legal duty to defendant to
scrutinize its returned cheques and bank statements; in that case it would not
even be obliged to do so vis-à-vis its own bank ─ see Spencer Bower and
Turner, op. cit., pp. 53-55, 199. If ignorant, the plaintiff could not, in my view,
reasonably be expected to foresee that its silence might mislead the defendant
into believing that Bosch had a good title to any cheques she offered to transfer
(see Connock’s case, supra at pp. 51-53 and 57-58). In the result, in my view,
the defendant can only rely on actual, i.e. imputed knowledge of the plaintiff.’
The distinctions between that case and the present suggested by
Navsa JA in para [24] of his judgment appear to me, with respect, to
be distinctions without a difference. As to the first, in both cases the
question is whether a duty can or should arise from constructive

knowledge; and as to the second, the duty to speak in the present
matter is not to be found in the statute but must, as in the reported
case, be sought in the common law ─ as is clear (in particular) from
paras [20] and [21] of my learned colleague’s judgment.

[31] Nor in my view does public policy require the imposition of a
duty to speak in the circumstances. In Standard Chartered Bank of
Canada v Nedperm Bank Limited 1994 (4) SA 747 (A) Corbett JA
said at 770J-771A:
‘There are, in my view, no considerations of public policy or fairness or equity to
deny Stanchart [the plaintiff] relief in this case. This is not the kind of case where
a finding in favour of the plaintiff raises the spectre of limitless liability or places
an undue or unfair burden upon the bank [the defendant].’
In the present case, as I have said, the spectre of limitless liability
does arise; and an undue and unfair burden would be placed on an
auditor. The burden would be undue because the third party is not
obliged to rely upon what the auditor has done (there is no
suggestion of involuntary reliance in Axiam’s particulars of claim): the
third party can appoint its own auditor, or ask the auditor whether it
can rely on the accuracy of the audit already done. The burden would
be unfair because should the third party make such an enquiry, the

auditor would be entitled to refuse to answer7; but if the enquiry is not
made, the auditor would be obliged nevertheless to issue a disclaimer
(which would reflect on its professional competence, and would be
completely unnecessary if it had not been negligent) or would be
obliged at its own expense to revisit the audit, on pain of being held
liable (perhaps, as in this case, for many millions of rand) to any
number of third parties whom the auditor knows or ─ even worse ─
ought reasonably to know, will rely on its accuracy.   At common law,
mere knowledge that the third party did indeed intend to rely on the
correctness of the audit or a foreseeable risk that he might, is not
sufficient to create a legal duty.8 The same is true of the statute: para
(ii) requires a representation in addition to knowledge (actual or
constructive).

[32] What para (ii) envisages is that the auditor must, subsequent to
the audit, take responsibility to the third party for its accuracy. If
silence per se constituted a representation for the purposes of para
(ii) then that paragraph would be largely ineffective in curbing the
mischief ─ indeterminate liability ─ at which s 20(9) is aimed. A third

7 Standard Chartered Bank of Canada v Nedperm Bank Ltd, above (para 31) 763A-B and 771A-B.
8 BOE Bank Ltd v Ries 2002 (2) SA 39 (SCA) para 13.

party in the position of Axiam would be entitled to sue an auditor in
the position of Deloitte simply because Deloitte had been negligent in
an audit performed for its client and, not having detected such
negligence, had not warned the third party, when it had actual or
constructive knowledge that the third party would rely on the
correctness of the audit. It is to limit such potential liability that para
(ii) requires a representation as well as knowledge. It may be that
silence can constitute a representation for the purposes of the
paragraph (although I confess to some difficulty in appreciating how
this can be so); but because an omission is not prima facie wrongful9,
facts which at least prima facie establish a duty to speak must be
alleged.10 As Hefer JA pointed out in Minister of Law and Order v
Kadir 1995 (1) SA 303 (A) 318H-J:
‘Decisions like these can seldom be taken on a mere handful of allegations in a
pleading which only reflects the facts on which one of the contending parties
relies.
…
It is impossible to arrive at a conclusion except upon a consideration of all the
circumstances of the case and of every other relevant factor. This would seem to
indicate that the present matter should rather go to trial and not be disposed of

9 BOE Bank Ltd v Ries n 2 above, para 12 at p 46G-H and authorities there quoted; Minister of Safety and
Security v Van Duivenboden 2002 (6) SA 431 (SCA) para 12 and authorities referred to in the footnotes.
10 Lillicrap, Wassenaar and Partners v Pilkington Brothers 1985 (1) SA 475 (A) 496 in fine ─ 497A.

on exception. On the other hand, it must be assumed ─ since the plaintiff will be
debarred from presenting a stronger case to the trial Court than the one pleaded
─ that the facts alleged in support of the alleged legal duty represent the high-
water mark of the factual basis on which the Court will be required to decide the
question. Therefore, if those facts do not prima facie support the legal duty
contended for, there is no reason why the exception should not succeed.’11
Such allegations as have been made by Axiam, do not in my view
even prima facie establish a duty to speak and it is for that reason I
conclude that the exception to the alternative claim was properly
upheld.

______________
T D CLOETE
JUDGE OF APPEAL

Concur: Heher JA

11 See also Indac Electronics (Pty) Ltd v Volkskas Bank Ltd 1992 (1) SA 783 (A) 801C.