PriceWaterhouseCoopers Inc v National Potato Co-operative Ltd (451/12) [2015] ZASCA 2 (4 March 2015)

SCA summary:

Auditor – relationship with client contractual – duties – whether audit conducted negligently – damages – causation.

Opinion evidence – when admissible – need to establish facts on which expert’s opinion is based – hearsay – qualifications of expert witness – duties of expert witness – independence – not to act as advocate for party calling expert.

Causation – need for causal link between loss and contents of auditor’s reports – losses arising from trading – not recoverable from the auditor.

Prescription – s 12(3) of the Prescription Act 68 of 1969 – knowledge of facts giving rise to claim – acquisition of knowledge by the exercise of reasonable care – corporate entity – knowledge of directors to be attributed to entity – no special rule of attribution when claim arising from auditor’s alleged failure to report properly to members of entity.

Conduct of trial – objections to hearsay evidence to be dealt with expeditiously – proper approach to the leading of expert evidence – need for judge to prevent proceedings from becoming unduly prolonged.

Coram: Wallis JA and Fourie and Koen AJJA.

Heard: 9 to 13 February 2015      Delivered: 4 March 2015

Wallis JA (Fourie and Koen AJJA concurring)

[1] Four firms (the second to fifth appellants, to which I will refer collectively as PWC) acted as auditors of the first respondent, the National Potato Co-operative Ltd (NPC) from 1984 to 1997.  Whether they breached their contractual obligations as auditors, thereby causing NPC to suffer damages, is the issue in this appeal.  NPC alleged that the annual financial statements of NPC, throughout that period, failed to make adequate provisions for bad and doubtful debts that had arisen through on-going reckless mismanagement of its affairs in regard to the extension of credit to its members.[1]

They said that PWC should have identified this reckless mismanagement in the course of the audits and either insisted on changes to the financial statements to reflect the true position, or disclosed the under-provisions in their auditors’ reports.  If they had done so, NPC alleged that remedial measures would have been instituted.

Instead NPC was obliged to write off substantial sums as bad debts causing it to suffer loss, which it sought to recover from PWC.  Botha J upheld its claims and judgment was entered against the four different firms of auditors in varying amounts totalling R62 884 905,45.  Interest was ordered to run on that amount at a rate of 15,5 per cent per annum from 15 December 2000 and a number of costs orders were made in NPC’s favour.

The main appeal lies against the judgment holding PWC liable in damages and against the quantum of the damages.  It is brought with the leave of the trial court, although the judge limited the grounds for that appeal by excluding issues that PWC wished to raise, such as prescription.  This court removed those limitations after argument and in addition it granted leave to appeal against certain costs orders granted by the trial court.[2]

[2] The core issue set out above, simply stated as it is, engaged the high court in a hearing on the merits of the claim for 264 days and a further hearing on quantum for 31 days.  In addition we were informed that the hearing was due to continue on 121 additional days but was, for one or other reason, stood down.

Two judgments were produced on the merits running to nearly 1100 pages.  Over and above those judgments there was a separate hearing on costs and a separate judgment on that issue.  A number of interlocutory applications were dealt with separately, both before the trial commenced and during it.

The case has already engaged the attention of this court on four prior occasions, once on the propriety of NPC receiving funding from an outside source in order to pursue this litigation,[3] twice on issues relating to the provision of security[4] and, as already mentioned, most recently on the scope of this appeal.

We are now confronted with a record that has been abbreviated when viewed against the size of the trial bundle, but is still some 85 000 pages long.  The heads of argument, together with the core bundles presented by the parties and the bundles of authorities, add another 5 000 pages.

This material was provided to us on computers loaded with appropriate software to enable us to work with it.  The court has been specially constituted to hear the appeal without disrupting the ordinary work of the SCA and to that end sat in the week prior to the commencement of the court term.[5]

[3] It is appropriate at the outset for us to express our gratitude to the attorneys and counsel for the efforts they have made to enable the appeal to be disposed of with reasonable expedition.  However, it is also appropriate to echo a recent comment by Lord Toulson,[6] that the case assumed a complexity that we do not think was necessary, as a result of the manner in which it was conducted, and, in consequence, the trial court, for which we have sympathy, was led into a forest relatively impenetrable to light.  I will deal with these matters at a later stage when addressing the issue of costs.