Issue: June 2012 / August 2012
A win for the workers
No FAIS licence, no valid contract. Words must be taken to mean what they say, not something else. Fund members off the hook for huge fees.
Argument over the validity of an “investment consultancy” agreement between the Chemical Industries National Provident Fund (mainly comprising trade-union members) and Tristar Investments (subsequently renamed Malaczynski Burn) has been bouncing between the courts for more than three years.
The agreement was found by Justice Claasen to be valid. Then a full bench under Justice Willis thought it invalid but wanted argument referred to trial. Now Justice Lamont, in the South Gauteng High Court, has held that the agreement contravened the Financial Advisory & Intermediary Services Act – in that it “constitutes a contract or offer to contract for the performance of an act that (Tristar) is not licensed to perform” – and consequently to be void.
Were it otherwise, Tristar was to have claimed over R40m from CINPF for fees, interest and damages that it considered itself to have been in line to receive under the purported contract. This amount was computed as an annual fee of 0,20% on the value of CINPF assets, plus an incentive and other fees from May 2008 (TT March-May ’11).
Instead, Tristar/Malaczynski Burn could face penalties for breach of the FAIS Act. Although Malaczynski Burn now is a licensed financial-services provider, when Tristar entered the contract it wasn’t. At worst, penalties are a fine of up to R1m or 10 years’ jail or both. The purpose of the legislature is to compel those who conclude such contracts to have a licence, Justice Lamont noted.
The contract being void, the court found, the party that had to be licensed cannot enforce it: “The other party can legitimately refuse to implement its terms, to make payment or perform any other obligation imposed upon him by the contract. The recipient of advice and/or actions of the unlicensed will not suffer loss in consequence of the voidness.”
Evidence for Tristar was to the effect that it only gave “advice” and did not render intermediary services. CINPF would make decisions on Tristar’s advice and act by giving instructions to intermediaries, not to Tristar.
The witness testified that the wording which appeared in the contract was intended to reflect an obligation to furnish advice alone. Tristar’s submission was that the contract provided for acts to be performed but not for the manner in which the performance was to be achieved.
CINPF countered that, apparent from sections of the contract, Tristar was not only to provide advice but also take steps to implement the advice. The differences between CINPF and Tristar arose from their different interpretations of the contract’s wording.
The “most telling point” against Tristar’s interpretation, the court held, was that the contract document regulates conduct between parties in a highly regulated activity: “The regulatory authority would be entitled to have sight of the document . . . It is probable that the parties to the document would have wished their true intention to appear from the document with great precision in common parlance and be readily understood by the regulatory authority. They would not have wished to use language the regulatory authority could misconstrue.”
The message ascertainable from the words of the contract, read as “untranslated”, is one that seeks to be readily comprehensible and not to have a special meaning. As such, under the contract Tristar had offered to act as a financial-service provider for which it did not have a licence that the FAIS Act required.
Licensees render services to a variety of persons who place their financial affairs in their hands, Judge Lamont continued. Frequently, these persons have little or no knowledge of financial affairs. It is understandable that the legislature would want to control the industry, so as to limit the ability of the unscrupulous to fleece the innocent.
Could the purpose of the legislature be achieved if the consequence of breaching FAIS was only the criminal penalties provided under the Act? asked Judge Lamont. He answered by citing another civil judgment that, if the court upheld as valid an agreement which contravened FAIS, it “would give legal sanction to the very mischief which the legislature sought to prevent i.e. the protection of the public at large from the provision of financial services without adequate regulation”.
A I S Redding SC (instructed by Webber Wentzel) acted for CINPF and A E Franklin SC (instructed by Werksmans) for Tristar.