The trustees of a trust which had invested money through a trust administration company whose directors had misappropriated the funds failed in its action against the investment manager of the funds which innocently paid out the funds to the trust administration company. The court held that the investment manager had not acted wrongfully nor negligently nor caused any loss to the trust and its beneficiaries.

There is no general right not to be caused pure economic loss. Wrongfulness must be proved, namely a duty recognised by policy and legal convictions not to cause harm in the circumstances. The first claimant in this matter was the company which intentionally misappropriated the funds and was consequently the author of its own misfortune. The suggestion that liability should be imposed on the investment manager, said the court, “needs merely to be stated to appreciate its absurdity”. Such a claim is contrary to the legal convictions of the community and the imposition of liability sought was both unreasonable and inconsistent with public policy. The investment manager acted as any reasonable investment manager would have done and paid out the money, properly requested by the investor, without any knowledge of the criminal wrongdoing of the investor and its directors. There was nothing in the Collective Investment Schemes Control Act, 2002 nor the Financial Institutions (Protection of Funds) Act, 2001 which created any liability on the investment manager to the beneficiaries of the trust administered by the investor. The duties on the investment manager were owed to the entity on whose behalf the investment manager holds and administers the funds. The legislation does not impose a duty on the institution to second-guess a lawful instruction by the principal to call up funds, nor to anticipate what the principal may do with the funds. Placing the obligation on the investment manager would produce manifestly absurd results. The investment manager was not a party to nor had any obligations under the trust deed that the claimants could rely on. The loss was caused as a result of the theft and fraud by the investor’s directors. There was no wrongfulness on the part of the investment manager.

The court also found that there was no negligence and that nothing that the investment manager did caused the loss. It was unnecessary to make these findings. If there is no wrongfulness there is no delict and reliance on the same facts to find there was no negligence nor fulfilment of the causation element is not the central point in the judgment.

This claim harks back to the losses suffered by the Living Hands Umbrella Trust because of the misappropriation by the Fidentia Trust administration company Living Hands (Pty) Ltd in 2004. The delay is not explained in the judgment. It is surprising it took so long to recognise the obvious flaws in the claim.

[Old Mutual Unit Trust Managers Limited v Living Hands (Pty) Ltd [2024] ZASCA 75]