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Negligent investment advice: a bank tries to compel an employee to reimburse it for compensation paid to a bank client

The global economic downturn of the past few years has caused many investors to lose large sums of money as a result of the decline in securities markets and property markets.

Predictably, many aggrieved investors have turned their wrath on their financial advisers for leading them into ill-advised investments, and for structuring their portfolios in a way that did not properly balance the various risks.
Where the adviser in question was employed by a financial institution to give such advice, that institution will be vicariously liable for any negligence on the part of the adviser.

Many financial institutions have had little choice but to pay compensation to investors who were given sub­standard investment advice.

But what of the unfortunate individual adviser, employed by these institutions? Will he or she have to reimburse their employer for such compensation paid out by the latter?

In the case of de Lange v ABSA Makelaars (Edms) Bpk [2010] ZASCA 21 which came before the Supreme Court of Appeal in March of this year, a certain de Lange had been employed by ABSA as a broker from 1995 to 2001 under a written contract of employment which provided that the bank: "is not liable for any loss or damage that may be suffered as a result of intentional or negligent, faulty or incomplete advice given by the employee… and if (the bank) is held liable for such loss or damage, (the bank) has the right to recover from the employee such damage or loss if the company is of the opinion that the company was legally liable".

Some fifteen clients of ABSA complained that they had suffered financial loss as a result of negligent investment advice given by de Lange.

After investigating their claims – but without asking de Lange (who had by then left the bank's employ) for his side of the story – the bank paid out some hundreds of thousands of rand in compensation to those clients, and then demanded that de Lange repay these amounts to the bank.

The High Court held that de Lange was indeed obliged, in terms of his contract of employment, to reimburse the bank for these amounts, and rejected de Lange's contention that the bank ought first to have given him the opportunity to tell his side of the story.

The case then went on further appeal to the Supreme Court of Appeal.
Happily for de Lange, the court took a different view from the High Court and upheld his appeal.

DID DE LANGE'S CONTRACT OF EMPLOYMENT CONTAIN A TACIT TERM?
De Lange conceded that the relevant clause in his contract of employment with the bank did not explicitly say that he must be given a hearing before being required to reimburse the bank for money it had outlaid to disgruntled recipients of his negligent advice.

However, de Lange contended that the right to a prior hearing was a tacit term of his contract of employment. In its judgment, the Supreme Court of Appeal pointed out that a tacit term of a contract is: "based on an inference of what both parties must or would necessarily have agreed to but which, for some reason or another, remained unexpressed".

The court emphasised in this regard that a tacit term does not arise simply because it would have been “convenient” to include such a term in the contract in question, and that a tacit term forms part of an agreement: "only if the court is satisfied that the parties would necessarily have agreed upon such a term if it had been suggested to them at the time. If the inference is that the response by one of the parties… would have been that he would first like to discuss and consider the suggested term, the importation of the term would not be justified".

In deciding whether the suggested term can be inferred, the court will have regard primarily to the express terms of the contract and to the surrounding circumstances under which it was entered into. Applying these principles to the facts of the case, the Supreme Court of Appeal came to the conclusion that the tacit term contended for by de Lange can and should be imported into the contract of employment between ABSA and de Lange.

Such a tacit term, said the court, was necessary: "in the business sense to give efficacy to the contract… [I]t is such a term that you can be confident that if, at the time the contract was being negotiated, someone had said to the parties – ' what will happen in such a case? ' they would have both replied, ' Of course, so-and-so. We did not trouble to say that; it is too clear' ".

In the result, therefore, the Supreme Court of Appeal held that, since ABSA had not given de Lange a hearing before deciding to demand reimbursement from him of the compensation paid to clients for his allegedly negligent advice, de Lange was not obliged to make reimbursement.

THE MORAL OF THE STORY
One of the lessons to be drawn from this judgment is how important it is for an employee to take legal advice before signing a contract of employment.

If de Lange had been wise enough to seek such advice, an attorney would have endeavoured to renegotiate the agreement to provide that de Lange would not incur any liability toward the bank for advice given in good faith, even if the advice later turned out to have been negligent.

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