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The court has no sympathy for business people who fail to protect their interests by way of a contract

The court has no sympathy for business-people who fail to protect their interests by way of a contract. Contracts (legally enforceable agreements) are the lifeblood of commerce.

In Trustees, Two Oceans Aquarium Trust v Kantey & Templer (Pty) Ltd 2006 (3) SA 138 the Supreme Court of Appeal showed no sympathy for a person who, in the context of a business transaction, had failed to protect his interests by way of a contract when it was within his power to do so.

The court observed in this regard that, generally speaking, it could see no reason why legal liability for financial loss caused by negligence, as distinct from liability for a loss that was caused by a failure to fulfil a contractual obligation: "should be extended to a plaintiff who was in the position to avoid the risk of harm by contractual means but who failed to do so".

In this particular case, said the court, “it must have been plain to everybody concerned”, at the outset of the events in question, that financial loss could be suffered. The court pointed out that the parties had been represented by professional and presumably able persons.

A TRUST WAS ESTABLISHED TO OPERATE AN AQUARIUM
What had transpired in this case was that the aggrieved party was a trust that operated the Two Oceans Aquarium at the waterfront tourist area in Cape Town.

The trigger for the litigation was the flawed design of the aquarium. The polyurethane lining that had been used to waterproof the exhibition tanks in the aquarium turned out to be porous. This allowed seawater from the tanks to penetrate the surrounding concrete structures, which caused corrosion in the steel reinforcement.

The cost of remedial work to correct the defective design plus the aquarium’s loss of revenue while the remedial work was in progress ran to some R14 million.

The trust sued for damages to recover its financial loss, citing as defendants all the professional advisers who had been involved in the project – the engineering consultant, the project manager, the supplier of the waterproof material, the builder, and the contractor who had installed the waterproof lining.

The trust, as the operator of the aquarium, claimed that all these parties had been negligent in advising the use of, and in actually applying unsuitable waterproofing material in the construction of the aquarium, and that such negligence was the cause of the R14 million financial loss that the trust had suffered.

THE TRUST WAS FORMED ONLY AFTER THE ORIGINAL AGREEMENTS WERE ENTERED INTO
The two original investors in the aquarium project had entered into a joint venture agreement in 1993 to investigate the feasibility of developing and constructing an aquarium.

At that time, they envisaged that a trust would, in due course, be formed to operate the aquarium. The critical decisions – which later turned out to have been negligent – regarding the design and construction of the aquarium were taken in this first phase.
The difficulty that later came to light was that the trust (which, as operator of the aquarium was the party who eventually suffered the financial loss) was itself only formed in July 1994.
 
The issue before the court was whether the trust was legally entitled to recover damages for financial loss which had been caused by negligent decisions taken by consultants and builders at a time when the trust itself was not even in existence.
 
Counsel for the trust argued that it was always envisaged by the joint venture that the aquarium would in due course be operated by a trust that would be formed at a later stage, and that all the consultants to and builders of the aquarium were aware of this, and knew that if their designs and advice turned out to be negligent, the trust would suffer financial loss.

The court refused to accept this argument, saying that to impose legal liability for negligence in such circumstances would require an extension of the established legal boundaries of liability for negligence, and that the court was not willing to extend the law in this regard.

The court pointed out that, even before the trust was formed, the contracts between the parties in question could have been drafted so as to extend legal benefits (by way of clauses imposing liability for negligence) to the trust, and that these contrac­tual benefits could then have been accepted by the trust after it came into existence.

Moreover, said the court, those contractual provisions could have been made retrospectively applicable to actions and decisions that had occurred before the trust came into existence.

The court pointed out that "vulnerability to risk" is an important factor for a court to bear in mind in deciding whether to extend the established boundaries of legal liability for negligence.

Where – as in the present case – the party who had suffered the financial loss could have avoided the legal risk of that loss by appropriate stipula­tions in a contract with the other parties, there was no reason for a court to stretch legal principles "to rescue a plaintiff who was in the position to avoid the risk of harm by contractual means but who failed to do so".

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