Employer liable for damages caused to ex-employee due to non-compliance with debarment process

August 29th, 2016
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By Daryl Marc de Bruyn

Reynecke v OdinFin (Pty) Ltd (GP) (unreported case no 86753/2014, 21-6-2016) (JW Louw J)

In the matter of Reynecke v OdinFin (Pty) Ltd, the plaintiff sued his previous employer (the defendant) for its failure to follow a fair debarment process in terms of the Financial Services and Intermediary Services Act 37 of 2002 (the Act), which prevented him from earning an income as a representative for approximately 12 months.

These are the facts, in summary, which led to the plaintiff’s claim:

  • The plaintiff breached his employment contract with the defendant by attending an induction program at Nedbank to pursue a new employment option.
  • The defendant instituted disciplinary proceedings against the plaintiff regarding this incident, which the plaintiff failed to attend.
  • At the hearing, the plaintiff was summarily dismissed by the chairperson from the defendant’s employ on the basis of misconduct in that he was found to be dishonest about his training at Nedbank.
  • After the plaintiff had left the defendant’s employ, he accepted a permanent employment position at Nedbank to render financial services as its representative.
  • Without any further notice, the defendant took a decision to debar the plaintiff from rendering financial services in terms of the Act, which led to the termination of his employment contract with Nedbank.
  • The decision to debar the plaintiff was based on the findings of the chairperson at the disciplinary proceedings without any further process or investigations by the defendant.
  • The decision to debar the plaintiff was taken by the defendant in terms of s 14(1) of the Act and recorded by the Financial Services Board (FSB) as follows: ‘[Reynecke] does not comply with personal character qualities of honesty and integrity.’
  • The plaintiff took the defendant’s decision on review to the High Court where it was subsequently set aside as being unlawful administrative action.
  • After the review proceedings had been finalised, the plaintiff sued the defendant for loss of income that he sustained for the period July 2013 to March 2014, during which time he was effectively debarred and did not receive income.

The plaintiff’s case as pleaded was that the defendant had owed him a legal duty to exercise its administrative powers in terms of the Act in a fair manner, which the defendant had breached by, inter alia, not providing him with adequate notice of the debarment proceedings and by not providing him with a reasonable opportunity to make representations. The particulars of claim alleged further that the defendant, in performing its statutory duty, had acted negligently and unlawfully.

During the trial, the defendant conceded that its decision to debar the plaintiff without notifying him of its intended decision and by not giving him an opportunity to be heard amounted to unfair administrative action, which fell to be reviewed and set aside.

The main issue to be decided by the court was whether the defendant’s conduct was wrongful in the circumstances.

It was argued by the defendant that the plaintiff’s cause of action was similar to that of Steenkamp NO v Provincial Tender Board, Eastern Cape 2007 (3) SA 121 (CC). In Steenkamp, the court held that a breach of an administrative duty is normally rectified by means of public law remedies (such as judicial review) and that an aggrieved party does not have private law remedies for damages.

In line with Steenkamp, the defendant’s point of departure was that administrative action exercised in a negligent manner is not wrongful in the delictual sense and does not give rise to liability for damages unless policy considerations require that the plaintiff should be compensated for such losses.

It was accordingly argued by the defendant that their conduct was not wrongful in that the Act did not confer any discretion on them to debar the plaintiff, or not. According to the defendant, the provisions of the Act are mandatory in that they are obliged to debar any representative who had acted contrary to the fit and proper requirements. The court, however, rejected this argument by holding that the defendant had in fact made a finding that the plaintiff was not fit and proper for which a fair process should have been followed by them.

It was further argued by the defendant that the imposition of delictual liability on the defendant in the exercise of its administrative function would have a ‘chilling effect’ on all Financial Service Providers (FSPs) when exercising their functions in terms of the Act. By this the defendant meant that an FSP would for instance be more cautious to debar a representative for fear of exposing itself to potential claims in the future. The court, however, held that the FSP could prevent such risks by merely following a fair procedure prior to a debarment.

In para 21 of the Reynecke judgment, Louw J stated as follows:

‘If an FSP acts responsibly and follows a fair administrative process before making a bona fide finding that a representative does not comply with the fit and proper requirements and thereafter debars the representative, it is unlikely that such a representative will succeed with a damages claim against the FSP. But if it debars a representative without following a fair administrative process and thereby potentially causing serious financial harm to the representative, the boni mores would not, in my view, require that the FSP be protected from delictual liability.’

Weighing up relevant policy considerations and facts of the matter, the court held that the defendant’s conduct towards the plaintiff was wrongful and negligent, and as a result whereof the defendant was held liable for the damage, which the plaintiff is able to prove that he suffered as a result of the defendant debarring him as a representative in terms of the Act.

How does the Reynecke decision affect the role of the FSPs and the FSB in debarment proceedings?

The following points are important to consider:

  • That a decision to debar a representative constitutes an administrative action, which is subject to the Promotion of Administrative Justice Act 3 of 2000.
  • That there is a duty on FSPs and the FSB to follow a fair debarment process when the debarment of a representative is contemplated.
  • From the policy underlying the Act, it is wrongful for any FSP or the FSB to debar a representative without following a fair process, which conduct may result in the FSP or the FSB being liable for damages sustained by the representative during the period of debarment.

I submit that the court’s decision to award damages for economic loss to an aggrieved representative, is the first claim of this nature under the Act and possibly even in the context of administrative law under South African law. It is hoped that FSPs and the FSB will take the necessary steps to ensure that fair administrative process is followed by them when exercising any of their powers in terms of the Act.

  • De Bruyns Attorneys Inc were the instructing attorneys for the plaintiff.

 

Daryl Marc de Bruyn BA LAW (Stell) LLB (Unisa) is an attorney at De Bruyns Attorneys Inc in Pretoria.

This article was first published in De Rebus in 2016 (Sept) DR 42.