SMM Holdings Pension Fund v Fidelity Life Assurance Company

### Preamble
1
HH 280-2012
HC 1214/08
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SMM HOLDINGS PENSION FUND

versus

FIDELITY LIFE ASSURANCE COMPANY

HIGH COURT OF ZIMBABWE

MATHONSI J

HARARE, 15 MAY 2012, 16 MAY 2012, 17 MAY 2012 AND 4 JULY 2012

Ms T. Mapota for the plaintiff

V.B.Sibanda for the defendant

Civil Trial

MATHONSI J: The plaintiff sued, the defendant by summons action for 2 claims arising out of 2 separate agreements allegedly entered into between the parties about year 2000. The first claim was for payment of a sum of $420 000-00 in Zimbabwean currency withheld by the defendant as penalty at the termination of a Pension Fund Administration Mandate given to the defendant and, related to that, payment of the sum of $83 127 870 000-00 as damages arising out of the penalty levied by the defendant for the termination of the mandate aforesaid.

The second claim was for the return of 40 300 Delta shares and 8590 Old Mutual shares belonging to the plaintiff but again withheld by the defendant at the termination yet of another agreement allegedly entered into between the parties, but this time being an asset management agreement in terms of which the defendant, or is it is subsidiary Fidelity Life Asset Management Company (FLAM), was hired to manage the plaintiff’s asset portfolio.

In respect of the first claim, the plaintiff averred in its declaration that in year 2000 it entered into a verbal agreement with the defendant in terms of which the defendant was given a mandate to administer its pension fund. When the pension fund administration mandate was terminated in May 2005, the plaintiff later discovered that the defendant had debited its account with a penalty of $420 000-00 which debit had caused the plaintiff to suffer prejudice in the form of unearned interest totalling $83 127 870-000. The plaintiff sought payment of those 2 sums of money.

In respect of the second claim the plaintiff averred that it had entered  into a verbal agreement with FLAM in terms of which FLAM was mandated to manage the plaintiff’s asset portfolio. The plaintiff further averred that the defendant took over the assets management portfolio from FLAM in 2004 which take over was accepted by the plaintiff. When the asset management mandate was terminated in April 2006 and in breach of an express term of that agreement, the defendant again withheld its shares as stated above. It sought an order for the return of those shares.

The defendant contested the 2 claims. In respect if the first claim it averred that while the parties did enter into an oral agreement for the administration of the pension fund, such agreement was subject to the pension laws of the country as well as the rules of the pension fund. The cancellation was in violation of the terms of the agreement between the parties which required that a 6 months notice be given for the termination. As a result of such breach, the defendant was entitled to levy a penalty.

The defendant later amended its plea to say that the claim by the plaintiff had been extinguished by the revaluation of the Zimbabwean currency in the form of the slashing of a total of 22 zeros in August 2008 and February 2009.

On the plaintiff’s 2nd claim the defendant alleged in its plea that while it had not returned the shares sued for this was not in breach of the agreement in that it was owed some money by the plaintiff which it did not specify in the plea. The defendant then averred that:

“At the time of termination of its assets management mandate and transfer of assets the

defendant then deducted the amount due to it which was equal to 40 300 Delta and 8590

Old Mutual shares”.

At the pre-trial conference of the parties held before a Judge the plaintiff abandoned its first claim in its entirety and pursued only the second claim. The matter was then referred to trial on the following agreed issues;

“1. Whether or not the defendant breached the agreement between the parties in not handing

over to the plaintiff 8590 Old Mutual and 40 300 Delta shares.

2.  Whether or not the plaintiff is entitled to return of the 8590 Old Mutual and 40 300

Delta shares.

3.  If the plaintiff was entitled to the return of the said shares whether the defendant

was entitled to set off the amount that it was allegedly owed by the plaintiff against the

value of the said shares.”

At the commencement of the trial certain facts were agreed between the parties namely:

“That the amount that was paid by the defendant in respect of defined benefits

was $481 280 430-08 (Zimbabwe currency) as at 31 May 2006.

2. That if interest is held to be due, the interest rate applicable should be the Old

Mutual rate applied at the relevant time.”

The trial was side tracked for lengthy periods by issues relating to the administration of the plaintiff’s pension fund which, after the withdrawal of the first claim, were peripheral to the issues for trial.

The plaintiff called the evidence of 2 witnesses. These were Loveness Mutero and Peter Moyo. In addition, it produced a bundle of documents, exhibit 1, which it relied upon to prop up its case.

Loveness Mutero (Mutero) is the Human Resources Officer of the plaintiff who is in charge of the plaintiff’s pension fund. She has been so employed since 1 June 2003 and was, before that, employed by the defendant as a pensions administrator. Her duties involved checking details of members, reconciliations and ensuring that the current benefits are paid. Mutero testified that, although she had not joined the plaintiff then, she was aware from records that the defendant was appointed by the plaintiff as fund administrator and assets manager about year 2000. The fund was registered with the Registrar of Pensions ( now the Commissioner of Insurance and Pensions), in terms of the Pensions and Provident Funds Act [Cap 24:09] as a self administered fund. She produced the registered rules of the Fund, item (a) of exhibit 1, showing that it was originally known as the T.H. Zimbabwe Pension Fund and by Certificate of Amendment issued on 5 February 2002, the name of the employer was changed to that of the plaintiff and new rules were introduced which were registered on 3 March 2002.

In terms of rule 2 of the rules of the fund;

“The Fund is a Pension Fund administered by the Administrator as a self

administered fund.”

She explained that registered rules govern a self administered Fund. The assets of the Fund are in its name and a bank account has to be opened where incoming contributions are deposited and from where claims are met. Mutero made reference to rule 2.8 which reads;

“The Administrator’s liability under the Fund at any time shall, other than in respect of

benefits that have actually been purchased from the Administrator, be limited to the credit balances in the Accounts maintained by the Administrator in respect of the Fund.”

She also drew attention to rule 8.8 which provides;

“All pension shall be paid from the Fund save for Additional Voluntary Contributions.

However, the member has the option of purchasing the pension in Rule 10.”

She testified that the defendant administered the Fund from 2000 to 2005 and it also was responsible for the investments of the plaintiff through its investment division from 2000 to 2006. The Fund administration mandate was terminated in March 2005 while the assets management or investment portfolio was terminated in April 2006. As assets manager the defendant had the responsibility of investing the assets of the Fund.

When the mandate to administer the Fund was given to the defendant in 2000, the administration of the Fund was moved from the then Fund Administrator, Old Mutual Limited (Old Mutual) to the defendant. This process involved the splitting of the Fund into 2 namely the Defined Benefits (DB) which remained with Old Mutual and the Defined Contributions (DC) which were transferred to the defendant for administration.

This arrangement meant that pensioners were being paid by Old Mutual while exits and other retirements were being paid by the defendant. The arrangement caused problems as a result of which the Trustees of the Fund decided at a meeting held on 4 February 2005 that there was a need to house everything under one administrator. They then decided to move the Fund administration back to Old Mutual. When this happened, the defendant was retained as the Assets Manager.

In good time, in April 2006, the Trustees again decided to move the Assets Management portfolio to Old Mutual as well, thereby, terminating the defendant’s mandate. The assets that were being managed by the defendant comprised of equities, cash at the bank and those assets that were in the money market.

Mutero went on to say that when the defendant was transferring the plaintiff’s assets as instructed, to Old Mutual it withheld 8590 Old Mutual shares and 40 300 Delta shares belonging to the plaintiff without the authority of the plaintiff alleging that it was owed money by the plaintiff. The debt was alleged to arise from payments the defendant had made to beneficiaries on behalf of the Fund using its own money. She insisted that at no point during the tenancy of the Fund administration mandate, did the plaintiff instruct or authorise the defendant to use its own money to settle any claims and that the defendant had been specifically instructed to use the plaintiff’s DC assets which it held, to settle all claims and to claim a re-imbursement of the BD portion from Old Mutual which had retained that part of the plaintiff’s Fund.

Mutero insisted that it made no sense whatsoever for the defendant to use its own money to settle liabilities of the Fund when it had been specifically instructed by the Board of Trustees of the Fund to use the Fund’s assets comprising of incoming contributions reaching the account. She disputed the argument that as a responsible Fund Administrator the defendant could not mix the DC and DB assets, that is, use the DC assets to settle DB claims, stating that it was the instruction given to the defendant by its principal and as such it had to be complied with. This was particularly so as the defendant never advised the plaintiff that it had resorted to using its own funds to pay on behalf of the plaintiff.

According to Mutero, the contributions which were being received by the defendant on behalf of the Fund far exceeded what was required by the Fund to settle claims, and as such there was no need, not only for the defendant to use its money to settle those claims but also for an exchange of money between the defendant and Old Mutual. This position was even confirmed by the defendant in a letter dated 24 March 2005 (right inside the period it claimed to had been using its own money to pay on behalf of the plaintiff) – item ( c) of exhibit 1 – which reads in relevant part thus;

“Our experience is that new monthly contributions far exceed monthly benefit

payouts so that, fundamentally, there is no good reason for any asset transfers

between the 2 Asset Managers ( Old Mutual and the defendant) at this stage. These net contributions have been invested on behalf of your Fund and have been appearing on your monthly investment statements. You may even consider

splitting the new contributions, net of benefit payments equally between the 2

asset managers for their investment. This is the common practice by self-

administered funds who have 2 or more Asset Managers. The administration

only needs to keep such amounts as necessary to meet benefit payments. In the

unlikely event of any huge benefit out flows from the Defined Contributions

portion of the Fund needing disinvestments. Old Mutual can always approach us

for such funds.” (The underlining is mine)

This letter was written by R. Razunguzwa, the defendant’s General Manager – Group Pensions, who testified in Court on behalf of the defendant and whose evidence shall be dealt with later in this judgment. Significantly he was here confirming that the plaintiff’s fund was a self administered fund and that it had excess funds, 2 factors he tried so desperately to dispute in his testimony.

Mutero added that the Asset Management mandate was terminated with effect from 20 April 2006 by letter dated 19 April 2006 – item (d) of exhibit 1 and the defendant was specifically instructed;

“Due to the nature of the assets in our portfolio, it was agreed that all disposals,

purchases or early terminations should be frozen with effect from today with the

notice period to be used solely for the transfer of all assets and securities to our

current administrators ( Old Mutual)”.

She went on to say that the defendant did not comply with that instruction as it later submitted a script account indicating that it had withheld certain Old Mutual and Delta shares aforesaid. This account was only submitted on 17 August 2006 – item (e) of exhibit 1. Although no reason was immediately given by the defendant for doing so, it later transpired that it was to offset a debt the defendant had incurred without the authority or knowledge of the plaintiff as its principal.

Mutero testified that although the defendant withheld the shares at the termination of its Asset Management mandate in May 2006, it did not notify the plaintiff that it had done so until August 2006 nor that it had off set them against what was owed to it. In addition to that, after the termination of the mandate, the defendant was holding large sums of money belonging to the plaintiff which it systematically paid back to the plaintiff after termination.

According to the accounts of the plaintiff – item (g) of exhibit 1 – as at 31 December 2004, the defendant was holding a huge balance of $980 015 622-84 (Zimbabwe currency) which should have been used to pay whatever claims were there instead of the defendant using its own funds. As at December 2005 the defendant had received contributions of $4 059 998786-00 (Zimbabwe currency) which was available for use to settle claims.

Mutero went on to say that even after withholding the plaintiff’s shares in May 2006, the defendant was still holding huge sums of money belonging to the plaintiff which, had it been genuinely desirous to offset a debt owed to it, it would have done so using that money. Indeed, items (o), (p), (q) and (r ) of exhibit 1 show that on 15 June 2006 the defendant transferred $5 153 474 123-42 to the plaintiff via Old Mutual. On 16 June 2006 it transferred $5 677 540 648,72. On 21 June 2006, it transferred $3 689 778, 58 and on 28 June 2006 it transferred $4 094 064 894,87 all Zimbabwe currency. She maintained that had it been acting in good faith the defendant would have appropriated from these funds the sum of $481 280 430,11 which it had paid out on behalf of the plaintiff, albeit without the latter’s authority. Mutero took the view that the defendant’s lack of bona fides was demonstrated by the fact that it went on to dispose of the plaintiff’s shares, again without its authority, for a whopping total sum of $60 850 000-00 (revalued) between October and November 2006.

Under intense and protracted  cross examination by counsel for the defendant Mutero stuck to her evidence. Although she was at times confused by the endless leading questions, she generally acquitted herself very well, readily agreed to facts which may not have been beneficial to the plaintiff’s case and did not try to exaggerate anything. For instance she quickly conceded that because Old Mutual was an agent of the plaintiff, information communicated to Old Mutual could be taken to have been communicated to the plaintiff, although it was not.

She however maintained that the defendant was claiming re-imbursement of the various sums that it had paid on behalf of the plaintiff from Old Mutual without disclosing that the sums in question were being claimed, not on behalf of the Fund, but for the defendant itself. This created confusion as shown by the fact that as late as 17 July 2006, after termination, Old Mutual wrote an email to the defendant, through Raphael Mubaiwa – item 39 of exhibit 2- in response to a demand for payment of $8,5 billion which reads as follows;-

“ I have seen the schedule and I will pass it on to the client. But it is ironic the

funds were coming from Fidelity and not the Fund’s DC Scheme which was

supposed to be reimbursed by the DB Scheme at Old Mutual since it was more

than big enough to foot the cost.”

Mutero gave her evidence reasonably well and struck me as a truthful witness. I accept her evidence.

Peter Moyo (Moyo) also testified for the plaintiff. He is currently employed by Tetrand Resources (Pvt) Ltd. Before that he had, in 1998 been employed by the plaintiff as Group Secretary Besides that he held the position of Principal Officer of the plaintiff’s Pension Fund which he says was initially called TH Holdings Zimbabwe Pension Fund before changing its name around 2002 to SMM Holdings Group Pension Fund. He was Pensions Officer up to 2002 and later served as the chairman of the Board of Trustees of the Fund.

This very impressive witness’s evidence was substantially similar to and supportive of that of Mutero. His main advantage was that he was directly involved when the Fund was formed and was also involved in the negotiations which led to the conclusion of the 2 agreements between the parties, that is, for Fund Administration and Asset Management.

Moyo testified that from 1998 the Fund was a defined Benefit Scheme. They worked on it from 1998 to March 1999 converting it into a Defined Contribution Scheme. Then the Fund Administrator was Old Mutual. In year 2000 the Board of Trustees resolved that the Fund Administration be transferred to the defendant. It also resolved that the Asset Management function was to be undertaken by FLAM, a subsidiary of the defendant.

There was no written agreement between the parties but there were agreed conditions under which the defendant and FLAM operated. He stated that the Fund was a self administered fund and explained that this means that any decision taken by the Administrator or Asset Manager should have the prior approval of the Board of Trustees. This applied to the way the assets of the Fund were invested, the interest accruing on them, any disposal of assets and the Fund Administrator and Asset Manager had to account to the Board for all their actions. The Trustees have the final say in whatever decision affects the assets of the Fund. They are involved in the management of the Fund. On termination, the Administrator and Manager are required not only to account fully but also to hand over all the assets of the Fund. Under an insured Fund the Trustees identify an individual to manage the Fund assets freely but only reporting to the Board.

Moyo stated that before conversion the Fund operated as a Defined Benefit Scheme which means that the employer establishes a pension fund which sets a mechanism through which an employee is paid benefits from the Fund based normally on his last 3 months salary and the number of years of service. This risk under this scheme lies with the employer. From1 April 1999, the Fund became a Defined Contribution Scheme which is based on an employee’s and employer’s contributions into the Fund. Upon retirement, or withdrawal the employee’s benefits are based on what he contributed personally and what the employer contributed for him. The risk under this scheme lies with the employee.

The plaintiff’s Fund, whether under Old Mutual or under the defendant was always regulated by a set of rules which were registered with the Registrar of Pension Funds. He stated that the ultimate management of the fund lay with the Board of Trustees composed of employer nominees and employee elected Trustees.

Moyo stated that he represented the plaintiff when the arrangement with the defendant to take over Fund management was concluded. He was partnered by the Chairman of the Board and the Internal Fund Administrator. The defendant was represented by Mr Chapereka and a team of subordinates he could not remember.

When negotiating the Asset Management mandate with FLAM again he and his team of the chairman and the internal administrator stood for the plaintiff while FLAM was represented by its managing director and a number of his subordinates. Although the agreements were verbal, the terms of the asset management agreement were that before any investment was made the approval of the Board had to be obtained. This applied to the interest as well and the nature of the investment. Any charges on the Fund’s assets had to receive prior approval of the Board. On the termination, FLAM would account fully to the Board and handover all the assets of the Fund.

Moyo recalled that about 2004 the defendant notified the plaintiff that it was undergoing some restructuring and for that reason, it was taking over the asset management function from FLAM. This was approved by the plaintiff and the defendant stepped into the shoes of FLAM on the same terms of agreement. The defendant then managed the assets until termination of the mandate aforesaid.

He corroborated the evidence of Mutero that the parties agreed that DB claims were to be paid by the defendant from DC assets that it held and not from its own coffers. The defendant was then to claim re-imbursement from Old Mutual on behalf of the Fund. At no stage was the defendant allowed to use its own funds. Moyo took the view that there was nothing wrong with this arrangement because it had been approved by the Board acting in terms of the Fund Rules and there was always going to be a refund.

The witness insisted that during the life span of the mandate the defendant did comply with that instruction and paid DB claims from DC assets. He then wondered how and why the defendant ended up applying its own funds to pay on behalf of the plaintiff. He contested the defendant’s claim that it had to use its own funds because it was unprocedural to use DC assets to settle DB claims as this prejudices the employees. In his view the argument did not make sense at all especially as the shares which the defendant withheld were DC assets which it was now using to offset DB liabilities.

Moyo was also subjected to intense cross examination. He came out unshaken. He presented his evidence very well and with dignity and, as I have already stated, he was an impressive witness. I have no hesitation whatsoever in accepting his evidence which was clearly credible.

The defendant’s case was presented by Paul Razunguzwa (Razunguzwa) who is the Group Operations Director of the defendant and has been employed in the Pensions Industry for 30 years. He was incapacitated by the fact that he joined the defendant in October 2004 long after the agreements between the parties had been concluded. He once worked for Old Mutual. Razunguzwa produced documentation – items 1,2 and 3 of exhibit 2 - showing that the defendant and FLAM are 2 distinct companies. He made reference to the plaintiff’s summons and declaration where it is alleged that the Asset Management agreement was between the plaintiff and FLAM. He suggested that the plaintiff had sued the wrong party as it should have proceeded against FLAM.

Perhaps I should dispose of this issue now before proceeding further with the defendant’s case. In my view, the argument that there was no legal relationship between the plaintiff and the defendant on account of the original agreement having been made with FLAM is pure redherring. This is because the defendant’s own pleadings admit the existence of such legal relationship. I need only quote verbalism from the defendant’s plea to the plaintiff’s 2nd claim. It states at paragraph 6 (f) as follows;

“At the time of termination of its asset management mandate and transfer of

assets the defendant then deducted the amount due to it which was equal to 40

300 Delta and 8590 Old Mutual shares.”

This is a clear admission that there was an asset management mandate given to the defendant which was terminated.

After spending time arguing that there was no privity of contract between the defendant and the plaintiff, Mr Sibanada for the defendant stated in his written closing submissions at paragraphs 58 and 61 as follows;

“58: On the other hand, the defendant, as part of its administering mandate,

held shares on behalf of the plaintiff arising out of the defendant’s management

of the DC portion of the pension fund.

59………………….

60…………………..

61. It is thus submitted that upon termination of the defendant’s administration

mandate was terminated (sic) the plaintiff’s shares held by the defendant

became a debt due from the defendant to the plaintiff…………………”

It is also common cause that at the time of termination, the defendant was the Asset Manager of the plaintiff’s assets and not FLAM. Earlier on in this judgment I quoted verbatim  a letter dated 24 March 2005 to the plaintiff done by Razunguzwa in which he stated;

“We understand from your letter that Fidelity Life has been retained as one of 2 Asset

Managers. We thank you for this acknowledgment of our expertise in this area……..”

To then try and disown the existence of an asset management agreement between the parties, in my view, lacks candour. So is the attempt to argue that there existed an asset management mandate in respect of the DC scheme but under the Fund Administration mandate and not a separate asset management agreement. Its an unnecessary splitting of hairs.

I conclude therefore that there was an asset management agreement between the parties under which the defendant controlled the shares that it withheld.

I now to the evidence of Razunguzwa. He made reference to minutes of a meeting between teams from Old Mutual and the defendant on 17 November 2000 – item 6 of exhibit 2 – which discussed their management of the plaintiff’s affairs which read in relevant part as follows;

“4.1 Withdrawals

* Only one termination form is completed and submitted to Fidelity Life.

* Fidelity Life would be responsible for paying the total benefit.

* Two calculations to be done i.e under the DB scheme SV as at 31 March 1999

would be updated with interest as per DB Rules and the DC benefit would be as

per the DC rules.

Fidelity Life would then claim the value of the DB withdrawals benefit up to

30/09/00”

The witness explained that this illustrated that the technical aspect of the methodology of payment was left to the teams of both Old Mutual and the defendant and they developed a practice in respect of payment of claims from the Funds they administered. Although there were disagreements to begin with, the 2 sides ended up developing a practice whereby, in the interest of members, it was agreed that the defendant would calculate the benefit due, generate a cheque which would go to the beneficiary and attach the payment cheque to a letter to the plaintiff’s Fund Administrator. The letter would detail the benefit payable from the DB scheme and the one payable from the DC Scheme and give a narration of how the value of the cheque was arrived at.

A monthly reconciliation would then be made for all the DB benefits so that there would be a reimbursement. He drew attention to a letter dated 19 September 2003 written by the defendant to Old Mutual claiming a refund – item 22 of exhibit 2. It reads;

“SMM HOLDINGS PENSION FUND (BMA FASTENERS) ILL HEALTH

EARLY RETIREMENT – CHIKUKWA JOSEPH: REF:20003041

The above named member retired on 31 March 2003 and we paid out the full DB

portion as computed below;

Full commutation of member’s pension		$90 422, 76

We look forward to receiving a cheque for $90 422, 76 from yourselves.

We trust that all is in order.”

He explained that together with the monthly reconciliation, the defendant would send a letter to the plaintiff updating it of payments made.

What is clear is that all the documents referred to as signifying payments made by the defendant in respect of the DB Portion, do not clarify the issue of where the money used to pay the benefits was coming from. It was not indicated that it was coming from the defendant’s coffers, hence the confusion. Razunguzwa, however insisted that the money used came from the defendant as they could not use the plaintiff’s DC funds to settle its DB liabilities.  As a prudent Fund Administrator, the defendant elected to use its own funds than those of the plaintiff residing in the DC portion. He maintained that this system of payment subsisted from 2000 when the defendant assumed the mandate.

Razunguzwa made reference to a letter dated 11 May 2005 from the defendant – item 28 of exhibit 2. The letter was addressed to the auditors of the Fund. KPMG and reads;

“This is to confirm that SMM Pension fund owed Fidelity Life an amount of $365

146 593-00. The amount is in respect of benefits that were paid on behalf of the

Fund by Fidelity Life Assurance Company and were not recovered as at 31

December 2004.”

He took the view that this claim should have been brought to the attention of the plaintiff as the defendant’s claims were reflected on yearly accounts in December 2003 and 2004.

Razunguzwa stated that if the DC portion had been used  to pay the DB claims and Old Mutual had refunded immediately, there would be no prejudice suffered by the DC Scheme. As this refund was not immediate, the defendant decided to bear the cross by discharging the liabilities from its own funds. As the $481 million they paid from their own account remained in the plaintiff’s Old Mutual Fund, it continued to enjoy investment returns. For that reason there was no prejudice to the plaintiff.

Demonstrating his argument by the use of a schedule – item 26 of exhibit 2- the witness insisted that the amount that the defendant took from source (the shares) left the plaintiff in a better position than it would have been in had they withdrawn cash. He however stated that the defendant had given the plaintiff an opportunity to repay them in cash as they had calculated the plaintiff’s liability on 31 May 2006 and withheld the shares equivalent, but when the plaintiff failed to do so, the defendant took it upon itself to deduct at source the amount owing on 17 August 2006 before handing over the balance of the assets.

He argued that as they were no longer holding cash belonging to the plaintiff on 17 August 2006, they could not set off what was owed using cash. In saying this the witness was not being truthful because the evidence shows that they did their arithmetic and withheld the shares in May 2006 when they were still holding a lot of cash belonging to the plaintiff It was only towards the end of June 2006 that the defendant released the cash to the plaintiff. But in its wisdom, kept the shares.

Razunguzwa stated that at the time this was happening hyper inflation had gripped the economy to the extent that monetary authorities, through a project known as Sunrise 1 , decided to strike off 3 zeros from the currency in August 2006. For that reason, the profit that the defendant made from the sale of the plaintiff’s shares  was just a bubble profit given that they took shares equivalent to what was owed as at 31 May 2006.

Under cross examination by counsel for the plaintiff Razunguzwa got himself in trouble trying to disown the existence of an asset management mandate given to the defendant. Although he was then not employed by the defendant, he said that the mandate was given to FLAM and not the plaintiff. He said he was not sure when the mandate was terminated. He prevaricated a lot and could not explain what the defendant was doing with the plaintiff’s assets at termination in April 2006 including the shares that they withheld, if it had no asset management mandate.

I have already demonstrated the fallacy of the defendant’s denial of the mandate. Clearly Razunguzwa was not being truthful.

Asked about the nature of the Fund given to the defendant in 2000 as to whether it was a self administered fund or an insured fund, Razunguzwa again prevaricated and then sought to argue that it would not make a difference what it was, as the requirements were the same. He finally settled for saying that the Fund that the defendant administered was a mixture of both.

His evidence in this regard is clearly unreliable. He could not explain how the Fund could be a hybrid when it had a set of registered rules.

To his credit Razunguzwa testified that when they took over the administration of the Fund, they got cash belonging to the Fund. They did not open a separate bank account for the Fund but instead chose to deposit the cash in the defendant’s own bank account although they maintained a cash account within their establishment in order to segregate transactions relating to the Fund.

However the bank account where the Fund’s finances were kept had other deposits belonging to the defendant.

He admitted that, as Fund Administrator, the defendant was the plaintiff’s agent, and as such, was expected to act according to the plaintiff’s instructions and that at no time during the subsistence of the Fund Administration mandate did the defendant receive an instruction to pay the DB claims from its own coffers. He admitted that at no stage did the parties agree on any interest that would accrue on the forward payments the defendant made without authority.

Asked by the court whether it was normal for  a Fund Administrator to use its own money to settle liabilities of the principal, his reply was that it was very normal as long as there was agreement between the parties on time value of money and compensation.

Razunguzwa did not make a good witness and was clearly unreliable. Even his demeanour was extremely bad. Where his evidence is at variance with the credible evidence of the plaintiff’s witnesses, I prefer that of the latter witnesses.

I now turn to resolve the issues placed before me at the trial

Whether or not the defendant breached the agreement between the parties in not handing over the plaintiff’s 8590 Old Mutual and 40 300 Delta shares.

I have already rejected Mr Sibanda’s argument that there was no privity of contract between the parties. The terms of the agreement entered into by the parties were set out by Moyo who testified on behalf of the plaintiff and I have already accepted his evidence, he having been a very credible witness. They are briefly that the defendant was mandated to manage the plaintiff’s assets on terms, inter alia, that any activity undertaken by the  Manager had to receive the prior approval of the plaintiff’s Board. Any charges on the Fund assets had to receive prior approval of the Board and, on termination of the mandate, the manager had to account fully and hand over all the assets to the Fund.

The evidence shows that the plaintiff notified the defendant of the termination and  specifically directed it to hand over all the assets to Old Mutual, its new Asset Manager. The defendant did handover most of the assets to Old Mutual including large sums of money systematically transferred to Old Mutual. It withheld the shares that form the subject of this litigation.

There can never be a clearer breach of a specific term of an agreement. I therefore answer the 1st question relating to whether there was a breach, in the affirmative.

Whether or not the plaintiff is entitled to return of the 8590 Old Mutual and 40 300 Delta shares.

When the Asset Management agreement was terminated the defendant was enjoined to return all the assets it held on behalf of its principal to the principal. That issue is therefore superfluous because once a conclusion is made that the defendant was in breach of the agreement, it must follow that the plaintiff is entitled to a remedy for that breach. The remedy available to the plaintiff is the return of the shares withheld in breach of the agreement of the parties.

The way I understand the defendant’s case is that, while the shares belonged to the plaintiff, it was entitled to appropriate those shares owing to some legal entitlement. That will then bring me to the final issue for determination which is really the fundamental issue.

If the plaintiff was entitled to the return of the said shares whether the Defendant was entitled to set off the amount that it was allegedly owed by the plaintiff against the value of the said shares.

The onus of proof in respect of this issue lies with the defendant. Mr Sibanda for the defendant has argued that the defendant was owed a sum of ZW$481 280 430-11 by the plaintiff in respect of DB claims that it discharged on behalf of the plaintiff and that interest accrued on that sum of money resulting in a debt of ZW8,5 billion being due at the time of termination of the agreement. For that reason the defendant was entitled to appropriate the shares to set off what was owed to it.

While conceding, in a way, that the parties had no agreement as to the rate of interest, Mr Sibanda has argued that interest became due on each payment made by the defendant when a demand was made to Old Mutual for reimbursement. The effect of the defendant’s demand was to place the plaintiff in mora. He submitted that communication of the demand to Old Mutual, an agent of the plaintiff, was communication to the plaintiff and relies on the authority of Denton v Director of Customs & Excise 1989 (3) ZLR 41 (H) 53 B-D where GREENLAND J stated, quoting with approval De Villiers and Macintosh, The Law of Agency in South Africa 3rd ed p530:

“Knowledge acquired by an agent and not communicated to his principal is

imputed to the latter merely by reason of the fact that the agent has acquired such knowledge, provided that (a) the knowledge was acquired in the course of the agent’s employment and (b) there was a duty upon the agent, to communicate the information obtained.

Whether there is such a duty will depend upon the scope of his authority and the

importance of materiality of such knowledge to the principal. The test of

materiality is whether the knowledge of the agent is such that in the ordinary

course of business a reasonable man would be expected to impart such

knowledge to the person who had delegated to him the conduct and control of his affairs.”

On that point Ms Mapota for the plaintiff submitted that there was never an agreement between the parties that the defendant would settle DB claims from its coffers or that, once it had acted outside its mandate and done so all the same, that any interest will accrue to the defendant let alone the rate of interest. She relies on the authority of Georgias & anor v ZDF Financial Services Ltd 2000 (2) ZLR 447 (H) 451 F where CHATIKOBO J said:

“ The general principle of our law is that interest is not recoverable unless the

parties have agreed that interest is payable unless the defendant is in mora.”

The issue of interest arises because the defendant seeks to argue that the shares that it appropriated are equivalent to the sum of ZW$8,5 billion which was due to the defendant as at 31 March 2006 when the shares were withheld which amount was made up of the sum of ZW$481 280 430-11 which was paid by the defendant from its coffers and ZW$8 031 041 101, 04 interest on that amount.

In my view, it is not even necessary to decide those legal issues because the evidence that has been led clearly shows that when making demands for reimbursement the defendant did not disclose to Old Mutual that it was claiming its own money or that it had settled claims from its own coffers. It is for that reason that, as late as 17 July 2006, Raphael Mubaiwa of Old Mutual was still not aware that the defendant was claiming its own money.

I make a finding that when Old Mutual received the claims for reimbursement from the defendant the assumption was that the defendant was seeking reimbursement on behalf of the DC portion of the Fund which it administered. I find as proved that the parties had agreed that the defendant would settle the DB claims from the Fund’s DC portion.

It makes no sense to me that the defendant elected to pay its principal’s liabilities using its own funds. By paying DB claims from its coffers the defendant was breaching the agreement between the parties and cannot then seek to benefit from its own breach. Indeed in doing so, the defendant was engaging in mischief and for its own benefits. In saying this I am mindful of the fact that all the witnesses who testified alluded to the problem of hyper inflation which was gripping the economy. I therefore take judicial notice of that factor as playing an important part in the manner in which the parties conducted business.

I am also mindful of the fact that the evidence that is available shows that the defendant managed the plaintiff’s funds from its own account when, by its very nature, the Fund should have been managed from its own bank account. In my view, the defendant ran the plaintiff’s business rough shod and did not differentiate that business from its own.

Hyper inflation may have influenced the defendant’s decision to utilize its own funds in paying the plaintiff’s liabilities while at the same time keeping large sums of money belonging to the plaintiff to lose value owing to hyper inflation. What the defendant did in the end, releasing these large sums while retaining shares which have intrinsic value speaks to the fact that the defendant was certainly not acting in the interest of the principal but its own.

I concluded that the parties did not agree on interest and that the plaintiff was not placed in mora by the demands made to Old Mutual at the time. No interest was due to the defendant.

The defendant relies on a set off in defending the plaintiff’s claim. According to the learned author RH Christie, Business Law in Zimbabwe, 2nd Ed, Juta & Co Ltd at pp.112-113.

“Set off, or compensation, comes  into effect when two parties are reciprocally

indebted to each other, a natural obligation being sufficient; Municipality of KweKwe v Space Age (Pvt) Ltd 1985(1) ZLR 300(S). It takes effect automatically by operation of law, and does not have to be claimed (ibid) but like any other fact it must be pleaded and proved so the court can take it into account. The reciprocal debts must be liquidated in the sense of being either admitted or capable of easy and speedy proof …… There must be true reciprocity of debts, in the sense not only that they must be owing between the same parties but that in respect of each debt each party must have been acting in the same capacity”.

In McCronev Sibanda 1991(2) ZLR 28(H) 30H to 31A GREENLAND J

stated:-

“Set off or compensatio is a method by which contractual and other debts are extinguished simultaneously ipso jure. Set off may be regarded as a form of payment. It may even operate as the equivalent of payment in cash”.

See also Commissioner of Taxes v First Merchant Bank Ltd 1997(1) ZLR 350(S)

353C where GUBBAY CJ had this to say:

“At common law, set off or compensatio is a method by which mutual debts, being liquidated and due, may be extinguished. It takes place ipso jure. If the debts are equal, both are extinguished; if unequal, the smaller is discharged and the larger is proportionally reduced”.

Mr Sibanda strongly argued that the defendant was entitled to set off what was owed to

it in cash by an appropriation of shares because “a share which is listed on a stock exchange has a value which is easily determinable on each day” and that the material date was 17 August 2006. I have serious difficulties with that argument because the defendant calculated interest at an arbitrary rate on 31 May 2006 and determined what it considered the equivalent of what was owed to it in shares. It then purported to set off the shares on 17 August 2006.

In my view the process adopted by the defendant was commercially impaired and devoid of the dynamics of a willing buyer and a willing seller. No evidence was led as to whether the value that the defendant attached to those shares at whatever date it did so, was their quoted value on the stock market on that date or that it represented the market price. What the defendant did was to simply say: “this is what I divine the shares are worth, you owe me, live with it”.

More importantly, I am not persuaded that the requirements of a set off have been established in this matter. It is a requirement that the debts or obligations must be of the same nature, and liquidated. The defendant sought to set off money against shares. The value of shares fluctuated. In addition the amount owed to the defendant, even assuming it was able to prove entitlement, is not what the shares were worth at the time. It was owed $481 280 430-08 but withheld shares it says were worth $8 512 321 531-12.

I am not persuaded that both debts were liquidated or indeed that what the defendant was claiming was due by the plaintiff.

I therefore come to the conclusion that the defendant has not discharged the onus resting upon it to prove that it was entitled to set off the amount owed to it against the value of the plaintiff’s shares. I must therefore answer the last question on the issues for trial in the negative.

I accordingly find in favour of the plaintiff and make the following order; to wit; that:-

The defendant returns forthwith to the plaintiff 40 300 Delta shares and 8 590 Old Mutual shares.

The defendant shall bear the costs of suit.

Gwaunza & Mapota , Plaintiff’s legal practitioners

Messrs Mawere & Sibanda, Defendant’s legal practitioners