Category Legal Affairs

Liability exposure for cyber fraud overturned

11 June 2024 Kagiso Tshandu, Senior Associate at Eversheds Sutherland (SA) Inc.

In Edward Nathan Sonnenberg Inc v Judith Mary Hawarden (421/2023) [2024] ZASCA 90 (10 June 2024), the Supreme Court of Appeal (“SCA”) overturned the previous decision of the High Court which held that ENS was liable to pay the sum of R5.5 million to Ms Hawarden due to the damages she suffered as a result of cyber fraud. The High Court found that ENS owed the plaintiff a duty of care which duty they breached, and as result upheld Ms Hawarden’s claim.

On 23 May 2019, Ms Hawarden entered into an offer to purchase agreement for the purchase of property in the amount of R6 million, requiring a R500 000.00 deposit. ENS was appointed as the conveyancing attorneys of the transaction. In terms of the agreement, the balance of R5.5 million would either be secured by way of a bank guarantee issued in favour of the seller from a recognised financial institution acceptable to the seller, alternatively, by way of an undertaking acceptable to the seller, which would be subject to the transfer taking place. Either of the said options had to be delivered by Ms Hawarden to ENS within 14 days. Prior to Ms Hawarden effecting payment, she followed up with ENS to telephonically enquire whether she could transfer the R5.5 million directly to ENS, which method was approved.

To Ms Hawarden’s dismay, she fell victim to a form of cyber fraud known as business email compromise (“BEC”). The fraud emanated from the interception of a genuine email transmitted by ENS to Ms Hawarden after the said telephonic discussion (unbeknown to her) on 21 August 2019 enclosing its trust account details, whereafter the genuine email was replaced by a fraudulent one wherein which ENS’s account details were altered to reflect the fraudster’s account details.

Thereafter, on 22 August 2019, Ms Hawarden transferred the 5.5 million into the fraudulent account, which money was withdrawn during the period of payment being made and Ms Hawarden becoming aware of the perpetrated fraud. The bank was not able to retrieve the money from the fraudulent account. Ms Hawarden contends that ENS had a duty of care in respect of the transaction which they breached by failing to caution and protect her from falling victim to BEC. Furthermore, Ms Hawarden contended that ENS failed to utilise more secure means regarding its trust account details resulting in an omission to protect the plaintiff.

The issue on appeal was whether or not the Ms Hawarden established the wrongfulness element in order to successfully prosecute her delictual claim arising out of an omission causing pure economic loss. The SCA pointed out that Ms Hawarden’s claim fell under the guise of pure economic loss caused by an alleged wrongful omission. The court then considered the principles regarding wrongful omissions and referred to the matter of Hawekwa Youth Camp and Another v Byrne [2009] ZASCA 156; [2010] 2 All SA 312 (SCA); 2010 (6) SA 83 (SCA) para 22 wherein it was held, in relevant part, that: “a negligent omission causing loss will only be regarded as wrongful and therefore actionable if public or legal policy considerations require that such omissions, if negligent, should attract legal liability for the resulting damages.

The court applied the principles relating to negligent omissions causing loss against the facts of the matter, and held that the loss occurred when there was no attorney-client relationship between Ms Hawarden and ENS. The court also held that Ms Hawarden’s loss arose as a result of her email account becoming compromised and not because of any filing in the ENS system. The court also pointed that Ms Hawarden had been warned by the estate agent about BEC and took heed of this advice at the beginning of the transaction, however three months later, she failed to do so in respect of ENS’s account details and to this end she was unable to provide any satisfactory explanation. The court was also of the view that any warning of BEC by ENS would have been futile as Ms Hawarden’s account was already infiltrated by the cyber criminals at the relevant time therefore the risk of BEC already materialised.

The court held that the decision of the High Court essentially opened the floodgates for indeterminate liability where pure economic loss arose. The SCA criticised the High Court for finding that “all creditors in the position of ENS owe a legal duty to their debtors to protect them from the possibility of their accounts being hacked” and held that such reasoning was flawed. According to the SCA, this was not a scenario where Ms Hawarden could not have avoided the risk of BEC by other means, as it is evident that she could have simply verified the account details of ENS by contacting the appropriate personnel. Consequently, the appeal was upheld as the court found that there was no reason in the circumstances that ENS should be held liable for her loss.

The judgement has far reaching implications for consumers who interface and transact with not only the legal profession but all entities. Whether or not the findings made by the court are susceptible to criticism, it is evident that is that the courts will not hesitate to find a consumer responsible for their loss in an effort to not unreasonably impute liability to an established and well-resourced entity for cyber fraud. On the other hand, the SCA decision has limited the level of exposure of conveyancing attorneys to liability arising from cyber fraud. Such a finding is however dependent the merits of each case. It will be interesting to observe whether the matter is taken to the Constitutional Court and what their final say on this matter will be.

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