LEGAL MATTERS J U L Y 2 0 1 6 V O L U M E 6 3 For a contract to be considered valid and binding in South Africa, certain requirements must be met, inter alia, there must be consensus ad idem between the contracting parties, the parties must have seriously intended the agreement to result in terms which can be enforced and the parties must have the requisite capacity to contract. In this article we will specifically focus on the requirement of consensus ad idem which refers to the intentions of the parties forming the contract. We will look at case law to determine what happens in the instance where a party signs a contract without reading it - and whether it can be said that the requirement of consensus ad idem has been met in such instances or not. As stated above, the requirement of consensus ad idem refers to the contracting parties having a common understanding in the formation of the contract. The law, as a general rule, concerns itself with the external manifestations, and not the workings, of the minds of parties to a contract. Consequently, a person s signature on a contract signifies his acceptance to the contents of the document - the other party is therefore reasonably entitled to assume that the signatory, by signing the document, was signifying his intention to be bound by it. Page 1
This is known as caveat subscriptor rule, which can literally be translated as let the signer beware", which goes hand in hand with the doctrine of pacta sunt servanda ( a legal contract must be honoured ), which means that an agreement, seriously entered into, must be honoured. However, as with most rules, there are exceptions. Iustus error is one of the recognised defences to the caveat subscriptor rule. Best explained in National & Overseas Distributors Corporation (Pty) Ltd v Potato Board 1958 (2) SA 473 (AD): "Our law allows a party to set up his own mistake in certain circumstances in order to escape liability under a contract into which he has entered. But where the other party has not made any misrepresentation and has not appreciated at the time of acceptance that his offer was being accepted under a misapprehension, the scope for a defence of unilateral mistake is very narrow, if it exists at all. At least the mistake (error) would have to be reasonable (justus) and it would have to be pleaded." (my emphasis) The above makes it clear that a party who wants to rely on the defence of iustus error must show that his error was reasonable in the circumstances. The crux, however, lies in whether or not a reasonable man would have been misled in such circumstances. In the matter of Sonap Petroleum (SA) (Pty) Ltd (formerly known as Sonarep (SA) (Pty) Ltd) v Pappadogianis [1992] 2 All SA 114 (A) the court set out the criteria for determining whether a mistake was iustus (reasonable) and determined that the decisive question is this: did the party whose actual intention did not conform to the common intention expressed, lead the other party, as a reasonable man, to believe that his declared intention represented his actual intention? To answer this question, a threefold enquiry has to be held: 1. Was there a misrepresentation as to one of the party s intention? 2. Who made that representation? 3. Was the other party misled thereby (which proposes two possibilities first, was the party actually misled and, secondly, would a reasonable man have been misled)? One of the most quoted cases on the topic is the Slip Knot Investments 777 v Willem Malan Du Toit [2011] JOL 27063 (SCA) matter. This appeal concerned the defence of iustus error to a claim seeking to enforce an agreement of suretyship. The respondent (the fifth respondent in the court below), although admitting that he signed the deed of suretyship, denied that he was liable and averred that he signed by mistake and without the intention to incur contractual liability. The appellant had lent R6 million to a trust in which the respondent was a trustee. The respondent and two others signed a deed of suretyship in the appellant s favour. When the trust reneged on the agreement, the appellant obtained judgment against the trust and the sureties. The trust and the estate of one of the sureties were subsequently sequestrated, and the appellant accordingly proceeded against the respondent. The respondent, however, pleaded that he had signed the deed of suretyship in error (iustus error). His explanation was that he was a farmer, and had nothing to do with the business conducted by the trust. His brother and nephew were the other trustees, and it was they who had negotiated the transaction with the appellant. The appellant and respondent had no dealings with each other. The respondent averred that he had no interest in the trust assets or its income and although he was one of the three trustees, that was in name only. He alleged that he Page 2
had received the deed of suretyship at a time when he was busy on his farm, and under pressure from his brother and nephew, signed the document on the assumption that his brother and nephew had agreed to the terms on which the appellant would advance monies to the trust and that his signature was required as a trustee only. He stated that he did not read the documents and never expected a suretyship to be amongst them. No one drew his attention to the suretyship. His defence was that he lacked the intention to be bound and therefore that no agreement of suretyship was concluded. In response, the appellant argued that although the respondent s mistake may have been induced by fraud, i.e.: the omission of his brother or his nephew to draw the suretyship to his attention, the binding force of the suretyship was not affected thereby. In coming to its decision the SCA took a very strict approach and held that the lower court s emphasis on the fact that the respondent was a farmer and not a businessman and that he had nothing to do with the trust and the loan advanced to the trust was incorrect. The respondent was a trustee of the trust. He may have been a farmer but this is of no consequence. The respondent had his own trusts and managed them. He must have known what a trust was and what the duties and responsibilities of a trustee were. Slip Knot was entitled to rely on the respondent's signature as a surety just as it was entitled to rely on his signature as a trustee. A contracting party is generally not bound to inform the other party of the terms of the proposed agreement. He must do so, however, where there are terms that could not reasonably have been expected in the contract. The respondent relied entirely on what was conveyed to him by his nephew through Altro Potgieter (the respondent's friend). Slip Knot made no misrepresentation to him and there is no suggestion on the respondent's papers that Slip Knot knew or ought, as a reasonable person, to have known of his mistake. The appeal was accordingly upheld with costs and the judgement of the court a quo was set aside. In the matter of Brink v Humphries & Jewell (Pty) Ltd [2005] 2 All SA 343 (SCA) the respondent (as Plaintiff in the court a quo) sued a company to whom it had granted credit, and the appellant who had signed as surety for the company. The respondent relied on the caveat subscriptor rule which is of course that a person who signs a document is taken to have assented to what appears above his signature. The appellant pleaded justifiable mistake (iustus error) he argued that he was unaware that the credit application which he signed incorporated a suretyship. The trial court gave judgment in favour of the respondent which accordingly led to this appeal. The SCA held that a party to a contract can rely on iustus error to repudiate his apparent acceptance to a contractual term if he has not, by his conduct, led the other party, as a reasonable man, to believe that he was binding himself. If the other party caused the iustus error through misrepresentation, then the party relying on the defence is not bound by the contract. Such misrepresentation need not be fraudulent - innocent misrepresentation would suffice in instances where it is material - and the signatory can cancel the contract because of the misrepresentation, provided he can show that he would not have entered into the contract if he had known the truth. In deciding whether a misrepresentation was made, all the relevant circumstances must be taken into account and each case will depend on its own facts. The SCA held that the furnishing of a document misleading in its terms can, without more, constitute such a misrepresentation. At paragraph 11 the SCA held: [11] In my view the form in question was a trap for the unwary and the appellant was justifiably misled by it.. It is true that the appellant had ample opportunity to read the form carefully and he did not avail himself of that opportunity. But that is no answer. It is not reasonable for a party who has induced a justifiable mistake in a signatory as to the contents of a document to assert that the signatory would not have been misled had he read the document carefully; and such a party cannot accordingly rely on the doctrine of quasi-mutual assent. (my emphasis) The SCA accordingly concluded that the respondent s conduct in furnishing the form, which was misleading, induced a fundamental mistake on the part of the appellant: he thought he was signing a credit application form on behalf of the company, whereas he was, in addition, undertaking a personal suretyship for the debts of the company. The suretyship obligation was accordingly held to be void ab initio and that appeal succeeded. Page 3
The Cape Town High Court recently decided that a surety who had not read a lease agreement that contained a suretyship clause before she signed it, was not bound by the suretyship because there was a lack of consensus to be bound. The respondent argued that she was not involved in the operation of the business and described herself as a sleeping partner. She was not involved in the negotiation of the contract of lease either - she left the matters in the hands of George Manousakis who did all the negotiations and other work required for setting up the restaurant. She trusted him and simply attended a meeting where she was called upon to sign certain documents which she did without realising that they contained the suretyship clause. She never read the documents and she contended that she was only presented with the documents at the meeting. It was also clear from the evidence that the creditor (Appellant) drafted the lease agreement and the agreement of suretyship. The respondent accordingly argued that the appellant knew she was not involved in the negotiations prior to signing the documents and therefore could not assume she was aware than an agreement of surety was amongst the documents. The court considered the principles laid down in the Sonap matter (discussed above) and stressed that she signed the agreement of suretyship without reading it whilst under the impression that she was signing a lease agreement. In applying the three-fold enquiry as laid down in the Sonap matter the court held that it can be accepted that by signing the surety agreement the respondent misrepresented to the appellant that she intended to bind herself in favour of the appellant. What remained was to examine whether a reasonable man would have been misled which is an objective test as to whether or not a suretyship agreement could have reasonably been expected or not. Considering the circumstances (i.e.: the respondent was presented with the agreement for the first time at the meeting where she was asked to sign, which she did without reading it) in conjunction with the fact that the agreement was drafted by the appellant, the court held that the appellant had a duty to speak and alert the respondent to the fact that she was required to bind herself as surety in respect of the lease agreement prior to her signing the document. The inference is inevitable that the appellant was aware of the respondent s mistake. The appeal was accordingly dismissed. The law recognises that it would be unconscionable for a person to enforce the terms of a document where he misled the signatory, whether intentionally or not. Where such a misrepresentation is material, the signatory can cancel the contract because of the misrepresentation, provided he can show that he would not have entered into the contract if he had known the truth. Where the misrepresentation results in a fundamental mistake, the contract is void ab initio. In this way the law gives effect to the principle that a person, in signing a document, is taken to be bound by the ordinary meaning and effect of the words which appear over his/her signature, while at the same time protecting such a person if he/she is under a justifiable misapprehension, caused by the other party who requires such signature, as to the effect of the document. From a legal perspective, I agree with this. I do, however, struggle to agree with the Parys determination, considering that its trite law that a contracting party is generally not bound to inform the other party of the terms of the proposed agreement. He must do so, however, where there are terms that could not reasonably have been expected in the contract. The court, however, appeared to not even consider the format of the contract at all. Surely, the respondent should have known by even a cursory examination of the documents signed, that they included a suretyship? Especially considering this was a commercial lease? Page 4
Nevertheless, I think it s clear from the above cited case law that one must be very careful before signing a contract especially considering the risk that, should the matter proceed to court, the court could very well take a strict approach as it did in the Slipknot matter and hold you liable, whether you read the document or not. Page 5