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A contract, once entered into, is legally binding and there are few avenues of escape

Escaping from a contract

The most important foundation-stone of commerce is the Roman law adage that expresses the sanctity of contracts - pacta sunt servanda - which connotes that an agreement, seriously entered into, must be honoured. This maxim is allied to a similarly fundamental legal concept - caveat subscriptor - which means that a person who puts his signature to a contract must beware, in other words, it is that person's responsibility to be cautious about what he agrees to, for a document, once signed, will be binding.

But are there circumstances in which the law allows a person who has put his signature to a contract to successfully contend that he is not bound by it?

This most basic of issues in the law of contract came to the fore yet again in Absa Bank Ltd v Trzebiatowsky [2012] ZAECCPHC 13 in which the Eastern Cape High Court handed down judgment on 23 February 2012.

The facts, in essence, were that a husband (the first defendant in the case) and his wife (the second defendant) decided to purchase three shops in the Woolworths franchise. They arranged for three companies under their control, and of which they were directors, to purchase all the shares in the company that held the franchise.

To raise the funds to pay the purchase price of those shares, they applied to a bank for loan finance. The bank agreed to provide the finance to the three companies in question on condition that these two individuals, the first and second defendant, signed personal suretyships for an unlimited amount in favour of the bank as security for the due repayment of the loan. Their family trust was also required to stand surety.

The deal went through on this basis, but the businesses failed and the companies went into liquidation with the approximately R8 million loan from the bank still unpaid. The bank sued the first and second defendant for the unpaid amount on the basis of their personal suretyships for the companies' indebtedness.

The first defendant (the husband) conceded liability, but the second defendant (his wife) contended that she was not liable to the bank in terms of her suretyship because she had been unaware that the documents she had signed in her capacity as a director of the three companies in question provided that she would be personally liable as surety for the company's debts.

She said that she had signed the documents only because her husband had requested her to do so. She asserted that the bank's relationship manager, one van Niekerk (who had been present at most of the discussions concerning the financing of the business venture and was also present when the relevant documents were signed) had failed to advise her that, by her signature to the documents, she would be personally bound as a surety. She said that she had trusted van Niekerk and that, if she had known that this would be the consequence of her signing, she would not have signed the document. She said that at none of the earlier meetings had van Niekerk told her that she would be required to sign personal suretyships, and she said she was unaware of the general practice amongst banks that directors of companies were required to give personal suretyships for loans granted to their company.

Fundamental issues raised in this case

These arguments raised some fundamental issues in regard to the principles of contract law, namely -

  • can a person escape liability under a contract on the grounds that he had been mistaken about the legal nature and consequences of the contract?
  • is one party to a contract - in this case the bank, represented by its relationship officer, van Niekerk - under a legal duty to explain the nature of the contract to the other signatory to the contract?

As always, the court in considering these issues, had regard to legal precedent, that is to say, to earlier judgments of other courts on the same issues.

The court held that, in order to succeed in her defence of justus error (reasonable mistake) to her liability under the contract, the following principle applied:

In order to succeed in the defence of iustus error the [second defendant] must show that she was misled as to the nature of the deeds of suretyship or as to the terms which they contained, or by some act or omission on the part of Van Niekerk, if there was a duty on him to inform the defendants (in particular the second defendant) of the consequences of signing the personal sureties.

In other words, it would not suffice for the second defendant merely to establish that she had made a mistake as to the nature of the document that she was signing. She would have a legal defence only if she could show that she had been misled in regard to the consequences of signing the suretyship.

The court went on to say that -

The question therefore arises whether van Niekerk was in duty bound to explain to her the personal risks of signing the sureties.

Earlier court decisions

An earlier High Court decision (in Brink v Humphries 2005 (2) 419 (SCA)) had held that a suretyship was void where the form of the suretyship document had been misleading and had induced a fundamental and genuine mistake on the part of the signatory who had thought that he was signing a credit application form on behalf of a company, whereas it was in fact a personal suretyship.

In Slip Knot Investments 777 v du Toit 2011 (4) SA 72 (SCA) a farmer was held to have made a reasonable mistake in regard to the nature of the document he was signing where, in the particular circumstances of that case, he did not expect those documents to include a suretyship. The court made clear in this case that a person who signs a suretyship on the basis of a mistake induced through a misrepresentation, in other words, a misstatement of fact, that had been induced by a third party (that is to say, a person other than the person in whose favour the suretyship is to operate), he will be bound to the agreement, despite the mistake, if the other party had been innocent and unaware of the surety's mistake.

In the latter decision, the court also said that, in general, a contracting party is not obliged to inform the other party of the terms of the proposed agreement, except where those terms are not such as would reasonably be expected to be in the contract.

The court applied established principles to the present case

In the present case, said the court, van Niekerk had no reason to suspect that the second defendant was as ignorant as she claimed to be. She had made no effort to establish why she was called on to sign the documents presented to her by the bank. Nor, said the court, did the suretyships contain any unusual clauses. They had not presented a trap for the unwary.

In the light of all of the aforementioned facts and circumstances, the court dismissed the second defendant's defence to her liability in terms of the suretyship and gave judgment against her, in favour of the bank, for some R8 million.

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