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[2002] ZASCA 12
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Van Reenen Steel (Pty) Ltd v Smith NO and Another (97/2001) [2002] ZASCA 12; 2002 (4) SA 264 (SCA) (25 March 2002)

REPORTABLE
Case No:
97/2001
In the matter between:
VAN REENEN
STEEL (PTY) LIMITED Appellant
and
ERROL
JOHN BARNES SMITH NO First Respondent
RICHARD ROSSO
Second Respondent
Coram: HARMS, MPATI, BRAND, NUGENT
JJA and LEWIS AJA
Heard: 14 MARCH 2002
Delivered: 25 MARCH 2002
Subject: Mistake in contract; common assumptions – their effect.
JUDGMENT
HARMS JA/
HARMS JA:
[1] The issue in this appeal is whether a contract
between the appellants on the one side and the respondents on the
other is vitiated
by the failure of a common assumption in relation
to an existing or past fact in the absence of an agreement which
elevated the correctness
of the assumption to a term or condition of
the contract. The Court below (Magid J) found against the appellants
by relying on a
statement of the Full Court in
Wilson Bayly Holmes
(Pty) Ltd v Maeyane and Others
1995 (4) SA 340
(W) 344I that –
‘
a common mistake relating to the existence of a
particular state of affairs will not render the contract void unless
it can be said
that the parties expressly or tacitly agreed that the
validity of the contract was conditional upon the existence of that
state of
affairs.’
[2] The first respondent (Smith) is the executor
in the deceased estate of one Rowley. Rowley was the majority
shareholder in Mortech
Industries (Pty) Ltd. The second respondent
(Rosso) and the second appellant (Hulton) each held a small number of
the remaining
shares. Hulton was, presumably since Rowley’s death,
the managing director and Rosso did not, it would appear, play any
significant
role in the affairs of the company. Smith was not
au
fait
with the details of the business but he was aware that the
company was in a dire financial position: the bank had called up an
overdraft
of R3m and a claim of R0.5m against a failed creditor was
worthless. He was not prepared to introduce further capital into the
business
and had either to liquidate the company or sell the estate’s
interest therein.
[3] Hulton, nevertheless, believed that an injection of capital would
make the company viable. He was able to attract the interest
of one
Van Reenen, the managing director of the first appellant (‘Van
Reenen Steel’), and after a ‘due diligence’ undertaken
by Van
Reenen, who holds a chartered accountancy degree but is a
businessman, Van Reenen Steel and Hulton purchased in an agreed
proportion from Smith and Rosso all their shares and claims to loan
accounts in the company.
[4] The appellants’ case is that it was –
‘
the common intention of the
parties that what was being bought and sold was a viable business,
the assets and liabilities of which
being known and disclosed by the
balance sheet [of 31 March 1998]’
and that consequently –
‘
all the parties to the agreement
laboured under the common and incorrect assumption of fact or common
mistake of fact that Mortech
had certain important attributes which
it did not have.’
Further –
‘
The mistake lay in the fundamental
assumptions of the value of the underlying assets being purchased,
the assumption that what was
being bought and sold was a viable
business as well as the assumption that the assets were known and
extant as disclosed by the balance
sheet [of 31 March 1998].’
[5] The 31 March 1998 balance sheet is a handwritten document,
ostensibly prepared by Van Reenen during his due diligence
investigation.
It has to be accepted that the balance sheet was
discussed with Smith during the negotiations preceding the conclusion
of the contract
but it should be noted that there is no allegation
that Smith, or for that matter Rosso, had made any representations to
the appellants
concerning the correctness of anything contained
therein. On the contrary, the sellers were not prepared to provide
any warranties
or indemnities beyond what was contained in the 1997
audited financial statements.
[6] The warranties and indemnities given or not given should be seen
in the context of a contract of fifty-five pages, twenty of
which
deal with warranties and indemnities. Of special significance is
clause 13:
‘
13.1 The Sellers bind themselves jointly and
severally to the Purchasers in accordance with the warranties and
indemnities given by
them in the attached Schedule 5.
13.2 The Sellers acknowledge that the Purchasers are
entering into this Agreement in reliance on the warranties,
indemnities and representations
given by the Sellers in terms of this
Agreement.
13.3 Each warranty and indemnity given by the Sellers in
terms of this Agreement shall be a separate warranty and shall in no
way
be limited or restricted by the provisions of any other warranty
or indemnity.
13.4 The Purchasers acknowledge and agree that, save for
the warranties set out in this Agreement and in the attached Schedule
5,
no representations or warranties of whatsoever nature, whether
express or implied, and whether oral or in writing, have been made
or
are given by the Sellers or by anyone else on behalf of the Sellers,
relating to the Company or to the affairs or business of
the
Company.’
[7] The first problem facing the appellants is
that they are unable to rely on a unilateral mistake because, as
mentioned, the respondents
were not the cause of the mistake in the
sense discussed in
Sonap Petroleum (SA) (Pty) Ltd (formerly known
as Sonarep (SA) (Pty) Ltd v Pappadogianis
[1992] ZASCA 56
;
1992 (3) SA 234
(A).
The next problem is that it is common cause that the written contract
expresses the parties’ consensus. Reliance on the
March statement
is not permitted by their ultimate agreement. It is for these
reasons that they take refuge in the ‘doctrine’
relating to
assumptions and that they argue that a false common assumption
relating to a present or past fact vitiates a contract
even if it is
not a term or condition of the contract.
[8] Assumptions or suppositions can have many forms and have
different effects depending upon the circumstances. An assumption
relating
to a future state of affairs –
‘
relates to an agreement which is
in operation and its recognition would have a direct bearing upon one
of the terms of the agreement.
Such a supposition is
indistinguishable from a condition,’
1
usually a resolutive condition, perhaps also a
condition precedent or an ordinary term of the contract.
2
The use of the word ‘supposition’ or ‘assumption’ instead of
‘condition’ in this context is not conducive to clear thinking.
[9] Assumptions may also relate to present or past
facts. If unilateral, one is back to the effect of a unilateral
mistake on a contract.
If common, unless elevated to terms of the
agreement, they invariably amount to no more than the reasons for
contracting (on those
terms)
3
or, expressing the same idea, common mistakes relating to a motive in
entering into the agreement (‘dwaling in beweegrede’).
4
Whether or not a motive leading up to an agreement is based upon an
assumption of fact, it remains a motive. A party cannot vitiate
a
contract based upon a mistaken motive relating to an existing fact,
even if the motive is common,
5
unless the contract is made dependent upon the motive, or if the
requirements for a misrepresentation are present.
6
The principle is as stated in
African Realty Trust Ltd v Holmes
1922 AD 389
403 –
‘
But as a Court, we are after all not concerned with
the motives which actuated the parties in entering into the contract,
except in
so far as they were expressly made part and parcel of the
contract or are part of the contract by clear implication.’
[10] In
Bell v Lever Bros Ltd
[1931] UKHL 2
;
[1932] AC 161
(HL), Lord Atkin
dealt likewise with common mistakes (although he referred to them as
mutual mistakes) and pointed out that there
is an alternative mode of
dealing with their effect (at 224)
‘
It is said that in such a case as the present there
is to be implied a stipulation in the contract that a condition of
its efficacy
is that the facts should be as understood by both
parties . . .’
and that (at 225) –
‘
if the contract expressly or impliedly contains a
term that a particular assumption is a condition of the contract, the
contract is
avoided if the assumption is not true.’
The latter statement accords with the views of De
Wet & Yeats
7
that were quoted with approval by this Court in
Fourie v
CDMO Homes (Pty) Ltd
1982 (1) SA 21
(A) 27 esp
in fine
.
[11]
In
McRae and Another v Commonwealth
Disposals Commission and Others
8
the Court in this context said that one must have regard to the basic
theory of contract and pose the fundamental question: ‘What
did the
promisor really promise?’ –
‘
Did he promise to perform his part
in all events, or only subject to the mutually contemplated original
or continued existence of
a particular subject matter? So questions
of intention or ‘presumed intention’ arise, and these must be
determined in the light
of the words used by the parties and
reasonable inferences from all the surrounding circumstances. That
the problem is fundamentally
one of construction is shown clearly by
Clifford v Watts
[(1870)
LR 5 CP 577].’
[12] Van der Merwe
et al
9
sum it all up:
‘
A
common mistake
is said to be present where
both parties to an agreement labour under the same incorrect
perception of a fact external to the minds
of the parties. Such a
mistake, of course, does not lead to dissensus: the parties are in
complete agreement, although their consensus
is based on an incorrect
assumption or supposition. This kind of mistake can be related to
the concept of a common underlying supposition
(’veronderstelling’)
on which the parties base their contract. In this manner the parties
can introduce a common motive into
the (terms of the) contract so
that a mistake in their common motive will render the contract
without further effect.’
[13] It follows from this that the quoted
statement in
Wilson Bayly Holmes
conforms to authority and
principle.
10
The correctness of the conclusion can be tested in other ways. If
the question were to be asked whether the appellants would not
have
concluded the agreement had they known of the true facts, the answer
is probably in the affirmative. There is, however, no
reason to
believe that the respondents, had they known the business was not
viable, would not have sold it on exactly the same terms
and
conditions. Whether the business was viable or not was to them of no
concern. The existence of the agreement was in their minds
not
subject to the correctness of their assumption. The viability of the
business was not causally connected to their decision to
sell, either
at all or on the agreed terms. PS Atiyah
11
suggests that the answer is to be found in determining which of the
parties assumed the responsibility for the truth of the assumed
facts, or, in other words, which of the parties has (or ought to be
treated as having) taken the risk of the facts turning out otherwise
than expected; only in the rare and unlikely event of neither party
having assumed this responsibility the falsity of the assumption
will
render the contract inoperative. There can be no doubt that it was
the appellants who took that risk especially since Hulton
knew the
business, Van Reenen had conducted a due diligence and they were
satisfied with a warranty based upon the 1997 audited statements
and
did not insist on one based upon the March 1998 statement.
[14] But, say the appellants, all of this is in
conflict with the judgment in
Dickinson Motors (Pty) Ltd v
Oberholzer
1952 (1) SA 443
(A) 450. A similar argument was
rejected in
Wilson Bayly Holmes
. The facts in
Dickenson
were these: the plaintiff claimed with the
condictio indebiti
repayment of an amount paid in error to the defendant. The substance
of the plaintiff's case was that he had paid the amount in
error
because both he and the defendant thought that the car which was to
be delivered to him in return for the payment was a Plymouth
motorcar
A, which had been sold to A G Oberholzer (plaintiff’s son) by the
defendant and had no idea that it was Plymouth B, which
belonged to
Alris Motors. The defendant then delivered Plymouth B to the
plaintiff and thereafter Alris Motors repossessed it.
‘
That there was this error common to both the parties
was not in dispute and the real issues in the case were what was the
nature of
the transaction which led to the payment and what legal
consequences flowed therefrom.’
(Per Schreiner JA at 448D.) The common error
referred to was the fact that the car delivered was car A and not car
B. It follows
from this quotation that the validity of the contract
was not in issue, only the nature of the contract. There was
consensus about
the vehicle involved and the amount payable. The
court was divided on the question of whether the contract was one of
sale or not.
Schreiner JA (Fagan JA concurring) held that it was and
that because of the fact that the issues in the case were fully
explored
it was unnecessary to decide the matter with reference to
the
condictio indebiti
. Since the plaintiff was lawfully
evicted and the defendant had failed to give him quiet possession,
the plaintiff was in any event
entitled to repayment of the money (at
449D-H.) Van den Heever JA did not agree that the agreement was one
of sale (at 451G) and
found that it was an agreement to release car A
by payment of the son’s debt.
[15] In dealing with this construction of the agreement Schreiner JA
made the statement upon which the appellants so heavily rely
(at
450A-F):
‘
But if the transaction be regarded
not as a fresh sale by the defendant to the plaintiff but as a
release of the car by the payment
of what was owing by A. G.
Oberholzer to the defendant the result is the same. For once it is
clear, as it undoubtedly is, that the
plaintiff, to the defendant's
knowledge, was only interested in obtaining the car and not in paying
his son's debts except as a means
of obtaining the car, the identity
of the car at Vereeniging as the one that A. G. Oberholzer had bought
from the defendant was of
vital importance. The plaintiff would not,
and the defendant knew that he would not, have considered paying his
son's indebtedness
except to secure the release of the car on which
the money was owing. It was only because the defendant's officers
believed that
the car at Vereeniging was the one they had sold to A.
G. Oberholzer that they were prepared to release it to his father
against
payment of his indebtedness. The £291 was paid under a
common mistake in regard to a matter which was vital to the
transaction
and if either of them had been aware of the true position
the transaction would not have gone through. In
Huddersfield
Banking Company Ltd v Henry Lister & Son Ltd.
,
1895 (2) Ch.
273
, LINDLEY, L.J., states the proposition,
“
that an agreement founded upon a common mistake,
which mistake is impliedly treated as a condition
12
which must exist in order to bring the agreement into operation, can
be set aside, formally if necessary, or treated as set aside
and as
invalid without any process or proceedings to do so.”
This seems to me to express in clear language a
principle which is inherent in all developed systems of law. No
question arises here
of neglect on the plaintiff's part giving rise
to the mistake; if blameworthiness were in issue the defendant, in
whose possession
the car was and who had the means of identifying it,
was the more to blame. Assuming that so long as the plaintiff
remained in possession
of Plymouth B he could not have recovered the
£291, once this was duly taken from him he was entitled to
recover from the defendant
what he had owing to a reasonable and
common error paid for it. It follows that on this alternative view
of the transaction, also,
the appeal could not succeed.’
[16] Once again, the existence of the release
agreement was not in issue. The parties were in agreement as to what
was to be released.
The reference to a reasonable and common error
relates to the payment of the money and not to the underlying
transaction. The payment
was for the release of car A; by delivering
car B, car A was not released; the payment was consequently
indebite
.
Counsel attempted to analyse the judgment as if it were a statute.
It is not. In any event, the quotation from
Huddersfield Banking
(a case that dealt with past or present facts) disposes conclusively
of the argument because it postulates that for a failed common
assumption to vitiate a contract it must at least be reflected in an
implied condition. It makes no difference if one were to call
the
mistake an incorrect assumption.
[17] The appellants finally relied upon the
‘doctrine’ of
error in substantia
. As Van der Merwe
et
al
(at 18) point out, there is no need for such a doctrine in our
law and our courts have yet to vitiate a contract on that ground.
13
If the
error in substantia
excludes consensus, it is
operative or material; if it does not do so, it is inoperative or
immaterial. In other words, by enquiring
whether the error is one
relating to substance, one is merely reformulating the primary
question and making it more difficult to
answer.
[18] Magid J was consequently correct in issuing a declaratory order
to the effect that the agreement between the parties is of full
force
and effect.
The appeal is dismissed with costs.
____________________
L T C HARMS
JUDGE OF APPEAL
AGREE:
MPATI JA
BRAND JA
NUGENT JA
LEWIS AJA
1
Sonarep (SA) (Pty) Ltd v Motorcraft (Pty) Ltd
1981 (1) SA 889
(N) 902F, a full court decision.
2
Williams v Evans
1978 (1) SA 1170
(C) 1174F-1175F is
consequently wrong.
3
D Hutchinson ‘Contract Formation’ in Zimmermann & Visser
Southern Cross: Civil Law and Common Law in South Africa
183-184.
4
Sonarep (SA) (Pty) Ltd v Motorcraft (Pty) Ltd
supra
901G-H; Christie
The Law of Contract in South Africa
4 ed
380.
5
Banks v Cluver
1946 TPD 451
458-459 accepted Von Savigny’s
classification. According to the latter an error in motive is one
that does not affect the will
of the contracting party but relates
to the preliminary process of the formation of the will. It is
contrasted with an error in
respect of the transaction. See R
Zimmermann
The Law of Obligations Roman Foundations of the Civil
Tradition
614; JC De Wet
Dwaling en Bedrog by Kontraksluiting
4-6. Pothier
Traité des Obligations
1.1.3.1.20 is to
the same effect.
6
The Laws of Scotland: Stair Memorial Encyclopaedia
vol 15 par
686, 688.
7
Kontraktereg & Handelsreg
4ed 138-139 now to be found in
De Wet and Van Wyk
Kontraktereg & Handelsreg
5 ed 154.
8
(1951) 84 CLR 337
407-408 per Dixon and Fullagar JJ.
9
Contract: General Principles
19.
10
See also
Hare’s Brickfield Ltd v Cape Town City Council
1985 (1) SA 769
(C) 781F-G;
McCulloch v Kelvinator Group Services
of SA (Pty) Ltd
1998 (4) SA 814
(W) 823E-824 and on appeal to
the Full Court
Kelvinator Group Services of SA (Pty) Ltd v
McCulloch
1999 (4) SA 840
(W) 844J et seq.
11
An Introduction to the Law of Contract
3 ed 191-192. Also
Atiyah & Bennion ‘Mistake in the Construction of Contracts’
(1961) 21
Modern Law Review
421.
12
In the reported
Huddersfield
judgment the word is
‘consideration’. I have checked the signed judgment in the
archives and Schreiner JA in fact used the
word ‘condition’.
Whether this was a slip of the pen or the correction of an obvious
mistake we do not know. The word ‘consideration’
–
considering its technical meaning in English law – appears to make
no sense in this context.
13
Papadopoulos v Trans-State Properties and Investments Ltd
1979 (1) SA 682
(W) 687G.