3 Mistake - Summary Law of Contracts 211 PDF

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3. Absence of Consensus: Mistake This section deals with mistakes that are material and therefore vitiate consensus between the parties.

3.2 Classifications of mistake 3.2.1 Common, mutual and unilateral mistake The following table, I think, commendably describes the differences between these three types of mistake, which was imported into South African law from English law Common Mistake

  

A and B make the same mistake There is consensus It is based on a common, false assumption

Mutual Mistake

 

A and B are at cross purposes. Each is mistaken about the other’s intention There is dissensus

 Unilateral mistake

  

A is mistaken about B’s intention B knows of A’s mistake but remains silent. There is dissensus.

The distinction between unilateral and mutual mistake is of little practical significance and they are both usually called unilateral mistakes. Relevant and irrelevant mistake It is sometimes said that a mistake does not vitiate consensus if it does not affect the party’s decision to enter into a contract. This occurred in Khan v Naidoo, where a woman signed a surety contract thinking it was a transfer of property. The court held that Khan would have signed the contract even if she had known the true nature thereof and that the mistake did therefore not vitiate consensus. This is confusing, though. The textbook recommends that we should ignore this distinction and I wholeheartedly agree. Material and non-material mistake A mistake is material if it vitiates actual consent between the parties. A mistake is immaterial if it does not. If a mistake is material, the contract is void for mistake unless reasonable reliance is present. If a mistake is non-material, then it may be voidable according to the principles in the next chapter. 1 of 10

A mistake is material, therefore, if one or more of the elements of consensus are not present: 1. Serious intention to contract. This will not be present if: a. The agreement is in jest. b. The agreement is a social agreement. c. The parties just don’t have the animus contrahendi.1 2. Agreement as to the material aspects of the contract.2 This will only be present if both of the following are present: a. They are in agreement as to the persons between whom the obligations are to be rendered. This will not be the case if: i. An offer is intended for A but it is accepted by B.3 ii. An offer is intended for A but it is accepted by A and B.4 b. They are in agreement as to the content of the obligations that are to be created. This will not be the case if: i. They do not agree on the subject matter of the contract, for example, A believes he is purchasing house A when he is actually purchasing house B.5 ii. Where the contracting party does not understand a provision of a contract he is signing.6 iii. Any mistake allowing a party to unilaterally vary aspects of performance7 or to release itself from liability.8 3. Each party must be aware of the other’s animus de contrahendo.9 A non-material mistake usually relates to a party’s motive for entering into the contract, rather than a mistake about the contents of the contract itself. For example, in Diedericks v Minister of Lands, the Minister purchased land from Diedericks unaware of a power to repossess Diedericks’ land at a much cheaper rate. The court held that the mistake related to the Minister’s motive and that consensus still existed. In Van Reunen Steel, a company was owned by three shareholders (A, B and C). A was the majority shareholder. The company was struggling financially. A dies and an executor (Smith) winds up his estate. C wanted A’s shares to be used to try to save the company. C goes to van Reunen and tells him the company is a viable investment. Van Reunen, an accountant does a due diligence test and buys the company. Company turns out not to be viable. Van Reunen then argues that the contract is void for mistake. He first argues common mistake, but the court holds that Smith knew the 1

Mondorp Eiendomsagentskap v Kemp en De Beer. This sounds pretty circular to me. 3 Potato Board. 4 Bird v Sumerville. 5 Allen v Sixteen Stirling Investments. 6 See Brink and Compusource. 7 Spindrifter. 8 Compusource. This is the source the textbook gives for this. I don’t think this was really the basis of the judgment. The reason the judge gave for saying the mistake was material was not so much because Compusource was mistaken about a clause that exempted Constantia from liability, but more because the clause was unexpected. 9 See Bloom v American Swiss. 2

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company wasn’t viable. He second argues that it is a material mistake. The court disagrees, holding it is a mistake in motive. In Orban v Steel, Orban wanted to buy a property for his daughters to build and run a kindergarten. The building society points out a property, but represents that it is bigger than it actually is. Its actual size makes it unsuitable for a Kindergarten. Court holds that this is an error in motive and is not material, as he wanted the land for his kindergarten. Hutch reckons this was badly decided Traditional classifications of mistake The traditional classifications below are not an entirely different set of categories; they are just a way of stating the above principles with reference to prominent instances: 1. Error in corpora: a. A mistake as to an object of performance. b. It is material. c. I want to buy house A, but the contract actually stipulates house B.10 2. Error in negotio: a. A mistake as to the nature of the contract itself. b. It is material. c. I sign a contract of surety but, as I am illiterate, I think it is a contract for the transfer of property.11 3. Error in persona a. A mistake regarding the identity of the other party to the contract. b. Some decisions have said that it is only material if the identity of the party is of vital importance to the mistaken party.12 The textbook advises that we always treat errors in persona as material. c. I sell my house to A, thinking I am selling to A and B. If this is of vital importance to me, the mistake is material.13 4. Error in substantia: a. A mistake regarding an attribute or characteristic of the object of performance. b. It is not material. c. I buy a farm, thinking the borders are slightly different to what they actually are, and thinking the land contains more forest than it actually does.14 The traditional categories are not exhaustive and the textbook recommends that the question is really whether a particular mistake relates to the content of an obligation, or merely the motive for actually entering into the contract.

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Maresky v Morkel. Khan v Naidoo. 12 Venter v Credit Guarantee Insurance Corporation of Africa 13 Kok v Osborne. 14 Trollip v Jordaan. 11

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Mistakes of law and mistakes of fact There is some confusion in South African law about this issue: 1. In Kimberley Share Exchange Co v Hampson15 the court held that a mistake of law does not vitiate consensus. 2. In Van Aartsen v Van Aartsen, it was held that a mistake of law that relates to motive does not vitiate consensus. 3. The textbook argues that the mistake of law/fact dichotomy is only incidental to the main enquiry of whether or not the mistake affected consensus and therefore whether it is material.

3.3 The South African approach to material mistake in the law of contract As we all know, the will theory is the basis of our law of contract and that it is corrected by the reliance theory. The reliance theory is applied in one of two ways: directly through the subjective approach (quasi-mutual assent/estoppel) or indirectly through the objective approach (iustus error). To summarise briefly the South African approach to mistake (broadly speaking) is as follows: First ask, is the mistake material (in other words, is there consensus)? 1. If no, then consensus exists. Then ask, is there misrepresentation inducing a non-material mistake? a. If yes, apply the remedies for misrepresentation. b. If no, a valid contract exists. 2. If yes, consensus does not exist. Then ask, is there reasonable reliance (in the form of iustus error or quasi-mutual assent)? a. If yes, then a valid contract exists. b. If no, then no valid contract exists. Quasi-mutual assent (reliance theory) Reliance theory comes from the English judgment of Smith v Hughes, where Blackburn J said that if there is no subjective consensus, there is no contract, unless the one party so conducts himself that the other party reasonably believes there to be consensus. The basis of reliance theory is disputed, however: Estoppel Some say that its basis lies in the English principle of estoppel. This theory stipulates that if one party (the estoppel raiser) reasonably relies on a misrepresentation made by the other party (the estoppel denier) to the former’s detreiment, then the misrepresented facts are upheld as if they are correct. Estoppel will not be upheld if it is contrary to public policy.

15

1882.

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In Van Ryn Wine & Spirit Co v Chandos Bar16 it was held that estoppel could succeed as a fictitious means to uphold a contract that otherwise lacked consensus. Estoppel has some shortcomings, however: 1. It is difficult for the estoppel raiser to prove estoppel, as he must prove prejudice and possibly fault. 2. It only gives rise to a “fictitious contract”, which means that rights cannot be ceded Quasi-mutual assent The balance of authority says that Smith v Hughes actually deals with the doctrine of quasi-mutual assent. According to this doctrine, if the contract assertor reasonably relies on the appearance of consensus induced by the contract denier then an actionable contract exists. In instances of material mistake vitiating consensus, the doctrine of quasi-mutual assent stipulates that a contract will exist when:17 1. The contract denier misrepresented his intention and; 2. The contract assertor did not realise there was a misrepresentation and; 3. A reasonable person in the position of the assertor would not have realised a misrepresentation had occurred. If the last two elements are present, it can be said that the assertor reasonably relied on the appearance of a contract and that a contract therefore existed. Some examples of cases where quasi-mutual assent was successfully relied on: 1. This approach first entered into South African law in Pieters & Co v Salomon, where the plaintiff offered to pay a debt of a third party to the defendant. The defendant accidentally accepted an amount that was lower than the debt. The judge held that, because the plaintiff reasonably relied on the defendant’s appearance of consensus, a contract existed. 2. In Hodgeson v SA Railways, Hodgeson offered to sell a lorry to SA Railways for £500. SA Railways expressed an acceptance of this offer. Later, it said that it had actually only intended to pay £300 for it. The court upheld the contract based on Hodgeson’s reasonable reliance. 3. In Ridon v Van der Spuy and Partners the defendants (a firm of attorneys) accidentally told Ridon that its client had offered to pay Ridon R358 000 for his farm. The client actually wanted to pay less than R385 000. The court held that there was dissensus, that Ridon had genuinely thought the client had offered to pay R385 000 and that a reasonable person would have thought the same. The contract was therefore upheld. Some examples where quasi-mutual assent was not successfully invoked:

16 17

1928 TPD As formulated in Sonap Petroleum v Pappadogianis

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1. In Sonap, the contract assertor (Pappadogianis) realised that the contract denier (Sonap Petroleum) had accidentally written down the wrong lease period, contrary to earlier representations. Pappadogianis therefore realised that there was a misrepresentation and a contract did not exist. 2. In Compusource, a reasonable person in the position of the assertor (Constantia Insurance) should have realised that Compusource (the denier) had not intended to consent to an exemption clause. A reasonable person in the position of Constantia should therefore have realised that a mistake had occurred and the contract was therefore not upheld. 3. In Steyn v LSA Motors18 a reasonable person in the position of Steyn would have realised that the prize was only being offered to professional golfers and the contract was therefore not upheld. The onus is on the contract assertor to prove that a contract exists on the basis of quasi-mutual assent. If a document has been signed, the doctrine of caveat subscriptor creates a presumption that a contract exists on the basis of quasi-mutual assent. Either way, if the contract assertor discharges his onus, then the onus is placed on the denier to prove that the elements of quasimutual assent are not present. Some issues are not clear in the doctrine of quasi-mutual assent: 1. It is not clear whether fault is required for a successful invocation of quasi-mutual assent. All indications are that it is not.19 2. A similar situation exists with regard to prejudice.20 3. The general approach, according to the textbook, is that fault and prejudice are not essential elements of reasonable reliance but simply part of the entire enquiry. The objective approach qualified by the doctrine of justus error The justus error approach is based on the declaration theory. The case for declaration theory in South African law is based on two legs: 1. Wessel JA strongly seeming to advocate it in SA Railways v National Bank of South Africa. 2. Cases relying on the iustus error doctrine, such as the Potato Board case. The iustus error doctrine is a corrective measure in cases of dissensus. It provides that a party will not be bound to an agreement if that party apparently gave his consent and that his mistake is material and excusable.21 The iustus error doctrine comes from the following two famous cases: George v Fairmead (separate summary attached) and National and Overseas Distributors v Potato Board. In the Potato Board case, National Distributors submitted a tender to build a shed to the Potato Board. The Potato Board mistakenly sent an acceptance letter to National Distributors, intending to send it to someone else. Here, the court held that because National Distributors had 18

See Section 1 for a summary of the facts of this case. Hartley v Pyramid Freight. 20 Mondorpv Kemp and de Beer. 21 The textbook says reasonable, but the tutor recommends that we use the word excusable, which I agree with. 19

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made no misrepresentation and that there was no indication that his offer was being accepted by mistake, the court held that the contract should be enforced. Whether or not a mistake is material has already been dealt with. A mistake will usually be excusable if one or more of the following elements are present: 1. The contract assertor knew the denier was mistaken. a. This was the case in Sonap Petroleum (even though the court there did not apply the iustus error doctrine). b. In Hartog v Colin & Shields (an English case), Shields offered to sell Hartog 30 000 skins at prices per pound when they intended the prices to be per skin. The court struck down the contract, holding that Hartog knew about the price mistake and that Shields’ error was therefore excusable. 2. The contract assertor should have realised that the denier was mistaken. a. In Horty Investments v Interior Acoustics, Interior Acoustics signs a contract of lease with Horty Investments. The contract contains a non-escalation clause and mistakenly says that the lease is for 12 years (it was meant to be for 2 years). The court held that the non-escalation clause was inconstant with the inordinately long lease and as such Interior Acoustics should have realised that Horty was mistaken. The court therefore held that Horty’s mistake was excusable. b. In Prins v Absa, Prins signed a document under the impression that he was signing a suretyship that was limited to R10 000, when it was actually an unlimited suretyship. The court held that, based on Prins’ correspondence with Absa, Absa should have known that Prins was mistaken when he signed the document. The court therefore held that Prins’ error was excusable. 3. The contract assertor induced the denier’s mistake, either by: a. Positive misrepresentation or; i. In Allen v Sixteen Stirling Investments, SSI caused Allen to be mistaken about the property that he was buying by pointing out a different property to the one that appeared on the deed of transfer. b. Misrepresentation by silence. This occurs when the contract assertor had a duty to inform the denier about something in the contract. Courts have considered the following criteria in determining whether there exists a duty to speak: i. Whether something was said before the conclusion of the contract that would make the provision in question unexpected.22 ii. Whether the provision in question is usually a part of the kind of agreement that was entered into.23 iii. The knowledge and training of the person who signed the agreement.24 iv. Knowledge that something about a certain clause is very important to the denier.25

22

Du Toit v Atkinson Motors Brink v Humphries. 24 Brink v Humphries. 23

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Application of misrepresentation by silence Du Toit v Atkinson Motors: When, prior to the conclusion of the contract, the contract assertor creates an impression that directly conflicts with a provision in the contract, then the assertor has a duty to inform the denier about this discrepancy. In Du Toit v Atksinson Motors, the court held that an advertisement claiming that a car was a 1979 model created a duty on Atkinson to inform Du Toit that the contract he was signing was for the purchase of a 1976 model and that it contained a nonmisrepresentation clause. Spindrifter v Lester Donovan: Lester Donavan was a person who went around to small businesses to sell spaces in trade fairs. Donavan went up to Spindifter and tried to sell the idea to him. From the context it was clear that the date was very important to Spindrifter. Spindrifter, under pressure, signed a contract for a stall. Later, Donavan moves the date of the exhibition, a power granted to him by the contract. Spindrifter said he didn’t know about the date-changing clause and tried to get out of the contract. The AD held that the fact that it was clear that Spindrifter cared about the date of the fair created a duty on Donavan to inform Spindrifter about the date-changing clause. Kempson Hire: TWM hires vehicles from Kempston hire on contracts of lease. In one instance Snyman, a clerk for TWM, signs a document for a bakkie. A clause in the document made the clerk stand surety for the bakkie. TWM goes into liquidation and Kempston Hire, realising that TWM won’t pay their debts, sues Snyman on the basis of the contract. The AD held that, because a surety clause was unexpected in this kind of document, Kempston had a duty to tell Snyman about it. Keens Group v Lotter: Keens Group is a wholesale supplier of electrical equipment. Collins is a smallscale electrical outfitter. Collins applies for a credit facility with Keens. Keens sends over a contract for credit. This contract contains a pretty standard clause making the directors stand surety for this contract. Lotter, a director, signs the document. The court held that Keens should have drawn Lotter’s attention to the clause. Academic commentators argue that Lotter, as a director who was not under pressure signing a document that often contains a surety clause, should have known about the clause and there was therefore no duty to speak. The role of fault The role of fault in the iustus error doctrine is uncertain: 1. A finding of fault on the part of the denier will weigh against a finding of excusability on his part.26 2. However, several cases have found that even though the denier was negligent in not reading the document his error could be excusable.27 3. Fault on the part of the contract assertor in the form of wrongful representation will probably weigh in favour of a finding of excusability on the part of the denier. 25