Notes on Spenmac v Tatrim CC Case

Spenmac (Pty) Ltd v Tatrim CC

Case Overview

• Case Number: 216/2013
• Court: Supreme Court of Appeal of South Africa
• Parties:
  • Appellant: Spenmac (Pty) Ltd (Formerly Bobcart (Pty) Ltd)
  • Respondent: Tatrim CC
• Heard: 28 February 2014
• Delivered: 1 April 2014
• Judges: Mthiyane DP, Lewis, Shongwe, Petse JJA and Mocumie AJA
• Summary: The appeal concerns the purchase and sale agreement of a unit within a sectional title scheme. The purchaser held a mistaken belief that the sale conferred on them the right to veto any sub-division of another unit. This mistake was a result of misrepresentation by the seller. The court found that this averted consensus between the parties and that an exemption clause could not be utilized by the seller. The purchaser was deemed entitled to avoid the contract because the entire contract was vitiated by the mistake.

Order

• Appeal from: Eastern Cape High Court, Port Elizabeth (Goosen J).
• Outcome: The appeal was dismissed with costs.

Judgment

Background

• Para 1: This is an appeal against the judgment of the Eastern Cape High Court, Port Elizabeth (Goosen J).
• The High Court set aside the sale agreement between Spenmac (Pty) Ltd (appellant) and Tatrim CC (respondent).
• The agreement concerned a sectional title property, Park Towers, concluded on 8 October 2010.
• The High Court declared the agreement void due to a lack of consensus.
• The appellant was ordered to pay the respondent R788 157.89 with interest at 15% per annum, plus costs.
• Para 2: The appeal to the Supreme Court of Appeal is with the leave of the high court.
• The dispute centers on whether a misrepresentation by Mr. Spendley, the plaintiff’s representative, led to a fundamental mistake.
• If so, the question is whether the purchaser (plaintiff) could avoid the agreement, considering the exemption clause.
• The exemption clause stipulated the property was sold ‘voetstoots’ (as is) and that the purchaser acknowledged they were not induced by any representations from the seller.

Relevant Contractual Clause

• Para 3: Clause 14 of the agreement:
  • 14.1: The property is sold "voetstoots" and subject to title deed conditions, township establishment conditions, and zoning regulations.
  • 14.2: The purchaser acknowledges they were not induced by any representations made by the auctioneer or seller and waives any rights against the seller resulting from such representations.
  • 14.3: The purchaser acknowledges full acquaintance with the property purchased.

Background Facts

• Para 4: During the latter half of 2010, the defendant offered for sale a unit in a multi-story building.
  • The unit (the property) was commercial, while the rest of the scheme was residential.
  • The plaintiff, represented by Mr. Joseph Thompson, made inquiries and submitted an offer, which was rejected.
  • On 30 September 2010, the defendant offered the property for sale by public auction.
  • The plaintiff bid at the auction, but the bid was not accepted.
  • Immediately after the auction, the plaintiff made a further offer, increasing the price to R10.5 million.
  • On 8 October 2010, the plaintiff and the defendant entered into a sale agreement for R10.5 million.
• Para 4: Per the agreement, the plaintiff was to pay a 5% deposit (which they did) and R300,000 (including VAT) for the auctioneer’s commission.

Plaintiff's Allegations

• Para 5: The plaintiff claimed the defendant's representative made false representations, inducing the contract.
• The plaintiff, therefore, sought cancellation of the agreement.
• The defendant denied making any representations and alleged the plaintiff failed to pay, claiming retention of the deposit as damages.

Misconception Claim

• Para 6: The plaintiff claimed Spendley represented, orally and in writing, that:
  • The rest of the scheme consisted of only one unit (unit 2).
  • Rule 27 of the Scheme Rules prevented the sub-division of unit 2 without the consent of unit 1's owner.
  • The plaintiff alleged the written representation was in a brochure stating the scheme had two units.
• Para 6: The plaintiff further alleged these representations were false because:
  • In 2007, the defendant permitted the owners of unit 2 (Southern Palace Investment (Pty) Ltd) to sub-divide it into 110 units.
  • Unit 2 had been sub-divided into 110 units, registered on 2 July 2010.
  • Therefore, unit 1’s owner did not have the veto right under Rule 27, as represented.

Rule 27 of the Scheme Rules

• Para 7: Rule 27 stated:
  • ‘No instrument signed on behalf of the Body Corporate shall be valid and binding unless it is signed by at least two trustees whereof one shall be a nominee of the owner or owners from time to time of section 1 (or any other sub-division thereof) of the Scheme.’

Core Issue

• Para 8: It was agreed that Rule 27 gave unit 1’s owner a veto right over unit 2’s sub-division.
• The key question was whether it was represented to the plaintiff that this right existed.
• If not, the plaintiff bought something fundamentally different.
• Alternatively, the plaintiff argued that both parties intended unit 1 to be sold with the veto right.
• The plaintiff contended the defendant knew, or should have known, about the prior consent to sub-divide unit 2.
• Spendley’s failure to disclose this induced a mistaken belief that unit 1 was purchased with the veto right, negating consensus.

Correspondence Regarding Sub-division

• Para 9: Correspondence showed that in October 2007, the defendant (through Spendley) authorized Southern Palace Investments to sub-divide unit 2 into 110 units.
• However, it was disputed whether Spendley made any representation regarding this sub-division.
• The defendant asserted Spendley didn't know about the sub-division and didn't recall the 2007 approval.

Thompson's Testimony

• Para 10: Thompson (plaintiff's sole member) testified he wanted to buy commercial property for investment in early 2010.
• He was introduced to Park Towers, told it had two units, and given the Scheme Rules and leases for unit 2.
• After advice, he wasn't interested due to concerns about managing a building with many units.
• Para 10: Thompson stated Spendley contacted him later and when he raised concerns about unit 2’s sub-division, Spendley assured him that the owner of unit 2 could not sub-divide without the consent of the owner of unit 1 who could veto.
• Thompson, satisfied with rental returns and having spoken with the financial director of the owner of unit 2 regarding the plans for the building, submitted an offer on 12 August 2010, subject to due diligence.

Further Negotiations and Sale Agreement

• Para 11: The initial offer was for R10.5 million, with R3 million cash and R7.5 million via mortgage bond.
• This offer was rejected, and the property was put up for auction.
• The defendant advertised the property for sale via a brochure.
• At auction, the plaintiff bid R9 million, which was also rejected.
• Following the auction, further negotiations resulted in the sale agreement in question.
• Para 12: The deed of sale stated that the property was purchased as a rental enterprise and a going concern.
• It included a clause acknowledging the purchaser was subject to the Body Corporate rules and had familiarized themselves with them.
• Thompson stated that the plaintiff secured loan finance from banking institutions to pay the balance of the purchase price.
• Conveyancing documents were prepared by the defendant’s attorney, Ms. Tracy Watson.
• Para 12: Thompson was later informed by Watson that unit 2 had been sub-divided into 110 separate units in July 2010, which Spendley was supposedly unaware of.
• This led to correspondence between Thompson and Watson, with the plaintiff ultimately withdrawing from the agreement.

Spendley's Testimony

• Para 13: Spendley testified that Thompson contacted him in early 2010 about the property advertisement.
• He dropped off documents about tenants and building costs at Thompson’s office but had no discussion about the property.
• Later in July, Thompson called him (contrary to Thompson's version), inquiring if it was the same property as before.
• Para 13: Spendley confirmed it was and explained why he considered it a good deal, including secured tenancies, full occupancy, and good income stream, also noting that the Rules favored unit 1 due to lower levies.
• Spendley claimed occurred during a phone call from a Spar Supermarket, and there was no discussion about sub-division of unit 2.
• He denied further direct contact with Thompson and any concerns raised about the division and ownership of unit 2.

Spendley's Awareness of Sub-division

• Para 14: Spendley said that the plaintiff submitted a written offer in August 2010, presented by Roger Venter.
• This offer was immediately rejected due to unacceptable suspensive conditions, particularly the due diligence investigation.
• Spendley claimed he was unaware of the sub-division of unit 2 until after the sale when Watson discovered it.
• Para 14: Spendley stated that upon inquiry, he remembered granting approval in October 2007 to the former owners of unit 2 to sub-divide it.
• Para 15: Spendley explained that the previous owners, Southern Palace Investments (Pty) Ltd, proposed the sub-division for selling residential units as luxury apartments.
• The defendant consented, but Southern Palace Investments was liquidated in 2008, and unit 2 was sold at public auction on 10 December 2008 (without reference to the defendant).
• The sub-division proceeded during 2010 without reference to the defendant or the Body Corporate.
• Spendley stated he had completely forgotten about the 2007 approval when concluding the sale with the plaintiff.

High Court Findings

• Para 16: Spendley denied any discussion with Thompson about sub-division of Unit 2.
• However, the high court found that correspondence suggested the issue had been raised before the plaintiff submitted its offer to purchase the property.
• Para 17: Although the high court found Thompson wasn't a particularly good witness, the court accepted his evidence.
• Much of his evidence was supported by correspondence between him and Watson upon discovering that unit 2 had already been sub-divided.
• The correspondence reflected shock at the discovery (including Spendley’s) and asserted that the sub-division was specifically discussed.
• The assertion wasn't challenged by the defendant in subsequent correspondence.

Misrepresentation

• Para 18: The alleged representation made by Spendley is not denied.
• The question of sub-division of unit 2 formed part of the discussion between the parties.
• Brochures handed to the plaintiff reflected the scheme as comprising only two units.
• Prior to the agreement of sale, the defendant represented that the scheme comprised two units.
• Para 19: Based on the plaintiff's evidence and correspondence after the discovery of unit 2 being sub-divided into 110 units, the court concluded the plaintiff had raised the possibility of sub-division as a concern before the conclusion of the sale.
• It was represented that the owner of unit 1 enjoyed a right of veto regarding future sub-division of unit 2, as provided in the Scheme Rules.
• The court rejected Spendley's evidence where it differed from the plaintiff's.
• Para 20: The high court accepted that Spendley had forgotten that he had signed the approval for the sub-division of unit 2.
• That is why he was shocked by the correspondence found by Watson which revealed that he had done so.
• Accordingly, the court accepted that the fact of the sub-division was unknown to him at the time of concluding the agreement of sale with the plaintiff.
• Since Spendley had heard nothing further about the matter he had simply forgotten about it thereafter.

Ruling on Fraudulent Misrepresentation

• Para 21: The high court found that the defendant’s misrepresentation regarding the two units comprising the scheme, and the existence of the effective right of veto regarding the proposed sub-division, had not been made intentionally.
• Accordingly the court accepted that the requisition of fraudulent misrepresentation had not been established.

Basis for Avoiding the Agreement

• Para 22: The high court ruled in favor of the plaintiff on the alternative basis:
  • Thompson, due to the misrepresentation, made a fundamental mistake about the nature of the property.

Innocent Misrepresentation

• Para 23: For the appeal it is not necessary to determine if the initial court was correct in its fraudulent misrepresentation conclusion.
• The effect of an innocent misrepresentation by Spendley on the agreement between the parties is needed.
• Relying on Trollip v Jordaan, counsel for the defendant argued the sale agreement was not void because the misrepresentation by Spendley had been made innocently.
• In the Jordaan case the majority held that a contract of sale was not void as a result of an innocent misrepresentation that did not give rise to an error in corpore, and therefore that a non-misrepresentation clause contained therein applied, and precluded reliance on the misrepresentation.
  ewline Trollip v Jordaan 1961 (1) SA 238 (A) at 252G-H ewlineAt 254B.
  ewline
• Para 23: In Jordaan the dispute turned on the effect of the misrepresentation wherein the majority said:
• ‘It is obvious that any actionable misrepresentation must have as its effect a mistaken belief on the part of the representee. If [the contract’s ‘no-representation’ clauses] prevent the appellant from relying on any innocent misrepresentation, then they are equally effective in preventing him from relying on a mistake induced solely by that very misrepresentation.’
• Para 24: A different approach was adopted by Howard J in Allen v Sixteen Stirling Investments (Pty) Ltd where it was stated that an error in corpore caused by a misrepresentation, and which vitiated the consent to the contract concerned, rendered that contract void ab initio and therefore the representor could not rely on an exemption clause.
  ewline Allen v 16 Stirling Investments (Pty) Ltd 1974 (4) SA 164 (D).
  ewline Allen at 171B-F.
  ewline
• Para 25: Jordaan did not consider that the mistake that had resulted from the misrepresentation was material. In Allen, on the other hand, the mistake clearly was material.
• Accordingly, a clause that excludes liability for misrepresentation will fall with the contract where the fundamental mistake that precludes consensus was induced by a misrepresentation, whether made innocently or not.
  ewlineD Hutchison & CJ Pretorius (eds) et al The Law of Contract in South Africa (2010) at 121.
  ewline
• Para 26: The court recently affirmed the principle enunciated by Howard J in the Allen case that where the misrepresentation results in a fundamental mistake, the ‘contract is void ab initio.’
• Cloete JA, writing for the majority, explained the rationale for the approach as follows:
  • ‘In this way, the law gives effect to the sound 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 or her signature, while at the same time, protecting such a person if he or she is under a justifiable misapprehension, caused by the other party who requires such signature, as to the effect of the document.’
    ewlineBrink v Humphries & Jewell (Pty) Ltd 2005 (2) SA 419 (SCA) para 2.
    ewline
• Para 27: In the present matter the correct enquiry is whether the error has precluded the parties from reaching consensus ad idem and secondly, whether it is reasonable for the resiling party to labour under a misapprehension.
• See Morgan Air Cargo v Sim Road Investments & another, Murphy J. noted in relation to the enquiry into whether an exemption clause is enforceable, that ‘. . . the emphasis has shifted from the nature of the fault element attending the misrepresentation to the nature and quality of the consensus vitiating error caused by the misrepresentation.’
  ewline[2009] 4 All SA 249 (GNP) para 83.
  ewline
• Para 28: Academic writers appear to be at one that a contract, including an exemption clause may fail for lack of consensus between the parties.
• In the Allen case Howard J referred with approval to a comment by P M A Hunt on Trollip v Jordaan, which appeared in the Annual Survey of South African Law, where the writer said the following in regard to the effect of an exemption clause:
  • ‘Prima facie it would seem that the vice taints consent to the whole contract, including the exemption clause. All the terms of the contract together regulate the contract’s object, and it is difficult to see how the consent can but stand or fall as a whole. It seems impermissible to find a separate untainted consent to the exemption clause.’
    ewline AJ Kerr The Principles of the Law of Contract (6 ed 2002) at 253; D Hutchison & C J Pretorius (eds) et al The Law of Contract in South Africa (2010) at 121; S W J van der Merwe, L F van Huyssteen, M F B Reinecke & G F Lubbe Contract: General Principles (4 ed 2012) at 258.
    ewline At 171A.
    ewline 1961 at 95.
    ewline
• Para 28: Howard J, I can find no fault with the reasoning and understand the ‘vice’ referred to in the above passage to mean ‘something in the nature of an essential error which vitiates consent and renders the contract void ab initio.’
  ewlineAllen at 171B.
  ewline

Application of Principles

• Para 29: The court considered whether the exemption clause availed the defendant.
• The plaintiff’s mistake, induced by Spendley involved the merx as such no consensus was established in concluding the contract.
• Both parties had a mistaken belief that the unit in the building was one of only two.
• The plaintiff’s mistake was induced by the misrepresentation that there were only two units in the building and that the owner of unit 1 could veto the right of unit 2 to sub-divide it.
• The parties were mutually mistaken to the true nature of the merx and accordingly the parties did not achieve consensus as to the subject matter of the sale.

Significance of Spendley's Forgotten Resolution

• Para 30: The fact that Spendley had forgotten about the resolution signed in 2007 approving the sub-division of unit 2 and that the misrepresentation was therefore not fraudulent makes no difference.
• Regardless of the nature of the misrepresentation, the plaintiff concluded the agreement on the basis of a justus error in Sonap Petroleum (SA) (Pty) Ltd (formerly known as SONAREP (SA) (Pty) Ltd v Pappadogianis.
  ewlineSonap Petroleum (SA) (Pty) Ltd (formerly known as Sonarep (SA) (Pty) Ltd v Pappadogianis 1992 (3) SA 234 (A) at 239I-240B.
  ewline
• Harms AJA explained the legal position as follows:
  • ‘In my view, therefore, the decisive question in a case like the present 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? Compare Corbin on Contracts (1 volume edition) (1952) at 157. To answer this question, a three-fold enquiry is usually necessary, namely, firstly, was there a misrepresentation as to one party’s intention; secondly, who made that representation; and thirdly, was the other party misled thereby?
  • See also Du Toit v Atkinson’s Motors BPK 1985 (2) SA 893 (A) at 906C-G; Spindrifter (Pty) Ltd v Lester Donovan (Pty) Ltd 1986 (1) SA 303 (A) at 316I-317B.
  • The last question postulates two possibilities: Was he actually misled and would a reasonable man have been misled?’

Conclusion

• Para 31: Thompson was misled by Spendley’s misrepresentation that the sectional title scheme comprised only two units, and the non-disclosure of the fact that the approval to the sub-division of unit 2.
• The misrepresentation resulted in a reasonable and material mistake as to what the merx was.
• The contract was thus void from the outset.
• In the circumstances the appeal must fail.

Order

• Para 32: The appeal is dismissed with costs.
• K K Mthiyane Deputy President

Appearances

• For the Appellant: A Beyleveld SC
  • Instructed by: De Villiers & Partners, Port Elizabeth
  • Honey Attorneys, Bloemfontein
• For the Respondent: R P van Rooyen SC
  • Instructed by: Friedman Scheckter, Port Elizabeth
  • Matsepes Inc, Bloemfontein