Van Reenen Steel v Smith Judgement Notes

Case Overview

• Case No: 97/2001
• Parties:
  • Appellant: Van Reenen Steel (Pty) Limited
  • Respondents: Errol John Barnes Smith NO, Richard Rosso
• Court: 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

Issue

• Whether a contract is vitiated by the failure of a common assumption regarding an existing or past fact.
• This applies when the correctness of the assumption was not a term or condition of the contract.

Background

• Smith: First respondent, executor of Rowley's deceased estate.
• Rowley: Majority shareholder in Mortech Industries (Pty) Ltd.
• Rosso & Hulton: Held remaining shares; Hulton was managing director after Rowley's death.
• Mortech's Financial Status:
  • Dire financial position.
  • Bank overdraft of R3m. Claim of R0.5m against a failed creditor was worthless.
  • Smith was unwilling to inject further capital and considered liquidation or selling the estate’s interest.

Hulton and Van Reenen's Involvement

• Hulton believed Mortech could be viable with a capital injection.
• Van Reenen (managing director of Van Reenen Steel) showed interest.
• Due Diligence: Van Reenen (a chartered accountant and businessman) conducted a 'due diligence'.
• Purchase: Van Reenen Steel and Hulton purchased shares and loan account claims from Smith and Rosso.

Appellants' Argument

• Common Intention: The appellants argued that the common intention was to buy and sell a viable business.
• Assets and liabilities were supposedly known and disclosed in the 31 March 1998 balance sheet.
• Common Mistake: All parties incorrectly assumed Mortech had certain important attributes it lacked.
• Mistake lay in:
  • The value of underlying assets.
  • The assumption that the business was viable.
  • The assumption that assets were known and extant as disclosed by the balance sheet.

Balance Sheet

• The 31 March 1998 balance sheet was handwritten and ostensibly prepared by Van Reenen.
• Discussion: The balance sheet was discussed with Smith during negotiations.
• No Representations: Smith (or Rosso) made no representations about the balance sheet's correctness.
• Sellers' Stance: The sellers were unwilling to provide warranties or indemnities beyond the 1997 audited financial statements.

Contractual Clauses on Warranties and Indemnities

• Extent: The contract was fifty-five pages long, with twenty pages on warranties and indemnities.
• Key Clause (Clause 13):
  • 13.1: Sellers jointly and severally bound to warranties and indemnities in Schedule 5.
  • 13.2: Purchasers entered the agreement relying on the warranties, indemnities, and representations given by the Sellers.
  • 13.3: Each warranty and indemnity is separate and not limited by other provisions.
  • 13.4: Purchasers acknowledged that, except for the warranties in the agreement and Schedule 5, no other representations or warranties were made by the Sellers.

Legal Issues

• Unilateral Mistake: The appellants could not rely on a unilateral mistake as the respondents did not cause the mistake, referencing Sonap Petroleum (SA) (Pty) Ltd v Pappadogianis 1992 (3) SA 234 (A).
• Written Contract: The written contract expressed the parties’ consensus, disallowing reliance on the March statement.
• False Common Assumption: The appellants argued that a false common assumption relating to a present or past fact vitiates a contract, even if it is not a term or condition.

Assumptions and Their Effects

• Future State of Affairs: An assumption relating to a future state of affairs relates to an agreement in operation and affects its terms.
  • Such a supposition is similar to a condition, possibly a resolutive condition, condition precedent, or ordinary term.
  • Using 'supposition' or 'assumption' instead of 'condition' is not helpful for clarity.
  • Reference to Sonarep (SA) (Pty) Ltd v Motorcraft (Pty) Ltd 1981 (1) SA 889 (N) 902F.
• Present or Past Facts: Assumptions related to present or past facts, if unilateral, revert to the effect of a unilateral mistake. If common, they are reasons for contracting or mistakes related to motive.
• Motive: A party cannot vitiate a contract based on a mistaken motive related to an existing fact, even if common, unless the contract depends on the motive or misrepresentation requirements are met.
  • Reference to African Realty Trust Ltd v Holmes 1922 AD 389 403.

Lord Atkin on Common Mistakes

• Bell v Lever Bros Ltd [1932] AC 161 (HL): Lord Atkin addressed common mistakes, proposing an alternative approach (at 224-225).
• Implied Stipulation: There might be an implied stipulation in the contract that its efficacy depends on the facts being as understood by both parties.
• Condition of the Contract: If the contract expressly or impliedly contains a term that a particular assumption is a condition, the contract is voided if the assumption is untrue.
• De Wet & Yeats: Their views, quoted in Fourie v CDMO Homes (Pty) Ltd 1982 (1) SA 21 (A) 27, align with this.

McRae and Another v Commonwealth Disposals Commission

• Fundamental Question: The court must consider what the promisor really promised: to perform in all events or only subject to the existence of a particular subject matter?
• Intention: Questions of intention or 'presumed intention' arise and must be determined by the words used and reasonable inferences from the circumstances.
• Reference to (1951) 84 CLR 337 407-408.

Van der Merwe et al on Common Mistake

• Definition: A common mistake occurs when both parties have the same incorrect perception of a fact external to their minds.
• Agreement: This does not lead to dissensus, as parties are in complete agreement based on an incorrect assumption.
• Underlying Supposition: Relates to a common underlying supposition on which the parties base their contract.
• Common Motive: Parties can introduce a common motive into the contract, so a mistake in their common motive will render the contract without further effect.

Wilson Bayly Holmes

• Conformity: The statement in Wilson Bayly Holmes conforms to authority and principle.
• Hypothetical Scenario: If asked whether the appellants would have concluded the agreement knowing the true facts, the answer is probably yes.
• Respondents' Perspective: There is no reason to think the respondents would not have sold the business on the same terms, regardless of its viability.
• Causation: The viability of the business was not causally connected to the decision to sell.

Responsibility and Risk

• Atiyah's View: Determine which party assumed responsibility for the truth of the assumed facts or took the risk of the facts being otherwise.
• Rare Event: Only if neither party assumed responsibility will the falsity of the assumption render the contract inoperative.
• Appellants' Risk: The appellants took that risk, especially since Hulton knew the business, Van Reenen conducted due diligence, and they accepted a warranty based on the 1997 audited statements without insisting on one based on the March 1998 statement.

Dickinson Motors (Pty) Ltd v Oberholzer

• Rejection of Conflict: The appellants' claim of conflict with Dickinson Motors (Pty) Ltd v Oberholzer 1952 (1) SA 443 (A) 450 was rejected, similar to Wilson Bayly Holmes.
• Facts: The plaintiff claimed repayment of an amount paid in error, as both parties thought the car to be delivered was Plymouth A but it was Plymouth B.
• Common Error: The common error was that the car delivered was car A and not car B.
• Validity of Contract: The contract's validity was not in question, only its nature.
• Consensus: There was consensus about the vehicle involved and the amount payable.

Schreiner JA's Statement

• Statement's Reliance: The appellants heavily relied on Schreiner JA's statement (at 450A-F).
• Context: The identity of the car at Vereeniging as the one A. G. Oberholzer bought from the defendant was vital.
• Common Mistake: The payment of £291 was under a common mistake regarding a matter vital to the transaction.
• Huddersfield Banking Company Ltd v Henry Lister & Son Ltd: Reference to this case, stating that an agreement founded on a common mistake treated as a condition can be set aside.

Analysis of Dickinson Motors

• Release Agreement: The existence of the release agreement was not in issue.
• Payment: The reasonable and common error related to the payment of money, not the underlying transaction.
• Huddersfield Banking: The quotation requires that a failed common assumption must be reflected in an implied condition to vitiate a contract.

Error in Substantia

• No Need: No need for the 'doctrine' of error in substantia in our law.
• Exclusion of Consensus: If the error in substantia excludes consensus, it is operative or material; otherwise, it is inoperative or immaterial.

Conclusion

• Correctness: Magid J correctly issued a declaratory order that the agreement between the parties is of full force and effect.
• Dismissal: The appeal is dismissed with costs.