Unilateral mistakes in signing agreements when using unconventional methods.

The growth of the global economy has fostered an environment for cross-border transactions to thrive. However, in many instances where parties are concluding agreements in cross-border transactions, differences in location and time may give rise to the need for remote contract execution mechanisms to conclude the deal.

Over the years, with the advancement of technology, we have seen a deviation from conventional methods of concluding contracts to the use of electronic contracts, smart contracts, and the holding of written contracts in escrow, which may be used for written contracts where a party to the contract is not available to sign the contract on the closing date, but signs a signature page prior to the closing, which is then attached to the rest of the contract.

What happens when a pre-signed signature page is attached to an agreement that contains material terms that the signatory had not agreed to be bound to?

As a point of departure, a party’s signature is evidence that the party agrees to be bound by the terms of the contract, in line with the caveat subscriptor rule. However, what recourse can be sought where the pre-signed signature page is attached to a version of the contract that contains material terms that the party had not agreed to be bound to? This article explores the consequences of a party’s unilateral mistake, and the contract law principle of iustus error as confirmed by the Supreme Court of Appeal (“SCA”) in Ruth Eunice Sechoaro v Patience Kgwadi (2023).

The Sechoaro case

In this case, Kgwadi (Respondent) had married her since deceased ex-husband (Mr Kgwadi) in community of property in May 1987, and said marriage was dissolved in October 1991. As a result of the divorce, they concluded a settlement agreement which did not deal with the division of a property that formed part of their joint estate. In its judgment, the divorce court had granted Mr Kgwadi 14 days to apply to the court for variation of the settlement agreement. At the time of their divorce, the Respondent and Mr Kgwadi were joint owners of an immovable property in Boksburg (Property). Since the settlement agreement did not deal with the division of the property, they verbally agreed that each of them would be entitled to half of the value of the Property. It was verbally agreed that Mr Kgwadi would pay the Respondent 50% of the value of the Property upon its sale; however, Mr Kgwadi never did. In September 2010, Mr Kgwadi remarried Ruth Sechoaro (Sechoaro), to whom he bequeathed 50% of his estate.

In March 2012, the Respondent was severely injured in an accident and remained in hospital for six months. During her stay, a messenger from a law firm (whom the Respondent assumed to be representing Mr Kgwadi) presented her with a document entitled, ‘variation agreement’, the terms of which were that, inter alia, the parties now agreed to amend the settlement agreement relating to the Property, and that she forfeited her 50% share in the Property to Mr Kgwadi at no value (the Variation Agreement), which the Respondent signed.

Mr Kgwadi passed away in 2014, and an executor of his estate was appointed (the Executor). The Executor and the Respondent attempted to sell the Property; however, the Respondent was informed that she was not entitled to 50% of the proceeds of the sale of the Property due to the Variation Agreement. The Respondent launched an application in the High Court to challenge the enforceability of the Variation Agreement on, amongst others, the grounds that she signed the Variation Agreement without any intention to be bound by its terms. The High Court found in favour of the Respondent. Sechoaro subsequently applied to the High Court for leave to appeal, which was dismissed. She subsequently applied to the SCA for leave to appeal.

The SCA had to consider whether the Respondent’s unilateral mistake (error) in signing the Variation Agreement under a misunderstanding of its contents is reasonable (iustus) and excusable. The court, in its application of the iustus error principle, found this to be the case on the premise of the following:

• Based on the facts, it is common cause that the Respondent was reasonable in not expecting the agreement she had signed to contain a term that forfeited her 50% share in the Property at no value;

• Mr Kgwadi’s decision to present a Variation Agreement – which contained a clause that was materially different to what had been agreed with the Respondent – 20 years after the initial settlement agreement, was done deliberately to deceive the Respondent;

• Mr Kgwadi must reasonably have known, contrary to the clause in the Variation Agreement, that the Respondent would not have agreed to that agreement; thus, when he received the signed agreement, he was aware of her mistake and was the cause of it; and

• The Respondent acted consistently under her assumption that the Variation Agreement did not contain a clause that bound her to forfeit her 50% share in the Property at no value.

The doctrine of iustus error

As a principle, iustus error has been developed by our courts over time, and functions as a corrective measure that provides that a party will not be bound where they mistakenly gave their consent, where that mistake is reasonable and excusable. In Du Toit, the court held that where prior to the agreement, the mistaken party created an impression that directly contradicts the provisions of the agreement, the other party must draw the mistaken party’s attention to the discrepancy. Where a party continues to rely on the mistaken party’s discrepancy, this reliance is said to be unreasonable, and the error iustus.

Lessons learnt

Commercial agreements are commonplace in trade and will continue to exist for as long as trade does. To ensure that contracting is efficient, inexpensive and speedy during cross-border trade, entities must develop mechanisms that allow for agreements to be concluded by individuals while they are in different locations across the globe.

While the practice of escrowing pre-signed signature pages or entire agreements for release on the agreed closing date is becoming more common, contracting parties must ensure that the final agreement and its terms align with what the parties had negotiated to be bound to. Where a dispute arises, it may not suffice to say that by virtue of the mistaken party’s signing the agreement, they are bound to its terms, irrespective of their mistake. Failure to draw the mistaken party’s attention to their mistake, and further relying – unreasonably – on a mistaken party’s consent to be bound will make the error iustus, and the terms of that agreement will not be binding.

Doron Joffe is an Executive and Joint Head of Department and Asanda Lembede a Candidate Legal Practitioner in Corporate Commercial | ENS.

This article first appeared in DealMakers, SA’s quarterly M&A publication.

DealMakers is SA’s M&A publication.
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