Unilateral Mistakes In Signing Agreements When Using Unconventional Methods – Enter At Your Own Risk – Economic Analysis

Introduction

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, they may not be able to conclude the contracts due to
differences in location and time, giving rise to the need for
remote contract execution mechanisms.

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 an escrow. An example of the use of an escrow
for written contracts is where a party to a contract, who is not
available to sign the contract on the closing date, signs a
signature page prior to the closing date which is then held in an
escrow to only be released on the closing date and 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 evidences that
the party agrees to be bound to 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) ZASCA 46.

The Sechoaro case

In this case, Kgwadi (“Respondent“)
had married her deceased ex-husband (“Mr
Kgwadi“) in community of property in May
1987, of which 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 a period of 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 her 50% 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 6 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 is 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 ground 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 they
  had agreed to with the Respondent, 20 years after the initial
  settlement agreement was done deliberately to deceive the
  Respondent;




• Mr Kgwadi must have reasonably 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

Iustus error as a principle has been developed by our
courts over time and functions as a corrective measure that
provides that a party will not be bound where that party 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 is 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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.