Third Party Fraud Inducing Material Mistake Slip Knot Investments 777 (PTY) Ltd V Du Toit 2011 4 SA 72 (SCA)

In Slip Knot Investments v Du Toit 2011 4 SA 72 (SCA) the Supreme Court of Appeal had to determine if the material mistake of a contractual party induced by the fraud of an independent third party could sustain a plea of iustus error raised by the mistaken party. The position prior to this decision was uncertain and characterized by inconsistency, mostly occasioned by the application of the iustus error doctrine together with fault. The Supreme Court of Appeal found that in the circumstances the mistaken party was liable, despite the fraud of the third party, on the basis of the reliance theory. The decision is commendable for bringing a measure of certainty to the law of mistake on this point and indicating that the reliance theory (as opposed to the iustus error doctrine) is the appropriate means to resolving such cases. Nevertheless, it is suggested that although the general rule implied by the court's approach is entirely apposite, there may well be exceptional instances where on the basis of relevant policy considerations the reliance theory should not prevail and the mistaken party should be absolved from contractual liability. In this manner reliance, which at first seems reasonable for being induced by the conduct of the contract denier, may upon further reflection be regarded as unreasonable based on the consideration of risk creation at the hand of the contract assertor, for instance. Admitting exceptions in appropriate circumstances would also provide a degree of consonance with earlier case law, where, even if the court's approach was open to theoretical criticism, a court has intuitively felt that liability should not lie.


Introduction
A problem that has perplexed the courts for some time, and to which there has been no clear answer, is whether the material mistake of a contractant induced solely by the deliberate interventions of an independent third party is sufficient to sustain a plea of iustus error (on the part of the contract denier) or, conversely, a lack of reasonable reliance (on the part of the contract assertor) raised by the mistaken party. A third party may be regarded as someone who does not act in collusion with, or as the agent of, either of the contractual parties. Consequently, the conduct of the third party cannot be attributed directly to either party. 1 Deliberate third-party conduct generally tends to be problematic as regards the law of obligations. 2 Within the realm of contract it manifests as fraudulent misrepresentation by the third party causing a mistake (either material or non-material) on the part of a contractant. The position in regard to non-material mistake has been settled for some time, but cases dealing with material mistake caused in this manner tend to reflect inconsistency and contradiction. On the whole the Supreme Court of Appeal has been silent on the matter, 3 but recently in Slip Knot Investments v Du Toit 4 this court was not prepared to uphold a plea of iustus error where the mistake in question was caused by third parties and not the contract assertor. Although the court's decision provides some much needed direction, it is suggested that there may well be exceptional situations where contractual liability should not lie. This note examines third-party fraud within the context of the law of mistake in the light of the approach adopted by the court.

Facts
The respondent was a sixty-year old farmer and a trustee of a trust along with his brother and the latter's son. The trust was created by the respondent's brother, who was a beneficiary of the income of the trust and administered the trust solely in his own interests and those of his heirs. The respondent had no interest in the trust assets or its income. The trustees, including the respondent, signed a deed of suretyship in favour of the appellant as security for advancing a sum of R6 million to the trust. Judgment was obtained against the trust and sureties after the trust failed to adhere to the terms of a settlement agreement. The sequestration of the trust and the estate of the respondent's brother ensued. The respondent admitted signing the deed of suretyship, but denied that he was liable as surety, alleging that he had signed by mistake and without the intention to incur contractual liability. He brought an application for rescission of the judgment against him as surety, which was granted. The main application subsequently came before Kruger J in the Free State High Court who dismissed the appellant's application for judgment against the respondent but gave leave to appeal to the Supreme Court of Appeal. 5 The facts material to the signing of the suretyship by the respondent are as follows: on the particular day the respondent's nephew telephoned the respondent's friend,

Decision
The decisions of the court a quo and Supreme Court of Appeal differ markedly on the question of whether or not the respondent's plea of iustus error was sustainable, which is a reflection of the difficulty that the courts generally have experienced in adjudicating similar cases.

Court a quo
In the court a quo Kruger J found that the respondent's mistake was reasonable. In reaching this conclusion he emphasised the following: the respondent was a farmer who had nothing to do with the business of the trust and the loan to it by the appellant. He was further not a businessman and knew that the documents related to his brother's risky venture in Africa, which did not concern him. It was also because he was put under considerable pressure to sign them forthwith that the respondent believed that the documents did not affect him. Furthermore, there were no negotiations between the appellant and respondent. The bank manager, in addition,

Commentary
There is authority for both the decision in the court a quo and the Supreme Court of Appeal. It is, however, suggested that the approach of the Supreme Court of Appeal is preferable, but the question that begs is if in all instances where the material mistake of a contractant has been caused by the fraud of a third party contractual liability nevertheless should lie as a matter of strict principle. After all, one is potentially dealing with two innocent parties: 13 the contract denier's mistake has been induced by the fraudulent conduct of a third party, while the reliance of the contract assertor has been caused by the contract denier. Why should the contract assertor necessarily be in a preferential position to the contract denier? As will be suggested, much depends on which approach to material mistake weighs heavier as a matter of legal policy, 14 but that in itself should not preclude exceptions to the general rule in appropriate circumstances.

Contradiction in case law
The Supreme Court of Appeal seemed to accept that the third parties who induced the respondent's mistake acted fraudulently, and it is highly probable that they did. 15 Decisions on third-party fraud inducing material mistake reflect a fair measure of inconsistency, especially where the iustus error doctrine is involved. In some cases the courts have been very tentative about this issue 16 and in others they have avoided addressing it if at all possible. 17 The case law has been analysed in detail elsewhere and does not bear repeating in any detail. 18 For present purposes it is sufficient to state that in some instances the courts have been prepared to absolve a party from contractual liability where his or her mistake has been caused by the fraudulent interventions of a third party, 19 while on other occasions they have not. 20 The rationales for these decisions, however, have not always been convincing.
Academic opinion tends to be against recognising that the fraud of the third party necessarily releases the mistaken party from liability. 21 Two factors in particular appear to have influenced the courts in this regard: firstly, the law relating to actionable misrepresentation, 22 where the position is that unless the fraud emanates from one of the contracting parties it has no effect on the contract; 23 and secondly, the question of negligence on the part of the contract denier either to justify liability where present 24 or to absolve the mistaken party where where the court formulated the rule as follows: "It is a general rule of our law that if the fraud which induces a contract does not proceed from one of the parties, but from an independent third person, it will have no effect upon the contract. The fraud must be the fraud of one of the parties or of a third party acting in collusion with, or as the agent of, one of the parties". 24 See e.g. Standard Credit Corporation Ltd v Naicker 1987 2 SA 49 (N) 53H-J. absent. 25 Both factors are open to criticism. The analogy with misrepresentation is perhaps at best a useful guideline 26 since the iustus error doctrine and the reliance theory do not apply in that instance, but certainly do where material mistake is in question. 27 The fault principle is more problematic and its application within the realm of mistake has drawn criticism on the basis that a comparison of degrees of fault between parties is unworkable. 28 At times the use of fault has also been questioned by the judiciary. 29 It is suggested that although fault is not a strict requirement under the tests for reliance or iustus error it generally remains a useful tool when balancing the equities of cases of dissensus. 30 Within the context of third-party fraud, however, it appears to be superfluous, because when a party has been deceived by the fraudulent conduct of another, surely his or her negligence is nullified by the intentional act of the deceiver? 31 Moreover, virtually in all instances of material mistake induced in this manner the negligence of the contract denier has in main consisted of not reading a contractual document before signing it. 32 The courts vary in their interpretation of such conduct, at times labelling it negligent, while at other times not. 33 Focusing on negligence simply does not seem to take the matter any further: if the contract denier was not negligent and actually read the contractual document before signing it, then surely there would have been no mistake to speak of. Rather, the point is that the fraudster has managed to lull the mistaken party into

Third party fraud and the tests for iustus error and reliance
Even a casual glance at the classic formulations in positive law of the iustus error doctrine and the reliance theory reveals that they do not make provision for material mistake induced by third-party fraud. 39 As regards iustus error, Malan JA referred to the statement of principle firstly in George v Fairmead (Pty) Ltd: Has the first party -the one who is trying to resile -been to blame in the sense that by his conduct he has led the other party, as a reasonable man, to believe that he was binding himself? ... If his mistake is due to a misrepresentation, whether innocent or fraudulent, by the other party, then, of course, it is the second party who is to blame, and the first party is not bound. 40

And secondly in National and Overseas Distributors Corporation (Pty) Ltd v Potato
Board: Our law allows a party to set up his own mistake in certain circumstances in order to escape liability under a contract into which he has entered. But where the other party has not made any misrepresentation and has not appreciated at the time of acceptance that his offer was being accepted under a misapprehension, the scope for a defence of unilateral mistake is very narrow, if it exists at all. At least the mistake ( This seems to have been the line taken by the court a quo in Slip Knot. As previously mentioned, it is this latter interpretation of iustus error that has clouded the issue of third-party fraud inducing material mistake, because it is quite plausible that a mistake may be regarded as excusable merely because it was occasioned by the fraudulent misrepresentation of a third party. 47 Aside from the fact that the iustus error doctrine does not seem to produce consistent results, the problem with this reasoning is that on the same facts one could infer reasonable mistake on the part of the contract denier (for being induced by the fraud of a third party 48 ) and reasonable reliance on the part of the contract assertor (for being induced by the contract denier 49 ). 50 The only way to resolve this conundrum is to acknowledge that since the iustus error approach is but an indirect expression of the reliance theory, the former should bow to the latter when the two are in a state of conflict. 51 It is therefore suggested that within the context of third-party fraud the iustus error approach should simply not be applied. 52 In facts can be interpreted to justify a lack of contractual liability on the basis of iustus error (the court a quo decision) and the imposition of liability on the grounds of reliance (the Supreme Court of Appeal decision). Consequently, it is fair to say that the parallel application of these principles within third-party fraud situations may frequently result in direct contradiction (see further Pretorius 2011b THRHR 191). 51 Hutchison "Contract Formation" 191-192;Hutchison and Van Heerden 1987 SALJ 525;Pretorius 2004bTHRHR 558. 52 See further Pretorius 2011b (D)id 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? … 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? … The last question postulates two possibilities: Was he actually misled and would a reasonable man have been misled?
And appropriately, although the respondent pleaded his defence in terms of iustus error, Malan JA preferred to apply the reliance theory in the circumstances: In argument before us counsel for the respondent expressly disavowed that the respondent was misled by Slip Knot -whether by reason of the form in which the documents were couched or in any other way. To the extent that the respondent was misled he placed the blame squarely and solely at the doors of his brother and nephew. Nor is there any suggestion that the fraud or misrepresentation of the respondent's relatives could or should be attributed to Slip Knot. There is every reason to infer that Slip Knot, as a reasonable person, believed that the respondent's declared intention to be bound as surety as evidenced by his signature to the suretyship also represented his real intention. The respondent entered into the suretyship relying, not on any representation by Slip Knot, but on representations made to him by his nephew and conveyed to him by Altro Potgieter. 55 In the result it is fair to state that the Supreme Court of Appeal has provided much needed direction in two respects: firstly, generally speaking where material mistake has been induced by the fraud of an independent third party a contract nevertheless may still arise; and secondly, the favoured approach to determining liability appears to be the reliance theory. 56 Although the iustus error doctrine was not expressly discounted in the circumstances, the general tenor of the judgment suggests that the reliance theory is the preferable route to follow. Appropriately also there was no direct enquiry as to fault on the part of the contract denier. It is submitted that the approach of the court is to be welcomed for bringing an element of clarity on a sound theoretical basis to a section of the law of mistake that has been problematic since its fledgling years. 57

Exceptions based on policy considerations
Although the judgment of Malan JA implies that third-party fraud does not negate contractual liability in terms of the reliance theory, it remains unclear whether this must be taken as a strict rule or whether there may yet be policy-driven exceptions in deserving instances. It is suggested that while a general rule or principle is essential to achieve a measure of legal certainty, there could be exceptions based on policy considerations peculiar to specific cases. 58 This argument is strengthened by case law, which acknowledges that a mistaken party may be absolved from liability in appropriate circumstances. 59 Pretorius 2011b THRHR 192-195. A number of policy considerations could potentially influence a court's decision where third-party fraud is involved, 64 but two may be specifically mentioned. In the first place there is the element of risk inherent in choosing a messenger to convey communications between parties. If the contract assertor chooses an independent third party to act as messenger between the parties, he or she should bear the consequences of a material mistake on the part of the contract denier caused by the fraudulent misrepresentation of the messenger. In such circumstances the principle of risk 65 could indicate that ultimately the contract assertor's reliance was not reasonable. 66 In the second place one may consider the question of prejudice. 67 Where the contract assertor has not incurred expenses or otherwise detrimentally altered his or her position, and where the status quo can easily be restored, it may be an indication that liability should not lie. 68 These are but examples of factors that could sway the equities in favour of the contract denier; however, a court will probably have to be convinced that there clearly is good reason to deviate from the approach in Slip Knot Investments v Du Toit.

Suretyships and third-party fraud
It may also briefly be mentioned that third-party fraud often seems to surface within the context of suretyship agreements. Typically, the contract denier is misled by the third party into believing that he or she is signing something other than a suretyship -64 See further Pretorius 2011b THRHR 193-194. 65 The risk theory or principle may be employed as a possible corrective to the will theory in that a party who by his or her conduct creates the risk of dissensus, and disagreement eventuates, may be held liable on the basis of risk assumption. Although not an independent ground for contractual liability, risk can be accommodated within present contract theory as a factor that may influence the reasonableness of a party's conduct ( an onerous agreement by its very nature. 69 Generally where a representative of some or other legal entity signs a personal suretyship agreement as security for the debts of the entity and then pleads justifiable mistake when the suretyship is enforced, the courts have been wary of lightly absolving the surety from the liability. 70 Where, however, there have been clear indications of underhandedness on the part of the creditor they have not hesitated in striking down the agreement. 71 The fairly strict approach that the courts have followed in this regard, especially since the caveat subscriptor rule applies, 72 is a reminder that traditionally the scope for a successful plea of unilateral mistake has been rather limited. 73 Although on the other hand on occasion the provincial courts have perhaps been a little too lenient, 74

Conclusion
The question of whether or not the material mistake of a contractant induced by the fraud of an independent third party is sufficient to sustain a plea of iustus error or a lack of reasonable reliance has finally been settled by the Supreme Court of Appeal.
Slip Knot Investments v Du Toit confirms that in such instances the mistaken party will not be exonerated from contractual liability where the other contractual party has been led to reasonably believe that the mistaken party has bound him-or herself to the juristic act in question. The situation in this regard now broadly mirrors the legal position where a third party fraudulently induces a non-material mistake on the part of a contractant: the fraud of the third party does not affect contractual liability where there is in fact consensus ad idem (in cases of non-material mistake) or reasonable reliance (in cases of material mistake). The position prior to this decision was characterised by uncertainty and contradiction largely caused by applying the iustus error approach and the question of negligence on the part of the contract denier to third-party fraud situations. The iustus error doctrine proves indeterminate in such instances because it could provide the reason either for contractual liability (if negligence on the part of the contract denier is regarded as decisive) or the lack thereof (if negligence on the part of the contract denier is automatically negated by the fraud of the third party). Earlier decisions reflect the ambivalence that the iustus error doctrine suffers from in this regard.
Moreover, even if the conduct of the mistaken party is regarded as excusable for being induced by the fraud of a third party, there would still almost inevitably be conflict between the iustus error approach and reliance theory where the belief of the contract assertor in consensus was reasonable in the circumstances. Although in Slip Knot the court did not expressly exclude the iustus error approach from thirdparty fraud cases, it clearly favoured the application of the reliance theory in such circumstances. Justification for this proposition may be derived from the fact that although the case was pleaded in terms of iustus error, the court regarded the test for reliance as decisive in the circumstances and clearly applied it to the facts. It is suggested that the law of mistake would benefit from express exclusion of the iustus error doctrine from third-party fraud situations.
It is further submitted that there may in fact be exceptional cases where the mistaken party should be relieved from contractual liability on the basis of policy considerations peculiar to the specific circumstances. In this manner reliance which at first seems reasonable for being induced by the conduct of the contract denier may upon further reflection be regarded as unreasonable based on, for instance, the consideration of risk creation at the hand of the contract assertor who has insisted on a specific third party as messenger between the contractants, and who perpetrates the fraud. Admitting exceptions in appropriate circumstances would provide a measure of consonance with earlier case law where a court has intuitively felt that liability should not lie, even if the court's approach was open to theoretical criticism.