4 March 2020 by Dispute Resolution Alert

The power of exemptions

A client of ours recently approached us with the following problem.

Our client is a food manufacturer. It wished to hire factory premises having adequate electricity supply (notwithstanding Eskom power cuts), to operate its machinery. Prior to the conclusion of a lease it sought and obtained advice from the landlord, via the letting agent, as to the power supply available at the premises. Having received the advice that what was being supplied was adequate to meet its needs, our client concluded the lease. However, the requirement for electricity supply was not written into the lease agreement.

When it sought to occupy the premises, our client found that the power supply capability had been significantly overstated. Since it could not operate its factory at the premises, our client advised the landlord that the lease would have be terminated on grounds of this misrepresentation. The landlord took the contrary view: since the lease agreement contained the usual clause that pre-contractual warranties or representations not incorporated into the lease agreement itself were not binding on the parties.

Historically courts have taken the position that parties are bound by the clear wording of contracts, and that contracting parties should ensure that whatever they wish to be recorded as part of their contract is incorporated in the contracted document itself.

However, this dogmatic approach has been softened over the years

The Supreme Court of Appeal was recently presented with a similar factual situation to determine. In Spenmac v Tatrim CC (216/2013) [2014] ZASCA 48 (1 April2014) the Court had to decide if an agreement for the sale of property should be set aside on the basis that it was concluded in the mistaken belief that the sale included a right of veto in respect of subdivision. This mistake had been induced, it was common cause, by the seller’s innocent misrepresentation of this material fact prior to the conclusion of the written agreement.

The written agreement contained an exemption clause to the effect that the sale was concluded “voetstoots”, and that no representations or warranties outside the agreement of sale itself would be binding on the parties. The agreement further recorded that the purchaser had fully acquainted itself with the property it was buying.

Relying on earlier authorities, the court confirmed that where a misrepresentation, even an innocent one, results in a fundamental mistake, a contract is void ab initio i.e. it can be set aside as though it did not come into existence.

The court therefore found that a party, who concludes an agreement under a justifiable misapprehension as to material facts caused by the other party’s representations, is entitled to resile from the contract. Such misapprehension leads to a lack of consensus between the contracting parties, and such lack of consensus taints consent to the whole contract, including any exemption clause. In such cases the exemption clause will not prevent cancellation.

The learnings from this case are as follows:

  1. To avoid getting into a fight in the first place, it is desirable that all material terms of a contract, especially as regards the quality of goods, be incorporated in the contract if at all possible;
  2. Parties who make misrepresentations as to material facts, even if such misrepresentations are made innocently, cannot hide behind exemption clauses to escape the consequences of such misrepresentation. This places a practical responsibility on contracting parties to ensure that they do not make such misrepresentations, failing which they run the risk of a contract being set aside in due course.

There is no doubt that this approach is equitable since it ensures that contracts are based on true agreement. It also ensures that contracting parties cannot rely on exemption clauses to escape from careless and misleading pre-contractual conduct.

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