South Africa: Beware - Signing Of Credit Agreements Containing Suretyship Clauses!

In the recent case of Brink v Humphries & Jewell (Proprietary) Limited 2005 (2) SA 419 (SCA); the Supreme Court of Appeal (SCA) has again dealt with the important principle of "caveat subscriptor". The signature to a document creates a refutable presumption that a person who puts his signature to a document knows what the document contains. If the contents of a document turn out not to be to the signatories liking, he has no one to blame but himself. The basis of the caveat subscriptor rule is a reliance upon the doctrine of quasi-mutual asset, the question being simply whether the other party is reasonably entitled to assume that the signatory, by signing the document, was signifying his intention to be bound by it.

A common defence to the principle of "caveat subscriptor" is the defence of "iustus error", i.e. unilateral mistake. If a signatory to a credit application form signed the document labouring under an honest misapprehension of the true nature of the document and which mistake was caused by the creditor, such signatory would be able to rescind the contract if his mistake was sufficiently material. The signatory would have to show that he would not have entered into the contract if he had known the truth. (Kahn vs Naidoo 1989 (3) SA 724 (N)).

In Brink, Cloete JA confirmed the caveat subscriptor principle in that when a person signs a document he is taken to have assented to what appears above his signature.

Cloete JA referred to the case of George v Fairmead (Proprietary) Limited 1958 (2) SA 465 (A). In such case the court posed the question - ‘When can an error be said to be iustus for the purpose of entitling a man to repudiate his apparent assent to a contractual term? As I read the decisions, our courts, in applying the test, have taken into account the fact that there is another party involved and have considered his position. They have, in effect, said: 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."

In Brink, the SCA confirmed that they would find it unconscionable for a person to enforce the terms of a document or contract where he misled the signatory, whether intentionally or innocently. Where there is such a misrepresentation and it is material, the signatory can rescind the contract because of the misrepresentation, provided he can show that he would not have entered into the contract if he had known the truth. Where misrepresentation results in a fundamental mistake, the "contract" is void ab initio.

The court in Brink stated that in deciding whether a misrepresentation was made, all the relevant circumstances must be taken into account and each case will depend on its own facts. The court went on to state that the furnishing of a document, which is misleading in its terms, can constitute such a misrepresentation. The court made the point that one of the deciding factors to be taken into account is whether the person providing the credit application to the signatory informs the signatory to the credit application form whether there is a personal suretyship included in such agreement.

The first question is whether in fact the signatory has been misled. Did the signatory know or realise that the credit application form contained a personal suretyship clause and did he expect the document to have such a clause?

Secondly, had the signatory known or realised that the credit agreement contained a personal suretyship clause, would he have nonetheless signed the agreement? Was the signatory acting under a misapprehension in signing the credit application form?

The third enquiry that needs to be undertaken is whether a reasonable man would have been misled. This is an objective enquiry which enables the court to prevent abuse of the iustus error defence in cases such as the present. Would a reasonable businessman have anticipated a personal suretyship obligation in an application for credit made on behalf of a company?

In deciding this question, the SCA analysed the following features of the credit application form relevant to that case, which in their view was relevant to the question as to whether a reasonable man would have been misled by the credit application -

• the prominent heading of the document must be taken into account. One must look at whether the document proclaims that it is a credit application form or whether it proclaims that it is a credit application form and personal suretyship agreement. If it merely states that it is a credit application form and then subsequently includes a suretyship clause, this in itself is misleading;
• whether there was a clear indication in the application form that the signatory was signing in two capacities i.e. in a representative capacity on behalf of the company and in a personal capacity. The suggestion offered by the SCA is to have provision for two signatures with appropriate wording indicating that the signatory provision pertains to a suretyship obligation;
• does the wording of the credit application form convey to any person who saw it that the signatory was signing in a representative capacity or in a personal capacity? Is the clause which contains the personal suretyship, sufficiently bold and eye catching to draw the attention of the signatory to this clause? Is the clause conspicuous enough so that it would stand out on its own? Would the wording suffice to alert a signatory to the fact that he or she was undertaking a personal obligation?

In the Brink case, the SCA held that the creditor’s conduct in providing the credit application form to the signatory without clearly indicating that it contained a personal suretyship by the signatory was misleading and had induced a fundamental mistake on the part of the signatory. The signatory had been under the impression that he was signing a credit application form on behalf of the company, whereas he had undertaken, in addition, a personal suretyship for the debts of the company. It followed therefore, that the suretyship obligation was void ab initio.

A checklist for creditors in assessing the legality of their credit application forms -

1. The creditor must inform the person signing the document that the form imposes a suretyship obligation on the individual who signs the document. If the application form states in the heading "COMPANY CUSTOMER RECORD AND CREDIT APPLICATION FORM BETWEEN …" this in itself is misleading. If the creditor required that the document would also be a suretyship undertaking, the creditor must include such an indication in the heading of the application form.
2. If the person signing the document understood that what was required of him in signing the form was a signature on behalf of the debtor i.e. the company, and such application form includes a personal suretyship, then by his signing the application he would have been misled. If the individual signing the document did not realise that the credit application contained a personal suretyship clause and did not expect it to, then he cannot be held bound by the suretyship contained therein. If the individual can categorically confirm that had he realised that the form contained a personal suretyship clause, he would not have signed the document, then that person can rely on the fact that he acted under a misapprehension in signing the credit application form.
3. The creditor must ask the question as to whether a reasonable man would be misled in signing the document containing a suretyship undertaking or whether he would understand that he is doing so.
4. The creditor must ensure that the point at which signature is requested on the form by the surety is preceded by a space for the capacity of the party signing the document. If this is not done, this further misleads the individual into thinking that he is signing a document in his representative capacity and not in his personal capacity. If a creditor intends that the person signing on behalf of a company be bound also as surety, it must provide for the signing by the individual in a dual capacity ie in a representative capacity and in a personal capacity. If there is no provision for two signatures with appropriate wording indicating the dual capacity, then the document is defective.
5. The actual suretyship clause must be in capitals and in bold i.e. it must be highlighted. This clearly assists in alerting the signatory to the clause containing the suretyship. The suretyship clause must therefore be conspicuous. The manner in which the personal suretyship clause is included in the form must alert a signatory to the fact that he or she is undertaking a personal obligation.

All in all, the creditor must ensure that the individual signing the document containing a suretyship is not misled by the features of the credit application form. One must ask the question as to whether a reasonable man in the position of such person would be misled by signing such form. If the misrepresentation is material, the signatory would be entitled to rely on the Brink case and argue that the contract should be rescinded because of such misrepresentation and therefore the "surety" cannot be bound by the contract.