IS THE LAW FAIR AND DOES IT EVEN MATTER?

The law is often accused of being unjust, unfair and an ass.?In reality however, the law is simply a framework comprising a set of rules and principles that have been developed so that people know where they stand in their dealings with each other.

For the framework to work, it needs to be applied consistently and uniformly, even if doing so would lead to strange and remarkable results. Take one of my cases, being the case of a commercial bank, Nedbank against my client, the Malabela Family Trust.

Unfortunately, we lost the case, something which no attorney likes. What made this loss more bitter for me was not only the fact that the court found against my client on an incorrect application of legal principles which I firmly believed to be well established, but also the fact that the judgement was subsequently reported in the December 2022 law reports, for all and sundry to see, the case name being?Nedbank v Mhlari & Others 2022(6)438 GJ.

Thankfully, we have managed successfully to apply for leave to appeal the judgement and the case will finally be decided by the Supreme Court of Appeal (SCA) in due course. The?fact that the case has been reported in the law reports also allows me to write freely about it.

In order to understand the case, one needs to be able to distinguish between two separate concepts, the first being legal capacity and the second being legal authority, as these concepts are not the same.

Legal capacity is the ability of a person, whether natural or corporate, to conclude a particular transaction. The person under consideration either has the ability to conclude a particular transaction or the person does not. Minors, being people under the age of 18 do not have the legal ability to conclude agreements, thus, they lack capacity.

Corporate persons such as companies, trusts and associations, derive their capacity through applicable legislation (i.e the Companies Act) and applicable corporate documents, such as Memoranda of Incorporation (MOI) / Constitutions or Trust Deeds, that give rise to their creation.

If the MOI of a company precludes a company from concluding a particular transaction, any attempt by the company to conclude that type of transaction would be void because the company lacks the requisite capacity to conclude that type of transaction.?The same goes for a Trust where the Trust Deed creates parameters within which a Trust may contract.

Legal authority relates to the ability of specific person, acting as the agent of another person, who does have capacity, to bind that person to a transaction. Take as an example a bank. One can accept that banks are incorporated for the purpose of concluding moneylending transactions and have the capacity to conclude such transactions.

Not all people working for the bank are authorised to sign the loan agreements for such moneylending transactions. On the one extreme, the board of directors would obviously be authorised to conclude loan agreements on behalf of the bank and on the other extreme, the janitor would self-evidently not be so authorised. But what if the board had routinely allowed the janitor to conclude loan agreements on its behalf? It would seem unfair if the bank, having previously allowed the janitor to conclude loan agreements, was allowed to suddenly do an about turn and rely on the janitor’s lack of authority to escape the consequences of a loan.

In order to cater for this, the law has developed a principle called estoppel.?In simple terms, where a company has previously represented that a particular person has the necessary authority to contract on its behalf, considerations of fairness and equity require that the company should be “estopped” from relying on that person’s lack of authority to escape the consequences of an agreement.

This then brings me to my case. In 2013 my client, the Trustees of the Malabela Family Trust concluded a loan agreement with Nedbank to buy a house. The bank loaned the Trust R14 million and the Trust executed a bond of R16 million over the property.

In the fullness of time the Trust reneged on its obligation to pay the monthly instalments and the bank sued. In defending the matter, the Trust raised a defence of lack of capacity.?The Trust’s Trust Deed specified that at all times, there had to be a minimum of three trustees and as it so happened, at the time of concluding the loan agreements with the bank and executing the mortgage bonds, there were only two trustees. The Trust argued that because the minimum number of trustees were not present, it lacked legal capacity to conclude agreements and that consequently the loan and mortgage agreements concluded with the bank were void.

The Trust’s argument was based on a well-known judgement of the SCA in the matter of?Land and Agricultural Development Bank of SA v Parker and others [2004] 4 All SA 621 (SCA),?in which it was held that once a Trust lacks the minimum number of Trustees, it lacks the capacity to contract.

In our case, whilst the Judge accepted that the Malabela Family Trust lacked capacity to contract, she nevertheless found against the Trust, and in doing so, she purported to establish a remarkable legal proposition.?What she said was this:

“I see no legitimate basis upon which it can be accepted that?(the defence of estoppel)?cannot be invoked in the case of the action of the Trust, where the other party was lured to believe that internal formalities were complied with when in fact that was not so. I am satisfied that on the undisputed facts,?the Trust should be estopped from relying on lack of authority to contract.”?(emphasis added)

What was remarkable about the Judge’s finding is this. If a person, such as the Trust in this case, lacks capacity to contract, the contract is void and that is the end of it. By applying the principles of estoppel in this instance, the Judge breathed life back into a void contract, and effectively resurrected the contract from the dead.

So why did the Judge do this??Well, the effect of the Trust’s defence is that if it is upheld, the Trust will be excused from having to pay back the loan and will effectively land a R12 million windfall. The Judge, in writing her judgement, was clearly influenced by considerations of equity and one can imagine that there is some sense in the argument that parties should not be entitled to profit from their own wrong doing. To be fair though, there were other bases on which the bank could have claimed payment of the money and by the time that it sought to exercise these alternative claims, they had prescribed (i.e lapsed).

What we seek to persuade the SCA is that once a party lacks capacity to contract, that is the end of the matter, the contract is void and one can never breathe life into a void contract through estoppel, by suggesting that the party had capacity, when it did not.

So what is the takeaway for you??

If you understand the difference between the capacity to contract and the authority to bind a party that has capacity, this will hopefully assist you in bringing clarity to your engagements with the counterparties that you negotiate with in order to ensure that:

• The parties to the agreement have the capacity to conclude the transaction in question. This may entail a consideration of the parties’ corporate documents to ensure that they have the requisite capacity to conclude the agreements that make up the transaction.
• The parties’ representatives are properly authorised to bind the parties for the contemplated transaction.

In addition, if a counterparty to one of your transactions alleges that it lacked authority to conclude the transaction, consideration must be given as to whether the party may nevertheless be bound on the basis of estoppel or some or other similar legal basis.