Van Reenen Steel (Pty) Ltd v Smith NO and Another

The first respondent, Smith NO, was the executor of the deceased estate of Rowley, the majority shareholder in Mortech Industries (Pty) Ltd, a company in serious financial difficulty. The second respondent, Rosso, and the second appellant, Hulton, held minority shareholdings. Hulton believed the business could be made viable with new capital and introduced Van Reenen Steel (Pty) Ltd as a potential investor. After a due diligence investigation, Van Reenen Steel and Hulton purchased all the shares and loan accounts of Smith and Rosso. The appellants later alleged that all parties laboured under a common but incorrect assumption that Mortech was a viable business with assets and liabilities accurately reflected in a March 1998 balance sheet. The sellers had, however, expressly limited warranties to those contained in the 1997 audited financial statements and excluded reliance on other representations. When the business proved unviable, the appellants sought to avoid the contract on the basis of common mistake.

The appeal was dismissed with costs, and the declaratory order that the agreement was of full force and effect was upheld.

The case is a leading South African authority on common mistake in contract law. It clarifies that a shared incorrect assumption about existing facts will not invalidate a contract unless the assumption is incorporated, expressly or impliedly, as a contractual term or condition. The judgment reinforces the distinction between operative mistake affecting consensus and inoperative mistake relating merely to motive, and underscores the importance of risk allocation and warranty clauses in commercial contracts.