Boundary Financing Limited v Protea Property Holdings (Pty) Limited

Protea Property Holdings (Pty) Ltd (respondent) wished to acquire the Edward Hotel in Durban. The property was owned by Karos (Pty) Ltd which was in liquidation. Boundary Financing Limited (formerly IBSA) (appellant) had financed the Karos group and held all shares in Swanvest (Pty) Ltd which had purchased the Edward Hotel property from Karos liquidators. On 1 March 2001, the parties concluded several agreements for the Edward Hotel transaction, including a sale of shares agreement for 60% of Swanvest shares. However, clause 1.24 of the agreement incorrectly warranted that Swanvest's sole asset would be the Arthur's Seat Hotel property (a different property) instead of the Edward Hotel property. The parties contemplated a possible restructuring if Karos' liquidation was terminated under section 311 of the Companies Act, so immediate implementation was delayed. Negotiations continued until 2004 when the appellant claimed the obligations had prescribed. On 13 March 2002 and 23 May 2002, the appellant agreed to sell the remaining 40% shareholding for reduced consideration. The respondent sued for rectification of the agreement and performance of the corrected warranty.

• Whether the sale of shares agreement should be rectified to reflect the Edward Hotel property instead of the Arthur's Seat Hotel property
• Whether a claim for rectification of a contract is subject to prescription under the Prescription Act 68 of 1969
• Whether the court should order specific performance of the warranty that the Edward Hotel property be an asset in Swanvest
• Whether the appellant's obligations under the sale of shares agreement had prescribed by the time summons was served

The appeal was dismissed with costs including the costs of two counsel. The order of the High Court was upheld, granting: (i) rectification of the sale of shares agreement to reflect that the Edward Hotel property (not the Arthur's Seat Hotel) would be an asset in Swanvest; (ii) delivery of all issued shares in Swanvest to the respondent against payment of R674,701; and (iii) performance of the warranty regarding the Edward Hotel property as rectified.

Prescription does not run against a claim for rectification of a contract. Rectification does not create a new contract or alter the parties' rights and obligations; it merely corrects the written memorial to reflect what the parties actually agreed. A claim for rectification therefore does not constitute a 'debt' within the meaning of the Prescription Act 68 of 1969, as it does not have as a correlative a debt in the ordinary sense of an obligation to do or refrain from doing something. A warranty and undertaking in a contract should be interpreted in light of all relevant circumstances, including what the parties knew at the time of contracting. Where parties know that a warranted state of affairs does not yet exist, the warranty should be interpreted as an undertaking to procure that state of affairs rather than merely a promise to pay damages. The running of prescription is interrupted by express or tacit acknowledgment of liability, which can include engaging in restructuring negotiations and concluding related transactions that implicitly recognize the binding nature of the underlying agreement.

The court noted that if rectification claims were subject to three-year prescription, parties could become entitled to rights and subject to obligations wrongly recorded and never intended, such as in cases involving mortgage bonds which only prescribe after 30 years - a result never intended by the Prescription Act. The court also observed that a defendant who contends that an agreement sued upon does not correctly reflect the agreement between parties may raise that contention as a defense without needing to counterclaim for rectification (citing Gralio (Pty) Ltd v D E Claassen (Pty) Ltd 1980 (1) SA 816 (A)). The judgment noted that an agreement of sale is not a requirement for transfer of property between related entities where the transferor has undertaken to procure such transfer.

This case establishes an important principle in South African law regarding prescription and rectification of contracts. It definitively holds that claims for rectification of contracts are not subject to the three-year prescription period under the Prescription Act 68 of 1969. The judgment clarifies that rectification merely corrects the written memorial of an agreement without altering the parties' substantive rights and obligations, distinguishing it from claims that create debts subject to prescription. The case also provides guidance on the interpretation of warranties and undertakings in commercial contracts, particularly where parties know at contract formation that warranted facts do not yet exist, holding that such provisions should be interpreted as undertakings to procure the warranted state of affairs rather than merely promises to pay damages. The decision on interruption of prescription through tacit acknowledgment during restructuring negotiations is also significant for commercial transactions.