Van Reenen Steel (Pty) Limited v Errol John Barnes Smith NO and Richard Rosso

Van Reenen Steel and Hulton (appellants) purchased shares and loan account claims in Mortech Industries (Pty) Ltd from Smith (executor of the Rowley deceased estate) and Rosso (respondents). Rowley had been the majority shareholder. The company was in dire financial straits with a R3m overdraft called up by the bank and a R0.5m worthless claim. Van Reenen, a chartered accountant and businessman, conducted due diligence and prepared a handwritten balance sheet dated 31 March 1998 which was discussed during negotiations. The sellers refused to provide warranties beyond those contained in the 1997 audited financial statements. The 55-page contract contained extensive warranties and indemnities clauses, and expressly stated that purchasers acknowledged no representations or warranties were made save those in the agreement. After purchase, the appellants claimed the contract should be vitiated because they believed they were purchasing a viable business based on the March 1998 balance sheet, which turned out to be incorrect.

• Whether a common mistake or false common assumption relating to an existing or past fact vitiates a contract in the absence of an agreement elevating the correctness of the assumption to a term or condition of the contract
• Whether the viability of the business was a condition of the contract either expressly or by implication
• The distinction between a common mistake relating to motive and a mistake that is a term of the contract
• The application of the doctrine of error in substantia in South African contract law

The appeal was dismissed with costs. The declaratory order of Magid J that the agreement between the parties is of full force and effect was confirmed.

A common mistake or false common assumption relating to a present or past fact does not vitiate a contract unless the parties expressly or tacitly agreed that the validity of the contract was conditional upon the existence of that state of affairs. Common mistakes relating to motive for entering into an agreement, even if shared by both parties, do not invalidate a contract unless the contract is made dependent upon that motive or the requirements for misrepresentation are present. The fundamental question is what the promisor really promised: whether to perform in all events or only subject to the mutually contemplated existence of a particular state of affairs. This is fundamentally a question of contractual construction based on the words used and reasonable inferences from surrounding circumstances. Where parties have allocated risk through express contractual terms (such as limiting warranties and indemnities), courts will give effect to that allocation.

The Court observed that there is no need for a separate doctrine of error in substantia in South African law, noting that South African courts have yet to vitiate a contract on that ground alone. The Court also commented that enquiring whether an error relates to substance merely reformulates the primary question of whether consensus exists and makes it more difficult to answer. The Court suggested (citing Atiyah) that the answer in common mistake cases can be found by determining which party assumed responsibility for the truth of the assumed facts, or which party took the risk of facts turning out otherwise than expected. Harms JA noted that the use of the word 'supposition' or 'assumption' instead of 'condition' when dealing with future states of affairs is not conducive to clear thinking, as such assumptions are indistinguishable from conditions.

This case is a leading authority on the doctrine of common mistake in South African contract law. It clarifies that common mistakes or assumptions relating to existing or past facts do not vitiate a contract unless the parties expressly or impliedly made the correctness of those assumptions a condition of the contract. The judgment provides important guidance on distinguishing between operative and inoperative mistakes, emphasizing that mistakes relating to motive (even if common) are generally not grounds for invalidating a contract. It reinforces the principle of caveat emptor in commercial transactions and the importance of express warranties and indemnities in commercial contracts. The case also confirms that parties bear the risk allocation they undertake through their contractual terms, particularly in sophisticated commercial agreements with extensive due diligence and express limitation of warranties clauses.