Formation of valid contracts in South Africa

Introduction

No one is expected to know all of the law but people who venture into any area of the law should familiarise themselves with what the law requires. Doing business in the field of financial management and advice requires one to become familiar with the law governing these activities, such as the Financial Advisory and Intermediary Services Act, 37 of 2002 (“FAIS Act”). The failure to so familiarise oneself would be reckless or at least grossly negligent, particularly for a person who receives money from clients or deals with their money. In the case of Weissensee Kim v Stone-Bird investments (Pty) Ltd and others 2020/19821 the court demonstrates how the failure to familiarise and comply with the law in one’s area of business does not only affect the company conducting the business, but also personally affects its’ directors.

Background

Weissensee Kim (“Weissensee”) entered into an asset management agreement with Stone-bird Investment (Pty) Ltd (“Stone-Bird”) on 19 December 2017. The agreement was to endure for 15 months from date of signature unless terminated by agreement. The agreement provides for advice in the form of guidance and a proposal for the purchase of bank guarantees, and for intermediary services in the form of the management and administration of the applicant’s funds by Stone-Bird and its associates, and for payment by and to Weissensee. Stone-Bird has the financial skills for management of international assets coupled with access to credit facilities and structured investment. It works in the sector of project funding and investments and has financial sources like banks, providers and commitment holders.

Weissensee paid €600 000 into the Stone-Bird’s account. Stone-bird carried on business for at least a decade and was never licenced. Weissnesee sought an order declaring the agreement void ab initio due to non-compliance by Stone-Bird with section 7(1) of the FAIS Act, that the €600 000 be repaid with interest, and that the directors of Stone-Bird be declared to be personally liable to her  under section 218(2), as read with section 22(1), and section 76(3)(c) and/or section 77(3)(b) of the Companies Act, 71 of 2008 (the “Companies Act”) together with the Stone-Bird for repayment of the €600 000. In terms of the contract The force majeure rules of the International Chamber of Commerce (ICC), Paris, France shall apply.

The Law

Section 7(1) of the FAIS Act provides that no person may act or offer to act as a financial services provider, unless such person has been issued with a licence under section 8. Also, no-one may act or offer to act as a representative, unless appointed as a representative of an authorised financial services provider under section 13. Section 13 provides that one may render financial services to clients on behalf of any third party who or that is not authorised or exempted from authorisation. 

Section 22 of the Companies Act stipulates that a company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose. Further, section 218 (2) of the Companies Act, provides that any person (this would include a director of a company) who contravenes any provision of the Act, is liable to any other person for any loss or damage suffered by that person as a result of that contravention. It follows that a director who does not comply with the standards of directors’ conduct as set out in section 76 of the Act, would be liable to any person suffering a loss as a consequence thereof.

In terms of section 77 of the Companies Act a director owes fiduciary duties to the company. A director should not allow the company to enter into agreements that are void and out of which liabilities may arise. Section 77(3) provides that a director is liable for any loss sustained by the company as a direct or indirect consequence of the director having acquiesced in the carrying on of the company’s business despite knowing that it was being conducted in a prohibited manner as per section 22(1) of the Companies Act.

The Judgement

Stone-bird raised a number of defences and brought a counter-application for rectification of the agreement. It submitted that the interpretation of the contract should be in light of the evidence that Weissensee, through its authorised representative, enquired whether the Stone-Bird held a Financial Services Board licence and that she was informed that it did not need a licence but that Lomolino, who would be the asset manager overseas, held an ‘international equivalent licence’.

Further, they submitted that Weissensee was informed in a telephone conversation that Stone-Bird had a partnership and/or relationship with an international company by the name of AS Private Equity (“AS”) and that Lomolino was an officer of the company. Weissensee was also informed that a FSB licence was not required as this was a ‘private placement’. She was further furnished with a copy of the agency agreement between Stone-Bird and AS. This, according to Stone-Bird, it made it ‘glaringly obvious’ that it was the agent of AS, incurred no obligations of its own, and had no standing to be sued.

Stone-Bird’s counter-claim sought to rectify the agreement so that it would be identified as the agent of a third party AS Private Equity limited and the directors no longer be identified as “Asset Manager” but only as the authorised signatory.

However, the court rejected Stone-Bird’s interpretation and followed the approach used in Natal Joint Municipal Pension Fund v Endumeni Municipality in which the court said “Interpretation is the process of attributing meaning to the words used in a document. Whatever the nature of the document, consideration must be given to the language used in light of the ordinary rules of grammar and syntax. Judges must be alert to, and guard against, the temptation to substitute what they regard as reasonable, sensible or businesslike for the words actually used.” The court further reasoned that Stone-Birds’ interpretation would be similar to creating a new agreement which Weissensee had no intention to enter into.The court further made reference to the case of Milner Street Properties (Pty) Ltd v Eckstein Properties (Pty) Ltd, in which it was said that “Rectification does not alter the terms of the agreement; it perfects the written memorial so as to accord with what the parties actually had in mind.” In the present matter the rectified agreement will not reflect a valid transaction because if AS were to be substituted as principal with Stone-Bird as agent, the agreement will still fall foul of section 7 of FAIS Act. AS is not licenced and Stone-Bird would also not be a representative of an authorised financial services provider under section 13 of the FAIS Act. The claim for rectification failed because the rectification would be futile, to as it would produce a corrected document that continues to record a void transaction. In the present matter the agreement, whether rectified or not, is a nullity for its non-compliance with section 7 of the FAIS Act.

The court held that Stone-Bird carried on its business recklessly, and the directors carried on the company’s business recklessly and failed to act in good faith and for a proper purpose and failed to honour their fiduciary duty to the company. The directors are held liable to Weissensee in terms of section 218 for her loss. Because the agreement was void the arbitration clause in the agreement was also void, and there was no dispute to be referred to arbitration. The Stone-Bird was obliged and was ordered to repay the amount of €600,000.00 paid in terms of the void agreement to Weissensee jointly and severally with its directors.

The Conclusion

This decision provides some light to new and old business owners who may be operating their business in a specific area of law without knowing or complying with the law. People who venture into any area of the law should familiarise themselves with what the law requires to avoid being held personally liable for any losses for being reckless or grossly negligent.

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