This blog was co-authored by Naledi Etsane, Candidate Attorney.
In Titan Asset Management v Lanzerac, six plaintiffs instituted an action against Lanzerac Estates Investments (Pty) Ltd (first defendant) and Markus Jooste (the second defendant) in relation to a number of inter-related contracts entered into in respect of the sale of their interests in various businesses, assets, and entities (referred to collectively as “Lanzerac”) for a combined value of R220 million in exchange for shares in Steinhoff International.
The court dismissed challenges to the summons by way of exceptions and the matter is expected to proceed to trial. The decision underscores that parties cannot benefit from their own fraudulent actions and further shows how the court can relax or dispense with the requirements for restitution if considerations of equity or justice require it.
The history gave rise to complexities. The plaintiffs allege that in November 2011 an oral agreement was concluded with Jooste, who falsely held out that he was acting on behalf of a consortium of unnamed investors. The oral agreement was subsequently reduced to five written contracts, in terms of which Morpheus Property Investments would acquire “Lanzerac” from the plaintiffs.
In October 2013, a further series of agreements was concluded in terms of which Steinhoff International shares acquired by the sellers were sold to Wiesfam Trust (Pty) Ltd (sixth plaintiff).
On December 7, 2015, pursuant to a scheme of arrangement, Steinhoff NV acquired all the issued shares in Steinhoff International in exchange for an equivalent number of shares in Steinhoff NV. As a result, the six plaintiffs’ Steinhoff International shares were exchanged for an equivalent number of Steinhoff NV shares.
In November 2017, the fraudulent misstatement of Steinhoff’s financial position became public knowledge and consequently the plaintiffs asserted several claims against the defendants and sought recission of the contracts and restitution of that which they had delivered based on fraudulent misrepresentation. Because the plaintiffs no longer held the Steinhoff International shares, they tendered restitution of an equivalent number of Steinhoff NV shares.
The plaintiffs asserted that Jooste, who was CEO of Steinhoff International at the time, fraudulently misrepresented the financial records and reports of Steinhoff International, which induced the plaintiffs to enter into transactions disposing of Lanzerac for a price that was significantly below the fair market value.
The defendants raised various exceptions to challenge the summons, two of which are discussed below.
First, the defendants asserted that the plaintiffs could not cancel the contracts due to the clauses in the agreements restricting cancellation. In particular, the defendants relied on a provision providing that neither party could cancel the contracts after the transfer date.
The court dismissed the defendants’ exception, finding that the clauses relied upon by the defendant were unenforceable as they would permit the first defendant to benefit from its own fraud, which is contrary to legal principles. The law does not bind parties to contracts formed under fraudulent circumstances. When an innocent party resiles from a contract induced by fraud, the agreement is regarded as void from the outset. The court went on to state that while such clauses are not ordinarily considered contrary to public policy, it would also be contrary to public policy to enforce such clauses where the effect is to exclude liability for fraud.
Second, the first defendant argued that the plaintiffs could not seek restitution because their tender to return Steinhoff NV shares was legally insufficient because the original Steinhoff International shares had been sold and the first defendant would not be placed in the same financial position they were in before the agreements were concluded.
While generally a party resiling from a contract must restore what it received, a court may relax or dispense with the requirement where required by considerations of equity and justice. The court stated that the relevant value of the consideration given by the first defendant for ‘Lanzerac’ for the purposes of the plaintiffs’ tender of restitution is the value of the fraud-tainted shares, not the false value attributed to them by a market or contracting party that was ignorant of the fraud. The plaintiffs’ apparently adequate tender for restitution of the Steinhoff NV shares was sufficient because the shares they were offering were the equivalent of the shares originally received and that it would be inconsistent with the equitable purposes of restitution to permit the return of fraud-tainted shares. The court concluded that the issue was not the making of the tender of the Steinhof NV shares, but rather its adequacy, which is an issue to be determined at trial.