Beware of undertakings: The irrevocable instruction that was revoked

June 29th, 2015
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By Jacques F Rossouw

Commercial realities demand that conveyancing attorneys provide guarantees and undertakings in order to fulfil their mandates to transfer immovable property.

What then is the legal effect of these undertakings and to what extent do practitioners unwittingly expose themselves to personal liability by giving them?

The Supreme Court of Appeal (SCA) recently had to rule on this suit. The case turned on the legitimacy of a client’s purported irrevocable instructions, and more specifically the answer to the question of when an attorney may disregard such instructions.

This SCA’s judgment was delivered under the citation of Stupel & Berman Inc v Rodel Financial Services (Pty) Ltd 2015 (3) SA 36 (SCA).

Factual background

The appellant, Stupel & Berman Inc, was appointed by the seller to transfer an immovable property sold at auction.

Pending transfer, the client obtained two bridging finance loans (the discounting agreements) from the respondent, Rodel Financial Services, in the amount of R 1,4 million.

The agreements consisted of two parts, the discounting schedule and separate terms and conditions.

Each schedule was signed by the client, the respondent and the appellant, in its capacity, as conveyancer. In each schedule the client purported to cede to the respondent its right, title and interest in the nett proceeds of the sale.

Each schedule contained a section titled ‘Undertaking by Conveyancer’, which later formed the basis of the respondent’s cause of action against the appellant.

The appellant gave undertakings that it was attending to the transfer, that the respondent had purchased the sale proceeds (the cession which formed the basis for the undertaking) and that it had received ‘irrevocable instructions’ from the client to pay the loan amount to the respondent on transfer ‘unless prevented by interdict or operation of law’. The undertakings further obligated the appellant to keep the respondent advised of all material developments in the sale and to advise in the event that the client terminated or attempted to terminate its mandate.

Pursuant to a transfer duty dispute, the client cancelled the sale agreement, whereupon the purchaser obtained an interim interdict to prevent the client from disposing of the property. This dispute became settled and the parties agreed to proceed with the sale and transfer. The respondent was informed of these developments by both the client and the appellant, although the client misinformed the respondent about the settlement in an attempt to pay the respondent a reduced amount.

The respondent then elected to cancel the discounting agreements, presumably on the basis of the client’s misrepresentation and proceeded with legal action against the client for payment of the full amount owing.

The client accepted the cancellation and instructed the appellant to withdraw from ‘any and all undertakings’ provided by the appellant to the respondent on the client’s behalf. The client thus revoked what purported to be its irrevocable instructions.

The appellant consequently advised the respondent that its mandate (to provide the undertakings) had been terminated and it therefore withdrew its undertakings. The respondent failed to lay claim to the proceeds, object or even reply to the appellant at all.

Approximately five weeks later, the transfer of the property was registered in the name of the purchaser and the nett proceeds of the sale were paid to the client. The respondent proceeded to obtain civil judgment against the client and its surety, whereafter it attempted to execute without success. Approximately five months after the withdrawal, the respondent demanded payment (including substantial discounting fees) from the appellant.

Litigation

The appellant denied liability and the respondent instituted legal action against it on the basis of the appellant’s supposedly irrevocable undertakings. Protracted litigation followed.

The appellant raised various defences including:

  • Agency, in that the appellant, as agent, was obliged to withdraw from its undertakings.
  • Invalid cession, in that there was a prior cession to the mortgagee, the purchaser did not consent to the cession of a portion of the sale proceeds and also that the cession reverted on cancellation of the discounting agreements.
  • Waiver and estoppel, in that the respondent only disputed the validity of the appellant’s revocation of its mandate after the property had been transferred.

Agency – the irrevocable undertaking and instruction

This article will focus on the agency aspect of the appellant’s defence, but practitioners are well advised to take note of the other defences.

The court a quo was not persuaded and awarded judgment against the appellant. It applied a (rather perplexed) hybrid of legal principles involving agency, tripartite agreement, stipulatio alteri and adjectus solutionis causa, and thereby concluded that the appellant was not entitled to withdraw its undertakings (see the court a quo judgment at Rodel Financial Services (Pty) Ltd v Stupel & Berman Inc and Another (GJ) (unreported case no 2011/43229, 28-10-2013) (Claassen J)). It did, however, provide leave to appeal directly to the SCA, stating that the relevant principles were of national importance to practitioners.

The SCA found that the undertakings provided by the appellant did not constitute irrevocable undertakings binding the appellant personally. The very terms of the undertakings foresaw the possibility of the client withdrawing the appellant’s mandate, and had the undertakings been personal, termination of the mandate would have been inconsequential to the respondent.

In terms of the law of agency instructions to an agent are generally revocable at the instance of the principal. The fact that instructions are described as ‘irrevocable’ does not detract from this principle (Ward v Barrett NO and Another 1962 (4) SA 732 (N) at 737 D – E).

The converse is also true – even if an undertaking makes reference to agency or is not described as irrevocable, it may nonetheless bind the agent personally (Ridon v Van der Spuy and Partners (Wes- Kaap) Inc 2002 (2) SA 121(C)).

In determining whether an undertaking is truly irrevocable and thus personally binding on the agent, context is everything. Regard should be had to the true import of the undertaking within the full context of the circumstances in which it is given (Ekurhuleni Metropolitan Municipality v Germiston Municipal Retirement Fund 2010 (2) SA 498 (SCA) para 13). Practitioners should be sure to categorically and unequivocally record the context within which they give an undertaking, to avoid being personally bound. Rather overemphasise than underscore this fact.

The question then arises as to whether a client can ever provide an attorney with a truly irrevocable instruction, in the absence of the attorney binding himself personally. The answer is ‘yes’, but only if the agent has a real interest in the mandate. This constitutes an exception to the general rule of agency (Consolidated Frame Cotton Corporation Ltd v Sithole and Others 1985 (2) SA 18 (N) at 22J – 23C).

An example of an agent vested with a real interest in the mandate of the principal is that of a finance bank (agent) making a loan to a client (principal). As security for repayment, the client provides the bank with a power of attorney to register a mortgage bond over the client’s immovable property. After advancement of the loan, but before the mortgage bond is registered, the client withdraws the bank’s mandate to act. Since the bank has a real interest in the mandate it may regard the instruction as truly irrevocable and may thus proceed to register the mortgage bond notwithstanding the purported withdrawal of the mandate (Natal Bank Ltd v Natorp and Registrar of Deeds 1908 T.S. 1016).

Revoking the irrevocable instruction

A third party will never obtain a right to bind an agent to a mandate revoked by the principal, even if the exception to the general rule of agency applies. The mandate may be regarded as irrevocable only at the agent’s instance and for its benefit only.

It follows that in the case under discussion the respondent could not rely on the exception to the general rule of agency. It was found that the appellant’s interest in its fees for the conveyancing transaction was derived from the sale agreement and it had no real interest in the discounting agreements. Even if the appellant had a real interest in the discounting agreements, the right to regard the mandate as irrevocable vested in the appellant and not in the respondent.

The SCA further found that the respondent’s predicament had resulted from its own failure to protect its interests by taking appropriate action. Had the respondent claimed a right to the proceeds at the time of the appellant’s withdrawal of the undertakings, interpleader proceedings would have resulted. At that stage the respondent was also in a position to interdict the client and/or the appellant but failed to do so.

Consequently, the SCA upheld the appeal and found that the appellant was not merely entitled, but indeed obliged, to act on the client’s termination of its mandate, thereby precluding the appellant, by the operation of law, from paying the respondent from the sale proceeds.

To recapitulate, when an attorney acts as agent for his client and has no real interest in the matter at hand, there is no such thing as an ‘irrevocable instruction’.

  • See 47.
  • Mr Rossouw’s firm was the appellant in the above matter.

Jacques F Rossouw BProc LLB (UJ) is an attorney at Stupel and Berman Inc in Johannesburg.

This article was first published in De Rebus in 2015 (July) DR 38.

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