Beware the catch all indebtedness

• Man goes to bank to borrow R1 000 000.00. Bank agrees, but says it wants security. Okay says the man; what do you want? Bank says; mortgage bond over property. Man agrees. Bank says we will instruct our attorney to prepare the documents. Man says that’s cool. Man gets phone call from attorney to come sign security documents for loan. Man hops into car, arrives at attorney’s offices and is presented with pack of documents. Signs documents. Doesn’t really read them (actually doesn’t read them at all), because everyone knows that these documents are not really negotiable. Man in any event feels comfortable that security relates to the loan and if he doesn’t pay what he borrows, the bank will have security. Man believes he has assessed risk and is happy to accept same.

• Turns out however, that the loan is unenforceable for want of certain legal formalities. Bank therefore cannot recovery money under loan. Bank sues under mortgage bonds. Whoa! Says man; mortgage bond is security given for loan; if loan invalid therefore mortgage bond must be invalid. Makes sense, right? No loan, no mortgage bond. It’s like bacon and eggs, or Bonnie and Clyde. The two are inextricably linked. Not so fast says the bank. The terms of the mortgage bond are a self-standing obligation independent of the loan. Man scratches his head. How is that possible? Simple; the terms of the mortgage bond don’t refer only to the money the man borrowed (as he thought it did) but – as so many if not almost all mortgage bonds state – the bond secures any indebtedness of any nature whatsoever and “for whatsoever reason“. Man did not bother reading. Man did not even ask for documents to be sent to him for his or his attorney’s consideration before he signed.

• Banks claim therefore is not under the (unenforceable/invalid) loan, but based on enrichment. Man has been enriched at the expense of the bank and even though bank cannot recover under loan agreement Bank can recover on the basis of enrichment. Bank therefore has a claim – just not under loan agreement. Man said I didn’t even think about that kind of claim (and didn’t even know it existed) and therefore had no intention to secure that kind of a claim with the mortgage bond. Bank says tough luck; the wording on the bond is clear.

• Even though the SCA opined that the terms of the mortgage bond in the matter was “not a model of clarity” it was sufficiently clear for the bank to create a covering bond with a wide enough net into which a range of possible debts (past, present and future) that man would owe the bank would fall – and this was wide enough to include an enrichment claim.

• Moral of the story; and it’s the same moral that applies so often – assume nothing, seek legal advice, read what you sign but more importantly understand what it is you sign as well as its scope. Legal documents – even those that are considered run of the mill – are notoriously tricky and so often cover consequences that were never envisaged by the signatory.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Please feel free to contact Brian Kahn for further information or specific and detailed advice. Errors and omissions excepted (E&OE)