post-contractual constitutional rights intervention in mortgage transactions: lessons from south...
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
N e w Y o r k U n i v e r s i t y I n t e r n a t i o n a l L a w & H u m a n R i g h t sF e l l o w s h i p P r o g r a m
F e l l o w s h i p R e s e a r c h P a p e r2 0 1 1 - 2 0 1 2 P r o g r a m
Fellowship Paper Supervisor: Professor Philip G. Alston(John Norton Pomeroy Professor of Law)New York University School of Law40 Washington Square South, 305New York, NY 10012Telephone: (212) 998-6173Facsimile: (212) [email protected]
Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
Contents
I. EXECUTIVE SUMMARY.........................................................................3
II. RESEARCH METHODOLOGY.............................................................5
III. THE RIGHT TO HOUSING: A BRIEF OVERVIEW..................................6
IV. POST-CONTRACTUAL CONSTITUTIONAL RIGHTS INTERVENTION IN
MORTGAGE TRANSACTIONS: THE SOUTH AFRICAN EXAMPLE..................9
a. The Brussons Mortgage Scheme x-rayed.........................................14
b. The unravelling of the scheme and the intervention of the South
African Right to Housing.........................................................................19
V. POSSIBLE ARGUMENTS FOR AND WEAKNESSES OF POST-
CONTRACTUAL CONSTITUTIONAL INTERVENTION IN MORTGAGE
TRANSACTIONS......................................................................................21
a. Possible Arguments for post contractual constitutional intervention
21
i. The nature of constitutional rights...................................................21
ii. Broader sphere of influence.............................................................22
iii. A Mortgagee’s amplified implied duty to investigate the title of the
Mortgagor in South Africa......................................................................22
b. Possible Weaknesses of post-contractual constitutional intervention
24
i. The rights nexus in contract.............................................................25
ii. Possibility of rendering commercial relations otiose and its attendant
economic consequences........................................................................25
VI. CONCLUSION.................................................................................26
Bibliography..............................................................................................30
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
I. EXECUTIVE SUMMARY
The conceptualization of public and private law as distinct aspects of
law both in the local and international context is one that has been
recognized for long.1 Public law is viewed as a theory of law governing
the relationship between individuals (citizens, companies) and the
state whereas private law on the other hand is the area of law in a
society that affects the relationships between individuals or groups
without the intervention of the state or government.2 In a sense one
could categorize constitutional law as belonging to the sphere of public
law. Constitutional law deals with the relationship between the state
and the individual, and the relationships between different branches of
the state, such as the executive, the legislature and the judiciary.3 But
labels can be misleading sometimes and we ought to bear this in mind.
There seems to be an increasing convergence between public law and
private law.4 One area where this is most evident is in the vindication
1 One source asserts that this dates back with the emergence of the nation-states and theories of
sovereignty to the sixteenth and seventeen centuries. See “The History of the Public/Private
Distinction” Morton J. Horwitz University of Pennsylvania Law Review Vol. 130, No. 6 (Jun., 1982),
pp. 1423-1428 Published by: The University of Pennsylvania Law Review. Article Stable URL:
http://www.jstor.org/stable/3311976
2 "About Bills, Resolutions, and Laws". LexisNexis. 2007. "About Public Laws" available at http://www.lexisnexis.com/help/CU/Serial_Set/About_Bills.htm. accessed on 9/09/2012
3 “A constitution is a document which contains the most important principles according to which
the organization and functions of the state and of the government are controlled, which means that
strictly speaking, it is part of public law. Private law on the other hand is usually said to be
concerned with the relation between private individuals and not with state functions…” AJ van der
Walt & GJ Pienaar, “Introduction to the Law of Property” Fourth Edition, 2002 ISBN 0 7021 5917 4
Page 335
4 Walt & Piennar (ibid at 335) essentially aligns with this view when they posit that“...However
there is widespread recognition of the fact that the private and public spheres cannot be separated
so easily. This fact was demonstrated very clearly in the old South African law, where apartheid
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
of Constitutional rights. An aspect of Constitutional law that does not
share in the definitional limelight is the individual to individual
relationships which often form the focus of Constitutional inquiries. This
aspect rears its head in fundamental rights enforcement procedures
brought by individuals against individuals and usually as a corollary in
the vindication of socio-economic rights. This is especially so in
countries with a history of strife, discrimination or systemic rights
violations.5
Notwithstanding this potential in Constitutional law for convergence
with Private law, in many respects the existence of the public/private
dichotomy is preferred. The convergence is just not taken seriously. For
one it goes against the grain of convenience. How convenient is it to
allow third party intervention on the basis of violation of a
constitutional right to defeat the just expectation of the parties in
contracts? Surely, it doesn’t take a genius to surmise that this would
have a deleterious effect on certainty which is a cornerstone of
commercial relations.
principles and practices, which were introduced as part of public law and on the basis of
government policy, had enormous implications for and effects upon private law….in other words,
apartheid demonstrated very clearly that there is no clear division between the private and the
public spheres, and that the two often overlap.”
5 In Gardener V. Whitaker 1994 (E), at 684D-I; 30G-31C, Judge Froneman recognized this fact when
he adumbrated as follows:
“Our Constitution (referring to the Constitution of the Republic of South Africa, 1996 ) is also,
obviously, primarily concerned with the protection of individual rights against State action…But the
Constitution is also concerned that the entire legal system, including the common law and
customary law, should accord with the broader values of the Constitution…After all , the ‘past of a
deeply divided society characterized by strife, conflict, untold suffering and injustice’ (words used
in the ‘unity and reconciliation’ section of the Constitution) is not merely a history of repressive
State action against individuals, but it is also a history of structural inequality and injustice on
racial and other grounds, gradually filtering through to virtually all spheres of society since the
arrival of European colonists some three and a half centuries ago, and it will probably take
generations to correct the imbalance”
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
Then there is the problem of supremacy that goes with any turf fight.
Theoretically speaking in the event of a convergence which should be
given priority? In the broader scheme of things should we sacrifice
commercial certainty for the vindication of societal rights? This may
sound like a no brainer but when we consider that commercial relations
have far reaching implications that extend to Constitutional rights then
we would begin to appreciate the difficulties inherent in blurring the
dichotomy.
Any suggestion that the convergence and interplay between Public and
Private law ought to be taken seriously is bound to raise jurisprudential
protests. But when we consider that private law (in these case
contracts) derives its fons et origo from public laws, we may begin to
change our minds. It is public law through a statute that for instance
may stipulate conditions of formal validity of a contract. Laws that seek
to promote public policy or vulnerable members of the public from
unscrupulous elements are in their conception and by their nature
public laws that constitute the canvass upon which private contractual
relations must take into cognizance and proceed. The argument is
even more forceful if this canvass is painted by the constitution. But
while one may not protest pre-contractual constitutional rights
intervention, how about post-contractual rights intervention? By post-
contractual constitutional rights intervention it is meant those
scenarios where a third party who is not privy to the contract, through
the courts seek to defeat the just expectation of the contracting
parties, by asserting a constitutional right after the consummation of
the contract.
This work seeks to make an argument based primarily on
developments in South African Constitution law that post-contractual
constitutional rights intervention in contractual relations that defeats
the expectations of the parties may be desirable in some cases. It is a
provocative assertion, but one that this work tends to justify mainly
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
from the narrow perspective of the South African Constitutional right to
adequate housing.
It is also admittedly very problematic in a multiplicity of ways as it
raises some very fundamental questions. Under which circumstances
should the courts permit such Constitutional intervention? What effect
if any does such a course have on the doctrines of privity? How should
the courts allocate the burden such Constitutional intervention is
bound to engender?
These issues are addressed in this paper from the standpoint of South
African law.
II. RESEARCH METHODOLOGY
This Research paper is inspired primarily by the Brusson Finance
Mortgage Scheme which unraveled in 2009 and has been declared as
nothing but simulated transactions by the Free State High Court,
Bloemfontein Republic of South Africa in Ditshego V. Brusson Finance
(Pty) Ltd6 and the effect of the scheme on over 900 home owners who
in varying respects have lost or face the prospect of losing their homes
against the backdrop of the South African Constitutional right to
housing. It examines the underlying jurisprudential implications of the
right to housing as a just intervener not only in the narrow context of a
Mortgage that can be said to be vitiated by fraud but also explores
whether such intervention can be at large, as regards contracts
generally.
The Research paper would draw from recently decided Constitutional
law cases in South Africa that touch on some aspects of the law of
contract. It would also examine relevant South African legislations
dealing with Mortgages, Alienation of Land, Contracts and
Constitutional Law.
6 Judgment delivered by Jordaan, J on 22nd July, 2010.
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
Lastly an attempt would be made as necessary to compare the South
African experience with other common law jurisdictions.
III. THE RIGHT TO HOUSING: A BRIEF OVERVIEW
The right to adequate housing is international and has its origin under
article 25(1) of the Universal Declaration of Human Rights which
stipulates that "Everyone has the right to a standard of living
adequate for the health and well-being of himself and of his family,
including food, clothing, housing and medical care and necessary social
services, and the right to security in the event of unemployment,
sickness, disability, widowhood, old age or other lack of livelihood in
circumstances beyond his control."
The right to adequate housing has also been codified in other major
international human rights treaties. Several nonbinding declarations,
resolutions and recommendations by the UN and its specialized
agencies and also regional instruments refers to housing as a human
right7
7 Some of these include generally: the International Convention on the Elimination of All Forms of
Racial Discrimination art. 5(e) (iii), G.A. res. 2106 (XX), Annex, 20 U.N. GAOR Supp. (No. 14) at 47,
U.N. Doc. A/6014 (1966), 660 U.N.T.S. 195, entered into force Jan. 4, 1969 (requiring the
prohibition of racial discrimination in all forms in the enjoyment of the right to housing); the
Convention on the Elimination of Discrimination against Women art. 14(2) (h), G.A. Res. 34/180, 34
U.N. GAOR Supp. (No. 46) at 193, U.N. Doc. A/34/46, entered into force Sept. 2, 1981 (prohibiting
discrimination on the basis of sex in the enjoyment of adequate living conditions, “particularly in
relation to housing, sanitation, electricity and water supply”); the Convention on the Rights of the
Child art. 27(3), G.A. Res. 44/25, annex, 44 U.N. GAOR Supp. (No. 49) at 167, U.N. Doc. A/44/49
(1989), entered into force Sept. 2 1990 (requiring States Parties to take measures to provide
material assistance with regard to housing for children and those responsible for them who are in
need); International Covenant on Economic, Social and Cultural Rights, art. 11(1), G.A. res. 2200A
(XXI), 21 U.N.GAOR Supp. (No. 16) at 49, U.N. Doc. A/6316 (1966), 993 U.N.T.S. 3, entered into
force Jan. 3, 1976 [hereinafter ICESCR] (recognizing the right of everyone “to an adequate
standard of living for himself and his family, including . . . housing, and to the continuous
improvement of living conditions,” States Parties are required to “take appropriate steps to ensure
the realization of this right, recognizing to this effect the essential importance of international co-
operation based on free consent”) the International Convention on the Suppression and
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
Under most constitutions, however, housing is classified under state
policy and not as part of a bill of rights. Therefore, they are said to be
aspirational and nonjusticiable.
Many countries on the other hand have incorporated a right to housing
in their constitutions. Such countries include Belgium, Mexico, France,
U.K. Portugal, Russia, South Africa, Spain and Iran.
In Nigeria for example, Section 16(2) (d) of the Constitution of the
Federal Republic of Nigeria, 1999 falls under the Fundamental
Objectives and Directive Principles of State Policy and states that: “The
state shall direct its policy towards ensuring that suitable and adequate
shelter, suitable and adequate food, a reasonable national minimum
Punishment of the Crime of Apartheid; the International Convention Relating to the Status of
Refugees; the International Labour Organization (ILO) Recommendation No. 115 (1961), principle
2; Declaration on Social Progress and Development (1969), part II, art. 10; Declaration on the
Rights of Disabled Persons (1975), art. 9; Vancouver Declaration on Human Settlements (1976),
section III (8); ILO Recommendation No. 62 Concerning Older Workers (1980), art. 5(g); Declaration
on the Right to Development (1986), art. 8(1); United Nations Sub-Commission on the Prevention of
Discrimination and Protection of Minorities resolution 1994/8 on "Children and the Right to
Adequate Housing" adopted 23 August 23 1994; United Nations Commission on Human Rights
resolution 1993/77 on "Forced Evictions," adopted on 10 March 1993; United Nations Commission
on Human Settlements resolution 14/6 on "The Human Right to Adequate Housing," adopted 5 May
1993; United Nations General Assembly resolution 42/146 on the "Realization of the Right to
Adequate Housing," adopted 7 December 1987, which "reiterates the need to take, at the national
and international levels, measures to promote the right of all persons to an adequate standard of
living for themselves and their families, including adequate housing, and calls upon all States and
international organizations concerned to pay special attention to the realization of the right to
adequate housing in carrying out measures to develop national shelter strategies and settlement
improvement programmes within the framework of the Global Strategy for Shelter to the Year
2000." At the regional level some of the instruments that contain express provisions and refer-
ences to the right to adequate housing are: the Charter of the Organization of American States
(OAS), article 31(k); The European Social Charter, the European Convention on Human Rights and
Fundamental Freedoms art. 8(1), 213 U.N.T.S. 222, entered into force Sept. 3 1953, as amended by
Protocols Nos. 3, 5, 8, and 11 entering into force Sept. 21 1970, Dec. 20 1971, Jan. 1 1990, and
Nov. 1, 1998 (recognizing the respect for private and family life, and requiring no public
interference in those rights except as in accordance with the law and as necessary in the public
interest); the European Convention on the Legal Status of Migrant Workers; the Resolution on
Shelter for the Homeless in the European Community; and the Final Act of Helsinki. See generally
http://www1.umn.edu/humanrts/edumat/IHRIP/circle/modules/module13.htm
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
living wage, old age care and persons, and unemployment, sick
benefits and welfare of the disabled are provided for all citizens.” But
Section 6(6) of the same constitution provides that “the judicial powers
vested in accordance with the foregoing provisions of this section shall
not, except as otherwise provided by this constitution, extend to any
issue or question as to whether any act or omission by any authority or
person or as to whether any law or any judicial decision is in conformity
with the Fundamental Objectives and Directive Principles of States
Policy set out in Chapter 11 of this Constitution.” Therefore there exist
no enforceable right to adequate housing in the Nigerian constitution.8
The US Constitution also knows no right to adequate housing.
Narrowing our focus to South Africa, it is worth noting that Section 26
of the Constitution of the Republic of South Africa, 1996 stipulates that:
1) Everyone has the right to have access to adequate housing.
2) The state must take reasonable legislative and other measures,
within its available resources, to achieve the progressive
realization of this right
3) No one may be evicted from their home, or have their home
demolished, without an order of court made after considering all
of the relevant circumstances. No legislation may permit
arbitrary evictions.
In Government of the Republic of South Africa and others v Grootboom
and others9 the Constitutional Court was of the opinion that the three
parts of sec 26 of the Constitution are connected with each other.
8 Other constitutions that suggest the general responsibility of the State to ensure adequate
housing and living conditions for all, based on the rule of law which is non justiciable include:
Bangladesh, Brazil, Colombia, Costa Rica, Dominican Republic, El Salvador, Finland, Guatemala,
Korea (Rep. of), Netherlands, Pakistan, Philippines, Poland, Romania, Sri Lanka, Sweden,
Switzerland, Turkey, Venezuela, and Vietnam etc.
9 2001 (4) SA 46 (CC)
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
Section 26(1) delineates the general scope of the right. Section 26(2)
speaks to the positive obligations imposed upon the state. And sec
26(3) spells out aspects of the negative right, by prohibiting arbitrary
evictions.10
The positive obligations imposed upon the state can be unravelled by
positing that it entails on the part of the state obligations to ‘respect’,
to ‘protect’, to ‘promote’ and to ‘fulfil’ the right to housing.11 There is
no doubt that these obligations imposed by the Constitution may
amount to intervening bystander provisions in contractual relations
between individuals. More so because the South African Constitution
provides for the justiciability of the bill of rights, including the right to
adequate housing and expressly confers legal standing to aggrieved
persons and their representatives to approach the courts to enforce
their rights.12
IV. POST-CONTRACTUAL CONSTITUTIONAL RIGHTS INTERVENTION IN
MORTGAGE TRANSACTIONS: THE SOUTH AFRICAN EXAMPLE
While vindication of the right to housing (a public law domain) in itself
should raise no eyebrows, its private law boundaries are murky. Is it
permissible or even convenient to allow post contractual constitutional
rights intervention generally or in Mortgage transactions? If it is, to
what extent is this feasible? What effect if any does such a course have
on the doctrines of privity and estoppel per rem judicata? How should
the courts allocate the burden such Constitutional interventions are
bound to engender?
10 See Grootboom at Para 34 & 38 and also Justiciability Of The Right To Housing -The South African
Experience By Geoff Budlender Legal Resources Centre, Cape Town at page 2 http://www.escr-
net.org/sites/default/files/budlender_housing_ms.pdf accessed on 12/08/2012.
11 See for a detailed exposition of these obligations in relation to the justiciability of the right to
housing, Budlender pages 2-18.12 See generally
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
To set the right tone for our discourse let us consider in detail the
tendons and sinews of principles pertaining to mortgages that is
generally applicable to most common law jurisdictions including the
quartet under consideration.
Generally speaking under the common law, a mortgage is a right which
one person has in the property of another which serves to secure an
obligation. The real right of mortgage is constituted when a mortgage
bond, properly drawn up and conforming to the substantive
requirements for the act of hypothecation, is duly registered by the
registrar of Deeds Registries Act13. Registration of a Deed and
Compliance with form of a Mortgage bond speaks to the formal validity
of a mortgage.
However the constitution of the real right of mortgage also takes into
cognizance substantial validity. It requires an intention to mortgage on
the part of a mortgagor possessed of the requisite legal capacity. It
must furthermore be legally possible to constitute the real right over
the property in question and the content of the proposed right must be
certain or ascertainable.14
The right of mortgage is itself merely an accessory right; it is accessory
to an obligation and, unless there is an original or principal obligation,
there can be no mortgage. Thus if the obligation is illegal…the
mortgage will be of no effect15 Likewise, the court may terminate the
mortgage where it amounts to a fraudulent alienation under the
common law. Under South African law, contracts condoning a party’s
13 The Law of South Africa, 2nd Edition, Vol 17 Part 2, Par 351-353 Vol 17: Mortgage and Pledge
page 316.
14 Ibid Page 317. Para 354.
15Ibid at Page 184, Para 184. Also Kilburn V. Estate of Kilburn 1931 AD 501.
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
fraud or theft have been held to be contrary to public policy.16
Comparable parallels can be drawn from other common law
jurisdictions.
In principle a mortgage can be granted only by the owner of the land or
the holder of the real right in question. The system of registration
requires the consent of the owner for the registration of the
mortgage.17 Thus where such consent is fraudulently obtained, consent
cannot be said to have been given.18 In such cases, the mortgage must
be set aside, provided, however that there is no room for the operation
of the doctrine of estoppels in favor of interested third parties19.
Though the object of a mortgage is to give the mortgagee a charge
upon the land mortgaged as security for a debt due20, a mortgage is
however also a contract and there exists a contractual nexus. The
mortgage bond, in so far as it is a contractual document serves as a
record not merely of the contractual aspect of the mortgage
relationship, but also of the terms relating to the principal debt and its
settlement by the mortgagor.21 Regard therefore must be had to legal
consequences which the law attaches to the contractual relationship as
16 Wells V. SA Alumenite Co 1927 AD 69 72; Goodman Bros (Pty) Ltd V. Rennies Group Ltd 1997 4
SA 91 (W) 98
17 In South Africa this is by virtue of section 50(1) and s. 3(1) (b) of the Deeds Registries Act 47 of
1937.
18 See for South Africa the following cases: Kristall v. Rowell 1904 TH 66; Faustmann v. Shadrick &
Samantha 1910 OPD 40; Gounder v. Saunders 1935 NPD 219. Cf Sutter v. Scheepers 1932 AD 165;
Tattersall v. Nedcor Bank Ltd [1995] 2 All SA 365 (A); 1995 3 SA 222 (A) 233B.
19 See Kristall v. Rowell supra 71; Sutter v Sheepers supra 171; but see Faustmann v Shadrick
supra
20Lubb and Scott ‘Mortgage and Pledge’ The Law of South Africa, 2nd Edition, Vol 17 Part 2, Page
321, Para 358-360@ 360.
21 Ibid @ Para 356.
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
a matter of course without reference to the actual intention of the
parties.22 The fact that parties have a contract does not necessarily
mean that they have a valid contract. For their contract to be valid, the
parties must have the necessary contractual capacity, the
performances undertaken in terms of the contract must be possible at
the time of contracting, the contract itself, its performance and object
must be lawful, and the constitutive formalities (if any) for that contract
must have been complied with. A contract that fails to comply with a
statutory requirement of form, such as under the Alienation of Land
Act23 is void and therefore cannot be rectified.24 So also is contract that
runs afoul of a requirement as to substance. A contract is illegal when
its conclusion, its performance, or its purpose is expressly or impliedly
prohibited by legislative enactment, or is contrary to good morals or
public policy.”25 As a rule if a contract is illegal it is void. The rule is
expressed in the maxim ex turpi causa non oritur action (“from an
illegal cause no action arises”). Since an Illegal contract is void , it
“means that no obligations arise from such contract and that no action
can consequently be founded on it, either for enforcement or for
damages- in other words, the maxim ex turpi causa non oritur actio is
inflexible.”26 It is the duty of a court to take the point of illegality mero
22Ibid at Para 357. Alfred McAlpine & Son (Pty) Ltd V. Tvl Provincial Administration supra 532;
Ebrahim v. Hendriks (1975) 2 All SA 263 (C); 1975 2 SA 78 (C) 81.
23 68 of 1981. S 2 (1).
24 W. A. Joubert, L. T. C. Harms, G. J. Pienaar, P. J. Rabie, T. J. Scott, J. A. Faris, B. Galgut “The Law of
South Africa, 2nd Edition, Vol 5, Part 1 Para 147, Page 234. Greathead V. SA Commercial Catering &
Allied Workers Union 2001 3 SA 464 (SCA) 469; Nuform Formwork & Scaffolding (Pty) Ltd V.
Natscaff CC (2002) 4 All SA 575 (D); 2003 2 SA 56 (D) 62.
25W. A. Joubert, L. T. C. Harms, G. J. Pienaar, P. J. Rabie, T. J. Scott, J. A. Faris, B. Galgut “The Law of
South Africa, 2nd Edition, Vol 17 Part 2, Vol 5, Part 1 Para 165, Page 252. Eastwood V. Shepstone
1902 TS 294 302; Kennedy V. Steenkamp 1936 CPD 113 116; Essop V. Abdullah 1986 4 SA 11 (C)
14.
26 W. A. Joubert, L. T. C. Harms, G. J. Pienaar, P. J. Rabie, T. J. Scott, J. A. Faris, B. Galgut “The Law of
South Africa”, 2nd Edition, Vol 17 Part 2, Vol 5, Part 1 Para 169, Page 258. Langham V. Milne 1962 4
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
motu, even if a defendant does not plead or raise it, where the illegality
appears ex facie the transaction or from evidence before the court.27
A mortgage may also be set aside by an order of court for instance on
the ground that the mortgage was constituted by mistake or on
account of misrepresentation, duress or undue influence28.
From our x-ray thus far, it is clear that there has long been recognition
that statutory intervention regarding the formal validity of a mortgage
is desirable and permissible. A mortgage that does not comply with a
statutory stipulation as to form in most cases is viewed as void. From
the standpoint of public law interaction with private law one cannot
quarrel with the logic behind this. After all one can argue in a sense
that private law derives its source from public law. For as the case of
statutory stipulation as to form has shown many rules of contracts are
pre-contractually prescribed or proscribed by statute. But pre-
contractual prescription or proscription of contractual relations
generally or mortgage transactions in particular is a totally different
proposition to post-contractual intervention of public law in private law
affairs by appeal to statutory provisions. Whereas the former is
regulatory and interactional in nature, the latter is tributary &
interventionist. Whereas the former lays the rules of engagement, the
latter seeks to render those rules irrelevant. Whereas the former is a
purveyor of commercial certainty, the latter is a harbinger of confusion.
The effect of the latter is like awarding a mandatory goal or match
points to a side (in some cases a side that did not even compete in the
game) long after the final whistle. Little wonder that many jurisdictions
SA 574 (N) 578-579; Esop v. Abdullah 1988 1 SA 424 (A) 435-436.
27 Cape Diary & General Livestock Auctioneers V. Sim supra 170; Yannakou V. Apollo Club 1974 1
SA 614 (A) 623; Goodgold Jewellery (Pty) Ltd v. Brevadau CC 1992 4 SA 474 (W) 479-480.
28 Ibid @ Para 383. Cf Kitshoff V. Daly’s Trustees (1866) 5 S 213: Kristal V. Rowell 1904 TH 66; Patel
V. Grobbelaar (1974) 1 All SA 518 (A); 1974 1 SA 532 (A).
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
frown upon it and allow it only in very limited cases. It is even peskier
when the intervening statute like the Constitution is one that aspires to
a certain degree of irreverent infallibility- an infallibility that brooks no
opposition and is deemed a sufficient answer to any private law
contractual cries of “blue murder!”
Arguments propelling post-contractual interventions in contracts are
rooted or are variants of Bentham’s utilitarian or greatest good
theory.29It can be argued that since the Constitution properly so called
is the font es origo of a people’s law and in the case of autochthonous
ones represents the collective will and aspirations of the people,
constitutional rights post-contractual interventions should be allowed
for the sake of the greater good. But is this view necessarily correct?
One pointer to the fact that this view is problematic is the fact that
even in jurisdictions that allow post-contractual constitutional rights
intervention like South Africa such intervention is restricted to a finger
full, primarily to give life to the letters of such rights. But before we go
further it is germane however that we consider in greater detail the
South African example of post-contractual Constitutional rights
intervention in mortgage transactions.
Perhaps the intention that the South African Constitution would
demand for a post-contractual pound of flesh in mortgage transactions
is revealed in the fact that the Law of South Africa30 states that a
contract must be constitutionally valid, in the sense that it must not
infringe any of the fundamental rights entrenched in the Constitution.
This bold broad stroke of a statement of intent clearly sets up an altar
of reverence for constitutional rights at the expense of any business
compulsion to be bound by terms of contractual arrangements. It
29 See generally Bentham, Jeremy (1907). [PML] An Introduction to the Principles of Morals and
Legislation. Oxford: Clarendon Press.
30 W. A. Joubert, L. T. C. Harms, G. J. Pienaar, P. J. Rabie, T. J. Scott, J. A. Faris, B. Galgut “The Law of
South Africa”, 2nd Edition Vol 5, Part 1 Para 159, Page 248
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
wreaks a devastating blow on any delusions of grandeur of contractual
privity and other such fancy contractual terms. Thus as far as South
African law goes, it’s almost a lost cause to argue the subordination of
constitutional (public law) rights to contractual (private law) rights.
They are neither at par. There is simply no contest. A plain reading of
that paragraph would lead to the inevitable conclusion that any
infringement of constitutional rights renders the contract between the
parties no matter how well intentioned invalid. It matters not if the
infringement is one that affects a third party who is not privy to the
contract between the parties. Neither is it a requirement that the
contracting parties must have, using all the reasonable diligence
available at their disposal, failed to notice such potential infringements.
The categories of potential infringements are not closed either.
So in what ways has this audacious statement been tested in South
Africa as regards the constitutional right to housing? Let us beam our
focus on the Mortgage scheme that inspired this discourse.
a. The Brussons Mortgage Scheme x-rayed
Brusson Finance CC (“Brusson”) was a closed corporation which was
registered in 2005, under the Companies Act of South Africa with its
registered place of business as 37 Vorster Avenue, Glenanda,
Johannesburg (“Brusson House”). It later became a private company
(Pty) Ltd in 2007.
The directors of Brusson were Ian Lockyear and Michael Basson. At
the time of creating Brusson, the two claimed to collectively have 30
years of experience in the property industry and, together with
Brusson, an asset value exceeding R40 000 000.00 (40 million
Rands).
On their website Brusson promoted itself as part of a property group
that specializes in all aspects of the residential property market, but
they specifically promoted the fact that they have extensive
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
experience in the refinancing of residential properties. Brusson
therefore held the opinion that they would determine a prospective
clients’ creditworthiness by the value of the property a client owned.
It held as its objectives the ability to “help” people with blemished
credit records that owned property and met their criteria to obtain
loans (“homeowners”). Brusson advertised itself as offering a
“second chance” finance product, and by offering this “second
chance” finance, homeowners would be able to clear their credit
record and obtain financial stability.
Brusson stipulated that all agreements entered into with Brusson
were standard agreements, accepted to be legally binding and fall
within the full context of the law. They also stipulated that they fully
understand and fully comply with the National Credit Act 34 of 2005
(“NCA”).
The Brusson process gave rise to several transactions that had
direct implications on the eviction of subscribers from their homes.
It is pertinent to set out the common denominators of these
transactions. Homeowners were made to sign “three way”
agreements comprising the Offer to Purchase, the Deed of Sale and
the Memorandum of Agreement and also a fourth Agreement-The
Memorandum of Understanding.
This in a nutshell is how the agreements were structured:
i. The Offer To Purchase Agreement (OTPA):
This agreement records that the applicants, (homeowners)
are in fact selling their property to a third party investor
(purchaser). The OTPA records a purchase price and states
that the purchase price is to be obtained by the purchaser
(investor). On transfer of the (homeowners) seller’s
property, occupation still remains with the (homeowner)
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
seller, who has to pay monthly occupational rent with
interest to Brusson Finance. The (homeowner) seller
undertakes to pay all transfer costs and appoints Brusson
Finance to administer the costs on the (homeowner)
seller’s behalf. This administration would also cost the
(homeowner) seller an administration fee to be paid to
Brusson Finance.
ii. The Deed Of Sale:
This agreement records the investor as the seller of the
same property and the homeowner as the purchaser that
was transferred in the offer to purchase. The agreement
records a minimum installment which only represents the
interest on the purchase price and not the capital
installments. The (investor) seller then undertakes to pay
Brusson and amount on the transfer of the property, and
Brusson undertakes to provide the seller with 15% of that
amount paid to Brusson. All payments were to be made to
Brusson as appointed agent of the (investor) seller. The
agreement also states that the (homeowners) purchasers
were already in occupation of the property. The
(homeowners) purchasers are also liable to pay taxes,
levies, services, water and electricity to Brusson who would
then pay it over to the relevant authorities. In addition, the
(homeowners) purchasers are once again liable for transfer
costs. The agreement goes on to state, amongst other
things that the (investors) seller shall keep the
homeowner’s property insured but the (homeowners)
purchaser shall be liable to pay the insurance premiums to
Brusson. In terms of this agreement Brusson takes out a
life insurance policy on the life of the (investor) seller, thus
on the death of the (investor) seller, the executor shall
cede the deed of sale to Brusson.
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
iii. The Memorandum Of Agreement:
This is an agreement between Brusson, the investor and
the homeowner. This agreement states that Brusson will
manage the agreement between all parties, and all
financial issues relating thereto. It mentions the first sale
agreement and the second installment sale agreement. In
terms of this agreement the homeowner acknowledges
that they are not creditworthy and that Brusson has
incurred huge financial risks in standing surety for the loan
and the homeowners agree to make all payments to
Brusson. It also states that Brusson stands as surety and
co-principal debtor in favor of the investor if the
homeowners fail to make any payments to Brusson. If a
homeowner defaults on any payments the investor may
cancel the installment sale agreement (The Deed of Sale)
and then sell the homeowner’s property to Brusson for the
price it was sold on the Offer to Purchase agreement.
The agreement also states that the investor shall authorize
Brusson to sign all necessary documents on their behalf to
affect such sale and transfer on behalf of the investors. The
investor would be required to sign a power of attorney for
this. This document states that the Memorandum of
Agreement, The Offer to Purchase and The Deed of Sale
contain the entire agreement between all three parties.
iv. The Memorandum Of Understanding:
This agreement is entered into between Brusson and the
homeowner. It records that out of the proceeds of the Offer
to Purchase agreement, the transfer costs and an amount
towards future rates and taxes and attorney’s fees for
cancellation of an initial bond, plus the costs of a property
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
valuation will be deductible from such proceeds. If the
homeowner causes a breach of the initial Offer to Purchase
agreement they shall be liable to pay an amount plus VAT
as a portion of liquidated damages immediately. 31
In order to facilitate the process of sale, Brusson would solicit
through an advertisement process and by word of mouth a
partnership investor (“investor”), an individual with a good credit
record to purchase the homeowner’s house by obtaining a mortgage
bond through one of the four major banks in South Africa as well as
SA Homeloans.
The investor signs an independent agreement with Brusson stating
that he is prepared to invest in the Brusson process. The investor is
told that he/she is purchasing the property for the benefit of the
homeowner.
The entire process for the application of the mortgage bond is done
by Brusson Finance through their in house Bond originators. They
are the ones who apply for the Bond on behalf of the investors.
None of the investors interviewed ever applied directly to the banks.
Further the investors were told clearly that they would not own
these properties and were required to sign agreements stating that
they had no right to dispose of the property registered in their
names. They were never told how many properties would be
registered in their names. 31 See generally Nomfundo Gobundo Director, Legal Resources Centre (as she then was) Memo
(Reference: 1058510J) to Advocate G Budlender SC and Advocate T. Ngcukaitobi of 1st September,
2011 requesting Counsel to draft Summons and Particulars of Claim in the matter between various
homeowners and investors affected by Brusson Finance cc/ (Pty) Ltd. Against Brusson Finance
cc/(Pty) Ltd., the four major banks of South Africa and the Attorneys firms who facilitated the
Brusson Finance cc/(Pty) Ltd. Transactions. At pages 3-7.
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
Once the bond was approved, some of the investors were contacted
by the Banks to say congratulations of the new purchase, other
claim they were never contacted.
They claim that they were not concerned about this as in their
agreement with Brusson they had been given an undertaking that
there was no risk to them as Brusson had taken security and
furthermore they were not to pay anything towards servicing the
bond but that instead this would be done by the homeowner with
the entire process being administered by Brusson.
The mortgage bond obtained by the investor on the property would
then be paid into Brusson’s attorney’s account and would settle any
previous outstanding mortgage bond on the property, all
outstanding municipal accounts, the transfer costs for the
purchase/sale, Brunson’s fees for administering the process. The
balance would then be given to the homeowner as the loan
requested.
The intention as stated by the agreement is that once the investor
obtains the mortgage bond, he/she would immediately sell the
property back to the homeowner using a Hire Purchase, or Sale by
Installment agreement in terms of the Alienation of Land Act 68 of
1981. Thus, a Deed of Sale is included in the many documents to be
signed by the homeowners and investors. The purchase price (the
Buy Back) on the Hire Purchase agreement was calculated at the
cost of the mortgage bond plus an amount based on how long
Brusson would have to service the mortgage bond. This was
estimated at 15% for the first year and 10% the following years.
Thus homeowners would be made to pay interest rates of 6.58%
more than the interest rate given by the banks. Thus the property
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
would only be registered back to the homeowner once they have
paid back all installments.
Homeowners are then required to pay exorbitant monthly
installments to Brusson Finance via debit order. From these monthly
installments Brusson would service the mortgage bond, pay any
rates and taxes on the homeowner’s homes, and pay the investor
their income – an amount of 2% per annum on the initial purchase
price or mortgage bond amount and the residue would remain with
Brusson. Brusson undertook to declare these amounts to SARS.
Brusson undertook to stand as a surety if homeowners defaulted
and for the mortgage bonds so that investors would never be at risk
of having to service the mortgage bonds. Brusson made it clear that
all documentation that needed to be completed for the success of
this process would be completed and taken care of by a Brusson
finance consultant.
The Brusson agreements also stated that if the homeowner
defaulted on the installments on the Deed of Sale the investor was
required to sell the property to Brusson for the price on the initial
offer to purchase. Brusson would then make attempts to evict the
homeowner and resell the homeowner’s home to someone else.
b. The unravelling of the scheme and the intervention of the South African
Right to Housing
In 2008 homeowners and investors alike started complaining about
Brusson to the National Credit Regulator (“NCR”). The NCR
investigated Brusson and together with Matile and Lizzie Ditshego, a
homeowner couple launched proceedings in the Bloemfontein High
Court under Matile Joseph, Lizzie Ditshego & The National Credit
Regulator v Brusson Finance (Pty) Ltd, Amanda Boshoff, & The
Registrar of Deeds (case no 5144/2009) (“Ditshego”).
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
The court HELD that all agreements concluded between Brusson
and the homeowners were illegal and void on two grounds. First, the
entire Brusson process amounts to pactum commissorium in that
the real intention of the homeowners was to obtain a loan from
Brusson against security of their Home and therefore all agreements
concluded between Brusson and the homeowners were simulated
transactions.
Secondly, the agreement was unlawful because Brusson was
essentially providing credit to the homeowners and Brusson was not
a registered credit provider as contemplated in the National Credit
Act 34 of 2005 (“NCA”). The court therefore ordered that the
homeowners’ home be transferred from the investors name back
into their name and that the mortgage bond that was registered
over the home be reduced to an amount specific to the
homeowners’ circumstances.
Subsequent to the Ditshego judgment an application for provisional
liquidation was brought in the North Gauteng High Court under
Yvonne Bella Nkosi v Brusson Finance (Pty) Ltd (Case no. 42986/10).
The liquidation was taken over by Xirimele Trustees. The matter is
now being heard in the North Gauteng High Court as Cloete v
Brusson (case no 48765/10). Due to the liquidation, there are
certain caveats entered in terms of section 18B of the Insolvency
Act, 1936 against the transfer or cancellation of the affected
properties. Such caveats still exist and have not been cancelled in
accordance with the Insolvency Act. Accordingly, such properties
cannot be transferred and the bonds registered in respect of such
properties may not be cancelled without the permission of the
Master of the High Court.
Flowing from the reasoning in the Ditshego judgment, we can safely
posit that by declaring the mortgage transactions under the Brusson
Scheme a sham and in breach of pre-contractual statutory
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
provisions as to registration of a credit provider, the courts were
positing that the illegality of the scheme taints whatever consent
that may have been claimed to be given by the named investors.
Brusson lacked the requisite legal capacity to transfer the
homeowner’s legal title to the named investors and as such the
named investors lacked the capacity to create a real right of
mortgage. Thus the courts avoided the pitfall of having just on the
strength of a constitutional right to housing without more to defeat
the commercial expectations of a mortgagee and mortgagor.
While Ditshego establishes that the South African courts are willing
to intervene to vindicate a constitutional right infringed by
contractual relations in the presence of fraud or statutory non
compliance, it doesn’t do much to address contractual constitutional
rights intervention without more. It is worth noting that the position
in Ditshego is not radically different from the position of other
common law jurisdiction as regards fraud, illegality, statutory non
compliance, duress, mistake etc all extenuating circumstances that
are pre-contractual and can warrant an intervention. The only
difference being that procedurally Ditshego goes beyond the ambit
of these extenuating circumstances since the proceedings is a rights
based proceedings as opposed to a an action or plea by one of the
mortgaging or contracting parties which is the norm in the other
jurisdictions.
The Ditshego judgement paved way for various homeowners under
the Brusson scheme on the verge of possible eviction from their
homes to seek a vindication of their right to housing. This has
created a scenario where the courts are now being called upon to
pronounce upon the rights of housing to homeowners who have
divested their interests in their homes via a mortgage bond at the
expense of the interest of the Mortgagee banks.
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
But many of these cases are at its infancy and involve or potentially
involve about 900 homeowners affected under the Brusson
scheme.32
Irrespective of what the South African courts would hold in these
cases, we may still have problems coming to a conclusive view that
post contractual rights intervention in mortgage transactions should
proceed at large. This is because the entire string of cases are likely
to be argued following the Ditshego clue, on the basis that the
underlying mortgage transactions are a scam or have been declared
illegal, null and void which has the effect of avoiding all of the
problems associated with constitutional rights operating to defeat
contractual rights post-contractually.
But suffice it to say that the cases post Ditshego can at least shed
light on possible arguments and weaknesses against post-
contractual constitution intervention.
V. POSSIBLE ARGUMENTS FOR AND WEAKNESSES OF POST-CONTRACTUAL
CONSTITUTIONAL INTERVENTION IN MORTGAGE TRANSACTIONS
In constructing possible arguments for and weaknesses of post
contractual constitutional intervention we would reference the
pleadings filed in one of the Brusson cases Sathekge, Pinkie Charles V.
Nedbank & 2 Ors.33
32 One of the cases flowing from Brussons presently before the South African Courts is Sathekge,
Pinkie Charles V. Nedbank & 2 Ors The High Court Of South Africa (South Gauteng Div) Case No:
31295/1
33 Ibid.
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
a. Possible Arguments for post contractual constitutional intervention
i. The nature of constitutional rights.
Constitutional rights are by their very nature sacrosanct and
exacting. The constitution is after all the grund norm. Rights that
find themselves embodied in the constitution are rights that
enjoy almost a hallowed like sacredness and thought to be so
germane to a society’s existence that only a constitutional
safeguard would suffice. That is why they find themselves in the
Constitution in the first place. Every effort thus has to be made to
ensure that constitutional rights are given efficacy even if it
means disturbing contractual rights.
ii. Broader sphere of influence.
Constitutional rights are mostly universal in nature thereby
compelling universal adulation. Giving effect to human rights is
central to the progress of mankind. Thus the sphere of influence
of rights generally and constitutionally enshrined rights in
particular is much broader and is of more importance to a society
than private contractual arrangements even though it may be
conceded that these private contractual arrangements may in
the final analysis be conceived as some form of socio-economic
rights in themselves. Be that as it may, if the foregoing is taken
as cogent, then why should a post contractual intervention be an
issue? It makes sense to give effect to constitutional rights and
uphold its supremacy at any time in the event of a conflict with
any perceived contractual rights which at best is private and has
a smaller sphere of influence.
iii. A Mortgagee’s amplified implied duty to investigate the title of the
Mortgagor in South Africa.
Ordinarily one would canvass a view that the existence of a duty
on the part of the Mortgagee to exercise reasonable care in
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
investigating the root of title of the immovable security
presented as security for the debt by the Mortgagor should be
limited to the Deed Registry where the interests in the security
would normally be registered. While this is the norm in most
common law jurisdictions. The pertinent question would be is the
duty to exercise reasonable care closed? Giving that the duty is
paramount and sacrosanct deriving it’s ambit from the extant
statutory milieu that governs the locus of the Mortgage
transaction as well as judicial decision or common law
precedents, this duty it is submitted, cannot be closed.
Grounds exist to assert that there are indeed strong justifications
under South African extant laws to presume that the Mortgagee’s
duty extend beyond checking the title of the property in the
Deed Registry. Thus a broad as opposed to a narrow construction
of the duty is warranted and gives way to statutorily imposed
additional due diligence responsibilities on the Mortgagee.
In the Sathekge case and indeed all of the Brusson cases34, the
Mortgagee’s duty to exercise reasonable care or due diligence
can be gleaned from a plethora of statutes dealing with banks
and financial institutions. Let us cursorily look at the major ones:
i. National Credit Act 34 of 2005. 35
The NCA applies to all credit agreements between parties
dealing at arm’s length. The NCA affects all credit
agreements entered into after 1 June 2007. Credit
agreements entered into before 1 June 2007 remain
34 Approximately 900 transactions were consummated under the Brussons scheme and
the Legal Resources Centre is handling many of the homeowner’s eviction cases in
pursuance to their constitutional rights to housing.
35 The NCA replaces the Usury Act and the Credit Agreements Act and came into effect on 1 June
2007
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
unchanged and are governed by their original terms and
conditions. There are however certain provisions of the NCA
which apply to existing agreements.
The relevant provisions are that the NCA requires that credit
providers perform a full credit assessment before entering
into a credit agreement with the customer.36
ii. Financial Intelligence Centre Act 37
The FICA established the Financial Intelligence Centre (FIC)
whose main objectives are “To establish and maintain an
effective policy and compliance framework and operational
capacity to oversee compliance and to provide high quality,
timeous financial intelligence for use in the fight against
crime, money laundering and terror financing in order for
South Africa to protect the integrity and stability of its
financial system, develop economically and be a responsible
global citizen.”38
Of particular relevance to the Mortgage relationship are
sections 21 (1) of the Act which requires accountable
institutions listed in Schedule 1 to the Act39 to establish and
verify the identities of the clients with whom they enter into
business relationships or conduct single transactions;
section 22 which provides that accountable institutions
36 See generally The National Credit Act, 2005 'All you need to know about the National Credit Act as a consumer' Volume 1: 2007 accessible on http://www.ncr.org.za/pdfs/publications/consumer/ENGLISH.pdf. Assessed on 10/9/2012.
37 No. 38 of 2001
38 See https://www.fic.gov.za/Default.aspx accessed on 9/09/2012
39 Accountable institutions include a wide range of financial institutions such as banks, long term
insurance houses, securities brokers and investment advisers; certain professions such as
attorneys and estate agents; and non-financial institutions such as casinos.
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
must keep record of its clients’ identities and the
transactions entered into with their clients; Sections 23 to
26 which stipulates the period and the manner in which
records are to be kept as well as the admissibility of those
records in court proceedings and "The Centre’s" access to
those records; and sections 42 and 43 which requires
accountable institutions to develop and implement internal
rules on their compliance with their obligations in terms of
the Act and to appoint compliance officers to ensure
compliance with these obligations within the institutions.40
The cumulative effects of these provisions particularly s.
21(1) by necessary implication is to create a statutory duty
on a Mortgagee to holistically access the ownership of the
property being used to secure the loan by verifying the
identity of the owner of the property beyond what is stated
in the Deed Registry.
b. Possible Weaknesses of post-contractual constitutional intervention
There are two major weaknesses in upholding a South African model
where the right to housing is left at large so much so that post-
contractual constitutional intervention is allowed beyond the
traditional fetters in mortgage transactions. They are as follows:
i. The rights nexus in contract.
There exists a rights nexus in contract. This connection proceeds
on the basis that stripped of its commercial wrappings, a contract
is really the expectation of the vindication of the rights conferred
40 In addition to these sections, Regulations 3, 4, 5 and 6 of FICA (the Financial Intelligence Centre
Act, 38 of 2001) stipulates the KYC (Know-Your-Customer) requirements which mandates
accountable institutions to establish (i.e. obtain) and verify (i.e. validate) information for
individuals. Sections 46 (1), 47, 48, 49, 61, 62 and 68(2) of the Act create the offences which
underpin the enforcement of the provisions referred to above. A person convicted of any of these
offences is liable to imprisonment for a period not exceeding 15 years or to a fine not exceeding
R10 000 000.
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
on the parties to the contract. Contractual relations presuppose a
certain freedom to contract and an assurance that the just
expectations of the parties would be met. Conceived this way,
what would stare a court in the face in post-contractual
constitutional intervention in mortgage transactions is really a
choice between giving efficacy to two rights-one a constitutional
endowed public right to housing and the other a private right in
the mould of a socio-economic right which it must be emphasized
accrued earlier than the former . So in these circumstances, what
justification exists for the court, in the guise of giving vent to a
constitutional right to housing, to post-contractually truncate the
legitimate aspirations of parties to a contract? What justification
exists for so broad an interpretation of the right to housing as to
warrant the stifling of private rights conferred by law as well?
ii. Possibility of rendering commercial relations otiose and its attendant
economic consequences.
Consider the Brusson scenario yet again. It’s not in doubt that a
valid loan agreement was entered into by the named investor
(Mortgagor) and the Mortgagee bank and that pursuant to that a
valid mortgage bond was registered over the property.
Consequently can it be said that the homeowners (who signed off
to a commercial arrangement that saw them being advanced
varying sums to solve their problems and in any event are not
parties to the investor-bank transaction) have a legal basis to
avoid the legal consequences flowing from the transaction, more
so in a situation where the Mortgagee have exercised its rights to
foreclosure under the mortgage and obtained valid judgment by
a court of competent jurisdiction?
Assuming but not conceding that the homeowners have a case,
surely they slept on their rights and should have even in cases of
alleged fraud like was the case in Brussons intervened to enforce
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
their claims as soon as they realized that the property was no
longer in their names. The homeowners would naturally have
knowledge of this as following standard practice several notices
of outstanding payments in the mortgage and the notice of
foreclosure would be sent to the respective addresses of the
homeowner’s property. Neither should the excuse by the
homeowners that they concluded agreements and signed
documents concerning their homes ignorant of what the
agreements or documents entailed hold any water, in the
absence of duress. Thus allowing the homeowners to assert their
constitutional rights to housing post-contractually has an effect
akin to stirring the hornet’s nest. It has the unsavory effect of
rendering commercial transactions otiose as a contract is not
worth the paper on which it is contained if it cannot be enforced
by aggrieved parties or its conferred rights and duties respected.
Though the court can surmise that there is an implied duty on a
Mortgagee to exercise due diligence or reasonable care in
investigating the title or ownership of the immovable security
presented by the Mortgagor towards obtaining a loan or credit
Agreement, this duty of the Mortgagee ought to be limited to the
Deed Registry where the interests in the security would normally
be registered. Evidence that a property is registered in the name
of an investor in whose name the loan was granted ought to be
sufficient to discharge this duty. If not where do we draw the
line? Are the courts to put mortgagees in an infinite due diligence
loop just because they want to declare that the species of
investigating title of the mortgage security are at large? This is
an absurd proposition whose effect would mean the end of
mortgage or other credit security based transactions as we know
it.
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
VI. CONCLUSION
Post-contractual constitutional rights intervention is problematic for a
judge in a multiplicity of ways as it raises some very fundamental
jurisprudential questions. There are no easy answers to these
questions.
The major difficulty can be summed up in the question how do we
allocate the burden of post-contractual constitutional rights
intervention among the homeowner who intends to assert his
constitutional rights to housing and hence avoid eviction; the
mortgagor who has acquired the homeowner’s property and has used
it as security for a mortgage; the mortgagee who seeks to enforce his
rights to foreclosure following a default by the mortgagor and in
schemes like Brusson, a middleman who brokers some credit based
deals?
The conundrum would be that the homeowners property through a
scheme like that of Brusson or other credit based schemes have come
into the possession of the Banks as Mortgagees. The Mortgage in
question would be between the named investors and the banks. Thus
the homeowners would not be parties to the Mortgage transactions
concerning their property as such property has evolved into the hands
of the Mortgagee bank who hold their title arguably without notice of
the fraud that creates the defect in title.
The situation may be further complicated by the liquidation of the
entity (the middleman or broker {Brusson}) that set the entire chain of
events in motion in the first place. This means that the homeowners
ordinarily would not have remedial recourse to the party alleged to
have committed the fraud in the first place-Brusson! It is important to
note that as laudatory as Ditshego is, it is distinguishable on the basis
of the fact that the proceeding was against Brusson the source of the
fraud. If the Mortgagee bank succeed in convincing the courts that it
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
acted diligently in investigating the title of the security presented by
the named Mortgagor (investors) and complied with all relevant laws
they may cast themselves in the light of innocent parties.
The fact that the homeowners seek to overturn private law contractual
relations (which it must be conceded they set in motion in the first
place) by asserting as third parties a public law constitutional right to
housing is one that even in a Constitutional democracy like South
Africa seem to be unprecedented.
No doubt contractual relations which are by nature commercial, have
far reaching implications that extend to Constitutional rights.41 But this
should not prevent a court from doing substantial justice. The common
law already curtails contractual relations post contractually. Traditional
fetters to the freedom to contract and to be so bound exists as we
have earlier noted in the form of public policy, fraud, mistake,
misrepresentation and statutory stipulation. A constitutionally imposed
post contractual constitutional rights intervention in contract is thus
not entirely an anathema. But such intervention should not be a cut
and dried affair. The peculiar facts of the case ought to serve as a
beacon to the judge. In cases where it is proved that homeowners
never intended to part with ownership of their houses, the courts ought
to interpret the right to housing provisions of the constitution liberally
to uphold post contractual intervention. For instance in Brusson
inspired cases; the Mortgage in question is not constitutionally valid. It
is founded on an illegality-namely a fraudulently obtained security and
any judgment of the court obtained by the Mortgagee directing that
the security in question be specially executable to the extent that it
permits the sale in execution of the home of a person is contrary to S.
41 An example of such far reaching implication in our context is the sheer magnitude of the amount
the Mortgagees would tend to lose if the courts were to set aside all 900+ mortgage transactions
flowing from the Brusson scheme on the basis of the homeowner’s constitutional right to housing.
The systemic shock that may be occasioned as a result of such trend setting precedent may result
in a greater majority been deprived of their socio-economic rights.
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
26 of the Constitution which guarantees a homeowner’s right to have
access to adequate housing.42 Such judgment since it does not take
into cognizance the materially relevant circumstance of the nature of
the security used in the Mortgage transaction and the proprietary
interest of the homeowner does not comply with subsection 3 of
section 26 which is to the effect that “No one may be evicted from their
home, or have their home demolished without an order of court made
after considering all the relevant circumstances. No legislations may
permit arbitrary evictions.”
In the same vein the Mortgagee’s argument that it obtained a valid
judgment in a court of competent jurisdiction pursuant to its right of
foreclosure can be met easily. This argument which is one that speaks
to the issue of estoppel fails because estoppel does not operate as a
bar to setting aside the mortgage. For our purposes the decision in
Klerck v. Van Zyl & Maritz43 is instructive. Here the court declined to
apply the doctrine of estoppel against the trustee of the insolvent
estate of a representor, as estoppel could not be allowed to clothe with
legal efficacy something which the law had decreed was unlawful
(namely the mortgage bond).44
In other cases however the courts should tread with caution so as not
to sacrifice contractual relations on the altar of constitutional rights
enforcement.
42S. 26 (1) Constitution of the Republic of South Africa, Act 108 of 1996.
43 [1989] 1 All SA 23 (SE); 1989 4 SA 263 (SE)
44 In arriving at this conclusion the court relied on the well-known judgments in Trust Bank van
Afrika Bpk v. Eksteen [1964] 3 All SA 507 (A); 1964 3 SA 402 (A) and Strydom v Die Land- &
Landboubank van SA [1972] 2 All SA 22 (A); 1972 1 SA 801 (A).
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Post-Contractual Constitutional Rights Intervention in Mortgage Transactions: Lessons from South Africa.
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