CREDIT APPLICATION FORMS - THE GOOD, THE BAD AND THE UGLY

Introduction

It is not uncommon that a credit application form has embodied in it a personal suretyship by the individual who signs the form on behalf of the applicant.

It is also not uncommon that such suretyship clauses are hidden amongst a host of other clauses in the application for credit. In most cases the individual who signs the credit application form on behalf of the applicant, does not realise that such application form contains a personal suretyship, which binds himself and his personal estate as co-principal debtor, jointly and severally with the applicant.

The caveat subscriptor rule would normally apply in these circumstances and the individual would therefore not be able to escape liability.

THE GOOD – a surety escapes liability

On 30 November 2004 the Supreme Court of Appeal upheld the defence of iustus error where a personal suretyship by the signatory was included in an application for credit signed on behalf of a company. See JZ Brink versus Humphries and Jewell (Pty) Ltd (SCA) (case number: 516/03, as yet unreported).

The court spent a considerable amount of time analysing the application for credit form on which the respondent relied. The court found that the following features of the form were relevant to the question whether a reasonable man would have been misled by it:

• The prominent heading of the document proclaims that it is a credit application form - not a credit application and personal suretyship. That in itself is misleading. Furthermore, the signatory is not required to sign the form twice, once in each capacity. It is not necessary that the signatory should do so, as a signature can be a “double signature”, but a clear indication that the signatory was signing in two capacities, or, even better, a provision for two signatures with appropriate wording indicating that one is as surety, should eliminate the difficulties which do arise in a case such as the present. The court stated in obiter that it has difficulty in understanding why not all of those who draft standard form contracts take these elementary precautions.

• The three clauses at the end of the first page are preceded by a phrase which would convey to any person who saw it that the signatory was signing in a representative capacity and the place for signature which follows those clauses has the obvious and unmistakable express qualification "FOR THE DEBTOR".

• The manner in which the personal suretyship clause has been included in the form would accordingly not suffice to alert a signatory to the fact that he/she was undertaking a personal obligation, despite the heading of the form, despite the wording which preceded the block of clauses of which the suretyship clause formed a part, and despite the qualification to the signature - which stands on its own, is in capitals and would be obvious to anyone signing the document - which followed those clauses

MOST IMPORTANTLY, the court held that the credit application form was a trap for the unwary and the appellant was justifiably misled by it. The court concluded that the appellant acted under a misapprehension in signing the credit application form. The court also concluded that the respondent's conduct in furnishing the form, which was misleading, induced a fundamental mistake on the part of the appellant. He thought he was signing a credit application form on behalf of the company, whereas he was, in addition, undertaking a personal suretyship for the debts of the company. It follows that the suretyship obligation was void ab initio and that the appeal must succeed.

THE BAD - businesses must review their credit application forms

The court stated that for present purposes, all that need to be said in this regard is that the furnishing of a document misleading in its terms can, without more, constitute a misrepresentation.

A document headed "credit application form" or "application for credit" is just that and nothing more. Should such a document contain a personal suretyship it is highly advisable to identify the document correctly so that their can be no mistake on the part of an applicant. In addition, the suretyship clause should be in a prominent and conspicuous place and the signatory should be required to sign the credit application form in two distinct places.

The respondent’s witness in cross-examination stated that the form had been used for 15 years and that no one had ever told her that it was a trap. The court quite correctly rejected this line of defence. A document that has been used for any length of time and has never been challenged does not mean that the document is legally binding.

THE UGLY – are your suretyships worth the paper they are written on?

This judgment has serious credit and legal risk implications for all businesses that rely on suretyship clauses which are contained in credit application forms. This judgment creates a fertile ground for alert lawyers to litigate on and individuals may well escape liability, unless the above elementary precautions are taken. It is prudent to review all credit application forms to bring them in line with the effects of this judgment.

By Nigel Petzer
March 2005