Undertakings – What are they?

In Commercial, Conveyancing and even Family Law matters, undertakings are often given between attorneys and their clients to third parties. An undertaking is a verbal or written pledge or promise either to do something or refrain from doing something.

Depending on the type of undertaking provided, attorneys and their clients may be personally held liable if the undertaking is not fulfilled as promised. The undertaking provided creates mutual trust between all parties concerned.

An undertaking must never be taken lightly and all parties who made the undertaking will be held to their promise even if the party cannot comply with their obligation.

Attorneys are not compelled and rarely provide undertakings themselves. An attorney’s word is their reputation and legal colleagues and the public at large will accept that an attorney’s undertaking will be unconditionally met, even if the attorney suffers financial loss.

If a client provides an undertaking and he or she is unable to comply, the third party may litigate to either compel the undertaking or seek the necessary relief due to the revocation of the undertaking.

There are mainly two types of undertakings:

    1. Revocable; and
    2. Irrevocable.

Revocable undertakings

A revocable undertaking is a promise or pledge that may be retracted at any time by the person who has provided it. However, when the undertaking is revoked, there is a risk being litigation and the potential allocation of costs being granted against the party who revoked the undertaking.

A revocable undertaking is where a client will usually provide an undertaking if he or she believes that their commitment will give them an advantage and create a trust between all the parties concerned. The wording of the undertaking depends on the type of undertaking provided.

For example, the client may undertake not to contact a mediator in a mediation outside any joint meeting, if the other side agrees to do the same. If either party contacts the mediator outside of any joint meeting, the undertaking provided has been broken and this may lead to litigation and costs to be granted against the party who contacted the mediator outside the joint meetings.

A further example is when a director on behalf of a parent company undertakes that the parent company and all the subsidiary companies will comply with an agreement reached with a third party. If the director is not in control of the subsidiary companies, and any of the subsidiary companies do not comply with the agreement reached between the third party and the parent company, the parent company has broken the undertaking. The third party will then seek the assistance of the court to compel the undertaking or seek a damages claim against the parent company and the subsidiary companies. The director of the company himself may be personally held liable depending on the wording used in the undertaking.

Irrevocable undertakings 

An irrevocable undertaking is usually provided by an attorney personally or by a bank in a conveyancing or commercial matter. The context and the wording of the undertaking will determine whether the undertaking is irrevocable or not. It is usually in relation to monies which the conveyancing attorney is holding in his or her trust account for the transfer of a property.

In terms of South African common law, if an irrevocable undertaking is provided, the attorneys bear the risk of and on behalf of their client, to be called upon to personally produce what was promised even though the client refused, defaulted or has made it impossible to undertake. The risks in providing an irrevocable undertaking is monumental for the attorney, and most suffer financial losses due to such undertakings provided.

However, in the recent Supreme Court of Appeal case of Stupel & Berman Inc v Rodel Financial Services (PTY) Ltd 2015 (3) SA 36 (SCA) (‘Stupel’), it was held that undertakings provided by an attorney acting as an agent did not constitute an irrevocable undertaking binding on the attorney personally unless they had a personal interest in the matter. This means that the common law has been altered and that the client will be held personally liable for an irrevocable undertaking and not the attorney.

Conclusion

Many clients instruct their attorneys to provide revocable undertakings on their behalf especially where the attorneys on the other side have called for an undertaking. These undertakings usually ensure a positive result in litigation and many of these undertakings may be revoked. These undertakings will usually not be provided by the attorney personally, and the attorney will always ensure that the wording will be that the client has provided the commitment. If the undertaking is revoked, this may lead to litigation and potential costs awarded against the party.

In conveyancing and commercial matters, the undertakings provided are more serious and South African Common Law dictates that an attorney will be personally held liable in terms of an irrevocable undertaking to another attorney even though such undertakings are provided on behalf of their client. However, since the Stupel case, the Supreme Court of Appeal in conveyancing matters has ruled that an irrevocable undertaking provided by an attorney will not hold the attorney personally liable unless the attorney has a personal interest in the matter. This means that the client will be personally held liable for an irrevocable undertaking.

An undertaking given by a client is regarded as serious and thus caution is required.  The client may land in more hot water than anticipated if they are unable to fulfill the undertaking.