A Sensible Succession Plan or a Fatal Legal Flaw?
Two business partners who co-own a thriving company recognise the importance of certainty in their business succession planning and agree on a straightforward arrangement:
"If either of us passes away, the surviving partner will assume full ownership of the deceased’s shares."
At first glance, the agreement appears both practical and commercially sensible, offering certainty, avoiding delays involved in the winding up of a deceased estate, and enabling a seamless transfer of ownership. However, it is precisely at this point that the agreement conflicts with established principles of South African succession law.
By entering into such an agreement, the business partners effectively bind themselves, during their lifetime, to dispose of their shares in a predetermined manner upon death. In doing so, neither party retains the freedom to later revise their decision or bequeath those shares to a spouse, child, or any other beneficiary of their choosing. This scenario reflects factual situations that have frequently come before the courts.
In substance, the business partners have created an arrangement that is not recognised by the law. They have created a “pactum successorium”.
The Nature of a Pactum Successorium
Translated literally, ‘pactum successorium’ means an “agreement of succession.” It refers to an agreement concluded during a person’s lifetime which seeks to regulate how their estate, or specific assets within it, will be dealt with upon their death.
A fundamental principle of South African succession law is the freedom of testation: a testator is free to dispose of their estate as they wish and, importantly, to change their mind at any time prior to death. Subject to limited exceptions, any agreement that seeks to restrict this freedom is considered null and void.
A will is inherently changeable. It can be revoked or amended at any time during the testator’s lifetime and only takes legal effect upon the testator’s death, reflecting their last wishes. A pactum successorium, by contrast, seeks to fix a person’s intentions during their lifetime, binding them to a predetermined estate distribution and thereby restricting their freedom to alter or reconsider those arrangements as time passes.
Why the Law Rejects Pacta Successoria
While such agreements may offer certainty, especially in estate planning or commercial contexts, the South African law of succession regards a pactum successorium as void and unenforceable.
The primary concern is that any agreement restricting freedom of testation undermines succession law. Beyond this, such agreements risk being used to sidestep the formal requirements of a valid will, weakening the safeguards that ensure a person’s final wishes are honoured. They can also place courts in a difficult position, particularly when disputes arise after a party’s death and direct evidence is no longer available. From a tax-related perspective, these arrangements may be structured to avoid estate duty, potentially prejudicing the Treasury. Accordingly, when it comes to succession, contracts cannot replace a valid will.
Judicial Approaches to Identifying a Pactum Successorium
In practice, identifying a pactum successorium is notoriously complex. In an attempt to allow freedom of testation to take its important position in the South African law of succession, the courts have developed a range of interpretive tests to distinguish between a pactum successorium and other, otherwise valid, agreements. These tests, however, are not applied uniformly and often produce uncertainty in their practical application. Over time, the following approaches have emerged in the case law:
- The absence of consideration test: This test considers whether the agreement is supported by a quid pro quo. Where no counter-performance is present, it may be an indicator of an invalid pactum successorium. However, this approach has been rejected by a number of courts, and it is generally accepted that the existence of counter-performance is not determinative of whether an agreement constitutes a pactum successorium.
- The revocability test: This test examines whether the offer/promise can be revoked during the lifetime of the promiser. It requires an assessment of whether the promisor retains the right to revoke the promise. If the promise is irrevocable, the agreement may be classified as a pactum successorium. However, revocability alone cannot always serve as a definitive criterion to distinguish a pactum successorium from other agreements.
- The vesting test: This approach focuses on whether rights arise and vest during the parties’ lifetimes (inter vivos), or are they deferred until death (mortis causa)? The timing of vesting serves as a key indicator in distinguishing contractual rights from testamentary dispositions.
- The intention test: The intention test considers whether the parties intended the agreement to function as a testamentary disposition, with legal consequences arising only upon death, effectively substituting a will. Courts have looked beyond the wording of the agreement to determine whether the arrangement seeks to achieve a testamentary outcome, thereby limiting a testator’s freedom to dispose of property by will.
- The restriction of freedom of testation test: Case law demonstrates that the overriding factor is whether the agreement places an impermissible limitation on a testator’s freedom of testation. This inquiry serves as the most decisive indicator, focusing on whether the agreement unlawfully fetters a party’s right to dispose of their estate, including the ability to revoke or amend their testamentary arrangements at any time during their lifetime.
Despite these various approaches, the jurisprudence remains fragmented, and no single test provides a conclusive answer. In essence, any agreement that seeks to operate after death and irrevocably dictates the distribution of a deceased estate, faces the risk of being characterised as an invalid pactum successorium.
The Final Word Rests in the Will
The law draws a firm line: agreements may bind you in life, but not in death. You may plan for the future but you cannot contract away your final say over your estate.
