UNISA CENTRE FOR BUSINESS MANAGEMENT
PROGRAMME IN PURCHASING AND SUPPLY MANAGEMENT
STUDY GUIDE FOR
LEGAL ASPECTS OF PURCHASING
© 2008 University of South Africa All rights reserved University of South Africa Muckleneuk Pretoria
Original: Ms I Fourie Revised by: Ms Rene Swart Assisted by: Prof JA Badenhorst
LEGAL ASPECTS OF PURCHASING
STUDY UNIT 1 1.1 1.2 1.3 General principles of the law of contract p1
Introduction General principles of the law of contract Requirements for the formation of a legally binding contract Consensus p6
STUDY UNIT 2
2.1 The concept of consensus 2.2 General principles of consensus 2.3 Offer and acceptance 2.3.1 The offer 2.3.2 Lapsing of the offer 2.3.3 The acceptance 2.4 The moment and place of formation of a contract 2.4.1 The moment 2.4.2 The place 2.5 Lack of consensus (mistake or error) 2.5.1 Mistake or error 2.5.2 Essential mistake 2.5.3 Non-essential mistake 2.6 Improper obtaining of consensus 2.6.1 Misrepresentation 2.6.2 Duress 2.6.3 Undue influence 2.7 Standard contracts and contract forms 2.8 Amendment of a contract Conclusion 2.9 STUDY UNIT 3 Contracts of sale p19
3.1 Introduction 3.2 Defining a contract of purchase and sale 3.3 Requirements for the creation of a contract of purchase and sale 3.4 The seller’s obligation 3.4.1 The seller’s duty to protect i
3.4.2 The seller’s duty to deliver 3.4.3 The seller’s liability for latent defects 3.4.4 The manufacturer’s and dealer’s liability for latent defects 3.4.5 Liability on grounds of dicta et promissa of the seller 3.4.6 The seller’s liability for eviction 3.5 The purchaser’s obligation 3.5.1 The purchaser’s obligation to pay the purchase price 3.5.2 The purchaser must take possession of the delivered merx 3.6 Risk for damage in a contract of sale 3.6.1 General principles 3.6.2 The requirements of a purchase to be perfecta and the influence on risk 3.6.3 The influence of mora (breach) on the risk 3.7 The passing of ownership 3.7.1 Cash purchases 3.7.2 Credit purchases 3.7.3 Sales transactions under the Credit Agreements Act 3.8 Conclusion STUDY UNIT 4 p43 Contracts for repairs
4.1 Introduction 4.2 Quotations for repairs 4.3 Price fixing by third party 4.4 Conclusion STUDY UNIT 5 Terms of a contract p48
5.1 Introduction 5.2 The express terms of the contract 5.2.1 The meaning of express terms 5.2.2 The different types of terms of contracts 5.2.3 Terms incorprated by reference 5.3 Implied (tacit) terms of the contract 5.3.1 Different implied terms 5.3.2 The ways in which ex consensu implied terms may become part of the contract 5.3.3 The interpretation of implied terms 5.4 Conclusion ii
STUDY UNIT 6
Interpretation of the contract
6.1 Introduction 6.2 General rules for the interpretation of contract 6.2.1 The words and symbols used in the contract 6.2.2 Presumtions regarding the parties’ intentions 6.2.3 The parol evidence or integration rule 6.2.4 Rectification of written contracts 6.2.5 Permitted extrinsic evidence 6.3 Conclusion STUDY UNIT 7 Breach of contract p66
7.1 Introduction 7.1.1 Default of debtor 7.1.2 Default of creditor 7.1.3 Positive malperformance 7.1.4 Repudiation 7.1.5 Prevention of performance 7.2 Legal remedies for breach of contract 7.2.1 Remedies aimed at execution of the contract 7.2.2 Cancellation 7.2.3 Damages 7.2.4 The penalty clause 7.3 Insolvency as cause of breach of contract 7.3.1 General background 7.3.2 The effect of sequestration on contracts 7.4 Conclusion STUDY UNIT 8 Agency representation p84 8.1 Introduction 8.2 The meaning of agency 8.3 The establishment of representative capacity 8.4 The effect of agency 8.5 The doctrine of the ‘undisclosed principal’ 8.6 The termination of representative capacity 8.7 Conclusion
STUDY UNIT 9
Legal framework for purchasing in South Africa p90
9.1 Introduction 9.2 Legal framework for purchasing in South Africa 9.3 Conclusion
PREFACE Welcome to this module that will introduce purchasers and supply chain personnel to the South African legal system in so far as it addresses the general principles of the law of contract. Whenever something is sold or bought a number of legal factors are involved. These are sometimes not so obvious, and can easily cause problems for parties who are ignorant of them. It is therefore essential for students in purchasing and supply management to be aware of these factors to facilitate the task of purchasers. The principles in this guide are applicable to the transactions you are involved with to procure something for your organisation. Although the procurement of services often forms part of your task, the purchasing of services falls outside the scope of the law of contract and thus this study guide. There is no prescribed book for this module. You will be examined on the information contained in this study guide.
The study guide consists of nine study units, the first five concentrating on the principles of the law of contracts; study unit six covers the interpretation of contracts, which is particularly important if parties to a contract should disagree after the contract had been concluded and end up in for litigation; study unit seven covers breach of contract; study unit eight agency representation; and nine some issues on the development of black economic empowerment (BEE) through organisational procurement in South Africa. Each study unit starts with a table of contents and then mentions the learning outcomes and issues that will be covered in order to realise the outcomes. The idea is to tell you what the study unit is all about. The learning outcomes are important. You must understand them because they form the core of the study unit. You should do the assessment questions at the end of each study unit because they cover the core issues of each study unit. These questions will be used in the examination. The icons used in the study guide are self-explanatory and you should use them to help you work your way through the study guide.
Keep your tutorial letters in a safe place because they contain important information on assignments, the lecturers’ contact details, prescribed books, and so on. We trust that you will enjoy your studies! ICONS USED IN THIS STUDY GUIDE
MODULE FRAMEWORK The module, Legal aspects in Purchasing is summarised diagrammatically below.
Study unit 1:
General principles of the law of contract
Study unit 2:
Study unit 3: Study unit 4: Study unit 5: Study unit 6: Study unit 7: Study unit 8: Study unit 9:
Contracts of sale Contracts for repairs Terms of a contract Interpretation of the contract Breach of contract Agency representation Legal framework for purchasing in South Africa
MODULE AIM The aim of the module is to introduce you to the legal aspects applicable to purchasing contracts
MODULE OUTCOMES You must be able to: • • • • • • • explain the general principles of law of the contract understand the different terms of a contract interpret contracts define and expound contracts of sale discuss the different forms of breach of contract in detail explain agency representation give a short overview of the legal framework of purchasing in South Africa
STUDY UNIT 1 GENERAL PRINCIPLES FOR THE LAW OF CONTRACT
CONTENT Introduction 1.1 1.2 General principles of the law of contract 1.3 Requirements for the formation of a legally binding contract
STUDY UNIT AIM The aim of this study unit is to introduce you to the basic principles of the law of contract.
STUDY UNIT LEARNING OUTCOMES After studying this study unit you should be able to: • • name and discuss the requirements for the formation of a valid contract define the concept of consensus
KEY CONCEPTS • • • • consensus legal capacity juridical possibility formalities
Study this section in the study guide, as there is no prescribed book for this module.
1.1 INTRODUCTION The purchasing department regularly concludes contracts with suppliers for the delivery of goods and services to the enterprise. Thus the conclusion of contracts is one of the routine functions of this department. An ordinary purchase order is an example of a contract and is therefore subject to the legal provisions of the law of contract. Although one cannot expect purchasers to have an indepth knowledge of the law of contract, they should have sufficient knowledge to protect the enterprise from damage and from legal action being taken against it. Most buying and selling transactions in the South African national economy occur indirectly through representatives (such as the purchaser who is responsible for an enterprise’s purchases). Thus where purchasers enter into lawful contracts on behalf of the enterprise and create rights and obligations for it, it is essential that the representative should have knowledge of these rights and obligations.
The purchaser also has the task of obtaining the highest possible value for the enterprise, which means that the right quality and the correct quantity should be purchased at the right price. A study of the legal aspects involving the purchaser should not be seen as an indication that the enterprise and its suppliers are continually involved in legal conflicts. From the nature of the business that is conducted, it is in the interests of all the parties concerned to create and maintain good relations and a situation of trust. However, the latter goal does not imply that knowledge of legal principles (especially the law of contract) is not required. Good relations and a position of trust may be based on the following factors, among others: • Knowledge of the rights and obligations of each party as well as the procedures and requirements to be complied with in various situations sets a generally acceptable standard for negotiations and gives certainty to both parties. Continued strict fulfilment of the obligations and legal 2
requirements and respect for the rights of the other party can therefore be proof of good intentions as well as the reliability of the party concerned, and this will reinforce the position of trust. A knowledge of and compliance with the relevant legal principles on the part of purchasers can only contribute to good relations and a position of confidence as well as civilised settlement of disputes, should disputes arise. 1.2 GENERAL PRINCIPLES of THE LAW OF CONTRACT • A contract is an agreement between two or more people. There may even be several persons involved in one contract. Try to think of such an example in your current work situation. Not all agreements are contracts.
I can make an agreement with my best friend to go to the movies tonight, but this is simply a social appointment and not a contract. The difference then, between a mere agreement and a contract is the fact that in case of the latter there is a serious intention to be legally bound between the contracting parties. Contracts bring about certain rights and obligations. A contract is a legal bond or a tie between two persons, in terms whereof one has the right to claim performance (the right of the creditor) and the other has the obligation to perform (the obligation of the debtor). Thus the two most important aspects of a contract are the parties’ intention to create rights and obligations, and the legal results that follow. REQUIREMENTS FOR THE FORMATION OF A LEGALLY BINDING CONTRACT
There are mainly five requirements for the formation of a legally binding contract:
(1) Consensus. There must be consensus between the parties.
Consensus as a requirement for the formation of a contract 3
(2) Legal capacity. The parties must have the legal capacity to conclude a contract. In South Africa this capacity is normally conferred upon individuals at the age of 18 and upon legal persons, such as a company or closed corporation, when such entity is created. Between the ages of seven and 18 a parent or guardian must assist the minor if the latter is to incur any contractual obligations to his/her detriment. (3) Physical executability. The performance must be possible at the time the contract is concluded. Performance will be impossible only when, for instance, it is objectively impossible for any one on earth to deliver the object of a contract of sale. This will be the case when the object is nonexistent and/or it is economically not viable to deliver it. Hence no valid contract of sale can be concluded for the delivery of a horse named Kolbooi if it is dead at the time of conclusion of the contract. Neither can a valid contract of sale be concluded for the sale of a box of cigars that was the property of Mr Winston Churchill, valued at R200 00000 but buried beneath an apartment block in the heart of London and that will cost R100 million to salvage. (4) Lawful.
The conclusion, performance and purpose of the contract must be lawful or legal. For your purposes, this requirement entails that the conclusion of the contract as such must not be forbidden by law. For example, the sale of children or slaves is forbidden by law. Neither will a contract to assassinate another person be valid. (5) Formalities. Prescribed formalities, if any, must be complied with. In certain instances, legislation prescribes that a specific contract will be valid only if it is reduced to writing, for example credit agreements and the alienation of land. Most important point is that all these requirements must be met to create a valid contract, whether the contract is reduced to writing or not. Please note that a verbal agreement is perfectly valid – as valid as any written contract. However, proving the content of a verbal contract may be extremely difficult in the event of litigation. On the other hand, a written contract, proverbially, speaks for itself. 4
will be discussed in greater detail in study unit 2.
The requirements of the contract and elements of the requirements are summarised in the following table. REQUIREMENTS FOR THE FORMATION BINDING CONTRACT OF A LEGALLY
Intention made known
General rule: no formalities required Exceptions
Create binding Marriage legal rights and duties Offer and Mental acceptance deficiency Factors that influence consensus Mistake Influence of alcohol and drugs Prodigals
Misrepresentati Insolvency on Duress Undue influence
The most important requirements will be discussed and explained in the following study units. In study unit 2 the dimensions of ‘consensus’ will be further explored. ASSESSMENT Name and discuss the five requirements for the formation of a valid contract
STUDY UNIT 2 CONSENSUS
CONTENT 2.1 The concept of consensus 2.2 General principles of consensus 2.3 Offer and acceptance 2.3.1 The offer 2.3.2 Lapsing and the offer 2.3.3 The acceptance 2.4 The moment and place of formation of a contract 2.4.1 The moment 2.4.2 The place 2.5 Lack of consensus (mistake or error) 2.5.1 Mistake or error 2.5.2 Essential mistake 2.5.3 Non-essential mistake 2.6 Improper obtaining of consensus 2.6.1 Misrepresentation 2.6.2 Duress 2.6.3 Undue influence 2.7 Standard contracts and contract forms 2.8 Amendment of a contract 2.9 Conclusion
STUDY UNIT AIM The aim of this study unit is to explore the dimensions of consensus
STUDY UNIT LEARNING OUTCOMES After studying this study unit you should be able to: • Explain the most important requirements for an offer • List the circumstances in which an offer will lapse. 6
• Explain the main requirements for an offer to be valid • Discuss the “moment” and “place” of the formation of a contract • Tabulate the types of errors (essential and non-essential) and give an example of each. • Discuss the various ways in which consensus can be obtained improperly.
KEY CONCEPTS • • • • • • • • • • consensus common intention lapse of offer acceptance lack of consensus mistake (error) essential mistakes non-essential mistakes misrepresentation modification
Study this section in the study guide, as there is no prescribed book for this module.
THE CONCEPT OF CONSENSUS
Consensus means the meeting of the minds or full agreement between the parties before entering into a contract. 2.2 General principles of consensus A valid contract can only come into being if the parties concerned have reached unanimity about the essential elements thereof. This unanimity is made known to each other, by means of declarations of intent of the parties, usually in the form of an offer and an acceptance. The law looks at specific considerations to determine whether or not unanimity was achieved. These considerations relate to the following:
(1)The parties must be ad idem (in full agreement) about their own identity. For example: If A makes an offer to a company (ABC Furniture) with the intention that only ABC Furniture can accept the offer, an acceptance by Mr ABC in his personal capacity (who is the owner of company) will not create a contract. (2)The parties must be ad idem that they wish to be legally bound. This means that the parties must intend to create legally enforceable rights and duties. A gentlemen’s agreement between neighbours A and B in terms of which B undertakes to transport A’s child together with B’s own children to school every morning, constitutes no contract, because the parties do not intend to create legal obligations. A will not be able to sue B in law should B occasionally be unable to transport the children. Neither will B be able to render an account to A for transporting A’s child. However, when A purchases a bus or train ticket, a valid contract is created and A can insist that the transport company indeed renders the transport for which he has paid. (3) Common intention. The parties must agree to the terms of the contract. Where A intends to sell, while B intends to lease, no contract will come into existence. 8
(4)The parties must be aware of each other’s intentions. This principle entails one party making an offer which is followed by an acceptance by the other. Only when the offeror understands that his/her offer has been accepted can one say that there is true consensus. In other words the acceptance of the offer must be communicated (in one way or the other) to the other party. This can be done by a declaration in writing; spoken words or even people’s behaviour. However, in many instances, the offer and acceptance cannot always be distinguished clearly therefore, it is extremely important to get a better understanding of the concepts: offer and acceptance. 2.3 OFFER AND ACCEPTANCE
2.3.1 The offer
A person making an offer to sell or buy something is called an ‘offeror’ and the person who the offer is directed at, who should respond to the offer, is the ‘offeree’. An offer is a declaration of intention whereby the offeror makes known on what terms he/she wishes to be legally bound towards another party. The most important requirements for an offer: (1)The offer should be precise, complete and clear so that the addressee (potential acceptor or offeree) can regard it as a fixed offer to which he/she can, as it were, reply only “yes” or “no”. All the rights and obligations should therefore appear clearly from the offer. (2)The offer must contemplate acceptance and a resultant obligation(s). Generally speaking, an advertisement cannot be regarded as an offer for the sale of a specific product, but merely as an invitation to conduct business. The intention of the parties, however, will
be the decisive factor. (3)The offer must come to the offeree’s attention.
2.3.2 Lapsing of the offer A valid offer will lapse (fall away) in the following circumstances: (1) When the offeror revokes the offer (withdraw the offer prior to acceptance by the offeree. This the offeror can do at any stage before the offer is accepted, directly or indirectly – directly by notifying the offeree of the revocation, or by, say, offering or selling the object of the offer to someone else. (2) When the offeree rejects the offer, directly or indirectly. The offeree will directly reject the offer by turning down the offer or indirectly reject the offer, by making a counteroffer to the offeror. Example: Person A offers an ‘Indigo’ printer for sale to person B for R2000-00. B makes a counteroffer to purchase the printer for R1 50000. Should A accept the counteroffer, A’s initial offer lapses. (3) After expiry of a reasonable or specified period of time prior to acceptance. (4) The death of the offeror or offeree prior to acceptance, because no personal right exists yet for either party. 2.3.3 The acceptance An acceptance is a declaration of intention whereby the offeree unconditionally accepts the offer of the offeror, verbally, in writing or tacitly (by way of conduct).
No contract exists until an acceptance, which satisfies certain requirements, is made. The main requirements for the acceptance of a purchasing or sales contract, for purposes of this module may be summarised as follows: (1)The acceptance must be unconditional, otherwise there is obviously no consensus. If new terms are tendered in the acceptance, it constitutes a counteroffer. However, mere enquiry to clarify an aspect of the offer does not constitute a 10
counteroffer. (2)The acceptance must be made by the person to whom the offer is addressed, if it was the intention of the offeror that the offer may only be accepted by the party addressed (the offeree) and not another third party. (3)The acceptance must be conveyed to the offeror, unless the offeror waived his/her right to be informed of the acceptance, for example, where the offeror placed an order for goods with the offeree. (4)The acceptance must be a reaction to the offer. A person cannot accept an offer of which he/she is not aware. (5)The acceptance must comply with any statutory formalities (e.g. writing in the event of alienation of land) or requirements set by the offeror, if applicable. 2.4 THE MOMENT CONTRACT AND PLACE OF FORMATION OF A
2.4.1 The moment The general principle, based on consensus, is that the contract is created at the moment when the offeror is informed of the acceptance by the offeree (acceptor). When the parties are in each other’s presence, informing the offeror of the acceptance is simple and usually creates no problem. Even if the parties are not in each other’s company, the acceptor may inform the offeror of the acceptance by way of telephone, fax or mail. In these circumstances, the contract is still created when the offeror becomes aware of the acceptance, for example, when he/she reads the letter of acceptance. However, the offeror may dictate the manner in which the acceptance must be affected and may even waive his/her right to be informed of the acceptance. The offeror may waive his/her right to be informed either expressly or tacitly: • Waiving his/her right to be informed expressly. The 11
offeror may instruct the offeree to immediately forward goods on receiving an order placed with the offeree by the offeror. In this instance, the contract is created the moment the acceptor complies with the order by selecting the goods and preparing the same for forwarding to the offeror. • Waiving his/ her right to be informed tacitly. The offeror may mail (e-mail, fax or postal) the offer to the offeree without instructing the offeree to inform the offeror of the acceptance. Should the acceptor then mail the letter of acceptance, the contract is created at the moment the acceptor mails the letter of acceptance.
2.4.2 The place
The general principle here is that the contract is created at the place where the final act necessary to constitute the contract was performed. As a rule it is therefore the place where the offeror learned of the acceptance of the contract. However, should a last signature, for instance, be required to constitute the contract, the contract is created where the last signature is attached to the contract. The place where the contract is concluded, can be of paramount importance, for example, to determine which court will have jurisdiction in the event of litigation. 2.5 LACK OF CONSENSUS – MISTAKE Since consensus is the basis of a contract, it stands to reason that no contract will be established if consensus is lacking. A lack of consensus is called a ‘mistake’ or ‘error’.
2.5.1 Mistake (error)
Mistake (error) arises when the parties appear to have reached consensus, but this is really not the case, because of a misunderstanding about any of the essential terms of the contract. The mistake or misunderstanding must affect consensus between the parties with regard to an aspect that forms an essential part of the contract, e.g. the nature of the object (merx), specifications of 12
object, nature of agreement (sale vs. lease), purchase price, etc. It is important to know how different mistakes or errors can influence the validity of the contract. To enable one to make this distinction, it is necessary to differentiate between essential (or material) mistakes (or errors) and mistakes (errors) that are not regarded as essential – nonessential mistake. If a mistake is regarded as essential, there is a total lack of consensus and no contract is established. The error involved in a nonessential mistake does not influence the validity of the contract but may make it voidable at the instance by one of the parties.
2.5.2 Essential mistakes
The following types of errors are material (essential) mistakes in the contract and have the effect that no contract is created. In other words the contract will be void. • Error in respect of the nature of the contract (error in the intention (had in mind) of X (offerer) to rent equipment, but it was the offeree’s (Y’s) intention to purchase it. •
negotio), is regarded as essential, for example, where it was
Error regarding the identity of the other party (error in
persona) is regarded as essential when the identity of the
party constitutes a fundamental part of the contract. An example of this would be when X thinks that he obtained the services of the famous singer Y for a concert, while singer Y is in fact another person with the same name. • Error in respect of the identity of the object of the contract (error in corpore) is regarded as essential, for example, where you have the intention to purchase diesel fuel on behalf of Transnet, but the supplier understands that you wish to buy paraffin.
2.5.3 Non-essential mistakes (nonmaterial)
The following types of errors are not essential and accordingly the result is not a completely void contract, but only what we call a voidable contract. In other words the parties will have a choice whether they would like to continue with the contract or not. The party affected by the non-essential mistake will have the right to 13
cancel the agreement if he/she chooses to do so. • Error concerning a non-material characteristic or quality of the object of the contract (error in substantia), is not regarded as essential for example, when you buy a certain type of diesel pump on behalf of your enterprise, and you think that you buy model A, but in fact you buy model with certain other characteristics. Mistake about motive is not regarded as essential, for example, when you order a certain type of luxury touring bus for Autonet because you erroneously believe that tourism in South Africa is going to increase in the coming season, and this does not happen.
Bear in mind that the above discussion does not provide an instant solution to problems pertaining to consensus or errors and that even the courts are not able to classify each and every error as one of the above. In conclusion, we wish to point out that where both parties make the same mistake, one speaks of common error. This can happen, for example, where you and your supplier believe that an imported type of grain contains no toxins and satisfies health regulations, but you subsequently learn that the grain does in fact contain an excess of toxins. The creation of the contract is dependent upon the understanding of both parties that the product satisfies the supposed qualities. 2.6 IMPROPER OBTAINING OF CONSENSUS It sometimes happens that the consent of one of the parties is obtained in an improper way. There is in fact consensus between the parties, but the consensus was achieved by with improper dealings. We say that such a contract is voidable.
Consensus can be obtained improperly in various ways: 1) Misrepresentation 2)Duress 3)Undue influence
When a party is persuaded through misrepresentation to enter into a contract which he/she would otherwise not have concluded, the law grants a certain extent of relief, depending on the type of misrepresentation in question. • Intentional (fraudulent) or negligent misrepresentation arises (e.g. from a supplier) when the following elements are involved: – There must be a misrepresentation which entails conveying a false statement through word or deed (e.g. on the quality of the material). – The misrepresentation must have been made by the other contracting party (e.g. supplier) or someone working for him/her (sales person). – The misrepresentation must be the cause of the agreement as such (based on the information provided, e.g. quality). – The misrepresentation must be made intentionally or negligently. In this instance, the misled or innocent party may approach the court to declare the contract void – i.e. the innocent party has the right to resile from or cancel the contract. He/she may, of course, also choose to uphold the contract. Whether the innocent party rescinds or upholds the contract, he/she may claim damages, provided she/he can prove damage. • Innocent misrepresentation, as indicated by its name, arises when misrepresentation is made without any intention or negligence on the part of the party “responsible” for the false 15
statement of fact (e.g. if a salesperson did not have the technical knowledge and was under the impression that this organisation could deliver the needed quality). Generally speaking, the misled party has no remedy in this instance. However, in this regard specific provision is made for remedies in the event of a contract of sale, as you will learn in study unit 3.
In cases where the contract is entered into because of duress or fear instilled in the innocent consenting party, there is consensus, but the contract is voidable at the choice of the innocent party. An example will be a hard-selling salesman steamrolling a buyer into a contract. The innocent party can claim damages irrespective of whether he/she upholds or rescinds the contract, provided he/she has suffered damage and can prove it.
2.6.3 Undue influence
Where one of the parties obtains an influence over the other (e.g. a buyer’s wife works for a supplier and the supplier threatens to fire her if he/she does not get the contract) and uses this influence unscrupulously to induce the latter to contract, the contract will be voidable. 2.7 STANDARD CONTRACTS AND CONTRACT FORMS Parties to a contract often use pro forma contracts, for example, lease and loan agreements frequently used by financial institutions; application forms for a credit card or cheque account; offers to purchase property used by estate agents and standard contracts to purchase standard materials or products for organisations.
These contracts have the advantage that they can easily be completed and constitute valid contracts when signed by both parties. However, these contracts also propose inherent dangers. Almost all of these contracts may contain, inter alia, a nonmisrepresentation clause that excludes any liability for negligent and innocent misrepresentations. The fine print, usually on the reverse side of the document, forms part of the contract. Hence the written document represents the complete contract between 16
Except where essential error was present and can
always be raised as a defence if it was present, the so-called ‘parol
evidence rule’ states that, generally, no evidence outside a written contract is allowed to prove what is recorded in the written document. The imminent danger is that a party to the contract is forced to rely wholly on the written document in litigation. When making use of such a pro forma contract, it is advisable to scrutinise it to ensure that one is satisfied with the content. It is legally in order to delete certain clauses and amend or add others. Parking tickets, dry-cleaning receipts, bus and train tickets and various other tickets, also constitute contracts even though neither party signs the ticket or receipt. This subject is discussed in more detail in study unit 4. 2.8 AMENDMENT OF A CONTRACT (MODIFICATION) As pointed out above, verbal contracts are just as valid as written documents provided that they comply with the basic requirements.
Verbal and written contracts may, generally speaking, be amended or even cancelled verbally or tacitly by way of conduct, if the parties to the contract have consensus on the amendment or cancellation. If verbal or tacit amendment or cancellation is prohibited by law or by the parties themselves, the contract must be amended or cancelled in writing. At all times, however, it is essential that the parties have consensus on the amendment or cancellation. Bear in mind that although many verbal agreements are legally valid and enforceable, they can easily give rise to misunderstanding, uncertainty and problems in the law of evidence. Thus it is recommended that any important issues/agreements be reduced to writing. This is particularly important when you purchase goods or services for your organisations.
The parties make known their consensus to each other by means of expressions of intention, known as an offer and an acceptance. This offer and acceptance must satisfy certain requirements in order to be valid. Various factors influence the consensus between the parties. If there is no consensus between the parties, there is no contract. BIBLIOGRAPHY 1. Van der Merwe 1998. Contract, general principles, Cape Town: Juta. Van Jaarsveld, SR. 1988. Suid-Afrikaanse handelsreg, vol I. 3de uitgawe. Johannesburg: Lex Patria:109. University of South Africa 2005. Study guide for CLA101S/BUL1M1-Z/CLA 101-A. Pretoria: UNISA
ASSESSMENT These questions test your insight. It will be to your benefit to answer them. 1 2 3 4 Explain the most important requirements for an offer. List the circumstances in which an offer will lapse. What are the main requirements for an offer to be valid? Discuss the “moment” and “place” of the formation of a contract. Tabulate the types of errors (essential and non-essential) and give an example of each. Discuss the various ways in which consensus can be obtained improperly.
STUDY UNIT 3
CONTRACTS OF SALE
STUDY UNIT AIM The aim of this study unit is to introduce you to the fundamentals of contracts of sale.
CONTENT 3.1 Introduction 3.2 Defining a contract of purchase and sale 3.3 Requirements for the creation of a contract of purchase and sale 3.4 The seller’s obligation 3.4.1 The seller’s duty to protect 3.4.2 The seller’s duty to deliver 3.4.3 The seller’s liability for latent defects 3.4.4 The manufacturer’s and dealer’s liability for latent defects 3.4.5 Liability on grounds of dicta et promissa of the seller 3.4.6 The seller’s liability for eviction 3.5 The purchaser’s obligation 3.5.1 The purchaser’s obligation to pay the purchase price 3.5.2 The purchaser must take possession of the delivered merx 3.6 Risk for damage in a contract of sale 3.6.1 General principles 3.6.2 The requirements of a purchase to be perfecta and the influence on risk 3.6.3 The influence of mora (breach) on the risk 3.7 The passing of ownership 3.7.1 Cash purchases 3.7.2 Credit purchases 3.7.3 Sales transactions under the Credit Agreements Act 3.8 Conclusion Assessment 19
STUDY UNIT LEARNING OUTCOMES After studying this study unit you should be able to: • • • • name the characteristics of a contract of sale name and discuss the requirements for the creation of a contract of sale describe the rights and obligations of the purchaser and seller describe the transfer of ownership rights
KEY CONCEPTS • • • • • •
purchase price latent defects obligations liabilities risk
Study this section in the study guide, as there is no prescribed book for this module.
3.1 INTRODUCTION In the preceding study unit you studied the basic principles of the law of contract. These principles form the background to all contracts. However, there are various types of contracts, each with its own unique characteristics. Nevertheless, factors such as the creation, consequences and the cancellation of contracts are dictated largely by the general principles discussed in the previous study unit. In this study unit we will emphasise only those requirements in a contract of purchase and sale that are different from other contracts. The contract of purchase and sale is important for this module because it is undoubtedly the type of contract that purchasers most often encounter.
3.2 DEFININING A CONTRACT OF PURCHASE AND SALE
A contract of sale can be regarded as a reciprocal agreement in terms whereof one party (the seller) undertakes to supply a thing (the merx) to the other party (the purchaser) in return for a purchase consideration in the form of money. It is the intention of the parties that the purchaser will acquire the ownership of the merx. You will notice here, as in the case of the general principles of the law of contract, that the intention of the parties is decisive. Deeds of lease also involve a thing and a pecuniary consideration, but the intention of the parties is merely to make the temporary use of the thing available to the lessee. 3.3 REQUIREMENTS FOR THE CREATION OF A CONTRACT OF PURCHASE AND SALE The essential requirements for the creation of a contract of sale are as follows: • • • The merx must be determined or determinable. The purchase price must be fixed or determinable. The parties’ intention must be to transfer ownership to the purchaser. (This will be discussed further in section 3.7).
The merx and purchase price need further clarification 3.3.1 The merx The thing to be sold (the merx) does not necessarily have to be of a material nature but may also comprise rights such as servitudes, mineral rights or even personal rights. Anything can be the object of a contract of sale – thus movable or immovable property, corporeal or incorporeal things, or even future things. The contract of sale grants a legal claim to the purchaser in respect of delivery of the merx.
3.3.2 The purchase price Requirements of the law regarding price are as follows:
(1) The price must be payable in money
In cases where the consideration does not comprise money, we are not dealing
with a contract of sale, but possibly with barter or even another type of contract. The price must be expressed in the prevailing currency (currently rands and cents) or in a currency that can be converted into the prevailing currency.
(2) Another performance as part of the price
This type of performance is especially prevalent in the motor industry where the buyer can trade in his/her car on a new one as part of the purchase price. Another example will be when you buy new equipment and the supplier is willing to ‘trade-inn’ the old equipment. As usual, the attitude of our legal system is that one should study the parties’ intentions. However, if it is not possible to determine the intention, the part of the purchase consideration that is the greatest, is decisive. If doubt still exists – that is, whether the parties intend it to be a contract of sale or exchange the contract is regarded as a contract of sale since this is the most common type of contract.
(3) A contract of purchase and sale without ascertaining the price In cases where the purchaser buys the thing without first ascertaining the price, our legal system assumes that the parties agreed tacitly that the purchaser would pay the prevailing (current) price for the thing. The purchase of a thing at a reasonable price is, however, invalid because of the problems that exist in determining what is reasonable.
(4) Fixing the price (i) General requirements:
The usual method is for the parties themselves to specify the price. They can, however, appoint a third party to determine the price, in which case the price will be valid unless it is clearly excessive. But, it is invalid for the parties to agree that only one of them will be 22
responsible for fixing the price. Furthermore, the price can be expressed in price per unit or in total. If the price is specified per unit, the fact that the number of units has not yet been specified makes no difference to the validity of the contract. However, there should be a method for calculating the price – if this is not the case, one of the essential requirements of a contract of purchase and sale is missing, in which case the contract cannot be created.
(ii) Ordering without specifying the price
It is possible to conclude a contract of sale without specifying the price. In such a case one can assume that it was the parties’ intention that the current price would be paid (Mostert & Joubert 1972). The current price is either the price for which the type of thing is normally sold (the ruling market price) or the price that the particular seller usually asks for the thing. If there is no current market price, there is no criterium or method according to which the price can be determined, and also no contract of sale. In most cases, the seller would send the purchaser an invoice, account or other document indicating the price the seller is asking. If the price asked exceeds the current price, the purchaser cannot be compelled to pay the price demanded. If the purchaser does pay the asking price, this is regarded as the contract price. In some cases the words, “to be advised”, are written on the purchaser’s order form by the purchaser.
Normally, the person who uses these words indicates that he/she does not wish to conclude a contract without the price being determined. This happens in cases where the person who places an order is uncertain of the current price or the asking price. It can also happen when there is no criterium or market price according to which the price can be determined. The person who places the orders wishes to be informed about the price first before he/she concludes the contract of sale. Use of the words “to be advised” may create the impression that one of the parties (in this case the seller/supplier) is appointed to 23
fix the price. This is, however, not the case since the fixing of the price in a contract cannot be left to one of the parties, because a term to that effect is deemed to be too vague and the price will therefore be uncertain and indeterminable. For example, the other party may argue that the price is excessive. It can also be reasoned that such a clause is invalid, because the parties do not have consensus about the price. The parties do, however, have consensus if both of them agree that they will accept and be bound by the determination of a third party. (A)). The parties’ intention is, however, decisive. Here normal business practices can provide an indication of what the parties meant. If the parties intended that the seller should fix the price and that the purchaser would be bound by it, there is no valid offer/acceptance and no agreement. Of course it may also be the parties’ intention that the supplier should first stipulate the price and for the person who places the order to decide whether or not he/she is satisfied. In such a case the order is not an offer, but merely an invitation to do business. If any essential aspect of the contract is left open for subsequent agreement, the order is not an offer.
If the supplier informs the person who places the order about the price, then he/she makes an offer to supply the specific product to the person at that price, and the latter can decide whether or not he/she wishes to accept the offer. If the product is delivered before the price is stipulated, the supplier can reclaim it, or the value thereof, if the goods cannot be claimed. It is clear from the above that it is preferable to place an order at a specific price so that it can serve as an offer and result in a binding contract. However, if the parties wish to place an order at a price “to be advised”, the person who places the order should bear in mind that he/she is only extending an invitation to do business. He/she must not wait until the order is delivered and then find that the price is too high. The best course of action in this case would be to set a specific date for the supplier on which he/she should 24 (Westinghouse Brake &
Equipment (Pty) Ltd v Bilger Engineering (Pty) Ltd 1986 (2) SA 555
inform the person who places the order of the price. If the price is communicated by invoice to the person who orders only after delivery has been made, the invoice will be the offer. No valid contract will have been concluded at this stage. If (in the case of contracts without specifying the price) the purchaser pays this price it will be regarded as the contract price.
(iii) Formal requirements for a contract of sale
In principle, our common law does not prescribe any formality such as, for example, the necessity of writing or signing in respect of a contract of sale This has been changed by legislation in some instances such as the following: • the alienation of land in terms of the Alienation of Lands Act, 68 of 1981 which requires the signature of written contracts. Alienation in terms of the Act includes the sale of: 9 any sectional title unit such as a flat 9 any right to claim transfer of land, for example, in terms of a barter or contract of exchange, or a donation 9 any undivided share in land 9 any interest in land, such as a servitude. An important exclusion is land or fixed property bought at a public auction. • credit agreements which must be in writing and signed by the parties property time-sharing agreements which must be in writing and signed by the parties
We shall not delve further into these legal formalities since they do not really concern you as purchasing managers.) 25
3.4 THE SELLER’S OBLIGATIONS 3.4.1 The seller’s duty to protect From the time of the conclusion of a contract of sale, the seller is obliged to take care of the merx until it is delivered. The seller must exercise the care of a reasonable person in caring for the thing in question. The seller is liable for breach of contract if the
merx is destroyed through his/her intentional or negligent
carelessness. If the thing is destroyed and a third party (e.g. a transporter) is to blame, the seller is not responsible, but must cede any claims that he/she has against the third party, to the purchaser. However, in the absence of an explicit term excluding risk, the purchaser carries the risk of the merx being accidentally damaged or destroyed while still in the possession of the seller. (This point is discussed in more detail later in the study unit, in section 3.6). Purchasers must make sure that the purchase-sales contract contains provisions to the effect that risk will only pass with the physical delivery of the merx If the purchaser remains in mora (breach or fails) to receive the merx (thing), the seller can only be held liable if the thing is damaged or perishes because of his/her intention or gross negligence. As a result of the purchaser’s mora, the seller will no longer be liable on the basis of ordinary negligence. His/her duty to protect is alleviated. If the seller neglects to deliver the thing on time and it perishes after the delivery date, he/she will be liable in all respects unless he/she can show that the thing would have perished even if he/she had delivered on time.
3.4.2 The seller’s duty to deliver
(1) The meaning of delivery
As you will have gathered from the preceding discussion, the seller is obliged to deliver the thing to the purchaser. The seller must give the purchaser full and unhindered possession of the merx. In reality this means that the seller must make the thing available to the purchaser and not necessarily that the seller must search for and find the purchaser in order to deliver the thing to him/her.
(2) How delivery occurs
In the case of movables, a distinction is made between actual and constructive delivery. In the case of actual delivery, the transfer of physical possession actually takes place, for example, the handing over of the thing. In the case of constructive delivery, the emphasis is on the intention of the parties. There are various possibilities. The merx may be pointed out or something symbolic may be handed over (e.g. car keys in the case of the sale of a car). The purchaser may already be in possession of the merx, say, as lessee, and then ownership is transferred sometime later. Likewise, the seller may retain possession of the merx, but no longer as owner.
Immovables, such as, land cannot be delivered and are transferred by way of registration in the office of the Registrar of Deeds in the name of the purchaser. In the case of a legal claim (personal right), transfer is effected by way of cession. Cession is the legal phenomenon by which a personal right (right to claim performance from another person) is transferred from one person to another. The transferor is known as the cedent and the person receiving the right is called the cessionary. Cession is quite common in the commercial world, for example, many finance transactions involve a cession of rights and the cessionary then receives and holds all the rights and powers that the cedent possessed before. However, this type of sales-purchase contract is seldom the responsibility of a purchaser in his/her official capacity and is thus included in this guide for the sake of interest only.
(3) What must be delivered
It stands to reason that if a purchaser has bought a specific object, it has to be delivered to him/her and must be in the same condition as it was when the contract of sale was concluded. You will probably also remember that the seller has a duty to take care of the thing purchased until the time of delivery. The seller must also deliver all accessories and attachments that belong with the object to the extent that these are not excluded by the contract. The seller must also deliver to the purchaser all the fruits and profits that the thing yields after the conclusion of the contract of sale. Thus if your cooperative purchases a number of cows and the cows calve after the contract has been concluded, the cooperative will also be entitled to the calves, unless this is excluded by the contract. 3.4.3 The seller’s liability for latent defects
(1) General principles
The discussion that follows requires a sound understanding of the principles of breach of contract and liability on account of misrepresentation. As a purchaser you may encounter this aspect of the law from time to time. Our legal system imposes an obligation on every seller to assume responsibility for latent defects in the merx. However, one should not summarily conclude that this specific liability is the only liability that the seller has with regard to latent defects.
The seller may, for example, be guilty of misrepresentation (or breach of contract), as explained in the previous chapter. On the basis of the general principles of the law of contract that we dealt with in the preceding study units, one would expect that the seller of a thing would only be liable for latent defects in the object sold if he/she were guilty of misrepresentation or if he/she had given an express or tacit guarantee. In the case of a contract of sale, however, the seller is held liable for the defects in the merx, even if he/she was unaware of the latent defects and even if he/she gave no guarantee. After all, latent, means concealed or dormant, and a latent defect is thus exactly one of which the seller and purchaser are unaware.
The liability of the seller with regard to certain defects in the thing sold, originates from the Roman law. This liability of the seller grants the purchaser of a thing with latent defects the right to cancel a contract of sale where the latent defect is of a serious nature (with the actio redhibitoria) or to apply for a reduction in price in the event where the reasonable person would still have bought it despite the latent defect, but at a reduced price (with the actio quanti minoris). This situation applies to all contracts of sale and all latent defects which render the merx less useful for the purpose for which it was sold or for which such an object would commonly be used. However, the parties are entitled to exclude the seller’s liability for latent defects by including a so-called voetstoots clause in the contract.
(2) Requirements for liability
Before the seller can be held liable for latent defects the following requirements must be satisfied: The thing must have a defect. The defect must amount to an abnormal characteristic of the thing which renders it less useful for the purpose for which it is usually sold or used. The defect must lie in the object itself and not depend on the purchaser’s specific needs. For example, the purchaser of a water pump for an indoor fountain, cannot be heard to complain that the pump is not suitable to pump water from a river to irrigate his/her land. The defect must not be insignificant. The law does not concern itself with pettiness. The defect must be a latent (concealed) defect. A defect is latent or concealed if: – neither the purchaser nor the seller has knowledge of it – one cannot reasonably expect the purchaser to be aware of it. A purchaser is expected to conduct a reasonable inspection of the merx. The defect must have existed at the time the contract 29
was entered into. If the defect in the thing only developed after the contract was concluded (e.g. during use), the seller will not be liable. This is of course a factual question that will have to be proved.
(3) Scope of the seller’s liability
As explained above, there are two actions available to the purchaser on the basis of latent defects in the merx, namely the demand for cancellation of the contract (actio redhibitoria) and the demand for a reduction in price (actio quanti minoris). A contract of sale can be cancelled if the purchaser can show that owing to the seriousness of the defect, a reasonable person would not have bought the thing if he/she had been aware of the defect. With this action the purchaser can, in addition to the restitution of the purchase price plus interest on this amount, also claim reasonable expenses relating to the thing, from the time of receipt. The purchaser must also return everything that he/she received from the seller, with the exception of anything that perished without his/her fault.
However, in spite of the seriousness of the defect, the purchaser may possibly still prefer to claim only a reduction in price. A claim for a reduction in price can be made subsequent to the purchase of a thing if it can be proved that a reasonable man would in fact have purchased the thing if he/she had been aware of the latent defects, but would have paid less for it. This action can also be used when cancellation cannot be claimed, because the purchaser cannot return the thing through his/her own fault or has renounced his/her right to return it. The amount of the price reduction is calculated as the difference between the purchase price of the product and the actual value of the defective merx.
(4) Waiver agreement
at the time of conclusion
The parties to a contract of sale may contractually exclude the seller’s liability for latent defects. This is the well-known “voetstoots” clause and usually reads as follows: “The seller sells and the purchaser buys the property/ motor car/etc, as it is and the seller shall not be liable for any latent defects.” It must, however, be pointed out that if the seller is aware of a defect in 30
the merx, he/she will still be liable on the basis of misrepresentation if he/she conceals the defect or fails to disclose it to the purchaser.
(5) Latent defects in repairs
The problem of latent defects in repairs requires special attention since in the case of repair work, one cannot always check whether the work has been done correctly and competently. Please note again that strictly speaking, repairs do not belong under the heading of a contract of sale. The topic is, however, discussed here because important questions about latent defects can also be raised and Purchasers also purchase services for their organisations. Van Jaarsveld (1998:851) refers to this type of contract as a ‘contract of the letting and hiring of services’. A contract of the letting and hiring of services can be defined as a reciprocal agreement between someone who requests that the work be done (mandator) and the person accepting the work (contractor or mandatory), in terms of which the latter undertakes to build, manufacture, repair, modify or maintain a physical thing within a certain time, and the mandator undertakes to remunerate the contractor or mandatory in return.
Repair or maintenance work is therefore not a contract of purchase and sale and is consequently also not subject to the same legal principles as contracts of purchase and sale. The main obligation of the person who accepts the work is to complete the agreed task strictly in accordance with the provisions of the contract and the plans and/or specifications submitted. He/she also undertakes tacitly to complete the relevant work skilfully and conscientiously and with the use of suitable materials. The contractor or mandatory is therefore liable for any latent defects in the work that he/she has performed.
3.4.4 The manufacturer and dealer’s liability for latent defects If the seller is the manufacturer of the particular object, or trades in the particular object as a specialist dealer, he/she can also be held liable for consequential damage. Consequential damages results from damage suffered consequence of the use of the merx of a sales contract The appeal case, in
Kroonstad Westelike Boere-Koöperatiewe Vereniging Bpk v Botha and Another (1964 (3) SA 561 (A)), is a key case on this subject. In this case the defendant claimed an amount for damages from the appellant (the cooperative). The cooperative sold a pesticide, Metasystox, to the defendant for the spraying of grain sorghum. However, the pesticide had latent defects which made it unsuitable for the purpose for which it had been purchased, and in the process the purchaser’s (respondent’s) crop was severely damaged. The court ruled that the liability for consequential damage can be attached to the dealer (seller) where he/she is unaware of the latent defect if he/she openly professes to have expert knowledge of the kind of products he/she sells. If the seller falls outside this expert category, he/she is only liable, like an ordinary seller, for price reduction or restitution for latent defects.
Damages cannot be recovered. However, if the seller falls within the above definition (has expert knowledge), he/she, like a manufacturer, is also liable for consequential damage. As indicated above, consequential damages are damages resulting from the use of the product and have wider consequences than damages flowing from the fact that the thing is worth less as a result of the defect. 3.4.5 Liability on the grounds of dicta et promissa of the seller Dicta et promissa means any fundamental statement that the seller makes to the purchaser during negotiations pertaining to the quality of the object purchased. It must extend further than mere puffing, praising or commendation. Whether or not a statement serves as mere puffing, praising or commendation will depend on the 32
specific circumstances. The purchaser of an article can demand the cancellation of the contract or claim a reduced price if he/she entered into the contract and/or agreed to the specified price on the ground of a fundamental statement pertaining to a quality of the merx [dictum et promissum] that the seller made to the purchaser and which subsequently proved to be false. The purchaser has the choice to use the actio redhibitoria or the actio quanti minoris. These are the Latin terms for the two actions ‘return of purchase price’ or ‘reduction in price’ that can be used within the South African legal system to aid the party affected by false statements (dicta et promissa). 3.4.6 The seller’s liability for eviction This part of the law of sales contracts does not form part of the normal duties of purchasing staff in organisations. However, it is important that you take cognisance of the principles involved.
As mentioned earlier, the aim of a contract of purchase and sale is that the right of ownership of a thing is transferred from the seller to the buyer. The seller, however, need not necessarily be the owner of the object in question. All that the law requires is that the seller guarantees that no one with a better right than the purchaser will deprive the purchaser of his/her possession or will disturb him/her in the exercise of his/her rights over of the thing. Thus the seller is liable for any person’s lawful interference in the purchaser’s use and enjoyment as a result of a defect in the title of the seller. Eviction means any depriving of the purchaser of the possession of the merx by another person who proves in a lawsuit that he/she has a better title to the merx than the purchaser, or literally the purposeful divestment of the possession of a thing by a third party who can prove that he/she has a better right or title than the purchaser, in respect of the object. For example, this may happen when a person buys a stolen thing and the real owner traces and recovers his/her property. In this case, as stated above, the seller is liable. If the seller is not the owner, the contract is indeed valid, but the seller may find that it is subjectively impossible for him/her to perform, because he/she cannot transfer ownership. This will constitute breach of contract in the form of malperformance and 33
the usual remedies, cancellation of the contract and a claim for damages will be available to the purchaser. The seller has an obligation to inform the purchaser of any claims that third parties may have on the thing. The seller is also obliged to support the purchaser in his/her defence against the claims of third parties, provided that the purchaser informs him/her timeously of the claim of the third party. The seller is therefore liable if a third party legally encroaches upon the possession and beneficial enjoyment of the purchaser on the ground of a better right that the third party has to the thing in question.
When someone threatens to evict the purchaser, he/she has to inform the seller so that the latter can assist him/her in his/her defence, for example by showing that the seller did in fact have a valid title to the thing. Even if the seller does not come to his/her assistance, the purchaser has to try and defend himself/herself against the claim of a third party. If the third party’s claim is indeed a better right, the seller will be liable even if the purchaser did not oppose the claim. The warranty against eviction can be contractually excluded by the parties. If not excluded, this warranty is automatically applicable to every contract of sale. 3.5 THE PURCHASER’S OBLIGATIONS
In the legal literature, the obligations of the purchaser are less comprehensive than those of the seller. However, for you as purchasing managers, this could be a vital aspect. 3.5.1 The purchaser’s obligation to pay the purchase price The seller must pay the full amount of the contract price in accordance with the provisions of the contract. This means that the purchaser may not offer a smaller amount; may not offer the amount in instalments (unless this was agreed upon); and may not offer a greater sum and insist on change. Furthermore, the purchaser must pay by means of a legal tender. 34
Suppliers often grant rebates or discounts to people who place orders, e.g. discounts for quantity or cash. These rebates or discounts are usually indicated on the supplier’s invoice. As a rule the person who orders has no right to claim a rebate by offering less than the prescribed amount, as explained above. In practice, however, there may be a business practice or tacit agreement that the person who orders may claim a rebate in certain circumstances. The question of implied terms, which are read into the contract as part of it, is discussed in study unit 4. Although the seller is entitled to cash, the purchaser may prove that it was the intention that a cheque or other means of payment would also be acceptable. Such evidence may, for example, arise from previous dealings between the parties or a business practice. The purchaser is entitled to a receipt for payment. 3.5.2 The purchaser must take possession of the delivered
The purchaser must take possession of the object purchased at the place and time where delivery is to take place in terms of the contract. However, if the parties have agreed that the thing must be delivered according to the purchaser’s instructions, the purchaser must give those instructions. In addition, the purchaser is not obliged to • • • single out the thing from others accept a substitute for the object purchased accept a thing that does not satisfy the requirements of the agreement accept delivery in instalments (unless the parties have agreed to this)
If the purchaser fails to receive the thing, he/she is in mora creditoris (failure to fulfil his/her obligations). This Latin term will be discussed under the general principles of breach of contract in 35
study unit 6. 3.6 RISKS FOR DAMAGE IN A CONTRACT OF SALE 3.6.1 General principles If a supplier has no control over damage (e.g.. Fire started by an arsonist or lightning) while still in the possession of the merx, it is a rule of the law of contract that the purchaser’s obligation to pay the purchase price does not fall away if the delivery of the thing becomes impossible subsequent to the purchase having become
perfecta (the contract is legally complete) (see section 3.6.2 below). Thus the purchaser must pay even if he/she does not receive the object at all, or receives it in a damaged state. We refer you back to section 3.4.1 where we stated that the purchaser carries the risk of the merx being accidentally damaged/destroyed while still in the possession of the seller, unless the contrary is explicitly stated in the contract. However, the seller is released from the obligation to deliver the thing in these circumstances or, should the merx not be destroyed completely, the seller’s duty is to deliver what is left of it.
On the other hand, it should be borne in mind that any benefit that accrues to the thing after the purchase has become perfecta, has to be delivered to the purchaser. As is the case with the warranties against latent defects and eviction, the contracting parties are always entitled to agree to any other arrangement regarding the risk or even exclude this tacit/natural provision that applies to every contract of sale automatically ex lege .
The requirements for a purchase to be perfecta and the influence thereof on risk The purchase is perfecta if the following requirements are satisfied: 3.6.2
(1) The purchase price must be determined or readily determinable If things are sold at a price per unit, such as a crop at R200 per 100 kilogram or R300 per unit, but the number of units (requirements) is unknown the purchase price is undetermined and the risk generally lies with the seller until such time as counting, weighing or measuring has been completed. This type of purchase is known as a purchase ad mensuram. Although a valid contract of sale exists (the purchase price has to be fixed or be determinable) the contract price (total value of contract) has not yet been determined. This type of purchase should be distinguished clearly from a purchase per aversionem where a thing as a whole is sold for a lump sum, for example, a herd of cattle for R20 000 or equipment for R100 000. The price and the thing are both certain and fixed in this case, and the risk immediately passes to the purchaser after the sale is perfecta.
The merx must be determined
It must be possible to point out the thing as the object of the purchase. In the case of the so-called alternative purchase, the thing is not yet determined (but only determinable) until the party who must point out the thing has done so, or until the alternative has been destroyed and only one remains. In the case where a quantity of goods of a certain class, degree or description is bought, this is referred to as a purchase of a genus (generic purchase) and the thing is also merely determinable. A generic purchase occurs where, say, the purchaser orders 50 000 litres of diesel fuel; or 5 000 light bulbs of 100 watts each; 50 rolls of 1 000 metres each of a specific type of copper wire; 9 000 HB pencils; or 20 000 sheets of A4 ruled writing paper. In the above examples, the thing will only become determined, and the risk will pass only after the 5 000 light bulbs or the 9 000 HB pencils, which 37 satisfy the definition of the contract, have been identified or set aside. The risk of accidental destruction lies with the seller until the individualisation has taken place to such an extent that the purchaser can take delivery thereof. As from that moment, the risk for accidental damage or destruction passes to the purchaser.
There must be no unfulfilled conditions
A condition in a contract means a provision in the agreement that makes the operation of the contract subject the happening of an uncertain future event that has not as yet been fulfilled. Contracts of sale can in fact be subject to conditions, and these conditions influence the passing of the risk. If the purchase is subject to a condition that has not yet been fulfilled, the seller bears the risk for the accidental destruction and damaging of the thing and cannot recover the purchase price from the buyer. The purchaser can, for example, agree that he/she will buy three containers from the seller if management approve it. If the condition is fulfilled (management approves) the risk passes to the purchaser from that moment, provided of course that the other requirements for the purchase to be perfecta have been met. 3.6.3 The influence of mora (breach) on the risk If the seller fails to perform on time (falls in mora debitoris) the risk for accidental damages or destruction passes back to him/her from the moment that he/she is in mora.
The failure of the purchaser to receive the product, mora creditoris, however, does not let the risk pass back to the seller. (Refer back to section 3.4.1) 3.7 PASSING OF OWNERSHIP The entering into of a contract of sale, contract of exchange or contract of donation does not automatically bring about the transfer of ownership. The receiver only acquires a personal right to delivery of the thing, and only upon delivery is the right of ownership transferred if the person who delivers has the intention to let ownership pass and the receiver has the intention of receiving it. The exceptions to the application of this basic rule of the law relating to the contract of purchase are the following:
3.7.1 Cash purchases In the case of contracts of purchase and sale it is assumed that the parties intended that despite delivery ownership would be transferred only upon the payment of the purchase price, if a cash purchase price has been agreed upon. This is called the price payment rule. In the case where goods are purchased for cash, and the purchaser fails to pay the price, the seller can reclaim the thing even if it has been delivered to the purchaser, provided that it was the intention of the parties that ownership would only pass upon the payment of the purchase price. The seller will therefore remain the owner of the thing. However, if he/she does not reclaim his/her property within a reasonable time, he/she loses this right.
There is a presumption that all sale transactions are cash transactions, unless the contrary can be proved. 3.7.2 Credit purchases In the case of credit purchases, it is assumed that the parties intended that the right of ownership should pass to the buyer when delivery takes place. However, there may be circumstances or provisions in the contract from which other intentions can be inferred. In fact, most credit agreements contain a clause providing that ownership will remain with the seller until the last instalment has been paid. The mere fact that the thing is delivered before the purchase price is paid, is not necessarily a proof of a credit transaction. 3.7.3 Sales transactions under the Credit Agreements Act In the case of instalment sale transactions under the Credit Agreements Act, the position is that ownership passes to the purchaser only upon payment of the last instalment.
In the preceding study units we studied the general requirements for legal contracts and breach of contract. In this study unit we focused on the contract of sale that has its own specific characteristics and requirements which developed over many years since Roman times. This study unit emphasised that a contract of sale must satisfy certain requirements in order to be valid. From the definition and requirements relating to contracts of sale one can infer certain obligations for the purchaser and the seller. Special rules also apply in respect of the risk of accidental destruction of or damage to the object after the contract of sale has become perfecta as well as in respect of the transfer of ownership.
BIBLIOGRAPHY Joubert, DJ. 1987. General principles of the law of contract. Cape Town: Juta:38, 39 & 180. Kerr, AJ. 1995. The law of sale and lease. 2nd edition. Butterworths. Mostert, DF, Joubert, DJ & Viljoen, G. 1972. Die koopkontrak. Durban: Butterworths: 12. Van der Merwe et.al. 1993. Contract law: general principles. Cape Town: Juta. Van der Merwe et.al. 1993. Kontraktereg: algemene
beginsels. Kaapstad: Juta.
Van Jaarsveld, SR. 1988. Suid-Afrikaanse Handelsreg. vol I. 3de uitgawe. Johannesburg: Lex Patria, chapter 37.
ASSESSMENT 1 Answer true or false to the following questions: X is aware of the latent defects in his batch of men’s blazers and accordingly covers himself with the voetstoots clause. Poor Y now has no remedy. A contract of sale is valid only if the seller is the owner of the merx. When the seller is not the owner of the merx, the true owner of the merx will be liable for the interference with the use and enjoyment of the purchaser. A sells a horse named Lost Property to B. A had bought Lost Property at an auction. Two days later C confronts B, proves ownership of the horse and takes Lost Property back. Apparently the horse was stolen two months earlier. B claims his money back from A. A draws B’s attention to a clause in their contract excluding the warranty against eviction. A will still have to pay B, now without money and a horse, some damages. A contract of sale is perfecta when the merx has no latent defects. For a contract of sale to be perfecta one of the requirements is that the merx must be determined. It is accordingly not possible to conclude a valid contract to buy the harvest on the
Define the concept contract of sale. Explain the requirements for the creation of a contract of sale. Discuss the seller’s obligations with regard to a contract of sale. Discuss the purchaser’s obligation with regard to a contract of sale. Explain the risk for damage in a contract of sale. 41
Explain the passing of ownership with regard to a contract of sale.
STUDY UNIT 4
CONTRACTS FOR REPAIRS
STUDY UNIT AIM The aim of this study unit is to briefly introduce learners to contracts for repairs, that falls outside the normal law of contract of sales CONTENT 4.1 Introduction 4.2 Quotations for repairs 4.3 Price fixing by third party 4.4 Conclusion
STUDY UNIT LEARNING OUTCOMES After studying this study unit you should be able to: • describe the concept: contract for repairs • explain why quotations are so important for this kind of contract You must study this study uni t in the study guide as there is no prescribed book for this module.
• • Strip and quote quotation contract
4.1 INTRODUCTION We have dealt with a contract of purchase and sale in the previous study unit and will now have a quick look at a contract for repairs. We include this section in this study guide as many purchasers are also involved with the purchasing of services as part of their normal duties. This study unit might just give you the insight you need to handle this type of agreement or contract. It often happens that the purchaser employs someone to do repairs for him/her but it is not possible to determine a price beforehand, because there is no certainty about the extent of the work and the costs involved. In these circumstances there is a tacit agreement (term) between the client (buyer of the service) and the enterprise responsible for the repairs (Supplier of the service) in terms whereof the client undertakes to pay the repair costs that are reasonable (Ellison
Electrical Engineers Ltd v Barclay 1970 (1) SA 158 (RA)).
4.2 QUOTATIONS FOR REPAIRS
One is inclined to say it would be safer to first obtain a quotation for repairs, especially if major repairs are required. One should first determine whether the quotation is in fact free. As in the case of any other contract, the parties can enter into an agreement about the quotation in order to eliminate all doubt. In the absence of such a formal agreement, the principles that usually apply in this type of business will be applied. There is, for example, a big difference between giving someone a quotation for repairing a structure, say, a building where it is easy to determine the extent of the damage, and repairing machinery where it is impossible to assess the damage without testing the machine or taking it apart.
In the latter case, looking for the fault and dismantling the apparatus may be a complicated business and take time and money, and one cannot reasonably expect the quotation to be free if the person giving the quotation does not do the repairs. In practice, in the case of repairing machinery, the repairers (suppliers) are ordered to “strip and quote”. The interpretation of 44
these words will depend on the practices in the particular industry. If there is any doubt about the interpretation of the term “strip and quote”, uncertainty should be removed by means of an agreement. There are different factors about which disputes may arise if only the terms “strip and quote” are used. Provision should be made for these factors in the contract. These disputes generally arise in cases where the quotation is too high or is unacceptable in other respects, after the machinery has been dismantled.
If the client then wishes to obtain another quotation, disputes may arise about the following: (i) The supplier’s claim for payment to reassemble the machine so that it can be taken to another supplier for a quotation. It is often not possible to transport loose pieces of machinery, particularly heavy mining equipment. As mentioned earlier, the supplier’s obligation in this regard depends on the wording of the contract and if the contract is silent, on the normal practices in the industry. It is therefore safer to make provision for this eventuality in a quotation contract. The supplier’s costs for dismantling if the repairs are not allocated to him/her. The same principles apply as in the preceding paragraph.
(iii) The supplier’s refusal to allow other suppliers to visit his/her premises in order to make quotations. The supplier may have good reasons for refusing, but one should bear in mind that the product remains the client’s property. The supplier does in fact have the right to determine who may enter his/her property, but the client should be allowed all reasonable access to the product. If, without good reason, the supplier refuses to allow arrangements to be made for other suppliers to visit his/her premises to inspect the product for a quotation, the client (owner of the equipment) can approach the court for an interdict. Another example of repairs where, in practice, there is uncertainty about the scope of the work, and consequently the total price of 45
the contract, is an agreement entered into to move a large quantity of ground or ore from one area to another. In practice, if the costs justify it, the expertise of a civil engineer, mining engineer or a surveyor should be enlisted to provide an estimate of the volume. The responsibility for the estimate and the quotation can, however, be left to the contractor. As far as legal principles are concerned, there is no problem when it comes to determining volume. In terms of the law, the parties can agree on a price per load, or on a lump sum. 4.3 PRICE FIXING BY A THIRD PARTY The parties sometimes decide to leave the fixing of a price to a third party. This is completely valid if the price that the third party fixes is not excessive and unreasonable to the purchaser (Dublin v Diner 1964 (1) SA 799 (D)).
At present there is no stipulation in our law that the agreed price must in any way relate to the value (intrinsic or market value) of the thing. The purchaser and seller must both look after their own interests and cannot dispute the purchase and sale simply because they purchased or sold for more or for less than a reasonable price for the goods, even if the other party was aware of the real value of the thing. 4.4 CONCLUSION The main issue with contracts for repairs is price fixing. In many of these cases it is impossible to determine the amount of work that must be done to repair a specific piece of machinery. Therefore there is reference to a term “strip and quote” where the service deliverer will charge to actually do a quotation. This is because it is unreasonable to expect the supplier to spend long hours to determine what the problem is without compensation. There must be an arrangement for the supplier to be compensated for the work done to ascertain the problem. BIBLIOGRAPHY Christie, RH. 1983. The law of contract in South Africa. Durban: 46
Butterworths. Joubert, DJ. 1987. General principles of the law of contract. Cape Town: Juta: 66. Kerr, AJ. 1998. The law of sale and lease. 2nd edition. Durban: Butterworths. Kerr, AJ. 1989. The principles of the law of contract. 4th edition. Durban: Butterworths. Van der Merwe et. al. 1993. Contract: general principles. Cape Town: Juta. ASSESSMENT 1 2 Explain what the term ‘strip and quote’ means Explain three disputes that may occur if ‘strip and quote’ is not provided for in detail in the quotation contract
STUDY UNIT 5
TERMS OF A CONTRACT STUDY UNIT AIM The aim of this study unit is to familiarise learners with a variety of terms that can be included in contracts.
CONTENT 5.1 5.2 5.2.1 5.2.2 5.2.3 5.3 5.3.1 5.3.2 Introduction The express terms of the contract The meaning of express terms The different types of terms of contracts Terms incorprated by reference Implied (tacit) terms of
the contract Different implied terms The ways in which ex consensu implied terms may become part of the contract 5.3.3 The interpretation of implied terms Conclusion 5.4
STUDY UNIT LEARNING OUTCOMES After studying this study unit you should be able to: • • • name and describe the different kinds of terms in a contract describe the meaning and interpretation of express terms in a contract interpret the meaning of implied terms in a contract
KEY CONCEPTS • • express terms implied terms 48
• • •
essentialia naturialia accidentalia or incidentalia
You must study this study unit in the study guide as there is no prescribed book for this module.
It is important to first of all understand the difference between terms of a contract and statements made during negotiations that do not form part of it. Terms of a contract • A “term” is a provision in a contract. It forces a party to act in a specific way, or requires a party to refrain from an act or conduct. • It has legal consequences that may be enforced. • It defines the parties’ rights and duties. Statements about the contract • Statements are merely “puffs” or sales talk intended to attract buyers. • These kind of statements meant to present the product as the best, the cheapest, the prettiest, etc, have no legal consequences. • If, however, these statements are misrepresentations they do have legal consequences. 5.2 THE EXPRESS TERMS OF THE CONTRACT
5.2.1 The meaning of express terms Express terms are provisions which the parties have expressed in words. They may be oral or written. During the negotiations preceding the conclusion of a contract, statements are sometimes made, orally or in writing, that do not form part of the contract because the parties do not intend them to be binding terms. In this regard you are advised to refer back to the discussion of dicta et promissa in section 3.4.5 in study unit 3 of this module. Words such 49
as “the best value money can buy” or “guaranteed to have the audience in fits of laughter from the beginning to the end” cannot be legally enforced, can be regarded as “puffs” and are irrelevant to the contract and without any legal effect. 5.2.2 The different types of terms of a contract In general the terms of a contract can be divided into the following categories: (i)
Essentiala The essentialia (essence) are the terms needed to classify a contract as a certain type, for example, the essence of a contract of sale is that the item and the price at which it is sold must be specified. From the terms of the contract it must also be clear that the intention of the parties is to transfer ownership. If these terms are not present, the contract will not qualify as a contract of sale. Nevertheless, it may still be a valid contract of another sort, such as barter, lease, or even an unnamed contract.
Naturalia The naturalia are terms not expressly mentioned in the contract, but which naturally and automatically nevertheless form part of it through the operation of law, unless excluded specifically by the parties. There is, for example, an “implied warranty” against latent defects in the contract of sale, but it may be excluded by means of the “voetstoots” clause.
(iii) Accidentalia (or incedentalia) The accidentalia or incidentalia are terms that are not required by law as part of the contract, but can be added by the parties by means of express or tacit mutual agreement (terms whereby the parties make special arrangements according to their specific requirements). The parties to a contract of sale can, for example, specify the colour of a product, or the method of transport and payment. The naturalia and accidentalia can be specified by the parties to the contract either in express or implied terms which may be oral or in writing. 50
5.2.3 Terms incorporated by reference Furthermore, terms are sometimes not spelled out in the contract itself, but may be incorporated into the contract by reference.
If a contract is signed by a party, he/she is bound by the terms stipulated in the contract or to the terms referred to in the document. In the case of Burger v Central South African Railways (1903 TS 571) an agent for a party signed a consignment note requesting that a package be received and forwarded “in accordance with the Goods Traffic Regulations in force … which regulations I hereby agree to be applicable to this consignment, as though they were fully stated thereon”. The court held the party bound by the regulations. The court held: “It is a sound principle of law that a man, when he/she signs a contract, is taken to be bound by the ordinary meaning and effect of the words which appear over his signature.” Similiarly, the parties will be bound to a contract signed only on the face of it, but refers to terms printed on the back of the contract, particularly when previous dealings between them have led a party to expect such terms.
There must, however, be reference to the additional terms above the signature of the party concerned. However, if the printed terms are inconsistent with the contract entered into they do not form part of it. Parties were even held bound to terms which they could not understand or were not aware of merely on the basis that their signatures were in effect proof of the fact that they had consented to the particular terms of the contract. Ignorance with regard to terms is not an excuse if a contract party signs the contract. Although consensus does not exist under these circumstances, generally speaking, a person is bound by reason of the impression that he/she created that he/she did in fact have consensus. A purchaser must therefore read any document carefully before signing it.
Unsigned documents (e.g. tickets or invoices)
The classical contract, as described in study unit 1, is created through consensus after a process of bargaining (offer and acceptance). In the business world these contracts have become outnumbered in daily life by contracts with parties offering products or services on standard contractual forms and terms. These cases are more popularly referred to as “ticket cases”. Ticket cases are likely to be more difficult, not because there is any difference in principle but because it may be difficult to establish whether the party who sought to be held bound assented to the inclusion of the specific terms. To solve this problem, the courts designed the following test questions to serve as evidence and guidelines: • Did the person who received the ticket know that there was printing or writing on it? If the recipient was aware of the writing on the document, did he/she know that the printing contained terms of, or references relating to terms of the contract in question?
If these questions can be answered positively, the relevant terms are part of the contract. If the answers to both questions, or only the second, are negative, a third question should be asked: • Did the person handing over the ticket do what was reasonably necessary to give the recipient notice of the terms/conditions or bring it to the attention of the recipient? In determining what is reasonable the following documents have to be distinguished, as decided in Central South African Railways v McClaren (1903 TS 727): – documents which would reasonably be expected to contain conditions – documents which would not reasonably be expected to contain conditions If the issuer of the ticket took sufficient measures, the terms 52
form part of the contract. The application of these principles can be illustrated by the decisions in the following cases: In Frocks Ltd v Dent and Goodwin (Pty) Ltd (1950 (2) SA 717 (C)) the court held that no reasonable person would expect to find terms limiting the liability of an owner on a warehouse invoice, and that the terms were not part of the contract even though they had been printed on the invoices for some years before the action took place. In Micor Shipping (Pty) Ltd v Treger Golf and Sports (Pty) Ltd and another (1977 (2) SA 709 (W)) the question was whether a reference to standard trading conditions at the foot of all invoices and credit notes actually formed part of the terms of the contract. These documents were only dealt with by the firm’s bookkeeper who only checked for facts and figures and referred the documents to the secretary or managing director of the company if there were any queries. The court held that the specific conditions did not form part of the terms of the contract.
In Bok Clothing Manufacturers (Pty) Ltd and another v Lady Land (Pty) Ltd (1982 (2) SA 565 (C)) new conditions were included among those printed on the back of the order forms which had been used by the purchaser for three years. No steps were taken to bring these changes to the offeree’s notice. The judge said: “Although an order form would ordinarily rank as a document where one would expect to find contractual provisions, this must be seen in its context. One would not be expected to be aware of such provisions where one has been doing business for three years, using the same forms without such conditions and one’s attention has not been specifically drawn to the fact that such conditions have been introduced onto the form. This is more particularly so where the conditions are such as to introduce a radical alteration in the contractual relationship of the parties ……. “The clauses relied on by the applicant, however,
introduce a substantial diminution of the respondent’s previous rights. They alter the ordinary incidence of the law of contract and as such will not be allowed to obtrude themselves into an existing business relationship ……. In all the circumstances, more particularly the fact that the parties had been doing business together previously, the new onerous conditions should have been drawn specifically to [the respondent’s] attention.” The court consequently held that the terms in question were not part of the contract. In the British case of Mendelssohn v Normand Ltd (1969 (2) All ER 1215 (CA)) the court even held that an oral representation inducing a contract has priority over a printed term. On the other hand, the notices at parking garages stating clearly that the owner parks his/her car on his/her own risk and that the garage will not be liable for any damage to the car, will probably form part of the contract between the person parking the car and the garage owner.
The terms printed on bus tickets, dry-cleaning invoices, train and airplane tickets, will probably fall into the same category. Basically, the question whether particular terms printed on invoices or tickets, form part of the contract in question, should be seen against the background of the complicated pronciple of error hence the formulation of the guidelines by the courts as set out above. 5.3 IMPLIED (TACIT) TERMS OF THE CONTRACT An implied term of the contract is a term that is not an express term defined in writing or orally by the contracting parties. The only difference between an express and an implied term is in the mode of proof. An express term is proved by direct evidence and an implied term by circumstantial evidence. 5.3.1 Different implied terms There are two types of implied terms:
Ex lege terms are terms implied by law and form part of the naturalia of the contract (refer to section 5.2.2 above in this regard). An example is the implied warranty against latent defects read as part of the purchase contract except in cases where it may, for example, be excluded by means of the “voetstoots” clause. (Refer to sections 3.4.3 and 3.3.3 in this regard).
Ex consensu terms are terms implied by the parties. The rules of consensus, as discussed in study unit 1, are applicable thereto. The basic test is therefore what the intention of the parties was. When we use the phrase “implied term” in this study guide we always refer to an ex consensu implied term.
The principle of ex consensu implied terms is a complex subject in the law and a purchaser cannot be expected to be acquainted with more than the basic principles. Purchasers should ensure that all the intentions of the parties are clearly stipulated in the contract (in express terms). This is borne out by the fact that the courts will not easily decide that there is an implied contract as is clear from the case “Spes Bona Bank v Portals Water Treatment [1983 (1) SA 978 (A)]” or an implied term in the contract as is clear from the case “Liquidator of Booysen’s Race Club v Burton [1910 TPD 597, 601]”. 5.3.2 The ways in which ex consensu implied terms may become part of the contract Ex consensu implied terms are terms implied by the parties and are based on the parties’ intention. An implied term can be inferred in the following ways: (1) By the parties’ conduct The parties’ conduct can serve as proof of the fact that a particular tacit term exists in the contract , for example, by pointing at a product, handing over money or permitting someone to take certain action but remaining silent about it. (2) By the inevitable implication of the circumstances Proof of the parties’ intentions in respect of the implied terms of an existing contract can be obtained by studying the inevitable 55
implication of the circumstances. Here the intentions of the parties are derived from the surrounding circumstances. The following are usually regarded as implied terms: • A customary term can be regarded as an implied term. This is not a term that applies to all contracts as part of the naturalia thereof, but which nevertheless applies to contracts of a particular kind. In the case of contracts of sale the law will, for example, infer a promise to pay the customary amount, the usual amount that would normally apply, where the parties agreed that a payment had to be made, but did not agree on the exact amount thereof. It must, however, be established that there is a practice whereby such terms are included and that the terms in question were so well known as a customary term that it could be assumed that the parties contracted in the understanding that it would form part of their agreement.
Both parties must have known about the term and therefore ignorance on the part of one party would exclude such a term as an implied term. • Terms implied by trade usage are closely related to the customary term. If trade usage (a custom in particular trade) is known to both parties, their knowledge will be one of the surrounding circumstances indicating that trade usage ought to be incorporated in their contract as a term implied from the facts. But if one party cannot prove that the other knew of the trade usage it will nevertheless be incorporated as an implied term if the following requirements can be satisfied: – The custom or usage must be universally and uniformly observed within the particular trade. – The custom or usage must represent a long-established trade usage. – The custom or trade usage must be well known. This does not mean that everyone in the trade concerned must know the usage, but that a person who is in the habit of dealing in a certain trade is assumed to know the trade usages and 56
customs. – The custom or trade usage must be reasonable. – The trade usage must be certain. – The trade usage must not conflict with the law in general. – The custom or usage must not conflict with the clear provisions of the contract. 5.3.3 The interpretation of implied terms We have already mentioned that the court can, and is prepared to, read a term into the contract in certain circumstances. The court will not do so where such a term would be contrary to the agreement or where the law prohibits proof of such a term or where it would be contrary to the law. The courts use a certain test to determine the inevitable implication of the circumstances and thereby any implied terms. This test is often called the test of the hypothetical bystander. Defining hypothetical bystander: The term that should be implied as being part of the contract must be so obvious that if a bystander suggested to them during their negotiations that an express clause to that effect be included in the contract, their common answer would have been “offcourse”
There is a great deal of support for the rule that if a term is necessary to give business efficacy to the contract it can be regarded as an implied term. However, it is not essential that the term be necessary for the contract to be legal. A term may therefore be regarded as an implied term even if the contract can stand without it. 5.4 CONCLUSION In this study unit we have paid attention to two types of terms of a contract, namely express terms and implied terms of a contract. Implied (tacit) terms are often the subject of litigation and therefore purchasers must be cautious and be aware of them when entering into contracts with suppliers.
BIBLIOGRAPHY Christie, RH. 1983. The law of contract in South Africa. Durban: Butterworths. Joubert, DJ. 1987. General principles of the law of contract. Cape Town: Juta: 66. Kerr, AJ. 1998. The law of sale and lease. 2nd edition. Durban: Butterworths. Kerr, AJ. 1989. The principles of the law of contract. 4th edition. Durban: Butterworths. Van der Merwe et. al. 1993. Contract: general principles. Cape Town: Juta.
ASSESSMENT 1 Those terms of a contract that categorise the contract a contract of lease, are known as the of the contract. 58
The implied warranty for latent defects normally contained in of the a contract of sale, is one of the contract of sale. Clauses in a contract formulated by the parties that, inter alia, pertain to the date of delivery, the method of installation and the quality of the product, are known as the of the contract. Briefly name the three questions formulated by the courts to determine whether terms printed on tickets form part of the particular contract. Explain what is the difference between implied and express terms of a contract Briefly explain the two types of implied terms Put the concept ‘hypothetical bystander’ in context
STUDY UNIT 6
INTERPRETATION OF THE CONTRACT STUDY UNIT AIM The aim of this study unit is to introduce learners to (i) the basic principles of interpreting contracts, (ii) to familiarise them with the basic principle and other rules of interpretation, and (iii) to focus their attention on the requirements for rectification of a written contract. CONTENTS 6.1 Introduction 6.2 General rules for the interpretation of contract 6.2.1 The words and symbols used in the contract 6.2.2 Presumtions regarding the parties’ intentions 6.2.3 The parol evidence or integration rule 6.2.4 Rectification of written contracts 6.2.5 Permitted extrinsic evidence 6.3 Conclusion
UNIT LEARNING OUTCOMES After studying this study unit you should be able to: • • • explain the general rules of the interpretation of contracts describe the special rules pertaining to written contracts explain the rectification of a contract
6.1 INTRODUCTION Numerous rules or guidelines can be used as aids in determining the intention of the parties to a contract as expressed by them, in writing or verbally. If the words are clear, then the intention of the 60
parties is clear, but if the words are not clear, then the intention of the parties must be sought. This is a complicated aspect of the law of contract and only the most important points are dealt with below. 6.2 THE GENERAL RULES FOR THE INTERPRETATION OF CONTRACTS 6.2.1 The words and symbols used in the contract itself As a starting point, the courts will first look at the words and symbols used in the contract itself to interpret the parties’ intention. This interpretation is guided by certain rules of interpretation. (1) The basic rules There are two basic rules: (i) The court should attempt to give to each word in the contract its normal grammatical meaning. The court should interpret the contract as a whole.
There are also a few rules that can be used to support the application of the basic rules in different circumstances: • It is assumed that the same word has the same meaning wherever it appears in the contract. It is assumed that the meaning of a general word is limited by any specific word following it.
After applying these rules there may still be uncertainty about the parties’ proper intention. (2) Cases where there is ambiguity about the words and/or symbols used in the contract If the above criteria do not lead to a positive conclusion about the parties’ intentions, the courts will consider factors outside the words and symbols used in the contract. This may be done by allowing extrinsic evidence and using certain presumptions, as 61
discussed in section 6.2.2 below. 6.2.2 Using presumptions regarding the parties’ intention Courts will use certain presumptions apart from the assumptions about the intentions of the parties as indicated above. The presumptions can, however, be rebutted (disproved) if a contrary intention clearly appears from the contract. These presumptions include the following: • The parties intended their agreement to be valid and enforceable rather than invalid and unenforceable. The parties did not intend to make a donation. The parties did not intend to waive or renounce any rights. The parties did not intend to limit the freedom of any party to do anything permitted by law.
• • •
6.2.3 The parol evidence or integration rule According to the parol evidence rule, the written document is the only record of the contract between the parties and it is this written document that has to be interpreted to determine the intention of the parties. This rule applies to all written contracts, that is, in both the following cases: • • where the law requires
the contract to be in writing where the parties themselves agreed to reduce the contract to writing
According to this rule the parties may not lead oral evidence of agreements reached prior to or at the time of entering into the written contract that contradict, alter or add to the written agreement.
The basis of the rule is that the written agreement is paramount. 6.2.4 Rectification of written contracts Rectification will be used when there is a mistake in the written agreement that does not reflect the parties’ true intentions. The document may then be brought in line with the parties’ true intention by the court. For example, rectification can occur if the purchase price is reflected as R100 instead of R1 000 because of a typing error. Rectification is not in law deemed to be in conflict with the parol evidence rule. The law does, however, place a heavy burden of proof on the person who wishes to apply to court for rectification. 6.2.5 Permitted extrinsic evidence Extrinsic evidence is evidence from outside the document in which the contract is embodied. It can therefore relate to the preceding negotiations or other surrounding circumstances.
Often the parties’ intention can be deduced from this. However, if the contract has been reduced to writing, the document will be the only evidence of the content of the contract. Extrinsic evidence will therefore as a rule not be allowed. Under certain circumstances ,, extrinsic evidence may be permitted in the case of a written contracts. The following circumstances are probably most relevant to purchasing practice in organisations: • Evidence is permitted to prove portions of the contract which depend upon the operation of law, such as customary rules or trade usage. The rule applies only to the terms or content of the contract and not, for example, to the validity of the contract. Evidence is therefore permitted to prove that the contract is void as a result of mistake or voidable because of misrepresentation.
6.3 CONCLUSION 63
The above principles should be borne in mind and care should be given to ensure contracts that can be interpreted easily and correctly. By following these guidelines, unnecessary conflict and legal cost can be avoided. These principles also provide guidelines for interpreting legal rights and duties originating from contracts.
BIBLIOGRAPHY Christie, RH. 1983. The law of contract in South Africa. Durban: Butterworths. Joubert, DJ. 1987. General principles of the law of contract. Cape Town: Juta: 66. Kerr, AJ. 1998. The law of sale and lease. 2nd edition. Durban: Butterworths. Kerr, AJ. 1989. The principles of the law of contract. 4th edition. Durban: Butterworths. Van der Merwe et. al. 1993. Contract: general principles. Cape Town: Juta.
ASSESSMENT 1 Name the two basic rules that the court will apply when interpreting a contract. Where words or symbols in a contract are ambiguous, two methods may be applied to determine the parties’ true intention. Name these two methods. Briefly discuss what the parol evidence rule entails. Briefly explain the rectification of written contracts. Give an example. 64
STUDY UNIT 7
BREACH OF CONTRACT STUDY UNIT AIM The aim of this study unit is to familiarise learners with the principles of breach of contract.
CONTENT 7.1 Introduction 7.1.1 Default of debtor 7.1.2 Default of creditor 7.1.3 Positive malperformance 7.1.4 Repudiation 7.1.5 Prevention of performance 7.2 Legal remedies for breach of contract 7.2.1 Remedies aimed at execution of the contract 7.2.2 Cancellation 7.2.3 Damages 7.2.4 The
penalty clause 7.3 Insolvency as cause of breach of contract 7.3.1 General background 7.3.2 The effect of sequestration on contracts 7.4 Conclusion
STUDY UNIT LEARNING OUTCOMES After studying this study unit you should be able to: • • • • describe the five different forms of breach of contract explain the legal remedies applicable to each form of breach of contract name the circumstances in which the courts will not order the specific performance of the contract in breach of contract describe the circumstances that grant a party to the contract 66
the right of cancellation explain the grounds for damages as well as the basis on which damages are calculated explain what a penalty clause is and the practical implications thereof
KEY CONCEPTS • • • • • • • •
mora debitoris mora creditoris repudiation positive malperformance prevention of performance legal remedies damages insolvency
Study this section in the study guide, as there is no prescribed book for this module.
7.1 INTRODUCTION In the previous study unit you were acquainted with the general principles of the law of contract. You were shown that there are certain requirements for the creation of a valid contract under which each of the parties obtains the rights contained in the contract. Although the parties are expected to comply fully with the obligations accompanying the contractual rights (the maxim is:
pacta sunt servanda – contracts must be performed/observed), breach of contract does occur. Breach of contract arises when one of the parties to the contract is guilty of encroaching on the rights of the other party.
Breach of contract can take one of five different forms: (1) (2) default of the debtor (mora debitoris) default of the creditor (mora creditoris) 67
(3) (4) (5)
positive malperformance repudiation prevention impossible) of performance (rendering performance
7.1.1 Default of the debtor (mora debitoris) Any obligation under a contract has a time limit for its performance, be it an agreed fixed period or in the absence thereof a reasonable period. If the debtor neglects or fails to perform timeously, he/she commits breach of contract. Lawyers then say that he/she is in mora and this form of breach of contract is known as mora debitoris (failure of the debtor to perform on time or timeously). We can distinguish the following situations relating to this form of breach of contract: •
Mora ex re (“re/rei” meaning the date on which the debtor must perform) occurs if a day for performance is fixed and the debtor fails to perform on that day. He/she is then automatically in mora and commits breach of contract. The delay must be the debtor’s fault, because he/she was either personally responsible for the delay or did not take the necessary precautions to prevent it.
Mora ex persona (default after notice by a person – the creditor) occurs when no day for performance has been fixed in the contract. In such a case the debtor must perform within a reasonable period after the conclusion of the agreement. The difficulty, however, is to determine what a reasonable time is. Hence the debtor does not summarily fall in mora and must be given notice to perform on a specific date that must be a reasonable time from the date of the notice or letter of demand. Thus the debtor must first be placed in mora by a demand made on him/her by the creditor. A demand is a notice from the creditor instructing the debtor to perform within a stipulated period. The period must be reasonable according to the circumstances pertaining to the nature of the transaction, 68
calculated from the date of the letter of demand. If the debtor does not perform during time mentioned in the demand, he/she is in mora and is guilty of a breach of contract. The fact that the debtor is in mora, does not necessarily entitle the creditor to cancel the contract. The creditor may only resile from the contract if he/she possesses the right to do so. The creditor will have the right to resile or cancel the contract (known as a lex commissoria) if • the contract contains such a clause, e.g.: “In the event of breach of contract, the innocent party may immediately cancel the contract upon such breach.” in the event of the absence of such clause in the contract, the creditor claims such right for himself/herself by way of a notice of rescission or cancellation given to the debtor, which notice must also afford the debtor a reasonable time to perform as from the date of the notice of rescission. Of importance is that the notice of demand and of rescission may be contained in the same document, for example: “Please deliver the stationery within seven days of the date of this notice and should you fail to deliver on 1 April, I will immediately cancel the contract.” the creditor tacitly obtains the right to cancel the contract where the contract does not provide for a
lex commissoria (notice of rescission). This will be the case where it is clear from the nature of the contract and required performance, and the surrounding circumstances that the debtor had to perform within a short period of time, usually referred to in practice by way of the phrase “time is of the essence”.
Example: The purchaser of Company A orders 1 000 T-shirts from supplier B on
1 March. The purchaser (A) informs the supplier (B) that the Tshirts are to be sold during the weekend of 1 to 2 April at the Easter Show where Company A has rented a booth for the specific purpose of selling the T-shirts with the words “Easter Show” imprinted on the T-shirts. Supplier B delivers the shirts to A on 1 May. The facts clearly reveal that the T-shirts have no use for A on 1 May, and in these circumstances Company A will probably be entitled to resile from the contract. Legal remedies of the creditor in the case of mora debitoris include the following: • The creditor can demand fulfilment of the contract on the grounds of the content of the contract. The creditor can cancel the contract in the circumstances set out above. The creditor can claim damages if he/she suffered damage due to the breach and can prove such damage.
7.1.2 Default of the creditor (mora creditoris) Where the cooperation of the creditor is necessary for the fulfilment of the obligations of the debtor, the creditor is guilty of a breach of contract in the form of mora creditoris if he, without justification, delays the fulfilment of the debtor’s performance, where performance is tendered. The appropriate legal remedies in this case are similar to the legal remedies at the disposal of the creditor in the case of mora debitoris and we shall therefore not discuss them in detail here. The debtor is entitled, inter alia, to claim for damages suffered because of the creditor’s refusal to accept performance.
7.1.3 Positive malperformance
There are two basic forms of positive malperformance: (1) where the debtor (supplier) tenders faulty or defective performance, for example, supplying Spoornet with certain electrical components or sleepers that fail to satisfy the requirements if the debtor does something that he/she is not permitted to do in terms of the agreement, for example, where a supplier, contrary to a clause in the contract, delivers supplies to the wrong department at Spoornet over a long weekend
Legal remedies for positive malperformance are the following: • The creditor (purchaser) may retain the defective performance and sue for damages for the defect. The creditor may reject the defective performance and claim proper performance. The creditor may cancel the agreement if he/she has reserved to himself/herself a right of cancellation (lex cannot reasonably be expected to uphold the contract. 7.1.4 Repudiation Repudiation means turning one’s back on an agreement When one of the parties to the contract conducts himself/herself in such a manner that the other party can conclude with reasonable certainty that the former will not comply with his/her obligations, this, is known as repudiation. The breach lies in the noncompliance with the basic rule underlying each and every contract: pacta sunt
commissoria), or if the defect is so serious that he/she
servanda ‘ contracts must be observed. This situation may occur before, during or after the period fixed for performance. The conduct of the guilty party must clearly indicate an intention not to perform, such as denial of liability, or communication of his intention not to continue with the contract. The unilateral cancellation of a purchasing order amounts to repudiation, and is a 71
breach of contract unless specific provision is made for such a cancellation in the contract. The innocent party can either ignore the repudiation or view it as breach of contract and take action accordingly. Should he/she decide to take steps, he/she can claim fulfilment of the contract or, if repudiation of a material obligation is involved, choose to cancel the contract. If he/she suffered damage, he/she may recover it from the guilty party. 7.1.5 Prevention of performance Here we can distinguish between two situations: (1) absolute or objective prevention of performance which means that the performance is prevented permanently and rendered impossible for everyone relative or subjective prevention of performance where performance only becomes impossible or difficult for the debtor (supplier). This is actually a case of repudiation in so far as it is reasonably clear and certain that the debtor will not perform. We shall therefore confine ourselves to the first situation.
Objective prevention of performance, like repudiation, may occur before, during or after the time fixed for performance. An example of absolute or objective prevention of performance, is where a contracting party intentionally or negligently destroys the object of the performance – a house, dog, motorcar, yield of crop, et cetera. The innocent party may cancel or uphold the contract and claim damages. Generally speaking, it is obvious that specific performance cannot be claimed. Prevention of performance must be the fault of the party who renders performance impossible. However, if it is not the fault of the above party, we are dealing with supervening impossibility of performance which terminates all contractual obligations but is not a form of breach of contract. This especially applies in the case 72
where a superior force (vis maior) prevents a party from discharging the contract, for example, a crop of wheat is destroyed by hail. In Peters, Flamman and Co v Kokstad Municipality (1919 AD 427) the action of the state prevented the defendants from illuminating Kokstad by means of gas lighting for several years by the compulsory termination of the defendants’ business in terms of certain war legislation. The court absolved the defendants of any liability for damages. Superior force means any factor that a person cannot foresee or against which he/she has no resistance, such as the forces of nature, war, government action, sickness and death. 7.2 LEGAL REMEDIES FOR BREACH OF CONTRACT When one of the parties to the contract is in mora (breach), the other party (the victim or the aggrieved party) is entitled to a contractual remedy or remedies.
The innocent party may sue the party who is in breach of contract; and may enforce these remedies with the assistance of the court. When this so called “breach of contract” occurs, the innocent party basically has two options. 1) Opt for the further execution (fulfilment) of the contract OR 2)Cancel the contract 7.2.1 Remedies aimed at execution of the contract There are mainly two remedies: • Specific performance • Reduced performance The innocent party may claim specific performance. This means that the contract must continue as it stands. But the court has the discretion to refuse to grant such an order on certain grounds. Specific performance will not be ordered in the following cases: • when specific performance has become impossible
where it is impossible for the court to control specific performance in the case where such an order will cause undue hardship for the defendant compared with the advantage the plaintiff will gain where the plaintiff is not in a position to fulfil his/her own obligations where it concerns an individual’s freedom, which means that one cannot use one’s freedom to contract to deprive oneself wholly of one’s personal freedom. Freedom to contract must not lead to slavery. Specific contracts that may be reflected in this regard are service contracts and a promise to marry (engagement)
An order for specific performance of a contract is left to the discretion of the court, which discretion the court will base on principles of public policy and practicality. Apart from an order for specific performance (discussed above) the court can also make an order for reduced performance. This will happen if the plaintiff who claims performance from the defendant has not himself/herself performed completely or does not tender proper and complete performance. In principle, the defendant may refuse to perform until the plaintiff is prepared to perform completely. However, in instances where this may be unfair, say, because the defendant in the meantime utilises the defective performance of the plaintiff, the court will order the defendant to render a reduced performance. 7.2.2 Cancellation • The right of cancellation. In principle, this is one of the remedies available to the prejudiced party to a contract. In breach of contract we referred to a number of cases in which the plaintiff has the right to cancel a contract. However, the right to cancel is not an obligation. The innocent party still has the choice of claiming performance under of the contract, 74
unless the court refuses to make an order for specific or reduced performance. The innocent party can either claim cancellation or performance. • When must the innocent party cancel? The innocent party must exercise his/her right of cancellation by means of an unambiguous action with immediate effect within a reasonable time after the breach of contract has come to his/her notice. Once the innocent person has made his/her choice, he/she cannot change his/her mind. It is possible, however, to grant the guilty party a final opportunity of performing without losing the right of cancellation. When does the right of cancellation lapse?
The right of cancellation lapses when the innocent party fails by choice or omission to exercise the right and/or through words, deeds and legal actions indicates that he/she has elected not to exercise this right. The innocent party exercises his/her right of cancellation by notifying the other party and the cancellation comes into effect as soon as the notification reaches the guilty party. The consequences of cancellation. All contractual obligations lapse and are replaced by the obligation to mutually restore what has been received in terms of the contract. The guilty party is, of course, still liable for damages. Impossibility of restitution.
Restitution means “mutual handing back of what has been received” The innocent party loses his/her right of cancellation if the restitution of what he/she has received is rendered impossible by his/her fault. Case In Harper v Webster (1956 (2) SA 495 (FC)), the 75
defendant induced the plaintiff, by means of misrepresentation that his cattle were free of disease, to purchase a few hundred head of cattle from him. The plaintiff slaughtered or sold 66 of the cattle before he/she discovered they were infected. The plaintiff then sued for cancellation and return of the purchase price, and offered to return to the defendant the remaining cattle together with the value of the cattle that had been slaughtered. The defendant contended that the plaintiff could not cancel if he/she could not return the cattle. However, the court decided that the plaintiff could in fact cancel because it was not his fault that restitution was no longer possible.
Another example is the case where plastic floor-covering was purchased for use in passenger coaches of Spoornet. After a number of coaches had been fitted out with the floor-covering, it was found that it did not satisfy the specifications in respect of nonskidding. Spoornet was entitled to cancel the contract and claim damages even though the floor-covering, which had already been cut and pasted, could not be returned. 7.2.3 Damages You have already learned that damages can be claimed as part of the legal remedy for breach of contract. It can be claimed in addition to fulfilment or cancellation depending on whether the plaintiff has suffered damage. The same principles for a claim for damages apply in the case where the innocent party cancels the contract and in the case where he/she claims performance.
The main principles for a claim for damages can be summarised as follows: • The innocent party must suffer patrimonial loss. Patrimonial loss is a loss suffered by a person in respect of his/her estate. The plaintiff must be able to prove that he/she suffered damage as a result of breach of contract. This is done by comparing the value of his/her estate with the position the estate would have been in if performance had taken place and breach of contract had not been committed. 76
Breach of contract per se does not give rise to a claim for damage unless the plaintiff suffered damages due to the breach. • Different kinds of patrimonial damage. Patrimonial loss does not only mean diminution of the plaintiff’s assets as a result of breach of contract (loss), but also includes the amount by which the plaintiff’s assets might have been enriched had breach of contract not occurred (loss of profit). The damage must be attributable to the breach of contract. The question here is whether damage would have been suffered if the defendant had fulfilled his/her obligations properly in terms of the contract. If damage would have occurred in any event, it cannot be attributed to the breach of contract. Damage from breach of contract for which the culprit is liable. As a rule, the attitude of our courts is that liability only has a bearing on damage that was contemplated by the parties or which may reasonably have been contemplated by them at the time the contract was entered into.
Although this approach is frequently applied in our courts, there are notable authors and jurists who are of the opinion that the damage should have been foreseeable at the time of the breach of contract. The main reason for their argument is apparently that at the time of conclusion of the contract, breach of contract is not in the minds of the parties, only the fulfilment thereof. The duty to prevent, limit or mitigate damage. It is the duty of the innocent party to prevent or limit damage. The guilty party is not liable for damage that the prejudiced party could have limited or prevented by exercising reasonable care. The amount of the damages. Damages are always calculated and paid in money and special methods of calculating damages have been developed in practice. Where the debtor (supplier) is obliged to do something and fails to carry out his/her obligation or renders defective services, then the damages are 77
usually equal to the amount that it would cost to procure someone else to effect proper performance or to repair the damage. 7.2.4 The penalty clause The penalty clause is a clause in terms of which the parties to the contract agree what “penalty” the guilty party should pay or forfeit in the event where he/she breaches the contract. This “penalty” may, for example, comprise a sum of money or benefits that the guilty party will forfeit. This actually amounts to the parties contractually agreeing on the extent of damage that will be suffered in a case of breach of contract. They therefore determine the amount of damages themselves, instead of the innocent party having to prove the quantum (amount) of damages in the normal way. A penalty clause can also serve to strengthen the fulfilment of the obligations in terms of the contract, in the sense that it can serve as an incentive not to breach the contract.
To eliminate uncertainties, the Conventional Penalties Act, 15 of 1962, was promulgated to legalise penalty clauses. However, in terms of this Act the amount of the penalty clause may not be excessive in proportion to the actual damages suffered by the plaintiff and can be reduced by the court in appropriate circumstances. For purposes of this study guide, the main aspects of the Act can be summarised as follows: • • Penalty clauses are legal and enforceable. A penalty clause is not necessarily enforceable to its full extent. The Act empowers the court to reduce the penalty in the court’s discretion to what the court deems reasonable, fair and equitable. The debtor bears the onus to prove that a penalty clause is excessive or unreasonable in comparison to the prejudice the creditor will suffer. The prejudiced party cannot claim damages and also enforce the penalty clause, because the parties intended the penalty clause to take the place of the claim for damages. The prejudiced party may only choose to claim either damages 78
or enforce the penalty clause if the contract specifically provides for this. If the contract has no such provision, the prejudiced party must enforce the penalty clause. Forfeiture of instalments or deposits already paid is penalty clauses and is valid and fully enforceable, subject to reduction by the court.
7.3 INSOLVENCY AS A CAUSE FOR BREACH OF CONTRACT 7.3.1 General background One of the main causes of breach of the commercial contracts is insolvency of one of the parties. This merits further attention and we shall concentrate primarily on the insolvency of the supplier in the case of a contract of purchase and sale. A person is insolvent if his/her liabilities exceed his/her assets. This is often leads to his/her inability to pay his/her debts in full. Some creditors, who can identify the danger signs early enough, may endeavour to obtain judgment against the debtor and have his/her property attached in an effort to ensure full payment of their claims. Other creditors, who fail to do so, may receive nothing, which means that creditors are treated unequally and the debtor may never overcome his/her financial problems.
There is a legal remedy to put an end to this unsatisfactory situation, namely the sequestration (in the case of an individual) and the liquidation (in the event of a legal person) of the estate involved. The insolvent or one or more of his/her creditors can apply to any division of the Supreme Court for an order of sequestration or liquidation of the estate. If the application is granted, the insolvent’s estate (assets) are taken away from him/her and placed in the hands of a trustee. The trustee liquidates the estate of the insolvent and divides the proceeds among the creditors. In South Africa, the sequestration of a person’s estate is governed by the Insolvency Act 24 of 1936, as amended. In the case of a juristic person, we speak of liquidation and not of sequestration and the Companies Act or the Close Corporations Act together with the Insolvency Act apply.
In this course we shall concentrate on the sequestration of the seller/supplier’s estate. As mentioned earlier, the affairs of an insolvent estate are dealt with by professional persons including a trustee. 7.3.2 The effect of sequestration on contracts
For the purposes of this course, it is important to study the effect of sequestration on contracts. Since the insolvent’s estate passes to the trustee as a result of sequestration, as a rule, contracts are not terminated by sequestration of the estates of either of the two parties. However, there are certain exceptions to the rule: • Firstly, the insolvent’s obligations under the contract should be such that the trustee is in fact able to fulfil it. In the event of the rendering unique personal services, e.g. the rights and obligations do not pass to the trustee. The contract is not terminated and continues to exist but specific performance cannot be claimed from the trustee. The creditor will only have a claim against the estate, equally with all the other creditors. There are, however, also contracts that are terminated by sequestration, for example, a contract of mandate which comes to an end as a result of the mandator’s insolvency and a service contract which is terminated by the sequestration of the employer’s estate. Furthermore, the Insolvency Act contains specific provisions relating to contracts of sale, lease and credit agreements.
The effect of sequestration on a contract depends on whether or not one of the parties has already performed.
Where no party has yet performed under the contract
If, at the time of the sequestration, neither of the parties has yet performed in terms of the contract, the trustee must render full performance before he/she can demand that the other party performs. However, in the case of divisible performances, each part 80
of the performance should be assessed independently. One should bear in mind that neither of the parties can withdraw from the contract because of sequestration, although the trustee can naturally repudiate it. The trustee must decide within a reasonable time whether he/she wishes to continue with the contract or repudiate it. If he/she decides on the latter course of action, the creditor may do the following: • He/she can withdraw from the contract and prove a concurrent claim against the estate or He/she can reject the repudiation and prove a concurrent claim for damages as a substitute for performance against the estate. (This is of course a form of specific performance).
Where one of the parties has already performed
If the insolvent has already performed, the trustee can demand performance from the other. Where the other party (e.g. the purchaser) has already rendered his/her performance (purchase price already paid), but the insolvent (supplier) has not, the purchaser cannot claim specific performance as usual, because the interests of all the creditors require protection. The other party will then have to be satisfied with a concurrent claim against the estate. However, the trustee, after consulting with the other creditors, may in fact decide to perform.
The effect of sequestration on certain contracts
Special principles apply to different types of contract, such as contracts of lease, real estate contracts and credit agreements. However, it is not possible within the ambit of this course, to discuss these complex matters. A few remarks will therefore have to suffice. • Immovable property The transfer of ownership of immovable property entails the registration of property in the name of the buyer in the Deeds Office. If the seller’s estate is sequestrated before registration takes place, the fixed properties still remain assets in the estate of the insolvent, and the purchaser only has a concurrent claim against 81 the estate. • Credit agreements If the seller’s estate is sequestrated, the goods purchased form part of his/her estate and the buyer only has a concurrent claim. 7.4 CONCLUSION In this study unit we emphasised various forms of breach of contract as well as the legal remedies that apply in each case. We also noted some of the consequences of breach of contract such as: • when the breach of contract grants the plaintiff a right of cancellation and when such a right lapses when the breach of contract entitles the plaintiff to damages and how this is calculated when the court will not order specific performance in terms of the contract the consequences when a contract contains a penalty clause the consequences when one of the parties becomes insolvent
ASSESSMENT 1 Indicate whether the following statements are true or false: A contract of sale can be seen as a reciprocal agreement in terms whereof the seller undertakes to supply a thing to the buyer in return for a purchase consideration in the form of money which the buyer will pay to the seller. In a contract of purchase and sale, the intention of the parties is to give the purchaser temporary use of the merx. The object of a contract of sale can also comprise of rights such as servitudes or mineral rights. In a contract of sale, the price to be paid is generally fixed. 82
1.2 1.3 1.4
If the price is determinable a third party can be appointed to determine a reasonable price. On an order form the words “to be advised” are to be construed as the seller determining the price at a later date. If a quote for repairs the words ‘strip and quote’ appear without the fixing of a price, this quote only constitutes an invitation to do business and not a valid offer. Explain the five forms of breach of contract in detail. Explain the four legal remedies applicable to each situation. Explain insolvency as a cause of breach of contract.
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STUDY UNIT 8
AGENCY REPRESENTATION STUDY UNIT AIM The aim of this study unit is to introduce learners to the principles of representation or agency.
CONTENTS 8.1 Introduction 8.2 The meaning of agency 8.3 The establishment of
representative capacity 8.4 The effect of agency 8.5 The doctrine of the ‘undisclosed principal’ 8.6 The termination of representative capacity 8.7 Conclusion
STUDY UNIT LEARNING OUTCOME After studying this study unit you should be able to: • • • summarise the meaning of representation indicate how representation is created and terminated discuss the effect of representation
KEY CONCEPTS • • agency representation “undisclosed principals”
Study this section in the study guide, as there is no prescribed book for this module.
8.1 INTRODUCTION Most purchase and selling transactions occur indirectly through agents, because most sellers and purchasers act on behalf of their enterprises. Therefore it is essential for the purchaser as the representative of his/her enterprise to have knowledge of his/her rights and obligations. As an agent or representative, the purchaser enters into lawful contracts on behalf of his/her firm, in which he/she bargains for certain rights and obligations. The agent must therefore have knowledge of the legal aspects of agency. 8.2 THE MEANING OF AGENCY Agency is the branch of law that deals with the situation where one person who has the necessary authority negotiates a legal act on behalf of another person, with the result that he/she acquires rights and obligations for that person (or organisation) without himself/herself acquiring rights and obligations in the process.
The power of representation is known as representative capacity. It is essential that the parties (the agent, principal and third party) are fully aware of their relationship with each other. The general principle is that any contract can be concluded by an authorized representative on behalf of another party (e.g. the organisation a person works for); the exception being where statutory provisions prescribe that a party must personally conclude a contract, for example, the Credit Agreements Act, 75 of 1980. The purchaser who acts on behalf of his/her enterprise should therefore ensure that the agent of the enterprise (supplier) with which he/she is negotiating does in fact have the capacity to bind the enterprise. This would be done in terms of a mandate, a contract between the mandator (the enterprise) and the agent (the buyer) who binds the agent contractually to perform something on behalf of the mandator. The representation by the agent is not a contract, but a legal phenomenon which entails the following:
The agent must have representative power/authority to conclude legal actions on behalf of another (the principal). The agent must act in the name of the principal. The intention of the parties should be to create a legal bond between the principal and the third party and not between the third party and the agent.
Agents often have to first submit contracts to their principals for authorisation. Purchase orders often contain a clause such as “We accept no liability whatsoever for goods delivered or work done on our account, without a formally approved written order”. The aim of such a clause is to exercise central control over all purchases. Approval for purchases often has to pass through a hierarchy of authority. 8.3 THE ESTABLISHMENT OF REPRESENTATIVE CAPACITY Representative capacity can be established in the following ways: • By authority. Authority is an express agreement between a principal and an agent. It is frequently contained in the following types of contracts: – In a contract of mandate.
This is the most common form of the granting of authority and, as mentioned earlier, entails a contract in which specific powers and rights are granted. – In a contract of service. A principal can also vest a representative with authority by virtue of a contract of service between them. In this case the agent is also an employee of the principal. • By ratification. If the agent acts without authority or exceeds his/her authority, the principal can ratify his/her actions subsequently. The position upon ratification will be as if the agent had authority from the outset.
By estoppel. Where someone culpably creates the false impression that someone else has the authority to perform certain actions on his/her behalf and a third party, as a result of this representation, acts to his/her own detriment, the person who has created the impression is prevented (by estoppel) from denying the authority. For example, A will be bound if he/she knows that B purports to be his/her agent and does nothing to prevent this false impression. By operation of law.
This is applicable where the agent does not receive his/her representative capacity in terms of a contract but on the strength of his/her office. Partners are representatives of each other and of the partnership in so far as this relates to the activities of the firm. The director of a company is also a natural representative of the business.
8.4 THE EFFECT OF AGENCY The principles of the effect of agency are as follows: • The agent binds the principal and acquires (obtains) rights and obligations for him/her as if the principal himself/herself had concluded the agreement. The agent acquires no rights and obligations under the contract and cannot be held liable on the grounds of the contract. Any knowledge that the agent acquires (obtains) belongs to the principal as though he/she had obtained it. If the agent acquired (obtained) the knowledge in the course of the exercise of his/her duties he/she has an obligation to convey this knowledge to the principal. The principal must indemnify his/her agent for liability incurred by him/her in the exercise of his/her duties.
8.5 THE DOCTRINE OF THE “UNDISCLOSED PRINCIPAL” This doctrine has been adopted into our system from the English legal system. • It applies in the case where the agent enters into the contract with another party (A) in his/her (the agent’s) own name without disclosing the fact that he/she is acting on behalf of the principal (B). The principal can now come forward, disclose his/her identity and act against the other party (A) as though that party (A) had known from the very start that negotiations had been conducted on his behalf. The other party (A), however, can choose whether he/she wishes to hold the principal (B) or the agent liable for performance under the contract. To escape possible personal liability, the agent should therefore make it clear that he/she is acting on behalf of his/her principal.
Example: You buy office furniture from Percy Lewis who does not disclose that he/she is acting on behalf of Reliable Office Furniture (ROF). ROF can now disclose the fact that Percy was in fact an agent acting on its behalf, as if Percy’s agency was known to you from the start. You can, however, decide whether you want to hold Percy or ROF liable for performance under the contract. 8.6 THE TERMINATION OF REPRESENTATIVE CAPACITY Representative capacity is terminated: • when the task of the agent has been completed, has become impossible, has elapsed through time, or as a result of the death of principal or of the agent when one of the parties withdraws from the contract of mandate. The specific wording of the contract and the parties’ intention will be decisive and it will depend (from case to case) whether the parties have the right of cancellation, on what grounds and what the implications will be. 88
where the principal revokes the authority of the agent. There are specific schools of thought in our law about the right of revocation of the principal as well as the effects thereof. Unfortunately, we cannot give attention to this aspect in this study guide. It can, however, be noted that where the authority is made irrevocable by the contract of mandate, authority can in fact be revoked by the principal, but then the principal maybe liable to the agent for breach of contract.
8.7 CONCLUSION In this study unit you were acquainted with the concept of representation (agency). You have probably already encountered these concepts in your daily business although you may not have seen them in perspective. This study unit explains the meaning of agency, how it arises, its consequences and how it is terminated. ASSESSMENT 1 Name the ways in which representative capacity can be established. Describe the effect of agency. Describe the doctrine of the “undisclosed principal”. How can representative capacity be terminated?
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STUDY UNIT 9
LEGAL/STATUTORY SOUTH AFRICA STUDY UNIT AIM The aim of this study unit is to give you a brief overview of the legal/statutory framework for purchasing in South Africa. FRAMEWORK FOR PURCHASING IN
CONTENT 9.1 Introduction 9.2 Legal/statutory framework for purchasing in South Africa 9.3 Conclusion
STUDY UNIT LEARNING OUTCOMES • explain the legal/statutory framework purchasing and supply in South Africa for
KEY CONCEPTS • • Preferential Procurement Policy Framework Act 5 of 2000 Preferential Procurement Regulations 2001
Study this section in the study guide, as there is no prescribed book for this module.
9.1 INTRODUCTION We have now looked at the basic aspects of the law of contract pertaining to purchasing and supply management. This section aims to introduce you to the legal/statutory framework for purchasing 90
of South Africa. 9.2 LEGAL/STATUTORY FRAMEWORK FOR PURCHASING IN SOUTH AFRICA Section 217 of the Constitution of South Africa (Act 108 of 1996) states: “217 Procurement • When an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective. Subsection (1) does not prevent the organs of state or institutions referred to in that subsection from implementing a procurement policy providing for• categories of preference in the allocation of contracts; and • the protection of advancement of persons, or categories of persons, disadvantaged by unfair discrimination. • National legislation must prescribe a framework within which the policy referred to in subsection (2) must be implemented”.
The Preferential Procurement Policy Framework Act 5 of 2000 was established to give effect to subsection 3 of section 217 of the Constitution and allows for: • • preference to historically disadvantaged people (conversely, people who had no vote, females or disabled persons) 80/20 preference point system for tender prices (conversely, a maximum of 20 points may be awarded for tenders between R30 000 and R500 000 for being or subcontracting with historically disadvantaged people or achieving specified goals) 90/10 preference point system for tender prices (conversely, a maximum of 10 points may be awarded for tenders larger than R500 000 for being or subcontracting with historically 91
disadvantaged people or achieving specified goals) These specific goals are governed by Regulation 17 Preferential Procurement Regulations 2001. This states that specific goals must be measurable, quantifiable and clearly specified. They include: • • • • • • • • • promotion of South African owned enterprises promotion of export orientated production to create jobs promotion of small and medium enterpises (SMMEs) creation of new jobs promotion of enterprises in province/region/municipal area for work to be done in that province/region/municipal area promotion of enterprises in rural areas empowerment of work force by standardising levels of skill and knowledge development of human resources upliftment of communities
It therefore stands to reason that every organisation in South Africa needs to proactively enforce their own procurement and supply policy, which must be drawn up in the legal framework discussed above. Also read the article in Annexure A to familiarise yourself with some of the pressing issues in the legal framework of purchasing in South Africa. 9.3 CONCLUSION Clearly there are some important aspects in the South African legal framework affecting the purchasing and supply function. Buyers should know about these in order to perform their tasks effectively and protect their enterprises against damage and possible legal action.
ANNEXURE A An exploratory study on the progress of adopting preferential procurement in the South African mining sector: a preliminary framework Senior Lecturer: Purchasing, Sourcing and Supply Chain Management Department of Business Management, University of South Africa
Ms I Fourie
Professor: Purchasing, Sourcing and Supply Chain Management Department of Business Management, University of South Africa Summary Transforming the South African mining industry from a sector predominantly controlled by minority white-owned organisations to an industry focused on the ethnic empowerment of the majority black population is a mammoth task, which can not be realised without guidance from the South African government and involvement of all the major stakeholders. This paper focuses on the critical contribution of preferential procurement employed by the South African mining industry towards the transformation of the country’s economy.
The purpose of this paper is to report on the preferential procurement requirements set out in the Broad-Based Socio-Economic Empowerment Charter for the South African Mining Industry and the Balanced Scorecard upholding it, with the objective of developing a preliminary framework as a tangible means for plotting the progress of the transformation process. This paper can contribute to provide insight into the monitoring of cooperative efforts between government and industry stakeholders to transform an economic sector through the procurement function to comply with socioeconomic pressures. Keywords: preferential procurement; ethnic empowerment; diversity suppliers Working progress
& Prof JA Badenhorst-Weiss
Introduction Democratic change in South Africa during the 1990s resulted in the endorsement of principles of private enterprise within a freemarket system, offering equal opportunities for all people. Discriminatory policies, which prohibited a large part of the population from full participation in economic activities, were largely eradicated by the first democratic government of South Africa. In its place, the South African government has outlined broad economic strategies to transform the economy by 2014. This restructuring of the country’s economy had a substantial impact on the manner in which the government applied their preferential procurement practices, establishing preferential procurement as an enabler of transformation (Jonck, Van Averbeke, Harding, Duval, Mwape, Perold, 2003, p. 1). Background to and demarcation of paper Empowering disadvantaged groups through preferential procurement practices is by no means a uniquely South African phenomenon (Fee, Erridge, Hennigan, 2001; Roth, Hernàndez, 2001; Khan, 2003; Brichi, 2004; Dolan, Fedele, 2004).
Many progressive purchasing and supply organisations across the globe have developed and implemented diversity programs whose objectives are to ensure that diversity suppliers receive a reasonable share of the purchasing organisation’s business (Burt, Dobler, Starling, 2003, p.53). Synonyms for the programmes used in different countries are “supplier diversity”, “minority supplier development”, “ethnic minority suppliers”, “disadvantaged business buying programmes”, “affirmative purchasing programmes” and “preferential procurement”. In a baseline study conducted by the Institute for Supply Management, 29 percent of the respondents acknowledged that they, to a good, great or very great extent, have a diversity program in place (Duffy, 2004, p. 20).The establishment of such supplier diversity, minority business or ethnic empowerment programmes in buying organisation worldwide, is commonly the result of (1) executing corporate responsibility; (2) supply base broadening with the aim of mirroring the changes in the buying 94
organisation’s customer base; (3) complying with government prescriptions associated with the allocation of a certain percentage spend to diversity suppliers; (4) alleviating the fear of economic boycotts by diversity groups; (5) complying with diversity requirements passed down from higher tier customers; and (6) realising that diversity suppliers provide products and services competitive with those of non-diversity suppliers (Carter, Auskalnis, Ketchum, 1999, p. 28 – 36). In general, diversity suppliers are defined as those suppliers that have challenges in becoming successfully established and gaining economic representation proportional with their demographic representation (Burt et al., 2003, p.53). Usually, this includes minority groups represented in a specific country and women-owned businesses. In South Africa, however, the opposite is true. It is well known and accepted that the Apartheid regime, systematically and purposefully restricted the majority of South Africans from meaningful participation in the economy.
The result is an economic structure that today, in essence, still excludes the vast majority of South Africans. The period since 1994 has seen the South African economy undergo profound restructuring, and ten years of consistent economic growth has been documented. The South African economy is the most developed and prosperous on the continent of Africa; endowed with massive resources; well established with first world infrastructure; and is managed by a progressive and popularly elected democratic government. Despite this, entrenched inequalities continue to characterise the economy and act as deterrent to optimal economic development (Ramaphosa, 2002, p. 58). From 1996 the Constitution of South Africa (Act 108 of 1996) made provision for the implementation of preferential procurement practices in section 217, whereby organs of the state in the national, provincial or local sphere of government are compelled to procure goods or services in accordance with a system which is fair, equitable, transparent, competitive and cost-effective. From that point on the South African government issued a drive for public sector procurement reform, leveraging its purchasing power in support of its economic policy objectives. Hence, the Preferential 95
Procurement Policy Framework (Act 5 of 2000) was established to give effect to section 217 of the Constitution. This framework allows for preference to be given to Historically Disadvantaged South Africans (hereinafter referred to as HDSAs), defined in the Mining Charter as any person, category of persons or community, disadvantaged by unfair discrimination before the Constitution came into operation, by implementing a point system (based on price and preference to target groups) to be used in the awarding of tenders in the public sector. Preferential procurement may be defined, for the purpose of this paper, as an active attempt on the part of organisations to purchase the materials and services they require from businesses belonging to HDSAs (Badenhorst-Weiss, Hugo, Fourie, 2003, p.1). This policy forced the procurement process of all the different organs of state to be more inclusive by allowing competitive advantage for businesses owned by HDSAs. Equity ownership and management participation are among the main principles applied during the evaluation of tenders as required by the Preferential Procurement Policy Framework Act.
These measures ensure that public tenders are more accessible to HDSAs, as large tenders were divided into smaller tenders to allow smaller HDSA businesses to compete more effectively. The changing view of procurement by the South African government led to many South African organisations establishing procurement policies and procedures promoting preferential procurement (Mthembu, 2002, p. 2). Yet, these regulations are only enforceable when organisations trade within the public sector. The South African government’s influence within the private sector is confined to orderly regulations and the encouragement of equal opportunity for all citizens through a complementary and supportive role. The lack of participation of the private industry stakeholders resulted in a slow rate of transformation within the broad economy, and predominantly white-owned organisations remains in control. Empowerment, in the South African context, allows HDSAs or business owned by HDSAs to (1) become involved; (2) obtain knowledge; (3) acquire a sense of worth and authority; (4) take ownership and responsibility; and (5) achieve success (Ramaphosa, 2002, p. 58). 96
Black economic empowerment (BEE) has at its aim to develop comprehensive strategies to create increasing access to productive assets while simultaneously ensuring the productivity of those assets by promoting new opportunities for and increased participation of black people in ownership, management and control thereof (BEE Commission, 2001). There is a tendency in South Africa to define black economic empowerment narrowly and focus on the entry and transaction activities of black people in business, especially what is commonly referred to as BEE investment companies. The consequence has been a continuous exclusion of black people from broad-based financial and economic resources since 1994 (Ramaphosa, 2002, p.59). Subsequently, the South African government has outlined broad economic strategies to transform the economy by 2014. One of these strategies involves the achievement of broad-based black economic empowerment and the deracialisation of the South African economy. This lead to the of the Broad-based Black Economic Empowerment Act (Act 53 of 2003) which created the foundation for the development of various industry socio-economic empowerment charters with the aim of setting goals for transformation pertaining to black economic empowerment in the respective industry, and the results envisioned include (1) more black South Africans who have ownership and control of existing and new enterprises, (2) a significant increase in the number of black, black-empowered and black-engendered enterprises; and (3) accelerated and shared economic growth (Department of Trade and Industry, 2003, p.12).
One of the most valued aspects focused on in the quest for transformation of the South African economy through these socioeconomic charters is the preferential procurement practices employed by all organisations in the private sector with the guidance of the government, including the organisations that form the focus of this paper – those in the South African mining industry. It stands to reason that the correct application of procurement will assist in fast tracking the transformation process, as it assists in the development of HDSA suppliers by awarding a sufficient amount of business to their organisations. However, this 97
is not a natural development in the South African economy and has to be supervised in order to ensure success. Problem statement The South African mining industry contributed R80.6 billion (US$7.7 billion) or 8.1 percent to the national economy through gross value-added contribution in 2002, and a further 8.0 percent through associate multiplier effects. This contribution has improved by R13.8 billion from the previous year. In addition to this, the mining industry employed 2.6 percent of South Africa’s economically active population. The average number of workers employed totalled 416 925 people. Also taking into account the multiplying effect with regard to the supply and consuming industries, as well as the related dependants, many millions of South African people rely on the mining industry for their livelihood (Jonck et al, 2003, p. 6). It is clear that transformation in the mining industry will have a great impact on socio-economic pressures in South Africa by empowering a vast amount of HDSAs and businesses. Realising this, the South African government lobbied the cooperation of all the stakeholders in the country’s mining industry to transform the industry towards redressing the results of past discrimination based on race, gender or disability.
Several of the largest organisations within the mining industry have already allocated substantial amounts of its annual spend to ensure progress towards transformation. Anglo Platinum spent R740m on empowerment endeavours in 2003, while AngloCoal contributed R402m and AngloGold allocated R367m (Van Zyl, 2004, p.7). The result was the establishment of various regulatory mechanisms culminating in the Broad-Based Socio-Economic Empowerment Charter for the South African Mining Industry (henceforth referred to as the Mining Charter). The Mining Charter was signed by representatives of the Department of Minerals and Energy, the Chamber of Mines, the South African Mining Development Association, and the National Union of Mineworkers. This document therefore represents a consensus (with important elements of compromise from all the parties) between the most important role players in the mining industry (including representatives from government) as to how the mining industry should be transformed 98
and regulated in the future. If such a transformation effort is not regularly measured and evaluated for continuous improvement, misconceptions prevail and this leads to the dissatisfaction and a lack of commitment of all the stakeholders involved (Chonco, 2002). The challenge that this paper will address is the development of a preliminary framework to serve as tangible means to plot the progress of adopting preferential procurement as a tool for transformation within the mining industry as prescribed by the requirements of the Mining Charter for the South African mining industry. Objectives This paper focuses on the critical contribution of preferential procurement employed by the South African mining industry towards the transformation of the country’s economy.
The purpose of this paper is to report on the preferential procurement requirements set out in the Mining Charter and the Balanced Scorecard upholding it, with the objective of developing a preliminary framework as a tangible means for plotting the progress of the transformation process. The paper forms the basis of an indepth research study to be conducted on the adoption of preferential procurement throughout the South African mining industry. Research methodology The research methodology followed to compile this paper is by nature explorative with a qualitative focus, as crucial elements of the study are based on historical information used to gain a better understanding of the necessary migration path towards transforming the South African mining industry by adopting preferential procurement, as it is one of the aspects highlighted by the Mining Charter. The requirements pertaining to preferential procurement set out by the Mining Charter for the South African mining industry In the South African mining industry the drafting of the Mining Charter for the South African mining industry was already available 99
in October 2002, long before the Broad-based Black Economic Empowerment Act (Act 53 of 2003) was promulgated. The document was drafted in pursuit of a shared vision of a globally competitive mining industry that draws on the human and financial resources of all South Africa’s people and to create an industry that will proudly reflect the promise of a non-racial South Africa. After careful negotiation, the Mining Charter calls for HDSAs to control 15 percent of mines within 5 years, rising to 26 percent in 10 years. The Mining Charter stresses commitment to create a South African mining industry that will reflect ethnic empowerment and focuses on the transformation of several aspects, including (1) human resource development, (2) employment equity, (3) migrant labour, (4) mine community and rural development, (5) housing and living conditions, (6) procurement, (7) ownership and joint ventures, (8) beneficiation, and (9) reporting. For the scope of this paper, we will be focussing on only one of these aspects – procurement. The Mining Charter divides procurement into three levels, namely capital goods, services and consumables. All the stakeholders undertake to give HDSAs a preferred supplier status, where possible, in all three of these levels of procurement.
This will be done by identifying the current levels of procurement from HDSA companies; committing to a progression of procurement from HDSA companies over a 3 to 5 year time frame reflecting the genuine value added by the HDSA provider; encouraging existing suppliers to form partnerships with HDSA companies where no HDSA company tenders to supply the goods or services; and commit to the development of HDSA procurement capacity. A list of suppliers, containing all HDSA companies that are able to participate in the industry, is envisaged. In order to give effect to the provisions of the Mining Charter, a Scorecard for the Broad-Based Socio-Economic Charter for the South African Mining Industry was released in 2003. The Scorecard was designed to reflect the essence of the Mining Charter for the South African mining industry and measure the progress of achieving the aims of the Charter as listed above, and further defined in the Scorecard, by quantifying the progress into a measurable percentage. The progress can be measured in two ways (1) according to the specific targets set in the charter for the 100 mining industry as a whole, and (2) the targets set by individual mining companies.
However, the only questions addressing procurement in the Scorecard are as follows: • • Has the mining company given HDSA’s preferred supplier status? Has the mining company identified current level of procurement from HDSA companies in terms of capital goods, consumables and services? Has the mining company indicated a commitment to a progression of procurement from HDSA companies over a 3 – 5 year time frame in terms of capital goods, consumables and services and to what extent has the commitment been implemented?
Clearly these questions are not adequate to establish the progress of transformation in respect to preferential procurement in the mining industry. Types of purchases and the possibilities for using HDSA suppliers Procurement strategy is essentially driven by two aspects: (1) what is the cost implications associated with the procurement of
complexity associated with the products or services? Any products or services? and (2) what is the level of risk and progressive buying organisation operating in the mining industry will execute an analysis of the level of risk and complexity a product or service holds for the organisation opposed to the cost implications allocated to the product or service. These products or services are then classified as routine, leverage, bottleneck or critical (each category exhibiting its own characteristics), as illustrated in Fig. 1 according to the supplier positioning model.
Figure 1 – The supplier positioning model
High Bottleneck products or services Low expenditure Few alternate products/services available Few qualified sources of products/services available Unique specifications Level of risk & complexity Routine products or services Critical products or services High expenditure Strategic to profitability and operations of the buying organisation Alternate products/services not available Few qualified sources of products/services available Complex specifications Leverage products or services High expenditure Existing alternate products/services available Products/services readily available
Low expenditure Many existing alternate products/services available Products/services readily available from various qualified sources Small individual transactions Low Clear specifications Low Cost
Schiewe (2002, p.3).
The general tendency in the South African preferential procurement effort is to allocate only products or services with low cost implications and little risk or complexity. Most HDSAs remain at the periphery of the economy, confined to low-value-added activities. This is also evident in the mining sector where barriers to entry include the capital-intensive nature of the industry, the limited life span of mines, the lack of exploration or beneficiation opportunities, and the difficulty in attaining funding for HDSA mining ventures. HDSA participation is primarily at the level of outsourcing of non-core activities, with very little participation in operations (BEE Commission, 2001, p.45). The result is a large amount of HDSA small and medium enterprises, with no or few growth opportunities. In order to realise true broadbased black economic empowerment and adherence to the requirements of the Mining Charter in particular, stakeholders in the mining industry will have to ensure that HDSA suppliers are 102
assisted to become more established suppliers within the routine, but also the leverage category of goods or services. Finding any supplier/s in the bottleneck and critical categories of products or services create the most challenges for a buying organisation in the South African mining industry, as they are faced with the predicament of little or no competitors in the supply market due to the complexity and nature of the product/service. Obtaining HDSA suppliers proves to be even more demanding, if not impossible. Achieving broad-based black economic empowerment and the preferential procurement targets set out by the Mining Charter is not going to be an easy task.
In order to achieve this, the focus of mining companies should be to (1) developing the large amount of HDSA suppliers from suppliers of routine products and services to expand their businesses to also supply leverage products or services, and (2) to focus their preferential procurement efforts to identify and develop HDSA suppliers of bottleneck and critical products or services, as illustrated in Fig. 2. Figure 2 – Focus areas for the use of HDSA suppliers
Identify & develop HDSA suppliers of bottleneck products or services Develop HDSA suppliers of routine products or services Low Value of
Identify & develop HDSA suppliers of critical products or services
Level of risk & complexity
HDSA suppliers of leverage products or services business High
Preliminary framework for mapping the progress of adopting preferential procurement in the South African mining industry The systematic dispossession and disempowerment of HDSAs that has defined South Africa for so long requires an equally systematic response from all the stakeholders to achieve redress (Department of Trade and Industry, 2003, p. 11). South African Mining companies will be wise not to attempt to restore equality by 103 employing a once-off event, but rather implementing a systematic approach for ongoing improvements that leads to a predictable, desirable result (Potgieter, 2004, p.3). It has already been established that a transformation effort should be regularly measured and evaluated for continuous improvement and, except for the few questions regarding procurement in the Scorecard as set out above, no framework exist to serve as tangible means to achieve this.
A preliminary framework establishing the development from no preferential program to the implementation of a world-class preferential process, and the aspects associated with it, will allow purchasing organisations in the mining industry to benchmark the progress of their own organisations in this regard. After they have established their current position, it will allow them to develop and perfect their own strategies to deal with the pressures to conform to the requirements of the Mining Charter. An explorative literature study on preferential procurement initiatives, both globally and in South Africa, lead to the identification of the most important issues in developing world-class preferential procurement processes for purchasing organisations who will make up the largest portion of the stakeholders in the South African mining industry’s preferential procurement process (Potgieter, 2004, p. 8; Yuva, 2003, p. 8; Khan, 2002, p.8; Roth, Hernàndez, 2001, p. 11).
These key performance areas include a variety of aspects. Firstly, the attitude of the purchasing organisation towards the preferential procurement process must be established. This is of paramount importance as it generally channels the organisation’s effort in this regard. Most preferential procurement initiatives started for compliance reasons, but some progressive purchasing organisations have already established the concept as part of their organisational culture (Roth, Hernàndez, 2001, p. 11). The second significant area is the identification of the various drivers of preferential procurement in the purchasing organisation as such. Do the organisation just attempt to maintain the status quo, or are the maintaining the preferential procurement drive as part and parcel of their values and culture (Potgieter, 2004, p. 8)? The third aspect entails the strategies put in place by the 104 purchasing organisation to respond to these drivers, ranging from seeking support to maintain the indifferent -attitude to pro-active management of preferential procurement issues.
It is then important to ascertain what the preferential procurement goals set by the buying organisation entail, and determine who the responsibility will be allocated to within the buying organisation. The allocation of a budget is the sixth key performance area that needs to be addressed. Organisations need to allocate a formal budget, with appropriate timetable, to the preferential procurement drive (Yuva, 2003, p. 8). No preferential procurement drive can be successfully implemented without focussing on change management aspects. A purchasing organisation must progress from a process of ad-hoc and reactive change management to formal change management, but must ensure that the process eventually ends as the culture of the organisation is established. The preferential procurement drive (and the change management aspect associated with it) must be communicated to the stakeholders involved through a well-detailed communication plan, focussing at first on employees within the organisation but eventually including an organisation spanning target audience (Roth, Hernàndez, 2001, p. 11).
We have established above that the South African mining industry should focus their preferential procurement endeavours to develop HDSA suppliers of routine products or services to the leverage category; and identify and develop HDSA suppliers in the bottleneck and critical categories. It is advisable that they focus on the first aspect initially and expand the focus as the preferential procurement process matures. Once all of the above areas have been attended to the achievement of the various levels pertaining to the development of a world-class preferential procurement process as identified by the National Minority Supplier Development Council must also be taken into account. Many organisations refer to their preferential procurement efforts as programs. Programs, however, imply only limited application and duration. Purchasing organisations must endeavour to apply preferential procurement as a mainstream process that is part and parcel of the organisational vision and culture. Lastly, the tracking of the preferential procurement process must be evaluated (Roth, 105
Hernàndez, 2001, p. 11). It is important to note that purchasing organisations will find themselves on different levels in respect to each of these issues, ranging from indifference to excellence (Potgieter, 2004, p. 8). The purchasing organisation may (1) be completely indifferent to the preferential procurement drive, and all aspects associated with it, (2) reluctantly be aware of certain aspects pertaining to the preferential procurement drive; (3) have a broad understanding of the fundamentals of the preferential procurement drive; (4) be competent in the implementation of the preferential procurement drive; or (5) have established an excellent culture of preferential procurement.
Figure 3 – Preliminary framework for mapping the progress of adopting preferential procurement in the South African mining industry PATH TO WORLD CLASS PREFERENTIAL PROCUREMENT
LEVEL 1 INDIFFERENT ATTITUDE Rejection
LEVEL 2 AWARENESS Reluctant acceptance
LEVEL 3 UNDERSTANDING Broad acceptance
LEVEL 4 COMPETENCE Participatory acceptance
LEVEL 5 EXCELLENCE Preferential procurement established in culture Maintaining the values and culture
Maintaining status quo
Pressure from government and customers Seeking loopholes Doing the minimum to avoid nonadherence
Internal and external sustainability issues High level of activity to define goals Goals quantified but not driven
Implement as part of organisational fabric Broad participation programmes Goals with actions reviewed periodically
Seek support to maintain resistance Lack of goals
Pro-active management of issues Preferential procurement maintained through culture tied to annual performance objectives Top management as custodian of preferential procurement culture Formal budget Change management virtually disappeared Target all internal and external stakeholders
Top management with champions driving
BUDGET CHANGE MANAGEMENT
Impromptu expenses Ad-hoc and reactive management of change Target employees
Partial Budgeting Understanding but limited progress
Allocated Spend Formal change management with clear strategy, measures, etc. Target internal stakeholders and a few
Target employees and a few internal stakeholders
external stakeholders SUPPLIER FOCUS AREAS No focus area Focus on suppliers of routine products or services Focus on suppliers of routine and, to a lesser extent, leverage products or services Focus on suppliers of routine, leverage, and, to a lesser extent, bottleneck products or services Focus on suppliers of routine, leverage, bottleneck, and, to a lesser extent, critical products or services World-class Preferential Procurement Process Tracking, measurement and continuous improvement
No Preferential Procurement Program No tracking
Basic Preferential Procurement Program Limited tracking
Traditional Preferential Procurement Program Limited tracking and outreach
Advanced Preferential Procurement Process Tracking and measurement
Educators and practitioner summary The key performance areas pertaining to the development of a world-class preferential procurement process and the various levels of competence a purchasing organisation applies, was used to compile the matrix reflected in Fig. 3. The matrix can be used as an outline for mapping the progress of adopting preferential procurement in the South African mining industry. It stands to reason that progressing from one level to another in the matrix will directly result in the investment of more effort and resources, as each phase is a step closer to adopting preferential procurement as a process woven into the buying organisation’s vision and culture.
It must be highlighted that this framework has been compiled based on a preliminary explorative literature study, and can thus not be regarded as the conclusive functional measurement instrument. Further study and testing will follow to develop the preliminary framework into a constructive and value-adding measurement tool. The final version will assist purchasing organisations in the South African mining industry to determine from which level the organisation is starting from, how many resources will be required 108
to move to the next level and which organisational changes must be made. Conclusion The systematic dispossession and disempowerment of previously disadvantaged South African, requires an equally systematic response in order to achieve redress and ensure accelerated economic growth to eradicate poverty in the country. To this effect, South Africa has made substantial progress in ensuring that the mechanisms governing preferential procurement practices, specifically in the mining industry, are in place. This was achieved by firm guidance from the South African government to focus on stakeholders within the ranks of the mining industry to lead the process of transformation.
This resulted in the current influential preferential procurement legislation by the South African Government, and mining industry stakeholders culminating in the Mining Charter for the mining industry. However, measuring the transformation process has left many unanswered questions. The Scorecard monitoring the Mining Charter is effective in providing an overview of the transformation process, but lack the ability to highlight where the purchasing organisations in the industry is in terms of
the process of adopting specific transformation tools, such as preferential procurement. This paper therefore attempted to develop a more comprehensive preliminary framework which can be utilised to plot the progress of adopting preferential procurement in South African mining purchasing organisations based on the key performance areas of any preferential procurement process.
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ASSESSMENT 1 Explain the implications of the legal framework from a practitioner-in-purchasing-and-supply’s point of view.
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