Commercialaw

FreshPerspectives
3rd Edition

Editors: A Govindjee and K Pillay

Authors: J Botha, S Driver, V Etsebeth, A Govindjee, D Holness
} Katzew, SP Newman, K Pillay, HC Schoeman,
A Shirk, PP Singh, M Tait, T Wagenaar
@ Pearson
Pearson South Africa (Pry) Ltd
4th floor, Auto Adantic Building, Corner of Hertzog Boulevard and Heerengracht, Cape Town, 8001
Za.pearson.com

© Pearson South Africa (Pty) Led 2019

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in
any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written
permission of the copyright holder.

Every effort has been made to trace the copyright holders of material produced in this title. We would like to apologise
for any infringement of copyright so caused, and copyright holders are requested to contact the publishers in order to
rectify the matter.
First published in 2008
Second edition in 2011
Third edition in 2019

ISBN 978-1-485-70209-2 (print)

ISBN 978-1-485-70212-2 (epdf)
Publisher: Silvia Raninger
Editor: Kim van Besouw
Managing editor: Ulla Schiiler
Proofreader: Cherie Wright
Indexer: Lois Henderson
Artwork: Claudia Eckard
Book design: Pearson Media Hub
Cover design: Pearson Media Hub
Cover photograph: Roman Babakin.Shutterstock
Typesetting: Baseline Publishing Services

In line with Pearson’s editorial policy this book has been peer reviewed.
Acknowledgements:
The publishers wish to thank the following copyright holders for permission to use the following material:
Text: Page 3: Quote from Brisley v Drotsky 2002 ZASCA 35 (28 March 2002), para. 4 - Supreme Court of Appeal of
South Africa. Page 10: Quote from Van Breda and Others v Jacobs and Others 1921 AD 334 — Supreme Court of Appeal
of South Africa. Page 35: Quote from Hleka v Johannesburg City Council 1949 (1) SA 842 (A) at 852-3, retrieved from
the South African Law Reports — Jura and Company (Pty) Limited. Page 40: Case R v Chitsa 1966 (2) SA 34 (R), retrieved
from the South African Law Reports — Juta and Company (Pty) Limited. Page 44: Prohibition of Disguises Act 16 of 1969
reproduced with permission from LexisNexis SA. Page 105: Quote from Brisley v Drotsky 2002 (4) SA 1 (SCA) -
Supreme Court of Appeal of South Africa. Page 279: Screenshot by permission of Oxford University Press — Blog. OUP,
hetps://blog.oup.com/2013/12/wrap-contracts-priva cy-control-consumers/, Page 391: Article ‘Saccawu: Strike
is impacting on Shoprite’ — African News Agency, retrieved from www.mg.co.za/article/2006-08-1 5-saccawu-strike-is-
impacting-on-shoprite. Page 445: Article ‘Steinhoff catastrophe biggest yet in SA and ranks among notorious global
collapses’ by Stuart Theobald — Business Day, retrieved from https://www.businesslive.co.za/bd/opinion/
columnists/2017-12-1 1 -stuart-theobald-steinhoff-catastrophe-biggest-yet-in-sa-and-ranks-among-notorious-global-
collapses/ Page 470: Article “Two eagles on their last flight’ - Netwerk24-05/09/2017Seugnet van Zyl and Andrea Kiisel.
Page 471: ““Free beer” as Capetonians loot SAB truck’ — Timeslive. Page 471: Adaptation from World Bank website -
World Bank. Page 491; Logo — Proudly South African. Page 497: ‘Hippo Roller’, based on Javan, M “Water, dignity and
the Hippo Roller Project’ (17 October 2017), retrieved from hetps://www.brandsouthafrica.com/play-your-part-category/
water-dignity-and-the-hippo-roller-project — Brand SA. Pages 510, 511, 515 and 517: Quoted material — The
Competition Act 89
of 1998. Page 515: Quoted material — The Competition Tribunal section 8(c) and 8(d). Page 516: Quoted material —
The Competition Act section 9(1). Page 15, 37,43, 111, 182, 207, 270, 278, 280, 282, 330, 445, 446, 508 and 509:
Extracts from legislation — This legislation was prepared by the University of Pretoria. Please note that legislation is always
changing, therefore it is advisable to go to the University of Pretoria’s website: http://www.lawsofsouthafrica.up.ac.za/ to
check for the latest versions of Acts and Regulations.
Every effort has been made to trace copyright holders. The publishers apologise for any errors or omissions, and invite
copyright holders to contact us if any have occurred, so that they may be rectified.
Contents

About the authors .....000 ooo

ovo ececcecees Part 4:
Part 1: Important aspects of Commercial Law
Introduction to Commercial Law Chapter 17
The Consumer Protection Act (Mark Tait) .......0.c00u00. 231
Chapter 1
Background to law in South Africa (Dave Holness) ........ Chapter 18
The law of agency (Mark Tait) 0.0... ....cccceeeceeeceeeseeseees 257
Chapter 2
Branches of the law (Avinash Govindjee) ....................+ Chapter 19
Online contracts and e-commerce (Priya P. Singh and
Chapter 3 Verne: Etseboe th) sccrasvaaasies
cartes asakecs ea Nica dincsccascainnaass 276
Interpreting statutes (Stephen Newman)....................--
Chapter 20
Methods of payment (Stephen Newman) ................0 294
Part 2:
Chapter 21
General principles of contract The law of insolvency (Karmini Pillay) ................000:00000 320
Chapter 22
Chapter 4 The law of succession (Sarah Driver)... 346
Contractual capacity (Abigail Shirk) ......0...........
ee
Chapter 23
Chapter 5 The law of security (Dave Holness) ......0cccccccceseceeeeeees 357
Reaching agreement (Abigail Shirk) ................0.0...00.
Chapter 24
Chapter 6 Labour law (Avinash Govindjee) .......cccccecreesesseeeeeseesees 383
Problems with the formation of a contract
(Abigail Shirk and Karmini Pillay) ...............:.:0.::eeeeeeeee Chapter 25
Arbitration (Avinash Govindjee) .........00.....ccccceeeseecereee 421
Chapter 7
Formalities, certainty, possibility and lawfulness Chapter 26
of contracts (Abigall:Shitk) scission Business entities Judith KatZew) .....0...ccceccecceeeneeneee 429
Chapter 8 Chapter 27
Contents of a contract (Abigail Shirk and The law of insurance Joanna Botha) ............c cee 451
Karmini Pillay) .......... a NG WAT EAWSEN VE NEG SPY EAN eee ERE
Chapter 28
Chapter 9 The law of carriage Judith KatZew) ........cccccecsceeees 470
Common contractual terms (Dave Holness) .................
Chapter 29
Chapter 10 The law of intellectual property (Tanya Wagenaap)....... 483
Forms of breach of contract (Avinash Govindjee and
Chapter 30
KSI) bose saisccveviascscaneasssonascussorammarancmsaes
Financial institutions (Avinash Govindjee and
Chapter 11 Kanmint: Pillay): sssscsccstessiercesatiacatetsaiiacaaasiienenaaieest . 498
Remedies for breach of contract (Dave Holness) ........ 3 147
Chapter 31
Chapter 12 The law of competition (Heidi Schoeman) ................08. 507
The passing, varying and ending of rights and duties
by agreement (Avinash Govindjee) ...............0.....c00:60+ Bibliography oitinaitentennomann 519
WK 55 scccs ccs entarnesennaediescaanieanicinseneieaeNeeR 521
Chapter 13
Index to Legislation 0000s 531
Termination of contracts by law (Avinash Govindjee
and Karmini Pillay).......000..000ccccees Coe eeeneeeees Grichext: Co: Cases 32ssis ICI 534

Part 3:
Types of contract
Chapter 14
The law of sale (Avinash Govindjee) ..........ccccceccceees
Chapter 15
The law of lease (Dave Holness) ...0..00000000c0ccceeeeeeeeeeeee

Chapter 16
Credit agreements (Dave Holness) ..............2..00:.200eeee
About the authors
Avinash Govindjee is Professor of Law and Executive Dean of the Faculty of Law, Nelson Mandela University,
a consulting attorney to Cliffe Dekker Hofmeyr and a part-time senior commissioner of the Commission
for Conciliation, Mediation and Arbitration. He is the editor of all three editions of Commercial Law —
Fresh Perspectives.

Karmini Pillay is an academic in the School of Law, University of the Witwatersrand, and a facilitator in the Labour
Dispute Resolution Programme for the Commission for Conciliation, Mediation and Arbitration at the Mandela
Institute. She is the editor of the third edition of Commercial Law — Fresh Perspectives.

Joanna Botha is the Head of Department of Public Law, in the Faculty of Law, Nelson Mandela University. She is
also an attorney of the High Court of South Africa.

Sarah Driver is a senior lecturer in the Faculty of Law, Rhodes University, where she has taught for the last
18 years. Her fields of interest are succession and intellectual property.

Verine Etsebeth is a senior lecturer in the University of the Witwatersrand’s School of Law. Verine, who is an
admitted attomey, has presented papers nationally and internationally, particularly on IT Law.

Dave Holness is Director of the University of KwaZulu-Natal’s Law Clinic and a senior lecturer in UKZN's Law
School. He is a practising attorney of the High Court of South Africa. He has published in the fields of commercial
law, socio-economic rights and legal aid.

Judith Katzew |s a lecturer in the University of the Witwatersrand’s School of Law. She has a particular interest in
company and insurance law and has taught and published in these fields.

Stephen Newman lectures in the Department of Mercantile Law at Nelson Mandela University. His fields of interest
are consumer protection and international trade law.

Heidi Schoeman is a senior lecturer in the Law Department at the University of Zululand. She is also an advocate
of the High Court of South Africa.

Abigail Shirk is an attorney, conveyancer and notary in practice. Previously, she lectured in law at the University of
Cape Town.

Priya P. Singh is an admitted attorney and notary and is a lecturer in the School of Law at the University of
KwaZulu-Natal, where she teaches the law of delict, the law of succession, maritime law and cyber law. Her
doctoral research deals with the development needed by the South African law to cope with privacy infringements
on social media networking sites.

Mark Tait is an associate professor and the Head of Department of Mercantile Law at Nelson Mandela University.

Tanya Wagenaar lectures in the Faculty of Law at Nelson Mandela University. Her fields of interest include
intellectual property law, environmental law and law of the sea.
 Chapter

Background to law in South Africa 1

The main ideas

What is the law?
Different types of rules
The state’s role in law
A history of South African law
Where can you look up South African law?
The South African court hierarchy

The main skills

Discuss what the law is.
Apply knowledge of theory of law.
Compare common law and customary law.
Answer questions on law.
Interpret, explain and define legal terms and concepts.
Solve problems and make decisions based on the law.

Part 1 gives you a basic introduction to the study of law. In Chapter 1, we begin by defining the law
because it’s a good idea to understand what something means before you examine its components.
Next, we outline the history of South African law, and explain where you can find it recorded. Finally,
we discuss the functions and powers of the various courts in South Africa and distinguish between some
of the main roles of the people who work there. In Chapters 2 and 3, we look at the branches of the law
and the interpretation of the law.

Before you start

Think about some of the ways in which rules and laws control your life. If you drive a car, you know that
you are allowed to drive only if you have a driver's licence. To get a driver's licence, you have to be at least
18 years old and pass a driving test. Before that, you have to pass a learner's test to prove that you know
the rules of the road and what the different road signs and markings mean. If you drive too fast, cross
an intersection when the light is red, or park in a place where it’s not allowed, you can be fined because
you are breaking the law. If you break the law in more serious ways, like driving while you are drunk or
stealing someone else’s car, you could end up in prison.
It is easy to see why we need laws and rules — they make it possible for a society to function smoothly.
In this book we focus mainly on the laws that control business relationships and how those laws are applied.

1.1 What is the law?

‘The law is a set of rules made by the state (or government) to order the way in which
5 j 3 a 3 s : The word law can mean
the people in a society behave. This is part of a social contract that members of society
one particular rule or
follow/agree to so that there is order in society. The state also reinforces the law by seeing the whole set or system
that people obey these rules. Laws define what you have to do, what you may not do and of rules, Lawis also one
what other people are not allowed to do to you. So, the law tells you what your duties or of the courses you have
obligations are (things you have to do) and also what your rights are (ways in which the law — “hosen to study,
will protect your well-being). We examine obligations and rights in Chapter 2.

Chapter 1 | Background to law in South Africa 1

 Before we continue, let us take a closer look at some definitions. Because language plays a very important
part in law, you have to pay particular attention to the meanings of words as you study this subject.
If something is legal, we mean that it is:
™ related to law, for example, legal terms are words related to law
= allowed by law, for example, it is legal to sell beer to adults in a licensed bar, but it is not legal to sell
alcohol to children.

You will also come across the term legal subject. This means any person to whom the law The parties are the people
applies. This is dealt with in more detail in Chapter 2. involved in an agreement
Laws are often based on legal principles. A legal principle is a generally accepted or disagreement, in other
standard of conduct or behaviour that has the backing (or support) of the law to make words, the two sides.
it legally binding. If something is legally binding, you have to obey it because you can
be held responsible for it in a court of law. For example, there is a legal principle that if something is ‘valid’ it is
people should be honest when they make an agreement. Usually, when two parties Ber ertane Ort Bases OF
decide to work together, they sign a contract (a legally binding ‘agreement) that states truth. So if an agreement
ace Ba
what each party agrees to do. When one party to a contract or agreement fails to tell the acceptable or binding; it
other party all the facts that might affect the agreement, the law may determine that the has no legal force.
contract is invalid.

1.2 Two different types of rules

There are two different types of rules that control how people should behave in society, namely:
1. legal rules, or laws
2. moral or ethical rules.

Legal rules, as you saw above, are rules that everyone in a society has to obey. If you break a law (legal
rule), the state can take you to court and may punish you with a fine or a prison sentence. In Chapter 2,
criminal law, as a branch of law, will be dealt with in more detail.
Moral rules, by contrast, are subjective. They are personal standards of behaviour as to what is right
or wrong based on people's belief systems, which are usually shaped by their religion. These belief
systems can be different for different people or groups in the same society, and behaviour considered
morally or evenly legally right or wrong may change over time. In relation to the previous sentence, for
example, adultery was considered illegal and generally immoral in South Africa at one point, but this is
no longer unlawful. Another example of a moral rule is that some people believe it is wrong to have sex
with someone you are not married to. They have a moral rule that prevents them from behaving in that
way. But, this (moral) rule is not a law in South Africa, and the state will not punish you just because
you are not married to someone you had sex with. Of course, there are many laws that do govern who
you can and cannot have sex with. For example, both people must consent, they must be over a certain
age and they may not be too closely related (like brother and sister).
There is a lot of overlap between moral and legal rules. For example, most of us would agree that
murder and theft are not only illegal (against the law), but also immoral (against our belief systems or
standards of behaviour).
Sometimes, laws can even be immoral, as we experienced in South Africa under apartheid, not too
long ago. The law forced people to treat one another unfairly, based on their skin colour. For example, in
terms of the apartheid era legislation, called the Immorality Act 23 of 1957, white people and non-white
people were not allowed to have sexual relations with one another. Religious leaders and organisations,
such as human rights organisations like the Black Sash, protested on moral grounds, because various
apartheid laws did not respect the human rights that every person should have.

2 Chapter 1| Background to law in South Africa

1.3 The role of the state
You know already that laws are the rules of the state. The state makes a number of laws, and it also makes
sure that people obey them. Different components of the state are responsible for these two functions.
In South Africa, Parliament is the highest elected law-making body and is also called a Legislature comes from
legislature, which we can consider the first arm of government — each arm of government the Latin word /egis which
having its own, unique functions. Legislation is the set, or system, of laws made by the means ‘law’.
legislature. The Constitution of the Republic of South Africa, 1996, is the highest law of the
land to which all other laws and conduct must abide (section 2) and it reflects public policy. The concept of public
In Brisley v Drotsky 2002 ZASCA 35 (28 March 2002), para. 4, CameronJ explains that: policy under the
Constitution of the
‘{T]here may be circumstances in which an agreement, unobjectionable in itself, will Republic of South
not be enforced because the object it seeks to achieve is contrary to public policy. Africa, 1996 includes
Public policy in any event nullifies agreements offensive in themselves — a doctrine of constitutional values
(such as section 1 of
very considerable antiquity. In its modern guise, public policy is now rooted in our the Constitution), which
Constitution and the fundamental values it enshrines. These include human dignity, provide an objective legal
the achievement of equality and the advancement of human rights and freedoms, standard by which to
non-racialism and non-sexism’. judge human conduct.

The Cabinet, which is the Executive, consists of the president and all the ministers of the
various state departments, and makes policies that put the legislation into practice or result
in new laws. The Cabinet can be considered the second arm of government. The third arm
of government is the judiciary, being the courts, which must decide whether laws have
indeed been followed or not and then make findings flowing from that determination.
Various other organs of state enforce the laws passed by Parliament. In other words, Organs of state are parts
they give force or power to the law by holding people responsible when they break the law. of government that have
For example, if I steal some digital cameras from a shop and someone catches me at it, the particular functions like
the police station, courts,
police will arrest me. I will then have to appear in court. If the court finds me guilty, I will
and correctional services.
have to pay a fine or go to prison. By enforcing the law in this way, the state makes sure that The Cabinet is also an
people obey the laws. The courts of law, judges and magistrates, also called the judiciary, organ of the state.
form the main part of the law enforcement process.
Here is another example of law enforcement. During severe droughts in the Western Cape,
local government made (and continues to make) new laws to restrict the use of water (because of
water shortages). People living in Cape Town could no longer water their gardens, unless they had a
borehole or used their bath water for their plants. A group of people known as the ‘water police’ went
around the neighbourhoods to check that everyone obeyed these rules. Those who used water illegally
had (as of 2017) to pay fines and those who exceeded their daily water usage quota faced very high
charges for their water usage.

Activity 1.1
1. The law is not easy to define. Everyone you speak to may have a different idea of what it is and
what its most important aspects are. Discuss with a partner how you would define the law.
2. Write down your own definition of the law and its most important components in no more
than 100 words.
3. Why are you studying commercial law? What benefits do you expect from doing this course?
if you have never really thought about it, think about it now. Write down every benefit you
could gain, both as a student and in your later career, from a good knowledge of commercial
law. A good list of benefits can be a great help when you are struggling to stay motivated.
4. Imagine a society without any laws. With a partner, discuss what such a society would be
like and why this would not be able to operate.

Chapter 1 | Background to law in South Africa 3

1.4 A history of South African law
Before the first European settlers arrived in South Africa, the indigenous people of this country had
developed their own law to govern relationships in their society. This law is now called customary law.
When Dutch settlers arrived at the Cape from 1652 onwards, they brought with them their law from
the Netherlands (Holland). This was called Roman-Dutch law, because the law of Holland was basically
Roman law interpreted or adapted by Dutch law makers. (The Roman Empire, which had a highly
developed legal system, had dominated much of Europe for many centuries.)
Roman-Dutch law was the official law of the Cape until the British took over in the early 1800s and
introduced parts of their English law. The South African courts adapted the various rules and principles
of these different legal systems to meet local needs and situations.
The law that has been inherited from other legal systems and that has developed over time is known
as common law. Our common law, therefore, comes from a combination of Roman-Dutch law and
English law. From there, it has grown and developed to include important court decisions and reflect
the changes in the political control of the country. Murder, rape, robbery and theft are some examples of
common law crimes.
In addition to common law and customary law, we also have statutory law, which is made up of
Acts of the national and provincial legislatures, and governmental regulations. In addition to these three
sources of law are judicial precedent, foreign law, academic writings and trade practices. All seven of
these sources of law are discussed in turn below.
In the apartheid era, under what is termed a system of parliamentary sovereignty, the laws from
Parliament were considered as sacrosanct and could seldom and under very narrow grounds
be challenged in court. But in the post-apartheid era, under which we will see below that The supremacy of the
the Constitution of the Republic of South Africa, 1996, is now supreme. This is a new Constitution of the
system, which ensures protection of fundamental human rights, allows for ready challenge Republic of South Africa,
in court of decisions of Parliament and the executive. There has therefore been a key shift in ee sau SSH 2
South Africa’s law from parliamentary sovereignty to constitutional supremacy and the rule PURE Cons ton:
of law.

Activity 1.2
This is a good time, if you have not already done so, to look at the headings in this chapter and
use them to draw a ‘tree structure’. Start with the main headings, which are listed under ‘The
main ideas’ on the first page of the chapter. Then, let the next level of headings branch out from
those, and so on. This does not take long, but will give you a very useful road map of where the
chapter is going. Do this with each new chapter you study, and you will find that things make
sense much more quickly. These tree structures are also useful in exam preparation.

1.5 Where can you find South African law?

It would be impossible for anyone to know every law there is in a country — there are far too many, and
they cover all the different areas of human conduct or behaviour. What is important is that you know
where to find any law you need to know about, and how to look it up. When a lawyer is
; : é A client is a person who
helping a client with a problem, she has to be able to find the relevant law or rule in the employs and pays a lawyer
mass of legal material available. The lawyer cannot begin to solve a client's legal problem to do some work.
unless she knows which rules apply to that client's situation.
‘The different places where you can find parts of the South African law are called if something is relevant
sources of the law. Note the difference between sources and origins: sources are where to a problem, it relates to
you can find (or source) particular laws you need to refer to. Origins, by contrast, are the feine in some way
historical roots of our law, which were discussed in the previous section. matters.

4 Chapter 1| Background to law in South Africa

 So, how do you go about finding a law? Fortunately, the field of law is divided up into various parts,
just as you probably keep separate files for your lecture notes on the different subjects that you are
studying towards your degree. These divisions of law make it easier to find the law that is relevant to the
situation you are working with.
The main sources of South African law are:
legislation
the Constitution of the Republic of South Africa, 1996
common law
customary law
judicial precedent
foreign law
international law
trade practices and customs
academic textbooks and journals.

The main sources of law can be divided into primary and secondary sources. Primary sources include
legislation, the Constitution of the Republic of South Africa, 1996, common law, customary law, judicial
precedent, foreign law, international law and trade practices and customs, whilst academic textbooks and
journals are secondary sources. Primary sources refer to original sources of law, where you find the law,
whereas secondary sources refer to what has been written about those primary sources of law. Clearly,
therefore, the primary sources of law are of greater importance for lawyers and are legally binding as a
source of law.
Now let us look at each of the abovementioned sources of law in turn.

1.5.1 Legislation
Legislation consists mainly of Acts (also called statutes), which are laws passed (or made) by the national
Parliament. Provincial and local levels of government also have the power to create legislation, which is
in the form of provincial statutes, by-laws and regulations.
By-laws are laws that are specific to a particular town or local area. For example, there may be a
by-law stating that dogs may be in public parks only when being walked on a leash. Regulations give
detail as to certain legal rules. For example, in a drought situation when there are restrictions on the
amount of water allowable per person, a regulation may set what the number of litres per day is at a
particular point in time.
Because South Africa is a democracy, you as a citizen have a say in electing the people who will
represent you in the various legislatures. These elected members should pass laws that have a positive
effect on the lives of the people they represent.
Legislation is the most important source of law, because it overrides any other source of law, except
the Constitution of the Republic of South Africa, 1996, which must be understood as a special form of
supreme legislation, and therefore stands as a separate source of law on its own. The supremacy of the
Constitution of the Republic of South Africa, 1996, is set out in section 2 of this Constitution.
Assuming that there is no constitutional issue at play, if two sources of law conflict with each other,
you have to follow legislation. If any source of law conflicts with the Constitution (which, as stated,
is supreme), then the Constitution’s provisions must be followed. For example, the death penalty
used to be allowed as a form of criminal punishment for certain serious crimes, but in the light of the
Constitution’s protection of the rights to life and dignity, this form of punishment has been outlawed.
Legislation also has the advantage of being more flexible than other sources of law. By this we mean that
legislation is fairly easy to change when new needs arise in society. For example, if the government needs
extra money to fund the building of more schools, it can pass a new tax law to raise the necessary funds.

Chapter 1 | Background to law in South Africa 5

 ‘The legislature has to follow the proper law-making procedures, otherwise its legislation will not
be legally binding. For example, at least 50% of the people in the legislature must vote in favour of a
new law before it can be passed. After that, the full text of the new legislation has to appear in a public
document to tell the people of the country about the new law. The most important public document
for new legislation is the Government Gazette. This is the official newspaper in which the government
publishes important information like new laws. For example, ifa majority in Parliament decides that
South Africans should drive on the right-hand side of the road instead of on the left, this change to the
law has to be published in the Government Gazette before it becomes legally binding. When new Acts (or
amendments to existing Acts) have appeared in the Government Gazette, commercial publishers republish
them in statute books. The statutes in these books are constantly updated to include the
To legislate means ‘to
latest changes. The government and various legal publishers have set up websites to give you create laws and regulations’.
easy access to legislation. For example, you can download particular Acts or search through
issues of the Government Gazette.
Ultra vires means
‘The power of any law-making body to legislate is limited to a specified area where that
‘beyond the powers’,
body has the necessary expertise and competence. The power or authority of any legislature meaning thatthe
is also limited by geographic boundaries, for example, the Gauteng Provincial government legislature does not have
cannot make laws for KwaZulu-Natal. If a legislature acts beyond its powers, we say ithas _the power to pass the law
acted ultra vires. When this happens, the High Court may declare that law invalid. in question.

Levels of legislation
You have seen that several different levels of government have authority to create legislation. Generally,
the laws created by higher levels of government have more authority than the laws created by lower
levels. For example, the national Parliament passes sovereign legislation, or primary legislation, which
is the highest source of legislation. Lower legislatures generally pass subordinate (lower) legislation,
but they may pass sovereign legislation on certain matters. A law-making body may have
the right to give someone else the power to make a law. This is known as delegation of To delegate means ‘to
legislative power. When the national or provincial government gives a municipality the give someone else the
right to pass laws on matters concerning that particular municipality, that is an example BEATTY ANE I ESDOS IORI
of delegation of legislative power. todo 9 particular task’.

Sovereign legislation
(e.g. an Act of Parliament
passed by the
National Assembly)

|
Lower legislation
(e.g. a Provincial Act passed by a
provincial legislation, such as the
Kwa-Zulu Natal Provincial Legislature)

|
Lower legislation
(e.g. municipal ordinance
or by-laws)

Figure 1.1 Levels of legislation

6 Chapter 1| Background to law in South Africa

The country’s highest source of law: the Constitution
The most important source of law in South Africa is the Constitution of the Republic of South
Africa, 1996, This is the supreme or highest law of the land. This means that no other law may
conflict with the Constitution, when drafting legislation, for example, the common law had always
defined a marriage as involving a man and a woman. This meant that nobody could marry a person
of the same sex. However, the Constitution states that the state may not discriminate unfairly
against anyone because of their sexual orientation (section 9(3) of the Constitution). In 2005, the
Constitutional Court of South Africa in Fourie and Another v Minister of Home Affairs and Another
2003 (5) SA 301 (CC) decided that our marriage law was unconstitutional (in conflict with the
Constitution) because it unfairly discriminated against gay people who wanted to marry their partners.
The consequence of this decision was that from then on, both gay and straight couples could marry.
When apartheid ended with the dawn of democracy, negotiations for an interim Constitution
between the National Party and the unbanned political parties, such as the African National Congress,
ensued. The Interim Constitution came into effect on the date of the first elections
Interim means ‘temporary’.
(27 April 1994). The final Constitution was drafted during a long period of negotiations
and was adopted by the Constitutional Assembly. This assembly was a type of parliament,
but not Parliament as we know it, and was created to draft the Constitution of the Republic of South
Africa, 1996, based on submissions it received from the public (and political representatives) on what
should be included in the Constitution. In two judgments the Constitutional Court made sure that the
final Constitution met the checklist of 34 constitutional principles that had been agreed upon in the
Interim Constitution.
The most important part of the Constitution of the Republic of South Africa, 1996, isthe +... Bin of Rights is
Bill of Rights. The Bill of Rights contains specific rights that everyone in South Africa has, in Chapter 2 of the
such as the right to life, equality and dignity. (Section 9, on equality, includes the statement Constitution,
about unfair discrimination that we mentioned above.) The Constitution also holds that when
courts interpret the common law and customary law, they have to do this in a way that promotes the spirit
and objectives (aims) of the Bill of Rights. In this way, the Constitution has played a major role in the
smooth transition from apartheid to the democracy that South Africans now enjoy.
What happens if a legislature wants to pass a law that will limit a right that is protected by the
Bill of Rights, like the right to equality? Before you read on, can you think of an example of such
a law? Section 36 of the Bill of Rights states that a law may limit a right under certain conditions,
as far as the limitation is reasonable and acceptable in a democratic society. For example, the law
about maternity leave, which applies only to expectant mothers and not to fathers, discriminates
between people on the basis of sex. However, this is considered to be a justifiable limitation of the
right to equality.

1.5.2 Common law

You know by now that South African common law is a set of laws that developed over time. It includes
contributions from various European cultures, as well as South African court decisions. Let us look at
three ways in which common law can develop.
1. As we have already mentioned, decisions made in superior courts of the land can help to shape
and change common law by addressing new issues or interpreting the legislation in new ways. The
Constitution of the Republic of South Africa, 1996, is particularly important to these decisions.
2. When these courts have to deal with a problem that is not covered by the common law or by
legislation, they sometimes look to the legal systems of other countries for suggestions. In this way,
the courts can bring in pieces of foreign law and make them part of our common law.
3. If the legislature wants to remove, adapt or develop a part of the common law, it can do so by
passing legislation.

Chapter 1 | Background to law in South Africa 7

 Because we inherited our common law from other legal systems and developed it over a long time, it
is not as easy to look up as other sources of law. Common law principles, as we will see in the section
below on customs in customary law, are long-established practices that have gained the force of law.
These principles are not written down and therefore they can be difficult to ascertain, find or even
interpret unless the courts have given clarity on them (see the section on judicial precedent below), or
set out these principles in academic textbooks. Academic textbooks are often the best place to start when
you want to find out what the common law or customary law on a particular subject states. The second
major place where you can find the common law is in the decisions of the courts.

1.5.3 Customary law

Many groups of people follow particular rules that are customary or traditional in their culture.
Customary law is not based on written rules but on oral tradition, or word of mouth. Customary
law develops from the beliefs and habits of the community and is carried down from generation to
generation. One example of customary law is the payment of /obola (bride price), which a man pays to
the family of his bride. The purpose behind this practice is to compensate or pay back the bride’s family
for the loss of her contribution to the upkeep of the family home.
According to the Constitution of the Republic of South Africa, 1996, a customary law can be valid
only as far as it is consistent with the Bill of Rights. In other words, a customary law principle is invalid if
it denies a person any of the rights stated in the Bill of Rights. For example, customary law included a rule
known as male primogeniture, which gave men the right to inherit property, but denied women this same
right. The Constitutional Court in Bhe v Magistrate Khayelitsha 2005 (1) SA 580 (CC) found this rule to be
unconstitutional because it denied that women had the same rights as men. For this reason,
: : : - ; i If something is
male primogeniture is no longer recognised as part of the law. Customary law is recognised :
bei abil law. but al bi he Co ns Cc unconstitutional, it does
as being on a par with the common law, it so su pect to the Constitution. Customary not comply (oragree) wit
law is applied by traditional courts (chiefs’ and headmen’s courts) on a daily basis. It is the Constitution.
sometimes difficult to look up and find out exactly what customary law states, because it is
based on oral tradition. As with the common law, a good place to start when you're looking
for the rules of customary law is in textbooks and past court decisions.

1.5.4 Judicial precedent

The law of judicial precedent is based on the principle that courts should decide similar cases Wyo somethin a
in a similar way for the sake of fairness. In this way, the courts try to maintain consistency in consistent, it always
the law. We use the Latin term stare decisis to describe this principle. You will find that many _ behaves in the same way.
legal concepts still have Latin names today, because they originally come from Roman law.
When confronted with a legal problem, we have to ask how the courts dealt with the Stare decisis means ‘the
same problem when it came up before. When one court has resolved a particular problem —_ decision stands’.
in a particular way, a court hearing a similar problem later will usually deal with it in
the same way. This means that the courts will not treat one person differently from another in similar
circumstances. This principle makes it possible to predict the future decisions of court hearings. It also
promotes consistency and fairness in our legal system.
You saw earlier that law-making is normally the function of the legislature. The role of the courts
is then to interpret and apply that law to decide whether a person has obeyed it. Matters only come to
court when two parties disagree (or are in dispute). The court has to decide on the respective legal rights
of these opponents, called litigants. When a judge in one of the higher courts interprets a
law in a particular way, that judgment may set a precedent. In future, that same court or A precedent is an
lower courts dealing with similar cases have to decide them in the same way. This is why example that others have
judicial precedent is regarded as a source of law, and is sometimes called judge-made law. to follow.
In other words, since the judges or magistrates handling later court cases usually uphold the
decision of the judge in the earlier case, the judge-made law becomes the established legal rule.

8 Chapter 1| Background to law in South Africa

 No judge or magistrate can keep track of all previous court cases, but they have to know where
to find the judgments. A judgment is not only the actual decision, but includes the reasoning and
arguments behind that decision. The South African Law Reports record all the judgments in which
important principles are laid down. These published judgments go back to the early 19th century and
form an essential source of our law. Law reports provide an efficient system of case reporting
that is necessary for judicial precedent to operate as a source of law. This Is the kind of
Nevertheless, it’s not always easy to find the relevant precedent. Firstly, you need judgment a court gives,
to know which courts’ decisions are binding on other courts. This means you have to but the decision you
understand the South African court structure, which we discuss later in this chapter. RS oO ene =
Secondly, you need to know which parts of such decisions have to be followed. For this, teenie ee
you need to understand the structure of individual judgments. The part of a judgment
that binds future court decisions is called the ratio decidendi. We can describe the ratio
decidendi as the legal principle that comes out of the court's decision, When a lawyer has Ratio decidendi means
found an earlier case that helps his client’s case, he can use the earlier case (the judicial Be see tee dat Innes I al
precedent) to support his client's arguments to the court. e decision’.

Added value How to find a case

In this textbook, we do not discuss many specific cases decided by South African courts. Instead,
we give more general examples to explain the concepts and principles. But we do include a
few real cases that have come up in the South African courts, either because they illustrate a
particular point or because they are important cases in South African law.
e Legal cases are always named, or cited, in a certain way, and each part of the name Is
important as it assists in finding the case.
e The case name starts with the names of the litigants, for example Smith v Jones. The
‘v’ stands for versus, which is Latin for ‘against’. You will also find case names beginning
with ‘S v ...". The letter ‘S’ is an abbreviation for ‘the State’, and this is the standard way of
citing criminal cases in law reports.
- Always italicise case names, such as Smith v Jones when typing them. The exception to
this is when the rest of the text is in italics. Then you may use Roman font. When writing a
case name by hand, such as in an exam or test, you must underline the case name.
e Next comes the year of the case, for example, 1995. The year may be in brackets,
depending on the referencing format for a specific publication series.
e Then (sometimes in brackets) you get the volume number of the law reports where the
case appears.
e The next abbreviation (SA or All SA) tells you which series of law reports to look in. ‘SA’
means the South African Law Reports published by Juta; ‘All SA’ refers to the Ail South
African Law Reports by Butterworths.
e This is followed by the page number where you can find the case.
© Finally, an abbreviation in brackets that tells you which superior court gave the judgment.
For example, (CC) means the Constitutional Court, (C) is the Cape High Court, (N) is the
KwaZulu-Natal High Court, and (A) or (SCA) refers to the Supreme Court of Appeal.
e Here's an example: Pillans v Jooste 1999 (1) All SA 367 (SCA) at 370 would refer to the case
between litigants called Pillans and Jooste reported in Volume 1 of the Ail South African
Law Reports of 1999, heard in the Supreme Court of Appeal and beginning on page 367.
The final bit, ‘at 370’, means that the writer is referring particularly to something on that
page. Now it’s your turn. Can you work out what the following two case citations mean?
-— Haynes v Queenstown Municipality 2001 (2) SA 371 (SCA) at 375
-— Worman v Jones 1968 (4) SA 762 (C).

Chapter 1 | Background to law in South Africa 9

1.5.5 Foreign law
South African courts often come across legal problems that are new to this country but The term global village
have already been handled and decided on by courts in other countries. For this reason, our —_ describes the close links
Constitution allows our courts, in such cases, to consider the decisions made about similar _ that have developed
problems in those foreign courts. The same applies to legislation. For example, sections between different parts
of the South African Constitution were borrowed from other countries, such as Canada of the world as ee of
. ‘ ‘ os ty improvements in electronic
and India. In this way, our law reflects the nature of the global village we live in today. eee like
Section 3910) of our Constitution indicates that our courts may consider foreign law in gmail, social media and
their decision-making. That means that our courts do not have to do so, but have the power _ the internet.
to consider the laws, including court decisions, from other countries.

1.5.6 International law

‘The law of nations, which is known as international law, is also a source of our law. International law
originates from agreements or treaties between countries or from international organisations like the
United Nations. Section 39(1)(b) of our Constitution requires that our courts consider international law
in their decision-making. We discuss international law further in Chapter 2.

1.5.7 Trade practices and customs

Trade practices and customs are any methods or dealings which have been done in a clear, particular
way for a sufficient period of time to become law. More specifically, the requirements for recognising a
custom as law is set out in Van Breda and Others v Jacobs and Others 1921 AD 334:
* ... a practice must be certain, uniformly observed for a long period of time and reasonable for it to
be recognised as law’.
Such an example is the fishing practices of indigenous communities. In Gongose and Others v State and
Another [2016] 2 All SA 130 (ECM), the Eastern Cape High Court recognised the customary right of a
local coastal community to access their marine resources.

1.5.8 Academic textbooks and journals

Writings of well-respected academics in textbooks and recognised journals are also considered to be
sources of law. This source of law is also known as modern writings. Textbooks tend to reflect the current
law as received from the other sources of law we discussed above. On difficult legal issues, the courts may
accept an opinion of a respected writer as the correct approach to take. In this way, textbooks and other
academic publications like journals become a source of law. In practice, lawyers often use textbooks as
their primary source of reference.

Activity 1.3
1. By way of a flow diagram, list the different sources of South African law in what you consider
their order of importance; thereafter explaining why certain sources take precedence over others.
2. Debate with a friend whether courts can be said to be makers of law, just interpreters of the
law or a combination of both.
3. You may have come across several new words in this chapter, and will learn many more
as you continue your studies. This is a good time to record the new words that you learn,
along with their meanings in a notebook. Start with the words in bold or italics in this
chapter, and add any others that you're not sure of.
Write down three common law crimes that apply in South Africa.
be

Find out (by asking class mates or members of your community who might know) about
Sa

certain customary law rules that apply in the area of South Africa that you live in and the
key aspects thereof. Then provide a written summary of these.

10 Chapter 1| Background to law in South Africa

1.6 The South African court hierarchy
Different courts in South Africa have different levels or areas of power. The range of matters
that a particular court is authorised to hear is called its jurisdiction. In other words, if
a court has jurisdiction in a certain subject area or geographical region, it has authority
to adjudicate, or rule, in those cases. Jurisdiction also refers to the limits of the orders,
or decisions, that the court can make, such as the maximum fines or prison terms it can
impose. The jurisdiction of a court determines its place in the legal hierarchy.
To understand more about how judicial precedent operates as a source of law, you have
to know the jurisdiction of the various courts and where each type of court fits into the court hierarchy.
The pyramid diagram in Figure 1.2 shows you how the main courts in the South African court hierarchy
relate to one another.

Figure 1.2 The South African court hierarchy

Chapter 1 | Background to law in South Africa 11

We will start at the bottom of the hierarchy and work our way up, but first you need to make sure that
you know the meanings of some new terms we will be using.
A crime, or criminal offence, is an unlawful act that can be punished by law. A criminal case is
between the state and a person accused of committing a crime, while a civil case is a claim between
persons. For example, if you accidentally throw a cricket ball through your neighbour's glass door, that’s
not a crime, and you will not face a criminal charge, but your neighbour can demand that you pay what
it costs him to replace the glass. If you refuse, he can bring a civil claim against you in court. A payment
to compensate a person for financial loss suffered due to another person’s wrongful actions is called
compensation or damages.
In acriminal case, the state has to prove the guilt of the accused beyond any reasonable doubt because
they may have to go to prison as a result. The state has to prosecute them while at the same time
protecting their rights. This makes it more difficult for the state to find someone guilty of a crime than it is,
for example, for you to prove your civil claim that someone owes you money. According to South African
law, the accused is presumed to be innocent unless he or she has been proved guilty in a court of law.
Table 1.1 shows that there are some differences between the terms that we use in criminal and civil
cases. A defendant is a person who is sued or accused in a court of law. The person who sues, or brings
the case against the defendant, is the plaintiff (in other words, the one who complains). The person who
appeals the finding is called the appellant and the person against whom they bring the appeal is called
the respondent. If it is a criminal case (like theft or murder), the person on trial is called the accused, but
we do not refer to an accused in a civil case. If the court finds the accused guilty of a crime (or criminal
offence), we say he is convicted. But again, we do not use that term in a civil case.

Table 1.1 Differences between the terms used in criminal and civil cases

We mittsbs Civil cases Criminal cases

Dominant parties Normally, the plaintiff versus defendant. The state versus the accused
Standard of proof Balance of probabilities Beyond a reasonable doubt
Case name examples Smith v Ndlovu State v Naidoo
Finding Liable or not liable Guilty or not guilty
Court sanctions Damages and cost orders Punishment, such as imprisonment

We discuss more about civil and criminal matters in Chapter 2.

1.6.1 Inferior courts

Inferior courts (which are also called lower courts) include the Small Claims Courts, chiefs’ or headmen’s
courts, and Magistrates’ Courts (at district and regional level). Remember these three points about
inferior courts:
® Inferior courts handle the less serious cases compared to the superior courts.
@ = Their geographical area of jurisdiction is smaller than for superior courts.
® = Inferior courts cannot create judicial precedent. They have to follow the decisions of superior courts.

Let us look at the different types of inferior court in turn.

Small claims courts

Small claims courts are at the bottom of the court hierarchy. They try, or hear, civil A claim is a demand for
. : ‘
matters that only involve : claims of R15 000 or less (though this maximum amount payment to compensate
changes now and then). The procedure is informal, with no lawyers present to represent someone for financial loss
litigants. The advantage of this system is that justice becomes more accessible to litigants, suffered due to another
mainly because it’s less expensive and generally quicker. person's wrongful actions.

12 Chapter 1| Background to law in South Africa

 Only natural persons can initiate proceedings in the Small Claims Court. Juristic A nataal paver oan
persons (for example, corporate legal entities) can be sued, but cannot sue in the Small individual acting in their
Claims Court. For example, Mr Singh may, in the Small Claims Court, sue Pick n Pay for own capacity in law.
R10 000 he alleges is owed to him. However, Pick n Pay cannot use the Small Claims Court
to sue Mr Singh for R10 000. The reason for this difference is that individuals are in a more vulnerable
legal position than corporate entities (juristic persons) and therefore must be given a legal forum, which
is readily accessible in terms of cost and speed.
A commissioner of the Small Claims Court decides the cases. These commissioners are legal
professionals who volunteer their services free of charge.

Chiefs’ and headmen’s courts

These courts deal with customary law cases, which are heard by a chief or headman. As in the small claims
court, the procedure is informal, and there are no lawyers to represent the litigants. Chiefs’ and headmen’s
courts have criminal and civil jurisdiction that is limited to disputes of customary law between people
who live in the jurisdictional area of the court. Litigants who are not satisfied with the decision in a chiefs’
or headmen’s court can take their matter to the Magistrates’ Court for it to reconsider the matter.

Magistrates’ Courts
There are two levels of Magistrates’ Courts:
@ = District Magistrates’ Courts
= Regional Magistrates’ Courts. (A region is larger than a district.)

The jurisdiction of each Magistrates’ Court is limited in terms of:

= geographical area (district or region)
m the type of case
® =the maximum sentence or value of the claim sought.

Let us take a closer look at these distinctions and limitations.

District Magistrates’ Courts have jurisdiction over local areas, called magisterial districts. In civil
cases, we simply refer to such courts as Magistrates’ Courts. These courts hear civil, as well as criminal
cases, with certain limitations:
= = In the civil category, they cannot hear cases of divorce or adoption, or those relating to a person’s
sanity or the validity or interpretation of a will.
= A District Magistrates’ Court may hear civil claims of up to R200 000, whereas a Regional
Magistrates’ Court may hear claims of up to R400 000.
= = In the criminal category, District Magistrates’ Courts cannot hear cases involving murder, rape or
treason. They can sentence convicted people to a maximum of three years’ imprisonment per offence.

Regional Magistrates’ Courts hear criminal and some civil cases within their region (which
is larger than the region of a District Magistrates’ Court). They are the highest in the Treason Wie cine oF
: se : : > ER ae betraying your count
hierarchy of the inferior courts. Regional Magistrates’ Courts have jurisdiction over all tri 2 oe Reon ae
criminal cases except treason. They can sentence convicted persons to a maximum of life government.
imprisonment or a fine per crime. A fairly recent development is that Regional Magistrates’
Courts may now, along with High Courts, hear divorce cases. Magistrates’ Courts do not
Decisions of Magistrates’ Courts, whether district or regional, do not create judicial set precedent because of
precedent. In other words, if a Magistrates’ Court decides a case a certain way today, another _ their status as lower courts
court can decide a similar case differently tomorrow if that second magistrate interprets the 2% because the decisions
law differently. However, where a higher court has decided a similar case a certain way before, ee cae se
the Magistrates’ Court has to follow the precedent set by the higher court in its jurisdiction. Sea

Chapter 1 | Background to law in South Africa 13

 In addition, a Magistrates’ Court is bound to follow Constitutional Court and Supreme Court of Appeal
decisions on a particular legal issue and to follow its High Court Division's decision where there is no
precedent from these other two courts.

1.6.2. Superior courts

The superior courts are the most important courts in the court hierarchy. Only superior
if you are bound bya
courts create judicial precedent. This is because these courts hear the most serious cases,
decision or agreement, you
and the law reports record only the superior court judgments. A lower court has to follow are committed to it and
the decisions of a superior court in its area/jurisdiction, and superior courts follow their have a duty to stay with it
own previous decisions. A superior court is bound by its own decisions unless and until or obey it. That decision or
it is overruled by a higher superior court. However, if the previous decision is found to be agreement is binding.
clearly wrong, the court will have to override its decision.

High Courts
Instead of a magistrate, the High Courts have judges, with a judge president at the head of
if you appeal against a
each High Court. A High Court’s jurisdiction extends only over the province in which it is court's decision, you ask
located. High Courts used to be called Supreme Courts, and you'll still find that reference a higher court to consider
in the literature. High Courts hear both criminal and civil matters, and they review cases the matter again and see
and hear appeals from the inferior courts. They can also hear some constitutional matters, where the lower court
but some of these decisions need to be confirmed by the Constitutional Court. made a wrong finding. If
you believe that you lost a
The High Courts, having inherent jurisdiction, may hear any criminal case and also civil
case because the presiding
claims over any amount of money. In criminal matters, they have jurisdiction to sentence a officer was unfair, you
convicted criminal to various punishments, right up to life imprisonment. may ask a higher court to
The High Court has provincial and local divisions. Although provincial divisions are review the decision of the
higher up the court hierarchy than local divisions, their powers and functions are the first court.
same, except that local divisions cannot generally hear appeals. An example of a provincial
division is the KwaZulu-Natal Provincial Division, based in Pietermaritzburg. The Durban and Coast
Local Division is a local division of the High Court and sits in Durban.
High Courts are bound by their own earlier decisions in the same province, but one High Court is
not bound by the judgments of a High Court in another province. This is because the various provincial
divisions are at the same level. However, a High Court may consider the decisions of other divisions to
have persuasive authority. Persuasive decisions act as guidelines, which a court may choose to follow or
not, Sometimes, two provincial divisions hold different views on a particular point of law, in which case
only the Supreme Court of Appeal can resolve the matter. The size of the High Court, determined by
the number of judges that presided over a matter, is also a factor that determines its weight as judicial
precedence — the larger the court, the more weight it carries when setting judicial precedent.
Where two High Courts disagree on a point, the Magistrates’ Courts in each province are bound by
the viewpoint of their own High Court.

Special courts
Special courts are at the same level of the court hierarchy as the High Courts, and create judicial
precedent for themselves. ‘Their purpose is to hear specialised types of cases. The Labour Court, the
Income Tax Special Court and the Water Court are some examples of special courts. Appeals from
the Labour Court go to the Labour Appeal Court, which is at the same level as the Supreme Court
of Appeal, but deals only with labour matters.

The Supreme Court of Appeal

The Supreme Court of Appeal, previously known as the Appellate Division, is generally the highest court
in South Africa dealing with matters not involving the Constitution of the Republic of South Africa, 1996,

14 Chapter 1 | Background to law in South Africa

 except for those non-constitutional matters handled by the Constitutional Court. It is staffed, 1 o) constitutional
by judges of appeal and headed by the President of the Court. The Supreme Court of Appeal matter is one that has
is seated in Bloemfontein. The main function of the Supreme Court of Appeal is to hear any —_ nothing to do with the
non-constitutional civil or criminal appeal arising anywhere in the country. It also has limited Constitution of the Republic
constitutional jurisdiction as it may not hear and decide constitutional issues which fall within f South Africa, 1996, or
the exclusive jurisdiction of the Constitutional Court. However, it is only a court of appeal, se be ae oI
not a court of first instance. By this, we mean it hears only cases that have already been aaeee ceicihver tor hat
heard by lower courts and where a litigant has appealed against the previous decision. resulting from a breach of
The Supreme Court of Appeal interprets statutes and develops in particular, the contract is a simple dispute
common law. The decisions of the Supreme Court of Appeal bind that court itself and all between these parties and
other courts below it in the court hierarchy. has nothing to do with
the Constitution.
The Constitutional Court
‘The function and purpose of the Constitutional Court, seated in Braamfontein, is to uphold the
Constitution of the Republic of South Africa, 1996 as the highest law of the land. The Constitutional
Court’s increase in jurisdiction beyond constitutional matters flows from the Constitution Seventeenth
Amendment Act of 2012. Under this, the Constitutional Court is the highest court in all matters,
not only constitutional matters. This is clear from the wording of section 167(3) of the Constitution,
indicating that the Constitutional Court may decide on constitutional matters and:
‘... any other matter if granted leave to appeal on the grounds that it raises an arguable point of law
of general public importance, which ought to be considered by the Constitutional Court’.
The Constitutional Court has ten judges plus the head judge, who is the Chief Justice. It is the highest
court in the country to interpret, protect and enforce the provisions of the Constitution of the Republic
of South Africa, 1996 (known as constitutional matters), and has had its jurisdiction extended to also
cover non-constitutional issues, which it does on occasion.
Non-constitutional matters are only considered if the Constitutional Court decides that the case
raises an arguable point of law of general public importance which it ought to consider. An example of
a non-constitutional matter is found in the case of S v Boesak 2001 (1) SA 912 (CC). Boesak, who had
been found guilty of criminal offences relating to fraud and theft turned to the Constitutional Court for
a final appeal from the Supreme Court of Appeal. The Constitutional Court held that the arguments
raised by Boesak did not raise constitutional issues — these were that the High Court and Supreme Court
of Appeal made errors of fact.
An example ofa non-constitutional matter that raises an arguable point of law of general public
importance, is found in the case of Paulsen and Another v Slip Knot Investments 777 (Pty) Ltd 2015 (3)
SA 479 (CC), which dealt with whether or not the Constitutional Court had jurisdiction to decide that
Paulsen’s loan agreement with Slip Knot was invalid, because Slip Knot was not registered as a credit provider
in terms of the National Credit Act 34 of 2005 and interest payable under the loan agreement was limited.
The Constitutional Court said that for it to have jurisdiction in such a case, the following must be
considered:
@ The point must be one of law, and it must be arguable (plausible or have some merit).
= = Whether it is an arguable point of law depends on the particular circumstances of each case.
= = The point of law must be of general public importance, which means it must transcend the narrow
interests of the litigants and implicate the interest of a significant part of the general public.
® = The point of law that ought to be considered by the Constitutional Court refers to the standard of
the interests of justice. In considering the interests of justice, prospects of success, although not the
only factor, are important. An applicant who seeks leave to appeal must ordinarily show that there
are reasonable prospects that this court will reverse or materially alter the decision of the Supreme
Court of Appeal, as stated in the case of Boesak.

Chapter 1| Background to law in South Africa 15

Among other things, the Constitutional Court deals with any violation of any fundamental or basic right
that the Constitution is designed to protect. For example, in the well known case of S v Makwanyane
and Another 1995 (3) SA 391 (CC), the Constitutional Court found that the death penalty
for criminal offences was unconstitutional as a form of punishment. From the time of this eee eee
judgment, courts could no longer sentence anyone to death. are not directly related
The decisions of the Constitutional Court are binding on all other courts. The Constitutional _ tg the Constitution. But
Court may invalidate (declare invalid) any legislation that conflicts with the Bill of if alaw or principle is
Rights, and it can order Parliament to correct any legislation that is not in line with the unconstitutional, it
Constitution. It may also order organs of state, or even individuals, to stop or correct mn conflict with the
Constitution.
behaviour that goes against the Bill of Rights.

1.6.3 Legal positions in the court hierarchy

We've looked at the hierarchy of courts and mentioned some of the staff and heads of those courts.
Let us now take a closer look at the various legal positions that people may hold in the court hierarchy.
As you would expect, these positions also have different levels of status or power attached to them.

Attorneys and advocates

Suppose that you are accused of a crime and want to find a lawyer to help you. The ‘lawyer’ This system is similar to
i
in this° case may mean an attorney or an advocate, but you have to consult with an attorney
;
the procedure for seeking
first. An attorney is a lawyer who can advise you and may appear in court on your behalf. medical help when you
If the attorney does not have time to do all the work you need due to a heavy case load, are ill. You have to go to
or lacks experience in that type of case, he may refer the specialised work to an advocate. your doctor first and she
Advocates are specialists who spend most of their time appearing in court or preparing Vea a specaist
for court.
‘The practical training and the steps needed to appear in particular courts differ between
attorneys and advocates, and the Legal Practice Act 28 of 2014 will bring about some changes in
this regard.

Prosecutors
To prosecute someone means to charge that person with a crime and to put them on trial so that a
judge or magistrate can decide whether or not they are guilty of that crime. Prosecutors, who are state
employees, are lawyers who represent the state in criminal cases, and they try to convince the court to
convict guilty persons. In this way, they protect the interests of the community, victims and witnesses. At
the same time, they also have to make sure that justice is done, and that the accused are treated fairly in
court. Prosecutors base their prosecution on the case docket, which is a file of all the evidence the police
collected during their investigation. By evidence, we mean proof in the form of information or facts that
support (or, on the other hand, conflict with) what a person is saying.
Prosecutors are part of the National Prosecuting Authority (NPA), which is headed by the National
Director of Public Prosecutions (NDPP) and several Directors of Public Prosecutions (DPP). The
prosecuting authority has powers to decide on things like which charges to lay against an accused and
whether to continue with a prosecution or withdraw charges. For example, the NPA decided to withdraw
charges of theft and fraud against the former Finance Minister, Pravin Gordhan, in October 2016.
Other important positions in the court hierarchy are those of the registrar of the court, the clerk of
the court and the sheriff.

Registrars or clerks of the court

‘The registrar of a High Court is the most senior administrative officer in any division of the High Court
or other superior courts. The registrar's office handles all the documents for a case. The clerk of the court
in a Magistrates’ Court performs very similar tasks to the registrar of a High Court.

16 Chapter 1 | Background to law in South Africa

Sheriffs
‘The sheriff of the court is responsible for serving certain legal documents on people and also

pene telont hee rainsene tenses: Ta

4 ;
to do so. The sheriff may then take away, or attach, and sell part of that person’s property
When the property or

sold, we say they have been

attached by the court.
to pay the required money to the plaintiff. The sale is called a sale in execution, because the
judgment is being executed or carried out.

Magistrates
A magistrate presides over (is in charge of) a Magistrates’ Court, Magistrates are employed by the
Department of Justice. It is common for experienced prosecutors to be appointed as magistrates.

Judges
Judges preside in the High Courts, special courts, Supreme Court of Appeal and Constitutional Court.
So the presiding officers in all the superior courts are judges. They are appointed from the ranks of
practising advocates, attorneys, magistrates and legal academics.
Judges enjoy security of tenure, which means nobody can dismiss them from their positions except
Parliament, and then only by following a special procedure. The purpose of this principle is to keep judges
independent, and to protect them from influence by the legislature (law makers) and the executive (the cabinet).

Activity 1.4
1. Ina table, compare the superior and inferior courts. Remember, to compare means to
highlight the differences as well as the similarities.
2. Then draw a mind map of the basic structure of the court system, focusing on the
jurisdiction of each court. This will become a very useful reference and revision tool.
3. Draw another mind map or diagram to summarise:
a) the roles of different legal positions in civil matters/cases
b) the roles of different legal positions in criminal matters/cases.

Added value Legal problem-solving steps

To solve legal problems, we have to apply the correct legal rule or principle. Suppose you have to
solve the following problem: Your client has leased a house for one year, starting on 1 January of
this year. Two weeks later the roof caves in. She can no longer live in the house, so she wants to
cancel the lease. Can she do so?
The first step is to classify the problem. To do that, you need to determine what area of the
law is involved. When you have identified the area of the law that applies, you will need to find
the applicable rule. Then you have to apply the rule to the facts and ask whether the facts justify
the application of the rule.
We cannot answer this example in detail at this stage, because we have not yet discussed the rules
of the law of contract and the law of lease. But it’s important that you note the logical problem-solving
technique we use in legal matters. The process of legal reasoning follows four preliminary steps:
1. Identify the legal issue and the relevant branch of law.
2. Find the applicable legal principles.
3. Apply the law to the facts so as to give advice to your client.
4. Obtain the necessary remedy, if any, or apply the law to the facts to reach a legally sound
conclusion. In the legal context, a remedy is a way of solving a problem via a legal route.
This is the approach to use when you deal with any legal problem or when you answer problem-
type questions you may come across in your commercial law studies.

Chapter 1| Background to law in South Africa 17

 Activity 1.5
1. With a partner, discuss the relationship between the origins and sources of South African law.
2. Draw diagrams to illustrate this relationship.

Added value Keep it simple

Being able to use the right words in the right way in your discussions or in writing will boost
your confidence as you study law. Always keep your language as simple as possible.
e Make sure you understand the meaning of any Latin term you use. If you're not sure of the
Latin, rather use the English term. Also, consider whether using the Latin term actually adds
to what you have written; if the Latin term does not add to what you have written, it is
better to stick to the English term.
e Do not use long or complex words just because they sound impressive — people just are not
impressed by that anymore. Even the government is now making a real effort to use plain
language in its publications. Simpler is better!

What do you think?

‘There is often a conflict or disagreement between what society generally considers to be ‘acceptable law’,
or ‘natural law’, and the laws that a state recognises. Such disagreement may lead to civil disobedience,
which is a non-violent refusal bya group of people to obey laws that they disagree with, to try to
persuade the government to change those laws. People, who take part in civil disobedience, sometimes
justify their actions by appealing to natural law. Natural law is the theory that certain rights belong to
everyone because one is human and that these rights are understood to be applicable universally.
The apartheid laws of this country were considered to be so unjust that some people refused to regard those
rules as law. Even though those legal rules met the definition of law, they were often in conflict with natural law.
Do you think people have the right to disobey laws that they think are unjust? If so, under what
conditions would it be acceptable to disobey? When is it not acceptable? When, if ever, should the
protesters resort to violence?
Discuss these questions in your small group.

Chapter summary

In this chapter, you learned the following about the
background to South African law:
Law controls relationships in society and consists of
legal rules and principles made and enforced by the
state. Legal and moral rules often overlap, but are not
the same, since the state makes and enforces legal rules
but not moral rules.
The South African legal system originated from
Roman-Dutch law, English law and customary law, the
traditional law of indigenous people, which developed
parallel to common law.
‘The main sources of South African law are as follows:
= ‘The most powerful source of law is
legislation, which is passed by legislatures
and recorded in statute books. The Constitution of
the Republic of South Africa, 1996, is the supreme
law (legislation) of the country.

18 Chapter 1| Chapter summary

= = The traditional legal rules of a particular indigenous
group make up customary law. To be binding, they
must mect certain requirements.
® Common law is the body of law that has developed
over time on the foundation of the inherited
Roman-Dutch and English law. Both common law
and customary law may be found in judgments,
academic textbooks and journals.
® Judicial precedent is judge-made law from superior
courts and is recorded in published law reports.
= Foreign law is the law of other countries.
= International law is law that operates worldwide,
generally by agreement among countries.
®@ Textbooks and other legal academic writings are
also sources of law.
In the hierarchy of courts, only the superior courts
create precedent. The superior courts are ranked as
follows in order of importance:
@ = The Constitutional Court is the highest court and
focuses mainly on constitutional matters except for
those non-constitutional issues that are in general
public interest.
= ‘The Supreme Court of Appeal is the highest
court for non-constitutional issues except for those
non-constitutional issues that are covered by the
Constitutional Court.
= High Courts (provincial and local divisions) have
civil and criminal jurisdiction.
= Special courts, like labour courts, judge specialised
cases and are at the same level as High Courts.
The order of hierarchy of the inferior courts is
as follows:
™ Regional Magistrates’ Courts decide criminal
cases and divorces in their region. They cannot
hear treason cases and can impose a maximum jail
sentence of life imprisonment or a fine per offence.
Review your understanding
1. Select the correct answer to the statement below.
‘The highest law of South Africa is:
a) the Constitution
b) customary law
= District Magistrates’ Courts hear criminal and civil
cases in their district. They cannot handle murder,
rape or treason cases. In criminal cases, their
maximum jail sentence is three years per offence.
m Districts Magistrates’ Courts can decide on
civil claims of up to R200 000 and Regional
Magistrates’ Courts up to R400 000.
m Chiefs’ and headmen’s courts have limited civil and
criminal jurisdiction over customary law disputes only.
= Small claims courts may hear civil claims of
R15 000 or less.
Some of the key roles in the field of law are as follows:
@ = The term ‘lawyers’ covers prosecutors, attorneys and
advocates. Prosecutors act for the state in criminal cases.
Clients consult with attorneys first. An attorney may
ask an advocate to assist with certain specialised work.
= Judges preside in superior courts, magistrates
in Magistrates’ Courts, and commissioners in
small claims courts, and chiefs or headmen in
their own courts. These people are all known as
presiding officers.
= The Registrar of the High Court and the clerk
of the Magistrates’ Court deal with the official
administrative work of the court.
= = The sheriff of the court serves certain court
documents and enforces civil court judgments.
The following are the suggested steps for legal
problem-solving:
1. Identify the problem and the relevant branch of
law.
2. Identify and state the relevant law.
Apply the law to the problem.
»
4. Conclude by advising or doing whatever else
is required.
c) international law
d) foreign law
e) none of the above.
Chapter 1| Review your understanding 19
2. Select the correct answer to the statement below. Assume that you have a civil claim against a business
South African law originates from: for selling you an iPad device worth R13 000 that
a) French law you want refunded as the device does not work
b) Roman-Dutch law properly, but the business refuses to do so. You
c) English law would also want to avoid having to deal with lawyers
d) b)andc). in the process of bringing your claim to court. To
3. Select the correct answer to the statement below. which court will you bring your claim and why?
Which of the following courts create judicial Discuss the relationship between morals (including
precedent? morals on the basis of religious belief), justice and law.
a) Regional Magistrates’ Courts In this discussion, provide examples of the following:
b) District Magistrates’ Courts i) arule that could be said to be common to
c) Small claims courts morality (including moral rules flowing from
d) Chiefs’ and headmen’s courts religious belief), justice and law
e) None of the above ii) arule or law that has existed or still exists,
4. Select the correct answer to the statement below. which can be argued or said to provide a
The jurisdiction of a court relates to: conflict between justice and law.
a) the geographical area Consider the relationship between the sources
b) the type of case of law, such as the Constitution and legislation.
c) the geographical area and the type of case Should an Act of Parliament be passed that requires
d) the court’s powers to award damages and women to be property owners in order to qualify
impose punishments to vote? Would this meet the requirements of the
e) c)andd) Constitution? If not, why not?

Further reading

Barratt, A. and Snyman, P., ‘Researching South African Law’,
March 2005 updated by Kapindu, R.E., GlobaLex website of
the Hauser Global Law School Program, New York University
School of Law (accessed on 3 October 2011) http://www.
nyulawglobal. org/ globalex/South_Africa.htm
(This is a very useful reference site, created by two law librarians
and senior law students at the University of Cape Town and
updated by R.E. Kapindu, Deputy Director of the South
African Institute for Advanced Constitutional, Public, Human
Rights and International Law (SAIFAC). Apart from giving
much more detail on certain topics in this chapter, they also
offer very useful references. Have a look at this site now so you
know where to find things you may need in future.)
Buzan, Tony, with Barry Buzan. 1995. The Mind Map Book—
Radiant Thinking: The Major Evolution in Human Thought.
(revised edn) London: BBC Books
(If you cannot find this one, look for any other book by Tony
Buzan on mind mapping. You can also explore the website
www.mind-map.com/)
Education & Training Unit (ETU), ‘Paralegal advice website’
February 2002, updated 2011, ETU and the Black Sash
(accessed on 3 October 2011) http://www. paralegaladvice.org.za/
(This is a very useful and easy-to-read website based on a
paralegal manual produced by the Black Sash and the ETU.
The home page has a simple but helpful dictionary, which you
can download. The Documents section, Chapter 3, “Courts
and Court Cases’, discusses some of the areas we covered
in this chapter, such as the sources of law and the court
hierarchy. Note that you can download a page at a time or
the whole chapter.)
National Prosecuting Authority of South Africa, Home page, July
2005, National Prosecuting Authority website (accessed on
3 October 2011) http://www.npa.goy.za/
(This site offers interesting information on the role
of prosecutors.)

20 Chapter 1| Further reading

 Tey ed iy

Branches of the law

yA
The main ideas
= Branches of law
= = Civil and criminal law
= Civil procedure
= Legal subjects and the nature of legal rights

The main skills

® Discuss legal subjects and legal rights.
= Draw a diagram showing the branches of South African law.
® Explain South African civil procedure.
= Summarise the trial procedure.

This chapter begins with an overview of the various branches of law and then focuses on the difference
between criminal law and the law of delict. Next, we examine the South African civil procedure, which
is important for legal practice because it’s the only way to sort out claims for money in court. Finally, we
distinguish between natural and juristic persons and between real rights and personal rights.

Before you start

You have probably watched some of the many movies and television programmes that
A jury is a panel of people
have a legal theme. They usually focus on a trial where the lawyers are shown arguing in
who listen to a case in a
front of a judge or a jury, which then has to reach a verdict. Have you ever thought about court of law and reach a
how these situations, or cases, land up in court, or about the procedure that the two sides decision as to whether the
have to follow to resolve their dispute? It's important to remember that South African person is guilty or not. This
law is different in many ways from the legal systems that you may have come to know on decision is called a verdict.
television. In America, for example, a jury sometimes decides who wins a case, but in South
Africa it's either a magistrate or a judge who makes this decision.

2.1 Branches of law

As a student in South Africa, you need to know about three branches of the law, namely:
1. international law
2. foreign law
3. South African national law.

We will explain each of these briefly.

Treaties and conventions
are formal agreements
2.1.1 International law between country leaders
International law is made up of treaties or international conventions that are agreed to bya or powerful groups on
number of countries. This means that all of these laws are the same in all of the countries that matters that concern
have signed the agreements. South Africa tries to comply with all international law, especially them all.
where it has signed an international convention or treaty. There are, however, cases where
South Africa does not comply with international law at present. For example, we are not To comply with something
yet able to provide the required minimum core of socio-economic rights for everyone. is to follow or obey it.

Chapter 2 | Branches of the law 21

 Section 39(1) of the Constitution of the Republic of South Africa, 1996, says that courts The UN was founed i
and other forums must consider international law whenever they interpret the Bill of Rights. 1945, right after World
International law is controlled by the United Nations Organization (UN) whose War ll to promote peace and
headquarters are in New York. The United Nations has an International Court of Justice in international cooperation.
The Hague (in the Netherlands), which can take action against any UN member country It has delegates, or
that violates (or disobeys) international law. Countries that are not UN members can also representatives, from most
; Ss countries of the world.
agree to have their cases heard in this court.

2.1.2 Foreign law

Foreign law refers to the law of countries other than South Africa. ‘The same section of the Constitution
we mentioned above also states that when interpreting the Bill of Rights, a court or other forum may
consider foreign law.
South African courts are not required to follow foreign law, because itis not the law of g4cig-economic rights
South Africa, and differs from one country to the next. Although foreign law is not binding _ jnclude peoples’ rights
on South African courts, our courts will refer to foreign decisions when it is appropriate to housing, health care,
to do so. For example, in the field of socio-economic rights, South African courts have a clean environment and
referred to cases in India, because Indian courts have sometimes managed to apply their social secustty.
Constitution in clever ways to help poor people.

2.1.3 South African national law

By South African national law we simply mean the law of South Africa. As we explained in Chapter 1,
our national law is based on Roman-Dutch and English law, and, most importantly, on the Constitution
and other Acts of Parliament. It includes the indigenous or customary law as far as this law does not
conflict with good public policy.
We can divide South African national law into:
= public law
@ private law
= procedural law.

Let us define each of these divisions briefly, and look at their subdivisions.

Public law
Public law is the law that governs the relationships between the government (the state) and its citizens.
We can further divide public law into other branches of law, including:
® constitutional law
= administrative law
® criminal law.

Constitutional law deals with the Constitution, which provides for (or looks after):
=~ people’s fundamental rights
m the distribution of legal power in the state
@ = the functions of the various parts of the government.

Administrative law regulates the power of the state over private individuals and tries to make sure that
state officials and departments do not use their influence or authority in ways that are unfair (in other
words, abuse their powers).
Criminal law determines what actions are unlawful and what punishment the state should impose for
each crime.

22 Chapter 2 | Branches of the law

 Private law
Private law, also called civil law, deals mainly with the legal relationships between private individuals.
We normally divide it into the following six branches:
mercantile law
eRe NNO

the law of obligations

the law of property
the law of persons
family law
the law of succession.
GN

Mercantile law is the law relating to companies and other areas in the business or commercial field such
as labour law and the law of insolvency. Commercial law is a subject area that tries to summarise the
main provisions of mercantile law.
The law of obligations deals with peoples’ personal rights when these rights have a monetary value for
the people concerned. (In other words, you can describe those rights in terms of an amount of money.)
Obligations come mainly from the law of contract and the law of delict, which we explain below. Note
that obligations can also come from unjustified enrichment.
The law of property, also called the law of things, generally contains rules about the ownership of
objects or land.
The law of persons explains the rules about being a legal subject of the country, meaning a person
who has rights and obligations under the national law. It defines who is or is not a legal subject,
distinguishes between the different types of legal subject and clarifies their legal positions.
Family law deals with the requirements for marriage and the relationships between parents and children.
Finally, the law of succession deals with the way a person’s estate is divided up after she dies. A
person’s estate includes everything that she owns once everything she owes to other people is deducted.

Procedural law
A tule or law is not much use if it cannot be enforced, or put into effect in everyday life. Procedural law
has to do with the way legal rules are enforced. It describes the steps you can take to get help when you
have suffered harm or loss. Procedural law has three aspects, namely:
1. the law of evidence
2. the law of criminal procedure
3. the law of civil procedure.

The law of evidence guides a court in deciding what the parties before it have to prove to succeed in a
legal case. It also explains how the parties should prove certain facts. The rules of evidence apply both to
criminal and civil cases.
The law of criminal procedure describes the steps the state has to take when it prosecutes a person
who has committed a crime.
The law of civil procedure sets out the process for enforcing non-criminal law, usually when one
person sues another.
Clearly, law isa broad and varied field, and fortunately we do not need to cover all of it here. For your study
of commercial law, the most relevant aspects of procedural law are civil procedure and the law of evidence.

Activity 2.1
Draw a diagram — or even better, a mind map — to show the different branches and sub-branches
of South African law. Add as much detail as you like, preferably using different colours. This
activity will help you understand and remember how the different divisions fit together. it will
also create a useful summary for reference and revision.

Chapter 2 | Branches of the law 23

 Pete BELTS Your attorney

Does your family have a relationship with a firm of attorneys, or have members perhaps consulted
with the local Legal Aid Clinic or Legal Resources Centre? Find out from a senior member of your
family. A sound relationship with a legal practitioner (lawyer) could be very helpful in the years
to come. Whether you are buying a house, getting married, inheriting money or starting a new
business, a good attorney can be an excellent person to discuss new ideas and developments with.
Attorneys can be general advisors to individuals, couples or families. Your attorneys will know a
number of specialists from other fields, so if they cannot help you themselves, they will probably
be able to refer you to people who can sort out your particular problem.

2.2 Civil and criminal law

We mentioned above that civil procedure and the law of evidence are two key aspects of law for this
course. So let us have a look at a case study involving a civil problem that results in a civil procedure
being followed. If you have forgotten the difference between a criminal offence and a civil dispute, this is
a good time to page back to Chapter | and revise that section!

Case study Traffic light accident

Naziem pulls up at a red traffic light in his brand new car, and sees his former girlfriend in the
car next to him. He is so busy trying to attract her attention that he does not notice immediately
when the traffic light changes to green. Sasha, driving another car, is watching the storm at sea
as she cruises down the road. She glances at the traffic light and sees that it’s green — but she
does not notice Naziem’s car until she smashes into the back of it. Sasha thinks that the accident
was caused because of the poor visibility and because Naziem’s car is grey in colour, Naziem
suffers R30 000 damage to his car, while Sasha's car will cost R20 000 to repair. The evidence
shows that Sasha was under the influence of alcoho! at the time of the accident.
Naziem approaches his attorney, who sends Sasha a letter of demand to claim the R30 000.
Sasha's attorney writes back, saying that the accident was partly Naziem’s fault, since he did not
drive away promptly when the traffic light turned green. Therefore the accident was out of
Sasha’s control, and she does not intend to pay.
It is clear from the facts in the case study that Sasha has committed a crime. She can be
charged with driving under the influence of alcoho! or with reckless and negligent driving. If the
court finds her guilty, she will probably have to pay a fine or could end up in prison. However,
this does not help Naziem pay for the damage to his car.
Fortunately for Naziem, there is not only criminal law but also civil law, which is the law
concerning private rights. Sasha's action of driving into the back of Naziem’s car is a delict as
well as a crime. A delict is a civil wrong that allows the wronged party to claim money. We can
define a delict as a wrongful act that causes monetary harm to a person and which can be
blamed on another person. The law of delict, which forms part of civil law, allows Naziem to
claim payment from Sasha for the loss he has suffered. This is called a claim in delict.

‘The facts of the case are: Acree Is legal of

® = Sasha’s conduct (crashing into the car in front) arises from her driving. na icc ele irs
@ = Her conduct is ‘wrongful’, because public law does not allow anyone to drive the car SES punish
while under the influence of alcohol. the wrongdoer under
@ Her conduct has caused Naziem harm, because it will cost R30 000 to fix the damage _ criminal law.
caused to his car.
= = Sasha is at fault for a number of reasons: she was driving while under the influence of alcohol, she
failed to stop in time, and she was being careless in not being alert.

24 Chapter 2 | Branches of the law

If you compare the above list to the definition of a delict, you can see that Sasha’s conduct meets all the
criteria. Since Sasha refuses to pay, Naziem’s only option is to take legal action against her, whether or
not the state prosecutes her for drunken driving. Naziem’s claim is a civil case for money and is based on
the law of delict.
How does he go about taking legal action? South Africa's civil procedure explains in detail what
people in Naziem’s position must do to recover the costs of the damage they have suffered.

Activity 2.2
Discuss and summarise the key differences between civil and criminal cases.

2.3 Civil procedure

We can divide civil procedure into two types:
@ the action or trial procedure
@ the application procedure.

‘The trial procedure is used when the parties are in dispute about the ‘wrongdoing’ of a person, since they
need the opportunity to question each other in court.
The application procedure is a simpler process, because there is no dispute of fact. The case before the
court is now more about applying the law to the facts.

2.3.1 The trial procedure

When the parties disagree about what the true facts of the matter are, the trial procedure allows them to
argue it out in court. In other words, we use the trial procedure when there are differences of opinion as
to what happened and who is in the wrong. The trial procedure, or method of getting a case to be heard
before a court, has four phases, namely:
the pleadings
the trial
awh

appeals and reviews

the enforcement of court judgments.

Let us examine each phase in turn,

The pleadings
A civil case is about one person taking legal action against another. The person who makes the first claim
is known as the plaintiff (Naziem, in the case study). To start the claim, the plaintiff's attorney issues a
summons. The summons is a document that contains the plaintiff's claim against the defendant (Sasha,
in the case study). It is the duty of the sheriff of the court to deliver the summons to the defendant — we
call that ‘serving a summons’. The sheriff will personally go to the business or residential address of the
defendant. After making sure that it is the correct address, the sheriff will serve the summons on a person
at that address or leave it under the door or attached to the door.
If the defendant wants to defend the case, she must notify the plaintiff by sending a notice of
intention to defend, which is a document, stating in writing that she is going to dispute the plaintiff's
claims and defend the case. The defendant must then deliver a plea that sets out the grounds for defence.
A plea is a formal reply to a summons. It is a written document in which the defendant responds to each
claim or allegation in the plaintiff's summons in one of three ways, namely by admitting, denying, or
claiming no knowledge of the allegation.

Chapter 2 | Branches of the law 25

 Sometimes the defendant has a separate claim against the plaintiff, in which case she can deliver a
counter claim against the plaintiff along with the plea. So, Sasha would have to think carefully about
whether Naziem acted negligently before deciding to counter claim. The plaintiff can then defend the
counter claim, and the court will hear both claims at the same time.
If either party chooses not to defend a claim, or does not deliver a notice of intention to defend or a plea,
the other party can ask the court to award a judgment by default. As long as the court has proof that the
summons was served, it does not need any evidence that the plaintiff's claim was true. The defendant is in
default because she has not responded to the summons, and this is why the court will award a judgment.
The documents that are referred to in the arguments are known as the pleadings. They contain the
written summaries of the main facts that can prove each party’s case and help the court to understand
the dispute clearly. An attorney, an advocate or the litigants themselves sign the pleadings. Except for
the summons, which is served by the sheriff, representatives of the attorneys that are officially acting
for the disputing parties usually serve pleadings. (These attorneys are called the attorneys of record.)
Even though such a case is likely to end with a trial, the pleadings ensure that the issues in dispute are
narrowed and that there are no unnecessary surprises at the trial.
At the start of legal proceedings, the clerk of the court opens a court file for the case, and files the
original documents of all the pleadings. (In a High Court case, the registrar opens the file.) Once the
deadline for deliveryf of all pleadings has ended, the
: pleadings
‘ are closed. In other words, A notice of set down is
neither of the parties can make any further pleadings or written arguments. B fannal vistosto tell the
Next, a date is set fora trial to take place in court. The court usually informs both defendant's attorney that
parties of the first available date, and then the plaintiff serves and files a document called a_ the matter has been set
notice of set down. After this there will usually be an exchange of documents between the aes - pro ae
parties. This process is known as discovery. See :

The trial
‘The purpose of the trial is for the court to decide whether or not the allegations made in the pleadings
are correct. After some opening statements, the plaintiff's advocate or attorney calls all the witnesses who
can testify in support of the plaintiff's case. All this evidence is given under oath. Evidence under oath
is a statement given after the deponent, the person making the statement, has sworn to tell the truth.
The court generally only accepts verbal evidence, known as viva voce evidence, by the Viva voce is alatin term
parties in support of their cases. The best way for a court to assess whether or not witnesses meaning ‘living voice’.
are telling the truth is to put them under cross-examination, which means the attorney Viva voce evidence
or advocate of the other party questions them. The judge or magistrate is then in a better refers to oral evidence of
position to make a judgment on the matter. In other words, the plaintiff's lawyer questions _@ Witness as opposed to
each witness and then the defendant's lawyer has the chance to cross-examine these witnesses. written sas evidence,
a such as
‘The plaintiff's lawyer — the term ‘lawyer’ covers both attorneys and advocate — then gets an affidavit.
an opportunity to re-examine each witness, to clear up any confusion caused by the other
advocate’s cross-examination. Once this procedure has been completed for the plaintiff's witnesses, the
process is repeated with the defendant’s witnesses. The lawyers then make closing statements in which they
summarise the points in favour of their cases and remind the court of the ruling they want.
Chapter 1 makes clear that in a criminal case, the state has to prove the guilt of the accused “beyond
reasonable doubt’. In civil cases, the test that the courts use to judge whether or not the plaintiff's case
has been proved sufficiently is called the balance of probabilities. This is a lower test. The test is whether
or not the plaintiff's story is probably true. So the onus of proof, or burden of proof, is on the plaintiff,
meaning that it is up to the plaintiff to prove that his case is probably true. This is why the plaintiff's
witnesses will testify first. If the court judges the plaintiff's version of events to be true on a balance of
probabilities, it will award judgment in his favour, usually together with most of the legal costs he has
paid. If the plaintiff has not proved his claim, the court will usually dismiss the plaintiff's claim and make
the plaintiff pay most of the defendant's costs.

26 Chapter 2 | Branches of the law

 Added value The scales of injustice

To picture the court's methods in coming to a decision, think of the well known image of the
scales of justice. Imagine the judge listening to all the witnesses and weighing the evidence on a
set of balancing scales. In this way, the judge tries to see which side of the evidence carries more
weight and is more believable: the plaintiff's or the defendant’s.

Figure 2.1 The scales of justice

Appeals and reviews

The losing party in a case has the right to appeal against a decision of a Magistrates’ Court or the High Court.
The party that appeals a decision is known as the appellant; the other party is the respondent. A case is taken
on appeal when one of the parties believes that the court's decision was incorrect in law.
The final court of appeal is the Constitutional Court, although non-constitutional matters frequently
end in the Supreme Court of Appeal. An Appeal Court relies only on:
m= the typed record of the court that heard the evidence in the matter previously
@ = the advocate’s explanation of why the first court made an incorrect decision.

The Appeal Court does not hear any new evidence. It only tests whether the previous court's judgment
was correct in the light of the evidence given in that court.
If you believe that you lost a case because the presiding officer was biased or unfair, you may ask a
higher court to review the decision of the first court. You can also ask for a review if you believe that the
procedure followed in court previously was incorrect. For example, if the court failed to give your lawyer
a chance to cross-examine a witness, you can apply to a higher court to review the case. So, a review tests:
=~ whether the previous court followed the correct procedure
= whether the attitude of the magistrate or judge was fair.

The enforcement of court judgments

Having looked at the pleadings, the trial itself and any appeals or reviews, we now get to the final phase
of the trial procedure, in which the judgments of the court are enforced, or put into effect.
In a civil matter, the judgment of a court often results in an order that one party has to pay a
particular amount of money, usually to the other party. ‘The person who has to pay the money is
called the judgment debtor, while the person who is to receive the money is the judgment creditor.

Chapter 2 | Branches of the law 27

If a judgment debtor fails to pay the amount of money due in terms of (or according to) A warrant of execution
a court order, the judgment creditor may issue a warrant of execution. The sheriff of the is a document that enables
court draws up a list of the debtor’s property and holds a sale in execution where the items _ the sheriff to attach the
are auctioned to the highest bidder. debtor's property to pay
In cases where the judgment debtor is not in a position to pay the debt, another option the debt to the creditor.
is for the judgment creditor's attorney to call the debtor to explain her financial position
(income and expenses) in court. The court can then order the debtor to pay off the debt in __Instalments are regular
affordable instalments. Pepe:

2.3.2 The application procedure

Up to now we've been discussing the trial procedure. The purpose of a trial is to establish the truth of
the allegations made in the pleadings. When the facts are not in serious dispute between the parties, the
matter can be brought by application instead. The person who is seeking relief (a legal remedy) through an
application is called the applicant; the other party is called the respondent. Applications usually start with
a document called a notice of motion, which sets out the relief or compensation that the applicant wants.
Application proceedings are generally quicker and less expensive than trials, but can be brought
only when there is no real dispute on any important question of fact between the parties.
: ; : A Commissioner of Oaths
For example, where the parties agree that a restraint of trade clause in a contract was falar cuuarA ctokenrgantc
signed but disagree over the correct legal interpretation of the clause, there is no dispute on any subject from the
of fact and an application would be appropriate. Because the facts are not in dispute, no members of the public.
oral evidence is usually necessary, and the argument between the parties is mostly about All police stations and
differences in the way they interpret the law. Instead of calling witnesses, the parties can post offices
; should have
Commissioners of Oaths
argue the matter on paper by way of affidavits. An affidavit is a statement made by someone :
who swears it is true and who signs it before a Commissioner of Oaths. The person who Se ee
and advocates are also
signs the affidavit has to make a statement to the Commissioner of Oaths that is similar to Commissioners of Oaths.
the oath that witnesses make in court, promising a truthful statement.
The affidavits contain all the statements of fact that are necessary for the court to decide on the
dispute. The first affidavit is attached to the notice of motion and is called the founding affidavit because
it explains the applicant's case. If the affidavits disagree on an important fact, the court can hear some
oral evidence or refer the matter to a trial court.
An application to be admitted as an attorney or advocate is an example of an ex parte application —
one that does not require notice to any other party.

Activity 2.3
Explain what the South African civil procedure is and what cases it applies to. Then summarise
the trial procedure from the pleadings stage onwards. Draw a flow diagram or mind map as part
of your summary.

2.4 Legal subjects and the nature of legal rights

Now let us look at what is meant by the term ‘legal subject’, as well as some types of legal rights.

2.4.1 Legal subjects

Legal subjects are also called legal persons (or simply ‘persons’), but they are not necessarily human beings.
‘They can also be groups of people, such as companies. South African law recognises two categories of persons:
® natural persons
@ juristic persons.
The word capacity comes
A legal person has legal capacity, which is the ability in law to exercise legal rights and take Aol ersi oe one
legal action or to have action taken against you. Enver

28 Chapter 2 | Branches of the law

 Natural persons are human beings, while juristic persons are ‘artificial persons’ like companies,
universities, municipalities and the state, which enjoy legal rights and are subject to legal duties.
Although they have no actual physical existence like natural persons, juristic persons have a legal status
in terms of our law. Because a company qualifies as a juristic person, it has a separate legal existence
from the directors and members of the company. We can also say it is a separate legal entity. A director
of a company does not have to worry about being held personally responsible for money owed by the
company, provided she acted reasonably. This is because the law sees the company and its director as
two separate legal subjects. The company has its own rights and duties and is responsible for the legal
consequences of its actions. The company itself can be the plaintiff in a civil claim, and it can be sued for
money owed. Because of this, the shareholders of a company cannot help themselves to the company’s
profits. The company holds the profits until it declares a dividend, which is the part of the profit that it
divides up among shareholders.
There is an important difference between the legal status ofa company and that of A sole proprietorship is 2
a partnership or a sole proprietorship. The partnership or sole proprietorship is not a business run by a person in
separate legal person from the people owning it. Ifa partnership does not have the funds to her own Name, for example,
pay its creditors, the partners will be personally responsible for those debts. (So be careful Andrea Kettles trading as
who you go into partnership with.) a a aa
Some legal subjects, such as natural persons under the age of 7, cannot perform legal
as eicans ‘ A guardian |s someone
acts and cannot litigate or argue legal proceedings in court themselves. Children over 2
who has been formally
the age of 7 have a limited legal capacity, which means that they can litigate only if they appointed to look after a
are assisted by their parent or guardian. Why would a child need to litigate? Suppose, child whose parents are
for example, a 10-year-old inherits a sum of money from her grandmother, but then the unable to do so or have
grandmother's brother comes along and claims that money for himself. The child may need _ di€d. Some definitions
include the parents under
to sue her great-uncle to get the money that is rightly hers. In this case, the child would be
the term ‘guardians’.
the plaintiff, but would be assisted by her parent.

Legal Aid Board: In re Four children 2011 ZASCA 39

Principle
Children can sometimes be caught up in a legal dispute involving their parents. While they
would generally be able to go to court only with the assistance of a parent or guardian, a
curator ad litem — a independent person such as an attorney or an advocate — should be
appointed to assist them in cases where they have a conflict with their parents’ intentions.
Facts

A divorced couple secured joint custody of their four children — three children under the age of
11 and one child aged 14. At first the parents lived in the same city and enjoyed a harmonious
arrangement in terms of which there was mutual access to the children. Sometime later, the
mother wanted to relocate to another country and to take the children with her, but their father
objected. The children found themselves being caught up in the dispute between their parents
and approached a Justice Centre for assistance.
The court's finding
The Justice Centre should have asked the court to appoint one of its own employees
(an attorney or advocate) as a curator in the exercise of its ordinary discretion. Instead it
unnecessarily chose a more complex route. The appointment of an employee of the Legal
Aid Board as curator would have met everything that was required. The case was presented
instead as an application for the appointment of a legal practitioner, under section 28(1)(h) of
the Constitution.

Chapter 2 | Branches of the law 29

2.4.2 Legal rights
Personal rights are rights that one person can exercise only against specific other people, for example, as a
result of a contract concluded between them, which specifies each party’s rights and duties. By contrast,
real rights are valid against the whole world. This may sound complicated, but some simple examples
will make it clear.
If Betty agrees to sell you her horse, then you have the right to receive the horse from her, and she has
the right to receive the agreed amount of money from you. These are personal rights. Betty has the right
to claim money from you, but she cannot claim that money from anyone else. Similarly,
Performance here means
you cannot claim the horse from anyone else, because Betty is the only one who has a duty
that a person will do
to you in this case. More generally, we can say that a creditor's right to receive performance something, like pay a
from a person who owes her a legal duty is a personal right. The debtor is the only person specified sum of money.
who has a duty to the creditor in this case.
Now let us look at a real right. If 1 own a tractor, the law will recognise my right of ownership and
protect it against anybody who may try to steal that tractor. Ownership is the most important real right.
Real rights can be transferred in various ways, depending on the type or nature of the right. For example,
ifI sell the tractor to my neighbour, the right of ownership transfers to her when I receive her payment
(if it's a cash sale).
So you can see that personal rights are rights against persons, whereas real rights are rights in things.
The following case study illustrates this once more.

TTB act
le ht Joel's car

Joel owns a car and decides to sell it to Nomalizo. Joel agrees to deliver the car to Nomalizo in
return for payment of the amount of R100 000. This is an example of an agreement of sale. The
agreement between Joel and Nomalizo creates personal rights for both Nomalizo and Joel. While
Nomalizo has the personal right to claim delivery of the car from Joel, Joel has a personal right
to claim R100 000 from Nomalizo.
¢ Nomalizo will have a real right against the whole world to possession of the car only after
ownership of the car has been transferred to her, in other words, after the car has been
delivered to her and she has paid the amount of money that makes her the owner of the car.

Activity 2.4
Explain your understanding of legal subjects and the nature of legal rights to a partner.

What do you think?

The South African legal system is often criticised for delays in completing cases. These delays are due to
the formal procedure the courts have to follow and the large number of cases they have to hear, Cases in
the High Court often take a year or two before they even come before the court, and after that they can
be postponed several times and for long periods.
Think about the effect of these delays on the court's ability to ensure justice. When a motor
vehicle accident happens in a split second, do you think the witnesses can remember the events and
circumstances clearly three years later? Can a magistrate or a judge remember all the details of the
testimony a witness gave six months previously, before the case was postponed? How do you think these
problems can be fixed, if at all?

30 Chapter 2 | Branches of the law

Chapter summary
In this chapter, you learned the following about
branches of the law:
There are three branches of law that affect us in
South Africa:
® international law — from international conventions
or treaties
® foreign law — from other countries
= South African national law.
We can divide our national law into:
= public law — about the relationship between
government and the public
= private law — dealing with relationships between
private individuals
™ procedural law— about ways of enforcing legal rules.
We further divided procedural law into:
m the law of evidence — dealing with what the parties
must prove to succeed in their cases
® criminal procedure — about how the state has to
prosecute the accused in a criminal case
® civil procedure — about the formal process for
enforcing non-criminal law.
Review your understanding
1. Which of the following describes private law situations?
a) The Constitutional Court decides that
abortion is legal.
b) Awoman kills her husband.
c) The Minister of Police sues a driver for damages
because the driver negligently failed to stop at
Further reading
Schulze, H., et al. 2015. General Principles of Commercial Law,
8th edn. Cape Town: Juta and Co. (Pry) Ltd
We distinguished between a crime and a delict.
= = Ina criminal case, the state prosecutes, and has to prove
the guilt of the accused beyond reasonable doubt.
® In civil cases, the plaintiff has to prove her claim on
a balance of probabilities.
A delict is a wrongful act that causes monetary harm to
a person and which can be blamed on another person,
A civil procedure can be either a trial procedure
or an application procedure. In a trial procedure we
identified the following four phases:
® the pleadings
ws the trial
® appeals and reviews
= = the enforcement of court judgments.
Where the facts are not in serious dispute, the matter
can be brought by way of application.
Legal subjects include natural persons (humans) and
juristic persons (legal entities that have no actual physical
existence). Registered companies are legal persons, while
sole proprietorships and partnerships are not.
Legal rights can be real rights (rights over things) or
personal rights (rights against persons).
a traffic light and collided with a police vehicle.
The damage to the police vehicle is R50 000.
d) a), b) andc)
e) None of the above.
2. Using examples where possible, explain in your
own words when a litigant would use:
a) atrial procedure
b) an application procedure.
Chapter 2 | Chapter summary 31
baile) cig
e Interpreting statutes

The main ideas

= = What does it mean to interpret a statute?
= Aids to interpreting statutes

The main skills

= Summarise the traditional approaches to statutory interpretation.
Explain what impact the Constitution has had on these approaches.
Identify internal aids in interpreting a statute.
Identify external aids to interpreting a statute.

Although the language of the law attempts to be as specific as possible, life does not always fit neatly into
the law's definitions. Therefore, as lawyers, we need to determine the purpose and aims of a statute, or
piece of legislation, and apply our understanding of the law to real-life situations.
In this chapter, we will look at what it means to interpret a statute. Statutory law consists of
governmental Acts and Regulations. ‘Acts’ are also known as ‘statutes’ or ‘legislation’, and they are passed
by Parliament. We will study the two traditional approaches to statutory interpretation and consider what
impact the Constitution of the Republic of South Africa, 1996, has on the interpretation of statutes.
We will also look at some of the most widely used internal and external aids that courts use to assist
them in interpreting a statute.

Before you start

Imagine that there is a statute that states: ‘It is an offence to impersonate a person who is entitled to
vote’. Sumaya Naidoo is unable to vote, because she does not have an identity document. Sumaya’s
mother died recently, and she still has her mother’s identity document. Sumaya decides to vote in the
general election, using her mother’s identity document. At the polling booth, the official realises that
Sumaya is not using her own identity document. The police arrest Sumaya and charge her with the
offence of impersonating a person who is entitled to vote.
Has Sumaya impersonated a person who is entitled to vote? Are dead people entitled to vote? How
would you interpret the statute? This example highlights the kinds of difficulty that may arise when
interpreting statutes.

3.1 Why do we need to interpret statutes?

Statutes regulate a wide variety of both civil and criminal matters covering many areas of life, from road
travel to income tax. For example, the National Road Traffic Act 93 of 1996 regulates the licensing and
driving of motor vehicles. The Income Tax Act 58 of 1962 regulates the payment of income tax.
A statute contains many provisions. A provision refers to a specific requirement, condition or rule about
something which the statute aims to regulate. In most instances, the language of the statute is clear,
however, difficulties can arise when reading the provisions of a statute. For example:
™ Provisions may differ — one section of a statute may say one thing while another says Eotii fed =
something else. An example of this would be in labour law, where one section of a statute retrenchment refer to
refers to redundancy while another section of the same statute refers to retrenchment. someone losing their job.
Whether the difference is significant would be a matter for interpretation.

32 Chapter 3 | Interpreting statutes

= A ‘ provision
i
in .a statute mayoe
be unconstitutional,
oo,
because it conflicts ; with the Chapter 2 of our
Bill of Rights in our South African Constitution. An example of this could be Constitution contains
where the legislative requirements for a job state that only males may be employed, a Bill of Rights that
for example, fire-fighters. This is discrimination and it is unfair because there is no is a statement of the
basis for reserving the job for males only. fundamental rights that are
= Technology is changing rapidly and legislation cannot change quickly enough to eae eee te Sea.
; 3 a = ie within
a specific jurisdiction.
adapt to new technological advances. In South Africa, legislation recognises only 2 a
bank notes or coins as legal tender, which may be used to settle a monetary debt. Yet
: “8 y : ; 'y "Something is ambiguous
technological changes allow us to make payments via our phones, the internet and WeHeniie Eunice
debit and credit cards. These are not yet recognised as legal tender and the creditor can confusing or not ieee
refuse to take payment in by these methods. especially because it can
@ = The wording used in the Act may be ambiguous because the words could have more —_-Be understood in more
than one meaning. For example, after the administrator appoints an assistant, “he than one way.
or she’ shall supervise the dissolution of the estate. Does the “he or she’ refer to the
administrator or to the assistant?

‘The above examples show instances where the court is required to ‘interpret’ a statute.

3.2 What does it mean to interpret a statute?

If a provision in a statute is unclear, then a court cannot give effect to the provision. The court must then
interpret the provision to determine the intention of the legislature in promulgating such a
Context means ‘the
provision. In other words, what was the intention of the legislature in creating a particular statute? Situation, event or
Interpreting a statute thus involves finding the purpose and aims of a piece of legislation information that is related
to determine whether a statute applies in a particular factual situation, and how it applies to something and that
to that situation. A court may also look at the context within which the legislation heips you to understand it’.
is promulgated.
‘This approach to interpretation originated from the doctrine of parliamentary sovereignty, in which
Parliament is the sole body responsible for drafting law. A court must merely give effect to these laws,
and in doing so, give effect to the intention of the legislature. ‘This approach is not without its problems
and has been criticised for being an ambiguous, fictional concept. How does a court determine the
intention of a group of legislators from language chosen by others who drafted the legislation on the
instruction of an official in a government department?
However, when the interim Constitution came into effect on 24 April 1994, interpretation of statutes
underwent a substantial change. Parliamentary sovereignty was replaced with constitutional supremacy
and the interpretation clause in the interim Constitution stated that the spirit and intended purpose of
the fundamental rights must be taken into account when interpreting statutes. This is also the case under
the Constitution.
Before considering the impact that the Constitution has had on the interpretation of statutes, we first
need to consider the traditional approaches a court may take to interpreting statutes.

3.3 Theories of statutory interpretation

There are a number of theories or approaches to the interpretation of statutes. We will look at four of
these approaches, namely:
@ the literal approach
m = the functional approach
® the historic approach
m the purposive approach.

There has been much debate about the use of the various theories. Each of these approaches contains or
uses various techniques in the interpretation of statutes.

Chapter 3 | interpreting statutes 33

3.3.1 Literal approach
‘The literal approach is also called the text-based approach. ‘The words of a statute are the primary source
upon which the court relies and if the words are clear and unambiguous, effect is given to them. In
the literal approach, the words in the statute are given their ordinary, grammatical meaning in order to
determine the intention of the legislature. The courts may make use of dictionaries in order to establish
what the ‘ordinary, grammatical meaning’ of a word is. South African courts will usually interpret
statutes by the words of the statute and a court would depart from the literal approach only in very
limited circumstances. Let us look at a case example:

ele
I elim ey me LT
el Me-Ts le Sate a) ie ee Aeele ee Re)
SA 570 (SCA)

Principle
The words of a provision must first be given their ordinary, grammatical meaning to establish the
intention of the legislature, and if this meaning is clear, then it prevails.
Facts

Frozen mutton was imported from New Zealand, and it was declared at customs as ‘prepared’
mutton by the importer, which would attract a lower tariff than other forms of imported mutton.
The Commissioner rejected this description and declared that the imported meat was mutton
portions, which were subject to a higher tariff than prepared mutton.
The court's finding
The court used the ordinary dictionary meaning of the word ‘prepared’, which is to ‘make ready
for eating’, to determine that the mutton was not prepared. The mutton portions were sprinkled
with breadcrumbs, but the portions were too large for consumption.

Prior to the Constitution of the Republic of South Africa, 1996, statutes in South Africa were drafted in
both English and Afrikaans and either could be signed by the State President. In the case of a difference
in meaning between the English and Afrikaans texts, the signed text would prevail.
Our Constitution makes provision for 11 official languages and states that national and provincial
governments may make use of any of the official languages for the purpose of government. The
Constitution of the Republic of South Africa, 1996, does stipulate that national and provincial
governments must use at least two official languages.
The Official Languages Act 12 of 2012 stipulates that three official languages must be used for
government purposes by both national and provincial government, and these uses must be identified
by the relevant government in its language policy. Thus, statutes may be promulgated in two official
languages if a particular government has identified this use in its language policy.
It is unclear whether the old interpretation rule regarding the signed text will apply if national or
provincial legislatures sign a version other than the English text. Currently, the English text is signed.
What may guide us on this is section 240 of the Constitution of the Republic of South Africa, 1996,
which states that if there is an inconsistency between different texts of the Constitution, the English
text prevails. This constitutional directive may be applied to other statutes as well which will ensure
consistency in interpretation.
However, words may mean something other than what they appear to say in a particular context,
and words can sometimes be vague or ambiguous. In these cases, if a court uses the literal approach
to interpret a statute, the result may lead to an absurdity. When it is unclear what the intention of the
legislature was from the ordinary, grammatical meaning of the words, the court could make use of other
approaches to determine the intention of the legislature.

34 Chapter 3 | Interpreting statutes

3.3.2 Purposive approach
The purposive approach, also called the contextual or text-in-context approach, takes a broader view of
interpreting a statute. The purposive approach aims to make sense of the statute in the light of the contextual
environment, including social and policy directions. The courts may consider intra-textual aspects such
as the language, as well as extra-textual aspects such as the purpose and consequences of the statute.
This is reflected in the ‘mischief rule’ that is considered to be the forerunner of the purposive approach.
The mischief rule was expressed by Van den Heever JA in Hleka v Johannesburg City Council 1949 (1)
SA 842 (A) at 852-3 as follows:
‘To arrive at the real meaning [of a statute] we have ... to consider, (1) what was the law before the
measure was passed; (2) what was the mischief or defect for which the law had not provided; (3) what
remedy the legislator had appointed; and (4) the reason for the remedy’.
The court must then interpret the legislation in such a way as to suppress the mischief and advance the
remedy, that is, the court must give effect as far as possible to what it believes was the purpose of the
legislature in passing the statute.
Courts have sometimes adopted a combination of the techniques found within each approach.
First, the courts look at the words themselves for a clear and unambiguous meaning that gives effect to
the purpose of the statute. Failing that, they will look to the apparent scope, purpose and background
to assist in the interpretation of that statute.
‘The emerging trend in statutory interpretation by our courts is to have regard for the context in
which the words occur, even where the words to be interpreted are clear and unambiguous.

3.3.3 Functional approach

This theory uses the approach of trying to eliminate any absurdity in using the ordinary meaning of the
words by giving more effect to them rather than to allow the statute to perish. The ‘golden rule’ is employed
which holds that the ordinary meaning must be given to words unless this would lead to an absurdity or
a result contrary to the intention of the legislature. This means that, if possible, an enactment should be
construed so as to render it effective, intelligible and valid, rather than interpret it in a manner that would
defeat its purpose and application. The case below illustrates how the functional approach works in practice.

R v Takawira 1965 Rhod LR 162 (RA)

Principle
If a provision is interpreted literally, and this leads to an absurdity, then the court must look
further than the mere literal meaning of the words to ascertain the intention of the legislature.
Facts

A statute made it an offence for any person to be in possession of subversive material. If

interpreted literally, this would mean that the policeman who took possession of subversive
material, the public prosecutor who tendered it as evidence and the judicial officer who
examined it at the trial would all be guilty of offences. It would be impossible to secure a
conviction in terms of the statute because everyone would be guilty of the offence.
The court's finding
The court held that it would have to qualify the literal meaning by reading into the clause words,
such as ‘without lawful authority’, to permit officials to be in possession of the material in the
exercise of their duties.

Chapter 3 | Interpreting statutes 35

3.3.4 Historic approach
According to this approach, the historical situation from which the rule became law is studied in order
to clarify the intention of the legislature. The parliamentary history of the wording of the statute may
be consulted, as well as the predecessor of the provision. ‘The surrounding circumstances leading to the
provision, as well as speeches, commission investigations or policy documents, may also be considered.
This approach has not found much favour and judicial opinion is against making use of such sources.
An exception seems to be in the case of Constitutional matters. The Constitutional Court has, on
occasions, referred to the multi-party negotiations that preceded the interim Constitution in order to
interpret provisions in the Constitution. However, in non-constitutional matters, there is little support
for this approach,

3.4 What does the Constitution say about interpreting statutes?

Section 1(c) of the Constitution is a foundation clause that states that South Africa is a sovereign,
democratic state founded on the value of the supremacy of the Constitution and the rule of law.
Section 2 is the Constitutional supremacy clause that tells us that the Constitution is the supreme
law of the Republic and any law or conduct inconsistent with it is invalid.
Linked very closely to this section are section 7(2), which instructs the state to respect, protect,
promote and fulfil the rights in the Bill of Rights, and section 8(1), which states that the Bill of Rights
applies to all law, and binds the legislature, the executive, the judiciary and all organs of state.
From these sections, we see that the Constitution and Bill of Rights must underlie every
interpretation of legislation, which a court undertakes. It isa mandatory instruction in the Constitution
and the Constitution must, therefore, be the starting point of any interpretation.
For the purposes of interpreting statutes, section 39(2) of the Constitution is if you cede your rights to
someone, you give them
particularly important. This section tells us that, when interpreting any legislation, a court
up in favour of that person.
must promote the spirit, purport and objects of the Bill of Rights. This provision has led to
a new approach to interpretation by the courts and introduces a mandatory requirement on
: Clanbiant h h Re An executor
is a person
courts to construe every piece 8) egis ation in a Manner that promotes the Spirit, purport you appoint to carry out

and objects of the Bill of Rights. This duty arises even where the parties have not raised the _ the terms of your will.
issue of interpretation, because the obligation imposed by section 39(2) is mandatory.
This means that when interpreting a statute, a court must consider, respect and protect _ Estate refers to all
fundamental human rights, such as equality, freedom and dignity as contained in the Bill of — the money, property
Rights. To illustrate how this affects the interpretation of statutes, we will look at a case that 4d possessions that a
concerned a section of the Insolvency Act 24 of 1936, person owns.

Brink v Kitshoff 1996 (4) SA 197 (CC)

Principle
All legislation must be interpreted in the light of the Constitution, promote the spirit, purport
and objects of the Bill of Rights and give effect to those rights.
Facts

Mr Brink died on 9 April 1994. During his lifetime, he had taken out a life insurance policy and
ceded it to his wife, Mrs Brink, the applicant in the case. On 23 May 1994, the executor of
Mr Brink's estate, Mr Kitshoff, who was the respondent in the case, acted in terms of section 34(1)
of the Administration of Estates Act 66 of 1965. Mr Kitshoff sent a notice to creditors of Brink's
estate informing them that the late Mr Brink did not have enough assets to cover his debts and
that the estate was insolvent.

36 Chapter 3 | Interpreting statutes

 Brink v Kitshoff 1996 (4) SA 197 (CC) (continued)

In terms of section 44 of the Insolvency Act 24 of 1936, Mr Kitshoff demanded that the
insurance company pay the proceeds of the policy into the estate. This section directed that
the proceeds of insurance in a married man’s insolvent estate in excess of R30 000, which were
payable to his surviving wife, revert to the insolvent estate. No such provision existed where the
proceeds in a married woman's insolvent estate were payable to her surviving husband.
The court's finding

Section 9 of the Bill of Rights holds that the State may not unfairly discriminate against anyone
of the grounds of their gender, sex or marital status. The Constitutional Court thus held that
section 44 of the Insolvency Act 24 of 1936 was unfairly discriminatory on the basis of sex and
marital status, and it was thus unconstitutional and invalid.

However, section 36 of the Constitution does provide for the limitation of rights contained in the Bill
of Rights by way of laws of general application in reasonable and justifiable circumstances. Laws of
general application are laws that apply to everyone. These may limit the Bill of Rights in reasonable and
justifiable circumstances.
Here is a case study example of how the limitation clause may work when interpreting a statute.

Case study Constitutional limitation

Jan Trap has a large piece of land that he is not using. He decides to use the plot to grow dagga
to sell and make a lot of money. Shortly after he starts selling the dagga, the police raid his plot
and arrest him for contravening section 5(b) of the Drugs and Drug Trafficking Act 140 of 1992,
which provides that:

“... no person shall ‘deal in’ - (a) any dependence-producing substance; or (b) any dangerous
dependence-producing substance or any undesirable dependence-producing substance’.

Section 1 provides that:

‘"deal in”, in relation to a drug, includes performing any act in connection with the
transhipment, importation, cultivation, collection, manufacture, supply, prescription,
administration, sale, transmission or exportation of the drug’.

Jan Trap alleges that, in terms of section 22 of the Constitution, he is merely exercising his right
to a trade or occupation. The prosecutor is of the opinion that the Act is quite clear and that Jan
Trap is guilty of the offence of dealing in dagga.
The Constitution is clear that, in any interpretation of a statute, effect must be given to promote
the spirit, purport and objects of the Bill of Rights. If this was the only factor the court had to
consider then Trap would be correct in his view that he is merely exercising his right to a trade or
occupation. However, section 36 of the Constitution allows for a limitation of these rights, but only
by a law of general application, which is a law that applies to everyone in the Republic.
The statute that criminalises dealing in drugs, including dagga, is a law of general
application. This is allowed in terms of section 36 and can limit a person's rights. Trap would be
guilty of the offence. A further argument could be raised that this law unfairly infringes on a
person’s right to practise a trade or occupation. This would result in an inquiry into whether the
legislation, banning dagga, is constitutional.

Chapter 3 | Interpreting statutes 37

 Added value Legalisation of dagga

A judgment in the Western Cape High Court in 2017 found that the possession, use and
cultivation of dagga for private use was allowed, The court found that sections of the Drugs
Act and Medicines Act, which prohibit the private possession and use of dagga by an adult for
personal use in private, contravened the Constitution. In particular, a person’s right to privacy.
The government lodged an appeal against this judgment with the Constitutional court.
The Constitutional Court handed down judgment in September 2018 on this appeal. The
Constitutional Court found that the relevant sections of the two Acts were unconstitutional,
only insofar as they infringe on the private use and consumption of dagga for personal use
of a quantity, which the legislative considers does not cause undue harm. The court did not
decide on the quantity of dagga that may be kept as this would infringe on the doctrine of
the separation of powers. The court has given the legislative 24 months to rectify the relevant
provisions of the two Acts.

3.5 Help with interpreting statutes

When courts have to interpret a statute, they can use a number of aids or tools. These aids help a court
in deciding whether, and if so, how, a statute applies to a particular set of facts. If the aids are part of the
statute itself, they are known as internal aids, while aids from outside the statute are known as external aids.

3.5.1 Internal aids

Anyone who wants to interpret a statute must begin with the statute itself. In many cases, the specific
words used in the statute will clearly set out the intention of the legislature. It is always important to read
the whole statute to make sense of it.
A statute consists of the following:
m = ashort title (also the official name of the piece of legislation), which is a brief description of what
the statute is about
m = the date assented to, which is the date on which the statute was passed into law, and the date of
commencement, which is the date on which the statute came into operation
m the long tide or preamble, which explains the purpose and objects of the statute
m the definitions section, which is a mini-dictionary of the terms used in the statute and which
explains their meaning within the context of the statute
m the purpose, interpretation and application sections
m the provisions, which set out what the legislature aims to regulate and how the statute applies in a
particular context.

Activity 3.1
Find the Wills Act 7 of 1953, and identify the internal aids of that statute.

3.5.2 External aids

As the name implies, external aids are found outside the statute being interpreted. Courts tend to find
the external aids most useful to the facts at hand. We will consider some of the external aids most widely
used by the courts to interpret the legal meaning of statutes.
External aids can be grouped as follows:
® interpretation materials, which are resources that include the Constitution, dictionaries, legal
history, current legislation, and explanatory memoranda that accompany suggested future legislation
= rules, which the court apples, that examine the purpose and historical context of the statute
® presumptions, which are rules of common sense.

38 Chapter 3 | Interpreting statutes

Interpretation materials
Courts use a variety of different materials to help them interpret a statute:
= = ‘The Constitution of South Africa: This is the supreme law and all statutes must be interpreted while
promoting the spirit, purport and objects of the Bill of Rights.
= = ‘The Interpretation Act 33 of 1957: This is a general interpretation Act that applies to the
interpretation of all law in South Africa. The Interpretation Act sets out how terms such as ‘writing’,
‘day’, ‘month’, ‘measurement of distance’, ‘gender’ and ‘number’ should be interpreted when these
matters are not specifically dealt with in the statute being interpreted. For example, section 4 states
that, in every law, unless the contrary intention appears, words importing the masculine gender
include females.
® Dictionaries: Courts frequently turn to authoritative dictionaries to interpret the meaning of words,
as words can have more than one meaning depending on the context in which they are used. For
example, the Oxford English Dictionary or the Standard Dictionary of the English Language.
= = Legislative history and the source of a provision: Many South African statutes have been drawn
from other legal systems so reference may be made to those court's interpretations. The Bill of
Rights is an example of this. Important wordings and mechanisms occurring in the Bill of Rights
are derived directly from the Canadian Charter of Rights and Freedoms of 1982. Thus, Canadian
judicial precedent on rights has, since 1994, had a notable influence upon the interpretation and
application of South African fundamental rights.
@ = The social and historical background of the legislation: It may be relevant to understanding
provision to look at why the statute was enacted and what was said in parliamentary debate during
its enactment. The Constitutional Court, in § » Makwanyane [1994] ZASCA 76, emphasised the
importance of looking at the history and background of the adoption of the Constitution when
interpreting any of its provisions.
= Explanatory memoranda: When a bill is introduced in Parliament, an explanatory
A bill is a draft of a statute
memorandum often comes with it. This memorandum can be useful in understanding before it becomes an Act.
the circumstances surrounding the legislation and the purpose of the proposed law.

Rules
We have seen that the starting point of the interpretation of a statute is to consider the literal meaning of
the words and phrases. We have also identified the kinds of problems that the literal approach can create.
When faced with a problem of this kind, the courts make use of two rules in order to arrive at a just and
fair result. These are known as the golden rule and the mischief rule. These rules were mentioned earlier
when we dealt with the theories of interpretation. The development of these rules stemmed from the
need to overcome the difficulties or problems in strictly applying the literal theory of interpretation and
the need to discover the ‘true intention’ of the legislature.
Another rule, the eiusdem generis rule, is used to interpret lists.

The golden rule

The golden rule of interpretation requires a court to apply the plain meaning of words in a statute, unless
it would lead to an absurd or unjust result that the legislature could not have intended, in which case the
court can give effect to the ‘true intention’ of the legislation. The case on the next page illustrates how
this works in practice.

Chapter 3 | Interpreting statutes 39

 S v De Abreu 1981 (1) SA 417 (T)

Principle
A court must apply the ordinary, grammatical meaning of the words in a statute unless the result
would lead to an absurdity or an outcome that the legislature could not have intended.
Facts

The accused, De Abreu, was charged and convicted with contravening a statutory provision contained
in the Arms and Ammunition Act 75 of 1969. The provision required a licence for the possession of a
firearm in South Africa. De Abreu was travelling from Botswana to Portugal, and he had to spend a
few hours at the Johannesburg airport in the transit lounge before catching his connecting flight. In his
luggage, he had two firearms. He was not a South African citizen, and he had no intention of staying
in South Africa except for a few hours while waiting for his next flight. On a literal interpretation of the
Act, it was absurd that a foreign person in transit needed a licence to possess a firearm in South Africa.

The court's finding

On appeal, the court, using the golden rule, found that a person in the position of De Abreu,
who was in possession of an unlicensed firearm while merely passing through the country and
staying at the airport in transit for only a few hours, was not acting in contravention of the
statute, The literal meaning of the statute was disregarded as it would have led to absurdity. The
intention of the legislature did not apply to such possession and the conviction was set aside.

The mischief rule

‘This rule is used when interpreting the plain meaning of a provision contained in the statute
4 Transit ‘pasi
would lead to a result that could not have been intended by the legislature. The court will then Ree
through one place
ae
use the mischief rule to attempt to give proper meaning to the statute by considering the toanother’.
surrounding circumstances and by placing the statute in its historical context. The mischief rule
requires the interpreter to look at the circumstances leading to the provision in the statute, and In this context, mischief
to ask what mischief the legislature wanted to avoid or suppress. If the facts of a matter do not _refers to a problem, harm
amount to the mischief that the statute is aiming at, then the statute will not apply. or damage.
When a court uses the mischief rule it looks at:
what the law was before the statute
what mischief the law did not provide for
the remedy that the legislature provided to deal with that mischief
the social and historical background of the legislation.

In the following case, the court made use of the mischief rule:

a eee ed ye 9)

Principle
If, on a literal interpretation of the words of the Act, it is unclear what the legislature intended
by the provision, then the court must consider the purpose of the provision in the Act. In other
words, what mischief did the legislature intend to regulate?
Facts

The accused, Chitsa, smashed some hostel windows using a club. He was convicted of:
‘throwing or propelling, or preparing to throw or propel, any article or thing likely to cause
damage or injury at any building or structure’.

40 Chapter 3 | Interpreting statutes

 Rv Chitsa 1966 (2) SA 34 (R) (continued)

The court's finding

The court applied the mischief rule to this situation to determine whether the legislation intended
to stop the throwing of any object at a building. The court concluded that the mischief that the
legislature wanted to prevent was the throwing of stones or articles or the propulsion of stones
or articles from a catapult or sling. This definition did not include striking with the use of a club.
The conviction was set aside, although the High Court did note that the Attorney-General could
reopen the case and charge the accused with malicious injury to property.

The eiusdem generis rule

‘The eiusdem generis rule is used to decide whether a particular fact is included in a listor sisdem ince
group of things mentioned in a statute. A statute will list various objects and then include a _ ‘9 the same kind’.
general word, for example, *...apples, oranges, bananas and other fruits’.
If you have to decide whether a carrot is covered by the statute under ‘other fruits’, you
must look at what items are in the list. A carrot is not a fruit because it has no seeds, so the statute does
not apply to carrots.
Thus, to decide whether or not a statute applies to a factual situation, the general words
are interpreted with reference to the specific examples given in a list to establish the limits of the group.
Another example includes the following list: ‘cattle, sheep, horses and other domestic animals’.
Lions or tigers would not be included because they are wild animals.
The following case illustrates the eiusdem generis rule:

AAC ay. el

Principle
The general words must be interpreted with reference to the specific examples given in the list
to establish the limits of the group.
Facts

Kohler was convicted of keeping a peacock within the Heidelberg municipal area. The municipal
regulation did not allow the keeping of ‘any fowl, duck, goose, turkey, guinea fowl, partridge,
pheasant, pigeon or any other bird’ in that area without a permit.
The court's finding
The court consulted a dictionary, which defined a peacock as a ‘chicken-like decorative bird’.
The court held that a peacock was a species of the group ‘any other bird’ and dismissed
Kohler's appeal.

Activity 3.2
If Kohler had been keeping an ostrich and not a peacock, what do you think the court would
have decided?

Presumptions
These are guides that courts use to interpret unexpressed or implied meaning in a statute. If your law
lecturer tells you to hand in your assignment by four o'clock on 31 May to the secretary, what the
lecturer implies, but does not say, is that:
® = the deadline for handing in your assignment is four p.m. and not four a.m. in the morning

Chapter 3 | Interpreting statutes 41

m the date is 31 May this year, not last year or next year
@ the secretary is the secretary of the law department, not the secretary of any other department.

Some of the most widely used presumptions that the courts use are the following: A share-block company
m = The legislature does not intend ridiculous or out-of-the-ordinary results. Soros & ie) prope,
= The levis! 4 : A ans ag hen | . such as a block of flats.
he legislature does not intend to backdate laws. Pack Garenciioe kus
® = The state is not bound by statutes. shares that entitle him or
wr ces : her to occupy particular
Avoiding ridiculous or out-of-the-ordinary outcomes parts of the property.
The legislature does not intend absurd or anomalous results. In other words, the legislature
does not intend the results of court cases to be nonsensical or out of the ordinary. The registered office
Sometimes, the wording of a provision may have two meanings, so the court will apply this _ of the company is
presumption where one of the possible meanings makes no sense, given the purpose of the —_—‘fegarded by the law as the
statute and, therefore, the other meaning will be used. company’s home,

Villiers v Kinsale Properties Share Block Ltd 1986 (2) SA 592 (D)

Principle
A provision in a statute must be given the meaning that is practically sensible and not ridiculous.
Facts

The relevant statute provided that the operator of a share-block company had to keep a
register at the property in respect of which the company operates the scheme.
The court's finding
The court found this absurd, and read the provision to include the registered office of the
company, which would be the more logical place to keep the register.

Against backdating a law

The legislature does not usually intend to make laws retrospective. This means that the legislature
does not intend for a law to take effect from a date in the past. This presumption assumes that the
legislature intends to regulate only future events, unless a statute says differently. Thus, laws are generally
prospective in nature. The presumption against backdating laws is in the interests of fairness and legal
certainty. Let us look at the case example below:

R v Mazibuko 1958 (4) SA 353 (A)

Principle
It is against the interests of justice and fairness to hand down a punishment to a criminal that
was not applicable at the time of the crime.
Facts
The accused appealed against a death sentence for robbery. After Mazibuko committed the
crime, but before sentence was handed down, the Criminal Procedure Act 56 of 1955 was
changed to allow for the death sentence. In other words, at the time that Mazibuko committed
the offence, the death sentence was not a possible punishment. The court had nevertheless
handed down a death sentence for the crime.

42 Chapter 3 | Interpreting statutes

 R v Mazibuko 1958 (4) SA 353 (A) (continued)

The court's finding

On appeal, the court concluded that the legislature did not intend to make the death
sentence retrospective.
This presumption against backdating laws is now contained in section 35(3)(n) of the
Constitution. This includes an accused person's right:
‘... to the benefit of the least severe of the prescribed punishments, if the prescribed
punishment for the offence has been changed between the time that the offence was
committed and the time of sentencing’.

State not bound by statutes

The presumption here is that state officials do not have to abide by certain laws they make. This does
not mean that state officials can do whatever they like, as the Constitution binds all organs of state
(sections 2, 7(2) and 8(1)). Rather, there are circumstances in which those officials may need to disobey
the law in order to carry out their duties in the public interest, as in the following case example:

Re) lever
lei ee) ey Pe

Principle
Sometimes, in the case of necessity, state officials may need to disobey a law in order to carry
out their job.

Facts

The accused, Labuschagne, was a fire-fighter. He drove through a red traffic lights while driving
a fire engine on his way to fight a fire, and was involved in an accident with a motor car.
Labuschagne was charged with negligent driving. At the time of the accident, the fire engine's
sirens were on and its red lights were flashing.
The court's finding
The fire-fighter was found not guilty. The court recognised that there are times when a
state official has to disobey the law to carry out a public function, The court held that it was
reasonable for the driver of the fire engine to assume that the driver of the motor car would
have reacted to avoid colliding with the fire engine. The same principle would apply to a
policeman who exceeds the speed limit when chasing a suspect.

What do you think?

Do you think that the approach to the interpretation of statutes giving effect to the underlying values of
the Bill of Rights is better than the traditional literal approach?

Chapter 3 | Interpreting statutes 43

 Chapter summary

In this chapter, you learned the following about
interpreting statutes:
= = ‘The interpretation of statutes is necessary because
words used in statutes can be open to more than
one interpretation.
@ = Statutes may be problematic in a number of ways,
for example, they may be unclear or ambiguous, or
a new set of facts may arise that the legislature did
not foresee and the current law does not cover.
= = There are four theories that are used to explain
a court's approach to statutory interpretation.
These are the literal, purposive, functional and
historical approaches.
The Constitution places a mandatory obligation on
the courts to interpret a statute by promoting the
spirit, purport and objects contained in the Bill of
Rights. Promoting values such as equality, freedom
and human dignity are therefore important when
interpreting a statute.
Interpreting a statute may be a simple matter,
requiring only the internal aids supplied in the
statute itself. When the words of the statute are
not so clear, the court will use external aids to
determine the intention of the legislature.

Review your understanding

1. Asan example of words that could be ambiguous,

consider the word ‘terms’. Use a dictionary to write 1. Penalties for being in disguise in suspicious
a sentence containing each term below that shows circumstances.
you understand the expression: (1) Any person found disguised in any manner
a) bring to terms whatsoever and whether effectively or
b) in terms of not, in circumstances from which it may
c) come to terms reasonably be inferred that such person
d) to pay for something on terms has the intention of committing or
e) tobe on good or bad terms with someone inciting, encouraging or aiding any other
f) to describe something in specific or vague terms. person to commit, some offence or other,
2. Read the statute below and answer the questions shall, unless he proves that when so
that follow: found he had no such intention, be guilty
of an offence and liable on conviction
to a fine not exceeding two hundred
PROHIBITION OF DISGUISES
rands or to imprisonment for a period
ACT 16 OF 1969 not exceeding six months or to both such
[Assented to: 13 March 1969] fine and such imprisonment.
[Date of Commencement: 26 March 1969]

ACT
An inference js a
To prescribe penalties for being in disguise in conclusion reached about
suspicious circumstances. @ particular issue based on
reasoning from evidence.

44 Chapter 3 | Chapter summary


(2) In any prosecution for a contravention of
sub-section (1) it shall not be necessary
to allege or prove that the circumstances
in which the accused was found, gave
rise to an inference that he had the
intention of committing or inciting,
encouraging or aiding any other person
to commit any particular offence.
3.
Sipho is an active member of the charity ‘Save the
Whale’. While campaigning to raise funds for the
charity, Sipho is arrested outside a shopping centre
dressed up as a whale.
a) Has Sipho committed an offence?
b) Explain the reasons for your answer to
a) above.
c) What internal and/or external aids would you
use to arrive at your answer?
d) Would the Constitution be relevant in this
instance?
Drawa mind map to help you remember the
external aids for interpreting statutes. Include a
brief description of each one and, where possible,
include examples in your illustration.

Further reading

Botha, C, 2012. Statutory Interpretation: An Introduction for
Students, 5th edn. Cape Town: Juta and Co, (Pey) Led
(This is a comprehensive introduction to statutory law in
South Africa.)
Du Plessis, LM. 2011. ‘Statute Law and Interpretation’.
LAWSA, 2nd edn, Volume 25, Part 1. Durban: LexisNexis
South Africa
Hoexter, C. (ed), 2005. “The Interpretation of Legislation’.
Introduction to Law Course Pack. South Africa: University of
the Wiewatersrand
Constitution of the Republic of South Africa 200 of 1993
Constitution of the Republic of South Africa, 1996
Interpretation Act 33 of 1957
Official Languages Act 12 of 2012

Chapter 3 | Further reading 45

Latte)
4 Contractual capacity

The main ideas

Requirements for a valid contract
Who has contractual capacity?
Contractual capacity regarding minors
Contractual capacity regarding married persons
Contractual capacity regarding drunken persons
Contractual capacity regarding insolvent persons

The main skills

= Analyse questions and situations that require knowledge on contractual capacity.
Answer questions on contractual capacity.
= Apply knowledge of legal theory regarding contracts.
a Solve problems and make decisions based on contractual law.

Part 1 of this book introduced you to the South African legal system. Part 2 focuses on the principles
that apply to contracts. This chapter begins Part 2 by looking at who can enter into a contract — and
who cannot. Some people are not legally able to enter into contracts at all, and some can do so only
with assistance, but most people can enter into contracts on their own. The law recognises that people's
capacity to enter into contracts changes at different stages in their lives.

Before you start

Suppose you go to a party with friends and get drunk. When you wake up the next morning, your friend
tells you that you have sold your car for R100 to a man you met at the party and that he’s about to
come and fetch it. To add to the pain that’s already in your head, you now have the following questions
bouncing around your brain: Can you hold on to your car, or are you bound by the contract that you
made to sell it? What does the law say about contracts that people enter into while they are drunk? Is
a contract valid if you do not understand what you're doing? Will the law force you to sell your car for
R100? These are some of the questions you will be able to answer once you have worked through this
chapter. They all have to do with contractual capacity, which is the legal ability to enter into a contract.

4.1 Requirements for a valid contract

Since this chapter is the start of the section that focuses on the law of contract, let us begin with an
overview of the legal requirements for a contract.
There are six requirements for a valid contract, which we will examine in detail over the next few
chapters. Very briefly, these six requirements are as follows:
1. contractual capacity, which we discuss in this chapter
2. agreement, which we discuss in Chapter 5
3. formalities — the contract must comply with any formalities required by law or agreement,
(dealt with in Chapter 7)
certainty — the contract must be clear and certain (dealt with in Chapter 7)
a

5. possibility of performance — the performance expected from each party must be possible (dealt with
in Chapter 7)
6. legality — you cannot hold someone to a contract that requires her to do something illegal (dealt with
in Chapter 7).

46 Chapter 4 | Contractual capacity

4.2 Who has contractual capacity?
Here, we look at who has the ability to enter into legally binding contracts. Towards the end of
Chapter 2, we discussed natural and juristic persons. Generally, natural persons are capable of entering
into valid contracts unaided — they have contractual capacity, so they can contract validly. Juristic
persons, such as companies and close corporations, also usually have full contractual capacity. They have
rights and duties, and the law treats them in many ways as if they were natural persons. This means that
a juristic person can enter into a contract in its own name. Though most persons have full contractual
capacity, there are some categories of natural persons who either lack contractual capacity completely or
have limited capacity to enter into a contract, in that they need someone to assist them.

4.3 What is contractual capacity?

Contractual capacity is the legal ability to enter into a contract. It is one of the many competencies that
the law regulates. For example, a person has the capacity to make a will at 16, but may witness a will
from the age of 14. A boy over the age of 18 and a girl over the age of 15 have the capacity to marry. A
child has the capacity only to be liable in terms of criminal law from age 10. A child from age 7 can sue
or be sued when assisted by their guardian.
Contractual capacity differs for:
minors
married people
people who are drunk at the time they contract
people who are insolvent, meaning they are declared by a Court to be unable to pay their debts.

The rest of this chapter considers issues of contractual capacity relating to each of these categories
in turn.

4.4 Contractual capacity regarding minors

Young people may not always understand the language and meaning of contracts, or know what is in
their best interests. This makes it easy for other people to take advantage of them. For this reason, the
law classifies young people as minors and protects them by limiting their contractual capacity.

4.4.1 Who is a minor?

A minor is a person who is below the age of 18 years. A major person, by contrast, is an adult who can
make independent decisions.
However, when a minor gets married (even if it is to another minor), he automatically becomes a
major in the eyes of the law. The law thinks that if people are independent enough to get married, then
they are able to make their own decisions and enter into their own contracts. If the marriage ends in
divorce, both parties remain majors. If the marriage ends as a result of death of one spouse, the other
party remains a major.
Similar to a minor who is married, a minor who has been emancipated by a court is legally a major
in the eyes of the law, and may contract without the assistance of a guardian as a major would. An
emancipated minor therefore has the same contractual capacity as a major. When a minor has been
emancipated, it means that the minor has been freed from parental authority. It means that the minor no
longer needs the protection of his minority status. A minor can be emancipated by court incase
or through tacit emancipation. Tacit emancipation is less prevalent today as the age of is understood or implied
majority has dropped to 18. It was more applicable in the past when a minor only reached —_ without being said.
majority at 21.
Emancipation by court is when a court rules that a minor may be regarded as a major, for example, if he
is already independent and does not need the protection of minority. Once that minor is emancipated, that

Chapter 4 | Contractual capacity 47

minor has the same contractual capacity as a major. It has been decided in our law that it is possible for a
minor to also be tacitly emancipated by her guardian.
In other words, a guardian expressly or implicitly can regard her child as sufficiently independent
to participate in commercial activities as an adult. Tacit emancipation would have to be proven by the
person who claims that it exists and the factors that are in favour of emancipation are:
® the relationship between the minor and her guardian or guardians (the guardian granting the
minor independence)
® = the minor not living with her parents.

Let us look at a case as an example of a minor being tacitly emancipated by his guardian.

ofa <a ae o1 a d yD

Principle
A minor living independently and conducting his life as a major is tacitly emancipated by his guardian.
Facts

Daley was a minor who lived with his mother and stepfather; not his guardian (his father—
Dickens). He had been working as a clerk and was financially independent. While he was living
with his mother, he was contributing towards his accommodation costs. Daley's guardian did
not exercise any control over him and allowed him to live as a major. Daley opened a bank
account unassisted by his guardian and later drew a cheque in favour of Dickens, which
was dishonoured.
The court's finding
Daley's guardian had tacitly emancipated him.

In this case, if the guardian had simply abandoned the minor — for example, did not have any interaction
with the minor for years of the minor's life — then that would not have necessarily meant that the minor
was tacitly emancipated. The guardian’s behaviour of allowing the minor to be emancipated must have
been as a result ofa conscious thought process, not merely neglect.

4.4.2 Contractual capacity of a child under seven

A child under the age of seven has no contractual capacity at all. This is because he has neither the
intellect nor judgment to enter into a contract. This means that he can be involved in a contractual
agreement only if a parent or guardian enters into the contract on the child’s behalf.

4.4.3 Contractual capacity of minors aged seven to 18 years

A minor between the ages of seven and 18 years has limited contractual capacity, and may enter into
a contract only with the assistance of a guardian. This makes sense as, at such an age, a child may
have some intellectual development and judgment, but they are not sufficient to enter into contracts
unaided. The guardian may enter into the contract on the minor's behalf, or may help the minor to enter
into the contract. For example, ifa minor wants to buy a motorbike, his guardian must agree to the
purchase, and help him do whatever is necessary to buy the motorbike, such as arranging finance from
a bank.

48 Chapter 4 | Contractual capacity

 Added value Questions on minors

Many questions in exams refer to a minor without indicating the minor’s precise age. When
you answer a question like that, you should start your answer by showing that you know the
difference between the contractual capacity of minors younger than seven years and that of
minors older than seven years. If the question gives the minor's age, you only need to deal with
the law that relates to a person of that age.

4.4.4 Legal position of a minor aged seven to 18 years in an assisted

contract in terms of common law
A guardian is a person who has the legal authority and duty to care for the person and property of
a child. In terms of the Children’s Act 38 of 2005, a biological mother of a child, whether married
or unmarried, has full parental responsibility, and rights in respect of the child, as the guardian of
the child.
Ifa child is born to an unmarried minor, the guardian of the mother is also the guardian of
her child.
A biological father of a child is a guardian of the child if he is married to the child’s mother.
In the case of a father having been never married to the child’s mother, the court will consider him
a guardian if he was living with the mother or if he contributed, or attempted to contribute, to the
maintenance of the child.
Therefore, depending on the circumstances, a minor child could have one or two guardians.
Most contracts only require the consent of one guardian. For the transfer or mortgaging of
immovable property, both guardians must consent.
Ifa minor enters into an assisted contract, it means that the guardian has consented to the contract.
‘The guardian may consent at any time. Usually, this is done before or at the time that the contract is
concluded. When the guardian consents to the contract, the guardian need only know and consent to
the general nature of the contract. It is not necessary for the guardian to know the specific details of
the contract.

Van Dyk v South African Railways and Harbours 1956 (4) SA 410 (W)

Principle
Where a guardian assists a minor in entering into a contract, the guardian does not know the
specific terms of the contract. The guardian need only know and consent to the general nature
and type of the contract.
Facts

In this case, the minor, Van Dyk, concluded an employment contract with South African Railways
and Harbours for the position of a railway officer. in terms of the contract, the minor undertook
not to terminate the agreement within three years of the date of the contract. Upon majority,
the minor sought to declare the contract as void. The minor asserted that his guardian was not
present at the time of the conclusion of the contract and was unaware of the specific terms of
the contract.

The court's finding

The court held that even though the guardian was unaware of the precise terms of the
agreement, the guardian had consented to the type of contract and this was evidenced by a
document which the guardian had signed. The minor was therefore bound by the contract.

Chapter 4 | Contractual capacity 49

Once the guardian has consented to the minor’s contract, the guardian does not have to be a party to
the contract. The contract is legally binding between the minor and the other contracting party. In the
event of a dispute, such as if the minor does not perform as per the contract, the guardian cannot be
sued for performance under any circumstances. The guardian does not incur any personal liability. All
rights and obligations under the contract apply to the minor and the other contracting party, and not
the guardian.

Marshall v National Wool Industries Ltd 1924 OPD 238

Principle
Where a guardian assists a minor in entering into a contract, the guardian does not incur
personal liability in terms of the contract.
Facts

In this case, the minor, Marshall, purchased shares from National Wool Industries with the
assistance of his guardian (father). When the minor did not pay the balance of the purchase
price, National Wool Industries sued the guardian for the outstanding balance.
The court's finding
The court held that the minor was personally liable to perform on the contract and not the
guardian. As such, National Wool Industries ought to have litigated against the minor for the
oustanding balance and not the guardian.

Itis also possible for an unassisted contract to become an assisted contract through ratification. >, Peach mmority ato
To ratify a contract means that consent is given to the contract after the minor has entered —_pecome a major, usually
into it. An unassisted contract can be ratified by either the minor or the major. In respect of _ when you turn 18.
the minor ratifying his own unassisted contract, when he reaches majority, he can decide
to continue with any of his unassisted contracts that he concluded while he was a minor. The length of a
When a minor becomes a major, he has a reasonable time within which to decide whether _ reasonable time in a
to reject or ratify any unassisted contracts that he entered into as a minor. If the unassisted _!@9a! context depends on
contracts are ratified, they become legally binding contracts. The guardian can ratify the SE ats OF ease:
minor's unassisted contract before the minor becomes a major.
Consent can be either express or implied. It is express when the guardian actually states his consent —
verbally or in writing. Consent is implied when the general circumstances, and specifically the guardian's
behaviour, show that the guardian consents to the minor entering the contract. For example, if a minor
buys a car and the guardian signs the contract on behalf of the minor, or both the minor and the guardian
sign it, that is express consent. By contrast, suppose a minor buys a car without informing his parents
(guardians). When he returns home, his parents do not say specifically that they agree with the purchase,
but they are happy and they do not demand that he returns the car. In this case, although the guardians
did not give their consent in so many words, their behaviour implies consent. The same applies to a minor
ratifying his contract, either expressly or tacitly. Once the minor becomes a major, he may ratify the
unassisted contract verbally or by his actions of, for example, continuing to use the item that he purchased.

Stuttaford and Co. v Oberholzer 1921 CPD 855

Principle
Aminor who enters into an unassisted contract can become bound by the contract if he or his
guardian ratifies the contract expressly or tacitly upon attaining majority.

50 Chapter 4 | Contractual capacity

 Stuttaford and Co. v Oberholzer 1921 CPD 855 (continued)

Facts

This case provides an illustration of where a minor impliedly ratifies a contract himself. A minor,
Oberholzer, purchased a motorcycle on instalments without the assistance of his guardian. The
minor, upon majority, continued to use the motorcycle without paying the instalments. The other
party, Stuttaford and Co., sued the minor for the oustanding payment. The minor contended
that he was not bound to the contract because it was an unassisted contract. An important fact
here is that the minor continued to use the motorcycle after attaining majority and even after
the other party instituted legal proceedings against him, and in so doing, exercised ownership
rights over the motorcycle.
The court's finding
The court held that the minor was bound by the contract. The minor had impliedly ratified the
contract by continuing to use the motorcycle after attaining majority and thereby giving his own
consent to the contract.

Instead of assisting a minor, a guardian can enter into a contract on behalf ofa minor without the
minor's knowledge or consent. An obvious example is a parent takinga child, who is under 12, toa
doctor to get her medical care. The guardian must always act in the best interests of the minor. However,
it can happen that the guardian consents to a contract for the minor and it turns out tobe pecsitutio in intregrum
prejudicial to, or burdensome, to the minor. In this instance, it is possible for the contract —_ means ‘restitution’.
to be set aside by a court through an application called restitutio in intregrum. This
application can be brought to the court in the following ways:
= = If the minor is close to reaching majority, he can wait until he is a major and bring the _4 court-appointed
application on his own. representative is known
= = The minor can bring the application with the assistance of his guardian. as a curator ad litem and
@ = The minor can bring the application with the assistance of a court-appointed is appointed by a court to
represent the best interests
representative.
of a person who lacks the
— ; ; . ; mental capacity to make
Once the courts grant restitution to the minor, each contracting party, that is, the minor decisions for themselves.
and the other contracting party, must give back what he has received under the contract.
This means that each party's position must be restored to what it would have been if the
contract had not been concluded.

Wood v Davies 1934 CPD 250

Principle
Where the court grants restitutio in integrum for an assisted contract that is or has become
prejudicial to the best interests of the minor, the minor must restore what he has received from
the other party, as well as recover what he has performed in terms of the contract.
Facts

The minor's guardian purchased a house from Davies on behalf of the minor, Woods. On attaining
majority, the minor sought to terminate the contract of sale, The purchase price was excessive
and there were a number of onerous clauses contained in the contract. The payments would
have eaten into a substantial portion of an inheritance benefit, which the minor held, and the
purchase was regarded as altogether unnecessary as the minor did not need a house to live in.

Chapter 4 | Contractual capacity 51

 Wood v Davies 1934 CPD 250 (continued)

The court's finding

The court held that the contract was evidently patently prejudicial to the interests of the minor,
As such, Woods was entitled to rescind on the contract of sale. To effect restitution, the minor
had to return the property to Davies and was entitled to recover all monies paid to Davies,
including interest (less an amount owing to Davies for the occupation of the property by Woods).

4.4.5 Legal position of a minor in an unassisted contract in

terms of common law A voidable contract is a
In an instance where a minor aged seven to 18 years has contracted with another party valid contract, but may be
without the assistance of his guardian, the law protects the minor and holds the other party ffitmed or rejected at the
option of one of the parties.
liable. The contract is voidable.

Tanne v Foggit 1938 TDP 43

Principle
Where a minor enters into a contract without the assistance of a guardian, the minor is not
bound to the contract and is therefore not liable to perform in terms of the contract.
Facts

The minor, Foggit, entered into a contract with Tanne, the owner of a college, for typing lessons.
The contract was concluded without the assistance of the minor's guardian. In terms of the
contract, payment for the lessons was due in advance and the minor was required to give one
month's notice if he wanted to terminate the contract. After paying for and attending lessons
for one month, the minor stopped attending the lessons in the next month without notice and
without payment. Tanne then sued the minor for payment of the outstanding fees for one month.
The court's finding
The court held that the minor was not liable on the contract for the simple reason that the
minor had entered into the contract without the assistance of his guardian. The minor therefore
was not contractually liable and did not have to pay the outstanding fees.

Such a contract is called a limping contract, because it can be enforced against only one of jf you are liable for
the two parties. In this instance, the contract can only be enforced against the major who something, you are legally
has full contractual capacity. To understand the legal effect of an unassisted contract, we responsible or accountable
have to consider the rights and duties of both the minor and the other contracting party. for it. Tobe contractually
liable means ‘to be bound
Furthermore, we have to consider two situations: by the law of contract to
@ where the contract continues do what the contents of
@ ~=where the contract is set aside. the contract states’.

The contract continues if the unassisted minor's contract is ratified, either by his guardian, _A limping contract is only
or by the minor himself when he becomes a major. The contract then becomes an enforceable against one of
assisted contract and the legal position is the same as that in an assisted minor's contract. the parties.
As discussed above, this means that the contract is valid, so the minor acquires the rights
and duties specified in the contract and he is personally liable to the other contracting party. Both the
minor and the other contracting party have to perform in terms of the contract. In other words, they
need to do what they agreed to do.

52 Chapter 4 | Contractual capacity

 The contract does not continue if it is repudiated by either the minor's guardian or by Torepudiate means ‘to
the minor upon reaching majority. The contract is then declared void as far as the minor is reject’.
concerned, The minor can recover everything that has been performed under the contract
from the other contracting party. In other words, the minor can ask the major to give back
Void means ‘non-existent’,
whatever the major received in terms of the contract. The legal basis for demanding the which means that one or
return of benefits received in terms of a contract are: more of the requirements
= if there was unjustified enrichment in the case of money for avalid contract is
m if there was the rei vindicatio in the case of goods delivered. missing and the contract
therefore has no legal
The choice to repudiate or ratify the contract belongs to the minor on reaching majority force or effect.

and not the other (major) contracting party. The major cannot use the fact that the minor
was not assisted to avoid liability under the contract.

Some terms are explained in more detail.

= ~=Unjustified enrichment means that someone has been enriched (received money or something
of value) unfairly or at the expense of someone else, and there is no legal justification for this to
happen. A valid contract would have counted as justification. The enriched person, who received the
money or valuable items, has to return the money or value of the enrichment to the impoverished
person who gave the money or valuable items.
= Rei vindication, or vindicatory action, is the legal term for the way in which an owner
can legally recover or get back an object that belongs to him, wherever he may find it. In A real right is a right
that is enforceable against
other words, it’s a claim for the return of property based on the real right of ownership.
the entire world, such
as ownership, unlike a
So in the situation we are talking about, because there is no contract, the minor can get
contractual right that
back all the money he gave on the basis of unjustified enrichment, and can reclaim his is usually a personal
property with the ref vindicatio. However, this works both ways: the minor also has to pay right and which is only
back any amount by which he was enriched as a result of the contract and has to return any enforceable against the
property that he still has that belongs to the other contracting party. other contracting party.
If a contract is declared void, the parties must be returned to their positions prior
to the contract being formed through restitutio in integrum (restitution), as discussed above.
The case study below illustrates the above concepts.

ETT a atehy Xolani‘s bicycle

Xolani, a sports science student aged 17 years, finds that he is spending about R50 per week on
-buses to get to his lectures and the sports fields, and back to his residence. He buys a bicycle
for R800 from Lindiwe, aged 19 years, and he is delighted with his newly found freedom. A month
later, he mentions this purchase to his parents back home. They feel that bicycles are too dangerous,
and they are very worried about his safety on the busy city streets. They tell him to return the bicycle
immediately, get his money back and use the bus. Does the law allow him to do that?
This is obviously an unassisted minor's contract, as Xolani is under 18 years of age and his parents
were not aware of the contract. The parents have the right to declare the contract (the purchase of
the bicycle) void. Xolani can demand the return of the money he paid, but he must also return the
bicycle (which is now a bit more scratched and worn). However, he is liable to Lindiwe for the amount
by which he has been unjustifiably enriched: he has saved R200 on bus fares by using the bicycle.
Therefore, Lindiwe has to pay back only R600 to Xolani. In return, Lindiwe will get back the bicycle.
If Xolani’s parents had approved of the purchase of the bicycle, none of this would be
necessary as the contract would be valid and legally binding on Xolani.

Chapter 4 | Contractual capacity 53

4.4.6 Legal position of the other contracting party in an unassisted
contract in terms of common law
Again, we look at the two cases — where the contract continues and where it does not continue. As
we said above, if the contract continues because it is properly ratified, it becomes an assisted contract
and continues as normal — both the other contracting party and the minor must perform in terms of
the contract.
If the contract does not continue, that is, if it is repudiated by the minor's guardian or by the minor
on reaching majority, the contract is declared void. The other contracting party cannot demand that the
minor perform in terms of the contract, which is now non-existent.
This does not mean that the other contracting party has no remedy at all against the minor. The other
party cannot use the law of contract, but may still be able to use other branches of South African law.
Often, in law, the same set of facts can provide more than one remedy in different branches of law.
Specifically, the other party can seek a remedy in the following instances:
@ unjustified enrichment and rei vindicatio
™ = aminor pretending to be a major
@ tacit emancipation.
Let us look at each remedy in turn, as well as the relevant branches of law.

Unjustified enrichment and rei vindicatio

While the other contracting party cannot force the minor to perform in terms of the contract, she can
demand that the minor return to her any money and/or property that she delivered to him in terms of
the contract. However, the rules state that the minor must return what he has left of the performance at
the time that the other contracting party demands the return of her goods or money. If the minor has
exchanged the goods or money for something else, that property must be returned. Furthermore, he
must pay the other contracting party for the money he saved by using her property. Finally, if the minor
has spent the money he received, or if the object he received in terms of a contract is damaged, the
minor has only to return what he has left of the money or return the damaged property as it is.

A minor pretends to be a major

When a minor fraudulently misleads another party into believing that he has contractual If you do something
capacity, the minor will be liable to the other contracting party. This liability is not in terms fraudulently, you do it
of the law of contract, as the contract is not enforceable against the minor. intentionally
and unlawfully.
‘The liability arises in terms of the law of delict. So, if the minor pretends to be a major
and the other contracting party suffers a loss, the minor is personally liable in terms of the law of delict.
Therefore, to determine the rights and duties of the parties in the case of a minor’s contract, we have to
determine whether the contract is assisted or unassisted, and consider both the law of contract and the
law of delict.

Tacit emancipation
A minor living independently and conducting his life as a major is tacitly emancipated by his guardian.

4.4.7 Legal position of contracting parties in terms of the Consumer

Protection Act
The Consumer Protection Act 68 of 2008 was introduced to protect consumers. Section 39(1) states that
a contract for the supply of goods or services is voidable if:
@ = if the consumer was an unemancipated minor
@ = the agreement was made without the consent of an adult responsible for the minor
@ the agreement was not ratified by the adult responsible for the minor or the minor after becoming
emancipated or an adult.

54 Chapter 4 | Contractual capacity

Section 39 (1) does not apply if the consumer convinced the supplier that she had contractual capacity
or hid the fact that she lacked contractual capacity.
This Act does not apply to all contracts. It applies only where someone sells or markets goods ‘in
the ordinary course of business’, Therefore, if your lecturer sells you her car, she is not a car dealer who
usually sells cars. Thus, the Consumer Protection Act 68 of 2008 will not apply.

Added value Show that you know

When you answer questions, show that you know the legal basis or reason for someone's
liability. In other words, if the person is liable in terms of the law of delict and not the law of
contract, you must explain that. Remember that the same set of facts can have different legal
consequences in different areas of law. For example, we saw in Chapter 2 that Sasha could be
charged for the crime of driving under the influence of alcohol. If she is found guilty, she would
be fined or even sent to prison. But, Naziem could also sue her in a civil claim for damages. So,
the consequences are different depending, in this example, on whether she is charged under
criminal law or sued in terms of the law of delict.

Activity 4.1
Thandi is a 15-year-old learner, who loves jewellery. On the way back from school one day, she
sees a watch that she really likes in the window of Mr Watch and Jewellery. She withdraws
money at a nearby ATM, and buys the watch for R2 000 from the store. Three months later,
her parents notice the watch and they are not happy about her purchase, as they think she has
enough watches already. They insist that she return the watch, and ask for her money back. The
shop refuses to accept the watch back, as it is scratched and now worth only R1 500.
1. Discuss the legal rights and obligation of both Thandi and the owner of Mr Watch and Jewellery.
2. Would your answer be different if Thandi bought the watch two months before she turned
18 years old?

4.5 Contractual capacity regarding married persons

In South Africa, people who want to get married have several legal options in the way they deal with the
ownership of their assets and liabilities. They can get married either in community of property or out of
community of property. If they get married out of community of property, they can choose to do so with or
without accrual. We will explain all these new terms in the following sections, which discuss these ways of getting
married (called matrimonial regimes) and the contractual capacities attached to each option.
Your assets are the
4.5.1 Marriage in community of property property and money you
When a couple gets married in community of property, the separate assets and liabilities of own. Your liabilities are
both spouses (husband and wife) are joined together in a joint estate. In other words, they Meier
P } °8 J " a owe to a creditor.
share what they each bring into their marriage. They also share what they make or lose during
the marriage, Marriage in community of property is the automatic regime in this country. Anteumial ean
This means that if a couple gets married without drawing up and registering an antenuptial —_‘pefore marriage’.
contract, they will automatically be considered to be married in community of property.
The benefit of this type of marriage is that both spouses have an equal share in their Sequestrated means
assets. The disadvantage is that they also share each other’s liabilities. The parties are jointly that a court has declared
and severally liable, which means that they can be sued independently or together for the that one’s liabilities exceed
full amount. If the joint estate is sequestrated and declared insolvent by a court, both one’s assets and facilitates
spouses will be declared insolvent. The reason for this is that they have one joint estate, the pet and exqitanle
ot 5 Be . distribution of one’s assets
which is seen as one economic unit in the eyes of the law. : :
q to one’s creditors.

Chapter4 | Contractual capacity 55

 In a marriage that is in community of property, both spouses have full and equal contractual capacity
individually to enter into contracts concerning the joint estate. However, the law regards certain
contracts as being too important for a spouse to enter into alone. It requires the consent of the other
spouse for the contract to be valid. For such contracts, the spouses have limited contractual capacity, as
they cannot act alone but need each other's consent to enter into these contracts.
In terms of the Matrimonial Property Act 88 of 1984, there are three different forms of consent that
may be required:
1. written consent signed by one spouse and two witnesses
2. written consent of the other spouse
3. express or implied consentual capacity.

Written consent signed by the spouse and two witnesses

This is the most stringent (strict) consent requirement and it is used for only the most important
contracts, such as:
@ the sale or mortgage of immovable property, like a house, apartment or a farm
@ asurety agreement, in which a third party guarantees (stands surety) that a debtor will pay a creditor
® accredit agreement, by which you can buy goods like furniture and pay off the purchase price
over time.

One spouse signs the contract and the other spouse signs consent to that contract, which is then also
signed by two witnesses.
Witnesses are people who observe the signature being made and can guarantee that it was made by
the person whose name appears on the document by signing their own signatures alongside or below.

Written consent of the other spouse

A spouse must give written consent for the transferring (selling) of valuable assets such as shares,
insurance policies, investments in a bank that belong to both spouses, jewellery, coins, stamps, paintings
that belong to both spouses, which are kept as investments, and the withdrawal of the other spouse's
money held by the other spouse in a bank.
In the case of the sale of valuable assets that are held as investments, such as jewellery, coins, stamps
or shares (investments in a company), the other spouse is required to sign the contract to indicate
consent. In other words, both spouses’ signatures are needed for these contracts.

Express or implied consentual capacity

For contracts that are less important, the only consent required is that the other spouse agrees to the
contract. This consent does not need to be in writing and can be either expressed or implied consent.
‘The Act lists certain contracts that require this consent, such as donations and the sale of furniture.

4.5.2 Marriage out of community of property

When a couple gets married out of community of property, they each continue to own their property
separately. As owners, they are each entitled to deal with their own property as they wish. In other words,
they have full contractual capacity with regard to their own property. They do not need the A notary public is an
consent of the other spouse, as the property belongs only to them. attorney who specialises
For a marriage to be concluded out of community of property, both parties have to sign _in dealing with documents
an antenuptial contract in front of a notary public. that have to be lodged at
When an antenuptial contract is signed, two contracts will be concluded — the the Deeds Office.
antenuptial contract and the marriage contract. The antenuptial contract has to be
registered at the Deeds Office within three months of the marriage. The Deeds Office is a place
where certain important
‘There are two types of marriage out of community of property: those without accrual
documents are kept.
and those with accrual.

56 Chapter 4 | Contractual capacity

Marriage out of community of property without accrual
In the contract of marriage or in a marriage without accrual, the assets and liabilities of the spouses are
kept separate, both before and after the marriage. As far as their property and debts are concerned, it is
almost as if they are not married. They have separate estates. The advantage of this form of marriage is
that the spouses do not share liabilities. So if, for example, the husband goes insolvent, the wife will not
automatically be insolvent as well. However, one disadvantage is that if one partner stays at home to look
after the children while the other works full-time, the one who does not earn during this time will not
automatically have claim to the estate of the other if they divorce. They would both leave the marriage
with what they had made separately during the marriage, which would be unfair.

Marriage out of community of property with accrual

In the contract of marriage or in a marriage with accrual, the property that the partners ; ‘neon Droit
bring into the marriage is kept separate and, while the marriage continues, the assets on or made’.
acquired (built up) and liabilities incurred during the marriage are also separate. So far, it’s
the same as for the contract without accrual.
However, if the marriage comes to an end (through either death or divorce), the money or property
gained during the marriage is then shared according to a percentage, as agreed upon by both spouses.
The advantage of this type of marriage is that earnings during the marriage are shared by the spouses, but
if one party goes insolvent, the other is not automatically made insolvent. This system therefore has the
benefits of both marriage in community of property and marriage out of community without accrual,
but none of the disadvantages.

Case study Simpiwe and Thandeka

Simpiwe and Thandeka are married in community of property. Simpiwe meets a friend at work
who has been admiring Thandeka’s engagement ring and is interested in buying it. The friend
verbally offers Simpiwe a good price for the ring and Simpiwe accepts, thinking he will use the
money to take his wife to Mauritius on holiday. When Simpiwe gets home and tells Thandeka
the good news, she refuses to let him sell the ring. Can Thandeka keep the ring or must she give
it to Simpiwe?

Liability of married spouses for household necessities

Whether spouses are married in or out of community of property, both spouses are jointly and severally
liable for household expenses.

Reloomel v Ramsay 1920 TPD 371

Principle
Necessities are considered to be things that are required for the household of the spouses in
accordance with their status, their mode of living based on how a married couple were living up
to the time of their separation.
Facts

Dr Ramsay left his wife, to whom he was married out of community of property, and his two
children for a year. He left a monthly allowance of £30 for household expenses, and forbade his
wife to buy anything on credit. When he returned, Dr Ramsay discovered that she had bought
£13.85 worth of silk material from Reloomel to make clothes for herself and their children. He
refused to pay for this debt, saying that the items were not household necessities and that his
wife may not incur debt on his behalf.

Chapter 4 | Contractual capacity 57

 Reloomel v Ramsay 1920 TPD 371 (continued)

The court's decision

The court held that necessities are considered to be things that are required for the household of
the spouses in accordance with their status, their mode of living in the past, the usual customs of
the place where they live and the means of the husband. What may be regarded by the court as a
necessity in the case of spouses who move in the best society of the place in which they live, will not
be regarded as a necessity in the case of a couple of humble origin, and of narrow means. Based
on how Dr Ramsay and his wife had been living up to the time of his absence, the dresses could be
regarded as a necessity. Therefore, Dr Ramsay had to pay the outstanding amount.

4.6 Contractual capacity regarding drunken persons

Ifa person enters into a contract while he is so drunk that he either does not realise thathe —_ T).6 terms are the
is entering into a contract or does not understand the terms of the contract, he is not bound provisions, conditions or
by the contract. The contract is considered void. In other words, the person cannot be arrangements that form
forced to comply with the contract, as he had no contractual capacity. But, he would have _ part of the contract.
to return what he received in terms of the contract (in return for what he gave).
You should now be able to answer the questions in the ‘Before you start’ section of this chapter.

4.7 Contractual capacity regarding insolvent persons

A person is factually insolvent if he owes more than he owns— in other words, if his An insolvent is a person
liabilities exceed his assets. We can also say that the person is bankrupt. When the court who has been declared
declares someone insolvent, it issues a sequestration order, which gives control of that to be such by a court
person's assets to a trustee. To sequestrate means to take legal possession of the insolvent’s through the process of
property until a debt has been paid or other claims have been met. Once a person has been sequestration under the
Insolvency Act 24 of 1936.
declared insolvent, his status in the law changes. The insolvent still has full contractual
capacity in all areas, except for three instances where he has limited contractual capacity.
‘ 5 ; The trustee is a person
According to the Insolvency Act 24 of 1936, the insolvent cannot enter into these contracts ; poe
i h : ” th appointed by the creditors
without the written consent of the trustee. and Master of the High
There are three instances where an insolvent has limited contractual capacity: Court to take care of the
1. Contracts to dispose of any assets that form part of the insolvent estate, such as trying _ insolvent person’s estate.
to sell his car in order to settle his creditors’ claims
2. Contracts that negatively affect the insolvent estate, for example, offering to buy a car for which the
insolvent estate would have to pay
3. Acting as a general dealer or a manufacturer.

If the insolvent enters into any of these kinds of contract without the consent of his trustee, the contract
is voidable at the instance of the trustee. By this we mean it is valid until the trustee decides to set it
aside. We look at voidable contracts in more detail in Chapter 6,

Case study Marius has been sequestrated.

Marius, who had been sequestrated by the High Court, was meeting friends for drinks at a bar.
He walked past a computer store on the way there and saw a really fantastic computer game
in the window. While getting quite drunk at the bar, he kept thinking about the game. The
next day, he woke up and saw that he had spent R2 000 on computer games, but he could not
remember buying them. What is the legal position with regard to the games that he bought?

58 Chapter 4 | Contractual capacity

What do you think?
Do you think that it benefits minors to have limited contractual capacity, or is it harmful to them? Do
you think that a person should be allowed to get out of a contract because he was drunk or should he
have to suffer the consequences, since it was his fault for getting drunk in the first place?
Chapter summary
In this chapter, you learned the following about
contractual capacity:
Most persons have full contractual capacity, but
there are factors that can limit a person's capacity to
enter into contracts:
= = Minors have limited contractual capacity and their
guardians must consent to their contracts.
= = If a minor enters into a contract, his guardian may
decide whether to continue with the contract or
not. If the contract continues, both parties are
contractually liable. If the contract is repudiated, it
is declared void and both parties must return what
they received in terms of the contract (in the case
of the minor, what he has left of the performance).
Review your understanding
1. Felix and Susan get married. They buy a flat
together and live there for five years. Felix decides
to sell the flat and buy a house. He signs a contract
of sale with Mandy. When Susan finds out, she
is very upset and does not want to sell the flat.
If Felix and Susan were married in community
of property, which option below describes the
legal position?
a) ‘There is nothing Susan can do, as Felix has
already signed a valid contract of sale.
b) As only Felix signed the contract, the contract
is not valid.
c) Felix can sell only half the flat as the other half
belongs to Susan.
d) ‘The contract is a limping contract.
A marriage may be in or out of community of property:
In a marriage in community of property, both
parties have full contractual capacity with regard
to the joint estate, unless the law requires the
other spouse’s consent in that type of contract.
Both spouses in a marriage out of community of
property have full contractual capacity with regard
to their separate property.
A person who is so drunk that he does not know what
he is doing has no contractual capacity.
An insolvent has full contractual capacity, except in
a few specified contracts,
If Felix and Susan were married out of community
of property and the flat belonged to him, which
statement below applies?
a) ‘There is nothing Susan can do, as Felix has
already signed the contract.
b) As only Felix signed the contract, the contract
is not valid.
c) Felix can only sell half the flat as the other half
belongs to Susan.
d) The contract is a limping contract.
Jerry is 16 years old. Her mom and dad decide she
needs a new laptop for school so they buy her one
from a shop called Computers, etc. When they
bring it home, Jerry decides that it is too slow and
unsuitable for school. Which statement is correct?
Chapter 4| Chapter summary 59
 a) The contract is valid as parents may
enter into a contract for their minor
daughter without her consent.
b) The contract is invalid as Jerry, a
minor, has not consented to the sale.
c) ‘This is a limping contract and it is only
partially valid.
d) Jerry must give back what she has left.
4. Raymond, who is turning 18 years old
next month in July, buys an electric guitar
for R10 000 in June. He does not tell his
parents. In August, his parents discover
the guitar and they insist that he return it.
Which statement is correct?
a) Raymond’s parents have not approved
the contract, and he must therefore
return the guitar.
b) This is an invalid limping contract.
c) Raymond has ratified his
contract himself.
d) This contract is invalid, as one of
the requirements for a valid contract
is missing.
5. Simmy had a business buying and selling
second-hand televisions. He was declared
insolvent and he had to close his business.
There are still ten televisions left from
his business.
Further reading
Schulze, H. et al. 2015. General Principles of
Commercial Law, 8th edn. Cape Town:
Juta and Co. (Pry) Led
60 Chapter 4 | Further reading
a) Canhe enter into a contract to sell the
remaining televisions?
b) Can he buy a new pair of shoes for his
upcoming job interview?
Minny and Jeff go out for dinner. Minny
drinks five vodkas and gets quite drunk.
Jeff is the designated driver as he does not
drink alcohol at all. At the end of the meal,
Minny thanks the waitress profusely and
gives her the scarf that she was wearing as
the waitress had admired it. Jeff gives the
waitress a very large tip. The next morning
both Minny and Jeff regret their donations.
Can they ask for the scarf and/or the
money back?
Sally buys an antique bed from Anne for
R5 000. Anne forgot to tell Sally that she is
married to Jeffin community of property.
Is the contract valid without Jeff's consent?
Andy is a 10-year-old boy. He searches
on the internet and manages to order a
skateboard from a website. His mother is
shocked when it arrives. What is the legal
position in respect of this purchase?
Jenny is turning seven years old next
month. She went to a supermarket by
herself and bought six ice-creams with her
pocket money. Is this contract valid?
Hutchison, D. et al. 2012, The Law of Contract, 2nd
edn, Cape Town: Oxford University Press Southern
Africa (Pry) Led
 Gi aT-Jeh cy

Reaching agreement
.
The main ideas
What makes a legal agreement?
Requirements for a valid offer
Requirements for a valid acceptance
Requirements for concluding contracts
What is an option?
What is a right of first refusal?

The main skills

Discuss the requirements for the formation of a contract.
Interpret, explain and define terms and concepts.
Analyse case studies on reaching agreement.
Apply knowledge of theory on legal agreements.
Solve legal problems and make decisions.
Answer questions on the validity of different contracts.

Now that we know who can legally enter into a contract, we look at the next requirement for a valid
contract, which is agreement. This chapter explains how the two parties reach agreement or consensus.
First, we examine the contract formation process, consisting of an offer and an acceptance. Then we look
briefly at different ways of concluding a contract. Chapter 6 will look at what happens when problems
arise with the conclusion of contracts.

Before you start

You decide to sell your tablet for R1 500 and place an advertisement on Gumtree. A few hours later,
you receive a phonecall from a man who says he wants to buy the tablet. You arrange to meet him the
following day to give him the tablet after he has paid you the money. Later the same day a woman
phones and tells you she is willing to pay R2 000 for the tablet. Can you sell the tablet to the woman for
R2 000, or do you have to sell it to the man for R1 500.

5.1 What makes a legal agreement?

In Chapter 1, we defined a contract as a deliberate legally binding agreement between two or more
competent parties. This definition tells us two things about a contract:
1. Both parties have to agree on something, and they must be clear about what they are agreeing on. In
other words, there must be consensus on the terms of the contract.
Both parties must seriously intend to be legally bound by the terms of the contract. For example, if
tr

two friends agree to meet for coffee, that does not create a contract between them, since they do not
intend it to be a legally binding agreement.

There are several approaches to the rationale for holding individuals bound by their contracts. These are:
s the wills theory
m = the declaration theory
@ the reliance theory.

Chapter 5| Reaching agreement 61

The wills theory suggests that a person should be bound by their contract as they have chosen to be bound.
This is a subjective approach and the law considers what the contracting parties were thinking when they
entered into the contract. For example, if I intend to enter into a contract with Andries, but I mistakenly
communicate with Xolani, my contract with Xolani cannot be valid as that was not my intention.
The declaration theory states that how people act, not what they think, is the reason we hold people
bound by contracts. If they objectively behave as if there is a contract, the law regards the contract as
having come into legal existence. Using the same example, Xolani’s contract would be void, as the law is
concerned only with external appearances (what you do), and not what you think (subjective).
The reliance theory is a combination of the above two theories. It proposes that the basis of a contract
is found in one party reasonably relying on agreement between the parties, because of the behaviour of
the other party.
South African law has adopted the wills theory's subjective approach to contract law, which we
consider in Chapter 6.

National and Overseas Distributors Corporation (Pty) Limited v Potato Board

1958 (2) SA 73 (A)

Principle
A contracting party is entitled to rely on the reasonable or objective appearance of agreement by
the other contracting party.
Facts
The Potato Board intended to accept a tender from another company, but mistakenly sent a
letter of acceptance to National and Overseas Distributors Corporation (Pty) Limited, which
had submitted a tender application. Once National and Overseas Distributors Corporation (Pty)
Limited received the letter of acceptance, they immediately acted on it by ordering the necessary
material and contracting with a sub-contractor and engineer.
The court's finding
The court held that the Potato Board led National and Overseas Distributors Corporation
(Pty) Limited to reasonably believe that its tender had been accepted. The Potato Board could
therefore not withdraw its acceptance, even though it had no subjective intention to be
contractually bound.

If we look at the communication between two people who want to enter into a co a :
. ‘ peop ee An offer is a proposal or
we can always identify two parts: request to enter into a
= an offer contract on specific terms.
@ an acceptance,

One party has to make a valid offer and the other party has to accept the offer in a valid way. Gonduding elas to ie
Both the offer and the acceptance must meet certain requirements to be valid. Asa general rule, 46 ang place thet the
acontract only comes into existence once all these requirements are satisfied. Once a contract is contract was concluded.
concluding, both parties are legally bound by that contract and have to perform in terms of the _ It is not usually a separate
contract. As long as the contract does not exist yet, the parties can still change their minds and not _ step in the process.
enter into the contract. So, it is important to determine exactly when a contract is concluded.
Therefore, there are three aspects to a valid contract, namely:
= ~=making an offer
® accepting an offer
® concluding a contract.

Each aspect is examined briefly and then the requirements for each one are specified in detail.

62 Chapter 5 | Reaching agreement

 5.1.1 Making an offer
‘The first step in making an agreement is for one party to make an offer. The person who makes the offer
is called an offeror. The person who receives the offer is called the offeree. The declaration (or statement)
of the offer contains all the terms on which the offeror is prepared to contract. So we can define an offer
as the way in which an offeror declares to the offeree her intention to enter into a contract and specifies
the terms of the contract.

5.1.2 Accepting the offer

An acceptance is the offeree’s declaration of his intention to enter into a contract with the offeror, with
the terms of the contract being those given in the offer. In other words, the offeree accepts by saying
that he wants to have a contract with the offeror, and that he agrees to the terms stated in the offer. The
offeree’s acceptance of the offer is what makes the interaction become a contract.

5.1.3 Concluding the contract

If you have ever signed a legal document, you may recall that it said something like: Signed at
this day of 20 followed by a space for your signature. There was probably a similar
statement of place and time for the other party’s signature. It is important to know when and where
a contract is concluded, as this indicates when and where it became legally binding on the parties to
the contract.
The general rule is that a contract is created when and where the offeror is informed that the offeree
accepts the offer, (This is known as the information theory.) If the two parties were standing in front
of each other when they finalised the contract, it is clear where the contract was concluded — the place
where they were meeting. It is also easy to say when the contact was created — when the offeror heard the
offeree say that he accepted her offer.
The Electronic Communication and Transactions Act 36 of 2005 has extended the way in which
contracts are concluded to include agreements concluded by data messages, such as Short Message
Service (SMS) or voice messages. These contracts are also concluded at the time and place where the
acceptance of the offer was received by the offeror, for example, if I offer you a book via SMS and you
reply via SMS. The offer is accepted where and when I receive the accepting SMS.
Suppose an insurance company sends me a letter offering me an upgrade on my motor vehicle
insurance policy. I consider the offer carefully, and I sign the document to accept it. Then, I crash my car
on the way back from posting the letter. Am I insured under that new policy?
Now let us consider the detailed requirements for each aspect of a valid offer.

5.2. Requirements for a valid offer

For an offer to be valid, it has to meet the following five requirements:
1. The offer must be complete.
‘The offer must be clear.
Ps RES

The offer must be made with the intention of creating a contract.

The offer must be communicated to the offeree.
The offer must be current, and must not have lapsed or been rejected or revoked.

5.2.1 Completion
The offer must be complete. It must contain all the terms that the offeror wants to have in the contract.
In other words, the offeror must explain fully what she wants the contract to say, so that if the offeree
agrees to these provisions, the contract will be created. Suppose, for example, I tell you that I want to sell
my guitar. I describe it to you in great detail, but I do not tell you the price I want to sell it for. Then the
offer is not valid because it is incomplete.

Chapter 5| Reaching agreement 63

5.2.2 Clarity
The offer must be clear. The offer must be made in such a way that the offeree can understand exactly
what contract the offeror wants. The following are some of the points the offer should clarify:
m= what type of contract it is
=~ what the aim of the contract is
= what amount of money is involved
@ the time of performance, in other words, when the parties will do what they are each agreeing
to do,

Suppose, for example, you ask a senior student if you can borrow her legal dictionary. She shows you
several, then picks one and says you ‘can have’ this one. But now you do not know whether she means
you can borrow it or whether she is giving it to you, or whether she means you can buy it from her if
you like. Maybe she even means you can have it (as a gift) at the end of the year when she finishes her
studies. This is not a valid offer, because it is not clear.

5.2.3 Contract intention

The offer must be made with the intention of creating a contract. The offeror must intend to be bound
by the offer, so that if the offeree accepts, there will be a contract. For example, if you admire my new
Mini Cooper and I, jokingly, say that I'll swap it for the beer in your hand, that is not a valid offer,
because I am merely joking and do not intend to draw up a contract if you agree to my suggestion. As
you can imagine, it is not always easy to determine how serious people's intentions are. This is part of the
reason why we put important contracts in writing.
A contract does not usually need to be in writing (unless it is a formality, which we deal with in
Chapter 7), but it is a good idea to reduce a contract to writing and sign it so that it can be used as
evidence if a dispute arises.

Advertisements
Advertising and the display of goods is an area of business where intentions are often unclear or misleading.
Our common law states that, as a general rule, an advertisement or a display of goods is not an offer as
the person placing the advertisement does not intend it to be an offer. The advertisement or the display
of goods is merely an invitation to do business. In other words, it is a way of telling people that the
advertiser wants to sell her product and she is asking people to make offers. The advertiser will then
decide to accept or reject the offer. The term ‘advertisement’ includes the price tag or marking on an item
in a shop and the price mentioned in a printed brochure or media display.
Let us look at the following two cases with regard to advertising and the display of goods. The second
case is in relation to the self-service system.

Crawley v Rex 1909 TS 1105

Principle
A display of goods for sale in a shop window, inside a shop or in print, online or on broadcast
media as an advertisement does not amount to an offer to sell. This is simply an invitation to the
public to do business.
Facts
This principle is illustrated in the case where the shopkeeper advertised tobacco on sale, using a
placard outside the store. The customer, seeing the advertisement, went into the shop, purchased
an amount of tobacco on sale, left the shop and returned a short while later wanting to purchase
more tobacco.

64 Chapter 5 | Reaching agreement

 Crawley v Rex 1909 TS 1105 (continued)

The shopkeeper refused to sell more tobacco to the customer, and when the customer refused to
leave the shop, the shopkeeper called a policeman, who charged the customer with the offence of
refusing to leave the premises on the request of the shopkeeper. The customer contended that the
advertisement was an offer to sell by the shopkeeper and that he (the shopkeeper) had accepted
this offer when the customer walked into the shop to take delivery of the goods.
The court's finding
The court held that the advertisement was an invitation to the public to do business; it was not
an offer to sell. Therefore, the shopkeeper was not bound to sell to every customer who walked
into the shop to purchase the goods. It is the customer who makes an offer to the shopkeeper
to purchase the advertised goods and it is up to the shopkeeper whether or not to accept that
offer. The customer in this case was therefore guilty of the offence of refusing to leave the
shopkeeper’s premises upon request.

irate thee lle6 ee eel ee ee ele les acl

Lee NBs at:7a ey)

Principle
The principle in Crawley v Rex has been extended to self-service shops. The self-service system is
an invitation to the public to come forward and make an offer to buy. A customer makes an offer
to purchase when he or she tenders the purchase price to the cashier (who may either accept or
reject the offer at that point) and not when he or she removes the goods from the shelves.
Facts

Boots Cash Chemist was a self-service shop that sold certain medical drugs, which were
controlled by legislation. In terms of this legislation, the sale of these drugs could only be
effected by or under the supervision of a registered pharmacist. The customer took the items in
question off the shelf, placed them in the baskets provided by the store and paid the purchase
price to the cashier. The Pharmaceutical Society of Great Britain asserted that the pharmacy
was in contravention of the law as the sale took place without supervision when the customer
removed the items from the shelf and placed the items in the basket.
The court's finding
The court held that the pharmacy was not in contravention of the law as the self-service system was
an invitation to buy, that the customer made an offer to buy only when payment was tendered to
the cashier. The transaction therefore took place under the supervision of a registered pharmacist.

If you see an advert for a guitar in a newspaper, but when you phone, the seller tells you that she has
already sold it, you cannot claim that there was a contract. The advertisement was the seller's way of
telling the public that she wanted to sell her guitar. It was merely an invitation to do business. Your
phonecall to the seller was an offer, but because the seller did not accept your offer, there was no
contract. Here is another example. If you see a television in a shop window with a price tag of only
R10, you cannot force the shop to sell it to you at that price by arguing that the price tag is an offer and
that you are accepting the offer. In terms of the common law, the price tag is not an offer; it is merely
an invitation to do business. However, if it is clear from the type of advertisement and the surrounding
circumstances that the advertisement is intended to be an offer, the law will regard it as an offer.

Chapter 5| Reaching agreement 65

 As mentioned in Chapter 4, the Consumer Protection Act 68 of 2008 applies to certain contracts
between suppliers and consumers only where the supplier sells goods or services ‘in the ordinary course
of business’. Section 23(6) of the Act, deals with prices displayed or advertised for a product and states
that a supplier must not require a consumer to pay a price for any goods or services higher than the
displayed price for the goods or services, for example, if there are wo prices displayed, the supplier
cannot charge more than the one price displayed. There are exemptions to this rule, such as if the price
advertised is obviously a mistake or someone else changed the price.
Therefore, in the example with the television in the shop above, the Consumer Protection Act 68 of
2008 will apply because the shop sells televisions in the ordinary course of their business. The Act says
that the shop must sell the television at that price unless there is an obvious error. The price of R10 fora
television is an obvious error and therefore the shop will not be forced to sell the television at that price
as long as they correct the displayed price and inform the consumer of the mistake.

Rewards
If an advertisement offers a reward, the advertiser's intention is that she will pay a reward to anybody
who meets the conditions of the reward. Therefore, the law regards the advertisement for a reward as
an offer to the public. If a person fulfils the requirements for the reward, the offeror is
contractually liable to pay the reward. For example, if you place an advertisement in the When a party is
newspaper stating that you will pay R500 to anyone who safely returns your lost dog, contractually liable, it
then that is an offer, not an invitation, to do business. If someone sees the advertisement means that party is bound
and returns your dog, then there is a contract between the two of you and you are obliged —_By the law of contract,
(bound) to pay the reward. and she is obliged to
Carlill v Carbolic Smoke Ball Co. 1893 1 QB 256 (CA) is a famous example of an ee eee ie
advertiser being held contractually liable to pay a reward.

Carlill v Carbolic Smoke Ball Co. 1893 1 QB 256 (CA)

Principle
In certain instances, an advertisement can constitute an offer depending on the nature of the
advertisement, the wording and all the surrounding circumstances.
Facts

An exception to the principle that an advertisement does not constitute an offer is illustrated
in this well known English case. Here, the Carbolic Smoke Ball Co. advertised in the press
that it would pay an amount of money to anyone who contracted influenza after using its
product, the carbolic smoke ball, in accordance with the prescribed method. Carlill, having
read the advertisement, used the product and contracted influenza nonetheless. She then
sued the company for the reward. However, the company refused to pay the reward on
the basis that it was merely inviting the public to use the product and it was not an offer to
the public.
The court's finding
The court ruled that, in this case, the advertisement was not merely an invitation to the public to
do business. The extract ‘£1000 is deposited with the Alliance Bank, Regent Street, showing our
sincerity in the matter’ was a clear indication to the public that the terms of the advertisement
were to be understood as a firm offer. The company was therefore liable to pay the reward to
the customer.

66 Chapter 5 | Reaching agreement

Auctions
An auction is a public sale of goods or property, where interested people compete against one another
by trying to outbid one another for the items on sale. The auctioneer calls out a price for which she is
prepared to sell the item and people in the audience indicate whether they are willing to pay that price.
There are two types of auction:
@ without reserve
= with reserve.

In an auction without reserve, the auctioneer calls for bids and sells the item to the highest bidder. In
other words, she is making an offer to sell the items to the person who makes the highest bid. That
person, by bidding, accepts this offer, and so creates a contract.
In an auction with reserve, by contrast, the seller specifies a minimum price at which the auctioneer
can sell the item. Therefore, when the auctioneer asks for offers, she is inviting people to do business.
When people make bids, they are making offers, which the auctioneer can decide to accept or reject.

5.2.4 Communication
‘The offer must be communicated to the offeree, because she cannot accept an offer if she does not know
about it. This can occur in any way, such as verbally, in writing or electronically.

5.2.5 Current
The offer must be a current offer — it must not have:
= = lapsed = been rejected = been revoked.

If the offer has lapsed, if the offeree has rejected it or the offeror has revoked it, then the offer has come
to an end. This means that the offer is no longer in existence, and the offeror may no longer accept it.
Let us look at each situation in turn.

A lapsed offer
Usually, an offer only stays open for a specified period of time. When that time has passed, the offer
lapses, expires or falls away. It is no longer valid and the offeror may not accept it. If the offer does not
have a set time limit, it remains valid for a reasonable period of time. (What is reasonable will depend on
the circumstances of the offer.) An offer also lapses if either the offeror or offeree dies before the offer is
accepted, if either party no longer has contractual capacity, such as due to insanity, or if the performance
becomes legally or factually impossible.

A rejected offer
If I make you an offer and you do not accept it, the offer comes to an end. By not accepting the offer,
you have declined or rejected the offer. When you make a counter offer, you are rejecting the first offer
(bringing it to an end), and you are then making a brand new offer. In the case of a counter offer, the
parties swap roles — the original offeror now becomes the offeree, and the original offeree then becomes
the offeror. As the parties go back and forth in negotiations, it often happens when contracting, the
parties continue to swap roles. At the conclusion of the contract, it is important to identify at that final
stage which of the parties were the offeror and offeree respectively.
Suppose, for example, I offer to sell you a textbook for R100, and you reply that you are interested
in buying the textbook, but only for R90. Your counter offer of R90 is a way of rejecting my original
offer, which therefore comes to an end. Instead, you have offered me R90 for my book, and now it's my
turn to decide whether to accept or reject your offer. If I reject your offer of R90, you cannot go back
and accept the original offer of R100, because it no longer stands, or applies. (Of course, I can repeat my
original offer if 1 want to, and this time perhaps you will choose to accept it.)

Chapter 5| Reaching agreement 67

A revoked offer
If you have made someone an offer, you can revoke, or take it back, at any time before that person has
accepted it. The withdrawal must be clearly communicated to the offeree in order to be effective. An
offer can only be revoked before it has been accepted. Once the offeree has accepted it, there is a legally
binding contract in place, and you can no longer revoke the offer.
This principle behind a revoked offer is illustrated in the following case:

else Er Mal ieee ee ey eee: ))

Principle
Revocation of an offer is effective only if it is communicated to the offeree before acceptance.
Facts
In this case, the offeror, Norbert, made an offer to purchase a farm from Odendaal, the
offeree. An estate agent, who was instructed by the offeree to source a buyer for the farm,
communicated the offer to the offeree who in turn accepted the offer. In the interim, the
offeror decided to revoke the offer. However, when the estate agent contacted the offeror to
communicate that the offer had been accepted by the offeree, the agent spoke first.
The court's finding
The court held that the acceptance of the offer was communicated before the offer was
revoked. Therefore, there was a binding contract between the offeror and the offeree.

Added value How to answer multiple-choice questions

Here is a tip for answering multiple-choice questions. Often it helps to cover up the different
options given and to see if you know the answer to the question before you look at the answers
offered. This way, you are less likely to get confused by answers that are fairly similar to one
another before you have considered the likely answer in your own mind.

Activity 5.1
John tells Andrew that his watch is not working perfectly. He says that Andrew can take it off his
hands. Andrew says, ‘Sure’. Is John’s statement a valid offer? Choose the correct answer.
a) Yes, as it was communicated to John.
b) No, as it is not clear if John is donating or selling his watch.
©) Yes, as it was made with the intention of creating a contract.
d) Yes, as John does not want his watch any more.

Case study Adverts in the shop window

Jabu sees a sign in a shop window saying that all items are for sale at only R75. He walks into
the shop and has a look around. He finds a beautiful pen hidden at the back of the store, and he
takes it to the cashier. The cashier says that the pen is the last of a batch that they thought was
sold out, and it costs R150. Jabu demands that he be allowed to buy the pen for R75. He hands
the cashier the R75, and he waits for the pen.
Is there a contract between Jabu and the shop?
Does the shop have to sell Jabu the pen at R75?

68 Chapter 5 | Reaching agreement

 Activity 5.2
Draw a mind map to help you remember the five requirements that an offer has to meet to be
valid. Use pictures rather than words, if possible, even if you think you are not good at drawing.
Drawings are often easier to remember than words. (You can add the words afterwards, if you like.)

5.3. Requirements for a valid acceptance

For an acceptance to be valid, it has to meet the following seven requirements:
The acceptance must be made by the intended offeree.
—

The offeree must have known about the offer before acceptance.
PON

The acceptance must be clear and unambiguous.

The acceptance must correspond with the terms of the offer.
‘The acceptance must be made within the prescribed time.
WAM

The acceptance must be made in the prescribed manner and place.

‘The acceptance is only complete when it is communicated to the offeror.

5.3.1 Source
The acceptance must come from the intended offeree, because only the person who received the offer
can accept that offer. The one exception to this is an offer made to the general public, like an offer ofa
reward for something that is lost. In a public offer, the offeror’s intention is that anyone can accept the
offer — the offer is open to the general public to accept.

Bird v Summerville 1961 (3) SA 194 (A)

Principle
Only a party that the offeror intended to accept the offer may do so. This principle also applies in
instances where it would make no difference overall to the offeror who accepts the offer.
Facts

An estate agent communicated to Bird, the offeror, that Summerville was willing to purchase
a certain piece of his property. However, when the offeror signed the offer to sell and sent it
through to Summerville for signing, both Summerville and another party signed as the offeree.
The court's finding
The court held that even though it made no material difference to the offeror, who purchased
the property, the offeror was not bound to the contract as he had only intended that
Summerville would accept the offer.

5.3.2 Awareness
The offeree must know about the offer. An offeror cannot accept an offer if she does not know about it.
‘This is not as obvious as it sounds, so let us use an example to illustrate what can happen.

Bloom v American Swiss Watch Company 1915 AD 100

Principle
An offeror cannot accept an offer if she does not know about the offer before accepting.
Facts
After a robbery, a notice was published in a newspaper by the American Swiss Watch Company,
offering a reward of $500 for information that resulted in the thief being arrested and the

Chapter 5| Reaching agreement 69

 Bloom v American Swiss Watch Company 1915 AD 100

jewellery being returned. Bloom gave this information to the police without having read the
notice in the newspaper, and then he claimed the reward after reading the notice later.
The court's finding
The court held that, as Bloom did not know about the offer, he could not accept it. Therefore,
there was no contract.

5.3.3 Clarity
There must be an unequivocal expression of the offeree’s acceptance. Acceptance may be made in
writing, orally or by non-verbal conduct. The offeree’s response must make it plain and simple that she is
accepting the offer.
If there is uncertainty as to whether or not the offeree has accepted the offer, we consider whether a
reasonable person in the position of the offeror would have understood the offeree’s communication to
be an acceptance.
As a general rule, silence on the part of the offeree does not constitute an acceptance, as there may be
a range of reasons for why the offeree did not expressly respond, such as the offeree may not have wanted
to waste her time responding to an offer that she was not interested in, or she may still be deciding
whether or not to accept the offer. The offeror may not impose a condition on the offeree to the effect
that silence from the offeree will amount to an acceptance.
Silence on the part of the offeree will only constitute an acceptance if both parties agreed that the
offeree's silence will amount to an acceptance, or if there is a duty to speak on the part of the offeree.
This will be determined from all surrounding circumstances, the relationship between the parties and
previous dealings, if any.

5.3.4 Compliance
‘The acceptance must comply with the terms set out in the offer. The offeree must accept all the terms of
the offer. If the offeree changes a term of the offer, she is rejecting the offer and making a counter offer.
Then it is the original offeror's turn to either accept or reject the counter offer. You saw this above in the
example about the textbook.

5.3.5 Timelines
The offeree must accept the offer within the given time. If the offer has a deadline (or time limit) for
acceptance, the offeree has to make a decision within that time, before the offer lapses. If the offer sets no
time limit, the offeree has to accept it within a reasonable time for the acceptance to be valid.

5.3.6 Form
The offeror may prescribe a specific manner in which the acceptance should be communicated to
her, such as in writing. The offeror may also specify a certain place for the offeree to communicate
the acceptance to her, such as the offeror’s office. In this instance, the offeree must adhere to these
specifications when making the acceptance. The acceptance will only be valid if the offeree meets these
conditions. If the offeree does not follow these conditions, the offer will lapse.

5.3.7 Communication
An acceptance is completed and a contract is created only when the offeror knows about the acceptance.
Until then, there is no contract and the offeror can revoke the offer at any time. However, once the
offeror has heard about the offeree’s acceptance, there is a contract between them and it is no longer
possible to withdraw the offer.

70 Chapter 5 | Reaching agreement

 Added value Acceptance requirements

Before you continue, see whether you can remember the seven requirements that an acceptance
has to meet. We can summarise these requirements as: source, awareness, clarity, compliance,
timeliness, form and communication. Make up your own mnemonic for this list. A mnemonic is
a sentence or word that helps you remember a list of things. For example, you may have been
taught to use Richard Of York Goes Battling In Vain to remember the colours of the rainbow in
their correct order, or perhaps simply ROY G BIV.

Case study The lost cat

Selina finds a lost cat in the street. The cat is wearing a collar with its name and the owner's
telephone number printed on a tag. Selina phones the owner and returns the cat to its very
happy owner. When she gets home, she sees in the newspaper that the owner had placed an
advertisement offering a R1 000 reward for the safe return of his cat. Can Selina claim the reward?

Case study Tumi’s house

Tumi wants to paint her house. She looks in the phone book and finds an advertisement for
‘Sobukwe's Painters — the cheapest in town’. She phones Mr Sobukwe and asks him to give her a
quote for painting her house. He looks at the house and sends a fax to her quoting R25 000 to paint
the house. Tumi phones Mr Sobukwe back and tells him that she thinks R22 000 is more reasonable.
Mr Sobukwe replies, ‘How about R23 500?’ Is there a contract between Tumi and Mr Sobukwe?

5.4 Requirements for concluding contracts

We said earlier that it’s important to know when and where a contract becomes valid, or comes into
effect. Let us look at two situations where disputes could arise about this aspect, namely:
= postal contracts
® = telephonic contracts.

5.4.1 Postal contracts

If the two parties to a contract send their offer and acceptance by post, we need to look at where and
when the contract is formed. Suppose, for example, I live in Cape Town, and you live in Port Elizabeth.
I post you an offer on 1 May. You post your acceptance to me on 10 May, and I receive it on 15 May.
When and where was the contract concluded?
The law has two approaches to this question:
‘The information theory states that the contract is formed when and where the offeror reads the
letter of acceptance. This is in line with the general principle that the contract is concluded when
and where the offeror hears about the acceptance. In the above example, it would mean that
the contract was concluded on 15 May, in Cape Town. This theory applies to the conclusion of
most contracts.
‘The expedition theory suggests that the contract comes into existence when and where the letter of
acceptance is posted.

Therefore, in our example, the contract was formed on 10 May, in Port Elizabeth.
The courts have decided that the expedition theory applies to contracts concluded by post, when the
following requirements are met:
= ‘The offeror must have authorised (or permitted) the offerce to send the acceptance by post.

Chapter 5| Reaching agreement 71

m = ‘This authorisation can be agreed expressly between the parties or it can be implied where the offer is
posted and does not prescribe how the offeree should communicate her acceptance.
m The acceptance must be posted to the correct address.
= = The postal service must be working. If post is not being delivered because war has broken out, for
example, the expedition theory will not apply.

If these conditions are met, the expedition theory will apply, so the contract is concluded when and
where the acceptance letter is posted (in our example, 10 May, Port Elizabeth). If one or more of the
requirements are missing, the information theory will apply, and the contract is formed at the time and
place that the offeror reads the acceptance (in our example, 15 May, Cape Town).
It is interesting to note that if I (the offeror) want to revoke my offer, I have to do so before you (the
offeree) post your letter, because the contract is concluded from that moment. In our example, I would
have to contact you before 10 May.
The law about postal contracts is part of a general principle that if there is a delay between the time
that an acceptance is sent and the time that it is received, then the information theory will usually apply.
Acceptance occurs when the recipient reads the letter, email or fax. However, if the offeror authorises
the way of communicating, the expedition theory applies. In that case, the contract is concluded at the
moment the offeree sends the letter, email or fax.

5.4.2 Telephonic contracts and electronic communication

If the offeror and offeree enter into a contract while talking on the telephone, the contract is formed at
the time and place that the offeror hears the acceptance. ‘The information theory applies.
This information theory also applies to data messages, so if you create a contract using emails, SMSs or
voice messages, the contract is concluded at the moment the offerer has the information from the offeree.
Let us look at the case below as an example.

Ae sleek eee EY)

Principle
As per the information theory, if the offeror and offeree enter into a contract telephonically or
via electronic communication, the contract is formed at the time and place that the offeror hears
the acceptance.
Facts

It was important to determine when a contract of sale was concluded. The buyer had made
an offer over the telephone from Namibia. The seller had accepted telephonically from
Johannesburg. The buyer (offeror) heard about the acceptance in Namibia.
The court's finding
The court held that the contract was concluded in Namibia as the offeror heard about the
acceptance in Namibia.

Added value Questions on valid contracts

An exam question may ask you to decide whether a valid contract exists or not. Questions
like these are asking if there is a valid offer and a valid acceptance. To answer this, you have
to look at the given facts and compare them to the requirements for a valid offer and a valid
acceptance. If one or more of the requirements is missing, you need to explain what the problem
is and conclude that there is no valid contract.

72 Chapter 5 | Reaching agreement

5.5. Options and rights of first refusal
Now that we have looked at the offer and acceptance, it isa good time to zoom in on contracts specifically
about offers.
Suppose, for example, that John is in Cape Town and Sandy is in Port Elizabeth. On Monday, John
sent an SMS to Sandy saying, ‘Hi Sandy, do you want to buy my textbook for R50?’ Sandy replied on
Tuesday saying, ‘Cool!’ Where and when was the contract concluded?

5.5.1 Options
An option is a contract where an offeror agrees to keep her offer open for a specific period of time.
In terms of the general principles of contract, an offeror can revoke her offer at any time before
the offeree accepts it. However, if the two parties enter into a contract of option, the offeror agrees to
make her offer irrevocable for a specific period of time, for example, you offer to sell your guitar to me
for R1 500,
I tell you that I am interested, but I cannot buy it right now, You agree to give me a six-month option
on it, in other words, you will keep your offer to me open for six months. | may accept the offer at any
time before the six-month period ends. You may not withdraw that offer during that six-month period as
this would be a breach of the contract of option.
There will be two contracts — the main contract to be entered into, and the contract of option.

5.5.2 Rights of first refusal

A right of first refusal is a contract between two people where one person agrees that if she ever decides to
enter into a particular contract, she will make an offer to the other person first. The person who gives a right
of first refusal is not making an offer. Instead, she is guaranteeing that if she does make that offer in future, she
will make it first to the person who has the right of first refusal. You may have come across an example of this
already if you are livingas a tenant in someone else's home. Your lease agreement may include a paragraph that
gives you, as tenant, the right of first refusal if the owner decides to sell you the flat or house. The owner has not
offered to sell you the home. She is only saying that if she decides one day to sell it, she will offer it to you first.
When, eventually, the person who gave the right of first refusal decides to enter into a contract, she
must first make the offer to the person who holds the right of first refusal. This person (now the offeree)
must then decide whether to accept or reject the offer. If he accepts the offer, they have a
contract. If he rejects the offer, she is free to approach other people with that offer. To pre-empt means to do
However, if she changes the terms of the offer, for example, if she decides to lower the price OF Say something before
— she has to start again by making the new offer to the person who has the right of first refusal. — @7YOn€ else gets a chance
If the right of first refusal applies to a contract of sale, it is also called a right of pre-emption. eS

Chapter summary

In this chapter, you learned the following about = the wills theory
reaching agreement: m = the declaration theory
A contract is valid if both parties reach an agreement = the reliance theory.
and intend to be bound by the terms of the agreement.
‘The approaches to the rationale for holding An offer is a declaration by an offeror of her intention
individuals bound by their contracts are: to conclude a contract.

Chapter 5 | Chapter summary 73

 For a contract to be concluded, one person has to make
a valid offer and another person has to accept that offer.
‘There are five requirements for a valid offer:
= = It must be complete.
= It must be clear.
= = It must be made with the intention of creating
a contract.
@ = It must be communicated to the offeree.
= It must be current (must not have lapsed, been
rejected or been revoked).
Acceptance is the offeree’s declaration of her intention
to enter into a contract with the offeror under the terms
that are given in the offer.
‘There are seven requirements for a valid acceptance:
m= The acceptance must be made by the
intended offeree.
= = The offeree must have known about the offer
before acceptance.
@ = ‘The acceptance must be clear and unambiguous.
@ ‘The acceptance must correspond with the terms of
the offer.
m ‘The acceptance must be made within the
prescribed time.
Review your understanding
1. Thabo sees an advert on Facebook that says, ‘Come
to Johannesburg Station wearing blue on 1 April,
and get paid R50’. He arrives wearing blue on the
given day only to be told that too many people
arrived and therefore he will not be paid. Can
Thabo insist on getting paid?
2. Jerry tells Anne, “When I sell my car, I will offer it
to you first’. This is (choose the correct answer):
a) aright of first refusal
b) an offer
c) an option
d) nota valid agreement.
3. Jenny sees an advert in a local newspaper that says,
“New model Mercedes Benz car for sale for R250
at Al Auto Dealer’. She phones the car dealer, who
tells her that the advertisement was incorrect, Can
Jenny insist that she buys the car for that price?
74 Chapter 5 | Review your understanding
m= The acceptance must be made in the prescribed
manner and place.
= = The acceptance is only complete when it is
communicated to the offeror.
‘The general rule is that a contract is concluded where
and when the offeror learns about the acceptance (the
information theory).
If an offeree sends the acceptance by post, and
the offeror has authorised this, then the contract is
concluded where and when the letter is posted (the
expedition theory).
A telephonic contract or an electronic communication
is concluded where and when the offeror hears about the
acceptance (the information theory).
If the offer requires that notice be sent to a particular
address, the contract is concluded where and when the
notice is received (the reception theory).
An option is a contract by which the offeror agrees
to keep the offer open for a specific period of time.
A right of first refusal is a contract between two
people in which one person agrees that if she ever wants
to enter into a particular contract, she will offer it to the
other person first.
4. Jenny goes to an auction where the auctioneer
says, ‘No reserve. New model Mercedes car must
go today’, She is the only one who bids and offers
R250, Is the contract valid?
5. Jenny goes to an auction where the auctioneer says,
‘Reserve price R200 000. New model Mercedes
must go’. She bids the highest amount of R10 000.
Is the contract valid?
6. Can you think of a situation where a contract
option can be very valuable?
7. Sally says to Jim, “Would you like to buy my phone
for R1 000?’ Jim answers, “R950?
Is there a valid contract?
8. On Monday, Nancy decides to sell her dog and
she offers to sell him to Cedric for R50. Cedric
says he must think about it. That night, Nancy
calls Cedric, and says she has changed her mind.
 Cedric then says that he accepts her offer. Does
Nancy have to transfer her dog to Cedric?
9. Jim wants to sell his house by auction. He tells
the auctioneer that he will not accept an offer
under R500 000. The auctioneer auctions the
house where the highest bid is R450 000. Is this a
valid agreement?
10. What does it mean if an item is auctioned
without reserve? (Choose the correct answer.)
a) ‘The auctioneer feels that the item he is selling
is highly recommended.
b) ‘The auctioneer will sell the item to the
highest bidder.
Further reading
Hutchison, D. et al. 2012. The Law of Contract, 2nd edn. Cape
Town: Oxford University Press Southern Africa (Pty) Led
Schulze, H. et al. 2015. General Principles of Commercial Law,
8th edn. Cape Town: Juta and Co. (Pry) Ltd
c) The auctioneer cannot sell the item below a
certain price set by the seller.
d) ‘The item will probably not be sold by auction.
11. Ria wants to buy Khomotsi’s car. Khomotsi says he
is willing to sell it to her for R30 000. Ria replies
that she first needs to sell her own car before she
can buy another car. She asks Khomotsi to keep
his offer open for one month. Khomotsi agrees.
Which statement is correct?
a) Khomotsi has only made an offer to Ria.
b) Ria has an option to buy Khomotsi’s car.
c) Riahas a right of first refusal.
d) Ria has bought the car from Khomotsi.
Sharrock, R. 2016. Business Transactions Law, 9th edn.
Cape Town: Juta and Co. (Pty) Ltd
Chapter 5 | Further reading 75
Chapter
a Problems with the formation of a contract

The main ideas

® Void and voidable contracts
Contracts that are void due to lack of agreement
Contracts that are voidable due to misrepresentation
Contracts that are voidable due to duress
Contracts that are voidable due to undue influence

The main skills

= = Analyse legal problems.
= Answer multiple-choice questions.
= Apply knowledge of theory.
® Solve problems and make decisions.
a Understand the law regarding mistake, misrepresentation, undue influence and duress.

In this chapter, we begin by explaining the difference between void and voidable contracts, and the
consequences in each case. After that, we examine each of the reasons for contracts becoming void or voidable.

Before you start

Suppose you are thinking about buying my car, and you ask me about its history. I tell you that it is
five years old and has never been in an accident. You buy the car, but a little while later you find out it
is actually seven years old and it has been in four serious accidents, What are your legal rights? Can you
claim back the money you paid and return the car? Or do you think you can claim back some of your
money because the car is actually worth less than you paid for it?

6.1. Void and voidable contracts

A contract is considered void, or non-existent, if any one or more of the six basic requirements
for a contract is missing. To recap, these are contractual capacity, agreement, legality, possibility of
performance, formalities and certainty.
When a contract is void, it is as ifit never existed and the parties have no rights or obligations under
that contract. In other words, they cannot be forced by law to carry out the terms of the contract.
What happens if one or both of the parties have already performed in terms of the contract, before
somebody notices that the requirement is missing?
Firstly, the parties can use the law of unjustified enrichment to claim back any money that they have
given in terms of the contract. Secondly, they can use the rei vindicatio to claim back their property from
the other party. (We discussed these options in an example in Chapter 4.) In other words, both parties
give back what they received, and it is as if they never entered into the contract.

The cause
A contract is voidable if all the requirements for a contract are satisfied, but the way in which the parties
reached agreement is a problem because one of them was guilty of misrepresentation, duress or undue
influence, A voidable contract is a valid contract, and will remain in force until the innocent party decides

76 Chapter 6 | Problems with the formation of a contract

to set it aside after proving the requirements for misrepresentation, duress or undue influence. We will
discuss these three reasons for voidable contracts in detail later, but let us distinguish between the terms,
= = If you misrepresent a situation, you describe it falsely to get an advantage. (We define representation
and misrepresentation more accurately later in this chapter.)
= = If you do something (like signing a document) under duress, it means someone is using threats to
force you to do it.
= By undue influence, we mean influence that prevents someone from making his own independent
judgment about a transaction.

The result
The effect, or result, of a voidable contract is that the innocent party has a choice. One option is that he
can choose to set aside, or rescind, the contract and claim restitution. Restitution is payment for damage
or loss so that both parties are returned to the position they were in before the contract. The Latin term
for this is restitutio in integrum. The other option is for the innocent party not to rescind the contract but
to abide by it, in other words, to stay with the contract or keep it going.
So you can see that a voidable contract is valid until the innocent party rescinds it. If the innocent
party decides not to rescind the contract, it continues being valid, and is therefore binding on the parties
in the sense that each must perform the terms of the contract.
Usually, what happens is that the innocent party has a reasonable time to decide whether to keep the
contract going or to rescind it. If he does nothing, he loses his right to set the contract aside, because it
is assumed that he has chosen to keep the contract going, But if the innocent party chooses to rescind
the contract, the contract comes to an end and both parties have to give back what they have received in
terms of the contract (restitution). If, because of the fault of one of the parties, it is impossible to return
what was received, that person can give the other person money equal to the value of what he should
return. Alternatively, the innocent party can choose to abide by the contract, and then it remains valid.
For example, you and I enter into a simple contract. I give you a book in exchange for a CD. But
then you find out that the book is not the latest edition, as I said it was. It is a few years old and perhaps
a bit out of date. This means the contract is voidable because I misrepresented facts to you. You have
a choice: either abide by the contract or rescind it. If you decide to abide by the contract, it is valid.
However, if you set it aside, | must give you back the CD and you must give me back the book. If I have
lost or broken the CD, I have to pay you for it instead.

Added value Void or voidable?

The effect of a contract being void is very different to its being voidable:
e Avoid contract can never be valid, unless a voidable contract is valid, or unless it is
rescinded. Make sure you know the difference and take care to use the right term.

Activity 6.1
In light of the difference between void and voidable contracts, it is possible that a voidable
contract is actually for your benefit so that you decide to keep the contract going. This is not
possible with a void contract. Can you think of an example where you would keep a contract
going even though you were ‘tricked’ —- where someone misrepresented the truth?

6.2 Contracts that are void due to a lack of agreement

We said above that a contract is void if it fails to meet any one of the six requirements. We have already
discussed contracts that are void or voidable because of the lack of contractual capacity. We are now
interested in the next requirement, namely agreement. Where a contract is void because of a lack of
agreement, we refer to the problem as mistake (see next page).

Chapter 6 | Problems with the formation of a contract 77

‘There are two types of mistake: The term mistake can
@ unilateral mistake be used in two different
@ common mistake. ways. A mistake can either
be a term that you use in
When the parties to a contract misunderstand each other (because they see certain facts, everyday speech to indicate
; a
events or circumstances differently), we say that there is: a unilateral
‘ 5
mistake. ;
Either one or that you made an error of
oth of Idbe w tates Sinus te that th some sort, or it can refer to
th of them could be wrong, but the important thing is that they are at cross purposes grounds for a void contract.
with each other — not thinking the same thing. The parties cannot be said to be in
agreement, because they are misunderstanding each other. By contrast, if there is a common
mistake, then both parties share the same mistaken understanding.
It is accepted that parties will still be held to their declared intention to contract unless the mistake they
have made is reasonable, in which case they will not be bound by the contract.
In other words, a contract will be void on the grounds of mistake if the mistake relates to a fact, or
a legal principle, and provided that the fact or legal principle is material and the mistake that has been
made is considered to have been reasonable. Misrepresentation by the other contracting party (discussed
below) will normally not make an agreement void — it merely makes the contract voidable at the option
of the innocent party. But where the misrepresentation is such that it results in a material mistake, so
that it can be said that there is an absence of consensus, the contract will be void.
Now we explore how these types of mistake affect the contract.

6.2.1 Unilateral mistake

Fora unilateral mistake to make the contract void, it must meet the following three requirements:
= = The mistake must be about facts concerning the contract.
m = The mistake about facts must be material.
= The mistake must be reasonable.

Let us examine each requirement in turn.

Mistakes about facts concerning the contract

This is in line with the wills theory we discussed in Chapter 5. The contract is void as there is no
subjective agreement that is required for a valid contract.
The first requirement is that the mistake must be about the facts of the contract. A mistake about
someone's reason for entering into a contract (mistake about motive) does not meet this requirement,
and does not make the contract void. Similarly, a mistake about what the law says (mistake of law) does
not meet this requirement either. Here are two examples of contracts involving unilateral mistakes, but
only one of them is a mistake of fact:
1, Suppose you are selling puppies. You and I enter into a contract of sale, but you think you are
selling me two puppies, while I think that I am buying only one puppy. This contract is void, as this
is a mistake about the facts of the contract, and there is no agreement between us.
2. We both know that only one puppy is being sold, but I believe that the law requires you to pay for
the puppy's food for the first year, which is not true. Again, the contract is valid despite the mistake.
I made a mistake of law, but that does not affect the agreement between us, and the contract is valid.

Material mistakes
Fora contract to be void because of mistake, the mistake must be material. This means the mistake must
have influenced the mistaken party's decision to enter the contract. In other words, if he had known
the truth, he would not have entered into that contract. This test is subjective, because it depends on
how we understand the thinking of the particular (mistaken) person involved. This is in line with the
wills theory.

78 Chapter 6 | Problems with the formation of a contract

 Added value Subjective and objective tests

You need to understand the difference between subjective and objective tests.
With a subjective test, we try to determine the person’s thoughts and ask whether this particular
person would have acted differently if he had not been mistaken, for example, would he have
decided not to enter into the contract?
With an objective test, we compare the person's behaviour to the behaviour of a
reasonable person.
The ‘reasonable person’ is an imaginary person you will come across often in legal discussions
and represents the average, normal, careful person. The reasonable person's behaviour is a
standard against which we measure the actual behaviour of particular real people. Where a real
person fails to meet the standard of the reasonable person, we consider that individual to be
negligent, careless or reckless. If the individual falls far short of the standard (in other words, his
behaviour is much worse than that of the reasonable person), then we consider him to be very
negligent. So the extent of the shortcoming indicates the extent of the person’s negligence.

To decide whether a mistake is material, we consider the facts of each case. Here, it is helpful that the law
has categorised certain types of mistakes as material and others as immaterial. If the particular type of
mistake fits into one of the categories that is considered material, then it usually meets the requirements
of materiality.
The following are mistakes that we consider to be material:
= = Error in negotio is a mistake about the type of contract being entered into. If] think I am selling you
my watch, but you think that I am giving (donating) it to you, that is an example of error in negotio.
= = Error in corpore is a mistake about the subject matter of the contract. Suppose you have two cars and
we enter into a contract for the sale of one of the cars. If] think that lam buying your Toyota, but
you think I am buying your Ford, then that is an example of error in corpore.
@ = Error in persona is a mistake about the identity of the person with whom the contract is being
concluded, This mistake is material only if it is important for one party to know who the other
contracting party is. For example, if I want to sell my house, it makes no difference to me who
the buyer is —a mistake about the other contracting party's identity is therefore not material.
But, if I want to enter into a contract of employment and hire someone to work for me, the
identity of the other contracting party is important. This is because the employer-employee
contractual relationship is a personal one where the employee's qualities, such as competence and
trustworthiness, are important.

By contrast, an error in substantia, which is a mistake about the attributes or qualities of the object of
the contract, is not material. Suppose, for example, I buy a car from you. If I think it is ten years old,
but you know that it is 11 years old, the contract is still valid. The mistake is not material, as we did
reach agreement.

Added value A material mistake

While the above categories of mistake help us to determine whether a mistake is material, it
is still possible that a mistake that is usually not material is found to be material in a specific
case, because of particular circumstances. This could happen, for example, if both parties know
that a particular fact is important to one of the parties, which means a mistake about that fact
is material.

Chapter 6 | Problems with the formation of a contract 79

 Case study Terence’s jacket

Terence is buying a jacket for a hike in the Drakensberg Mountains and he tells the shop
assistant that the jacket must be waterproof and very warm for his hike. The shop assistant
assures him that the ones they sell are ‘the warmest and most practical for hiking, by far.’
He really believes this. Terence later discovers that the jacket is not very warm and that it is
definitely not waterproof.
e Is the contract valid?
e Would it make a difference if Terence was buying the jacket merely as a fashion item?
e Return to this question after we have covered misrepresentation and see if you think this is
misrepresentation,

Reasonable mistakes
‘The third requirement for a mistake is that it must be reasonable. The mistake must be one that a
reasonable person would make.
A mistake is not reasonable if the person who was mistaken was negligent. In other words, the law
thinks that there is a way that all of us should act in particular circumstances. If we do not live up to this
standard of behaviour, then we are negligent, and a mistake that we make is not reasonable.
‘The test for reasonableness is an objective test: we compare the behaviour of the person who was
mistaken with that of the reasonable person. If the reasonable person would not have made the same
mistake, then the mistake was not reasonable, and the contract is still valid.
Say, for example, I want to buy a car from a car dealer, and he takes me into the showroom and
points out the car he wants to sell me. I am too busy talking on my cellphone and do not concentrate
properly, so that I think I am buying a different car. My mistake is material (error in corpore), but it is
not reasonable. A reasonable person would have paid attention when the dealer was pointing out the car.
The contract is still valid, as the requirements for a mistake have not all been met. I am bound by the
contract to buy the car that the dealer pointed out.
The law looks at each situation to decide how a reasonable person would have behaved. When it
comes to reading written contracts, the general rule is that a party signing a contract is bound by its
terms even if that party did not read the terms. This principle is called caveat subscriptor. These Latin
words mean ‘let the person signing beware’, Similarly, caveat emptor means ‘let the buyer beware’.
The rule of caveat subscriptor assumes that a reasonable person reads and understands a contract
before signing it. Therefore, you are bound by the terms of a written contract, even if you have not read
the contract. If you sign the contract without reading it, you are negligent, and any mistake that you
make in respect of the terms of the contract is not considered reasonable. This means that a contract can
be legally binding on the parties even though there was no true consensus or agreement between them.
This is because the signing party gave the other contracting party the reasonable impression that she
wishes to be bound by the terms of the contract when she signed it.
The following case describes the common law position.

George v Fairmead (Pty) Ltd 1958 (2) SA 465 (A)

Principle
As a general rule, where a party signs a document, his actions of signing the contract create the
reasonable impression that he intends to be bound by the terms contained in the document (the
caveat subscriptor principle).

80 Chapter 6 | Problems with the formation of a contract

George v Fairmead (Pty) Ltd 1958 (2) SA 465 (A) (continued)

Facts

In this case, George checked into a hotel and signed the register without reading the terms
and conditions contained in it. By signing the document, George indicated that he agreed to
the conditions of occupation, which included an exemption of a liability clause. After taking
occupation in the hotel, certain belongings were stolen from his room. George sued the hotel
for damages claiming that he was not bound by the terms in the documents as he had not
read them.

The court's finding

The court ruled in favour of the hotel. George was aware that there were terms contained in the
document and he was bound by the terms when he signed the document because he gave the
other party the reasonable impression that he wished to be bound by the terms.

Added value The reliance theory

Like the caveat subscriptor rule, the reliance theory is another principle that allows a contract
to come into effect even though the parties did not have true consensus at the time of
the formation of the contract. The reliance theory states that enforceability of a contract
depends not on the subjective meeting of the minds, but rather on the reasonable impression
that is communicated to the mind of one party by the words or conduct of the other party as
evidenced by the facts of the case. The principle seeks to promote legal certainty and to protect
the reasonable expectations of parties to a contract.

National and Overseas Distributors Corporation (Pty) Ltd v Potato Board

1958 (2) SA 73

Principle
The law may uphold a contract with dissensus, if it is necessary to protect a party's reasonable
reliance on the appearance of assent.

Facts

In this case, National and Overseas Distributors Corporation (Pty) Ltd submitted a tender
to the Potato Board (in answer to a call for tenders), and the former party subsequently
received a letter of acceptance from the Board. National and Overseas Distributors (Pty) Ltd,
relying on the appearance of assent, started making the necessary arrangements to render
performance on the contract. However, a short period thereafter, the Board communicated to
National and Overseas Distributors Corporation (Pty) Ltd that the letter of acceptance had been
sent as a result of an administrative error and that the Board intended to accept the tender
from another company.
The court's finding
The court held that, based on fairness and practicality, there was a binding contract between
the Potato Board and National and Overseas Distributors Corporation (Pty) Ltd as the actions of
the former party led the National and Overseas Distributors Corporation (Pty) Ltd to reasonably
believe that there was a valid contract in place.

Chapter 6 | Problems with the formation of a contract 81

‘The common law position applied above has been varied by the Consumer Protection Act 68 of 2008
below. The caveat subscriptor rule does not apply if the other contracting party did not actually think that
the mistaken party was agreeing to the terms of the contract. This could have happened in one of two ways:
1. The other party misled the mistaken party.
2. The other party was aware that the mistaken party did not know about a term in the written contract.

If one contracting party is aware that the other contracting party is mistaken, she cannot rely on the
appearance of consent.

Let us look at an example of each of these situations.

= Firstly, the mistake is reasonable if the other party misled the mistaken party. Suppose, for example,
that I want to rent you my holiday house, so I tell you that the house has a wonderful sea view.
However, the house has no sea view at all, so I am actually misleading you. I then make you sign
a written contract of lease, which says in one of the clauses that the house has no sea view. When
you find out the truth, | cannot say that you are mistaken about the terms of the written contract,
and that under the caveat subscriptor rule the mistake is not reasonable. In fact, I misled you and
therefore the caveat subscriptor rule does not apply. Your mistake is reasonable and, if the other
requirements for mistake are met, the contract is void.
= Secondly, the mistake is reasonable if the other party was aware that the mistaken party did not
know about a term in the written contract. In this case, the other party cannot use the caveat
subscriptor rule. This often means that if the party who drew up a contract knows that there are
any unusual terms in the contract, he has a duty to point them out to the other contracting party.
Suppose, for example, I am renting you a house and I give you a lease agreement to sign. You skim
through the lease, but you do not notice a particular term at the bottom of one of the pages, in
very small print. This term says that if my best friend comes to town, you have to leave the house
immediately, and let her stay for as long as she likes. This is a very unusual condition, which I know
that you have not noticed. If I do not specifically point it out to you, | cannot rely on the caveat
subscriptor rule to hold you to the terms of the contract.

Clearly, caveat subscriptor also does not apply if the mistaken party is blind or cannot read. If the above
three requirements are met, the contract is void because of unilateral mistake. Both parties must then be
returned to the position in which they were before the conclusion of the contract, by using the law of
unjustified enrichment and the rei vindicatio.
In terms of the Consumer Protection Act 68 of 2008, which only applies to contracts where the
supplier sells goods or services in the ordinary course of business, there is an additional situation where a
clause in the contract limits:
= the supplier's liability
makes the consumer assume more risk
imposes an obligation on the consumer
relates to an activity that is unusually risky, and it would not normally be expected by the consumer
could result in serious injury or death.

Then the supplier has an obligation to ensure the following:

@ = The clause is in plain language.
= = The customer's attention is drawn to the clause (for example, the contract might put the clause in
bold and say ‘important — take note’).
m= ‘The consumer is given adequate opportunity to read the clause.
= With regard to unusually risky behaviour, the consumer must sign the end of the contract and also
sign next to the unusual clause to show that she has seen it.

82 Chapter 6 | Problems with the formation of a contract

Therefore, returning to the George v Fairmead case above, if that case were decided today, the hotel
would have had to draw George's attention to the clause that limits the hotel's liability, and George
would succeed if this had not been done.

6.2.2 Common mistake

So far, we have been looking at examples of unilateral mistake, where the contracting parties see things
differently. But what happens when both parties share a common belief about a certain fact or legal
position, and then they discover this is not true? When both parties believe something that is untrue, the
contract is void because of a common mistake.
Suppose, for example, that I am a doctor and I want to buy your house to use as my surgery, because
we both believe that it has business rights. We sign the contract, but then we find out that the house
cannot be used for commercial purposes, This is a common mistake, because we both mistakenly
believed the same thing,
There are two legal requirements for a common mistake:
1. It has to be a mistake that is shared by both contracting parties.
2. It has to be a material mistake, such that the parties would not have entered into the contract had
they known the true facts.

If a common mistake occurs, the contract is void. Both parties must be returned to the situation
they were in before entering into the contract, using the law of unjustified enrichment and the
vei vindicatio,

Rectification
What happens if the contracting parties agree verbally to a contract, but they make an error later,
when they write down the terms of the contract? This is not a mistake that would render the
contract void, since there is agreement between the parties. The only problem is that the piece of
paper does not reflect this agreement accurately. In this situation, the parties can apply to court for
an order for rectification to correct the error in the written document. The party that asks for the
rectification must show that the content of the written document differs from their verbal agreement,
and must prove what the terms of the verbal agreement are. The court will then order the written
document to be changed so that it is a correct reflection of their agreement. For example, suppose
you and I agree verbally that I can hire your car for two months, but when we draw up the written
contract, it says ‘12 months’ by mistake. You or I can apply to court to rectify the written agreement
by changing the ‘12’ toa ‘2’.

Activity 6.2
Jacob wants to open a karate school where he will teach 30 children per class. He needs to
rent premises. He looks at a hall and is told by the lessor, Jonny, that the hall is very sturdy, well-
built and that there is no problem having even 40 people doing karate in the hall. At the time
that Jacob enters into an agreement of lease and starts his school, he discovers that the hall floor
is old, and that it will not support 30 students doing karate simultaneously. When he checks his
contract, Jacob sees that Jonny has added the clause: ‘The hall is not designed to support more
than 20 people at any one given time.’ When Jacob tries to cancel the lease, he is told that
the contract is valid as the reason why he entered into the contract is not material. What is the
legal position?

Chapter 6 | Problems with the formation of a contract 83

 Activity 6.3
Funeka and Andile enter into a contract of sale. Funeka is selling her computer to Andile for
R5 000. Both parties believe that the computer is in perfect working order, but soon after the
sale, they discover that the computer does not work at all. Neither of them would have entered
into the sale had they known the truth.
1. What is the legal consequence of this mistake?
2. Would it make a difference to your answer if Funeka knew that the computer was broken,
but Andile believed that it worked perfectly?

Added value Mistake and misrepresentation

The facts in the first situation could also be interpreted as a misrepresentation, which we discuss
in the next section. We can often argue the same facts in different ways.
We have to look at the circumstances for mistake to see if the facts qualify as a mistake.
Similarly, we have to look at the circumstances for misrepresentation to see if the facts qualify
as a misrepresentation, Sometimes, it is unclear whether there was no agreement (mistake) or
whether there was a flawed or defective agreement (misrepresentation), as the same facts can
be argued both ways.

6.3 Contracts that are voidable due to misrepresentation

In the cases of misrepresentation, duress and undue influence, the contracting parties reach agreement,
but they reach it in an improper way in that the consent of one of the parties to the contract is not
true or real consent, or consent was not freely and voluntarily given. In terms of the law of contract,
the contract in a case like that is not void; it is voidable. ‘The innocent party has a choice of whether
to rescind the contract or abide by it. You will see later that the law of delict may also apply to
these situations.
Before we can talk about misrepresentation, we need to know exactly what we mean by a
representation, A representation is a statement of fact or conduct, made by one of the contracting parties
to the second party, before the contract is concluded, with the intention of persuading the second party
to agree to the contract. If a representation is false or misleading, it is a misrepresentation. We evaluate
misrepresentations both in terms of the law of contract and the law of delict.
Does it make a difference whether the person making the statement knew (or should have known)
that the statement was false? You will see later that this question is relevant for working out whether the
disadvantaged party can claim damages in terms of the law of delict.
Let us consider under which conditions a misrepresentation causes a contract to become voidable.
After that, we will distinguish between three types of misrepresentation. Finally, we will have a look at
what amounts a party can claim in damages.

6.3.1 When does misrepresentation lead to a voidable contract?

In terms of the law of contract, a misrepresentation makes a contract voidable if all the following six
conditions are met:
1. The representation must be untrue.
2. The misrepresentation must be about a fact.
3. The misrepresentation must be material.
4. The misrepresentation must be made by one of the contracting parties.
5. ‘The intention must be to induce the other party to contract.
6. ‘The effect must be to induce the other party to contract.

84 Chapter 6 | Problems with the formation of a contract

The representation must be untrue
When we make representations, we usually use words. However, we can also make them through
silence — by not saying anything. In some situations, there is a duty on one of the contracting parties
to say something, to disclose some important fact. This is called a duty to disclose, Silence does not
usually count as a misrepresentation. As a general rule, there is no duty on contracting parties, who are
negotiating to disclose information. However, if the law considers that one contracting party had a duty
to disclose but kept quiet instead, there is a misrepresentation by non-disclosure.
A duty to disclose information to the other contracting party exists in the following situations:
Where a party makes a positive statement that is only a half-truth, there is duty on that party to
disclose the other part of the truth. While the positive statement is true on its own, it creates a false
impression because other important facts are omitted.

Marais v Edelman 1934 CPD 212

Principle
Where a party makes a positive statement that is only a half-truth, there is duty for that party to
disclose the other part of the truth.
Facts

In this case, the seller of a farm informed the buyer that he had successfully pumped water from
the borehole for three years. However, the seller omitted the crucial facts that this had occurred
fourteen years ago and that the depth of the borehole had since been shortened.
The court's finding
The court held that the seller misled the buyer by disclosing a half-truth. He was therefore under
a duty to disclose the rest of the facts known to him.

Where a true statement is made by a contracting party but circumstances change, there is a duty
to disclose the new state of affairs. For example, if I tell you that my neighbour has no objection
to my building near our boundary wall but before the contract to sell my house to you is signed,
I have learned that my neighbour has changed his mind and will object to the building of the
boundary wall.
Where a seller knows of latent defects in the property being sold, there is a duty on A latent defect is an
the selling party to disclose this information. unusual quality of the object
Where one party takes active steps to hide certain facts or characteristics about the being sold that makes it
: e 3 ‘ : . les useful or useless.
thing that is being sold, there is duty on that party to disclose this to the other party. See teetu es

Dibley v Furter 1951 (4) SA 483 (C)

Principle
Where a contracting party intentionally hides certain facts about the subject matter of a sale,
there is a duty to disclose this to the other party.
Facts

The plaintiff bought a farm from the defendant. One quarter of the farm was a graveyard,
recently ploughed over to hide this from the plaintiff.
The court's finding
This constituted misrepresentation as there was a duty on the defendant to disclose this fact.

Chapter 6 | Problems with the formation of a contract 85

m= = Where the parties are in a fiduciary relationship with each other (a relationship of trust and
confidence, for example, a business partnership) there is a duty on the parties to protect each other's
interests by disclosing information when contracting.
® Besides words and silence, I can also make an untrue representation by way of conduct.

Consider the misrepresentation of facts in the following case.

Trotman and Another v Edwick 1951 (1) SA 443 (A)

Principle
You can misrepresent facts orally and/or by your actions.
Facts

Mr and Mrs Trotman, the sellers, owned two flats next to a piece of land that belonged to the
city council. The sellers rented this piece of land for a small fee from the council, and had built
a wall around their flats incorporating the council land. Furthermore, the Trotmans knew that
the council was going to reclaim their land for the purpose of building a road. However, during
negotiations with Edwick to sell the property, the Trotmans verbally misrepresented the size of
the property. Further, they paced out the boundary of the property, which gave the buyer the
impression that the council land was a part of the sale.
The court's finding
The court held that based on what the Trotmans had expressly stated and their conduct of
physically pacing out the boundary of the property under sale, they had misrepresented the size
of the property and fraudulently created the impression that the council land was theirs to sell.

The misrepresentation must be about a fact

‘The second requirement is that the misrepresentation has to be about a fact. An untrue statement about
what the law says does not fulfil this requirement. An opinion is also not a statement of fact. If] tell
you that I really believe that the car that I am selling is a good car, this is not a statement of fact, but a
statement of my opinion, or what I think. If the car turns out to have many problems, my comment
does not make the contract voidable, because it was not a statement of fact but rather a statement of
opinion, But, what if I tell you that I think it is a good car, but | actually think it is a fairly useless car?
Then, I am making a false statement of fact, because | am misrepresenting my thoughts, or my state
of mind. It is a fact that I believe the car is bad, and I am misrepresenting that fact by telling you I
believe the car is good. We must also distinguish a misrepresentation from ‘puff. Puff is what we call
the exaggerated, sweeping statements that sales assistants often make about their products. If these
statements are vague and broad, we cannot consider them to be statements of fact. For example, a sales
assistant might say that if you buy a particular television, ‘you will be getting the deal of the century,
because this is the best television ever made’. This statement is clearly not intended to give you facts
about the television as it is just sales talk. So, puffing does not count as misrepresentation if it is just
vague, exaggerated sales talk. To make a distinction between puffing and misrepresentation, one must
consider the facts of each case, taking into account the following:
®@ = whether the statement was made in response to a question
® ~~ whether the statement was material to the purpose for which the items were to be used by the
innocent party, and the person making the statement was aware of this
=~ = whether even a gullible person would know that the statement was just sales talk.

86 Chapter 6 | Problems with the formation of a contract

The misrepresentation must be material
As you saw earlier, a misrepresentation is material if it would help to induce a reasonable peciccion means
person to enter into the contract. To provide a basis for rescission, the statement must ‘cancellation’ or ‘annulment’.
have induced a reasonable person to enter into the contract. In the case of non-disclosure,
the court will consider whether disclosure of the relevant information would have resulted in a reasonable
person not binding himself in a contract at all.
Suppose Jimmy is trying to sell you his house. He tells you that he is selling because he is moving to
another city, however, he is moving overseas instead. ‘This misrepresentation would generally not make
the contract voidable, because for most buyers it makes no difference where the seller is moving to. His
plan to go overseas is not a factor that would change your decision to buy or not to buy. However, in
the example where Jonny let his hall to Jacob, his statement that it was suitable for use was a material
misrepresentation. It made a difference to Jacob's decision to rent the hall.
A question addressed by our courts (see case below) is whether there should be an objective test for
misrepresentation. In other words, should the courts focus on whether a reasonable person would have
believed the misrepresentation?

Lourens v Genis 1962 (1) (SA) 431 (1)

Principle
A misrepresentation must be one that would mislead a reasonable person.
Facts
Lourens represented to Genis, an experienced farmer, that his (Louren’s) son had X-ray eyes and
could see water underground. Acting on this representation, Genis contracted with Lourens,
only to discover thereafter that this was not the case at all.
The court's finding
This does not constitute misrepresentation as a reasonable person would not have been misled
by such a claim. The contract in this case was therefore not voidable as all the requirements for
misrepresentation had not been satisfied, (This decision has been criticised by later judgments,
which clarify that fraudulent misrepresentation would be actionable even if misrepresentation
would not induce a reasonable person to enter into the contract.)

The misrepresentation must be made by one of the contracting parties

Think of the last time you bought a phone because a friend of yours had recommended it. The contract
of sale was between you and the phone shop, but your friend’s comments may have influenced your
decision to buy the phone. A person like your friend, who is not party to the contract but plays some
role in it, is called a third party.
If a misrepresentation is made by a third party, it will not affect the contract. If a contracting party
was misled by the statements of the third party, he may be able to sue the third party in terms of the
law of delict, but the misrepresentation will have no effect on the contract. Once again, suppose, for
example, that I am trying to sell you a house. It is a house on a busy road, and you do not like the noise
of the traffic. But, when you have a chat to my neighbour, she tells you that the city council is planning
to close off the end of the road, so you will have a quiet cul-de-sac. Now you feel much happier and
agree to the sale. Sadly, it turns out that the city council has no such plan. Equally sadly, you cannot
get out of the contract with me on the grounds that my neighbour made a material
In delict means ‘in terms of
misrepresentation, because she was a third party and not a party to the contract. You may,
the law of delict’.
however, be able to sue the neighbour in delict.

Chapter 6 | Problems with the formation of a contract 87

The intention must be to induce the other party to contract
Note that this requirement and the next one are quite similar, but this first one deals with the intention
and the next one deals with the result, or effect, of the misrepresentation.
The misrepresentation must have been made with the intention of inducing the other contracting
party to contract. In other words, the reason why one person misrepresented the facts was to persuade
the other person to enter into the contract. If the misrepresentation was not made with this purpose or
intention, it will not make the contract voidable.

The effect must be to induce the other party to contract

The misrepresentation must have induced the other contracting party to enter into the contract. In other
words, the person claiming misrepresentation must show that he would not have entered into the
contract if he had known the truth. There must be a causal link between the misrepresentation and the
conclusion of the contract by the parties. In other words, the remedy of rescission is not available if the
other party would in any event have entered into the contract (that is, even if the misrepresentation had
not been made). For example, when Vish wants to sell his car to Costa, he tells Costa that the car has
never had any major accidents.
When the rain comes and the car starts leaking, Costa finds out from the garage that it was actually
quite badly damaged in two accidents. Would Costa have bought the car anyway, even if he had known
the truth? If the answer is yes, then the misrepresentation did not induce him to enter into the contract,
and the contract is therefore not voidable. However, if the answer is no, then the misrepresentation did
induce him to enter into the contract and the contract is therefore voidable.

Activity 6.4
1. Write down the definition of a representation in the form of a list.
2. Next to that, write down the six requirements that a misrepresentation has to meet to make
a contract voidable.
Can you see the connections?
= Ww

Draw lines or create a mind map, or a diagram, to help you remember these two lists and
how they are related. That is much easier — and less confusing — than trying to learn the two
lists separately. Feel free to add further detail to each requirement on your mind map and
you will have a really useful revision tool.

6.3.2 Consequences of misrepresentation

There are various legal consequences if there has been a misrepresentation, which meets all six of the
above requirements. Firstly, there are remedies in terms of the law of contract. Secondly, depending on
the type of misrepresentation, there may be remedies in terms of the law of delict. Let us consider each
option in turn.

6.3.3 Consequences in terms of the law of contract

If the misrepresentation meets all six requirements, the innocent party has a choice in terms Din bon
of the law of contract. He can either rescind the contract or abide by it. set It aside; to abide by it
If he chooses to rescind the contract, he has to return what he received in terms of the is to keep it going.
contract (or pay back the value in money), and the other party has to do the same. The
parties are relieved of their respective obligations and the innocent party obtains a refund
for any performance he has rendered (generally provided he restores everything received
in terms of the contract to the other party or pays the monetary equivalent). Ifhe chooses Reasonable time here
to abide by the contract, it remains valid and each party must perform in terms of the means that the time it
contract. The innocent party has a reasonable time to make this decision. If he does takes will depend on the
nothing during that time, he loses the right to rescind the contract and it remains valid. eave See

88 Chapter 6 | Problems with the formation of a contract

6.3.4 Consequences in terms of the law of delict
In certain circumstances, the innocent party also has the right to recover damages for misrepresentation.
To sue someone for misrepresentation in terms of the law of delict, you need to prove all five
requirements of the Lex Aquilia.
The Lex Aquilia is one of the Roman laws from which modern delict law developed. It states that
there has to have been an untrue statement (or a non-disclosure), wrongfully made by any person, that
has caused the innocent person loss, and the misrepresentation must have been the fault of the person
making the statement. Fault means either fraud (wrongful intention) or negligence.
Can you distinguish the five requirements in the above statement? You can break them down more
clearly as follows. To sue someone for misrepresentation in terms of the law of delict, you need to prove
the following:
1. ‘There was an untrue statement (or a non-disclosure).
2. ‘The statement (or non-disclosure) was made wrongfully (which will include consideration of the
context in which the statement or non-disclosure occurred).
3. The innocent person suffered loss.
4. The loss was caused by the false statement (or non-disclosure). The court will ask whether, but for
the misstatement or non-disclosure, the guilty party would have suffered the loss in question and
whether the misstatement or non-disclosure is linked closely enough to the loss for legal liability
to arise.
5. The misrepresentation (or non-disclosure) was the fault of the person making the statement (or
failing to make disclosure).

Added value Two perspectives on one problem

As you might have seen, one set of facts can lead to different consequences in different
areas of law. It may be possible that the same set of facts makes the contract voidable in
terms of contract law, on the one hand, and allows the innocent party to claim damages in
terms of the law of delict on the other. We have to look at the facts and then compare them
to the requirements set out by contract law and the law of delict. We evaluate each legal
perspective independently.
What we are doing here is seeing when a misrepresentation fulfils the requirements for
an action to recover damages in delict. Our question is: Under what conditions can you sue
someone for damages because of their misrepresentation?

6.3.5 Types of misrepresentation

Toapply the Lex Aquilia and establish when you may claim damages for a misrepresentation, you need
to specify the type of misrepresentation.
Generally, there are three types of misrepresentation:
1. fraudulent misrepresentation
2. negligent misrepresentation
3. innocent representation.

These are distinctions in terms of the common law, which we explain below.

6.3.6 Fraudulent misrepresentation

If a contracting party makes a statement intentionally or deliberately, knowing that it’s untrue, without
believing that it is true, or not caring whether it’s true or not, and intending that the false statement
should persuade the party to whom it is made to enter into the contract, they have fraudulently
misrepresented the facts. The other party can claim delictual damages for fraudulent misrepresentation.

Chapter 6 | Problems with the formation of a contract 89

 Activity 6.5
Take the first sentence of the above paragraph and break it down so that you have a list of three
requirements for fraudulent misrepresentation. If you are not sure how to do it, see how we
broke down the statement of the Lex Aquilia into five requirements above. This is an essential
skill, and one that you should be applying automatically whenever you come across a long,
complicated sentence. You will find many sentences like that in legal books and documents.

Case study A gold ring

Jeremy sells you jewellery. He tells you that the ring he has is 18-carat gold, and that it is worth
R10 000. You buy it for R8 000. Later, you discover that he knew all along that the ring was not
18-carat gold and that it was worth only R4 000. This is fraudulent misrepresentation as Jeremy
knew the truth, but was lying to induce you to buy the ring. If Jeremy was not sure what type
of gold was in the ring but did not care and said it was 18-carat, then that is also fraudulent
misrepresentation because of his recklessness.

6.3.7 Negligent misrepresentation

Generally, if you are negligent, or neglect something, it means you are not taking enough care.
A misrepresentation is negligent if, although the person making it believes it to be true, he should
have been more careful in checking that it was true before making it, because a reasonable person
would have done so. That is a rather complicated definition, so let us break it down:
= A person made an untrue statement, which he thought was true.
® He did not check whether the statement was true.
= A reasonable person, in the same circumstances, would have taken care to check before making a
statement like that.
m = The person is negligent because he did not meet the standard of carefulness of the reasonable person.

Therefore, to decide if a misrepresentation was negligent, we imagine what a reasonable person

would have done in the circumstances, and we then compare this to the actions of the person who
misrepresented the truth. If the reasonable person would have been more careful, the misrepresentation
was negligent. You can claim delictual damages if you suffer as a result of negligent misrepresentation.
Consider the example in the case study.

Case study Timid watchdogs

Hendrina is a dog breeder, who is selling puppies. She believes that these dogs are generally bred
as watchdogs, so she tells the buyers that these pups will make great watchdogs. Actually, dogs
of that particular breed happen to be particularly timid, so they do not make good watchdogs.
Hendrina’s statement to the buyers is a negligent misrepresentation, because a reasonable
person who breeds dogs would have checked and found out the true nature of the breed,
knowing that potential buyers consider this an important factor in their choice of dog.

Added value Negligence or fraud?

The difference between a negligent and a fraudulent misrepresentation is that in the case of a
negligent misrepresentation, the person making the representation believes it to be true, but in
the case of a fraudulent misrepresentation, the person making the representation knows that it’s
false, or does not care whether it is true or false.

90 Chapter 6 | Problems with the formation of a contract

6.3.8 Innocent misrepresentation
A misrepresentation is innocent if the person who makes the untrue statement is acting neither fraudulently
nor negligently. In other words, if the person who makes the untrue statement believes it to be true and
a reasonable person would not have behaved any differently, then the misrepresentation is innocent. No
delictual damages can be claimed for innocent misrepresentation. ‘The law does, however, allow the buyer
who has been misled a reduction in purchase price (equal to the difference between the market value of
the item that was bought and the price paid).

er Tye actiiY] Solly’s roof

Solly is selling his house to Joelene, and he tells her that the roof is in good condition. He
believes that this statement is true because he recently had the roof fixed by a builder who told
him, after finishing the repairs, that the roof was now in a good condition. However, it turns
out that the roof is actually in a very poor state. Solly’s untrue statement is not a fraudulent
misrepresentation, because he thought he was speaking the truth. The statement is also not
negligent, because a reasonable person would also have trusted the opinion of the builder and
believed that the roof was fine if the builder had said so.

Added value The laws of contract and delict

Do not get confused between the laws of contract and delict. As long as the requirements of
misrepresentation set out by the law of contract are met, the contract is voidable. It makes
no difference to the law of contract whether the misrepresentation is fraudulent, negligent or
innocent — they can all render the contract voidable. However, in terms of the law of delict, you
can claim damages only if the misrepresentation was fraudulent or negligent.

6.3.9 How much can you claim in damages?

‘The amount of delictual damages that a person can claim depends on the facts of each case. As a general
rule, the party that suffered the misrepresentation, the innocent party, has a right to be put back into
the financial position that he would have been in if the misrepresentation had not happened. Note that
damages for misrepresentation can be claimed only if that misrepresentation was fraudulent or negligent.
If the misstatement or non-disclosure was the cause of a contract being formed when this would
otherwise not have been the case, the innocent party may recover what has been lost as a result of the
contract having been formed.
The amount of damages that can be claimed also depends on whether the contract is voidable in
terms of the law of contract and, if so, whether the innocent party decides to rescind or abide by the
contract. Let us look at these three cases in turn.
1. The contract is voidable and is rescinded.
2. The contract is voidable but is not rescinded.
3. The contract is not voidable.

The contract is voidable and is rescinded

We already know that if the contract is voidable in terms of the law of contract because of a misrepresentation,
and the innocent party decides to rescind it, both parties must return what they have received in terms of
the contract.
However, in a case like this, the law of delict enables the innocent party to claim damages to cover
the amount that he lost or spent on wasted expenditure. Suppose, for example, that I buy a house, but
I set the contract aside because of a fraudulent misrepresentation. In terms of the law of delict, I have a
claim for the moneyI have spent on the legal fees to transfer ownership of the house.

Chapter 6 | Problems with the formation of a contract 91

 Added value Costs of property transfer

When you buy a house, flat or land (immovable property), there are certain expenses that you
have to pay to transfer ownership of the property into your name. These include transfer duty
and the legal fees charged by the conveyancer. There are also other fees and expenses that have
to be paid, so the costs of transferring the house can be quite high.

The contract is voidable but is not rescinded

In the case where a contract is voidable but the innocent party decides not to rescind it, the contract
continues to be valid. Here, the damages would be the difference between what the innocent party gave
in terms of the contract and what he received in terms of the contract, as well as any additional losses
he suffered.

Case study Thandi‘s house

Thandi recently bought a house from Thabo, but the contract is voidable because he misrepresented
the facts fraudulently. She decides not to rescind the contract. However, because he misled her
about the value of the house, she paid R300 000 fora house that was worth only R250 000.
The law of delict allows Thandi to recover the extra R50 000 from Thabo. She can also
recover the additional money that she spent on the estate agent's fees. (Estate agents calculate
their fees as a percentage of the purchase price of the house, so Thandi paid too much because
the house was over-valued.)

The contract is not voidable

What happens when you cannot rescind the contract, because the misrepresentation does not make
the contract voidable in terms of the law of contract? Can you, as the innocent party, still use the law
of delict to claim damages for misrepresentation? Yes, you can. The misstatement or non-disclosure
is merely incidental in that it results in terms being agreed on which are less beneficial in nature. The
contract would still have been concluded even if the innocent party knew the true state of affairs. The
damages would be the difference between what you gave in terms of the contract and what you would
have given if you had known the truth, as well as any additional losses suffered.

Ler ET y abebY) Joe's old Crox car

Joe goes to Old Crox Car Lot looking for a car in the R22 000 to R28 000 price range. He finds
one that he likes, and he buys it for R25 000 after the salesman assures him that itis in perfect
working order. It turns out later that the salesman did not know much about that car, and that
the car actually needs R2 000 worth of repairs.
In terms of the law of contract, the contract is not voidable. Although the salesman’s claim
was a negligent misrepresentation, it did not induce Joe into the contract, since he would still
have bought that car even if he had known of the problems. What are Joe’s rights in the law of
delict? In terms of the law of delict, Joe will be able to recover the R2 000 in damages from Old
Crox, because he would have paid R2 000 less if he had known the truth.

As you can see, we have to evaluate each case of misrepresentation in terms of the law of delict
and the law of contract separately to see what the rights of the innocent party are. The legal
position that we have explained thus far is the position in terms of the common law. As mentioned
above, the Consumer Protection Act 68 of 2008 applies to certain transactions, generally,
where the transaction between the supplier and consumer is in the ordinary course of business.

92 Chapter 6 | Problems with the formation of a contract

Where the Act does apply, the Consumer Protection Act gives the court a wide discretion, and it can
order that the consumer be refunded the money or property or any other order that the court deems fair.
‘These are remedies that exist in addition to the above common law position.

Activity 6.6
Sam is hoping to sell his farm to Lisa. In talking about the farm, he tells her that it is the most
beautiful farm in the whole area, and that he and his wife have always been very happy there.
He also informs her that the size of the farm is 20 hectares. Sam does not tell Lisa that the
government has notified him that it is considering taking over a corner of the farm on which
to build a public clinic there. One of Sam's workers tells Lisa that this farm produces the most
apples in the whole area. Lisa buys the farm because she believes it to be a good investment
and, as she told Sam, she specifically needs a farm that is over 17 hectares in size and has good
fruit trees. However, when she moves onto the farm, she discovers the following:
a) The farm is only 15 hectares.
b) The farmhouse is quite ugly.
c) The farm does not produce the most apples in the area.
d) Sam has never been happily married.
e) The government is planning to use a piece of the farm for a clinic.
For each of the above statements, state what type of misrepresentation it is and whether it
would allow Lisa to rescind the contract. Explain your answer in each case.

Activity 6.7
Mpho’s swimming pool is green and dirty. She goes to Bob’s Pool Shop and asks to buy
chemicals to clean her pool. Bob gives her a large bag of chemicals and tells her that they are
completely safe to use in her kind of pool. Mpho takes the chemicals home and adds them to
her pool as directed. The next day she checks her pool and notices that the walls and floor of
the pool have been badly damaged by the chemicals. She wants to claim delictual damages from
Bob for the harm caused to the pool.
1. Name the type of misrepresentation in each of the following situations:
a) Bob thought there was a possibility that the chemicals could damage Mpho’s pool but
decided to sell them to her anyway.
b) Bob did not know that the chemicals could damage the pool because he generally
did not pay too much attention to the chemicals that he sold. He assumed that all pool
chemicals were safe.
c) Bob was shocked to find out that the chemicals had harmed the pool because he
had often sold them and they had seemed perfectly safe. He later discovered that
the bag of chemicals that he had sold to Mpho had been incorrectly labelled by the
supplier and that it actually contained a completely different chemical to what it said
on the bag.
2. Discuss whether Mpho would have a claim in delict in each case and, if so, what damages
she could claim for.

6.4 Contracts that are voidable due to duress

Let us revise before we continue. We gave three possible reasons for voidable contracts, namely
misrepresentation, duress or undue influence. We have discussed misrepresentation in detail.
Now we will look at duress.

Chapter 6 | Problems with the formation of a contract 93

 If a person agrees to a contract because he has been threatened in some way, then his consent to the
contract is flawed because he did not give it freely and voluntarily. So, although the person has ‘agreed’
to the terms of the contract, that consent was given under duress. The contract is valid, because there is
agreement between the parties, but the person who agreed under duress can set the contract aside, because
his consent was improperly obtained. In other words, the contact is voidable because the consent that
exists between the parties was forced out of the innocent party.
When does duress render a contract voidable?
In terms of the law of contract, duress renders a contract voidable if it meets all of the following
five conditions:
There must have been a threat of harm to the contracting party, his family or property. _ if something is imminent, it
The threat must have been of imminent or inevitable harm. is likely to happen very soon.
PPS OPO

‘The fear that the innocent party felt because of the threat must be reasonable. If it is inevitable, it will
The threat must have been unlawful or against public policy. Sere ieee eos
: - : s cannot prevent or escape it.
The threat must have induced the innocent party into entering the contract.

6.4.1 There must have been a threat of harm to the contracting party, his
family or property
The innocent party must have been threatened that something bad would happen to him, his family or
property if he refused to enter into the contract. For example, if someone threatens to burn down your
house unless you sign a contract, then there is a threat of harm to your property. The contract is voidable
because of the duress.

6.4.2 The threat must have been of imminent or inevitable harm

‘The threat to the innocent contracting party must be imminent or inevitable. If 1 hold a gun to your
head and threaten to shoot you unless you sign a contract, that isan example of imminent harm. If
I threaten to shoot you unless you sign a contract within five days, the harm is inevitable, but not
quite imminent.

6.4.3 The fear that the innocent party felt because of the threat must
be reasonable
The fear that the contracting party felt is reasonable if a reasonable person would have been afraid when
faced with the same threat. Suppose, for example, you are a very nervous person, and you sign a contract
out of fear because the other party is breathing heavily. This would not qualify as duress, because a
reasonable person would not have felt afraid in that situation.

6.4.4 The threat must have been unlawful or against public policy
A threat is unlawful if the conduct threatened is unlawful — for example, if I threaten to assault or
murder you. A threat is also unlawful or against public policy if the threat is made using something
lawful in an unlawful manner. Suppose, for example, I find out that you are not paying your taxes
properly, and [ tell you that I will report you to the South African Revenue Service (SARS) if you do
not give me R5 000. Although it is lawful to report someone who is cheating on tax, my purpose in
threatening to report you unless you pay me is unlawful and against public policy.

6.4.5 The threat must have induced the innocent party into entering
the contract
The innocent party must have entered into the contract because of the threat. If the party would have
entered into the same contract anyway, even without being threatened, the contract is not voidable.

94 Chapter 6 | Problems with the formation of a contract

 Hendricks v Barnett 1975 (1) SA 765 (N)

Principle
The innocent party must prove that the threat induced the contract.

Facts
Hendricks, an expert on the breeding of horses, managed a farm for Barnett. Barnett put the
farm up for sale, but he had an agreement with Hendricks that he (Hendricks) would stay on
until certain animals were prepared for auction, and that Barnett would pay him a termination of
employment bonus. Shortly before the auction, Hendricks threatened to leave his employment
unless Barnett paid him a bonus of R10 000. This meant that the sale of the farm would have
been jeopardised as Hendricks was the only person who could identify the horses for prospective
buyers. This would have resulted in Barnett sustaining financial loss. Barnett therefore gave
Hendricks one cheque for the immediate payment of R5 000, and another cheque for R5 000
that was postdated. After the auction had taken place, Barnett put a stop on the second cheque.
When Barnett was sued for the payment of the second cheque, he contended that he was
induced into issuing the cheque under duress.
The court's finding
In this particular case, there was insufficient evidence to show that Barnett unequivocally
protested against making the payments to Hendricks. Therefore, he was not induced into the
contract with Hendricks.

6.4.6 Consequences of duress

If all the requirements of duress are met, the contract is voidable. Therefore, the innocent party can
decide whether to rescind the contract or to abide by it. If the contract is rescinded, each party returns
what he received in terms of the contract. This is called restitutio in integrum. If the innocent party
chooses not to rescind the contract, it remains valid. It is also possible for the innocent person to recover
damages in terms of the law of delict. This applies whether he decides to rescind the contract or not. The
damages would be the amount of money needed to put the innocent person in the same position that
he would have been in if he had not been forced to enter into the contract. For example, if you force me
to sign a contract donating my house to you, and I later rescind the contract because of duress, I will be
able to claim delictual damages for wasted legal and other expenses.

6.5 Contracts that are voidable due to undue influence

Undue influence occurs when one contracting party has such an influence over the other contracting
party that the second person is not able to think rationally for himself. Under the first party's influence,
he enters into a contract that he would not normally have entered into. So he gives his consent
(agreement), but he does not give it freely and voluntarily. The most likely situation for undue influence
is where the two contracting parties have a long-term relationship, or are in a relationship of trust and
confidence, and one party develops power over the other. A contract signed under undue influence is
voidable because consent was gained in an improper way.
In terms of the law of contract, a contract is voidable because of undue influence if it meets all of the
following five requirements:
1. One contacting party had influence over the other contracting party.
2. The influence must have weakened the ‘weaker’ party’s powers of resistance to the point that he will
do exactly what the ‘stronger’ party wants him to do.
3. The stronger party must have used his influence in an unscrupulous or corrupt way.

Chapter 6 | Problems with the formation of a contract 95

 4. ‘The influence of the stronger party over the weaker party must have caused the weaker party to
enter into a contract that he would not have otherwise entered into.
5. The contract that was entered into was not in the best interests of the weaker party.

There is usually a pre-existing relationship between the two parties.

6.5.1 Consequences of undue influence

As with other voidable contracts, if undue influence is proved, the innocent (or weaker) party can decide
whether to rescind the contract or to abide by it.

Preller v Jordaan 1956 (1) SA 483 (A)

Principle
Where all the requirements for a voidable contract on the basis of undue influence are met, the
innocent party can decide to set aside the contract.
Facts

Preller, a doctor, took transfer of four farms that belonged to his patient, Jordan. Jordan sought
to rescind on the donation and transfer of the properties on the basis that he had been unduly
influenced into making the transaction and that he had been mentally and physically exhausted
from his illness at the time. Jordan further asserted that, had it not been for Preller’s behaviour,
he would not have otherwise made the transfers.

The court's finding

The court ruled that the undue influence constituted a good basis on which to cancel the
contract as all the requirements had been satisfied.

Case study Entering into a contract

Aman enters Stephanie's house and threatens to destroy the beautiful flowers in her garden
unless she signs a contract donating her coastal holiday cottage to him. Stephanie signs the
contract but later she obviously wants to set it aside. Can she rescind the contract?

What do you think?

Courts around the world are often faced with legal questions about artwork that the German army
removed from the countries that it occupied during World War II. Some of the soldiers forced the local
people to sell their rare and expensive artworks to them very cheaply. If the owners refused, they risked
being sent to the concentration camps. After the war, the owners of the artworks tried to recover their
treasures, but they were told that they had sold the art and that it therefore belonged to Germany. Many
of these artworks are now in museums or private collections. Who do you think the art belongs to?

96 Chapter 6 | Problems with the formation of a contract

Chapter summary
In this chapter, you learned the following about problems
with the formation of contracts and why they could be
void or voidable:
A contract is void if any one or more of the
six requirements for a valid contract have not
been satisfied. If a contract is void, both parties
have to return what they received in terms of
the contract.
Agreement, one of the requirements, is missing
if there was mistake. Mistake can be either unilateral
or common.
With a unilateral mistake, the two parties have
different understandings of the situation, so there
is no agreement. The contract is made void if the
mistake was:
m about a fact concerning the contract
= material
® reasonable,
Common mistake happens if both parties share
a mistaken belief. The contract is void if the
mistake was:
= common
=~ material. (It does not need to be reasonable.)
When the parties reach a verbal agreement, but then
make an error in the written document, the error can
be rectified according to the verbal agreement.
A contract is voidable if all the essential requirements
of the contract are present, including agreement, but one
party used misrepresentation, duress or undue influence
to induce the other party's consent. If a contract is
voidable, the innocent party has the choice of rescinding
the contract or abiding by it.
Misrepresentation is a false statement of a material
fact, made with the intention of inducing a person to
enter into a contract. It makes the contract void and is:
® about a fact that is material to the contract
@ made with the intention and has the effect of
inducing the other party to contract.
Misrepresentation can also be a delict, which allows the
innocent party to claim damages. Misrepresentation is a
delict when it is fraudulent or negligent, but not when
it is innocent.
Duress is present if a person uses fear to force
another person into a contract. Duress makes the
contract voidable if:
@ there was an unlawful or immoral threat
m the threat was of both imminent and inevitable harm
m the threat persuaded the innocent party to contract
m the fear that the innocent party felt was reasonable.
Duress may also be a delict, which allows the innocent
party to claim damages,
Undue influence means that one contracting party
has such an influence over the other that the second
party is unable to think for himself and is influenced to
enter into a contract he would not normally have agreed
to. Undue influence makes the contract voidable if:
m the stronger party had influence over the weaker
® the influence was such that the weaker party would
do what the stronger party said
= the stronger party used his influence in an
unscrupulous way
@ the influence caused the weaker party to enter into
a contract
m the contract was not in the weaker party's
best interests.
Chapter 6 | Chapter summary 97
Review your understanding
Sandy runs a florist business. She needs a small
van to transport her Hower arrangements. She tells
ABC Car Dealers what she is looking for and why
and they tell her that they have a ‘newish van that
drives like a dream’ for R150 000. Sandy buys
the van and thereafter discovers that the van's
engine is in poor condition. It constantly stops
and starts, causing her flower arrangements to
fly around in the back of the vehicle. She takes
the car to a mechanic, who tells her that in its
present condition the car is worth only R100 000.
Answer the following questions:
Assuming that ABC did not know that the engine
was in a bad condition:
a) Is the contract void due to mistake?
b) Is this a case of misrepresentation and, if so,
what type?
c) What are Sandy’s remedies?
Jimmy finds a coin at the beach. It looks like
gold and he sells the ‘gold coin’ for a large sum to
Mpho, who thinks that it is beautiful. It later turns
out that they are both mistaken and that the coin is
actually brass. Answer the following questions:
a) What type of mistake is this?
b) Is the contract valid?
Further reading
Christie, RH. 1996. The Law of Contract in South Africa,
3rd edn. Durban: LexisNexis South Africa
98 Chapter 6 | Review your understanding
Nina is a very lonely woman who lives alone and
has no family or friends. The highlight of her week
is going to her hairdresser, Charl, with whom she
gets along very well. Charl convinces her that meat
is bad for her and she then decides to become a
vegetarian. Charl also convinces her that cars are
bad for the environment and that she must donate
her car to him. Nina, accordingly, gives up meat in
her diet and gives her car to Charl. Is the contract
of donation valid, void or voidable?
Mandy has a watch that she inherited from her
mother. She always believed that the watch was
gold. Mandy tells Lynn that it is a gold watch. She
sells the watch to Lynn for R10 000. When Lynn
has the watch valued for insurance purposes, she
discovers that it is actually not a gold watch.
a) What type of misrepresentation is this?
b) What are Lynn’s remedies?
Cindy owns a beautiful dog. Her neighbour, John,
constantly asks Cindy to sell the dog to him, but
Cindy refuses. One day he arrives at her house and
says, If you do not sell this dog to me, I am going
to burn this house down!’ Cindy sells him the dog
for R1 000. Can Cindy claim her dog back?
Hutchison, D, et al. 2012. The Law of Contract, 2nd edn. Cape
Town: Oxford University Press Southern Africa (Pry) Led
Formalities, certainty, possibility and Chapter

lawfulness of contracts y
The main ideas
Formalities — the starting point
Types of formalities
When are formalities required?
Certainty of performance in contracts
Possibility of performance in contracts
Legality of performance in contracts

The main skills

Apply knowledge of theory in an analysis of a lease agreement.
Explain and interpret formalities of a contract.
= = Identify problems in a contract.
Solve problems and make decisions based on legal requirements for contracts.

So far we have dealt with the first two of the six requirements for a valid contract, namely contractual
capacity and agreement. ‘This chapter deals with the remaining four requirements. Some contracts have
to be concluded in a particular way, in other words, they have to comply with certain formalities. A
contract also has to be clear, and the action it describes must be both possible and legal. Failure on any
one of these grounds would make the contract void.

Before you start

You agree to buy your friend's car for R50 000, but you do not draw up a written contract because you
trust each other and do not think that it’s necessary. A few days later, you have a fight with your friend
and he changes his mind about selling you the car at that price. He says there is no contract because you
have nothing in writing. Is this true? Do all contracts have to be in the written form?

7.1 Formalities — the starting point

‘The starting point is that most contracts have no formalities — they do not need to comply with a
particular form or format. Many contracts do not require any formality, such as writing down the terms,
but can be concluded verbally or even by your actions. For example, if you walk into a shop and puta
packet of chips and a R20 note on the counter and the cashier takes the money and gives you change
and the packet of chips, you have entered into a contract of sale.
However, certain contracts do have formalities that you have to comply with. If the contracting
parties fail to comply with these formalities, the contract is most often declared void, but there may also
be other legal consequences. The formalities can either be required in terms of the law or agreed to by
the contracting parties themselves.

Added value Verbal or written?

It is a common mistake for people to think that contracts are valid only if they are in writing.
Be careful of what you agree to in discussions, because most verbal contracts are valid!

Chapter 7 | Formalities, certainty, possibility and lawfulness of contracts 99

7.2 Types of formality
The three types of formality that most often apply to contracts are that the contract must be:
@ written down
™ = registered at the Deeds Office
® signed in front of a notary public (who acts as a witness to the signatures).

7.2.1 The contract must be written down

‘This is the most common formality. It requires that all the terms of the contract must be written down
in a document and that each of the contracting parties must sign the document. This
formality is usually applied to important contracts, where the law wants to be certain of the To impose something on
terms and does not want to rely on a verbal contract. someone is to force that
Even where the law does not require the contract to be reduced to writing, the person to accept or do
contracting parties may decide on their own to impose such a requirement before the that thing. For example,
the government imposes
contract will be legally binding on them. The primary reason for the formality of reducing
parece . gristasced a : VAT on almost everything
a contract to writing is that verbal contracts, while ordinarily valid in law, are often difficult you buy.
to prove in the event of a dispute between the parties.

7.2.2 The contract must be registered at the Deeds Office

All the major cities of South Africa have Deeds Offices, where certain important public
When you transfer
documents are kept, or relodged. The general public has a right to see any/ of the documents aa
immovable property,
lodged at the Deeds Office. As we have already mentioned, conveyancers and notaries you are selling land or
public are the attorneys who specialise in preparing these documents and lodging them at buildings.
the Deeds Office. The conveyancer is involved with the transfer of immovable property
while the notary public deals with the other documents that are lodged at the Deeds Office.
The process of placing the documents at the Deeds Office is known as registration. Certain
important documents have the formality that they must be registered at the Deeds Office. Documents
that will affect the rights of the general public often have to be registered, because the public has to
have access to all registered documents. For example, a member of the public may need to know who
the owner of a particular house is, so this information is registered at the Deeds Office, where everyone
has access to it.

7.2.3 The contract must be signed in front of a notary public

Certain documents, such as antenuptial contracts, which are dealt with below, have the formality that
they must be signed in front of a notary public. This is known as notarial execution. This formality
applies to very important documents that the law wants a trusted person (the notary) to witness.

Activity 7.1
1. Are you keeping up with making notes and drawing mind maps as you work through this
material? We have not done much on formalities so far, but this is a good time to draw up
a simple mind map of the three most common formalities. Include important details, like
the distinction between a notary public and a conveyancer.
2. This is also a good time, if you have not already done so, to look at the headings in this
chapter and draw up your tree structure. If you have forgotten how to, refer back to the
activities in Chapter 1.

7.3 When are formalities required?

Formalities may be required either in terms of the law or by the contracting parties themselves. The law
usually requires formalities when it regards the contract as too important to be only verbal. Parties may
agree between themselves that they want a contract to be entered into in a particular manner.

100 Chapter 7 | Formalities, certainty, possibility and lawfulness of contracts

7.3.1 Formalities required by law
Our legislation stipulates that certain contracts have to comply with particular formalities. Most of the
time these will be that the contract must be in writing and it must be signed by the parties. The law also
sets out the consequences if these formalities are not met. A few of the more important contracts that
require formalities are contracts concluded around agreements of:
@ = marriage
® sales of immovable property
= suretyship (or guarantee).

Let us look at each of these types of contract.

Antenuptial contracts
An antenuptial contract is a contract entered into by a couple before they marry. It details
their rights of ownership of items and money while they are married and in case they if a contract is notarially
separate. We discussed these contracts in Chapter 4, An antenuptial contract has two executed, it means the
formalities, both of which must be satisfied according to section 87 of the Deeds Registry parties signed it before
Act 47 of 1937: a notary public and it
= = It must be notarially executed before the parties marry. Meas fegeeren ey ie
= = It must be registered within three months of the date of the execution. :

If the contract does not meet these formalities, it is binding on the husband and wife, or parties to same
sex marriage (civil union), but not on any third parties. For example, it is common for the husband to
give the wife a present in terms of the antenuptial contract. The agreement may say that the present
is R100 000. If the formalities regarding the antenuptial contract are met, everyone must accept that
the present given to the wife then belongs to her. The husband’s creditors cannot claim that money.
However, if the formalities are not met, the antenuptial contract is only binding on the husband and
wife. As far as the husband's creditors are concerned, the money still belongs to the husband and can be
used to settle his debts.

Contracts for the sale of immovable property

In terms of section 2(1) of the Alienation of Land Act 68 of 1981, contracts for the sale of immovable
property must be in writing and signed by the contracting parties. If this formality is not met, the
contract is void. So, if I want to make an offer to buy your flat, | must write it down, sign the offer and
then give it to you. You accept my offer by writing your acceptance and signing it. Thus, in the case of
immovable property, a verbal offer or acceptance of the sale is void and has no legal effect.

Contracts of suretyship
A contract of suretyship is a contract in terms of which a third party (the surety) guarantees that if a
debtor does not honour an obligation to a creditor, the surety will be liable to the creditor. Because
these contracts place a heavy burden on the surety, the law imposes the formality that the contract of
suretyship must be in writing and signed by the surety. The creditor does not have to sign, but the surety
must. If this formality is not met, the contract of suretyship is void and can be ignored.
For example, when a bank lends money to a student, it usually requires the student's guardian to
stand surety for the student loan. This means that if the student does not pay back the loan, the bank
can sue the guardian for repayment of the loan. However, if the contract of suretyship is not in writing
and signed by the guardian, the contract is void, which means that the bank cannot sue the guardian if
the student fails to repay the loan.
You should generally be careful of signing as a surety, as these contracts place a great financial burden
on the surety.

Chapter 7 | Formalities, certainty, possibility and lawfulness of contracts 101

7.3.2 Formalities agreed to by the contracting parties
Usually when parties to a contract agree to put their agreement in writing, they intend to do so only so that
there is proof of their contract. However, it is also possible for the contracting parties to agree that their
contract will be valid only if it is written down and signed. In fact, the parties can agree to any formality
they choose. If the contract does not meet that formality, the contract is void. In this case, the parties
have made it a formality for the contract to be valid. If the formality is not met, the contract will be void.
If the parties do not agree to any formalities, the general rule that no formalities are required will apply.

Activity 7.2
Before you continue, make sure you know the six requirements for valid contracts. Go back and
revise this from Chapter 5, which explained the requirements. We are halfway through the list
and the rest of this chapter looks at the last three requirements.

7.3.3 Electronic contracts

Chapter 111 Part 1 of The Electronic Communication and Transaction Act 25 of 2002 provides that an
accessible data message is generally sufficient to satisfy the formality that a contract be in writing. This
applies to a suretyship agreement, but not to the alienation of land, which must still be in a document.
The Act also allows an electronic signature to replace a written signature in certain circumstances.
However, these signatures are not usually sufficient to comply with the contractual formality of a
signature in terms of contract law.

7.4 Certainty of performance in contracts

When we talk about performance in terms of the law of contract, it means what each The performance of each
party to a contract has to do in terms of that contract. If it is not clear what performance contracting party refers
is required of each party, the contract is void because of uncertainty. For performance to to the rights and duties
be possible, it must be clear what each party has to do in terms of the contract. This means _ that the contract gives to
that the contract must: each party.
@ state clearly what performance is required — it must be certain
® = enable the person to decide what performance is required, from the contract itself— it must
be ascertainable.

If the performance is not certain, but is ascertainable, it means that it can be made certain, with more
information. In terms of ascertainable performances, the legal principle that applies is “That is certain
which can be made certain’. In other words, we consider something to be certain when we can read
something certain from it.
In Levenstein v Levenstein 1955 3 SA 615 (SR), the court classified the three main causes of uncertainty:

*,.. (a) There is uncertainty whether the one party will ever acknowledge the existence of an obligation.
This can occur when a contract gives a party an unlimited option whether or not to perform.

(b) Where the vague and uncertain language creates the impression that the parties never reached
agreement. In deciding whether a contract is in fact vague, a court will consider all surrounding
circumstances, the relationship of the parties, the conduct of the parties and the facts around the
conclusion of the contract.

(c) Where there is uncertainty as to the subject matter which has still to be agreed, in that they have
failed to agree on the material contractual terms. In deciding whether all the contractual terms have
been included in a contract, the courts will consider all the terms including express terms, tacit terms,
any trade practices relevant statutory or common law principles’.

102 Chapter 7 | Formalities, certainty, possibility and lawfulness of contracts

Courts are loath to void a contract due to uncertainty and in as far as possible, interpret a contract in a
way that does not result in uncertainty.
For example, Buli agrees to sell her restaurant to her friend Vuyani. Both Buli and Vuyani will be
happy as long as the price is ‘fair’, As neither of them is an expert at deciding on the true value of the
business, it is possible for Buli and Vuyani to agree that an accountant, Natalie, will make the decision
on the price at which Buli will sell the restaurant.
In this case, Vuyani’s ‘performance’ relating to the price he has to pay Buli for the restaurant has
not been decided or determined, but it is determinable, in other words, it is possible to determine the
performance. So even though the price is not certain in the contract, the contract is not void, because
any person or court would be able to find out the price by asking Natalie. So the performance is
determinable (or ascertainable) and the contract is valid.
However, an agreement to buy something ‘on terms to be agreed upon’ would be void, because of the
uncertainty it causes. Any contract that gives a debtor an open choice as to whether or not to perform
will also be void on the basis of uncertainty, because it is not clear whether or not the debtor will choose
to perform,
The court usually determines the intention of the parties from the way it understands the contract
as a whole. In each case, the courts will try to give effect to the intention of the parties and will try to
interpret a contract so that it is valid. The courts usually look at whether the contract is ‘reasonably’
certain — it is not necessary to understand every clause precisely or exactly. When a clause is vague, the
court will allow evidence, such as a statement from the lawyer who drafted the contract, where possible,
so that it can decide what the parties really intended. For example, a clause granting an extension ‘of a
few months’, can be resolved by evidence of the circumstances of the parties at the time the contract was
entered into.
Let us look at two further examples of contracts that the courts would consider to be certain even
though they appear to be unclear.
Firstly, if Lester agrees to buy a horse from Gary's stable at a certain price, the contract is valid
without any further detail being provided. The performance is determinable, and it will be for Gary to
choose a healthy horse from his stable to sell to Lester, unless the parties agree to a different arrangement.
This example illustrates a generic obligation. The parties must have agreed on the following:
= = what type of object is to be bought (such as horses, cattle or corn)
= whether the selection is going to be made according to number, mass or measure
®@ = which party will make the selection.

Secondly, if Lester agrees to buy any one of two or three horses that Gary owns, fora fixed price,
and allows Gary to choose which one of the horses he would like to sell, the performance is again
determinable. This is known as an alternative obligation. In this case, it is necessary for Lester to state
how many horses he wants to buy, and for the parties to reach agreement as to which horses Gary is
going to choose from. So the alternative obligation is more specific than the generic obligation, because
it refers to a choice between particular individuals, not just one of an unspecified group.
If the performance required by the contract is neither certain nor ascertainable, the contract will be
void, in other words, it is neither determined nor is it determinable. If the obligation under the contract
is severable, in other words, it can be removed from the contract, then only that part is invalid and the
rest remains in force. If it is not possible to sever that obligation, the whole contract will be invalid.
If the parties have agreed on what performances are to be made, but one still cannot clearly
understand what each of them is meant to do, we say the contract is ‘void for vagueness’,
In the case below, the court ruled that the agreement was void for vagueness.

Chapter 7 | Formalities, certainty, possibility and lawfulness of contracts 103

 Mitchell Cotts Freight Zimbabwe (Pvt) Ltd v S & T Import and Export (Pvt) Ltd
1982 (2) SA 669 (Z)

Principle
The terms of a contract must be certain. Where the language used is vague, indefinite or lacking
in detail, the agreement is void for vagueness.
Facts

One of the clauses in the contract stated that the debtor would make payment ‘by instalments
on a regular basis —- the amount of the instalments to vary in accordance with the liquidity
position’ of the debtor.
The court’s finding
The court ruled that the phrase was void for vagueness, as it omitted important details, such as
the intervals, date and amount of the instalments.

Activity 7.3
Read a copy of a contract that you (or your parents) have signed, such as a lease agreement or
a contract of sale. Are your rights in terms of the contract completely clear? Is there anything
that is not certain to you even after you have looked up difficult words in a dictionary? If there
is no contract at home, go to a CNA or similar shop and look at one there, such as an ‘Offer to
Purchase’. Based on your understanding of this chapter so far, consider whether you think any
uncertainty in that contract is enough to make a clause, or the entire contract, void.

7.5 Possibility of performance in contracts

Possibility is the fifth in our list of six requirements for a valid contract.
A contract will sometimes not be valid if performance is impossible at the time the contract is
concluded. Suppose, for example, Orlando Pirates Football Club agrees to pay its manager a bonus of
one million rand if it wins the Premier Soccer League. Then, if the team does actually win the league,
part of the club’s performance in terms of the contract will be to pay the bonus.
What happens if the club does not have the money to pay? Is the contract invalid on the grounds of
impossibility? To answer that, we need to consider two types of impossibility.
If Orlando Pirates Football Club has no money at the time that it enters into the agreement with the
manager, this is a problem of impossibility only experienced by that club. The payment is not something
that’s completely impossible for anyone to perform. This type of impossibility is known as subjective
impossibility. It does not make the contract void.
The rule that a contract is invalid if performance is impossible only applies when the performance is
completely impossible for anyone at the time of the agreement. This is known as objective impossibility.
For example, if one person contracts to paint the whole of the Cape Town Convention Centre, on her
own, in one day, the contract would be void because it is objectively impossible for anyone to do this.
A more common example of a contract that is void because performance is impossible is the sale of an
object that no longer exists.
What happens when something that is out of the parties’ control happens after the contract is entered
into? After the contract is concluded, it becomes objectively impossible to perform in terms of the
contract. The contract becomes void. ‘Then we use the concept of supervening impossibility, which we
discuss in Chapter 13. There are also cases when the debtor makes performance impossible after she has
entered into the contract. This is again dealt with in Chapter 13.

104 Chapter 7 | Formalities, certainty, possibility and lawfulness of contracts

 So under what conditions will a contract be made void because it does not meet the requirement of
possibility? This happens only in the case where performance is objectively impossible at the time the contract
is agreed to. If it is difficult or inconvenient, but not impossible, for any person to perform in terms of a
contract, for example, because of other work commitments, the contract remains valid. The contract also
remains valid despite initial impossibility where one of the parties has guaranteed performance.
There are instances where a performance may be factually possible, but it is practically or
economically impossible, in other words, it can be done, but the cost of doing so might be ‘utterly
disproportionate to its value’. In this case, too, no obligation will arise.

7.6 Legality of performance in contracts

A court can enforce a contract only if the contract is allowed by law. For example, an iran o ant niiotes
agreement to buy a house that someone intends to build on the sand at a public beach is a contract, it means that
legally impossible, because the rights and duties from such a contract cannot be performed. the court helps one of the
A contract like the sale of a piece of public land by one member of the public to another parties by giving effect to
is invalid in terms of general legal rules. It is also impossible to buy or sell something that —_*he contract.
cannot be owned by a person, such as the moon or the sea.
We can distinguish the following two kinds of illegality related to contracts:
1. statutory illegality — the contract is prohibited by statute
2. common-law illegality — the contract is illegal in common law on the grounds of public policy.
As CameronJ stated in Brisley v Drotsky 2002 (4) SA 1 (SCA):
‘In its modern guise, public policy is now rooted in our Constitution and the fundamental value it
enshrines. These include human dignity, the achievement of equality and the advancement of human
rights and freedoms, non-racialism and non-sexism’.

7.6.1 Statutory illegality

Parliament usually passes more than 100 laws or statutes (Acts) every year. Most Acts of Parliament give
guidance to citizens of the country as to what their law makers allow and do not allow. Sometimes an
Act will make an agreement invalid, or void. This is known as statutory illegality.
For example, an Act may require you to get a licence or permit before you can sell certain items,
such as alcohol, drugs and ammunition or weapons according to the Firearms Control Act 60 of 2000,
Sometimes it is the buyer who needs a licence, for example, you have to have a valid television licence if
you want to buy a television (Broadcasting Act 4 of 1999). Or an Act may make it illegal for anyone at
all to enter into certain contracts, such as the sale of human body parts (National Health Act 61 of 2003).
Usually, the Act provides a penalty if people enter into such contracts. For example, the National Health Act
provides for imprisonment and/or a fine if one is found guilty of selling body parts. The question in this case is
whether the contract itself becomes void or whether the penalty stated by the Act is enough punishment.
Generally, if a contract goes against what an Act says, the contract is void (in addition to any penalty
provided for in the Act), but in each case the court will have to interpret the particular statute carefully.
Among other factors, the court will look at the effect of recognising the agreement, the language used
and the intention of the legislation. Would it bring about the harm that the Act is trying to prevent? If
this is the case, the agreement will be void, because of statutory illegality.

7.6.2 Common-law illegality

Agreements that are against public policy or against good morals (contra bonos mores) are also not allowed. Either
case would result in common-law illegality. It is difficult to give general definitions of these concepts, because
their meaning is so broad but the Constitution of the Republic of South Africa, 1996, will assist the courts in
deciding whether a contract is against public policy as this is something that changes over time. We will give some
examples where courts have found contracts to be void because they were against public policy or good morals.

Chapter 7 | Formalities, certainty, possibility and lawfulness of contracts 105

These examples will help you understand common-law illegality. We will look at four categories, namely:
® contracts that interfere with the administration of justice
@ marriage contracts
® = gambling contracts
@ = unfair contracts.

Contracts that interfere with justice

When two people enter into an agreement that one will commit a crime or a delict in exchange for
money or some other reward, that contract is void, In the same way, an agreement in which one party
pays another to keep quiet about a crime that has been committed would be void. Where a crime is
committed, no one may benefit from it in terms of any agreement, because that would be
against the administration of justice. If, for example, a man murders his wife to benefit from ‘A bloody hand may
her life insurance policy, he cannot claim from the policy. Even though the policy itself was Lar lelinea nai ae
a valid contract between the wife and the insurance company, the husband cannot claim ooen whioce death
under it, because he committed an offence to make that claim. It is a principle of South she caused.
African law that a ‘bloody hand may not inherit’.
Any agreement that tries to enable the parties to avoid the courts or the law, and to take the law into
their own hands, is void. An agreement with a citizen of a country at war with South Africa will also be
void if that agreement is to the advantage of the enemy country. For example, an agreement to provide
that country with weapons and ammunition would be against public policy, and therefore void.
If both parties to a contract have an illegal purpose in mind, the agreement will be void for illegality.
If only one of the parties has an illegal purpose in mind, the agreement will be illegal and void against
only that person. In a case like this, the innocent person may enforce the agreement. Suppose, for
example, Hennie buys rat poison, intending to use it to kill someone. If the shop owner knows of his
intention, the agreement between Hennie, the buyer, and the shop owner, the seller, for the sale of the
poison is illegal and void. Neither party can sue the other in terms of the contract. But if the shop owner
had no idea of Hennie’s motives, then she can sue Hennie for payment of the price of the poison.
Let us look at the following case.

Diners Club SA (Pty) Ltd v Singh and Another 2004 (3) SA 630 (D)

Principle
Clauses designed to protect a credit card issuer by placing the risk of wrongful use on a
customer are not necessarily against good morals, even where the card was used by someone
without authorisation.

Facts
Diners Club had issued credit cards to the defendants, in terms of written contracts. A clause
in each contract provided that the cardholder was liable for amounts due, even if somebody
else had used the personal identification number (PIN) of the credit card. Singh refused to pay
amounts due on the credit card because somebody else had used them without his permission.
He raised the defence that this clause was contra bonos mores.
The court's finding
The court found that the clause was intended to protect Diners Club by placing the risk of
wrongful use on its customer, the cardholder. When the cardholders accepted the credit cards,
they knew that they were bound by the contractual terms and conditions they had signed. They
had not been forced to accept the cards, and should have found out for themselves which of
the terms applied to all cardholders. There was therefore no basis for holding the clause against
good morals. The contract was valid.

106 Chapter 7 | Formalities, certainty, possibility and lawfulness of contracts

Marriage contracts
An agreement that completely restricts the freedom to marry will be void. However, a promise not to
marry a member of a certain class of persons or an agreement not to marry someone who is born into
a different religious faith will be valid. An agreement that promotes sexual immorality is void, as the
contract would be against good morals. It is important to note that the Constitution of the Republic of
South Africa, 1996, will assist the courts in deciding whether a contract is against public policy or contra
bonos mores. Over time, there has been some change regarding the conduct that society
considers to be good. For example, although adultery (mentioned in Chapter 1) used tobe 4 marriage broker is a
a crime, it no longer is — because society's idea of what is criminal has changed over time. matchmaker, a person
Another example is that society now allows marriage brokers to enter into contracts with Who introduces single
people, and to introduce them to potential partners with a view to marriage, in return for depeleghes de another as
payment ofa fee. This might have been considered a ridiculous idea in the past. POSING: IHATHAQS PBL ers:

Gambling contracts
There has also been a change of social attitude towards gambling, which is now allowed in certain
circumstances and governed by law. Gambling involves various ways of placing bets, usually with
money. A bet or wager is a contract that is based on luck, and usually results in the payment of money,
depending on the outcome of a contest, such as a horse race.
The National Gambling Act 7 of 2004 deals with betting and gambling, while the Lotteries Act 57
of 1997 deals with lotteries and sport pools. Any gambling or debts coming from gambling allowed
by these Acts (such as a bet or wager placed in a casino or the playing of an amusement game, which
is regulated by the National Gambling Act) are enforceable in a court. Any other forms of gambling
are not enforceable, and are still against public policy, even though the contract may be valid at
common law.
So although nothing prevents a person who has placed a wager from performing in terms of the
contract and paying the debt, the courts will not enforce these contracts, because they are against public
policy. This means that if you lose a bet and refuse to pay, the other party will not be able to sue you in
court. The contract is not enforceable. Although there is nothing wrong with the contract itself, a court
will not hear a case that has to do with unregulated gambling.

Unfair contracts
Sometimes people enter into a contract that turns out to be completely unfair and to only one party's
advantage. Fairness is not a requirement for a valid contract. It is a reality that people often conduct
business with maximum profit in mind, and those who are in a stronger position will use their strength
to gain an advantage. The courts accept that this is allowed as a general rule, and that contracts have to
be enforced, whether or not their terms are reasonable or fair.
But the courts do recognise that this principle may be relaxed in exceptional circumstances, so that
a contract or a term in a contract may be void because it is very unfair. The courts can do this only if
they consider the contract so unfair that it goes against the interests of the general public. It's not easy
for a party to succeed in having a contract declared void on the grounds of unfairness, because public
policy generally favours complete freedom of contract without any restrictions, when contracts are freely
entered into,
In terms of the Consumer Protection Act 68 of 2005, suppliers are not allowed to offer goods or
services at an unreasonable price or on terms that are ‘unfair, unjust and unreasonable’. If a court finds
this has happened then the court may order that the money or goods be restored to the buyer or that the
buyer be compensated.

Chapter 7 | Formalities, certainty, possibility and lawfulness of contracts 107

 The case below is an example of a contract that was so unfair that it was declared void.

Erle aE ee Oe ey, iP

Principle
A contract that deprives a person of obtaining any benefit whatsoever will be against
public policy.
Facts
The parties divorced and entered into an agreement regarding the maintenance of their
children. Malan, who was a teacher, agreed to pay an amount equal to the amount she
received as a salary every month, plus her annual bonus, to her husband for a period of
20 years.
The court's finding
This agreement was against public policy because it deprived Malan of any benefit coming
from her employment as a teacher.

7.7 Effects of illegality of contracts

If someone has performed in terms of a contract that is void because it is illegal, she is not allowed to
recover her performance. Two rules apply here:
1. the in pari delicto potior est conditio possidentis is rule In pari delicto means ‘in
2. the ex turpi causa non oritur actio rule. Sith all

7.7.1 The in pari delicto rule

The in pari delicto rule says that when parties are both equally guilty, the party that is in possession of an
item is in a stronger position than the party that does not have it— the saying, ‘possession is nine tenths
of the law’ can apply here. The rule is intended to warn people against entering into illegal contracts.
Note, however, that the in pari delicto rule applies only when parties are equally guilty of entering into
an illegal contract. For example, if one of the parties to a contract was aware that it was illegal because
for instance a permit was missing but the other party was unaware, they would not be in equal guilt. It
may be relaxed if required for the courts to do justice. If one of the parties is less guilty than the other,
then that less guilty person may sue the other for performance of the terms of the contract, as the i pari
delicto cule will not apply.

7.7.2 The ex turpi causa rule

‘The ex turpi causa rule states that ‘no action can be based on a dishonourable cause’ and Action here means legal
. ‘ . . ’

means that the courts may refuse to enforce a claim that arises from the claimant's illegal action, so you cannot take
or immoral conduct. So when there is an illegal contract, the law will not allow any action a dispute to court if it is
to recover performance in terms of such a contract. Neither party can force the other about something illegal
to perform in terms of the contract. Thus, to use an extreme example, if] contract for or immoral.
someone to commit murder, | obviously cannot go to court to enforce this.
Suppose, for example, Freddy enters into a contract with a criminal to steal a car for him in return
for R1 000 and Freddy pays the thief the money. If the thief “breaches the contract’ by not stealing a car,
then in terms of the in pari delicto rule, Freddy cannot sue the thief to force him to steal a car and, in
terms of ex turpi causa, Freddy cannot sue to get his R1 000 back.

108 Chapter 7 | Formalities, certainty, possibility and lawfulness of contracts

 This case is an example of how contracts can be void for illegality.

Lion Match Co Ltd v Wessels 1946 OPD 376

Principle
A strict principle in South African law is that a contract that is void for illegality cannot
be endorsed.
Facts

According to the law, anyone who wanted to sell or purchase poplar wood needed a permit
from the Government. Wessels sold and delivered a certain quantity of poplar to Lion Match Co.
in ignorance of the legal requirement.
The court's finding
If a contract is only partially illegal, a court can sever the illegal part while the rest of the contract
will remain in force. However, where society's morals require the whole contract to be declared
void, then the courts will not grant an order to remove the illegal terms.
The court held that Wessels could not claim for the purchase price as the agreement was void
for illegality, and it was therefore unenforceable.

7.8 Restraint of trade agreements

A restraint of trade agreement is usually a clause in a contract that restricts a person’s ability to contract
freely. You are most likely to find a clause like this in:
= an employment contract
® acontract for the sale of a business
® partnership agreements.

For example, if Best Bank employs and trains Bongani, a computer programmer, it may be concerned
that he could take his expertise to another competing bank, which would then have the benefit of his
training and knowledge of inside information (i.e. trade secrets). So, his employment contract could
include an agreement that he will not work for a competing bank within two years of leaving his job
with Best Bank.
In principle, a restraint of trade agreement is valid and enforceable. The only time it is not
enforceable is if the specific agreement goes too far and is considered to be in conflict with the public
interest. The person who does not want to be bound by the restraint clause needs to prove that the clause
in a specific contract is against the public interest. The court will look at the circumstances at the time
of the hearing to decide whether the restraint is against public interest or not. To be in line with public
policy, the clause must be reasonable.
The court considers the following factors in deciding whether a restraint is reasonable or not:
@ = the nature of the act that is not allowed (such as being employed by a similar business, or owning a
similar business)
the nature of the interest that is protected (for example, goodwill or trade secrets) and how far this
protection goes
the time period of the restraint
the geographical area of the restraint
the type of business or employment concerned
the relationship between the parties.

Chapter 7 | Formalities, certainty, possibility and lawfulness of contracts 109

We mentioned earlier that the first kind of contract in restraint of trade is where an employer wants to
protect itself from an employee. Let us consider the case study of X-Co and Mr James and see whether it
meets the above conditions.

Case study X-Co and Mr James

X-Co specialises in the manufacturing of welding guns for the automotive industry. The company
has trained one of its staff members, Mr James, for five years, so that he is now an expert when
it comes to building the welding guns. X-Co gets large contracts from the Volkswagen factory
and is hoping to get more contracts from Delta Motor Corporation. A competitor of X-Co,
QL Welding, offers Mr James double his current salary if he will agree to work at QL. QL Welding
is hoping that with Mr James on its staff, it will get the business from Delta. Mr James has a wife
and four children and needs the extra money desperately. He has also been having problems
with X-Co, which refuses to give him a fair increase even though he has done good work. He
knows that X-Co depends on him, and he also knows all the faults in X-Co’s manufacturing of
the welding guns. With his knowledge, QL Welding could produce better welding guns than
X-Co is doing, which should allow QL to get the Delta business. Mr James is very pleased to get
the offer of double pay from QL Welding and resigns from X-Co.
His contract with X-Co contained the following clause:

Restraint of trade
In order to avoid the possibility of unfair competition and/or prejudice to X-Co, and to
secure reasonable protection for the business of X-Co for a reasonable period of time,
over a reasonable area, | understand that certain restraints are necessary. | therefore agree
not to be engaged in and not to have any interest in any concern or business that carries
on business similar to that of X-Co, for a period of 12 (twelve) months after termination of
the contract, within X-Co's primary area of business, the Eastern Cape.

Do you think this clause is valid, and can X-Co prevent Mr James from working for QL Welding?

The second kind of contract in restraint of trade relates to the sale ofa business, as the case study
below shows.

Case study A restaurant sale

Mario owns and manages a successful restaurant, The Windy Wave, on the Port Elizabeth
beachfront. After five years in business, he decides to complete the B.Com degree that he
started before taking over the management of the restaurant from his father. In order to finance
his studies and to pay for his upcoming wedding, Mario decides to sell The Windy Wave. The
buyer, Nino, agrees to pay R800 000 for the restaurant, but is worried about the good personal
reputation that Mario has in the restaurant business. Mario agrees to sign a restraint of trade
clause that will prevent him from operating a restaurant in Port Elizabeth for a period of two years,
so that all his old customers will hopefully continue to have their meals at The Windy Wave once
Nino has taken over.

As the above examples show, restraint of trade agreements cause a conflict between a person's freedom
to work in a trade and occupation of their choice on the one hand and the binding nature of contracts
freely entered into on the other hand.

110 Chapter 7 | Formalities, certainty, possibility and lawfulness of contracts

 As in the case of X-Co, it is reasonable for employers to restrain their former employees from
competing against them if the ex-employees have gained knowledge of trade secrets or have made
business contacts because of their employment in the company. It would not be reasonable for an
employer to restrain a former employee from competing against it if the employee had no access to
the company’s trade secrets or contacts, or if the company had no secrets to protect. For example, a
restaurant could not restrain a waitress from moving to another restaurant, even if she had learned all her
waitressing skills there.

Added value Restraint of trade

Generally, a restraint of trade clause will be reasonable for a long period of time if the area of
the restraint is very limited. In the same way, the restraint of trade clause is more likely to be
reasonable for a large area if it is only for a short period. For example, when the buyer of a store
had a restraint clause preventing the previous owner from opening a store within a radius of
eight kilometres of the original store, the court held that to be reasonable. The court does not
have to choose between enforcing the restraint clause completely or rejecting it. If the facts
require this, it may choose to enforce only part of the restraint. For example, it can decide that a
five-year restraint clause is valid for only one year.

Ntsanwisi v Mbombi 2004 (3) SA 58 (T)

Principle
A doctor can have a protectable interest (an interest important enough to be protected by the
court) in the form of his relationship with the patients of the practice. Such interest is worthy of
protection from the date of termination of the agreement and it is not necessary to prove that
patients had been lost to another doctor — all that has to be proved is that a practice has been
set up in breach of the restraint.
Facts

The parties were two doctors sharing a practice in the town of Giyani in Limpopo Province. They
had entered into a partnership agreement that contained the following restraint of trade clause:

Restraint of trade
Should this partnership be terminated at any time, due to any reason whatsoever, the
second partner shall, for a period of 3 (three) years from the date of termination, not be
entitled to practise as a medical practitioner or in any related field in Giyani, or within a
radius of 50 (fifty) kilometres from the practice.

After he terminated the partnership, Dr Mbombi (the second partner), set up a rival practice
in Giyani. Dr Ntsanwisi then brought an application for the court to enforce the restraint of
trade clause.

The court's finding

The court held that the radius of 50 kilometres was not unreasonable. Giyani is the centre of
an extended semi-rural area and the town appeared to be the only viable position for a medical
practice. The court stated that the legitimate purpose of the restraint could only be to prevent

Chapter 7 | Formalities, certainty, possibility and lawfulness of contracts 111

 Ntsanwisi v Mbombi 2004 (3) SA 58 (T) (continued)

patients from moving from the original practice to the new rival practice for such a time as was
needed for Ntsanwisi to take the necessary steps to retain and nurture the loyalty of his patients.
He needed time to rearrange his practice and employ another doctor to fill the gap left by
Mbombi. Once he had done that, and his patients had got used to the substitute, there was no
reason to prolong the restraint.
The court could not accept that the period had to be long enough for Ntsanwisi’s patients to
forget Mbombi and for their desire to be treated by him to vanish. The purpose of restraint was not
to punish. In the circumstances, there was no justification for a restraint of more than twelve months.

Activity 7.4
1 Think about some of the actions of fellow students that you have experienced at your
institution. Can you identify which actions are legal and which ones are illegal?
2. Make lists of actions or behaviours that you consider to be acceptable and unacceptable.
Now try to work out where the law would come into effect in each case. For example, is
it possible to buy a case of beers from a shopkeeper who knows that you intend to drink
them all in one day? Will it make a difference if you promise the shopkeeper that you will
not drive after you start drinking?
3. Consider the relationship between South African customary law and the term ‘public policy’.
Do you see a conflict between, for example, Xhosa initiation rituals and ‘the morals of society’?

What do you think?

It is a principle of our law to uphold the binding force of contracts. This often results in persons being
forced to keep strictly to agreements that they signed, even if the agreements were unfair to them. Is it
necessary for our society that courts adhere to the wording of signed contracts, or should courts rather
look at the outcome of the contracts and decide what is fair in each case?
Does it make a difference if one party was in a desperate situation at the time the contract was concluded?

Chapter summary

In this chapter, you learned the following about formalities,
certainty, possibility and lawfulness of contracts:
Generally, contracts require no formalities, but the
law or the parties themselves may impose formalities on
particular contracts.
The effect of not completing with a formality
is usually that the contract is void. Sometimes, the
consequence of ignoring a formality is that the contract
is valid between the contracting parties, but not
enforceable against third parties.
Examples of contracts that have formalities are:
= antenuptial contracts
® contracts for the transfer of immovable property
= suretyship.
Performance in contract law refers to what each party to
the contract has to do in terms of that contract.

112 Chapter 7 | Chapter summary

 For performance to be possible, it must be clear or
ascertainable what each party has to do in terms of the
contract. The test to be applied is whether the contract
is reasonably certain.
Generic and alternative obligations are considered to
be certain by the courts.
If the performance, which must occur in terms of
the contract, is neither certain nor ascertainable, the
contract will be void.
The rule that a contract will not be valid if
performance is impossible only applies when the
performance is completely impossible for anyone at the
time the agreement is entered into.
Subjective impossibility is not enough to
make a contract void; the contract must be
objectively impossible.
Agreements are lawful unless there is a statute or
common-law rule that makes the contract void.
Review your understanding
1. Bobby and Johnny often do business together.
They always conclude their contracts ‘on a
handshake’ — they agree verbally and do not write
anything down. One day, they enter into the
following contracts:
a) Bobby sells his car to Johnny for R50 000.
b) Johnny sells his house to Bobby for R550 000.
Are these contracts valid?
2. Choose the correct answer below. The formality of
notarial execution means that the contract must be:
a) signed and registered at the Deeds Office
b) signed in front of an attorney, notary or
conveyancer
c) signed in front of an attorney or notary and
registered at the Deeds Office
d) the contract must be signed in front of a
notary public.
3. Stephen is an asset manager at Poor Co. He is
head-hunted by Wise Co. to work for them in the
same field, at double the salary. Both companies
are based in the same city. Stephen would love
to accept the offer from Wise Co., but when he
started with Poor Co., he signed a restraint of trade
Common-law illegality occurs if a contract is against
public policy or against good morals.
The in pari delicto rule states that if a party has already
performed in terms of a contract that is void because it is
illegal, then that party cannot recover her performance.
The ex turpi causa rule states that if an agreement
is void because it is illegal, it cannot be enforced at all.
In principle, restraint of trade agreements are valid and
enforceable, The only time that a restraint agreement
will not be enforceable is when the specific agreement
in question goes too far and is considered to be in
conflict with public interest.
There are a number of factors that assist courts in
deciding whether restraint of trade clauses are valid or
not. There needs to be a balance between the period of
the restraint and the area in which it operates.
agreement to the effect that he would not work in
the same field anywhere in Southern Africa for ten
years after leaving the company. Which one of the
following is true?
a) Stephen is not bound by the agreement, because
restraint of trade agreements are not enforceable,
b) Stephen is bound by the agreement unless he
can prove that the restraint is unreasonable.
c) Poor Co. cannot hold Stephen to the
agreement unless they can prove that the
restraint is reasonable.
d) Restraint of trade agreements are invalid, and
Stephen is not bound to the contract.
4. Tobile is a partner at one of the ‘big four’
accounting companies of South Africa. The
company, based in Cape Town, is extremely
concerned about its ‘scorecard’ when it comes to
the number of black partners on its books. When
Tobile is due for an increase, the managing partner
asks him to sign a contract preventing him from
working for any of the other ‘big four’ accounting
companies in Cape Town for a period of three
years if he resigns from the company.
Chapter 7 | Review your understanding 113
 a) Is sucha clause valid and enforceable in
general? If so, when would such a clause be
unenforceable?
b) Is the clause enforceable in this case and would it
have made any difference if the restraint was only
for six months? Give reasons for your answer.
5. Sally and Andrew agree that all contracts that they
enter into must be reduced to writing, be translated
from English into Zulu and Afrikaans, and all
three versions must be signed by both parties. Sally
arranges for the Afrikaans translation but forgets
about the Zulu one. Both language versions are
signed. Is the contract valid?
6. Jimmy asks Anne to sell him her car for R50 000 and
she agrees. When she gets home, Anne decides she
wants to keep her car. She claims that the contract
is not valid as it is not in writing. Is Anne correct?
7. Neil wants to buy a gun, but does not want to go
through the vigorous legal requirements to buy
one ina shop. He therefore asks John to get one on
the street. John says that if Neil gives him R500,
he will have one by the next day. Neil gives John
Further reading
Hutchison, D. et al. 2009. The Law of Contract.
Cape Town: Oxford University Press Southern
Africa (Pty) Led
Hutchison, D. et al. 2012. The Law of Contract,
2nd edn. Cape Town: Oxford University Press
Southern Africa (Pty) Led
114 Chapter 7 | Further reading
the money, but John disappears with it. What legal
options, if any, are available to Neil?
What are the required formalities when one enters
into an antenuptial contract? Is the contract
completely invalid if the formalities are not
complied with?
Jerry owes Frank R10 000. Frank is worried that
Jerry will not pay him so he asks Jerry's brother,
Andrew, to sign a suretyship agreement. Andrew
does not sign the suretyship, but verbally says,
‘Do not worry, if Jerry does not pay, I will pay!’ Is
the suretyship agreement valid?
10. Nina’s cat has five kittens. Lexi wants to buy a
kitten for R100. When they look at the kittens,
they all look identical. How would you word the
contract so that it is certain and valid?
ll. Anne leases her house to Frank on 1 December.
On 3 December, Anne sells her house to Raymond.
When Frank tries to move in, he is told that it is
impossible as the house now belongs to Raymond.
Is the contract void due to the impossibility
of performance?
Schulze, H. etal. 2015. General Principles of Commercial
Law, 8th edn. Cape Town: Juta and Co. (Pry) Led
 Chapter

Contents of a contract 8

The main ideas

= Identifying terms by their role
= = Identifying terms by how they become part of the contract
= Interpreting the contents of a contract

The main skills

Differentiate between essentialia, naturalia and incidentialia.
Differentiate between express, implied, tacit and imposed terms.
Identify when a contractual term will be legally binding.
Outline how a court interprets a contractual term.
Analyse legal problem-type questions.
Identify the legal issue in problem-type questions.
Apply knowledge of theory.
Answer multiple-choice questions.

The last few chapters focused on the six requirements for a valid contract. Now it is time to look at the
contents of the contract; in other words, the terms that specify the rights and duties of each party. Some
of the terms of a contract are clearly stated while others are implied. Some are required by law and others
can be changed to suit the contracting parties. We also look at how the law interprets a contract that is
not clear.

Before you start

Suppose you drive into a parking garage, take the ticket at the entrance boom and park your car. When
you return to your car a few hours later, you see that a light fitting has fallen from the ceiling and landed
on your car. The roof of your car is damaged, so you ask to speak to the management of the parking
garage. They tell you that the ticket that you took when you entered the garage, as well as a notice board
outside the garage (which you did not see), states that you park at your own risk— the parking garage
cannot be held responsible for any damage to the cars parked there. Therefore, they are not liable for
the loss. What is the law that is applicable to this situation? Are you bound by the terms on the ticket or
notice that you did not even see?

8.1 Identifying terms by their role

When parties enter into a contract, they reach agreement about the rights and obligations of each party.
This agreement sets out in detail exactly what the contract requires each party to do.
We can distinguish three different types of terms according to their role in the contract, namely:
@ terms that identify a contract as a specific contract, called essentialia
@ terms that are implied into a specific contract by law, called naturalia
@ other terms that the parties have agreed to, called incidentalia.

We will look at each type in turn. The next section will look at a different way of classifying the terms.

Chapter 8 | Contents of a contract 115

8.1.1 Essentialia
All contracts have to follow the general principles of contract law, but there are some contracts, called
specific contracts, which fall into specific groups or types and therefore have to include particular terms.
Contracts of sale, lease or donation are examples of specific contracts.

Those terms of a contract that identify it as one of the specific contracts are called the essentialia, or
essential terms, of that contract. So the essentialia are the terms that have to be present in a contract in
order for it to be classified as a specific type of contract.
‘The parties to the contract must agree on these essential terms for the contract to be considered a
specific contract. For example, for a contract to be a valid contract of lease, there must be agreement
about the following essentialia:
@ the object being leased
@ the length of the lease
= =the amount of rental payable.

Similarly, a contract of sale must state the following essentialia:

@ the item that is being sold
@ the purchase price.

Added value Classifying contracts

The law uses essential terms to classify contracts in specific groups, just as a zoologist will use
essential features to classify animals in groups or species. For example, if an animal has a spine,
feathers and warm blood, then it belongs to the bird group. If it does not have those features,
it is not a bird, even if it can fly or has a beak. But, once you know it is a bird, you also know a
lot of other things about it. For example, you can assume that the female of that species will lay
eggs. In the same way, once you have identified a contract as belonging to a particular group,
you can assume a lot of other things about it, as you will see when we look at naturalia in the
next section.

8.1.2 Naturalia
The importance of classifying contracts in different specific contracts is that once you
have identified a contract to be a P particular specific
Pe contract, , there are terms that the en it meansoe
text, you are
law automatically reads into the contract. These terms are the naturalia of the contract. seeing, understanding or
These clauses are implied by law. assuming things from the
For example, if a contract is classified as a lease, the law automatically reads in the text that are not actually
common law duties of the lessor and the lessee. Chapter 15 on the law of lease will deal Stated there.
with more on these common law duties. The naturalia apply automatically to a contract
even if the parties have not specifically agreed to them. However, it is possible for the a ays es
; : eee : who owns the property
contracting parties to change most of the naturalia by agreeing to other terms instead. ae nie tt Cut
We discuss this below under “Terms implied by law’.

8.1.3 Incidentalia
‘The incidentalia are the terms in a contract that the parties have agreed to, but which are neither
the essentialia nor the naturalia of the contract. These are terms that meet the specific needs of the
contracting parties. For example, when a house is sold, it may be agreed that certain furniture is
sold with the house.

116 Chapter 8 | Contents of a contract

8.2 Identifying terms by how they become part of the contract
The second way we classify terms is according to how they become a part of the contract. The terms of a
contract can be:
= express @ tacit
= implied = imposed.

Let us look at each of these in turn below.

8.2.1 Express terms

An express term is a term of a contract that is put into words, or given some physical form by the
contracting parties. The contracting parties can express the term verbally or write it down in the form of
a written contract. For example, if the contracting parties write that the agreed purchase price for a book
is R200, this is an express term. In certain circumstances, an express term can also be the conduct of a
contracting party. For example, | may walk into a shop and ask to buy a cool drink. If the shopkeeper
shows me a specific drink and I nod my head, then my conduct of nodding my head is my way of
expressly agreeing to buy that drink.

8.2.2 Implied terms

Implied terms are terms that the parties to a contract do not expressly agree to, but that are read into the
contract either by law or because of a particular trade usage.

Terms implied by law

As we mentioned earlier, once a contract is classified as a particular specific contract, the law automatically
reads certain terms into the contract. These terms are the zaturalia. This is one way in which terms are
implied by law — that is, automatically included in the contract by operation of the law. Since the law
regards these terms as implied, there is no need for the contracting parties to agree to them expressly.
However, if the parties do not want these terms to be part of their contract, they can remove them
by expressly agreeing to vary the implied terms. For example, all contracts of lease have the implied term
that the lessee can use the entire property. However, the parties can agree that the lessor will leave some
of his belongings in one of the bedrooms of the property, which will be kept locked and not used by the
lessee. The parties’ express agreement will override the implied term.

Terms implied by trade usage

Trades and professions tend, over time, to develop particular ways of doing their business. As a result,
there will be certain terms that are generally understood to be part of every contract in that trade. These
are the terms implied by trade usage.
The following case dealt with trade usage and fishermen.

Van Breda v Jacobs 1921 AD 330

Principle
The law will treat a trade usage term or custom as being implied in a contract if that term meets
certain requirements.

Facts
A local custom amongst fishermen is that once the fishermen set their fishing lines on a beach,
where no boats are permanently stationed, for the purpose of catching a shoal of fish, no
further fishermen are entitled to set lines within any reasonable distance in front of the lines that
have been already set.

Chapter 8 | Contents of a contract 117

 Van Breda v Jacobs 1921 AD 330 (continued)

The court's finding

The court held that this trade usage among fishermen was duly established by the evidence as
being valid, provided that the following requirements were met:
e It must be a long-standing practice.
e It must have been in existence without exception since its origin.
e It must be reasonable and lawful.
e It must be certain and clear.
e It must be generally recognised and observed by the community in which it is applied.

As with terms implied by law, it is possible for the contracting parties to prevent the trade usage from being
implied in their contract by expressly agreeing to other terms. For example, in the fishing industry there are
trade usages about how certain catches of fish are priced. These will apply to every catch of that particular fish
unless the parties expressly agree otherwise. Suppose, for example, there is a trade usage that all catches of hake
are valued at R30 per kilogram. Then this price will apply unless the parties agree otherwise.

8.2.3 Tacit terms

Sometimes, contracting parties do not think about or expressly agree about what their contract will say
in a particular situation. In certain situations, the matter may come to court. Then the court will look at
the express terms, consider the surrounding circumstances and read a term into the contract to deal with
that situation. A term that is created in this way is called a tacit term. The court will read a
tacit term into the contract only if it is necessary for the business efficacy (or effectiveness) An officious person likes
of the contract. This condition means that the contract will not achieve what it was meant _t0 tell other people what
to achieve unless it includes the tacit term. The law uses a test known as the officious to do. This person is the
bystander test to decide whether or not to include a term into a contract. ieee
Here is how the officious bystander test works: Imagine that, at the time that the parties
entered into the contract, someone was standing next to them and asked the contracting parties the
question, “What will the contract say if a certain situation arises?’
If both parties would have answered, ‘Of course the contract would say this (and then explain what
the contract would say) — it was so obvious that we did not bother to spell it out,’ then that explanation
would be considered a tacit term. The tacit term that will be read into the contract is the consequence
that both parties would describe (in the imaginary scenario we created).
In other words, the law is saying that if a contract needs a particular term in order for it to be
effective, and the law believes that the particular term is obvious and that the parties would have agreed
to it, then that term will be read into the contract.
For example, suppose that you and I enter into a contract where you will grow flowers on my land, and
when we sell them, we split the profit. It was not discussed whether you can enter my property and take
samples of my soil to see which plants are best suited for the area. The officious bystander test would regard
this as a tacit term as you could not grow flowers if you do not know which kinds are best suited to the
area. If at the time of entering into the contract, a bystander had asked, “Can someone check the soil?’ we
both would have answered, ‘Of course, that is so obvious that we did not feel it necessary to mention it!’

8.2.4 Imposed terms

So far, we have considered terms that are part of a contract because they were either agreed upon
between the contracting parties themselves (express terms) or they are terms that the law will apply if the
parties do not vary them (implied terms). There are also terms that parties are forced to include in their
contracts, either by law or because one party will not enter into the contract unless that term is included.
These are called imposed terms.

118 Chapter 8 | Contents of a contract

 Added value Implied and imposed terms

Take care not to confuse implied and imposed terms.

¢ Implied terms are terms that the law will read into a contract unless the parties agree to
different terms that alter the implied terms. It is always possible for the parties to change
the implied terms.
¢ Imposed terms are terms that cannot be changed, either because the law does not allow for
this or because one of the contracting parties agreed to enter into the contract on condition
that that term is included.

Terms imposed by law

There is legislation that requires specific contracts to include particular terms. These are terms that the
parties cannot change — they are imposed by law. They are part of the contract, even if the parties did
not agree to them. For example, section 29A(1) of the Alienation of Land Act 68 of 1981 states that if
immovable property is sold for less than R250 000, the contract must include a ‘cooling-off term. This
is a term that gives the purchaser five days to change his mind and get out of the contract.

Terms imposed by the parties themselves

When you drive into a parking garage at a shopping mall, you may see a notice saying, ‘Parking at
owner's risk’. Similarly, when you drop off clothes at a laundry or dry-cleaner, you often get a ticket
with a note on the back: “The laundry will not be responsible if clothes are lost or damaged.’ These are
examples of unsigned contracts: one of the parties tries to impose a term on the other contracting party,
but the second party does not sign the contract. The owner of the garage or laundry is basically saying
that if you want to contract with them, this term must be in the contract.
If you do not wish to accept the term, then they will simply not contract with you. This method
of imposing a term in a contract is usually used by suppliers of goods or services who, due to the large
number of customers they deal with, cannot negotiate contractual terms with every customer, as that
would be impractical.

Added value Exclusion clauses

The type of term that is most often imposed is an exclusion clause. This is also Known as an
exemption of liability clause, which limits one party's liability for any loss, damage or harm
that is caused negligently in terms of the law of delict. We will look at these clauses in more
detail in Chapter 9, but meanwhile, it is useful to understand why a party wants to include a
term like this. An exclusion term can, in certain cases, prevent the customer from suing the
other contracting party for damages where the owner has negligently caused loss, damage
or harm to the customer. This is obviously an advantage to the person who imposes the
exclusion clause.

When does a term on a ticket or notice form part of the contract? Clearly, if the other contracting
party (the customer) has seen the term and agreed to it, there is no question that the term is part of the
contract. The issue is more complicated when the customer claims not to have seen the term on the
ticket or notice. The general rule is that a customer who did not see the term will still be bound by it, as
long as the party imposing the term did what is reasonably necessary to bring the term to the customer's
attention. So what exactly does a party have to do to make an imposed term valid? That depends on
whether we are dealing with a ticket or a notice, so let us look at cach one separately.

Chapter 8 | Contents of a contract 119

Tickets
In the case of a ticket, the law will consider the facts of each case to determine whether the party issuing
the ticket has done everything reasonably necessary to bring a term to a customer's attention. The
following factors are often used to make the decision.

= ‘The customer must receive the ticket before the contract is concluded. If one party intends to
impose a term on the other contracting party, that second party must know about it before entering
into the contract. For example, if a laundry wants a term on a ticket to be part of a contract, it
cannot give you the ticket only when you collect the clothes. That will be too late. The reason
for this is that a party cannot unilaterally change or impose the terms of an existing agreement.
This would be unfair to the other contracting party.

Let us look at the example in the following case.

Thornton v Shoe Lane Parking Ltd 1971 1 All ER 686 (CA)

Principle
Where a supplier of goods and services seeks to incorporate contractual terms and conditions
in a ticket, the customer will be bound by the terms and conditions if the supplier did what
was reasonably necessary to bring the provisions to the attention of the customer (even if the
customer was not aware of the provisions). The ticket must be issued to the customer before the
conclusion of the contract.
Facts

Thornton parked his car at Shoe Lane Parking. There was a notice outside exempting Shoe
Lane Parking from liability for damage or loss to all cars. After the traffic light at the entrance
turned from red to green, a ticket was issued to Thornton. The ticket contained an exemption
of liability clause for personal injuries to a customer. On his way to collect his car, Thornton
sustained personal injuries caused in part by Shoe Lane Parking. Shoe Lane Parking, relying on
the exemption clause contained in the ticket, denied liability for Thornton’‘s personal injuries.
The court's finding
The court held that Thornton was not bound by the terms of the ticket as they were introduced
after the conclusion of the contract between Thornton and Shoe Lane Parking. The changing
of the traffic light from red to green was an indication that the contract was already formed
between the parties, and Thornton was then allowed to enter the premises. This means that
any term that was introduced after the light turned green would not be legally binding on the
parties. Thornton was therefore successful in his claim for damages for personal injuries. Only
the terms on the notice at the entrance, exempting the owner from liability for damage or loss
to cars, were legally binding on Thornton as these were included in the agreement before the
contract was concluded, which was before Thornton was allowed to enter the premises.

B The ticket must be the type of ticket in which a reasonable person would expect to find terms of a
contract. Examples of documents in which a reasonable person would expect to find terms include
a quotation form, an order form and train tickets. Examples of documents in which a reasonable
person would not expect to find terms include a receipt, a statement of account, an invoice and a
movie ticket.

120 Chapter 8 | Contents of a contract

 Activity 8.1
What would the rationale be for deciding whether a document that you come across would be
one on which a reasonable person would expect to find terms on it?

Eyl ice Mat )eg ele ee eee eel lel ee ee ee

Principle
Where a supplier of goods or services seeks to incorporate contractual terms into a ticket, the
document must be one in which a reasonable person would expect to find terms and conditions.
Facts

Chapelton hired two beach chairs from the Council, and was issued with two tickets after he
made payment. The attendant requested that he keep the tickets issued for proof of payment
at a later stage. The tickets contained an exemption of liability clause stating: ‘The Council will
not be held liable for any accident or damage arising from hire of chair’. Thereafter, Chapelton
set up the chair firmly and sat on the chair, only to be injured when it broke. The Council denied
liability, claiming that Chapelton was bound by the exemption of liability clause on the ticket.
The court's finding
The court ruled that the purpose of the ticket was to serve as proof of payment (a receipt), and
that a reasonable person would not have expected to find terms and conditions on it. Chapelton
was successful in his claim for damages.

= = ‘The term must be clearly printed on the ticket. The customer must have had an opportunity to examine
the document and the customer's attention must have been drawn to the writing on the document.

Here are the court's finding regarding the term on the railway ticket.

eee ue tie) ee a se ea

Principle
Where a supplier of goods or services seeks to incorporate contractual terms into a ticket, the
document must be one in which a reasonable person would expect to find terms, the writing
must be prominent and legible, and the customer's attention must be drawn to the terms.
Facts

McLaren deposited a parcel at a railway station's cloakroom, and he was given a ticket by the
attendant. There were terms on the ticket: ‘The department is not responsible for any article
exceeding the value of £5’. However, the words were partly obscured by the attendant’s written
description of the parcel. The parcel was thereafter lost, and McLaren sued the railway for its
value, which was more than £5. The railway denied liability on the basis that the term of the
ticket indicated that it would not be liable for any items that exceeded the value of £5.

Chapter 8 | Contents of a contract 121

 Central South African Railways v McLaren 1903 TS 727 (continued)

The court's finding

The court held that the railway had not done what was reasonably necessary to bring the term
to the attention of the customer. The court considered the following factors:
e Acloakroom ticket is not a document in which a reasonable person would expect to find terms.
e The attendant wrote over the term, which suggested that what was written underneath it
was not important.
e The term was not legible.
e¢ The customer's attention was not drawn to the term.
Thus, McLaren was able to successfully sue the railway for the value of the lost parcel.

Notices
In the case of terms that are contained in a notice, the law will look at the following factors to see
whether the party imposing the term took reasonable steps to bring the term to the customer’s attention:
m = ‘The notice must be clearly displayed at the entrance to the premise or at a place where the customer
is able to see it before the conclusion of the contract.

A case example follows.

Olley v Malborough Court Ltd 1949 1 All ER 127 (CA)

Principle
Where a supplier of goods or services seeks to incorporate contractual terms into a notice,
notification of the terms must be contemporaneous with the conclusion of the contract.

Facts

Olley checked into a hotel, and thereafter had certain personal belongings stolen from the
hotel room. The hotel denied liability on the basis that there was an exemption of liability clause
contained in a notice that was clearly displayed in the hotel room.
The court's finding
The court held that the terms contained in the notice did not form part of the contract between
Olley and the hotel as they were introduced after the formation of the contract. Olley was
therefore successful in his claim for damages.

= The writing on the notice must be legible and conspicuous.

Let us look at the case below in this regard.

Durban‘s Water Wonderland Pty Ltd v Botha and Another 1999 (1) SA 982 (SCA)

Principle
Where a supplier of goods or services seeks to incorporate contractual terms into a notice, the
customer will be bound by them if the supplier did what was reasonably necessary to bring the
notice to the customer's attention, even if the customer was not aware of the notice.

122 Chapter 8 | Contents of a contract

 Durban’s Water Wonderland Pty Ltd v Botha and Another 1999 (1) SA 982 (SCA)
(continued)

Facts

Botha and her daughter were injured on a ride at an amusement park. The accident was as a
result of mechanical failure and Botha sued the amusement park for damages. The park denied
liability on the basis that there was a notice that contained an exemption of liability clause
above the window of the ticket office in the park. The notice was prominently displayed and the
writing was legible.
The court's finding
The court held that the park had done what was reasonably necessary to bring the terms to the
attention of the customer. The notice was displayed at a place where a reasonable person would
expect to find it and where a reasonable person approaching the ticket office would have seen
it. The writing was clearly visible from about six paces away and the notice had a bold white
border around it and was placed on either side of the cashier's window. In short, the inclusion
of the terms on the notice was contemporaneous with the conclusion of the contract between
the parties and the terms were also capable of being easily read by the customer. Botha was
therefore unsuccessful in her claim for damages.

If the law considers these factors for tickets and notices, and decides that the party trying to impose the
terms did everything reasonably necessary to bring the terms to the other party’s attention, the terms will
be part of the contract even if the customer did not see or read the terms.
What we have discussed thus far is the common law position in respect of tickets and notices.
The Consumer Protection Act 68 of 2008 now confirms and supplements this common law position.
See Chapter 17 for more detail.

Ler ET cheA] WET mena WE No

It was a bright sunny day and Sipho decided to take his two children to Sun City’s Valley of
Waves for the day. At the entrance to the premises, there was a large white notice before the
boom gate, which stated the following in bold black writing:

‘Management of the Valley of Waves will not accept liability or responsibility for any loss or
damage of any nature caused negligently to a person's property whilst on the premises’.

In his hurry to make the most of the good weather and to keep an eye on the excited kids at
the same time, Sipho did not see the sign. He then realised that he forgot to carry their picnic
chairs. He was relieved to see a sign at the customer services office stating: Valley of Waves Chair
Hire —R100 per day. After he had paid for the chairs, the attendant handed over the chairs and
a ticket, and requested that he keep the ticket for inspection later on. On the back of the ticket
were the following words in blue writing:
‘Management of the Valley of Waves is unable to accept liability or responsibility for any loss,
damage or injury caused to a person and/or to his/her property whilst on the premises’.

Sipho shoved the ticket into his shirt pocket and set up the chairs. Thereafter, his chair broke and
he tumbled to the ground, dropping and shattering the screen on his new iPhone and hurting
his wrist as he fell.

Chapter 8 | Contents of a contract 123

 Case study (continued) Valley of Waves

What are Sipho’s chances of success in suing the management of the Valley of Waves for the
physical injuries that he sustained and medical expenses, as well as the cost of repairing his
phone? Here, the owner of the premises took reasonable steps to bring the term of the notice
to his attention by having it displayed at the entrance (that is, before the conclusion of the
contract) and having it written in bold black writing. Thus, Sipho will have a slim chance of
success in suing for the cost of repairing his cellphone. However, the owner of the premises
did not take reasonable steps in bringing the term on the ticket to the customer's attention,
as it was written on a document (a receipt) in which a reasonable person would not expect to
find terms and it was handed over to the customer after the conclusion of the contract. So in
this regard, Sipho has a good chance of success in suing for the cost of physical injuries and
medical expenses.
The owner in this scenario could have avoided liability altogether by simply having a widely
worded exclusion clause — one that exempted him from liability in respect of both personal
injuries and damage or loss to property — on the notice at the entrance.

8.3 Interpreting a contract

Once we have determined what the terms of a contract are, we have to work out exactly what they mean.
This is the process of interpreting the contract. If there is a dispute about a verbal contract, the law will
hear from the parties what they intended the contract to say. If the contract was written down, there are
special rules governing the interpretation of the terms of the contract.
To interpret a written contract, we need to find out what the intention of the parties was.
The law identifies three stages in this process:
1. Begin by giving the words their ordinary meaning.
2. If the words in a contract have more than one possible meaning, look at the surrounding
circumstances of the contract to help interpret the word or term,
3. If the contract is still not clear, apply further rules of interpretation.

Let us look at each of these stages in turn.

8.3.1 Give the words their ordinary meaning

The law will try to give the words their ordinary grammatical meaning. This means that the law will look
at how an authoritative dictionary defines the words and follow the normal rules of grammar. As far as
possible, no word should be ignored. If a word has been used in a special way, the law will
interpret the word in that way. For example, if the word ‘catch’ has a specific meaning in Sometimes, a word will be
the fishing industry, the law will give the word that meaning in a contract that relates to the ambiguous. This means
fishing industry. that we can interpretit in
If the contract is clear once you have applied this rule, no more needs to be done. If the — MOF than one way. The
contract is still unclear or ambiguous, the law goes to the second stage of interpretation. ieee cen

8.3.2 Consider the surrounding circumstances

If the words in a contract have more than one possible meaning, the law will look at the circumstances
surrounding the contract to help interpret the words. This means that the law will look at the
circumstances in which the parties entered into the contract. For example, if a contract says that a
certain sum of money must be given to ‘John’, and it is not clear who John is, the law will look at the
surrounding circumstances. If, for example, the court finds that John is the son of one of the parties, and
that he helped to conclude the contract, then the court will assume that the person referred to as John’
in the contract is that same person.

124 Chapter 8 | Contents of a contract

8.3.3 Apply further rules of interpretation
If the above two stages fail to clarify the words or terms of the contract, the law will use the following
rules to interpret the contract:
m = If a contract can be interpreted in two ways, the court will choose to interpret it in a way that
upholds the contract, rather than renders it void.
m= = The court will interpret a contract in a way that does not favour one party over another.
= = The court will interpret a contract in a way that causes as little inconvenience as possible.

If, after all the above rules are applied, the law still cannot interpret a term ofa contract, it will interpret
the words in favour of the person who did not draft (or write) the contract.

What do you think?

Do you think itis right that a parking garage can limit its liability using a term in a notice that you did
not actually see? Next time you park in a public garage or parking lot, see whether you can spot the
exclusion notice.
In your group, give a few more examples of unsigned contracts that you have come across. In each
case, discuss whether you think they are reasonable or not. Make a point of gathering examples as you go
about your day-to-day activities for the next week or so.

Chapter summary

In this chapter, you learned the following about the
contents of a contract:
‘The terms of a contract contain the details of each
party's rights and obligations.
‘The terms of a contract are classified in two ways:
= according to their role and importance
= according to types, depending on the way they
were included in the contract.
‘The terms classified in the following groups according
to their role and importance are:
= = essentialia (terms that identify a contract as a
specific contract)
® naturalia (terms that are implied in a specific
contract by law)
= incidentalia (other terms that the parties have
agreed to).
The terms, classified as the following types, depending
on the way they were included in the contract, are:
® express terms (terms that the parties have agreed to
in writing, verbally or by their conduct)
= implied terms (terms that the law automatically
applies to a contract because they are the naturalia
of the contract or a trade usage)
™ tacit terms (terms the parties would have
included in the contract if they had considered a
particular situation
m imposed terms (terms that the law requires to
be present in a particular type of contract, or
terms that one of the parties insists on as part of a
contract and that are specified on a ticket or notice).
The court follows certain rules when interpreting
contractual terms. It tries to find out the intention of
the parties by looking at the ordinary meaning of the
words, the surrounding circumstances of the contract
and, if needed, further rules of interpretation.

Chapter 8 | Chapter summary 125

Review your understanding
1. Anna wants to buy Fred's car, so she goes to Fred's
house where there are three cars in his driveway. Fred
does not say which car is for sale, but he points to one
of the cars and takes Anna for a test drive in it. After
the test drive, Anna asks Fred how much he wants for
the car. Fred says “R25 000’ and Anna replies, “That
seems reasonable. I will fetch the car on Sunday.’
a) Foracontract to be classified as a contract of sale,
there must be agreement about the object that is
being sold. Did the parties reach this agreement?
b) What are the express terms of the contract?
c) Do you think there is an implied term about
when Anna will pay for the car?
2. In an agreement of sale, between Minnie (the
seller) and John (the buyer), which clauses are
essentialia and which clauses are incidentalia?
a) ‘The purchase price is R10 000.
b) ‘The car is a Honda 2017 model.
c) ‘The purchase price is payable on 1 May.
d) John has ten days to return the car and cancel
the contract if is he is unhappy with the car.
3. Jerry takes his cellphone to Alan’s Cellphone Repair
Shop for repairs. After leaving his cellphone there,
he is given a receipt that states, ‘Cellphones left
here at your own risk’. When Jerry goes to collect
the phone, he is told that the cellphone was stolen
and that Alan’s Cellphone Repair Shop is not liable
because of the term on the receipt.
Further reading
Hutchison, D, et al. 2009. The Law of Contract, 2nd edn. Cape
Town: Oxford University Press Southern Africa (Pry) Led
Schulze, H. et al. 2015. General Principles of Commercial Law,
8th edn. Cape Town: Juta and Co. (Pry) Ltd
126 Chapter 8 | Review your understanding
a) What is Jerry's legal position?
b) Would your answer be different if the term
was also displayed on a big sign as you walked
into the shop?
Simon and Cleo agree that Cleo can lease Simon's
flat from | June. In terms of the lease agreement,
Cleo will pay a lower than normal rental as Cleo
is going to renovate the flat by painting and tiling
it. Cleo wants to include a contractual term to the
effect that she can renovate the flat during May so
that it will be ready by June. Simon replies, ‘It is
not necessary to put that into the agreement, as it
is a tacit term’. Is he correct?
In an agreement of sale, ownership generally
passes from the seller to the purchaser. When the
seller delivers the object to the purchaser with
the intention of passing ownership, is this a tacit,
express or implied term?
Anne and Linda have entered into a contract of
lease. The contract was written down by Anne, the
lessor. The following term appears in the contract,
“The contract of lease will terminate when the
parties meet as usual’. There is no explanation in
the contract to explain the phrase ‘meet as usual’.
However, it seems that Anne and Linda live in
separate cities, but have a long-standing practice
of meeting once a year in Durban. In light of this,
how will the law interpret this term?
Sharrock, R. 2016. Business Transactions Law, 9th edn.
Cape Town: Juta and Co, (Pry) Ltd
 Chapter

Common contractual terms

,
The main ideas
Clauses about whether or when a contract will take effect or end
® Clauses about contractual obligations
= Entrenchment clauses
® Clauses about how to resolve disputes

The main skills

@ = Identify the types of common contractual terms that you would include to meet the given aims in a
typical commercial contract.
= Explain why contracting parties would agree to go to arbitration rather than have a dispute and go
to court.
= Organise your principles by drawing mind maps to keep track of various kinds of clauses.
® Solve problems and make decisions about the type of clauses in a donation contract.

It often happens that contracting parties disagree on whether each party has done what the contract
requires. For this reason, there are certain terms that are commonly included in contracts. These
common contractual terms affect the way in which the contract operates, and they indicate what
happens if there is a dispute or if someone fails to perform according to the contract.

Before you start

Suppose your mother enters into a contract with a builder who is to build her a new house. Your mother
wants the work to start only if and when she sells the house she currently owns. She also wants the
builder to guarantee the quality of the work he does and to indicate what work is not part of the deal.
Both she and the builder want to be able to cancel the contract if the other person fails to meet their
obligations on time. Provided that her existing house is sold, your mother needs the new house to be
built within four months. If this is not done, she wants the builder to agree to pay her an agreed amount
for every day he is late with finishing the building. Both the builder and your mother want any changes
to the agreement to be in writing in order to be binding. Your mother and the builder want any dispute
over the contract to be decided out of court by an impartial person, agreed to by both parties, who will
make a binding decision.
While you are reading this chapter, think about what contractual terms there should be in the
contract to meet the aims of both parties. At the end of the chapter, you will have the chance to answer
this question and test your understanding.

9.1 Common contractual terms

Because people enter into contracts so often — and get into disputes so often — those who draw up
contracts have developed common contractual terms that make it easier to solve disputes. One place
where you will often find common contractual terms is in the so-called standard form contracts that
many companies and other bodies use. These are called standard form contracts because each contract
on the same subject is more or less the same, so the parties can use a standard format (or even an actual
form) and just fill in the details.

Chapter 9 | Common contractual terms 127

 We will look at each of the following groups of common contractual terms in turn:
clauses about whether or when a contract will take effect or end
clauses about contractual obligations
entrenchment clauses, which make the contract more difficult to change
clauses about how to resolve disputes.

This chapter includes many short extracts from contracts, similar to those that you will come across in
the commercial world, so that you can see examples of the clauses in operation. These examples will
enable you to identify such clauses in practice and to understand how they operate.

9.2 Clauses about whether or when a contract will take effect or end
The terms in this first group are the ones that determine whether and when a contract will come into
effect, continue to operate, or end, These clauses can be:
® conditions
= time clauses
™ suppositions
= cancellation clauses.

9.2.1 Conditions
A condition is a contractual term that indicates whether a contract will start or continue to operate.
‘The condition describes an event that may or may not happen in the future. For example, if | agree to buy
Fred's farm on condition that I can sell my own house this month, then that contract of sale comes into
operation only if I do sell my house. We say the sale is subject to a condition. However, if Sipho offers to
buy Balindwa’s house ‘if Balindwa dies’, that is not a condition, as death is certain to occur at some time.
Note that a condition relates to a future uncertain event, rather than something that may or may not
exist at the time.
This is what makes conditions different from suppositions, which we discuss later in this section.
‘There are two main types of condition:
™@ — suspensive conditions
® = resolutive conditions.

Suspensive conditions
A suspensive condition suspends or delays the operation of a contract until the condition is met, or the
future event occurs. The extract below is from a contract of sale.

This sale of land is conditional upon the buyer obtaining a loan for R500 000 from a registered
bank or building society in South Africa. If this condition is not fulfilled within 21 (twenty one) days
after signature of this contract, this agreement will fall away and the seller will refund the buyer
any money paid to the seller by the buyer within 7 (seven) days of the agreement falling away.

In the above example, there is no sale unless the buyer manages to get the R500 000 loan A valid contact &
from a financial institution. It could be that the buyer is unable to get the loan, in which one that meets the six
case the agreement will fall away when the 21 days are up. Note, however, that a valid requirements: contractual
contract is created on agreement. It is only the operation of the contract, which requires capacity, agreement,
performance by both sides, that requires the condition to be met. So the seller in the legality, possibility of —
example cannot decide, before the 21 days are up, that she will no longer sell the land to the Sines fearless
buyer, unless there is another clause in the contract that specifically allows her to do this.

128 Chapter 9 | Common contractual terms

Resolutive conditions
A contract that is subject to a resolutive condition is immediately binding on the parties, —_ pecotutive condition
but comes to an end should the future uncertain event occur. The extract below is from a ends a contract if a stated
contract of lease. event happens, whereas a
suspensive condition ends
the contract if a stated
The lessor leases the dwelling situated at 2 African Street, Grahamstown, to the lessee event does not happen.
for the sum of R4 000 per month for the duration of 2017. The lessee’s right to lease
the premises will come to an end should she marry or give birth to any children.

In the above example, it may be that the lessee does not get married or have any children during the
course of the lease, in which case the lease will continue, unaffected by the condition. However, if she
does get married or have a child, the lease will end.
In some types of contract, when a resolutive condition happens, the parties have to A resolutive condition js
return whatever they received from each other up to the time the condition occurred. the event that is specified
For example, suppose Dave sells his boat to Steve for R50 000, the sale being subject to in the clause or term,
but the term itself in the
Dave not receiving an offer of R55 000 or more within 14 days of his agreement with coeiiae i aien coed
Steve. If Steve pays Dave the R50 000, but Dave does receive an offer of R55 000 within resolutive condition. Be
the 14-day period, then Dave will have to refund Steve the money paid to him. aware of the two slightly
However, this is not always the case with contracts that include resolutive conditions. In the _ different meanings of
lease example above, if the lessee were to get married six months into the lease, the lessor ‘condition’, so you do not
would not have to refund her the rental she paid for the six months she occupied the home. 9®" Sonfused.

9.2.2 Time clauses

A time clause is different from a condition. A time clause is one in which the rights or duties of a contract
start or end at a specific time or event, or after a specific period of time or event, which, unlike a condition,
is certain to occur. There are two types of time clause:
1, asuspensive time clause
2. aresolutive time clause.

Suspensive time clauses

A suspensive time clause indicates when the duties in a contract have to be performed.

Contract of donation
|, John Smith, undertake to give my son, James Smith, R100 000 on 31 December 2017.

Contract of donation

|, John Smith, undertake to give my son, James Smith, R100 000 on the death of my father,
David Smith.

In the first example above, the suspensive time clause states directly on which date John will pay his
son the money. In the second example, the clause will have effect on a specific date, albeit what that date
will be cannot be specified by referring to the future date of death of David Smith. In both examples,
James can enforce his father’s agreement to pay him the money only once the agreed moment arrives —
that is, on the last day of 2017 in the first example and on the death of his grandfather David in the
second example. The exact date when David will die is obviously unknown.

Chapter 9 | Common contractual terms 129

Resolutive time clauses
A resolutive time clause indicates when the contract will come to an end. The examples below are taken
from employment contracts.

The employer agrees to employ the employee to pick beans on the employer's farm, Monte Vista,
at the rate of R250 per day until 30 September 2017.

The employer agrees to employ the employee to pick beans on the employer's farm, Monte Vista,
at the rate of R250 per day, for nine calendar months from the date of signing of this contract by
the employer.

The first example mentions a specific date for the employment to end. In the second example, although
no specific end date is given, the parties can work out the date on which the employment relationship
will end by simply adding nine months to the date on which the employer signed the contract.
Both extracts are examples of resolutive time clauses, because the employment contract will be in
operation and bind both parties until the specified time is reached.

9.2.3 Suppositions
A supposition is a contractual term that states that the contract will only become operative if a given
situation exists or a given event has occurred. Unlike a condition, a supposition relates to a possible
present state of affairs, rather than a future one. For example, | may agree to buy your ring, provided that
it is 18-carat gold.
On the other hand, a supposition is similar to a condition in that a contracting party wants to be
bound by the contract only if the circumstances meet their requirements (as outlined in the condition
or supposition).

Contract of sale
|, Vuyo Ndube, agree to buy Wandisile Bangeni’s cellular phone for R3 000 on condition that it is
an iPhone 6s model.

Wandisile offers to sell Vuyo his phone, which Wandisile thinks is an iPhone 6s. Vuyo is happy with the
offer, but wants to buy it only if Wandisile is right about the make and model. ‘The clause in the contract
of sale above is a supposition, because the sale is subject to the phone being the make and model
described, Even though the contract says ‘on condition ...’, the clause is not a condition, because the
brand and model of the phone are not a future uncertain event (which would make it a condition), but
an existing fact, which the parties can check by looking at the phone. If the phone turns out to be any
other make or model (for example an iPhone 5), there will be no contract. However, if the phone is an
iPhone 6s, both parties will be bound by the agreement.

9.2.4 Cancellation clause

The harmed who
A cancellation clause enables a contracting party to cancel the contract if the other party binge alot ae Hi
fails to do what she agreed to do in the contract. Without a cancellation clause, it is called the plaintiff. The
still possible for the harmed party to cancel, but then only if the breach of contract is person against whom the
sufficiently serious. To breach a promise or agreement is to fail to keep it. This cancellation _case is brought is called
would be in terms of common law, which we discussed in Chapter 1. the defendant.

130 Chapter 9 | Common contractual terms

 Cancellation
The example below provides for a notice period for the coming into effect of the cancellation clause.

Cancellation

Should either party breach any of their obligations in terms of this agreement, then the harmed
party may cancel this agreement on giving the other party five days’ written notice of their
intention to cancel.

Alternatively, the cancellation clause could allow for immediate cancellation without the need for any
notice period.

Activity 9.1
1. Discuss with a partner two different business situations in which you might want to make a
contract dependent on a supposition.
2. Discuss with a partner a business situation in which you might need to make your
contracting as a buyer dependent on a suspensive condition.

9.3 Clauses about contractual obligations

‘The group of common contractual terms related to contractual obligations include:
= = warranties
® = exclusion clauses
= exemption clauses
= modi
@ penalty clauses. A guarantee is a
Z contractual undertaking
Warranties that the product
A warranty binds a contracting party to extra duties relating to the quality, quantity or bought will meet its
other aspects of the thing being contracted to, A warranty clause does not always use the expectations, failing which
word ‘warranty’. Sometimes, it will be referred to as a guarantee. Bea ere
may be demanded.
The following warranty clause comes from a contract of sale:

|, John Ngambi, guarantee that the tools sold to Jake Vosloo will not rust for five years from the
date of purchase.

If, in the above example, the tools do rust during the five-year period, John will be in breach of contract.
We discuss breach of contract in detail in Chapter 10.
In addition to warranties expressly agreed to by contracting parties, the law also Warranties expressly
imposes warranties in certain contexts. These imposed warranties, called tacit warranties, agreed to are those
will bind the parties unless they expressly state that they will not be bound. We discuss that are directly stated
examples of this type of warranty at various points in this book. In Chapter 14, for in the contract, like the
guarantee against the
example, where we discuss contracts of sale, the warranty against latent defects is a tools rusting.
tacit warranty,

Chapter 9 | Common contractual terms 131

Exclusion clauses
As you saw in Chapter 8, an exclusion clause limits one party’s liability in terms of the law of delict. In a
sense, an exclusion clause serves the opposite function to a warranty. While a warranty adds the stated
extra obligations, an exclusion clause removes, or excludes, the liability it refers to.
The example below is an extract from a contract of sale.

This laptop is bought subject to the buyer acknowledging that the sellers’ ordinary warranty
against latent defects is specifically excluded from this sale.

Latent defects are hidden faults in an item or property, and we discuss them in Chapter 14 under the
law of sale. The seller's warranty against latent defects is the normal guarantee to the buyer that the
item being sold has no significant hidden faults at the time of sale. In the above example, the exclusion
clause, also sometimes called an exemption clause, says that the laptop is being sold without that normal
warranty against latent defects. This puts the seller in a safer (less vulnerable) position. However, to
prevent abuse of buyers in such circumstances, our courts have often limited the defects
that the seller will able to get away with. The legal term for buying
Note that in certain circumstances, a seller may exclude liability for any defects. In other Something ‘as is’ is
words, the buyer purchases the item ‘as is’. poeiog

Exemption clauses
An exemption clause states that a contracting party is limited or excluded from liability in stated
circumstances. This clause protects one of the contracting parties against liability for certain types of legal
claims by the other party and reduces the range of their contractual duties.
Therefore, exemption clauses have the common characteristics with exclusion clauses
of limiting one party's liability under a contract, and operating in an opposite manner to If a contract or part of a
contract is against public
a warranty. But, the nature of exemption clauses means that it is possible for them to be policy, it may be held bya
considered (unduly) unfair against one of the contracting parties where their inclusion crankto He Uinentorcoabie:
would be against public policy and in such circumstances might be found by a court to not jp basic terms, the
be binding. requirement of public
The case of Naidoo v Birchwood Hotel below illustrates how a court may consider policy is that an element
whether or not a contract should be found to be binding or whether a term is such that it is of law shouldurenot be likely
to lead to injustice.
against public policy and therefore unenforceable.

Naidoo v Birchwood Hotel 2012 6 SA 170 (GSJ)

Principle
A contractual clause, or the whole contract, will not be binding against an affected party where
it would unfairly prejudice them on the basis of the clause, or contract as a whole, being against
public policy.
Facts

Naidoo sued Birchwood Hotel for severe bodily injuries that were caused when an entrance
gate to the hotel fell on top of Naidoo. The hotel's main argument was that disclaimers,
which excluded liability for such claims, were prominently displayed. Naidoo had noted these
disclaimers. Naidoo asked the court to award him legal damages flowing from his injuries, whilst
the hotel sought to escape liability due to the contractual term that aimed to exclude liability for
such claims.

132 Chapter 9 | Common contractual terms

 Naidoo v Birchwood Hotel 2012 6 SA 170 (GSJ) (continued)

The court's finding

The court held that the hotel had a duty of care to properly maintain its premises. It had not done
so, and this had caused Naidoo’s injuries. The only question, therefore, was whether the displayed
contract/contractual term, said to exclude their liability, would save the hotel from the damages
claimed by Naidoo. The court refused to uphold the exemption clause based on the fact that it
would have been unfair and unjust to Naidoo in that the exclusion clause, went against public
policy. Therefore, Naidoo was able to successfully claim his damages from Birchwood Hotel.

Modi
A modus is an extra condition as to how something must be done or used. It places a duty on a
contracting party to perform some future action related to the original contract. However, the creation of
the contract is not dependent on the modus being performed. Note that a modus differs from a condition
in that if a condition is not met, the contract does not go into operation.

Contract of donation
|, Olusanda Mbeki, donate my Toyota Camry motor vehicle, registration number CA 14680, to my
son, Siya Mbeki. Siya is to use the vehicle to visit me at least once per month as long as | live.

In the above example, Siya can demand immediate delivery of the car, since the operation —_ Remedies are the options
of the contract does not depend on him performing the modus. If Siya fails to visit his that you have in law to
father regularly with the car, he will be in breach of contract, and Olusanda can seek legal correct a situation where
remedies for breach of contract. another party has wrongfully
The case study below illustrates the use of a modus. caused you harm.

Case study The use of a modus

A multi-national donor, Africa Philanthropies, donates a building to a university, The donor's

specific intention and requirement is that the building is to house a department within the
university's Commerce faculty. The donor’s department, which drafts its donation contracts,
must insert the appropriate type of contractual clause to ensure that the university does use the
building for its designated purpose. The appropriate clause to include here would be a modus,
as this is the type of clause that one uses to indicate or restrict how something may be used. In
this instance, the modus would serve to provide a contractual restriction on the university's use
of the building. For example, the university must not use the building for another faculty or for a
non-academic purpose.

Penalty clauses
A penalty clause allows contracting parties to agree in advance about what will happen
if they fail to fulfil their duties in terms of the agreed contract. A penalty is generally Pn centsive (5 0/809
that encourages you
related to punishment. In the context of a contract, a penalty is the compensation that to do something, like
one party has to pay for not doing what was agreed in a contract. The person who fails in when a friend promises
her obligations, and is penalised, is called the defaulter. The penalty clause acts asa further _ to treat you to a meal as
incentive to the parties to meet their agreed obligations. The penalty normally takes the soon as you finish your
form of the defaulter having to pay an amount of money to the other contracting party. assignment.

Chapter 9 | Common contractual terms 133

 You could also think of the clause as a deterrent — a negative consequence that discourages a person
from doing something. For example, a penalty for late delivery will discourage a contractor from
dawdling over a job.
‘The extract below shows a penalty clause from a building contract.

The builder agrees to complete work on the property by 1 December 2017. The builder will pay
the owner R600 for every day after 1 December 2017 that work has not been finished.

The reasoning behind a penalty clause is that one party is likely to suffer a financial disadvantage if
something fails to happen by the time agreed to in the contract. In the above example, the owner will
suffer financial loss if her house is not ready on time. She may be staying in rented accommodation until
she can move into her house, so the delays will cost her money.
In addition to its deterrent effect, the penalty clause can also provide for payment of the estimated
damages that one party will suffer if the other party's performance is late or not up to standard. In the
above example, the damages could be the extra money the owner would have to pay to extend her lease
or move to a hotel or bed and breakfast if her home is not ready in time.
Parliament passed a law called the Conventional Penalties Act 15 of 1962 to ensure that such penalty
clauses do not penalise the debtor, or defaulter, unfairly. For example, section 3 of that Act gives a court
the power to reduce a penalty that is out of proportion to the loss suffered by the creditor, or harmed
party. In the above example, it would be fair for the builder to pay the estimated rent that the owner has
to pay for alternative accommodation until the work on her house is finished.

Added value Negative marking in MCQ

Read the instructions carefully when you answer multiple-choice questions (MCQs). Often, you
will get negative marks for wrong answers. If your examiner uses negative marking, you should
consider not giving answers if you are unsure. If you guess, you risk losing the marks you have
earned. However, if negative marking is not used, you should always give an answer to each
question — do not leave any answer spaces blank.

9.4 Entrenchment clauses

An entrenchment clause creates formalities that the parties must meet if they want to change their
contractual obligations. If something is entrenched, it is firmly established and hard to change or
remove. Usually, the entrenchment clause will provide that the only way you can change or add to the
contract is if you put the change in writing and both parties sign it. This means that a verbal agreement
to change any obligations will have no effect.
Entrenchment clauses are often called no variation clauses. To vary something is to change or
adapt it. A no variation clause makes it difficult to change or adapt the contract — the changes must
be in writing.
The extract below shows an example of a no variation clause.

No variation of this agreement will be of any force or effect unless it is recorded in writing and
signed by both parties or their authorised agents.

134 Chapter 9 | Common contractual terms

 Added value Contractual variations

It is common for contracting parties to change their minds about the exact contractual
obligations that they expect someone to perform for them. Suppose, for example, Joseph is
renting a house from Naledi. After the lease has been running for a few months, they agree
that from now on, Naledi (the lessor) will pay for garden services to maintain the garden. In
return, Joseph (the lessee) will pay an extra R400 in rent, since he no longer has responsibility for
looking after the garden. When people make changes like this, it is easy for disagreements to
arise over the new rights and duties of each party.

For this reason, it is a good idea to include entrenchment clauses in any business contracts jease is the agreement
you may enter into in your future career. It is much better to avoid disagreement over you sign when you rent
interpreting contracts than to have to go to court to have the disagreement decided for a vehicle, equipment, or
you — which is expensive and often takes a long time. fixed property.

9.5 Clauses about how to resolve disputes

The terms in this final group of clauses relate to ways of legally resolving disputes over the contract. They
specify which court or other body will hear the dispute and how the costs will be covered. These clauses
can be:
@ jurisdiction clauses
@ arbitration clauses
= costs clauses.

9.5.1 Jurisdiction clauses

In Chapter 1 we mentioned that different courts, given the same facts, may reach different conclusions,
What happens if you are in Gauteng and I am in the Eastern Cape, and we have a dispute about our
contract? Which court will we go to? A jurisdiction clause serves to indicate what both parties have
agreed as to which court will have the power to decide disputes, if they arise, concerning the contract.

Jurisdiction
Such consent is allowed
The parties consent to the jurisdiction of the Grahamstown Magistrates’ Court, in by section 45 of the
respect of any legal proceedings arising out of this agreement. Magistrates’ Courts Act 52
of 1944.

When we discussed the hierarchy of the South African courts in Chapter 1, we noted
that a court's civil jurisdiction in a matter depends on the area, the size of the claim and pee vena
; ; ; . , . go to court concerning a
the type of case. Contracting parties often agree to a particular Magistrates’ Court havi ng dispute between them,
jurisdiction, even if the amount of the claim is more than the normal limit of R200 000 for that is a civil matter.
civil matters in a District Magistrates’ Court. The reason for an agreement like this is that
cases in a Magistrates’ Court are usually cheaper and faster to finalise than in the High Court.

9.5.2 Arbitration clauses

Parties to a contract may want to avoid going to court over a dispute relating to their contract. It is often
cheaper, quicker and more private to seek alternative dispute resolution (ADR), by which we mean
ways of solving legal disputes without going to a court. One form of alternative dispute resolution is
arbitration.
Other forms of ADR, which we will not discuss here, are negotiation, conciliation and mediation.
These are all less formal forms of ADR and do not bind the parties as arbitration does.

Chapter 9 | Common contractual terms 135

 An arbitrator, agreed to by the parties, listens to what both parties have to say, and then makes a
decision, which both parties are bound to follow. The arbitrator must be impartial — she may not take
sides or be biased in favour of either party.

Arbitration

The parties agree that any dispute arising out of this agreement will be referred to an arbitrator
whose decisions will be binding upon both parties. The arbitrator will be appointed by the
Arbitration Foundation of South Africa (AFSA) and the arbitration will be conducted in terms of
the rules and regulations of AFSA.

9.5.3 Costs clauses

Costs clauses in contracts refer to two separate issues:
= = the costs of drawing up the agreement, including stamp duty
@ the legal costs (lawyer's fees) payable by the losing party to the winner, in terms of a court judgment.

Costs of drawing up the agreement

A lawyer who draws up a contract will usually charge a fee for this service. Below is an example of a cost clause.

Costs
1. The costs of this agreement will be paid in equal shares by both parties.
2. In the event of any legal action arising out of this agreement, the party who is more
successful in court is entitled to the legal costs incurred on an attorney-and-client scale.

Legal costs
There are various scales, or levels, of legal costs. Party-and-party costs are the legal costs that are
reasonably incurred in a court case. These are the costs that are usually ordered, unless the parties have
agreed otherwise.
Attorney-and-client costs are higher than certain other levels of costs, and refer to the amount the
winning party gets from the losing party to cover most of her legal costs.

Activity 9.2
Have you been drawing mind maps to keep track of the various kinds of clauses? If not, this is the
time to do it. Otherwise, you will struggle to remember all the different kinds of contractual terms, as
there are more than a dozen. Begin by drawing the four categories we listed on the first page of this
chapter and then split them up. The headings in the chapter will help you. Add as much detail as
you like, and use drawings where possible. Drawings tend to stick in the mind better than words.

Added value Precedent for drafting legal documents

A precedent is an example of a similar type of document to the one you are drawing up — in
other words, it is like a template. It can be a useful starting point when it comes to drafting
of legal documents. However, you should be careful that the precedent you use is appropriate
to your needs and well-drafted. If this is not the case, any mistakes in the precedent will be
repeated or even made worse, or you might be drafting the wrong type of contract for your
needs. If you are in doubt, consult an attorney who is trained to help you in such matters.

136 Chapter 9 | Common contractual terms

 What do you think?

Interestingly, in 2008, the chief magistrate in Durban made a decision to run a case in isiZulu where
the accused person, the lawyers and he were isiZulu speaking. This was despite the fact that court
cases in South Africa are usually conducted in English.

South Africa has eleven official languages, and yet contracts in this country are usually written in
English. Do you think that contracting parties should be able to demand that contracts be written in
their official language of choice, so that they could have a better understanding of the meaning and
consequences of the contracts?

Chapter summary

In this chapter, you learned the following about common
contractual terms;
The aim of common contractual terms is to simplify
the operation and consequences of contracts.
‘These are clauses about whether or when a contract
will take effect or end:
Condition clause: A future uncertain event must
occur to start or end the operation of the contract.
‘There are two types:
® With a suspensive condition, the contract will
not be operational unless and until the condition
is met.
@ With a resolutive condition, the contract will
operate until the condition is met.
Time clause: The rights or duties imposed by a contract
start or end at a stated time or when a particular future
event occurs, There are two types:
= With asuspensive time clause, performance in terms
of the contract will be suspended until the future
uncertain event has occurred or the time has come.
@ With a resolutive time clause, the contract will
operate until the future uncertain event has
occurred or the time has come.
Suppositions: The contract will become operative only if
a given situation exists or an event has already occurred.
Cancellation clause: One party can cancel the contract
immediately if the other party breaches the contract.
‘These are clauses about contractual obligations.
Warranty clause: One contracting party gives an agreed
extra promise regarding the amount or quality of work
she will do or of the product she will provide.
Exclusion and exemption clauses: These similar types
of clause remove or limit the liability of a contracting
party with regard to specified actions.
Modus clause: One contracting party is limited in
what she may do with the subject matter of the contract.
Penalty clause: The parties agree in advance on a
penalty (normally money) for breach of contract.
Entrenchment clauses make the contract more
difficult to change.: This clause provides that any
change to the contract must be in writing.
These are clauses about how to resolve disputes.
Jurisdiction clause: ‘The contracting parties specify the
court that will have authority to judge any dispute
concerning the contract.
Arbitration clause: The contracting parties agree
to be bound by an arbitrator's finding, rather than a
court's, normally because arbitration is cheaper, faster
and more private.
Costs clause: This clause specifies who will pay the
costs of drawing up the agreement and the legal costs if
a dispute arises.

Chapter 9 | Chapter summary 137

 Review your understanding

1. Read about the proposed building contract in the 4. Identify the type of contractual clause (below) and
‘Before you start’ section of this chapter again, and explain your answer:
identify the types of common contractual term that “You may use my car from the end of 2017.’
you would need to include to meet the given aims. 5. Discuss the similarities and differences between
2. Outline the main aims of the following types of conditions and time clauses.
contractual clause. Then, in each case below, give both 6. Outline the main aims of the types of contractual
an example ofa situation in which it would be useful clauses below, and give examples of situations in
to include a clause like that in a contract fora start-up which it would be useful to include each type of
business in which you are a supplier of computer clause in a contract:
chips, and why its inclusion would be useful: a) supposition
a) awarranty b) a resolutive condition
b) an exclusion clause c) cancellation clause.
c) amodus 7. Why would contracting parties agree to go to
d) a penalty clause. arbitration rather than have a dispute go to court?
3. Identify the type of contractual clause below and
explain your answer:
‘You may use my car until you graduate from
university with a BCom, obtain employment and
receive your first salary.’

Further reading

Harms, L.T.C. 2015. Amler’ Precedents of Pleading, 8th edn.

Durban: LexisNexis South Africa
(This user friendly guide to pleadings and causes is found in
every law library. The 8th edition includes recent legislation
and case law.)

138 Chapter 9 | Review your understanding

 Chapter

Forms of breach of contract

10
The main ideas
® Breach due to impossibility
Breach due to repudiation
Breach due to malperformance
Breach due to a delay in performance by the debtor
Breach due to a delay in performance by the creditor

The main skills

= Analyse a breach of contract and identify the relevant form of breach.
® Outline the requirements for each type of breach of contract.
= Apply knowledge of theory to problem-type scenarios.
a Draw a mind map of the requirements for each type of breach of contract.

When parties conclude a contract, the primary purpose is the fulfillment of each party's duties and
obligations through proper performance. However, sometimes a party to a contract breaks the agreement
for a reason that is not allowed in law. This is known as a breach of contract. The law distinguishes
between various forms of breach of contract. In this chapter, we discuss five of these forms. Chapter 11
will look at remedies for breach of contract.

Before anyone can breach a contract, the contracting parties must have formed that contract, as we
explained in the previous chapters. When one party breaches a contract, the party that suffers because of
the breach can seek remedies for the breach. First, however, you have to identify the type of breach that
has occurred. The five most common types of breach of contract are as follows:
breach due to impossibility — when one of the parties makes performance of the contract impossible
we wNo

breach due to repudiation — when one party indicates that he will not honour a contract
breach due to malperformance — when performance goes against the terms of the contract
breach due to a delay in performance by the debtor
breach due to a delay in performance by the creditor.

The consequence of one party breaching the contract in each instance (above) is that the other party
becomes entitled to the legal remedies for the breach, This chapter looks at each of these forms of breach
in turn.

Before you start

Lwazikazi, who lives in Johannesburg, has a job interview in Cape Town with Sheldon Cooper Inc at
10h00. Before she catches her flight to Cape Town, she books and pays online for an airport shuttle with
Go-Go Airport Shuttle to take her from Cape Town International Airport to the interview. However,
once she lands in Cape Town, she cannot find the airport shuttle driver and vehicle. She searches for
him for 20 minutes and then books and pays for another shuttle service to take her to her interview.
Lwazikazi had to pay 20% more for the second shuttle service, as she was not able to book online to
qualify for the online discount due to the last minute rush at the airport, At the end of the chapter, you
should be able to identify the form of breach that is applicable to this scenario.

Chapter 10 | Forms of breach of contract 139

 Would your answer be different if Lwazikazi's flight from Johannesburg was delayed, the airport shuttle from
Go-Go Airport Shuttle waited 30 minutes for her and then left without her? What if Go-Go Airport Shuttle
sent Lwazikazi a Short Message Service (SMS) an hour before her flight from Johannesburg to Cape Town?
People generally feel that it is unacceptable when a contracting party fails to perform properly, or at
the agreed time, or if one contracting party prevents the other party from performing as agreed upon, or
if one contracting party indicates that she does not intend to perform at all.
Think about similar experiences that you may have had when someone failed to do exactly what
she agreed to do in terms of your agreement. What would you consider to be good reasons for not
performing as required in a contract? Write down your ideas. As you read this chapter and the next
chapter, see whether your reasons are similar to the way in which the law sees a breach a contract.

10.1 Breach due to impossibility

There are two ways in which it can become impossible for a contracting party to perform a duty that is
required in terms of the contract, namely:
m= ~~ when the debtor makes his own performance impossible
= when the creditor makes it impossible for the debtor to perform.

For both these types of impossibility, the performance does not have to be objectively impossible for
the defaulting party to perform. This means that there will be a breach even if the performance is
subjectively impossible to perform.
A third possibility is that a duty becomes impossible to perform due to something beyond the control
of either party, such as a natural disaster or a change in legislation.
Let us consider the two options below.

10.1.1 The debtor makes his own performance impossible. When we talk eboutine
Sometimes, the debtor, by her own blameworthy behaviour, makes it impossible to blameworthiness of a
perform according to the contract. If the debtor's behaviour is to blame for her own party, we are talking about
inability to perform as agreed, then she can be held to be in breach of contract. 2 party being at fault or in
the wrong.
Let us look at the case study below to illustrate this.

ert Toa atehi] Contract to deliver ten helicopters

Scorpion Helicopter Manufacturing Company (Scorpion) has signed a contract to deliver ten
custom-built helicopters to the South African Police Services (SAPS). However, Scorpion is unable
to make good on their undertaking to deliver the helicopters because the only company that
makes the propellers for these helicopters refuses to do business with Scorpion. The reason for
their refusal to do business with Scorpion is that Scorpion did not pay its account on time and
still has a large sum of money outstanding on the account. For this reason, Scorpion cannot fulfil
its contract with SAPS and it can therefore be held liable for breach of contract for making its
own performance to SAPS impossible to perform.
Consider whether Scorpion’s impossibility to perform is objectively or subjectively impossible?
What are the reasons for your answer?

10.1.2 The creditor makes it impossible for the debtor to perform

Sometimes, the creditor, by her own blameworthy conduct, makes it impossible for the debtor to
perform in terms of the contract. If the creditor’s behaviour is to blame for the debtor not being able to
perform as agreed upon, then she (the creditor) can be held to be in breach of contract. The debtor has no
contractual duty to perform when the creditor has made it impossible for her (the debtor) to perform.
Let us consider the case study below.

140 Chapter 10 | Forms of breach of contract

 Case study Halona destroys her laptop computer in a fit of rage

Halona contracts with Selen today to have her laptop computer repaired and the software
upgraded the following week at a set date, time and place. The parties also agree on the
amount that Halona is required to pay Selen. However, that very night after Halona contracted
with Selen, Halona flings the laptop computer against the wall in a fit of rage after discovering
that all of her saved documents have been corrupted by a software virus. In this instance,
Halona, the creditor, has made it impossible for Selen, the debtor, to perform in terms of their
contract. Selen is therefore under no obligation to render performance to Halona. However,
Halona is still required to pay Selen since it was through no fault of Selen’s that her performance
is now impossible and Selen had already booked out her time for the appointment. If Halona
refuses to pay Selen, she (Halona) will be in breach of contract.

Activity 10.1
There are significant legal differences in cases where, on the one hand, the debtor makes her
own performance impossible (resulting in the debtor breaching the contract) and where, on the
other hand, the creditor makes it impossible for the debtor to perform (which constitutes a valid
reason for the debtor's non-performance).
1. Draw a table with two columns. On the one side, write down three examples to illustrate
instances where the debtor has made her own performance impossible and, on the other
side, write down three examples to illustrate instances where the creditor has made it
impossible for the debtor to perform.
2. Share your answers with a partner and discuss your examples to test your understanding.

Added value Is fault always a requirement?

The chapters that follow often refer to debtors and creditors, and it is important that you
understand what we mean by those words. A debtor is someone who owes the creditor
something (money or some other type of performance), and a creditor is someone to whom the
debtor owes something (money or some other type of performance). Suppose, for example, you
bought clothes on credit from Sedgars Clothing Store (Pty) Ltd (Sedgars), and you agreed to pay
the full purchase price off in monthly instalments. You are Sedgars’s debtor since you owe the
company money for the clothes that you purchased, and Sedgars is your creditor since you owe
your performance (payment of money) to the company.
But note that in the context of contracts, we define ‘creditor’ and ‘debtor’ in relation to
a particular duty or right. If you employ me to re-cover your lounge suite, then you are my
debtor (and | am your creditor) in that you have a duty to pay me for the work. But | am also
your debtor (and you are my creditor) because | owe you a duty to do the work of covering the
furniture. So each party to a contract is usually both a creditor and a debtor, as each one usually
owes at least one duty to the other.

10.2 Breach due to repudiation

When a creditor receives some form of notification, expressly or tacitly, that the debtor will not honour
her obligations in terms of the contract and where there is no legally valid reason for this refusal, then
the debtor is in breach of contract. The notification by the debtor is a distinguishing characteristic
between this type of breach and the other types.

Chapter 10| Forms of breach of contract 141

 ‘This type of breach of contract is called repudiation. As discussed in Chapter 4, when you repudiate
something, it means that you reject, deny or refuse that something.

Activity 10.2
Notification can either be expressed or implied. In other words, the debtor can notify the creditor
either by his words or conduct.
1. Think of two examples to illustrate how a debtor may repudiate a contract by express
notification, and two examples to illustrate how a debtor may repudiate a contract by
his actions.
2. Compare your answers with a friend's to test your understanding.

PNs fete ZLtt Fault is not a requirement

Fault is not a requirement for this type of breach of contract. This means that, even if the debtor
believes that she cannot lawfully perform in terms of the contract, but her belief is wrong,
then her conduct is in breach of contract through repudiation. So, even if the debtor genuinely
believes that her conduct is justified, she will still be in breach of contract by repudiation.
How do the courts decide whether or not a communication between parties is repudiation?
The test is whether a reasonable person placed in the position of the innocent party would
have understood the communication to mean that the debtor did not intend to honour the
agreement. If so, the innocent party can choose whether he wants to accept the repudiation
and cancel the contract, or to allow the contract to remain in force. If he chooses to keep the
contract in force, he can go to court to get an order that the other party should perform his
obligations in terms of the contract.

Tuckers Land and Development Corporation (Pty) Ltd v Hovis 1980 (1) SA 645 (A)

Principle

The legal test to determine whether or not a communication between the contracting parties
amounts to a repudiation is whether a reasonable person placed in the position of the creditor
would have understood the debtor’s communication to unequivocally mean that she (the debtor)
did not intend to honour the agreement.
Facts

Tuckers Land and Development Corporation (Pty) Ltd sold two plots of land in a proposed
township to Hovis. Even though the contract was subject to the township being proclaimed as
such, Hovis was obliged to make certain payments in the interim. Hovis made payment in terms
of the contract. However, Hovis soon became aware that the township developer was facing
difficulty in having the township proclaimed and that he had drafted a new plan of the township
for submission to the authorities — one which did not include Hovis’s plots of land.
The court's finding
The Appellate Division held that the township developer's actions amounted to a breach of
contract in the form of repudiation. A reasonable person in the position of Hovis would have
understood the township developer's actions to unambiguously mean that, in his attempt to
obtain proclamation of the township, he was sacrificing Hovis’s rights to transfer in respect of
the plots of land.

142 Chapter 10| Forms of breach of contract

10.3 Breach due to malperformance
If one of the parties to an agreement performs in a way that is against the agreed terms, then this is
a breach of contract. A distinguishing characteristic between this type of breach of contract and the
others is that here the debtor does actually perform, but her performance is not in line with what was
agreed upon in the contract. This type of breach is called malperformance and it is probably the most
common type of breach of contract. We can categorise cases of this type of breach into the following
two categories:
m= the debtor performed in a way that was not allowed in terms of the contract
m the debtor tendered (carried out or gave) performance that was defective or incomplete.

A case study follows to illustrate the difference.

ler-T yo actokt] Mechanic at fault

Leonard is a mechanic working for A-Class Motors. In terms of his contract with the company,
he has agreed, among other things, not to do any private mechanical work after hours without
permission from the company. He has also agreed that he will only use new, genuine parts to fix
the vehicles at work.
If Leonard decides to make extra money by repairing cars in his neighbourhood without the
company’s permission, this is an example of the first category of malperformance since he has
done something that is not allowed in terms of the contract.
On the other hand, if Leonard repairs vehicles using second-hand or inferior parts while
at work, this would be an example of the second category of malperformance since his
performance is defective.

10.4 Breach due to a delay in performance by the debtor

If the debtor fails to perform in terms of the time requirements set out in a contract, he is in breach of
contract. There is no need for the creditor to demand performance from the debtor. This type of breach
of contract is known as mora debitoris, which means ‘default by the debtor’.
If the contract does not specify a time for the debtor's performance, then the creditor should indicate,
either verbally or in writing, a date of performance to the debtor. If the debtor does not perform by that
date, he will be én mora. The date indicated should allow the debtor a reasonable time to In mora means ‘in default’.
perform. However, it is not a requirement. It is now accepted in law that the creditor may
demand performance at any time after the formation of the contract, or even at the same
. , Reasonable always refers
time that the contract is concluded. so wee
to an objective evaluation
Where the creditor does allow the debtor a reasonable time to perform, what is ree
reasonable will depend on the circumstances of the contract, taking into account factors
including, but not limited to, the nature of the performance. Some contracts may require
more urgent performance by the debtor than other contracts. The reason that the time set should be a
reasonable one is that the time was nota part of the initial agreement and the creditor is choosing a time
after the fact without actual agreement with the debtor.
If no time had been set, and a period of time has already passed since the formation of the contract,
then this may be taken into account in determining whether the creditor's demand for performance
afforded the debtor a reasonable time to perform.
A key characteristic of this type of breach of contract is the requirement that the debtor has failed to
perform at the required time.

Chapter 10| Forms of breach of contract 143

 Added value Possible versus impossible performance

The debtor will be in breach of contract for a delay in performance only if performance is
actually possible at the time of the delay. This means that, if the debtor’s performance has
become impossible without any fault on her part, the debtor cannot be liable for breach of
contract. However, if the debtor is already in default by the time her performance becomes
impossible, then the debtor will still have a duty to the creditor. For example, the impossibility of
performance by the debtor could be as a result of a natural disaster, such as a tsunami.

Activity 10.3
Consider the following facts. Tom undertakes to transport a ton of bricks from Jack's
construction site in Lenasia to Lindani’s site in Pretoria by midday on 15 August. When Tom
arrives to pick up the bricks from Jack’s yard, he discovers that the bricks have not arrived from
the manufacturing site. This delay, which is beyond Tom’s control, causes him to deliver the ton
of bricks to Lindani's site in Pretoria five hours later than agreed upon. Discuss your answers to
the following questions in a group of three.
1. Is Tomin breach of contract?
2. Would your answer be different if the reason for Tom’s delay was that he stopped on the
way at his girlfriend’s house for lunch?

10.5 Breach due to a delay in performance by the creditor

If the creditor is at fault for not accepting or allowing proper performance by the debtor, then the
creditor is in breach of contract. This type of breach of contract is called mora creditoris, which means
‘default of the creditor’. This type of breach can arise only where the debtor cannot perform properly
without the creditor's assistance or cooperation.
There are certain conditions that must be met for the creditor to be at fault in this way:
The time for the debtor to perform must have arrived.
Performance must be possible.
The debtor must have tendered proper performance to the creditor, as per the terms in the contract.
The creditor must have failed to give his cooperation, thereby delaying the debtor's performance.
The default must be due to the fault of the creditor.

Let us consider an example to illustrate this type of breach of contract.

fer
T Toe abehv] In mora

Nokuthula contracts with William to paint the inside of her house at a specified date and time.
On the day, William arrives at Nokuthula’s home only to discover that it is locked.
She is out of town for the day and she did not leave a key for William to access the house.
William's performance is therefore delayed by Nokuthula — she is in mora (in default) and guilty
of breach of contract.
A delay in performance by the creditor does not cancel the duties of the parties. In other
words, the debtor is still entitled to performance by the creditor, and he must still perform in
terms of the agreement, even though the creditor is in breach of contract.
This means that William is still entitled to payment for that day that he made himself
available to paint Nokuthula’s house. He is also still required to paint Nokuthula’s house once
they arrange another date and time and she needs to pay him for that performance.

144 Chapter 10 | Forms of breach of contract

 Added value Possible versus impossible performance?

Similar to mora debitoris, this type of breach will apply only if it is still possible for the defaulting
party to perform. Provided that the debtor does not cause any loss intentionally or by way of
gross negligence, if the performance becomes impossible while the creditor is in default, the
creditor will still owe a duty to the debtor, even though the debtor owes no duty to the creditor.

Let us consider the example above again. We already stated that Nokuthula’s delay does not cancel her
duties to William nor does it cancel his duties towards Nokuthula. He still has to paint the house once
they arrange another suitable time, and she still has to pay for the work done. However, what would
happen if Nokuthula’s house burned down before he returned to paint it? In this instance, it would
be impossible for William to perform in terms of the contract. Since William did not cause (either
intentionally or negligently) the fire that burned down Nokuthula’s house, Nokuthula still owes a duty
to him, even though he owes no duty to her. This means that he cannot paint the house, but she still has
to pay him for his time, as initially agreed upon.

Activity 10.4
For each type of breach of contract that we discussed, draw a list of requirements that must be
satisfied. You can draw mind maps or simply use bullet points. You could even create flowcharts
with a series of yes/no decisions. These exercises will help you to easily engage with the material
and remember your legal principles.

What do you think?

The old saying ‘A promise is a promise (and you must keep it)’ may apply to cases of breach. In addition
to the legal remedies for breach of contract, which we cover in the next chapter, there are a number of
other ‘non-legal’ consequences of breaking a contract.
With a partner or in your small group, think of some examples to illustrate the above statement. You
can refer either to your own experiences or make up your examples.

Chapter summary

In this chapter, you learned the following about the
breach of a contract:
When a party to a contract fails to comply with its
terms in an instance, where the law does not allow for
non-compliance, that party is in breach of contract.
There are five different types of breach of contract:
= Performance made impossible — the debtor is held
liable for making his own performance impossible
through blameworthy conduct.
® Repudiation — one contracting party notifies the
other contracting party, through words or conduct,
that she will not honour the contract. Fault is nota
requirement here.
= = Malperformance — performance that is rendered is
either against the terms of the contract, or defective
or incomplete.
= Delay in performance by the debtor — the debtor
is at fault for not meeting the time requirements of
the contract.

Chapter 10 | Chapter summary 145

m Delay in performance by the creditor — the creditor
is at fault for not accepting or not allowing proper
performance by the debtor.
Review your understanding
1. Sally buys a car trailer from Sizwe for
R10 000 and agrees to pay for iton 1 August.
However, instead of paying him on that date,
she informs him that she will be able to pay
him only on | September. Sizwe refuses to
accept payment on | September. Has there been
a breach of contract? Explain fully.
2. Thandeka contracts with Bill to fix the
software virus on her laptop at a specified date and
time. Bill arrives at Thandeka’s office at the agreed
time, only to find that Thandeka has gone toa
yoga class and has not left her log-in details for Bill
to carry out the necessary repairs. Thandeka arrives
at her office only two hours later. However, Bill has
already left for his next appointment. Advise Bill
whether he can still claim payment from Thandeka
for his time. Give reasons for your answer.
3. Tumelo has contracted to do flower arrangements
for Tumi’s upcoming wedding. Tumi, in her
wedding mania, accidentally gives Tumelo the
address for the wedding. Tumelo arrives at the
venue that he was given the address of by Tumi
on the correct date, only to find that the venue
is locked and no one is there. Has there been a
breach of contract? Explain. Can Tumelo still claim
for payment from Tumi?
Further reading
Schulze, H. et al. 2015. General Principles of Commercial Law,
8th edn. Cape Town: Juta and Co. (Pry) Ltd
146 Chapter 10| Review your understanding
Once a breach of contract has been established, the
innocent contracting party may claim one of the
legal remedies.
Mora debitoris is (Choose the correct answer.):
a) the failure of the debtor to perform on time
b) the giving of notice by the debtor that he does
not intend to comply with his obligations
c) the failure of the creditor to accept proper
performance when tendered by the debtor
d) none of the above.
Milo, a building contractor, undertakes to build
a house for Anne. They agree that Milo will
complete the house by 31 May. Milo’s delay in
ordering certain building materials results in the
house being completed only on 31 July. From
the options below, select which type of breach of
contract applies in this scenario.
a) malperformance
b) mora debitoris
c) mora creditoris
d) prevention of performance by the creditor.
Which statement below is incorrect?
a) Breach due to repudiation requires that the debtor
indicates her refusal to honour her obligations.
b) Breach of contract due to impossibility relates
to both subjective and objective impossibility.
c) ‘The test to determine whether or not the debtor
has repudiated the contract is an objective one.
d) Breach due to malperformance is, generally,
where the debtor tenders incomplete or
defective performance.
Sharrock, R. 2016. Business Transactions Law, 9th edn.
Cape Town: Juta and Co. (Pty) Ltd
 Cat aTey
oh cig
Remedies for breach of contract
oy
The main ideas
= =When and why to use remedies
= = Types of remedy
= How to choose remedies

The main skills

Discuss factors that a court would consider before granting an order for specific performance.
Apply knowledge of theory to determine which remedy to apply in different situations.
Make a decision about when to rescind a contract.
List the reasons that may allow one party to cancel a contract.
Explain how to determine contractual damages.
State how to distinguish between delictual and contractual damages.

Chapter 10 showed you how to identify the common types of breach of contract. Now we are ready to
look at the remedies, or legal options, available to one contracting party if the other party breaches the
contract. We begin with an overview of the various categories of remedies and then consider briefly how
to choose an appropriate remedy,

Before you start

Imagine that you own a construction business. Your business enters into a contract with a homeowner
to build her a garden wall at a cost of R30 000. The contract states that half the fee is payable up front,
before the work begins. You bring the machinery and supplies to the property and ask the homeowner
for the agreed R15 000 before you begin to work. The homeowner promises to pay, but after a few
weeks, she still has not. What solutions or remedies do you think the law can offer you in this situation?

PXs (ole BYE

Lt Are you ready?

This chapter builds on your knowledge of breach of contract from Chapter 10. That chapter is a
fairly simple one, but you need to know it well before you continue. Revise the summaries and
activities of Chapter 10 to make sure that you understand those concepts. Once you are confident
in your understanding of breach of contract, you are ready to consider what remedies are available
to one contracting party when the other party has broken the contractual agreement.

11.1 What is a legal remedy?

A legal remedy is what the law allows a harmed or aggrieved party to be awarded, usually by a court, for
the inappropriate behaviour of another party, which would ordinarily have caused the harm. It is a way
in which a dispute between parties is resolved. This is expanded upon below.

11.2 When and why to use legal remedies

When one contracting party breaches a contract, the law provides remedies by which the
To rectify a matter means
other party can try to rectify the situation. Without such remedies, there would be no way ‘to put it right or correct’.
to enforce contracts, and no real reason for contracting parties to keep their contractual
promises. Various factors, including the type and extent of the breach, determine which
remedies will be available to a harmed party.

Chapter 11 | Remedies for breach of contract 147

11.3 Types of remedies
The remedies available in the event of a breach of contract can be categorised into the following:
@ those that enforce the contract
@ those that rescind the contract
® = those that compensate the harmed party for the breach — namely, damages and penalty clauses.

11.3.1 Enforcing the contract

Enforcement of the contract is also referred to as execution of the contract. If you get a court to enforce
a contract, the result should be that the defaulting party performs in terms of the contract as promised
originally. We can distinguish two enforcement remedies, namely:
= an order for specific performance
® an interdict.

A court will not allow a party to enforce a contract in certain instances. Examples of these are when a
contract is illegal, impossible or against public policy. An example of an illegal contract would be where
a drug dealer does not deliver drugs that he agreed to deliver to the person wanting to buy those illegal
drugs. An example of a contract being against public policy is a gambling debt, for example, when two
friends bet as to who will win the Premier Soccer League. An example of an impossibility of performance
is where someone has agreed to sell and deliver a motorcycle when that motorcycle has already been
totally destroyed by a fire.

Specific performance
An order for specific performance is an enforcement order to do what was promised. If you, as one
contracting party, have met or are willing to meet your responsibilities under a contract, then you can
apply for an order of specific performance to force the other person to also perform as promised.

When will the court grant the order?

The court has a choice, called a discretion, whether to grant or refuse a specific performance To grant an order or other
: : ; . 2
order, depending on the particular circumstances of the case. When a contracting party is request means ‘to agree
able to perform in terms of the contract but chooses not to do so, the court will usually to it’.
grant an order for specific performance.

When will the court refuse the order?

‘There are various circumstances under which a court is not likely to granta specific performance order, namely:
® = if performance is impossible
® if performance will cause too much suffering
= if the cost for the defendant would be too high
@ if the debtor is insolvent.

Let us look at each case in turn.

When a contracting party is unable to perform what she agreed to, a court will not order her to perform
if performance is impossible. Suppose, for example, a farmer contracts to sell her maize crop to a farming
produce merchant, but then sells the crop to a supermarket instead. The court will not grant an order
for specific performance against the farmer to deliver the maize crop to the farming produce merchant,
since this is not possible in the circumstances — the crop has already been sold to another party. In this
example, the farmer is in breach of contract, but the farming merchant does not have the remedy of specific
performance available to him. Instead, he will have to sue the farmer for damages suffered.
You will see later in this chapter that such a breach does allow the farming produce merchant to claim
damages from the maize farmer.

148 Chapter 11| Remedies for breach of contract

 A court will not grant a specific performance order if it will cause too much hardship for the
defendant or other parties, The case study below illustrates this principle.

Case study Fees must fall!

In the context of the ‘fees must fall’ protest, a group of concerned parents (and others)
urgently took the Nelson Mandela (Metropolitan) University to court seeking an order
(amongst other things) of specific performance that academic activities, which had been
suspended, should be ordered to swiftly resume on campus. This was the case of Concerned
Association of Parents and Others for Tertiary Education at Universities v Nelson Mandela
Metropolitan University and Another 2016 ZAECGHC 136. The application for an order of
specific performance was denied by the court because of the undue hardship that this would
have placed on the University had the order been made. For example, were the court to
have ordered resumption of classes, the University would not have been able to assure, at
that point in time, the safety of students and staff or property on campus. This case is well
discussed in a journal article — Glover, G. "University protests, specific performance, and the
public/private-law divide’ (2017) 134.3 SAL/ 466.

Another factor that the courts consider in situations like this is whether the cost of
If something is
the order for the defendant would be disproportionately high in relation to what the disproportionate,
plaintiff would gain from the order. In the ‘fees must fall’ case example above, the cost of it means that it is
the private security required to maintain the necessary protection of people and property out of proportion, or
on campus was prohibitively high in the context of available funds to the university, out of balance. For
which could result in other core functions of the university being unable to run due to example, someone
who kills a cockroach
insufficient funds. with a shotgun is using
A court will also not grant specific performance if the debtor is insolvent. When disproportionate force.
a debtor has too little money to cover all her debts, her creditors do not get repaid
the whole debt she owes them. If the court grants one creditor an order of specific An insolvent person's
performance against an insolvent person, it is unfair to her other creditors, to whom she debts exceed her assets.
also owes money. In other words, the court order could cause too much hardship to the In other words, the
other creditors. Further, the trustee has discretion under the Insolvency Act 24 of 1936 amount that she owes is

on whether to perform in a contract based on what would be in the best interests of more than the value of
everything she owns.
the creditors.

What if the court refuses to grant the order?

When the court refuses, for any of the above reasons, to order specific performance, the harmed party
may sue for damages. Sometimes the court will grant both the order of specific performance and award
damages. For example, if a property owner agrees to let you rent a shop in a busy shopping centre, but
then causes a delay by not giving you access at the agreed time, then a court could order her to hand over
the keys to you (specific performance) and you would be able to sue for the value of the loss of business
during the delay (damages).

Interdict
An interdict is a court order that orders someone not to do something. In the context of contracts, you
can seek an interdict to stop the other contracting party from doing what she has contracted not to do.
So if one contracting party breaches a part of the contract, then the other party can apply to court for
an interdict to prevent or stop the breach. Because such an order aims to prevent certain conduct, it
is known as a prohibitory interdict. (The opposite of a prohibitory interdict is a mandatory interdict,
which orders some kind of action to occur.)

Chapter 11| Remedies for breach of contract 149

 When someone seeks an interdict, it is usually a matter of urgency. Suppose, for example, Richman
enters into a written, binding contract to sell his house to Lex. But after a heated argument between
them, Richman threatens to get a bulldozer and flatten the house before Lex can move in. Then Lex
could successfully apply for a prohibitory interdict to prevent the destruction of the house.
A prohibitory interdict is a type of order for specific performance, because, by granting the interdict,
the court is ensuring that the parties follow the requirements of the contract. This is why we consider
prohibitory interdicts, like orders for specific performance, to be remedies for the enforcement of the
contract, These two types of remedy are granted only at the discretion of the courts.
A specific performance order demands performance of what was agreed in the contract. A court has
discretion to grant a specific performance order. It will not do so against an insolvent or if performance is
impossible or will cause undue hardship.
To compensate for extra losses, a court may award damages in addition to a specific performance order.
A prohibitory interdict is an urgent remedy to prevent or stop a contracting party from avoiding their
contractual agreement(s).

Activity 11.1
Thandi, a small-scale farmer, contracts with Stephen to supply him with five bags of beans every
month. After a locust plague, Thandi produces only enough vegetables to feed her family and
therefore does not supply Stephen with the beans for three months.
Discuss with a classmate the factors a court will consider in deciding whether to grant an
order for specific performance against Thandi in these circumstances.

11.3.2 Rescission or cancellation of the contract

So far, we've looked at enforcement as one way of remedying a breach of contract. Another option is to
seek to cancel (or rescind) the contract.
You saw in Chapter 9 that a contract may include a cancellation clause, which allows either party to
cancel the contract if the other party breaches it. The breach of contract itself does not bring the contract
to an end; the harmed party must actually cancel the contract to end it. Cancelling a contract due to
breach means that the harmed party is released from her obligations because the other party breached
the contract.
What if there’s no cancellation clause in the contract? It’s possible for a party to succeed in having
a contract rescinded or cancelled even without a cancellation clause. However, the courts do not
easily grant cancellation in such circumstances because it goes against the accepted legal principle that
contracting parties should perform as they have promised to do in the contract.
Our courts grant such cancellation orders only when the breach of contract is material; in other
words, the breach relates to an important part of the contract.
In the following sections we look more closely at:
® reasons for cancellation
@ =~ what happens when you cancel (the results of cancellation).

Reasons for cancellation

Cancellation for a material breach can be categorised according to what sort of breach it is and who
caused it. The breach may be due to lateness or for reasons other than lateness.

Cancellation because of lateness

A party who does not meet her duties in terms of a contract on time is in mora (in default). You should recall
from Chapter 10 that lateness of performance may or may not allow a party to cancel. This depends on
how critical it is that the performance is on time. Suppose, for example, you plan to work on a summer
camp programme in America, and contract with a company to process your visa and other travel documents.

150 Chapter 11 | Remedies for breach of contract

You need the documents by a particular date to be able to travel. If the visa processing company does not
deliver the documents to you by the critical date, they will be i mora, and this lateness would allow you
to cancel. In this example, the time for performance is vital — performance after that date would be useless.
Whenever a case involves late performance, the court has to consider the facts and decide whether the time for
performance is a critical part of the contract.
Consider a situation where a contract does not specify a deadline for performance. In that case, if one
contracting party believes that the other party is taking too long to perform, she can notify him that he
must meet his duties in terms of the contract by a given date and that, if he fails to do so, the contract
will be cancelled.
In law, this is called ‘placing the other side in mora’ through giving notice. As you saw in Chapter 10,
either the creditor or debtor could be in mora. When the debtor causes the delay, it is called mora
debitoris; when the creditor is at fault, it is mora creditoris.

Cancellation due to breach other than lateness

Where a party breaches terms of a contract other than through lateness, the contract can be cancelled
only if the court decides that the breach is serious enough for cancellation. (This requirement is the same
as in the case of lateness.)
When making this decision, the court will ask:
=~ what part of the contract was broken
@ how badly it was broken.

We will look at remedies for:

@ = malperformance
= repudiation
= mora debitoris
= mora creditoris.

Malperformance
If the contracting party's actions are substandard or defective; in other words, there is action __In law, this is sometimes
based on the contract, but it is not done well enough, then the same rules apply as if the called positive
breach took the form of malperformance, and cancellation is only possible: malperformance. The
1. in terms of a cancellation clause pee ee
there is some performance,
2. if the breach is: although the performance
= material (central to the contract) is not what is agreed to.
= = major.

For example, if a security company agrees to provide appropriate security for an international rugby
game and then it provides only two guards (maintaining security at a sporting event requires far more
than two security guards), that performance is inadequate and relates to a major part of the contract.
‘The rugby association that hired the security company can cancel the contract on the basis of major and
material malperformance. (It can also sue for damages, which is a separate issue.)
If the term that is breached is not central to the operation of the contract, or the breach is not too serious,
then the harmed party will not be able to cancel the contract and will only be able to claim damages.
Suppose, for example, you sign a lease to rent my house, which is still being built. However, the
builders take longer than expected, and by the time you want to move in, the house still does not have a
roof. My failure to provide the home that I promised in the contract is a major breach. You are allowed
to cancel the lease, because the provision of shelter is central to a home lease. However, if | rent you a
furnished house and one of the chairs has a broken leg, you will not be able to cancel the lease because of
that. The chair leg is not central to the contract. (You can just require the landlord to have it fixed.)

Chapter 11 | Remedies for breach of contract 151

Repudiation
Suppose you have a contract, and the other contracting party says that she no longer intends to be
bound by a part of the contract or the whole contract. In other words, she repudiates the contract. If her
intention not to be bound relates to a central part of the contract, then you, as the innocent party, can
decide whether or not to cancel the contract.
For instance, in the example given in the previous paragraph about the security company, if the
security company indicates on the day before the rugby game that it has a staff shortage and can only
provide two guards, this is major (and material) repudiation, which would allow the other party to
cancel the contract. The Sandown Travel case below illustrates this.

Sandown Travel (Pty) Ltd v Cricket South Africa (42317/2011)

2012 ZAGPJHC 24907/12/2012

Principle
An election whether to cancel a contract rests with the harmed contracting party when the
other party indicates they will not be meeting their agreed obligations.
Facts

A travel agency, Sandown Travel, sought damages from Cricket South Africa for R1 640 000.
Sandown Travel alleged that Cricket South Africa had repudiated the latter's agreement to pay
the travel agency for the provision of its services.
The court's finding
Where an agreement is repudiated by one party (in this case, Cricket South Africa), it allows/
allowed the other party (Sandown Travel) to elect whether to cancel the contract or not. If the
one side does decide to continue with the contract, it may claim damages from the repudiating
party. In this case, the plaintiff was successful in claiming the damages it had suffered due to the
defendant's repudiation of their contract.

Mora debitoris
If the debtor's actions prevent the creditor from acting in terms of a contract, then the creditor may
cancel the contract. Suppose, for example, Londiwe pays a jeweller R200 in advance to repair her watch,
and the jeweller agrees to complete the repair by 1 November. On 7 November, Londiwe discovers that
he still has not fixed the watch — or even looked at it. On the basis of mora debitoris, Londiwe may cancel
the contract and get both the money and the watch back from the jeweller.

Mora creditoris
If the creditor prevents the debtor from fulfilling the contract, the debtor may choose to cancel the
contract or to seek specific performance. Refer to the example of mora creditoris in Question 2 of
Chapter 10's Review your understanding, where Thandeka contracts with Bill to repair a virus on her
computer, but then makes it impossible for him to do the repair.

Results of cancellation
When a contract is cancelled or rescinded, the contract ceases to exist. For most types of contract, this
means that everything has to be returned to what it was before the parties entered into the contract.
Suppose a computer dealer brings a computer to the home of a buyer. If, for whatever reason, either
side then cancels the contract, the buyer must return the computer to the dealer. In such circumstances,
one of the parties may have to pay damages, but this does not change the general principle that on
cancellation of a contract, each party must give back anything that was received from the other party.

152 Chapter 11 | Remedies for breach of contract

Exceptions
‘There are some types of contract where the rights and duties of both parties end from the moment of
cancellation, but any earlier actions by either party remain unaffected. Leases and employment contracts
are examples of this type.
If the contract is cancelled, the landlord does not have to repay the tenant's rent, nor does the
employee have to repay the salary she received while the contract was in force. It would be unreasonable,
and sometimes impossible in such circumstances, to demand that all the consequences of the contract
before cancellation be reversed.
The choice
A party that has the right to cancel a contract does not have to do so — it is just one of the available options.
She may choose to claim damages or seek specific performance instead. If the innocent (or harmed) party
chooses to cancel the contract, she has to indicate this decision clearly to the party that is in breach. The
cancellation may be confirmed by a court, but this is not a requirement for cancellation of a contract.

11.3.3 Damages
By ‘damages’, in this context, we mean the money that a defaulting party has to pay the other contracting
party (the harmed or innocent party) to compensate for the loss it suffered as a result of the breach
of contract. It is fair that the contracting party who has met her obligations in terms of the contract
should not lose money due to the other party's breach of contract. The payment of damages should put the
harmed party in the financial position she would have been in if the defaulting party had met his duties
in terms of the contract. In other words, the harmed person gets the benefits she lost out on.
‘The harmed party can claim damages whether or not the contract is cancelled. The issue is whether
she has suffered loss due to the other contracting party's breach of contract. For example, she may have
applied for an order of specific performance rather than cancellation.

Added value Prove your claim

A key issue in court battles is providing proof or evidence of what you are claiming or alleging.
The general principle in our law is that the person who makes allegations must provide proof. In
other words, if you make an allegation in court, you must prove what you are claiming.
If you cannot prove your allegation, the court will not make the order you request. If you
claim to have suffered loss due to a breach of contract, and are seeking remedies for that
breach, you have to prove three things, namely:
1. that there has been a breach of contract
2. that you have lost money as a result of the breach
3. that you have suffered the specified amount of loss.

What damages can you claim for breach of contract?

If someone has breached a contract, the harmed contracting party can claim only for loss that resulted
from the breach, or loss that the contracting parties considered (or should have considered) likely to
result from such a breach.
Here is an example to illustrate this point. Wandisile contracts to buy 1 000 live chickens from
Balindwa at R8,50 each. He pays the R8 500, but Balindwa, having sold the chickens to another buyer,
does not deliver the 1 000 chickens to him. Wandisile will be able to claim R8 500 from Balindwa,
because that is what he lost due to the breach.
Now, suppose Wandisile explained to Balindwa, when they were concluding the contract, that he
was going to slaughter the chickens, and then sell them to a particular supermarket at a profit of R5 per
chicken. When Balindwa breached the contract, Wandisile would then be able to claim (in
Five rand multiplied by the
addition to the R8 500 damages) an additional R5 000 for the extra loss, which both sides
1 000 chickens = R5 000
knew about beforehand.

Chapter 11 | Remedies for breach of contract 153

 ‘The most important way of working out the amount of damages payable is to look at the financial
position of the harmed party after the breach, and then compare it to what it would have been if
the contract had been properly completed. This is what we just did in the example of the chicken
sale contract.

PNe
fe [Te BEIT Delictual damages versus contractual damages

Note this important difference between delictual damages and contractual damages:
e An award of delictual damages aims to put the harmed party in the position she would
have been in if the delict had not been committed. For example, Vikash is walking
along a pavement and steps into a manhole that has been left open, and is injured.
He would be able to claim for the losses he suffered as a result of the injuries from
the municipality that had a duty to maintain the pavement. For example, he may be a
consultant who loses money when he is unable to work while recovering, and for medical
expenses he incurs. Then, in addition to these damages, the court could also award him
what are termed damages for ‘pain and suffering’ because of the unpleasantness, pain
and suffering from his injuries, which have negatively affected his quality of life during his
recovery period.
e An award of contractual damages as per the chicken sale example above, aims to put
the harmed party in the position she would have been in if the contract had been
properly completed.

Does the harmed party have a responsibility?

A final point we need to discuss in relation to damages for breach of contract is so-called Tonge coments
mitigation of loss by the harmed party. What we mean by this is that the harmed party to reduce it; make it less
cannot just stand back and claim for whatever loss she has suffered due to the breach harmful or serious.
of contract. If there is something she can do to keep her loss to a minimum, she should
do it, as far as is reasonable in the circumstances. Suppose that Yusuf, an art buyer, agrees to buy a
set of valuable paintings from a famous American painter who is visiting South Africa. They agree
to meet at the exhibition hall in Cape Town's Kirstenbosch Gardens, where Yusuf will receive the
paintings from her. However, Yusuf enters the appointment in his diary incorrectly and, as a result,
misses the meeting. Since the painter will now have to make a second trip to Kirstenbosch, she can
claim her wasted travel expenses from Yusuf. But she cannot just leave the paintings in the Gardens
and then sue Yusuf for their total cost, because it is her responsibility to mitigate her loss as far as
reasonably possible.

11.3.4 Penalty clauses

A penalty clause is part ofa contract that specifies what will be payable if either party breaches the
contract. Such clauses are useful because they make it easier to prove the amount of damages suffered
due to a breach of contract. So we can define a penalty clause as an agreement the parties make in
advance about what the consequences (or results) ofa particular type of breach will be. They agree on the
penalty clause at the same time as the rest of the contract. Therefore, penalty clauses in contracts provide
for payment of damages in the same way as cancellation clauses provide for cancellation.
Penalty clauses discourage breach of contract, and make it unnecessary for the harmed party to prove
the amount of the damages suffered due to the breach. A harmed party cannot claim both damages and
penalties in terms of a penalty clause. It iscommon, however, for contracts to give the harmed party the
choice between claiming damages and claiming in terms of a penalty clause. A penalty clause applies
only if a contract is breached, and not if it ended lawfully.

154 Chapter 11 | Remedies for breach of contract

 Chapter 9 includes the possible limitations on penalty clauses in terms of the Conventional Penalties
Act 15 of 1962.
When there is a penalty clause, the harmed party does not need to prove the amount of loss she
suffered, The penalty clause indicates what is payable upon breach of the contract.
Damages and a claim in terms of a penalty clause are alternative claims; they cannot both be granted
in a case.

11.4 How to choose remedies

In this section, we will look at two remedies regarding a breach of contract:
m choosing a remedy after a breach
® seeking a remedy to prevent a breach.

11.4.1 Choosing a remedy after a breach

You have learned what remedies are available for breach of contract. But how does the harmed party
know which remedies to choose? In some cases, it is possible to use two remedies together, but
sometimes the harmed party has to choose either one or the other. For example, it is not possible to
both cancel the contract and apply to enforce the contract through specific performance. However, it is
possible to claim both of these remedies in the alternative. In other words, you can ask the court to grant
one order, and if that order is not granted, to grant another order as an alternative. Alternative claims are
common in South African law.
When one party has lost money because the other party has breached the contract, the harmed
party can claim for damages and at the same time either seek to enforce the contract or to cancel it.
Look at the example given in the “Before you start’ section of this chapter. Here, you may decide to
cancel the contract and look for another construction job to begin working on. However, even if you
do seek cancellation, you probably also want to sue the homeowner for the damages you suffered by
having to pay your employees’ wages, machinery hire and the costs of transporting the materials to
the building site. Alternatively, you may choose to seek an order for specific performance to force
the homeowner to meet her obligations. At the same time, you could also claim the damages you
suffered. When a plaintiff seeks several remedies for breach of contract at the same time, the law does
not allow her to be compensated for more than the loss she has suffered, as this would be unfair to the
defaulting party.

11.4.2 Seeking a remedy to prevent a breach

Usually, you apply for a remedy for breach of contract after the breach has happened. However, there are
cases where you may seek a prohibitory interdict from court to prevent a breach that is about to happen.
You may cancel a contract only if that breach of contract would be a major one, for example:
@ = where the time for performance is urgent and yet the other party is not performing
m@ where it would be a significant breach of a critical part of the contract
=~ ~=where the other party repudiates the contract.

Added value Prove your claim

lf a debtor has no money (unemployed and with debt) and no goods to sell like a car or house
to raise the money, suing her for damages is a waste of your time and money. Therefore, when
you are considering what remedy to seek for breach of contract, it is important to try to find
out the debtor's ability to compensate you in terms of a penalties clause or damages. If the
debtor is insolvent or broke, a claim for executing the contract through a court order for specific
performance (if performance is possible) or cancelling the contract, is likely to be a better choice
of remedy.

Chapter 11 | Remedies for breach of contract 155

What do you think?
The Conventional Penalties Act 15 of 1962 allows a court not to enforce a penalty clause if it finds the
amount payable in terms of the clause to be excessive. In other words, if the penalty clause provides for
significantly more payment than the loss that the other party suffers due to the breach, the court need
not enforce the penalty.
Do you think that someone who agrees to such an excessive penalty clause should be bound by it
because they have agreed to the contract, or do you support the protection provided by the Conventional
Penalties Act? Analyse this issue in a comparable way where a seller of goods such as furniture, sells to a
buyer on credit but at an extremely high, unaffordable interest rate. There is also legislation that protects
buyers in such credit sales against unduly harsh credit terms, even though the buyer may have agreed to
these.

Chapter summary

In this chapter, you learned the following about
remedies for breach of contract:
You can seek remedies for breach of contract only
once the breach has occurred. (But you can apply for an
interdict when breach is threatened.)
Remedies may involve either enforcement or
cancellation of the contract.
Remedies relating to enforcement of the contract
order the contracting parties to meet their obligations as
agreed in the contract. There are two types of order:
A specific performance order demands performance
as agreed,
An interdict prevents non-performance.
Alternatively, the harmed party may decide to
rescind or cancel the contract in terms of a cancellation
clause or because of a major breach.
In addition, the harmed party may be able to sue for
damages or claim in terms of a penalty clause.
Damages are compensation for loss naturally
suffered or contemplated by the parties.
Penalty clauses pre-determine the amount payable
on breach, so the harmed party does not need to prove
the loss suffered.
A claimant usually has a choice of which of the above
remedies to use, and may sometimes seck more than
one remedy at the same time. However, the law does
not allow a claimant to be awarded more money than
their total loss caused by the breach of contract. Also,
when the remedies have conflicting aims, the law will
not grant both remedies.

Review your understanding

1. Write down an imagined scenario for a business Set out a practical example from a business that
Ne

that you own when someone has been in breach of
contract with your business for a particular contract.
In these circumstances, list all the factors that you,
as the harmed party, have to consider when you
are choosing a remedy or perhaps remedies for the
breach of contract that has occurred.
you have started where you are sued for specific
performance but, were that order to be granted by
the court, it would create undue hardship for both
you and suppliers to your business.
3. List the reasons that may allow one party to cancel
a contract and its elements. Then draw up a table

156 Chapter 11| Chapter summary

 that includes the key details of these different
grounds for cancellation.
4. While studying for your degree, you sell hot-
dogs to make money. Your university's sports
administration contracts with you to sell hot-dogs
at a big inter-varsity sporting festival. On the day
Further reading
Kerr, J.A. 2002 The Principles of the Law of Contract, 6th edn.
Cape Town: Butterworths
of festival, university officials deny you entrance
to the venue, saying that they have arranged for a
hamburger vendor instead. What factors will affect
whether you can claim damages and how much
can you claim?
Chapter 11| Further reading 157
chapter | The passing, varying and ending of rights
4 and duties by agreement

The main ideas

® Co-debtors and co-creditors
= Simple joint liability and severable liability
= Stipulatio alteri
® ‘The transfer of personal rights
a Variation and termination of contracts by agreement

The main skills

m Discuss the problems of the cessionary’s role.
® Illustrate in a mind map the different ways in which contracting parties can vary the terms of
a contract.
= Solve the lessee’s problem of a lessor ceding his right to receive the lessee's rental to a bank.

Contracts are mainly about creating rights and duties and you have seen that the parties can agree to put
almost anything into a contract. Similarly, they can agree to vary the contents ofa contract. This chapter
explains different ways of changing the terms ofa contract and therefore also changing the rights and
duties of the parties involved.
We have mentioned rights in Chapter 2 and several other places. What exactly do we mean by a right
in the legal context? We can define a legal right as a privilege, given and protected by law, which gives
one person a claim against another person or persons. The claim can take the form of a reward (such as
money or goods) or a service or duty, or it can prevent the other person from doing something.
This chapter begins by briefly explaining what is involved when you make a contract, before =
dealing with how you can pass, or transfer, personal rights or claims from one person to another by Iesece Sean iste
. “give it up or hand it over. So
a process known as cession. This is an important subject and takes up the first half of the chapter. Gession is the act or process
There are various other ways in which contracting parties can agree to vary (change or of ceding a right that one
alter) the contents of a contract and thereby change the rights or duties that it gives the party has against another.
parties. The chapter also discusses some ways in which rights and duties can be brought to
an end (terminated by agreement) by the actions of one of the parties or because of the law.

Before you start

Consider the following situation. You need a loan of R300 000 from your bank to improve your house.
The bank looks at your salary slip and is prepared to give you a loan of only R200 000, based on what
you earn. What can you do to get the loan that you want?
Also think about what happens once you have signed the contract. Can you (or the bank) change the
terms or are you stuck forever with what you signed?

12.1 Co-debtors and co-creditors

Most of the time, there are two parties to a contract. Sometimes, however, there are more than two.
Where this is the case (in other words, where there are multiple parties to the contract), there might
be a number of co-debtors or co-creditors to the obligations in the contract. For example, a number of
persons may all become debtors in respect of the same debt; likewise, one person may owe a number of
creditors something in terms of the agreement.

158 Chapter 12 | The passing, varying and ending of rights and duties by agreement
Who owes what to whom in terms of the debt will depend on a number of factors:
@ = what the intentions of the parties were
m the nature of the contract entered into
® the nature of the performance which must be made.

It is important to consider the divisibility of the performance in determining what the parties owe each
other. Where we talk about a divisible performance, we mean one which can be separated between the
co-debtors or co-creditors. A simple example would be where a seller sells 200 sheep to two buyers. In
this case, the number of sheep can be divided between the two of them. An indivisible performance
would be one that cannot be separated. If a seller sells one car to two people, then that performance
clearly cannot be split between the two buyers. The car will be given to the buyers together.

12.2 Simple joint liability and joint and several liability

If a number of co-debtors have to perform to a creditor and the performance is divisible, then it is
usually presumed that the liability is a simple joint liability. This means that each of the debtors is
responsible for paying only his pro rata share of the debt.
For example, Jack and Jon rent a flat together from their landlord, Dan, for R4 000 per month, Jack
and Jon are co-debtors in respect of the R4 000 debt, which is divisible. Unless Jack and Jon agree to pay
in different proportions, each of them will be liable to pay R2 000 in respect of the rental amount.
Now let us say that Jack decides to move out and live on his own. He moves into a one-bedroom
flat owned by Sibu and Zoli. He is liable to pay them R3 000 per month in rent. Sibu and Zoli are
co-creditors in respect of the rent. Each of them is entitled to receive a proportionate share of the rent;
unless they agree otherwise, each of them will receive an equal half (R1 500).
If a creditor decides to release one of the co-debtors from performance, he does not automatically
release the other co-debtors.
The debtors or creditors to an agreement may agree, either expressly or by implication, that they will
be liable jointly and severally instead of there being simple joint liability. Often, this kind of arrangement
applies by way of law. In a partnership, for example, the different partners are all liable iv solidum (joint
and several liability). This form of liability means that each of the co-debtors is liable to pay the full
amount of the debt, and not just their pro rata share. In terms of the contract the creditor can claim the
full amount from any one of the co-debtors. This may seem unfair, but a debtor who pays the full debt
will have a right of recourse against his co-debtors to recover their shares of the debt.
In contract to simple joint liability, where a creditor releases one of the co-debtors for a joint and
several debt, the liability of the remaining co-debtors is reduced proportionately,

12.3 Stipulatio alteri

Sometimes a contract will be concluded, which benefits third parties who are not parties to the contract.
This kind of agreement is called a stipudatio alteri. Examples of such contracts are life insurance policies
and certain kinds of trusts.
A stipulatio alteri works as follows:
= =A and B contract for the benefit of C (who is not a party to the contract). Party A (the stipulans)
specifies the benefit that she wishes to have awarded to C, and Party B (the promittens) promises to
award the benefit to C, or at least to offer it to C.
= By way of A and B's agreement, B is obliged to perform to C and C is given a legal right to enforce
that performance.
= ~Cwill only get a right to the performance when he notifies B that he is accepting the benefit. Until
this happens, A and B can change their agreement as they please.
® = The relationship between A and B depends upon the terms of their agreement. A may agree to do or
give something to B in return for B's promise to confer the agreed benefit on C.

Chapter 12 | The passing, varying and ending of rights and duties by agreement 159
Let us consider this example. Andrew decides to enter into a life insurance agreement with Best
Insurance Co, so that his life partner, Sephiri, will be financially secure in case he dies unexpectedly.
Best Insurance agrees to pay Sephiri R2 million in the event that Andrew dies accidentally. Andrew
undertakes to pay the insurance company R1 000 per month under the contract.
In this example, Andrew is the stipudans and Best Insurance Co. is the promittens. Sephiri is the
beneficiary under the agreement. He is not a party to the contract, but will be entitled to receive
compensation from the insurance company if Andrew dies.

12.4 The transfer of personal rights

Most contracts create rights and duties. For example, if Nozuko buys a motor car from Rubens
for R100 000, she will have the right to receive the vehicle and at the same time have the duty, or
obligation, to pay the agreed price for it. In other words, a right normally has a duty or obligation which
goes with it. We call this kind of agreement an ‘obligationary agreement’. Remember, a person who
has a right due to him is the creditor as far as that right is concerned while a person who owes a duty
is the debtor. Cession is about the transfer of personal rights. It is not possible to ‘deliver’ or ‘possess’
a personal right, because the object of that right is the performance that another person
owes in terms of a service or the payment of money or property. Instead, the law has created, jhe thing that the right
the concept of cession, which is the legal way in which rights that belong to one person is about; in this case, a
can be transferred to another person. This is an agreement that happens separately from duty that one party owes
the original agreement. An agreement to cede is called a ‘transfer agreement’ because the the other.
creditor transfers his rights to another party.

12.4.1 The parties involved in cession

Let us look at a few new words related to cession before we continue. When one person The cedent is the party
cedes a right to another, the person who originally had the rights is called the cedent, while rom whom the rights are
the person to whom the rights are transferred is called the cessionary. The cessionary is a transferred.
third party to the initial contract. Suppose that Rubens in the above example owes his
bank R100 000. Since Nozuko owes him R100 000, one way that Rubens could pay back _A third party is someone
his bank is to cede to the bank his right to receive R100 000 from Nozuko. In this case, who is not part of the
Rubens would be the cedent and the bank would be the cessionary. Nozuko is the debtor initial agreement.
in the agreement between her and Rubens. The bank is not a party to the initial contract
(between Nozuko and Rubens), and is therefore a third party to the agreement. Please note that it's only
the right to receive payment that gets passed to the bank. In terms of the law of cession, Rubens still has
a duty to deliver the car to Nozuko, as agreed in their contract.
A cession will happen only because the cedent has a duty to the cessionary. That is why the cedent
will transfer away the right. This duty is known as the underlying causa or reason for the cession. The
cedent will transfer his right to claim from their debtor to the cessionary and in that way discharge his
own debt. As you will see, there are many different reasons for a cession.

12.4.2 The cession procedure

For a proper cession to take place, all that is required is an agreement between the cedent and the
cessionary. Cession of a right normally takes place without the agreement or consent of the debtor.
‘The cession is complete when the cedent and the cessionary agree on the cession. It is not even a formal
requirement that the debtor should receive a notice about the cession. So, in the example of Nozuko
and Rubens, Rubens does not have to ask Nozuko’s permission to cede his right to the R100 000 to the
bank. The cession is an agreement between him and the bank only.
Generally, a cession requires no formalities to make it valid. For example, the cession agreement
does not need to be in writing or signed by the parties, although this may happen in reality.

160 Chapter 12| The passing, varying and ending of rights and duties by agreement
12.4.3 Requirements for cession
Cession involves the following six requirements:
The cedent must be entitled to cede the right.
2. The right must be capable of being ceded.
3. The parties (the cedent and the cessionary) must intend for cession to take place.
4. Any formalities agreed upon by the parties must be complied with.
5. The cession must not be unlawful.
6. The cession must not prejudice the debtor.

12.4.4 Restrictions on the cession of contractual rights

There are restrictions on what can and cannot be ceded. These restrictions arise if the cession:
® = is considered illegal
® = involves rights that are too personal to be ceded
® will prejudice the debtor.

Some laws or statutes prevent people from ceding certain
instances is illegal. The purpose of these laws is usually to
what little they have. For example, two rights that cannot
@ the right to a pension
= an employee's right to compensation for injuries that
rights. Cession that takes place in these
protect people who are poor, from giving away
be ceded are:
happen in the workplace.

Some rights are so closely related or connected to the creditor that it would make the duty more difficult
or unpleasant for the debtor if a different person were to exercise that right. In such a case, the creditor
cannot cede the right. Suppose, for example, Tao has a personal training contract that gives him the right
to be physically trained by Dwayne. Because of the personal nature of this right, Tao would probably
not be able to cede this right to someone else. The personal element of supervision and control in the
contract of service also prevents an employer from ceding its employment rights to another person or
company without the agreement of the worker. For example, your municipality cannot simply decide
to cede its employment rights by seconding its labourers to Eskom for a week or two to dig up cables,
without the agreement of the labourers.
Another example of a personal right that cannot be ceded is that of a football player who has a contract
with a football club, such as Kaizer Chiefs. A club cannot generally cede its rights (that the player plays
soccer for them) to another club without the consent of the player. The contract between the club and
the player may allow the club to sell the player to another club, but this is not the same as cession.
We said earlier that the debtor should not be put in a worse position because of the cession. For
this reason, you are not allowed to cede part of a debt without the debtor's consent. Although it makes
no difference to a debtor who he actually pays the debt to, it will cost him more if he has to make two
separate payments. This rule does not apply where the debtor agrees to make two payments.

12.4.5 Agreement not to cede

An agreement can include a paragraph to prohibit any cession of rights with regard to that contract.
When two contracting parties agree not to cede their rights to anyone else, this agreement is called a
pactum de non cedendo.
‘There are two ways in which an agreement can prevent a creditor from ceding his right against the debtor:
1. At the time when their rights and duties are decided (such as in a lease agreement), the debtor and
the creditor agree not to cede.
2. The cedent and the cessionary agree, at the time when they enter into their cession agreement, that
there will be no further cession. Say, for example, I have a contract with your gardening service, but
now | am having my house extended, and the garden will be under rubble for the rest of the year.

Chapter 12 | The passing, varying and ending of rights and duties by agreement 161
 Since I can no longer benefit from the contract, I cede my rights to your service to a neighbour
whose garden is similar to mine. (We are assuming that the contract is transferable.) However, to
protect your company from further change and possible difficulty, we include a clause that prevents
my neighbour from ceding the right to anyone else.

For such an agreement to be valid there should be some need to protect the debtor's interests. In other
words, there must be a good reason from stopping somebody from ceding a right that he has. For
example, lease agreements often have a clause preventing the lessee (the person renting the property),
from ceding any of her rights to the property to someone else, or subletting. If] let my
flat to you, I'll try to make sure that you are a responsible tenant who will look after the if alessee sublets a
property. If you go away for a few months and sublet the flat (in other words, you cede property, he enters into a
your right to live there to someone else), that person may damage my property or cause second lease agreement in
problems with the neighbours. To protect myself from this type of problem, I would make which he lets the property
to another person.
sure that the lease agreement does not allow you to sublet without my approval.

PXs(e(te Mie] el How to prevent cession

The wording of the paragraph to prevent cession is usually very simple and reads something like:
‘All rights created in this contract cannot be ceded’.

12.4.6 Cession of future rights

One of the requirements for a valid cession is that the right must be capable of being ceded. One
then needs to ask: Can you cede a right that you do not yet have? Generally, cession of future rights is
allowed. There are practical cases where you may need to cede a right that you do not have yet but will
have at some future time. For example, traders often cede their present and future book debts to their
bank to serve as security for a bank loan. Banks are more willing to lend money when there is a cession
to secure (guarantee or protect) that loan.
Another place where people may try to cede future rights is in the context of court Cons Fee tere
cases. When someone expects to win a court case and be awarded costs, he may cede that compensation for legal
expected right (to receive costs) toa third party. This is known as cession in anticipando. costs incurred, which the
What happens is that the cedent and cessionary conclude both the agreement that court can award to that
forms the underlying reason (or causa) for the cession and the transfer agreement itself person if he wins the case.

in anticipando — in other words, before the subject matter of the cession comes about.
‘The transfer agreement relates to the future right, and is meant to operate only if and when the cedent
obtains the right against the debtor. When that happens, the right is immediately transferred to the
cessionary, without the need for a further act, because of the previous agreement of cession,
Let us look at a case study to clarify this concept of cession in anticipando.

Case study An extended car sale

Raj, who lives in Cape Town, wants to sell his Karmann Ghia for R100 000. His wife remembers that
her former colleague, Vanessa, has always dreamed of owning this type of car. Vanessa now works
in Johannesburg and seems very keen to buy the car. Raj and Vanessa start discussing the sale of
the car in May. Vanessa insists on seeing and test-driving the vehicle before buying it and arranges
to travel to Cape Town in September to do that. Meanwhile, in June, Raj decides to buy another
business and urgently needs R150 000. He signs a loan agreement with Saleem, who lends him
the R150 000 that he needs. Raj promises to pay R15 000 per month until the loan is paid off. At
the same time, Saleem and Raj agree that if Raj sells the Karmann Ghia to Vanessa in September,
Raj will cede his right to payment (from Vanessa) to Saleem, as part of the money owed.

162 Chapter 12 | The passing, varying and ending of rights and duties by agreement
 Case study (continued) An extended car sale

This is a valid cession of a future claim. Of course, if Vanessa decides not to buy the car, the
cession cannot take effect. In that case, Raj will still owe Saleem R150 000 in terms of their
loan agreement.

12.4.7 Consequences of cession

‘The main consequence of a cession is that a creditor who was entitled to a personal right transfers that
right to a cessionary, who is now the only person entitled to enforce that right. Once the cedent has
ceded the right, he cannot cede it to another cessionary.
In law, we have a rule that a person cannot transfer more rights than he, himself, has — the nemo plus
inris rule. The cedent can thus only give to the cessionary the rights that he once had. He may not
transfer rights that he is not entitled to himself. The cessionary may enforce those rights only to the same
extent that the cedent would have been able to.
‘The debtor can raise any defence against the cessionary that she could have raised against the cedent,
because we picture the cessionary as having stepped into the shoes of the cedent. To illustrate, let us suppose
you buy a second-hand television from me, and I cede my right to your payment to my bank. A few days
later, you plug in the television and find that it’s faulty, so you refuse to pay. After a while, the bank sues
you for payment. If I had not ceded my rights, and had sued you myself, you would have been able to
defend your default on the basis that the set was faulty. Therefore you can raise the same defence against
the cessionary.
If the debtor has been given notice of the cession but still keeps paying the cedent, this does not
mean she does not have to pay the cessionary. The debt is not settled until the debtor has paid the
cessionary in full. When the debtor has received notice of the cession, she must redirect her payments to
the cessionary instead of to the cedent. However, if the debtor has not been given notice of the cession,
then payment in good faith (bona fide payment) to the cedent will clear her debt. There would be ‘good
faith’ if the debtor was previously told to pay the cedent and did not know about the cession. The cedent
will then have to give that money over to the cessionary as he is no longer entitled to it.

Northern Estate and Trust Administrators (Pty) Ltd v Agricultural and Rural
eT lolol eae els elle a ee |

Principle
Protection is afforded to a debtor who deals with a cedent without notice of a cession. The debt
is discharged if the debtor pays the cedent in ignorance of the cession.
Facts

An agreement of sale was concluded, in terms of which the Agricultural and Rural Development
Corporation (ARDC) sold shares it held in a company to Boyes. Boyes paid the purchase price
but the shares were not transferred to him. The parties subsequently agreed to cancel the sale
but before making this agreement, Boyes ceded his right to the transfer of the shares to the
appellant (Northern Estate and Trust Administrators (Pty) Ltd).
The appellant instituted action against the ARDC (the respondent) alleging, that Boyes
had ceded his rights in a claim against ARDC for transfer of the shares, and claiming an order
directing the respondent to transfer such shares to it.
The court's finding
Because ARDC was unaware of the cession when concluding the cancellation agreement, the
agreement had the effect of discharging ARDC from its obligation to transfer the shares.

Chapter 12 | The passing, varying and ending of rights and duties by agreement 163
A cession of a personal right is effective even if the transfer of the right is not made public and the
debtor is unaware of the cession. However, the law protects the debtor in this case, because a debtor
who was not aware of the cession may have paid the wrong person. Either the cessionary or the
cedent can give the debtor notice of the cession. So the cessionary has nobody to blame if the debtor
does not know about the cession and therefore discharges the debt by paying the cedent (in place of
the cessionary).
Where cession agreements involve a transfer of the cedent's existing and future book debts, the
cedent usually has to supply the cessionary with updated lists of debtors every now and again. This
means that, in the event of the cedent (trader) defaulting on his payments to the cessionary (bank),
the cessionary would be in a position to give notice of the cession to debtors and collect payment of
debts from them.
A cession normally takes effect as soon as the parties conclude the transfer agreement. However, they
may include a condition in the agreement to state when it will occur.

12.4.8 Two types of cession

The rights and duties that exist between the cedent and cessionary depend on the terms of a contract
that they may have concluded. There are two common types of cession:
= complete cession, commonly known as outright (or ‘out-and-out’) cession
® cession as security for a debt.

We have already mentioned them briefly, but let us take a closer look and distinguish between them
more clearly.

Complete cession
With a complete cession, the subject matter of the cession forms part of the estate of the
: ‘ ‘s estate |
cessionary, who becomes the person entitled to the performance of the debtor. eRe dake
; . 5 . oe assessed only on death,
The result is that the cessionary is substituted as creditor in place of the cedent. The when all the money
cessionary is then entitled to enforce the claims and to retain any proceeds of them for due to that person and
his own benefit. The cessionary is now also entitled to accept any amount he pleases in everything that he has
settlement of the claim. For example, he can give the debtor a ‘discount’ if he so chooses, acquired with a monetary
and can even abandon the claim altogether. But remember that a cessionary cannot demand Value 's calculated, after
: all debts are deducted and
more from the debtor than the debtor owed to the cedent. paid Gut. A persons has
The cessionary only stands in for the cedent, and therefore cannot have a stronger inherit what is left in his
claim against the debtor than the cedent had. The simple act of cession also cannot fix any _ estate after this process.
problems that the cedent may have with the right, for example, if the debtor has a good
defence against the cedent’s claim. Remember, the debtor can use any defence against the cessionary
that she could have used against the cedent. Suppose, for example, Cedric (the cedent) has sold
Doris (the debtor) defective goods. The fact that the goods are defective is a good defence for a debtor
who refuses to pay. So, Cedric is not actually entitled to be paid any money for those goods, If Cedric
now cedes his ‘right’ to payment to Cecil (the cessionary), Doris can raise the defence (that the goods
are defective) against any claim from Cecil for payment of the money owing for the goods. In other
words, if the cedent could not have enforced his right to payment, the cessionary cannot either.
An out-and-out cession prevents a cedent from dealing with the right as a creditor after the cession
agreement. In other words, if I sell you something and then cede my right to payment to Mhlomi, you
owe Mhlomi the money, and I cannot claim anything from you anymore.
A cession agreement that intends a right to be given away to somebody else results in a complete
transfer of the right to the cessionary. This type of cession also extends to any advantages that go with the
right in question, unless there is some agreement or indication to the contrary in the agreement.

164 Chapter 12| The passing, varying and ending of rights and duties by agreement
 Case study A gap in the retirement plan

Brijlal has a savings policy. For the past forty-eight years, he has made payments to Big Bank
every month so that he can retire in two years’ time. The policy is due to pay an amount of
R2 million in two years’ time. Unfortunately, Brijlal has not taken out a hospital plan. His wife
suddenly needs an operation, for which he does not have enough money. Brijlal manages to
cede his savings policy to Vikash for R1,5 million. Vikash is happy to wait for two years to collect
the full R2 million on the policy. Vikash steps into the shoes of the cedent and acquires full rights
against the bank when the policy is to be paid out. So, Vikash pays Brijlal R1,5 million so that
Brijlal can pay for his wife's operation. In exchange, Brijlal cedes his retirement savings to Vikash,
who will get back his R1,5 million, plus an extra R500 000, when the retirement policy pays out.
Note that Big Bank will pay the R2 million straight to Vikash.
There is no way that Brijlal can try to claim a share of the extra R500 000 when the policy
pays out. He has lost that right by ceding the policy.

Cession as security
Sometimes a person needs to borrow more money from a bank than the bank is willing to give. In order to
get a bigger loan, the borrower may cede a personal right he has to the bank as security, or as a promise
that the bank will be repaid the money due to it from the loan.
Whent the reason for a cession is that the cedent. wants to i use a personal osright that he | In securitatem debiti
has against someone to secure a debt towards a third party (like a bank), this is known as enn Gy coca de
a cession as security, or én securitatem debiti. \n terms of an agreement of transfer for in Latin.
security, the cessionary becomes the creditor and is then the only person entitled to enforce
the right that is the subject of the cession, The cedent retains no right against the debtor, but has a
personal right against the cessionary coming from their personal arrangement for the re-cession (back to
the original cedent) of the right once the main duty to the cessionary has been met.
All this may sound very complicated, so let us use a simple example to help clarify the situation.
Joshua sells Debbie a lounge suite, and agrees that she can pay for it in a lump sum of R4 000 in six
months’ time when one of her policies matures. But Joshua needs a bit of extra capital to buy more
furniture in the meanwhile, so he approaches his friend Stan for a loan of R3 000. Joshua cedes Debbie's
debt to Stan as security for the loan. What happens now is that Stan becomes Debbie's creditor. As soon
as Joshua has paid back his loan debt to Stan, you can consider Stan’s right as Debbie's creditor as being
ceded back to Joshua. The agreement protects the cessionary (Stan) if the cedent (Joshua) becomes
insolvent (and cannot repay his loan debt to Stan). The cession agreement makes sure that Joshua
cannot dispose of the right in a way that has a negative impact on Stan. For example, Joshua cannot tell
Debbie that she can give him her old Beetle as payment for the furniture.
As before, any defence that Debbie, the debtor could have raised against Joshua, her original creditor,
is equally valid against Stan, the cessionary, because Stan has taken the place of Joshua. Stan cannot have
greater rights against her than Joshua had.
Each case is unique and will involve different factors. In the case where a trader cedes all his book
debts in securitatem debiti, for example, the arrangement between the cedent and cessionary normally
allows the cedent to continue receiving and collecting payment from the debtors. But continuing to
collect after the power to do so has been brought to an end by the cessionary will constitute a breach.
Despite the cession, the right remains an asset in the estate of the cedent. However, the cedent cannot
exercise any of the capacities (rights) of a creditor.
A cession in securitatem debiti serves to secure the main obligation, and its operation depends on the
continued existence of that main debt. In our above example, the main obligation, or main debt, is the
loan that Joshua took from Stan. Debbie's debt is just the security for that loan. Once the debt has been
paid, the cession falls away and the right is back with the cedent.

Chapter 12 | The passing, varying and ending of rights and duties by agreement 165
 Case study Ceding book debts as security

Sibusiso needs to borrow money from Big Bank to expand his business, but the amount he
needs is more than the bank is willing to give him.
It is willing to give him the amount he wants if he cedes, as security, his right to all the book
debts that his business has at the date of the agreement. Sibusiso and the bank agree that he
will cede these book debts to the bank. It’s a condition of the loan that Sibusiso must repay the
bank R10 000 every month for five years. Sibusiso will run his business as before, with the help
of the loan he has received from the bank. He believes that the loan will enable him to make
enough profit to be able to repay the bank.
As long as Sibusiso makes the payment of R10 000 every month, there will be no problem.
But if he fails to repay the amount due, the bank will exercise the rights it has in the cession
agreement. If Sibusiso makes the R10 000 payments every month for five years as agreed, his
right to the book debts of his business will revert (come back) to him.

Activity 12.1
Consider the following set of facts and then answer the questions that follow:
Sunil rents property from Morné. Although his rental is due on the first day of every month,
Sunil often makes his payment only sometime after the fifteenth of the month when he gets
his salary. So he is unhappy to hear that Morné has ceded his right to receive rental to his bank.
Sunil has experienced bad service from that bank before, so he is concerned that the bank will
not record his payments properly and will charge him interest for late payments.
1. Can Morné cede his right to receive rental to his bank? Why would he do this?
2. Do you have any suggestions for Sunil that would help him to solve the problem?

12.5 Variation and termination of contracts by agreement

It often happens that people sign a contract that is lawful and binding, but then decide that the terms are
not suitable for their purposes. This section explains some ways in which the parties can reach agreement
to vary or bring to an end the rights and/or duties that they have in terms of a contract. Let us look at
the following types of change to contracts:
® variation — changing the rights and duties of the parties
® = release — relieving one or both parties of their duties
delegation — transferring duties
assignment — substitution of a third party
novation — replacing an old duty with a new one
compromise z accepting new terms.

12.5.1 Variation: Changing rights and duties

The contracting parties are generally free to vary or change a contract as they wish. Nothing stops them
from changing the rights and duties coming out of the contract. They can do this informally or by means of
new agreements. The only times that there is a formality requiring the variation to be in writing would be:
® when a law provides for that type of contract to be in writing, which means that any changes to the
terms of that contract also have to be in writing
m= when parties agree in a written contract that verbal changes to that contract will not be valid, and
that any variation of the contract has to be in writing. In that case it’s obvious that the variation
of the contract would have to be in writing and signed by both parties for the change to be lawful.
‘These terms are known as non-variation clauses. In either of these cases, any informal variation will
be invalid.

166 Chapter 12| The passing, varying and ending of rights and duties by agreement
12.5.2 Release: Relieving parties of their duties
‘The persons who enter into a contract may, after some time, both agree that they should if you relieve someone of
be relieved of their initial duties. A creditor may decide to release a person who has an a duty, or ‘release’ them
outstanding debt from paying that debt. In this case, the claimant (or creditor) waives from it, that person no
(gives up) his right to claim payment. No formalities are required. We then treat the longer has to perform
situation as if the contract is cancelled, without anybody having a claim. We ey.

12.5.3 Delegation of duties

We saw earlier that when a creditor's rights are transferred, we call it cession. Similarly, when a debtor's
duties are transferred, it’s called delegation. A debtor may be released from his debt or duty if a third
party promises to fulfil the obligation instead. The agreement that moves the duties from one person to
another, with the creditor's agreement, is known as delegation. Suppose Nolwazi, a student, enters into
a lease agreement with Andries for expensive student accommodation in Stellenbosch. Unfortunately
for Nolwazi, she is unable to make the monthly payments. But luckily for her, her mother is willing to
take over her duty to pay the rent every month. If Andries agrees, Nolwazi may delegate her debt to her
mom. This will not affect Nolwazi’s rights to occupy the premises.
So, delegation is a tripartite agreement meaning that it requires the agreement of three parties — the
debtor, the creditor and the person who is going to take over the duties of the debtor. Delegation has no
effect on the debtor's rights. However, it creates a new contract.

12.5.4 Assignment: Substitution of a third party

We have noted that the parties can transfer their rights by cession and their duties by delegation.
Sometimes, both the rights and the duties of one contracting party fall away and a third party takes the
place of that party. This substitution by a third party is known as assignment.
A common example of assignment, which is probably familiar to you, happens when one person's
contract of lease for rented accommodation ends and another lessee takes his place. Although the new
lessee will have the same rights and duties as the old lessee, there will now be a new person living in the
property and paying the rent to the lessor. Because of this, the lessor’s consent is required before the
assignment will be valid. In other words, the original lessee cannot simply arrange for another person to
take over the lease agreement from him without first getting the landlord's agreement. Every
assignment includes a delegation, and therefore the consent of the landlord will be required. The person who takes
Once the landlord has agreed that the new lessee will replace the old one, the agreement over the rights and
between the lessor and the original lessee comes to an end. The ‘tenant or assignee duties of the lease from
becomes the debtor and the creditor of the lessor — he is the debtor because he has to pay the old lessee is called
rent, but he is also a creditor, because he has the right to live in the property. the assignee:

12.5.5 Novation: Replacing duties

Novation is the act or process of making something new. We find novation in the context 4 1464 and more familiar
. . oO 3 : i iV: 1 i
Tr

of contracts when a duty that exists between parties to a contract comes to an end and is concept of novation
replaced by a new duty. Novation is valid only if both the contracting parties agree to it. is renovation — making
The court will not be easily convinced that the parties have novated a duty, and it will be something new again.
a question of fact whether a novation has actually occurred. (When we say something is
a question of fact, we are contrasting it with a question of law. Here, the task of the court would be to
determine whether the parties had novated the duty or not.)
Novation, the replacing of an old duty with a new one, is often very similar to the variation of a duty.
To illustrate novation, let us suppose Soni and Son Attorneys have a contract with Telkom, in terms
of which they give their legal services in exchange for payment of R20 000 every month. Telkom then
decides to give Soni and Son more business, and the parties change the original agreement so that
Telkom pays R30 000 every month. The original agreement has been novated.

Chapter 12 | The passing, varying and ending of rights and duties by agreement 167
 12.5.6 Compromise: Acceptance of new terms
Compromise involves the settling of a legal dispute or fight between people by making a new agreement.
Like any agreement, compromise happens by one party making an offer and the other accepting it.
Suppose, for example, Hezekiel believes that Hestrie owes him R100 000 in terms of a verbal
contract they entered into last year. Hestrie has a different understanding of that contract, and believes
that she only owes Hezekiel R50 000. Because they do not want to fight about the matter in court,
Hestrie and Hezekiel may agree that Hestrie will pay R75 000 in settlement of Hezekiel’s claim. This
would be a compromise.
Once the parties have reached a compromise, their rights are decided by the compromise agreement
and not by the initial contract. Compromise occurs frequently in legal practice because it gives the
parties a friendlier and cheaper way of settling legal disputes, rather than fighting in court.
Sometimes one person will make an offer to pay less than the amount claimed from him, and will
then add the words ‘in full and final settlement to the letter containing the offer, or a cheque.
It will be a question of fact in this case whether that person was making an offer of compromise.
If the claimant banks the cheque or keeps the money that came with such an offer, it would seem to
indicate that the offer of compromise has been accepted. The court will consider other facts that show
that the compromise was not accepted, as it is a question of fact as to whether or not there actually was
a proper compromise. However, if the debtor is clearly making an offer of compromise, and the creditor
rejects that offer, the creditor should return the payment that came with the offer of compromise.

Activity 12.2
Think about times when you have compromised your position during an argument, or times
when you have agreed to accept less than what you believe you were entitled to, just because
it was easier for you to do so. Now make sure that you understand, in a legal context, the
different ways in which agreements can be changed and even brought to an end by agreement,
in order to suit the needs of the parties.
1. Draft your own example of a compromise agreement.
2. Share your example in asmall group so that you obtain a variety of perspectives.

What do you think?

You are the manager of a large national cellular phone company. Your company offers a number of
bursaries (worth R20 000 per year) to enable students to study at a technical college. These students
will then be qualified to do the technical work that the telephone company requires. The students
and their parents sign a bursary agreement that includes a clause stating that they will jointly pay
back to the company all money received, plus interest and costs, if the student fails to complete the
course successfully. A number of students fail either their second or third year of study. They then find
themselves with a large debt, but are unable to get jobs because they have no qualifications.
Some people in the company want to help these students by cancelling the debt, while others believe
that the students or their parents should repay the money because it is the students’ fault for failing the
exams. What do you think? Give reasons for your answers.

168 Chapter 12 | The passing, varying and ending of rights and duties by agreement
Chapter summary
In this chapter, you learned the following about the
ways in which contracting parties can pass, vary or
terminate the rights due to them and/or the duties
required of them in terms of a contract:
@ Cession is an act of transfer that causes personal
rights or claims to be transferred from the cedent
to the cessionary in such a way that the cessionary
becomes the creditor of the debtor.
® Cession occurs by way of a transfer agreement
between the cedent and the cessionary.
= Cession does not usually require any formalities.
= A future claim may also be ceded, as long as it is
described properly.
= A cession usually comes about because of a contract
or legal act that forces the cedent to cede. This legal
act forms the reason or causa for the cession.
® Although it is not necessary to give notice of a
cession to the debtor in the case of a claim that has
been ceded, it’s advisable to do so.
= A person's power to cede his rights is sometimes
restricted or limited by law or agreement.
Review your understanding
1. Which statement is true?
a) Cession is a transfer agreement in terms of
which a right or rights are transferred from the
person who holds them to another person.
b) Cession is a way of transferring rights and
obligations from one party, called the cedent,
to another party, called the cessionary.
The effect of an out-and-out cession is to take a
claim or right away from the cedent and to place it
with the cessionary. The cessionary steps into the
shoes of the cedent and becomes the only person
able to enforce the claim.
Contracting parties often cede certain rights as
security for a debt (in securitatem debiti).
By waiving the right to claim payment of the debt,
a creditor may release a debtor from paying a debt.
Delegation is the transfer of duties from one
person to another by way of a tripartite agreement
between the creditor, the original debtor and the
new debtor.
Assignment is the substitution of a third party for
one of the parties to a contract.
Novation occurs when a duty that exists between
parties to a contract comes to an end and is
replaced by agreement by a new duty.
Compromise involves the settling of a dispute by
means of a new agreement.
c) Cession is a surety agreement.
d) Cession is a contract in terms of which only
obligations are transferred.
Explain the difference, if any, between assignment
and delegation.
Chapter 12 | Chapter summary 169
Further reading

Sharrock, R. 2016. Business Transactions Law, 9th edn, http://www.polity.org.za/article/the-non-variation-clause-and-

Cape Town: Juta and Co, (Pry) Ltd its-place-in-modern-contracts-2015-12-07 (accessed on
25 January 2018)
(This link provides more information about non-variation clauses.)

170 Chapter 12 | Further reading

 best)
e) Clg

Termination of contracts by law 13

The main ideas

Proper performance
Prescription
Impossibility of performance
Merger
Set-off
Death
Insolvency

The main skills

= Identify instances where a contract terminates in law.
= Summarise the requirements of the Prescription Act 68 of 1969 in a mind map.
= Answer questions on the legal termination of contracts.

Chapter 12 dealt with the termination of contracts by agreement between the parties. In the absence of
any such agreement, contracts also come to an end because of certain reasons in law. Once a contract
has been terminated by law, the parties will generally not be subject to any legal remedies for breach of
contract. In this chapter, we look at the various ways in which contracts can be terminated by law.

We will consider the following ways in which legal rules may terminate a contract:
® proper performance last willand
@ prescription testament is a signed
® impossibility of performance document, often called
wu merge simply a will, in which a
@ set-off person, called the testator,
records her wishes about
@ death
. what should happen to
= insolvency. her estate in the event
of her death. It usually
Before you start specifies things like
Consider the following scenario: Buhle Zulu, a millionairess, owes Alex Johnson R100 000 who should inherit the
in terms of their contract, but she dies before she gets around to paying him. In her last testator's belongings or
will and testament, Buhle leaves everything to her only daughter. Should Johnson still take care of any minor
children. See Chapter 22
get paid the R100 000, or does Buhle’s death excuse her from performing in terms of their
on the law of succession.
contract? Would your answer be different if Buhle was declared insolvent by a court?

13.1 Proper performance

As we explained in previous chapters, contracts normally create rights and duties for both contracting
parties. If both parties do what they are supposed to do in accordance with the requirements of a
contract, that contract will automatically come to an end when it is supposed to end.
For a contract to terminate in this way, it is important that the performance of both parties is completely
in accordance with what was agreed. So, it is important for a debtor to comply with the time, place and
manner of performance as specified in the contract. This is what we mean by proper performance.

Chapter 13 | Termination of contracts by law 171

13.2 Prescription
‘The law provides for obligations to come to an end automatically after a certain amount of time has
passed. This is regulated by statute — the Prescription Act 68 of 1969. When that happens, we say that
the obligation has prescribed. Suppose, for example, Ighsaan fixes my computer, and he sends me an
invoice, but I just never get around to paying his bill. If he does not follow up on the payment, and
four years passes by, he cannot at that point claim payment from me. The reason is that the period of
prescription for an ordinary contractual debt, such as the payment owing to Ighsaan, is three years.
Section 11 of the Prescription Act 68 of 1969 sets out the periods of prescription for various types of debt:
= 30 years in respect of:
m= any debt secured by a mortgage bond
® any judgment debt
® any debt in respect of any taxation imposed or levied by or under any law
® any debt owed to the state in respect of any share of the profits, royalties or any similar
consideration payable in respect of the right to mine minerals or other substances
@ 15 years in respect of any debt owed to the state and arising out of an advance or loan of money or a
sale or lease of land by the state to the debtor, unless a longer period applies in respect of the debt in
question, as per above
™ six years in respect of a debt arising from a bill of exchange (such as a cheque) or other _y potarial contract
negotiable instrument or from a notarial contract, unless a longer period applies in is a contract that has
respect of the debt in question, as per above to be signed before a
m = three years in respect of any other debt, except where an Act of Parliament notary public, such as an
provides otherwise. antenuptial contract.

Generally, prescription begins to run from the day on which the debt is due. A debt becomes due once
the creditor has knowledge of the identity of the debtor and the facts that gave rise to the debt. The
creditor is regarded as having this knowledge if he could have obtained it through reasonable care.
This provision can be relaxed in the interests of justice — for example, if a debtor has deliberately
prevented the creditor from knowing about a claim, the period of prescription will start running only
once the creditor knows the facts about the claim and who the debtor is.
There are several instances in which prescription may be interrupted. In these cases, the timer
is reset to zero and the period of prescription starts over again. Suppose, for example, that Ighsaan
had sent a reminder two years after doing the repairs to the computer, and I sent an email saying,
‘Sorry, I owe you the money, but I cannot pay it right now. I will pay you as soon as I can.’ In this
instance, my acknowledgement that I owe Ighsaan the money would have the effect of restarting the
period of prescription for the debt. Then, Ighsaan’s demand another two years later would have been
enforceable (based on my acknowledgment of debt) even though the demand was made four years after
the initial invoice. This is just one of the ways in which prescription may be interrupted.
We call this example, acknowledgment of liability. The other way is by servingasummons _4 gummonsis the first
on the debtor. legal document in the
In cases where a claimant is insane or is a minor, the Act provides for the completion litigation process. It is an
of the period of prescription to be suspended until one year after the person becomes sane _— Ofer of court that is issued
or becomes a major (section 13(1)(a)). This process if called an impediment or delay in for various purposes. In
Ss z - e . : , gs . this instance, it would
prescription (section 13(1)). It is different from an interruption, which was discussed in the hose: bien iecued forthe
example above. Here, prescription does not start to run from the beginning, but it stops for non-payment of a debt.
a period of time and then continues to run again.
Suppose, for example, that Jan owes Lisa (a minor) R1 000, which becomes enforceable on
1 April 2019. On that particular date, Lisa will be 16 years old. If Lisa was not a minor, then prescription
would end at 00:00 on 1 April 2022. Lisa turns 18 years old on 1 March 2021. That date is one year and
one month before prescription is meant to end. Since Lisa has more than a year to claim her money after

172 Chapter 13 | Termination of contracts by law

she becomes a major, prescription will still end on 1 April 2022. However, if Lisa’s birthday was on
1 June 2021, then there is only ten months until prescription would normally end. Since this is less than a
year, the Prescription Act 68 of 1969 allows Lisa to have one full year after she becomes a major to claim
from Jan. Prescription, in this case, will thus end on 1 June 2022, and not on 1 April 2022.

Activity 13.1
With a colleague in your class, look up section 13(1) of the Prescription Act 68 of 1969. Discuss
the various other ways in which the period of prescription can be delayed, giving examples for
each instance.

Note that ifa debtor pays his ‘debt’ after it has been extinguished by the prescription, that payment is
regarded as being valid and it cannot be recovered by the debtor even if he did not know that the debt
had prescribed.

Activity 13.2
Draw a mind map to set out the requirements of the Prescription Act 68 of 1969, as they have
been discussed in this chapter.

Added value A plaintiff must make a claim ‘once and for all’

An attorney often only institutes a claim in the law of delict on behalf of her client as close as
possible to the three-year deadline for an ordinary contractual debt. This is usually not because
the attorney is too busy to attend to the claim. The delay has the practical benefit of making
sure that the claim has been properly calculated and that any medical, or other, complications
have been given enough time to develop and be identified. In this way, the client can make a
single comprehensive claim. Suppose, for example, that you had a series of medical operations
on your leg as a result of a car accident that was caused by another driver's negligent driving.
You would want to ensure that all your medical costs were covered until your leg was completely
healed, and that all your costs of any possible future medical care were included in your claim.
This is important because the law does not generally permit one party to sue another party more
than once for a single event that resulted in the claim. The plaintiff's claim should be ‘once and
for all’ to give finality to the matter.

13.3 Impossibility of performance

If performance by a party to a contract becomes impossible because of, for example, a natural disaster,
both parties are excused by law from performing in terms of the contract, which terminates automatically.
This is an example of a supervening impossibility of performance, which we mentioned in Chapter 7.
Performance must be objectively impossible. This means that the impossibility must not be
something that affects only a particular debtor — that is, any reasonable person in that situation would
also have found performance to be impossible.
For this excuse for non-performance to be successful, the impossibility must not be due to the fault
of any of the parties, and neither party can have taken the risk of such an event on herself. For example,
if someone specifically promises that she will perform in terms of a contract no matter what happens,
then her guarantee means that she will still be liable even if the performance becomes impossible because
of something beyond her control.
Sometimes, only a part of a contract has become impossible, and it is possible to separate that part
from the rest of the contract. In this instance, the court may terminate that specific part of the contract
without interfering with the rest of the contract.

Chapter 13 | Termination of contracts by law 173

 ‘The case below gives an example of supervening impossibility that does not involve a natural disaster.

Peters, Flamman and Co. v Kokstad Municipality 1919 AD 427

Principle
A supervening impossibility of performance automatically terminates the rights and obligations
arising from a contract.
Facts

Peters, Flamman and Co., a German company, had a contract with the Kokstad Municipality to
provide street lighting for the town. However, after the Union of South Africa became involved
in World War I, on the side of the allies, the South African government passed a law forbidding
German companies to do business here.
The court's finding
The court found that this law made it legally impossible for the company to meet its obligations
under the contract. The company was excused from performing in terms of the contract as a
result of the supervening impossibility.

Activity 13.3
The legal consequences of impossibility of performance depend on when the performance became
impossible and whether or not the impossibility can be blamed on a party to the contract.
1. Compare and contrast the following:
a) supervening impossibility of performance
b) initial impossibility of performance
c) prevention of performance due to the fault of one of the parties.
2. Discuss your answers with a partner in the class.

13.4 Merger
Merger refers to the coming together or joining of two or more things. In the law of contract, merger
is when one person becomes the debtor and also the creditor in respect of the same debt. For example,
if Bradley, who was renting an apartment from Nokuthula, decides to buy that apartment from
Nokuthula, then he will not have to pay rent to himself once the sale goes through. It would then be
nonsense for the debtor to pay the creditor (who is himself).

13.5 Set-off
Suppose you have borrowed R200 from Sithandekile on the understanding that you will pay it back
at the end of the week. On Saturday, you go to the movies together, and she borrows R100 from you
for her ticket because her debit card is not working. Now you have a choice: either she can pay you the
R100 back when she goes to an ATM (automatic teller machine) and you can pay her back the R200
that you owe her, or you can agree to set off the R100 against the R200 that you owe her. In that case,
you will simply pay her back the difference of R100.
Commercial law makes provision for this kind of trade-off in business contracts too. The debts that
two people owe each other may be set off against each other if they meet the following requirements:
1. The debts must be between two persons who are acting in the same capacity — that is, in their
personal capacities. Debts cannot be set off if one party is acting in a representative capacity (for
example, as a guardian or trustee) and the other party is acting in a personal capacity.
2. ‘The debts must be of the same kind or nature. A debt for money cannot be set off against a car,
for example.

174 Chapter 13 | Termination of contracts by law

3. ‘The debts must be due and payable. For instance, the debts must not be enforceable at a later date
or be subject to a suspensive condition.
The debts must both be liquidated at the time of set-off. In other words, they must both be capable
om

of easy and speedy proof.

Set-off happens automatically once these requirements are met. No formalities between the parties are
necessary and the law does not require the parties to first agree to set-off before it takes place.

Case study Setting off money for money

Nosimo owes Frikkie R200 for a pair of shoes, but Frikkie owes Nosimo R300 for a meal that he
enjoyed at her restaurant. The law may excuse Frikkie from paying Nosimo R300 and likewise
excuse Nosimo from paying Frikkie R200. Frikkie must simply pay Nosimo R100, because of the
principle of set-off.

Added value Without set-off or deduction

Set-off may not happen in certain instances. One such instance is where parties include a clause
in a contract stating that debts are to be paid ‘without set-off or deduction’. Here, generally, set-
off will not be an option.
Another instance when set-off will be disallowed is where one party, the debtor, has been
sequestrated (declared insolvent by a court) in terms of the Insolvency Act 24 of 1936 before the
date for performance of her debt arrives.
Where the debtor has been sequestrated, set-off will be disallowed even if the parties have
included a clause in their contract to the effect that, if one of them fails to perform her side
of the contract then the other party may set off his resultant claim for damages against any
debt which he owes to the defaulting party. This clause cannot be invoked, as it allows the
other contracting party, through set-off, to get paid earlier than other concurrent creditors. This
gives that party an unfair advantage or preference over other creditors. This goes against the
Insolvency Act, which sets out a predetermined order for the payment of creditors.
Set-off can also be prohibited by statute, such as the Consumer Protection Regulations,
which protects the rights of the consumer against the supplier.

13.6 Death
The death of a party to a contract will usually not automatically bring that contract to an Thin uxocuune Otae
end. It depends on whether the performance that was due by that party was such that it Geransad's extate ic
was specific to her. If the contract was of such a personal nature that the rights and duties appointed to administer
of the deceased person cannot be transferred to the deceased estate, then the contract will the estate under the law
automatically terminate. For example, in an employment contract, if the employee dies, of succession. If there is
the contract between the employee and employer will come to an end. The executor of the # Be PRINS Cuty OU
: the instructions in the will.
deceased’s estate cannot simply step into the shoes of the deceased and render services to i there ke ng WH aon the
the employer on behalf of the deceased. So, if the performance arising from the contract is gyecutor must administer
such that it could have been performed only by the debtor (or only to the creditor, as the the estate in terms of the
case may be), then the death of that debtor (or creditor) will result in that performance law of intestate succession.
being impossible, and therefore the contract will come to an end.
If, however, the contract was such that the rights and duties were not personal in nature and therefore
could be transferred to the estate, then it must be enforced by the executor of the deceased estate. For example,
if the performance that a party owes is the payment of money for goods that were purchased and already
delivered and that party dies, then death will not extinguish the deceased's obligation to pay the debt.

Chapter 13 | Termination of contracts by law 175

Here, that obligation falls into the deceased estate, and the executor will be responsible for the payment
of the debt out of the assets in the estate under the law of succession.

13.7 Insolvency
When a debtor has more liabilities than assets, she may be sequestrated under the law of insolvency.
When a person is sequestrated, she is declared insolvent bya court. At this point, the court appoints a
trustee to take custody of the insolvent estate with the aim of gathering assets and paying creditors in
terms of the Insolvency Act.
Prior to insolvency, it may have happened that the insolvent (or debtor, as she was at that time) was a
party to contracts that gave rise to rights and duties. As part of the trustee's statutory functions, she has
to decide whether to uphold these contracts or terminate them. Once the trustee makes this decision,
she cannot change her mind.
If the trustee decides to abide by any of the contracts that the insolvent (or debtor, as she was at that
time) entered into with other contracting parties, then she steps into the shoes of the insolvent and takes
over the contract in all respects. This means that the trustee is obliged to perform to the other contracting
parties as if she were the insolvent. The question of whether or not the trustee has elected to abide by a
contract is one of fact, not law. This is determined by inference with reference to all relevant facts.
However, if the trustee does not decide whether or not to abide by or repudiate a contract within
a reasonable time, then the other party can safely assume that the trustee does not intend to abide by
the contract. The Insolvency Act does, however, provide for certain statutory controls on the exercise of
the trustee's election — that is, the Act stipulates when and how the trustee should exercise his election
in respect of certain contracts. Examples of these contracts are the purchase of immovable property
(section 35) and the lease of property (section 37).
This means that, like with death, insolvency does not automatically terminate a contract between the
insolvent and the other contracting parties.

What do you think?

Whar do you think is the reasoning behind the principle that most civil legal claims prescribe after a
period of three years? What would happen if a plaintiff sued a defendant one day late because of the fault
or negligence of the attorney?

Chapter summary

In this chapter, you learned the following about
termination of contracts by law:
Although contracts can be terminated by agreement
between the contracting parties, they can also be
terminated by the operation of the law in various ways:
= If both parties perform fully and properly as per
the terms of the agreement, then that contract will
automatically come to an end.
m The Prescription Act 68 of 1969 provides for
obligations to come to an end when a specified
period of time (the period of prescription)
has passed.
= = If performance by a party to a contract becomes
impossible because of a natural disaster, both
parties are excused by law from performing in
terms of the contract.

176 Chapter 13 | Chapter summary

= A contract ends a merger when the roles of the
debtor and creditor are merged into one person.
= Where two persons owe each other debts of the
same nature and where the amounts involved
are certain and the debts are due and payable,
then the amounts owed may be set off against
each other.
Review your understanding
Briefly explain the difference between set-off
and merger.
Which of the following statements are incorrect?
a) Prescription begins to run as soon as the debt
is due.
b) Ifa debtor pays his debt after it has prescribed, he
cannot recover that payment from the creditor.
c) Aparty can interrupt prescription by leaving
the country.
d) An ordinary contractual debt prescribes after a
period of three years has lapsed from the time
the cause of action arose.
e) Any debt owed to the state which arises out of
a sale or lease of land by the state to the debtor
prescribes after 30 years.
Which one of the following statements about
excuses for non-performance is correct?
a) Asa general rule, the death of a party is not an
excuse for non-performance since the rights
and obligations of the deceased arising under a
contract are transmitted to his estate, which is
administered by an executor.
b) Under certain circumstances, a debtor is
still legally bound to perform in terms of an
obligation which has prescribed.
c) The performance of the debtor is not affected by
the fact that it has become physically or legally
impossible for him to render his performance
once the contract has been entered into.
d) Inorder fora debtor to be excused from
performance, it makes no difference that
the impossibility is absolute and not merely
relative or personal to the debtor.
m The decision as to whether or not an insolvent’s
contracts will be fulfilled generally depends on the
trustee of the insolvent estate.
Once a contract has been terminated by law, the parties
will, generally, not be subject to any remedies for breach
of contract.
e) The insolvency of a party is an automatic
excuse for performance.
Which of the following statements are correct in
respect of set-off?
a) Tilly, the guardian of Tommy, owes Timmy
R10 000 for Tommy's education costs. Timmy
owes Tilly R10 000 for the cost of repairs that
Tilly did on Timmy’s new car. Set-off may
apply to simplify the business transactions.
b) The debts need not be of equal amounts.
c) The parties must sign a written contract
agreeing to set-off their respective debts.
d) The debts must be liquidated at the time
of set-off.
e) The debts must be of the same kind.
MrT enters into a contract with Mr F to buy
Mr F’s holiday house for R1 million. Unbeknown
to the parties, the house burns down two months
before Mr T moves in but after the contract is
concluded. Identify the correct statement:
a) ‘The contract is void as a result of initial
impossibility of performance.
b) ‘The contract is valid and Mr F will have to
rebuild the house in order to deliver it to Mr T.
c) The contract is voidable and Mr T can choose
whether to enforce the contract or set it aside.
d) The contract is voidable as a result of
supervening impossibility of performance.
e) None of the above is correct.
Which statements are correct?
a) Any debt that arises froma bill of exchange or
negotiable instrument prescribes after a period
of three years.
Chapter 13 | Review your understanding 177
 b) Adebt arising from a mortgage bond
prescribes after a period of 20 years,
c) The death of a party to a contract will
automatically terminate the contract.
d) ‘The trustee of an insolvent estate may never
prevent the insolvent from honouring
Further reading
Sharrock, R. 2016. Business Transactions Law, 9th edn.
Cape Town: Juta and Co. (Pry) Ltd
Sharrock, R., Smith, A.D. and Van Der Linde, K. 2012. Hockly’
Insolvency Law. 9th edn. Cape Town: Juta. and Co. (Pry) Led
http://www.blacksash.org.za/files/perscriptionact.pdf
(This is a good article on the Prescription Act 68 Of 1969, as well
as some other examples of prescription.)
178 Chapter 13 | Further reading
contracts that the insolvent entered into before
the estate was declared insolvent.
e) In set-off, the debts owed between Bongiwe in
her personal capacity and Nonkululeko in her
professional capacity can be set-off as long as
the debts are of the same kind.
http://www.youtube,com/watch?v=GS16HmusPCc
(This is a YouTube video of a lawyer explaining impossibility of
performance and frustration.)
 aT yel cog
The law of sale
Ce
The main ideas
= = The nature of a contract of sale
Duties of the seller
Duties of the buyer
= Examples of specific contracts of sale

The main skills

= Discuss and summarise the nature of a contract of sale.
= Interpret and explain common types of contract of sale.
= = Make decisions and solve problems concerning the law of sale.

The last ten chapters looked at principles of contracts. This chapter is the first of Part 3, which focuses
on different types of specific contract, namely sales (in this chapter), leases (Chapter 15) and credit
agreements (Chapter 16). Sales contracts are probably the most common type of contract you will come
across in your day-to-day life.

Before you start

What is the most expensive item you have ever bought? It could be a house, a car, a smartphone or even
an item of clothing. At the time, did you think of what would happen if the smartphone did not work
or if the item of clothing fell apart when you washed it for the first time? Have you ever wondered what
would happen if the car you bought was actually a stolen vehicle? And if the item was too big for you to
carry home, what would happen if it was damaged by accident while being delivered to you? When did
you become the owner of that item: when you finished paying the seller for it, or when it was delivered
to you? You will have a clearer idea of these issues after studying this chapter.

Added value Specific contracts

We discussed specific contracts in Chapter 8. If you do not remember what the essentialia,
naturalia and incidentalia of specific contracts are, now is the time to go back and revise that
chapter, because a contract of sale is a specific type of contract.

14.1 The nature of a contract of sale

A contract of sale is generally an agreement about an item that one party sells to the other party. The
person who is selling the item (the seller) agrees to give that item to the other person (the buyer). In
return, the buyer promises to pay the seller a specified amount of money for the item (the purchase
price), Thus the two essentialia for a contract of sale are:
™ agreement on the item to be sold
™ agreement on the price to be paid.

Chapter 14| The law of sale 179

‘These two things have to be agreed on, otherwise there can be no contract of sale. omens
Almost anything can be bought and sold. For example, Thabo can sell his house, his car, _ jncorporeal, you cannot
his leather jacket, his cellphone, the grapes that will be ready for harvesting next summer (a __ see or touch it; it has no
future thing) and the publishing rights to the book he has written (an incorporeal thing). __ body or physical form.
‘The naturalia of a contract are those terms that apply automatically to that type of
contract. They are attached by way of law. The parties are generally allowed to change these Naturalia are assumed
terms in their contract. Below, we will consider the different naturalia that apply specifically © @PPly to the contract,
to contracts of sale. Here, we will focus on two aspects: a though they arenot
necessarily mentioned.
@ the duties of the seller
m = the duties of the buyer.

14.2 Duties of the seller

We are first going to consider the duties that the law places on the seller in a contract of sale. They are:
= aduty of care until the goods are delivered
= =a duty to make the goods available to the buyer
@ a duty to warrant against latent (hidden) defects
@ a duty not to make false statements
@ awarranty against eviction.

14.2.1 The duty of care until the goods are delivered

When property is destroyed or damaged, it is normally the owner who bears the loss. Now suppose I sell
you my car, and then someone crashes into me on my way to deliver it to you. Is it your loss or mine?
We generally describe this problem as a question of whose it is—in other words, we ask who will suffer
loss if the item is damaged.

Passing of risk in cases of accident

When two parties conclude a contract of sale, the risk generally passes to the buyer as soon as the
contract is perfecta (or completed). For this reason it’s important to know exactly when a contract is
complete, in other words, when the sale has become ‘perfect’.
A contract of sale is perfected when all of the following conditions are met:
m= ‘The price has been determined.
= = The goods are definite and identified.
m Any suspensive conditions have been fulfilled.

Although the risk of damage lies with the buyer when the sale is perfecta, the seller has The silier at aun if
a duty to care for the goods until they are handed over. If the goods are damaged before he acted intentionally
or
delivery, due to the seller's fault, then the seller will have to pay for the damage. However, negligently.
when damage occurs by accident and not due to the fault of the seller, the risk has passed to
the buyer.
Consider the following case study.

rT TE Dathi) Freddy’s Florist

Freddy's Florist grows roses, and sells them to the public from a large garden. Emma places an
order with Freddy for the purchase of 100 roses for her wedding. The day before the wedding,
she visits the rose garden, picks out 100 roses that she likes and pays for them (at R10 per rose).
Freddy marks that part of the garden clearly, so that the roses may be picked and delivered to
Emma the next day. However, that night, wild dogs jump over the fence surrounding the garden
and damage all the roses. Who has suffered the loss?

180 Chapter 14] The law of sale

 Case study (continued) Freddy’s Florist

In this case, the contract of sale has been perfected, because all of the requirements have
been met:
e Emma placed her order with Freddy.
e The price was fixed at R1 000.
e The goods were specified (100 roses).
e There were no further conditions.

PXele(-teMtr litt When isa sale perfecta?

If the contract between Freddy's florist and Emma stated that she would buy the roses only if
the morning of the wedding was sunny, then the contract would not be perfected until this
condition was met.

The general rule is that the risk passes from the seller to the buyer once the sale is perfecta. The passing of
risk is important because there is sometimes a delay between the time when the parties sign or agree to
the contract and the time when the buyer receives the goods.
In our case study, Freddy, the seller, has a duty to take care of the flowers during this time period,
but the buyer bears the risk. In other words, if the item is damaged or destroyed through an accident
after the sale is perfected, the buyer suffers the loss. Because the contract between Emma and Freddy
was ‘perfect’, Emma will not be able to get her moncy back, even though the roses she bought have
been damaged.
However, Freddy would be held liable if the damage had occurred because of his fault. For example,
if Freddy left a gate to the garden open, the risk remains with him as the owner. Any fraud or default
(such as late delivery) would also mean that the risk stays with him. Even though the buyer bears the risk
of damage or destruction of the item as soon as the contract is perfecta, the seller must take reasonable
care to look after the item until delivery,
If the contract was not perfecta, the loss would remain the risk of the seller, because it's generally the
owner of a thing who suffers loss when that thing is damaged.
Just as the risk in an item passes to the buyer once the sale is perfecta, any improvements or benefits
in the item being sold (such as fruit that ripens) also pass at that time.

When risk does not pass to the buyer

‘There are a number of situations where risk does not pass to the buyer at the usual time. Some of these
situations are described below.
= = When the buyer and the seller agree that the risk will not pass to the buyer until delivery. In other
words, they have added this condition to the contract.
When the goods have to be weighed, measured or counted. In this kind of situation, the contract
is not perfecta until the purchase price has been determined. In other words, the risk will pass to
the buyer only once the goods have actually been weighed, measured or counted and kept apart.
Suppose, for example, Tiger buys a big bag of golf balls from Annelisa at R50 per ball, but no one
knows exactly how many balls are in the bag. The risk remains with Annelisa until the counting has
taken place. When the parties know that there are, say, 200 golf balls in the bag, then the purchase
price is determined (R10 000), and the risk passes to Tiger.

Chapter 14| The law of sale 181

= When the seller has not delivered the goods at the agreed time and this causes loss and damages
that would not have happened if the goods had been delivered on time. In other words, the seller
is in breach of contract for mora debitoris. If the seller's performance is delayed beyond the agreed
deadline, we say he is in mora. In this situation, the seller is the one who will suffer loss, because if
the item had been delivered on time, it would not have been on his property. For example, if there
was unexpected flooding on the seller's property, the item would have been safe if he had delivered
it to the buyer on time. However, if the damage would have occurred even if the item had been
delivered on time, it will be the buyer who suffers the loss. Suppose, for example, a cow that is
delivered late dies of a disease it had before the contract was concluded. The risk in this case will be
the buyer's, because the cow would have died even if it had been delivered on time.
= However, if the buyer is in mora creditoris for failing to take delivery, then the seller Gross negligence
will only be responsible for losses caused by gross negligence or intention; he will no 3 ceyere lack of care -
longer be liable for damage caused negligently. it is more than just
@ = In acase where the sale is subject to a condition, until the condition is fulfilled, the risk — being negligent.
stays with the seller. For example, if Oprah buys a car subject to its being roadworthy,
the risk will stay with the seller until the car is declared roadworthy. The case study below gives you
another example of a sale that is subject to a condition,

Gengan v Pathur 1977 (1) SA 826 (D)

Principle
Where the normal rules about passing of risk have been excluded by a specific clause, the seller
should bear the loss.
Facts

Gengan bought some buildings from Pathur. The contract (a deed of sale) stated that the risk
in respect of the property would pass to Gengan (the buyer) on registration of transfer in the
deeds office. However, before registration of the transfer, but after the signing of the deed of
sale, the buildings were partially destroyed by a fire. Gengan used his own money to restore the
buildings. After the transfer of the property was registered, Gengan instituted an action (sued)
for damages against Pathur for the costs of repairing the buildings. Pathur’s defence was that he
was not under any duty to repair the buildings.
The court's finding
In order to decide whether the buyer would be entitled to damages for loss of the buildings, the
court stated the following:
"Where there is total destruction of the goods through no fault of the seller, the buyer has
no claim against the seller because the contract comes to an end because of impossibility of
performance. Where the goods are only partially destroyed, the buyer does have a common
law remedy against the seller. It does not matter that such damage occurred through no fault
of the seller. This still amounts to a material breach of contract. The innocent buyer still has
common law remedies of claiming damages and accepting the defective goods or refusing
delivery of the goods and claiming proper delivery (of fixed goods) or damages in place of this’.

Therefore, the seller in this case was still under a duty to deliver the buildings in the same
condition they had been in when the two parties concluded the contract.

182 Chapter 14] The law of sale

 Activity 14.1
This is a fairly long chapter with quite a lot of detail to remember, so make time now to go
back over what you have covered so far and summarise it in a mind map or some other type of
diagram. If possible, use small line drawings to help you remember the concepts.
Also page through the rest of the chapter and jot down the heading structure so that you get
an idea of where the discussion is going. It's much more effective to follow a ‘map’ and know
where you're going than to just drift along.

14.2.2 A duty to make the goods available

It is generally the seller's duty to deliver the goods he has sold to the buyer. When we talk about ‘deliver’
in this sense, we do not mean that the seller must physically take the goods to the person who bought
them. All that the seller is under an obligation to do is to ‘make the goods available’ to the buyer, so
that the buyer can remove them. Unless the parties have agreed that the seller will transport them to the
buyer, it is the buyer's responsibility to arrange for transport.
Unless the parties have agreed on a place and time to deliver the goods, the seller must make them
available at the place where they are at the time of sale, and they must generally be made available
immediately (or at least within a reasonable time).
In this section we look at three topics related to the seller's duty to deliver, namely:
= types of delivery
= transfer of ownership
m= the purchase price.

Types of delivery
Delivery of an item is not the same as changing ownership of that item. It refers to the handing over of
an item from one person to another. There are different ways of delivering things, depending on the type
of item being delivered. This contract does not, by itself, cause the buyer to become the owner of the
goods. The contract simply gives the buyer the right to claim delivery of the item she has bought from
the seller. Delivery of the item is necessary for the transfer of the rights of possession or ownership.
‘There are six different types of delivery, namely:
actual delivery
=

symbolic delivery
hWN

delivery with the long hand (traditio longa manu)

delivery with the short hand (traditio brevi manu)
transfer of possession (constitutum possessorium)
AW

attornment.

Let us look at these six different types of delivery in greater detail.

Actual delivery
Actual delivery is the most common form of delivery. For example, a seller may physically bring a piano
to the seller's home and hand it over.

Symbolic delivery
In symbolic delivery, the handing over of the item is symbolised or represented by some other action.
For example, when someone sells you a car, he will hand over the keys to you to symbolise that he is
handing over the car.

Chapter 14| The law of sale 183

Delivery with the long hand (traditio longa manu)
This method is mainly used where the property is too heavy or big to be physically handed over. For
example, a farmer who is selling a flock of sheep may point out the sheep to the buyer and make them
available to the buyer.

Delivery with the short hand (traditio brevi manu)

Consider a situation where, for some time, you have been using or renting an item that belongs to
someone else. Then you decide to buy it from her. You and the other person may agree that, although
you are now entering into a contract of sale, it’s pointless for you to give the item back to the seller so
that she can deliver it to you. You simply keep the item, but now you are its owner. This is an example of
delivery with the short hand.

Transfer of possession (constitutum possessorium)

Transfer of possession is the opposite of delivery with the short hand, because the buyer agrees that the
seller will keep the item for him after the sale. In other words, the seller then has possession of the item
on behalf of the buyer. This meets the requirement of delivery.

Attornment
With delivery by attornment, there is an agreement between the seller, the buyer and a third party that
from the date of the sale, the third party will look after the item on behalf of the buyer. For example,
Pam's adult son Joe is an excellent pianist. When he moved out of her home, she let him take her grand
piano along so that he could keep practising every day. But now Pam needs some money. She arranges to
sell the piano to Urmila, who agrees that Joe can continue to look after and use the piano for some time,
and pay her a specified sum of money every month for its use. So the piano that has been sold is actually
in Joe’s possession before and after the sale. The seller (Pam), the buyer (Urmila) and a third party to the
contract (Joe) agree that from the date of the sale, the third party will hold the piano on behalf of the
buyer and not the seller.

Activity 14.2
Before you continue, draw a quick mind map of the types of delivery, to consolidate what you
have learned.

Transfer of ownership
The owner of an item is the person who has the legal right to be in possession of that thing. Ownership
of an item can change, and this process of change is guided by the law of sale.
When one person wants to buy an item, such as a house, from another person, they both sign a
contract of sale after they have agreed on the price. However, this does not transfer ownership; other
requirements still have to be met for ownership to change. Exactly what these requirements are depends
on the nature of the item being sold.
The ownership of movable property is normally transferred when the price is paid is paid in full. If
the sale is on credit, then ownership will pass when the goods are delivered.
The following are the formal requirements for the passing of ownership:
® = Both parties must have the intention that ownership should pass.
m = The seller must be in a position to transfer ownership. In other words, he must be the owner of the
property, or have the owner's permission to transfer ownership.

184 Chapter 14| The law of sale

= = ‘The purchase price must be paid, or credit must have been given for its payment.
= When delivery is not possible (as, for example, in the case of a house, which is immovable property),
transfer of the item or property from the seller to the buyer is done by registration in a Deeds Office.

‘The first three requirements are the same for transfer of movable objects, like cars, furniture and books,
as for fixed (immovable) property. The only difference is that the movable property must be delivered to
the buyer, while immovable property is ‘delivered’ by registration of transfer as described above.
Only the seller and the buyer can agree on transfer of ownership — and only if the seller is the real owner
of the item being sold. If the seller does not really own the item, he does not have the right to transfer
ownership to the buyer. In that case, the buyer will generally enjoy legal protection only to the extent of the
seller's rights in the item sold. In other words, the law will not give the buyer any rights — like ownership —
that the seller did not have. Suppose you buy an item and pay the seller for it in good faith, but it turns out
that the item is stolen, and the seller was not the real owner. Then the rightful owner can claim the item
back from you, and you may have difficulty getting your money back from the seller.

Purchase price
‘The law usually presumes that every sale is for cash. This presumption can be countered To presume means
(argued against) or challenged by evidence showing that the parties did not intend the sale ¢oughly the same as to
to be for cash. We call this a rebuttable presumption, which means that if there is evidence assume. A presumption
to show that the normal position does not apply to a particular case, then the presumption _ |S like an educated guess,
will be rebutted (defeated), By contrast, irrebuttable presumptions cannot be challenged in ased on the fact that the
same thing happens in
this way. :
Iti a hat eased iecdieE ich most cases. A presumption
tis important to note that cas oes NOt Mean Nnecessari Vy that the uyer pays wit becomes a legal rule

notes and coins. ‘Cash’ will include payment by credit/debit card or by EFT. If the buyer unless there is evidence
pays by cheque, the sale is regarded as a cash sale as long as: that it should not apply.
m = the cheque is dated on the day on which the item was delivered
@ =the bank honours the cheque.

If the seller agrees to accept payment on a day after the date of delivery, the law will assume that the
seller gave the buyer credit. Whether or not delivery has taken place, the general rule is that the buyer
will become the owner of whatever she is buying only when she has paid the purchase price or received
credit from the seller.

Added value What is a cheque?

In this age of electronic banking, it may be that you are not really familiar with cheques and the
way they work, so here’s a quick summary.
A cheque is a written order from one person to a bank, asking the bank to pay a specified
sum of money either to the person named on the cheque or to any person (the bearer) who
presents the cheque to the bank. When we say that the bank honours the cheque, we mean
that it pays out the amount written on the cheque to the person whose name is on the cheque
(or to the bearer, if it is written out as ‘cash’),
A post-dated cheque is a cheque that has a future date on it. If you want to deposit a post-
dated cheque, or cash it (exchange it for money at the bank), you can do that only on or after
the date that is stated on the cheque.

With a sale of movable property, the law adopts the rebuttable presumption that if the sale was for cash,
the seller intended to pass ownership on receiving payment. If the sale was on credit, it is presumed that
the seller intended to pass ownership on delivery of the property.

Chapter 14| The law of sale 185

 With a sale of immovable property, ownership passes to the buyer only when the property is transferred
from the seller to the buyer by registration of the property in the Deeds Registry in the name of the
buyer. Note that all the legal work involved in the transfer of immovable property and registration of
deeds is handled by conveyancers.

Case study Lessons from maize exports

The case of Lendalease Finance (Pty) Ltd v Corporacion De Mercadeo Agricola and Others 1976
(4) SA 464 (A) involved the sale of maize to a purchaser in Venezuela. The issue to be decided
was when the ownership of the maize passed to the buyer. While the actual decision of the
Court is not relevant, the following list, drawn from the Supreme Court of Appeal, is a useful
summary of the requirements for the passing of ownership:
e Ownership does not pass by virtue of the contract of sale alone.
e There must at least be delivery of the item being sold.
e In the case ofa cash sale, ownership passes when there is delivery and payment at the same time.
e In the case of a credit sale, ownership passes on mere delivery, but the parties must
have intended that credit be granted. Credit is usually granted where payment has been
postponed for a long period after delivery.
e Whether a sale is for cash or credit depends on the intention of the parties. Their intention
must be determined from the terms of the contract and all the surrounding circumstances.
e Until the opposite is proved, every sale is presumed to be for cash.
e Acash sale can become a credit sale through a change in the intention of the parties.

14.2.3 A duty to warrant against latent defects

In the days of the Roman Empire, the poor slaves were valuable ‘property’ for the slave The Colosseum is ahuge
owners, who would buy and sell them at a market. A slave who was a good gladiator stadium in Rome where
(fighter), for example, could earn a lot of money for his master. Now imagine that Remus people were entertained
(a wealthy slave owner) sold his slave, Maximus, to Claudius (another slave owner) for in ancient times, similar
50 gold coins. Maximus was tall and well built, and Claudius hoped to make a lot of money © the sports stadiums of
through this deal. Claudius proudly took Maximus to the Colosseum, but after handling iy
the sword for about half an hour, Maximus was unable to move his arm for a week.
Some law had to be made to protect Claudius in this situation, especially because it would be difficult
for Claudius to prove that Remus had known of Maximus’s weak arm.
Faced with this sort of problem, the magistrates of the Roman markets made an edict (an official rule
or order). This edict made it the seller's duty to tell the buyer about any hidden problems in the item
being sold — problems that might cause the item to be in a less than perfect condition for the purpose for
which it was going to be used, and which are not discoverable upon inspection. These problems (or flaws
or faults) are called latent defects.
To this day, it is the seller who has to take responsibility for defects, even if he was not aware of
them at the time of the sale. The reason for this is that the seller is in a position to be aware of defects in
the item being sold. To the buyer who buys an item and discovers a defect afterwards, it makes no real
difference whether the seller was being dishonest or did not know about the problem. This responsibility
for defects is one of the duties that the law puts on the seller in a contract of sale.

The defect must be material

The seller’s duty with regard to defects applies only if there is something wrong with the item sold at the time
of the contract. The problem, or defect, must be one that affects the purpose for which the item is going to
be used or for which an item like that is normally used. In legal terms, we determine whether something
counts as a defect by asking whether it ‘materially impairs the usefulness or effectiveness of the item being sold.

186 Chapter 14 | The law of sale

Some defects are so small that they make no difference to the use of that item. For a buyer
to be able to complain to the seller in law, the defect should be more than justa very minor We say that the item is
problem. The test is actually whether a reasonable person would consider the problem to defective when there
get in the way of the item’s use. So, in the example of the gladiator, it is the arm that is Se promern wir Cat
defective — making Maximus unsuitable for the purpose for which he was sold. IESE ME EGNOS

Holmdene Brickworks (Pty) Ltd v Roberts Construction Co Ltd 1977 (3) SA 670 (A)

Principle
The manufacturer of a defective product is responsible for rectifying this.
Facts
Bricks that contained a large amount of magnesium sulphate were supplied to a builder.
This caused the bricks to crumble. Obviously this made them unsuitable for building with.
The court's finding
The court held that the bricks were defective. The manufacturer was held liable to pay for
breaking down the walls built with the defective bricks and to pay to have them rebuilt.

The defect must be latent

‘The law requires that the defect must not only be material but must be hidden, or latent. A fault 4 something is patent
that is clear or obvious on inspection of the item is known as a patent defect, and normally does _ jt js obvious and easy
not result in any common law remedies related to defective goods. But if a defect is not visible, — to see. So a patent
even when the item is inspected, then it is known asa latent defect, and the seller could have a duty defect in a house would
to the buyer in terms of the edict. For example, Claudius should have inspected Maximus before 5€ something like a
buying him. A reasonable inspection would have included a test of the strength of his arms and SE ae
legs (because Maximus was going to be used as a gladiator). The defect in Maximus's arm would
not have been visible during such a reasonable inspection, and because of this, the defect should qualify as being
latent. To use a more modern example, you may go to a bookshop and decide to buy a certain book after reading
the cover and dipping into the text here and there. If there are a few pages missing, you will not notice it until you
read the whole book and get to that part of the book. Those missing pages would qualify as a latent defect.

i) le eel ae tC) ee

Principle
The buyer has a duty to inspect and examine the item being purchased.
Facts
The buyer bought a 19-year-old Morris car, unaware that there was a crack in the chassis of the
vehicle. The car was not in a good condition anyway.
The court's finding
The court held that the buyer should have given the car a proper inspection, which should have
included examining the entire external part of the car— both top and bottom. If he had done this,
he would have discovered the defect immediately. The court therefore held that the cracked chassis
did not amount to a latent defect. This meant that the buyer’s claim against the seller was defeated.

Cases when there is no duty

If the seller warns the buyer of a hidden problem in the item at the time of the sale, then he will not be
responsible to the buyer for that defect. The seller will also not be responsible to the buyer if the buyer knows
of the defect but still buys the item, or if the defect came about only after the contract was concluded.

Chapter 14| The law of sale 187

 ‘These days, contracts of sale, especially for second-hand items, usually include a clause stating that
the buyer will not hold the seller responsible for any hidden defects. This is known as the ‘take it as it is’
sale, and is another case where there is no duty on the seller. The clause that relieves the seller of liability
for any faults is called the voetstoots clause, and we say the item is sold voetstoots.

For sale. 1964 Crockmobile 120. As good as new.

400 000 kms on the clock. What offers?
Strictly voetstoots.
Call 074 4911 911

Figure 14.1 An advertisement using the term voetstoots

The term woekstoots, meaning ‘to push with the foot’, apparently comes from the carlydays geese
of stock sales in farming areas. Once the deal had been done and the money paid, the ‘farm animals like cattle
seller would prod the animal towards the buyer with his foot, thereby completing the sale. _ and sheep’.
Here is an example of an advertisement using the term voetstoots.

Added value Voetstoots clause

The inclusion of a voetstoots clause in the contract normally means that there is no duty on the
seller to promise that there is no hidden defect.
By signing a contract with a voetstoots clause, the buyer agrees that he is buying the item
with all its faults, and will not hold the seller liable for any hidden defects.
What, then, is the point of the seller's duty regarding latent defects, if a clause in a contract
can simply wipe away the duty? Well, the voetstoots clause in the contract will not help a seller
where the buyer can prove that the seller knew about a defect and deliberately hid it from the
buyer at the time of the contract. In this case the seller could also be guilty of fraud.
Where there is both a voetstoots clause and a clause containing a warranty (or promise) in a
contract, the court will decide which paragraph reflects the intention of the parties better. This
means that only one of these paragraphs will really apply.

Remedies
In contract law, a remedy is relief that is given to the harmed party when the court finds that there has
been a breach of contract. The common law remedies available to a buyer who has purchased latently
defective goods are collectively called the aedilitian remedies — the actio redhibitoria and actio quanti
minoris. They are named after the Roman magistrates (aediles) who introduced them.
These are different from the usual contractual remedies for breach of contract. The buyer must
institute either the:
® actio redhibitoria
@ actio quanti minoris.

If the defect is so serious that the buyer cannot use the item for its intended purpose, or if the buyer
would never have bought the item if he had known about the defect, then the buyer can cancel the
contract and get his money back (assuming that he has already paid), in addition to interest and
expenses. Expenses could include transportation costs in taking delivery, the cost of taking care of the
item (storage costs), payment of expenses in examining the item to discover the defect, and the cost of
returning the item to the seller. The defective item has to be returned to the seller.
‘This remedy for the buyer is known as the actio redhibitoria — an action for redhibition,
Redhibition is the cancellation of a contract and the repayment of whatever has been paid plus interest and
expenses, so as to put the innocent party back in the position he was in before he entered into the contract.

188 Chapter 14| The law of sale

 If the buyer, by his behaviour or by what he says, creates the impression that he will keep >) Waive a sont eae
the item even though it has faults, then the buyer could, in law, waive the right to this remedy. to give it up, or not to use
What if the buyer cannot return the item because it was destroyed as a result of the it. The right expires and
defect (or through no fault of the buyer, or while it was being used normally)? According cannot be used later.
to the principle of fairness, the buyer must still be given the benefit of the remedy for the
defect, without having to return the goods.
If the item is not completely useless for its purpose, then the buyer cannot use the actio redhibitoria.
Instead, the buyer may claim a reduction of the price paid, while keeping the item. The amount of the
reduction will be the difference between what the buyer paid for the item and what the market value of
that object is in its defective state. This remedy is known as the actio quanti minoris, meaning a reduction
in price. In other words, where a hidden defect means that an item priced at R2 000 is actually only
worth R1 000, the buyer may use the actio quanti minoris to claim a reduction of R1 000.

Damages
Damages usually take the form of an award of money by the court. The aedilitian remedies do not
generally include a claim for damages. There are, however, three categories of damage that the buyer will
be able to claim in particular situations:
1. When the seller has specifically promised either that the item is free of defects or that it has certain
good features, and these promises prove to be false, the court will allow contractual damages.
2. If the seller knew about the defect (or should have known), and deliberately kept quiet about it, the
court may award delictual damages.
3. Finally, suppose a manufacturer or merchant seller tells the public that his product has some special
quality or ability, but it turns out that this is not the case, and a customer suffers additional loss
because of the latent defect. The manufacturer or dealer will then be responsible for damages.
‘This is known as the manufacturer's or dealer's liability for consequential loss. As an example of
consequential loss, suppose a dealer in electrical appliances advertises a certain model of fridge as
being frost-free. A few weeks after you buy the fridge, the freezer section frosts up and then starts
leaking water, which damages other electrical equipment that is standing next to the fridge. The
damage to the other equipment is a consequence of the latent defect in the fridge, which is not
frost-free as advertised. The dealer or manufacturer is therefore liable for the damage to the equipment.

The Roman name for the court action to claim damages is actio empti.

14.2.4 A duty not to make false statements

Have you ever been tricked or forced into buying something you really did not need by a salesperson
who promised you, for example, that you would definitely sleep better if you bought a particular bed,
or that you would lose 20 kilograms in three weeks if you took a tablet every day? Or maybe that you
would have abdominal muscles like Vin Diesel’s if you used a certain exercise gadget ‘for only five
minutes a day’? When does this ‘sales talk’ go too far, and can you ever do something about it? The
following case tried to answer this question.

Phame (Pty) Ltd v Paizes 1973 (3) SA 397 (A)

Principle
If a seller makes a dictum et promissum that causes the seller to enter into the contract, or to
agree to the price in question, and it is shown later that the statement was false, then the buyer
may, by law, rely on the aedilitian remedies (including claiming a reduction in purchase price).
The case held further that it is a question of fact in each case as to whether a statement by
the seller goes further than normal praise or sales talk.

Chapter 14| The law of sale 189

 Phame (Pty) Ltd v Paizes 1973 (3) SA 397 (A) (continued)

Facts

In the case of Phame (Pty) Ltd v Paizes 1973 (3) SA 397 (A), Paizes (the plaintiff) negotiated with
the defendant (Phame (Pty) Ltd) for the purchase of the Phame’s shareholding in a company.
The main asset of the company was a rent-producing immovable property. Phame was aware
that Paizes was interested in the purchase of this property because of the income derived from
the property. A relevant factor to be considered in deciding the true value of the shareholding
was the expense it incurred in connection with the property. The defendant's agent showed the
plaintiff that the annual municipal assessment rates and other charges were about R4 600. As a
result, the plaintiff agreed to buy the entire shareholding from the defendant for R846 000.
However, this was a false representation, because the company’s annual liability for rates
and other charges was in fact R14 700, which made the true value of the shareholdings only
R815 000.
The court's finding
The plaintiff successfully claimed a reduction of the purchase price by an amount of R31 000 on
the grounds that the defendant had made a false dictum et promissum. A dictum et promissum
is astatement, made by the seller to the buyer during the negotiations, that describes the quality
of the item being sold and goes further than just normal praise of the quality of that item.

14.2.5 A warranty against eviction

A warranty, as you saw in Chapter 9, is a guarantee or promise. ‘Eviction’ means either:
® that people are removed from the premises they were occupying — they are (made to leave their home)
® = that an item in someone's possession is taken away from him.

In legal terms, we say the person is ‘disturbed of possession of the item bought’.
When a seller sells something that he does not own, he cannot transfer ownership to the buyer. If the
true owner finds out that her property is in the possession of the buyer, she may reclaim the property
from the buyer. The buyer is then threatened with eviction in the sense that the true owner would
deprive the buyer of the property that he bought from the seller. The buyer therefore has a claim against
the seller for breach of the warranty against eviction. The duty of the seller to ‘warrant against eviction’
is intended to prevent the buyer from being disturbed of possession of the item bought. The warranty
against eviction is automatically part of a contract of sale, to protect the buyer. The warranty means that
the seller promises that no third party who has greater rights in the thing sold than the buyer will stop
the buyer from enjoying or selling the thing sold.
Suppose, for example, I bought a watch from a hawker on the street and then sold it to you. As
far as I was aware, | owned that watch, and we both now think the right of ownership has passed to
you. Your cousin, who is the true owner, sees you with the watch and claims it back. You have no right
of ownership to that watch, even though you bought it from me, because I also did not have right
of ownership.
A warranty against eviction is applied by operation of law; it exists unless the parties agree
otherwise. In other words, it goes together with a contract of sale and will apply unless the parties
make another agreement.
If the seller sells a thing that he does not own (but believes he owns it), then the buyer who acts in
good faith will be able to hold the seller liable under the warranty against eviction. If the buyer buys
something from a person who knows he is not the owner, then he may sue the seller under delict for
fraudulent misrepresentation.

190 Chapter 14 | The law of sale

14.2.6 Dealing with eviction
‘The most common form of eviction happens when the true owner of an item claims it back from a
person who has bought that item from a seller who had no authority to sell it. The warranty protects the
buyer even if only a part of the item is taken away or if the buyer's enjoyment is reduced in any way by
the party with the greater legal right.

fer
T Ya drei] The Thomas Crown Affair

Thomas Crown sells a priceless Monet painting to the Prado Art Gallery in Madrid. The gallery
pays him a fortune for this masterpiece. A few months later, Monet's great-granddaughter
produces a document proving without doubt that she is the rightful owner of the artwork, and
that it was stolen from her. She claims back the painting from the Prado Gallery.
The Thomas Crown Affair is the name of a movie about a theft of a Monet painting. Both the
movie and this case study are fictional.

In the above case study, it appears that the great-granddaughter’s claim to the painting cannot be
defeated. What remedy can the Prado Gallery seek if it gives up possession of the painting to the true
owner? In terms of the duty of the seller, the gallery should be entitled to a remedy from the seller
(Thomas Crown) by showing that the great-granddaughter’s claim could not be defeated in law. This
means that the gallery is entitled to repayment of the purchase price (or the part that it has already paid)
plus interest. It should also have a claim for any additional damage it has suffered. This could include
legal costs and any increase in the value of the painting from the time it was purchased to the date of
eviction. In cases where there has been a lot of wear and tear in an item, the courts may decrease the sum
that the seller has to repay.
However, as a general rule, the buyer must not simply give up the property to a person who threatens
to take it away. In the above case study, the gallery has to investigate the great-granddaughter’s claim and,
if there’s any doubt about it, put up a proper defence in court. If the gallery hands over the painting in
response to a false claim, it loses all its rights against the seller. The buyer must notify the seller of the
claim of the ‘true owner’, so that the seller has time to prepare a defence and help the buyer to prove the
buyer's right or claim to the goods.

14.2.7 Limitations of warranty

The seller will not be held liable when:
® the eviction was caused by an act of God or anything else that’s completely out of the seller's control
m= the buyer's claim has become prescribed (in other words, the claim is too late)
@ the seller informed the buyer, when they concluded the contract of sale, that he was unsure whether
or not the thing belonged to him
m= the buyer knew, at the time they concluded the contract, that the seller was not the owner of the
thing that was being sold.

‘The seller is only liable in terms of the warranty if he bona fide believes himself to be the owner.

Activity 14.3
Draw up your own study summary for this section on warranty against eviction. It’s now time to
go further back in this chapter and summarise the various duties of the seller in your own words.
Make a new, more detailed mind map (or other diagram, like a table) to show and summarise
the duties of the seller. Use your illustration to explain these duties to a partner.

Chapter 14| The law of sale 191

14.3 Duties of the buyer
Just as the seller is subject to a number of legal duties, so the buyer in a contract of sale also has certain
duties. These duties are:
® to pay the purchase price
= to accept delivery
= to reimburse the seller for expenses.

14.3.1 A duty to pay the purchase price

As you can imagine, paying the purchase price is the buyer's most important duty. The buyer must pay
the entire contract price. He can pay it in instalments if the contract provides for this. If the contract does
not state how the price is to be paid, the buyer should pay with legal tender, which normally means a cash
payment. However, it is generally accepted that payment may be made by cheque, as long as the cheque is
honoured. Payment by cheque can cause some problems, as illustrated by the following case study.

Eriksen Motors (Welkom) Ltd v Protea Motors, Warrenton

and Another 1973 (3) SA 685 (A)

Principle
The fact that the sale was either for cash or for credit is a factor to be considered, but not the
only factor, in determining whether ownership has passed.
Facts
Eriksen Motors sold a car to Protea Motors, knowing that Protea Motors was immediately going
to resell the car to their customer X. Both Protea Motors and X paid by cheque. Protea Motors’s
cheque was dishonoured, while X's cheque was honoured by his bank. Eriksen Motors claimed
that they remained the owner of the car, and tried to claim the car back from X.
The court's finding
The Appellate Division held as follows:
e Payment by cheque is a conditional payment. The condition is that the cheque be honoured on
presentation, and this rule is not affected where the cheque is payable some distance away.
e If the cheque is dishonoured, there has been no payment.
e Payment by cheque is neither cash nor credit but a payment that is conditional on the
cheque being honoured.
Regarding the requirements for the transfer of ownership, the court held that:
e in asale for cash, both delivery and payment must take place before ownership can pass
e inasale on credit, ownership passes on delivery
e the parties’ intention will decide whether they wanted a cash sale or a credit sale.
The court concluded that the parties intended ownership to pass— whether the sale was for cash
or credit. (This intention was identified by the fact that Eriksen Motors knew that Protea Motors
was buying the car for immediate re-sale to X.) The court held that X was the owner of the car.

Note that the price will not always be paid completely with money. For example, when a dealership sells
a new car, it often accepts the old car as part of the purchase price. But at least part of the price must be
paid with money, because that is one of the essential aspects of a contract of sale. Otherwise the contract
could be a contract of barter, or exchange.
The price must either be a fixed amount or the parties must have agreed on some way of calculating
it. A sale at a price of ‘whatever the buyer feels is reasonable’, or ‘to be agreed upon by the parties’, is
invalid. The following case also deals with the duty of the buyer to pay the purchase price.

192 Chapter 14 | The law of sale

 imal ee eee es yee ee:Y)

Principle
The price must be described in such a way that it is fixed or legally possible to determine.
Facts
Adam sold an erf to Patel for R25 000. The relevant term of the contract stated that the purchase
price ‘shall be payable in monthly instalments, free of interest’. Adam believed that the contract of
sale between himself and Patel was void, because the purchase price had not been properly described.
After Patel had paid off R16 000 of the purchase price, Adam claimed for the return of the erf.
The court's finding
The court held that the price must be described in such a way that it is fixed or legally possible to
determine. The method in which payment has to be made must also be determined, or capable
of being determined. The wording in this contract was held to be so vague that the number and
amount of instalments could not be determined. As a result, the contract placed the method of
payment within the sole discretion of the buyer. This was not acceptable, and the court held that
it made the contract void. In other words, Adam succeeded in reclaiming the erf that he had
sold to Patel, because the contract of sale was found to be void.

The manner in which the buyer must pay the purchase price is influenced by considerations), erg jc an urban building
of time and place and by whether the sale is for cash or credit. lot — a piece of land in a
@ = Inacash sale, the buyer must pay the price at the time when the seller delivers the town or city.
item purchased. Ownership will normally only pass when the price is paid.
m In acredit sale, the parties agree that the buyer will pay the price on or by a specific future date.
Normally, such an agreement includes payment of interest on the purchase price. If the buyer is late
in making any payment, then he must pay interest.
= = When the parties have not agreed a time period, then the buyer must pay within a reasonable time,
considering all the circumstances. If a date for payment is specified, but this date happens to be on
a Sunday or public holiday, then payment should be made on the next business day. It is usually
implied between the parties that payment should be made within business hours.
= =Payment must be made at the place that the parties agreed to.
@ In acash sale where the parties have not agreed to a specific place for payment, the buyer has to pay
at the place where the goods are delivered. In the case of a credit sale, the buyer should
tender payment to the seller to avoid being in breach of contract. He can pay at any To tender here means ‘to
place, although it usually happens at the place where the contract was signed. give or offer’.

If the buyer fails to pay the purchase price, he is in breach of contract and, more specifically, in breach of
a duty he owes to the seller. The seller's remedy is to claim the amount agreed on, plus interest from the
date when payment became due. To protect the buyer, the law does not allow the amount of interest to
exceed that of the purchase price.
Buyers often order goods from a trader or dealer without any mention of the price. There is no
problem with this, because the court will assume that the parties intended that the price usually charged
by the seller will apply. If there is no ‘usual price’, then the market price of that type of item will be
deemed (assumed) to be the price. The agreement is still a valid contract of sale.

14.3.2 A duty to accept delivery

The buyer must accept delivery at the time and place where the parties agreed that delivery will take
place. If there is no such agreement, then delivery must be accepted within a reasonable time.

Chapter 14| The law of sale 193

14.3.3 A duty to reimburse the seller for expenses
It could happen that the seller incurs expenses due to a buyer not removing the purchased goods on
time. Where the buyer delays in removing goods held in storage, and this causes unnecessary costs for
the seller, the buyer must repay these costs.

Activity 14.4
If a buyer pays in instalments, the payments will usually include interest. Find out the rate of
interest you would have to pay your bank if you borrowed money from it (say R10 000). Also ask
the bank what interest you would get on your money if you deposited money there (again, say,
R10 000) for various periods of time.
Finally, consider the following situation: You buy a car for R100 000. The bank gives you a
loan for the full amount and pays the car dealer. You repay the bank R 5 000 every month, and
it charges you interest at the current rate. Work out how long it will take you to pay for the car
and how much you will actually have paid, once you have included the interest.

14.4 Examples of specific contracts of sale

Some contracts of sale are of special importance because of how frequently they are used. Here are two
examples of specific contracts of sale, namely:
1. sale of land
2. sale in execution.

14.4.1 Sale of land

‘The Alienation of Land Act 68 of 1981 regulates contracts for the sale of land. Its purpose is to
ensure that land is sold in a fair way. We highlight some interesting aspects of this Act
When we say a law
below, as an introduction to the law of the sale of land. provides that we mean
‘The Act provides that no sale, exchange or donation of land will be of any effect, or will it makes allowance for
be recognised by law, unless it is contained in a deed of sale. This is a contract document things that happen or are
that must be signed by the buyer and the seller, or by their agents acting on their written expected to happen, and
authority. These are only some of the formalities of this type of contract of sale. We have states what the law is in a
reproduced just the first page of a deed of sale below. Lei

MEMORANDUM OF AGREEMENT OF SALE OF IMMOVABLE PROPERTY

Made and entered into by and between
SELL DEVELOPERS CC
(‘the Seller’)
and
BUY PROPERTY TRUST
(‘the Purchaser’)
in respect of Erf 16 Treetops, Port Elizabeth
Prepared by LONE INCORPORATED
40 Straight Street
Walmer
PORT ELIZABETH

Figure 14.2 The first page of a deed of sale

194 Chapter 14| The law of sale

Section 29A of the Act gives the buyer of land (excluding agricultural land) a five-day Tin fear oalee
cooling-off period. This means that the buyer may cancel the contract within five days off period is calculated
after signature of the deed of sale, by giving written notice to the seller or the seller'sagent. _ excluding Saturdays,
The buyer has no right to cancel the contract if; Sundays, public holidays
m the price exceeds R250 000 (or such higher amount as the Minister may prescribe in 39 the day on which the
contract was concluded.
line with inflation)
@ the buyer is a trust, company, close corporation or another type of juristic person
@ the land was bought at an auction that was publicly advertised
= the parties have previously entered into a deed of sale of the same land on substantially the
same terms
m the buyer has reserved the right to nominate or appoint another person to take over his rights and
obligations
m= the buyer bought the land by exercising an option that was open for at least five days.

In terms of the Act, the written notice must:

= identify the deed of sale in question
= have no conditions
m be signed by the buyer or by the buyer's agent acting on written authority.

On termination of the deed of sale, the buyer is allowed a refund of any amounts he has already paid.
This money must be refunded within ten days of the date on which the notice terminating the deed was
delivered to the seller or the seller's agent.
If a buyer signs an offer to buy land within five days after having signed a deed of sale to buy other
land, and this buyer does not really (in good faith) intend buying both pieces of land, the law sees
this buyer as having exercised the right to terminate the earlier sale. The buyer must immediately send
written notice to the seller of the first piece of land. Failure to do so is a criminal offence in terms of the
Act. In other words, you cannot sign two deeds of sale and then take your time to decide which property
you want.

14.4.2 Sale in execution

Sometimes one person is unwilling or unable to pay an amount of money that he owes to another
person. As indicated in Chapter 2, our civil procedure begins with the issue of a summons, in terms
of which the plaintiff calls on the defendant to defend a claim for money. If the defendant ignores the
summons, then the court awards judgment (by default) to the plaintiff. The judgment is an order by the
court directing the defendant to pay the money he owes to the plaintiff. Normally, the plaintiff would
then send a notice to the defendant (who is now called ‘the judgment debtor’), telling him about the
court judgment.
Sometimes, the judgment debtor will still not pay the money to the plaintiff. Usually
,in case like
Peethis, the plaintiff's
a ae attorneys instruct
: the sheriffae to hold a sale in; execution
: of co alcosts
costsof issuing
refer to the
the property of the judgment debtor. The sale is by public auction and is regulated by the summons and the funher
rules of court. The money brought in by the auction goes towards settling the judgment action taken to obtain
debt, once legal costs have been deducted. The sheriff will always try to sell movable items the money from the
belonging to the debtor before selling his immovable property. If the sale brings in more creat, INCHING tie
than the amount owed to the plaintiff, after all costs have been deducted, the judgment eS
debtor will receive the balance of the money.
On the next page is an example of a notice of sale in execution.

Chapter 14| The law of sale 195

 NOTICE OF SALE IN EXECUTION - 41

IN THE MAGISTRATES’ COURT FOR THE DISTRICT OF PRETORIA

HELD AT PRETORIA

In the matter between; ——-- Case no:

Plaintiff
and
Defendant

NOTICE OF SALE IN EXECUTION

In execution of a judgment of the Magistrates’ Court for the district of Pretoria, in the above matter, a
sale will be held at XY Vehicles c/o HOPE'S AUCTIONEERS, 55 Arcadia Street, Arcadia on Tuesday,
the 7th day of January 2001 at 10:00, of the under-mentioned goods of the Defendant:

1 x Green 1994 Jeep Cherokee

DATED AT PRETORIA on this 2nd day of December 2000.

ATTORNEYS FOR BUILDING

STREET ADDRESS PRETORIA

TO: THE CLERK OF THE COURT PRETORIA

ANDTO: — Attorneys

ATTORNEYS FOR BUILDING

STREET ADDRESS PRETORIA

Received copy hereof on:

This day of 2000
andat : (time)

Figure 14.3 An example of a notice of sale in execution

Activity 14.5
Have a look in your local newspaper and find a house for sale that you would love to be able to
buy. (Some daily newspapers have special property supplements on Saturdays.) Try to visit the
house and talk to the estate agent who is selling it. The estate agent should tell you what the
selling price of the house is. Your task is to get a breakdown of all the extra costs you would
have to pay if you wanted to buy the property. The estate agent should be able to help you with
this. Extra costs may include attorneys’ fees, costs of registering a bond, transfer costs and so on.

196 Chapter 14| The law of sale

 What do you think?
When Thembi earned a promotion at the accounting firm she worked for, she immediately celebrated by
buying a large flat-screen television, a surround-sound system and a game station from Electronic Corporation
for R50 000. Thembi got credit from Electronic Corporation and started paying off the instalments. Five years
later, the amount was fully paid off. With the interest included, Thembi paid R75 000 for these goods.
Unfortunately, Thembi then lost her job and is now unemployed. She is looking for jobs and owes
her telephone company R5 000. She has been fighting her dismissal and owes her lawyers R20 000.
She also still owes a lot of money for clothing bought on credit (R10 000) and is now late in paying her
rent. After a while, one of Thembi’s creditors obtains a judgment against her. On the instruction of the
creditor's attorneys, the sheriff attaches her television, surround-sound system and game station, and sells
these items in a sale in execution. Because the goods are now second-hand, the sale yields only R6 000,
once the sheriff's fees and legal costs have been deducted. Unfortunately this still does not cover the
amount that Thembi owes to her creditors. She now not only owes a lot of money to her creditors, but
no longer owns the things she spent the last five years paying off.
What do you think about this state of affairs? Is there anything Thembi can do now? Whar will
happen to her if she cannot find a job? What could Thembi have done to avoid this situation?

Chapter summary

In this chapter, you learned the following about the
duties that the law of sale imposes on sellers and buyers:
When a contract of sale is concluded, the risk of
accidental harm passes to the buyer as soon as the sale is
perfecta, or perfected. The sale is perfected when:
® the item to be sold is determined
® the purchase price is decided
= the contract is not subject to any conditions.
The seller has the following duties to the buyer:
= a duty of care until the goods are delivered
®™ a duty to make the goods available
® a duty to warrant against latent defects
= aduty not to make untrue statements
™ a duty to warrant against eviction.
There are certain situations where the risk may not
pass to the buyer because the sale is not perfected. One
example is where the goods still have to be measured,
weighed or counted.
Signature of a contract of sale is not enough to
transfer ownership of property from the buyer to the
seller. Ownership passes when:
@ the seller is allowed to sell the item
= both parties have the intention that ownership will
be transferred
= the price is paid (or credit is given)
® in the case of immovable property, the property is
registered in the name of the buyer
® in the case of movable property, delivery has
taken place.
Delivery of movable property may take any one of a
number of forms, such as actual delivery, symbolic
delivery, traditio longa manu, traditio brevi manu,
constitutum possessorium and attornment,
‘The intention of the parties determines the way in
which the purchase price is paid (cash, cheque, or credit
granted). The manner of payment determines when
ownership passes.
Generally speaking, unless the contract of sale excludes
this duty (normally by way of a voetstoots clause), the seller
is responsible to the buyer to disclose hidden defects in
the property, even if the seller was unaware of them.
The remedies available to an innocent buyer for
hidden defects are known as the aedilitian remedies.
‘The duties of the buyer are:
= to pay the purchase price
= to accept delivery of the item
® to reimburse the seller for any necessary
expenses incurred.

Chapter 14 | Chapter summary 197

‘Two specific types of contract of sale are those involving:
@ asale of land
@ = asale in execution.
The Alienation of Land Act 68 of 1981 regulates
contracts for the sale of land and also provides for a
‘cooling-off period in certain cases.
Review your understanding
1. Siphiso buys a 15-year-old Citi Golf from
Mymoena for R20 000. He does not inspect the
car at the time, and signs no contract. Shortly after
delivery of the car, Siphiso finds a crack in the
chassis (the underside) of the vehicle. Which one of
the following statements is most correct?
a) Siphiso will be entitled to relief in terms of
the actio redbibitoria, as the seller is liable for
latent defects in the res vendita that existed at
the time of the sale.
b) Siphiso will be entitled to relief in terms of the
actio quanti minoris, as the defect is such that
a reasonable buyer, ifhe had known about it,
would have bought the car for a lesser price.
Further reading
Glover, G. 2015. Kerr's Law of Sale and Lease, 4th edn.
Durban: LexisNexis South Africa
198 Chapter 14| Review your understanding
A sale in execution is one way of enforcing a
judgment obtained in a court of law.
c) Siphiso is not entitled to any relief, as there
is no defect, for purposes of the law, in
the vehicle.
d) Siphiso is not entitled to any relief from
Mymoena, as the cracked chassis does not
qualify as a latent defect.
e) Siphiso is not entitled to any relief, as he
should have employed an expert to inspect the
res vendita.
2. Suppose you had enough money to buy the car
of your dreams, and you paid for it in cash, What
would the legal position be if it turned out that
the dealership you bought it from had sold you a
stolen vehicle?
 Chapter

The law of lease 15

The main ideas

Definitions related to a contract of lease
Types of lease agreement
Contractual agreements within leases
The legal effect of a lease including renewal of leases
‘The lessee’s right to occupy against third parties
Protection of the lessee
The duties of the lessor
The duties of the lessee

The main skills

Distinguish between an agreement of sale and lease.
Summarise the elements of a lease agreement, drawing a mind map.
Explain what the essentials of a lease are.
List the rules that govern how rent may be specified in a lease.
Analyse the type of lease you need.
List the advantages, for both the lessor and the lessee, of having a written lease.

This chapter outlines the basic rules regarding the leasing or hiring of property, and distinguishes
between the different types of lease. It covers the rights and duties of each party to a lease, together with
the remedies available to each party if the other one breaches the contract.

Before you start

If your own home is quite a distance from your university, you probably had to choose between living
in a university residence and renting accommodation (leasing a room, flat or house from the owner of
that property). In the world of business and in your personal life, you will often come across contracts
of lease, Leasing provides a way for someone (the lessee) to use another person’s property (the lessor) on
payment of rent, without having to buy it. From a lessor’s point of view, leasing property provides a way
of making money and possibly using the rent to pay off money owing on the property. Allowing another
person to occupy your property can involve a large amount of risk, so the law of lease is very important.

15.1 Definitions related to a contract of lease

A contract of lease is an agreement between a lessor and a lessee in terms of which the lessor agrees to
give the lessee the undisturbed temporary use and enjoyment of part or all of a property. In return, the
lessee agrees to pay rental.
The lessor is the person who rents out the property to someone else. The lessor is usually the owner
of the property. The lessee or tenant is the person who pays rent to use someone else's property.
The property does not have to be a building or a piece of land; it can also be an object like a car,
musical equipment or a telephone line. If the property being leased is a building, the lessor is also
called the landlord or landlady.
The lessor does not necessarily have to be the owner of the property. For example, in terms of
a sublease, the lessee of a property leases that property to another person, called the sub-lessee.

Chapter 15 | The law of lease 199

In this case, the lessee is renting property to a sub-lessee, even though the lessee does not own the leased
property. For example, one student might rent a house from a landlady, and then sublet rooms in that
house to other students, The lease might either allow or not allow subletting or only allow subletting
under set conditions. For example, the lessor might allow the lessee to sublet provided the lessor has
agreed to whom the property will be sublet. Any duty on a lessee (as set out below) will bind a sub-lessee
too. Most rights of a lessee (for example to occupy the leased premises) will be enjoyed by the sub-lessee
too, Some rights of a lessee do not extend to the sub-lessee, for example, if a lease provides for a lessee to
extend their lease, that right does not automatically extend to the sub-lessee.

AGREEMENT OF LEASE
ENTERED INTO BY AND BETWEEN:
Gordon Ted Miller
(hereafter referred to as the lessor)
And
Simphiwe Vuyelwa Futuse
(hereafter referred to as the lessee)
1. PREMISES
The lessor lets to the lessee the premises situated at:
1 Hibiscus Road, Uvongo (hereafter referred to as the leased premises).
2. DURATION
The lease shall be for 12 months commencing on 1 January 2018 and ending on
31 December 2018.
3. RENTAL
The monthly rental shall be R7 000, which is payable on or before the first working day of the
month into the bank account of the lessor.
4. PAYMENT OF ACCOUNTS
4.1 The lessor shall pay the rates payable on the leased premises to the local authority.
4.2 Allother accounts for the property, including but not limited to lights and water and
telephone accounts, shall be paid by the lessee.
5. MAINTENANCE OF THE LEASED PREMISES
5.1 The lessor shall keep and maintain in good order and condition at his cost the exterior of
the premises.
5.2 The lessee shall keep and maintain in good order and condition the interior of the premises.
6. ACCESS
The lessor may inspect the leased premises for the purposes of repairing the premises by
making an appointment with the lessee.
7. NO VARIATION
This lease may only be varied by written variation signed by both parties.
DATED AT UVONGO THIS 26TH DAY OF DECEMBER 2017.

LESSOR: LESSEE:
Signature Signature

AS WITNESSES: 1. 2.
Signature Signature

Figure 15.1 An example of a simple lease contract

200 Chapter 15 | The law of lease

We now discuss the different parts of the definition of a lease in more detail.

15.1.1 The use and enjoyment of the thing

The contract must include a promise by the lessor to make the leased thing available for the lessee’s use
and enjoyment for the period of the lease. The contract is not a lease if it gives the lessee greater rights,
for example, the power to use up or sell the thing. Any movable property, such as a car, or immovable
property, such as land, can be let (or leased).
The lessor does not necessarily have to be the owner. For example, in terms of a sublease, the lessee of
a property leases that property to another person, called the sub-lessee. In this case, the lessee is renting
property to a sub-lessee, even though the lessee does not own the leased property. For example, one
student might rent a house froma landlady and then sublet rooms in that house to other students.
It is possible for a lessee to lease only part of the leased property, for example, a granny flat in the garden of the
owner's house. But the lessor must give the lessee undisturbed use and enjoyment of the property he is leasing.
The property leased must be identified or identifiable in terms of the agreement. This makes sure that
both parties know what the lessee is renting. The contract could identify the property by giving its street
address or by way of a description. For example, the contract could specify 15 Hill Street, Pinelands,
Cape Town’ or ‘the green and yellow boat in Yacht Basin 2 in the Kalk Bay harbour’.
A lessee’s rights include the right to use the property and its fruits. A fruit is something that is
produced by the property. For example, if someone leases a flock of sheep, the lessee has the right to use
and enjoy any lambs born during the lease. But this does not mean he can eat those lambs! He can only
use their wool (like the wool of the other sheep). The lambs become part of the lease: they belong to the
lessor and must be returned at the end of the lease, together with the rest of the flock.
‘The lessee must use the property for the purpose agreed to with the lessor. For example, if you rent a
property as a place to live, then you cannot use it as a factory.

15.1.2 The duration of a lease agreement

In terms of the nature of a lease agreement, the lessee’s use and enjoyment of the property cannot last
forever. It must be returned to the lessor at the end of the period of the lease agreement. Parties are free
to determine the duration of the lease agreement to suit their needs, and they often specify a fixed period
for the lease agreement. However, although a lease cannot be permanent, the parties do not always need
to specify a fixed period. The following are all proper leases:
® a lease that runs until a certain event occurs at some unknown time in the future, such asa
particular person’s death
® a lease that lasts while the lessor or the lessee wishes it
@ a lease where the length, or duration, is not set.

A ‘long term’ lease lasts for between ten years and 99 years. As usual with ownership of property, a long
term lease (with all its requirements and implications for the lessor and lessee) must be registered in the
Deeds Registry against the title deed of the property. A lease cannot last longer than 99 years. Thereafter,
the rights of property ownership can be lost to the owner/lessor. It is therefore not an uncommon
practice for leases to be for a 99-year period. For example, if a municipality wanted a school to be able
to use land for sports fields, but for the municipality to remain the owner of that land, the municipality
might lease that land to the school for a period of 99 years, even at a nominal rental such as R1 per year.

15.1.3 Agreement on rental

Use and enjoyment of property without payment of rental is not a lease. Just using the word ‘rent’
in a contract does not make it a lease, The question is rather whether the law regards it as a lease. For
example, if Aaron agreed that Jane could lease his car and the ‘rent’ would be that Jane was required to
pay for the petrol she used, that would not be a lease as the petrol cost to Jane while borrowing the car
would not amount to rent payable to a lessor in order for the contract to be a lease in law.

Chapter 15 | The law of lease 201

Definition of rental
Rental is the lessee’s payment to the lessor for the use of the leased property. Use and enjoyment of
property without payment of rental is not a lease. There must be a payment of some sort of rent in order
for the agreement to be one of lease. Generally, rental must take the form of money. The one exception
is the rent for the lease of a farm, which may consist of an agreed amount or proportion of what the
leased property produces. For example, a lessee who rents a vegetable farm may agree to pay the lessor
50 kilograms of vegetables in season per month or 20% of the vegetables produced each month.
To meet the need for certainty as to the rental amount, the parties must agree expressly or by
implication on the amount of rent to be paid, or it must be possible to calculate the amount by an
agreed method. Directly agreeing on R1 800 per month rent is an example of express agreement. Where
the amount of rent is implied, the figure is not directly stated, but both parties understand what it will
be. For example, the rent payable may be the same amount that the previous lessee paid, or the parties
may agree that someone else they choose can set the amount of rent within a particular time.
A variation on the above could be that both parties agree that the rent amount will be the average of
the amounts determined by the rental valuations of two specified estate agents.

Bracketed rental
When rental is bracketed, the lease agreement states that the rental is payable as a range rather than an
exact figure. For example, you may agree with your landlady that you will pay rent of between R2 000
and R2 500 per month, as a tenant in her granny flat.
Generally, our law does not accept bracketed rental amounts, because it is impossible from most of
these agreements (like in the example) to know what the rent would be at a particular time.

15.2 Types of lease

Leases are classified into different types according to the duration of the lease period. Let us consider the
following types:
m fixed-term leases = @ tenancy at will ® periodic leases w hybrid leases.
15.2.1 Fixed-term leases
Where the agreement states the length of the lease expressly or by implication, the lease comes to an
end at the end of the agreed period. If the lessee does not return the property at the end of the lease, the
lessor may immediately take legal action to have the lessee evicted, also called ejectment.
The following are examples of agreements that create fixed-term leases:
@ = “This lease shall run for 12 months from 1 January 2013’
@ In the case of Davy v W Walker & Sons 1902 TH 114, the parties agreed that the lessor would lease
particular premises to the lessee at a set rental “until the end of the war’. The court decided that the
lease was valid and that it came to an end in terms of the agreement when peace was formally signed
in the so-called South African or Anglo-Boer War.

15.2.2 Tenancy at will

Sometimes the duration of a lease is not fixed, but the parties agree that the lease will last for as long as
both of them want it to carry on. This is a valid lease. Such a lease will normally come to an end only
when one party to the lease tells the other that he wishes the contract to end,
Because a lease like this depends on the wishes of the parties, the contract ends if their wishes can no
longer be carried out, for example, if one of the parties dies.

15.2.3 Periodic leases

A periodic lease has no fixed duration, but the parties intend it to last through a series of agreed periods,
or terms, without saying when the lease will end. The terms may be stated:
= = expressly, for example, “This will be a monthly lease’.
® by implication, for example, “You may have the flat at a rental of R5 000 per month’.

202 Chapter 15 | The law of lease

In this example, the fact that the rent is payable per month, implies that the lease is periodic. We say a
lease like this is for an indefinite period, because its end is not defined or stated.
In both these examples, there is a valid lease running from month to month indefinitely. Leases
running monthly or yearly operate from the beginning to the end of the month or year (rather than, for
example, from the middle of a month or year), unless the contract indicates differently.
‘The lease may be ended by either of the parties giving notice to the other that the lease will
When you give notice,
end when its next term ends (for example, in the case of a monthly lease, at the end of the next oil tell thie Gltiet Canty that
month). The amount of notice to be given may be fixed by the parties. If not, then reasonable you want to end the lease.
notice is required. As usual, the circumstances will determine what is considered reasonable. You can do this verbally
Our courts have decided, for example, that a monthly lease for an indefinite period requires _ or in writing. If the lease
one calendar month’s notice. If a lessee wants to end the lease, he must therefore give notice _ prescribes the form of
no later than the first day of a month for the lease to end at the end of that month. notice, then the prescribed
: . . method of
In a lease running from year to year, reasonable notice would not necessarily be a whole eet unication
¢ must be followed.
year. It would depend on the circumstances. Our courts have considered either three or
six months’ notice as reasonable to end a yearly lease of farming land.

15.2.4 Hybrid leases

A hybrid lease is a mixture of a fixed-term and a periodic lease. The lease is for a set period, Generally, a hybrid
but includes a clause giving either of the parties the choice to end the lease before the fixed means a mixture of two
term is over by giving the required notice. If neither party gives notice, the lease will end different things.
when the fixed period is over.

15.3 Contractual agreements within leases

This section covers agreed terms between the lessor and lessee regarding the continuation or ending of
the lease in particular situations. We look at the following:
= renewal of leases
= termination of a lease without notice
® insolvency of the lessor.

15.3.1 Renewal of leases

When a lessee is given the right to renew a lease, it means that he has the option of extending the
original lease. He can do this only during the original lease period, not after it is finished. If the lease
period comes to an end, the parties have to conclude a new agreement.
If there are duties that have not yet been performed, such as rent still owed, the requirements of
the old contract remain. This ensures that whatever is owed can be claimed from the other party even
though the lessee may not continue to occupy the premises after the lease period is finished.

15.3.2 Termination of a lease without notice

A lease contract may come to an end through any of the usual methods for termination of contracts.
Three specific ways in which a lease ends without notice, before the lease period is over, are:
m= = death of one of the parties to a tenancy at will
® insolvency of the lessee
® insolvency of the lessor.

Death of one of the parties to a tenancy at will

Death does not usually end a lease. For example, if you have a fixed-term lease on a property and your
landlord dies, normally you still have the right to occupy the property until your lease comes to an end.
= = In the case of a periodic lease, the estate of a lessee or lessor who dies may continue the lease until
it is terminated. In other words, the heirs of the deceased party inherit the rights of the person who
died, including the right to renew the lease.

Chapter 15 | The law of lease 203

@ = In the case of a tenancy at will, the lease does end when one party dies. This is because in a tenancy
at will, the agreement is that the lease will last for as long as one or both of the parties want it to
carry on. When a person dies, she can obviously no longer choose that the lease should carry on. In
such circumstances, a reasonable amount of notice is needed before a lessee can be evicted after the
lessor’s death. This gives a lessee the chance to find somewhere else to live.

The main difference between these two lease types is the different result upon the death of either the
lessor or lessee in a tenancy at will as opposed to in a periodic lease.

Insolvency of the lessee

An insolvent person is someone who owes more money than the value of everything that he owns and
who has been sequestered by a court. As we discussed in Chapter 4, the court appoints a trustee to take
control of the financial affairs of the insolvent person.
In terms of the Insolvency Act 24 of 1936, if a lessee becomes insolvent, his trustee has the choice of
whether to carry on with the lease or not. If the trustee does not make this choice within three months
of the lessee becoming insolvent, the lease ends automatically when this time is up.

Insolvency of the lessor

The lease may end if the lessor loses her rights over the property when she is declared insolvent. ‘The
decision as to whether to continue with the lease rests with the lessor’s trustee.

15.4 The legal effect of a lease

The creation of a lease agreement has certain results in law for both the lessor and the lessee. This section
discusses these consequences for lessors and lessees.
Lease contracts may be verbal or written. A verbal contract of lease is valid and binds ay eltunad aware Ae
the parties, unless they intend that the contract will be binding only when it is in writing. _pjan or to aim to do
Section 1(1) of the Formalities in Respect of Leases of Land Act 18 of 1969 states that a something’. In a dispute
lease of land does not have to be in writing for it to be valid, although an unwritten lease about the intention of the
may be difficult to enforce against third parties. parties, the court would
:
‘The law protects lessees from lessors who may try to take advantage of them. have to make a decision
For example, the Rental Housing Act 50 of 1999 requires that a lessor, if requested by ae pes See
‘ me . . : evidence. The general rule
a tenant, must put the lease in writing, and must provide the tenant with receipts for all the in law is ‘he who alleges
money received from her. Because this protection is set out in Acts of Parliament, it is called must prove’.
statutory protection.

Added value Have it in writing

While most leases do not have to be in writing, it is far better for all concerned if a lease
is in writing and sufficiently detailed, so that the rights and duties of both the lessor and
lessee are clear. This makes it easy to refer to the lease at a later date if there is any dispute
about the lease. For example, if a burglar breaks a window in an attempt to break into your
rented house, the window has to be replaced. Your discussions with the landlord may not
have made it clear who would have to pay for replacement of the window in a case like this.
But the matter can be solved quickly and easily if you have a written lease that deals with
the issue,

204 Chapter 15 | The law of lease

 15.5 The lessee’s right to occupy against third parties
A person who owns property has a real right in that property, which is a right against the A real right refers to a
whole world, based in an object or thing. This right of ownership is made up of a number thing, whereas a personal
of rights, for example: right is based on
@ the right to sell, lease or donate the property to someone else someone's obligation to
@ the right to possess and use the property perform a duty. Chapter 2
gives some examples. A
@ = the right to destroy the property.
personal right Is not as
strong as a real right as it
When the owner has concluded a lease agreement with a lessee, and before the lessee takes is based on performance
possession of the leased property, the lessee has a personal right against the lessor for the rather than a physical thing.
use and enjoyment of the property to be delivered to her. Once the lessee takes possession,
she cannot be evicted, and the law protects her right to the use and enjoyment of the property. So, the
lessee’s rights against the lessor are twofold; first, there is a right to delivery, and then there is a right not
to be evicted.
One particular situation in which the law protects the lessee’s rights is when the property is sold.
In leases of land, South African law has adopted and extended the Roman-Dutch law
Land here means
rule, buur gaat voor koop, this rule means that if there is a lease contract, and the owner ‘immovable or fixed
sells the leased property, the new owner will be bound by the lease that has already been property’, such as a house,
entered into by the lessor and lessee. So the lessee can stay in occupation even though not just bare land.
someone else now owns the property. The new owner is substituted for the original lessor,
and the original lessor is no longer a party to the lease agreement at all. The new owner Huur gaat voor koop
takes over all the rights and duties of the original lessor under the lease. The new owner means ‘lease comes
must recognise the lessee, and allow him to continue to occupy the leased premises in terms before sale’.
of the lease, provided that the lessee performs his lease obligations, such as paying rent. The
lessee is also bound by the lease and cannot withdraw from the contract, provided that the new owner
recognises his rights as a tenant. The Auur gaat voor koop rule obviously provides protection for lessees,
who do not need to worry that they can just be evicted should the lessor sell the property. The lessee is
also protected against eviction by those who inherit from the lessor on her death.

Added value A reminder on how to type foreign words

When you type foreign (non-English) words in assignments or other typed work, these words
must be in italics, like huur gaat voor koop, in the text above. The same applies to case names,
like Davy v W Walker& Sons 1902 TH 114. When you are writing by hand, like in an exam, you
must underline these foreign words or case names.

15.6 Protection of lessees

‘The protection given to a lessee of land depends on the duration of the lease. Protection here means
We distinguish between the following: protection from eviction if
® a long-term lessee, who has a lease that is for a minimum of ten years, and the land changes hands.
= ashort-term lessee, whose lease is for less than ten years.
The title deed is the
15.6.1 Protection of a long-term lessee document that indicates
A long-term lessee enjoys the following special protection in law: who has rights to a
® He is protected against any heir or creditor of the lessor if the lease is registered against particular land and what
the title deed of the leased property, That means that the lease must be reflected on the those rights are. Title
title deed. deeds are kept in the
® He is also protected against any creditors or heirs of the lessor who knew of the lease Deeds Registry.
when their rights were created (in other words, when they became creditors or heirs).

Chapter 15 | The law of lease 205

 = = If he is not protected in any other way, and if he is occupying the leased property, the lessee is
protected fora maximum of ten years against the lessor’s creditors and against anyone who buys the
leased property.

15.6.2 Protection of a short-term lessee

‘The law protects a short-term lessee against anyone for the full period of the lease if she is occupying the
property (or if a sub-lessee is occupying it). If there is no such occupation, a short-term lease is effective
only against the lessor’s heirs and against buyers who knew of the lease.
Where a lessee has made improvements to the leased property during the course of the lease, their
rights relating to whether they will be compensated for such improvements are discussed in Chapter 23
relating to ‘liens’ as a form of security.

15.7 The duties of the lessor

‘The lessor’s duties are the actions that the law requires a lessor to do for a lessee. The five duties are as follows:
the duty to deliver the property to the lessee
Be OOS.ee

the duty to maintain the property during the lease

the duty not to disturb the lessee’s use and enjoyment
the duty to warrant against eviction of the lessee
the duty to pay the rates and taxes for the leased property.

‘The duties of the lessor and lessee are those that normally exist as part of the common law. They can be
changed if both parties agree.
Let us look at each of the above-mentioned duties in turn, and also consider the remedies available to
a lessee if the lessor fails to perform as required.

15.7.1 The lessor’s duty to deliver the property to the lessee

We can identify the following eight aspects of the lessor’s duty to deliver:
1. The lessor must give the lessee the use and enjoyment of the leased property. A duty like this,
which applies by operation of the law, unless the parties remove it by agreement, is called a residual
obligation or residual duty.
2. ‘The lessor must deliver the leased property to the lessee by the agreed date and time.
If the leased property is movable (such as a car), and the agreement does not mention Oe a
delivery, then the lessor must physically deliver the property to the lessee. os ete
: " : : or attached to land.
3. Where it is a lease of land, the lessor delivers the property by making it available to the
lessee. A rented house, for example, is normally delivered by handing over the keys to
the building. In the case of a long lease, the duty to deliver includes the duty to cooperate in the
registration of the lease, if the lessee wants it registered against the title deed of the property.
4. The lessor must deliver the leased property in a ‘fit condition’ for the lessee’s use. See the Harlin
Properties (Pty) Ltd and Another v Los Angeles Hotel (Pty) Ltd case below on this requirement.
5. ‘The lessor must evict previous
,
tenants or trespassers and remove any goods that may A trespasser is anyone
interfere with the lessee’s use and enjoyment. who is on the land illegally.
6. The lessor must deliver the property that the lessee agreed to lease. She cannot deliver
another property instead. Unless there is an indication that movables on leased Fixtures are items that are
property are included, they are not part of the leased immovable property, but fixtures _ not easy to remove and are
are included. For example, a lessor who leases a house to someone would have to considered to form part of
remove all her things from the room she has been using as a storeroom. If premises the immovable PIOpety,
are rented furnished, then the lessee may demand reasonable furniture or the actual such = light fittings or
. built-in cupboards.
furniture to be provided, as described in the lease. If the lessee sees that the furniture is
not reasonable but makes no objection, a court may decide that he agreed to accept it.

206 Chapter 15 | The law of lease

7 If the lease describes the condition of the property, then the lessor must provide it in that condition,
If the lease does not include a description, the property must be in a condition reasonably fit for
the purpose for which it is being leased. The case of Harlin Properties (Pty) Ltd and Another v Los
Angeles Hotel (Pty) Ltd illustrates this point, along with the ‘fit condition’ requirement in the fourth
point above.
The lessor must make available to the lessee any other thing that he will require for the proper use
and enjoyment of the property. For example, in a dry area, the lessor may have the right to use a
borehole on a neighbouring property. Such a right of use of someone else's land is called a servitude.
The lessee must be given these rights by the lessor under such a servitude.

Harlin Properties (Pty) Ltd and Another v Los Angeles Hotel

(Pty) Ltd 1962 (3) SA 143

Principle
The lessor must deliver the leased property in a condition that is fit for the lessee’s use.
Facts
The lessor of a hotel delivered the building with faulty plumbing, which made it unfit for use
as a hotel. The lessor refused to carry out the necessary repairs. The lessee then repaired the
plumbing, and the lessor had to reimburse him (pay him back) for the costs of the repairs. As
indicated above, it is a duty of the lessor to ensure that the leased premises are in a reasonable
condition so that they are fit for the purpose for which they are intended. The lessor further has
the duty to maintain the premises in such a condition.
The court's finding
The court considered the common law duties of the lessor and held:

‘It is well established ... that it is the duty of a lessor to place the leased premises in a
condition reasonably fit for the purpose for which they are let, and also to maintain them
in that condition during the currency of the lease. This duty relates to the condition of the
premises both externally and internally, and includes the duty to remedy all defects or flaws in
the premises which unreasonably interfere with their use for that purpose (at page 150[G))’.

The judge found that the defects complained of by the Los Angeles Hotel were serious enough
to affect the business of the hotel. Accordingly, it was the lessor’s responsibility to fix them. The
court held further that one of the lessee’s remedies was to pay for the repairs itself and to then
deduct the amount from the rent it paid the lessor (at page 151[E)).

The lessee’s remedies

What can the lessee do if the lessor fails to fulfil her duty to deliver? She can ask acourtto —_A court order for specific
grant a court order as a remedy. The following are the remedies that are available to the performance forces the
lessee if the lessor does not deliver the property as required: defaulting party to meet
@ request specific performance the requirements of
@ = refuse delivery SE SHS:
= cancel the lease
@ repair the problem and charge the lessor
® claim damages
® = claim a reduction in rent.

Chapter 15 | The law of lease 207

Request specific performance
Depending on the circumstances, the court may order the lessor to properly deliver the property — in
other words, to perform as agreed upon in the lease. The court can choose whether to grant this order or
not. If specific performance will be too difficult to enforce, the court may prefer to grant another remedy
instead, such as one of the others listed above (and discussed below).

Refuse delivery
Where the lessor delivers the property in an unfit condition, the lessee can refuse to accept delivery until
the lessor fixes the problems.

Cancel the lease

As with any contract, cancellation will be allowed in the following situations:
@ in terms of a cancellation clause
@ ~~ where there has been a major breach, for example:
m where delivery becomes impossible because the property is with someone else
m where the lessor refuses to deliver
m where delivery is late, and a timely delivery is essential to the lessee
= where the property is largely unsuitable for the purpose for which it was leased, and the lessor
cannot or will not sort it out within a reasonable time.

Where a defect totally prevents the use of the leased property, the lessee may cancel the contract and/or
claim damages if the lessor knew, or ought to have known, of the defect.

Repair the problem and charge the lessor

The lessee can arrange for necessary repairs to be done, and then can deduct the cost of these repairs
from the rent that is payable. This is what happened in the case discussed earlier.

Claim damages
Alternatively, or in addition to another remedy, the lessee may claim damages for any predictable loss
caused by the breach.

Claim a reduction in rent

Alternatively, or in addition to another remedy, the lessee may claim a reduction in the rent inked here means ‘in
linked to her loss of use and enjoyment of the property, including delay in the delivery of proportion to’. In other
the property. words, the lessee may
However, a lessee who stays on leased property is liable for the full rental, and she should dain a reduction even
rather claim damages. The proportionate decrease in the amount of rent applies irrespective _'f he problem is not the
of whether or not the lessor caused the problem. For example, if a flood destroys half of a Sa
leased house, the lessee is entitled to a rent reduction.

15.7.2 The lessor’s duty to maintain the property during the lease
So far we have looked at only the first of five duties of the lessor, namely the duty to deliver. The lessor’s
second duty is to look after or maintain the leased property adequately for the whole period of the lease,
‘The parties may, by agreement, move part or all of this duty onto the lessee. Most leases provide that, in
rented accommodation, the lessor must maintain the outside of the building and the lessee the inside.
‘There is also a duty on the lessee or those for whom the lessee is responsible not to damage the leased
property through his actions, be they intentional or negligent.
‘The lessor is responsible for keeping the property in such a condition that it can be properly used for
the purpose for which it is being leased. For example, the lessor must ensure that a leased house does not
have a leaky roof, because the main purpose of a home is to give proper shelter. The lessor does not have
to repair damage caused by the lessee.

208 Chapter 15 | The law of lease

The lessee’s remedies
What can the lessee do if the lessor fails to maintain the property properly? The remedies are the
same as for a breach of the duty to deliver. However, here the lessor will be in breach only in the
following instances:
@ the lessee informs the lessor of the problem with the leased goods
m the lessor then does not arrange for adequate repairs to be done within a reasonable time.

Therefore, before the lessee may cancel the lease, she must give the lessor a chance to repair the property,
unless repairs are impossible or not possible within a reasonable time. A similar rule applies to the
granting of damages. Before a court will grant damages, the lessor must have been told of the need to
repair the leased property, and he must have failed to do so.

15.7.3 The lessor’s duty not to disturb the lessee’s use and enjoyment
The lessor must not unlawfully interfere with the lessee’s use and enjoyment of the leased property. There
are three points to note here.
® Firstly, the lessor may enter the leased property only when he is allowed to do so in terms of the
lease agreement. If the agreement does not mention the lessor having access to the property, he
has access only at a reasonable time and for a proper reason. A reasonable time could be a time
convenient to the lessee, when she is at the property. A proper reason may be that the lessor is
planning to sell the property, and she needs to show it to possible buyers. The lessor may again have
access to the property without notice to the lessee in the event of an emergency, for example, if the
geyser has burst, the lessor has spare keys and the lessee cannot be reached.
= Secondly, the lessor can only take away the lessee’s use and enjoyment of the property lawfully.
This part of the duty includes the fact that the lessor may not unlawfully interfere in the supply of
services, such as water or electricity, to the leased premises.
= = Thirdly, the lessor cannot evict the lessee when repairing or improving the leased premises, unless
the following instances apply:
m the lessor has given the lessee reasonable notice, the main test of which would be the urgency of
the need for repair
m the repairs are urgently necessary, and the repairs cannot be properly done while the lessee stays
in the leased premises. Repairs are necessary if the lessee’s use and enjoyment cannot carry on
without them.

The lessee’s remedies

What can the lessee do if the lessor interferes with her enjoyment of the property? There are four possible
remedies, namely:
1. an interdict
2. aspoliation order
3. cancellation
4. damages or rental reduction.

An interdict
An interdict, in these circumstances, is a court order that orders a party to stop any unlawful interference.

Chapter 15 | The law of lease 209

A spoliation order
Spoliation means that something has been taken without the lawful procedure being followed.
A spoliation order is an urgent remedy where the court orders the return of possession of property
to someone who was in peaceful possession of the property, and whose possession was taken without
his permission, or without a court order. A spoliation order is also called a possessory order. The full
name for a spoliation court order is a mandament van spolie.
Suppose, for example, you are living in leased accommodation, and someone who claims to be the
real owner of the property moves in and occupies the place while you are away for the weekend. Then,
you will be able to apply for a spoliation order for the return of the property to you. The court will
return possession to you as the lessee, before it determines who has a greater right to the property.

Cancellation
The lessee may cancel the lease if the lessor’s interference prevents him from properly using and enjoying
the leased property.

Damages or rental reduction

When a lessor does not properly deliver the property, the lessee has a choice of claiming damages or
paying less rental, or both. The law does not allow for a reduction in the rent for small inconveniences
that are caused by the need for repairs if the lessee knew when he entered into the lease that the repairs
might be necessary.

15.7.4 The lessor’s duty to warrant against eviction of the lessee

The lessor promises that no one has the legal right to disturb the lessee’s use and enjoyment of the property
during the lease. The warranty only applies where a third party (who could be the real owner of the
property) has a valid right to the leased property, and he disturbs the lessee’s use and enjoyment of it. The
warranty does not apply in certain instances, such as if the lessee was aware of the third party's rightful claim.

The lessee’s remedies and rights

‘The lessee has three options or remedies in the case of disturbance by a third party, namely:
1. cancellation
2. damages
3. rental reduction.

Cancellation
‘The lessee can cancel the lease if the disturbance has a major negative effect on his use and enjoyment of
the property.

Damages
The lessee can claim damages for the loss suffered due to the disturbance.

Rental reduction
‘The lessee can claim a reduction in rent according to how much the interference has lessened his use and
enjoyment of the property.

A lessee who wants to use any of these remedies must tell the lessor of any threatened disturbance, so that
the lessor can show that the third party does not have a valid claim to the leased property. If the lessor is not
available, or refuses to get involved when the lessee’s possession is threatened by a third party, the lessee must
take legal action herself to defend her occupation. If the lessee loses the case, she may leave the leased property,
and sue the lessor for damages. When the lessee can prove that the third party's claim to the property is certain,
she (the lessee) can immediately sue for damages without having to defend her possession legally.

210 Chapter 15 | The law of lease

15.7.5 The lessor’s duty to pay the rates and taxes for the leased property
The general rule is that the lessor has the duty to pay rates and taxes for the leased property, if she is the
owner of the property. This rule can be changed or removed by agreement between the parties.

15.8 The duties of the lessee

So far, we have looked at the lessor’s duties (and the lessee’s rights), and perhaps by now you think the
law is all on the side of the lessee — this is certainly not the case. So let us look at the other side of the
contract, and see what duties the lessee has towards the lessor.
‘The lessee’s duties are as follows:
m the duty to pay rent
® the duty of reasonable care of the leased property
@ = the duty not to make major changes to the leased property without the lessor’s permission
@ = the duty to return the property in the same condition.

The lessee is bound by all the duties — these duties are called residual duties — that she agreed to in the
lease contract as well as any other duties that apply by operation of the law, such as the duties discussed
below, unless the lease agreement says differendy.

15.8.1 The lessee’s duty to pay rent

‘The lessee’s main duty is to pay rent. When there are joint lessees, each lessee is only liable for his share
of the rent. Note the following six points about payment of rent:
1. The lessee must pay the lessor in the agreed way. This may be in cash, by electronic banking or
whatever other form of payment was agreed to. Practically, the lessor may well have chosen the
agreed form of rent payment for a specific reason. For example, the lessor might not want the
security risk of being given quite large sums of money for the rent in cash.
2. If the agreement specifies a place for the rent to be paid, then it must be paid there.
3. If the rental must be paid by a set time, but the agreement does not specify a place for payment, the
lessee may choose. For example, the lessee could deposit the rent into the lessor's bank account. But
it is the lessee’s duty to make sure that the lessor receives the right amount of rent on time.
4. If the lessor asks fora cheque for rent to be posted to him or her (which is not very common these days), the
lessee will have paid rent on time when the cheque has been properly posted by that time. If someone else
unlawfully uses the cheque after the lessee has posted it, then that is the lessor’s loss. However, if the cheque
simply gets lost in the post, then the lessee, upon being told by the lessor, must try to pay the rent again.
5. When the lease specifies a fixed date for payment, the lessee may pay before that time, unless the
agreement states that this is not allowed (which is very unlikely).
6 When the date for payment has not been fixed, the following rules apply:
®@ = The rental is only due after the lease period is over. With a monthly lease, the rental would be
due at the latest on the first day of the following month. This point is very important when a
cancellation clause allows the lessor to cancel the lease if the lessee has not paid the rent.
= When the agreement says that rental is required in advance, but does not give a date, the rent
must be paid on or before the first day of the lease period, This is commonly on or by the first
day of the month,

The lessor’s remedies

If the lessee fails to pay the rental, the lessor has the following remedies:
= = claim the rental owing
= claim damages
® cancel the lease.

Chapter 15 | The law of lease 211

Claim the rental owing
The lessor can sue the lessee for any rental that has not been paid.

Claim damages
There are two parts to the damages that a lessor can claim from a lessee who has defaulted.
1 If the paymentis late, the lessor can claim for interest from the date on which the rent ty. interest per yaar
should have been paid. The lease may indicate what percentage of interest is payable. 10,25% of R1 000, or
Otherwise, the lessor may charge the standard legal rate of 10,25% interest per year, which —R102,50. So, for half a
is the rate as of 2017 until the government changes it. For example, if 10,25% interest _ year, it is half of that,
is payable, and the lessee should have paid a rental of R1 000 six months ago, then the aie Ae 8
interest owing on that one month’s unpaid rent from six months ago is R51,25.
2 Ifa lessee breaks a lease without giving the required notice, the lessor can claim for lost rental until a
new lessee starts paying.

Cancel the lease

The third remedy available to the lessor is to cancel the lease. The lessor may do this in any of the
following ways:
® after informing the lessee that she (the lessor) will cancel the lease if the rent has not been paid bya
given date
m where the lessee’s actions or words clearly show that he no longer plans to be bound by the lease —
in other words, if he repudiates the lease
@ where the lease has a cancellation clause for not paying rent on time, the lessor has a choice once the
lessee defaults in paying rent; the lessor may carry on with the contract and sue for the rent owing
and damages, or she may cancel the contract and claim damages and any unpaid rental. The lessor
may not use the cancellation clause if he has not performed his part of the lease or if has waived his
right to cancel the contract.

Hold on to the lessee’s property

If the lessee owes rent to the landlord, the landlord can take steps to hold on to any property of the
lessee’s which is on the leased premises until the rent is paid. The legal term for the landlord's right to
hold on to the lessee’s property is the landlord’s hypothec for rent.
When a lessee owes rent, the lessor may apply to court to stop anyone from removing goods from
the leased property. This order to prevent the removal of goods from the leased property is called a rent
interdict.
The second step is for the lessor to apply to court to give her the first right to sell the goods on the
leased property to pay for the unpaid rent. This is done by the court granting an attachment order. You
can picture this as placing the lessor first in a queue of people lining up to be paid by the lessee. The
court will give an attachment order only after it has given the lessor a court judgment for the rent owed.
The landlord's hypothec for rent applies to all types of property brought onto the leased property by
the lessee. The hypothec applies to property of a sub-lessee only to the extent that the sub-lessee owes
rental to the lessee. So, if a lessee owes rent to the lessor, but there is a sub-lessee who has paid all her
rent to the lessee, the lessor cannot attach the sub-lessee’s property in terms of the hypothec.
If the lessee brings someone else's goods onto the leased property to use, without an indication of
when he will return them, the lessor could attach those goods as well. This can happen only if the lessee
brought the goods onto the leased property with their owner's permission. If the lessor knows that such
oods do not belong to the lessee, they are not subject to the hypothec and cannot be
etucbel A third oi property baibed to Hewat aE the goods of the lessee or The sii petty At Ses ee
is someone who is not the
sub-lessee (if the sub-lessee owes rent) are not enough to cover the rent. lessor, lessee or sub-lessee.
Importantly, the lessor has no hypothec over any property of the lessee or anyone else
that is not on the leased premises.

212 Chapter 15 | The law of lease

 The attachment order (hypothec) ends when all the rent owed has been paid. When the payment is
complete, the lessor must return the attached goods to their owner. If the lease ends while the lessee still
owes rent, the hypothec carries on.

15.8.2 The lessee’s duty of reasonable care of the leased property

A lessee may use the property only for the purpose for which it was let. The purpose may be expressly
stated or may be implied by the type of property being let. For example, if you rent a house in a
residential area, with no mention of what you want to use it for, this implies that you will use the leased
house as a place to live. The agreement may allow the use to be changed with the lessor’s permission.
The lessee’s obligation to care for the property is different from the lessor’s duty to maintain the
property in a fit condition. Itis not always easy to work out how these obligations are divided up if that
is not stated directly in the lease. It is therefore in both the lessor and lessor’s interests to spell out this
division of duties between them clearly in the lease.
As a general rule, things that are easy to look after and simply require regular attention are the lessee’s
duty. This category includes things like looking after the garden, clearing gutters and drains, keeping a
swimming pool clean, protecting the inside of a house from the weather by keeping doors and windows
closed where necessary, and keeping the leased property clean and tidy. The lessee must tell the lessor of
any problems that need the lessor's attention.
The lessee must also not misuse or damage the leased property. The degree of care required of the
lessee over the leased property is that of the standard of the reasonable person taking care of his own
property. If the lessee does cause damage, either intentionally or negligently, she must fix it. For example,
a tenant who damages the paintwork by sticking posters on his bedroom wall is not meeting his duty of
care. Misuse may include using the property in a way that causes harm to the lessor or other tenants, for
example, by making excessive noise that disturbs the neighbours.
We deal with the lessor's remedies to these situations in the next section.

15.8.3 The lessee’s duty not to make major changes to the leased
property without the lessor’s permission
‘The owner of the property, who is normally the lessor, has the right to make structural changes to the leased
property. The lessee may not make any such changes unless the lessor has agreed to this beforehand. For example,
a lessee who rents a beach cottage from a lessor cannot add on an extra room without the lessor’s permission.

The lessor’s remedies

‘The following remedies are available to the lessor when the lessee fails to care properly for the property,
or changes it without permission:
m The lessor may get an interdict for a threatened or continuing breach. In other words,
the court orders the lessee not to breach his duty of care or, if it is already happening, eto it Giles
to stop his wrongful behaviour. apparent that the lessee
@ = The lessor may apply for an order of specific performance to get the lessee to perform a __ js not going to fulfil his
particular action to meet his duty of care, for example, to clean leaves out of the gutters duties. A continuing
of the leased property. breach means that the
@ The lessor may claim damages for the loss that she has suffered as a result of the lessee’s. SUtY 'S already not being
: . : : done and has already been
failure to care properly for the property. The lessor will have to give proof of this loss. 5 preach by the lessee.
@ = The lessor may cancel the lease for repudiation or for a major breach by the lessee. In
practice, it is important to note that a court will rarely order one of these remedies if
the lessee can properly sort out the problem(s) before handing the property back to the lessor. There
is achance of such an order if the lessee’s lack of proper care, or changes made without the lessor’s
permission, have left the property in a condition that is likely to discourage potential future tenants
or buyers of the leased property.

Chapter 15 | The law of lease 213

So, the lessee is in breach of these duties only in the following instances:
= ~~ what she is doing, or threatening or omitting to do, has harmed, or is likely to harm, the lessor or
her property
@ in cases where the lessee does not fix the problem before the lease ends.

15.8.4 The lessee’s duty to return the property in the same condition
‘The lessee must return the leased property to the lessor at the end of the lease in the
condition in which he received it, with the exception of fair wear and tear or damage Fair wear and tear
caused d by by natural disasters, A such as foodin g. oe ensacthe normath aS
Another way the lessee can be in breach of this duty is by failing to vacate the property —_yce and age, such as
by the required date. In law, failing to vacate in such circumstances is described as holding —_ rusting of metal fittings
over. To meet her duty of vacating the property, the lessee must also remove everything she _and peeling of paint.
brought onto the leased property, or allowed others to bring there.
The lessee must remove all changes she made to the leased property without the lessor's permission.
If anyone else for whom the lessee is responsible caused any damage, either intentionally or negligently,
or made any changes to the leased property, the lessee is also responsible for fixing those damages before
returning the property to the lessor.

The lessor’s remedies

To hold over means that 2
If the lessee fails to return the leased property to the lessor on time and in its proper lessee continues to occupy
condition, the legal remedies available to the lessor are as follows: the leased premises after
@ ejectment they should have vacated
= damages in terms of their lease. In
@ an order of specific performance. other words, occupation
had at first been lawful in
Ejectment terms of the lease, but it
Ejectment is a court order for the removal of the lessee. This is the same as eviction. Rad later become Unawtul,

Ndlovu v Ngcobo; Bekker and Another v Jika 2003 (1) SA 113 (SCA)

Principle
Occupiers who hold over cannot be summarily evicted.
Facts

The two cases of Ndlovu and Bekker were heard by the court at the same time as it raised the
same legal issue. Only the Ndlovu case related to a lease. In the Ndlovu case, the lease was
terminated lawfully but the lessee refused to vacate the premises. The owner of the property
in the Ndfovu case sought to evict the lessees who were holding over, without relying on the
legislation dealing with lawful eviction.
The court's finding
The decision by the Supreme Court of Appeal made it far more complicated and a more lengthy
process to evict lessees who hold over. In that case, the occupiers had held over and the lessor
could not so easily evict them as was the situation before this decision of the court, because they
have to comply with the procedural requirements of eviction law, which is quite time-consuming
and onerous.

214 Chapter 15 | The law of lease

 Damages
A lessee who remains in occupation of the property after the lease has ended by holding over is acting
unlawfully. The lessor can therefore sue the lessee for damages suffered, which is typically the loss of rental.

An order of specific performance

‘The lessor can get a court order for the lessee to fix the returned property.

Activity 15.1
Discuss the following scenario with a partner: Mrs Andrews rents a room in her house to Dianne,
but Dianne has not paid rent for three months. Mrs Andrews has asked for the rent many times, and
Dianne always promises to pay ‘tomorrow’. What can Mrs Andrews do to get payment of the rent?

What do you think?

The Prevention of Illegal Eviction and Unlawful Occupation of Land Act 19 of 1998 requires property
owners to follow a complicated procedure if they want to evict tenants who owe rent. The requirements
to evict occupants of premises have also been made even more onerous on lessors (and others) in terms of
subsequent decisions made by the Constitutional Court. Do you think that this is a good development
in our law, as it helps to protect people from becoming homeless, or do you think it is unfair to lessors?

Chapter summary

In this chapter, you learned the following about the law = damages
of lease: ® a reduction in rental.
A contract of lease provides for a lessee to pay rent
in return for the temporary use of the lessor’s property. ‘The lessor has to give the lessee full use and enjoyment
There are four types of lease, namely: during the lease, and is responsible for the following:
™ fixed-term leases ® maintaining the property in a fit condition
® tenancy at will ® not disturbing the lessee’s occupation.
® periodic leases
= hybrid leases. The lessor’s possible remedies for inadequate maintenance
are the same as for non-compliance with the duty to
A lease agreement does not have to be in writing, but deliver. The lessee’s possible remedies for disturbance are:
a tenant may demand a written lease and must get ® an interdict
receipts for all money paid. a spoliation order (mandament van spolie)
‘The lessor has duties in terms of a lease cancellation
The lessor has a duty of delivery. The lessee’s possible damages or a rental reduction.
remedies for non-compliance are:
® a specific performance order ‘The lessor gives the lessee a warranty against eviction
= refusal of delivery or disturbance by a third party. The lessee’s possible
= cancellation remedies against disturbance by a third party are:
® repair of the fault at the lessor’s expense ® cancellation

Chapter 15 | Chapter summary 215

 = damages
® a rental reduction proportionate to the disturbance.
The lessor has a duty to pay the rates and taxes for
the property and the lessee’s main duty is to pay the
agreed rental. The lessor’s possible remedies for non-
payment are:
m specific performance
® cancellation
= damages
m = the landlord’s hypothec for rent.
Review your understanding
1. Imagine that you are approached by a lessor and
lessee of a residential house, who want you to draw
up the headings for a lease between them. List the
headings you would include to protect each of
them and to minimise later confusion and disputes
between them regarding their rights and duties.
2. You are moving to a new town and want to buy
a house. There is a shortage of houses in the price
range you can afford, so you decide to rent a house
while you look for one to buy. What type or types
of lease would you choose in these circumstances?
Give reasons for your answer.
3. List the advantages, for both the lessor and the
lessee, of having a written lease. Also, indicate
whether the lessee may demand a written lease and,
if so, on what legal basis?
4, Peter owns business premises, which he leases
to Lyn for four years. Lyn uses the premises as a
sewing shop. After the lease has run for two years,
Peter sells the premises to Vernal. Vernal wants to
evict Lyn so that he can convert the building into
an arcade game centre for young people. Discuss
Lyn’s rights in the above circumstances.
5. Discuss the key difference(s) between a tenancy at
will and a periodic lease.
216 Chapter 15 | Review your understanding
The lessee has a duty to use the leased property
appropriately and care for it properly. The lessor’s
possible remedies for breach are:
a an interdict
= a specific performance order
= damages
® cancellation (in the case of a major breach).
The lessee has a duty to repair any damage to the
property or reverse any changes made without
permission. The lessor’s possible remedies for breach are:
@ ejectment
= damages
™ a specific performance order to fix the property.
6. Explain what happens to a lease if one of the
parties to the contract dies, considering the
different types of lease that exist.
7. List the rules that govern how rent may be
specified in a lease. Then, explain why each method
of establishing the rent is considered to meet the
requirement of there being agreement on rental.
8. Sibongile and James enter into a lease agreement
in terms of which the lessor (Sibongile) will fix the
leaking roof above the lounge before James moves
in. Three weeks after James has taken occupation,
rain comes through the ceiling and destroys James's
expensive hi-fi system that is in the lounge. James
then realises that the leak was not fixed. Explain
what legal remedies are open to him.
9. Jasmine leases a room in Jack’s house. After three
months, the room develops a leak when it rains.
Advise Jasmine of what she can do if Jack refuses to
fix the leak and if there is more than one recourse
available to Jasmine. Discuss the advantages of
choosing one remedy over another.
10. A lessee has a very inquisitive landlord who
comes in and looks around the premises every
day. Does the lessor have the right to do this? If
not, what are the lessee’s rights if the landlord's
behaviour continues?
11. A man knocks at the door of your leased house,
and claims that he signed a lease to stay there
before you for the same period that you have
signed a lease with the landlady for. He threatens
to go to court to have you removed. What rights
do you have asa lessee and how should you
exercise those rights?
Further reading
Glover, G. 2015. Kerr's Law of Sale and Lease, Ath edn.
Durban: LexisNexis South Africa
12. Create a mind map to summarise the duties that
a lessee owes to a lessor and give a short practical
example of what such a duty might entail in a
typical residential lease. Then, add in the remedies
that are available to a lessor in case of breach of
each duty.
Chapter 15| Further reading 217
Chapter
1 Credit agreements

The main ideas

The National Credit Act (NCA) —a new start for credit regulation in South Africa
The aims of the NCA
Implementation of the NCA’s aims
The scope of credit agreements under the NCA
The control of agreements by certain bodies created by the National Credit Regulator
The main legal changes under the NCA

The main skills

=™ Summarise using a mind map the shortfalls of the old laws governing credit agreements.
m Identify in a table what types of transaction are covered by the NCA, giving examples of the
transactions that are likely to take place in the commercial world on a regular basis.
® Discuss situations where consumers are not protected by the NCA, giving practical examples of
these instances.

Most people cannot afford to pay cash for their larger purchases, such as cars, so they use credit
agreements which enable them to buy the products over a period of time. In that many people do not
really understand the effect of interest on debt, the law seeks to regulate credit agreements. In particular,
the law tries to limit sellers’ ability to exploit credit sale buyers through excessive rates of interest or
unfair conditions of sale. This chapter discusses the main law in South Africa dealing with credit
agreements, namely the National Credit Act 34 of 2005.

Before you start

Suppose, for example, that you want to buy a new smartphone. You have decided on a pay-as-you-go
agreement, rather than a monthly subscription. The cash price of the phone is R3 500. Alternatively, you
can buy the phone by way of a credit agreement that offers two payment options, The first credit option
is to pay a non-refundable deposit of R350 and monthly payments of R225 for 18 months. The second
option requires no deposit, but the monthly premium is R275 for 18 months.
Consider the following questions and discuss them briefly in a group:
# =What will either payment option above end up costing you?
m = What are the advantages or disadvantages of either option?
# = Which method of payment would you choose, and why?

‘The cash sale has the advantage of being the cheapest option at a total cost at R3 500, but obviously
requires that you have that amount of money available at one time. The first credit option (totalling
R4 400) is cheaper than the second one, but you have to have a R350 deposit up front. The final credit
option, at R4 950, is the most expensive, but has the advantage of requiring the least money to start
with. The problem with both of the credit options is that consumers often commit themselves to pay
more than they can afford, or do not properly calculate the total cost of their purchase when it is made
on credit. As a result, they may end up in debt which they cannot afford or get out of.

218 Chapter 16 | Credit agreements

16.1 The National Credit Act - a new start for credit regulation in
South Africa
In basic terms, most credit agreements relate to agreements to repay a loan or for a purchase (or to make
at least part of the payment) ata later date.
‘The formal definition of a credit agreement used to be found in the Credit Agreements Act 75 of
1980. But the Credit Agreements Act has been replaced by the National Credit Act 34 of 2005, which
we will refer to as the NCA and which came fully into effect on 1 June 2007. You will remember from
the first two chapters of this book that our law can, and does, change in order to meet the changing
needs and circumstances of society. Such a change happened relating to the law on credit agreements.
The law in South Africa on credit agreements has been greatly changed by the NCA. The government
decided that the previously existing laws (such as the Credit Agreements Act) did not deal properly and
fairly with the massive number of credit agreements being entered into in South Africa. Some of the
problems, challenges and other factors identified (before the passing of the NCA) were the following:
m = The granting of credit had both positive and negative aspects.
= The positive aspect was mainly that people who receive credit were able to access goods and
services that they could otherwise not afford.
= On the negative side, many people were getting into more debt than they could afford to repay,
with the result that they were never going to be able to get out of debt and creditors or sellers
were making unduly high profits at the unreasonable expense debtors or buyers.
= Those who provided the credit (such as shops that sold items on credit) were found to be in a much
stronger contracting position than those receiving the credit. A new law was needed to balance
the granting of credit by credit providers with the need to ensure that credit consumers were fairly
treated in credit agreements. The NCA was the law that was passed to create a fair balance, or at least
a fairer balance between credit providers and credit consumers. Furthermore, the existing laws did
not adequately prevent inequality in terms of who received credit and the conditions for repayment.
® Credit bureaus (which are discussed later in this chapter, but for now can be understood as
businesses that are set up to keep records of peoples’ credit histories) were found to be acting
unfairly in terms of unduly prejudicing certain consumers, for example, people who were in debt
with accounts but were subsequently up to date, or those who had judgments against them from
many years previously and had paid up the debt in terms of those judgments, Credit bureaus exist
to keep a record of those with a negative credit history, for example, where judgments have been
obtained against such persons or accounts were in arrears. A more positive role for credit bureaus
was therefore sought.
Source: Department of Trade and Industry, 2004

16.2 The aims of the NCA

The NCA aims to provide access to credit for those who can afford it, and to ensure that credit agreements
are fair to both credit providers and consumers (section 3). In addition to these two general aims, the Act
has other specific aims including:
® ensuring that consumers get all the information they need about a credit agreement and the costs to
them of the credit
requiring credit providers, who must be registered, to keep certain records and to make reports
not allowing certain types of marketing by credit providers
preventing credit providers from granting what the NCA calls ‘reckless credit’
helping consumers who are over-indebted to repay what they owe in terms of a credit agreement
over a new longer period set by a court.

Later in this chapter, you will see that credit providers and receivers are given specific rights and duties
under the NCA.

Chapter 16 | Credit agreements 219

16.3 Implementation of the NCA’s aims
More detail will now be given to the mechanisms provided in the NCA for consumers to deal with
problems of over-indebtedness and the various other aims of the NCA.

16.3.1 The agreements to which the NCA applies and key definitions in
the Act
In the NCA, a credit agreement involves one person, the credit provider, providing credit (normally in
the form of money) to someone else, the consumer, in return for the payment of interest or some other
charge. In other words, the parties to a credit agreement under the NCA are the credit provider, being
the person who provides the credit, and the consumer, being the customer in the credit agreement to
whom the credit is granted.
As indicated above, the consumer has to pay these various agreed amounts to the credit provider:
@ adeposit
@ = instalments.

A deposit is the debtor's initial payment to the creditor, and is an agreed portion of the total cost of
the item being bought. The instalments are the amounts the debtor pays at regular times after paying
the deposit. Other words relating to the repayment obligations of a consumer in a credit agreement are
principal debt, interest and finance charges. The principal debt is the basic price or value of the item.
But if you are buying on credit, the principal debt is not all you pay.
Creditors do not provide credit agreements as a favour to debtors — their aim is to make money in the
process! Because they have to wait for the debtor to pay all the money owed to them, creditors charge:
= interest
™ finance charges.

Interest
‘The interest on debt is the amount that a debtor has to pay to the creditor over and above (in addition to)
the actual value received. Interest is calculated as a percentage of the value of the item received.
Here is an example ofa simple interest calculation: Mohammed lends Khush R100 at 10% interest
per year. One year later, Khush owes Mohammed R110, made up of R100 (the principal debt) plus
R10 interest.
Later in this chapter, we discuss the limitations that the NCA places on interest that may be charged
to a consumer by a credit provider.

Finance charges
Finance charges are extra expenses that the debtor may have to pay in addition to the principal debt and
interest, such as penalties for late payment. Many credit agreements include penalty clauses that indicate
what will happen to the debtor who fails to perform properly in terms of a contract. These clauses
usually set out the financial penalties for late payment or non-payment.
Here is an example of a simple penalty clause:
Payment of R500 per month must be made by the first working day of each month. Notwithstanding
the seller's other rights in terms of this agreement, a penalty fee of R25 is payable if the payment is made
after the first working date of any month. It iscommon for credit agreements to provide for payment of
both interest and penalties.
We will see later in this chapter, that, as with interest, the NCA limits the finance charges that may be
included in a credit agreement.

220 Chapter 16 | Credit agreements

 ert Tea atebY) The danger of credit purchases

Thandeka has just got engaged to Mpho. Mpho wishes to impress Thandeka by buying a new
lounge suite for the flat he rents. The cash price for the lounge suite is R10 000 from Homely
Homes. However, Mpho, who earns R3 000 per month on average from casual work as a brick-layer
(the amount differs from month to month depending on how much work he gets), wishes to
buy the lounge suite on credit over a period of 18 months. Mpho also intends to pay /obola (bride
price) to Thandeka’s family for his planned marriage to her within the next year. Even in terms of
the protections for Mpho as a consumer under the NCA, making a purchase of the lounge suite
on credit under such circumstances is likely to be unwise for various reasons. Firstly, as in all credit
agreements, a consumer ends up paying far more for a purchased item than if it were bought for
cash. In these circumstances, unless he actually needs the lounge suite, it would be better for
him to save up to buy it for cash. Furthermore, as his income is not steady due to the nature
of his work, he might end up not having enough money to pay instalments owed in particular
months. Then, if he defaults in payment, penalty clauses are likely to be applicable with extra
costs incurred. Finally, in the context of Mpho's aim to pay /obola, this may be difficult to do
when his available funds are being spent on a luxury item like a lounge suite instead of saving
for this payment. Mpho, as with all consumers, should thus be wary of all the consequences of a
purchase on credit so he does not regret it at a later date.

The NCA is a long and complicated law. So instead of attempting to discuss all parts of the Act, this
chapter concentrates on only a few key parts of the NCA. The remaining discussion will be divided into
three key sections:
™ agreements covered by the NCA
® = the control of agreements by certain bodies, like the National Credit Regulator
@ =the most important new applicable rules not previously discussed.

16.4 The scope of credit agreements under the NCA

The scope of categories of credit agreements under the NCA can be found in section 9.
Earlier in this chapter, a basic understanding of a credit agreement under the NCA was given to you.
You learned that a credit agreement involves one person, the credit provider, providing credit (normally
in the form of money) to someone else, the consumer, in return for the payment of interest or some
other charge. To take this definition further, a credit agreement is very widely defined in the NCA to
include many different types of agreement. The feature common to all such agreements is that they
involve the granting of credit by one party to another, usually in return for the payment of interest (or
some other charge). More specifically the NCA defines credit as either one of the following:
® a delay in payment of money owed to someone
m= at the choice or discretion of someone else to make such an advance.

Whilst this broad description of credit agreements under the NCA is sufficient for our purposes at this
stage, it should be noted that the Act does provide further sub-categories of credit agreements to cover
credit facilities where payment owed is delayed or a consumer is billed from time to time. In both such
instances, in return for the credit facility, a charge, fee or interest is payable by the consumer to the credit
provider. A sub-category of credit agreements in the Act is a credit transaction. Credit transactions in the
NCA include a number of different types of agreement such as a mortgage agreement, lease ofa movable
item, a pawn agreement, an instalment agreement, or any other agreement in which the payment owing
is delayed and for which some type of charge is payable.
An example ofa mortgage agreement is when someone borrows money from a bank and the bank
holds a mortgage bond as security over a house. This means that, if the borrower does not repay the loan

Chapter 16 | Credit agreements 221

as promised, the bank will have first claim (called security) over the mortgaged house. A lease of a yacht
is an example of leased movable property. A pawn agreement is when someone is paid a cash amount
whilst another person holds the pawned item. This item can either be bought back at a higher price or,
after an agreed period has passed, the credit provider may sell the object. An instalment sale (which you
might know of as a hire-purchase agreement) is when a purchaser buys an item over a period of time in a
number of instalments. An example of another type of credit transaction is an interest bearing loan.
The NCA applies to every credit agreement entered into by parties who are independent of one another.
‘Therefore, loans and other credit agreements between family members, partners and friends on an informal
basis are not covered by the NCA. The NCA also does not apply to, amongst others, the following situations;
m= where the consumer is a juristic person (such as a company) with turnover or assets above a set
amount or where a juristic person enters into a credit agreement above a certain value. ‘The likely
reason for such exclusion from the protection of consumers ordinarily provided by the NCA is that
juristic persons, which are represented by various individuals, are less vulnerable to exploitation
through ignorance of the law.
=~ = where the consumer is the state or the credit provider is the Reserve Bank A stokvel is an informal
® transactions between a stokvel and its members type of savings scheme
= where there is an insurance policy between the two parties SOE roan seen
communities.
where there is a lease of land.

16.4.1 Application of the NCA

‘The Act does not apply to credit agreements entered into before 1 June 2007. In this regard, we say that the law is
not retrospective as the law does not apply to or affect behaviour that happened before the law came into effect.
In relation to credit agreements to which the NCA does apply, the Act categorises three sizes of credit
agreements, namely:
@ small credit agreements of R15 000 or less
@ intermediate credit agreements of between R15 000 and R250 000
@ = large credit agreements of R250 000 or more.

16.5 The control of agreements by certain bodies created by the NCA

A number of bodies have been created by the NCA to control credit agreements. These are:
@ National Credit Regulator
= The National Consumer Tribunal
= credit bureaus
@ = debt counsellors.

16.5.1 The National Credit Regulator

Chapter 2, part A of the NCA in sections 12 to 25, covers the National Credit Regulator.
‘The National Credit Regulator, which we will refer to as the NCR, has two main functions. Firstly,
it deals with the registration of credit providers and other bodies requiring registration under the NCA.
Secondly, it has a watchdog, or monitoring, function to ensure that the Act is being properly followed. In
relation to the registration function, credit bureaus and debt counsellors are also registered with the NCR.
In terms of the registration function, the NCA requires all credit providers who have entered
into 100 or more credit agreements to which the Act applies, or where R500 000 or more is
Unrehabilitated
owed to them
a»
under crediti agreements,
5
Co register
;
with
1
the NCR.
]
Certaini persons
*
may not jncotvents are insolvent
register as credit providers, these include: peopie who still owe more
= an unrehabilitated insolvent money than they own
™ anyone removed from a position of trust (such as the administrator of a deceased and who are still under
estate) because of misconduct concerning fraud or theft, or a company controlled or that status in terms of a
court order.
managed by such a person or an unrehabilitated insolvent.

222 Chapter 16 | Credit agreements

A person or organisation that does not register in terms of section 40 of the Act asa ea coniract bond the
credit provider may not enter into a credit agreement. Any such agreement entered into law considers it never to
is unlawful and void. The NCR keeps a record, called the National Credit Register, of all have existed.
outstanding credit agreements (section 53).
In terms of its monitoring task, the NCR conducts its own monitoring, and receives and considers
complaints from interested parties alleging that the NCA has not been followed.

16.5.2 The National Consumer Tribunal

The National Consumer Tribunal is covered in Chapter 2, part B of the NCA in sections 26 to 34.
Unlike the NCR, which is largely an investigative body, the National Consumer Tribunal has more
of an adjudicating or refereeing function. The Tribunal has to decide whether applications made in terms
of the NCA should succeed (for example, whether a credit provider should be registered as such), and to
decide whether behaviour alleged to be against the rules of the NCA is in fact prohibited.
The Tribunal can, on request by the NCR, also cancel or suspend the registration of a credit provider
who repeatedly fails to comply with the Act (sections 27 and 31). In the case of such a cancellation, the
obligations of the credit provider and of consumers continue in relation to credit agreements already
entered into, The Tribunal also has the power to review decisions of the NCR.
If someone is unhappy with a decision of the National Consumer Tribunal, such a decision may be
taken on appeal or review to the High Court.

16.5.3 Credit bureaus

Businesses often make use of credit bureaus in order to establish if potential clients have a good or a bad
history of paying their debts. In terms of section 14 of the NCA, a person or organisation must apply to
the NCR to be registered as a credit bureau if it is paid to:
® investigate or receive reports on consumer credit information, consumer credit applications, credit
agreements, consumer payment history or patterns
® formulate and keep information from reports received and issue reports on consumers based on the
information received.

As with credit providers, all registered credit bureaus have a number of rules to follow in terms of the
NCA. For example, anyone who is disqualified from being a credit provider may also not register as a
credit bureau. The NCA makes it unlawful for any person or body to perform the functions of a credit
bureau or to pretend to be a credit bureau without being registered.

Law for Life

It is interesting to note that from 1 April 2014, the government created an amnesty to certain debtors
listed with credit bureaus, the most important aspect requiring that past debts had orhave When vcan bw
been paid in full. A necessary and key aspect of this negative credit record amnesty is that in _ period of time you can
no way is debt still owed by a debtor to a creditor cancelled. admit something illegal
without being punished,
16.5.4 Debt counsellors
We will see later in this chapter that when a consumer becomes over-indebted, he may approach a
debt counsellor to rearrange his various debt repayments in a way that the consumer will be better
able to manage. Only natural persons (meaning individuals as opposed to organisations) may be debt
counsellors under the NCA. All debt counsellors, as we have already noted, must be registered with
the National Credit Regulator. In order that debt counsellors are well-suited to perform their task and
are unbiased, the NCA does not allow individuals under administration orders (similar to being an
insolvent), debt collectors, credit providers or those who run credit bureaus to be debt counsellors.

Chapter 16 | Credit agreements 223

 16.6 The main legal changes under the NCA
Greatly improved rights for consumers are a noticeable aspect of the NCA. We look at these in detail below.

16.6.1 Consumer rights under the NCA

Consumer rights can be found in Chapter 4, part A of the NCA in sections 60 to 66. This Act gives
onsumers the following rights:
The consumer has the right to apply for credit.
Sec

‘The consumer has the right to protection against unfair discrimination in the granting of credit.
For example, the NCA prohibits people from being denied credit on the grounds of their gender,
race or religion.
= ‘The consumer has the right to know the reasons for the refusal of credit. Such reasons are needed in
order for the consumer to judge whether she has been unfairly treated, and can therefore challenge
the decision before the National Credit Tribunal.
m The consumer has the right to information regarding the agreement, in an understandable official
language, and the relevant financial accounts. In relation to the information to be given to the
consumer, the credit provider must provide the consumer with a copy of the original or amended
credit agreement.
= = The consumer has the right to be told of all relevant aspects of the credit agreement by the credit
provider before the agreement is entered into, which is called pre-agreement disclosure. It is crucial
that consumers know all such information before they enter into the agreement, so as to have a
proper understanding of what they are getting themselves into. Furthermore, the NCA requires full
disclosure of any changes made to a credit agreement. An example of changes of which the consumer
must be informed by the credit provider would be a change in the interest rate payable when the
interest rate has not been fixed at a particular percentage (that is, the interest rate is variable).
® = Consumers under section 108 of the NCA have the right to regular statements of what they have
paid and still owe.
= = The consumer has the right to a five-business-day cooling-off period. This is a right to withdraw
from the credit agreement within this period when the contract was entered into away from the
registered business premises of the credit provider. For this to be applicable, the consumer must
properly notify the credit provider of their intention to cancel the contract, and must return any
goods or money received from the credit provider. By allowing for such withdrawal, the NCA is
acknowledging the undue pressure which door-to-door salespeople and telemarketers can place on
unsuspecting consumers.
= = The consumer has rights relating to the limitation of the costs a credit provider may charge to a
consumer in terms of a credit agreement.

It is worth looking at a pre-agreement disclosure in more detail because of the significant changes this
rule has made to what used to apply to credit agreements. The NCA requires that all credit providers
must take reasonable steps to ensure that the consumer has a general understanding and appreciation
of the risks of the credit agreement he is entering into, as well as all costs of the credit (for example,
insurance costs, if applicable) and the rights and duties that he has as a consumer in terms of the credit
agreement. The NCA further protects consumers by not allowing certain types of clause to be included
in a credit agreement. For example, the credit provider cannot require the consumer to leave his identity
document or bank debit card with the credit provider, nor can the credit provider require the consumer
to promise in the credit agreement not to sue the credit provider for losses that the credit provider may
cause the consumer. If such unlawful clauses are inserted into the credit agreement, the consumer may
go to court for legal protection in putting the situation right. The court in such circumstances will either
exclude only the offending sections or declare the whole credit agreement to be unlawful. The court's
decision will depend on the nature of the clause and how badly the consumer is affected.

224 Chapter 16 | Credit agreements

 ‘The NCA limits the ways in which credit providers may market (or advertise) their products to consumers.
‘This is linked with one of the main aims of the NCA — namely, to empower consumers to make informed
choices in acquiring credit. In addition to credit providers including certain essential information in any
marketing of credit agreements (such as the total cost of the credit), they may not practise prohibited or
restricted marketing. Examples are so-called negative-option marketing (in section 74) sales and marketing at
the consumer's home or workplace, and misleading advertising. Negative-option marketing is when a credit
provider states in their marketing that the consumers will be assumed to have accepted the credit if they do
not reply to the credit provider. A practical example of this would be when a credit provider sends goods to
be bought on credit in the post to the consumer, and states in the attached letter that it will be assumed
that the consumer has entered into the credit agreement unless the consumer rejects the offer in writing.

Activity 16.1
We have seen above that, under the NCA, consumers have the right to an account of their
payments made and amounts said to be owing under a credit agreement. But, getting such
statements has virtually no value for the consumer if they are not properly checked. Assume
that you are the consumer with an account at Style Clothing store, where you buy clothes
periodically, and pay these off over a six month period. Specifically, what would you check on
each statement of account, and why would you do so?

16.6.2 The NCA and the poor

Earlier, we mentioned the NCA’s limitation of the costs that a credit provider may charge to a consumer
in terms of a credit agreement. This, together with capped (meaning ‘set maximum’) interest rates, would
appear to mean that credit consumers should now be in a better position than they were before the
implementation of the NCA. However, research conducted by the Director of the Rhodes University
Law Clinic in Grahamstown has shown that a relatively high initiation fees (the initial fee charged by
a credit provider on drawing up the credit agreement), together with monthly service fees (charged for
the administration of the credit agreement), has meant that even though interest rates are now generally
lower under the NCA than before, the actual cost to the consumer, once the initiation and service
fees are factored in, remains high. The same research indicates that relative to the size of the credit, the
smaller the value of the credit agreement (for example, a loan of R200 as opposed to R5 000), the greater
the initiation and service fees are. To build upon this rather gloomy picture, it is normally poorer people
who seek smaller credit, typically in the form of loans. Therefore, those in need of the most protection in
terms of the NCA and with the least disposable income are the very people who end up paying the most
for the credit that they receive.
Chapter 5, Part C of the NCA deals with various financial protection aspects for consumers.

16.6.3 Protection measures for instalment sale buyers of land

In addition to the protection provided under the NCA, people who buy residential land are protected
in a number of ways by the Alienation of Land Act 68 of 1981 and the Alienation of Land Amendment
Act 103 of 1998. These Acts give specific protection to instalment-sale buyers of residential land (in
addition to the rights already mentioned).
In terms of these Acts, a sale of residential property qualifies as an instalment sale if 70 dledious ifacnation
the buyer pays for the property in more than two instalments over a period of more than means to make it known
one year. The main aim is to protect the buyer if the seller becomes insolvent. The seller's rather than keeping it
insolvency could be a problem to the buyer because an instalment sale does not transfer to yourself.
ownership to the buyer immediately. These Acts require disclosure of the terms of the sale,
in a language chosen by the buyer. This guarantee is known
in law as the warranty
When land is sold, the Acts require the seller to guarantee that the buyer will not be : Sc
against eviction.
removed from the land by someone who has a greater legal right to the land. The Alienation

Chapter 16 | Credit agreements 225

of Land Act protects the buyer by disallowing any clause in the instalment sale contract that states that
the seller does not give such a guarantee,
The Alienation of Land Act provides for the buyer's right to accelerate her payments. In other words,
she can speed up her payments, or pay off her debt in a shorter time than that agreed to.

16.6.4 Consumer duties under the NCA

Overall, consumers are placed in a stronger position under the NCA than they were in before the Act.
In terms of the NCA, the main duties of consumers are:
® to notify the credit provider of the location of goods bought under a credit agreement until the item
has been fully paid for; normally, this duty would simply mean the consumer informing the credit
provider, in writing, of any change of address
® to answer all requests for information that are made by the credit provider fully and truthfully.

We will see below that the NCA aims to prevent what it calls ‘reckless credit’, It is also the duty of credit
providers to have all the necessary information from consumers to make an informed decision as to
whether or not to grant the credit.
Various sections of the NCA deal with consumer duties. An example of an important one is
pre-agreement disclosure, in section 92.

16.6.5 Over-indebtedness under the National Credit Act

A major aim of the NCA is to promote responsible borrowing, so that consumers are able to meet their
financial obligations under the credit agreements they have undertaken. Before the NCA came into
force, many consumers found that they were getting deeper into debt, and had to start borrowing even
more money to pay back other debts. Therefore, the NCA allows for consumers to be declared over-
indebted, a declaration which gives them some breathing space to meet their financial obligations.
Consumers are over-indebted under the NCA if they are or will be, unable to satisfy, in time,
all the obligations under all the credit agreements they have entered into. This determination of
over-indebtedness considers, amongst other factors, the financial situation and history of the consumer,
including their income and expenses. This financial analysis takes into account the income earned by
other adult family or household members who also contribute to the household expenses of the consumer.
A consumer applies to a debt counsellor to be declared over-indebted. At the same time, the debt
counsellor may also consider whether reckless credit has been granted to the consumer. The application
to be declared over-indebted is rejected if the debt counsellor does not think that the consumer is over-
indebted, on the basis of the information given to him. However, if the counsellor does decide that the
consumer is over-indebted, the matter is referred to the Magistrates’ Court with the recommendation
that the court should order that one or more of the consumer's repayment duties be rearranged. For
example, the court may give the consumer a longer period to repay his debts with smaller, more
affordable monthly repayments.
Over-indebtedness under the NCA can be found in section 79.

16.6.6 Reckless lending

In terms of section 80 of the NCA, a credit agreement is termed reckless if the credit provider, before
entering into the agreement, failed to take reasonable steps to establish the following:
@ = that the consumer knew and understood their duties, rights and risks under the agreement, and the
total and particular financial costs involved
m = the consumer’s debt repayment history with regard to other credit agreements
@ = the consumer's existing financial situation, including current forms of income and possible future
income sources weighed up against the consumer's existing financial obligations (for example, to pay
school fees for his children),

226 Chapter 16 | Credit agreements

Even if the credit provider obtained all the information he needed, as outlined above, the NCA considers
that there has been reckless lending if the credit provider entered into a credit agreement despite such
information indicating the following:
@ = the consumer did not understand or appreciate the risks, costs or obligations of the agreement
@ = the consumer is already over-indebted, or entering into the new agreement would make the
consumer over-indebted.

The prospective consumer is obliged to answer fully and truthfully any requests for information made
by the credit provider as part of the assessment required by the Act (section 81(1)). Ifhe fails to do so,
and this materially affects the ability of the credit provider to make a proper assessment, a court or the
National Consumer Tribunal cannot make a finding that the agreement was reckless (section 81(4)).
Ifa debt counsellor finds that a credit provider has provided reckless credit, a Magistrates’ Court
is asked to declare that the agreement is reckless, and to make an order cancelling all or some of the
consumer's rights and obligations under the agreement or suspending the agreement until a later date.
Whilst a credit agreement is suspended, the consumer need not make any payments nor may she
be charged interest or any other fees in terms of the agreement. Clearly, therefore, it is in the credit
provider's best interests, as well as the consumer's, to ensure that reckless credit is not provided in any
credit agreement.

16.6.7 Exceptions to over-indebtedness and reckless lending protection

‘The protection measures discussed above do not apply to over-indebtedness or reckless lending where the
consumer is a juristic person, such as a company or closed corporation. The protection measures with
regard to reckless credit also do not apply to, amongst others, the following types of agreement:
@ an emergency loan
a study loan
a public interest credit agreement
a pawn transaction
a temporary increase of the credit limit under a credit facility.

16.6.8 Debt collection under the NCA

Just as with the old Credit Agreements Act, the NCA requires the creditor to follow certain procedures
when taking legal steps against a defaulting debtor. Firstly, if the credit provider wants to sue the
consumer to claim their money in court, she must wait until the consumer has been in default (meaning
that the repayment of the debt has already been overdue) for more than 20 business days. Once these
20 days are up, the credit provider must give the consumer notice in a particular form asking the
consumer to meet his payment obligations in terms of the agreement. If the consumer has not responded
to the notice in at least ten days or rejected it, the credit provider may approach a court to enforce the
agreement. This whole procedure gives consumers every possible chance to meet their obligations under
a credit agreement, and it ensures that credit providers respect the rights of consumers by not taking the
law into their own hands.
Mashilo Shadrack Sebola v Standard Bank Of South Africa Limited CCT 98/11 2012 1 indicates how
our courts have interpreted the notice requirement in a way which is not to the benefit of consumers in
credit agreements.

Chapter 16 | Credit agreements 227

 Mashilo Shadrack Sebola v Standard Bank Of South Africa Limited
CCT 98/11 2012 11

Principle
The NCA provides protection for a debtor who has entered into a credit agreement under the Act.
Facts

In terms of section 129(1), a debtor is entitled to written notice before a credit provider may
institute legal action against him. In terms of section 129(1) as read with section 130 of the
NCA, a creditor only has to prove that it duly sent the required notice, but does not have to
prove that the debtor received the notice or was even aware of it.
In this case, Mr and Mrs Sebola entered into a home loan agreement with Standard Bank,
and gave the bank a post box address. When the Sebolas were in arrears, Standard Bank sent
a notice in terms of section 129(1) to the post box address that they had provided. However,
the Sebolas denied receiving the notice. Standard Bank took default judgment against them,
and then wanted to sell their house in a sale in execution. The Sebolas applied for the rescission
(cancellation) of the judgment on the grounds that they did not receive the notice and they
argued that the creditor had a duty to ensure they were aware of the notice.
The court's finding
The Constitutional Court held (in para. 87) that proof by the bank that it had sent the notice was
sufficient, even if the notice did not reach the debtor, as there had been ‘delivery’ of the notice
as required in the Act. This case does raise a concern that those debtors living in areas with poor
postal services may be disadvantaged by this court finding.

Added value Some law for life lessons

In practice, it is important to remember that it is not much use to be owed money by someone
who has no money, job or assets that could be sold. Even if a court orders a judgment in your
favour for money owed to you, you will still have no way of getting the money back.

Added value Advice for credit receivers

In a consumer society like ours, it can be very tempting to buy things on credit, especially since
marketers do their best to make each offer look like the bargain of a lifetime. However, credit
is dangerous if people do not manage it responsibly. Here are a few things that you could tell
consumers considering buying things on credit that they should do to avoid getting into debt:
e Avoid buying anything on credit wherever possible. Cash transactions are always far
cheaper than buying on credit. Rather try to do without something than get yourself into
debt, most especially when what is being bought is a luxury item rather than something
that is really needed. if you default on a credit agreement, and the creditor gets a court
order and repossesses the item you bought, then you may well lose that item, even if you
have already paid a great deal of money for it. If you do decide to buy on credit, then get
the best deal you can, and carefully work out how much you will be able to repay. You need
to take into account all your personal financial circumstances, such as how much you earn
and what you spend each month. Do not overburden yourself with repayments that you will
find hard to meet.

228 Chapter 16 | Credit agreements

 Added value (continued) Advice for credit receivers

¢ To protect yourself, you should read the credit agreement very carefully, and take advice
from a suitably qualified person, like a financial advisor or an attorney, if something in the
contract is not absolutely clear to you. Do not be rushed or let anyone force you to enter
into the agreement. Never, under any circumstances, sign blank contracts, or sign without
knowing how the agreement will affect you. Once you sign a credit agreement, keep a copy
of the contract (you are entitled to be given one) in a safe place. Also, keep proof of all your
payments, as you will need it if there is any dispute about the contract. You are also entitled
to statements of what you have paid and still owe in terms of the agreement. Always check
that the statement is correct.
e if you are unable to make a payment, explain to the creditor why you will not be able to
make the next payment, and try to negotiate a new payment that you can afford. If you
miss a payment, more money becomes payable, due to interest and other finance charges.
These extra charges pile up quickly and significantly in addition to the original debt.
e If at all possible, avoid defaulting on payments. if you really cannot find the money, at least
make an arrangement with the creditor. However, avoid borrowing from registered micro-
lenders to meet credit agreement repayments. Such loans are likely to lead you into further
debt, from which you will find it difficult to escape.
e Seek legal advice from a lawyer if you believe that a creditor has treated you unfairly. For
example, you can lay criminal charges if a creditor has used illegal methods to repossess
goods. However, it's much better to seek legal advice before you enter into a contract that
you do not fully understand.

What do you think?

Estate agents and car dealers have complained that their businesses are suffering as a result of the stricter
controls over loans to potential consumers under the NCA. Do you think that these concerns are as
relevant as the government's aim of preventing people from getting into too much debt? Or has the
‘legal pendulum’ in this regard now swung too far in favour of debtors to the unfair detriment of such
businesses or credit providers?

Chapter summary

In this chapter, you learned the following about credit
agreements:
The NCA came into effect in June 2007, and it
supersedes previous laws on credit agreements and the
provision of credit. The NCA seeks to deal with the
weaknesses of previous legislation and make the whole
process of providing credit more transparent and fair. In
terms of greater transparency, credit providers and credit
bureaus have to ensure that their information on the credit
history of consumers is accurate, and that consumers
themselves are able to see details of their credit history.
All credit agreements have to be in writing in order
to be enforceable.
The NCA provides definitions of what constitutes a
credit agreement and defines which credit agreements
are covered by the Act.

Chapter 16 | Chapter summary 229

 The NCA also set up the National Credit Regulator,
which monitors the effectiveness of the Act, registers
credit providers, regulates their activities and registers
debt counsellors.
The National Consumer Tribunal adjudicates
disputes relating to the NCA.
The NCA significantly improves the rights of
consumers, protecting them from unfair discrimination
in the granting of credit, and trying to ensure that
they have a full understanding of all the terms and
implications of the agreement they are signing.
Consumers have a duty to provide relevant information
Review your understanding
1. Under what circumstances will the granting
of credit be considered reckless lending under
the NCA?
2. It would seem as though the NCA provides a much
better deal for consumers than was the case before the
NCA. However, there are situations where consumers
are not protected under the NCA. Discuss these
exclusions from protection under the NCA.
3. What is a debt counsellor under the NCA, what
does she do, and how?
4. Produce for yourself a summary or mind map
indicating the shortfalls of the old laws governing
Further reading
Campbell, J. 2006. “The Cost of Credit in the Micro-finance
Industry in South Africa’. LLM thesis, Rhodes University,
Grahamstown
Papenfuss, T, 2012. ‘What are the effects of the reckless credit
sections in the NCA in the prevention of over-indebtedness?’
(This article can be found on the University of Pretoria’s website.)
Department of Trade and Industry. Making credit markets work:
Policy framework for consumer credit http://www.ner,
org.za/publications/Background_NCA_docs/Credit%20
Law20Review.pdf (accessed on 27 September 2017)
230 Chapter 16 | Review your understanding
of their financial situation to the credit provider fully
and truthfully.
The NCA seeks to prevent credit providers from
lending money recklessly by requiring them to take into
account the financial circumstances of consumers who
apply for credit, and by restricting the ways in which
they might promote their products.
Where consumers do become financially over-
extended, or over-indebted, the NCA provides for a
declaration of over-indebtedness that will enable the
consumer's debt repayments to be re-scheduled over a
longer period of time.
credit agreements and how the National Credit Act
aims to remedy these.
5. Draw up atable in which you indicate what types of
transaction are covered by the NCA and which are
not, giving an example of each which you either as a
credit provider or a consumer might encounter in the
business world in the town or city where you plan
to work after completing your studies at university.
6. John, a credit provider, has loaned R10 000 to
Andiswa. Andiswa defaults on her repayment.
Outline the procedure that John must follow under
the NCA in order to take Andiswa to court.
National Credit Regulator (NCR) of South Africa, 2017. Home
page. hetp://www.ncr.org.za (accessed on 28 September 2017)
(This website describes the National Credit Act and provides
information about and access to the National Credit Regulator.)
 Lei preyeh cay

The Consumer Protection Act

17
The main ideas
The Consumer Protection Act 68 of 2008 (CPA) — a new era for consumers in South Africa
Key terms explained
Aims of the CPA
Interpretation and application of the CPA
Consumer rights
Enforcement of consumer rights

The main skills

Indicate the aims of the CPA.
= Understand when the CPA applies.
= Apply relevant provisions of the CPA to practical scenarios.
= Explain the remedies available to consumers for enforcing their rights under the CPA.

In Part 4 of the book we look at various important aspects of commercial law. We start with the
Consumer Protection Act. Millions of consumer agreements are concluded every day. Generally,
consumers and the suppliers of goods or services benefit from these agreements. For a number of reasons,
however, consumers can be exploited quite easily. In particular, the costs and time factors prevent
consumers from taking a consumer complaint to court. So in order to provide consumers with effective
protection the Consumer Protection Act 68 of 2008 was enacted. This Act, which from now on will
be referred to as the CPA, provides the consumer with a comprehensive set of rights that is aimed at
protecting the consumer. The Act also provides mechanisms for the enforcement of these rights. This
chapter considers the CPA in more detail.

Before you start

Suppose you buy a cellphone for R2 000 and a few days later it stops working. You take it back to the
supplier and you ask for your money back. However, they refuse to give you your money back and
insist on repairing it instead. Is the supplier entitled to do this? What are your rights as a consumer in a
situation such as this?

17.1 The Consumer Protection Act — a new era for consumers in

South Africa
In 1962, American President John F Kennedy proposed a bill of rights to provide consumers with
effective protection. This bill of basic consumer rights was to include a right to safety, a right to be
informed, a right to choose and a right to be heard.
This recognition of specific rights for consumers provided momentum for the development of
an international consumer movement. However, in South Africa, consumer protection was not a
government priority prior to 1994, and South African consumers had to rely on the common law
(particularly the law of contract and delict) to protect themselves as consumers, Using the ordinary civil
courts is, however, very expensive and it takes a long time before a matter is heard, so it was often not
worthwhile for consumers to pursue consumer complaints through the legal system.

Chapter 17 | The Consumer Protection Act 231

In certain areas specific legislation was passed to provide consumer protection. Examples include:
= Foodstuffs, Cosmetics and Disinfectants Act 54 of 1972
Estate Agency Affairs Act 112 of 1976
National Building Regulations and Building Standards Act 103 of 1977
Competition Act 89 of 1998
Rental Housing Act 50 of 1999.

Since 1994, the South African government has committed itself to consumer protection. This commitment
is part of a wider commitment to the promotion and advancement of the social and economic welfare of
all South Africans, which is reflected in the following legislation that has been passed since 1994:
@ = Electronic Communications and Transactions Act 25 of 2002
National Credit Act 34 of 2005
CPA
Protection of Personal Information Act 4 of 2013
Financial Sector Regulation Act 9 of 2017.

The need to introduce comprehensive and general consumer protection legislation was made necessary
by factors such as unfair and discriminatory market practices, the proliferation of low
quality and unsafe products, the complexity of goods, a lack of knowledge of the rights of Codification means
consumers, limited redress and weak enforcement of consumer rights. ‘to arrange laws into
The CPA provides comprehensive consumer protection legislation, but the Act is nota °N€ Body or a system’,
normally in a written form.
complete codification of all consumer legislation in one piece of legislation.

Activity 17.1
You considered the National Credit Act in the previous chapter. Write down three examples of how this
Act protects consumers, If you cannot remember, go to the previous chapter, and refresh your memory.

17.2 Key terms explained

In terms of the CPA, a consumer means any person to whom goods or services are marketed,
. Transaction refers to an
who enters into a transaction to purchase these goods or services and/or who subsequently makes agreement between a
use of the goods or services. A supplier is a person who markets any goods or services. To market, _ person (supplier) acting
when used as a verb, means to promote or supply any goods or services. A supplier can bea _ in the ordinary course of
natural or a juristic person. When a consumer and a supplier enter into a transaction in which the SU¢h person's business and
consumer purchases any goods or services, this is generally in terms of a consumer agreement. BRATS RESIN KCmESEENET
Z f for the supply or potential

17.3 The purpose of the CPA seisof goods or

fog
Our understanding of a constitutional democracy in South Africa includes the principle of consideration, or the actual
consumer protection. This principle is based on the Constitutional purpose stated in the supply of the goods or
preamble to the Constitution of the Republic of South Africa, 1996, — namely, to improve __ services to the consumer in
the quality of life of all citizens and free the potential of each person. exchange for consideration.
The primary purpose of the CPA is to promote and advance the social and economic
welfare of consumers in South Africa (section 3). This aim is to be achieved through:
= establishing a legal framework for achieving and maintaining a consumer market that is fair,
accessible, efficient, sustainable and responsible for the benefit of consumers generally
reducing disadvantages experienced in accessing goods and services by vulnerable consumers
promoting fair business practices
protecting consumers from unfair trade practices
improving consumer awareness and access to information, and encouraging informed consumer
choices and behavior

232 Chapter 17 | The Consumer Protection Act

@ developing a culture of consumer responsibility
® providing an effective system of consensual dispute resolution
= providing an efficient system for redress.

The CPA must be interpreted in a manner that gives effect to these stated purposes. This A purposive approach
approach is called the purposive approach to statutory interpretation. It can therefore be provides a broader view of
stated that the CPA must be interpreted so as to promote and advance the social and economic _ interpreting the law and
welfare of consumers in South Africa by, amongst other ways, achieving a consumer market aims to make sense of the
statute in the light of the
that is fair — fair to both consumers and suppliers. However, where it is reasonably possible to
purpose of the legislation.
interpret a provision of the CPA in more than one way, then the court or tribunal must choose
the interpretation that will best promote the spirit and purposes of the Act, and advance the
rights of consumers, especially vulnerable consumers. Vulnerable consumers include low-income consumers,
minors and seniors, consumers in remote areas, and consumers whose ability to read and understand written
communication, such as advertisements, agreements and notices, is limited because of low levels of literacy,
vision impairment or limited fluency in the language of the specific written communication.

17.4 Application of the CPA

The CPA does not apply to all transactions between suppliers and consumers. It is therefore Promotion refers to any
very important to establish in each case whether the CPA actually applies toan agreement —_ efforts made by a supplier
(section 5(1)). The CPA applies to: to advertise, display or
@ every transaction occurring within the Republic, unless specifically excluded by the Act _ offer for sale any goods
= =the promotion of goods or services, or of the supplier of them within the Republic Or services i the ordivaty
@ any goods or services provided or supplied in terms of a transaction to which the ee ee ae
‘ S i for payment; making any
cCappues representation that reflects
® goods supplied in terms of a transaction, even though the transaction has been a willingness to supply
excluded from the application of the Act. goods or services in the
ordinary course of business
The CPA does not apply to certain transactions (section 5(2)). These are: for payment; or the doing

transactions for the supply of goods or services to the State of anything in the ordinary
ti bare the co RE Re ith | d/ | course of business to
transactions where
- >
the consumer is a juristic person
2 . Vv
with
'
an asset-value and/or annua
-V ¢
induce ’a person to enter
é

turnover of R2 million or more into a transaction.

transactions exempted by the Minister
transactions falling under the National Credit Act 34 of 2005 (credit agreements)
employment contracts, as well as collective agreements regulated in terms of the Labour Relations
Act 66 of 1995,

erT Tea atehY] 3 =) ae eee) ey

Peter is a student. He wants to sell his old scooter. He puts a sign on it, which reads ‘For sale —
R5 000’, and he includes his phone number. He parks the scooter on the grass near the lecture
halls, Becky calls Peter, and offers to buy the scooter for R4 600, Peter and Becky conclude
a transaction.
Does the CPA apply to this transaction?
To find out whether the CPA applies to a situation or not, start by looking at the definitions
in the Act. The CPA defines a transaction as an agreement between a person, ‘acting in the
ordinary course of business’, and another person or persons for the supply of goods or services
for consideration. The question then is whether Peter is acting in the ordinary course of his
business. The answer is probably that Peter is not acting in the ordinary course of business, as
Peter is a student and that is not his usual line of activity.

Chapter 17 | The Consumer Protection Act 233

 Added value Financial services excluded from the application of the CPA

In terms of the Financial Services Laws General Amendment Act 45 of 2013, the CPA does
not apply to the banking industry, the short- and long-term insurance industry, pension fund
industry, collective investment schemes industry and securities industry.

17.5 Consumer rights

Chapter 2 of the CPA provides for nine fundamental consumer rights. These rights are:
the right to equality in the consumer market
the right to privacy
the right to choose
the right to disclosure and information
the right to fair and responsible marketing
the right to fair and honest dealing
the right to fair, just and reasonable terms and conditions
the right to fair value, good quality and safety
the supplier's accountability to consumers.

Added value The Regulations to the CPA

While rights are provided for in the CPA, often more detail regarding the rights, or other aspects
in the CPA, is provided for in the regulations to the CPA. Regulations are subordinate legislation.
This means the regulations are not made by Parliament as is the CPA. Parliament gives the
Minister responsible for consumer protection the power to make regulations that provide more
detail regarding an aspect or right provided for in the Act. The CPA gives the relevant Minister
the authority to make regulations for the CPA (section 120).

17.5.1 The right to equality in the consumer market

Suppliers may not unfairly discriminate against consumers (either as an individual or as a
category of persons) on any of the grounds that are listed in section 9 of the Constitution Se Seen
s ; . . : here means that a supplier
of the Republic of South Africa, 1996, or Chapter 2 of the Promotion of Equality and the differentintve Hetaeen
Prevention of Unfair Discrimination Act 4 of 2000 when promoting or supplying goods consumers in the manner
or services to such consumers (section 8). These listed grounds include race, gender, sex, the different consumers
pregnancy, marital status, ethnic or social origin, colour, sexual orientation, age, disability, are treated and there
religion, conscience, belief, culture, language and birth. i Oe Or aa
The CPA lists various types of behaviour that may constitute unfair discrimination oe a
prohibited by the Act if the differentiation is based on a prohibited ground. Examples are:
= excluding some consumers from accessing goods or services offered by the supplier
= supplying different quality of goods or services to some consumers
= charging some consumers different prices for the same goods or services.

For example, a supplier may not charge different consumers different prices for the same goods or services when
the reason for charging the different prices is the fact that the one consumer is male and the other female.
The CPA does permit differential treatment in some cases. It will not be unfair discrimination if an
establishment reasonably makes certain facilities available for the exclusive use of minors or of people
aged 60 years or more, or offers a discounted price on the basis that the person is a minor or of the age
of 60 years or more. An establishment may also provide separate but substantially similar facilities for the
exclusive use by the different genders or may provide facilities exclusively for the use by one gender only
if it is reasonable to do so.

234 Chapter 17 | The Consumer Protection Act

 LaF
T Ta atohy Nae Ch

Anele opens a gym in Port Elizabeth for women only. John wants to join the gym as itis located
close to his home. When he finds out that only women are allowed, he complains that it is
unfair discrimination and is prohibited by the CPA. Is Anele’s conduct lawful?
From the above you can see that there is a difference in the manner in which Anele treats
men and women respectively —- women are allowed and men not. This difference in treatment is
based on gender. Anele’s conduct may constitute unfair discrimination based on gender if there
is NO justifiable reason for the differential treatment. The CPA specifically allows a supplier to
provide facilities exclusively for the use by one gender, but only if it is reasonable to do so.
Is it reasonable to provide this facility to women only? Answering this question requires that
all relevant facts be considered. One such fact may be that Port Elizabeth has a number of gyms.
It should therefore not be too difficult for John to find an alternative facility. Anele’s gym is, in all
likelihood, not contravening the CPA.

17.5.2 The right to privacy

The CPA protects the privacy of consumers by limiting the use of direct marketing by suppliers (section
11). Direct marketing means a person, either in person or by mail or electronic communication, for the
direct or indirect purpose of marketing goods or services or asking for a donation. The right to privacy
allows the consumer, when approached in person, to refuse to accept or require the direct marketer to
discontinue the direct marketing. When requested to stop direct marketing, a supplier is required to
record the request, and provide the consumer with written confirmation of having received the request.
A national registry is to be established where consumers can register in order to pre-emptively block
certain forms of direct marketing. Direct marketers will then be obliged to consult this registry, and may
not contact consumers who have registered.

Added value Opting out of receiving direct marketing

The Direct Marketing Association of South Africa (DMASA) operates a registry in which a
consumer can register if the consumer does not want to receive direct marketing from members
of the association. This means a consumer can opt-out from receiving direct marketing from
suppliers who are members of DMASA.

The CPA provides that consumers may not be contacted at home for purposes of direct marketing on the
following days and during the following hours:
= Sundays and public holidays
m Saturdays before 09h00 and after 13h00
® all other days between the hours of 20h00 and 08h00 the following day (section 12).

If consumers conclude agreements as a result of direct marketing, they are entitled to a cooling-off period
of five days (section 16). A cooling-off period is a period of time within which a consumer is allowed to
change their mind, and cancel the contract for no reason and at no cost after concluding the contract.
The consumer must inform the supplier in writing or in another recorded way, such as via email or
SMS, of the cancellation. The supplier must inform the consumer of his rights in respect of the cooling-
off period when the transaction is concluded (section 32). It is not certain what the effect will be if the
consumer is not informed of the right.

Chapter 17 | The Consumer Protection Act 235

 Added value The right to cooling-off in the European Union

The European Commission Directive on Consumer Rights provides for a cooling-off period
of 14 days, and the supplier must inform the consumer of the right. If the consumer is not
informed of his right, then the cooling-off period extends for a year. If the supplier informs
the consumer within the year, then the cooling-off period comes into effect from the time the
consumer is informed.

Other legislation also contains cooling-off rights. For instance, if the contract was concluded
electronically, then the Electronic Communications and Transactions Act may apply to the situation.
If so, the consumer has a seven-day cooling-off period.

Activity 17.2
You have concluded a contract with a supplier as a result of direct marketing. You now want to
cancel this contract. What are the steps that you must take?

17.5.3 The right to choose

A number of different rights are provided for under the ‘consumer's right to choose’. These include
the consumer's:
right to select a supplier
rights in respect of fixed-term contracts
right to a quotation
right to cancel reservations
right to choose or examine goods
right with respect to the delivery of goods
right to return goods to a supplier
right to unsolicited goods,

Right to select a supplier

The first of these specific rights is the consumer's right to select a supplier. In terms of this right a
consumer cannot be forced to buy two products together (section 13). This practice is referred to
as bundling.
Bundling will be allowed if the supplier can show that the bundling provides the consumer with
convenience that outweighs the limitation of consumer's choice; results in economic benefit to the
consumer, or offers the bundled goods or services separately and at individual prices.

Activity 17.3
You work for ABC Hardware, a large retailer of hardware products. Product A is not selling
and this is causing ABC Hardware to lose money. The manager then suggests that in order
to get rid of product A and to make some money from it, the following marketing strategy
will be used — namely, that product A will be sold to consumers as part of a package with
product B. Product B is very popular, and it sells very fast. Therefore, in order to get product B,
a consumer will have to buy product A as well. The products are not to be sold separately as
consumers will then not buy product A. Explain to the manager whether this strategy complies
with the CPA.

236 Chapter 17 | The Consumer Protection Act

Rights in respect of fixed-term contracts
A fixed-term combed, such as a cellphone of gym cnet may , nat exceed 2 24months e en
unless the longer period has been expressly agreed with the consumes and the supplics can les contract which staré:
show a clear financial benefit to the consumer (section 14). A consumer can cancel afixed- —_ ang is due to end when a
term contract at any time by giving 20 business days’ written notice to the supplier. The specified date js reached, a
supplicr may charge a reasonable cancellation fee. The cancellation fee may not have the specified event occurs or @
effect of making the right to cancel meaningless. Whether a cancellation fee is reasonable specified task is completed,
has to be determined by considering a number of factors (regulation 5). These include:
@ the value of the goods returned to the supplicr Business
days are ali the
the duration of the consumer agreement as initially agreed =) o = nd 9
the nature of the goods or services booked public holidays.
the length of the notice of cancellation given by the consumer
the general practice of the relevant industry.

Activity 17.4
Big Mac has joined Muscles, a gym, on a 24-month contract. In terms of the contract, Big Mac
pays a fee of R300 per month to Muscles. Big Mac wants to cancel the contract, because
he realises that he cannot afford the payments. What steps must Big Mac take to cance! the
contract? Say what you think would be a reasonable cancellation fee and explain why?

A fixed-term contract may also not be automatically renewed, The supplier must give the consumer
notice within a period of no more than 80 days and no less than 40 days before expiry of the contract
that the contract is abour to lapse. This notice must inform the consumer of any material changes to the
contract, such as an increase in monthly fees or premiums payable, should the contract continue. The
supplier must also advise the consumer of the following:
@ ‘The consumer may expressly choose to cancel the contract when it expires.
® ‘The consumer may expressly renew the contract on the mew terms as proposed by the supplicr.
@ = If the consumer does not expressly choose to cancel or renew the contract, the contract will
continue on a month-to-month basis, according to the new terms.

Right to a quotation
When a supplicr performs repairs or maintenance work fora consumer and has possession of the
property of the consumer to carry out the work (such asa garage taking possession of the consumer's
vehicle for a service), the supplicr must give the consumer a quotation for the cost of the work and must
get the consumer's authorisation before performing the work {section 15). If the consumer, in waiting,
declines to receive a quotation and authorises the work toa certain amount, then the supplier can
perform work to the agreed amount. The supplier may net charge an amount higher than the quotation,
unless the supplier informs the consumer of the higher costs and the consumer authorises the work. The
supplicr may not ask for a fee for preparing a quotation, unless the partics agree to it.
A quotation must contain the following details:
® a breakdown of all the charges and the total of the amount to be charged if the repairs or work is to
be done
the nature and extent of the repairs
the period of validity of the quate
the period within which the consumer must collect the goods
the consequences if the consumer fails to collect the goods.

Chapter 17 | The Consumer Protection Act 237

 Activity 17.5
Max takes his car to the garage as there is a strange noise in the engine. He asks the manager
to determine the cause of the noise and what can be done about it. Later that day, the manager
phones Max, and tells him the car is repaired. Max is very happy until the manager informs
him that he can collect the car after settling the account for the repairs amounting to R15 000.
What rights does Max have in terms of the CPA?

Right to cancel any advance reservation, booking or order

A consumer has the right to cancel any advance reservation, booking or order (section 17). A supplier is
entitled to charge a reasonable deposit and a reasonable cancellation fec. What will constitute a reasonable
cancellation fec will be determined with reference to certain factors such as the length of time of the notice
and the potential for the supplier to finda replacement consumer. A hotel, for example, may no longer
apply a standard policy in terms of which deposits are non-refundable in the case of a cancellation. No
cancellation fee may be charged if the cancellation is duc to the hospitalisation or death of the consumer.

Activity 17.6
In March, Thum books a holiday for her husband and her at the very popular Crystal Waters
Hotel in Cape Town for the period 22 Decemberto 31 December. She has to paya 50% deposit
to secure the booking, which she does. In October, Thumi has an accident, and she breaks a
leg. She ts hospitalised for three weeks and she is allowed to go home in November, but she has
to remain in bed for the rest of November and December. The couple cancels the booking at
Crystal Waters Hotel on 17 October. The hotel informs them that if they cancel, they will forfeit
their deposit as being a reasonable cancellation fee. Consider the position of the couple and the
hotel in terms of the CPA.

Right to choose or examine goods

A consumer is not liable for any loss or damage to any goods displayed by a supplicr, unless the damage
results from gross negligence, recklessness or intentional behavior (section 18). This is the case even
where the supplice has placed a notice to state that ifa consumer handles and breaks something the
consumer must pay for the damaged goods. Ordinary negligence is not enough to result in Liability for
the damage.
Shops often display a notice with the following wording, ‘Nice to touch, nice to hold, but if it should
break consider it sold’. A supplier cannot rely on such a notice to held a consumer liable for breakages.
unless the damage is occasioned through gross negligence, recklessness or intentional conduct.

Right with respect to delivery of goods

The CPA introduced an important change to the common law in respect of the passing Passing of risk refers to
of risk when goods are sold to a consumer. As you know from the law of sale, the risk for the moment when the
damage to or destruction of the thing sold passes to the consumer (buyer) once the sale risk in the damage or
is perfect (or perfecta). This means the parties have reached agreement on the price, the destruction of the goods
goods bought and sold have been determined, and the sale is not subject to a suspensive passes from the seller to
condition. The CPA now provides that the risk will pass to the consumer only when the ee
goods arc delivered to the consumer, unless it is agreed otherwise (section 19).
Suppliers may include a provision in their standard-form contracts providing that the risk will pass
before delivery. However, the CPA provides in its regulations that such a term is presumed to be unfair.
This means that the supplier will have to prove why it is fair to have a term in the contract transferring
the risk to the consumer before delivery.

238 Chapter 17 [| The ConsumerProtection Act

 Activity 17.7
What reasons, do you think, can a supplier advance to prove why it ss fair to include a term in
the contract with the consumer which transfers the risk to the consumer before delivery?

Right to return purchased goods to a supplier

A consumer may return purchased goods to a supplicr only in very specific instances (where the goods
are not defective) (section 20). These include:
@ goods purchased because of direct marketing and the contract has been cancelled within the
cooling-off period
® goods the consumer did not have the opportunity to inspect before delivery
® goods intended for a specific purpose, which the supplier was informed of and within ten days of
delivery to the consumer, it was found that the goods are not suited for the stated purpose.

Goods may not be returned if, for reasons of public health, a public regulation prohibits the return of
the goods, or the goods have been disassembled, altered or installed.

Activity 17.8
Rachel bought a pair of shoes from The Shoe Box. The next day Rachel decides that she does not
like the colour of the shoes, and she wants to return the shoes and get her money back. Discuss
whether the CPA gives Rachel the right to return the shoes to the supplier.

Right to return unsolicited goods

Goods delivered to a conswmer can, in some instances, be considered unsolicited goods Hapedhine bead
(section 21). The result of goods being unsolicited is that the consumer in possession of it means that you have ne
these goods becomes the owner of them without any duty to pay the supplicr. Examples asked for the thing.
ave when goods are left with a consumes during direct marketing without any arrangement
for payment, or a larger quantity than was ordered is delivered, or afteran agreement for the periodic
delivery of goods or services has been terminated the supplier keeps on delivering the goods. An
example of this would be where the supplier keeps on delivering the newspaper after the contract
has been cancelled.
Ifa supplier informs a person within ten business days that goods were delivered incorrectly to
thar person, the goods will become unsolicited only if the supplier does not collect the goods within
20 business days of notifying the person. Goods that are clearly delivered to the wrong person or
address only become unsolicited when the consumer, who received these incorrectly delivered goods,
has informed the supplier of the incorrect delivery and the supplier does not collected the goods within
20 business days.
A person in passession of goods incarrectly delivered, must not prevent the reasonable steps of the
supplicr to recover the goods.

Activity 17.9
Sally orders ten flash drives from Computer Suppliers CC. They deliver 20 flash drives to Sally
on Monday, 5 February. On what date will the incorrectly delivered goods become unsolicited?
What will be the position if Computer Suppliers CC phones Sally on 14 February and informs her
of the incorrect delivery?

Chapter 17 | The Consumer Protection Act 239

17.5.4 The right to disclosure and information
The right to choose only has meaning if the consumer has sufficiently relevant information to make
an informed choice. The CPA aims to ensure that the consumer is provided with sufficiently relevant
information to make informed choices, The general right to disclosure and information is given meaning
through a number of specific rights in the CPA. These are the:
right to plain and understandable language
tight to have prices of goods and services displayed
right to product labelling and trade descriptions
right to disclosure of reconditioned or grey-market goods
tight to written sales records
right to disclosure by intermediaries.

Right to plain and understandable language

At the heart of the right to sufficient and relevant information is the nght to plain language. A consumer
is entitled to receive any document. notice or visual representation to be in plain and understandable
language, unless a specific form is prescribed (section 22).
Acontract should be in plain language and understandable to every consumer. The The active voice describes
consumer is usually a person of average literacy skills and with a minimum experience of a sentence where the
the product or service, and they must be able to understand the content and significance of — subject performs the action
the contract without undue effort. stated by the verb, An
example
is. “The supplier
The readability of a document can be improved quite easily by making use of some simple
must inform the consumer.’
techniques. These include avoiding legal terms and phrases (or at least explaining them), using 4, the passive voice, the
persona! pronouns (such as he or she}. and using the active voice rather than the passive voice. subject is acted upon by
‘The format can help to make the document understandable to or mislead the consumer: — the verb. An example is,
a font size and font colour —a small font and a light shade of grey is very difficult to read 4 TH@ Consumer must be
® headings — these guide a reader to relevant parts informed by the supplier.”

@ = layout — beware of hiding the important clauses of the contract on the back page
@ cross-referencing to other parts of the document or other documents should be avoided.

Activity 17.10
Rewnte the following sentence in plain language, applying some of the considerations
mentioned above:
‘The supplier must be informed by the consumer where the consumer is domiciled."

Right to have prices displayed

A retailer may not display goods for sale without displaying a price in respect of those goods (section 23).
A supplice may not require a consumer to pay a price higher than the displayed price. Where two prices
are displayed, then the consumer is entitled to pay the lower price. This is different from the common
law position where the displayed price gencrally docs not constitute an offer, but mercly an invitation to
do business. This means that in terms of the common law, a supplicris not bound by the displayed price.
The CPA has now changed this position in respect of consumer agrecments.

Activity 17.11
Thandi goes shopping. She sees a dress that she likes on a rack in a shop. The price indicated on
the dress is R299. She decides to buy it. When she comes to the check-out counter where she
has to pay, the dress is scanned, and the teller informs her that the price is R499. If Thandi wants
the dress, is Thand) obliged to pay the higher price?

240 Chapter 17 | The ConsumerProtection Act

Right to true labelling and trade descriptions
A person may not knowingly apply a label or trade description to any goods that is likely to mislead the
consumer (section 24). This means that a supplier may not make any statements regarding the amount
of the goods, the content of the goods, the name of the manufactures, the geographical origin of the
goods and the manner in which the goods were manufactured that is untrue. A product must carrya
notice to indicate that it contains genetically modihed ingredients (GMQ). These are ingredients that
have been altered at the gene level and are regarded as being the opposite of organic ingredicnts. These
are also known as ‘genetically engineered’ or ‘genetically altered’ ingredients.
Regulation 7(6) provides that a motice may nat state that a good or ingredient does not contain
genetically modified organisms unless such good or ingredient contains less than 1% genetically
modified organisms.

Added value More statutes regulating labelling and trade descriptions

There are a number of other statutes requlating labelling and trade descriptions. Two important
examples are the Liquor Act 59 of 2003, and Medicines and Related Substances Control Act 101
of 1965.

Right to disclosure of grey-market goods

A person who supplies goods that have been reconditioned, or are grey-market goods, must apply a
conspicuous notice to the goods toinfarm the consumer of that fact (section 25). Reconditioned or
refurbished goods refers to goods that have repaired, rebuilt or remade, but still bear the trademark of the
original manufacturer or supplier. Grey-market goods are goods traded through distribution channels thar,
although legal, are unofficial, unauthorised, or unintended by the original manufacturer. An example would
be if ashop imports and sells branded electronic goods — such as Samsung, Sony or LG products — without
the approval or licence of the registered owner of the trademark. If the goods break, the consumer is not
protected by the manufacturer's warranty, and no official or licensed importcr will honour a warranty in
respect of such goods. This is why the consumer needs to be informed that the product is a grey-market good.

Right to written sales records

The CPA requires that a supplier must provide a written sales record in respect of every transaction, ta
the consumer to whom goods or services are supplied (section 26). The record must contain at least the
following information:
the supplier's full name, registered business name and VAT registration number
the supplier's address from where the goods or services are supplied
the date of the transaction
the name or description of the goods or services
the unit price of the goods or services
the quantity of the goods or services supplied
the total price before amy taxes
the amount of applicable taxes
the total price of the transaction including applicable taxes.

Right to disclosure by intermediaries

An intermediary is a person who, in the ordinary course of business and for remuneration, engages in
certain kinds of business activity. These activities are:
® representing another person with respect to the actual or potential supply of goods or services
@ accepting possession of any goods or property from another person for the purpose of offering the
property for sale

Chapter 17 | The Consumer Protection Act 241

@ offering to scll to a consumer any goods or property that belongs to a third person, or service to be
supplied by a third person.

Such an example would be when Zamindlela hands his car over to Auto Car Sales to sell the vchicle on
his behalf.

Added value Intermediaries in the financial services industry

Intermediaries in the financial services industry are primarily governed by the Financial Advisory
and Intermediary Services Act 37 of 2002, the Long-term Insurance Act 52 of 1998 and the
Short-term Insurance Act 53 of 1998.

An intermediary must disclose certain information to the consumer {section 27). The information
required to be disclosed to the consumer is set out in regulation 9 of the CPA, Some of the information
that must be disclosed includes:
@ the full names, physical business address, postal address, phone numbers, email address and any
registration number assigned to the intermediary by a regulatory body
@ the identity number, or if the intermediary is a juristic person, its relevant registration number
@ the exact service to be provided by the intermediary
m the fee payable to the intermediary for the services provided by him or her, and the basis for
calculating such fee. if the consumer asks for this information
m the frequency with which the intermediary will in writing account to the consumer in respect of the
mandate of the intermediary
@ any commision, consideration fees, charges or brokerage payable to the intermediary by any other person
@ any information that may be relevant and which the intermediary may reasonably be expected to be
aware of.

It is also specifically required that an intermediary must disclose any potential conflict of interest to
the consumer.

17.5.5 The right to fair and responsible marketing

The CPA provides for marketing practices that must comply with a general standard. This cunkal arlieee
standard requires that a producer, importer, distributor, retailer or service provider must not — imeans to promote
or
market any goods or services in a manner that is misleading, fraudulent o1 deceptive in any — supply something.
way as to any important aspect of the goods or services, such as the ingredients, qualities,
uses and benefits the goods ar services may have.
The CPA also regulates specific marketing practices, such as:
bait marketing
negative option marketing
trade coupons and similar promotions
customer loyalty programmes
promotional competitions
alternative work schemes
referral selling.

Bait marketing
Bait marketing is the practice where a supplier advertises certain goods or services at a very low price in order
to attract consumers to the supplier's business (section 30). Bait marketing is not prohibited. Misleading
or deceiving consumers as to the actual availabiliry of the goods at the price advertised is prohibited.

242 Chapter 17| The ConsumerProtection Act

 For example, Eagle Appliances CC launches an advertising campaign in the local newspaper, stating
that they will be selling a certain make and model of television for RY 990, where it normally, sells for
R20 000. This practice of advertising goods at a low price to attract consumers is not prohibited. Bur, if
Eagle Appliances CC does not actually have any of those televisions available for sale, then consumers are
deceived into coming into the store and this form of bait marketing is prohibited.

Activity 17.12
Do you think Eagle Appliances CC complies with the CPA if the following is stated in its
advertisement?
‘There are only 10 of these speafic televisions available at this price."
‘Stocks are imited.’

Negative option marketing

Negative option marketing is prohibited in terms of the CPA (section 31). This practice entails placing
the consumer ina position where the consumer must decline an offer by the supplies, failing which the
offer will be considered to have been accepted. An cxamplc is if a supplicr sends the consumer a book,
and states that if the book is not returned within seven days, then there will be a contract between the
partics and the consumer will have to pay for the book.
The prohibition of negative option marketing supports the common law principle that for a contract
to come inte existence, the person to whom the offer was made (offeree) must accept the offer and the
acceptance must be successfully communicated to the person making the offer (afferor) in a clear and
unambiguous manner. The offeror cannot unilaterally impose a condition that the silence of the offeree
constitutes acceptance of the offer.

Trade coupons and similar promotions

The use of trade coupons, and similar promotions, is a marketing tool often used by suppliers in terms
of which a prize, reward, gift, free goods or services, price reduction or concession is offered or promised.
A supplier may not make a promational offer without the intention of fulfilling it. A supplier offering
a trade coupon or similar promotional offer must provide specified information about the offer and the
steps required by the consumer to receive the benefit that is offered (section 34),

Customer loyalty programmes

The CPA provides thar loyalty credits are legal tender, like cash, when offered as payment for any goods or
services in terms of 2 customer loyalty programme. Loyalty credits refer to points awarded for moncy spent at a
particular place in terms of their loyalty programme which can then be used to discount future goods or services
purchased. A person may not offer participation in a loyalty programme, or offer any loyalty credits or awards
with the intention of not actually providing them, or providing them in a manner other than as offered. A loyalty
programme may therefore not, for example, offer an award of free accommodation at any of a group of hotels,
but when claimed by the consumer, the supplier insists that the free accommodation be taken at a specific hotel
that has a low occupancy rate. The supplicr must also provide the consumer with specified information abour
the nature of the programme and the steps required to participate and receive the benefits of the programme.
Asupplicr is obliged to:
@ = ensure that the supplier has sufficient goods or services available to accommodate all reasonably
anticipated demand for the goods or services in exchange for credits
® not limit the supply of the goods or services to consumers paying with loyalty credits as opposed to
consumers paying with moncy
@ accept loyalty credits as payment for goods of services if the supplicr has capacity to provide the
goods or services where a consumer pays with moncy

Chapter 17 | The Consumer Protection Act 243

@ = not require a consumer to accept inferior quality goods of services because the consumer is paying
with loyalty credits
@ not charge a consumer an administration fcc for exchanging credits for goods of scrvices in terms of
the programme if the consumer pays a membership fee to participate in the programme
® not require the consumer to buy any other goods or scrvices as a condition for concluding a
transaction with loyalty credits.

The CPA allows a supplier who accepts loyalty credits as payment for goods or services to restrict the
availability of such goods or services for consumers paying with loyalty credits for a specific period of
time. The supplicr must inform the consumer in writing at least 20 business days before the start of the
specific period, and such a period may not exceed 90 ordinary days per year.

fet Madeley Thandi's holiday

Thandi is a member of a programme that is offered by the Best Hotels Group. in terms of the
programme, a member earns points or credits for staying at any of the hotels of the group. Once
a member has 100 credits (ten credits are earned for each night of paid accommodation spent
at one of the group's hotels), that member gets one night of free accommodation at any one of
the hotels in the group, subject to availability. Thandi pays a membership fee of R500 per year.
Thandi has 1 000 points and wants to spend seven days at the Best Hote! Drakensberg.
Consider Thandi's legal position under the CPAin each of the following situations:
* When making the reservation, Thandi ts advised that members of the programme are
limited to exchanging credits for accommodation only at the Best Hotel Durban City, a
three-star hotel. The Best Hotel Drakensberg sa five-star hote!, and only guests paying
with money can book there. Best Hotels may not offer any loyalty credits or awards
with the intention of not actually providing them, or providing them in a manner other
than as offered. It appears that Best Hotels is attempting to provide the awards in a
different way to what the loyalty programme promised. We could also argue that Best
Hotels is trying to get Thandi to accept infenor quality goods or services because she ts
paying with loyalty credits.
* = Thandi is also informed that she has to pay in money for at least three of the seven nights
(that is, she cannot pay for all the accommodation with loyalty credits). A supplier of a
loyalty programme must accept loyalty credits as payment for goods or services if the
supplier has capacity to provide the goods or services. Best Hotels cannot insist that part of
the payment must be in cash if Thandi has sufficient loyalty credits.
* Thandi is charged R250 by Best Hotel Drakensberg as an administration charge for
exchanging the loyalty credits for accommodation. A supplier may not charge a consumer
an administration fee for exchanging credits for goods or services in terms of the
programme if the consumer pays a membership fee to participate in the loyalty programme.
Thandi pays R500 per year to belong to the programme. Best Hotels may not impose the
administrative charge of R250.

Promotional competitions
The CPA furthermore provides rules in respect of a promotional competition, which is any competition,
game or arrangement tor the distribution of prizes by lot or chance done in the ordinary course of
business for purposes of promoting a supplier or the sale of goods or services {section 36). A promoter
of such a competition may not require a consumer to pay any money to participate in the competition
other than the reasonable cost of posting or transmitting an entry to the competition.

244 Chapter 17[ The ConsumerProtection Act

 Alternative work schemes
An altcrnative work scheme catails a person inviting other persons to conduct work, business or
activities from their homes for gain. A person conducting an alternative work scheme must not make false
representations about the profitability or any other material aspect of the scheme (section 37). An example
of this would be where people are offered the opportunity to place letters into cnvclopes for compensation.

Referral selling
Referral selling is the practice whereby a consumer is persuaded to buy goods or services by promises of
a rebate, commission or other benefit if the consumer provides the supplier with information, such as
the names of other potential consumers. However, if a condition for receiving the reward or benefit is
that there must first be an actual sale between the supplicr and the person whose name was supplied, the
practice will be prohibited in terms of the CPA {section 38).

17.5.6 The right to fair and honest dealing

The CPA contains a number of provisions to try to ensure that consumers are fairly and equitably treated in their
dealings with suppliers. Consumers are protected against unconscionable conduct, as well as false, misleading or
deceptive representation. Part F in Chapter 2 of the CPA also regulates auctions, fraudulent schemes, pyramid
schemes and a number of other matters. Some of these provisions will be considered in more detail below.

Unconscionable conduct
A supplier may not subject a consumer to unconscionable conduct (section 40). Unconscionable conduct is
explained as uncthical or improper conduct to a degree that would shock the conscience of a reasonable
person. This conduct is prohibited during the whole relationship between the supplier and the consumer —
from the way in which the goods or services are marketed, to the way in which any transaction is negotiated
and concluded, the way in which the goods or services arc supplicd. and to the way in which payment is
enforced or goods recovered from the consumer. Suppliers may not use physical force, cocrcion, undue
influence, pressure, duress, harassment or unfair tactics in conducting their relationship with consumers. It is
specifically also unconscionable for suppliers to knowingly take advantage of consumers inability to protect
themselves because of disability, illiteracy or an inability to understand the language of the agreement.

False, misleading or deceptive representation ee

Asupplier may not make or cause a false, misleading or deceptive representation about a case is when the false:
material fact to be made on the supplier's behalf to a consumer (section 41). Where it is misleading or deceptive
clears that the consumer misunderstands a material fact, the supplicr has a duty te correct that —_ representation will have
misunderstanding. Iris also prohibited for a supplicr nor to disclose a material fact if such the naturalor probable
failure amounts to deception, A supplicr may not usc cxaggcration, innuendo or ambiguity in effect ol persuading 2
wie s ge ‘ 4 ne ‘ ee reasonable person to
explaining a material fact. This seems to change the common law position as far as ‘pufling’ is pmainne a asee tin
concerned, ‘The commen law Accepts puffing aS pare of the normal bargaining, process.

Added value TRE Alay®

Puffing refers to an expression or exaggeration made by a salesperson or found in an

advertisement that concems the quality of goods offered for sale and is often referred to
as sales talk. Whether a statement constitutes a misrepresentation rather than mere praise
(puffer), depends on the circumstances of each case. Certain factors can help to make the
distinction. These factors include whether the statement was made in answer to a question of
the consumer, the matenality to the purpose for which the consumer was interested in acquiring
the goods or services, whether the statement was one of fact or personal opinion, and, whether
it was obvious that the supplier was merely singing the praises of his goods or services.
itis a false, misleading or deceptive representation to state falsely that goods are new or
unused if they are not.

Chapter 17 | The Consumer Protection Act 245

Overbooking
Suppliers may not oversell or overbook goods or services (section 47), [fa supplier has agroed to supply a
certain service or certain goods to a consumer on a specified date, and the supplicr is then not able to do
so because of overbooking or oversclling, the supplicr must refund the consumer any mency paid, as well
as all costs directly caused by the failure to provide the scrvice.

Case study Sarah’s shuttle

Sarah has booked a shuttle to collect her from OR Tambo Intemational Amport after her vacation
overseas and to take her home to Lephalale. She made the booking before she left for overseas and
made the required payment. When she arrives at the airport on her retum, she is informed that there
is no space available on the shuttle as it is overbooked. She is forced to stay the day at a hotelat the
aimport and to make arrangements for another shuttle service to transport her the next day. The first
shuttle service will have to refund the amount that Sarah has paid them, pay the costs incurred by
Sarah a5 a result of her stay at the hotel, as well as the costs of arranging the other shuttle service.
The CPA provides that if a supplier has agreed to supply a certain service to a consumer on a
specified date, and the supplier ss then not able to do so because of overbooking or overselling,
the supplier must refund the consumer any money paid, as well as all costs directly caused by
failure to prowde the service.

17.5.7 The right to fair, just and reasonable terms and conditions
‘The CPA provides that a supplicr may not include unfair, unreasonable or unjust terms in a consumer
contract (section 48). This includes supplying goods or scrviccs at a price that is unfair, unrcasonable or
unjust. A term will be unfair if it is cxeessively in favour of the supplice or is so adverse to the consumer.
The CPA provides a black list of terms. These are terms that are prohibited and, if they are included
in a contract, the term will be void {section $1). Examples of such terms arc where the cflect of the term
is to defeat the purposes of the CPA as well as terms that exclude the liability of the supplier for damage
caused to the consumer through the gross negligence of the supplicr.
The CPA also provides for a grey list of terms (regulation 44). Terms on the grey list are presumed
to be unfair, and therefore the supplicr will have to show that including such a term in a contract is fair.
Examples of such terms are terms that exclude the liability of the supplier for death or personal injury
caused by the supplier, terms restricting a consumer's right to rely on the defence of prescription, and
terms permitting the supplier, but not the consumer, to renew or not renew a contract.

Exemption provisions
The CPA contains very specific requirements for the use of cxcmption provisions (scction 49}.
Exemption provisions are terms ofa contract that aim ta exclude the liability of the supplier for damage
or loss caused to the consumer through the fault of the supplier. It is important to remember that
exemption provisions (or disclaimers) can be contained in a written contract, but they often appear
in notices, such as a notice at the entrance to a facility or premises. Exemption provisions are not
prohibited, but when they are used, the supplier must comply with certain requirements and non-
compliance will lead to the term being excluded from the contract. In other words, if the requirements
are not met, the exemption provision will not exclude the liability of the supplier.
The requirements are that:
@ the fact, nature and effect of the exemption provision must be drawn to the attention of the
consumer in a conspicuous manner
@ = it must be drawn to the attention of the consumer before the consumer enters the facility or is
required to pay (that is, before or at the conclusion of the contract)

246. Chapter 17| The ConsumerProtection Act

@ the consumer must be given an adequate opportunity to receive and understand the term Gross negligence s
@ the term must be in plain language. different to negligence

which refers to an attitude

In short, the supplier must have taken reasonable steps to bring the term te the attention or conduct
of carelessness
of the consumer. If the supplicr took reasonable steps to bring the term to the attention of —_-& Houghtessness,
the consumer and the consumer did not see or read the term, then the consumer may still ek me eee
be legally bound by the term, provided there has been compliance with the requirements of ne a, oe
the CPA in respect of terms excluding the liability of the consumer. legally required of her
If the exemption provision is applicable to a situation that cnvisages injury or death, in a particular situation.
involves risk of an unusual nature. of risk that the consumer cannot reasonably have known of, — Gress negligence refers
then the consumer, in addition to the requirements stated above, must sign next to the relevanr CONGUE that Involves
provision of act in a manner that shows that she acknowledges and accepts the risk. recmyaige poe
Asupplier is prohibiced from excluding liability for gross negligence on the part of the required (the standard of
supplier. Furthermore, it is presumed unfair for a supplicr to exclude liability for the death the reasonable person to
or personal injury ofa consumer of the service of a supplier. The effect of the CPA is to such an extent that it may
severely limit the use and application of exemption provisions. be described as extreme.

17.5.8 The right to fair value, good quality and safety

Part H of Chapter 2 of the CPA provides a number of very important rights entitling consumers to
quality service and safe and good quality goods. These are:
@ consumer's right to quality service
® consumer's right tw safe, good quality goods
@ consumer's right to return goods
®@ consumer's warranty on repaired goods
® liability of supply chain for damage caused by defective goods.

Consumer's right to quality service

Consumers are entitled to demand quality service from suppliers (section 54). Good quality service includes:
@ the timely performance and completion of the transaction as well as timely notice of any
unavoidable delays
@ = the performance of the services must be in a manner and of a quality that people are gencrally
entitled to expect
@ the use and installation of goods or parts thar are free of defects and ofa quality that people are
generally entitled to expect, when such parts are required for the performance of the service
® the return of property in at least the same condition as when it was handed to the supplier of the
service when necessary to effect the service.

If the supplier fails to supply the service at the required standard, the consumer can demand that the
supplicr remedy any defect in the service performed or goods supplied, or refund the consumer a
reasonable portion of the price paid for the service when considering the extent of the failure.

Consumer's right to safe, good quality goods

As far as goods are concerned, every consumer has a right to expect goods that are reasonably suited for the
purpose bought. The goods must be of good quality, in working order, and free of detects, and useable and
durable for a reasonable period of time (section 55). In a transaction for the supply of goods, there is an implicd
warranty that the goods comply with the standards mentioned (section 56). A warranty is an undertaking that
a certain state of affairs exists. A person who gives a warranty, in other words, who warrants that the statement
he has made is true and correct, intends to be legally bound by the statement. Thus, if the statement turns out
to be incorrect, the person who gave the warranty, will be legally liable. The fact that the CPA provides for an

Chapter 17 | The Consumer Protection Act 247

implied warranty means that the warranty forms part of the contract between the parties, even if they have
not specifically agreed on such a term. The warranty forms part of the contract because the law— the CPA-
provides that it must form part of the contract. The parties cannot exclude this term by agreement. It does
not matter whether the detect is latent or patent. This warranty does not y ifthe consumer was expressly
informed about a particular defect, and the consumer agreed to accept the goods in that condition.

Added value Voetstoots

In terms of the common law, the seller is liable to the buyer for latent defects in the object
sold to the buyer. This liability is often excluded by the seller by including a voetstootsor ‘as is’
clause in the agreement. The CPA now provides that goods sold must be free of defects. This
right cannot be excluded by agreement. The CPA therefore limits the use of voetstootsclauses
considerably. This does not mean that voetstootsclauses have become irrelevant. However,
the CPA does net apply to all transactions. The parties to a contract, to which the CPA does
not apply, can still include a voetstootsclause in the contract to protect the seller from liability
for latent defects. For example, the CPA does not apply to contracts between a supplier and a
consumer where the consumer is a juristic person with an asset value or annual turnover greater
than R2 million. Where this is the situation, the seller will be able to include a voetstootsclause
in the contract with the consumer. The CPA does not also apply to so-called private sales. In the
earlier case study about Peter’s scooter, Peter can include a voetstootsclause in his contract with
Becky because their transaction ts a prevate sale and therefore not subject to the prowsions of
the CPA.

Consumer's right to return goods

A consumer has the right to return goods to the supplier within six months after delivery The actio redhibitoria
without penalty and at the supplier's risk and expense ifthe goods do not comply with = a ~_—
the required standard, for example, the goods are defective (section 56). The consumer aerate
may then require the supplicr to either repair or replace the defective goods, or refund the contractat sale, anc
purchase price. The choice is that of the consumer's, If the goods are repaired, and they claim the repayment of
become defective again within three months, the consumer can demand that the goods be the purchase price where
replaced or the purchase price be refunded. the product bought is

Let us refer to the case example. materially defective.

Vousvoukis v Queen Ace CC t/a Ace Motors 2016 (3) SA 188 (ECG)

Principle
The right of a consumer under the CPA to cancel a contract and return a defective product
to the supplier must be exercised within six months, failing which the right will be lost
to the consumer (that is, the nght cannot be extended). After the six-month period, the
consumer can still rely on the common law aedilitian remedies for latent defects, including the
actio redhibitoria

Facts
Mr Vousvoukis bought a BMW X5 as a used car from ACE Motors for R470 000 on
13 September 2011. On 27 December 2011, the car broke down and the engine had to be
replaced. ACE Motors replaced the engine at their expense. In July 2012, some ten months after
purchasing the vehicle, the engine again became defective. Mr Vousvoukis then tendered return
of the vehicle and daimed a refund of the purchase price.

248 Chapter 17 | The Consumer Protection Act

 Vousvouwkis vy Queen Ace CC t/a Ace Motors 2016 (3) SA 188 (ECG) (continued)

The court's finding

The court held that the legslature, for whatever reason, had expressly prescnbed a limitaton penod of
six months for the return of any defective goods under the CPA. The provision prescribing the limitation
of six months is not ambiguous in any way. A court cannot extend this peniod. Extending the penod wll
provide consumers with more rights than those specifically given to them in terms of the CPA.

Consumer's warranty on repaired goods

Any new or reconditioned part that is installed during any repair or maintenance work is
guaranteed for a three-month period in terms of the CPA, or a longer period as the supplicr Aelopl gael a
may specify in writing. eho directly or indirectly
tues . contribute to the ultimate
Liability of supply chain for damage caused by defective goods supplyof the goods to a
In an important provision, the CPA introduces strict liability in respect of the whole supply consumer, and includes
chain for any harm caused to a consumer resulting from the use of an unsafe or defective the producer, importer.
product, or because of a lack of adequate instructions or warnings concerning the use of the — tributor and retailer of
goods (section 61). The supply chain is jointly and severally liable for the damage. the gone.

Added value Joint and several liability

A consumer who is harmed by a defective product distributed through the supply chain can
hold any one party in the supply chain liable for all her damage or loss, or she can hold all
of the parties together in the supply chain liable for her damage. This means, for example,
that the consumer can sue the shop (the retailer) where she bought the product, or she can
choose rather to sue the producer of the product. Both the retailer and the manutacturer are
responsible separately for all the damage that the consumer suffered. Therefore, the retailer
and the producer are individually, or severally, liable for payment of the damages of the
consumer. However, the consumer can choose to sue them both. They will then both be liable to
compensate her damages. If the producer pays the whole amount, the retailer does not have to
pay, but if the producer pays 50% of the damages, then the retailer will be responsible for the
payment of the other 50%. Therefore, it is said they are jointly responsible for the damages.
Any person or business in the chain of supply (for example, a manufacturer, wholesaler or
retailer) can be held liable for damages caused by an unsafe product to the user of the product
without it being necessary to show that the supplier (person in the supply chain) was negligent.
A person in the supply chain may escape liability if it is unreasonable to expect the person
te have discovered the defect considering her role in the marketing and supply process, if the
detect is the result of complying with a public regulation, or the claim has prescnbed_

Added value Prescription

If a person has a claim against another person, the claim can become extinguished if the person wath
the claim does not pursue it within 2 stipulated penod of tme. Where a person has suffered harm or
damage as a result of the conductof another, such as if the consumer sutfers damage resulting from
the use of a defective good, the consumer must institute a daim within three years of the damage
occurring. Three years is the period of prescnption for an ordinary contractual debt. If the consumer
does not institute the daim within three years, the claim is said to have prescnbed. A court may
apportion liability among persons who are found to be jomtly and severally table for the damage.

Chapter 17 | The Consumer Protection Act 249

17.5.9 The supplier's accountability to consumers
A supplicr often will have possession of the property of a consumer. This could be for a number of
reasons, including where the supplier is to perform certain work on the consumer's property. This can
place the consumer in a vulnerable position. Sections 62-67 of the CPA provide consumers with some
protection in these situations, The rights provided for in these sections deal with:
@ lay-bye agreements
prepaid certificates and vouchers
prepaid services and access to facilities
possession of moncy or property of a consumer
deposits on container
return of replaced parts,

Lay-bye agreements
Alay-bye agreement is an agreement in terms of which the supplier agrees to sell goods to a consumer,
who will pay the price in instalments to the supplicr while the supplicr retains possession of the goods
until payment in full has been madc. The goeds remain at the risk of the supplicr until the goods have
been delivered to the consumer, while the moncy (instalments) paid to the supplicr remain the property
of the consumer until delivery (scction 62).
Ifa supplier cannot deliver the specific goods contracted for when the dull price has been paid,
the supplier must provide the consumer with similar goods or repay the mancy of the consumer plus
interest, provided that the inability to provide the goods is not the fault of the supplier. The choice is
that of the consumer's. If the supplier is at fault, the consumer can choose to accept similar goods as
replacement or an amount double that which the consumer has paid to the supplier
Ifthe consumer cancels the agreement before fully paying for the goods, the supplier must refund
the consumer the moncy already paid by the consumer. The supplict may deduct a maximum of 1% of
the full purchase price of the goods as a cancellation penalty. A cancellation penalty may not be charged
unless the supplier had informed the consumer before concluding the lay-byc agreement that such a
cancellation penalty may be imposed if the contract is cancelled. No cancellation penalty may be charged
if the cancellation is due to the death or hospitalisation of the consumer.

Prepaid certificates and vouchers

Prepaid certificates ane vouchers do not expire until the earlier date of their full value being redeemed
for goods or services, or a period of three years from the date of issue (section 63). This provision
deals with the situation where a person has paid money in exchange for receiving the voucher. An
cxample would be a R200 gift voucher that you buy from a shop or beauty salon to give wo a friend for
her birthday.

Prepaid services and access to facilities

Where a consumer has prepaid a sum of money in order to receive a specified service or to gain access
to a facility such as a gym, the amount that has been paid remains the property of the consumer, and
the supplicr may make a pro rata charge in advance against the amount to pay for the next month's
membership or service (section 64). If the supplier intends closing the facility in respect of which the
supplicr has committed to provide a service or access, the supplies must provide an alternative facility
which is reasonably accessible. If this is not possible, the supplier must inform the consumer in writing
of the intended closure at least 40 business days before the closure, and refund the consumer the pro rata
amount of money still belonging to the consumer not later than five business days after the closure.

250 Chapter 17 | The ConsumerProtection Act

 Lett Maalhy The squash club

Benni joined a squash club. The agreement between Benni and the club was that he had to
pay R4 800 upon joining, and that he would then have access to the club’s facilities for a
period af one year. Six months later, the club notified Benni of its relocation to another venue,
far from where Benni lives. It was not a reasonable option for Benni ta make use of the club's
facilities at the new venue. The club gave Benni the required notice of 40 business days.
The club is now obliged to repay Benni a pro rata share of the money belonging to Benni -
an amount of R1 600.
How is this calculated? Benni originally paid R4 800 for the year, which means Benni was
paying R400 per month to use the facilities of the club. Benni used the club for six months
before he was given notice — that is, he had to pay an amount of R2 400 for six months.
The club then gave notice of 40 business days, which in effect was a further two months
during which Benn) had access to the club — representing an amount of R800, What remains
is a period of some four months, which equates to R1 600 — a pro rata portion of the total
amount paid.

Possession of money or property of a consumer

Where a supplier has possession of money or the property ofa consumer, the supplier may not treat thar
money or property as the supplier's property (section 65). In fact, the supplier must care for the property
in a manner that could reasonably be expected of someone managing the property of another. The
supplier will be liable to the consumer for any loss or damage caused to such property where the supplier
is in breach of this duty of care.

Activity 17.13
Rajesh is a student at your university. During June, Rajesh has to write his Commercial Law
examination in the Sports Arena. It is a huge venue accommodating about 800 students at one
time. Upon entering the venue, Rajesh Is instructed by the chief invigilator to place his briefcase
at the front of the venue with all the other bags of the other students. Rajesh’s briefcase is
made from expensive leather and it contains his expensme smartphone and laptop. Once Rajesh
has completed the examination, he wishes to collect his briefcase and exit the venue. Rajesh
discovers that an unidentified student had taken his briefcase. Do you think the university is
hable for Rajesh's loss? Motivate your ew

Deposits on containers
Where the Minister of Trade and Industry has determined deposits to be paid in respect of containers
or other items, the supplier must require a consumer to pay the prescribed deposit (section 66). ‘The
supplicr must return the prescribed deposit to the consumer on return of the specific item. Examples
include certain types of glass bottle used for the sale of beer or soft drinks, and liquefied petroleum
gas cylinders.

Return of replaced parts

When a supplier has been authorised to perform any service
must return any parts to the consumer that were required to
the service. The parts must be returned to the consumer in a
if a mechanical workshop performs a service on your vehicle
replaced must be returned to you.
to the property of a consumer, the supplier
be removed and replaced when carrying out
reasonably clean container. This means thar
and makes some repairs, the parts that were

Chapter 17 | The Consumer Protection Act 251

 17.5.10 Business names
The CPA contains important provisions concerning business names in Part A of Chapter 4 of the
Act (sections 79-81), but note that this part of the CPA has not yct come into cHect. A supplicr
may not conduct business undera name, unless it is her own name as it shows in her identity document or
the name registered in terms of legislation if the person is a juristic person. The CPA also requires that a
person conducting business under a business name, which is different from the person's name, must register
that name. For example, if John Smith is conducting a business as Premium Auto Sales, then the name
‘Premium Auto Sales’ must be registered in terms of the Act. Often, companies will also trade under a
different name from that of the registered name of the company. The CPA requires that the trading name
be registered. For example, ABC (Pry) Led trading as Crown Hardware Suppliers must also register the
name that it is trading under. This enables the consumer to know who to litigate against, if necessary.
‘The following information must be included on any catalogue, business letter, sales record or
statement of account:
@ =the name, title or description under which the business is carried on
® astatement of the primary place from which business is carricd on
® = if a business name is being used, the name of the person to whom the business is registered.

If someone docs business under a name that is not the person's full name or a business name registered
to that person, the National Consumer Commission (NCC) can issuc a notice forcing the supplicr
to comply with this requirement. The NCC is the main body responsible for the achievement
of the purpases of the CPA (section 85). The CPA cmpowers the NCC to perform a number of
functions, including:
facilitating the establishment of industry codes
® developing codes of practice (such as for the use of plain language)
= promoting legislative reform
® advising the Minister on consumer protection matters.

The NCC is also responsible for the enforcement of the CPA. The NCC can receive and investigate
consumer complaints. Where the NCC has found thar a supplier is involved in prohibited conduct. the
NCC may issuc a compliance notice that is an instruction to the supplicr to correct her actions. The
NCC can refer a matter to the National Consumer Tribunal (NCT) where the supplier fails to comply
with a compliance notice. The NCT may then impose an administrative fine of R1 million or 10% of
the supplier's annual turnover, whichever is greater.
The NCC, or the parties, may refer a complaint to the NCT for adjudication. The NCT, therefore,
acts as a court, and any decision, judgment or order of the NCT has the same binding power as that
of an order of the High Court. Its decisions are binding on the NCC, provincial consumer regulatory
authorities, consumer courts, ADR agents amd Magistrates’ Courts,
[fa supplier is doing business under someone else's name or business name, that person can apply to
court for an order preventing the supplicr from doing so.
Asupplicr may apply to register or change the name of his business. The business name may also be
registered or translated into any of the official languages. A business name may be transferred to another
person on application.
A business name may consist of words in any language, together with any letter, number or
punctuation mark. It can also include symbols such as +, &, #, @, Yo and =. A business name may not
be the same as, or confusingly similar to, the name of a registered company, a registered trade mark
belonging to another person, or a mark protected as a national symbol, such as the South African flag.
A supplicr may also not falscly imply that the business is:
® associated with another person or business
@ an organ of state ar a court
@ supported by an organ of state or a court

252 Chapter 17] The ConsumerProtection Act

 ® owned or managed by someone with a particular educational qualification The Constitution of te
@ owned of associated with a forcign state. Republic of South Africa,
1996, describes hate
A supplicr may also not use any words or expressions which amount to hate speech. speech as the advocacy
Non-compliance with any of these requirements could result in the NCC ordering that of hatred that is based
the business name no longer be used. on yace, ethnicity, gender
or religion, and that
17.6 Enforcement of consumer rights constitutes incitement to
The CPA aims to establish a legal framework for the achievement ofa consumer market haem (section 16(2%c})-
that is fair, to promote fair business practices, to provide an efficient system of consensual
resolution of disputes and to provide an accessible and cftective system of redress for consumers.
The CPA provides a number of mechanisms to help facilitate these aims.
Who is entitled to approach a competent body to have consumer rights enforced? The following
persons may do so (section 4)
® a person acting on her own behalf
an authorised person acting on behalf of another person who cannot act for herself
a person acting as member of, of in the interests of, a group or class of affected persons
a person acting in the public interest
an association acting in the interests of its members

The CPA encourages suppliers in industries to regulate their own affairs. If industries take responsibility
to address consumer issucs effectively, it is unnecessary for outside bodies, such as the courts, to enforce the
law within that industry. Such a situation is to the benefit of everyone. Therefore, the CPA provides for
the accreditation of industry codes (section $2). An industry code is a code that regulates the interaction
between persons conducting business in a specific industry, including business conducted between the
supplices and consumers of that industry. The code will then preseribe a procedure for
. An ombud is a person
resolving disputes between consumers and suppliers. An industry code will usually provide
7 f s : ; who investigates
for an ombud for that industry to address consumer complaints. Some industry codes have complaints
and mediates
been accredited in terms of the CPA, such as the Consumer Goods and Services Ombud fair settlements between
(CGSO) and the Motor Industries Ombud of South Africa (MIOSA). the parties 10 4 dispute,
Legislation provides for the establishment and functioning of an ombud with jurisdiction
for some industries, such as the ombud for banks. Parties to a consumer-related dispute may make use of
bodics that provide conciliation, mediation and arbitration services, especially in industrics where there is
no accredited ombud or an ombud with jurisdiction. A provincial consumer court, if such a court exists in
a province, may act as an altcrnative dispute resolution (ADR) agent to resolve a consumer-rclated dispute.
Aconsumer can also file a complaint with the NCC, as explained in the previous section.
‘The ordinary courts may be approached but only if all other remedies available in terms of national
legislature have been tried.

Chapter summary

In this chapter. you learned the following about the CPA:
The CPA aims to promote and advance the social
and economic welfare of consumers in South Aftica by
establishing a legal framework for achieving a consumer
market thar is fair, accessible, etticient, sustainable and
responsible.
The Act seeks to achieve this purpose by providing
consumers with extensive consumer rights and an
effective system for enforcing these rights. The CPA
is not a complete codification of consumer protection
in South Africa, but it does provide consumers with
a comprehensive set of consumer rights. and it forms

Chapter 17| Chapter summary 253

part of a larger legislative framework providing
consumer protection.
The CPA must be interpreted in a purposive
manner, This means that the ultimate aim of the Act
must be considered when interpreting and applying
the Act.
[tis important te determine whether the CPA
actually applies in a particular situation, as the Act docs
not apply to all transactions.
The CPA provides consumers with nine general
consumer rights, each of which may in turn contain
more than one specific right.
@ the first is the right to equality in the consumer
market. Suppliers may not unfairly discriminate
against consumers on any of the prohibited
grounds of discrimination when promoting or
supplying goods or services to such consumers.
These grounds include race, gender, scx, pregnancy,
marital status, cthnic or social origin, colour,
sexual oricntation, age, disability, religion.
conscience, belief, culvure, language and birth.
Excluding consumers from accessing goods
or services offered by the supplier on any of
the mentioned grounds will constitute unfair
discrimination.
@ ‘The second consumer right protects the privacy of
consumers by limiting the usc of direct marketing
by supplicrs.
@ The third provides the consumer with the right to
choose. This right regulates the bundling of goods.
It allows consumers to cancel fixed-term contracts,
as well as any advance reservations, bookings
or orders. This right also contains important
provisions regarding delivery of goods, and it
regulates the position regarding unsolicited goods.
® ‘The fourth consumer right provides for the right
to receive relevant information. This includes the
right of the consumer to receive all documents
and notices to which the consumer is entitled,
in plain and understandable language. The right
also regulates the display of prices, and entides
consumers to be informed when goods are
reconditioned or grey-market goods.
@ The filth right provides the consumer with a right
to fair and responsible marketing. This entails a
general right to marketing that is not misleading
254 Chapter 17 | Chapter summary
or deceptive. Specific marketing practices are
regulated as well, including a complete prohibition
of negative option marketing. Promotional
competitions, loyalty programmes and bait
marketing are other specific marketing practices
regulated by the CPA.
® The sixth consumer right provides a right wo
fair and honest dealing. This right protects the
consumer against any form of unconscionable
conduct on the part of the supplier at any time
during the marketing or supply process.
@ The seventh consumes right provides the consumer
with a right to fair, just and reasonable terms and
conditions. The CPA provides that a supplier
may not include unfair, unreasonable or unjust
terms in a consumer contract. This includes
supplying goods or services at a price that is unfair,
unreasonable or unjust. A term will bc unfair if it is
excessively in favour of the supplicr or so adverse to
the consumer so as to be inequitable.
@ ‘The cighth right provides the consumer with a
right to fair value, good quality and safety. This
right makes any person in the supply chain strictly
liable for harm caused by the use of a defective
product. The right also entitles a consumer to
return a defective product and claim a refund,
repair or replacement within six months of buying
the product.
® The ninth consumer right provides the consumer
with a right that the supplicr is accountable to
consumers for goods of the consumer in the care
or possession of the supplicr. In terms of a lay-bye
agreement, the supplier carries the risk in the goods
forming the subject of the lay-bye agreement until
the delivery to the consumer.
The CPA provides that consumer rights cam be
enforced by different bodies, Emphasis is placed
on self-regulation within industries through the
encouragement of the use of accredited industry codes.
The main bedy responsible for the implementation and
enforcement of the CPA is the NCC. The NCC may
issuc compliance orders to supplicrs in order to bring
about compliance with the CPA. Failure to comply with
such a notice may lead to a substantial fine imposed by
the NCT-
Review your understanding
Name three statutes that provide for consumer
protection measures, other than the CPA.
Explain in your own words what the main purpose
of the CPA is. Indicate four ways in which the
CPA secks wo achieve this purpose.
Busi buys a pair of jeans on account from Chique
Stores {Pry} Lid. When she receives her account
statement, she notices that there is a charge for
credit insurance and a charge for membership of
the Chique Club. Does the CPA apply to these
aspects? After Busi washed her jeans for the first
time, she noticed that the seams of the jeans were
coming apart. Can Busi rely on the CPA to help
her with this problem?
City Paints CC, a business that sells paint and
related goods to the public, buys a large quantity
of paint from its supplicr, Paint Warchouse (Pty)
Ltd. City Paints CC discovers that the paint they
bought is defective. Can City Paints CC rely on
the CPA for help? Explain.
Thandi takes her two-year-old son with her when
she goes shopping. She goes into a shop where
glassware is displayed on shelves. There is a notice
in the shop warning consumers that if they break
any of the goods on display. they are liable to pay
for such breakages. Thandi places her son on the
floor unattended while she looks at the beautiful
glassware. Her son crawls around and then pulls
some glassware from a shelf, causing it to break.
The shep wants Thandi to pay for the goods, but
she refuses, claiming thar the CPA provides that
she does not have to pay. Explain who you think
is correct and why.
Kate makes a booking at the Mount Pleasant
Hotel for a 10-day holiday, She is required to pay a
deposit of 50% of the total amount payable for the
stay. Two weeks before the holiday is abour to starr,
she cancels the booking as she now has to attend to
an urgent work meeting. She asks thar her deposit
be refunded. The hotel advises that the deposit
cannot be refunded as it is imposing a cancellation
charge equal to the deposit. Discuss Kate's legal
position under the CPA.
7. Sykes enters into an agreement with Thando’s Pawn
Shop and buys a flat-screen tclevision. Sykes will
pay off the television in instalments over six months,
and the television will remain with Thando until the
full price is paid. When Sykes comes to pay the final
instalment, he is informed that Thande has sold the
television on the previous day, Thande offers Sykes a
standard television as an alternative. What remedics
does Sykes have in terms of the CPA?
3. Sam wants to buy shampoo, Normally, the
shampoo would cost approximately R80 per bottle.
The shop only has the shampoo as part ofa saving’s
deal, where a consumer must buy the shampoo
together with a bottle of hair conditioner for R120
{the shampoo cannot be bought separately). The
conditioner would normally cost approximately
R80. Sam docs not want the conditioner as she still
has a lot of conditionce at home. Can the shop do
this under the CPA?
5: The local pizza restaurant charges people aged 60
or above only 50% of the normal menu prices.
Atul, a student at the university, loves pizza. He
thinks that this pensioner's discount is unfair
discrimination. Atul complains to the manager.
What advice, from the position of the CPA, can
you give the manager?
10. Bambanani buys a gift youcher from Salon
Massage and Beauty im July, and she gives the
voucher to her friend, Kathy, as a birthday present.
When Kathy makes an appointment in December,
the salon informs her that she cannot use the
voucher as it was valid only for three months.
Advise Kathy from the position of the CPA.
Ll . When and where maya supplier not contact a
consumer at all for purposes of direct marketing?
12. What obligations must a consumer comply with in
order to exercise his right to coaling-off
in terms of
the CPA?
Under the CPA, a supplier has certain dutics in
respect of a consumer when a hxed-term contract
nears the end of its term. What are these dutics?
. Explain the concept of bundling and indicate when it
would be allowed in terms of the position of the CPA?
Chapter 17| Review your understamding 255
15. Give three examples of unsolicited goods.
16. Whar is bait marketing? Does the CPA prohibit
this marketing strategy? Motivate your answer.
. What are grey-market goods? What does the CPA
require ofa supplier in respect of grey-market goods?
18. You have been appointed manager of a lodge,
which provides tourist accommodation. All guests
are required to sign a document containing the
terms of the contract between the lodge and the
guest. One of the last terms of the contract is a
clause that reads as follows:
“The guest hercby cxchudes the legal liability of
the lodge and/or its owners and/or any person in
the employ of the lodge from any liability for any
damage caused in any way whatsoever.’
Further reading
De Stadler, E. 2015. Costner Loew Uivdackad. Cape Towre Siber Ink.
Naude, To and Eiselen, 5, 2014. Cormomensary on the Coninmer
Protection Act, Cape Lown: Juta and Co. (Pry) Ld
256 Chapter 17| Further reading
Besides the normal activities offered by the lodge.
it also offers guests the opportunity to participate
in rock-climbing, quad-biking and game drives.
Consider whether this term complies with the
requirements of the CPA and indicate how
the lodge may improve compliance with the
requirements of the CPA, if ar all.
19, Who may approach an appropriate body to enforce
a right of a consumer in terms of the CPA?
20, Explain what a compliance notice is.
21. What body may issuc a compliance notice in terms
of the CPA?
Provide a bricf description of an industry code and
give an cxample of such a code?
Van Eeden. E. and Barnard, J. 2017. Conswmer Protection Larne: in
South Africas, Ind eda. Durban: LexisNexis South Africa
 eyo Cy

The law of agency

Es:
The main ideas
Whar is agency?
The requirements of agency
Sources of authorisation
Duties of the principal
Duties of the agent
Acting without authority
Disclosing authority
Ending authority

The main skills

@ Define agency.
Distinguish between agency and mandate.
Explain the requirements for agency.
Discuss sources of authorisation.
Explain the requirements forostensible authority.
Discuss the duties of the principal.
Discuss the duties of the agent.
Explain the doctrine of the undisclosed principal.
Discuss termination of authority.
Apply the legal principles of agency to practical situations.
Problem solving,

This chapter is about agency. If you want to conclude a contract. you do not have to do
so personally. You may authorise somebody else, an agent, to do it for you. We will look If you do something on
at how agency comes about, the dutics of the parties involved and consider the position if behalf of someone, you
certain requirements for agency are absent. Finally, we will examine how agency ends. do it for the person so ihat
he does not need te do
Before you start it hirmsetf_

Suppose, for example, that you have agreed with your neighbour that you will look after
his house while he is travelling everscas. Your neighbour also authoriscs you to make all the The principal, generally
necessary arrangements for the leasing of the property. The contract, in terms of which the speaking, refers to the
current tenant is renting the house, terminates at the end of the month. The temant wants most important person

to extend the contract for another year, You enter into a mew contract with the tenant on in an organization. An
example is the prndpal
behalf of your neighbour. Yourncighbour has authorised you to act on his behalf as his of a school, However, a
agent. The contract concluded between you, as agent of your neighbour, and the tenant is principle refers to a rule,
legally binding. a standard or a belief that
governs the way someone
18.1 What is agency? behaves. For example, it
Agency eccurs when one person, the agent. performs a juristic act for another person, is a principle of matural
the principal. A juristic act occurs between the principal and a third party. The agent, justice that both parties to
a dispute must be heard
who concludes the contract with the third party, does so on the principal's behalf.

Chapter 18 | The law of agency 257

In our example about Icasing the house, you would be the agent for your neighbour (the principal).
You would act on behalf of your neighbour and conclude the contract with the tenant (the third party),
but the contract will be between your neighbour (the principal) and the third party.
When you deal with an agency, there are always at least three parties involved, namely:
@ the principal
@ the agent
® a third party.

There is a relationship between the principal and the agent, which is regulated in terms of a contract
berween the principal and the agent. The agent is authorised in terms of this contract, to perform a
juristic act on behalf of the principal. The agent may be authorised, for example, to conclude a contract
of lease with a third party on behalf
of the principal. All the rights and duties acquired by the agent
in terms of this contract of lease with the thied party are for the principal. ‘The cantract of lease exists
between the principal and the third party.
While an agent is often appointed for purposes of convenience or practical necessity (for example,
if the principal is out of town), this kind of representation is sometimes essential. For example, a minor
under the age of seven cannot act alone in law. For such a minor to become party to a contract, the
minor's guardian has to conclude the contract on behalf of the minor. Similarly, a legal entity such as a
company or a close corporation cannot conclude a contract without an agent. For example, a company
can conclude a contract to buy property. but it needs a natural person to represent it in the conclusion of
the contract. The contract to buy the property comes into existence between the company and the third
party (the seller of the property). The person who concludes the contract (the agent) merely does so on
behalf of the company (the principal), which cannot act by itself.
Even though the agent performs the juristic act, the legal relationship that is created, changed or
ended is between the principal and the third party. Any legal rights and duties that result from this
juristic act operate between the principal and the third party.

18.2 Difference between agency and mandate

We need to distinguish between agency and mandate. A contract of mandate is an agreement where one
party, the mandatory, agrees to perform a task for another party, the mandator, A mandatory differs from
an agent. While an agent has to perform a juristic act, such as concludinga contract, on behalf of the
principal, a mandatory has to carry out a particular task. This task does not have to be a juristic act. If
you instruct an estate agent to find a buyer for your house, the estate agent is a mandatory and not an
agent. The term ‘estate agent’ can be misleading and an estate agent is often misunderstood to be an agent
instead ofa mandatory. The task of the mandatory in this case is to simply find a buyer and bring the
buyer to you. The estate agent does not have the task, or authority, to actually sell the house on behalf of
the seller (mandator). ‘The estate agent's task is limited to finding a buyer who is prepared to enter into a
contract of purchase and sale with the seller (the mandator), If you thereafter authorise the estate agent
to conclude a contract of sale — perform a juristic act — on your behalf with the buyer, then the estate
agent acts as an agent in concluding the contract. Then, in this instance, you will be the principal.
The contract of mandate can be structured in such a way that it includes agency. For instance, if the
task given to the estate agent was to find a buyer and conclude a contract of sale with that buyer, the
mandate would include agency. So there can be an overlap between the two concepts.

18.3 Who can be an agent?

A person who docs not have the necessary capacity to perform juristic acts for herself cannot act as the
agent for another person. Thus, an insane person or a minor below the age of seven years cannot act as
agent for another person. However,a person with limited capacity to conclude juristic acts can act as the
agent of another person, as the agent binds not herself but the other person (the principal). A minor person
over the age of seven years of age or an insolvent person may therefore act as the agent of another person.

258 Chapter 18 | The law of agency

18.4 Who can be a principal?
Any person who has the necessary capacity to perform a particular juristic act or acts, can authorise
another person (an agent) to perform such an act on her behalf (the principal). However, in a number of
instances, the law authorises a person to act as an agent on behalf of another person where that person
has no or limited capacity to perform juristic acts. An example is where the guardian of a minor is
authorised by law to act on behalf of the minor.

18.5 Requirements for agency

There are three requirements for valid agency:
1. The principal must exist.
2. The agent must have authority to do what she docs on behalf of the principal.
3. “The agent must make the third party aware that she is acting on behalf
of the principal and not in a
personal capacity.

18.5.1 The principal must exist

It is a general rule that a person cannot act as an agent on behalf of a principal who does not exist.
However, in the world of business. there are some important exceptions to this rule. One such exception
is contained in section 2! of the Companies Act 71 of 2008 (Companics Act). In terms of this section
a person may act as an agent for an entity that isto be incorporated in terms of the Companies Act, but
does not yet exist at the time. The Board of Directors (BoD) of the company can ratify
the actions of the agent, such as concluded contracts. If the actions are not ratified by the Incomporationis the
BoD within three months after incorporation, the actions will be considered to have been ssn ee which a
ratified. Contracts concluded on behalf of a company that is not yet incorporated are aie rae. =
referred to as pre-incorporation contracts.
Section $3 of the Close Corporations Act 84 of 1988 (Close Corporations Act) contains
a similar provision in respect of close corporations. The section provides that any written contract
entered into by someone professing to act a5 an agent on behalf of a corporation not yet formed can
be ratified after incorporation by the corporation. The contract will be valid between the corporation and
the third party as if the corporation was duly incorporated at the time the contract was included.

18.5.2 The agent must have authority to act on behalf of the principal
For the agent to be able to conclude juristic acts on behalf of a principal. the agent must have been
authorised by the principal to act on behalf of the principal. The authority may be given expressly
or impliedly. Where the agent does not have authority to act on behalf of the principal, agency may
still arise through the ratification of the act by the principal or where it is found that the agent had
ostensible authority. We discuss ratification and ostensible authority below.

18.5.3 The agent must make the third party aware that she is acting on
behalf of the principal, and not in a personal capacity
For the principal to be bound by the actions of the agent, the agent has to disclose that she is acting on
behalf ofa principal. But an agent does not have to reveal the identity of the principal. The principal is
then known as an unidentified principal. In this case, the third party knows that the agent is acting on
behalf ofa principal, bur the principal remains anonymous, The agent informs the third party thar the
agent is acting on behalf of a principal, but that the principal wants to remain anonymous. ‘The third
party is therefore aware that there is an anonymous principal, and the third party can decide whether
to contract on thar basis or nor. It is clear that, in this case, the agent cannot incur personal liability as
that was not the intention of cither of the partics.

Chapter 18 | The law of agency 259

 A person may contract for herself or her nominee. She acts in her own name but reserves the right to
transfer all her rights and delegate all her obligations acquired in terms of the contract to another person
to be named by her. For example, Taki may word an offer to rent property in the following terms:

|, Taki Roma, or my nominee, offer to rent Serena King’s flat from her for RS 000 per month for a
period of two years.

Activity 18.1

Can you think of a reason why a person may wish to contract for herself or a nominee?

The situation of the unidentified principal must be distinguished from the doctrine of the undisclosed
principal. An agent and a principal can agree that the agent can perform a juristic act on behalf of a
principal without disclosing the fact that the agent is representing a principal. The agreement between
the agent and the principal will provide that the principal can elect to take the place of the agent and
be bound to the contract with the third party. If the principal decides to take the place of the agent,
the third party has a choice to whom he wants to be bound — the principal or the agent. If the third
party elects to be bound to the agent, then there is actually no agency involved. The contract then exists
between the ‘agent’ and the third party. The ‘agent’ can enforce the contract, not the principal.
For the doctrine of the undisclosed principal to apply, three conditions must be met. These are:
@ = The agent must have authority.
™ = The agent must intend to conclude the contract on behalf of the principal.
m ‘The agent must not disclose to the third party that he is acting only as an agent.

‘The doctrine of the undisclosed principal has certain exceptions. The doctrine will not apply:
m if there is more than one undisclosed principal
@ if the contract excludes the doctrine
@ if the circumstances will not allow the doctrine to apply, for example, if the agent has specific skills
which the principal does not have.

Activity 18.2
In a small group, think of a reason why a principal would want to remain unidentified, or
anonymous? Also discuss reasons why a principal would want to be an undisclosed principal.

There is no specific prescribed manner by which the agent must inform the third party that she is acting
as an agent and not in her personal capacity. But it is common for an agent to use words or abbreviations
such as ‘for’, ‘on behalf of , ‘pp’ or ‘qq’ to indicate to the third party that the agent is acting on behalf of
a principal.

Added value Signing ‘pp’ or ‘qq’

The letters ‘pp’ are an abbreviation for the Latin words per procurationem, which mean ‘through
the agency of’. The letters ‘qq’ are an abbreviation for the Latin words qualitate qua, which mean
‘in the capacity of,

260 Chapter 18 | The law of agency

18.5.4 The agent must have the necessary capacity to conclude juristic acts
A person who acts as an agent for a principal must have sufficient understanding to appreciate what she
is doing. A person who has no capacity to conclude juristic acts cannot act as an agent for a principal.
Therefore, an insane person, a drunk person or an infant cannot conclude a valid juristic act on behalf
of another person. But, as the agent does not bind herself, she can act on behalf of a principal, even
though she has limited contractual capacity. For example, a person who is insolvent may act as an agent
for a principal, as it is not the agent's estate that is affected by concluding the juristic act, but that of
the principal. Similarly, a minor with limited contractual capacity can act as agent for a principal.

Case study Busi is buying a car

Busi lives in East London. She wants to buy a car that she found advertised on the internet, but it
is in Tswane. So she asks her 16-year-old friend, Stephen, who lives in Tswane, to inspect the car
at WeCars (Pty) Ltd, a car dealership in Tswane. She authorises Stephen to buy the car for her
if he can negotiate a price below R150 000. Stephen negotiates a contract on behalf of Busi
to buy the car for R135 000. Identify the principal, the agent and the third party. Can Stephen
act as agent for Busi? If Busi had asked Stephen to simply inspect the car, take photos of it and
report his findings to her, explain whether it would be correct to refer to Stephen as an agent?

18.6 Different ways the agent can be authorised to act

For an agent to perform a juristic act on behalf of the principal, the agent must have the authority to do
so. In this context, authority is the power to perform a juristic act on behalf of another. An agent can
obtain this power by:
® being authorised to act as an agent
® other legal sources of authority, such as the:
m Children’s Act
= Close Corporations Act
= Companies Act
= another authorised agent delegating authority to the agent.

18.6.1 Appointing an agent through authorisation

Authorisation is an act by which one person gives another person the power to act on her behalf. For
agency to come into existence, the principal asks another person to perform a certain juristic act or acts
for the principal. If the other person accepts the request (offer), a contractual relationship comes into
existence between the parties. There is consensus between the parties, and the authority of the agent to
act for the principal flows from this contractual relationship. The parties, both principal and agent, must
have the necessary contractual capacity to enter into this contractual relationship.
The principal can authorise the agent expressly. This can happen verbally or in writing. An agent can
be authorised verbally, but it is advisable for the authorisation to be in writing as it is much easier to
prove what was agreed between the parties in the event of a dispute.
Where the power or authority to represent another is given in writing, it is called a power of attorney.
A power of attorney can be a general power of attorney or it can be a special power of attorney. A general
power of attorney authorises the agent to act for the principal in respect of any matter concerning the
principal. For example, a parent who is disabled may appoint her son as an agent with a general power of
attorney to handle the affairs of the parent. A special power of attorney provides the agent with limited
authority to represent the principal in a specific matter.

Chapter 18 | The law of agency 261

 Added value Power of attorney

In certain instances the law prescribes that the agent must be expressly authorised by way of a
power of attorney. These instances are:
e when buying or selling immovable property (section 2(1) of the Alienation of Land Act 68 of 1981)
e¢ when a conveyancer transfers ownership of land from one party to another
e when a conveyancer registers a bond over immovable property
¢ when a legal practitioner lodges or opposes an appeal in the High Court on behalf of her
client (the principal).

Authorisation can also be given tacitly, or silently. In such a case, the principal does not expressly
authorise the agent, but the circumstances of the situation are such that the only reasonable conclusion
is that the principal authorised the agent to act for the principal. The conduct of the principal will bea
very important factor in determining whether the agent received tacit authority.

Activity 18.3
As stated above, the conduct of a principal can be an important factor in establishing whether
an agent received tacit authorisation to bind the principal. Give examples of conduct that may
show that the principal gave the agent tacit authorisation.

18.6.2 Other sources of authority

Authority may come about automatically by operation of the law. A good example is the common law
rule that provides that every partner in a partnership has the power to bind the partnership (including the
partner acting as an agent) to contracts falling within the normal course of business of the partnership.
In a number of instances the law grants certain people the power to act as an agent on behalf of
another or regulates the relations between the principal, agent and third parties. Let us consider three
relevant statutes.

Children’s Act
Section 18 of the Children’s Act 38 of 2005 provides that a guardian has the authority in law to act on
behalf of a minor. The section provides that the guardian must administer and safeguard the minor's
property and property interest, and assist or represent the minor in administrative, contractual and other
legal matters. So, if you are still a minor, your parents do not need your permission to act on your behalf.
As your guardians, they may do so automatically and their authority does not come from you, but from
the law, namely, the Children’s Act.

The Close Corporations Act

A close corporation is a juristic person that has to act through a natural person. The natural person
is then the agent of the close corporation. Section 54 of the Close Corporations Act gives authority
to any member of a corporation to act as an agent of the corporation (principal) for purposes of the
corporation's business, when dealing with a person who is nota member. It is the law (section 54 of the
Close Corporations Act) that empowers members of a corporation to act as an agent for the corporation
and not the corporation, or principal, that authorises the member to act as an agent.

The Companies Act

Like a close corporation, a company is a juristic person and can only act through a natural person.
A company’s Board of Directors (BoD) has the duty to manage a company. In practice, the BoD
will delegate authority to directors or officers of the company to act as agents for the company.

262 Chapter 18 | The law of agency

Whether a company is bound to the actions performed by such directors or officers depends on the
law of agency. For a company to be bound, two requirements must be present:
m= =the company must have the necessary legal capacity to perform the action
® the director or officer representing the company must have the necessary authority to perform
the action.

A company generally has the same capacity as a natural person, except for those things
: : Memorandum
that a company by its nature cannot do, such as conclude a contract of marriage. The Es an Oke
Memorandum of Incorporation (MO]) may also restrict the capacity of the company. company the document
If, for example, the MOI prohibits the company from buying products that are not by which the company
biodegradable, then the company does not have the capacity to buy these products. Ifa is incorporated in terms
director is mandated by the BoD to buy non-biodegradable products from a bona fide of the Companies Act. It
third party, the company cannot later rely on the fact that it does not have the capacity to sets out the rights, duties
and responsibilities of
buy such products in order to escape liability: in terms of the contract. Shareholders of the
: shareholders, directors
company may have a claim for damages against anyone who fraudulently, or through gross 64 others within the
negligence, caused the company to perform an act outside its capacity. Such acts can be company and in relation
ratified by special resolution. to the company.
A company may have the capacity to do something, but that the company's MOI limits
a director's authority to perform that specific action. In terms of the normal rules of agency, A special resolution
the principal (company) will not be bound by the actions of the director, unless the third refers to a resolution
party can show that the director had authority, such as express or ostensible authority. Bur 2d0pted with the support
the Companies Act provides that the company will still be liable in terms of the juristic act of at least 75% of the
: i ig 3 g voting rights exercised
(such as a contract) even though the director acted outside the limits of his authority. If the nthe resolution. Voting
company’s MOI provides that a director can perform certain acts if there is compliance with sights refers 'n Hae hunber
certain internal procedures, the company will be bound to such acts, even where there is no _ of shares in the company
compliance with the internal procedures. The reason is that section 20(7) of the Companies _ held by shareholders.
Act provides that a bona fide third party can assume that there is compliance with internal
procedures. But, if the third party is aware of the non-compliance with the rules or reasonably should
have known about it, the company may be able to escape liability.
The Companies Act makes it clear that the doctrine of constructive notice does not apply to
companies. According to the doctrine of constructive notice, anyone dealing with a company is
considered to be aware of the contents of its public documents (such as the MOI). The effect of the
doctrine was that the law expected anyone who concluded a contract with a company to know who had
authority to act on behalf of the company. As stated, this doctrine no longer applies.
Section 20(7) of the Companies Act referred to above is similar to the so-called Turquand-rule that
has been applied in our law for some time already, based on considerations of fairness.

Added value The Turquand-rule

The name of the rule comes from the English case of Royal British Bank v Turquand (1856) 6
E&B 327, in which the rule was originally developed.
The Turquand-rule provides that a third party dealing with a company can accept that, if an
agent of the company is authorised to act on behalf of the company, provided certain internal
processes have been complied with and the act falls within the normal authority of the agent,
then the internal processes have been complied with. Thus, if the chief financial officer (CFO) of
the company is authorised to borrow money from a bank, provided that the BoD has approved
such a loan, then the third party (bank), who deals with the CFO, can assume that the BoD did
give the necessary approval. This rule will not apply if the third party knew that the required
internal processes were not followed, or the circumstances of the transaction are such that he
should have been warned to establish whether the agent did have the required authority.

Chapter 18 | The law of agency 263

 Case study Sarvesh buys immovable property

Sarvesh is the managing director (MD) of Sunset Properties Ltd. The MOI of Sunset provides that
the MD of the company is authorised to represent the company in all transactions relating to
the business of the company, including the buying and selling of immovable property. The MOI
provides, however, that if the company purchases property for a price exceeding R5 million, the
Board of Directors (BoD) must first approve the purchase. Sarvesh buys immovable property to
the value of R8,5 million from Innovations CC. When the BoD finds out about the contract, it
refuses to honour the contract. Explain to Innovations CC what its legal position is.

18.6.3 Delegating authority

As a general rule, an agent may not delegate the authority to represent the principal to another person.
But, the contract between the principal and the agent may expressly or tacitly allow for delegation. If
the agent is allowed to delegate, the agent has the authority to authorise another person to perform a
juristic act for the principal. In the absence of express authority, the authority to delegate is a question
of fact. If the act in question requires the special skill and expertise of the agent, it is unlikely that the
agent will have the authority to delegate. If I authorise my stockbroker to buy and sell shares for me, the
stockbroker will not be able to delegate that authority to a secretary. | gave the stockbroker the authority
because of the special skill and expertise the stockbroker has in the stock market, and so the stockbroker
must act personally.

18.7 Duties of the principal

The principal has several common law duties, namely:
® to remunerate, or pay, the agent for performing the juristic act
= to reimburse, or pay back, any money that the agent spent while performing the juristic act
® to indemnify the agent against loss or liability incurred by the agent in carrying out the mandate.

These duties apply generally, even though the parties have not expressly included the duties in the agency
agreement. We discuss these duties in more detail below.

18.7.1 Paying the agent

The duty of the principal to remunerate exists once the agent has performed the juristic
: Se aa 5 Sas . . If you bear the onus of
act. This duty only exists if the parties have agreed that the principal will pay remuneration. proving something, it
If the agent claims remuneration, she bears the onus of proving that there was an means that if you want
undertaking by the principal to pay and that she has completed the juristic act. to succeed in your claim,
Agency contracts in a commercial or business context would normally imply that the it is your responsibility
principal must remunerate the agent. So, if the agent belongs to a class of persons that to prove tt
would normally charge for their services, the principal will be obliged to pay the agent for
her services, even in the absence of an express agreement. For example, a conveyancer acts as agent for a
party in attending to the registration of a bond over immovable property for the principal. Even though
the parties may not have agreed expressly on the payment of remuneration, it is normal practice for
conveyancers to be remunerated for their services. So we can say that there was a tacit agreement to pay
remuneration to the agent.
When it comes to the extent of the remuneration payable, the parties may agree, for example, that
the remuneration will be a specified amount or a percentage of the purchase price. In the absence of a
specified amount, a percentage or a formula to determine the remuneration payable, it is presumed that
the principal will pay a reasonable remuneration. The agent bears the onus to establish what a reasonable
remuneration is in the particular context.

264 Chapter 18 | The law of agency

18.7.2 Repaying the agent's expenses
‘The principal has the duty to reimburse the agent for all reasonable and necessary expenses and liabilities
that he incurred in performing the juristic act. Reasonable and necessary expenses can be claimed even
if the matter has not been brought to a successful conclusion. The expenses can be claimed as soon as
they are incurred, but the agent must give an account of such expenses. The principal does not need to
reimburse the agent for unnecessary expenses or expenses that were a result of the agent's own negligence.
If the agent was negligent, it means that he did not take reasonable care when performing the juristic act.
It is not always clear as to when a principal is liable for the expenses of an agent and in the absence of
an express agreement, the circumstances may dictate what expenses the agent may be entitled to recover
from the principal.

Activity 18.4
Nosiwe is very busy at work and cannot find the time to take her daughter, Lindiwe, shopping
for to buy a dress for her birthday. Nosiwe'’s friend, Thuli, offers to take Lindiwe to the mall to
shop for adress. Thuli uses her own car to take Lindiwe to the mall. They find a suitable dress
and Thuli pays for the dress. Is Thuli entitled to the cost of the dress and the cost of the petrol?

18.7.3 Indemnifying the agent against loss or damage

The principal must indemnify the agent for all loss or damage brought about within the scope
of performing the juristic act. This means that, if the agent suffers any loss or damage during the
performance of the juristic act, the principal will be legally responsible for the loss. If the agent acts
outside the scope of their authority, the agent will not be indemnified by the principal.
Do you think the agent would be entitled to recover loss or damage suffered during the performance
of the juristic act on behalf of the principal? Such loss or damage is the result of two causes:
@ = the performance of the juristic act
# an intervention beyond the control of the agent.

An example of such a situation is when the agent, in the performance of the juristic act on behalf of the
principal, has to undertake travel in his car. While travelling, the agent is robbed of his car. Is the agent
entitled to be indemnified for his loss by the principal?
To answer this question, we must consider the following:
® Do the terms of the contract between the principal and agent provide for the situation?
= = If not, then could the agent have avoided the loss?
= = If not, then one has to ask whether performing the juristic act has brought the agent significantly
closer to the danger than if he had not undertaken performing the juristic act on behalf of
the principal.
@ = If so, then the agent is entitled to be indemnified, unless the loss or damage would have occurred
even if there was no agreement for the agent to act on behalf of the principal.

Case study SIC ea 1g

Xola has agreed to act as agent for Sisiwe. Sisiwe has asked Xola to drive from East London to
Durban to conclude a contract on Sisiwe’s behalf with Olive Importers Ltd, for the purchase of
raw materials for Sisiwe’s business. It was agreed that Sisiwe would pay Xola a specified amount
as well as his expenses, including petrol, food and accommodation. On route, Xola decides to
take a short detour to stop at a small village outside Mtatha to visit his mother. While Xola is
visiting his mother in her house, his car is stolen.
Do you think Xola is entitled to claim his damage from Sisiwe? Would your answer be different
if Xola’s car had been stolen while he was buying food and filling up with petrol in Mtatha?

Chapter 18 | The law of agency 265

 18.8 Duties of the agent
An agent is in a fiduciary relationship with the principal. This means that this is a relationship of trust
and confidence, and the agent is obliged to act always in the best interests of the principal. Other
examples of fiduciary relationships are those between:
® a director of a company and the company
= =the members of a close corporation and the close corporation
@ the trustees and the trust beneficiaries
@ an attorney and his client.

The obligation to act in the best interests of the principal entails several common law duties for the
agent, namely:
® to follow instructions ® toact in good faith
@ to exercise care and diligence ® toaccount properly.

‘These duties of the agent apply generally, even though the parties have not expressly included the duties
in the agency agreement. Let us discuss these duties in more detail.

18.8.1 Following lawful instructions

The agent must act according to the principal's instructions. If the agent acts outside the
: ; , : was enc ; A right of recourse
boundaries of the instructions of the principal, the principal has a right of recourse. If, for sone that the princisal
example, Ziko authorises Zamindlela to purchase a three-bedroomed house on his behalf, can take legal action
Zamindlela has the duty to buy exactly such a house. If Zamindlela buys a two-bedroomed _ against the agent.
flat, he has acted outside the boundaries of his instructions. Ziko can then sue Zamindlela
for any losses he incurs in trying to cancel the sale and in the purchase of the correct house.
‘The principal's instructions must be lawful. This means that the appointment of the agent must not
be for a purpose that is not permitted by law. This includes an act that is:
® criminal @ against public policy.
@ = prohibited by legislation

An appointment ofan agent for an unlawful purpose is null and void. So, no obligation can arise between the
principal and the third party if the agent's appointment is null and void. Also, no action can arise from
such a void appointment. If such an action was performed, the principal will not be able to claim such
performance from the agent. Neither will the agent be able to claim reimbursement from the principal. So, if
Ziko authorises Zamindlela to sell a car to Fikile that Ziko had stolen, the authorisation would be void. If Fikile
paid the purchase price to Zamindlela, then Ziko would not be able to claim that money from Zamindlela.

18.8.2 Acting with care and diligence

The agent must perform the juristic act with the same care and diligence as a reasonable person in his
position would do. A reasonable person in the position of the agent is someone who exercises the general
level of skill and care of a member of the branch of the profession of the agent. The degree of care, skill
and diligence required may differ from case to case. If the act to be performed by the agent is a complex
one requiring a high degree of care and skill, the principal is entitled to expect a high level of care and
skill from the agent. If the agent acts negligently and the principal suffers damage or loss because of such
negligence, the agent breaches this duty and he must compensate the principal.

18.8.3 Acting in good faith

The duty of good faith means that the agent must act in the interest of the principal (and not for
personal benefit) in respect of the juristic act. The duty of the agent to act in good faith includes:
@ = the duty to account for all profits to the principal; the agent may not make secret profits from
transactions concluded on behalf of the principal

266 Chapter 18 | The law of agency

@ the duty to avoid a conflict of interest; the agent must make the principal aware of any possibility
of a conflict of interest; where there is a conflict of interest, the agent must put the interests of the
principal above his own interests
@ = the duty to keep private and confidential all information about the principal and the performance of
the juristic act, even after the termination of the agency.

Added value Accepting a bribe

Section 6 of the Prevention and Combating of Corrupt Activities Act 12 of 2004 provides that if
an agent accepts a bribe to abuse a position of authority, to commit a breach of trust, or violate
a legal duty, or the agent gives a bribe to persuade someone else to do so, then the agent is
guilty of the offence of corrupt activities.
Section 26 of this Act provides that a sentence of imprisonment for life can be imposed as a
penalty if convicted of this offence.

Plaaslike Boeredienste (Edms) Bpk v Chemfos Bpk 1986 (1) SA 819 (AD)

Principle
The law does not allow a third party to enforce a contract against the principal's will, if the
contract was obtained by the third party through immoral and unlawful conduct.
Facts
Plaaslike Boeredienste (Edms) Bpk bribed the agent of Chemfos Bpk in order to get contracts for
the spreading of fertiliser. When Chemfos Bpk discovered the bribery, it repudiated (cancelled)
the contracts with Plaaslike Boeredienste (Edms) Bpk.

The court's finding

Chemfos Bpk was entitled to repudiate the contracts. The basis for the right to repudiate a
contract in a case like this is the fact that the law views bribery as an immoral and wrongful act.
The method the third party used to obtain the contracts, namely the bribing of the agent of the
principal, was immoral and unlawful.

18.8.4 Accounting to the principal

‘The agent must account properly on all matters concerning the agency. This means that the principal's
property must be kept separate from that of the agent. It is wrong for an agent to pay money that is due
to the principal into the private bank account of the agent. All documentation relating to the agency
must be kept up to date and the agent must allow the principal, or her accountant, to inspect the books,
Information must be disclosed to the principal when required. When the agency ends, the agent must
give back everything belonging to the principal. If the agent fails to do so and the principal is prejudiced,
the principal can recover her damages from the agent.

18.9 Acting without authority

If a person concludes a contract on behalf of somebody else, but does not have the authority to do so,
there are various possible consequences. These will depend on the circumstances surrounding the juristic
act. Let us look at these consequences below.

18.9.1 Being party to an unauthorised contract

The general rule is that if an agent acts without the authority of the principal, the principal cannot be
bound to the juristic act. There are certain exceptions to this general rule, which include:
® ratification of the contract by the principal ® ostensible authority.

Chapter 18 | The law of agency 267

Ratification of the contract by the principal
Ratification occurs when a person makes an unauthorised act valid by accepting or approving it after the
fact. Like authorisation, ratification is a unilateral juristic act, and it makes the act valid from the time
that the contract was concluded by the agent and the third party. In effect, the juristic act then comes
into force retroactively. After ratification, the parties are in the same legal position that they would have
been in if the agent had the necessary authority at the time that the contract was concluded. If an agent
concludes a contract without the authority of the principal and the principal ratifies the contract, the
principal will be bound to the contract.
Ratification can be express or tacit.
Express ratification means that the principal plainly confirms, either verbally or in writing, that he
will be bound by the contract.
Tacit ratification occurs if the principal's actions indicate to the third party that he (the principal)
wants to be bound by the contract. For example, if the principal complies with the legal obligations
of the contract, or uses the object that was bought in terms of the contract, those will be indicators
that the principal has tacitly ratified the contract.

Certain requirements have to be met for ratification to be valid.

‘The agent must have made it clear that he acted on behalf of a principal. The agent does not have to
indicate who the principal is; simply that he is acting on behalf of one.
The principal must have existed when the agent concluded the juristic act. For example, you cannot
conclude a contract for someone who is not yet born and then have the contract ratified after the
birth. An exception to this requirement is the pre-incorporation contract, which is concluded by
an agent on behalf of a close corporation or company that is not yet in existence. This ratification is
valid if the close corporation or company is incorporated.
The principal must have the capacity to ratify the act. For example, an insolvent person cannot
ratify a contract that will negatively affect his estate and creditors.
The juristic act must be lawful. An illegal act cannot be ratified.

Dreyer v Sonop Bpk 1951 (2) SA 392 (O)

Principle
An intention to tacitly ratify a contract can be established from the silence and inaction of
the principal.

Facts

Dreyer’s minor son was at boarding school. Without his father’s authorisation, the son bought
a school blazer on Dreyer’s account from Sonop Bpk. Dreyer was aware that his son required a
blazer for school as the son wore the blazer on numerous occasions when visiting his parents.
Sonop Bpk sent Dreyer regular accounts, but Dreyer did not pay. When Sonop Bpk threatened
legal action, Dreyer denied liability. At the subsequent court proceedings, Dreyer elected not
to testify.

The court's finding

Dreyer was aware of the contract though the regular statements of account that were sent to
him and through seeing his son wearing the blazer. The court concluded that the inaction and
silence on the part of Dreyer, after becoming aware of the contract, warranted a finding that
Dreyer had tacitly ratified the contract for the purchase of the blazer, and was therefore liable.

268 Chapter 18| The law of agency

Ostensible authority
If a person culpably creates a false impression that somebody else has the authority to perform an act
on his behalf and if, because of this false impression, a third party acts to that third party’s disadvantage,
the person cannot then claim that there was no authorisation. Although the agent did not have real or
actual authority, the principal is said to be estopped from denying there was authorisation because of
the impression created by the principal that the agent did have actual authority. Therefore, it is stated
that the agent had ostensible authority, and the principal will be held to the contract because of the
impression the principal created through his conduct.
The third party has to prove a number of requirements to hold a principal liable on the basis of
ostensible authority. These requirements are:
a representation by words or conduct; the representation can be made expressly (words) or tacitly
(non-verbal conduct such as silence or even inaction)
the representation must have been made by the principal that the agent had authority to act on the
principal's behalf

Added value African Life Assurance Co Ltd v NBS Bank Ltd 2001 (1) SA 432 (W)

The court stated that, where a principal allows an agent to act in a particular manner when
conducting the business of the principal, the principal clearly shows that the agent has authority
to enter into contracts on behalf of the principal. These contracts are of the kind where the
agent usually has actual authority to conduct the principal's business.

the principal should have reasonably foreseen that the third party (or outsiders, generally) would
have been misled into believing that the agent had authority to act
the third party must have actually acted on the strength of the representation to his detriment — for
instance, entered into a prejudicial contract
the third party’s reliance on the representation that the agent had authority must have been
reasonable; this means that a reasonable person, in the position of the third party, would have
believed that the agent had authority from the principal; if there was good reason to be suspicious of
any of the circumstances, then the agent falls short of this standard
the third party must have suffered prejudice.

NBS Bank Ltd v Cape Produce Co. (Pty) Ltd and Others 2002 (1) SA 396 (SCA)

Principle
In order for a third party to hold a principal liable on the ostensible authority of the principal's
agent, all the requirements identified (and set out above) must be established.
Facts

A was a branch manager for NBS. The bank required that when a bank official received deposits
from investors, the official enter it in the computer system so that the amount and the name
of the investor are reflected on the bank's accounting system. A issued a letter signed by him
as branch manager to investors, indicating the amount to be repaid on a particular day with a
stipulated amount of interest. However, the money was not paid into an account in the name of
the investor. The money was actually paid into a general account held in the name of a firm of
attorneys, one of the attorneys being A’s accomplice in this fraudulent scheme. In this way, A
and the attorney obtained control of the money. The investors did not know this, one of them
being Cape Produce Co. (Pty) Ltd. A and his accomplice advanced the money to property
developers from which they had hoped to make sufficient money to repay investors.

Chapter 18 | The law of agency 269

 NBS Bank Ltd v Cape Produce Co. (Pty) Ltd and Others 2002 (1) SA 396 (SCA)
i Creyebelalti-te))

High interest rates were offered so as to attract more investors. In essence, it was a pyramid
scheme and the investors lost millions. The investors sued NBS. The claim against NBS relied
thereon that A had ostensible authority to bind NBS. NBS, in denying liability for the lost
investments, argued that the investors did not act reasonably when relying on A's representations.

The court's finding

The court distinguished between actual and ostensible authority. The court explained actual
authority as follows:
‘{A]ctual authority may be expressed or implied. It is express when it is given by express
words, such as when a board of directors passes a resolution which authorises two of their
number to sign cheques. It is implied when it is inferred from the conduct of the parties and
the circumstances of the case, such as when the board of directors appoints one of their
number to be managing director. They thereby impliedly authorise him to do all such things
as fall within the usual scope of that office. Actual authority, express or implied, is binding as
between company and the agent, and also as between company and others, whether they
are within the company or outside it.’
In turn, ostensible authority is as it appears to others. So, if a board of a company appoints one
of their members as managing director, the board invests such a person with implied authority
and also with ostensible authority to do such things that would normally fall within the usual
scope of that office. People dealing with him in his capacity as managing director are entitled
to assume that he has the usual authority of a managing director. But, ostensible authority can
extend beyond actual authority. If the board of the company limits the actual authority of the
managing director, then his actual authority is limited, but his ostensible authority still includes
the usual authority of a managing director.
The court held that ostensible authority flows from the appearances of authority created
by the principal. For a principal to be held liable on the basis of the ostensible authority of the
agent, the law stresses that the appearance (the representation) must have been created by the
principal herself. The fact that another holds himself out to be an agent of the principal cannot,
of itself, impose liability on the principal.
In order to prove ostensible authority, the court determined that a party has to establish the
requirements discussed above, namely:
e Representation — the court found that what had to be decided was whether a branch
manager has the authority to accept a deposit and issue an undertaking to repay the
money. This must be considered in the context that a bank’s business is to take deposits for
a period at interest, and the advancement of loans on security at a higher rate of interest.
The court found that the principal, NBS, had made a representation that A was authorised
to agree terms of deposits, even non-routine transactions.
e By the principal — it is clear that the representation as to A's authority, was made by NBS,
as principal.
e Reasonable foreseeability that outsiders will act upon the strength of the representation —
the court found that, even though NBS could not foresee exactly what A did, it could
reasonably foresee that A would take deposits and that he might misappropriate them.
Some of the internal restrictions and procedures of banks are designed exactly to prevent
losses caused by the dishonesty of bank officials, thus making it very difficult for a bank to
deny that there was reasonable foreseeability.

270 Chapter 18 | The law of agency

 NBS Bank Ltd v Cape Produce Co. (Pty) Ltd and Others 2002 (1) SA 396 (SCA)
(continued)

e Actual reliance by the third party on the representation — the court found that it is clear on
the facts that Cape Produce had relied on the representation by NBS as to who and what A
was, and what authority he had.
e Reasonableness of the reliance — the court considered that A was a bank manager of a large
branch of a reputable bank. Cape Produce had taken a number of steps to ensure that its
investment was safe, including consulting with its attorney. Perhaps, as the court stated,
an ultra-cautious person may have taken the step to contact the head office, but the very
status of A might have caused a reasonable person not to take such a step. Cape Produce
Co. (Pty) Ltd acted reasonably in relying on the representation.
e Consequent prejudice for the third party — the court stated that prejudice is clearly present.
In the end, the court found that NBS Bank was liable to Cape Produce Co. (Pty) Ltd. on the
ostensible contracts of deposit, concluded through the ostensible agency of A.

When a party wishes to rely on the ostensible authority of an agent to bind a juristic person specifically,
the following principles apply:
= = The person who made the representation that the agent did have authority must have been a person
who had actual authority to manage the business of the principal. Thus, a third party cannot rely on
the actions (representations) of a person who has no actual authority to act on behalf of the juristic
person to claim that that person's representations established ostensible authority of the agent.
= A juristic person, whose powers are imposed by statute, cannot be liable for acts of 4 Notice of a
an agent with apparent ostensible authority, if that means that the juristic person a prescribed notice that the
will be forced to do something prohibited by the empowering statute. However, if _incorporators of the company
the statute permits the performance of the act by the principal (the juristic person) —_ must file with the Companies
but only if certain internal formalities or processes have been complied with, then _ 4d Intellectual Property
the principal can be held liable on the basis of ostensible authority of an agent. Commission, informing the
Commission of the company’s
= If acompany has drawn specific attention in its Notice of Incorporation to limits
: incorporation for the purpose
placed on its representatives in the MOI of the company, then it is assumed that of ee it registered.
everyone knows about these limitations.

18.9.2 Concluding a contract without authorisation

An agent can incur personal liability and be personally bound to the contract in certain circumstances.
If an agent does not disclose that he is acting as an agent on behalf of a principal, the agent can be held
personally liable for the obligations incurred. The third party can choose to hold either the agent or the
principal liable.
Where a person professes to contract as an agent but is doing so without any authority, no contract is
formed. The third party cannot hold the agent to the contract as principal, as neither party intended that
consequence. However, the agent can incur personal liability on one of two grounds:
@ = ‘The agent may be held liable for contractual damages because the agent has breached the warranty,
if the agent gives a warranty to the third party that the agent is acting with authority when, in fact,
there is no authority,
= An agent can be liable on the basis of misrepresentation, Misrepresentation occurs when an
agent makes a fraudulent or negligent representation that he has the authority to perform the
act when there is no authority. A misrepresentation may give rise to claim for delictual damages.
A representation will be fraudulent if the agent made the representation intentionally, knowing
that there is no authority. A representation will be negligent if the agent did not take reasonable
steps to establish whether the necessary authority was granted.

Chapter 18 | The law of agency 271

 Where an agent acts without authority in concluding a contract on behalf of a principal, the agent will
not incur liability if the third party entered into the contract because of factors other than the words or
conduct of the agent.

Case study The unclear message

Peter and Andy are friends. Peter lives in Johannesburg, but has a seafront flat in Cape Town,
which he does not use. Tom is aware of the friendship and the flat. He approaches Andy about
the possibility of renting the flat from Peter as he has been transferred by his employer to Cape
Town. (At present, Tom and Andy both live in Bloemfontein.) Andy knows that Peter is looking
for a good tenant for the flat and asks Peter for authorisation to conclude a juristic act — an
agreement of lease on behalf of Peter with Tom. Peter sends the same voice message to both
Andy and Tom. Both Tom and Andy understand that the message means that Andy is authorised
to act on behalf of Peter, but Peter actually stated, and meant, the opposite. Andy, on behalf of
Peter, concludes a contract with Tom. When Peter finds out about the ‘contract’, he refuses to
ratify it. Tom sues Andy for damages on the basis that Andy had presented himself as having the
required authority. Is Andy liable because he acted without the required authority?
Andy should be able to escape personal liability as Tom entered into the ‘contract’, not
because of what Andy had represented by word or conduct, but because of the message
received from Peter. Thus, it was the message that had induced Tom to enter into the contract
and not Andy's words or conduct.

18.9.3 Misrepresentation
You might remember from Chapter 6 that a contract concluded as a result of a misrepresentation by one
of the parties can be set aside (voided) by the innocent party. For an innocent party to be entitled to the
available remedies, he must prove that the representation:
was untrue
was about a fact
was material
was made by one of the parties
was made with the intention to induce the innocent party to contract
induced the innocent party to contract.

What is the position if the misrepresentation was made by an agent representing one of the parties to the
contract? It is the same as if the party herself (the principal) had made the misrepresentation and not the
agent. If the third party bought a property from the principal and the third party was induced into the
contract by the misrepresentation, the third party may be able to have the contract set aside (declared
void), or claim a reduction in the purchase price, depending on the facts of the case. But, besides proving
the above requirements, the third party must prove one of the following two aspects, namely:
= = The principal was party to the misrepresentation as it was the principal who conveyed the incorrect
information to the third party through the agent (in other words, the agent merely conveyed the
untrue information to the third party).
@ = The agent was acting within the course and scope of his employment or the task he was authorised
to perform by the principal. Thus, if the agent makes a misrepresentation to a third party, whilst
acting in the course and scope of performing the juristic act as agent on behalf of the principal, the
third party may be entitled to the remedies shown above.

18.10 Ending authority

272 Chapter 18 | The law of agency

Authority can come to an end in different ways. These include:
® = death, insanity or insolvency of the principal
death or insanity of the agent
performance of the juristic act for which authority was given
the expiry of the period of authority
revocation by the principal.

If the principal dies, becomes insane or insolvent, or loses his capacity to act, the agent's authority
ends. Similarly, if the agent dies or becomes insane, the agent's authority is also terminated. But if the
agent becomes insolvent, the authority of the agent does not end. This is because a juristic act does not
bind the agent’s estate, but the estate of the principal. Insolvent persons, for instance, cannot perform
juristic acts that bind their estates, as they no longer have control over their own estates. They cannot,
for example, buy themselves cars. But an insolvent person can act as an agent for somebody else. If he
buys a car as the agent of somebody else, the principal's estate is bound. This means that the principal
has to pay for the car and the car belongs to the principal’s estate. The agent’s estate is unaffected by
the transaction.
If the authority was granted for a specific act, then on proper performance of the act, the authority
would end, or for a specific period of time, the authority would end once the time expires. Ifa special
relationship between the agent and the principal ended, the authority would terminate if the relationship
came to an end. So, the authority of a parent to conclude juristic acts on behalf ofa minor child ends
when the child becomes a major person. Likewise, the authority of a director to act on behalf of a
company ends when the person is no longer a director of the company.
Where an agent is given authority for a specific juristic act, this authority ends once the act has been
performed. Where authority is given for a specific period, the agent's authority ends once that period
is over. For example, if I have the authority to buy a car on behalf of somebody else, my authority ends
once I have concluded the contract to buy the car.
Where a principal has authorised an agent to represent her interests, the principal can also revoke this
authority. To revoke authority means to withdraw or cancel it. If the revocation is because of breach of
contract, the agent will have the normal contractual remedies available to him.

Chapter summary

In this chapter, you learned the following about the law
of agency:
Agency occurs when one person, the agent, performs
a juristic act for another person, the principal.
The three requirements for valid agency are that:
= the principal must exist
m= the agent must have authority to act on behalf of
the principal
m= the agent must make the third party aware that he
is acting on behalf of the principal and not in a
personal capacity.
For an agent to perform a juristic act on behalf of the
principal, the agent must have the authority to do so.
Authority can be provided expressly or tacitly by the
principal. Authority can be given also to an agent by
operation of law. As a general rule, an agent may not
delegate his authority.
‘The duties of the principal include the following:
= to remunerate the agent
= to reimburse the agent for expenses incurred

Chapter 18 | Chapter summary 273

 ® to indemnify the agent for any loss or
liability incurred in the performance of the
principal's business.
The duties of the agent include the following:
® Follow the lawful instructions of the principal.
@ Exercise reasonable care, skill and diligence in the
performance of his duties.
® Act in good faith in the performance of the
juristic act.
® Account properly to the principal.
If the agent acts without authority,
the principal will,
generally, not be bound. However, the principal may
incur liability by ratifying the agent's actions or by
behaving in a manner so as to create the impression
that the agent does have authority, referred to as
ostensible authority.
‘The agent may incur personal liability when acting
for a principal, if the agent does not disclose to the
third party that she is acting for a principal. If the agent
concludes a contract without authority, no contract
Review your understanding
1. In what ways can an agent acquire the necessary
authority to act on behalf of the principal? Discuss.
2. The agent has a duty to act in good faith. Explain
what this duty entails.
3. When an agent acts without authority, the
principal is generally not bound by the juristic act
performed by the agent. There are exceptions to
this general rule. What are these exceptions?
4. In order for a third party to hold a principal liable
on the basis of the ostensible authority of the agent,
the third party must prove certain requirements.
What are these requirements?
5. Ronaldo, a star soccer player, authorises Benni
specifically to negotiate a players-contract on
behalf of Ronaldo, with Ajax Soccer Club. Benni,
thinking that Ronaldo will need a car, concludes
a contract with SuperCars (Pry) Led on behalf of
Ronaldo and in Ronaldo's name, When Benni
realises that he did not have the necessary authority
274 Chapter 18 | Review your understanding
comes into existence between the principal and the
third party. However, the agent may incur personal
liability in such
a case if the agent had warranted
her authority to the third party, or on the grounds
that she had committed a delict in the form of a
misrepresentation.
For the principal to be bound, the agent must reveal
that the agent is acting for a principal. The principal
need not be identified. The unidentified principal is to
be distinguished from the doctrine of the undisclosed
principal. This doctrine allows an agent to act for
the principal but in the name of the agent and not
disclosing that there is a principal. The principal can
then elect to step into the shoes of the agent. The third
party, however,
has a choice to be legally bound to
eitherthe agent or the principal.
Agency is terminated in a number of ways, including:
= agreement
® proper performance
® anefflux of time
= = the death of the agent or principal
® the insolvency of the principal.
to conclude a contract for the purchase of a car,
he asks Ronaldo to ratify the contract. Explain
whether ratification will be possible in this case.
6, Zuki is 17 years old. She is studying at university and
lives with her parents. Without the knowledge of her
parents, she concludes a contract on their behalf for
the purchase of a scooter with which she can travel
to and from university. Her parents see her driving
the scooter every day. When the seller of the scooter
tries to claim payment from Zuki’s parents, they deny
liability, arguing in their defence that they did not
give Zuki authority to conclude the contract. Advise
the seller as to the remedies available to him.
7. Conn and Duma are in a partnership. The business
of the partnership is the building of houses. Conn,
without express authority from Duma, concludes
a contract on behalf of the partnership with Clay
Bricks CC, to buy the 10 000 bricks needed for
one of the houses that the partnership is building.
 a) Explain whether you think the partnership is
bound to the contract.
b) If Conn had bought a ear for his son, who is
a student at university, would the partnership
be bound to the contract? Give reasons for
your answer.
8. Oprah, with the authority of Extra Life Insurance
Co. Ltd, concludes a contract for life insurance
between the insurance company and David.
Explain if Oprah has any financial claims against
the insurance company?
9. Chester authorises Keshav to sell Chester's car for
R100 000. Keshav manages to sell the car to Lungi
for R115 000. Keshav hands Chester an amount of
R100 000. Is Keshay in breach of any of the duties
of an agent?
10. In what instances can an agent incur personal
liability when contracting on behalf of a principal?
11. Ajay is the Managing Director (MD) of Kapow
Steel Co. Ltd. The MOI of Kapow provides
that purchases made on behalf of the company
exceeding R10 million must first be approved
by at least three members of the board of
directors. As MD, Ajay normally approves all
Further reading
Kerr, A. J. 2006. The Law of Agency, 4th edn. Durban: LexisNexis
South Africa
Sharrock, R. 2017. Business Transactions Law, 9th edn.
Cape Town: Jura and Co. (Pry) Led
purchases of Kapow below R10 million. Kapow
regularly purchases coal for the steel factory from
Deep Level Mines. These purchases normally
range between R2 million and R7 million. On
17 February, Ajay approves the purchase of
R12,5 million of coal for the steel factory. On
3 March, Ajay is removed from the board of
directors at a shareholders meeting because of
the poor financial performance of the company.
It is then discovered that Ajay had entered into
the latest contract with Deep Level Mines to
the value of R12,5 million. The acting MD of
Kapow immediately writes to Deep Level Mines
and informs them that Ajay did not have the
necessary authority to conclude the contract for
R12,5 million and that Kapow will not accept
the liability in terms of the contract. (In fact,
Kapow has decided to cut back on its operations
due to a cash-flow shortage.) You are the
assistant manager responsible for purchasing
and logistics at Deep Level Mines. Write a
memorandum to your manager, advising her of
whether you think Kapow is bound by the contract
concluded on its behalf by Ajay.
Dendy, M. ‘Agency and Representation’ in W.A. Joubert (ed_).
2014. LAWSA, Vol. 1. Durban: LexisNexis South Africa
Chapter 18 | Further reading 275
Gir eit ig

19 Online contracts and e-commerce

The main ideas

® An overview
of the internet
An introduction
to e-commerce
Types of online contract
Formalities that must be fulfilled for online contracts
Legal consequences of not reading the contract
Legal issues to consider before concluding an online contract

The main skills

® Apply knowledge of theory of contract to online contracts.

® Analyse an online terms-and-conditions-of-use

document.

So far you have encountered various types and forms of ‘physical world’ contract. But, as you all
know, we are now living in the information age, and as a result, almost everything you can do in the
physical world, you can also now do on the internet, This includes doing business and more specifically
concluding contracts over the internet. This chapter deals with e-commerce (or electronic commerce)
and, in particular, the different online contracts that you may conclude, as well as legal consequences
that will flow from the conclusion of these contracts. You will notice that, similar to the position in
the physical world, contracts generally have to be concluded in a particular way — in other words, they
have to comply with certain requirements. As you will see in this chapter, it often happens in the case of
online contracts that the buyer and the seller are located in different parts of the world. So, one of the
most difficult questions to answer is which country's law should we apply to the online contract. Will the
domestic laws of the buyer apply, or those of the seller?

Before you start

You want to buy the newly released Me&Me II gaming console. It is, however, not yet available in
South Africa. You visit one of your favourite online stores, Buy.com, and there it is! You immediately
purchase the gaming console without even reading Buy's terms of service. Buy.com is very reliable
and two weeks’ later, your console is delivered. You are so excited that you have given yourself the
day off from your classes at varsity (and studying) so that you can play games (the console came with
one free game — “The Art of War’). With an energy drink in hand, you switch on the console ready to
be transportedto another world. But 15 minutes into the game, you realise that your headset is not
working properly and that your troops cannot communicate with you and hear the orders you give
them. You are furious! This causes you to lose your first game, and you immediately want to cancel
payment of your purchase. The way you feel now you may even decide to sue Buy.com,
Now, in terms of South African law, you would be able to demand a refund or replacement from Buy,
but will South African law be applicable here? Pur differently, does South African law still protect you
even though you decided to do business with an American company?

276 Chapter 19 | Online contracts and e-commerce

Chapter

19 Online contracts and e-commerce

®
¢
= = Types of online contract
® Formalities chat must be fulfilled for online contracts
= Legal consequences of not reading the contract
= Legal issues to consider before concluding an online contract

The main skills

= Apply knowledge of theory of contract to online contracts.
® Explain the difference between click-wrap and browse-wrap agreements.
® Analyse an online terms-and-conditions-of-use document.

So far you have encountered various types and forms of ‘physical world’ contract. But, as you all
know, we are now living in the information age, and as a result, almost everything you can do in the
physical world, you can also now do on the internet. This includes doing business and more specifically
concluding contracts over the internet. This chapter deals with e-commerce (or electronic commerce)
and, in particular, the different online contracts that you may conclude, as well as legal consequences
that will flow from the conclusion of these contracts. You will notice that, similar to the position in
the physical world, contracts generally have to be concluded in a particular way — in other words, they
have to comply with certain requirements. As you will see in this chapter, it often happens in the case of
online contracts that the buyer and the seller are located in different parts of the world. So, one of the
most difficult questions to answer is which country’s law should we apply to the online contract. Will the
domestic laws of the buyer apply, or those of the seller?

Before you start

You want to buy the newly released Me&Me II gaming console. It is, however, not yet available in
South Africa. You visit one of your favourite online stores, Buy.com, and there it is! You immediately
purchase the gaming console without even reading Buy's terms of service. Buy.com is very reliable
and two weeks’ later, your console is delivered. You are so excited that you have given yourself the
day off from your classes at varsity (and studying) so that you can play games (the console came with
one free game — “The Art of War’). With an energy drink in hand, you switch on the console ready to
be transported to another world. But 15 minutes into the game, you realise that your headset is not
working properly and that your troops cannot communicate with you and hear the orders you give
them. You are furious! This causes you to lose your first game, and you immediately want to cancel
payment of your purchase. The way you feel now you may even decide to sue Buy.com.
Now, in terms of South African law, you would be able to demand a refund or replacement from Buy,
but will South African law be applicable here? Put differently, does South African law still protect you
even though you decided to do business with an American company?

276 Chapter 19 | Online contracts and e-commerce

 More importantly, look at what Buy's terms and conditions provide:

Applicable law
You and Buy agree to submit to the personal jurisdiction of a state court located in San Francisco
County, San Francisco, California, or a United States District court, Northern District of California
locatedin San Francisco, California (collectively, the “San Francisco Courts’) for any actions.

Do you still feel protected, or is your confidence giving way to anxiety?

19.1 An overview of the internet

Before we can start discussing the different types of electronic contract that may be concluded online,
the following background information may prove valuable.
Most of you use the internet on a daily basis, but did you know that the internet was created in the
late 1960s by the US military who wanted to link the various networks they had created in order to
share academic research. In the early 1970s, technologists established the first Trans-Adantic link-up of
computer networks. The internet is now more than 50 years old, and during this time, a huge number of
networks have been attached and removed from the ‘original structure’. At present, we do not even know
how many networks are attached to the internet. You may ask yourself the question, “Who owns the
internet?’ Unfortunately, no straightforward answer exists. No single body, government or organisation
controls all activities on the internet. It is out there, and it is impossible to switch off.
Let us try to explain ownership, or rather the lack of it, by looking at the diagram in Figure 19.1.

z,
==... f ) on-net traffic
,
a —@— tee South African traffic
—e—
data centre web content ——~=== international traffic
home network
(computer, smartphone)

i
sd
—~————
— a{e
—p © a cage
“T's
e ——_—_
_
t
y ® 7
}

‘ante teen cae national network South African data centre web content
|| | (fibre network) internet exchange

, Het ie =, AT

au — ss
g=_—ii i . . .
ee — 2 — 3

metropolitan network submarine cable global data centre web content

(fibre or microwave network) network internet exchange

Figure 19.1 How South Afnca’s internet works

19.2 An introduction to e-commerce

As the name suggests, electronic commerce involves business being conducted over the internet.
E-commerce can be done only by making use of online contracts.
Before we discuss online contracts, you need to know two important things:
1. The Electronic Communications and Transactions Act 25 of 2002 does not do away with any of the
common law principles that you have already studied in the previous chapters (such as principles
relating to contractual capacity, consensus, and legal validity).

Chapter 19 | Online contracts and e-commerce 277

2. All agreements can be concluded online except for:
a) agreements for the sale of immovable property
b) a long-term lease of immovable property for 20 years or more
c) the execution, retention and presentation of a will or codicil
d) the execution of a bill of exchange
e) documents or agreements, which, by agreement between the parties, may not be generated
electronically.

The first question we need to ask ourselves is, “What type of online contract are we dealing with?”

19.3 Types of online contract

Three broad categories of online contracts may be identified, namely:
= contracts for the sale of goods
= contracts for the supply of digitised products
= contracts for the supply of services and facilities.

These three categories may further be subdivided into the following three classes of online contracts:
= = shrink-wrap agreements
@ = click-wrap agreements
= browse-wrap agreements.

The names of the contract refer to the way or manner in which these contracts are concluded.

19.3.1 Shrink-wrap agreements

Shrink-wrap agreements are typically encountered when buying and selling software. Shrink wrap refers to
This type of contract was first used in the 1980s and 1990s, when more and more the wrapping of an item
companies started to sell software. The reason that companies felt it was necessary in plastic and sealing it
to conclude this type of contract with the buyer of the software was because of the with a heat gun, which
unexpected rise of piracy which is the illegal copying of software. (Think about how has been around since
; ia pea
many times you may have illegally copied music, pictures and games from your friends!)
1959. Its popularity
facts
with
To counteract this threat of piracy, companies started to include an ‘agreements of use’ Raaaion khsca the earn
whenever they sold software to a user. from being contaminated
The whole aim of a shrink-wrap agreement is to regulate the activities of the user by dust and stops it from
and to prevent him from acting in a way that may damage the software producers being tampered with
and developers. by customers.

What does this mean in practice?

When you buy any software today, you will be handed a box that has a plastic seal. Once you open the
box, you will typically find a CD or DVD containing the software as well as a slip of paper on which
the software licence (sometimes called ‘terms and conditions’) is printed. This little piece of paper is in
fact the shrink-wrap agreement. Now you can see where the contract gets its name from — it is literally
wrapped in plastic.
The effect of a shrink-wrap agreement is that you find out about the terms and conditions of the
agreement only once you have already made the purchase and opened the box. So, what this means
is that you are, in a way, forced to accept the terms and conditions, because you are not given the
opportunity beforehand to consider them and, more importantly, decide whether or not you wish
to be bound by them. In spite of this, shrink-wrap contracts seem to have been accepted as legal
and binding.

278 Chapter 19 | Online contracts and e-commerce

 Activity 19.1
1. Do you think thar ir is fair that you do not know the terms and conditions that you consent
to until after you have purchased the software?
2. Do you have any ideas on how software companies can prevent or restrict piracy, yet still be
able to inform you of the terms and conditions before you make the payment?

19.3.2 Click-wrap agreements

A click-wrap agreement is basically the online version of shrink-wrap agreement. Click-wrap agreements
are those agreements that are built into internet websites. This type of agreement has mainly two
purposes, namely:
= to get you to accept (and therefore be legally bound by) the terms and conditions of the website
= to exclude/limit and restrict the legal liability of the website owner, company or third party if
something goes wrong.

The easiest way in which you will know you are dealing with a click-wrap agreement is by the fact that
it has at the end of the agreement ‘I accept’ and ‘I do not accept’ buttons. The purpose of these buttons
is to allow you, as the user, to decide whether or not to enter into the agreement. As soon as you click
‘accept’, it is as good as if you have placed your personal signature on the contract. This contract is now
legally binding, and it may be legally enforced against you.

Please take a moment to read the ficense agreement now. If pou accept the terms below, click "I
Agee”, then "Next", Otherwise cick "Cancel"

END-USER LICENSE AGREEMENT FOR ARCHIVE MANAGER .

IMPORTANT: PLEASE READ THE TERMS AND CONDITIONS OF THIS

LICENSE AGREEMENT (“LICENSE AGREEMENT”) CAREFULLY BEFORE
USING THE SOFTWARE (AS DEFINED BELOW).

This End-User License Agreement is a legal agreement between you

(either an individual or a single entity} and electrongoo for the
rattan aendhint idantifind ahourn cdhiak lncludac cammnitne onfeinen

© I Do Not Agee @ J Agred

[LeaCanealincs) [<Bac New>

Figure 19.2 A click-wrap agreement

19.3.3 Browse-wrap agreements

A browse-wrap agreement is an agreement that regulates how the content of a specific website is used
and/or accessed. The easiest way to identify a browse-wrap agreement is to look for the (hyper) link
on the screen. This is because, in this type of agreement, just by clicking on that link and entering
its website, you are agreeing to its terms and conditions of use. The main difference then between a
click-wrap agreement and a browse-wrap agreement is that in a click-wrap agreement, you typically
indicate that you accept the terms and conditions by clicking on the ‘I accept’ button whereas, in a
browse wrap agreement, there is no such affirmative action.

Chapter 19 | Online contracts and e-commerce 279

 Added value Click-wrap agreement

Danger: keep in mind that with a click-wrap agreement, as soon as you click on the ‘I accept’
button you are bound by the terms and conditions even if you did not read and/or understand
them! This is because section 11(3) of the Electronic Communications and Transactions Act says:

‘Information incorporated into an agreement and that is not in the public domain is regarded
as having been incorporated into a data message if such information is: (a) referred to in a
way in which a reasonable person would have noticed the reference thereto and incorporation
thereof; and (b) accessible in a form in which it may be read, stored and retrieved by another
party, whether electronically or as a computer printout as long as such information is
reasonably capable of being reduced to electronic form by the party incorporating it.’

Activity 19.2
1. Do you think you will now be able to identify different types of online contract?
2. Why not practise by visiting a few of your favourite retail websites (and do some shopping
while you are at it)?

19.4 Formalities that must be fulfilled for online contracts

As with physical contracts certain formalities must be fulfilled for electronic contracts. Details of these
formalities follow.

19.4.1 Deeming provisions

When you conclude an online contract, the following legal principles will apply automatically (these are
called deeming provisions).
These deeming provisions will apply unless you and the seller have specifically agreed that different
provisions will apply.

Sending of the online contract to a different IT system

If you send an online contract to a different IT system, you can presume the contract has been sent when
it enters a IT system that is outside your (the sender's) control.

Sending of online contract to the same IT system

If you (the sender) and the receiver make use of the same IT system, then it is presumed to have been
sent when it is capable of being retrieved by the person the contract was addressed to.

Attributed
An online contract can be attributed to somebody — that is, you can say that a specific
person sent the relevant online contract if it was sent by the originator personally, or by ~means that you
Siebelieve or
a person who had authority to act on his behalf in respect of that data message, or by an say a certain person sent
information system programmed by him or on his behalf to operate automatically (unless it _ the online contract.
is proved that the information system did not properly execute such programming).

Contract received
We can presume that the online contract has been received when the complete file (data message)
enters an information system (IT system) that is used by the seller and it is capable of being retrieved or
processed by the seller.

280 Chapter 19 | Online contracts and e-commerce

Acknowledgement of receipt
The seller does not have to acknowledge that he received the final contract.

Added value in other words

The above legal principles will apply unless the terms and conditions contain provisions to the
contrary. Put differently, the seller can always provide for other legally binding principles to apply.

Jafta v Ezemvelo KZN Wildlife 2009 30 ILJ 131 (LC)

Principle

A valid contract of employment can be concluded via email and SMS.

Facts
In this case, Jafta was offered a position at Ezemvelo KZN Wildlife via email. He needed to
accept this offer by the end of December or he would lose the position. Jafta sent an email
on 29 December accepting the offer. On the same day, the HR officer of Ezemvelo sent
him an SMS asking him to respond to the offer. He replied to this SMS via an SMS message
stating that he had sent an email in the affirmative. The HR officer denied receiving
the email.
She acknowledged receipt of the SMS, but stated that she had not seen the word ‘affirmative’.
The position was given to someone else, and Jafta then sued for damages
The court's finding
The court explored the position in regard to the email, which had not been received by Ezemvelo.
It considered the deeming provisions and held that in order for the email to conclude a valid
contract, the email had to have been capable of being retrieved and processed by Ezemvelo.
This did not mean that the email needed to have been read by the HR officer — it merely needed
to have reached her inbox. Had this happened, a valid contract by email would have been
conduded. However, the court held that no valid contract by email had been concluded as the
email sent by Jafta had not reached her inbox.
The court, however, held that the SMS sent by Jafta was a clear acceptance of the position and
a valid contract of employment had come into existence when the SMS was received. Jafta was
entitled to damages arising from Ezemvelo’sbreach of the employment contract.

19.5 Not reading the contract: Your legal position

What is the legal position if you did not read the terms and conditions of the online contract — are
you still bound by it? The general rule is that if you are given the opportunity to read the terms and
conditions and you decide not to do it, you do so at your own peril. Think about the situation where
you drive into a parking garage. You are handed a parking ticket and, on the back of the ticket, the
terms and condition are printed. Just because most of us never take the time to read those terms and
conditions, it does not mean we are not bound to them. So, if something goes wrong, the
parking garage owner's liability can be restricted if he relies on these terms and conditions, _!9 Contract law, ticket
and, more importantly, the fact that you accepted them, ae ase ee
The courts have decided that in these so-called ticket cases a party (such as the parking ai
if you take a ticket or
garage owner) will be entitled to rely on your acceptance of the terms and conditions if: another document with
@ it can be proven that you knew whether there was writing on the ticket terms and conditions
= = the writing contained terms of a contract printed on it, then you
= the party wishing to rely on the contract took reasonable steps to bring the terms to are bound by those terms
the notice of the other party. ee

Chapter 19 | Online contracts and e-commerce 281

 19.5.1 What are the legal implications of these ticket cases for
online contracts?
An online contract of which you had neglected to read the terms and conditions will still be binding on
you in the following instances:
@ if the website took reasonable measures to bring the content of the terms and conditions to
your attention
@ = if the website makes it clear that the terms and conditions constitute binding contractual terms
® = if the website required you to click on the ‘I accept’ button
@ = if the contract contains any unusual or unexpected terms, these are highlighted.

19.5.2 Mistakes that can happen when using automated transactions

In modern times, many people do a lot of their shopping using online stores instead of physically
entering shops. This can sometimes lead to the buyer making an error when purchasing a product.
For example, you see the cutest handbag for sale on Buy.com. It is at least R200 cheaper than at the
shops at your local mall. You excitedly purchase the handbag, but accidently type that you want ten
handbags instead of one handbag. You only realise your mistake once you have ticked the ‘I accept’
button and concluded a valid contract. You are very worried as you do not have the money to buy ten
handbags and you only wish to buy one handbag. What can you do now? Can Buy.com hold you to the
contract and force you to pay for ten handbags?
Our law does allow for mistakes in real-world contracts provided the mistake is a reasonable
mistake. For mistakes in automated transactions, we must look to section 20(e) of the Electronic
Communications and Transactions Act.
In terms of this Act, no contract will be concluded if:
= Buy.com did not give you an opportunity to correct your error. So, for example, before
you clicked on the ‘I accept’ button, Buy.com should have given you an opportunity to ay automated system
review the goods that you were buying. is a system
in which one
® You notify Buy.com of the error as soon as is practically possible. This means that you _ Or both of the contracting
should phone or email them as soon as you notice the mistake. parties make use of a
® You must take any reasonable steps that Buy.com asks you to take in order to return solnvere peogremane Hat
does not need human
the extra bags to them. intervention. An example
® You must not have received a material benefit from the purchase. This means that you _9¢ this would be buying
cannot use the extra nine bags and then return them to Buy.com. something from an online

It is important to note that section 20(e) protects only the purchaser and not the online Buy or Takealot.
shopping store.

bET ats Takealot.com

Sid finds out that Takealot.com is having a huge online sale. That evening he browses the app
and is very happy to discover that the site has, on sale, a pair of sunglasses he has been wanting
to buy for ages. The price of the sunglasses is R1 000, which is RS00 cheaper than the same
sunglasses at his local store. Sid decides to buy two pairs — one for himself and one as a gift
for his best friend. He places the order and the site displays the order and asks him to click and
accept the terms and conditions to conclude the sale. Sid is very distracted as he completes this
process as he is also watching his favourite soap opera while he is shopping online. Later that
evening Sid receives an email from the site stating that his 20 pairs of sunglasses will be shipped
to him within five working days. He is very shocked and immediately goes back to the website
to review his order. He realises that he mistakenly typed 20 instead of 2. Can Takealot.com force
Sid to pay for the 20 pairs of sunglasses?

282 Chapter 19 | Online contracts and e-commerce

 Case study (continued) Takealot.com

If Sid wants to allege that he made a mistake in his order, he will have to meet the
requirements of section 20(e) of the Electronic Communications and Transactions Act. Takealot.
com did give Sid an opportunity to review his order prior to confirming the purchase. The fact
that Sid was distracted and did not review the order will not be an acceptable reason allowing
him to avoid responsibility. He will therefore be bound by his error. He will be able to escape
liability in terms of the common law only by showing that the error he made is so blatant that
it should have been noticed by the owner of the website. The court will then ask whether an
order for 20 pairs of sunglasses would be so obvious that the owner of the website would
realise it was an error. In terms of the other requirements of the Act, Sid will have had to notify
Takealot.com of this error as soon as he became aware of it. Since he has not received delivery
of the sunglasses, he will not have received any material benefit, nor will he have to return
the sunglasses.

19.6 Legal issues that you need to look out for before concluding
an online contract
Before you even think about buying anything over the internet, you need to read the terms and
conditions of the company that you are buying from (in our example, it is Buy.com).
Here are some of the things you need to pay specific attention to.

Citation of the parties

= = Is the company that you will be doing business with (for example, Buy) clearly identified in the
terms and conditions?
® Do you know where the company’s registered offices are?
® Do you know how to contact the company if you need to?

Contract formation
® Do the terms and conditions make provisions for other principles to apply other than the normal
deeming provisions?

Consumer protection
In terms of the terms and conditions, what kind of consumer protection will you receive if, for instance:
@ = the product is defective or does not work at all
@ goods are not delivered
® = goods are delivered late
@ there is a mistake with the payment?

Payment by consumer
@ When and at what stage must you pay?
= What amount must you pay?
@ Does the amount include or exclude taxes/delivery charges/customs?

Method of payment
= How must payment be made? (for example, credit card or EFT)

Performance by seller
= How long does the seller have to deliver goods and/or services to you?
= What happens if the seller does not perform in terms of the agreement?

Chapter 19 | Online contracts and e-commerce 283

 Risk
= Who bears the risk if something goes wrong?
@ = To what extent did the seller limit his liabiliry?
® How, when and by whom may the contract be terminated?

Jurisdiction/alternative dispute
® If you and the seller ever do end up in court, which party's law will apply?
® Which court is authorised to hear a dispute between you and the seller?

What do you think?

Think back to the example that we had at the beginning of the chapter where you bought a defective
gaming console from Buy.com. You failed to read Buy's terms and conditions. Imagine that Buy refuses
to refund the money or replace the gaming console on the strength of a provision in their terms and
conditions. Do you think thar this is fair? Do you think that you should be penalised, so to speak,
in this way for not reading their terms and conditions? What do you think should ideally happen in
this instance?

Chapter summary

In this chapter, you learned the following about online
contracts and e-commerce:
Similar to the physical world, we can also conclude
contracts in cyberspace.
As in the physical world, certain legal principles will
regulate the formation, performance and conclusion of
online contracts.
All the legal principles that apply to physical world
contracts, also apply to online contracts, but we find
that additional requirements are also applicable.
The single most important thing is that just because
you do not read and/or understand the terms and
conditions of the electronic transaction, this does not
mean that you will not be held liable in law to those
terms and conditions. If the seller (reasonably) provided
you with the opportunity to read the terms and
conditions before you made the purchase, you really
have no excuse not to do so.
Shrink-wrap agreements are concluded when you
open the shrink-wrapping of the product.
Click-wrap agreements are agreements in which
you have to click on a box to accept the terms and
conditions of the contract.
Browse-wrap agreements are agreements that
regulate how the content of a specific website is used.
If you makea mistake when contracting with an
automated system, you may be able to avoid liability if
you comply with the provisions of section 20(e) of the
Electronic Communications and Transactions Act.

284 Chapter 19 | Chapter summary

Review your understanding
Below, you will find an extract from the website Terms of Service of Buy.com, Read it and answer the questions
that follow.
Termsof use
Effective
date: Aug 15, 2017
Please read on to learn the rules and restrictions that
govern your use of our website(s), products, services
and applications (the “Services”). If you have any
questions, comments, or concerns regarding these
terms or the Services, please contact us at support@
buy.com, or at One Sansome Street, 40th Fl, San
Francisco, CA 94104.
These Terms of Use (the “Terms”) are a binding
contract between you and ContextLogic, Inc. (“Buy~
“we" and “us”). You must agree to and accept all
of the Terms, or you do not have the right to use the
Services. Your using the Services in any way means that
you agree to all of these Terms, and these Terms will
remain in effect while you use the Services. These Terms
include the provisions in this document, as well as those
in the Privacy Policy and Copyright Dispute Policy.
Will these terms ever change?
We are constantly trying to improve our Services,
so these Terms may need to change along with the
Services. We reserve the right to change the Terms
at any time, but if we do, we will bring it to your
attention by placing a notice on the Services, by
sending you an email, and/or by sore other means.
if you do not agree with the new Terms, you are free
to reject them; unfortunately, that means you will
no longer be able to use the Services. If you use the
Services in any way after a change to the Terms is
effective, that means you agree to all of the changes.
Except for changes by us as described here, no other
amendment or modification of these Terms will be
effective unless in writing and signed by both you and us.
What about
my privacy?
Buy takes the privacy of its users very seriously. For the
current Buy Privacy Policy, please visit here.
The Children’s Online Privacy Protection
Act
(“COPPA”) requires that online service providers
obtain parental consent before they knowingly collect
personally identifiable information online from children
who are under 13. We do not knowingly collect or
solicit personally identifiable information from children
under 13; if you are a child under 13, please do not
atternpt to register for the Services or send any personal
information about yourself to us. Parents and legal
guardians may not agree to these Terms or register for
the Services on behalf of any children under the age of
13. If we learn we have collected personal information
from a child under 13, we will delete that information
as quickly as possible. if you believe that a child
under 13 may have provided us personal information,
please contact us at privacy@contextLogic.com.
What are the basics of using the services?
You may be required to sign up for an account, and
select a password and user name (“Buy User ID"). You
promise to provide us with accurate, complete, and
may not select as your Buy User ID a name that you
do not have the right to use, or another person's name
with the intent to impersonate that person. You may
not transfer your account to anyone else without our
prior written permission,
You represent and warrant that you are an
individual of legal age to form a binding contract (or
if not, you have received your parent's or guardian's
permission to use the Services and gotten your parent
of guardian to agree to these Terms on your behalf).
You will only use the Services for your own
internal, personal, use, and not on behalf of or for the
benefit of any third party, and only in a manner that
complies with all laws that apply to you. If your use of
(continued)
Chapter 19 | Review your understanding 285
 the Services is prohibited by any applicable laws, then
you are not authorized to use the Services. We cannot
and will not be responsible for your using the Services
in a way that breaks the law.
You will not share your account or password with
anyone, and you must protect the security of your
account and your password. You're responsible for any
You may have multiple accounts on Buy but Buy
strictly forbids the use of multiple accounts for the
same sole user or the use of one account for multiple
users for the purpose of earning more rewards. Buy
will not honor rewards earned from such accounts.
By using the Services, you will automatically
be deemed to have opted in to receive e-mail
communication from us. When you sign in for the
first time, your preferences will be set to automatically
publish all social interactionsto other social networks.
However,
you will be able to edit these preferences at
any time under “Settings.”
Your use of the Services is subject to the following
You represent, warrant, and agree that you will
not contribute any Content or User Submission (each
of those terms is defined below) or otherwise use the
Services or interact with the Services in a manner that:
A. Infringes or violates the intellectual property rights
or any other rights of anyone else (including Buy);
8. Violates any law or regulation, including any
applicableexport control laws;
C. ts harmful, fraudulent, deceptive, threatening,
harassing, defamatory, obscene, or otherwise
objectionable;
D. Jeopardizes the security of your Buy account or
anyone else's (such as allowing someone else to
log in to the Servicesas you);
E. Attempts, in any manner, to obtain the password,
account, or other security information from any
other user;
F. Violates the security of any computer network, or
cracks any passwords or security encryption codes;
G. Runs Maillist, Listserv, any form of auto-responder
or
“spam” on the Services, or any processes that run
or are activated while you are not logged into the
Services, or that otherwise interfere wath the proper
working of the Services (including by placing an
unreasonableload on the Services’ infrastructure),
286 Chapter 19 | Review your understanding
H. “Crawls,” “scrapes,”
or “spiders” any page, data,
or portion of or relating to the Services or Content
(through use of manual or automated means);
1. Copies or stores any significant portion of
the Content;
J. Decompiles,
reverse engineers, or otherwise
attempts to obtain the source code or
underlying ideas or information of or relating
to the Services; or
K. Upload, transmit, distribute, store, create, or
otherwise sell or offer for sale any Prohibited Items.
A violation of any of the foregoing is grounds for
termination of your right to use or access the Services.
What are my rights in the services?
The materials displayed or performed or available on
or through the Services, including, but not limited
to, text, graphics, data, articles, photos, images,
illustrations, User Submissions, and so forth (all of the
foregoing, the “Content”) are protected by copyright
and/or other intellectual property laws. You promise
to abide by all copyright notices, trademark rules,
information, and restrictions contained in any Content
copy, reproduce, modify, translate, publish, broadcast,
sell or otherwise exploit for any purpose any Content
not owned by you, (i) without the prior consent of
the owner of that Content or (ii) in a way that violates
someone else's (including Buy's) rights.
You understand that Buy owns the Services. You
will not modify, publish, transmit, participate in the
transfer or sale of, reproduce (except as expressly
provided in this Section), create derivative works based
on, or otherwise exploit any of the Services.
The Services may allow you to copy or download
certain Content; please remember that just because
this functionalityexists, does not mean that all the
restrictions
above do not apply — they do!
Do | have to grant any licenses to Buy or to
other users?
Anything you post, upload, share, store, or
otherwise provide through the Services is your
“User Submission.” Some User Submissions are
viewable by other users. in order to display your User
Submissions on the Services, and to allow other users
(continued)
to enjoy them (where applicable), you grant us certain
rights in those User Submissions. Please note that all
of the following licenses are subject to our Privacy
Policy to the extent they relate to User Submissions
that are also your personally-identifiable information.
For all User Submissions, you hereby grant Buy a
license to translate, modify (for technical purposes,
for exarnple making sure your content is viewable on
an iPhone as well as a computer) and reproduce and
otherwise act with respect to such User Submissions,
in each case to enable us to operate the Services, as
described in more detail below. This is a license only -
your ownership in User Submissions is not affected.
If you store a User Submission
in your own
personal
Buy account, in a manner
that is not
viewable by any other user except you (a “Personal
User Submission”), you grant Buy the license above,
as well as a license to display, perform, and distribute
your Personal User Submission for the sole purpose of
making that Personal User Submission accessible to
you and providing the Services necessary to do so.
If you share a User Submission only in a manner
that only certain specified users can view (for example,
& private message to one or more other users) (a
“Limited Audience User Submission”), then you grant
Buy the licenses above, as well as a license to display,
Submission for the sole purpose of making that Limited
Audience User Submission accessible to such other
specified users, and providing the Services necessary
to do so. Also, you grant such other specified users
a license to access that Limited Audience User
Submission, and to use and exercise all rights in it, as
permitted by the functionality of the Services.
If you share a User Submission publicly on the
Services and/or in a manner that more than just you
or certain specified users can view, or if you provide
us (in a direct email or otherwise) with any feedback,
suggestions, improvements, enhancements, and/or
feature requests relating to the Services (each of the
foregoing,a “Public User Submission"), then you
grant Buy the licenses above, as well as a license
to display, perform, and distribute your Public User
Submission for the purpose of making that Public User
Submission accessible to all Buy users and providing
the Services necessary to do so, as well as all other
rights necessary to use and exercise all rights in that
and/or otherwise in connection with Buy's business,
provided that Buy will try to notify you if it uses your
Public User Submission for any reason other than
displaying it on the Services. Also, you grant all other
users of the Services a license to access that Public
User Submission, and to use and exercise all rights in
it, as permitted by the functionality of the Services.
You agree that the licenses you grant are royalty-free,
Finally, you understand and agree that Buy, in
performing the required technical steps to provide
the Services to our users (including you), may need to
make changes to your User Submissions to conform
and adapt those User Submissions to the technical
requirements of connection networks, devices,
services, or media, and the foregoing licenses include
the rights to do so.
What if | see something on the services that
infringesmy copyright?
You may have heard of the Digital Millennium Copyright
Act (the “DMCA”), as it relates to online service providers,
like Buy, being asked to remove material that allegedly
violates someone's copyright. We respect others’
intellectual property rights, and we reserve the right to
delete or disable Content alleged to be infringing, and
to terminate the accounts of repeat alleged infringers;
to review our complete Copyright Dispute Policy and
learn how to report potentially infringing content,
click here. To learn more about the DMCA, click here.
Who is responsible
for what | see and do on
the services?
Any information or content publicly posted or
privately transmitted through the Services is the sole
responsibilityof the person from whom such content
originated, and you access all such information and
content at your own risk, and we are not liable for any
errors or omissions in that information or content or
for any damages or loss you might suffer in connection
with it. We cannot control and have no duty to take
any action regarding how you may interpret and
use the Content or what actions you may take as 4
result of having been exposed to the Content, and
you hereby release us from all liability for you having
acquired
or not acquired Content through the Services.
(continued)
Chapter 19 | Review your understanding 287
We cannot guarantee the identity of any users with
whorn you interact in using the Services and are not
responsible for which users gain access to the Services.
You are responsible for all Content you contribute,
in any manner, to the Services, and you represent and
warrant you have all rights necessary to do so, in the
manner in which you contribute it. You will keep all
your registration information accurate and current.
You are responsible for all your activity in connection
with the Services.
The Services may contain links or connections to
third party websites or services that are not owned
or controlled by Buy. When you access third party
websites or use third party services, you accept
that there are risks in doing so, and that Buy is not
responsible for such risks. We encourage you to be
aware when you leave the Services and to read the
terms and conditions and privacy policy of each third
party website or service that you visit or utilize.
Buy has no control over, and assumes no
responsibility for, the content, accuracy, privacy policies,
or practices of or opinions expressed in any third party
websites or by any third party that you interact with
through the Services. In addition, Buy will not and
cannot monitor, verify, censor or edit the content of
any third party site or service. By using the Services, you
release and hold us harmless from any and all liability
arising from your use of any third party website or service.
individuals found on or through the Services, including
payment and delivery of goods or services, and any
other terms, conditions, warranties or representations
you and such organizationsand/or individuals. You
should make whatever investigation you feel necessary
or appropriate before proceeding with any online or
offline transaction with any of these third parties. You
agree that Buy shall not be responsible or liable for any
loss or damage of any sort incurred as the result of any
foregoing, you agree that Buy does not facilitate (and
bears no responsibility
or liability for) any transaction
(or payment
or refund therefore) arranged through
Buy Local.
If there is 4 dispute between participants
on this
site, or between users and any third party, you agree
that Buy is under no obligation to become involved.
288 Chapter 19 | Review your understanding
In the event that you have a dispute with one or more
other users, you release Buy, its officers, employees,
agents, and successors from claims, demands, and
damages of every kind or nature, known or unknown,
suspected or unsuspected, disclosed or undisclosed,
arising out of or in any way related to such disputes
and/or our Services.
YOU SHALL AND HEREBY DO WAIVE CALIFORNIA
CIVIL CODE SECTION 1542, WHICH SAYS: “A
GENERAL RELEASE DOES NOT EXTEND TO CLAIMS
WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME
OF EXECUTING THE RELEASE, WHICH, IF KNOWN BY
HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS
OR HER SETTLEMENT WITH THE DEBTOR.“
Will Buy ever change the services?
We are always trying to improve the Services, so they
may change over time. We may suspend or discontinue
any part of the Services, or we may introduce new
features or impose limits on certain features or restrict
access to parts or all of the Services. We will try to give
you notice when we make a material change to the
Services that would adversely affect you, but this is not
always practical. Similarly, we reserve the right to
remove any Content from the Services at any time, for
any reason (including, but not limited to, if someone
alleges you contributed that Content in violation of
these Terms), in our sole discretion, and without notice.
Do the services
cost anything?
it is currently free to access and browse Buy.com
or any other Services. However, you may choose to
purchase products through the Services, and you
alone will be responsible for paying the purchase
price of any products you buy, in addition to any
taxes and shipping costs. Buy may limit or cancel
quantities of products purchased, and it reserves the
right to refuse any order. In the event Buy needs to
make a change to an order, it will attempt to notify
you by contacting the email address, billing address,
and/or phone number provided at the time the order
was made. Prices are subject to change at any time.
Due to separate and applicable tax jurisdictions,
your
purchases may be subject to specific sales, custom
or value-addedtaxes, and the shipping time and
associated
cost may increase accordingly
(continued)
 Buy reserves the right to require payment of fees
for certain or all Services, in addition to the fees
charged for the purchase of products. You shall pay ail
such fees, as described on the website in connection
with such Services selected by you. Buy reserves the
right to change its price list and to institute new
charges at any time, upon notice to you, which may
be sent by email or posted on the Website. Your use
of the Services following such notification constitutes
your acceptance of any new or increased charges.
What if | need to return a purchase?
We want you to be completely satisfied with your
purchase on the Services. If for any reason you are
unhappy, please contact Buy support at
support@buy.com.
You may return all products within 30 days of
delivery. You can initiate a return or a refund on items
from your Order History page. Simply click on ‘Contact
Support’ next to the item you wish to request a return
or a refund and Buy Support will be ready to assist.
We aim to process all requests within 72 hours
upon receiving. Refunds are issued back to the original
form of payment used to purchase the order. Should
you have any questions about the status of your
refund, your return or your account, please feel free
to contact Buy support at support@buy.com.
For more
information
on our Return Policy, visit here.
if a Buy promotional credit is applied to an order and
that order is refunded for any reason, any promotional
credit used in that order will not be refunded.
Buy cannot refund, reimburse, cover, or otherwise
be responsible for any fees not paid to Buy. This
includes any customs taxes or VAT as well as any return
shipping costs you may incur in the refund process.
However, the foregoing refund and return terms DO
NOT apply to any product you purchase by using Buy
Local. Transactions conducted by using Buy Local are
entirely between you and the other user of Buy Local.
What if | want to receive Buy mobile text alerts
or opt-out?
lf you would like to enroll to receive mobile texts and
alerts about Buy products and services, you may sign
up to do so on the checkout page for purchasing a
product through Buy by providing your consent to
receive recurring autodialed marketing texts from or on
behalf of us at the mobile number you have provided to
opt-in. You understand that consent is not a condition
of purchase, Message and data rates may apply. If you
would like to be removed from the Buy text list, you
can follow the instructions provided in those messages
or otherwise reply STOP to any Buy alert. if you have
any questions, you may reply HELP to any Buy alert or
contact customer care at support@buy.com.
What if | want to stop using the Services?
You're free to do that at any time, by following the
steps here. please refer to our Privacy Policy, as well
as the licenses above, to understand how we treat
information you provide to us after you have stopped
using our Services. Buy is also free to terminate (or
suspend access to) your use of the Services or your
account, for any reason in our discretion, including
your breach of these Terms. Buy has the sole right
to decide whether you are in violation of any of the
restrictionsset forth in these Terms.
Account termination may result in destruction of any
Content associated with your account, so keep that in
mind before you decide to terminate your account.
Provisions that, by their nature, should survive
termination of these Terms shall survive termination.
By way of example, all of the following will survive
termination:
any obligation you have to pay us or
indemnify us, any limitations on our liability, any terms
regarding ownership or intellectual property rights,
and terms regarding disputes between us.
| use the Buy App via the Apple App Store -
should | know anything about that?
These Terms apply to your use of all the Services,
including the applications available via the Appie, Inc.
(“Apple”) App Store (including, without limitation, for
Phone, iPad, Touch, and Watch) (each an “Application”
and, collectively, the “Applications”), but the following
additional terms also apply to each Application:
A. Both you and Buy acknowledge that the Terms
are concluded between you and Buy only, and not
with Apple, and that Apple is not responsible for
the Application or the Content;
B. The Application is licensed to you on a
limited, non-exclusive, non-transferable,
non-sublicensable basis, solely to be used in
connection with the Services for your private,
(continued)
Chapter 19 | Review your understanding 289
 personal, non-commercial use, subject to all the
terms and conditions of these Terms as they are
applicableto the Services;
C. You will only use the Application in connection
with an Apple device that you own or control;
D. You acknowledge and agree that Apple has no
obligation whatsoever to furnish any maintenance
and support services with respect to the Application;
E. In the event of any failure of the Application to
conform to any applicable warranty, including
those implied by law, you may notify Apple
of such failure; upon notification,
Apple's sole
warranty obligation to you will be to refund to
you the purchase price, if any, of the Application;
F You acknowledge and agree that Buy, and not
Apple, is responsible for addressing any claims
you or any third party may have in relation to
the Application;
G. You acknowledge and agree that, in the event of
any third party claim that the Application or your
possession and use of the Application infringes
that third party's intellectual property rights,
Buy, and not Apple, will be responsible for the
investigation, defense, settlement and discharge
of any such infringement claim;
H. You represent and warrant that you are not
located in a country subject to a U.S. Government
embargo, or that has been designated by the
U.S. Government as a “terrorist supporting”
country, and that you are not listed on any U.S.
Government list of prohibited or restricted parties;
|. Both you and Buy acknowledge and agree that,
in your use of the Application, you will comply
with any applicable third party terms of agreement
which may affect or be affected by such use; and
J. Both you and Buy acknowledge and agree that
Apple and Apple's subsidiaries are third party
beneficiaries of these Terms, and that upon your
acceptance of these Terms, Apple will have the
right (and will be deemed to have accepted the
right) to enforce these Terms against you as the
What else do | need to know?
Warranty Disclaimer.
Neither Buy nor its licensors
or suppliers makes any representations
or warranties
concerning any content contained in or accessed
290 Chapter 19 | Review your understanding
through the Services, and we will not be responsible
or liable for the accuracy, copyright compliance, legality,
or decency of material contained in or accessed
through the Services. We (and our licensors and
suppliers) make no representations or warranties
regarding suggestions or recommendations of
services or products offered or purchased through the
Services. Products and services purchased or offered
(whether or not following such recommendations
and suggestions) through the Services are provided
“AS IS” and without any warranty of any kind from
Buy or others (unless, with respect to such others
only, provided expressly and unambiguously in writing
by a designated third party for a specific product).
THE SERVICES AND CONTENT ARE PROVIDED BY
BUY (AND ITS LICENSORS AND SUPPLIERS) ON AN
“AS-IS” BASIS, WITHOUT WARRANTIES OR ANY
KIND, EITHER EXPRESS OR IMPLIED, INCLUDING,
WITHOUT LIMITATION, IMPLIED WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, NON-INFRINGEMENT, OR THAT USE OF
THE SERVICES WILL BE UNINTERRUPTED OR ERROR-
FREE. SOME STATES DO NOT ALLOW LIMITATIONS
ON HOW LONG AN IMPLIED WARRANTY LASTS,
SO THE ABOVE LIMITATIONS MAY NOT APPLY
TO YOU.
Limitation of Liability. TO THE FULLEST
EXTENT ALLOWED BY APPLICABLE LAW, UNDER
NO CIRCUMSTANCES AND UNDER NO LEGAL
THEORY (INCLUDING, WITHOUT LIMITATION, TORT,
CONTRACT, STRICT LIABILITY, OR OTHERWISE) SHALL
BUY (OR ITS LICENSORS OR SUPPLIERS) BE LIABLE
TO YOU OR TO ANY OTHER PERSON FOR (A) ANY
INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL
DAMAGES OF ANY KIND, INCLUDING DAMAGES
FOR LOST PROFITS, LOSS OF GOODWILL, WORK
STOPPAGE, ACCURACY OF RESULTS, OR COMPUTER
FAILURE OR MALFUNCTION, OR (B) ANY AMOUNT,
IN THE AGGREGATE, IN EXCESS OF THE GREATER
OF (1) $100 OR (i) THE AMOUNTS PAID BY YOU
TO BUY IN CONNECTION WITH THE SERVICES IN
THE TWELVE (12) MONTH PERIOD PRECEDING THIS
APPLICABLE CLAIM, OR (lll) ANY MATTER BEYOND
OUR REASONABLE CONTROL. SOME STATES DO
NOT ALLOW THE EXCLUSION OR LIMITATION OF
CERTAIN DAMAGES, SO THE ABOVE LIMITATION AND
EXCLUSIONS MAY NOT APPLY TO YOU.
 indemnity.
To the fullest extent allowed by
applicable law, You agree to indemnify and hold
Buy, its affiliates, officers, agents, employees, and
partners harmiess from and against any and ail claims,
and expenses (including attorneys’ fees) arising from
Of in any way related to any third party daims relating
to (a) your use of the Services (including any actions
taken by a third party using your account), and (b)
your violation of these Terms. in the event of such a
claim, suit, or action (“Claim”),we will attempt to
provide notice of the Claim to the contact information
we have for your account (provided that failure to
deliver such notice shall not eliminate or reduce your
indemnification obligations hereunder).
Assignment. You may not assign, delegate or transfer
these Terms or your rights or obligations hereunder, or
your Services account, in any way (by operation of law
or otherwise) without Buy's prior written consent. We
may transfer, assign, or delegate these Terms and our
rights and obligations without consent.
Choice Of Law & Jurisdiction.
These Terms and your use of the Services will be
interpretedin accordance with the law of the State
of California and the United States of America,
without regard to their conflict-of-law provisions. You
and Buy agree to submit to the personal jurisdiction
of a state court located in San Francisco County,
San Francisco, California or a United States District
court, Northern District of California located in San
Francisco, California (collectively, the “San Francisco
Courts”) for any actions which the parties retain the
right to seek injunctive or other equitable relief in a
court of competent jurisdiction to prevent the actual
or threatened infringement, misappropriation, or
violation
of a party's copyrights, trademarks, trade
secrets, patents, or other intellectual property rights,
a5 set forth in the Dispute Resolution provision below.
Miscellaneous. You will be responsible for paying,
withholding, filing, and reporting all taxes, duties,
and other governmental assessments associated with
your activity in connection with the Services, provided
that the Buy may, in its sole discretion, do any of the
foregoing on your behalf or for itself as it sees fit.
The failure of either you or us to exercise, in any way,
any nght herein shall not be deemed a waiver of any
further rights hereunder. If any provision of these Terms
is found to be unenforceable
or invalid, that provision
will be limited or eliminated, to the minimum extent
necessary, so that these Terms shall otherwise remain
in full force and effect and enforceable. You and Buy
agree that these Terms are the complete and exclusive
statement of the mutual understanding
between
you and Buy, and that it supersedes and cancels ail
previous written and oral agreements, communications
and other understandings relating to the subject matter
of these Terms. You hereby acknowledge and agree
that you are not an employee, agent, partner, or joint
venture of Buy, and you do not have any authority of
any kind to bind Buy in any respect whatsoever. Except
as expressly set forth in the section above regarding the
Apple Applications,
you and Buy agree there are no
third party beneficiaries
intended under these Terms.
Dispute Resolution.
Mandatory, Bilateral Arbitration
and Waiver of
Class Actions.
Please read this carefully. It affects your
rights. YOU AND BUY AGREE THAT ANY
DISPUTE, CONTROVERSY, OR CLAIM ARISING
OUT OF, OR RELATING TO YOUR USE OF BUY,
TO ANY PRODUCTS OR SERVICES SOLD OR
DISTRIBUTED BY OR THROUGH BUY, TO THIS
AGREEMENT, OR TO THE CONTENT, AND/OR
USER SUBMISSION (PUBLIC, PERSONAL AND/OR
LIMITED AUDIENCE) ON BUY SHALL BE RESOLVED
ONLY BY FINAL AND BINDING, BILATERAL
ARBITRATION, except that (1) you may assert
claims in small claims court if your claims qualify;
and (2) this agreement to arbitrate does not
include your or Buy's right to seek injunctive or
other equitable relief in state or federal court in
San Francisco to prevent the actual or threatened
infringement, misappropriation or violation of
a party's copyrights, trademarks,trade secrets,
patents, or other intellectual property rights. The
Federal Arbitration Act, 9 U.S.C. § 1, et seq., and
federal arbitration law apply to this agreement
and govern all questions as to whether a dispute
is subject
to arbitration.
There is no judge or jury in arbitration,
and
court review of an arbitration
award is limited.
(continued)
Chapter 19 | Review your understanding 291
 An arbitrator, however, can award on individual
basis the same damages and relief as a court
{including injunctive and declaratory relief or
statutory damages), and must follow the terms
of these Terms of Use.
“Disputes” shall include, but are not limited to,
any claims or controversies between you and Buy
against each other related in any way to or arising
out of in any way from the Service, the Content,
User Submission (Public, Personal, and/or Limited
Audience), including but not limited to sales, returns,
refunds, cancellations, defects, policies, privacy,
advertising, or any communications between you
and Buy, even if the claim arises after you or Buy has
terminated Service or a user account. Disputes also
include, but are not limited to, claims that: (a) you
bring against our employees, agents, affiliates, or
other representatives; or (b) that Buy brings against
you. Disputes also include, but are not limited to,
{i) claims in any way related to or arising out of any
aspect of the relationship between you and Buy,
whether based in contract, tort, statute, fraud,
misrepresentation, advertising claims, or any other
legal theory; (ii) claims that arose before these Terms
or out of a prior set of Terms with Buy; (iii) claims that
are subject to on-going litigation where you are not a
party or a class member; and/or (iv) claims that arise
after the termination of these Terms.
Dispute Notice
Before initiating an arbitration, you and Buy each
agree to first provide the other a written notice
(“Notice of Dispute”), which shall contain: (a) a written
description of the problem and relevant documents
and supporting information; and (b) a statement of
the specific relief sought. A Notice of Dispute should
be sent to: One Sansome Street, San Francisco,
CA 94104 or emailed at support@buy.com. Buy will
provide a Notice of Dispute to you via the email
address associated with your Buy User ID. You and
Buy agree to make attempts to resolve the Dispute
prior to commencing an arbitration and not to
commence an arbitration proceeding until this 45-day
post-notice resolution period expires. If an agreement
cannot be reached within forty-five (45) days of receipt
of the Notice of Dispute, you or Buy may commence
an arbitration proceeding.
292 Chapter 19 | Review your understanding
Arbitration
Process and Procedure
Unless you and Buy agree otherwise in writing,
arbitration shall (1) be administered by the Judicial
Arbitration and Mediation Services, Inc. (“JAMS*),
pursuant to the JAMS Streamlined Arbitration Rules
& Procedures then in effect (the “JAMS Rules”) and
as modified by this agreement to arbitrate, including
the rules regarding filing, administration, discovery,
and arbitrator fees; (2) be conducted by a single,
neutral arbitrator; and (3) take place in the county
where you reside. To the extent that this agreement to
arbitrate conflicts with the JAMS Policy on Consumer
Arbitrations Pursuant to Pre-Dispute Clauses Minimum
Standards for Procedural Fairness (the “Minimum
Standards”), the Minimum Standards in that regard
will apply.
We each agree that any dispute resolution
proceedings will be conducted only on an
individual basis and not in a dass or representative
action. Further, unless both you and Buy expressly
agree otherwise, the arbitrator may not consolidate
more than one person's claims. If this prohibition of
class, representative, or consolidated arbitration is
found to be unenforceable, then the entirety of this
arbitration provision shall be null and void.
If, for any reason, a claim proceeds in court
rather than in arbitration, we each waive our right
to a jury trial.
YOU THEREFORE UNDERSTAND AND AGREE THAT
BY ENTERING INTO THIS AGREEMENT, YOU AND
BUY ARE EACH WAIVING THE RIGHT TO A TRIAL
BY JURY AND THE RIGHT TO PARTICIPATE IN A
CLASS ACTION FOR ANY CLAIMS COVERED BY
THIS AGREEMENT.
The arbitrator may award declaratory or injunctive
relief only in favor of the individual party seeking
relief and only to the extent necessary to provide relief
warranted by that party’s individual claim.
Notwithstanding any JAMS Rules to the contrary or
any other provision in the arbitration rules chosen, by
agreement, to govern, you and Buy each agree that
all issues regarding the Dispute are delegated to the
arbitrator to decide, except that only a court (and
not the arbitrator) shall decide any disagreements
regarding the scope and enforceability of this
agreement to arbitrate.
(continued)
 Hearing
If your claim does not exceed $5,000, you and Buy
agree to waive an oral hearing by the arbitrator
and the arbitration will be conducted solely on
the basis of documents you and Buy submit to
the arbitrator, unless you request a hearing or the
arbitrator determines that a hearing is necessary.
To the extent an oral hearing is requested by you
or Buy, or deemed necessary by the arbitrator, you
and Buy agree that the hearing will be conducted
telephonicallyor videographically.
Arbitrator’s Decision
An arbitrator's award will be a written statement of the
disposition of each claim and will also provide a concise
written statement of the essential findings and conclusions
which form the basis of the award. The arbitrator's
decision and award is final and binding, with some limited
court review under the FAA, and judgment on the award
may be entered in any court of competent jurisdiction.
Questions:
Identify the provisions in this specific agreement
which you think may (potentially) be problematic
for you as the buyer.
Will you (as the buyer) be provided with adequate
legal protection under this agreement?
What type of agreement are we dealing with here?
~~
Can you refuse to consent to the terms and
conditions of the agreement, yet still go ahead with
your purchase?
Further reading
McFadyen, T.M. 2008. eCommerce Best Practices — How to
Market, Sell, and Service Customers with Internet Technologies.
USA: McFadyen Solutions
(Since 2005, a large number of e-commerce books have been
published on- and offline. This is 2 good onc — generously
illustrated
and explained.)
Papadopoulos,S. and Snail, S. 2012. Cyberlaw@SA Ill, Pretoria:
Van Schaik Publishers
(This book is a good introduction to Cyber Law in
South Africa.)
Fees
It is each parties’ responsibility
to pay any JAMS filing,
case management/administrative,
and arbitrator
fees as set forth in the JAMS Rules. If your daim for
damages does not exceed $5,000, Buy will pay all
such fees unless the arbitrator finds that either the
substance of your Dispute or the relief sought was
frivolousor was brought for an improper purpose (as
measured by the standards set forth in the Federal
Rule of Civil Procedure 11(b)).
Small Claims & Government
Actions
As an alternative to arbitration, you or Buy may resolve
Disputes in a small claims court that has jurisdiction over
your claim. These Terms and this arbitration agreement
do not prevent you from bringing your Dispute to the
attention of any federal, state, or local government
agency. Such agencies can, if the law allows, seek
relief against Buy on your behalf.
(Source: httos-://wwwe buy.com/terms)
5. Do you think the terms and conditions in this
agreement are fair and reasonable? Explain
your answer.
6. Have all the formal requirements of contract law
been met by this agreement?
7. What would you be able to do if you did not read
the agreement but made a purchase only later to
discover that the product you bought is broken?
Van Der Merwe, D. et al. 2016. Jnformation and Communications
Technology Law, 2nd edn. Durban: LexisNexis South Africa
(This is 2 very comprehensiveexploration of Cyber Law in
South Africa.)
hrtps://www.eff_org/ wp/clicks-bind-ways-users-agree-online-
terms-service
(This well-written online article by Ed Bayley explains what
you need to know about online contracts. It is published
by the non-profit organisation The Electronic Frontier
Foundation: Defending Your Rights in a Digital World.)
Chapter 19 | Further reading 293
20 Methods of payment

The main ideas

@ What are negotiable instruments? ® Parties to negotiable instruments
@ Requirements for bills of exchange = Transferring ownership of a bill
= Who gets paid? = Who pays?
= Cheques @ =What
are electronic payments?

The main skills

® = Identify dements of a bill.
= Compare the different negotiable instruments.
@ Understand order bills and bearer bills.
@ Identify parties to a cheque.
= Identify and differentiate between different types of holder.
@ Discuss the rights of different holders.
@ = Identify who must pay on a bill.
®@ Explain the relationship that exists between a bank and its customers.
®@ Discuss what the legal implications are if a cheque is crossed.
® Discuss when a cheque is considered to have been paid.
@ Describe and differentiate between not negotiable and not transferable cheques.
@ Identify the different forms of electronic payment.

We are all familiar with paying cash for things. But, advances in technology have allowed for the
development of other methods of paying for goods and services, such as debit cards, credit cards, electronic
funds transfer (EFT) and internet banking. This chapter looks at some of these types of payment. We
will identify the parties involved, discuss the different processes involved with each respective type of
payment, and look at how and when different parties will be able to claim payment from one another.

Before you start

How do you pay your accounts? And if you owned your own business, how would you manage the payment
of creditors? Would you trust someone with your banking details and passwords? Would you pay cash,
by cheque or by internet banking? Carrying cash around is inconvenient and it can be dangerous. It is also
inconvenient to pay for expensive goods with cash. So, various forms of payment have developed over the
years to avoid the use of cash and to try to find safer methods of payment. We will look at some of these now.

20.1 The development of payment methods

At first, people used a system of barter. A person would exchange what they had for the goods or services
of another person. This was highly inefficient, as you had to find someone who had what you wanted
and who wanted your goods or services in return.
Merchants then developed cash, in the form of coins and notes, to pay their debts. This created a
much more flexible payment system. But the risk of travelling with moncy led to the evolution of paper
money, most notably the negotiable instrument — an instrument of payment. However, there are two
disadvantages to negotiable paper money, namely:
® arisk of non-payment
® a volume of paper-flow involved in the collection process.

294 Chapter 20 | Methods of payment

This led to the development of other payment instruments. SAS Ra
The latest development in the evolution of payment is electronic transfers. The debtor ___ the electronic transmission
electronically instructs her bank to pay funds into another person's bank account. of funds from one bank
We will now study the different methods of payment. account to another.

20.2 What are negotiable instruments?

A negotiable instrument is a legal document that entitles the person who is in possession of the document,
and who satisfies certain requirements, to receive the specified amount of money. In South Africa,
negotiable instruments are regulated by statute in the form of the Bills of Exchange Act 34 of 1964 (BEA).
Negotiable instruments consist of:
® bills of exchange @ cheques & promissory notes.

20.2.1 Bills of exchange

The BEA defines a bill of exchange as an unconditional order in writing, addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a
fixed and determinable future time, a sum certain in money to a specified party or her order or to bearer.
This definition contains the formal requirements for a bill that need to be met in order to have a valid
instrument. One party, the drawer, writes out an instruction to another party, the drawee, ordering them
to pay an amount of money to a third party, the payee. The party who writes the order, or draws the bill
of exchange, is called the drawer. The drawer must sign the bill. The drawer must order somebody to
make payment. This order must not contain a condition.
Below is an example of a bill of exchange.

Bill of exchange

To: Bill no:

On Due date:

Pay tothe orderof__ Accepted: 20

The sum of: Payable at:

Drawer: Drawee:

Figure 20.1 An example of a bill of exchange

20.2.2 Cheques
A cheque is defined in the BEA as a bill drawn on a bank. It is a specific kind of bill, but it Payable on demand
is only payable on demand and the person who has to make payment, called the drawee, —_ Means that a person can
is always a bank. The full definition of a cheque is therefore an unconditional written order _ immediately take a cheque
that is addressed by one person (party) to a bank and is signed by the drawer, the person Spe bee an get
giving the order. A cheque is an order to pay, on demand, a specified sum of money to the: Pen ee
= person on the bill, namely the payee
@ their order or the bearer.

Chapter 20 | Methods of payment 295

 FIRST CHOICE BANK Date
runs 3 2018

Belad _ Thandi Nkabinde as

Amount
Bedrag Three hundred rand j
R 300,00

J. Small
Jaco Small
+>O806/49080S 49086916840. 03

Figure 20.2 A cheque

Added value Post-dated cheques

In some instances, the drawer may place a date on the cheque that is a future date, and not the
date on which the cheque is written out. This is referred to as a post-dated cheque. A person
who takes such a cheque cannot obtain payment from the bank until the date on the cheque.
This is because a cheque is payable on demand only on that future date. This also means that
such a cheque is not a cheque in terms of the definition in the BEA. The post-dated cheque is, in
fact, a valid bill of exchange that may be dated at a future date.

20.2.3 Promissory notes

The difference between a bill and a promissory note is that a promissory note is not an order, but a
promise. An order is a command to somebody else. A promise is an undertaking to do something
yourself, A promissory note is an unconditional promise in writing, made by one party to another party,
signed by the maker, engaging to pay on demand or at a fixed or determinable future time, a sum certain
in money, to, or to the order of, a specified party, or to the bearer.

20 Due date 20.

On the day of

UWe the undersigned

residing at

promise to pay or order

the sum of

payable at

Figure 20.3 An example of a promissory note

296 Chapter 20 | Methods of payment

 20.3 Parties to negotiable instruments
Negotiating a bill means transferring legal ownership of the bill to someone else.
For a bill to be successfully negotiated, the person to whom you give the bill needs to become
the holder. Giving the bill to somebody, so that she can keep it safe for you, will not be negotiation.
Something more than delivery is required. There must be an intention to transfer ownership of the bill.
For example, if Tumi buys a pair of shoes from Shiny Shoes Store and pays by cheque, Shiny Shoes could
pay their suppliers with Tumi’s cheque by negotiating it to them. The requirements to be the holder of
an order bill and to be the holder of a bearer bill are different.
Let us now look at the essential and non-essential parties needed for a bill to be valid.

20.3.1 Essential parties

There are three parties to a bill that are essential for the bill to be valid. Look back at the cheque in
Figure 20.2so you can identify the different parties.
@ = The drawer is the person who gives the order. In the case of a cheque, it will be the cheque account
holder. Jaco Small is the drawer, because he gives the order to First Choice Bank to pay the R300.
= = The drawee is the person who is given the order to make payment. In the case of a cheque, the
drawee will always be a bank. First Choice Bank is the drawee, because the bank is ordered by Jaco
Small to pay R300. For other negotiable instruments, the drawee may be a natural or juristic person
other than a bank.
= = The payee is the person to whom payment is made. On a cheque, the name of the payee appears
next to the pre-printed word ‘Pay’. Thandi Nkabinde is the payee, because she is the person to
whom the R300 is going to be paid.

20.3.2 Non-essential parties

There are often other non-essential parties to a bill. These parties are non-essential because if they are not
present, the bill of exchange will still be valid. These parties are as follows:
@ acceptor ® = indorser ® = indorsee.

Acceptor
As soon as a drawee accepts a bill, her capacity changes to that of acceptor. In accepting the bill, she is
accepting that she undertakes to make payment of the amount. This acceptance is done by the drawee
signing their name on the bill. The drawee and the acceptor are thus the same person.
For example, Penny, indicated on a bill as payee, receives the bill, which indicates that Thuli Mjenge
will pay the amount of R1 000. Penny must take the bill to Thuli and Thuli must then sign the bill to
indicate that she is accepting her liability to make payment on the bill.
A cheque does not always have to be accepted by a bank. In the case of a cheque, there is an existing bank—
client relationship and, in the contract between the bank and its customer, the bank agrees that
it will pay all cheques drawn on it by their customer, if there are sufficient funds in the account. The BEA defines
an

indore a
indorsement
as an

An indorser is a person who signs their name on the back of a cheque or bill, with the intention of ca haan :
allowing somebody else to chim payment on the bill. In signing the bill, the person also accepts os nat an indorsement
responsibility for paying the bill himself or herself. The signature is known as an indorsement. —_actually
is. In practice,
If the payee wishes to negotiate an instrument payable to order, she must indorse and an indorsement
is the

nin a
deliver it.
As soon as the payee indorses the instrument, her capacity changes to that of signature
of the person

Note that it is not only a payee who may be an indorser — any subsequent holder who of
indorses the instrument, is also known as the indorser. (Indorser can sometimes be spelled nership
with an ‘e’ — endorser.) someone sedigas 7

Chapter 20 | Methods of payment 297

 indorsee
If the indorser names the person to whom the cheque is being transferred in the indorsement, the person
who is named and to whom the cheque is delivered is the known as the indorsee. The indorsee can, in
turn, sign and deliver the cheque to somebody else. In doing so, the indorsee will become an indorser.

Activity 20.1
1. Sipho pays Thabo for painting his house with a cheque drawn on Africa Bank. Thabo signs
and writes his daughter's name, Annie, on the back of the cheque and gives it to her so that
she can use the money to pay her university fees. Identify each of the parties to the cheque.
2. Suppose Annie, instead of paying her university fees, signs the back of the cheque and
Gives it to her boyfriend, Petrus. Identify the parties to the cheque here.

20.4 Requirements for bills of exchange

In order for a bill of exchange to be valid, certain essential requirements need to be present. If one of the
essential elements is not present, the bill is not valid — it would simply be a piece of paper with no value.
The main consequence of one of the essential elements missing, is that the party to whom the order to
pay is given does not have to pay.

Figure 20.4 Essential requirements for a bill

20.4.1 Essential requirements

We will now look at the essential requirements for a bill in Figure 20.4 in greater detail.

Must contain an order/promise to pay

This requirement causes little difficulty in practice because cheques are pre-printed with the word ‘Pay’
which is the order.

298 Chapter 20 | Methods of payment

 Added value Different meanings of order

The word ‘order’ can have different meanings when used in the context of negotiable
instruments. in the first place, order refers to the command given by the drawer to the drawee.
The drawer orders, or commands, the drawee to pay an amount of money.
Secondly, order can also refer to a person. If the payee of the bill orders that the bill be paid
to somebody else and names the person, the person is called the payee's order.
Finally, order can refer to a kind of bill. An order bill is a bill that has to be paid to a specified
person. The amount cannot be paid to just any person who is in possession of the bill. The last
two meanings are dealt with below in more detail.

Must be unconditional
The order contained in a bill may not be subject to any condition. If there is a condition,
it is not a
valid bill. Conditionality creates uncertainty that weakens the assurance of payment to the holder, and it
undermines the ability of the instrument to circulate and function as an instrument of commerce.
An example of a condition would be when someone writes this instruction on a cheque: ‘Payment
on this cheque will not be made unless a receipt is signed when this cheque is collected.” This means that
if a receipt is not signed when the cheque is collected, then the drawee (bank) would not have to make
payment, as the signing of a receipt is a condition of payment.

Must be in writing
‘The order in its entirety must be in writing. This requirement is not defined, but probably includes
any mode of representing or reproducing words visibly, for example, computer-generated printing
or typewriting.

Must be addressed by one person to another

The order to pay in the bill must be directed to another party, and this party must be indicated with
reasonable certainty (section 4(1)). In the case of a cheque, this presents no problem as the drawee will
always be a bank whose name is displayed on the cheque.

Must be signed by the person giving it

The bill must be signed by the person issuing the order to pay. The signature of the drawer has a
constitutive function because the bill is not valid without it_ It is not necessary for the drawer to sign the
instrument in her own hand ~ it is enough if her signature is written on it by another party under his
authority (section 95(1)).

Forged signature
Where a bill or cheque has a forged signature (where the person who signed the cheque did not have any
permission to do so), section 22 of the BEA applies. The rule is simply that forged signatures are wholly
inoperative, This means that:
= = if you are in possession of a bill with a forged signature on it, you have no right to keep possession
of the bill
® you cannot enforce payment of a bill against another person if the bill contains a forged signature.

Unauthorised signature
An unauthorised signature differs from a forged signature as the person who signed the cheque does have
the authority to sign cheques on behalf of a principal, but does not have the necessary authority to do so
in the instance of that particular
cheque.

Chapter 20 | Methods of payment 299

The® followinglegal principles will apply
Unauthorised signatures are also wholly inoperative and the consequences are the same —_—sAnoperative means
as with a forged signature, but the principal may ratify an unauthorised signature. “useless
or worthless’.
@ = If the unauthorised signature is ratified, then the cheque becomes valid and payable.
A proviso
is a qualification
Section 22 proviso in the BEA does not allow certain parties to raise the defence of a forged Of # ule Rt limits
the
or unauthorised signature and will hold that person who signed the bill liable. eee crear
oer etek Claims when a signature is forged

Suppose A draws a bill on 8, payable to C or order. A thief, X, steals the bill from C, forges
C's signature on the back and delivers it to D. D changes the forged ‘indorsement’ to an
indorsement in her (D's) name, signs the bill and delivers it to E.
A
B
c
C's signature
forged by X, a thief.

D
E
The forged indorsement
is wholly inoperative and no title is transferred to D, which she, in turn,
can transfer to E. Thus, E is not a holder, and she may consequently not claim payment from A
or B or from C, as C did not sign the bill. However, in certain circumstances,
E will be able to
claim payment from D. This is because D created the impression that she had the right to indorse
and deliver the bill. The law holds D bound by the impression she has created — that is, that she
could transfer a right to the bill.

Signatures by juristic persons

As you know by now, a company is a juristic person that can act only through its organs — for example,
its directors, officers and/or employees. Imagine the following scenario. You are the managing director of
a big company. The company has just opened new offices in Sandton, Johannesburg. You are tasked with
getting classy furniture for the office that will make a statement and impress your clients. After doing
some research in the yellow pages, you find the ideal modern, custom-made furniture store in Fourways,
Johannesburg. You visit the store, select the furniture, and pay with a company cheque.
Now imagine that the cheque that you made out to the furniture store is dishonoured (not paid).
Can you personally be held liable for the R245 000?
The following
rules apply:
® Where a person has no authority to sign on behalf of a company, she will incur personal liability on
the document.
@ Whether authorised or not, a person will incur personal liability if the company’s name is printed
incorrectly
on the bill.
® An authorised agent who signs as a drawer while the name of his principal appears with his
signature will not be personally liable if he has authority.

300 Chapter 20 | Methods of payment

Must be payable on demand or at fixed or determinable future date
Payment on a bill may be made either on demand, which is when a person may present the bill for
payment immediately, or at a fixed or determinable future date, whichever is specified on the bill.
A fixed date is a specific date, for example, 28 July 2018. A determinable date is a date that is not
fixed, but which can be determined, for example, ‘upon receipt of the specified goods’.

Must be made out for a sum certain in money

The order must be an order to pay an amount of money. An order requiring any other form of
performance, for example, the delivery of goods, will not constitute a bill (section 2(2)).
Although not required by the Act, it is customary to express the amount payable in both words and
in figures. If these two amounts differ, the amount in words is taken to be correct (section 7(2)).

Must be made out to a specific person/bearer/order

A bill must be payable to a specified person or her order if it is not payable to the bearer. Thus, the payee
must be named or otherwise indicated with reasonable certainty and, if not, then the bill must be made
payable to a bearer.

Bearer and order bills

A bill can be classified either as an order bill or a bearer bill. It is important to know whether a bill is an
order bill or a bearer bill, because they are negotiated differently and different people can claim payment
on the different types of bill.

Added value ‘Negotiation’

In the context of negotiable instruments, the word ‘negotiation’ means something different
to its usual meaning. The general meaning of negotiation is to talk with others to reach an
agreement. In the case of negotiable instruments, the word means to transfer the bill to another
in such a way that the person to whom the bill is transferred becomes the holder of the bill,
which means that she can claim payment on the bill. Transfer is not necessarily the same as
negotiation. If | ask my brother to deposit a cheque at the bank for me and | hand it over to him
so that he can do so, | transfer the cheque to him, but | do not negotiate it to him. He does not
become the holder of the cheque; he is merelyin possession of it so that he can deposit it on my
behalf. But, if | transfer possession of the cheque to him so that he can claim payment on the
cheque for himself, | negotiate the cheque to him.

Bearer bills
A bearer bill is not made out to a specific person. An instrument is payable to the bearer if the word
‘bearer’ is on the bill. A bill made out to ‘Ron Richards or bearer’ or simply to ‘bearer’ or even to ‘cash’ is
a bearer bill. According to the Act, an instrument that is payable to the bearer is payable to anyone who
is in possession of it.
A bearer bill in favour of Ron Richards will look like the cheque in Figure 20.5. Note that Ron
Richards is the payee and the words ‘or bearer’ make this a bearer bill.

Chapter 20 | Methods of payment 301

 FIRST CHOICE BANK 18 March 2018
BOX STREET, ORANGEVILLE ee
Pay
Betaal__ Kon Richards [orien
Amount
Bedrag One hundred rand J
R 100,00

D. De Beer
DEWALD DE BEER

+: O606)'9080S% 49086916840. 03

Figure 20.5 A bearer bill

In order to negotiate the bill, Ron Richards (or whoever is in possession of the bill) just has to deliver it
to another person. It is not necessary to sign the back of the bill before delivering it.

Order bills
How do we know if a bill is an order bill? An order bill is made out to a named payee, or to their order.
The word ‘order’ refers to the payee’s order (instruction) that the bill be paid to someone else, named by the
payee. This order is indicated by an indorsement on the back of the bill. This means that payment must be
made either to Ron Richards, or to another person, once Ron Richards has indorsed the back of the bill.
A bill made out to “Ron Richards’ or to ‘Ron Richards or order’ is an order bill. In the case of
cheques, the phrase ‘or bearer’ is pre-printed on the cheque. This phrase must be crossed out by the
drawer for it to be an order cheque. By crossing out ‘or bearer’, the cheque is now payable to a specified
person. Figure 20.6 is an example of this.

FIRST CHOICE BANK Date

BOX STREET, ORANGEVILLE Daum a18M eee

Betas _ Ron Richards \spestrcer

Amount
Bedrag One hundred rand J
R 100,00
D. De Beer
DEWALD DE BEER
0606190805 1908 691840. 03
Figure 20.6 An order bill

Fictitious or non-existing payee

There is no definition of a fictitious or non-existing payee in the Act. The courts have thus had to
interpret these two phrases as follows:
= A fictitious payee is a payee that exists only in a person’s mind. In other words, when the drawer
is writing out the cheque, she honestly believes that person exists. It is a subjective test to discover
what the drawer was thinking when she wrote the name on the bill.
® A non-existing payee is one that does not exist at all. It is an objective test to see whether the payee
exists in reality or not.

302 Chapter 20] Methods of payment

 A cheque made payable to ‘Cash’ or Cash or bearer’ or even “Cash or order’ is considered a cheque that is
made payable toa non-existing payee.
‘The consequence of there being a fictitious or non-existing payee is that the bill will be treated as
payable to bearer. ‘The importance of this is chat the bill is negotiated by delivery only.

20.4.2 Non-essential requirements

Non-essential elements
are also usually present on a bill, namely:
= the date @ the place
of drawing @ the place
of payment.

If one of these non-essential dements is missing, it will not affect the validity of the instrument.

Date
Although it is standard practice to date a bill, the fact that it does not have a date will not make the bill
invalid. It is a good idea to date a bill, because it will show how long the bill has been in circulation. For
example, after a cheque has been in circulation for six months, it will be considered stale and banks will
no longer make payment on it.

Place of drawing bill

In some instances, a drawer may indicate the place where a bill is drawn. In the event that the bill is not
paid by the drawee, the drawer will then be liable to make payment. By indicating the place of drawing,
the holder knows where the drawer is. This is especially important when a bill has been drawn in another
country to where it is payable.

Place of payment
This lets the holder know where to get payment from. However, if the place of payment is not given, the
bill can still be valid, The holder will simply establish the business or residential address of the drawee/
acceptor and present it there.
In the case of cheques, the name and branch of the bank to which the order is given are printed on
the cheque. So, presentation for payment will take place at that branch of the bank.

20.5 Transferring ownership of a bill

The main characteristic of a negotiable instrument is that it is easily negotiated or transferred from
one person to another. This means that ownership of the negotiable instrument, along with the rights
contained in it, can be transferred to somebody else without too much trouble.
If you want to transfer ownership of a car, you cannot just give it to someone. You have to fill in
various forms, and take them to the traffic department to have it registered in the new owner's name.
By comparison, a negotiable instrument, like money, is much easier to transfer. This is one of the
most important rights of the holder of a bill — that is, the right to transfer possession.
Transfer can be done in two ways, depending on whether the instrument is a bearer or an order
instrument. The two transfer methods are as follows-
® = delivery, which means handing the instrument to another person
® = indorsement and delivery, which requires you to sign the instrument on the back, and then hand it
to another person.

Whether or not a negotiable instrument is negotiated by delivery, or by indorsement and delivery,

depends on whether it is a bearer or an order instrument. Each type of negotiable instrument can be
either an order, or a bearer instrument, as we will discover.

20.5.1 Transferring bearer bills

A bearer bill is a bill that is transferred
by delivery. This is done by simply giving it to another person.
The right to claim payment is transferred along with the bill to a new bearer.

Chapter 20 | Methods
of payment 303
20.5.2 Transferring order bills
An order instrument is an instrument that is transferred by signing it on the back and then giving it to
another person. This is called indorsing the bill.
For an indorsement to be valid, all the following requirements have to be met:
@ = The indorsement must be written on the instrument and signed by the indorser.
@ = ‘The indorser must have had the intention to indorse. This is known as animus indorsandi.
® ‘The indorsement must be for the whole instrument. If a bill is made out for R500 and the indorser
only indorses R200 of the amount to another person, the indorsement is invalid.
® Indorsement must be completed by delivery.

We will now look at three different ways in which a bill may be indorsed.

Indorsement in blank
An indorsement in blank is an indorsement that does not specify an indorsee. In other words, the
indorser’s signature appears on the back of the bill without the name of the person to whom the bill is
being negotiated. The effect of an indorsement in blank is that the bill is now payable to the bearer.
An indorsement in blank will look like this on the front of the cheque:

FIRST CHOICE BANK Date 23 August 2018

»OB06/ 9080S 4906 694840. 03

Figure 20.7 indorsement in blank on the front of a cheque

An indorsement will look like this on the back of the cheque:

Signed: Barney Brandt

Figure 20.8 The back of the cheque showing Barney Brandt as the indorser.

304 Chapter 20 | Methods of payment

 Special indorsement
A special indorsement is an indorsement that specifies the name of the indorsee. The indorser'’s signature
on the back of the bill is accompanied by the name of the person to whom the bill is being negotiated.
‘The effect of a special indorsement is that the bill is an order bill.
A special indorsement will look like this on the front of the cheque:

FIRST CHOICE BANK Date

BOX STREET, ORANGEVILLE Ome
August
25 = mm 2018
dd * yjyj

NE a Iguthcer
Amount
Bedrag Four hundred
and fifty rand j
R 450,00

#0606) '90680S 49086914640. 03

Figure 20.9 The front of a special indorsement cheque

A special indorsement will look like this on the back of the cheque:

Figure 20.10 The back of a special indorsement cheque

Restrictive indorsement
A restrictive indorsement is an indorsement that prohibits further negotiation of the instrument, Once
a bill has been negotiated with a restrictive indorsement, it is valid only between the indorser
and the
indorsee. If the signature of the indorser on the back of the bill is accompanied by the name
of the
person to whom the bill is being negotiated, followed by the word ‘only’, the indorsement is restrictive.

Chapter 20 | Methods
of payment 305
 A restrictive indorsement looks like this on the front of the cheque:

FIRST CHOICE BANK Date

BOX STREET, ORANGEVILLE Osun ge Queso

ped nara pecie Ippectnder

Amount
Bedrag Four hundred
and fifty rand J

»OB06! 19080 1908 694860. 03

Figure 20.11 The front of a restrictive indorsement cheque

A restrictive endorsement looks like this on the back of a cheque:

Fay: Sumaya Naidoo only

Signed: Barney Brandt

Figure 20.12 The back of a restrictive indorsement cheque

Activity 20.2

Study the following cheque (front and back) and then answer the questions that follow:

BOX STREET, ORANGEVILLE Serraaeerene!

Bete Martha Moloi come

Bedrag Four hundred and fifty rand |

:O606)49080S £908 694840: 03

306 Chapter 20 | Methods of payment

 Activity 20.2 (continued)

Pay. Fenny Plenaar

Signed: Martha Moloi

identify the parties to this cheque.

Is this cheque an order or a bearer cheque. Why?
WN

A draws a bill on B in favour of C or order. C delivers the bill to D.

a) Is this an order or a bearer bill?
b) How is this bill negotiated?
c) Did the delivery of the bill to D constitute a valid negotiation? Give reasons for your answer.

20.6 Who gets paid?

A bill or cheque is a form of payment. So, who gets paid? The holder gets paid. The holder is the person
entitled to payment on a bill. So who is a ‘holder?
Imagine you are the owner of a business and you have to make a decision of how to pay your
creditors. If you decide to use a cheque because it is safer, who is the holder? Is it the payee? Is it
somebody the payee nominates?
It is important to know this because the liability on a bill or cheque can only be lf a person is Hiable
discharged by payment to a holder. on a bill, she is
The law recognises three kinds of holder: legally responsible or
@ = The ordinary holder can be the holder of an order bill or a bearer bill. accountable
to make
® The holder for value is the holder
of a bill who has given some form of value or SAREE
OF Bie D-
counter-performance for the bill.
@ = The holder in due course is the holder of a bill who meets certain additional requirements.

Whichever type of holder you are, you have certain rights and duties. We will now look at the different
kinds of holder and their rights in more detail.

20.6.1 The ordinary holder

‘The Act defines
a holder as the payee (the person named on the bill by the drawer) or indorsee (the
person who is named on the bill
by the indorser
and to whom the cheque
is delivered) of a bill, who is in
possession of it, or the bearer of it. There are two requirements to be a holder:
® = For an order bill or cheque, your name must be on the instrument (as payee or indorsee) and you
must have physical possession of it.
@ = For a bearer bill or cheque, it must be made out to ‘bearer’ and the person must be in physical
possessionof it.

Chapter 20 | Methods of payment 307

 Added value The holder of a bill

To qualify as the holder of a bill, possession of the bill does not have to be lawful. In the case of a
bearer bill, a thief who is in possession qualifies as a holder, and he is allowed to claim payment on
the bill. This will not be the case with an order bill, because the bill is made out to a specific person.

The rights of a holder

The most important of the holder's rights is the right to enforce payment against any party who is liable
on the bill and to sue in her own name on the bill. Not everyone who has been in possession of the bill,
or who has negotiated the bill, can be held liable to pay the sum of money. The parties who are liable on
the bill are discussed later in this chapter.
Some of the other more important rights follow:
= A holder has the right to institute action in her own name.
@ = She has the legal power to negotiate the instrument in her possession if it is payable to her order
or bearer.
= She may rectify certain omissions on a bill. For example, she may add a date or place of drawing.
m= She may effect certain additions to the bill. For example, she may cross a cheque. Raseung bs panicle
= Upon dishonour of a bill or cheque by non-payment, the holder immediately obtains a marking on a cheque.
right of recourse against the drawer and previous indorsers.

The duties of a holder

The holder has three duties:
= to present the bill for acceptance
® to present the bill for payment — if a bill is not presented for payment, the drawer and
indorsers will not be held liable on the bill Notice of dishonour is
= to give notice of dishonour. or Lome ~ the
Dishonour occurs when the drawee refuses to accept the bill or make payment on the bill. When bill has been dishonoured.
a bill is dishonoured, the holder gets a right to daim payment against the drawer and indorsers. Notice of dishonour “can be
But, the holder can enforce this right only if these parties have been given notice of dishonour. given orally or in writing.

20.6.2 The holder for value

The holder for value is the holder of a bill who meets an extra requirement, which is that he must have
given value for the bill. In other words, some form of counter-performance must have been given in
order to receive the bill. For example, if Nazeem’s father gives him a cheque for R200 as a gift for his
birthday, he does not give value for the cheque. Nazeem will qualify as a holder of the cheque, but not
as a holder for value. But, if Nazeem washed his father’s car for two months and was given the cheque as
payment for this service, he gave value and will qualify as a holder for value.

20.6.3 The holder in due course

The holder in due course is the holder of a bill that meets certain other requirements. The definition
of a holder in due course is complicated, but will be explained in simpler terms. We will look at the
definition in full and then break down the elements of the definition.
The holder in due course is the holder of a bill who took the bill:
complete and regular on the face of it
before it was overdue
if it had previously been dishonoured, without notice thereof
in good faith
for value
without any notice of a defect in title of the person who negotiated it to him.

308 Chapter 20 | Methods of payment

 Added value Legal meaning of ‘title’

In law, when we speak of ‘title’, we do not mean Mr or Ms or Dr. A person's title in law has to
do with her relationship to an object. If | buy a jacket to wear to a party, once | have paid for it
and taken delivery of it, | become the owner of the jacket. If, however, | only borrow the jacket
to wear to the party, | am not the owner of the jacket, but merely the possessorof the jacket. If,
at the party, my friend asks to buy the jacket, whether or not he can become the owner of the
jacket depends on my title to the jacket. If | am the owner of the jacket, | can sell or give it to my
friend, and he will become the owner. If | only borrowed the jacket, my friend cannot become
the owner, but merely the possessor. The general legal rule, that people may not transfer greater
rights to someone else than they possess themselves, is known as the nemo plus iuris rule.

Let us now look in more detail at each of the requirements to be a holder in due course. The nemo plus iuris rule
= A bill is complete if it contains all the essential elements of a bill. eee
= A bill is regular on the face of it, if it appears, by looking at the bill, that nothing cna has.
improper, such as forgery, took place in previous dealings with the bill.
= A bill is overdue if it has been in circulation for an unreasonably long period of time. Forgery occurs when
A cheque will become stale, or overdue, after six months. A bank cheque will become _a person signs another
stale or overdue after three months. person's signature.
= = Ifa bill is dishonoured, it means that the person or bank to whom the order to pay was given,
refused to do so. For example, a bank will dishonour a cheque if the drawer does not have enough funds
in her account to pay the necessary sum of money. Ifa bill has been dishonoured
at some stage before it is
negotiated, the holder must not know about the dishonour if she wants to qualify as a holder in due course.
= = The requirement of good faith means that the holder must have acted honestly when she took the
bill. If she was in any way dishonest, that person acted in bad faith and will not qualify as a holder
in due course. If, for example, Kirsten takes a cheque as payment for uncut diamonds, she has
not taken the cheque in good faith. Even if the transaction is legal, for example, if Kirsten takes a
cheque as payment for her old television, but she is suspicious of an aspect of the cheque yet does
not make further enquiries, she will not have taken the cheque in good faith.
= A bill has been taken for value if some form of counter-performance has been given for it. Counter-
performance can take on various forms, such as money, goods or services.
= The law of negotiable instruments contains an exception to the nemo plus iuris rule. If the person
who negotiates the bill has a defective title, for example, if he has found or stolen a bearer bill, the
person taking the bill must have no knowledge or suspect that the bill was found or stolen and can
have title to the bill and be a holder in due course.

LeeToe arishy Title to a cheque

Ahmed is the owner of a wheelbarrow. He decides to sell it to his friend, Mark. Mark pays him R50 and
becomes the owner of the wheelbarrow. But, if Ahmed has only borrowed the wheelbarrow from his
father and sells it to Mark, Mark cannot become the owner, only the possessor. Even if he thought
that
Ahmed was the owner and could sell him the wheelbarrow, the law will not allow Mark to become the
owner of the wheelbarrow as Mark cannot receive more rights than Ahmed, his predecessor, had.
In the case of a negotiable instrument, the situation is different. If Mark paid Ahmed for
the wheelbarrow with a bearer cheque that he had stolen (Mark is not the owner of the stolen
cheque), Ahmed could become the owner of the cheque. Ahmed would have to satisfy all the
other requirements of a holder in due course and he must have had no knowledge that Mark
had stolen the cheque. If this is the case, then Ahmed becomes owner of the cheque and can
claim payment on it, even though Mark had no title to it.

Chapter 20 | Methods of payment 309

20.7 Who pays?
Se ne ee enn neice neem Race to make payment are
as follows:
@ = The acceptor: If the drawee (the person who receives the order to pay a certain amount to the payee)
signs the bill with the intention to pay the amount, she becomes the acceptor.
@ The drawer: The person who gives the order to pay a certain amount to the payee has to sign the
bill, as this is a formal requirementfor a valid bill
The indorser: The person who signs a cheque with the intention of transferring ownership
of the cheque to somebody else can be required to make payment, even though he does not
receive payment.

Here is an example. You sell your computer to Tumi for R3 000. You draw an order bill on her (she
is named as drawee) for R3 000 as payment for the computer. You owe a third party, Sophie, R3 000
so, instead of naming yourself as payee on the bill, you name Sophie as the payee. If Tumi accepts the
bill, by signing her name on it, she is liable to make payment on it. Sophie, as the holder, can claim
the R3 000 from Tumi, the acceptor, if Tumi does not accept the bill or if she accepts the bill, but does
not pay Sophie the R3 000. Sophie can daim the R3 000 from you, the drawer. This is because, when
you draw the bill, you must sign it as drawer before you give it to Sophie. By signing it, you are then
also liable on it. If Sophie indorsed the order bill to somebody else, and neither Tumi nor you paid the
amount to the indorsee, the indorsee could claim the R3 000 from Sophie, the indorser.

20.7.1 Liability of the acceptor

‘The primary responsibility to make payment on a bill lies with the acceptor. If a drawee signs the bill
intending to pay the amount, she will become the acceptor. The holder can claim payment from the
drawer or the indorser only if the acceptor does not pay. In the case of a cheque, the drawee bank is
liable to make payment. The drawee bank is not required to accept the cheque.

20.7.2 Liability of the drawer

‘The drawer is the person who gives the order to pay the payee. By signing a bill, the drawer guarantees
that the amount stated on the bill will be paid. If a bill is dishonoured, the drawer is liable to pay the
holder of the bill if notice of dishonour has been given to the parties.
In the above example, where Tumi did not pay, you, as the drawer, became liable. If an indorser has
been forced to pay the amount of the dishonoured bill to the holder, the drawer is liable to compensate
the indorser. The fact that the drawer is liable means that she has a legal duty to pay. If the drawer does
not do so, the indorser can sue the drawer and get a court order to make the drawer pay. Extending the
example, if Sophie is held liable on the bill as the indorser and she pays the R3 000 to the indorsee,
she can hold you, the drawer, liable for the R3 000. In effect, this means that you have to pay her the
R3 000 that she paid to the indorsee.

20.7.3 Liability of the indorser

By signing a bill, the indorser guarantees that the amount for which the bill is made out will be paid. Ifa
bill is dishonoured, the indorser is liable to pay the holder of the bill. If a later indorser was forced to pay
the amount of the dishonoured bill, the earlier indorser is liable to compensate the later indorser.
Let us say that Sophie indorsed and delivered the bill to Fatima. Sophie becomes the indorser and
Fatima becomes the indorsee.
If Fatima owes Thabo money, she can indorse and deliver the bill to Thabo. By doing this, Fatima
becomes a later indorser and Thabo becomes the indorsee. If Thabo holds Fatima liable for the R3 000
and Fatima pays the amount to him, Fatima (as the later indorser)can hold Sophie (as the indorser)
liable for the amount. As you know by now, Sophie can then hold you (the drawer) liable.

310 Chapter 20 | Methods of payment

 Activity 20.3
1. Draw a scheme of the parties to a bill. Be sure that you know how the instrument travels in
this scheme (that is, who is in possession of the instrument at what stage).
2. Use this scheme to identify the parties who are liable to pay on the bill. Once again, make
sure you know who will be liable, under which circumstances, and at which stage.

20.8 Cheques
Our discussion about bills also applies to cheques. However, there are parts of the BEA that apply only
to cheques and not to other negotiable instruments. There are a number of different markings which
may be placed on cheques, each of which is a specific instruction to a party or has a particular meaning
and effect on a cheque.
We will discuss these provisions in this section after you have completed the following activity.

Activity 20.4
1. Can you remember the difference between a bill and a cheque? Go back to the start of the
chapter, and read the definitions again. Tabulate the differences.
2. Refresh your memory about the parties to a cheque by studying the example below:

FIRST CHOICE BANK Oe ein

BOX STREET, ORANGEVILLE oes asyyjyj
ad*mm »*
Pay or bearer
Betaal Daven Govender lof toonder
Amount
Bedrag Three hundred rand J
: R 300.00

L Lawson
LEANNE LAWSON

+0606) 390805 1906693640. 03

e Leanne Lawson is the drawer and gives the order to First Choice Bank (the drawee
bank) to make payment to the payee, Daven Govender.
e The collecting bank is a party that is not reflected on a cheque. The collecting bank
is the bank that collects payment on behalf of the holder from the drawee bank. It
may be the same bank but different branches or it may be different banks. If Daven
Govender had a bank account at FNB and he deposited this cheque into his account,
FNB would be the collecting bank and it would collect payment on behalf of Daven
Govenderfrom First Choice Bank.

20.8.1 Crossing a cheque

We cross a cheque by drawing two diagonal, parallel lines on the face of the cheque. Certain words
may be included in the crossing,such as the name of the bankor the words ‘not negotiable’ or ‘not
transferable’. A crossed cheque must be paid to another bank account. In other words, the money must
be paid into the holder's bank account.
A crossed cheque may not be paid in cash over the counter. In
this way, the drawer will know who has been paid as the payment can be traced.
A cheque may be crossed by the drawer, the holder and a bank. These persons may cross cheques in
one of two ways — either generally or specially. The holder of a cheque that is crossed may usually change
the general crossing to a special crossing by inserting the name of a bank in the crossing.

Chapter 20 | Methods of payment 311

 The crossing of a cheque is a safety mechanism. If the drawee bank pays a crossed cheque in a way
that is not in accordance with the crossing, the bank is liable to the true owner of the cheque for losses
suffered by the true owner. The true owner of a cheque is the person who is entitled to be in possession
of the cheque, and therefore to payment on the cheque. Therefore, if, in the examples below, First
Choice Bank pays the R400 over the counter instead of into an account, First Choice Bank will be liable
for any losses suffered by Daven Govender.

Added value True owner of a cheque

Sometimes, cheques in particular, are stolen from the possession of true owners. But this does
not mean that a person ‘loses’ his entitlement to be a true owner. As long as you are the person
who is lawfully entitled to possession of the cheque, you will remain the true owner of that
cheque. Moreover, in terms of section 81(1) of the Act, you are entitled (as the true owner)
to claim any losses you incurred as a result of the theft of your cheque from every subsequent
possessor. Think about that for a moment. This section has far reaching implications, as it entitles
you to institute a claim against every single future person who is in possession of your cheque.

General crossing
A cheque with a general crossing may consist of two diagonal, parallel lines. If the words ‘not negotiable’
or ‘not transferable’ occur beeween the lines, the crossing is still a general crossing. A cheque with a
general crossing must be paid into a bank account, but it can be any bank. This cheque will have to be
deposited into Daven Govender'’s account.
In terms of the Act, a cheque with the words ‘not transferable’ on it is considered as being crossed
generally unless it is crossed specially. This means that if a cheque is marked ‘not transferable’ and has
not been crossed with diagonal, parallel lines, it cannot be paid over the counter. The cheque has to be
deposited into a bank account.
Below is an example of a general crossing:

eS eels Date 14 April 2018

dd = mm - yy)

ls Daven Govender eo igecae

+#0606/s90605 4908693640. 03

Figure 20.13 A cheque with a general crossing

Special crossing
A cheque with a special crossing consists of either two diagonal, parallel lines on the face of a cheque,
with the name of a bank between the lines, or the name of a bank on the face of a cheque without the
diagonal, parallel lines. The words ‘not negotiable’ and ‘not transferable’ may also be included, along
with the name of the bank. The special crossing means that the money can only be paid into Daven
Govender’s account at Africa Bank, and not into another of his accounts at some other bank.

312 Chapter 20 | Methods of payment

 Below is an example of a special crossing:

FIRST CHOICE BANK Date

BOX STREET, ORANGEMILLE On nT

ecag Four hundred rand LES,

ZEB R 400,00

L. Lawson
LEANNE LAWSON
.O606!) 490608 1908 691840. 03

Figure 20.14 A cheque with a special crossing

20.8.2 Other markings

A marking is another addition to the cheque, such as the words ‘not negotiable’ or ‘not transferable.’

Not negotiable
A cheque may be marked ‘not negotiable’. You may be surprised to know that this does not mean that it
cannot be negotiated, but there are certain other consequences.
A ‘not negotiable’ cheque can be transferred, but this is subject to the memo plus iuris rule. The person
who receives the cheque cannot get a better title or give a better title to the cheque than the giver of the
cheque had. This means that, if the person who transferred the cheque was not the owner of the cheque,
the receiver of the cheque would not become the owner of the cheque.
For example, if the person who transfers a cheque marked ‘not negotiable’ to me does not have the
right to daim payment on the cheque, I will nor have the right to claim payment on the cheque. | also
cannot transfer the right to claim payment on the cheque to somebody else. In other words, the person
who takes the cheque can become an ordinary holder, but not a holder in due course, As an ordinary
holder, your rights are more limited than those of a holder in due course.
The other consequence of marking a cheque ‘not negotiable’ along with a crossing is that the rights
of the true owner of the cheque are protected. If a cheque is lost or stolen, the true owner of the cheque
has an action against a person who was in possession of the cheque after it was lost or stolen, even if the
possessor acted in good faith.
This principle is best explained using an example. Portia draws a cheque on Balance Bank in favour
of Precious. She crosses the cheque, marks it ‘not negotiable’ and delivers it to Precious. While Precious
is walking home from university, Xandile steals her handbag along with the cheque. Xandile buys herself
books from Best Bookshop and pays for them with the cheque, which she negotiates to them, Best
Bookshop presents the cheque for payment at Tiptop Bank. Tiptop Bank pays the money into Best
Bookshop’s account.
‘The true owner of the cheque is Precious, because she is the person who is actually entitled to be
in possession of, and claim payment on, the cheque. Since the cheque was crossed and marked ‘not
negotiable’, she will have a claim against a subsequent possessor of the cheque.
In this case, the subsequent possessor will be Best Bookshop. Even though Best Bookshop acted in
good faith, and did not know that the cheque was stolen, Precious will havea claim against them for the
value of the cheque or the actual loss suffered by her, whichever amount is smaller. Tiptop Bank, although
it was also in possession of the cheque, is protected by the Act and cannot be held liable by Precious.

Chapter 20 | Methods of payment 313

Not transferable
There are only two ways to prevent a cheque from being negotiated (transferred from one person to
another). The cheque can either be marked ‘not transferable’ or ‘non-transferable, with or without the
word ‘only’ after the payee’s name.
The following are both examples of not transferable cheques:

FIRST CHOICE BANK ee 14 April 2018

BOX STREET, ORANGEVILLE dd * mm °* yyjyj

Belad Daven Govender oS gee

:O606!/i9080S% 4908691640: 03

FIRST CHOICE BANK Date

Datum _14April 2018
BOX STREET, ORANGEVILLE dd * mm °* yjyj
Pay
or
Betaa Daven Govender only j
Amount
Bedrag — Four-hundred rand j
R 400,00

L. Lawson
LEANNE LAWSON

»0606/i9060S 1908694640. 03

Figure 20.15 Two examples of not transferable cheques

The result
of either of the markings in these two examples is that the cheque is only valid between the parties
to the cheque: the drawer, the drawee and the payee. Such a cheque cannot be transferred to another person.
If there are no diagonal parallel lines across the face of the cheque (general crossing) but the words
‘not transferable’ are written across the face, the cheque is nevertheless deemed to be crossed generally.
This means that it must be paid into a bank account. It may not be paid over the counter.

Activity 20.5
Complete the following table in your notebook:
Ee ‘Not negotiable’ cheque ‘Not transferable’ cheque
¢ The way in which the marking
is made
* The effect of the marking
* is the cheque negotiable?

314 Chapter 20 | Methods of payment

 20.9 Forms of electronic payment
In spite of the fact that cheques provide a more secure form of payment than cash,
they have
two disadvantages:
@ There is a risk of non-payment.
@ = There is a large volume of paper-flow involved in the collection process.
‘These disadvantages, along
with advances in technology, led to the development of other payment
instruments, such as:
@ ATM transfers = card payments
@ = electronic funds transfers ® = internet banking.
All these electronic forms of payment make use of computer-based technology to transfer or store
information on payments. This information is processed by the computerised banking systems either
online or offline. An offline system records each transaction on a tape, and a courier transfers the tapes
each day to the financial institution for processing. In an online system, the payment device
(ATM or card reader) is connected directly to the computer of the financial institution so Mandate refers the
that each transaction is processed immediately. authority
to perform an act
‘The principle ofa mandate between customer and bank is still fundamental to these on behalf of somebody
ese,
electronic forms of payment. In each instance, the customer has to give an instruction to
their bank to make the payment to a beneficiary. This instruction is sent dectronically. A cryptocurrency
is a
The internet has brought with ita number of payment possibilities. It is now possible to pal cx easel Casey
purchase an item via the internet and to pay by means of a credit card. Recent technology asia ene,
is moving towards the introduction of other payment instruments over the internet, such as a method
of storing and
cryptocurrencies. transmitting
data in a way
There is very little legislation regulating electronic forms of payment, and the majority of _ that only those for whom
electronic payments are regulated by contracts concluded between a bank and its customer. _ it is intended can read
We will look at some of the more common forms of electronic payment. a

20.9.1 The automated teller machine (ATM)

‘The automated teller machine (ATM) was originally introduced with the single function of making
it possible for bank customers to make cash withdrawals at any time of the day or night. It has
subsequently expanded its role to include the acceptance of cash and cheque deposits, the provision of
statements, balance enquiries, the payment of accounts and the electronic transfer of funds.
The ATM operates as a payment method when a customer transfers funds from their account to that
of a beneficiary. The bank, through its electronic clearing system, acts as the payment intermediary for its
customer. In other words, it pays a beneficiary on behalf of its customer from the funds in the customer's
account held with the bank. This is similar to the bank paying a cheque on behalf of its customer
(drawer) from the customer's funds in their bank account.
As a security measure, a customer is issued with a Personal Identification Number (PIN), which is
used in conjunction with the ATM card. It is the responsibility of the customer to protect the card and
PIN from being lost or stolen. Should there be an unauthorised withdrawal or funds transfer using the
card and PIN, the customer will bear the risk. Only once the bank has been notified of the loss will the
customer not bear any risk.

20.9.2 Electronic funds transfers (EFT) coer oe

An electronic funds transfer, or EFT, method of payment encompasses a wide variety funds transfer.
of mechanisms
for effecting a transfer. It includes transfers
done at ATMs, point-of-sale
transfers, mobile phone applications and personal computers. There is no actual physical The beneficiary is the
transfer of funds in the form of notes and coins. The transfer is electronic and is done personwho receives,
through a process of mandates, which ultimately leads to funds being debited from the of benefits from, the
originator’s account and credited to the beneficiary's account. Rice paceter.

Chapter 20 | Methods of payment 315

 These transfers are broadly divided into credit transfers and debit transfers. In a credit transfer,
the debtor gives an instruction to her bank to transfer funds to a beneficiary's account. In a debit
transfer, the beneficiary requests her bank to obtain funds from the debtor's bank. A debit transfer is
usually a recurring debt, the amount of which may vary, and the debtor has authorised the creditor
to request the funds. This is known as a debit order — for example, a gym membership or DStv
subscription. The debtor may not revoke this authority to request payment — only the creditor can cancel
the authority. In contrast, a stop order is an instruction by the debtor to their bank to make payment
of a fixed amount of money to a beneficiary's bank from time to time. The debtor may cancel this
instruction at any time.
A debtor can make use of an ATM, mobile application or internet banking facilities to transfer funds
to a beneficiary. Banks include various security measures in these transfers to safeguard their customer's
account. These may be a card used with a PIN or a password and PIN in the case of internet banking.
The customer controls the details of the transfer, and she is responsible for safeguarding her personal
details and passwords. If these details are disclosed and someone else accesses the customer's account, the
bank is not liable.
‘The customer is also responsible for ensuring that they have the correct details of the beneficiary.
If the transfer is made to the incorrect person, the customer will have to recover the money using
common law remedies and cannot approach the bank to recover the funds. Once a payment
instruction
has been given by a customer, it cannotbe revoked. Legal tender refers to
This form of payment does not constitute legal tender, and a debt is only discharged Aria pera es
once a beneficiary (creditor) has access to the funds in their bank account. Sve.

Added value Legal tender

In South Africa, cash is regarded as the only form of legal tender. Section 17 of the South
African Reserve Bank Act 90 of 1989 sets out what notes and/or coins may be used and the
quantity of each. Legal tender is the only means by which a debtor may extinguish a monetary
debt. A creditor is not compelled to accept any other form of payment.

Card payments
Electronic funds transfers are also made using a bank card, such as a debit or credit card, Soe
and a PIN. These cards are normally used to pay for goods or services in the shop where phcicabaieeGancic winler or
they are bought or used. These types of transfer are known as an EFTPOS. The creditor point-of-sale.
has an agreement with her bank, which provides them with the technology to effect
this transfer,
Usually, it is a card reading machine and electronic system linked to the banking network. The
customer inserts her card in the machine and enters her PIN. This triggers an electronic payment
instruction to the relevant bank to make payment to the retailer's bank. In the case ofa debit card,
the debtor must have sufficient funds available in the account or have an overdraft facility for the
transfer to be done. A credit card provides the customer with a credit facility,
and the customer can
use this facility until the pre-determined credit limit is reached. They are then charged interest on the
amount they have used.
A recent improvement to the security of debit and credit cards is the introduction of the smart card.
It is the same as the traditional
cards except that the magnetic strip, which provides the card details, has
been replaced with a microcomputer chip. This chip also works in conjunction with a PIN but the card
reader then sends a randomly-coded challenge to the card, which must be answered by the card with the
correct secret key, which has been loaded on the card. This prevents hackers from reading card details
and placing them on a fake card as can be done with a magnetic-strip card_

316 Chapter 20 | Methods of payment

 Added value Card charges

Banks charge for the various facilities they provide. These costs are charged to their customers
in the form of monthly bank charges. But in most instances, the retailer who makes use of the
electronic network carries the cost. The bank charges the retailer a percentage fee on each
transaction that is processed. So, you may find that some smaller retailers will not accept card
payments because of this cost, or they may charge an additional amount over and above the
price to cover the cost of this fee. As these forms of payment are not legal tender, retailers are
not compelled to accept them, and they may demand payment in cash.

20.10 Internet banking

Technology has enabled banks to give customers access to their bank accounts from the comfort and
privacy of their own home in the form of internet banking. A customer must apply to gain access to this
facility and, in doing so, enters into another contract with their bank for the use of this facility. This is
because of the high risk involved in the use of this facility. This contract specifically caters for these risks
and apportions responsibility between customers and their banks for any unlawful access to the account.
The benefits for the customer include unlimited access to her account to make payments, check balances,
manage payments, recharge data or airtime and little or no charge for the use of this service.
Generally, the customer carries the majority of the risk. Bur, as the provider of a service, banks are responsible
for ensuring they have a secure computer system with the necessary safeguards in place to prevent hacking. This
common law duty will be legislated with the implementation of the Cybercrimes and Cybersecurity Bill.
It is almost impossible to have a completely secure system. If the banks systems are hacked, the bank
carries these losses. But, as the customers make use of their own personal computers at home or work,
these should also have proper security features. Unfortunately, customers seldom do, and most hacking is
done via a customer's personal computer.
Banks try to secure the system as much as they can by making use of various security features. These
include user identity coupled with a password, PIN and Short Message Service (SMS) or email notification
of access to the account. The account access procedure also includes encryption. Any new beneficiary or
payment is activated only after a code is entered, which is sent to the customer's cell phone or email address.

Chapter summary

In this chapter, you learned the following about
methods of payment:
A negotiable instrument is a document that can
easily be transferred and that can be used to make
payment instead of cash. This chapter has examined the
nature of negotiable instruments in some detail.
There are three kinds of negotiable instruments:
= bills of exchange
= cheques
@ promissory notes.
For a negotiable instrument to be valid, it must include
an unconditional, written order by the drawer to
the drawee to pay an amount, certain in money, on
demand, or at a fixed or determinable future date. The
order must be addressed by the drawer to the drawee.
The drawer must sign the order and payment must be
made to a specified person, or her order or bearer.
Features on a negotiable instrument, such as the
date, place of drawing, place of payment and amount
in words and figures, are non-essential elements.
Their absence will not make a bill invalid.

Chapter 20 | Chapter summary 317

‘The essential parties to a negotiable instrument are:
= the drawer, who gives the order to pay
m the drawee, to whom the order is given
= the payee, to whom payment must be made.
There may be other non-essential parties to a negotiable
instrument. These parties include:
® the indorser, who signs the back of the bill and
delivers it to somebody else
m = the indorsee, who is named by the indorser and to
whom the bill is delivered by the indorser
m the acceptor, who is the drawee who has signed the bill.
In the transferring
of ownership, a bearer bill is negotiated
by delivery, while an order bill is negotiated by
indorsement and delivery.
The different types of indorsement in the case of an
order bill are:
® indorsement in blank, which does not specify an
indorsee so that the bill is payable to the bearer
® special indorsement, which specifies the indorsee so
thar the bill is an order bill
® restrictive indorsement, which prohibits further
negotiation of the instrument.
The party who can claim payment on a negotiable
instrument is the holder. There are three types of holder,
namely, an ordinary holder, a holder for value, and a
holder in due course.
The holder in due course has to meet certain
requirements to qualify.
Review your understanding
1. Thabo draws a cheque on Big Bank in favour of
Alison or order.
a) Identify the drawer, drawee and payee.
b) Is this cheque an order or a bearer cheque?
c) Can Alison negotiate the cheque?
d) If your answer to (c) was yes, how can she
do so?
2. Explain the difference between the results ofa ‘not
negotiable’ and a ‘nor transferable’ marking on
a cheque.
318 Chapter 20 | Review your understanding
The party who is liable to make payment on a
negotiable instrument in the first instance is the acceptor
(or in the case of cheques, the drawee bank). If the
acceptor refuses to make payment, the drawer and the
indorsers are liable to make payment on the instrument.
A cheque is a bill that is drawn on a bank and is
payable on demand. A cheque can be crossed either
generally or specially. The result of a crossing is that the
cheque must be paid into a bank account, and cannot
be paid over the counter. A ‘not negotiable’ cheque is
still negotiable, but will be subject to any defect in title
of the person transferring it. A ‘not transferable’ cheque
is no longer negotiable. It is valid only between the
drawer, the drawee bank and the payee.
Forms of electronic payments include:
ATM transfers
electronic funds transfers
card payments
internet banking.
Payment is only complete once the beneficiary has
access to the funds in her bank account.
EFTs cannot be revoked once made.
The risk of using electronic payment methods for a
customer is the risk of hackers accessing your accounts.
Banks have various security features on accounts.
Customers are responsible for safeguarding their
passwords and PIN.
The benefits of internet banking for a customer are
access and no cost.
3. Brian draws a cheque on ABC Bank for R1 300
in favour of Golden Goods Jewellery store or
order. Brian crosses the cheque and adds the words
‘account payee only’ in between the lines. Golden
Goods Jewellery receives the cheque and indorses
it to Goolam Goldsmith to whom Golden Goods
owes money for the manufacture of jewellery.
Goolam Goldsmith presents the cheque to ABC
Bank for payment, but ABC Bank refuses to pay
him, saying that valid negotiation cannot take place
 if a cheque is crossed in this way. Advise Goolam
Goldsmith on the negotiability
of the cheque.
4. List three forms of electronic
payment.
5. What are the differences between a debit order and
a stop order?
6. Whar are the benefits of using internet banking?
Roger Gooding pays for his shopping at Checkers
~
with his credit card. He has a lot of parcels and
does not notice when his wallet, with his credit
card, falls out of his pocket. Sarah, who is behind
him in the queue, picks up his card, and she
immediately uses it to pay for her groceries. She is
able to use it because she saw Roger's PIN when he
entered it. When Roger gets home he discovers that
he has lost his wallet, and he immediately phones
the bank to inform them of the loss. They tell him
Further reading
Malan, ER. and Pretorius, J.T. 2015. Malan on Bill of Exchange,
Cheques and Promissory Notes, Sth odin, Durban: LexisNexis
South Africa
Sharrock, R. (ed). 2016. The Law of Banking and Payment in
South Africa. Cape Town: Jura and Ca. (Pry) Led
that the card has been stopped, burt a purchase for
R1 000 has been made and he is liable to pay the
bank this amount. Explain whether or not Roger
will be liable for this amount.
Erica Grootboom
owes Woolworths a R500
instalment on her Woolworths
card. This must
be paid by the 25 January 2018. Erica only gets
paid on the 25th of each month, so she waits
until she gets paid on 25 January 2018, and she
immediately
does an electronic funds transfer
via internet banking to pay her Woolworths
instalment. When she tries to use her Woolworths
card on 26 January 2018, the cashier tells her that
the card has been frozen because of an outstanding
payment. Is Erica’s payment outstanding?
Van der Merwe, D.P. ct al. 2016. Information
and Communications
Technology Law, 2nd edn. Durban: LexisNexis South Africa
Chapter 20 | Further reading 319
 The law of insolvency

The main ideas

®@ Whar is the meaning of the term insolvency? © The effectsof sequestration
® Defining other important terms ®@ = The rehabilitation
of an insolvent
® = The parties involved in the legal proceedings © Winding-up of a company
@ = The sequestration ofa debtor's estate @ Business rescue

The main skills

Tabulate and compare the requirements for the two sequestration processes.
Draw a flow chart of the two sequestration processes.
Identify the key role-players.
Distinguish between provisional and final sequestration orders.
Explain the rationale for the acts of insolvency.
List the acts of insolvency.
Discuss the legal position of a solvent spouse.
Discuss the effects of sequestration.
Outline how an insolvent is rehabilitated,
Discuss winding-up of a company by court order.
Distinguish berween members’ and creditors’ voluntary winding-up of a company.
Apply knowledge of theory.

When a person or business cannot pay his, her or its debts, this is called ‘insolvency’. This chapter
provides you with an overview of the legal aspects attached to and flowing from the fact that a person
or business is insolvent. Insolvency describes the situation where a business or person owes more money
than he, she or it actually has. Put differently, insolvency occurs when you are unable to pay the debts
you owe. Insolvency is governed by the Insolvency Act 24 of 1936, The chapter focuses on the key legal
principles that apply when a person or a business cannot pay their debts, First, we will define important
legal terms and identify the parties who are involved. Next, we will outline the legal proceedings that
are applicable, consider the effects of sequestration and explore how an insolvent may recover from
insolvency. Finally, we will look at the winding-up of a company under the relevant legislation and
business rescue.

Before you start

Suppose that your Uncle Somizi, who owns a business selling used car parts, is married out of community
of property to your Aunt Shelley. Uncle Somizi’s business takes a knock during the economic recession,
and soon he is unable to pay his business’s debts. This is a source of great worry for your aunt. Can his
creditors take away the one-carat diamond ring that he bought her as an anniversary gift this year? What
will the impact be on her financial record? Will he lose his business? If so, how soon will this happen?
Contemplating insolvency, Uncle Somizi decides to pay his sister, Samantha, R10 000 for a loan that
he borrowed from her a year ago — he pays her to ensure that she does not lose out on her money if his
business goes under. As you read the chapter, bear these facts in mind with a view to advising Uncle
Somizi and Aunt Shelley on their concerns.

320 Chapter 21 | The law of insolvency

21.1 What is insolvency?
A person's estate is comprised of all his assets and liabilities. A person (or debtor) is insolvent Assets are all the property
when his liabilities exceed his assets. For the purposes of insolvency law, a person who only has that you own, such as a
liabilities may be regarded as having an estate. But, a debtor who is unable to pay his debts is house,
car and jewellery.
not treated as an insolvent until his estate is sequestrated by an order of court. Sequestration
is the process whereby the court formally declares that a debtor's estate is insolvent. Liabilities
are the debts
Sequestration applies to a person's estate and not to the person herself. We do not say that you owe to your
creditors,
such as your
Uncle Somizi is being sequestrated. We say Uncle Somizi’s estate is being sequestrated. So,
Edgars account and your
the debtor is insolvent and her estate will be sequestrated. It is also important to remember credit card.
that only a natural person's estate can be sequestrated. A company that is unable to pay its
debts will not be sequestrated — it will be liquidated. To sequestrate means to
Once a debtor's estate is sequestrated, he is no longer called a debtor — his legal status take legal possession of
changes to insolvent. In early Roman law, creditors were allowed to seize a debtor who was a debtor's estate until his
unable to pay his debts, and sell him into slavery. They also had the option of cutting him into debts are paid.
pieces according to the size of their respective debts. Thankfully, that is no longer the case!
The Insolvency Act 24 of 1936 regulates and governs the sequestration of a debtor's estate. Let us
look at some of the main principles that apply to the sequestration of a debtor's estate. Towards the end
of the chapter, we will look at the winding-up of a company.

Added value Marriage regimes and insolvency

Parties who are married in community of property have a joint estate. If one spouse's business
goes insolvent, that spouse does not have a separate estate that is sequestrated. Instead, their
joint estate is sequestrated. This is the case even if the other spouse had no dealings with the
insolvent business venture or the reasons that led to insolvency. Accordingly, both spouses
will be declared insolvent in terms of the Act. Insolvency therefore has very serious and harsh
consequences for spouses who are married in community of property.
Parties who are married out of community of property, with or without accrual, have
separate estates. When one spouse's estate is sequestrated, the solvent spouse's estate is not
sequestrated. But, the solvent’s estate is not unaffected by the insolvent spouse’s sequestration.
Later, we will discuss how the Insolvency Act 24 of 1936 impacts the solvent spouse’s estate.

Activity 21.1
Draw a line down the middle of a page, creating a table. On the one side, list all your assets,
including any income that you may get in the form of an allowance or salary. On the other side,
list all your expenses and liabilities. Once this is complete, you will get a good sense of whether
you are solvent or insolvent.

21.2 The parties to insolvency proceedings

Now let us look at each of the parties who are involved in the insolvency proceedings.

21.2.1 The debtor

A debtor is a person who owes money to someone else — a creditor. In our example, Uncle Somizi is the
debtor. Under South African law, the following persons qualify as debtors:
@ a natural person & a trust
@ a deceased person “ a partnership
@ a person incapable of handling his own affairs & certain companies.

Chapter 21 | The law of insolvency 321

21.2.2 The insolvent
Once the court has granted a sequestration order against a debtor, his status in law changes to that
of insolvent. If the debtor was married in community of property at the time of sequestration, then
both spouses’ statuses will change to that of insolvent. The insolvent will remain as such until he is
rehabilitated under the Insolvency Act 24 of 1936 and is regarded as solvent again.

Duties of the insolvent

‘The Insolvency Act 24 of 1936 imposes the following important duties on the insolvent:
= = The insolvent must deliver all financial records to the sheriff.
@ Within seven days of being served with the final sequestration order, he must lodge, in duplicate, a
statement of affairs at the Master’s office, which must be verified by an affidavit.
= Once the trustee has been appointed, he has 14 days to deliver to her any property in the insolvent
estate that is in his possession.
= When called upon by the trustee, he is required to assist her in the collection of property that
belongs to the insolvent estate.
= = The insolvent must provide a full and frank disclosure to the trustee or the Master on all relevant
matters relating to the insolvent estate, such as details of the location of any property that is not in
the insolvent's possession.
@ = The insolvent must inform the trustee of his residential and postal addresses, including any changes
to his addresses.
® = The insolvent must keep a detailed statement of all transactions, such as assets that he receives from
his debtors and payments that he makes to his employees.
® = The insolvent must attend the meetings of creditors, and give evidence, when called upon to do
so, on matters relating to the insolvent estate during the interrogation process and/or in any legal
proceedings relating to the insolvent estate.

In many instances, a failure by the insolvent to carry out his duties will lead to him committing a
criminal offence under the Insolvency Act 24 of 1936,

21.2.3 The creditors

A creditor is a person who you owe money or other performance to. Again, not every person will qualify
as a creditor in South African law. Only those people who meet certain requirements will be able to call
themselves creditors and claim money from the debtor. All the people Uncle Somizi owes money to will
qualify as creditors.
Different kinds of creditors are ranked according to the order in which the insolvent estate pays them.
@ Secured creditors are creditors who hold security over their claims, such as a mortgage bond. Here,
the security — the house that is mortgaged — can be liquidated upon insolvency. A secured creditor
is paid out of the profits of the property after certain expenses are paid. If the profits of the property
are insufficient to cover the claim, the secured creditor has a concurrent claim for the outstanding
balance. A secured creditor has the option of relying entirely on her security, which comes with its
own advantages and disadvantages.
@ = Preferent creditors are entitled to payment after secure creditors have been paid, but before all the other
creditors — so, they are said to have a preferential claim. Preferent creditors are therefore
Free residue refers to that
unsecured creditors, which means that they will get paid only if there is enough free residue 37+ of the estate that is
in the estate after secured creditors have been paid. Examples of these claims are funeral not subject to any right of
expenses, costs of sequestration, income tax and the salaries of the insolvent’s employees. preference — that is, the
The Insolvency Act 24 of 1936 ranks preferent creditors according to a predetermined order _ unencumbered portion of
of preference. Some of the preferent claims have a maximum limit under the Insolvency the insolvent estate.
Act, in which case the creditor has a concurrent claim for the balance.
@ Concurrent creditors are paid out of the free residue after preferent creditors have been paid.

322 Chapter 21 | The law of insolvency

For example, Uncle Somizi owes money to Matt, Lebo and Joseph. Matt is a preferent creditor with a claim
of R10 000, Lebo is a concurrent creditor with a claim of R1 000, and Joseph is a secured creditor with a
claim of R5 000. As a secured creditor, Joseph will get paid first. Matt will get paid after Joseph has been
paid. Lebo is last in line to get paid, and he will get paid only if there is anything left in the insolvent estate.

The meetings of creditors

The Insolvency Act 24 of 1936 sets up a system of four meetings. These meetings are an important
mechanism for creditors to prove their claims, elect a trustee, issue instructions to the trustee, and
interrogate any relevant person (for example, the insolvent). The four types of meeting are as follows:
the first meeting
the second meeting,
PS

a special meeting
a general meeting.

21.2.4 The Master of the High Court

The Master of the High Court is responsible for insolvent estates. The Administration of Estates Act 66
of 1965 deals with the appointment of the Master. Every High Court has a Master. We call the Master
‘a creature of statute’, which means that he can act only if the national legislature gives him the power
to do so, So the Master’s authority and powers are all contained in statute. He is not allowed to deviate
from the rules and regulations as they are described in the Act. Consequently, he can perform only the
functions and make the decisions that the statute allows him to.
Ifa party is dissatisfied with a decision or order that is made by the Master, she may bring an
application to court to have it reviewed (section 151).
Although the Master of the High Court may be a woman, the language of the statute refers to a man.

21.2.5 The trustee

The trustee, like the Master, has an important role to play in insolvent estates. The trustee takes control
of the debtor's assets in order to divide the assets among the creditors. The trustee is elected, through
a system of voting, at the first meeting of the creditors (section 54), and the appointment must be
confirmed by the Master (section 56(1)). It is the responsibility of the trustee to act to the benefit of
all the creditors, while at the same time, not negatively affecting the estate of the insolvent. A trustee
is entitled to a reasonable payment for the job she does (section 63), and the Master may increase or
decrease the amount of this payment. More than one trustee may be elected (section 57(5)).

The powers and duties of a trustee

‘The trustee must collect and preserve assets in the insolvent estate with the aim of realising those assets
for the benefit of the creditors. In order to do this, the trustee uses the following powers and duties:
= to take possession and control of all movable property, books and documents (including electronic
records) that belongs to the insolvent estate
to get the property appraised and furnish the Master with a valuation of the property
to call upon debtors to the insolvent estate to pay their debts within a specified date at a specified place
to temporarily carry on the insolvent’s business, but only if authorised by the Master to do so
to investigate the insolvent’s financial affairs in order to report to the creditors
to open a receipt book to record all money, goods and documents that she receives, and make it
available for inspection by the Master and any interested party
to open a cheque account in the insolvent estate's name, and deposit all moneys received
to submit a full written report on the insolvent's financial affairs to the creditors
to enlist the services ofa legal practitioner, if necessary
to refer a dispute regarding the insolvent estate to arbitration with the authorisation of the creditors,
or the Master, if no creditor has proven a claim as yet.

Chapter 21 | The law ofinsolvency 323

Impeachable dispositions for trustees
As part of the trustee's duty to collect assets that belong to the insolvent estate, the trustee
The Insolvency Act 24
is empowered to set aside certain dispositions that were made by the insolvent before OF 1936 detines’a
sequestration. Each disposition can only be set aside if certain requirements are satisfied, disposition as any transfer
These dispositions are as follows: or abandonment of rights
® = dispositions that were made for no value (section 26(1)) to property, such as a sale,
® = dispositions that have the effect of preferring one creditor above another creditor — ae oe bond
voidable preference (section 29(1)) on 1).
® = dispositions that were intended to prefer one creditor — undue influence (section 30)
® collusive dispositions which prejudice creditors or prefer one creditor (section 31(1)) Ree pare te
@ = dispositions that were made in fraud of creditors — actio P pauliana , eS
P $ an attempt ees:
to avoid debt
The trustee occupies a position of trust towards the insolvent estate. She must also always By Wrabsterniny money t0
another person or company.
be independent and impartial in her decision-making, and always act in the best interests of
the general body of creditors.

Who cannot be a trustee?

The following persons are disqualified from occupying the position of a trustee:
® an insolvent person
® a person who is within certain degrees of relationship to the insolvent — for example, a close
family member
a minor or other person with legal disability — for example, a mentally ill person
a person who resides outside the country
a person who has a conflicting interest to that of the general interest of the creditors
a former trustee who was disqualified under section 72 — that is, for the unlawful retention of
money or use of property in the insolvent estate
a person who is disqualified to be elected as trustee under section 59 — that is, fora reason related to
misconduct in an office of trust
®™ acorporate body
®@ a person who has been convicted, whether in this country or elsewhere, of theft, fraud, forgery or
perjury, and has been sentenced to imprisonment without the option of a fine, or toa fine exceeding
R2 000
® a person, who was at any time a party to an agreement with a debtor or a creditor whereby she
undertook that she would, in her position of trustee, grant or obtain a benefit for a debtor or
creditor that was not provided for by law
® a person who has by means of misrepresentation, reward, or the offer of a reward, whether direct or
indirect, induced or attempted to induce a person to vote for her as trustee or to assist in having her
elected as trustee
™ a person who acted as the bookkeeper, accountant or auditor of the insolvent estate during a twelve-
month period before sequestration
® any agent authorised specially or under a general power of attorney to vote for or on behalf of a
creditor at a meeting of creditors of the estate concerned and acting or purporting to act under such
authority (section 55).

Case study Can a close family member be a trustee?

Sally's brother, Senzo, would like to be appointed as trustee to Sally's insolvent estate, since he
was Sally's auditor for two years until just a few months ago. Therefore, he thinks that he would
be best placed for the position of trustee. If you were the Master of the High Court, would you
have any objection to Senzo being appointed as trustee to the insolvent estate?

324 Chapter 21| The law of insolvency

 Case study (continued) Can a close family member be a trustee?

The Insolvency Act 24 of 1936 is very clear that certain relatives are disqualified from acting
as trustee. Another ground for disqualifying Senzo from acting as trustee is that he was the
auditor during a twelve-month period before sequestration.

Case study A conflict of interest?

Sally has recently been sequestrated under the Insolvency Act 24 of 1936. The trustee
who has been appointed to administer and manage Sally's insolvent estate bought a car
that Sally advertised and sold for a very low price, as she (Sally) was desperate for cash, If
you were the Master of the High Court, would this be grounds for action to be taken against
the trustee?
This transaction poses a potential conflict of interest. Firstly, the insolvent is not allowed
to dispose of assets without permission from the trustee, as this would jeopardise the
interests of the creditors. Secondly, since the trustee seemingly approved the transaction by
his participation in it, he is acting against the interests of the creditors by trying to ‘cash in’
on a good deal for his personal benefit, knowing that this would deprive the insolvent estate
of an asset without getting the proper price for it. As the Master, | would remove the trustee
from office.

Removal of the trustee from office

A trustee must vacate her office for following reasons:
= if her own estate is being sequestrated
@ if she has been declared incapable of managing her own affairs by a court, or an order is issued
under the law on mental health for her detention at a mental institution
@ if she is convicted of any offence and sentenced to serve any terms of imprisonment without the
option of a fine, or if she is convicted, whether in this country or elsewhere, of fraud, theft, forgery
or uttering a forged document, or perjury (section 58).

Removal of the trustee from office by the Master

The Insolvency Act 24 of 1936 also provides that the Master may remove a trustee from her office in the
following instances:
m = The trustee was not qualified for election or appointment as trustee, or her election or appointment
was illegal, or she has become disqualified.
= = The trustee failed to perform any of her duties satisfactorily or to comply with a lawful demand by
the Master.
m = The trustee is mentally or physically incapable of performing her duties satisfactorily.
The majority of creditors who are entitled to vote have requested her in writing to do so.
= = In the Master's opinion, the trustee is no longer suitable to be trustee of the insolvent estate
(section 60).

Activity 21.2
Think about the reasons that led the legislature to come up with the above lists of persons who
are disqualified from being a trustee, or when a trustee can be forced to vacate her office and
who can be removed from office by the Master. Who and what do you think the law was trying
to protect? Discuss this with a classmate and record your answers.

Chapter 21 | The law ofinsolvency 325

Now that we know who the parties involved in a sequestration process are, let us look at the purpose and
process of sequestration.

21.3 The purpose of sequestration

What is the purpose of sequestration? The main aim of sequestration is to ensure that the insolvent’s
creditors receive a fair and equitable portion of the debtor's estate. Sequestration is therefore a means to
protect the interests of creditors. There are two ways in which this is done:
= voluntary surrender, where the debtor voluntarily applies to the court for a sequestration order
® compulsory sequestration, where one or more creditors apply to the court for a sequestration order
against the debtor.

Using our example, Uncle Somizi has the option of personally applying to the court to have his estate
sequestrated, If he does not voluntarily surrender and if he get deeper into debt, then his creditors have
the option of compulsorily sequestrating his estate.

21.4 The sequestration process

Each process of sequestration has its own set of requirements and procedures that must be followed.
Let us look at them in greater detail.

21.4.1 Voluntary surrender

‘There are two main reasons why a debtor would apply for voluntary surrender.
1. The debtor will no longer be liable for the debts he incurred before the estate was sequestrated.
This means that he will be free of his pre-sequestration debts, and he will have a new estate with
new assets and liabilities.
2. ‘The insolvent debtor gets a chance to be rehabilitated through the sequestration process. This
means that after rehabilitation, he will be able to manage his own estate again, and be able to
incur debts again.

Qualifying for voluntary surrender

‘The applicant will have to prove certain requirements in terms of section 6(1) of the Act. He must
prove that:
@ his estate is, in fact, insolvent
@ he owns realisable property of sufficient value to cover the costs of sequestration, which is payable
out of the free residue of the estate
®@ sequestration will be to the advantage of the creditors.

Applying for voluntary surrender

‘The following persons may apply for voluntary surrender:
m the debtor, or his duly authorised agent, in respect of the estate of a natural person (section 3(1))
= acurator: bonis in respect of an estate of a debtor who is incapable of managing his A curator bonis is a |egal
own affairs (section 3(1))
representative who is ,
m = the executor in respect of a deceased estate (section 3(1)) appointed by the court to
® = all the members of a partnership in respect of a partnership estate (section 3(2)) manage the affairs of a
= both spouses in respect of a joint estate — that is, where the spouses are married person who is unable to
in community of property (section 174(4) of the Matrimonial Property Act 88 do so on their own.
of 1984).

As well as proving the above three requirements, the debtor must also comply with certain formalities
(section 4). These formalities protect the creditors as they aim to notify them within a reasonable
time that one of their debtors intends to apply for voluntary surrender. ‘This will then give the

326 Chapter 21 | The law of insolvency

creditors an opportunity to investigate the debtor's financial records. ‘These formalities include the
following steps:
The debtor must publish a notice of surrender in the Government Gazette and in a newspaper in the
area where he resides or, if he is a trader, in the district where he has his place of business, not more
than 30 days and not less than 14 days before the date stated in the notice for the hearing of the
application.
‘The debtor must send copies of the notice to creditors, trade unions, employees and the South
African Revenue Services (SARS) within seven days after publication of the notice of surrender.
The debtor must do this by way of affidavit.
The debtor must prepare and lodge a statement of affairs, which sets out:
® abalance sheet
a list of all assets
a list of debtors
a list of creditors
a list and description of every book of accounting that was used by the debtor at the time of the
notice of surrender (or sequestration) or at the time that he ceased to carry out business
a detailed statement of the cause of insolvency and any prior insolvency or rehabilitation
® an affidavit verifying that all the information provided is correct; the statement of affairs must
be lodged at the Master's office.

Once a notice of surrender has been published and these procedural steps have been complied with,
certain consequences follow:
The debtor may not sell any property in the estate, which has been attached under a court order or
other similar process.
‘The Master may appoint a curator bonis to the debtor's estate as a safety measure to stop the debtor
from selling or squandering his assets in the interim.
If the debtor fails to lodge his statement of affairs, or lodges one that is incomplete or incorrect, or
fails to apply to court on the date set out, and the notice of surrender is not properly drawn, then
the debtor commits an act of insolvency, which means that a creditor can apply for
h | 2 Pwdebror An act of insolvency
the compulsory sequestration of the debtor's estate. is ari eck conrimnibied by
If the debtor wishes to withdraw the notice of surrender, he needs to obtain written the debtor whereby he
permission from the Master. benefits one creditor
The notice of surrender and the debtor's application for voluntary surrender lapse if the _9F another. This will be
court does not accept the surrender, or if the notice was not properly drawn, or if the discussed in more detail in
the next section.
debtor fails to bring the application within 14 days after the date specified. If a curator
bonis was appointed, then the estate must be restored to the debtor once the Master is
satisfied that the costs will be paid.

Voluntary surrender at the court's discretion

Even if the debtor satisfies all the above requirements, the court can accept or reject the application for
voluntary surrender (section 6(1)) at its discretion. The court will consider factors such as:
The debtor failed to give a full financial disclosure.
The debtor had an underhanded reason for applying for surrender (for example, to disadvantage a
certain creditor).
The debtor's conduct showed that he was being grossly extravagant and reckless in the kinds of debts
that he was incurring.

The debtor may not appeal an order rejecting the surrender of an estate. But, an interested party may
appeal an order accepting the surrender of an estate.

Chapter 21| The law of insolvency 327

21.4.2 Compulsory sequestration
A creditor may apply for the compulsory sequestration of the debtor's estate for the following reasons:
= = The debtor will lose control over his estate. This means that he will no longer be able to squander
any more money or assets.
= = It will no longer be possible for one of his creditors to sue the debtor on a particular debt and obtain
judgment and full payment of money owing, if he or she negatively affects the chances of other
creditors getting paid.
@ = The sequestration process ensures that all the debtor's creditors are treated equally and fairly, and
that one creditor does not get preferential treatment over another. So, the Insolvency Act 24 of 1936
protects the interests of the creditors as a group, rather than the interests of one creditor.

Qualifying for compulsory sequestration

The court may grant an application for compulsory sequestration if the applicant satisfies the following
requirements in terms of section 12(1) of the Act:
@ = ‘The applicant has established a claim under section 9(1), which entitles her to
A liquidated claim is a
apply for sequestration. In terms of section 9(1), a creditor with a liquidated claim claim for money.
against the debtor of not less than R100, or two or more creditors with a combined
liquidated claim against the debtor of not less than R200 may bring the application
= Z The sheriff of the court
for compulsory sequestration. can othicee wtio exiforces
@ = The debtor has committed an act of insolvency or is insolvent. and delivers court orders.
= = There is reason to believe that sequestration will be to the advantage of the
debtor's creditors.

Activity 21.3
Draw up a comparison of the three requirements for voluntary surrender and compulsory
sequestration in a table. The third requirement for each process makes reference to ‘advantage
to creditors’. But, under voluntary surrender, the debtor must prove that sequestration ‘will be’
to the advantage of creditors whereas, under compulsory sequestration, the creditor/s must
prove that there is ‘reason to believe’ that sequestration will be to the advantage of creditors.
Which requirement is the stricter one? What do you think is the reason for the different wording
for this third requirement under each process? Discuss your answers with a classmate.

Added value Acts of insolvency

One of the requirements for compulsory sequestration is that creditors must prove that the
debtor committed an act of insolvency or is insolvent. The creditors are unlikely to have access
to the debtor's financial records to prove that his liabilities exceed his assets, so it may not be
possible to prove that he is insolvent. To assist the creditors, the legislature designed a list of acts
of insolvency. If the creditors can prove that the debtor committed an act of insolvency, this will
allow them to apply for the compulsory sequestration of his estate without having to establish
that the debtor is insolvent. In terms of section 8 of the Insolvency Act 24 of 1936, these acts of
insolvency come into effect if the debtor:
e left the country with the intention of evading or delaying payment of his debts
e was ordered by a court to pay a creditor, but he was unable to do so, or he did not show
the sheriff of the court enough property that could be sold to satisfy that court order
e made or attempted to make a disposition of his property which has, or would have the
effect of prejudicing his creditors or of preferring one creditor over another

328 Chapter 21 | The law of insolvency

 Added value (continued) Acts of insolvency

e removed or attempted to remove any of his property with the intent to prejudice his
creditors or to prefer one creditor above another creditor
e made or offered to make any arrangement with any of his creditors to release him entirely
or in part from his debts
¢ published a notice of surrender and then failed to prepare and lodge a statement of affairs,
in duplicate, at the Master's office as prescribed by the Act, or lodged a statement of affairs
that is incorrect or incomplete in a material aspect, or failed to apply for acceptance of the
surrender on the specified date
¢ gave notice in writing to any one of his creditors that he is unable to pay any of his debts
e isa trader and he gave notice in the Government Gazette.

Let us look at a case example relating to the first act of insolvency — evading or delaying payment of debts.

Estate Salzmann v Van Rooyen 1944 OPD 1

Principle
In order to prove this act of insolvency, the creditor must prove that the debtor's intention in
leaving was to evade or delay payment of his debts.
Facts

The debtor, a director of a company, went to another town, supposedly to visit his sick wife.
Before he left, he appointed a person to take over as co-director of the business, he got rid
of certain office equipment and he terminated his residential lease. He also did not provide
any forwarding address, and he ignored business mail. When he arrived in the other town, he
immediately resigned from the company.
The court's finding
The court held that the debtor's overall actions gave rise to the clear inference that the debtor's
true intention was to evade payment, and not visit his sick wife.

Applying for compulsory sequestration

The sequestrating creditors must bring the application by way of a notice of motion A notice of motion
supported by an affidavit. The affidavit must set out the following information: is a formal notice to
@ the full details of the sequestrating creditors (full names, status, occupation, addresses) _ Participants in litigation of
m = the details of the debtor (full names, date of birth, identity number, and marital eR ee eer opens
status); if the debtor is married in community of property, then the same details of the Reset BY Regal Set0n-
spouse must also be included
m = the nature, cause and amount of the claims, and a statement on whether or not the Tie sesame
= must provide security to
claims are secured; if the claims are secured, then details of the nature and value of the the Master as a way to
security must be included guarantee that the costs of
@ the act/s of insolvency committed by the debtor and/or proof that the debtor sequestration will be paid.
is insolvent The Master will issue a
®@ astatement that the sequestration will be to the advantage of the creditors Certificate to confirm that
™ —astatement that security will be provided to the Master Seat ie Dee nee
® —astatement that the copy of the documents will be lodged with the Master so that his
report can be obtained

Chapter 21| The law ofinsolvency 329

® —astatement that confirms that copies of the application will be provided to interested parties, and
that an affidavit will be filed before or during the hearing, setting out the manner in which the
relevant section of the Act was complied with
@ any other relevant factor that may sway the court.

Friendly sequestrations
‘The application for compulsory sequestration may be brought by a creditor that the debtor knows,
such as a friend or a family member. This is known as a friendly sequestration and its goal is to help the
debtor. These are the advantages for the debtor:
@ = ‘The application may be brought on an urgent basis without having to comply with any of the
preliminary formalities, such as the advance notice to creditors, under voluntary surrender.
@ = The requirements that must be satisfied under a friendly sequestration are far less onerous than
under voluntary surrender.
A friendly sequestration
While friendly sequestrations are not prohibited, the courts approach these applications is a compulsory
with caution, as there is room for conspiracy and collusion between the creditor and the sequestration where the
debtor because of their relationship. For example, they may hide or suppress important sequestrating creditor:
known by the the debtor.
information, or manufacture false evidence in order to mislead the court and creditors.

Added value Characteristics of a friendly sequestration

The court, in Craggs v Dedekind; Baartman v Baartman and Another; Van Jaarsveld v Roebuck;
Van Aardt v Borrett 1996 (1) SA 935 (C) at 937, described friendly sequestrations as follows:
‘Friendly sequestrations seem to share certain characteristics. Although, like pornography,
they may be hard to define, they are easy to recognise. The debt which the sequestrating
creditor relies upon is almost always a loan. It is usually quite a small loan, very often made
in circumstances where it would have been apparent to the whole world that the respondent
was in serious financial difficulty. Despite this, the loan is customarily made without security
of any sort. It is seldom evidenced by a written agreement, or even subsequently recorded in
writing. The only writing that is produced to the Court is the letter stating, with appropriate
expressions of dismay, that the debt cannot be paid, and, sometimes, for good measure,
setting out details of the respondent's assets and liabilities. Very often debtor and creditor are
related: fathers commonly sequestrate sons, wives sequestrate husbands and sweethearts
sequestrate each other, without, | am sure, any damaging effect on their relationship.’

A provisional sequestration order

If the court is satisfied that prima facie requirements for provisional sequestration are In this Context, prima fade
satisfied, it will grant a provisional order of sequestration. A provisional order of sequestration _ means that, based on first
allows any interested party an opportunity to object to the issuing of a final order of impression or appearance,
sequestration. It also gives the creditors a legal remedy for preserving the debtor's estate. the court will accept the
After examining all the relevant documents, the court also has the option of dismissing _ €vidence as correct until
the application for compulsory sequestration, postponing the hearing, or any other order PRS Ciewee:
that it deems fit.

A final sequestration order

When the sequestrating creditors approach the court for the second time to ask the court to make
final the provisional order of sequestration, they must prove on a balance of probabilities that the
requirements for final sequestration are satisfied. The court cannot grant a final order of sequestration
without a provisional one having been made first.

330 Chapter 21 | The law of insolvency

Compulsory sequestration at the court's discretion
As with an application for voluntary surrender, the court has discretion to grant or reject an application
for compulsory sequestration. This applies even if the sequestrating creditors have satisfied all the
requirements and preliminary steps under the Insolvency Act 24 of 1936.

Setting aside a sequestration order

A person, who is dissatisfied with the court's decision to grant a final order of sequestration, or by the
court's decision to set aside an order of provisional sequestration, may lodge an appeal.

Added value The poor debtor

It is possible for a creditor to bring an application for compulsory sequestration with malicious
intention — perhaps to bully or intimidate the debtor. If the court has good reason to believe that
the application amounts to an abuse of the court’s procedure or is malicious or vexatious, it may
allow the debtor to prove the extent of the damages that he suffered as a result (section 15).
The debtor will also have a common law remedy for damages on the basis that the sequestrating
creditor brought the application without reasonable and probable cause.

Activity 21.4
Draw a flow chart of the two different types of sequestration process under the Insolvency
Act 24 of 1936. This will help you to remember and study the two processes. When you have
done this, compare your flow chart with that of a classmate to see if either of you missed out
any important information.

21.5 Effects of sequestration

Now we will look at how the insolvent person will be affected by sequestration.

21.5.1 The legal position of the insolvent

Insolvency has an impact on the insolvent’s contractual capacity in that there are certain restrictions
placed on the insolvent's capacity to contract. If the insolvent concludes a contract without the necessary
consent of his trustee, or if he concludes a contract that the law does not allow, the contract can be
cancelled at the option of the trustee.
Contractual capacity is dealt with in Chapter 4. Refer back to this chapter to refresh your memory on
this section.
The insolvent is also prohibited from holding a number of positions, including the following:
@ a trustee in an insolvent estate
® a director of a company unless the court grants an exemption
®@ management of a close corporation unless the courts grants permission
@ a business rescue practitioner In law, a fitand proper
® atrader who is a general dealer or manufacturer person refers to a person
® adistributor of liquor or a tor
‘ . ‘ ‘ fac egal order and a sense
= amember of the National Assembly, National Council of Provinces or provincial eee :
levisl : of equality and fairness.
egislature This test is important
® apractising attorney unless he can prove that he is still a fit and proper person as lawyers must handle
@ a registered credit provider matters with diligence,
= amember of the governing board of the National Credit Regulator. honesty and virtue.

Chapter 21 | The law ofinsolvency 331

21.5.2 Consequences for the insolvent’'s estate
When sequestration takes place, the insolvent’s estate first vests in the Master and then, once she has
been appointed, in the trustee. This then enables the trustee to carry out her duties of collecting assets
that belong to the estate, realising those assets and paying creditors. Note that where a joint estate is
sequestrated, both spouses’ estates vest in the Master and then in the trustee.
Generally, the following property does not vest in the trustee:
clothes, bedding and other means of subsistence, such as furniture
payment for work done (except for that portion which is not needed for subsistence, which is
payable to the trustee upon the Master's determination)
pension
compensation arising from a claim for defamation, personal injury or occupational injuries
or diseases
unemployment insurance benefits
certain insurance policies, such as life policies
trust money and property
the insolvent’s share in accrual, where he is married out of community of property with accrual
property that is acquired with money from any of the above property.

21.5.3 Consequences for the solvent spouse’s estate

Where the parties are married out of community of property, with or without accrual, an important
effect of sequestration is the temporary vesting of the solvent spouse’s estate in the Master and then the
trustee, once the trustee is appointed (section 21(1)). Ifthe debtor is married in community
of property, the law views both spouses as debtors and their joint estate will be sequestrated. A civil union is concluded
under the Civil Unions
The purpose of the section in the Insolvency Act is to:
5 é ‘ Act 17 of 2006, and it is
prevent collusion between the insolvent and the solvent spouse to the disadvantage of 5 voluntary union of two
the insolvent estate, bearing in mind the intimate nature of their relationship. majors that is solemnised
to allow her certain protections to counter the harsh effects of section 21(1). For and registered as such
example, she is allowed to apply for a postponement of the vesting if her business under the Act. A civil union
interests will be prejudiced. The vesting of the solvent spouse's estate is not meant to be e eel
a permanent measure.

Added value Who is the ‘spouse’?

In insolvency law, ‘spouse’ includes any spouse who is married under any law, Customary practice
or tradition, and this includes civil unions. The term also includes same-sex partners, even if the
parties are not married. But, strangely, if the insolvent is separated from his legal spouse and is
living with another person who is he not married to, only the legal spouse's estate will vest in the
Master and then the trustee.

Activity 21.5
The law of insolvency has a negative impact on the spouse of the debtor, whether they are
married in or out of community of property. Compare and contrast the legal position of a spouse
who is married to the debtor in community of property to that of a spouse who is married to the
debtor out of community of property. Do you think it is fair that the law of insolvency has such a
harsh impact on the legal position of the spouse? What are the reasons for your answer? Discuss
your answers with a classmate.

332 Chapter 21| The law of insolvency

21.5.4 Consequences on unexecuted contracts
Usually the trustee has an election — a choice — as to whether or not to abide by the contracts that the
insolvent was party to at the time of sequestration. This decision must be made in the best interests of the
creditors. Once the trustee exercises that election, the decision is final. If the trustee fails to make a decision
within a reasonable time, it is assumed that she does not intend to perform in terms of the contract.
The Insolvency Act 24 of 1936 regulates the trustee’s election in respect of the following contracts
that the insolvent is a party to at the time of sequestration:
= = If the insolvent is a party to a contract to acquire immovable property, the trustee must exercise her
election within six weeks of receiving written notice to do so by the other party (section 35).
@ = If the insolventis a party to a lease agreement as a lessee, the trustee must exercise her election in
writing within three months (section 37(2)).
= = If the insolvent is a party to a lease agreement as a lessor, the /uur gaat voor koop To repudiate means
principle applies, which means that the trustee cannot repudiate the contract and ‘to reject’,
must realise the property subject to this principle.
® Employment contracts, where the insolvent is the employer, automatically terminate in 45 days
from the date of the trustee’s appointment if she (the trustee) has failed to put appropriate measures
in place to save the business (section 38).

Added value Composition and compromise

If an insolvent has been provisionally sequestrated (or before), the insolvent may enter into a
written agreement with his creditors and the trustee (if a provisional trustee has been appointed)
to pay a certain amount on his debts on condition that the provisional order of sequestration is
discharged. This is a common law compromise, and it requires consent from all the creditors.
Section 119 of the Insolvency Act 24 of 1936 allows for an insolvent, whose estate has been
finally sequestrated, to avoid some of the effects of sequestration and shorten his period of
insolvency by entering into a statutory composition with his creditors. Here, if the majority of the
creditors accept the insolvent’s offer of payment, the minority of the creditors are also bound
by this acceptance. If the offer of composition is not less than 50 cents in the rand for every
concurrent claim, then the insolvent has the advantage of applying to court for early rehabilitation,

21.6 Recovering from sequestration

An insolvent’s insolvency comes to an end once he has been rehabilitated. Rehabilitation Rehabilitation is a
marks a new start for the insolvent, without the worries of the effects of sequestration and _ process of healing but, in
his pre-sequestration debts. Once rehabilitated, he is regarded as being solvent again, and this context, is the process
he has a new estate. whereby zsthe insolvent
; F ; 5.
There are two ways‘ in which an insolvent can be rehabilitated:
recovers beachesuestration.
So a rehabilitated insolvent
® automatic rehabilitation after ten years fax been ‘cured’ of
® = rehabilitation by court within ten years. their problem.

21.6.1 Automatic rehabilitation after ten years

After a period of ten years from the date of provisional sequestration, an insolvent is automatically
rehabilitated by the passing of time (section 127A(1)). The exception to this is when an interested party
successfully applies to court before the ten-year period to prevent the insolvent from being rehabilitated.

21.6.2 Rehabilitation by court within ten years

Section 124 of the Insolvency Act sets out the circumstances in which the insolvent may apply to court
to be rehabilitated before the period of ten years from the date of sequestration has passed.

Chapter 21 | The law ofinsolvency 333

 These are the circumstances:
An offer of composition
@ = The insolvent has obtained a certificate from the Master that the creditors have is an offer to make
accepted an offer of composition of not less than 50 cents in the rand for every payment to the creditors,
concurrent claim. subject to certain
= Lapse of the prescribed period after confirmation by the Master of the first account requirements in the Act
in the estate. The Act sets out various prescribed time periods depending on the een):
circumstances and conduct of the insolvent, for example, if the insolvent has been
convicted of a fraudulent act in relation to his insolvency, then he may only apply for rehabilitation
after five years have passed from the date of his conviction,
@ No claims have been proved against the insolvent estate after six months, the insolvent has not been
convicted of any fraudulent acts in relation to his insolvency or any offence under the Act, or his
estate has not been sequestrated before.
= The Master has confirmed a plan of distribution providing for the full payment of all proved claims
with interest and all the costs of sequestration.

The Act comprehensively sets out the procedures and preliminary steps to be followed for an application
for rehabilitation.

21.6.3 Rehabilitation at the court's discretion

‘The court exercises its discretion in deciding whether or not to rehabilitate the insolvent. The court will
consider whether the insolvent should be allowed to trade with the public again based on:
=~ whether he is an honest person
= how he conducted his affairs before insolvency
m= whether he is likely to transact recklessly if rehabilitated.

‘The court must provide sound reasons for arriving at its decision to either postpone rehabilitation, grant
rehabilitation subject to a condition, or to refuse rehabilitation.

21.7 Winding-up companies

A company cannot be sequestrated. Instead, a company is wound up. Winding-up is the process by
which a company’s assets are sold, its debts paid, and the balance is paid to the shareholders. Note
that a company need not be insolvent in order for it to be wound up; a solvent company may also be
wound up.
There is more than one statute that applies to the winding-up of a company. Unlike with the
sequestration of a debtor's estate where the Insolvency Act is the primary piece of legislation that governs
and regulates the process, the winding-up of a company follows these statutes:
m the Insolvency Act 24 of 1936 applies in so far as it is applicable to companies
@ the Companies Act 71 of 2008 (sections 79-81, applies to the winding-up of solvent companies)
m= the old Companies Act 61 of 1973 (sections 337-426, subject to certain exceptions).

A company can be wound up in one of two ways:

1, by acourt (compulsory winding-up)
2. by voluntary winding-up.

Compulsory winding-up
‘The process of compulsory winding-up is initiated by an application to court. The application is brought
by either of the following parties:
@ = by acreditor, in the case of an insolvent company
m by ashareholder in the case of a solvent company.

334 Chapter 21| The law of insolvency

This process may take place when the company (solvent or insolvent) is unable to pay its debts. In the
event of a solvent company, it may resort to this type of winding-up where it is unable or unwilling to
furnish security for the full payment thereof within 12 months.

Voluntary winding-up
If a company chooses to close itself down in a process of voluntary winding-up, there are two options
available to the company:
= acreditors’ voluntary winding-up
= ~amembers’ voluntary winding-up.

A creditors’ voluntary winding-up may be used when the company is unable to pay its debts. A
members’ voluntary winding-up will be allowed by the court only if the company is able to pay its debts
in full. Otherwise, the members must provide the Master with security for payment of the debts of the
company. The security that could be provided here would include, for instance, life insurance policies or
immovable property, such as a house, flat or piece of land.
Let us look at these processes in more detail.

21.7.1 The winding-up processes

The Companies Act 61 of 1973 makes provision for the winding-up or liquidation of a
company. Winding-up or liquidation means the procedure that must be followed to:
@ sell the company’s assets
= pay the company’s debts
® = divide any money left over between the members of the company.

Winding-up by a court
The following people may apply to the court for the winding-up of a company:
the company
one or more of the company’s creditors
one or more of the company’s members
any of all of the above-listed parties
the Master
a provisional or final judicial manager.

‘The following people may apply for the winding-up ofa solvent company:
= the company, in the case of a special resolution
= =the company, or one or more directors, shareholders or creditors in the instance of it being just and
equitable to wind-up the company
@ =the company where there is a conversion of a voluntary winding-up into a winding-up by a court
® the business rescue practitioner, in a case where there is no reasonable prospect of rescuing
the company
= the company, or one or more directors or shareholders where there is a deadlock in the
management voting
@ any shareholder in a case where there is fraud, illegality or misuse of the company’s assets
= =the Companies and Intellectual Property Commission or Takeover Regulation Panel where there is a
failure to comply with a compliance notice in the instance of the directors, officers or other persons
controlling the business being engaged in fraudulent or illegal activity.

Chapter 21| The law of insolvency 335

The court may wind-up an insolvent and solvent company if the following have been complied with:
= = ‘The company has passed a special resolution to be wound up by the court.
= The company started doing business before it received its certificate entitling it to start doing business.
= The company does not start doing business within a year of being incorporated.
= The number of a public company’s members has fallen below seven.
m= =The company has lost 75% of the shares in its business.
= The company is no longer able to pay its debts.
= Winding-up the company appears to be the reasonable thing to do.
a : in: the country in which
e ita was incorporated,
:
If an exicrmal company has been dissolved 4, ternal pane
or has ceased to carry on business, or is carrying on business only for the purpose of is a foreign company— a
winding-up its affairs (insolvent company). company that has been
@ = It is just and equitable to wind-up the company (solvent or insolvent companies), for _ incorporated outside the
example, if: country, regardless of
m the objective for forming the company is no longer possible VEE OO ROU ss ran
: see : or non-profit company or
m the company’s objectives are illegal : Sepa
< ian as e - : carrying on business in
m there is a justifiable lack of confidence in the management of the company South Africa.
m the voting power in the company is divided
m the minority shareholders are being oppressed by the controlling shareholders The term incorporated
= The company is in business rescue and there is no reasonable prospect of the company refers to the legal
being rescued (insolvent company). process used to form a
= = The directors, officers or other persons in control of the company are acting in a corporate entity.
manner that is fraudulent or illegal.
= The company’s assets are being misused or wasted.
= = ‘The company has failed to comply with a compliance notice that was issued by the Companies and
Intellectual Property Commission or Takeover Regulation Panel in the case where the directors,
officers or other persons controlling the company have acted fraudulently or illegally.

21.7.2 The effects of winding-up

‘These are the effects of winding-up an insolvent company:
= = The winding-up by the court begins when the application for the winding-up, that is, the relevant
documents, are lodged with the registrar of the court.
The directors are divested of their powers.
The Master takes control of the company’s property until a liquidator is appointed.
The business of the company may only continue in so far as it is necessary for the winding-up.
If the company is unable to pay its debts, its dispositions of property must be authorised by the
court. Otherwise, those dispositions will be void.
Any transfer of the company’s shares must be authorised by the liquidator, Otherwise, that transfer
will be void.
All civil proceedings by or against the company are stayed until a liquidator is appointed.
@ Once the Master receives the winding-up order, he must give notice of it in the Government Gazette.
@ = The registrar must serve a copy to all relevant persons, such as certain sheriffs, the Registrar of Deeds,
registered trade unions, employees, and the South African Revenue Services (SARS).
® = If the court made a winding-up order, the directors and officers of the company must prepare and lodge a
statement of affairs of the company with the Master within 14 days of the date of the winding-up order.
@ = =The Companies and Intellectual Property Commission makes a record that the company is no
longer in existence (dissolved and deregistered) and it publishes a notice of this information.

336 Chapter 21 | The law of insolvency

21.7.3 The liquidator
The Master may first appoint a provisional liquidator to carry out any preliminary tasks in the winding-
up process. The Master appoints a liquidator as follows:
@ = In the instance of a members’ voluntary winding-up, the person who is nominated and has a special
resolution for the winding-up of the company is appointed.
@ = In the instance of a creditors’ voluntary winding-up and a winding-up by a court, the person who is
nominated in the first meeting of creditors and the initial meeting of members is appointed.

Note that at least two meetings of creditors must be held in the instance of a winding-up by the court
and in a creditors’ voluntary winding-up. The purpose is to:
® nominate a liquidator
= prove claims
®@ examine the company’s statement of affairs
@ interrogate any relevant person.

More than one liquidator may be appointed.

Duties of the liquidator

The function of the liquidator is similar to that of the trustee. The main duties of a liquidator are:
® to take custody of all property that belongs to the company
® = to realise that property
® to use the proceeds to pay the costs of the process and the creditors
® to share the balance among the shareholders (section 391 of the 1973 Act).

In carrying out these functions, the liquidator must bear in mind that he has a general Khuda ee eee
fiduciary duty towards the company, its members and the creditors, ‘The liquidator must that the liquidator is in a
consider the interests of the members as a whole, and not the individual interests of the position of trust, and has a
members. The same applies in respect of the creditor's interests. duty to act independently
and impartially at all times.
‘The specific statutory duties of the liquidator are as follows:
® to provide relevant information to the Master
® to keep proper records of all property, money, books and other relevant documents that she receives
on behalf of the company
® = to allow the creditors and the Master to inspect such records;
® to open a current bank account in the company’s name, and deposit all money received on behalf of
the company
® to examine the company’s transactions in order to determine whether any directors and officers
(former or present) have contravened the 1973 Act or committed an offence in this regard with a
view to determine whether they need to be disqualified
= = to submit a full report in this regard to the Master, which is then forwarded to the Director of
Public Prosecutions
® to report fully on the company’s affairs to the creditors within the prescribed time period
@ to prepare a liquidation and distribution account and lodge it with the Master within the prescribed
time period, which will then be made available for inspection
® to distribute the estate, collect contributions, share any remaining amounts among the members,
once the Master has confirmed the liquidation and distribution account.

Chapter 21| The law of insolvency 337

Powers of the liquidator
The liquidator has extensive powers, which enable her to carry out the duties listed above. The liquidator
may exercise the following powers without permission:
to execute in the name and on behalf of the company all deeds, receipts and other documents, and
for that purpose to use the company’s seal
to prove a claim in the estate of any debtor or contributory of the company, and receive payment of
any dividend
to draw, accept, make and endorse any bill of exchange or promissory note in the name and on
behalf of the company, subject to certain provisions
to summon a general meeting of the company or the creditors or contributories of the company for
the purpose of obtaining its or their authority or sanction with respect to any matter
to take measures for the protection and better administration of the affairs and property of the
company, subject to certain provisions (section 386(1) of the 1973 Act).

liquidator may exercise the following powers with the Master's consent:
to terminate a lease agreement under which the company is the lessee, at any time before the general
meeting (section 386(2) of the 1973 Act)
to sell any property at any time before the general meeting (section 386(2A)—(2B) of the 1973 Act)
to take urgent legal proceedings for the recovery of outstanding accounts (section 386(4) (a) of the
1973 Act).

liquidator may exercise the following powers with the consent of the members and/or creditors:
to bring or defend in the name and on behalf of the company any action or other legal proceedings
for the recovery of outstanding accounts
to agree to any reasonable offer of composition made to the company by a debtor and to accept
payment of any part of a debt due to the company in settlement of a debt
to compromise or admit any claim or demand against the company, including an unliquidated claim
to make an arrangement with creditors, including creditors in respect of unliquidated claims, except
where the company being wound up is unable to pay its debts
to submit disputes to arbitration
to carry on or discontinue any part of the company’s business, if it would be necessary for winding-up
to enforce or repudiate contracts for the acquisition of property that have not been completed by
the company
to sell any movable and immovable property of the company by public auction, public tender or
private contract and to deliver the property
to perform any act or exercise any power for which she is not expressly required by the 1973 Act to
obtain the permission of the court (section 386(4) of the 1973 Act).

Who cannot be a liquidator?

Thefollowing persons are disqualified from being appointed as liquidator:
8 an insolvent
a minor or any other person under legal disability
a person declared to be incapable of being appointed as liquidator in terms of section 373
a person removed from an office of trust by the court on account of misconduct, ora person who is
disqualified from being a director
a corporate body
any person who has at any time been convicted (whether in the Republic or elsewhere) of theft,
fraud, forgery or uttering a forged document or perjury, and has been sentenced therefore to
imprisonment without the option of a fine or to a fine exceeding R2 000

338 Chapter 21 | The law of insolvency

®@ aperson who was at any time a party to an agreement with a debtor or a creditor whereby she
undertook that she would, in her position of trustee, grant or obtain a benefit for a debtor or
creditor that was not provided for by law
® any person who has, by misrepresentation or reward, whether directly or indirectly, induced or
attempted to induce any person to vote for or nominate her as liquidator
® a person who does not reside in the Republic
® any person who, at any time during a period of twelve months immediately preceding the winding-
up of a company, acted as a director, officer or auditor of that company
@ any agent authorised to vote for or on behalf ofa creditor at a meeting of creditors of the company
concerned and acting or purporting to act under such authority (section 372 of the 1973 Act).

Removal of the liquidator from office

The Master may remove a liquidator from office in the following instances, if:
@ the liquidator was not qualified, or her nomination or appointment was illegal, or that she has
become disqualified from being a liquidator
@ the liquidator failed to perform a statutory duty satisfactorily or to comply with a lawful demand of
the Master or a commissioner appointed by the court
® the liquidator's estate has become insolvent or she has become mentally or physically incapable of
performing her duties satisfactorily
@ the majority in number and in value of creditors who are entitled to vote at a meeting of creditors
or, in the case of a members’ voluntary winding-up, a majority of the members, has requested the
Master in writing to do so
® = in the opinion of the Master, the liquidator is no longer suitable to be the liquidator of the company
concerned (section 379(1) of the 1973 Act).

A court may remove a liquidator from office upon application by the Master or any other interested party if
the Master failed to do so and if it would benefit all relevant parties (section 379(2) of the 1973 Act).

21.7.4 Impeachable dispositions for liquidators in this context, the term

The dispositions of a company can be set aside, if the company is unable to pay all its debts _ mutatis mutandi means
(section 340(1) of the 1973 Act). Here, the law of insolvency will apply mutatis mutandi _“hat the principles on
; ote 5 impeachable dispositions
to the dispositions of a company. irider the wechency
° * ° PT . Act 24 of 1936 will apply
21.7.5 Staying or setting aside of winding-up proceedings ks conanies making
A creditor, member or even the liquidator may bring an application to court to stay or set —_ the necessary changes in
aside the proceedings (section 354(1) of the 1973 Act). wording — for instance, we
will simply read ‘company’
21.7.6 Alternatives to winding-up insteatt of ‘debtor’
or ‘creditor’.
There are two alternatives to winding-up a business:
@ business rescue
= compromise.

Business rescue
When a company is in financial distress, business rescue serves as one of two alternatives to winding-up.
The other alternative to the company is to reach a compromise with its creditors (discussed below).
The aim of business rescue is for the business rescue practitioner to help the company out of its
financial distress by facilitating its rehabilitation through the following:
@ the drafting and implantation ofa business rescue plan
= the temporary suspension of the rights of claimants against the company
@ = the temporary supervision of the company and its affairs.

Chapter 21 | The law of insolvency 339

While a court will favour business rescue over winding-up, it will be alert to the possible abuse of business
rescue proceedings where they are used to simply keep the creditors at bay, instead of rescuing the business.
The process may begin in either of the following ways:
1. The board of directors adopt a resolution to this effect (voluntary business rescue).
2. An order of court (compulsory business rescue).

The effects of business rescue

‘The effects of business rescue are as follows:
@ There is a stay on any legal proceedings against the company.
= Property may only be disposed of in very limited instances — for example, if it is the ordinary course
of business to do so.
= Employment contracts with employees generally continue as they were before proceedings began.
= = The business rescue practitioner may suspend any contract that the company was a party to before
proceedings began.
m = The business rescue practitioner has the power to exercise full control over the company.
@ = Each director must continue her functions as such, subject to the instructions of the business
rescue practitioner.

The business rescue practitioner

Section 138(1) of the Companies Act 71 of 2008 sets out who may, and may not, be appointed as
a business rescue practitioner. A business rescue practitioner must be in good standing in the legal,
accounting or business management profession that is accredited by the Companies and Intellectual
Property Commission, and she must also be licensed by the Commission. A person who has a relationship
with the company such that her judgment, impartiality, integrity or objectivity is in question, or a person
who is related to someone who has such a relationship with the company or a person is disqualified from
being a director of a company and may not be appointed as a business rescue practitioner.
‘The practitioner is appointed by the company (through a business rescue resolution) or by the court
(upon a business rescue application).

Duties of the business rescue practitioner

The duties of the business rescue practitioner are as follows:
to take full control of the company and its affairs
to delegate powers to a director or other persons in management
to replace persons in management as she deems fit
to inform the relevant authorities that the company is under business rescue
to investigate the affairs of the company
to draft and implement a business rescue plan
if the proceedings continue for longer than three months or within the time allowed by the court, the
practitioner must draft a report on the progress of the proceedings, and send copies to all relevant parties,
including the court (section 140(1)—(2), section 142(4) and section 132(3) of the 2008 Act).

‘The business rescue practitioner will be held liable for gross negligence in the scope of his duties (section
140(3) of the 2008 Act).

Removal of the business rescue practitioner from office

The court may remove the practitioner in the following instances, if:
m the practitioner failed to perform her duties properly
m the practitioner failed to exercise the requisite degree of care
@ the practitioner was involved in illegal acts
@ the practitioner's impartiality was impaired

340 Chapter 21| The law of insolvency

= = the practitioner does not meet the requirements for appointment
= the practitioner does not have the requisite capacity to perform the functions of her office, and is
unlikely to regain capacity within a reasonable time (section 139(1)—(2) of the 2008 Act).

The business rescue plan

The business rescue plan constitutes the blueprint for business rescue proceedings. It is drafted by the
business rescue practitioner after consultation with all relevant parties, for example, the creditors and
management. Section 150(1) sets out what must be contained in the plan:
= = Part A— the background
= Part B — the proposals
® Part C —an explanation of any assumptions and conditions.

Once the plan is published and approved in terms of the 2008 Act, it is binding on the company, its
creditors and shareholders.

Compromise
Compromise is the second alternative to winding-up when a company is in financial distress
(section 155 of the 2008 Act).
® A compromise may take place even if the company is under liquidation.
= When a company opts for this procedure, it enters into a payment agreement with its creditors.
@ To take effect, the compromise must be approved by a majority of creditors — majority in numbers,
representing 75% or more in value.
The compromise must be sanctioned by the court. The court will sanction the compromise if it is just
and equitable. Once the compromise is sanctioned by the court, it is binding on all creditors.

What do you think?

Section 2 of the Constitution of the Republic of South Africa, 1996, states the Constitution is the supreme
law of the country, and that law or conduct that is inconsistent with it, is invalid. The Constitution
and its Bill of Rights therefore have a significant impact on all branches of law, including the law of
insolvency. Can you think of which human rights are potentially under threat by the principles of
insolvency law? Do you think that this potential conflict requires an amendment to the principles of
insolvency law to avoid it from being potentially unconstitutional? If so, which principles? Or, do you
think that the limitation of the right/s is reasonable and justifiable?

Chapter summary

In this chapter, you learned the following about the law
of insolvency:
An insolvent person is someone who cannot pay
their debts — their liabilities are more than their assets.
Sequestration is the process whereby the court
formally declares that a debtor's estate is insolvent.
The main aim of sequestration is to ensure that the
insolvent's creditors receive a fair and equitable portion
of the insolvent’s estate as payment of their debts.
‘The Insolvency Act 24 of 1936 regulates and governs
the sequestration of a debtor's estate.

Chapter 21| Chapter summary 341

 ‘There are two forms of sequestration:
= Voluntary surrender is the process whereby the
debtor voluntarily applies to the court to have his
estate sequestrated.
= Compulsory sequestration is the process whereby
the debtor's creditors apply to court for a
sequestration order against the debtor.
Each process has its own sets of requirements that
must be satisfied. In each instance the court exercises
its discretion in deciding whether or not to grant the
sequestration order.
Parties who are married in community of property
have a joint estate. If one spouse's business goes
insolvent, their joint estate is sequestrated.
Parties who are married out of community of
property, with or without accrual, have separate estates.
When one spouse's estate is sequestrated, the solvent
spouse's estate temporarily vests on the trustee, as one of
the effects of sequestration.
‘The trustee is tasked with collecting and preserving
assets in the insolvent estate with the aim of realising
those assets for the benefit of the creditors.
The duties of the insolvent are:
= to deliver all financial records to the sheriff
= to lodge in duplicate, within seven days of being
served with the final sequestration order, a
statement of affairs at the Master's office, which
must be verified by an affidavit
® once the trustee has been appointed, to deliver to
her within 14 days, any property in the insolvent
estate that is in his possession
® to assist her in the collection of property that
belongs to the insolvent estate when called upon by
the trustee
® to provide a full and frank disclosure to the trustee
or the Master on all relevant matters relating
to the insolvent estate — for instance, details on
the location of any property that is not in the
insolvent’s possession
= to inform the trustee of his residential and postal
addresses, including any changes to addresses
® to keep a detailed statement of all transactions — for
instance, assets that he receives from his debtors
and payments that he makes to his employees
= to attend the meetings of creditors, and give
evidence, when called upon to do so, on
matters relating to the insolvent estate during
the interrogation process and/or in any legal
proceedings relating to the insolvent estate.
342 Chapter 21| Chapter summary
A failure by the insolvent to carry out his duties will
lead to him committing a criminal offence under the
Insolvency Act.
‘The effects of sequestration are as follows:
m = ‘The insolvent’s contractual capacity is limited.
= = The insolvent estate vests in the trustee.
® = The insolvent is disqualified from holding
certain positions.
The trustee has an election (a choice) on whether or
not to abide by the contracts that the insolvent was a
party to at the time of sequestration, subject to certain
statutory exceptions. This decision must be made in the
best interests of the creditors.
‘The solvent spouse’s estate vests temporarily in
the trustee.
An insolvent's insolvency comes to an end once
he has been rehabilitated, either automatically or by
application to court. The court exercises its discretion in
the latter instance.
Winding-up is the process by which a company’s assets
are sold, its debts paid, and the balance is paid to the
shareholders. In the instance of companies, a company
need not be insolvent in order for itto be wound up.
‘There is more than one piece of legislation applicable
to the winding-up ofa company:
= = The Insolvency Act applies in so far as it is
applicable to companies
= ‘The Companies Act 71 of 2008 (sections 79-81,
applies to the winding-up of solvent companies)
= The old Companies Act 61 of 1973 (sections
337-426, subject to certain exceptions).
A company can be wound up in one of two ways:
1. by a court (compulsory winding-up)
2. voluntary winding-up.
‘The process of compulsory winding-up is initiated by
an application to court. The application is brought by
either of the following parties:
= by acreditor in the case of an insolvent company
® ~ashareholder in the case of a solvent company.
The process of voluntary winding-up is initiated by
a special resolution of the shareholders, which has to
indicate whether the process will be conducted by the
creditors (a creditors’ voluntary winding-up) or by the
shareholders (a members’ voluntary winding-up where
the company is insolvent). A voluntary winding-up by the
company may take place where the company is solvent.
 The grounds for winding-up an insolvent and
solvent company by the court are as follows:
A special resolution to wind up the company
(solvent or insolvent company) has been passed.
The company has not commenced business within
a year of incorporation or if it has, suspended
business for a year (insolvent company).
75% of the company’s share capital has been lost or
become useless (insolvent company).
‘The company is unable to pay its debts, subject to
certain provisions (insolvent company).
An external company may be wound up if it has
been dissolved in the country in which it was
incorporated, or has ceased to carry on business,
or is carrying on business only for the purpose of
winding-up its affairs (insolvent company).
It is just and equitable to wind-up the company
(solvent or insolvent companies) — for instance,
if the objective for forming the company is no
longer possible, the company’s objectives are
illegal, there is a justifiable lack of confidence
in the management of the company, the voting
power in the company is divided, or when the
minority shareholders are being oppressed by the
controlling shareholders.
The company is in business rescue and there is no
reasonable prospect of the company being rescued
(insolvent company).
The directors, officers or other persons in control
of the company are acting in a manner that is
fraudulent or illegal.
The company’s assets are being misused or wasted.
The company has failed to comply with
a compliance notice that was issued by
the Companies and Intellectual Property
Commission or Takeover Regulation Panel in the
case where the directors, officers or other persons
controlling the company have acted fraudulently
or illegally.
The following parties may apply for the winding-up of
an insolvent company:
the company
one or more of the company’s creditors
one or more of the company’s members
any of all of the above-listed parties
the Master of the High Court
a provisional or final judicial manager.
The following parties may apply for the winding-up of a
solvent company:
the company, in the instance of a special resolution
the company, or one or more directors,
shareholders or creditors in the instance of it being
just and equitable to wind-up the company
the company where there is a conversion of a
voluntary winding-up into a winding-up by a court
the business rescue practitioner in the instance
where there is no reasonable prospect of rescuing
the company
the company, or one or more directors or
shareholders where there is a deadlock in the
management voting
any shareholder, in the instance of fraud, illegality
or misuse of the company’s assets
the Companies and Intellectual Property Commission
or Takeover Regulation Panel, where there is a
failure to comply with a compliance notice in
the instance of the directors, offices or other
persons controlling the business being engaged in
fraudulent or illegal activity.
‘The effects of winding-up a company are as follows:
The winding-up by the court (of an insolvent
company) is deemed to commence at the time of
the presentation to the court of the application
for the winding-up — that is, when the relevant
documents are lodged with the Registrar of
the court.
The directors are divested of their powers.
The Master takes control of the company’s property
until a liquidator is appointed.
The business of the company may only continue in
so far as itis necessary for the winding-up.
If the company is unable to pay its debts, its
dispositions of property must be authorised by
the court.
Any transfer of the company’s shares must be
authorised by the liquidator.
All civil proceedings by or against the company are
stayed until a liquidator is appointed.
Once the Master receives the winding-up order, he
must give notice of it in the Gazette.
‘The Registrar must serve a copy to all relevant
persons — for instance, certain sheriffs, the Registrar
of Deeds, registered trade unions, employees,
and SARS.
Chapter 21 | Chapter summary 343
m = If the court made a winding-up order, the directors
and officers of the company must prepare and
lodge a statement of affairs of the company with
the Master within 14 days of the date of the
winding-up order.
® Once a company is wound up, the Companies
and Intellectual Property Commission makes a
record that the company is no longer in existence
(dissolved and deregistered), and it publishes a
notice of this information.
The functions of a liquidator are to take custody of
all property that belongs to the company, to realise
that property, to use the proceeds to pay the costs of
the process and the creditors, and to share the balance
among the shareholders.
‘The trustee and the liquidator are both in positions
of trust, and both must act independently and
impartially at all times.
A solvent company can be wound up voluntarily if
there has been a special resolution to this effect, indicating
whether it will be by the company or the creditors.
An insolvent company can be wound up voluntarily
if there has a special resolution to this effect, indicating
whether it is a members’ voluntary winding-up or a
creditor's voluntary winding-up.
A members’ voluntary winding-up and voluntary
winding-up by a company can take place only if the
company is able to pay all its debts in full.
This process may take place when the company
(solvent or insolvent) is unable to pay its debts. In
the event of a solvent company, it may resort to this
type of winding-up where it is unable or unwilling to
furnish security for the full payment thereof within
12 months.
Review your understanding
1. Refer back to the example with Uncle Somizi and
Aunt Shelley. What legal advice would you give them?
2. What are the requirements for the voluntary
surrender ofa debtor's estate?
3. What are the requirements for the compulsory
sequestration of a debtor's estate?
344 Chapter 21| Review your understanding
When a company is in financial distress, business
rescue and compromise serve as two alternatives to
winding-up.
Business rescue proceedings may commence in the
following ways:
= The board of directors adopt a resolution to this
effect (voluntary business rescue).
= There is an order of court (compulsory
business rescue).
The aim of business rescue is for the business rescue
practitioner to help the company out of its financial
distress by facilitating its rehabilitation.
The business rescue plan constitutes the blueprint
for business rescue proceedings, and it is drafted by the
business rescue practitioner in line with section 150 of
the 2008 Act after consultation with all relevant parties.
‘The effects of business rescue are as follows:
= = There is a stay on any legal proceedings against
the company.
= Property may be disposed of only in very limited
instances, for example, if it is the ordinary course
of business to do so.
= Employment contracts with employees generally
continue as they were before proceedings began.
m The business rescue practitioner may suspend any
contract that the company was party to before
proceedings began.
= The business rescue practitioner has the power to
exercise full control over the company.
= Each director must continue her functions as such,
subject to the instructions of the business rescue
practitioner.
= Compromise must be approved by a majority of
creditors — majority in numbers, representing 75% or
more in value and it must be sanctioned by the court.
4. What is a friendly sequestration?
5. Critically analyse the meaning of ‘spouse’ in
insolvency law.
6. Who qualifies as a debtor?
7. Compare the powers and duties of the trustee and
the liquidator.
8. Who is disqualified as a trustee and as a liquidator? 15. Discuss the role of the Master during sequestration
9. List the instances in which a trustee and a and the winding-up processes.
liquidator be removed from office. 16. Compare the effects of a sequestration order and a
10. Discuss the significance of the ranking of the winding-up order.
creditors in insolvency law. 17. What types of property of the insolvent do not vest
11. Outline the ways in which the interests of the in the trustee?
creditors are protected in insolvency law. 18. When can a company be wound up by the court?
12. What is the purpose of a provisional order of 19. How is a sequestration order set aside?
sequestration? 20. How is a winding-up order set aside?
13. Distinguish between a compromise and a 21. What is business rescue, and why is it a desirable
composition in insolvency law. option to a company that is in financial trouble?
14. When can an insolvent apply to court for 22. What are the effects of business rescue?
rehabilitation?

Further reading

Bertelsmann, E. et al. 2008. Mars: The Law of Insolvency in Sharrock, R. et al. 2012. Hockly’ Insolvency Law, 9th edn.
South Africa, 9th edn. Cape Town: Juta and Co. (Pry) Ltd Cape Town: Juta and Co. (Pty) Ltd

Chapter 21| Further reading 345

Chapter
y) y The law of succession

The main ideas

The legal capacity to draft a valid will
The legal capacity to witness a valid will
The basic contents of a will
What happens to a person's estate when he dies without drafting a valid will?
What happens to a person’s estate when he dies with a valid will?
The legal capacity to inherit
‘The procedure for the administration of a deceased estate

The main skills

Identify and describe the requirements of a valid will.
Draft a simple will.
Analyse factual situations and advise on the order of intestate succession.
Calculate the portion due to an intestate heir.
Explain the difference between testate and intestate succession.
Explain who may not inherit from an estate.
Describe the executor’s duties when administering a deceased estate.
Explain the difference between an executor and a master’s representative.

When someone dies, the law specifies which people will inherit the property of the dead person. This
chapter looks at the contents of a will, who inherits the estate, both when there is a will and when there
is not. We will also examine the formal process provided for in the law to ensure that creditors and heirs
are paid out fairly.

Before you start

Most of us own assets. You may have a savings account with a healthy balance, or a laptop, or a special
piece of jewellery. Who would you want to inherit your possessions if you die? How would you want
your estate to be divided up? What would happen to your assets if you did not leave a will?
If the deceased — the dead person — has left a will (testate), then the heirs are named in the will.
A will is a legal document in which you, the testator, state to whom you want your
money and property to be given when you die. Heirs are the people who inherit the money _ Every person in law has an
and property of a deceased person. A deceased person's estate consists of their assets less estate, which consists
eS of
his assets and liabilities.
any liabilities.
If there is no will (intestate), then the law directs who the heirs will be. The law also
directs how the estate is administered. . The pce Dy which
This chapter will deal with the aspects of estate law listed below: her deceaeeite acona ee
= Who may make a will? collected, the debts paid
@ = What are the basic contents of a will? and the balance paid
= = What happens if someone does not leave a will? to the heirs is known as
wan Xp 29 the administration of
@ Who can inherit? sic
m= What are the requirements for the administration of a deceased estate? :

346 Chapter 22 | The law of succession

22.1 Dying with a valid will
If you are testate when you die, you made a will before you died. Testate succession refers to the transfer
of the deceased's assets to his heirs in terms of a will, A testator is a person who draws up a will himself,
or who gives instructions to a lawyer to do so on his behalf.
Person, in this context,
The general rule in our law is that a testator has freedom of testation. This means that you
can mean a natural person
are free to choose any person to leave your estate to. Although there is no obligation on a or a juristic person, such
testator to leave anything to parents, spouse or children, the law does place some limitations _ as a charity or educational
on the testator. So, the freedom of testation is not complete. institution.
Some of these limitations come from the common law. When a person dies and has
named heirs in a will, the law allows minor children, whether named in the will or not, to A dependent child
claim maintenance from the deceased’s estate. This means that a maintenance claim bya is someone who relies
dependent child will reduce the amount that is available for the heir(s) named in the will. mn their parent/s fo
The effect is that a testator cannot exclude his minor children from receiving maintenance DNs Tene ae
education for them.
from the deceased estate.
Other limitations on whom you can leave your possessions to come from legislation.
The Constitution of the Republic of South Africa, 1996 prohibits unfair discrimination against a person.
In terms of section 9(3), no one may unfairly discriminate against anyone on the basis of race, gender,
sex, pregnancy, marital status, ethnic or social origin, colour, sexual orientation, age, disability, religion,
conscience, belief, culture, language or birth. Any contents of a will that unfairly discriminate against anyone
on these grounds will be unconstitutional. An example of a clause in a will that is unconstitutional would be
where a testator prohibits an heir from marrying a person of a different race or religion.
In terms of the Pension Funds Act 24 of 1956, benefits payable by a pension fund are excluded from
the deceased estate. This means that even if the testator states in a will that their pension should go to a
particular person, this will not happen because the Act provides for the trustees of the pension fund to
determine (use their discretion) who should receive a benefit based on dependency. A ‘dependent’ is
defined in section | of the Act. For example, if a testator leaves his pension funds to a named beneficiary
in his will, the bequest will be ignored, and the provisions of the Pension Funds Act will be applied. In
the normal course of events, the trustees of the pension fund will award the proceeds to the surviving
spouse and any dependent children of the deceased.
Similarly, the Maintenance of Surviving Spouses Act 27 of 1990 provides for a A spouse can refer to
maintenance claim by a surviving spouse of the deceased. So, ifa husband supported his itier w quale Ge tamale
wife financially while she stayed at home to look after their children, she would not be ina __ partner in a marriage or
position to support herself after the death of her husband, and she would have a claim for _Givil union.
her reasonable maintenance needs from the estate of her husband. This too will reduce the
amount that is available for the heir(s) named in the will.

22.1.1 Drafting a valid will

The Wills Act 7 of 1953 gives the requirements for making a valid will. The Act requires a will to
be signed, and so it follows that a will must be in writing. The Electronic Communications and
Transactions Act 25 of 2002 provides for certain documents to be signed with a digital signature, but
wills cannot be signed electronically.
The Wills Act says that anyone over the age of 16 years may make a will unless, at the time of making
the will, the person is mentally incapable of appreciating the nature and effect of their act. jyental incapacity can
A person between the ages of 16 and 18 years is still a minor, and the capacity to make a arise in a number of ways,
will without the assistance of the parent or guardian is an important exception to a minor's _ such as mental illness or
restricted legal capacity. the influence of alcohol
The Wills Act states that a testator may ‘sign’ a will either with a signature, or by making °F 4749s.
a mark such as a thumbprint or a cross, or even by having someone else sign the will on his
behalf. This method makes it possible for a wide number of people to make a will, for example, someone

Chapter 22 | The law of succession 347

who cannot sign the will because they are illiterate or paralysed. Where the will is not personally signed
by the testator with a signature, a Commissioner of Oaths must attach a certificate to the will confirming
the identity of the testator, and that the will is the will of the testator.
In addition, the Wills Act requires all wills to be signed in the presence of two witnesses, Mot incompetent means
who must also sign the will. A witness is defined in the Act as a person of 14 years or older _ that the person has the
who is not incompetent to give evidence in a court of law. necessary ability to give
Witnesses must sign with a signature, and they may not sign with a mark. evidence in a court of law.

22.1.2 Basic contents of a will

A testator can achieve a wide variety of things in a will. We will look at the basics, but please be aware
that there are many more that will not be dealt with here.
Anyone can draft a simple will for herself and it is not necessary to consult an attorney to do this.
Banks also offer this service to their customers provided that the bank is appointed to administer the
estate. Most stationery shops sell standard templates of a will that can be purchased for a nominal
amount. The testator simply fills in their personal details, details of the heirs and executor and the date
before signing it before two witnesses.
Here is an example ofa very simple will.

LAST WILL AND TESTAMENT

This is the last will and testament of Sazi Ntuli.
ye Oe

| revoke all previous wills made by me.

See

| leave my laptop and my motor vehicle to Thulani Ntuli.

| leave an amount of R10 000 to the Nelson Mandela Foundation.
| leave the residue of my estate in equal shares to Sethu and Nimrod Ntuli.
| appoint my attorney, Thuli Mazibuko, as the executor of my estate, and | direct that she
shall not be required to furnish security to the Master of the High Court.

Signed at Johannesburg on this 22nd day of January 2019

As witnesses: 1.

Sazi Ntuli

Testator 2.

Figure 22.1 An example of a simple will

We will now discuss the contents of the will shown in Figure 22.1. Asa a cecice Waa
A person who wishes to leave a will must sign a document clearly identifying it asa Last contact, Act or will,
Will and Testament, and stating their name (clause 1).
Although not required by law, it is important to include a revocation clause (clause 2). A revocation clause
revokes, or cancels, all previous wills. If a revocation clause is not included, the law will recognise the contents
of earlier wills. This may lead to confusion or frustration in respect of the testator's wishes if the wills differ.
Wills may contain legacies (clauses 3 and 4). A legacy is a specific asset or specific amount of money that
is left to a named legatee by the testator in the will. In our example, the legacies are the laptop, motor vehicle
and the sum of R10 000, and the legatees are Thulani Ntuli and the Nelson Mandela Foundation. It is not
essential that a will contains legacies and the inclusion of any legacy will depend on the testator’s wishes.

348 Chapter 22 | The law of succession

 A will must always specify what should happen to the rest of the estate (the residue) chutes nthe Oe
after the legacies have been taken out. Clause 5 of our example leaves the residue to Sethu mean equal portions.
and Nimrod Ntuli in equal shares. They do not refer to an
Clause 6 deals with the appointment of an executor to administer the estate. An executor _ investment.
is a person appointed by the testator to administer the estate and carry out the terms of the
will. It is not essential to appoint an executor in a will but it makes the task of administering the estate less
complicated. It is also possible to provide for an alternative executor should the main appointee not be
able or willing to take on the role of executor. We will look at the role of the executor later in this chapter.
It is always a good idea to date a will, although this is not a requirement in the Wills Act. Most
people have a series of wills during their lifetimes as circumstances, such as getting married and having
children, can change. ‘The importance of the date is to ascertain which will is the most recent. If someone
dies with, for example, two or three wills and none of them are dated, it is impossible to know which
will came last and the end result will be that all the existing undated wills will have to be reconciled as far
as is possible. This has the potential to complicate the administration of the estate.

22.2 Dying without a will

When someone dies intestate, it means that they have died without leaving a valid will. Since there is no
will to direct the executor as to who should inherit the estate, the Intestate Succession Act 81 of 1987
applies. The Act can also apply if the deceased left a valid will, but did not provide for the disposal of all
of the property in the estate. For example, if the will did not contain clause 5, the Act would determine
who inherits the residue of the estate, but the legacies (see clause 3 and 4) would still apply. Moreover, a
will may be declared invalid by the Master or the court, and in that case, the estate will be administered
in terms of the rules of intestate succession.
‘The Intestate Succession Act lists potential heirs who may inherit the estate in order of
cod :
ThisSe is determined : . , .
status, if. applicable,
: A descendant is someone
succession, or importance. by the deceased’s marital
and d blood relationships. As As most most peoplepeol leave
blood relationships. leave behind
behind a spouse, descendants
descendants or parents, apn
Soll fac euarninle your
we will only consider these categories of heirs in our discussion. Note that the law treats child, grandchild or
adopted children, extra-marital children and children born of incest in exactly the same way — great-grandchild.
as natural children or children born of a marriage. The reason for this relates to section 9
of the Constitution and the right to equality, and the right not to be unfairly discriminated | More remote blood
against on the basis of birth. relatives refers to
Bear in mind that if the deceased has not left a spouse, descendant or parent, the Act brothers, sisters, aunts,
: . : . uncles and cousins.
provides for other more remote blood relatives to inherit.

Added value The legal meaning of ‘spouse’

The usual meaning of spouse is a party to a marriage or civil union in terms of the Matrimonial
Property Act 88 of 1984, the Civil Union Act 17 of 2006 and the Recognition of Customary
Marriages Act 120 of 1998, the last of which permits polygamous marriages. Same-sex partners
can enter into a civil union, which is recognised in the same manner by the law as a marriage is.
In our constitutional democracy, the meaning of the term ‘spouse’ in the Intestate Succession
Act has received much attention from the courts, with the Constitutional Court making great
strides in expanding on the meaning of spouse under our law. This issue has been a particularly
controversial one in respect of survivors of certain relationships that are not formally recognised
by the law, for example, the spouses in a religious marriage or same-sex partners. A religious
marriage takes place under the customary law of a particular religion but is not recognised
by the law because it does not meet the requirements of the civil law as there is no formally
appointed marriage officer or marriage licence as is the case with a conventional marriage or civil
union between same-sex partners.

Chapter 22 | The law of succession 349

 Added value (continued) The legal meaning of ‘spouse’

Examples of relationships that are not formally recognised by the law but have been recognised
for the purposes of intestate succession and the meaning of ‘spouse’ include the following:
* monogamous Muslim marriages
¢ polygamous Muslim marriages
e Hindu marriages
e survivors of same-sex life partnerships who have undertaken reciprocal duties of support.
Where does this leave survivors of a heterosexual or homosexual life partnership who are not
married? As the law currently stands, heterosexual life partners will not inherit from their deceased
intestate partners, and this is problematic if one considers the equality clause in the Bill of Rights
and the right not to be discriminated against on the basis of marital status or sexual orientation.

22.2.1 Order of succession under the Intestate Succession Act

So, who gets what, when there's no will? In terms of the Intestate Succession Act, the order of succession
is as follows:
1. Where the deceased is survived by a spouse, but not by a descendant, the spouse inherits the whole
estate (section 1(1)(a)).
2. Where the deceased is survived by descendants but not by a spouse, the descendants Per stirpes means ‘by
inherit the estate per stirpes. The term is best understood by looking at a family tree branch’ in Latin.
and remembering that each branch, but not each sub-branch of the tree, will be treated
equally. A branch refers to a child of the deceased, or if the child is pre-deceased, the branch refers
to the descendants of that child. All descendants of that child belong to the branch from which they
grow, so although each branch as a whole is treated equally when it comes to inheriting, descendants
will not be treated equally when compared to one another if some branches have more descendants
than others (section 1 (1)(b)).

Let us consider the example of the family tree shown in Figure 22.2 to understand this concept better.

Mpho
deceased

| ‘|
Lesedi . |
predeceased | Thato Bandile

Unathi | Faith |

Figure 22.2 Family tree

In the family tree, you will see that Mpho has died. He had three sons — Lesedi, Thato and Bandile. Each
son forms a branch of the family tree. Lesedi pre-deceased Mpho, but Lesedi had two daughters, Unathi
and Faith, who are both still alive. Thato and Bandile do not have children. So, Mpho is survived by the
descendants of his pre-deceased child (Unathi and Faith) and two of his children (Thato and Bandile).
Unathi and Faith belong to one branch, so although each branch will receive one-third of Mpho’s estate,
Unathi and Faith will each receive only one-sixth of the estate, as they share equally in one branch.

350 Chapter 22 | The law of succession

3. Where the deceased leaves behind a spouse and descendants, the spouse inherits R250 000 or a
child’s share, whichever is the greater. A child’s share is calculated by taking the number of stirpes
that the deceased left behind, plus one. So if the deceased had three children, we would calculate
a child’s share by dividing the estate by four, The descendants per stirpes inherit the residue, if any
(Section 1(1)(c) read with section 1(1)(4)(f)), For example, if the deceased leaves a spouse and
three children and an estate worth R400 000, then the spouse inherits R250 000 ora child’s share,
whichever is the greater. A child’s share would be R100 000, so the spouse would inherit R250 000
and the three children would inherit R50 000 each. However, if the estate was worth R250 000 or
less, the spouse would inherit the entire estate, and the children would inherit nothing.
4. Where the deceased is not survived by a spouse or descendants, but is survived by both parents,
then the parents inherit the estate in equal shares (section 1(1)(d)(i)).
5. Where the deceased is survived by one parent and the other parent has descendants, the surviving
parent inherits half of the estate and the descendants of the deceased parent inherit the other half
per stirpes (section 1(1)(d)(ii)).
6. Where the deceased is survived by one parent and the other parent does not have any descendants,
the surviving parent inherits the whole estate (section 1(1)(e)).

Activity 22.1 A family tree

As you work through the following questions, draw a family tree for each question to decide
who will inherit what when there is no will.
1. X dies intestate and leaves an estate of R800 000. His wife pre-deceased him. X had four
children, A, B, C and D. D pre-deceased X, and left two children, F and G. Who will inherit
the estate and what is the amount of each heir’s inheritance?
2. X dies intestate and leaves an estate of R2 million. X was married to Y in community of
property and Y survived X. X is also survived by his three children, A, B and C, Who will
inherit the estate, and what is the amount of each heir’s inheritance?
3. X dies intestate and leaves an estate of R300 000. He was married to Y out of community
of property and she survived X. X was also survived by his two children, A and B. Who will
inherit the estate and what is the amount of each heir’s inheritance?

22.3 Capacity to inherit

The general rule in our law is that any person, natural or juristic, and regardless of their general legal
capacity, can validly inherit from a deceased estate. There are, however, certain situations that disqualify
someone from inheriting. In these circumstances, we say the heir is unworthy to inherit. The principle
that underlies this disqualification is that to allow a beneficiary to inherit in certain circumstances would
be contrary to public policy, as no one should be allowed to benefit from their own wrongful act. The
courts have recognised a wide variety of situations where an heir is unworthy. We will consider two of
these situations by looking at two case examples:
@ where the heir is responsible for the death of the deceased
@ where an heir forges the will of the deceased,

It has long been part of our common law that a murderer is unworthy to receive a benefit from his
victim's estate. This principle is expressed in the law by the maxim de bloedige hand neemt geen erf,
which means ‘the bloody hand takes no inheritance’. Murder involves intention on the part of the
perpetrator. But, what about a situation where a person is responsible for the negligent death of another?
Let us look at a case example.

Chapter 22 | The law of succession 351

 Casey v The Master 1992 (4) SA 505 (N)

Principle
Where someone is responsible for the negligent death of another, they cannot inherit from
their victim,

Facts

The husband of the deceased had gone to bed with his pistol, as was his habit, and at some
point during the night he accidentally shot and killed his wife.
The court's finding
The court held that the husband of the deceased (his wife) was unworthy and could not inherit
from his victim.

Since it is a criminal offence to destroy, conceal, falsify or damage a will in terms of section 102(1)(a) of
the Administration of Estates Act 66 of 1965, you will see from the case example below that an heir who
forges a deceased's will, will be unworthy to inherit.

Pillay v Nagan 2001 (1) SA 410 (D)

Principle
Someone who interferes with the will of a deceased person may not be capable of inheriting
from the deceased estate.
Facts

The son of the deceased, Nagan, forged his mother’s will, and named himself in the will as the
sole heir of her estate.
The court's finding
The court held that Nagan intended to deprive his brothers and sisters of their share of their
mother's intestate estate, and he was found to be unworthy. The court ordered that the estate
be divided between Nagan’s brothers and sisters in terms of intestate succession, and that he
should not receive a share.

22.4 Administration of a deceased estate

Specific rules apply to the administration of an estate. These rules are contained in the
Administration of Estates Act 66 of 1965. The procedure for the administration of an estate can be
divided into two stages:
1. reporting the estate
2. administering the estate.

22.4.1 Reporting the estate

Every death must be reported to the Master by lodging a death notice on the prescribed form. The Master
of the High Court is the government official who oversees the administration of estates. According to the
Administration of Estates Act, the surviving spouse or nearest relative of the deceased must report the
estate to the Master. The spouse or relative must complete various official forms, which include a death
notice and a list of the deceased's assets. If there is a will, this too must be submitted. If the deceased died
with a will, or the value of the estate exceeds R125 000, then the estate must be supervised by a Master.

352 Chapter 22 | The law of succession

 If the deceased died without a will and the value of the estate is less than R125 000, An flake undes legal
then a magistrate will supervise the intestate estate, as long as there are no heirs under disability is someone who
legal disability. does not have full legal
In most instances the will sets out who is to be appointed as executor. Where there is no Capacity, such as a minor
will, the Master will require a next-of-kin affidavit to establish who the intestate heirs are. or a mentally ill person.
The heirs will need to nominate an executor to administer the estate.
If the assets exceed R250 000, the Master appoints an executor to administer the estate. If the value
of the estate is less than R250 000, then the Master's representative is appointed either by the Master or a
magistrate. A magistrate generally has jurisdiction to deal with estates only worth less than R125 000.

The Master’s representative

The Master's representative has far fewer tasks than the executor. All that is required of this person is that
she should collect the estate's assets, pay the debts and transfer the balance to the heirs. It is not necessary
for the Master's representative to account to the magistrate or Master for the administration of the estate,
unless called upon to do so.
Later in this chapter, we will discuss the requirements to advertise and lodge a liquidation and distribution
account. However, in the case of an estate worth less than R250 000, these requirements do not apply.

The executor
‘The executor is usually nominated in a will if the deceased died testate.
If the deceased died without a will, then the heirs nominate an executor. The Misappropriate means
Administration of Estates Act requires that an executor provides security for the proper ‘to steal assets, give them
performance of her duties. Security would be in the form of a guarantee from an insurance —_ away or sell them for less
company. The insurance company provides the surety bond on the basis of the executor's than their value’.
own assets. The executor must pay an insurance premium for as long as the surety bond
lasts. If the executor misappropriates estate property, then the Master can claim the Exempted means ‘free
necessary amount from the bond to pay back the estate. from’ and an example of
An executor does not have to provide security in the following instances: ECE ne
m if the executor has been exempted from providing security in the will ee
will in section 1.2.
@ = if the executor is the parent, spouse or child of the deceased.

Once the Master has appointed an executor, the executor begins to administer the estate.

22.4.2 Administering the estate

As soon as letters of executorship have been issued by the Master, the Administration of
A letter of executorship
Estates Act requires the executor to perform the duties listed below:
= = The executor must place an advertisement in the Government Gazette and in a inpeewhich
ranthe ace
executor is
newspaper that circulates in the area where the deceased lived. This advertisement calls formatly appointed by
for creditors of the estate to submit to the executor any claims they may have against the Master.
the estate.
® As soon as the executor has R1 000 on hand, she must open an estate banking account. All money
that is received by the executor on behalf of the estate must be deposited into this account.
@ = The executor must collect the assets of the estate, and sell them if necessary. The executor must establish
who the creditors are and what amounts are due to them. Creditors can include a claim for maintenance
by a dependent child or the surviving spouse, as well as anyone to whom the deceased owed money.
@ = The executor must submit a liquidation and distribution account. This account sets out the
deceased's assets and liabilities, how they will be dealt with and who will inherit the assets.

Regulation 5(1) of the Administration of Estates Act sets out in detail the format of the liquidation and
distribution account. Other charges on the estate include administration costs such as the Master's fees

Chapter 22 | The law of succession 353

and the executor’s remuneration. The executor’s remuneration is the amount that the executor receives
from the estate for performing the functions of executor. The amount is calculated at 3,5% of the total
(gross) value of the assets.
An important purpose of the liquidation and distribution account is to establish whether the estate
is liable for estate duty. Estate duty is a form of tax payable by a deceased estate. If the value
. ; “1: . Net value means ‘assets
of the deceased
2 estate is less than R3,5 million, then there is no estate duty payable. Where less liabilities and any other
the value of the estate exceeds R3,5 million, then the estate duty is calculated by deducting _ajjowable deductions’.
R3,5 million from the net value of the estate and the balance is taxed at 20%.
Once the Master approves the liquidation and distribution account, the executor is then required to
advertise the account to lie for inspection in the Government Gazette and in a newspaper that circulates
in the area where the deceased lived. This gives interested parties (creditors and heirs) an opportunity to
inspect the account and to object if they think it is incorrect.
For example, a creditor's claim may not have been included in the account. If there are any
objections, these problems must then be corrected by the executor.
Once the account has lain for inspection free from objection, the executor then pays the creditors and
distributes the rest of the estate to the legatees and heirs. as is due to them. The executor is required to
close the estate banking account and the Master will release him from office once the administration of
the estate has been completed.

What do you think?

Do you think that heterosexual life partners who have not left a will should be treated differently to
same-sex life partners who have not left a will, where the parties have not entered into a marriage or civil
union? How could the law develop to accommodate heterosexual life partners so that they are on the
same footing as same-sex life partners?

Chapter summary

In this chapter, you have learned the following about
the law of succession:
= = The Wills Act 7 of 1953 governs the making of
wills in our law.
= Generally, all persons have freedom of testation,
but the law does place common law and legislative
limits on this freedom.
m= Anyone who is over the age of 16 years can
make a will unless they are mentally incapable of
understanding what they are doing.
= Avwill must be in writing, and it needs a signature
or mark of the testator, or it must be signed by
someone on behalf of the testator.
® = If the testator makes a mark or has someone else
sign the will on her behalf, a Commissioner of
Oaths must attach a certificate confirming the
testator's identity and that it is, in fact, the will of
the testator.
= All wills must be signed in the presence of two
witnesses who may not sign with a mark.
A testator has a wide choice of what is permissable in a
will. Two things are essential:
® a revocation clause
= actause that states how the residue of the estate
should be divided up.

354 Chapter 22 | Chapter summary

The Intestate Succession Act 81 of 1987 governs the
distribution of the estate where a person dies without a
will. The following rules apply:
= Spouses always inherit.
= Descendants always inherit if there is no spouse.
® Descendants inherit if there is a spouse and the
estate is valued at more than R250 000.
= Descendants inherit per stirpes.
™ Parents inherit if there is no spouse or descendants.
The general rule in our law is that anyone can
inherit from a deceased estate, except where they
are found to be ‘unworthy’. Unworthiness is based
on the principle that you cannot benefit from your
own wrongful acts.
The Administration of Estates Act 66 of 1965 sets out
the procedure for the administration of a deceased estate.
Review your understanding
1. Explain how someone who is paralysed or illiterate,
and not able to sign their name, can make a will.
2. Draft a will for your own estate and include a
revocation clause, a legacy and a bequest regarding
the residue of the estate.
3. Portia is 15 years old and has inherited R2 million
from her grandfather. Can she make a will for herself?
4. Explain the difference between testate and intestate
succession.
5. Mlandu has died intestate and has left an estate
valued at R1 million. Mlandu is survived by the
following persons:
® his wife, Rachel, to whom he was married in
community of property
@ his ex-wife, Nomsa
m his sons, Bradley and James, from his marriage
to Rachel
® = three grandchildren, Thembeka, Viwe and
Prosper, the children of his pre-deceased
son, Tobile
@ his parents, Thabo and Tricia.
a) Who will inherit the estate?
b) What is the amount of each heir’s inheritance?
This takes place in two stages:
reporting the estate
administering the estate.
Reporting the estate requires the death to be reported to
the relevant Master or magistrate, depending on the value
of the estate and whether or not the deceased left a will.
‘The Master or magistrate appoints an executor or a
Master's representative, depending on the value of the
estate and whether or not the deceased left a will.
If a Master's representative is appointed the
procedure is straightforward:
The assets are collected.
The debts are paid.
The balance, is paid to the heirs.
If an executor is appointed, they are required to
submit a liquidation and distribution account.
If the facts were the same as in question 5 above,
but Mlandu was married to Rachel out of
community of property, would your answer be
different and, if so, how?
Bob and Tumi are married. On their way home
from Cape Town, Bob is driving, but falls asleep
and the vehicle is involved in a serious accident.
Tumi dies in the accident. Tumi left a will in which
she bequeathed her whole estate to Bob. Will Bob
be able to inherit from Tumi?
Compare the duties of an executor and a Master's
representative.
Maxine dies intestate and leaves an estate
valued at R500 000. Maxine is survived by the
following persons:
@ her husband Thabo to whom she was married
out of community of property
® her daughter Prudence
m two grandchildren, Trecia and Chido, the
children of her pre-deceased son, Tobile
= her parents, Sipho and Thembeka.
a) Who will inherit the estate?
b) What is the amount of each heir’s inheritance?
Chapter 22 | Review your understanding 355
 10. Sizwe dies intestate and leaves an estate his son, Fred, from his marriage to Viwe
valued at R800 000. Sizwe is survived by the his extra-marital daughter, Kelly
following persons: his adopted daughter, Agnes.
® his wife, Nomcebo, to whom he was married a) Who will inherit the estate?
in community of property b) What is the amount of each heir’s inheritance?
m his ex-wife, Viwe
® his sons, David and Eric, from his marriage
to Nomcebo

Further reading

Abrie, W. et al. 2015. Deceased Estates, 10th edn. For information on the administration of deceased estates, go to
Durban: LexisNexis South Africa the official website of the Master of the High Court.
De Waal, M.J. and Schoeman-Malan, M.C. 2015. Law of
Succession, Sth edn. Cape Town: Juta and Co. (Pry) Ltd
De Vos. P. “Moralistic view of marriage leaves unmarried
couples unprotected’
https://constitutionallyspeaking,co.za/moralistic-view-of-
marriage-leaves-unmarried-couples-unprotected/

356 Chapter 22 | Further reading

 Chapter
The law of security
Pa
The main ideas
What is security?
Real security
Personal security
Mortgages
Pledges
Common clauses in express mortgages
Lien

The main skills

List the different types of express mortgage.
Discuss the creation of different real security.
= Indicate three types of real security.
Distinguish between real and personal security.

Businesses and individuals often need additional money or finance before they can grow and develop.
Certain institutions and other persons may be willing to lend money to someone for these purposes, but
they will usually only agree to do so if they can be sure, or at least reasonably sure, that the money will
be repaid, usually with interest too. This chapter explains how loans are secured to make sure there will
be money to repay them.

Before you start

You finish your BCom degree at university and now wish to start an Honours degree. To afford the fees,
you need to take a study loan from the bank. Of course, you will have to pay back the amount of the
loan, known as the capital, as well as interest, which is the cost of borrowing money. The bank will not
lend money to you without having some way of making sure that it will get the money back. In other
words, the bank requires security for the loan before it will grant it to you.

Added value Lend v borrow

The words ‘lend’ and ‘borrow’ can be confusing. Please lend me your textbook. Please may |
borrow your textbook? The correct use of these terms is as follows: | lend you my textbook.
You borrow the textbook from me.

23.1 What is security?

Why do you think the bank would be hesitant to provide you with a study loan without having some
form of security? The answer is that the creditor, in this case the bank, is taking on a risk. You might
not pay the bank back. This risk becomes greater when a debtor owes money to more than one creditor.
What if the debtor does not have enough money to repay all the creditors?
This is where security comes in. Security is used to ensure repayment. If you provide the bank with
security for performance of an obligation, you guarantee that you will indeed perform the obligation
(usually to pay your debt as agreed) and that if you do not, the bank may take over your property.

Chapter 23 | The law of security 357

 ‘There are different kinds of security in our law. Where there are a number of creditors owed money
by a debtor, the type of security that each creditor has (if any) will determine which creditors receive
payment first. The bank usually has a preference over other creditors to get its money. The right of
certain creditors to be paid before others is an important part of the law of security.
Security serves a positive purpose for both the creditor and the debtor. For creditors, security makes it
more likely that the debtor will repay them their money by the due date. Or, if the debtor does not, the
creditor will have the right to sell the property that was promised by the debtor as security. The creditor
can then recover the debt from the money received from the sale. From a debtor's perspective, the
provision of security greatly increases the chances that someone will loan him money.
Consider the following. You have the idea to start your own cosmetics business, so you conduct
careful research to establish whether the business is likely to be a success. No matter how great your idea
is, you will need start-up funds to get your business going, and if you cannot secure funding from a bank
because the bank does not have security for the loan you seek, then your whole idea will in all likelihood
never get off the ground.

23.1.2 Different types of security

Security may take the form of real security or personal security. Real security is provided in 4). word ‘bond’ is
the form of property owned by the debtor. A typical example of real security is a mortgage —_ysed as the property is
ona house. This is often also known as a mortgage bond. A mortgage is a right of security _ bonded, or covered, by
over property. Let us say you borrowed money from the bank to buy your house. You owe _‘ the Mortgage. A bond is
the bank money, so you are a debtor. If you miss too many repayments, the bank can take 9 agreement creating
: ; ; ; : a relationship between
steps to have your house sold in order to get the money owed to it. This arrangement gives sitios ‘racials he bank
the bank confidence that it will not lose money on the deal. and thecoped Saaien
Personal security, also called suretyship, is given when someone agrees to meet the
obligations of the debtor if she is unable to pay the creditor.

Added value What is in the word?

It can be a bit confusing when the word ‘mortgage’ is sometimes used as another word for
real security. However, it is also just one example of real security. For example, a bank manager
might say that the bank requires a ‘mortgage or real security’ for a debt, when in fact the bank
manager would prefer the ‘mortgage’ to take the form of a pledge or lien.
The word ‘mortgage’ also has a narrower meaning as a specific type of real security. For
example, ABC Bank, which lent Andiswa money to buy her house, has real security in the form
of a mortgage bond over the house she bought.

23.1.3 Comparing real and personal security

‘The easiest way to understand the difference between real and personal security is to review the difference
between a real and a personal right, which you studied in Chapter 2. You will recall thata real right is a
right in a thing — for example the right of ownership. A personal right is a right to demand performance
from a particular person or persons. For example, someone who works for a repair shop and fixes a
customer's television set has a personal right against the owner of the television set to be paid for their work.
On the basis of this difference between real rights and personal rights, it should be clear that a real
right is stronger than a personal right.
The basic difference between real and personal security has already been explained. Real security
takes the form of property owned by the debtor. In other words, the debtor provides property as security
that she will pay any money owed to the creditor. If the debtor is unable to pay her debts, then the
creditor may take legal steps to have the property sold to repay the debt. Personal security is given when
someone called the surety agrees to meet the obligation of the debtor, if the debtor is unable to pay the

358 Chapter 23 | The law of security

creditor. Real security is a stronger form of security than personal security, because real security is based
in a physical object. A huge advantage of having real security for a debt is that the creditor is paid out
from the value of the sold security, even if the debtor does not have enough money to pay back her
other creditors.
Personal security, on the other hand, still requires the surety to have the ability to repay the debt. If
both the main debtor and the surety are unable to pay the debt, the personal security is actually not of
any help to the creditor.

Activity 23.1
1. Draw up a table in which you list the primary differences between real and personal
security, including the strength or value of each.
2. Write a scenario in which both real and personal security could be created to secure the
same debt. When writing your short paragraph and without being aware of what the law
is, Keep in mind the natural, logical ‘rules’ that society needs in order to operate smoothly.

23.2 Real security

We have already been introduced to the concept of real security. This section now looks primarily at the
three different types of real security that debtors can provide to secure a loan.
1. A mortgage, as you have already learned, is security in a property owned by the debtor and which
provides a creditor with security that the debtor will repay his debt to the creditor.
2. A pledge is created when a debtor delivers her property to a creditor as security for a debt owed.
A pledge is, in fact, a special type of mortgage, but it is dealt with separately in this chapter because
of its importance and some special characteristics.
3. Alien allows someone, who provides a service to another's asset or property to retain that property
in certain circumstances until he is paid for the work.

But before you learn about the three forms of real security, there are some important things to remember
about real security in general. ‘The holder of real security has no right to use and enjoy the property of
the debtor. The property just serves as a guarantee that the debtor will do what she promised to do. For
example, ifa bank holds a mortgage over a debtor's house, the bank manager has absolutely no right to
live in the house.
Real security also cannot exist on its own. Real security can only exist if there is a valid and
enforceable principal debt. ‘The principal debt is the main debt to which the real security relates.
For example, you borrow money from a bank to buy a house on the condition that the house is
mortgaged. The principal debt is the money you borrowed from the bank.
In legal language, we say that real security is accessory, because an accessory is An eeassory to a cine
something that goes with something else. In law, the real security is accessory because, is someone who helped a
without the debt, there is no security. For example, a bank agrees to lend Asieff money, if he _ criminal to commit a crime.
offers his car as real security. If the bank does not actually lend Asieff the money, then there
is no mortgage over his car.
Although real security is accessory, the security may still be used to secure a debt that
An overdraft is granted
may only arise in the future. An example of such a situation is real security being used to ip youiniens bank
secure an overdraft with a bank. agrees that you can take
For example, Devdas wants to start up his own flight-training centre. He has enough more money out of the
money to start with, but knows that he may need an overdraft facility at some point. bank than you actually
Devdas can offer the bank one of his aircraft as real security for the possible future debt thar have in your account.
would arise if he used the overdraft facility.
Note that only something that can be privately owned can be subject to real security. For example,
I may not mortgage a part of the ocean as real security for a debt, as people do not own the ocean.

Chapter 23 | The law of security 359

23.3 Personal security
Personal security takes the form of suretyship. A contract of suretyship exists when someone (called the
surety) agrees to meet the obligation of the debtor, if the debtor is unable to pay the creditor. Think back
to the study loan example in the introduction of this chapter. This situation often results in suretyship
being offered as security for the debt. Someone applying for a study loan often has no property that a
bank will accept as real security. Instead, someone who is in a better financial standing than the student
agrees with the bank to stand surety for the debt. For example, a mother or father may stand surety for
the child’s student loan. The bank may be willing to accept the parent as a surety, if the parent has a
steady form of income and owns assets like a house or car.
A surety indicates that the principal debtor will repay the debt, but that if the principal debtor cannot
do so, then the surety will pay the debt. In this way, suretyship can be understood as a type of guarantee
to the creditor for the performance by the principal debtor and also as a back-up if the principal debtor
does not perform as promised.
Although there are clearly advantages to a suretyship for both the principal debtor and the creditor,
the surety gains nothing in return from standing surety.

23.3.1 Characteristics of suretyship contracts

The two parties to a suretyship contract are the creditor (often a bank) and the surety. The bank’s loan to
the student (or any other obligation between a creditor and principal debtor) is between the bank and
the student. The agreement between the bank and the surety is a separate contract. It is even possible
(although it would be very unusual) for the principal debtor not to know that someone has agreed to
stand surety for him.
For example, Willem applies to his bank for a student loan. Without his knowing it, his aunt Hilda
in the United States has already contacted his bank and agreed to stand surety for just such a loan, but
on the condition that Willem does not know she is standing surety. The bank is happy to give Willem
the loan subject to the suretyship, although Willem is not aware of the suretyship contract.
As with real security (like mortgage or pledge), a suretyship obligation is accessory to the main, or
principal, obligation. Without a principal debt being owed, there can be no suretyship obligation. Using
the study loan example, if the bank did not in fact provide the loan, then the suretyship contract relating
to the loan is not created either.
In a similar way, if the main debt comes to an end, so does the suretyship contract. The accessory
nature of the contract requires a principal debt that is valid and enforceable and to which the suretyship
can become accessory. If the principal obligation is void, the suretyship agreement will also be void, and
where the principal debtor has a valid defence, that defence also excuses the surety. A debtor may claim
the defence of prescription if the creditor has taken too long to claim performance from him or her.
It is very important to understand that the creation of a suretyship contract does not remove or
reduce the main debtor's contractual duties. The surety’s obligation only becomes enforceable against her
when the principal debtor does not pay. The principal debtor is not released from her obligation by the
surety agreeing to stand surety for the debt.
Also, although the principal debtor is not a party to the suretyship contract, the surety who pays the
creditor for the principal debtor's debt has the right to reclaim that money from the principal debtor.
This might happen if the bank claimed an outstanding student loan plus interest from the surety,
because for two years the debtor (student) could not find employment. But, if after that, that former
student does find employment but refuses to repay the surety for the money that the surety paid to
the bank, then the surety is able to claim the money that he paid to the bank from the former student.
Although, in practice, to try and do so may be a waste of time, as the principal debtor may not have
enough money.

360 Chapter 23 | The law of security

 A surety, who claims against the principal debtor, after having paid off the debtor's debt, is also
entitled to additional expenses suffered as a result of the debtor's failure to meet their obligation.
An example is the interest on the debt that had to be paid in addition to the principal debt.
It is possible for more than one person to stand as surety fora debt. In this case, the sureties
are called co-sureties. Co-sureties are equally liable for the debt and any co-surety may be sued
by the creditor for the whole amount owing. Once a co-surety pays the debt to the creditor, this
co-surety then has a claim against the remaining co-surety or co-sureties for their share of the debt
paid. If the creditor releases one or more of the co-sureties, the remaining sureties are also released from
a proportionate share of their liabilities, This is more clearly illustrated in the case study below.

ba TD A Consequence of co-suretyship

Assume that six sureties equally guarantee a debt of R12 000. The creditor releases two of them.
Their proportionate, or pro rata, shares are R2 000 each. The remaining four co-sureties are then
only liable to the creditor for R8 000 in total.

23.3.2 Requirements to create a suretyship contract

The two requirements for a valid suretyship contract are:
@ agreement Interest is money paid regularly
@ awritten contract. at a particular rate for the use of
money lent, or for delaying the
Agreement to create a suretyship agreement repayment of a debt. The current
Here, the normal rules apply as to when the parties to a contract can be said to interest rate payable on any debt
be validly in agreement. For example, both the surety and the creditor must have (as of late 2017 and this will remain
the same until changed through
contractual capacity, and consensus must have been properly reached.
a formal government regulation),
where no percentage has been
Written contract agreed between the parties, is
A suretyship contract is one of the few types of contract that must be in writing 10,25% per year.
to be valid in our law. A suretyship contract must be contained in a written
document signed by the surety or by their authorised agent. Interestingly, the In law, we say that co-sureties are
creditor is not required to sign the suretyship contract. jointly and severally liable to the
All the essential requirements of the suretyship contract must be included creditor for the whole of the debt
in the written contract for it to be valid. Any change of an essential term of a owed by the principal debtor. This
suretyship contract must be in writing to be valid. The case of Northern Cape means that each surety may be held
liable for a pro rata share or the
Co-operative Livestock Agency Ltd v John Roderick and Co. Ltd has made it clear
full amount.
what such essential terms are.

Northern Cape Co-operative Livestock Agency Ltd v John Roderick and Co. Ltd
1965 (2) SA 64 (O)
Principles
The applicable principle of the case was that all the essential requirements of the suretyship
contract must be included in the written contract for it to be valid.

Facts

A dispute existed between the creditor company that wanted to claim a debt owed to it by a
debtor and another company that the creditor said was bound to pay it for this debt as the
surety. The question was whether all the requirements in the written contract amounted to a
contract of suretyship.

Chapter 23 | The law of security 361

 Northern Cape Co-operative Livestock Agency Ltd v John Roderick and Co. Ltd
1965 (2) SA 64 (O) (continued)

The court's finding

The essentials of a suretyship contract are the identities of the parties — the surety and the
creditor, as well as the principal debtor, and the nature and extent of the guarantee. The nature
of the guarantee means the type of debt that the surety is providing personal security for. We
can illustrate the court's rationale and finding, by way of an example: A surety may be willing
to stand surety for a study loan, but not for a loan to be used for a holiday. The extent of the
guarantee means how much money the surety is standing security for.

If the identity of the principal debtor is not stated, but can be worked out from a document :
i eA iaodk hi a cell beleatcmn Th Adocument that is referred
ncorporated into the suretyship agreement by reference, that wil be sufficient. The teins cone cto
suretyship contract stating the principal debtor's identity will be indicated in a letter be incorporated into that
attached to the contract, and must be signed by the surety. contract by reference.
One special type of suretyship contract, called an aval, has its own special ‘in writing’
rules. When someone signs a cheque, there is always a danger that the cheque will bounce —in other
words, there may not be enough money in the bank account of the person who signed the cheque.
An aval isa special type of suretyship arrangement where someone stands surety for the cheque being
honoured (that is, paid out). An aval is different from other types of suretyship in that no separate
suretyship contract is required. Instead, all the surety needs to do is sign the back of the cheque.

23.3.3 The surety’s duties

‘The surety is required to pay the debt only if the principal debtor has not paid the creditor. The surety
never has to pay more than the principal debtor would have had to pay. In most cases, the surety will
have to do exactly what the principal debtor was required to do. For example, in the study loan example
we used earlier, if the student is unable to pay back the debt, the surety will have to pay back the debt,
with interest.
Sometimes, what the surety has to do is not exactly the same as the debtor's obligations. This usually
comes about where the principal debtor is required to perform some sort of task other than paying money.
‘The surety in such a case agrees to pay the money value of the principal debtor not performing. In such a
situation, it can be seen that the surety’s duties are different from that of the principal debtor.
An example of such a situation is set out in the case study below.

Case study Duties of a surety and principal debtor

Riaan is paid R25 000 to build a wall for a school. Liziwe stands surety that Riaan will build the
wall, but if he does not do so then she (Liziwe) will repay the R25 000. Here, the principal debtor's
obligation is to build the wall, but the surety’s obligation is to repay the debt, if necessary.

23.3.4 The surety’s rights when sued by the creditor

A surety’s rights can be divided into two categories, namely, defences that can be raised against the
creditor, and other rights that the surety has against the creditor.

Defences
The surety generally has the same defences that the principal debtor has against a claim by the creditor. If
a surety is asked to pay a debt by the creditor, she should tell the principal debtor about this so that the
debtor may reveal any defences that are available. A surety, who pays the creditor without first advising

362 Chapter 23 | The law of security

the debtor of their intended action, bears the risk that the debtor had a valid defence that could have
been used to avoid the payment.
The principal debtor's duties must not be impossible, illegal or otherwise unenforceable. prescribed here means
These cannot be enforced against the principal debtor and nor can they be enforced against —_ ¢hat the debt has become
the surety. This is because of the accessory nature of suretyship. If the debt has become ‘stale’ as it has not been
prescribed, the surety may raise that defence and should do so in the interests of the principal _daimed fast enough.
debtor if the surety knows, or should know, that the defence exists. Generally, if the
principal debtor is released from their duties by the creditor, this releases the surety too.
‘There are circumstances where the defences available to the principal debtor cannot be used by the surety.

Principal debtor’s personal privilege

Occasionally, a defence may be available to the principal debtor that arises not out of the obligation
itself, but out of some personal privilege given only to the debtor. In such a situation, the surety will
remain liable. This situation is explained by the case below.

Worthington v Wilson 1918 TPD 104

Principle
A defence is available to the principal debtor but not the surety because of peculiar personal
circumstances — a personal privilege — of the debtor, which the law protects, but no such
personal circumstances exist to give the surety that defence.

Facts

The principal debtor was on military service during World War |. In terms of a particular law, people
on military service could not be sued. The surety for the principal debt tried to raise the defence that
he, too, should not be sued, because the principal debtor’s defence should also apply to him.
The court's finding
The surety did have to pay once the debt was due. The surety, in such a situation, would be
able to reclaim the money that was paid from the principal debtor once his privilege had ceased
(once the principal debtor was no longer on military service).

Principal debtor is an unassisted minor

A minor (an unmarried person under 18 years) who enters into a contract without their guardian's
consent cannot be sued. While an unassisted minor cannot be sued, someone who stands surety for a
minor's debt can still be held liable for it. Even worse for the surety in such circumstances is that once
she pays, she cannot claim this money back from the minor.

Where statutes create exceptional cases

There are two instances where a statute creates a defence for a principal debtor that is not
available to a surety.
= = In terms of the Insolvency Act 24 of 1936, someone who is insolvent is treated a bit like a child who
may not enter into contracts on their own. But there is a procedure for an insolvent person to be
returned to full status; it is then said that she is rehabilitated. Once rehabilitated, the debts that an
insolvent had before insolvency are no longer held against her. But rehabilitation of the principal
debtor is not available to the surety as a defence. The surety remains liable.
= = Similar to the exception applicable to rehabilitated insolvents is where a company is unable to pay
all its creditors, In terms of the Companies Act, a court can allow a company to pay its creditors in
a particular way (for example, less than what is owed). But this kind of arrangement cannot be used
by the company’s surety as a defence — he will have to pay the whole debt.

Chapter 23 | The law of security 363

Surety’s other rights against the creditor
We will now look at three further rights that a surety has if she is sued by the principal debtor's creditor:
1. excussion
2. division
3. cession of actions.

Excussion
This is the right of the surety to demand that a creditor first sues the principal debtor before suing the
surety. The surety can choose whether or not to claim this right. If the creditor tells the surety that the
debt is due and unpaid, and that it is planning to claim against the principal debtor, and the surety
allows the creditor to do so, then the surety is said to have chosen the right of excussion by implication.
Where the surety has chosen to make use of excussion and the creditor does not get any money from the
principal debtor, the surety will have to pay the extra costs spent by the creditor in claiming from the principal
debtor. This is called a “barren harvest’. The extra costs could, for example, be the costs of employing lawyers
to help the creditor with its claim against the principal debtor. But if the creditor sued the principal debtor
without the surety having claimed excussion, the extra costs would be payable by the creditor.
Excussion cannot be claimed in the circumstances described below.
= = If the surety has, expressly or by implication, indicated that she will not claim the right of excussion,
then excussion cannot be claimed. For example, it is possible for the surety also to be a debtor —
what is called a co-principal debtor. In this case, the surety is both liable for the debt herself and is
standing surety for another person's debt. Where the surety is also a co-principal debtor, she cannot
claim excussion because if she did so, the surety would effectively be saying, ‘Do not sue me until
you have sued me’, which clearly makes no sense. Being both a surety and a co-principal debtor
implies that the surety has formally abandoned the right to claim excussion.
= = The benefit of excussion will also not be available where neither the debtor nor her property is in the
jurisdiction of the court. This is because it would just be wasting time to force the creditor to sue
the principal debtor, as there would be no way for the creditor to get its money.
= Where the principal debtor's estate has been sequestrated, excussion cannot be claimed, because it
would also be a waste of time.

Division
We already know that co-sureties are jointly and severally liable to the creditor for the whole debt owed
by the principal debtor. Ifa co-surety does pay the debt to the creditor, that co-surety has the right to
claim from the other co-sureties his share of the debt.
The right of division means that a co-surety who wishes to avoid the trouble and expense of later
suing his co-sureties for their share of the debt may demand that the creditor sues the other sureties for
their share of the debt and that it sues him for the proportionate share only. Then, the obligation of the
surety for more than his share, falls away.
For example Jane and Anne are co-sureties for Thandi’s debt of R10 000 from ABC Bank. If Jane is
sued for the full R10 000, then, in claiming division, she will have to pay only RS 000 and ABC Bank
will have to claim the other R5 000 from Anne.
Division does not result in the debt necessarily being divided by the number of sureties. A surety who
has no money or is insolvent at the time the division is claimed is disregarded as a surety.
For example, Brad, Vikash and Thandi are co-sureties for Terry's R120 000 loan from Quality Bank.
Terry cannot pay the debt and Quality Bank sues Brad for the full R120 000. Vikash is insolvent. If Brad
claims division, then he will be sued for R60 000 only and Thandi for the remaining R60 000.
A surety who is outside the jurisdiction of the court is also not considered when it comes to division.
A co-surety will not be able to claim division:
® = if the co-surety claiming division goes beyond the given time for claiming the right
@ if the co-surety has said that he will not claim division (in other words, that he has renounced
the right).
364 Chapter 23 | The law of security
Cession of actions
It is possible for a bank to hold both real security (for example, a mortgage over the debtor's property)
and suretyship as security for the principal debtor's debt. We have already established that if a surety
pays a principal debtor's debt then the surety has the right to sue the principal debtor for what has
been paid. A claim of cession of actions means that if the surety pays the debt to the
creditor, the creditor must help the surety to get that money back from the principal Ceding something means
debtor by passing over (or ceding) any real security held (for example, a mortgage) to ‘passing rights over
the surety. This will mean that the surety then has real security for his claim against the See ere
principal debtor.
For example, Best Bank lends Simone R50 000. Simone’s debt is secured by both a mortgage over —
Simone’s 2006-model car and a suretyship agreement signed by Simone’s father, Fred. If Fred pays back
the R50 000 loan to Best Bank and claims a cession of actions, the bank must cede the mortgage over
the car to Fred to help him claim that money from Simone.
‘The surety’s right to a cession of actions is based on fairness in that the creditor should help the surety
to recover any money paid by the surety from the principal debtor.
Cession of actions must be expressly asked for and cannot be implied. Once the surety claims a
cession of actions, it must be provided by the creditor. Unlike the case with excussion, being both a
surety and co-principal debtor does not prevent a surety from claiming cession of actions.

Activity 23.2
You are the surety for your nephew’s study loan. The bank that gave the loan to your nephew
has brought a claim against you. Write out a set of valid legal defences for yourself.

23.3.5 Ending suretyship contracts

A suretyship contract will usually come to an end in one of two ways:
1. If the existing principal contract comes to an end, the suretyship also ends. For example, Lwando
has a study loan from the bank for his LLB studies. The loan is secured by a suretyship agreement
signed by his mother. Once Lwando has paid off the loan, the suretyship contract ends too.
2. Where the principal debtor has a valid defence, the suretyship ends. For example, if the debt against
the principal debtor has prescribed, the surety’s obligations end too.

Although the continuation of a suretyship contract usually depends on the continuation of the principal
debtor's obligation (as in the example above), there are some exceptions. Sometimes the principal debt
remains, but the surety does not have to pay. This happens in the following circumstances:
= = The surety has been released from her obligation by the creditor or by the terms of the suretyship
contract. An example is where the contract said that the surety would stand as surety for ten years
and now that time is up.
@ = ‘The creditor breaks an important term of the suretyship agreement or makes a major change to
the principal debt that allows the surety to withdraw from his position as surety. For example, a
surety agrees to stand surety for a loan for her nephew, provided that the money is used to pay the
nephew's university fees. The nephew asks the bank, and it agrees, to pay the loan directly to a travel
agent, to pay for an around-the-world cruise. This breach of the suretyship agreement by the bank
would allow the surety to withdraw from the contract. Whether a surety can withdraw
from a suretyship contract because of a major change to conditions of the main debt Prejudiced means
‘negatively affected’.
will depend on whether the surety will be prejudiced by the change.
® A creditor may have sued the principal debtor in time, but took too long to sue the
surety. Under the law on prescription, a creditor usually has three years in which to sue someone for
money owing, The following case study is an example.

Chapter 23 | The law of security 365

 Case study Defence of prescription

Balindwa has a study loan from ABC Bank. Moses stands surety for the loan. The loan becomes
payable on 1 March 2017. ABC bank sues Balindwa within three years (before 1 March 2020),
but the bank is unable to get any money from her, because she is unemployed. If ABC Bank
does not sue Moses before 1 March 2020, then the claim against the surety will not succeed,
because it has prescribed.

23.3.6 What happens if the surety dies?

Unless the suretyship contract specifically states that the contract will end with the surety’s death, the
surety’s duties will be payable by the estate of the deceased surety. In other words, a creditor will still have
personal security for a loan, but that security is payable out of the money left behind by the surety on his
death, rather than from the surety himself.

23.4 Mortgages
A mortgage exists when someone called the mortgagee obtains a right of security over property of the
mortgagor until the mortgagor repays his debt to the mortgagee. In other words, the mortgagee is the
creditor — like a bank, for example — holding the real security and the mortgagor is the debtor whose
property is being held as security.
For example, Thandi wishes to buy her first house. She approaches Life Bank to provide her with a
loan for the amount of the purchase price. Life Bank agrees to lend Thandi the money provided that
real security in the form of a mortgage bond over the house is created. In this example, Thandi is the
mortgagor and Life Bank is the mortgagee.
Depending on the type of real security, there are different ways in which a mortgage can be created.
We will look at three types of mortgage:
1. express mortgages 2. tacit mortgages 3. judicial mortgages.

23.4.1 Express mortgages

Mortgages that are created by agreement and a public act are called express mortgages. A useful way of
remembering this is that such mortgages are created expressly through both the intention of the parties
and the public act. We will look at express mortgages in more detail in the sections to follow.
The first requirement of an express mortgage is agreement, which means that both the mortgagor and
the mortgagee must intend to create a mortgage. All the requirements for agreement must be present, for
example, capacity and a meeting of minds.
The mortgagor must also have the power to mortgage the property. For example, you could not
mortgage a property that is owned by someone else, The mortgagor must be the owner of the mortgaged
property and there must be no restriction or limits on the mortgagor mortgaging the property.
‘The second requirement for an express mortgage is publicity. There must be a public act that the
law regards as sufficient to indicate to the public that a mortgage has been made. The public act will
differ according to the type of property to be mortgaged. The publicity requirement to create an
express mortgage over immovable property (land) is met through registration of the mortgage on the
title deed of the property at the deeds registry. When you buy a property, the tile deed over the land
indicates who the owner of the land is and any real security held over the land. The deeds registry is the
place where all information about land ownership and security is kept by the state. The deeds registry
office is situated in one place in a particular province — for example, in KwaZulu-Natal, this is situated
in Pietermaritzburg.
So, in the example of Thandi mortgaging her house in favour of Life Bank, the title deed over the
property will indicate that Thandi is the owner of the property and that Life Bank has a mortgage over
the property. This record can be found in the deeds registry and can be inspected by the public.

366 Chapter 23 | The law of security

 In contrast to immovable property, movable property refers to movable assets such as cars and ships.
The publicity requirement for a mortgage over movable property is normally met by delivery of the
real security by the mortgagor to the mortgagee and by continued possession of the property by the
mortgagee or through registration of movable property at the deeds registry.
Another type of property over which a mortgage can exist is incorporeal property. Incorporeal
property is property that has no material or physical form, such as shares in a company. The publicity
requirement for incorporeal property is met by evidence of the right to the property being passed or
ceded to the mortgagee. For example, the cession of the right to shares in a company takes place through
delivery of the share certificates (which are evidence of the existence of the ownership in a company)
from the mortgagor to the mortgagee.
Note that there may be more than one mortgage over a property, ‘The following is a case study that
illustrates just how this might occur and why.

Case study Multiple mortgages

James buys a house that is mortgaged in favour of ABC Bank. James then wants to borrow
more money to build a swimming pool at the house. He borrows money from XYZ Bank for a
second mortgage over the house. An earlier mortgage will always take precedence over a later
mortgage. In other words, if the property is sold to pay off the mortgagor's debts, the holder
of the first mortgage over the property will be paid out first. The possibility that a mortgagor
may wish to obtain more than one mortgage on a property is one reason why the publicity
requirement is important. A mortgagee will want to know about other mortgages over the
property before lending any money. You have learned that express mortgages are created by
agreement and a public act.

You will now study five different types of express mortgage:

special mortgage over immovable property
2 her

kustingbrief
Me

covering bond
participation bond
notarial bond.

Special mortgage over immovable property

Siphokazi, who owns a house, borrows money to add on an extra garage to the existing carport. The bank
lends Siphokazi the R75 000 needed to build the garage, subject to a mortgage bond in favour of the bank.
This express mortgage is called a special mortgage because the mortgage relates to a specific,
is hase piece . immov - ie A pce ee - = pet Amada warigae wes
purchase price. A special mortgage over immovable property has the following, 3 specilic (or special piece
main requirements: of immovable property.
@ = ‘The agreement of the mortgagor and mortgagee is set out in a mortgage bond prepared
by a special kind of lawyer called a conveyancer. Simply agreeing in words to create A conveyanecer is a lawyer
a special mortgage over immovable property is not sufficient to create an express who is involved in the
mortgage over immovable property. legal processes of having
m ‘The mortgage must be registered in the deeds registry with the Registrar of Deeds. property transferred from
m = ‘The conveyancer does this at the deeds registry for the owner of the property. A)

There is an important technicality to remember about the timing of the registration of a special mortgage
bond over immovable property. This has an impact on whether the mortgage will in fact give the
mortgagee a preferent claim if the mortgagor becomes insolvent. Section 88 of the Insolvency Act 24 of

Chapter 23 | The law of security 367

1936 applies to special mortgages over immovable property. The section says thata mortgage bond must
be lodged, or registered, by the lender, typically a bank, with the deeds registry within two months of the
money being lent. If it is lodged later than that and the mortgagor becomes insolvent within six months
of the date of lodging, the mortgagee will not have a preferent claim.
For example, Anne lends Shafieck money on 1 January. A mortgage is registered only on 31 March.
Shafiek becomes insolvent on 1 July. So, Shafiek becomes insolvent three months after the bond is
registered. In these circumstances, Anne will have no security. In order to have had real security, Anne
should have ensured that the mortgage bond was registered by the end of February because that was the
end of the maximum two-month period allowed for doing so.

Added value Being secure

It is important to distinguish between the debt itself and having security for the debt. In the example
above, Shafiek still owes Anne the money borrowed from her. But Anne has no security for the
debt. She will not be a preferent creditor. Because Shafiek is insolvent, she will probably be paid only
a portion, if anything, of the money owing to her, along with other concurrent creditors.
Similarly, if your sister lends you money without any security for the debt, you are still
required to repay the money you have borrowed.

Kustingbrief
A kustingbriefis a type of express mortgage created at the time that a buyer buys a property. The
hustingbrief relates to money lent to buy the property. Compare this to a special mortgage over
immovable property, which is created when someone who is already the owner of property borrows
money to improve the property. In our previous example, Siphokazi borrowed less than what his house
was worth, in order to build the garage.
You saw that in the case of a special mortgage, the mortgage bond had to be registered within two
months of the money being lent. But the Insolvency Act 24 does not apply to a kustingbrief, because
there can be no question of registration not happening within two months. The mortgage bond and
the change of ownership are registered at the same time. In terms of this type of express mortgage,
registration of the mortgage takes place immediately upon the transfer of ownership from the buyer to
the seller.
You know that there may be more than one mortgage over a property. You saw that an earlier
mortgage will always take precedence over a later mortgage. As a kustingbrief is always registered at the
time of transfer, it will always create a preference in favour of the mortgagee.
For example, Ted buys a house. Tops Bank provides a loan for the purchase price of the property,
subject to a mortgage bond. Three years later, Ted borrows money from Better Bank, to put ina pool
at his house, A mortgage is also created in favour of Better Bank. In this case, the mortgage in favour
of Tops Bank is a kustingbrief and it will have preference over the mortgage held by Better Bank. A
kustingbrief may be in favour of the seller of the property or someone else, such as a bank, which has
provided a loan to the mortgagor.

Covering bond
A covering bond provides real security for future debts — in other words, for debts that are not yet owed.
A covering bond is usually over immovable property, although it may also be over movable property.
Think back to the example of Devdas and his flight-training centre in the section on Real security.
A covering bond may be:
® = general, in relation to movable property
® = special, over specific movable or immovable property.

368 Chapter 23 | The law of security

A general covering bond does not relate to a specific piece of property; a general mortgage provides
real security over all the property of the debtor. A notarial bond, which is discussed later, is a
general mortgage.
For example, if Johan's debt to EFG Bank is secured by a general covering bond, then the bank has
security over all the property owned by Johan. This could be his house, his car, an open plot of land he
owns and his motorbike.

Case study Covering bond

Typically, a covering bond covers a fluctuating overdraft. This type of covering bond provides
security for the bank that the debtor will repay the bank the amount of money she owes on
the overdraft. The covering bond must indicate what future debts it is covering and the limit of
the amount covered. For example, Devdas wants to start up a flight-training academy. He has
R200 000 start-up capital, so he does not need to borrow money at first. But Devdas knows
that in the business, sudden large expenses may arise. Such expenses would require an overdraft
from the bank of up to R100 000. Devdas approaches the bank for a possible future loan. The
bank agrees to provide Devdas with the overdraft facility he wants, if Devdas uses one of his
aircraft as a covering bond for the overdraft.

In terms of section 87 of the Insolvency Act 24 of 1936, the earlier a mortgage bond is A fluctuating overdraft
registered, the greater preference exists. What this means is that a creditor who has his means that the amount of
rights as mortgagee registered before another creditor will have the right to be paid before money thata client owes
the other creditor from the proceeds of the property when it is sold. the bank at any given time
For example, a bank grants Nomsa an overdraft facility that is secured by a covering Sa ea:
bond over Nomsa’s farm. The bond is registered on 8 July 2018. Another mortgage bond is
Capital is cash or other
registered over the farm on 8 August 2018. (An extra bond is created when the mortgagor
b orrows more money.) N Nomsa goes intointo overdraftoverdraft onlyonly onon 10August
ugust 2018 and and fail
fails to Seabee cnn
Sip clad by ibe Gane to
make her repayment a month later. the business.
The bank's covering bond for the overdraft will have preference over the second bond.

Participation bond
An investment where more than one person acts as the mortgagee over the property is called a
participation bond. Each one of a group of investors contributes towards the capital borrowed by the
mortgagor from the investment company to which the investors belong.
For example, Stephen, David and Carol provide the money fora loan to Roger. The mortgage created is
a participation bond as there is more than one mortgagee. The three mortgages in this example will all benefit
from the interest that Roger must pay on the loan. So the participation bond is a type of investment for them.
In addition to earning interest from his investment, each investor's investment is secured by way of
the bond over the mortgagor's property.

Notarial bonds
A notarial bond is an example of an express mortgage over movable property. A notarial bond is real
security that is registered over movable property. In other words, a notarial bond relates to movable
property of the mortgagor and creates a record of what is being mortgaged. The rules that apply to
notarial bonds are the same as for a special mortgage over immovable property. For example, the notarial
bond must be registered within two months of its creation to create preference for the mortgagee.
The notarial bond may be specific, or special, in that the bond provides real security relating only to
specific movable property. For example, the notarial bond might relate to a ship owned by the mortgagor.
Or the bond may be general, meaning that the bond does not relate to a specific piece of property, but

Chapter 23 | The law of security 369

that it provides real security over all the movable property of the debtor. As with a mortgage jae pace
over land, a notarial bond is registered with the deeds registry. A notary public draws up the specially qualified lawyer.
notarial bond and ensures that all the legal requirements have been met.
We have looked in detail at the first type of mortgage, namely an express mortgage. We turn now to
the other two types of mortgage, namely tacit and judicial mortgages.

Activity 23.3
Assume you are a start-up company offering various IT services, but in providing these services
you want to ensure that debts owed to you for services provided are correctly secured by way of
express mortgages. List the advantages and disadvantages of each of the five types of express
mortgage and provide practical examples to show why each express mortgage type would be
appropriate or inappropriate for your business.

23.4.2 Tacit mortgages

Unlike express mortgages, which are created by agreement, tacit mortgages are created by operation of
the law. In other words, the law indicates that tacit mortgages will automatically be created in certain
circumstances. A lien, which is discussed later in this chapter, is an example of security that comes about
tacitly. You learned about examples of tacit mortgages in Chapter 15 — the landlord’s hypothec for rent.

23.4.3 Judicial mortgages

Judicial mortgages are created through a court process. You will recall from Chapter 2
that there are certain ways in which a court judgment may be enforced. For example, if a A: warrant of execution
, : ’ : ; is a document that enables
court orders that James owes Ricardo money fora debt, James is the judgment debtor and the sheriff to attach a
Ricardo the judgment creditor. Ricardo may issue a warrant of execution to attach James's gertoy's property to pay
property as a way of getting the money owed to him. ‘The sheriff of the court attaches the debt of the creditor.
James's property by indicating that this property is to be sold to meet the judgment debt.

Case study Attachment of property for debt owed

James has a motor car. If Ricardo issues a warrant of execution on James's motor car, James may
not sell or remove the car from where it currently is. The motor car becomes attached property.
In this way, a type of mortgage is created over the attached property through the warrant of
execution. If the judgment debtor, in this case James, pays the debt in full, the property (the
car) stops being subject to the mortgage. If the judgment debt is not paid and James does not
pay Ricardo what he owes him, the car may be sold to pay for the judgment debt. This type of
mortgage is called a judicial mortgage.

Added value Way to remember

The way to remember the name of this category of mortgages is that the judiciary is another name
for the courts. Therefore, a judicial mortgage is a mortgage created by the court or judicial process.

23.5 Pledge
A pledge is the second kind of real security we will examine. In plain language, a pledge means a promise.
In law, the promise aspect is just one part of a pledge. A pledge is, in fact, a type of express mortgage.
A pledge is also created by agreement and by a public act. It is dealt with separately in this
chapter because it is a very important category of express mortgages, and because it has Incorporeal property,
some unique characteristics. such as shares in a company,
Both movable and incorporeal property may be pledged, as you will see. CEO DOSER St ESTE:

370 Chapter 23 | The law of security

23.5.1 Pledge of movable property
There are two requirements to create a pledge of movable property:
1. There must be an agreement to create the pledge.
2. The pledged property must be delivered into the possession of the pledgee.

So, the parties need to agree to the pledge, and the person who gives the loan will take possession of
whatever item the borrower has pledged as security.
‘The parties to the pledge are the pledgee, who pledges their property, and the pledgor, who takes
possession of the property. Suppose, for example, that Amy wants to borrow R1 000 from Jane, a work
colleague. Before Jane will lend Amy the money, she requires some form of real security from Amy.
Amy has a gold necklace around her neck. Amy pledges her necklace to Jane by handing it to her, and
indicating that Jane may keep the necklace as security for the loan. Jane accepts the pledged necklace,
and then lends Amy the money. Although the pledgee may keep the pledged item until the pledgor
repays her, a pledge does not give the pledgee the right to use the pledged property.

Added value Pledgors and pledgees

Be very careful that you get your terminology correct. If you have to write an exam answer about
a pledger, and you confuse the name with a pledgee, you will probably receive no marks for
that question! Obviously, the same would apply to making sure that you correctly distinguish
between a mortgagor and a mortgagee.

‘There are cases where the pledgee already has possession of the pledgor’s property. As long as the pledgor
intends to create a pledge and clearly indicates which item is being pledged, the law regards the delivery
requirement as having been met. For example, Mohammed lends Hashim his watch worth R3 000. Ata
later date, Mohammed wants to borrow money from Hashim. Itis possible for Mohammed to pledge his
watch to Hashim as security for the debt. Both parties simply have to agree that a pledge will be created
over Mohammed's watch, which is already in Hashim’s possession.
To create a pledge, the pledgee must take possession of the pledged property. Ordinarily, the pledgee
must not give up possession of the property. So, in the example of Mohammed's watch, Hashim should
not voluntarily pass on possession of the watch to someone else, whether it is to Mohammed or someone
else. In most cases, if the pledgee does voluntarily give up possession of the pledged property, the
pledge comes to an end. If the pledgee loses possession against his will, the pledge does not end. So, if
somebody steals Mohammed's watch from Hashim, for example, the agreement between Mohammed
and Hashim is not over. If the loss of possession was involuntary, Hashim may go to court to claim the
pledged property from whoever has the property.

23.5.2 Pledge of incorporeal property

You should remember from earlier in this chapter that incorporeal property, such as shares in a company
or a right of lease, cannot be seen or touched. Incorporeal property has no physical existence. But, you
can still own incorporeal property. For example, when you own shares in a company, your rights in the
company have no physical form. Alternatively, you may have signed a lease to stay in a house for a period
of time. Although the house has a physical existence, your rights as a lessee are incorporeal.
How can someone who has incorporeal property pledge those rights to someone else as real security
for a debt? First, there needs to be agreement between pledgor and pledgee to cede the right in the
incorporeal property that will be used as security. Then, there must also be delivery to the pledgee of a
document providing evidence of the incorporeal right. For example, there must be delivery of a share
certificate indicating that the shares are being used as security for a debt.

Chapter 23 | The law of security 371

 Activity 24.3
Re-read the paragraph above. Now assume that you are a business person who has been offered
shares in a company called Upstart (Pty) Ltd. These shares have been pledged to you as security
in return for you providing 50% of their start-up capital. If Upstart does not follow through with
this, it will repay the sum lent to you plus interest at the maximum permissible rate in South
Africa. Practically set out how such a pledge would have to be created.

23.6 Common clauses in express mortgages

Now that we have looked at the different kinds of express mortgage, we will consider some of the clauses
typically found in an express mortgage. The clauses listed below are commonly found in documents
creating express mortgages. We will discuss each of the following:
1. interest and use clauses
2. foreclosure clauses
3. calling-up clauses
4. summary sale clauses
5. pactum commissorium
6. rights and duties during mortgage period
7 termination clauses.

23.6.1 Interest and use clauses

Express mortgages commonly include clauses about interest that must be paid by the debtor to the
creditor, and some also include clauses that allow a creditor to use the mortgaged property (use clauses).

Interest clauses
Banks and other lenders lend money to borrowers in order to make a profit. The way that this profit is made
is through interest being charged on the loan.
While it is perfectly acceptable to charge interest, the law limits the maximum interest payable by
debtors. The law makes sure that a mortgagee does not charge an excessive amount of interest. The
government changes the maximum interest rates from time to time.
It is common for parties to a loan to agree, in an interest clause, that interest will be payable for the
whole period of the mortgage, even if the original loan by the debtor is paid off early. For example, Anne
borrows R100 000 from Pumla. Anne is supposed to pay back the loan over a ten-year period at 10%
interest per year. In terms of such an agreement, Anne would have to pay back the R100 000 interest (in
addition to the R100 000 borrowed), even if she paid back the R100 000 early.

Use clauses
Sometimes, instead of charging interest on a loan, creditors use the mortgaged property. In law, a fruit is something
Clauses that govern this kind of arrangement are called use clauses. They are allowed in our that is produced by
law, provided that the mortgagor has the right to repay the debt as fast as he is able to do so, _ property, for example, the
Otherwise, the debtor would be unduly prejudiced. If such a clause applies to a pledge, the —_‘uits of a herd of cows
pledgee in possession of the pledged property may use the pledged property or its fruits. oe eee

23.6.2 Foreclosure clauses

Mortgage agreements with a bank usually contain a foreclosure clause. This clause allows the mortgagee
(the bank, in this case) to demand that a debtor repays the amount of the original loan and any interest
owing if the debtor misses a payment agreed to in the mortgage agreement.

372 Chapter 23 | The law of security

 For example, Robin borrows money from Rich Bank. In terms of the mortgage agreement with the
bank, if Robin misses a payment in repaying the loan, all the money owed and interest can be claimed by
the bank.
A foreclosure clause may include the right by the mortgagee to demand that the debtor pay interest
for the whole time that the mortgage was supposed to run — even though the debtor has to repay the
whole loan early because of a failure to make agreed repayments. This is a harsh penalty for the debtor
to suffer.
However, a right to charge interest for the whole period when a foreclosure clause is used would have
to be specifically included in the contract — it would not and could not be implied — if the mortgagee
wanted to use this right when a debtor failed to make a payment.
But, if it can be shown that the mortgagee, at the time that the contract was agreed to, did not intend
that the mortgagor should be able to make the repayments, a court has the power not to allow the
interest payment. Such a mortgagee is said to have acted in bad faith.

23.6.3 Calling-up clauses

A calling-up clause allows either the mortgagor or the mortgagee the right to end the mortgage by giving
an agreed amount of warning (or notice) to the other party. Any money owing at the time would have to
be paid by the mortgagor to the mortgagee.

23.6.4 Summary sale clauses

Something that happens summarily, happens immediately, so a summary sale is a sale that will happen
immediately after a debtor does not pay an amount owing. A summary sale clause says that the
mortgagee may sell the mortgaged property immediately if the mortgagor defaults with a payment.
A summary sale is sometimes known by its Latin name, parate executie.
Because a summary sale is a drastic measure, our law will not allow it unless it is clear that the result
will be fair and that the mortgagor would receive a fair price at a summary sale.
In summary sale clauses, you have to be able to tell the difference between summary sales of movable
property and summary sales of immovable property.
In general, our law does not allow summary sales of immovable property and they will be legally
invalid. There are various reasons for not allowing summary sales in transactions involving something as
important as land. These include the following:
= = There is a need to protect debtors from exploitation by creditors. This is because someone who
borrows money is often in a more vulnerable position than the lender of the money.
= Giving the mortgagee the right to a summary sale goes against the general rule that someone should
not take the law into his own hands.

Nonetheless, there have been many instances when fixed properties (typically someone's house), subject
to mortgages, have indeed been sold, either in terms of a judicial mortgage or under a summary sale,
even when the amounts owed are relatively small. In 2017, these were the subject of ongoing court
challenges, and we await clarity from our courts as to what protection the courts are likely to provide to
debtors in these circumstances, without unduly prejudicing the creditors either.
But there are exceptions to the ban on summary sales. In Kwazulu-Natal, a mortgagee may ask for
permission to sell the property in a summary sale subject to conditions laid down by the court. The logic
behind summary sales being allowed in Kwazulu-Natal is that the conditions laid down by the court
ensure that the sale is fair. There are also certain statutes which authorise summary sales.
The rules on summary sale clauses for movable property are not as strict as those for the summary
sale of land. This is because sales of land tend to have bigger consequences than sales of movable things.
A summary sale of movable property is valid, as long as the property is in the possession of the mortgagee.

Chapter 23 | The law of security 373

But even for these sales, there is protection for the mortgagor. If property in the possession of the
mortgagee is sold subject to unfair terms, the mortgagor can ask the court not to allow the sale to go
through. An example of unfairness would be where the property is to be sold for less than its actual
value. Whenever property subject to a mortgage is sold to pay off the mortgagor’s debt, any money left
over once the debt is paid, goes back to the mortgagor. For this reason, it is important that a sale of
property fetches a fair value for the property.

Added value Dealing with Latin tags

When you are faced with a Latin expression or some other foreign word or phrase, do not be
alarmed. A few hints may help you.
e Because English is a language that has borrowed words from many different languages,
the English word may help you guess the meaning of the foreign word. This is especially
the case with English and Latin, because the languages are closely related. For example,
the second word in parate executie is very similar to the English word ‘execute’. You will
recall that to execute a right or judgment in law means for something to be done against
a party who has not performed as it should have. So, the link should be clear between the
Latin term and the English term ‘summary sale’, which allows execution against the debtor's
property through an immediate sale.
e Mixing up foreign terms or not understanding them properly creates a bad impression. It is
far better just to use the English term than to use the wrong foreign one. Ideally, you should
know the foreign term as well as its English translation and meaning.
e The exception to this rule is that when the text is in italics, a foreign word is typed in plain
typeface to make it stand out from the rest of the italic text.

23.6.5 Pactum commissorium

A pactum commissorium is the Latin name for a clause that gives the mortgagee the right to become the
owner of the mortgaged property if the mortgagor misses a payment. This kind of clause is generally
not allowed in our law for the same reason that summary sale clauses are restricted for land. This kind
of clause creates a danger of exploitation by a mortgagee of a more vulnerable mortgagor where the
mortgagee could gain a profit that is disproportionate to the debt. But if the clause provided for payment
of a fair value for the property, this would be valid.

23.6.6 Rights and duties during the mortgage period

These are sometimes known as interim rights and duties of the parties. These apply between the creation
of a mortgage and its termination.
Both a mortgagee and a pledgee have a legally protected interest in the mortgaged or pledged
property and they can go to court to protect that interest. A mortgagee is likely to apply to ask for one
of two main orders from a court, namely an interdict or a spoliation order. An interdict is normally a
court order that orders someone to stop doing some unlawful action. For example, if a mortgagor got
into a fight with her bank manager and threatened to burn down her own house to destroy the bank’s
security, the bank (the mortgagee) could get an interdict to prevent the mortgagor's illegal behaviour.
A spoliation order is a court order that requires property to be returned to the person who was in
undisturbed possession of it and from whom it was unlawfully removed. This is illustrated in the case
study immediately below.

374 Chapter 23 | The law of security

 TTD aCeAY A pledgee using a spoliation order

A Rolex watch is held as a pledge by a pledgee (ABC Micro-Lenders) for a short-term loan of
R15 000 made by ABC until the borrower, Mr Free Spender, pays back the loan plus the agreed
interest. The watch is stolen from the safe of ABC by a disgruntled employee of ABC, Mr Sticky
Fingers, who is unhappy that he did not receive an end-of-year bonus from the company. ABC
discovers what Fingers has done and where he is storing the watch. Here the pledgee, ABC, may
get a spoliation order from court requiring Fingers to return the watch to them.

In Chapter 15, you learned that the rights in a lease always take precedence over a sale. The implication
of this rule here (uur gaat voor koop) is that although a mortgagee has secured rights in the mortgaged
property, the rights of the lessees must still be upheld. For example, Thabo owns a house subject to a
mortgage over a house in favour or Thrifty Bank. Thabo has rented the house to Jim. Assume that Thabo
defaults with his mortgage repayments to the bank. Whilst Thrifty bank may take steps to have the
property sold to recover its money lent to Thabo, Jim's rights as lessee will continue for the duration of
the lease.
Something which is added on to immovable property also forms part of the real security held by a
mortgagee. So, if a bank has a mortgage over a piece of land and the mortgagor then builds a house on
that land, the bank also has real security over the house. Certain fruits of land and movable
The legal term for such add-
property also form part of the mortgage. The fruits that are included for the mortgagee’s ee Ld clase
purposes are both civil and natural fruits. A civil fruit is not a tangible thing, but isaright 55, example, a house built
to something provided for in law. For example, rent received from a house is a civil fruit. Gn tend ivan accession.
A natural fruit is something actually produced by the property, for example, apples on
an apple tree.
Although a pledgee does not have a right to use the pledged property, she must take proper care
of the pledged thing while it is in her possession. This is called a duty of care. If the pledged item is
damaged while the pledgee has the item, the law presumes that the pledgee was negligent in allowing
the damage to occur. It would then be up to the pledgee to prove that the damage was not her fault. The
pledgee must, upon full payment by the pledgor, return the pledged property together with any fruits
that it has produced. For example, if a pledgor pledged a cow to the pledgee and while the pledge was in
existence, the cow gave birth, on receipt of payment, both the cow and calf must be delivered back to the
pledgor. In relation to a mortgage, the mortgagee must cancel the mortgage when she receives the last
remaining payment from the mortgagor.

23.6.7 Termination clauses

Termination clauses tell you how express mortgages come to an end, This can happen in a number of
ways, which are set out below.

Main obligation ends

If the main obligation of the mortgagor comes to an end, usually when he finishes paying the mortgagee,
the mortgage also comes to an end. The main obligation may come to an end in various ways. For
example, it may end through prescription, which means the creditor has taken too long to claim what
is owing from the debtor. But the important thing to remember is that the mortgage cannot continue
when the main debt has ended. This is because of the accessory nature of a mortgage. You will remember
that we refer to a mortgage as being accessory in that it cannot exist without the main obligation to
which it relates.

Chapter 23 | The law of security 375

Mortgagee gives up real security
If a mortgagee agrees to give up her real security for the debt, effectively releasing the mortgagor, this
also ends the mortgage. This would be the case where the mortgagee gives her consent to the sale
of the property by the mortgagor and the sale will then not be subject to the mortgage. However,
although the mortgage comes to an end, the debtor still owes the original debt to the creditor — it is
just that the creditor no longer has real security for the debt. It is hard to think of many examples in
the competitive commercial world where a mortgagee would, in fact, give up her mortgage over the
property of the mortgagor. An example might be where the mortgagor is a very good and wealthy client
of the mortgagee, the bank. The bank is very confident that its client will repay the debt, and it wishes
to improve its relationship with the client by showing faith in the client's ability to repay it. So, the bank
gives up its real security over the client's property.

Mortgaged property destroyed

If the mortgaged property is destroyed, then the mortgage comes to an end. This is logical because,
if the mortgaged property has been destroyed, the mortgagee no longer has real security for the debt
owed to it. This category of termination of mortgage only applies to movable property. The reason is
obviously because, although movable property can be destroyed, it is not possible to destroy land, even
if something on the land like a house is totally destroyed. Two examples will explain this more clearly.
First, let us say that ABC Bank holds a mortgage over Carol's ship. The ship sinks without a trace in a
huge storm, and so ABC’s mortgage comes to an end. Any money that Carol still owes the bank must
still be repaid, but the bank no longer has real security for the debt. Now imagine that the bank holds
a mortgage over Carol's property on which she has built a house. The house is very badly damaged in a
fire. Although the property is very likely worth far less because of the fire, the bank still has a mortgage
over the land and whatever remains on it.

The state claims the land

‘The state has the right to take land from private individuals for particular public use. In South Africa, a
particular law says how this process is to occur and provides for compensation to be paid to the person
whose property is taken over by the state. If the property expropriated was subject to a mortgage, then the
mortgage comes to an end. The case study below illustrates how this might occur in practice.

rT Toe datehi] Expropriation of property

Ishmael borrows R500 000 from XYZ Bank to finance the building of his house in the Western
Cape. XYZ has a mortgage over the house. Ten years later, Ishmael still owes R200 000 on the
house. The state decides to expropriate (termed expropriation of property) the property on
which the house is built and by necessity, the house itself, because a new dam will be built for
the town due to the water crisis in the region. The best place for the dam is where Ishmael's
house is situated. Such expropriation of land by the state is allowed in terms of statute. Getting
back to our example, Ishmael gets paid out R750 000 by the state for the loss of his house. The
bank no longer has a mortgage over the house, but Ishmael must still pay the bank back the
R200 000 that is owing.

Note that expropriation by the state is a special situation. In other cases, a mortgage is not ended bya
mortgagor selling their property to someone else. The mortgage will remain registered and effective until
the debt is paid or the mortgagee agrees to the mortgage ending,

376 Chapter 23 | The law of security

Limited time
If the parties agree that a mortgage will last only for a particular length of time or until a particular
event occurs, then, when the time is up, or that event occurs, the mortgage ends, For example, if it is
agreed that a mortgage will last for ten years once the ten years is up, the mortgage ends. Alternatively,
parties could agree, for example, that a mortgage will last until the mortgagor gets married. If the
mortgagor does get married, the mortgage comes to an end. Both these examples would appear to be bad
business decisions by the mortgagee, as in both cases the mortgagee could lose her real security over the
mortgagor's debt before full payment is received,

Rescission
The last form of termination of a mortgage is when a court orders the termination. When a court cancels
something, it is said to be rescinded. The court may do this if either party did not actually agree to the
creation of the mortgage. A court may also grant a rescission order if one of the parties has wrongfully
misrepresented something to the other. For example, ifa man who wanted to borrow money from a
bank to buy a house pretends to be employed as a company manager, when in fact he is unemployed, he
has misrepresented himself. The bank has lent money to the man subject to a mortgage over the house.
A court may cancel the contract due to the misrepresentation of the debtor. In this instance, the bank
might not have lent the debtor money if it had known that he was unemployed.

23.7 Lien
A lien, like a mortgage, is a type of real security. It is the right, in certain situations, of a creditor to hold
onto someone else's property until paid for work done on that property.

23.7.1.Two types of lien

Two types of lien will be discussed in this chapter:
m = debtor and creditor liens
= = enrichment liens.

Debtor and creditor liens

A debtor and creditor lien is created when someone asks another person to provide some sort of service
to his asset or property. The owner of the asset is the debtor in respect of money owing for the services
provided by the creditor. The creditor who has provided the service may keep possession of the asset
until he is duly paid by the owner.
For example, Georgina takes her car to Mac’s garage. She requests Mac to perform a service on
her car. Mac does the service and charges R600. Mac can hold onto the car as security until he is paid
by Georgina.
This example shows the three requirements for the creation of a debtor and creditor lien. All the
following requirements must exist for this kind of lien to be created:
1. There must be agreement between the debtor and the creditor regarding the service to be rendered.
2. The agreed work, which creates the debt, must have been fully and properly done.
3. The creditor must keep possession of the item on which the work has been done.

Agreement between the debtor and the creditor regarding the service to be rendered
In Mac and Georgina’s example, it was agreed that a service would be done on the car. It is important
to note that there is no agreement (or need for agreement) about the creation of the lien. For example,
Georgina did not have to say, ‘If Ido not pay you for the service on my car, you may keep possession of
it through a debtor and creditor lien’. Instead, there was (and only needs to be) simply agreement about
the work to be done on her car.

Chapter 23 | The law of security 377

Agreed work must have been properly done
In our example, Mac actually did provide a service on the car. For this requirement to be met, the work must
have been satisfactorily done and it must have been the work that was agreed to. For example, there would be
no lien if Mac had been asked to replace the air filter on Georgina’s car, but he had instead just cleaned the car.

Creditor must keep possession

‘The creditor has to keep possession of the item on which the work has been done. In law, possession of a
thing is more complex than merely having it — you must also intend to hold it for yourself. Possession is
required both to create the lien and for the lien to continue. If someone slips something into your pocket
without you knowing about it, in law you are not the possessor of it. So, for example if Mac were to
allow Georgina to take the car to use before he has been paid, then the lien comes to an end.

Enrichment lien
This type of lien arises when some type of work is done on an item without the owner's permission or
instruction which has ‘enriched’ the owner of the item. The question is then whether the
person who has provided the service or work may keep possession of the item. Ifthe owner _ Tbe enriched means
has been enriched by the unauthorised service, then the service provider (the person who ade
did the work) may retain possession of the item (through an enrichment lien) in certain from something.
circumstances until she has been compensated for expenses.
This enquiry is a bit more complicated than for a debtor and creditor lien. It would be
unfair for someone always to be able to keep possession of an item on which she has provided a service
without the owner's permission. So, whether or not an enrichment lien exists will depend on both the
knowledge of the possessor (what was going on in her mind) at the time she carried out the service, and
how necessary it was to provide the service carried out. These two factors will be discussed next.

Knowledge of the possessor

‘The person who provides a service to someone else's property or asset either acts bona fide, meaning in
good faith, or mala fide meaning in bad faith. A bona fide possessor believes she has a right to possess an
item — for example, because the owner would consent to the possession. A mala fide possessor has no
reason to believe that she has any right to possess the thing. A thief is an example of a mala fide possessor
of property. You will see later that a service provider who acts in good faith (in other words, who is bona
fide) creates an enrichment lien in more situations than someone who acts in bad faith.

Type of service done

Some types of service are more valuable or essential than others. The existence of an enrichment lien
may depend on whether the services were necessary, useful or just luxurious. These different categories of
service are discussed next.

Necessary expenses
These are expenses without which the owner's property would be destroyed or could not be used for its
intended purposes. For example, during a fierce storm the crew ofa ship are forced to abandon the ship.
The owner of a tugboat, without being asked by the ship's owner, goes out to the sinking ship, and tows
it into harbour. The expense involved in towing the ship is necessary because, without it, the ship would
have been lost. An enrichment lien created by a necessary expense is sub-categorised as a salvage lien.

Useful expenses
These types of expense are less needed than necessary expenses. Useful expenses increase the value of
the owner's property. For example, during the absence of livestock from his farm, his neighbour drills a
borehole on the absent farmer's farm. That expense or service is called useful in that the farm's market
value is increased, but the work was not needed for the farm to be able to continue to be able to operate.
An enrichment lien created by a useful expense is sub-categorised as an improvement lien.

378 Chapter 23 | The law of security

Luxurious expenses
Expenses that neither preserve the property nor increase its value are luxurious expenses. a on
Such expenses are simply a matter of preference, and do not serve any practical function. perfume, fs something
For example, while house-sitting, Busi, the house-sitter, decides to replace the green which may be wanted, but
curtains in the house with equivalent blue ones of the same value, simply because she is not needed,
prefers the colour blue.

Case study Different categories of service

The interpretation of law and its application to given facts is not always clear-cut. For example,
it could be argued, that a particular service could be termed ‘necessary’, yet the same services
could also be argued to be merely ‘useful’.
Such difficult situations are often the cause of disputes and even litigation between different
parties. In the context of liens, such potential conflict could be made moot (meaning in this
context, of no relevance) where a creditor and debtor have agreed to services being provided. In
the latter context (where the service provided has been stipulated), the question of the nature of
the work done does not matter. If it is done as per the agreement, the nature of the service need
not be considered, as the creditor may nonetheless be entitled (other requirements discussed
above being present) to an enrichment lien over that product.

Deciding whether an enrichment lien will exist

You now know that the need for the expense and the knowledge of the possessor affect whether an
enrichment lien will exist. Here we look at how these factors combine, and to what effect.
If an expense is necessary, then no matter whether the possessor is bona fide (acting in good faith) or
mala fide (acting in bad faith), an enrichment lien arises. So, in the earlier example of the tugboat towing
the sinking ship into harbour, the tugboat owner has a lien over the ship until he is paid for his expenses.
‘The tugboat owner may keep possession of the ship until he is paid for the services provided. This lien
exists whether the tugboat owner knew that the ship's owner would have wanted the ship towed or not.

Activity 23.5
Discuss, with a classmate, why the example given above is not a debtor and creditor lien.

In relation to useful expenses that have not been agreed upon, if the possessor is bona fide, an enrichment
lien is definitely created. In the earlier example of the farmer who installs the borehole on his neighbour's
farm, assume that the farmer who installed the borehole reasonably thought that the landowner would
not object to the work being done. Assume also that in drilling the borehole the neighbour used the
landowner’s tools. Since the work that was done was useful and the possessor was bona fide, the installer
of the borehole will have an enrichment lien over the landowner’s tools until the landowner pays his
neighbour for his expenses in drilling the borehole.
In relation to useful expenses when the person who does the work is mala fide, there is no clear decision
from our courts whether an enrichment lien will exist. Until there is a clear decision, each case of this type will
have to be argued as to whether an enrichment lien will exist. So, in the previous borehole example, if the
driller of the borehole was acting in bad faith in that he knew that the owner would not want the borehole
drilled, there is no clear answer in our law as to whether the possessor will have an enrichment lien.
Where luxurious expenses are concerned, no enrichment lien will ever be created against the owner of the
property, Whether the service provider is bona fide or mala fide makes no difference. So, in the example of
the house-sitter who swaps the green curtains in the house with equivalent blue ones because she prefers the
colour blue, the house-sitter will not have an enrichment lien over the removed green curtains.

Chapter 23 | The law of security 379

 So, an enrichment lien might not arise against the owner in the case of certain useful expenses (in
relation to the undecided position for mala fide possessors discussed a little earlier), and it does not arise
for luxurious expenses. However, a debtor and creditor lien will arise if the owner requested the service.
In the example of the green curtains being swapped for equivalent blue ones, if the owner asked the
house-sitter to do this, then the house-sitter will have a debtor and creditor lien over the removed green
curtains, until she is compensated for her expenses.

23.7.2 The legal effect of a lien

Whether it is a debtor and creditor lien or an enrichment lien, the legal effect is that it is a valid legal
defence to an action for the return of an owner’s property. Remember, if someone has someone else's
property without her permission, the lawful owner of the property may normally go to court to have her
property returned. The rei vindicatio is the legal action that the owner uses to get her property back, for
example, from a thief.
Where a lien-holder (the service provider) is sued for the return of property held in terms of a lien,
he will be able to explain to the court that the owner's normal right to have the property returned should
not be granted because of the lien over the property. So an owner (who is also the debtor) will be able to
have her property returned only when she pays what is owing to the service provider.
But the lien-holder cannot have the property sold or use the property. Rather, the lien-holder may
only hold onto the owner’s property until she is paid or until adequate security is given for payment (for
example, a mortgage ora pledge).
However, where the owner becomes insolvent, the lien-holder will have a preference against all other
creditors in relation to money received from the sale of the property. As mentioned earlier in this chapter,
the creation of preferences is the main advantage of having real security. In our earlier example with Mac's
debtor and creditor lien over Georgina’s car, if Georgina becomes insolvent and the car is sold to pay off
Georgina’s creditors, Mac will be paid for his work on the car before any other creditors will receive money.

What do you think?

A number of years ago, debtors could be put into prison for owing money to a creditor. Now that there
is no longer a so-called debtors’ prison, there is a greater need for creditors to ensure that they will be
paid by getting security for the debtor's obligation. What do you think are the positive and negative
aspects of putting debtors into prison?

Chapter summary

In this chapter, you learned the following about the law
of security:
Real security is an asset, or thing, that is provided as
security (but, not for use) for a debt owed by a debtor
to a creditor.
Both real security and personal security (by way of
suretyship) are advantageous for both the creditor and
debtor. For the creditor, the security provides them with
greater likelihood of ultimately getting back any debt (plus
other dues in law, like interest) owed to them by a debtor
in terms of a contract. For the debtor, they are more likely
to be granted credit (for example, by way of a study loan or
a loan to start a business) by a creditor (such as a bank), if
the creditor is confident that it has a secured debt.
Suretyship is personal security provided by a surety to the
creditor for the debt. An example would be where a parent

380 Chapter 23 | Chapter summary

acts as surety for her child’s study loan (the child being
the principal debtor) from a bank (being the creditor). The
surety’s duty is to pay the principal debtor's debt if that
debtor cannot pay back the debt; thus the surety’s obligation
is said to be accessory to the main debt. The contract is
between the creditor and the surety, or co-sureties.
A suretyship contract is created by agreement and a
written document.
A surety has certain rights against the creditor.
A suretyship contract normally comes to an end
when the main debt ends, but there are situations
where the surety is no longer bound, even though the
principal debtor still is.
A surety’s death normally means that their duties
pass to their estate.
‘There are different ways in which debtors can provide
real security for a loan. Different types of real security are:
™ amortgage @ a pledge = alien.
With a mortgage, the mortgagee obtains a real right
of security over the mortgagor's property until the
mortgagor repays the debt to the mortgagee. There are
three main types of mortgage, namely:
@ an express mortgage
@ a tacit mortgage
@ a judicial mortgage.
An express mortgage requires both agreement and a
public act (such as registration of the mortgage in the
deeds registry). Certain clauses are commonly found in
express mortgages, such as:
@ interest and use clauses
= foreclosure clauses
® calling-up clauses
= summary sale clauses
@ = pactum commissorium
= = rights and duties in the mortgage period
® termination clauses.
The five types of express mortgage are as follows:
= special mortgage over immovable property
= kustingbrief = participation bond
= covering bond = notarial bond.
Tacit mortgages do not require a public act (like
registration) for their creation, but rather arise
automatically in certain instances. An enrichment lien
is an example of a tacit mortgage.
Judicial mortgages are created by a court such that
once the court decides that a debtor does owe the creditor
money, goods (property) of the debtor are ‘attached’, This
means that the debtor has a judicial mortgage over them
until they are paid by the debtor or the goods are sold
by the sheriff of the court to cover the debt owed.
A pledge is created by agreement, and delivery of
the pledged item by the pledgor to the pledgee. In
simplified terms, the pledgee keeps in his possession an
item owned by the pledgor until the pledgor (who is
his debtor) repays the debt. A pledge does not give the
pledgee the right to use the pledged item.
A pledge of incorporeal property (such as shares in
a company) takes place by agreement and delivery of a
document that is evidence of the pledgor’s ownership of
the incorporeal property.
A lien is a right of retention in terms of which someone,
who is in possession of another's property on which he has
done work, has the right to keep the property until he is
compensated. A lien can be used as a legal defence against
a claim by the owner of the property for its return.
Two types of lien were discussed, namely:
® a debtor and creditor lien
® anenrichment lien.
In terms of a debtor and creditor lien, the debtor has
agreed to pay the creditor for work to be done. The
creditor may keep the item he has satisfactorily worked
on (because of this lien created) until he is paid by
the debtor for his work. A lien is used as a legal defence
against a claim by the owner of property for its return.
Under an enrichment lien, there is no agreement
between a debtor and creditor as to work which is
to be done and upon which the service provider
has then incurred expenses, Nonetheless, in certain
circumstances, someone who does a particular service
for a debtor has a right of retention over this property
under this category of lien. Whether such a lien will
arise depends both on the knowledge of the possessor
and whether the person acted in good or bad faith
(bona fide or mala fide) and the type of service provided.
In the case of possible creation of enrichment liens,
categories of service could be necessary, useful or luxurious.
= = If the work is necessary, then an enrichment lien arises
whether the service provider is bona fide or mala fide.
@ = If the work is useful, there is an enrichment lien if the
service provider is bona fide, but our law is unsettled
on this question if the service provider is mala fide.
® For luxurious expenses, only debtor and creditor
liens, not enrichment liens, may arise.
Chapter 23 | Chapter summary 381
Review your understanding

1. Complete the following sentence using one of the c) delivery

options below. Salvage and improvement liens are d) a,b andc above
types of: e) registration.
a) debtor and creditor lien Assume that you have established a construction
b) landlord’s hypothec business, and you require a large loan to buy capital
c) both debtor and creditor liens, and equipment, such as bulldozers. Discuss how real
enrichment liens security is created such that a bank may secure the
d) personal security loan that you seek.
e) none of the above. Briefly discuss the surety’s rights of excussion and
2. Complete the following sentence using one of the cession of action. In each instance, give a practical
options below. Necessary expenses: example of how the right could be exercised in a
a) never create a lien (even if the other business context.
requirements for a lien are present) List and discuss four clauses commonly found in
b) always create a lien (if the other requirements express mortgages. For one of these, draft a clause
fora lien are present) for a practical situation, which would set out clearly
c) are required for a pledge to be valid the rights of both mortgagor and mortgagee.
d) are irrelevant in determining whether a lien Using examples to illustrate your answer, discuss
will arise the factors that affect whether an enrichment lien
e) are none of the above. is established.
3. Jake's ship sinks without a trace off the East You wish to borrow R50 000 from the bank to
London coast. The following applies in respect of finance your Honours studies in 2018. Your aunt
the mortgage over the property: is willing to act as surety for the loan, but she first
a) ‘The mortgage continues. wishes to know what her rights and duties as surety
b) The mortgage comes to an end. would be. Provide this information to your aunt.
c) ‘The mortgage must have been registered to 10. How may a suretyship contract end?
be valid. Li. What is the legal effect of a lien?
d) ‘The bank will cover the losses. 12. Provide a practical example of when a service
¢) None of the above applies to the scenario. provider who has agreed to do particular work
4. Complete the following sentence using one of the for a customer would have lien over the item the
options below. A valid pledge requires: customer has left with the service provider.
a) intention to pledge by the pledgor 13. What is the legal effect of a lien?
b) intention by the pledgee for a pledge to be
created in their favour

Further reading

Van der Walt, A.J. and Pienaar, G.J. 2009. Introduction to the (More detail on security law is provided in this general introduction
Law of Property. 6th edn. Cape Town: Juta and Co. (Pry) Ltd to property law as a whole, albeit in far more detail than you
require for your Commercial Law university module/course.)

382 Chapter 23 | Review your understanding

 eiateyen cog

Labour law
ye
The main ideas
The impact of the Constitution of the Republic of South Africa, 1996, on labour law in South Africa
Who is an employee?
The Labour Relations Act 66 of 1995
Strikes and lock-outs
Dismissals and unfair labour practices
Disputes about dismissals and unfair labour practices
Unfair discrimination
Affirmation action
Monitoring and enforcing the Employment Equity Act 55 of 1998
The Basic Conditions of Employment Act 75 of 1997

The main skills

List the statutes that make up South African labour law.
Distinguish between an employee and an independent contractor.
Identify whether a worker is an employee under labour law.
Explain how disputes about organisational rights are resolved.
Discuss whether disclosure of information is an organisational right.
Tabulate the differences between protected and unprotected strikes.
Identify the different forms of dismissal.
Write a paragraph about automatically unfair dismissals.
Research dismissal for incapacity in the workplace.
Identify the provisions of the Basic Conditions of Employment Act 75 of 1997.

After completing their studies, most people enter the job market and apply for employment. Some
people start their own businesses or take over a family business. Employment law affects both the people
who are employed to work for someone else as well as those who need to hire staff for their business.
Employment law is also known as labour law. This chapter explains the current law governing the
employment relationship in South Africa.

We will look briefly at the relationship between the Constitution of the Republic of South Africa, 1996,
and labour law and consider the legal position of independent contractors, who work for someone else,
but who do not qualify for protection as employees in terms of our law. This chapter also looks at the
importance of collective bargaining, which is favoured by the Labour Relations Act 66 of 1995 (the
LRA). Collective bargaining allows groups of workers and employers to come together to create their
own proposal as to how people are going to work in a sector or industry. We deal also with strike law.
Because so much of labour law in legal practice is devoted to cases of unfair dismissal, a large part
of this chapter explains dismissal law. The chapter concludes by looking at some of the other important
statutes in our labour law.

Chapter 24 | Labour law 383

Before you start
Unemployment is one of the major problems facing South Africa at present. Some people argue that labour
laws should be relaxed so that companies can employ as many people as possible, even if the wages are very
low. Let us take a typical situation. A poor woman with three children is willing to do any work in order to
feed her family. You live in a large, double-storey house, which has not been cleaned since your last party.
You have only R10 left over as it is the end of the month. Do you think that our law allows you (or should
allow you) to hire the woman to clean your house for R10?

24.1 The Constitution and labour law

The Constitution of the Republic of South Africa, 1996, is the supreme law of the A trade union js an
land. If any law disagrees with the Constitution, that law has to change. However, the association of employees
Constitution does not provide a complete list of laws that must be followed. Statutory law formed to reguiate the
is made up of governmental regulations and Acts, or statutes. In this section, we will look relationship between
at what the Constitution and the legislation say about the employment relationship. employees and employers
and to improve the
incomes and working
24.1.1 The South African Constitution conditions of the
Section 23 of the Constitution of the Republic of South Africa, 1996, gives everyone the employees by collective
right to fair labour practices and gives every worker the right to: bargaining.
= form and join a trade union
® participate in the activities and programmes of a trade union When workers strike, they
@ strike to try to force their employer to take note of their demands regarding working stop work in order to try
conditions and/or low pay. to force their employer to
take note of their demands
regarding working
Section 23 also gives every employer the right to: conditions and/or low pay.
® = form and join an employers’ organisation
@ participate in the activities and programmes of an employers’ organisation.

There are also other sections of the Constitution that influence employment law. For example, The word person in this
Section 9 of the Constitution states that everyone is equal before the law and has the context includes juristic
right to equal protection from and benefit of the law. More importantly for labour law, persons such as companies
no person may unfairly discriminate directly or indirectly against anyone on one or more and close corporations.
Therefore, businesses
reasons, including race, gender, sex, pregnancy, marital status, ethnic or social origin,
employing workers will be
colour, sexual orientation, age, disability, religion, conscience, belief, culture, language subject to the provisions
and birth, of Section 9.
All rights contained in the Constitution's Bill of Rights may be limited. ‘The limitation,
however, must be reasonable and justifiable (in other words, be for a fair and good Reasonable and
reason) in an open and democratic society, based on human dignity, equality and freedom. justifiable means that the
For example, a person’s right to freedom of expression will be limited if that person is reason for the limitation
encouraging one group of people to kill another group of people. must be fair and good.

24.1.2 Labour law

Because of the serious issues facing the country regarding unemployment and working conditions, a
number of Acts make up our employment law. These Acts include:
@ the Labour Relations Act 66 of 1995 (LRA)
the Basic Conditions of Employment Act 75 of 1997 (BCEA)
the Employment Equity Act 55 of 1998 (EEA)
the Compensation for Occupational Injuries and Diseases Act 130 of 1993 (COIDA)
the Unemployment Insurance Act 63 of 2001

384 Chapter 24| Labour law

m =the Occupational Health and Safety Act 85 of 1993 (OHSA)
@ the Skills Development Act 97 of 1998
m= =the Employment Services Act 4 of 2014.

Acts such as the Broad-Based Black Economic Empowerment Act 53 of 2003 may, in addition,
indirectly influence employment law in the future.
The LRA and the other relevant statutes have effectively codified our labour law.
. 5 To codify means ‘to
This means that a number of the common law duties z
of employers
:
and employees, such 3 as organise or collect
the duty of an employer to take reasonable care of the worker's safety and the employee's together into a system’.
duty to maintain trust and confidence, have been specifically included in various statutes,
or given effect to by decisions of the courts.

Activity 24.1
1. Research the purposes of the LRA, the BCEA and the EEA.
2. List the Constitutional rights of employees and employers.
3. Debate with a friend what you think is the most important Act for labour law and why?

24.2 Who is an employee?

The LRA does not apply to members of the National Defence Force and the State Security Agency
(section 2). Nobody working for these government bodies will be entitled to any protection in terms of
the Act. In addition to this complete exclusion, a number of the protections provided by the LRA are
reserved for employees.
The definition of an ‘employee’ is wide-ranging. It includes:
™ any person who works for another person or for the State
= any person who receives (or is entitled to receive) any payment
@ = any other person who in any manner assists in the carrying on of the business of an employer (section 213).

In some cases, even an ex-employee or a job seeker falls within the definition (section 9 of the EEA). But the
term ‘employee’ specifically excludes an independent contractor. Independent contractors are generally
persons working under a contract for work where they will try to produce a specified result. By contrast,
employees are generally used by the employer for whatever tasks the employer chooses.
For example, domestic workers are considered to be employees. They would normally The dominant impression
be obliged by law to obey the lawful instructions of their employers. On the other hand, Saat ic atest that conciiors
a painter, who you have hired for a period of a week to paint your house, would be an a range of factors, such
independent contractor. It would be largely up to the painter to decide how to paint the as the extent of contro!
house. The painter would not have to take note of any tips you might wish to give her shown by the employer
regarding a better painting method. It is sometimes difficult to know whether someone over the employee, the
‘ ‘ . extent to which the
is an employee or an independent contractor. For example, Uber drivers are presently Sristeven forins pan of the
considered not to be employees in South Africa, although this principle is likely to be employer's organisation,
challenged. In deciding whether people are employees or independent contractors, the as well as factors such as
court usually tests all the factors present to arrive at a conclusion. The problem with this whether tax and other
test, known as the dominant impression test, is that there is no agreement as to which statutory deductions have
factors are the most important. been made from the
employee's salary.

24.2.1 Employees versus independent contractors

The following case provides an example of how the Labour Court has had to decide whether a group of
people were employees or independent contractors.

Chapter 24 | Labour law 385

 Medical Association of South Africa and Others v Minister of Health and Another
shy Ant: 8 | et: ee)

Principle
Workers who enjoy a great deal of independence, free from the control of the employer, are not
necessarily excluded from the definition of ‘employee’.
Facts

In this case, it was argued that district surgeons were part-time employees of the health
authority. The facts were as follows:
e The doctors could only take leave that was ‘duly authorised’.
e They received annual salary increases and reviews.
e They had Pay As You Earn (PAYE) tax (consistent with being an employee) deducted from
their salaries.

The court's finding

The court implied that the Health Department had kept control over the way in which the
doctors did their job. The doctors had effectively given over their ability to work, to the health
authority. In other words, instead of choosing to work as they pleased, the doctors would do
what the employer asked of them. This fact was shown by a clause in their contract that forced
the doctors to be available ‘at all times’ to do their job. In other words, even though the nature
of their qualifications meant that the doctors required less supervision than ordinary employees,
the doctors were found to be employees of the provincial health authority. This meant they were
entitled to the protection provided by the LRA.

The Labour Court has claimed that somebody who may have been called a “freelance writer’ is, in fact,
an employee in the following situation: When a writer is required to spend the whole of his working
time, writing the stories requested from one employer.
Conversely, the court has stated that an insurance salesman ora sales agent is an independent contractor
rather than an employee. The court based this conclusion on the argument that the ultimate purpose of a
salesman’s job is to produce a result (sell a product), rather than to provide a personal service.
From case law, we can summarise the differences between the contract of employment and the
contract of work as shown in Table 24.1:

Table 24.1 Contract of employment v contract of work

Contract of employment | Contract of work/independent contract

The object of the contract is the provision of
personal services.
The employee must personally answer to all the
employer's demands. The employee must work at
the times the employer wants her to work.
The employer can decide whether or not it wants
the employee to do the work.
Employees have to obey the lawful orders or
instructions given by their employers. Employers
are allowed to controi and supervise their workers
by telling them the way in which they are to work.
The object of the contract is the performance of certain
specified work or the production of a certain specified result.
Independent contractors do not have to do the work
themselves. They can sub-contract the work to others and
the work can be done in their own time.
Independent contractors have to do the specified work or
produce the specified results within the fixed time period
stated by the contract,
Independent contractors only have to produce the results
as specified in the contract. They do not have to obey any
specific additional orders of the employer. How independent
contractors do their work is up to them.

386 Chapter 24| Labour law

 P@eyeielamelme sil ses Zul’
An employment contract ends on the death of
an employee.
According to common law, an employment
contract comes to an end once the period
of service which has been stated in the
contract expires.
Contract of work/independent contract
An independent contractual relationship does not necessarily
come to an end on the death of either of the parties.
An independent contract comes to an end once the
task has been completed or once the required result has
been achieved.

24.2.2 When is a person presumed to be an employee?

Because of the difficulty in deciding whether workers are employees or not, the LRA was amended.
The revised LRA creates a presumption that a person is an employee if she earns less than an amount
specified by the minister of labour (section 200A). This figure is currently R205 433,70 per annum.
In addition, a person is an employee if one or more of the following factors are present:
The way in which the person works is subject to the control or direction of another person.
The person's hours of work are subject to the control or direction of another person.
If the person works for an organisation, that person forms part of that organisation.
The person has worked for the other person for an average of 40 hours per month for the last
three months.
The person is economically dependent on the person for whom he works.
‘The person receives the necessary supplies and other work equipment from the other person,
= = The person works for or provides services to only one other person.

In cases where one of these factors is present and the worker does earn less than the amount determined
by the minister, the responsibility shifts to the employer to prove that the person in question is not an
employee. The presumption will be that the worker is an employee and should receive protection by
the Act.
When the employer brings the contract to an end in an unfair or unlawful way, all employees are
entitled to protection by the law, provided there is a contract of employment.
‘The wording in a written contract between the parties will not affect whether the presumption
applies. Labelling a worker a ‘casual worker’ does not change whether a person is an employee, even
though companies sometimes try to get out of their obligations in terms of the Act by using this term.
Following recent amendments to the LRA, people are also presumed to be employees if they earn
under the threshold, having been appointed by a labour broker and placed with a client for more than
three months, or if they have been appointed for more than three months on a fixed-term contract basis
(section 198B(3)). There are, however, various exceptions to this (section 198B(4)).

Activity 24.2
Ruud works for Pay TV, and produces a weekly sports programme, for which he is paid. Ruud
has completed three years of a five-year contract, headed Contract of Work, he has signed
with Pay TV. In terms of the contract, Ruud can work from an office at Pay TV and must
report to a manager regarding the contents of each of his programmes, Ruud tries to attend
staff meetings but does not always do so. He always ensures that he behaves in a courteous
fashion by notifying Pay TV in advance when he will miss a meeting or is unable to be present
at work. Ruud pays tax to the Receiver of Revenue as a freelancer. Is Ruud an employee or an
independent contractor? Give reasons for your answer.

Chapter 24| Labour law 387

24.3 The Labour Relations Act
The main aim of the LRA is to put into practice the fundamental constitutional right to fair labour
practices. In this way, the LRA seeks to promote economic development, social justice, labour peace and
the democratisation of the workplace.
The LRA attempts to achieve these ideals by allowing and encouraging employees to join trade
unions and employers to join employers’ organisations. This is known as freedom of association.
The LRA also provides a framework in which the parties can bargain together to decide wages, terms
and conditions of employment and other matters of common interest. The Act also provides structures
to resolve disputes between employment parties.

24.3.1 Freedom of association

Every employee has the right to participate in forming a trade union or a federation of trade unions and
to join a trade union (section 4). As defined in section 24.1.1 above, the main purpose of a trade union
is to regulate the relationship between employees and employers, including any employers’ organisations.
The National Union of Metal Workers of South Africa (NUMSA) is an example of a South African
trade union.
No person may discriminate against an employee for exercising her right to join or form a trade
union. Nor may any person discriminate against an employee for exercising any other right given to
employees by the LRA.
Every employer has the right to form or join an employers’ organisation or a federation of
employers’ organisations. No person may discriminate against an employer for exercising such a right.
An employers’ organisation means any number of employers who come together for the purpose of
regulating the relations between employers and employees or trade unions. The Chamber of Mines of
South Africa, founded in 1889, is an example of an employers’ organisation.

24.3.2 Organisational rights

A representative trade union means a registered trade union that is sufficiently representative
of the employees employed. In other words, there are enough employees who are members ee
: =e may consist of two
of the union, although nota majority of workers, to allow the union to be entitled to some _6¢ more registered trade
rights. The parties sometimes argue about whether or not a union is sufficiently representative. unions acting jointly.
In the absence of an agreement, a sufficiently representative trade union is generally a trade
union that has as its members around 30% of employees at a workplace. A majority representative trade
union is a trade union, which has more than 50% of the employees as members.
Representative trade unions enjoy special rights, which sometimes burden the employer with
corresponding duties. These are known as organisational rights and must be granted by the employer.
A representative trade union has the right to:
@ access to the workplace in order to recruit members and hold meetings
® deduction of trade union subscription fees or levies if an employee member authorises the employer
in writing to deduct these fees or levies
® reasonable leave during working hours for an employee who is an office-bearer of a representative
trade union to perform her trade union activities.

A sufficiently representative trade union enjoys fewer rights than a majority representative trade union
because the union has a lesser percentage of employees as members. In terms of recent amendments to
the LRA, however, an arbitrator may grant organisational rights if a trade union, or trade unions acting
jointly, represent a significant interest or a substantial number of employees in the workplace (despite
not meeting a set threshold of representation established by a collective agreement),
Where the trade union’s members are made up of the majority of employees employed by an
employer in a workplace, the organisational rights described below will also be enjoyed.

388 Chapter 24| Labour law

- ‘ iv y
Members may elect trade union representatives so that these representatives may Trals undon
assist and represent employees in disciplinary and grievance proceedings. representatives are
® Disciplinary proceedings are started when an employee is charged with an offence. members of a trade
A grievance proceeding is when one worker complains about the conduct of another union elected to speak
employee or a manager. Employees, who do not know their rights as employees, often on behalf of employees in
pay = Pp”) 8 Ber a workplace.
need help to defend themselves at disciplinary hearings.
@ = The trade union is entitled to receive certain information from the employer so that
the trade union representative can effectively perform her functions. For example, the union is
entitled to see the work record of an employee who is being charged with repeated misconduct.
Disputes about organisational rights must first be conciliated and if not resolved, the Conciliation is a process
matter will be arbitrated. ‘The arbitrator's decision will be based on the LRA. where an independent
When the Labour Court is asked to decide a case, we say that the court is adjudicating _ PEFS0N, 4 Conciliator, tries to
the matter. Adjudicative or decision-making procedures include arbitration by the oe sled iclbnteees
Commission for Conciliation, Mediation and Arbitration (CCMA) or bargaining council Be
and adjudication by the Labour Court, as opposed to conciliation, which is a process that AN writen
aims to get arguing parties to reach agreement. to both cides of the
The CCMA was created by the LRA to deal with most labour disputes so that the courts argument and makes
would not be filled with labour matters. The CCMA is staffed by commissioners who are a binding decision that
trained in conciliation and arbitration techniques. settles the dispute.

Added value Representative trade unions v trade union representatives

Do not get confused between a representative trade union and a trade union representative.
A representative trade union is a registered trade union whose members represent a sizeable
percentage of the employees employed in a particular industry.
A trade union representative, on the other hand, is a member of a trade union elected to
further the interests of the employees in a workplace.

24.3.3 Collective agreements

One of the main purposes of the LRA is to help settle labour disputes. To this end, the LRA favours
centralised bargaining. Groups of employers and employees can enter into a group or collective
agreement to regulate their relationship.
A collective agreement is a written agreement that deals with the terms and conditions of
employment or any other matter of mutual interest to employers and employees. A collective agreement
is concluded by one or more registered trade unions, on the one hand and, on the other hand:
®@ one or more employers
= one or more registered employers’ organisations
@ one or more employers and one or more registered employers’ organisations.

A collective agreement binds the parties who enter into the collective agreement. The agreement also
applies to employees who are not members of a trade union participating in the agreement. These points
apply if:
= = the employees are identified in the agreement
@ = the agreement expressly binds the employees
@ the trade union has a majority of employees in the workplace as its members.

Any dispute about the interpretation or application of a collective agreement must also be resolved by
way of conciliation and, if that fails, arbitration.

Chapter 24| Labour law 389

Agency shop agreements
A registered trade union that has a majority of the employees employed as members may conclude a
particular kind of collective agreement, known as an agency shop agreement with an employer or employers’
organisation. An agency shop agreement requires the employer to deduct an agreed agency fee from the
wages of employees who have chosen not to be members of the trade union, even though they are entitled
to be members. The deduction from their wages is fair because these workers get the benefit of the time the
union spends in negotiating to improve the conditions and wages at work. The union's members have to
pay union levies, so the agency shop deduction ensures that other employees do not get this benefit free.
‘The amount deducted by the employer must be paid into a separate account, which is administered by the
trade union. The funds must be used to promote or protect the socio-economic interests of employees.

Closed shop agreements

In a similar way, a majority representative registered trade union may conclude a collective agreement
known as a closed shop agreement. A closed shop agreement requires all employees covered by the
agreement to be members of the union,
For a closed shop agreement to be binding, all the employees to be covered by the agreement
must vote on whether to have a closed shop. Two-thirds of the employees who voted must have
voted in favour of the closed shop agreement for the agreement to be valid. Again, the
money received asa result of such an agreement must be used to advance or protect the Conscientious objection
socio-economic interests of employees. means that an employee
When a closed shop agreement is in place, the employer may fairly dismiss an employee has a moral problem
who refuses to become a member of the union as long as the refusal is not based on grounds Se 8
of conscientious objection.

24.3.4 Bargaining councils

Registered trade unions and employers’ organisations may establish a bargaining council for 4 sector is an industry or
a sector and area. Bargaining councils must have constitutions and must be registered with service.
the Registrar of Labour Relations.
The functions of a bargaining council include:
concluding collective agreements
enforcing those agreements
preventing and resolving labour disputes
performing dispute resolution functions
establishing and administering a fund to be used for resolving disputes
promoting and establishing training and education schemes
establishing and administering pensions, provident funds, medical aid, sick pay, holidays
unemployment and training schemes or funds.

Added value Pension and provident funds

Both pension and provident funds try to provide benefits to employees when they stop working.
Under a pension fund, at least two-thirds of the final benefit must be paid as a pension for the
rest of the pensioner’s life. Under a provident fund the full amount of the available benefit may
be taken as a lump-sum cash payment.

No trade union or employers’ organisation is forced to be a party to a bargaining council. But once an
agreement is reached at a bargaining council, it does set a standard for that particular industry. Agreements
that are properly concluded by the representatives of all parties can be extended to everyone in that particular
industry. An example of a bargaining council is the one that has been established for the public service.

390 Chapter 24| Labour law

24.3.5 Statutory councils
A trade union or employers’ organisation whose members make up at least 30% of the employees in
a sector and area can apply for the registration of a statutory council. This is only possible where no
bargaining council exists for that sector and area.
Parties to a statutory council can draw up agreements on wages and working conditions but these
agreements cannot be extended to parties outside the statutory council.

Activity 24.3
1. The Sport and Recreation Workers Union has 45% of the employees at the South African
Sports Company as members. During a dispute about wage increases, the union wants
the company to disclose information to it regarding the profit that the company is making
so that it can represent its members better. The information will help the union argue for
higher wages.
@) Is disclosure of information an organisational right?
b) Will the union succeed in its claim? Give reasons for your answer.
2. How are disputes about organisational rights resolved?

24.4 Strikes and lock-outs

The law defines a strike as the deliberate refusal to work, or the slowing down or obstruction of work,
either partially or completely, for the purpose of remedying a grievance or resolving a dispute in respect
of any matter of mutual interest between the employer and employees. The LRA allows employees to
participate in strikes if they meet certain requirements. A strike that meets the requirements of this Act is
called a protected strike. A strike that fails to meet the requirements will be unprotected and may easily
result in employees being fairly dismissed.

Saccawu: Strike is impacting on Shoprite

A strike at Shoprite stores the South African Commercial, the greater of a wage increase
around South Africa enjoyed Catering and Allied Workers’ of R300 or 10%, as well as
widespread public support and Union (Saccawu) said on improved working conditions.
is impacting on the company, Tuesday.Saccawuhasdemanded — Shoprite has offered R265.
Source: mg.co.za/article/2006-08- 15-saccawu-strike-is-impacting-on-shoprite

24.4.1 What is a strike?

Every employee has the right to
who are or have been employed
by these several employers. The
resolving a dispute. The dispute
employee, such as the wages the
strike. To qualify as a strike, the refusal to work must come from persons
by the same employer or, if the strike is against several employers,
refusal to work must be for the purpose of remedying a grievance or
must be about a matter of mutual interest between employer and
employer pays to employees.

PAs (e( SoBe Rights disputes v mutual interest disputes

Note the difference between rights disputes and mutual interest disputes. Employees typically
do not strike over rights disputes, such as the right not to be unfairly dismissed or the right not
to be subjected to unfair labour practices. Rights disputes typically get resolved by conciliation,
arbitration and adjudication, which we will explain later.
Mutual interest disputes such as disputes about wage increases may be resolved through the
power-play of strike and lock-out.

Chapter 24| Labour law 391

24.4.2 What is a lock-out?
Every employer has recourse to lock-out in certain situations. Lock-out means that the Racoinsa ke the actor
employer excludes employees from the workplace for the purpose of forcing employees to resorting to a particular
accept management's demands on any matter of mutual interest between employer and course of action when
employee. This recourse applies whether or not the employer breaches those employees’ in difficulty.
contracts of employment in the course of excluding them from work. In other words, even
if the contract of employment states that the employee is always allowed onto the employer's premises to
work, the employer's recourse to a lock-out, where allowed, will take the place of this contractual right.

24.4.3 Protected strikes and lock-outs

In order for a strike or lock-out to be protected by the LRA, a matter of mutual interest must
have been referred to a bargaining council or to the CCMA. A commissioner must have issued a
certificate confirming that the dispute remained unresolved. Or, 30 days must have passed since the
council or the CCMA received the referral.
After that, in the case of a proposed strike, the employer, council or employers’ organisation
(whichever applies) must be given at least 48 hours’ notice, in writing, of the start of the strike. Employers
must give similar notice to either trade unions, employees or a council in the case of proposed lock-outs.
In the case of a proposed strike or lock-out where the state is the employer, the state must give at least
seven days’ notice of the start of a lock-out. Similarly, the state's employees must give at least seven days’
notice of the start of a strike.
The requirements for a protected strike or lock-out mentioned above do not need to be followed in
these circumstances:
@ the parties to the dispute are members of a bargaining council and the dispute has been dealt with
according to the Constitution of the council
the strike or lock-out follows the prescribed procedures of a collective agreement
the strike is in response to an illegal lock-out
the lock-out is in response to an illegal strike
an employer refuses to agree to a request from employees or a trade union not to carry out a
one-sided change to the employees’ conditions of employment.
‘The following legal consequences apply to strikes and lock-outs that are protected by the LRA:
= A person does not commit a delict or a breach of contract or expose himself to any civil claim.
= Anemployer is not obliged to pay an employee for services that the employee does not give during a
protected strike or lock-out. This is in terms of the ‘no work no pay’ principle.
= An employee may generally not be dismissed for participating in a protected strike.
= Anemployer can nevertheless dismiss an employee for misconduct during the protected strike or for
reasons based on the employer's operational requirements or business needs.
‘These are explained more fully below.

24.4.4 Unprotected strikes and lock-outs

The following legal consequences apply to unprotected strikes and lock-outs:
@ = The Labour Court can grant an interdict ordering any person to stop the unprotected activity 4p interdict is a court order
— such as illegally striking or illegally locking out the employees. The Labour Court can _ that orders someone to do
order the payment of compensation for any losses that result from the unprotected activity. oF not to do something.
m = In general, the Labour Court may not grant any interdict unless 48 hours’ prior notice
of the interdict application has been given to the respondent. The person seeking a legal
@ = If atleast 10 days’ notice of the proposed strike or lock-out has been given to the remedy is the applicant
applicant, the applicant should give at least five days’ notice to the respondent that it econo au
will apply for an interdict.

392 Chapter 24| Labour law

= = If employees participate in or promote an illegal strike, the employer is entitled to dismiss the
employees, provided the dismissal follows a fair procedure.
Essential service is the
24.4.5 Limitations on strikes and lock-outs term: used toreferto
No person may take part in a strike or lock-out, or in any related conduct, if: any of the following: the
= = the person is bound by a collective agreement that prevents a strike or lock-out in Parliamentary service,
respect of the dispute ae ae Police
@ = theiss
person is bound by. an agreement that provides that the dispute must be referred to ee ee
which, if interrupted,
AST: would endanger the life,
@ = the nature of the dispute is such that it could be referred to arbitration or the Labour personal safety or health
Court in terms of the LRA of the whole or any part
= the person is employed in an essential service or a maintenance service and is bound _Of the population.
by an arbitration award, or a collective agreement, or an award made by the Minister
of Labour that regulates the dispute An arbitration award is
® a determination on employment conditions was made in terms of the BCEA, during the binding decision of an
ice arbitrator.
the first year of the determination.

Activity 24.4
1. Tabulate the differences between protected and unprotected strikes.
2. Explain to a friend the circumstances when a strike would be unprotected and when an
employer would not be allowed to take part in a lock-out.

24.5 Dismissals and unfair labour practices

The most common cases requiring knowledge of employment law are cases that involve claims for
unfair dismissal.
The LRA is the most important statute for explaining the law in this area. The LRA deals with
the following:
= What is a dismissal and what is an unfair labour practice?
® When will a dismissal be fair or unfair?
= = =What is the proper procedure to follow when dismissing workers?
a What can you do if you are unfairly dismissed or have been subjected to an unfair
labour practice? A dispute is a
disagreement or conflict.
= = What is the proper way to resolve these disputes?

24.5.1 What is a dismissal?

We have explored the legal factors that help to classify a working relationship as that between employer
and employee. We will now consider how that relationship can come to an end.
Before we can answer the question as to whether an employee has been unfairly dismissed, we must
consider whether or not a dismissal has taken place under section 186(1) of the LRA.
The concept of dismissal is different to that of unfair dismissal. Courts will, in all cases, first look
to see whether or not an employee has been dismissed before considering the issue of whether such a
dismissal is unfair.
We saw that the employee usually has to prove that he is an employee (unless the A balance of probabilities
presumption referred to above applies). Similarly, it is the responsibility of the employee refers to the most
to prove that she has been dismissed. ‘The employee will be able to do this on a balance likely explanation or
of probabilities (since this is a civil matter). This means that if the employer denies that interpretation of the facts,
the employee was dismissed, the employee has the responsibility to produce the necessary based on the evidence.
evidence to prove that a dismissal has indeed occurred on a balance of probabilities.

Chapter 24| Labour law 393

 The definition of dismissal is much wider than you may think. People think of dismissal as referring
only to the situation where an employer fires an employee. But what about cases where the employee has
resigned because the employer has made life at work impossibly difficult? Or when the employer refuses
to allow an employee to come back to work after she took leave in order to have a baby? Depending
upon the circumstances, both of these cases can meet the definition of dismissal as contained in the LRA.
In fact, the Act’s definition of dismissal provides for six different types of situation.
These are:
1. termination with or without notice Tin MaRNGn GLIne
2. non-renewal of fixed-term contracts context of labour law
3. not being allowed to resume work after maternity leave refers to the ending of a
4. selective re-employment contract of employment.
4. constructive dismissal
6. resignation by employees after transfer of business.

We will look at each situation in more detail.

Termination with or without notice

Probably the most common type of dismissal occurs where an employer brings a contract of employment
to an end, either by giving an employee notice or without giving notice. The employer usually gives the
employee notice in the form ofa letter, advising the employee that his contract of employment is going
to come to an end on a certain day. In this type of dismissal, the employer brings the contract to an end,
So, any act that shows that the employer thinks of the contract as having come to an end will confirm
this definition of dismissal. The test is whether the employer's intention was to bring the contract to
an end.

Non-renewal of fixed-term contracts

A fixed-term contract is an agreement that lasts for a certain and specified period of time. A fixed-term
contract can also come to an end when the specific project or event for which the work was being done
is completed. There is nothing to stop an employer from employing someone on the basis of a fixed-term
contract that comes to an end after a limited period of time. But, if the employer does not renew the
contract at the end of such a period of time, this may amount to a dismissal, if the employee had a
reasonable expectation that his contract would be renewed.
Let us consider an example: Kavita works for Khush as a dental assistant. She is an On probation is a test
employee who was first employed two years ago on probation for a period of a year. Kavita period to make sure that
receives a fixed-term contract of six months to train as a dental assistant for Khush. At the —_ the employee has the
end of six months, Khush congratulates Kavita on the work she has done and offers her a ability to do the job for
further contract of six months, together with an increase. At the end of the second period which she was hired.
of six months, Khush offers Kavita a contract for a period of one year, with medical aid in
addition to her salary. Towards the end of this contract, Khush tells Kavita that he will unfortunately not
be able to offer her a further contract as the position is going to be filled by someone else.
Note that Khush’s failure to renew the contract would only allow Kavita to successfully prove that a
dismissal had taken place. Khush could still prove that he did not renew the contract for a good reason and
that he did so by following correct procedure. But, this is the next step, which we will deal with below.
Case law has given us some indicators to help assess whether an employee's claim that she expected
the contract to be renewed, is reasonable.
If an employer made promises to the employee, this will often be sufficient to create a reasonable
expectation in that employee's mind. Another factor in favour of a dismissal having taken place is whether
or not the employer has renewed an employment contract with the employee a number of times.

394 Chapter 24 | Labour law

 To prevent this expectation from arising in the mind of the employee, employers frequently include a
clause in the contract, which reads as follows:

The employee understands that she has no expectation that this contract will be renewed and
no renewal of this contract will take place unless the employer gives notice to the employee in
writing of the intention to renew.

This kind of clause might help the employer persuade a court or arbitrator that the employee could not
reasonably have expected a renewal of the contract. But the clause will not be the only factor considered
by the court or arbitrator.
‘There are a number of ways in which the court or an arbitrator will consider the To imply something
employer to have implied that a fixed-term contract of employment with an employee will means ‘to hint at or
be renewed. suggest something rather
For example, evidence may show that the employee concerned was going to be involved _ than stating it directly’.
in work that only began after the end of the fixed-term contract. In this case, the arbitrator
may find that the employee reasonably expected the contract to be renewed — at least until the end of the
work in which he or she was to be involved.
Also, bear in mind that following recent amendments to the LRA: an employee earning under the
prescribed threshold (currently R205 433,70) may claim to be a ‘deemed permanent’ employee if he has
been appointed on a fixed-term contract basis for in excess of three months and one of the exceptions
listed in the Act does not apply. Exceptions to this provision include seasonal workers, contract workers
who have already retired and are thereafter appointed on contract, and employees working on a special
project or a project involving external funding.

Maternity leave
In terms of the BCEA, a female employee is entitled to four consecutive months’ maternity leave. In
addition to this, the employee may be entitled to take maternity leave in terms of a collective agreement
or in terms of her contract of employment.
If the employee has taken all her maternity leave and the employer then refuses to allow her to come
back to work, this is considered to be another form of dismissal.

Selective re-employment
An employer dismisses a large number of workers because the company is losing money, but it promises
to consider re-employing workers if the situation improves. The employees were all fairly dismissed. But
if the employer later chooses to rehire only a certain number of the workers who lost their jobs, those
who have not been re-employed may claim that a dismissal has taken place. The reason for this situation
being classified as a dismissal is that the employer gives no explanation as to why certain workers have
been re-employed, while others remain unemployed.

Constructive dismissal
In this case, it is the employee who terminates the contract of employment and not the employer. This
is why this type of dismissal is referred to as constructive dismissal. Normally, when this happens, the
law considers the employee to have resigned from employment and there can be no claim for unfair
dismissal. But if the employee can prove that she resigned because the employer made continued
employment intolerable, this is constructive dismissal and the employee may succeed in a claim for
dismissal. A situation that is merely inconvenient will not be enough. The emphasis is on the effect that
the employer's conduct has on the employee continuing in employment.

Chapter 24| Labour law 395

For the employee to succeed with such a claim, the employee has to prove:
= = that the employee brought the contract to an end
@ that the reason for the employee resigning was that the employer made continued employment unbearable
@ = that there was no other reasonable option available to her.

The key to an employee proving constructive dismissal rests on whether the intolerable situation can be
proved. The feelings of the employee on his own will not be enough to convince a court or arbitrator that
the situation was intolerable. The employee’s feelings must also have been reasonable. The employee must
show the court or arbitrator that her resignation was a direct result of the employer's conduct. If the real
reason for the resignation was that the employee received a better job opportunity, there can be no talk
of constructive dismissal. To succeed with the claim, the employee must show that she would have carried
on working for an indefinite period if the unbearable situation had not been created by the employer.

Added value Proving constructive dismissal

In general, it is very difficult for employees to prove that they have been constructively dismissed.
Although the intolerable circumstances have to be more than just temporary in nature,
remember that even a single event or incident can sometimes be enough for a reasonable
employee to feel that the employment relationship cannot continue.
Cases where a claim for constructive dismissal has succeeded include:
e cases of sexual harassment by an employee's superiors
e abuse and assault
e failure to pay the employee's salary
e unfair disciplinary action taken by the employer.
But where the employer gives one unreasonable instruction, this will generally not be enough to
justify a finding of constructive dismissal, especially when the employee chooses not to follow
available company procedures before resigning.
A claim for constructive dismissal will not succeed in cases where a fellow employee has
created the intolerable circumstances without the knowledge of the employer. Also, constructive
dismissal will not apply where the circumstances were out of the employer's control.
A test of whether the situation was intolerable is to look at any options the employee may
have had before his decision to resign. If the employee had no reasonable option other than
to bring his contract to an end, then it is likely that the employee will succeed in proving a
constructive dismissal — as long as the other requirements are present.

Activity 24.5
Tasneem is a doctor employed at a private medical centre called The Health Centre (Pty) Ltd in Port
Elizabeth. Tasneem earns R10 000 a month. She is also entitled to a bonus from The Health Centre
for every patient she sees after the first ten patients every day. Tasneem is unhappy because her
contract of employment promises her two nurses to assist her. For the past year, she has had only
one nurse as the company alleges that it is in financial difficulty, Tasneem is especially upset because
she feels she is missing out on an extra R5 000 a month as she cannot see more patients without the
additional help. So Tasneem looks for another job. She applies for and succeeds in her application
for a job at Groote Schuur Hospital at a salary of R20 000 per month. She is very happy with the job
offer, especially because she has always wanted to live in Cape Town and considers this hospital to
be the best in the country. She resigns from The Health Centre and claims constructive dismissal.
Discuss with a classmate whether Tasneem is likely to succeed in her claim, giving reasons for
your answer.

396 Chapter 24| Labour law

Resignation by employee after transfer of business
In the case of a business being taken over by a new employer, an employee may resign and claim a
dismissal if her new conditions of employment are less favourable than they were before the business was
sold. The employee must prove that the conditions of employment offered by the new employer differ
significantly from the previous working conditions. In order to prevent such claims, the new employer
must place employees on terms and conditions of service that are substantially similar to those provided
by the previous employer.

Added value Other ways in which employment can come to an end

There are also ways in which the contract of employment can come to an end outside of the
provisions of the LRA. For example, you will remember from Chapter 6 that there are certain
contracts that are void. Void contracts of employment may be ended at any time.

24.5.2 What is an unfair dismissal?

In terms of the LRA, every employee has the right not to be unfairly dismissed. There are only three
types of dismissal that are considered to be fair. Dismissals for any other reason are unfair. There is
also a special category of unfair dismissals that are considered to be so bad that they are referred to as
automatically unfair. Automatically unfair dismissals often result in a more severe penalty being paid by
the employer. Remember that an employer has to prove that a dismissal is unfair for one of the three
reasons allowed by the Act and that the dismissal was carried out following a fair procedure.

24.5.3 Automatically unfair dismissals

Our law considers certain types of dismissal to be especially serious. The LRA names eight situations that
are considered to be automatically unfair dismissals:

1. ‘The employee took part in or indicated that he was going to take part in a protected strike or
protest action.
2. The employee refused to do the work normally done by a worker taking part in a protected strike
(unless that work was necessary to prevent danger to health, personal safety or life).
3, The employer forced an employee to accept a demand relating to a matter that should have been
negotiated between the employer and the employee because it was of interest to both parties.
4. The employee took action against the employer by exercising a right given by the LRA or by
participating in proceedings set up in terms of the LRA.
5. The employee was pregnant or intended to fall pregnant (any other reason for dismissal that is
related to an employee's pregnancy will also be automatically unfair).
6. The employer unfairly discriminated against the employee, directly or indirectly, for any arbitrary
reason (examples of arbitrary reasons would include, but are not limited to: a person's race, gender,
sex, ethnic or social origin, sexual orientation, age, disability, religion, conscience,
‘ ni ni . . veh An arbitrary decision is
belief, political opinion, culture, language, marital status or family responsibility), oa
one based on personal
7. The business in which the employee worked was transferred as a going concern, impulse or prejudice or
8. ‘The employee revealed information that is protected in terms of the Protected for a reason not allowed
Disclosures Act 26 of 2000. by law.

Chapter 24 | Labour law 397

 Ps fete BYES When is a business a going concern?

We say that a business is a going concern when the business is operating successfully and is
expected to continue doing so into the future. When the business is sold to a new owner, the
business may be transferred as a going concern, complete with all the essentials for the business
to continue operating, including the staff.

Dismissals will also be automatically unfair if the employer, in dismissing the employee, breaches the
right to freedom of association; for example, the employer prevented an employee or a person seeking
employment from belonging to a trade union.

Added value Unfair dismissal?

A dismissal is normally automatically unfair if the reason for the dismissal is that the employer
unfairly discriminated against an employee. But the dismissal may be fair if the employee has
reached the company’s ordinary retirement age or if the reason for the discrimination is based on an
essential requirement of the job. For example, it is fair to require pilots to have perfect eyesight.

Activity 24.6
Benny works for a religious organisation as a cleaner, After he has been employed for six months,
the religious organisation finds out that Benny is a homosexual. Even though his work is of a high
standard, the head of the organisation believes that it is bad for the organisation's image to be
employing a homosexual and dismisses Benny. She also dismisses Freddie the gardener, because
she heard that Freddie had taken some money from the organisation's donation box. In fact,
Freddie is completely innocent of this. Assume that both Benny and Freddie are employees.
Write a paragraph explaining whether either of these dismissals can be classified as
automatically unfair. Then pay a visit to your own religious or community organisation and find
out what its policies are on such issues. Decide whether its policies are in line with the law.

24.5.4 Three fair reasons for dismissal

The LRA maintains that there are three fair reasons for dismissal.
1. Dismissals related to the conduct, or behaviour, of the employee may be fair. In other Capacity refers to the
words, an employee can be fairly dismissed if she has committed misconduct or is employee's mental and
guilty of unacceptable behaviour. A common example of misconduct is theft at work. _ physical ability to do the
2. Dismissals related to the capacity of the employee may also be fair. An employee can —_‘J0® Of work for which he
be fairly dismissed if he is incapacitated by illness or by inability and cannot do the was hired.
work required. :
3. Dismissals linked to the operational requirements or financial affairs of the employer _ "ability to do the work
. . . . : as required is known as
may be fair. For example, a gold mine affected by the downturn in the gold price can pnetonneice
fairly lay off workers.

We will deal with each of these reasons below. But it is important to remember that in each of these
cases, the employer must prove not only one of the three fair reasons for dismissal, but also that the
dismissal followed a fair procedure. We can therefore summarise three issues that need to be addressed
when considering the fairness of a dismissal:
1. The employee must prove that she is an employee and has been dismissed in terms of one of the six
types of dismissal discussed in the previous section.

398 Chapter 24 | Labour law

 2. The employer will have to prove that there was a fair reason for dismissing the employee. Failure
to do so will result in the dismissal being classified as substantively unfair, in other words, without
good reason or substance, and so unjustifiable.
3. ‘The employer will have to prove that he followed a fair procedure in dismissing the employee.
Failure to do so will result in the dismissal being classified as being procedurally unfair.

So, a dismissal will be fair only if there is a fair reason for the dismissal and the proper procedure was
followed. We will consider an example.

Case study Is this a fair dismissal?

Vikash is a lecturer at a university in Gauteng. He is very technologically minded, and he always

lectures using a laptop. Vikash has a class of 400 students. During a break midway through a
lecture, Vikash steps outside the lecture venue to talk to a student. Another lecturer employed
by the university, Roger, who does not have the money to buy a laptop and who is jealous of
Vikash, comes into the lecture venue and steals the laptop in front of most of the class. When
Vikash returns and searches for the laptop, his class tells him what has happened. Vikash reports
the matter to his boss, the Dean, who immediately confronts Roger, finds the laptop in his
possession, and tells him to ‘Get lost and never come back’. Is this a fair dismissal?
As the facts tell us that Roger is an employee, we can accept that he will have no problem
proving this.
But, Roger must still prove that he has been dismissed. In this case, and assuming that the
employer referred to is somebody in the university structure who has the power to dismiss
people, Roger will succeed in proving that the employer (the university) has terminated the
employee's (Roger) contract of service without notice.
At this stage, the question of unfairness has not been considered yet. It is only at this stage
that the need to prove a fair reason and a fair procedure shifts to the university. If the university
can prove both a fair reason for dismissal and that a fair procedure was followed, the dismissal
will be fair and Roger will have no claim for an unfair dismissal. The university will need to prove
this using the balance of probabilities test with which you are already familiar. The balance of
probabilities test must be satisfied in labour cases.
It is probable that the reason for Roger's dismissal is a fair reason, namely that he has
committed misconduct in the form of theft. Itis also probable, however, that the dismissal will
be found to be procedurally unfair. For example, Roger was not given a hearing prior to his
dismissal where he could have explained why he took the laptop.

You should be able to see from this example that the requirements ofa fair reason and of fair procedure
for dismissals are separate from each other. This means that it is possible for dismissals to be either
procedurally and substantively unfair, or only unfair because of a lack of either a good reason or a
fair procedure.
The LRA includes a Code of Good Practice that outlines the thought process that employers,
arbitrators and judges should follow before deciding upon the fairness of a dismissal. Below isa brief
summary of the most important principles of this Code.
Various Codes of Good Practice exist, including Codes of Good Practice on Picketing and on the
handling of Sexual Harassment cases. Codes are useful to provide additional guidance to decision
makers, such as chairpersons of disciplinary tribunals and commissioners at the CCMA or Bargaining
Councils, on how the law should be interpreted.

Dismissal for misconduct

Chapter 24 | Labour law 399

According to the Code of Good Practice, the following questions should be asked in cases of misconduct:
@ Is there a rule which applied to that employee's conduct in the workplace or which was in some
other way relevant to the workplace?
Is the rule reasonable and valid?
Did the employee actually break the rule?
Was the employee aware of the rule, or should she have been aware of it?
Has the rule been applied consistently by the employer?
Was dismissal the correct punishment for the employee breaking the rule?

Now we will deal with each of these questions in more detail.

Is there a rule?
‘The starting point for answering this question is to look at the terms of the contract which governs
the relationship between the parties. The contract itself cannot, of course, set out in precise detail
every single rule that the employee must obey. The court or tribunal will not hesitate to imply terms
in the signed contract so that the employee actually has to meet the standards expected by employees in
terms of the common law, such as the duty to obey a reasonable command given by the employer.
Also, many companies have a set of legal rules that are contained in a document referred to as a
disciplinary code. The rules may also be listed in the employee's contract of employment.
A disciplinary code explains the types of offence against which the employer will take action. The
disciplinary code often specifies the usual penalty for a specific offence. For example, it is usual to
dismiss employees for serious misconduct, such as sexual harassment, sleeping on duty, unauthorised
possession or use of the employer's property, fraud, drug use, drinking on duty, dishonesty, assault,
damage to property, absence from work without permission and racist remarks.
Is the rule reasonable and valid?
For a rule to be valid and apply to an employee, the employer must show that the rule Ifa rule ls unlawful, the
is not unreasonable or unlawful. An employee cannot be forced to obey rules that are rule will not be valid.
against public policy or that are not relevant to the employee's work. For example, a rule
that employees working with chemicals inside a laboratory must wear face masks is reasonable. But it
will not necessarily apply to a person who is employed as a security guard outside the laboratory door.
If the security guard were dismissed for failing to wear a face mask, the dismissal would probably be
substantively unfair, because the rule is not valid or reasonable as far as the security guard is concerned.
Did the employee break the rule?
To decide if the employee broke the rule, the employee's conduct is compared to the rule. For example,
ifa scientist working in the laboratory was on her way out for a smoke break and removed her face mask
before she left the laboratory, the scientist would be guilty of breaking the rule.
Did the employee know of the rule?
An employee can be guilty of misconduct only if she broke a valid and reasonable rule of the workplace
and was aware (or should have been aware) of the rule. Let us say it was the scientist's first day at work
and she had not yet been given a copy of the company’s disciplinary code of conduct. She may be
found not guilty of misconduct because she was not aware of the rule about wearing a face mask in the
laboratory and nor could she be expected to know about the rule.
The situation may be complicated if it can be shown that there were a number of signs displayed in
the laboratory, reminding employees never to remove their masks while inside that room. The company

400 Chapter 24 | Labour law

might then argue that the new scientist should have been aware of the rule. The employer might also be
able to prove that the scientist should have been aware of the rule from her previous working experience
in a similar laboratory environment.

Added value Be informed

Awise employer will always make sure that each new employee signs a contract that explains
the more important rules and procedures followed by the company. The contract will set out the
penalties in the event of the employee breaking any of the rules. The employer can also publish
certain rules on notice boards. This will prevent an employee from arguing that she was unaware
of a company rule. The law does not expect a company to put every single disciplinary rule on
paper. On the other hand, the law does expect employees to use their common sense with
regard to their own conduct. For example, the employee must realise that common-law crimes,
such as murder, rape and theft will also amount to disciplinary offences for which the employee
can be dismissed.

Has the rule been consistently applied?

For an employer to find an employee guilty of knowingly disobeying a valid and reasonable if you are consistent, you
rule, the employer must also show that the company has been consistent in taking always behave in the same
disciplinary action against people who have acted in a similar way. For example, let way or you always have
us assume that despite the wording of the rule regarding the wearing of masks in the the same standards.
laboratory, the company director has only ever taken disciplinary action against workers
who take their masks off while working over their experiments. In fact, the director permits scientists to
remove their masks as soon as they stop working on an experiment.
‘The employer will then not be entitled to take action against the employee who takes off her mask
on her way to the laboratory door. The employer has not been consistent in taking action against people
who have done similar things in the past. The employee will be able to challenge any disciplinary action
taken against her in these circumstances by showing that the conduct of the employer was unfair because
it was not consistent.
The employee could also question whether the rule is still in place, considering the employer's failure
to act upon the rule in the past.

Is dismissal the correct punishment?

Dismissal is the ultimate penalty for cases of serious misconduct. A court or arbitrator may reverse an
employer's decision to dismiss in a case where this penalty is considered to be extreme to the extent that
no reasonable person would have made the same decision.
‘The following factors have been listed as the most relevant in deciding the issue:
Was the penalty of dismissal in accordance with the employer's disciplinary code?
Could a lesser penalty have served the purpose?
Could the employer reasonably have been expected to continue with the employment relationship?
How serious was the offence?
What is the employee's disciplinary record like?
What is the employee’s length of service with the employer?
Are there any factors, such as a feeling of remorse on the part of the employee, which should lessen
the penalty?
What are the employee's personal circumstances?

Chapter 24 | Labour law 401

 PU
le SoBe Warnings

Disciplinary codes should provide for verbal or spoken warnings, written warnings and final
written warnings as punishments short of dismissal. The warnings should indicate to an
employee, in a progressive way, the seriousness of an offence, before she is dismissed. Warnings
generally only build upon each other, if the same or a similar offence has been committed by an
employee and if the offence was committed shortly after the previous offence. But remember
that even one incident of serious misconduct together with the employer following a fair
procedure may result in a fair termination of the employee's services. Each case must be decided
on its own strengths and weaknesses before a decision to dismiss is made.

Fair procedure in misconduct cases

According to the LRA’s Code of Good Practice, the employer should normally conduct an investigation
to decide whether there are grounds for dismissal. The investigation does not always need to be a
formal enquiry.
The employer should charge the employee with the alleged misconduct, using a form To allege something is to
written in language that the employee can understand. The employee should be allowed the state your belief of what
chance to state a case in reply to the allegations. has happened, the proof
The employce is entitled to a reasonable time to prepare a response. The employee is also _ Of which is still to follow.
entitled to the assistance of a representative, who may be a trade union representative or a
fellow employee. An enquiry should then be conducted. If possible, an impartial person should chair
the enquiry.
After the enquiry, the employer should give the employee written notice of the decision that has been
taken —in other words, whether the employee has been found guilty and, if there is a penalty, what the
penalty is. The employee should be given the opportunity to appeal against the decision taken. We can
summarise good procedure as follows:
a investigate
™ notify the employee of the charge aoc deatupsl elle
= = give the employee time to prepare a response have a personal interest
® have a hearing with an impartial chairperson in the matter and who
@ allow a union representative or fellow employee to assist at the hearing can make decisions based
® communicate the decision to the employee, preferably in writing solely on the facts of
® provide the opportunity for an appeal. EEE:

Smuts v Backup Storage Facilities 2003 (2) BALR 219 CCMA

Principle
Some rules in the workplace may be implied so that an employer is able to dismiss an employee
for misconduct on those grounds.
Facts

Mr S was the manager of a small branch of Backup Storage Facilities. The only computer in the
branch was in his office. Management intended the computer be used for email correspondence
only. There was no other policy regarding internet usage in the branch. Mr X worked for Backup
as a driver. He was allowed to sleep on the business premises. Owing to the fact that Mr X
had no television on the premises, he had access to the computer after hours. In an attempt to
cut down on telephone costs, Mr S informed Mr X that he could no longer use the company
computer for his personal purposes.

402 Chapter 24| Labour law

 NY ee a Ec diel
e- lel lel Alte OS a ee eG EM (ecoliieiili
te)

Six months after Mr X ceased to use the computer, head office launched an investigation into
the expenditure and productivity of Mr S's branch. Investigations revealed that a huge portion of
the phone bill was made up of internet usage during office hours. The internet numbers dialled
were those of pornography websites.
When Mr $ was asked about this, he denied any knowledge. Two employees testified
that they had on several occasions witnessed Mr S's pornographic interest when they had
unexpectedly entered the office.
Can Mr S be dismissed for misconduct or can he rely on the absence of a clear rule regarding
internet usage?
The court's finding
The Commissioner in Mr S's case found that Mr S could be fairly dismissed for a number of charges,
including viewing pornography, as the employer had proved all the charges against him. Dismissal
was considered to be the most appropriate penalty, considering all the circumstances of the case.

Activity 24.7
Find out whether the company you hope to work for one day has a computer usage policy and
what it is. You may be able to access this information online. You should also be able to find
your university's rules about computer usage by students, on the university home page.

Dismissal for incapacity

In misconduct cases, as you have seen, the dismissed employees are at fault, because they have committed
misconduct. But employers are also allowed to dismiss employees when they are unable to do their work
because of incapacity. Here, the employees are not at fault, but for one or other reason, they are unable to
do the required work. Dismissals for incapacity can usually be divided into two different types of case.
1. Cases where employees are unable to do their work because of illness or injury.
2. Cases where employees are dismissed because they lack the skills, knowledge or efficiency that the
employer requires. Such cases are also known as dismissals for poor work performance.

Because employees are not at fault in cases of incapacity, the LRA Code treats such cases in a different
way to cases of misconduct. Remember that in all cases of dismissal, for the dismissal to be fair,
employers need to have a fair reason for dismissal and need to follow proper procedure.
In cases related to the illness or injury of employees, the difference between having a fair reason and
following a fair procedure is sometimes difficult to understand. For example, an employee may be too
sick to do the job she was doing before becoming ill. Despite this, an employer who fails to consider all
the other options (such as moving the employee to another section) before dismissing the employee, will
be acting in a procedurally unfair way.

Cases of ill health or injury

Any person, usually a commissioner appointed by the CCMA or a bargaining council, who has to decide
whether a dismissal due to ill health or injury is unfair, should consider whether or not the employee
is capable of performing the required work. The Code sets out general guidelines for dealing with
employees who cannot perform their work because of illness or injury. We can summarise the contents
of the Code as follows:
@ = Incapacity because of ill health or injury can be temporary or permanent.
= = If the employee is only temporarily unable to work, the employer should investigate the extent of
the incapacity or injury.

Chapter 24| Labour law 403

m= If the employee is likely to be absent for a time that is unreasonably long in the circumstances, the
employer should investigate all possible alternatives short of dismissal.
= When alternatives are considered, relevant factors might include the nature of the job, the period
of absence, the seriousness of the illness or injury and the possibility of securing a temporary
replacement for the ill or injured employee.
@ = In cases of permanent incapacity, the employer should consider the possibility Employees are
of giving the employee some other type of work, or changing the duties or work permanently
circumstances of the employee to provide for the employee's disability. incapacitated when they
® During the investigation of whether the employee should be dismissed for incapacity, © Injured so badly that
:
the chance to state a case ins response. A trade union
: they are unable to perform
the employee should be given a :
‘ their old job ever again.
representative or fellow employee should be allowed to assist the employee in question.
= The degree of incapacity is relevant to the fairness of any dismissal. The cause of the
incapacity may also be relevant. In the case of certain kinds of incapacity, such as alcoholism or drug
abuse, counselling and rehabilitation may be the most appropriate steps for an employer to consider.
@ Special treatment should be given to employees who are injured at work or who are suffering from
incapacity due to illness related to the work they were doing. The courts have indicated that the duty on the
employer to make provision for the incapacity of such an employee is more severe in these circumstances.
This means that the employer should try everything possible to help an employee who has been
injured at work. For example, the employer might give the employee extra leave of absence from work.

Cases of poor work performance

Any person who has to decide whether a dismissal for poor work performance is unfair should, according
to the Code, consider whether or not the employee failed to meet a performance standard. Poor work
performance is a common issue with new employees. Because of this, the Code allows employers to
employ workers on probationary periods.
‘There are particular requirements for how employers should treat workers who are
on probation, but we will look at these later.
If an employee is not on probation and does not meet a required performance standard, the person who has
to decide whether the employee should be dismissed for incapacity should generally look at whether or not:
® the employee was aware, or could reasonably be expected to have been aware, of the required
performance standard
m= = the employee was given a fair chance to meet the required performance standard
® dismissal is the appropriate penalty for failing to meet the required performance standard.

Answering yes to each of the above questions will result in the finding that there is a fair reason for
dismissing the employee for poor work performance.

Fair procedure in poor work performance cases

In order to dismiss a person fairly for poor work performance, the employer must follow these procedures:
= The employer must give the employee's progress at work a fair testing, with proper feedback.
@ ‘The employer must issue a clear warning so that the employee is aware that he does not meet the
required standard and is being watched.
‘The employer needs to provide the employee with counselling and assistance so that the problem
can be fixed before further action needs to be taken.
The employer must check on the employee's progress after the counselling.
The employer must warn the employee that he may face dismissal if performance does not improve.
The employer must give the employee a reasonable chance to improve.
‘The employer must give the employee a chance to state his case before a final decision is taken,
usually at a hearing.
The employer must consider alternatives to dismissal.

404 Chapter 24 | Labour law

Poor work performance in cases of probation
‘The purpose of probationary periods is for the employer to have the chance to test the work of the
employee before appointing the employee. In order to allow the employee to give a service that is
satisfactory, employers must also give probationary employees instruction, training, guidance or
counselling in addition to testing their work performance.
Once the probationary period is over, the employer has the option of either extending the period of
probation, allowing the employee to continue working by appointing him permanently, or dismissing
the employee after probation.
If the employer decides to dismiss the employee or to extend the probationary period, the dismissal
or extension will be fair only if the employer has met the requirements set out below.
= ‘The employer should advise the employee of any aspects of the job where the employee is not
meeting the required performance standards.
® The employer must give the employee a chance to make comments about any criticisms and the
employer should consider these. A trade union representative or fellow employee may make the
statements on behalf of the employee.
= = The employer should advise the employee of her right to challenge the employer's decision.
= = The procedure leading to dismissal should include an investigation to establish the reasons for the
poor performance.
= ©The employer should consider other ways, short of dismissal, to fix the problem.

‘The effect of probation is that the employer will be able to dismiss an employee fairly, during or immediately
after the probation period, for reasons that may not be good enough once the probation period is over.
After probation, an employer should not dismiss an employee for poor work performance unless the
employer has actually given the appropriate evaluation, instruction, training, guidance and counselling.
If the employee continues to perform poorly after a reasonable period, then the employee may be fairly
dismissed for poor work performance.

Activity 24.8
Read through the facts of the case below — these facts are loosely based on the case of Titherv
Trident Steel 2004 (4) BALR 404 (MEIBC) — and answer the questions that follow.

Mrs T is employed as a telesales assistant at Trident Steel. After six months in this job, Mrs T develops
severe neck pains. Her chiropractor finds that the pain is chronic and is caused by the numerous
hours Mrs T spends working at her computer. The chiropractor recommends adjusting the brightness
on the monitor to prevent eyestrain and the need to extend her neck toward the screen. The
doctor also advises Mrs T to use a chair that supports her lower back. The employer makes the
recommended changes. However, more than a year later, there has been no improvement and MrsT
still suffers from the pain. Owing to these neck pains, Mrs T is often absent from work.
A secretarial job becomes vacant. Mrs T suggests that she be moved to this job, as it is only
an administrative job that does not involve computer usage, But management does not consider
this idea as Mrs T had not been hired for secretarial work.
Two years after the beginning of Mrs T's health problems, the company dismisses her.
It states that her permanent incapacity makes it impossible for her to perform the work for which
she was hired. It insists that it has done everything in its power to help her, but without success.

1. Do you think that there was a fair dismissal for incapacity in this case? Were reasonable
alternatives explored?
2. Ask friends or your parents who are employed to find out for you what their company
would do in a case like Mrs T’s. Compare notes with a classmate,

Chapter 24 | Labour law 405

Dismissal for operational reasons
The third fair reason for an employer to dismiss an employee is operational requirements. The LRA defines
operational requirements as the economic, technological and structural or similar needs of an employer.
Employers often dismiss people because business is bad, or because they hope to make a bigger
profit by restructuring their organisation and reducing staff numbers. This is called retrenchment.
A retrenchment is a dismissal with the reason related to the employer's economic, technological,
structural or similar needs. In other words, the employer no longer needs certain employees to work
because of business circumstances at the time.
Again, you will note that this type of dismissal is allowed, even though the employee is not at
fault for the downturn in the employer's business. Because it is not the employee's fault, an employee
is entitled to payment of one week's remuneration (or pay) for each completed year of service. This
payment is in terms of the Basic Conditions of Employment Act and is known as severance pay. As with
cases of misconduct and incapacity, however, the dismissal will be fair only if the employer has followed
a fair procedure on top of having a good reason to lay off, or retrench, certain staff.

Added value What is remuneration?

Remuneration means any payment, in money or in kind, made to any person, in return for that
person working for any other person, including the state. An example of a payment in kind is
where an employee receives accommodation and food in place of money for work done.

Section 189 retrenchments

In order to be considered fair, all retrenchments must comply with the provisions of Section 189 To comply with something
of the LRA. is to act according
Section 189 of the LRA explains: to certain rules or
® with whom the employer must consult when the business wishes to retrench some workers S0Meone’s wishes.
@ when the employer should consult
m= = what the employer and the other parties must consult about and what the aim of the consultation is
= ~~ what information the employer needs to give to the other parties to the consultation
= how the employer should treat the other parties during the consultation.

With whom must the employer consult?

‘The LRA sets up a hierarchy of those who must be consulted about possible retrenchments.
, A hierarchy js a system of
If the employer and employees have concluded a collective agreement, the employer ye
people or things arranged
should consult with those parties specified in the collective agreement. This agreement deals jn order of importance.
with things like how labour disputes between the parties should be settled and the benefits
that different categories of employees should enjoy. As an example, employers and unions in the motor
industry have negotiated a collective agreement for the industry.
If there is no collective agreement, the Act states that the employer should consult with a workplace
forum, if one exists, as well as any registered union whose members are likely to be affected by the
proposed dismissals.
If there is no workplace forum, the employer should consult with any registered union whose
members are likely to be affected.
And if there is no union, only then should the employer consult with the specific employees likely to
be affected by retrenchment or their representatives.
It is important to note that since the list is a hierarchy, the Labour Court has said that if the
employee consults with a union, the employer will not have to consult with the individual employees to
be retrenched.

406 Chapter 24| Labour law

 Only if there is no collective agreement or workplace forum in place and if there is no union, must
the employer consult with the individual employees.

When should the employer consult?

The employer must consult when planning retrenchments. It will be too late for the employer to attempt
a consultation once the decision has already been taken to retrench certain workers.

What is the aim of the consultation?

‘The employer must engage in a ‘meaningful, joint, consensus-seeking process’ with representatives of the
affected employees. This means that the employer should try to come to an agreement with the other
consulting party and not just consult for the sake of doing so.
‘The purpose of the consultation is to:
a see if there is a possibility of avoiding the dismissals completely
@ consider ways to reduce the number of dismissals
® = change the timing of the dismissals
a reach agreement on which workers are to be retrenched and what payments they are to receive
a consider whether the negative effects of the retrenchments on the lives of those concerned can be
eased in any other way.

The consultation process for retrenchment is tightly regulated, as you have seen. But the decision
whether or not to reduce the number of workers is one that the courts normally allow the employer to
make. The employer still has to follow the procedure explained in the Act. Ideally, the employer and the
other parties will be able to agree on which employees will be dismissed. If this is not possible, Section
189 confirms that it is the employer that will select which workers will lose their jobs. The employer has
only to show that it chooses the unlucky workers by using a standard that is fair and objective.

What information must the employer disclose?

The employer should disclose relevant information to the consulting parties who FePFeseNE The onus of proof refers
the affected employees. The onus of proof is on the employer to show that any information — ¢o the burden of proving
it does not wish to disclose is irrelevant to the matter. something. In labour law,
The court tries to find a balance between providing employees’ representatives with the person who bears the
sufficient information to enable them to challenge the reason behind the retrenchment, SOUS OF PRONG Soret ny
. ; ‘ j ; : ‘ must do so on a balance
while protecting the employer from having to reveal confidential business information. na
of probabilities.
Information that employers should disclose includes:
® the reasons for the proposed dismissals
m= the number of employees likely to be affected
® the number of employees that the employer has dismissed for reasons based on its operational
requirements in the previous twelve months.

How should the employer treat the other parties to the consultation?
During consultation, the employer must allow the other consulting party an opportunity to state its case
on behalf of the affected employees. The employees’ representatives must deal with all of the issues raised
above, as well as any other matter relating to the proposed dismissals.
The employer must consider and respond to the representations made by the other consulting party.
If the employer does not agree with the arguments put forward by the employees’ representatives, the
employer must state the reasons for disagreeing.

Section 189A retrenchments

Section 189A of the Act applies only in the case of dismissals based on the operational requirements
of an employer with more than 50 employees. The section also applies only if a certain number

Chapter 24 | Labour law 407

of employees may be retrenched. The section will apply if the employer, because of operational
requirements, contemplates dismissing at least:
= 10 employees, if the employer employs between 50 and 200 employees
= 20 employees, if the employer employs more than 200 but not more than 300 employees
= 30 employees, if the employer employs more than 300 but not more than 400 employees
= 40 employees, if the employer employs more than 400 but not more than 500 employees
= 50 employees, if the employer employs more than 500 employees.

There is a major difference between section 189A large-scale retrenchments and ordinary section 189
retrenchments.
Section 189A says an employee may strike over the fairness of a dismissal for operational
requirements. Striking is not allowed in the case of ordinary retrenchments.
If section 189A applies, the employer must give employees the same type of notice as that required
by section 189. A different feature of retrenchments in terms of section 189A is that after the notice has
been given, the employer or employees may request the appointment of a facilitator who will assist the
process. A facilitator is a person who has proven knowledge, experience and expertise in helping parties
to resolve their disputes.
The employer will be able to retrench employees 60 days after giving notice of the proposed
retrenchment. The employees or the union then have the choice of either beginning a protected strike or
referring a dispute to the Labour Court. The Labour Court usually judges disputes over the fairness of a
dismissal for operational requirements.
If a facilitator is not appointed, either party may refer a dispute to the CCMA for conciliation
30 days after the issuing of the notice of proposed retrenchment. Once either a further 30 days has
passed, or a commissioner of the CCMA has certified that the dispute remains unresolved, the employer
can give notice of termination. The union or employees can either give notice of a strike or refer a
dispute to the Labour Court challenging the reason for the dismissal. They cannot do both. Their
decision either way is important, because it cannot be changed.

Added value Can they be retrenched?

As we have seen, section 189A makes it more complicated to retrench large groups of people.
What stops an employer from retrenching small groups of employees at a time in order to avoid
section 189A? The LRA provides for the section to operate if the number of retrenchments over
the past twelve months is equal to or goes beyond the numbers stated above.

Failure by the employer to follow a fair procedure

In terms of section 189A, disputes over the procedural unfairness ofa dismissal are dealt with separately
from disputes where the employees challenge the reason for a dismissal.
If an employer does not comply with a fair procedure, a consulting party may approach the Labour
Court for an order:
= forcing the employer to follow a fair procedure
® stopping the employer from dismissing an employee before the employer complies with a
fair procedure
® = directing the employer to give an employee his job back until the employer has complied with a
fair procedure.

If none of these orders is appropriate, the court may make an award of compensation to the unfairly
dismissed employees.

408 Chapter 24| Labour law

Fair reasons for dismissal
The Labour Court will consider the reason for dismissals (in terms of section 189A) to be fair:
® if the dismissal was to give effect to a requirement based on the employer's economic, technological,
structural or similar needs.
@ if the dismissal was rational. In other words, a proper link exists between the reasons for retrenching
the workers, such as that the business is in trouble, and the number of workers dismissed.
= if the employee gave proper consideration to alternatives to retrenchment.
= if the selection criteria for the retrenched employees were fair and objective.

24.5.5 What are unfair labour practices? An omission is a failure to

do something or to include
Unfair labour practice refers to an unfair act or omission that arises between an employer something.
and an employee. The employer's action or omission does not involve dismissal. Unfair
labour practices include:
Benefits refer to ‘perks’
unfair conduct by the employer relating to the promotion, demotion, probation or such as free transport to
training of an employee or relating to the provision of benefits to an employee and from work, in addition
the unfair suspension of an employee or any other unfair disciplinary action short of to earning a salary.
dismissal in respect of an employee
a failure or refusal by an employer to reinstate or re-employ a former employee in To suspend somebody
terms of an agreement from work is to temporarily
the employer making employment difficult for an employee, without dismissing that remove the person from
employee, because the employee made a disclosure protected by the Protected Disclosure Act. ee

Activity 24.9
Read the following factual scenario and then answer the questions that follow.
The directors of Gloria’s Plastics (Pty) Ltd launch an investigation aimed at finding ways to
increase productivity and profit in the business. The result of the investigation is a report that
recommends a change from the current three-shift system to a two-shift system. The report
also recommends the withdrawal of a transport subsidy that the employees have been getting.
During negotiations for a collective agreement with regard to these two changes, some
problems arise. The union rejects the proposal regarding the changing of the shift system.
The employer calls a meeting, after failing to reach agreement on this issue. The employer
explains to the employees that the changes are necessary for the business to be efficient and
profitable. The employer then sends out a letter setting out the proposals to all the affected
employees. The letter also states that those employees who do not accept the changes by a
certain date may be retrenched. It also says that if a worker accepts the changes after that date,
that person's job will not be guaranteed. The employer subsequently dismisses ten employees in
accordance with an appropriate and fair procedure.
1. Is this a dismissal for operational requirements, and so substantively fair?
2. Or, is this an attempt to force employees to agree to a change in their terms of
employment, as envisaged in one category of automatically unfair dismissal?

24.6 Disputes about unfair dismissals and unfair

labour practices A shift is a set period of
If the employee wishes to challenge the fairness of a dismissal, or if he disputes the employer's time that people work in
conduct regarding an unfair labour practice, he may refer the dispute in writing to: a day.
= acouncil, if the parties to the dispute fall within the registered scope of a council, for
example, the Motor Industry Bargaining Council A subsidy is a: monetary
m= the CCMA, if no council has jurisdiction. ba a

Chapter 24 | Labour law 409

The employee generally needs to refer a dispute to the CCMA or bargaining council within 30 days of
a dismissal, or, in the case of an unfair labour practice, within 90 days after the alleged unfair labour
practice. Late referrals are allowed if the employee can show a good reason for the lateness.

24.6.1 Conciliation
The bargaining council or the CCMA must try to resolve the dispute through conciliation. Conciliation
is a process in which the commissioner uses her knowledge of labour law to explain the legal position to
parties in order to encourage them to settle the case.
‘The proceedings are informal. The commissioner can even speak to the employee alone in order to
explain that the offer of settlement made by the employer is reasonable. The commissioner may suggest
that the employee accept the employer's offer. By speaking to both parties in this way, the commissioner
helps settle a majority of cases at this stage of conciliation. The commissioner will draft a settlement
agreement that will be signed by both parties, bringing the matter to an end.

24.6.2 Arbitration
Arbitration is a process in which an arbitrator, appointed by the CCMA or bargaining council, listens
to the evidence of both parties in a dispute. The arbitrator allows the representatives of the parties to
question or cross-examine the witnesses of the other side after these witnesses have given their evidence.
The arbitrator will then make a final decision as to which party should succeed in the case.
The council or the CCMA must arbitrate the dispute in the following instances:
m if the dispute remains unresolved after conciliation
= if 30 days have passed since the case was referred to the council or the CCMA
= = if the employee requests arbitration
= if the employee has alleged that the reason for the dismissal is related to the employee's conduct
or capacity
= if the employee has alleged that the reason for dismissal is that the employer made continued
employment intolerable
= = if the employee has alleged that, after a transfer, the employer provided the employee with less
favourable conditions or circumstances at work
® if the employee does not know the reason for dismissal
@ if the dispute relates to an allegation of an unfair labour practice.

In certain cases the arbitration proceeds immediately after the conciliation has failed.

24.6.3 Adjudication
When a judge of a High Court decides a case, we say that the matter has been adjudicated.
The Labour Court must adjudicate a labour dispute after it remains unresolved at conciliation, if the
employee has alleged that the reason for dismissal is:
® automatically unfair
@ based on the employer's operational requirements
@ = the employee's participation in a strike, which is not protected by the LRA
m = that the employee refused to join, was refused membership of or was expelled from a trade union
which is a party to a closed shop agreement.

If only one employee is retrenched, that employee may choose, instead, to refer the dispute to arbitration.

24.6.4 Remedies for unfair dismissals and unfair labour practices

If the Labour Court or an arbitrator finds that a dismissal is unfair, the Court or the arbitrator may:
= order the employer to reinstate the employee

410 Chapter 24 | Labour law

= = order the employer to re-employ the employee, either in the work in which the employee was
employed before the dismissal or in other reasonably suitable work
@ order the employer to pay compensation to the employee.

Reinstatement involves the employee being returned to the position she held prior to the dismissal on
the same terms and conditions. Reinstatement would normally include the employee receiving payment
for those months in between the unfair dismissal and the date of reinstatement.
Re-employment is a different remedy, as the employee can be employed under new conditions
of employment.
If an employee is reinstated, her period of service will be unaffected. But if an employee is
re-employed, the benefits that the employee used to have will not necessarily continue.
The Labour Court or the arbitrator must require the employer to reinstate or re-employ the
employee unless:
® the employee does not wish to be reinstated or re-employed
@ the circumstances surrounding the dismissal are such that it would be unbearable for the
employment relationship to continue
@ = it is not reasonably practical for the employer to reinstate or re-employ the employee
@ = the dismissal is unfair only because the employer did not follow a fair procedure.

‘The court has interpreted these exceptions in such a way that an employee will not be reinstated or
re-employed if any of the exceptions apply. In other words, if a dismissal is for a fair reason but the
employer followed a poor procedure, the only remedy available to an arbitrator will be compensation.

But, even though the dismissal is procedurally unfair, reinstatement or re-employment is not an option.

Compensation for unfair dismissal

Compensation should always be just and equitable in the circumstances. In other words, an employee
should receive fair compensation where she has been subjected to an unfair dismissal.
In cases where dismissal was found to be unfair, the LRA states that the compensation awarded
to the employee may not be more than 12 months’ remuneration. This is due to one, or both the
following reasons:
= =the employer did not prove that the reason for dismissal was fair
® = the employer did not follow a fair procedure.

‘The amount of compensation is calculated at the employee's rate of remuneration on the date of dismissal.

Compensation for an automatically unfair dismissal

Compensation awarded to an employee in a case of automatically unfair dismissal must be just and
equitable in all circumstances, But the amount of compensation may not be more than the equivalent of
24-months’ remuneration calculated at the employee's rate of remuneration on the date of dismissal.

Compensation for unfair labour practices

The compensation awarded to an employee in respect of an unfair labour practice must be just and
equitable in all circumstances. The compensation may not be more than the equivalent of 12 months’
remuneration.

Chapter 24 | Labour law 411

 Activity 24.10
Consider the following situation and then answer the questions that follow.
Joe, an employee of Tyre Company, is regularly late for work. Since he is a good employee
and sometimes works after-hours, the managing director, Percy, has not dismissed Joe for his
lateness. However, Percy has warned Joe verbally and in writing on at least ten occasions. Other
workers have been dismissed for lateness after one warning. One day, Joe arrives at work four
hours late. Percy has finally had enough of Joe's lateness, and he is waiting at the company gate
when Joe arrives, Percy tells Joe to turn around and go find another job as he is being dismissed.
Joe asks you for advice. He tells you that he overslept on the day he was dismissed because his
alarm clock failed to go off.
1. Is the dismissal fair or unfair?
2. If the dismissal is unfair, what remedies are available to Joe?
3. Where should Joe refer his dispute?

24.7 Other relevant labour law principles

‘The LRA, although very important, is not the only law that governs the relationship between employers
and employees. We will now look at two other relevant Acts, the EEA and the BCEA.

24.7.1 The Employment Equity Act

You know by now that the equality clause contained in section 9 of the Constitution of the Eau Mu cone
Republic of South Africa, 1996, does not permit unfair discrimination. The Employment dates Gace at ie
Equity Act 55 of 1998 (EEA) is one of the tools the law uses to give effect to this
constitutional right. To discriminate, in the context of labour law, is to treat employees
differently by preferring some employees over others, without an acceptable reason for doing so.
When we read the Constitution, we notice that the section is quite specific as to discrimination being
unfair and therefore not allowed. The question then arises whether the EEA serves any purpose other
than repeating what is in the Constitution?
It is common knowledge that apartheid and its unjust laws resulted in gross inequality in the national
labour market. Parliament realised that in order to give proper effect to the right to equality, it was not
enough to abolish the apartheid laws. It was also necessary to take positive measures to correct the effects
of discrimination and to encourage transformation. It was in this context that the EEA came about.
The EEA aims to achieve fairness in the workplace:
= by promoting equal opportunity and fair treatment in employment through the elimination of
unfair discrimination
= = by putting into practice affirmative action measures to ensure that previously disadvantaged people
are fairly represented in all categories and levels of the workforce.

Applying the EEA

Generally, the part of the Act that outlaws unfair discrimination binds all employers and protects all
employees. The provisions dealing with affirmative action apply only to designated employers and
designated groups.
A designated employer is one that employs 50 or more employees, or that has a total annual income
greater than certain amounts set out in the Act. Also included are municipalities and organs of state,
regardless of the number of employees.
A designated group refers to:
= black people (includes Africans, coloured people and Indians)
= women
= people with disabilities.

412 Chapter 24| Labour law

The South African National Defence Force, National Intelligence Agency, and South Africa Secret
Services are excluded from the entire EEA (section 4(3)).

Prohibiting unfair discrimination

‘The EEA states that no person may unfairly discriminate against an employee in any employment policy
or practice. Discrimination will normally be unfair if it is based on any of the following grounds: race,
gender, pregnancy, marital status, family responsibility, ethnic or social origin, colour, sexual orientation,
age, disability, religion, HIV status, conscience, belief, political opinion, culture, language, and birth.
Note that discrimination may be unfair even if it is not based on the above grounds. But the employee
would have to show unfairness.
‘The prohibition against unfair discrimination principle can be divided into two categories:
® = Firstly, employers have to make sure that there are no unfair, discriminatory employment policies
or practices in the workplace. Employers must take steps to remove such policies if they exist
(section 5).
® Secondly, no one is allowed to unfairly discriminate against any employee on any of the _ To harass someone
listed grounds. Harassment (sexual, racial or otherwise) of an employee is also prohibited _ 'S to trouble, torment
as unfair discrimination. This means that if a woman or a man is sexually harassed in or confuse the person
:
verbally or physically.
the workplace, the employer could be ordered to pay compensation to the victim.

When an employee alleges unfair discrimination, the employer will have to prove that the discrimination
was fair, in order to escape liability. In its defence, the employer can say that the discrimination was part
of its affirmative action measures, in which case it will not be unfair (section 6(2)(a)). But the employer
will have to prove this justification, not merely allege it.
Discrimination is also not unfair if the preference of one person over another took place as part of the
inherent requirements of the job (section 6(2)(b)) — that is, if the discrimination is necessary by nature of
the job. This idea is best explained by way of an example.
Where an all-girls Catholic private school chooses a Christian person over a Jewish person for a
teaching post in religious education, there might be discrimination, but it is justified by the inherent
requirements of the job —in this case, the job required someone to be able to teach the Christian faith
with conviction, something a Jewish person is unlikely to be able to do.
As a general rule, employers cannot force employees or job applicants to undergo medical or
psychological testing. The exception is where this is allowed by law or can be justified as an inherent
requirement of the job. But an employer cannot use the exception to require her employees to undergo
HIV testing. The employer must first approach the Labour Court, which will decide whether the testing
is justifiable or not.

Hoffman v South African Airways 2000 (11) BCLR 1211

Principle
An employer cannot justify everything under the blanket of inherent requirements of the job. The
onus is still on the employer to prove that the person concerned would actually be incapable of
performing the function for which he would be being hired. In this case, South African Airways
(SAA) clearly failed to show how being HIV-negative was essential to being a cabin assistant.
Facts

Hoffman applied for a job as a cabin assistant at SAA. Before hiring him, the airline asked him to
undergo HIV testing, to which he agreed. When Hoffman tested HIV-positive, SAA refused to
give him the job, alleging inherent requirements of the job.

Chapter 24 | Labour law 413

 Hoffman v South African Airways 2000 (11) BCLR 1211 (continued)

SAA's position was this: As cabin assistants must have certain vaccinations before being
allowed to enter certain countries and as it was not advisable that a person with HIV have such
vaccinations, it would be impossible for Hoffman to do his job.
The Constitutional Court had to decide whether Hoffman’s rights had been violated.
The court's finding
The court held that:
e SAA had discriminated against Hoffman.
e = The discrimination had been unfair.
e SAA failed to prove how being HIV-negative was an inherent requirement of the job.
e SAA should have further investigated how Hoffman's immune system would have
responded to the travel and the vaccinations.

Affirmative action
Affirmative action is one of the most talked-about areas of our labour law. Some people Affirmative action
think that a black candidate must always enjoy preference over a candidate of a different measures are policies
race, even if the other candidate is better qualified. ‘This view is not a true reflection of such as hiring members
the law. from designated groups,
A designated employer has to put in place affirmative action measures that will benefit and promoting and
people from designated groups. training these employees.

What this means is that the employer must establish policies that are designed to
To accommodate
ensure that suitably qualified persons from designated groups have equal employment
someone means to do
opportunities and are fairly represented at all levels of the workforce. something to make them
Such measures must include the following: feel more comfortable.
® = identifying and eliminating barriers that negatively affect people from designated
groups, such as unfairly discriminatory employment policies Diversity, in this context,
= measures that promote diversity refers to the different
= =making reasonable accommodation, or adjustments, for people from racial groups, age, gender
designated groups. and disability status
that characterise South
= = measures aimed at keeping, developing and training members of designated groups
Africa's population.
(including skills development)
= preferential treatment to ensure a fair representation of different groups of people
at work. For example, where two job applicants have the same experience and qualifications, the
employer should choose a candidate from a designated group over a candidate who is not from a
designated group.

Simply being a member of a designated group does not guarantee anyone a job. A person must also
be suitably qualified. The Act says that you may be suitably qualified for a job as a result of any one of
your formal qualifications, such as a university degree, prior learning or relevant experience. You may
also be suitably qualified as a result of your capacity to gain, within a reasonable time, the ability to do
the job.
It is also important to note that, just because an employer has to take affirmative action measures, it
does not mean it is required to adopt a policy that prevents the hiring or promotion of people who are
not from designated groups.

414 Chapter 24| Labour law

Employment equity plan
A designated employer must prepare and put in place a plan aimed at achieving employment equity.
Before the employment equity plan is put in place, the employer must consult with employee
representatives on how to prepare and carry out the plan. The employees can be represented by their
union or, if there is no representative union, the employees may nominate their own representatives.
The employer could also consult directly with the employees, but this may prove impractical.
An employer must also consult with her workers about conducting an analysis of the labour policies
and practices in the workplace. Such an analysis would be aimed at finding out whether there was an
under-representation of people from the designated groups in any category or level in the workforce.
Employers must disclose all relevant information to make the consultations effective.
Once all the required consultations have occurred, the employer must adopt an employment equity
plan. The plan must:
@ = set out the goals for each year n saps
. s : 2 : achieving equitable
@ outline the affirmative action measures to be implemented representation refers to
= have numerical goals for achieving equitable representation plans when the employer
® have a timetable within which the goals must be achieved in each year finds that designated groups
@ set out internal procedures to monitor and evaluate the plan, including internal are not fairly represented
dispute resolution mechanisms in a particular occupational
category or level.
® identify persons to monitor and implement the plan.
An employer has to submit an annual progress report containing certain prescribed information about
its employment equity plan. If the employer has fewer than 150 employces, the employer needs only to
submit this report every second year.

Monitoring and enforcing the EEA

Employee or union representatives can monitor violations of the Act. ‘The representatives may then
report the violation to a union, the employer, the labour inspectorate or any of the bodies that are given
this function of monitoring and enforcing the Act.
Labour inspectors are authorised by the BCEA to conduct an inspection. If an inspector finds the
employer to be in violation of the Act, the inspector may ask for a written undertaking in which the
employer agrees to comply within a specified period. If the employer refuses to give an undertaking
or fails to comply with the undertaking, the inspector may issue an order of compliance, forcing the
employer to comply.
‘The Labour Court can, upon request by the inspector, make that an order of court. The employer can
also object or appeal to the Labour Court against such an order.

24.7.2 Basic Conditions of Employment Act

The BCEA aims to set minimum standards of employment. Its purpose is to set basic conditions for the
treatment of vulnerable employees. The Act is intended to help those employees who are at risk of being
exploited, owing to their weaker bargaining position.
‘The provisions of the Act dealt with here do not apply to:
= members of the State Security Agency
= unpaid volunteers working for an organisation serving a charitable purpose (section 3).

Working time
A person who works five days or fewer in a week cannot be forced to work more than nine hours a day
and forty-five hours in a week. If he works more than five days a week, then the maximum working
time allowed is eight hours a day. This does not mean that an employee can never work more hours than
these. But, if an employee does work more, then the law considers the extra work as overtime.

Chapter 24 | Labour law 415

Overtime
An employee may work overtime only if she has concluded an agreement to that effect with the
employer. The BCEA requires that an employee be paid at least one-and-a-half times the normal hourly
rate, For example, if the normal rate was R10 per hour, then overtime pay must be at least R15 an hour.
‘The rate is merely the standard and parties are free to agree to other alternative benefits for overtime
work. For example, they could agree that the employee gets paid the normal rate for overtime and earns
extra leave calculated in a manner fixed in the BCEA.

Meal breaks
After five hours of work, every employee is entitled to a meal break or interval period of at least one
hour. This break period may be changed to a shorter period by written agreement. If the employee works
less than six hours a day, then the interval period can be done away with. An employer does not have to
pay the employee for the meal break, but if the employee must be available for work during the break,
then he must be paid for it.

Rest periods
A rest period of at least 12 hours must pass between ending and restarting work. In each weekly cycle, an
employee is entitled to a rest period of at least 36 hours, which must include Sunday, except if a different
arrangement is reached. By written agreement, the weekly rest period may be reduced by up to eight
hours in a particular week so long as the next week's rest period is extended by the same amount of time.

Night work
This is work done between 18:00 and 06:00. An employee may agree to perform night work under the
following conditions:
= = the employee receives compensation for night work in the form of an allowance, which may be a
shift allowance or a reduction of working hours
™ transport is available between the employees’ workplace and residences before and after their shift.

If the employee regularly works after 23:00 and before 06:00, the Act sets out other special protections
that go beyond the scope of this book.

Public holidays
If an employee is required to work on a public holiday, which would have been a normal working day, he
must get paid double pay or other extra pay as set out in the BCEA. Employees must still be paid at least
a normal day’s pay if they do not work on a public holiday.

Leave
The BCEA sets out when an employee is allowed to be absent from work on full pay, such as when
taking annual leave or sick leave. Employees are also entitled to family responsibility leave for family
illness, births and deaths.

Annual leave
Employees are entitled to at least 21 days’ fully paid annual leave after every 12-month cycle worked.
If any public holidays fall within the 21-day leave period, then the period is increased by one day for
each such holiday. The parties may also agree to another method of calculation set out in the BCEA.
The employee must take their leave at a time determined by the employer, but no later than six
months from the end of the annual cycle. The leave may not be given at the same time as any other
leave, such as sick leave. The leave may not go together with a notice to end the employment contract.

416 Chapter 24] Labour law

Sick leave
Sick leave is calculated on a 36-month cycle, but during the first six months of working for a particular
employer, an employee is entitled to one day’s sick leave for every 26 days worked.
After the first six months, the employee is entitled to sick leave equal to the number of days he works
in a six-week period. For instance, if Fred works six days a week, he is entitled to 36 days paid sick leave
in one sick-leave cycle — that is, in a three-year period.
An employer may request a medical certificate from an employee if she is absent for longer than two
days. If the employee fails to produce such a certificate, the employer may refuse payment for those days.
The same applies if an employee takes more than 36-days’ sick leave in three years. The employer does
not have to pay for the extra days. Even if the employee presents a medical certificate that explains the
extra sick days, only 36 days have to be paid.

Maternity leave
Maternity leave does not have to be paid, unless there is an agreement to that effect, but Consecutive means
employees are entitled to at least four consecutive months’ maternity leave. ‘following on, one after
Unless otherwise agreed, the leave can begin at any time from four weeks before the due the other’.
date of the baby’s arrival, Alternatively, maternity leave could begin on a date certified by
a doctor ora midwife as being necessary for the health of either the expectant mother or The third trimester is the
the unborn child. The employee is not permitted to work for six weeks after birth unless a _/@st three months of a
medical practitioner or midwife certifies that she is fit to work. OU eae
If, in the third trimester, an employee miscarries or has a stillborn child, she is entitled
to maternity leave for six weeks after the miscarriage or stillbirth.

Family responsibility leave

An employee who works at least four days a week and has been working for an employer for more than
four months is entitled to request family responsibility leave. The employee is entitled to three days’ paid
leave in each annual cycle, in the event of:
@ the birth or illness of a child
™ = the death of a spouse, life partner, parent, grandparent, child, grandchild or sibling.

If an employee does not take any family responsibility leave during the year, the leave falls away at the
end of the annual leave cycle. A collective agreement may change the number of days and reasons for
which this leave can be given.

Termination of employment
If either of the parties wishes to end the employment relationship, for whatever reason, that party must
give notice in writing, unless the employee cannot read or write. If you have been employed for six
months or less, you must give the employer one week's notice that you are leaving. The employer must
also give you one week's notice of termination of employment.
If an employee has been in a job for longer than six months but less than one year, both parties must
give two weeks’ notice. However, if the employee is a farm worker, the Act requires four weeks’ notice on
both sides.
After the first year of employment, four weeks’ notice is required. If an employer dismisses a worker
for operational requirements, the employer must pay out the worker. The amount must be equal to at
least one week's severance pay for every year of continuous service with that employer.
It is possible for an employer to dismiss an employee summarily, that is, without notice, in cases of serious
misconduct or material breach of the employment contract. A material breach is a breach that goes to the
core of the relationship or agreement between the employer and the employee, and which is considered to
be very serious by the employer. The employee can turn to the Labour Court if he is dissatisfied.
An employer can do away with the required notice and replace the notice period with payment.

Chapter 24 | Labour law 417

Variation of basic conditions of employment
In terms of the BCEA, a collective agreement concluded by a bargaining council can differ from the
BCEA as long as it does not:
= reduce protection of workers in terms of health and safety, and family responsibilities
c=] reduce leave to less than two weeks
m reduce maternity leave in any way
® = reduce sick leave in any way
® = allow for any child labour or forced labour.

Activity 24.11
The government introduced the Expanded Public Works Programme (EPWP) a few years ago.
The aim of the EPWP programme is to try to create a large number of jobs in a short period of
time. The programme favours labour intensive methods of employment so that more jobs can
be created. Think about the contractual relationships involving the state, construction companies
and workers employed on projects such as building roads and dams. What statutory protection
do you think these workers will enjoy or not enjoy?
Now, try to do some research to investigate whether your ideas are in line with the present
legal position. As part of your research you could use websites such as http://www.saflii.org.za
to determine whether any court cases have discussed or decided these issues.

What do you think?

Labour relations are often contested terrain. Employees want high wages while employers would
generally like to maximise profit. These tensions also affect wellness at work with staff increasingly feeling
pressured to focus their energies on work, sometimes at the expense of family life. What do you think of
this reality and are there any creative ways you would do things differently if you were an employer or
employee in order to obtain a better work-life balance?

Chapter summary

In this chapter, you learned the following about labour law:
Section 23 of the Constitution of the Republic of
South Africa, 1996, gives everyone the right to fair labour
practices and gives every worker rights to form and join a
trade union, to participate in its activities and to strike.
The most important Act, which governs the South
African labour market, is the LRA. This Act is intended
to help settle labour disputes effectively. The LRA
protects employees.
The definition of an employee specifically excludes
independent contractors, who are not entitled to the
protections provided by the labour legislation.
The LRA creates a presumption in certain cases that
a person is an employee. If the presumption applies, the
onus shifts to the employer to prove that the person is
not an employee. Where the presumption does not apply,
the dominant impression test is used to decide whether
workers are employees or independent contractors.
Employers and employees have a right to freedom
of association. Employers join employers’ organisations
and employees become members of trade unions.
Representative trade unions enjoy special rights.
These are known as organisational rights and must be
granted by the employer.

418 Chapter 24| Chapter summary

 Every employee has the right to strike. Every
employer has recourse to a lock-out in certain
situations. The consequences of strikes and lock-outs
differ depending on whether the action is protected
or unprotected. The right to strike or lock-out has
limitations. There are certain situations where such
action is not permitted.
‘The LRA favours centralised bargaining where
groups of employers and employees enter into a group
or collective agreement to regulate their relationship.
‘The LRA provides for six different types of situation
where an employee may claim to have been dismissed
by her employer. In each case, the employee will have
to prove, on a balance of probabilities, that she has
been dismissed.
An employer may sometimes be justified in
dismissing an employee. ‘The LRA recognises three fair
reasons for dismissal:
= = misconduct
®@ incapacity
= the operational requirements of the employer.
Review your understanding
1. Select the correct answer to each of the following
multiple-choice questions.
1.1. Which statement about independent
contractors is true?
a) ‘They always have to do the work
themselves.
b) Their contract terminates on the death
of an employee.
c) The object of the contract is the
performance of certain specified work
or producing a certain specified result.
d) They are employees.
1.2. Which one of the following is not a dismissal?
a) selective re-employment
b) non-renewal of a fixed-term contract
where there is an unreasonable
expectation of renewal
¢) termination of an employment
contract without notice
For each reason for dismissal, the employer has to
prove that the dismissal was both substantively and
procedurally fair. Guidelines to be followed by a
dismissing employer are set out in the Code of Good
Practices. Where the dismissal is a retrenchment
for operational requirements, it is important to
remember the consultation process that must take place
before dismissal.
The CCMA plays a key role in resolving labour
disputes. Before resorting to the labour courts, opposing
parties can approach the CCMA for arbitration and
mediation of certain labour disputes.
‘The EEA attempts to give effect to the Constitutional
right to equality. It does so by outlawing unfair
discrimination in the workplace. The Act also seeks to
promote the previously disadvantaged and allows for
affirmative action measures in the workplace.
The BCEA aims to set minimum standards of
employment. Its purpose is to set basic conditions
for the treatment of vulnerable employees. The Act is
intended to help those employees who are at risk of
being exploited due to their weaker bargaining position.
d) termination by the employee of the
contract after a transfer of business because
of less favourable working conditions
1.3. | Which statement or statements regarding
automatically unfair dismissals is/are true?
A dismissal is automatically unfair if the
reason for it is that:
i) the employee took part in or indicated
that he was going to take part in a
protected strike or protest action
ii) the employee refused to do the work
normally done by a worker taking part
in a protected strike (unless that work
was necessary to prevent danger to
health, personal safety or life)
iii) a transfer, or a reason related to a
transfer of a business as a going concern.
a) All the above
b) i) only
Chapter 24| Review your understanding 419
 c) i) and iii) Is there a dismissal where an employee terminates
d) i) and ii) the contract after a transfer of business because of
2. Discuss the non-renewal of fixed-term contracts as less favourable working conditions? Explain.
a form of dismissal. Differentiate between a dismissal and an
What is a statutory council? unfair dismissal.
»

4, What is the relationship between the supreme law

and labour law in South Africa?

Further reading

Grogan, J. 2017. Dismissal, 3rd edn. Cape Town: Juta and Co.
(Pry) Led
(This is a good text to read more case studies involving the
various types of dismissal.)

420 Chapter 24 | Further reading

 Leste)
e) 1g

Arbitration . G

The main ideas

= What is mediation?
Whar is arbitration?
Parties to arbitration
Arbitration process

The main skills

= Outline the process of mediation and arbitration.
® Describe how umpires may be replaced.
= Explain the process that should be followed before an arbitrator’s or umpire’s appointment is
set aside.
@ Discuss when an arbitration award may be reversed.
m List what constitutes an offence under the Arbitration Act 2 of 1965.

Disagreements can happen in any relationship. What are the options if the parties are unable to resolve
their dispute? The legal system gives parties an opportunity to turn to a person who is not involved in
the argument to help find a fair solution. Most obviously, this can mean taking a matter to court, but
there are other choices (as discussed in Chapter 24 on Labour Law). In this chapter, we look at a method
of dispute resolution called arbitration.

Before you start

Environmental campaigners Helen Steel and David Morris of Tottenham, north London, had, writ is a document
handed out leaflets entitled “What's wrong with McDonald’s?’ The two had not helped to write requiring someone to
the London Greenpeace fact sheet; they only helped distribute them. However, McDonald’s come to court to answer
issued writs against the pair on 20 September 1990, alleging that its reputation had been a case against them. In
harmed by the leaflets. The trial began on 28 June 1994 and ended on 19 June 1997: the SOUuD AINGE We call it
trial had lasted 314 days — the longest legal case of any kind in English history. Do you ens.
think this was the most efficient way for the parties to resolve their differences?

25.1 What is mediation?

Mediation is a process by which a mediator assists parties to a legal dispute, by facilitating
discussions, helping them to identify issues, explore areas of compromise and generate options in
an attempt to resolve the dispute. It is a viable alternative to having each and every dispute resolved
in court. Court-Annexed Mediation Rules have come into operation at various pilot project sites
in Gauteng and the North-West Province from December 2014. The objective of these rules is
to assist Case-Flow Management in the reduction of disputes appearing before Court and to
promote access to justice. These rules make provision for the referral of disputes for mediation at
any stage during civil proceedings, provided that judgment has not been delivered by the presiding
officer. Mediation adopts a flexible approach and tries to ensure that disputes are resolved in
a reconciliatory manner. ‘The mediator will typically be chosen by the parties and would have
undergone mediation training. Importantly, the mediator will not make a binding decision herself,
but will assist the parties to come to the position where they are hopefully able to resolve the dispute.

Chapter 25 | Arbitration 421

The advantages of mediation include:
® speedy resolution of disputes
m the cost-effectiveness of the process
® the possibility of achieving a ‘win-win’ situation.

25.2 What is arbitration?

As you have seen, the process of takinga case to court can be a very long and expensive one. Cases can take
years to get to court, especially in matters where there is a lot of paperwork to go through. Some matters
can be very technical in nature, for example, when the dispute is about a company’s audited financial
statements. A judge without technical knowledge may not be the best person to decide such a case. Or
sometimes, both parties want the outcome of their dispute to remain private. For reasons such as this,
rather than going to court, it is sometimes easier and better to use private arbitration to resolve the dispute.

25.2.1 Legislation
The Arbitration Act 2 of 1965 provides for an alternative and cheaper method of dispute resolution, which
may be used in certain situations. This method is known as arbitration. Arbitration is a process in which
arguing parties refer the disagreement to a person not involved in the dispute, the arbitrator. This neutral
third party, after investigation, makes a binding decision, the award, which the parties have to follow.
In terms of the Arbitration Act, certain matters may not go to arbitration. These include marriage
issues and any matter relating to status, such as whether a person is a minor or a major. This is because
these cases are considered to be very important to members of the public. Such cases are better resolved
by the formal court process where there is no risk of a bad arbitrator being chosen. In general, the parties
are free to arbitrate on any matter they wish.
As a general rule, a single arbitrator adjudicates arbitration matters. However, it is possible for the
parties to agree that they want a team of people to arbitrate a specific type of dispute. If this is their
intention, this should be followed.

Lufuno Mphaphuli & Associates (Pty) Ltd v Andrews and Another 2009 ZACC 6

Principle
The Constitutional Court considered the manner in which the Constitution of the Republic of
South Africa, 1996, (particularly the right to a fair and impartial hearing contained in section 34)
has an impact on private arbitrations conducted in terms of the Arbitration Act.
Facts

Mphaphuli and Associates (Pty) Ltd were electrical infrastructure contractors awarded a contract by
Eskom to electrify certain rural villages in the Limpopo Province. The sub-contracted part of this work
went to Bopanang Construction CC. A dispute arose between the two companies and the parties
agreed that the dispute would be resolved by an arbitrator. The questions to be decided by the
Constitutional Court were whether section 34 of the Constitution applied to private arbitrations and
whether the private arbitration in this case was conducted fairly.
The court's finding
The majority held that section 34 of the Constitution does not apply directly to private arbitrations,
which have always been required to be conducted fairly. What is fair, according to the court,
will depend on the context of the facts. The Constitution is relevant to arbitrations in that a
clause in an arbitration agreement which is contrary to public policy in the light of the values
of the Constitution, will render the agreement null and void to that extent. A majority of the
Constitutional Court in this case decided that, while the arbitrator may not have been perfect, the
arbitration had been conducted fairly.

422 Chapter 25 | Arbitration

25.2.2 The arbitration agreement
Imagine that Giovanni decides to sell his beachfront restaurant to Maria. They sign a contract and agree
that the price of the restaurant is to be decided by their friend, Prabha, a chartered accountant, since
both seller and buyer want a fair price. They also agree that, if either of them is unhappy with Prabha’s
decision of what is a fair price, Themba, an advocate, should arbitrate the matter. This is an arbitration
agreement. Giovanni and Maria could also have agreed that any dispute about a fair price should be
arbitrated jointly by a lawyer and an auditor, because of the financial nature of the dispute.
An arbitration agreement usually forces arguing parties to use arbitration for resolving > Sbitration
certain disputes. The clause in the sale of business contract between Maria and Giovanni is agreement can be 2
a good example. The clause states that any dispute about the price Prabha decides on should — separate agreement or a
be arbitrated. The arbitration agreement says that arbitration will be the method of solving Cause in a contract.
certain disputes. The agreement does not have to name the arbitrator.
Ifan agreement, which is binding on the parties, provides for arbitration, the parties are not allowed
to go to court before they use arbitration. In Giovanni and Maria's example, the clause about the price
might have expressly stated that any dispute regarding the price decided by Prabha must be arbitrated.
One party involved in the dispute cannot simply decide to disregard the arbitration agreement
without the agreement of the other party. If a party wants to get out of an arbitration agreement and
cannot get the other party to agree to this, it may apply to court. There will need to be good reasons for a
court to order that the parties are not bound by the arbitration agreement.

Activity 25.1
Set up a debating team with two of your classmates. Research the pros and cons of various
dispute resolution processes with particular emphasis on mediation, arbitration and court
adjudication, and present your findings to one another.

25.3 Parties to arbitration

Prabha, after carefully analysing everything, decides that the restaurant is worth R1 million — more than
double the figure Maria expected to pay. Maria is very unhappy about this. Under the conditions of the
contract they must now call in an arbitrator.
The arbitrator, although he is an adjudicator, is not a judge or magistrate and has
no official connection to the courts. Sometimes, more than one arbitrator is involved in The word adjudicate
Pecan hewn th) f adiudi che akbiesi ‘banal Anoth comes from the Latin word
an arbitration hearing. This group of adjudicators is the arbitration tribunal. Another judicare which means
important party in the arbitration process is the umpire. If the arbitrators cannot reach ‘to judge’.
agreement on a particular case, the umpire is called in to break the deadlock.

25.3.1 The arbitrator

‘The arguing parties may appoint any person over the age of 18 years to act as an arbitrator. In practice,
attorneys, advocates or retired legal practitioners and judges are often appointed as arbitrators. But some
cases involve experts from other fields, such as accountants and architects. Nothing stops a person who
has an interest in the matter being appointed, although any display of bias, for example, would result in
that person's removal.
If the parties cannot agree on an arbitrator, either party may serve the other party with a written
notice requiring that person to agree to the appointment of an arbitrator. If seven days after the notice,
the appointment has still not been made, the party who sent the notice may ask the court to appoint
an arbitrator for them. The court may also be asked to do this if an arbitrator has been removed or his
appointment set aside. In other words, a party to the dispute can apply to court and the court may
appoint a replacement. For example, if Themba refused to accept his appointment as arbitrator in the
case of Giovanni and Maria, the court may be asked to step in.

Chapter 25 | Arbitration 423

25.3.2 The umpire
It is one thing when people cannot agree on an arbitrator, but what if there is more than one arbitrator
and they cannot reach agreement among themselves? The Arbitration Act deals with this by providing
for the appointment of an umpire by either the parties or the arbitrators. When an arbitration agreement
insists on an even number of arbitrators, but does not mention an umpire, the arbitrators can appoint an
umpire at any time they see fit.
The parties who appointed the umpire can replace her in the following instances:
® where an appointed umpire refuses to act as umpire
= = where an appointed umpire is unable to act, for example, if she dies
® = where an appointed umpire is removed from office, for example, if the umpire was appointed
because she was the chairperson of the Law Society at the time the contract was signed, but by time
the dispute occurs, she is no longer involved or up-to-date with legal matters.

If the arbitration agreement allows for the replacement of an umpire who is unable to act, then the
umpire must be replaced. Imagine that Maria and Giovanni agreed to Themba, an advocate, and Max,
an attorney, being joint arbitrators. The parties gave the arbitrators the power to appoint and replace an
umpire, if necessary. Themba and Max disagree as to how the matter should be resolved. They appoint an
umpire who subsequently leaves the country. The parties would have to allow Themba and Max to replace
the umpire in an attempt to resolve the dispute before trying anything else to resolve their disagreement.

Ending an arbitrator's or umpire’s appointment

In the example of Maria and Giovanni, what do you think would happen if Themba, after six months of
being asked to decide whether Prabha’s price is fair, had failed to do so? Could Maria and Giovanni do
anything so that a proper price can be fixed and the sale of the restaurant could proceed?
Generally, the appointment of an arbitrator is permanent and all the parties to a dispute would have
to agree to end (set aside) an arbitrator or umpire’s appointment. However, the contents of an arbitration
agreement can change this requirement.
Ifa party to the dispute can show a good reason for the removal of the arbitrator/umpire, that party
can apply to court for an order to remove him from office. Good cause may include a situation where
the arbitrator takes an unreasonably long time to make a decision. Good cause would also include
situations where there are two or more arbitrators and they are unreasonably late in notifying an umpire
of a stalemate or deadlock.
If the court does set aside the appointment or removes an arbitrator or umpire from office, the court
may also give a costs order against him. This would force the removed arbitrator or umpire to pay the
legal costs which the parties have wasted because of that person’s conduct. The court may even order that
the arbitrator or umpire should not be paid for their services.

Activity 25.2
Write a note in which you describe the situations in which umpires may be replaced, and explain
the process that should be followed before an arbitrator's or umpire’s appointment is set aside?

25.4 The arbitration process

One of the main reasons that arbitration is a more popular remedy than going to court is because the normal
court process has very complex and specific rules relating to the manner in which the case is presented
to the presiding officer. For example, the rules that state how witnesses give evidence differ according to
whether the evidence is documentary or oral. A paper contract, which is offered as proof of an agreement
is documentary evidence. ‘The evidence given by a witness under examination is oral evidence. In court,
the rules that apply to oral evidence depend on whether a normal or an expert witness gives the evidence,
The rules of arbitration are far less complex.

424 Chapter 25 | Arbitration

25.4.1 Rules of arbitration Pleadings are the
In the case of Maria and Giovanni, had they not agreed to take their dispute to arbitration, | documents that contain
one of the parties would have had to sue the other. They would have to follow the detailed _ the written summaries of
and formal pre-trial procedure of pleadings that were discussed in Chapter 2. In our the main facts that can
example, because the parties have agreed to go to arbitration, Themba (the arbitrator) can, prove each party's case.
for example, decide whether or not pleadings are necessary.
Something is admissible
Acan arbitration hearing, all evidence that would be admissible at a trial, such as what
if there is no rule of law
witnesses to the case saw and heard, must be allowed. The parties to the dispute must be stopping a person from
given a chance to examine and cross-examine witnesses. The arbitrator may examine the introducing it as evidence
witnesses himself, unless the arbitration agreement prevents him from doing so. in a particular case.
If any of the parties to the dispute request it, the arbitrator is allowed to:
@ ask a party to the dispute or a summoned witness to produce documents or to give A summoned witness is
evidence under oath at the hearing not a party to the dispute,
m ask any of the parties to give particulars of his claim or counter claim but someone who has been
@ require the party, who is in possession of disputed property or goods, to allow for Called to give evidence by
a court document known
inspection of the property or goods by the arbitrator. Lewes ne.

The Arbitration Act also states that the arbitrator must give the parties written notice of the time and
place of the arbitration. The parties have a right to be present either personally or to be represented. If a
party is absent without good cause, and has been given prior notice of the hearing, the arbitration may
go on without him.
The evidence at the arbitration hearing must be recorded, either by the arbitrator or the parties to the
dispute themselves.

25.4.2 Arbitration decisions

At the end of a court case, once each of the parties has presented his case and been heard by the court,
the presiding officer makes her decision, which is known as a judgment. Similarly, the arbitrator, in an
arbitration hearing, has to make a decision or finding, which is called an award. If there is more than one
arbitrator, as in the case of a tribunal, the majority must agree on the award. If the tribunal consists of
two arbitrators who cannot reach agreement, then the umpire’s decision is the award.
An arbitrator has to make his award within four months after the date on which he started adjudicating
the matter. Where an umpire has to be involved, he must make his award within three months from the date
on which he became involved. The parties to the arbitration may request the award earlier if they give notice in
writing to the arbitrator or umpire. The award must be in writing. Where there was more than one arbitrator,
the award must be signed by all the members of the tribunal. If the award is a majority decision and the
minority refuses to sign, the award is still valid. Just as a judge delivers her judgment, the arbitrator or tribunal
must deliver the award to the parties or their representatives. The date on which the arbitrator 7,
o deliver the award is
delivers the award is known as the date of publication of the award. iinake it nea,
An arbitration award is final, and it is not subject to appeal in a court of law. Each party
to the arbitration is bound by the award and must comply with its conditions. In an
appeal, the losing party may apply to a higher decision-making body for a decision in the same case.
(In ordinary matters, unconnected to arbitration, the right to ‘appeal’ means that the losing party may
appeal to a higher decision-making body for a decision in the same case.)
Any party may apply to court to have the award made an order of court. This means that the award
would be enforced in the same way, and it would have the same effect as an order of court. For example,
to ignore the award would be to act in contempt of court. You should remember from Chapter 11
that a court may order the parties to a contract to do what they promised, which is also called specific
performance. If the case being heard by an arbitrator is the same type of case in which a court would be
able to order specific performance, then the arbitrator may also issue the same order,

Chapter 25 | Arbitration 425

 Where the award orders the payment of a sum of money without taking into account an amount of
interest, then interest will be added to that sum as from the date of the award until such time as it is paid.
‘The interest is calculated at the same rate as that of court judgment debts. From 8 January 2016, the
prescribed rate of interest is no longer a fixed rate (for many years the rate was 15,5%), but is the
repurchase rate, which is determined from time to time by the South African Reserve Bank, plus 3,5%.

25.4.3 Reversing decisions

As we have seen, an arbitration award is final and the losing party may not appeal the decision. However, a party
may apply to court and request an order setting aside the award. This application must be made within six weeks
of the date of publication of the award. If the request to set aside the award is based on an act of corruption, then
the application must be made within six weeks of discovery of the corrupt act. An application based on an act of
corruption cannot be made if the act is discovered later than three years after the award’s date of publication.
‘The court may set aside an arbitration award only on one of the following grounds:
®@ An arbitrator or an umpire committed misconduct with regard to her duties as an arbitrator or
umpire. An example of such misconduct is where the arbitrator showed clear bias throughout the
proceedings and was not neutral in coming to her decision.
@ = The arbitrator has committed gross irregularities in the running of the arbitration proceedings or
where she has exceeded her powers, for example, the arbitrator only allowed one party to give evidence.
@ = The award was obtained in an improper manner, for example, the arbitrator accepted bribes.
In some instances, the court is empowered to order that a matter be resubmitted to the arbitrator who made
the award. The arbitrator must then reconsider the matter and make a further award or a fresh award as
the court may direct. This can only happen where a party makes an application to court within six weeks
of publication. The party will have to show good cause why a court should make such an order.
The parties may also, within six weeks of publication, resubmit the matter for A plaintiffis the person
reconsideration themselves because they are both unhappy with the outcome. However, this | who complains and who
can only happen if all the parties sign the document authorising such resubmission. If only _ institutes the legal action.
one or some of the parties want this remedy, then resubmission to the arbitrator can only
occur by application to court as mentioned above. A defendant is the
Arbitrations have their advantages, but can also cause problems. ‘The case below is an Ssepeale ES
: e plaintiff claims.
example of how having a case resolved by arbitration can cause a problem later on.

Case study The risk of arbitration

The plaintiff, D’s Motors, alleges that an employee of the defendant, Transnet, had damaged
his petrol station’s roof cover in the small Eastern Province town of Burgersdorp.
At the court date, the parties agree to remove the matter from the court roll, which is the list of
cases to be heard on that day. Instead, the parties enter into an arbitration agreement. The matter is
eventually heard, by agreement, by an advocate acting as arbitrator, in Grahamstown, at a neutral
venue for the parties. The defendant loses the case at arbitration. However, as the arbitration
agreement does not include the right of appeal, the defendant is unable to do anything to have
the decision overturned. Although the arbitrator may have come to the wrong decision, he has not
committed misconduct or any gross irregularities and the award has not been obtained in an improper
manner. So, Transnet would not be able to appeal the arbitrator's decision, and would have to pay the
money claimed by the plaintiff even though they did not believe that they were liable for this.

25.4.4 Breaking the law

In the case of Giovanni and Maria, Themba asks Prabha to testify at the arbitration as to how she
decided upon the figure of R1 million as a fair value for the restaurant. What happens if Prabha does not
appear at the arbitration hearing?

426 Chapter 25 | Arbitration

 Ifa person is found guilty of any of the offences that are listed in the Arbitration Act, the person faces
a fine of not more than R100 (for a first offender) or three months in prison.
A person is guilty of an offence if she:
@ = fails to appear as summoned to give evidence before an arbitrator or tribunal, without good cause
appears as summoned, but leaves before being told she may, by the arbitrator or tribunal
® refuses to take an oath or affirmation as a witness when she is required to do so by an arbitrator
or tribunal
m refuses to answer fully and to the best of her knowledge and belief any question that is lawfully put
to her during any arbitration proceedings
= fails to produce any document or object that is specifically requested in a summons, without
good cause
-

® intentionally insults any arbitrator or umpire during arbitration proceedings, or deliberately

interrupts such proceedings, or misbehaves in the place where the arbitration is being held.

25.5 Recent developments

The International Arbitration Act 15 of 2017 was recently adopted to provide for the incorporation
of the Model Law on International Commercial Arbitration, as adopted by the United Nations
Commission on International Trade Law, into South African law. This Act provides for the recognition
and enforcement of foreign arbitration awards. It facilitates the use of arbitration as a method for
resolving international commercial disputes and ensures that South Africa will give effect to its
obligations under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(1958), subject to the provisions of the Constitution.

Activity 25.3
Find an updated copy of the Arbitration Act online. Read through this document and list what
constitutes an offence under the Act.

What do you think?

The Constitution guarantees everyone the right to a fair public hearing before a court. Yet, in certain
contracts, arbitration is chosen as the dispute resolution mechanism. In addition, it is ordinarily not
possible to appeal the decision of an arbitrator. Do you think that this is constitutionally valid?

Chapter summary

In this chapter, you learned the following about arbitration:
Arbitration is a process in which disputing parties refer
the disagreement to a neutral third party, an arbitrator.
An arbitration agreement may oblige arguing parties
to use arbitration for resolving certain disputes, such as
a dispute relating to the fair value of a business which
has been sold.
‘The arbitrator, or group of arbitrators in the case of
a tribunal, investigates the circumstances of the dispute
and then makes a binding decision.
‘The parties must follow the conditions of the
arbitration award. Losing parties may not usually appeal
against a decision made in favour of the other party.

Chapter 25 | Chapter summary 427

 Where a matter is referred to a tribunal and a deadlock
arises, an umpire is called to resolve the stalemate.
As a general rule, once an arbitrator or umpire has
been appointed, his appointment cannot be terminated
or set aside unless all the parties to the dispute agree or
a court order is obtained.
Under certain circumstances, a matter may be
resubmitted for reconsideration by the tribunal which
made the award.
Review your understanding
1. Which of the following statements regarding the
procedure at arbitration is true?
a) ‘There is never testimony from the parties.
b) ‘There are no rules relating to the procedure.
c) Cross-examination never occurs.
d) Evidence, which would be admissible at a trial,
must be admitted.
2. Choose the correct statement. Arbitration is:
a) the only method of dispute resolution
b) where a third party mediates and makes a
recommendation
Further reading
http://www.arbitration.co,za
(The Arbitration Foundation of Southern Africa website is
a useful site for expanding upon why arbitration should be
selected as an alternative dispute resolution mechanism and
when itis inappropriate. Also, the FAQs on this site should
be interesting for readers.)
428 Chapter 25 | Review your understanding
A court can sometimes set aside an award, provided
the party who asks for the award to be set aside can
show good cause.
Failure to comply with some provisions of the Act is
an offence punishable by fine and/or imprisonment.
c) aprocess whereby disputing parties refer the
dispute to a neutral third party, where the
neutral third party, after investigation, makes a
binding decision
d) the same as civil litigation.
3. Who may be appointed as arbitrator and how is
such an appointment made?
4. Write a note on the procedure to be followed at
arbitration hearings.
http://www 1.saflii.org/cgi-bin/disp.pl?file=za/cases/
ZACC/2009/6.html&query=mphaphuli
(For the Constitutional Court's decision in the Lufuno
Mphaphuli & Associates (Pty) Ltd v Andrews and Another case,
follow this link.)
 Tey
oh cot

Business entities Wis

The main ideas

= The different forms of business entities
‘The incorporation and registration of a company
The company as a separate legal entity
‘The types of company that can be registered in terms of the Companies Act 71 of 2008
‘The organs of a company: the shareholders meeting and the board of directors

The main skills

= Distinguish between different forms of business entities and choose an appropriate entity through
which to conduct business.
m= Understand and apply the law in relation to unincorporated entities.
® Understand certain foundational principles of company law.
® Collect, analyse and critically evaluate information relating to the management and governance of
different business entities.
= Apply problem-solving skills to legal problems.

It is a particularly challenging time to be studying business entities, as there have been a number of
business failures and challenges both internationally and in South Africa. So, there is a spotlight on
how a business should be conducted. This area of law, which is influenced by changes in the business
environment and the economy, has a huge impact on both the small everyday transactions that we
engage in, as well as on global economy. In this chapter, we will start by considering the different forms
of business entity, especially the partnership structure as a mechanism to conduct business. Then we will
explore the incorporation and registration of a company asa separate legal entity, as well as the types of
company that can be registered in terms of the Companies Act 71 of 2008. Finally, we will look at the
governance of shareholders and directors.

Before you start

If you are thinking of starting a business, one of the most important decisions you will have to make
is the choice of business entity through which you will manage your business. In this chapter, we will
identify and analyse some of the choices that are available to the new entrepreneur. Before you make
your choice, there are specific circumstances that you should consider, such as how much capital you will
have to start the business, whether it is important for you to be protected from creditors if your business
carries a high level of risk, the best structure to minimise the tax payable, as well as your long-term goals
for the business. By the end of the chapter, you will be able to apply a set of facts and make a sound
business decision regarding the best form of business to choose.

26.1 Forms of business entities

Different factors must be taken into account before deciding which business enterprise to choose. These are:
= confidentiality
® strategic objectives, or goals
® = size and available resources
@ need for expansion and growth

Chapter 26 | Business entities 429

m the legal regime
@ the tax regime
= available capital.

Every business will have different needs. For some businesses, the potential for growth will be more
important than confidentiality, and so, a company will be a better form of business to choose than a sole
proprietorship. But, let us look at these different forms of business in greater detail.
A business can be set up and operated through different structures, which have both advantages and
disadvantages for an entrepreneur. The four main business entities used to conduct business in South
Africa are:
1. asole proprietorship
2. a business trust
3. a partnership
4. a company.

‘The law of business entities is primarily concerned with understanding the common law principles and
the regulatory regime that govern the most common forms of business undertaking in South Africa.
‘These can be divided into the two broad categories of unincorporated and incorporated business
undertakings. Unincorporated business entities include sole proprietorships and partnerships which
are not subject to specific statutory regulation in terms of their formation, financing, governance and
dissolution. Business trusts are also not incorporated but they are regulated by the Trust Property
Control Act 57 of 1988. Incorporated business entities (that is, close corporations and companies) are
regulated by specific statutes.
Note that, since 1 May 2011, no new close corporations can be registered, but quite a large number
of close corporations are still registered and are still being used as business entities.

26.1.1 A sole proprietorship

The simplest and the cheapest way to start trading is through a sole proprietorship. A sole proprietorship
is a form of business enterprise which has the following characteristics:
@ = ‘The proprietor is the owner of the business.
= = The owner operates the business alone.
® He may have employees, but they will neither own nor manage the business.
= ‘There are, generally, no formalities or regulation requirements, so it is a simple and cost-effective
way to begin a business.
The single investor is the owner of the business, who owns all the assets and profit of the business.
= ‘There are no public disclosure requirements, which ensures privacy in the conduct of the business.

These are some disadvantages of a sole proprietorship:

m = The owner or sole trader is personally liable for all the debts and liabilities of the business.
= = The potential to grow the business is limited.
m All the capital of the enterprise is provided by the sole proprietor, so there is little opportunity to
share ideas and responsibilities.
® = The business does not exist outside the sole proprietor’s personal involvement, so it will lack continuity.

26.1.2 A business trust

A trust does not have a separate legal personality in South African law. But, the legal status of a trust is
complex. Section 1(1) of the Income Tax Act 58 of 1962 includes a trust under its definition of ‘person’,
as does section 1 of the Value-Added Tax Act 89 of 1991. This means that although the common law
does not recognise a trust as a separate legal entity, it is taxed as if it were a separate entity. Also, section 1

430 Chapter 26 | Business entities

of the Companies Act includes a trust in the definition of a ‘juristic person’, so it will be treated as a
separate entity in situations where provisions of the Companies Act may be relevant. So, let us look at
what a trust is in more detail.
A trust isa legal relationship between three people:
1 the founder — the person who forms the trust
2 the trustee — the person who administers the trust
3 the beneficiary — the party who benefits from the trust.

The relationship between the founder, the trustee and the beneficiary is governed by both a written trust deed,
which is the basis for the contractual relationship between the parties, and by the Trust Property Control Act 57
of 1988. Together, these sources regulate the functioning and administration of the trust, which include:
@ the powers and responsibilities of the trustees
m =the purposes for which the trust assets can be used
@ = the appointment of trustees ie the High
® the registration of the trust. scree eee
terms of the Trust Property
Trusts must be registered with the Master of the High Court in the relevant jurisdiction Control Act of 1988 and
where the trust’s assets are situated. Trustees may act only once the Master has issued letters has oversight over the
of authority allowing them to act. appointment of the trustee.
A trust may be created in the Last Will and Testament of the founder of the trust, and
it will be formed and registered when that founder dies. This is known as a Testamentary Inter vivos is a Latin
Trust. In this chapter, we are more concerned with a business trust, which is formed during ke ‘between
the lifetime of the founder. A business trust is referred to as an inter vivos trust.

Formation of a trust
A business trust is formed by a written contract known as a trust deed. The founder of the trust must
create the trust in which he hands over control of his assets to a trustee or trustees that he appoints.
There must be at least one trustee for the trust to be valid. The assets that are placed in the trust must
be clearly defined. The main purpose of trusts is to protect the assets for a beneficiary by separating the
control of the assets from the enjoyment of those assets.
The trustees must accept their appointment and are then obliged to look after the assets of the trust on
behalf of the beneficiaries. The trustees control the trust’s assets, and these assets must be held separately
from the trustee's own assets, They cannot be used to satisfy the personal creditors of the trustee.
A trustee's responsibilities include:
the duty of good faith in the management of the trust’s assets
the duty to act with reasonable care in the management of the trust’s assets
the obligation to open a bank account separate from his own for the trust's assets
the obligation to account to the beneficiaries on a regular basis
the obligation to act within the powers given to him by the trust deed.

Termination of the trust

The trust will terminate according to the provisions of the trust deed, for example, when the beneficiary
reaches a certain age or gets married, or a project conducted through the trust is completed. It will also
come to an end if the assets of the trust are depleted and no longer exist.

26.1.3 A partnership
A partnership is a contractual agreement entered into by two or more people, each of whom must make
a contribution to the partnership, which has as its object to make a profit for the joint benefit of all the
partners. So, not every agreement between business associates is a partnership — the relationship may

Chapter 26 | Business entities 431

be a debtor/creditor relationship, or an employer/employee relationship, or simply an agreement to do
business together or to co-own certain assets. If two or more individuals want to pool their knowledge,
skills and resources to conduct a business, they may form a partnership.
‘These are some advantages of a partnership:
= As with a sole proprietorship discussed above, a partnership is a simple, cost-effective and flexible
vehicle through which to conduct business.
= There are no registration costs and formalities.
= Unlike a sole proprietor, a partner has the benefit of partners with whom to share the running of the
business and to contribute to the business to enable it to grow.

These are some disadvantages of a partnership:

= = The main disadvantage of a partnership is that it does not have a separate legal Perpetual succession
personality. This means that there is no limited liability for the partners. Each partner —_ means that the entity
is jointly and severally liable for the debts of the partnership. This means that there continues in existence
is a high risk associated with forming a partnership, as there is no protection for the beyond the involvement
partners’ assets including those separate from the partnership business. Since the of its incorporators or
founders. A company
partnership is not a separate legal entity, it does not enjoy perpetual succession.
enjoys this privilege.
= = The partnership must terminate if there is any change in the partners. This can be
disruptive to the smooth running of the partnership.
@ = ‘There are tax implications of a partnership as each partner is liable for the partnership's tax obligation,
and the partners will not enjoy the benefit of a corporate tax rate. For the purpose of paying Value-
Added Tax (VAT), section 1 of the Value-Added Tax Act 89 of 1991 includes a partnership in its
definition ofa person, and this is an exception to the principle that a partnership is not a juristic
person. So, there is no tax advantage for conducting business by means of a partnership.
= Although a partnership may have access to a significant amount of assets from the pooling of the
assets by the partners, its ability to raise capital is limited.

Now, let us look at the elements of a partnership.

Elements of a partnership
From the definition of partnership given above, you will see that there are four essential elements that
must be present for a legal relationship to constitute a partnership. These elements are:
@ agreement
= contribution
® = object to make a profit
@ joint benefit.

A fifth essential element, which is a requirement of all valid contracts, is that the contract must be lawful.

Agreement
The partnership contract can be entered into in writing, orally or by conduct. No formalities are
required. The contract must meet all the essential requirements of any contract. The intention of the
parties is particularly important when determining a partnership relationship. It is good business practice
for the partners to enter into a written partnership agreement to regulate their legal relationship.

Contribution
Each party to the contract must make a contribution to the partnership assets.
‘The contribution by each partner need not be of the same type, quantity or value. It must Pecuniary means
have commercial value, although it need not be capable of exact pecuniary assessment. ‘consisting of money or
Examples of possible contributions include capital, property, labour, knowledge and skill. ietaung to: money:

432 Chapter 26 | Business entities

Object to make a profit
A partnership is a business entity that is aimed at the making and sharing of profits, and it cannot be
formed for a charitable or social purpose, such as a social club.

Joint benefit
As a general rule, all the partners participate in the management of the business, and they share in the
net profits and losses of the partnership. But, there are some limited exceptions, which will be considered
below. Every partner must share in the profits of the partnership. This does not have to be shared equally.
‘The partnership agreement may regulate the proportion in which the profits are shared. If the agreement
is silent, the court may allocate profit in accordance with the partner's contribution, or it may distribute
the profits equally. Any loss that the partnership incurs may be shared.
Read the following case study with the above four elements in mind.

foe TT ct Teh) Ayesha and Bongani’s second-hand car business

Ayesha and Bongani conduct a second-hand car business, Dodgy Deals, on a piece of land that
belongs to Ayesha. Bongani had put up the original capital to purchase the first cars. Ayesha’s
sister, Carol, has a contact named Peter, who owns a Car rental business and sells the old cars to
Dodgy Deals.
Ayesha, Bongani, Carol and Peter have a meeting to discuss the terms of their relationship.
They agree that:
e Peter will supply Dodgy Deals with reasonably priced cars. He will be paid a basic amount
for the cars, and he will, in addition, be entitled to 10% of the profits of the whole business
on an annual basis. If the business does not make a profit, Peter will not be paid anything
over the basic price of the cars.
e Caro! will be employed to administer the new cars. She will be paid a monthly salary
for this.
Do you think Ayesha, Bongani, Carol and Peter are partners?

Consequences of a partnership
Certain legal consequences flow once a partnership agreement is concluded. These can be Bitarue male between
divided into the internal consequences that affect the partners inter se and the external each other’ in Latin.
consequences that affect the partnership's relations and liabilities towards outside parties.

Internal consequences
The partners are united in a joint business enterprise and, unless there is a contractual provision to the
contrary, all the partners are entitled to participate in the management of the partnership. They share
in the profit and loss, and the partnership property is jointly owned by the partners. The partners have
certain obligations and duties towards each other:
= Each partner must carry out her duties as agreed between the partners and must do so with
reasonable care.
m = The partners owe each other and the partnership a duty of good faith. This means that a partner
must put the interest of the partnership before her own. She must pass on to the partnership any
benefits and advantages she may obtain, which fall within the scope of the partnership business, and
she must not compete with the partnership,
= = The partner must disclose to her partners any information affecting the partnership.
= A partner is obliged to keep proper records and to account for all transactions.

Chapter 26 | Business entities 433

External consequences
Partners have the authority to bind the partnership and co-partners to a contract with a third party.
This authority may be expressly given or implied by the general authority given to a partner to manage
the business. In this case, it is clear that the third party will be able to proceed against the partnership
for performance. A more complex situation arises if a partner, who has not been authorised by the
partnership to act on its behalf, enters into a transaction with a third party. Here, the most important
question is whether the transaction is within the broad scope of the partnership business. If it is, the
partnership and each partner will be bound as a bona fide third party — a party who enters into the
contract in good faith — and entitled to assume that the partner did have the requisite authority to enter
into the transaction. This flows from the important concept of partnership law known as the mutual
mandate, which provides that each partner has the power to bind her co-partners to any contract that
she has entered into on behalf of the partnership.
Let us look at this principle of mutual mandate in the following case:

Goodricke’s v Hall 1978 (4) SA 208 N

Principle
In accordance with the principles of the mutual mandate, a partner's implied authority to bind
the partnership will be applicable, even if the partner lacks express authority, provided the third
party is unaware of the limitation in the partner's authority and the transaction is within the
partnership's scope of business.
Facts

Hall and Burn were partners who intended running a restaurant. Burn, without the express
authority of Hall, instructed the plaintiff, a firm of attorneys, to apply for a liquor licence for the
restaurant. After the partnership dissolved, the plaintiff aimed payment for services rendered
from Burn and Hall jointly and severally. Hall denied he was liable on the basis that Burn lacked
the authority for the transaction.
The court's finding
The court held that Burn had authority to give the instructions to Goodricke'’s, and that a partner
cannot hide behind a private arrangement. Accordingly, as Burn purported to act on behalf of
the partnership, he had implied authority to do so, and both partners were jointly and severally
liable for the legal fees.

Liability to third parties

If one partner pays the entire amount of the debt, he (the partner who settled the amount) can then
recover his share of the debt from his co-partners. But, this will not be the position if a partner is an
extraordinary partner. The extraordinary partner is not jointly and severally liable with his co-partners
for the debts of the partnership to third-party creditors. As such, the creditor cannot sue him for the
satisfaction of the debt, whether alone or jointly with his co-partners.
A creditor who obtains judgment against the partnership must first proceed against the partnership.
It is only if the partnership assets are not sufficient to secure his judgment in full that he is entitled to
proceed against the individual partners. If the partnership is dissolved, an individual partner may be sued
for the full amount of a partnership debt. A partner will be liable even if she was not a partner when the
partnership was dissolved, provided that she was a partner at the time the debt was incurred.

434 Chapter 26 | Business entities

 Ler TY Ea aireht] Daniel and Shaheeda’s partnership

Daniel and Shaheeda are the partners in a business that buys T-shirts, prints the university logo
onto the T-shirts, and sells them at the entrance to Wits University. They agree that only Daniel,
who is studying law, will be able to enter into contracts on behalf of the partnership.
One day, while walking in a shopping mall, Shaheeda sees a beautiful pair of sunglasses.
She is sure these would complement the T-shirt business, so she orders 100 pairs of sunglasses.
When they are delivered to the office of the partnership, Daniel refuses to pay for them,
stating that the business cannot afford this purchase.
Who can the retailer recover the debt from?

Types of partnership
‘The principles discussed in this chapter are applicable to ordinary partnerships that are formed to conduct
business transactions. There are other types of partnership that exist in South African law that are
different from the ordinary partnerships that provide exceptions to the principles discussed above, such as:
® = extraordinary partnerships
® universal partnerships.

Extraordinary partnerships
The main characteristic of this type of partnership is that it is an exception to the principle that partners
are liable jointly and severally to the creditors of the partnership. In extraordinary partnerships, one partner
(or more than one — although there must always be at least one ordinary partner as well) will enjoy special
protection and will not be liable to the third party. The condition for this exceptional situation is that the
extraordinary partner must not participate in any aspect of the partnership business and must not be held out to
third parties as being a partner. This extraordinary partner will therefore not accrue any liability to a third party.
An anonymous or ‘silent partner’ is an extraordinary partner, who will be liable to contribute to the
other partners for her share if the partnership makes a loss. An extraordinary partner may also be termed
an en commandite partner, which means she will not be liable to the third party, nor to her co-partners if
the partnership suffers a loss.

Universal partnerships
The partners in a universal partnership share more than just the profits from the specific partnership
business that they are engaged in. In a universal partnership of all profit, they share all the profits that each
has made from their business activities. The partners also combine all their property that may be acquired
from any source during the partnership, not only from business undertakings. This type of partnership has
successfully been relied on to determine an allocation of assets between partners who are ina relationship
that is not (exclusively) a business relationship, such as in a long-term romantic relationship.

Butters v Mncora 2012 (4) SA 1 SCA

Principle
A universal partnership may be tacitly entered into and may be relied on by parties in a relationship,
even if the relationship was not a business relationship but was one of cohabitation.
Facts
The parties lived together for almost 20 years and had children together, but were not
married. The defendant had been the major financial contributor to the joint household whilst
the plaintiff mainly cared for the children and looked after the home. All the assets in the
partnership were in the defendant's name. When the relationship ended, the defendant denied

Chapter 26 | Business entities 435

 Butters v Mncora 2012 (4) SA 1 SCA (continued)

that the plaintiff had any claims to any property and assets. The plaintiff claimed that a
partnership existed between herself and the defendant.
The court's finding
As the plaintiff was able to prove that the essential elements of a partnership existed in the
relationship between them, the parties had tacitly entered into a universal partnership, and the
plaintiff could successfully rely on the financial consequences of this partnership.

Dissolution of a partnership
It is important to note that the dissolution of the partnership does not terminate the obligations of
the partners who will still be jointly and severally liable to the creditors of the dissolved partnership.
A partnership may be terminated in one or more of the following ways.

Lapse of time
A partnership agreement may stipulate that a partnership will be dissolved after a stated number of years
or ata stipulated time in the future.

Completion of the partnership business or if the business becomes impossible to perform

If a partnership was formed to undertake a specific business the partnership will dissolve once the
purpose has been achieved. It will also terminate if it becomes impossible to carry on with the business,
for example, if the business becomes illegal.

Agreement
‘The partners can agree to dissolve the partnership at any time.

Change of membership
Since a partnership is not a legal person, it lacks the advantage of perpetual succession. ‘The partnership
will be dissolved every time there is a change in its membership. The business can carry on trading.

Order of court
A partner can apply to court for the partnership to be dissolved. The applicant will have to show ‘good
cause’, An example of good cause is the prolonged absence of a partner or the incapacity of a partner.

Death or insolvency in a partnership

As a partnership is not a separate legal entity, it will terminate automatically if a partner dies or becomes
insolvent. The insolvency of a partner's personal finances will result in the partnership being declared insolvent.

26.1.4 A company
The incorporation of a company to conduct business is the fourth type of business entity considered in
this chapter. A number of different types of company can be registered, each with different requirements
and roles. Irrespective of whether the entity is a large multinational corporation or a small business,
understanding the fundamental principles of company law is essential.
There is a difference between the management of the company and the ‘ownership’ of the company,
and companies are highly regulated by the Companies Act which, despite the legislators’ aim to make the
Act simplified and flexible, can be complex to comply with. Here, we will examine and understand these
complexities. We will look at the common law and the Companies Act to understand key areas of companies,
including the legal nature of a company, the role of the directors, an understanding of the securities of a
company and how they enable the financing of the company. An understanding of these principles will guide
an entrepreneur who is considering whether a company is the most advantageous vehicle for his business.

436 Chapter 26 | Business entities

 Added value The role of the company: section 7

The role of the company has changed in recent times. The rise of multinational corporations
that span the world have provided companies with enormous wealth and influence, which
has resulted in companies wielding enormous power. The role of the company in society is the
subject of heated debate. Is the company’s role only to make a profit for its shareholders? Or
does a company have a wider responsibility to its stakeholders, such as the community in which
it is based, its employees and the environment?
Section 7 of the Companies Act sets out the purpose of the Act. The purpose extends
beyond the traditional role of the company, which was to make a profit for its shareholders, and
now includes the following:
e compliance with the Constitution
© ameans of achieving economic and social benefits
e to provide for the creation and use of companies in a manner that enhances the economic
welfare of South Africa as a partner within the global economy
e higher standards of corporate governance
e encourage innovation and diversity
e create conditions that are conducive to international trade and investment
¢ encourage transparency and good governance
¢ to promote the development of the South African economy by encouraging
entrepreneurship, efficiency and flexibility.

26.1.5 Close corporations

Close corporations are regulated by the Close Corporations Act 69 of 1984, The Companies Act 71 of
2008 has provided that no new close corporations could be registered after May 2011. However, close
corporations that are already in existence will continue indefinitely. As a number of close corporations
continue to operate, we will look at the important characteristics and principles of close corporations:
® A close corporation is a separate legal person and has a simple governance structure.
= = Its members enjoy limited liability and the corporation enjoys perpetual succession.
@ = It owns its assets and must sue and be sued in its own name.
m = It does not have shareholders but it has members.
= =A close corporation can have between one and ten members and all the members must be natural persons.
® = Each member has an interest in the corporation that is expressed as a percentage of 100%. So, for
example, two members may each hold 50% of the member's interest each.
= ~All the members must be natural persons.
@ = There is no distinction between its members and managers — the members manage the corporation.
m= Every member must make a contribution of money or assets or service to the close corporation.
Details of the contribution must be reflected in the founding statement.
= Members have similar duties to the close corporation as directors have to a company. These include:
m the duties of good faith
m the duty to exercise care, skill and diligence in the management of the close corporation.
= A member may be personally liable for the debts of the close corporation if the member has
breached certain provisions of the Close Corporations Act or if the separate legal identity of the
close corporation has been abused.
= A member will cease being a member if she disposes her member's interest or by a court order.

The registration of a close corporation involves:

® = From the 1 May 2011, the date of inception of the Companies Act of 2008, no Close Corporation could be
registered. Before then, the process under the Close Corporation Act of 1984 required that a document

Chapter 26 | Business entities 437

 known as the ‘founding statement that contained details of the close corporation such as the particulars of
the members, the business address and details of the accounting officer had to be registered at the CIPC.
m= The name had to be registered with the suffix ‘CC’ attached.
@ = The accounting officer was responsible for the financial governance of the corporation. She did not
have to be a chartered accountant.
‘These processes were much simpler than those under the Companies Act of 2008 which are discussed below.

26.2 Incorporation and registration of a company

Unlike a sole proprietorship or a partnership, a company must be registered before it can conduct
any trade or business. Registration is effected through the Companies and Intellectual Properties
Commission (CIPC). This is the body charged with, amongst other functions, the oversight and
monitoring of companies and close corporations.
The first step in the registration process is to incorporate a company. This is effected by the
incorporators or founders of the company signing a Memorandum of Incorporation (Mol) for the
company and registering the Mol and a notice of incorporation at the CIPC.

The Memorandum of Incorporation

The Memorandum of Incorporation (Mol) is the document that forms the basis of the company — its
constitution. It sets out foundational information about the company. In terms of the definition of the
Mol in section | of the Companies Act 71 of 2008, it is the document that:
® sets out the nature of the company, the rights, duties and responsibilities of the shareholders and
directors in relation to the company
provides information about the number and type of shares the company will have
includes information about directors
sets out the procedural requirements for the running of the company
may contain special conditions and restrictions imposed on the company
may prohibit the amendment of any provision.

‘The intention in the Companies Act is to make the Mol as flexible as possible. To this end, the Act
makes provision for ‘alterable clauses’, which are provisions of the Act that can be changed in the Mol to
suit the needs of a specific company. If a clause is ‘unalterable’, its provisions cannot be affected by the
Mol (except if it is made more difficult to comply with).

The company rules

The constitutive documents of a company may include rules that are made by the board of directors.
‘These govern the internal functioning of the company, and they must be consistent with the Mol and
the Companies Act. The rules must also be filed at the CIPC.

Registering the name of the company

‘The first step to registering a company is to reserve a name for the company (although it should be noted
that this is not mandatory and if no name is registered, the registration number of the company, given to
it by the CIPC will be its name, until amended), This is done by an application to the CIPC,
‘The policy of the Companies Act is to allow the incorporators to choose any name they wish in line
with the principle of freedom of expression. But, limits on the right to a particular name do exist in
order to prevent fraud and misrepresentation, and to avoid the use of hate speech, and similar offensive
names. Further, the name must not be the same as or confusingly similar to, the name of another
company. An example of this is that the CIPC would be unlikely to allow the name ‘Pick and Pay’ to
be registered as it is too similar to the existing name of “Pick n Pay’. The name may include numbers
or symbols, as well as words. All companies’ names must end with a suffix that indicates what type of
company is registered. So, for example, a private company must end with the abbreviation, (Pty) Ltd.

438 Chapter 26 | Business entities

26.3 The company as a separate legal entity
A company is a legal person that has a separate legal existence from its incorporators, shareholders and
directors. This principle is legislated in sections 19(1) of the Companies Act, which provides that a
company is a juristic person from the date that it is incorporated, and it has the powers of a natural person
except for those things that only a natural person can do. For example, a company cannot get married.
Separate entity is at the core of company law and it has certain important consequences:
= Asa separate entity, the company, and not the shareholders or directors, are liable for its own debts.
m = The shareholders and directors have limited liability. This means that they are liable only for the
amount that they chose to invest in the company, and they are not liable to the creditors of the
company. This principle was confirmed in England in the 19th century.
= = =The company owns its own property. The company, and not the shareholders, own the profits of
the company.
= The company must sue and be sued in its own name.
= The company enjoys perpetual succession.

Salomon v Salomon & Co Ltd 1897 AC22 (HL)

Principle
As soon as a company is incorporated, it becomes a separate legal entity from its incorporators,
shareholders or directors.
Facts
Salomon, a sole trader, carried on business as a leather and boot trader. He decided to convert his
business into a company. He was, essentially, the only shareholder (his wife and children owned
a few shares). He and his two sons were the directors. Salomon sold his business to a new
company. He financed the sale by lending money to the company. In the loan contract (known
as a ‘debenture’), he was a preferent creditor. When the company was declared insolvent,
Salomon demanded that the assets of the company be utilised to pay him before other creditors.
The liquidator argued that Salomon and his company were in fact the same person.
The court's finding
The court held that Salomon and his company were separate even though it was a one-man
company, and that Salomon was entitled to be paid before the other creditors.
Although this case was heard in 1897, its principles are still applicable and have been
confirmed in South African case law.

Dadoo Ltd v The Krugersdorp Municipal Council 1920 AD 530

Principle
The company is a separate legal entity, separate from its shareholders in form and in substance.
Accordingly, assets owned by the company are not the property of its shareholders.

Facts
Due to discriminatory legislation, South Africans of Indian descent were prohibited from owning land
in the old Transvaal province (now known as Gauteng). Dadoo and another shareholder formed a
company that bought property in the Transvaal, and the company then rented the property to Dadoo.
The court's finding
That ownership of the property by the company was not ownership by Dadoo as the company
was a separate entity, and therefore no contravention of the legislation had occurred.

Chapter 26 | Business entities 439

Exceptions to the separate legal entity principle: Piercing the veil
The principle that a company is a separate legal entity can be abused. So, in exceptional circumstances,
it will be disregarded by the court. Two enquiries will have to be satisfied for the court to hold the
shareholders or directors personally liable to a creditor of the company:
1. ‘The creditor must show that the company and the shareholders/directors were not substantially
separate — that the company did not, in fact, have a separate identity from the shareholders/directors
and was their alter ego.
2. ‘The creditor must show this resulted in misconduct and abuse by the company.

Section 20(9) of The Companies Act has incorporated these common law tests, and provides that if
any conduct by a company is an ‘unconscionable abuse of the juristic personality of the company as a
separate entity’, the court may declare that the company be deemed ‘not to be a juristic person’ in respect
of any rights, obligations or liabilities of the company.

Ex Parte: Gore NO and Others 2013 2 All SA 437 (WCC)

Principle
Although companies in a group enjoy the same benefits of being separate legal entities as
individual shareholders enjoy, the court will disregard the separate legal identity of a company if
there has been an unconscionable abuse of this separate corporate identity of the company.
Facts
The applicants were the liquidators of a group of companies that formed the King Group. The
shareholders of all the companies in the group were the King brothers, who were also the
directors of the various companies. The brothers used the companies in the group to conduct
business, mainly in property investments. In conducting their business, they failed to distinguish
the corporate identity between the companies in the group. Funds from investors were
transferred between the companies with no regard to the individual identity of the companies
concerned. When the holding company was declared insolvent, the liquidators wished to pool
the assets of the different companies and thus pierce the corporate veil.
The court's finding
The court concluded that the separation between the different companies should be disregarded
in terms of section 20(9) of the Companies Act, and the liquidators could pay the separate
creditors from one pot of assets.

26.4 Types of company registered under the Companies Act wren the court finds the
71 of 2008 shareholders or directors
The Companies Act 71 of 2008 aims to be flexible and user-friendly to accommodate liable, this Is known as
i 2a é ‘piercing the corporate
a wide range of different types of business. So, the entrepreneur must choose the most veil’, The metaphor of a veil
appropriate type of company depending on the type of business he wishes to conduct. separating the shareholders
The two types of company that may be incorporated under the Act are: and the company is
= profit companies often used to describe
® non-profit companies. the company as separate
from its shareholder,

‘There are four types of profit company, whose main object is financial gain. These are as follows:
1. State-owned companies
@ = These are public entities that are directly or indirectly controlled by the State.
2. Private companies
m@ = These can be incorporated with one shareholder and one director.

440 Chapter 26 | Business entities

 = A private company cannot sell its securities to the public and its Mol must have a restriction on
the transferability of its securities.
= ‘The name ofa private company must end with (Pty) Limited.
3. A personal liability company
® = This is a private company where the Mol must provide that the company’s directors and its past
directors are liable, together with the company, for any debts incurred by the company during
the time they were directors.
= = This type of private company is used mainly to conduct a professional business such as for
doctors, architects, accountants and lawyers.
= It must end with the suffix ‘incorporated’ or ‘Inc’.
4. A public company
= = This can be incorporated by one person, but must have at least three directors.
« There is no restriction on the offer of its securities to the public.
® As public companies raise capital from the public, there are greater responsibilities on public
companies, soa public company must appoint a company secretary, as well as an audit
committee and external auditor.
= ‘The name of a public company must end with the word ‘Limited’ or the abbreviation ‘Ltd’.

Non-profit companies have a specific public benefit, such as a cultural, social, educational or
religious purpose.
= = The income of this type of company cannot be distributed to its shareholders or any other office
bearer of the company, nor can the assets of the company be so distributed if the company is de-
registered, but it must be handed over to a similar non-profit organisation.
= A non-profit company may have, but it does not have to have, members.
m= It must have at least three directors.
= ‘The name of a non-profit company must have the suffix ‘NPC’.

In addition to the types of company outlined above which are registered and conduct business in South
Africa, companies incorporated outside South Africa are also recognised in company law. An external
company is a company that carries on business activities within South Africa, irrespective of whether it is
for profit or for non-profit. It must register with the CIPC even if it is registered in a foreign jurisdiction.

Activity 26.1
Draw a diagram of the different types of company that are set out in the Companies Act 71 of
2008 and include the characteristics of each type.

26.5 Organs of the company: Shareholder meetings and the board

of directors
A company is a legal person and therefore, it must act through two organs in the The definition of a
shareholder is found
company, namely:
in section 1 of the
= = the general meeting of shareholders Companies Act 71 of
@ = the board of directors. 2008 -'a holder of a share
issued by a company’.
‘The shareholders are often referred to as the ‘heart’ of the company and the board of Part F of the Act adds that
directors as the ‘brains’ of the company. In this section, each of these vital aspects of a a shareholder is a ‘person
who is entitled to exercise
company will be considered.
voting rights’.

Chapter 26 | Business entities 441

26.5.1 Shareholder meetings
Certain decisions of the company can be made only by the shareholders. They are required to make
decisions regarding the fundamental nature of the company. These decisions are made at shareholder
meetings where issues, such as a proposed merger or acquisition or the sale ofa company’s major asset,
will be discussed and debated, and a resolution will be passed. Meetings must be properly called and
properly conducted in order to be valid. There are two types of meeting:
® annual general meetings (AGMs)
® ordinary shareholder meetings.

The formalities of these meetings are set out below.

Annual general meetings (AGM)

The annual general meeting (AGM) is one of the mechanisms to promote transparency in the
governance of companies and is required to be held once a year by public companies. The prescribed
business of the company must be discussed and voted upon.
The AGM must tend to the following business of the company:
= present the directors’ report, the audit committee report and the audited financial statements for the
immediately preceding financial year
@ = elect directors
® = appoint an auditor and an audit committee for the ensuing financial year
= = deal with any matters raised by shareholders.

Ordinary shareholder meetings

Ordinary shareholder meetings can be convened as necessary, in accordance with the prescribed
formalities set out below. These meetings can be called by the board of directors or by shareholders, who
hold at least 10% of voting rights.
Certain decisions by the company must be made at the shareholder's meeting, such as:
™ amending the Mol
®@ removing or appointing a director
® approving certain fundamental transactions.

Notice of meetings
Proper notice in the prescribed form must be given to all shareholders who, at the record
The record date js the
date, are entitled to attend the meeting. The prescribed form is as follows: date when the company
= = The notice must be in writing. first determined the
= = It must state the date, time, venue and the purpose of the meeting. identity of its shareholders.
® = For a public company or non-profit company with voting members, 15 days’ notice
must be given.
= For all other companies, ten days’ notice must be given. The notice periods may be altered
in the Mol.
= The notice of the meeting may be given electronically.
= A copy of any proposed resolution must accompany the notice and should show the eon are ae
ee : : have to be a shareholder
percentage voting rights for adopting the resolution. himself, is appointed by a
= = If relevant, a summary of the financial statement that will be tabled at the meeting shareholder to represent
should be attached. that shareholder at a
m Shareholders can appoint a proxy to vote on their behalf and this right should be meeting. The appointment
prominently displayed on the notice of the meeting. must be in writing,

442 Chapter 26 | Business entities

If no notice or defective notice of the meeting is given, the meeting may still proceed as long as all the
people entitled to vote on the agenda items:
@ are present
@ acknowledge receipt of the notice
® agree to waive the notice or ratify the defective notice.

A quorum
A minimum number of people must be present before the meeting can validly commence. This is
called the quorum, A meeting may not begin until there is a quorum, which is that at least 25% of all
the voting rights of the issue to be decided are present. This can be altered in the Mol. In addition, if
a company has more than two shareholders, there must be at least three shareholders present for the
meeting to commence.

Resolutions
Decisions are taken by shareholders by means of resolutions, which are passed at the meeting by the
shareholders voting in favour or not in favour of a particular submission. Two types of resolution can be
passed, depending upon the issue being dealt with. These are:
® ordinary resolutions
= = special resolutions.

Ordinary resolutions must be adopted with more than 50% of voting rights being exercised. Special
resolutions can only be adopted with the support of at least 75% of voting rights exercised in favour of
the resolution. Voting can be done by polling the shareholders present at the meeting or by a show of
hands. Special resolutions are required in the following instances:
=@ to amend the Mol
to apply for voluntary winding-up of the company
to approve the sale of majority of assets
for mergers and amalgamation
for schemes of arrangement
for the approval of directors’ remuneration
any other time when required by a company’s Mol.

The Mol may specify a different threshold level for each type of resolution, provided that there is at least
10% difference between them.

Added value The doctrine of unanimous assent

There are times when shareholders can take decisions without the formalities of a meeting.
The doctrine of unanimous assent provides that if all the shareholders are aware of what is
proposed and have agreed to it, a meeting is not necessary. This will include the case where the
resolution has been submitted to the shareholders, who respond in writing, or if there is only
one shareholder or all the shareholders are also directors.

Securities
If an entrepreneur has decided to conduct his i through a ca the company will Measiantue een e
need to be funded in order to function. ‘This can be done in a number of ways, but the core jnctrument by which the
funding will most likely come from selling the equity in the company — that is, from selling company incurs debt as a
the company’s shares and from borrowing money. Section 1 of the Companies Act71 of 2008 way of raising capital.
defines ‘securities’ as referring to ‘any share or debenture or other instrument’ that is issued
by a profit company. This chapter will focus on shares as the mechanism for a company to raise money.

Chapter 26 | Business entities 443

Shares
Shares are a bundle of incorporeal rights that give the owner the right to participate in the company’s
profits (income), the right to share in residual assets (capital) and to vote (control). Section 1 of the
Companies Act 71 of 2008 defines a share as: “One of the units into which the propriety interests in a
profit company is divided.’
‘There is a process by which a company issues shares. There are two basic steps:
1. Shares must be authorised.
2. They are then issued to a shareholder.

Authorised and issued shares

The Mol of the company creates and provides for the potential number and classes of shares that the
company is authorised to issue. A company may not sell more shares of a class than the number of shares
that are authorised in the Mol. If additional shares are required to be authorised, this can be effected by
an amendment of the Mol by a special resolution of the shareholders or by the board of directors. This is
a new and important power allocated to the board of directors. The authorised shares may then be issued
or allocated to specific shareholders. The issued shares can never exceed the authorised number of shares.

Classes of shares
A class of shares is a type or category of shares in terms of which all shares categorised in that class have
the same basic characteristics. All shares are presumed to have equal rights, but the company can vary
this to suit its needs or the needs of the shareholder. The distinction between the classes of shares may be
in relation to:
® voting rights
® rights to share in profits
® participating in new issues of capital
® = distribution of residual assets after winding-up.

‘There are a number of different classes of shares that can be determined in the Mol, such as ordinary
shares and preference shares.
Ordinary shares enjoy voting rights, are entitled to receive dividends subject to the Wdividead bs ihe chars of
discretion of the directors and have a right to the residue of assets if the company is wound up. profits that the company
The holder of preference shares has a preferential right to participate first in the has made during a specific
distribution of dividends. They may be entitled to a fixed dividend, which is more year that is available to
advantageous financially than the entitlement of the ordinary sharcholder. Preference shares _D€ distributed to the —
usually do not carry the right to vote. But, shareholders will have the right to vote on any shareholders. Itis within the
aspect that affects their preference ri hts specifically, such as any proposal to amend the Sevier ci ne
pe —_ eee te any BrOP whether
a dividend will be
preferences or the rights, limitations and other terms associated with that share. available (‘declared’) and
If there are several classes of shares issued, the holders of at least one class of share must —_in what amount.
have the right to vote at a general meeting and the holders of at least one class of shares
must be entitled to receive the net assets of the company upon dissolution.

Pre-emptive rights
A pre-emptive right is an important principle that provides that if a private company intends to
issue new shares, every existing shareholder of the company has a right to be offered a percentage in
proportion to the percentage shares already held, of new shares that the company intends to issue,
before those shares are offered to outsiders. The aim is to protect the existing shareholders, who may be
concerned that new shareholders will affect their voting rights. A pre-emptive right does two things:
@ = It places a restriction on the transferability of shares that is a requirement ofa private company (see
the types of company discussed above).
@ = It guards against the dilution of the existing owner's voting power.

444 Chapter 26 | Business entities

 For example, if there are ten shareholders and each holds ten shares, each shareholder has ten voting
rights. Each shareholder has a 10% say in the company. If there is an additional issue of 100 shares of
the same class and ten new shareholders take up those shares, there are 20 shareholders who each hold
ten voting rights. All the shareholders hold the same amount of voting rights, but each shareholder now
only has a 5% say in the company.
If shareholders have pre-emptive rights, they have a first option to acquire the shareholding of
members who wish to sell their shares, proportional to their shareholding in the company. Using the
right of redemption, if five shareholders wanted to sell their shares, 50 shares will be on offer and five
shareholders will have an equal opportunity to accept a proportional part of those shares —in this case,
it will be ten shares each. If each takes up the offer, they will still all have an equal say in the company,
namely 20%.

26.5.2 The board of directors

As the other vital organ of the company, the board of directors has the legal duty of managing the
business of the company. This responsibility is legislated in section 66(1) of the Companies Act 71 of
2008, and states:
“The business and affairs of a company must be managed by or under the direction of its board,
which has the authority to exercise all of the powers and perform all of the functions of the
company, except to the extent that the Act or the company’s Memorandum of Incorporation
provides otherwise.’
This provision highlights the important role of the directors in steering a company. The integrity,
diligence and high standard of governance of the directors are crucial to ensure that a company is
properly and efficiently run.
Recent corporate scandals as reflected in the article below highlight how important the integrity of
the board of directors isand how important it is to have proper regulatory oversight of the board.

Steinhoff catastrophe biggest yet in SA and

ranks among notorious global collapses
Stuart Theobald captured the Steinhoffs implosion ranks of survival. Its shares continue to
extent of the meltdown. alongside global corporate col- trade, almost 90% down on their
The Steinhoff corporate disaster lapses such as that of WorldCom, value a week ago.
is the biggest yet to hit SA. The Tyco and drug company Valeant. Its listed bonds are trading at
value destruction in Steinhoff so Only 27% of Steinhoff’s revenue about half of their face value. The
far is 30 times the 2015 collapse was generated in Africa. The company has said it is concerned
of African Bank, depending on company was global in opera- about the “validity and recover-
how it is measured, and multi- tions and its collapse is global in ability” of €6bn in non-South
ples more the size of JCI, Tigon, its consequences. African assets. That is equivalent
Fidentia, First Strut, and the The company is not yet dead, to R96bn. But R187bn has been
many other corporate collapses of though there has been very little wiped off Steinhoff’s market capi-
the past two decades. information to assess its chances talisation.
Source: Stuart Theobald, Business Day, 11 December 2017

https://www. businesslive.co.za/bd/opinion/columnists/2017-12-11-stuart-theobald-steinhoff-catas-
trophe-biggest-yet-in-sa-and-ranks-among-notorious-global-collapses/

Chapter 26 | Business entities 445

Directors and prescribed officers
A director has no particular qualification and requires no special training or degree.
A director is any person who has been appointed as a member of the board of a company, or a person
who acts as a director if the director is unable to act for any reason (an alternate director), or any person
who is conducting the functions of a director even if that person is not formally appointed as a director.
‘This is important as directors have huge responsibilities and these cannot be evaded easily.
A prescribed officer is a person who is not a director of the company, but performs the functions of
a director. An example may be the chief operating officer or the head of the human resources division of
the company. Prescribed officers are subject to the same duties and liabilities as the directors.

The appointment and removal of directors

The first directors are appointed in the Mol. Then they are appointed in accordance with the provisions
of the Mol but the shareholders must elect at least 50% of the directors. The other directors may be
appointed by the board of directors or an outside party. The director must consent to the appointment
in writing.
Certain persons may be not be appointed as directors. These include:
any person with a lack of legal capacity, such as a minor
a juristic person
any person who has been disqualified or declared delinquent (see below) by a court
any person who is prohibited by public regulation
any person who has been removed from office for dishonesty
any person who has been convicted of offences concerned with fraud and perjury.

Directors can be removed by a shareholders’ ordinary resolution. This right of the shareholders cannot
be removed in the Mol and bestows significant power on the shareholders. But, a director usually has
a contract of employment with the company, and then his removal may amount to breach of contract,
which may entitle him to claim damages from the company.

The duties and liability of directors

Directors have much power in the management of the company. So, both the common law and the
Companies Act recognise that comprehensive duties and obligations, together with properly enforced
liability for breach of these duties, are necessary to prevent an abuse of this power.
Directors’ duties are found in both the common law and they have been legislated in the Company's
Act. There is considerable overlap, and therefore the common law and the Companies Act are discussed
together in the sections below. Both the common law and the statutory duties should be integrated in
your understanding of these duties.
‘The first step is to consider to whom the directors owe these duties. Section 76(3)(b) of the
Companies Act 71 of 2008 states that:
‘a director must exercise the powers of a director and perform the functions of a director in the best
interests of the company’.
In modern company law, this concept includes considerations of the long-term sustainability of the
company. This will require a director to consider other stakeholders, such as the community in which
the company is situated, the environment, employees and others. This reflects what has been termed an
enlightened shareholder value approach,
The directors’ duties are divided into two separate duties. These are:
@ the fiduciary duties (duty to act in good faith)
m the duty of care and skill.

446 Chapter 26 | Business entities

The fiduciary duties
Section 76 of the Companies Act 71 of 2008 is headed: Standards of Director's conduct. This section
sets out the statutory overarching duty of good faith, which requires a director to act with the utmost
honesty and loyalty. It encompasses the following four categories:
1. the duty to exercise powers for a proper purpose — directors may use their powers only for the
purpose for which they were given
2. the duty to exercise an unfettered judgment — when making a decision, a director must act in the best
interests of the company only; she must act independently and not be beholden to any other cause
3. the duty to act only within the scope of their powers — a director may not exceed the authority given
to him by the company
4. the duty to avoid a conflict of interest— this duty has two components:
m = the no-profit rule, where directors may only earn remuneration for their duty to the company.
They may not retain any profits made over and above this remuneration that was made in their
capacity as directors. Any profit earned must be returned to the company.
® =the corporate opportunity rule, which prohibits the director from taking any contract or
opportunity that belongs to the company and that came to her as a director of the company.
This rule applies even after the director has resigned.

Let us look at a case example that deals with fiduciary duty.

Robinson v Randfontein Estates Gold Mining Co. Ltd 1921 AD 168

Principle
A director has a fiduciary duty towards the company of which he is a director. This duty prohibits
the director from making any profit from the company without disclosing it to the company and
obtaining its permission. The duty will endure even after the director has resigned.

Facts

The Randfontein Estates Gold Mining Co. Ltd wished to purchase a piece of land. The owner refused
to sell it to the company. Robinson, a past director of the company, formed a new company and
bought the land. The new company then sold it at a profit.
The court's finding
The court found that Robinson had breached his fiduciary duty to the company, and it ordered
that he return all the profit to Randfontein Estates Gold Mining Co. Ltd.

Duty to act with care skill and diligence

Directors are liable for damages caused by the company as a result of their negligence. In terms of the
common law, the test for whether the director was negligent was a subjective test — she was expected
to exercise the care reasonably expected of a person with her knowledge and experience. She was not
required to have special skills. This was a relatively low bar to set for directors, but this has been lifted.
Section 76(3)(c) of the Companies Act 71 of 2008 contains an objective test, requiring that the
director acts with the care and skill reasonably expected from a person having the knowledge, skill and
experience of that director.
A new principle that was not expressly part of the common law has been incorporated in sections
76(4)—(5). This principle is known as the business judgment rule, and it provides a defence or a safe
harbour for directors who may be found to have breached their duty of care, skill and diligence. These
sections deem that the director has acted with reasonable care provided that:
@ = the director has taken reasonable steps to become informed about the matter
® = she has no material personal financial interest in the matter

Chapter 26 | Business entities 447

w = she has made a proper disclosure of any financial interest to the board of directors in the
prescribed manner
m = she had a reasonable basis to believe, and did believe, that the decision was in the best interests of
the company.

The section also provides that the director can rely on the advice and opinion of employees, experts or
professionals, if reasonable.

Case study Better Bodies (Pty) Ltd

Karabo is a director of Better Bodies (Pty) Ltd, a company that owns and manages health spas in
Johannesburg. The company wishes to expand, and requires the building adjacent to one spa for
this purpose. Unfortunately, the owners of the building refuse to sell it to the company because
of a feud dating back many years between the shareholders of Better Bodies (Pty) Ltd and the
owners of the building. Karabo, looking for a change of career, resigned from Better Bodies
(Pty) Ltd and, together with an associate, formed a new company, Venture Properties (Pty) Ltd, a
property investment company. Karabo was a shareholder and director of this company. Venture
Properties (Pty) Ltd first undertaking was to purchase the building next to that of the spa owned
by Better Bodies (Pty) Ltd. It then sold the building to Better Bodies (Pty) Ltd, realising a large
profit from the transaction.
When the directors of Better Bodies (Pty) Ltd discover that Karabo is a shareholder of Venture
Properties (Pty) Ltd, they wish to take legal action against Karabo for the profit made on the
transaction. Advise Better Bodies (Pty) Limited of their prospects of success in their action
against Karabo.

Director’s liability for breach of his duties

The approach to directors’ liability has moved away from criminal liability and the focus is rather on imposing
personal liability. There are a number of provisions in the Companies Act 71 of 2008 that impose liability.
‘The director will be liable to the company for loss, damage or costs if she breaches her duty to
disclose her financial interests or any breach of her fiduciary duties. She will further incur delictual
liability for breach of the duty to act with care, skill and diligence. Section 162 of the Companies Act
provides for a new sanction that may be used against directors who grossly abuse their position. The
section gives power to the court to declare a director to be delinquent. This will mean that she may not
be appointed a director for seven years if the application against her is successful.

Deregistration of the company

A company comes to the end of its life only once it has been deregistered by the CIPC who will then
remove it from its register. This will be effected if the company is wound up because it is insolvent and
cannot pay its debts or because the shareholders have voluntarily decided to wind up the company.
The CIPC can also deregister a company if, after warnings and demands, it has not complied with
certain requirements, such as the filing of financial returns or if it appears to the CIPC thar it has
ceased to carry on business. The deregistration of the company will not affect the liability of any former
shareholder or director of the company.

What do you think?

What do you think was the motivation behind prohibiting businesses from establishing any further CCs
in the future?

448 Chapter 26| Business entities

Chapter summary
In this chapter, you learned the following about the law
of business entities:
An entrepreneur has a choice of business entities
that can be used to conduct a business.
A sole proprietorship is conducted by the owner
who manages the business.
‘The advantages of sole proprietorships are that
they are cost-effective and simple to start and manage.
The disadvantages are that the proprietor is personally
liable for the debts of the business and the business has
limited potential to grow.
A partnership is an agreement between two or more
people each of whom contributes to the partnership
which is carried on for the joint benefit of the partners.
The object of the partnership is to make a profit.
A partnership is nota separate legal entity, and
therefore the partners are jointly and severally liable for
the debts of the business.
The mutual mandate provides that each partner is an
agent for the partnership and the other partners.
Partners have certain duties towards the partnership
and if these are breached, the partner will be liable to
his co-partners.
There are different types of partnership recognised
in South Africa. These include an extraordinary
partnership and a universal partnership.
An extraordinary partnership is distinguished from
an ordinary partnership because the liability of an
extraordinary partner is limited.
In a universal partnership the partners share all their
property, not only that acquired by conducting a business.
A company is a separate legal entity which means that:
™ ~The shareholders and directors are not liable for the
company’s debts. They enjoy limited liability.
= The company owns its own property.
= = It must sue and be sued in its own name.
= = It has perpetual succession.
The court may disregard the separate legal existence of a
company if this principle is abused by the shareholders
or directors.
Companies are regulated by the Companies Act 71
of 2008.
A company is incorporated by the registration
of its constitutive document, the Memorandum of
Incorporation (Mol).
‘There are different types of company that can be
formed. These include the following:
= profit companies, which include state-owned
companies, public companies, private companies
and personal liability companies
® non-profit companies, which are incorporated for a
public benefit purpose.
In terms of the Companies Act 71 of 2008, no new
close corporations could be incorporated after 2011.
Close corporations have members who own an
interest in the close corporation. The members also
manage the close corporation.
The members owe fiduciary duties to the close
corporation.
The company functions through two organs:
= = the shareholders meeting
m the board of directors.
The shareholders meetings and meetings of the board
of directors must be properly convened and properly
held. There are a number of notice and procedural
requirements that must be complied with.
A company will issue shares to raise capital. These
must first be authorised in the company’s Mol.
There are different classes of shares that may
be authorised. These include ordinary shares and
preference shares. Different rights will attach to the
different types of shares.
In private companies shareholders will enjoy
pre-emptive rights which enable existing shareholders
to be offered a proportion of the new shares before an
outside party is offered them.
Every company is managed by a board of directors.
The directors have the responsibility to ensure that
the company is run with integrity and good governance.
The directors have common law and statutory
duties, which if breached will result in onerous liability.
The directors have a fiduciary duty and a duty to exercise
proper care and skill in the management of the company.
Chapter 26 | Chapter summary 449
 The fiduciary duties include the duty of honesty and
integrity, the duty to avoid a conflict of interest, the
duty to act for a proper purpose and to not exceed the
authority conferred on the director.
Review your understanding
1. Set out the advantages and disadvantages of the
different forms of business entities that were
discussed in this chapter.
Discuss the requirements for a valid partnership.
Nm
3. Is it correct to state that a universal partnership can
be used to regulate the financial consequences of a
romantic relationship?
4. What are the characteristics of a company as a
separate legal entity? Under what circumstances
will a court disregard this?
5. Discuss the difference between authorised and
issued shares.
6. Fairyland (Pty) Ltd has two classes of shares,
namely, ordinary shares that confer one vote per
share and preference shares that do not confer a
right to vote. Cinderella holds all of the issued
ordinary shares in the company and Beauty holds
all of the issued preference shares. Fairyland (Pty)
Ltd has recently decided to issue 100 more shares.
Further reading
Cassim, F.H.I., Cassim, R., Cassim, M.F., Jooste, R., Shev,J. and
Yeats, J. 2012. Contemporary Company Law, 2nd edn, Cape
Town: Juta and Co. (Pry) Ltd
Davis, D., Geach, W., Mongalo, T., Buder, D., Loubser, A.,
Coetzee, L., and Burdette, D. 2013. Companies and Other
Business Structures in South Africa, 3rd edn. Cape Town:
Oxford University Press (Pry) Ltd
450 Chapter 26 | Review your understanding
The company’s life comes to an end when it is
deregistered at the CIPC.
Close Corporations are separate legal entities that are
regulated by the Close Corporations Act 69 of 1984.
Explain to Cinderella and Beauty what their
pre-emptive rights entail.
7. Mosiuis an architect. He is a director in a big
architectural company. He becomes aware from
a colleague in his office that a lucrative contract
to build a new development is available. He
thinks that he will have a better chance of being
awarded the contract if he tenders for it on his
own, as he will be able to offer a more reasonable
price than a big company. He resigns from the
company, tenders for the contract, and he is
awarded it. Advise the company if they have
any remedy.
8. Section 76(3)(c) of the Companies Act 71 of 2008
requires that directors of companies act with a
‘degree of care, skill and diligence’. Analyse this
duty and consider to what extent this duty, read
together with section 76(4) and (5), effectively
regulates the directors’ conduct.
Blackman, M.S., Jooste, R.D. and Everingham, G.K. 2002.
Commentary on the Companies Act, Vol. \ (as updated per
revision service) Cape Town: Juta and Co. (Pry) Ltd
Delport, P. (ed). 2011. Henochsberg on the Companies Act 71 of
2008. Durban: LexisNexis South Africa
 leary ehcog
The law of insurance
27
The main ideas
= What is insurance?
Concluding contracts of insurance
= Rights and duties of the insurer
@ Rights and duties of the insured
The main skills
Define insurance.
Understand risk.
Understand the meaning and effect of insurable interest.
Distinguish indemnity from non-indemnity insurance.
Distinguish between contracts of insurance and wager.
Explain the requirements fora valid contract of insurance.
Identify and discuss the essentialia of a contract of insurance.
Explain the rights and duties of the insurer and the insured.
Discuss over-insurance, under-insurance and double insurance.
Explain double insurance in indemnity and non-indemnity insurance.
Apply your knowledge of insurance law to analyse and solve hypothetical case studies and
problem questions.

This chapter will focus on the contract of insurance. We will determine what insurance is and explore
different types of insurance. We will also consider how a contract of insurance is concluded and examine
the essential requirements and elements of an insurance contract. The different parties to insurance
contracts will be identified and their rights and duties discussed.

Before you start

Assume that you have been saving for years to buy an apartment. You approach an estate agent, who
finds you a suitable apartment, close to where you work, with a wonderful view, and a brand new
kitchen and bathroom. Your offer is accepted and the property is transferred into your name. You move
into the apartment with great excitement. You work out that you will finish paying the bond instalments
to your bank in approximately three years’ time. About two months later, the entire apartment block
burns down while you are at work. Your apartment and all your household contents are destroyed.
Although no one was injured, you have lost everything and, to make things worse, you still need to pay
the bond instalments. How could you have protected your property?
We need to accept that life is full of risks and that accidents are bound to occur, so we need insurance
to protect ourselves from potential losses such as these.

27.1 What is insurance?

A contract of insurance is concluded to transfer the risk of possible loss to an insurance company.
Insurance therefore is an attempt to protect ourselves and our possessions, such as our houses and our
cars, against possible future loss or damage. In exchange for regular payments, insurance companies will
pay us out a certain amount of money, if the event against which we are insured should happen.

Chapter 27 | The law of insurance 451

 In addition to the usual home, household contents and car insurance, people also insure against
potential liabilities, such as professional negligence insurance, their lives, their bodies and the lives of
close family members.
Insurance is defined as a contract of good faith between two parties, the insurer and the insured.
‘The insurer is the party that provides the insurance and agrees to give a sum of money or its equivalent
to the insured if a specified uncertain event occurs. The insured is the person who pays money, a
premium, to insure her interests against unforeseen events.
‘The insurer will be a professional insurer. The company concludes contracts of insurance with many
people. The insurer collects premiums from these people and then pays claims for losses from the pool of
funds, which it also manages.
For example, Nrombi, with the assistance of her insurance broker, insures her car with Cut Costs
Insurance Company against the risk of loss or damage caused by a motor vehicle collision. The contract
is for one year and Ntombi agrees to pay a monthly premium of R600 to the insurer. Cut The insurance
company is the insurer and Ntombi is the insured. In many cases an intermediary, such as an insurance
broker or agent, may help to conclude the contract, as occurred in Ntombi’s case. Should Ntombi’s car
be damaged in a collision, the insurer will compensate her for her loss. The chance that this
may occur is the risk. The collision, on the other hand, would be the peril — the event that Risk in insurance law is
defined as the possibility
causes the loss. The car is the object of the risk.
that an uncertain event
‘The insurance industry is regulated both by the common law and three pieces of or peril might occur in the
legislation, namely: future, causing the insured
1. the Long-Term Insurance Act 52 of 1998, which applies to the long-term to suffer a loss.
insurance industry
2. the Short-Term Insurance Act 53 of 1998, which applies to the short-term A peril in insurance law
insurance industry is the event that causes
3. the Financial Advisory and Intermediary Services Act 37 of 2002, which introduced De
minimum standards aimed at protecting consumers of financial products (which
include insurance policies) and Policy Protection Rules to promote sound The object of the risk is
the item or person insured.
insurance practices.

Activity 27.1
1, Explain the importance of insurance.
2. Make a list of the different kinds of risk we face in everyday life. Compare your list with the
list of the person sitting next to you. What type of insurance could you take out to protect
against these risks?
3. Have you concluded an insurance contract? Draw up a list of your existing contracts of
insurance and compare these with your classmate’ list.

Case study Your car insurance

On 1 March, you insure your motor vehicle, a 2013 VW Golf, with Easy Risk Insurance Company
Ltd, for R125 000, being the value of the Golf. You take out comprehensive motor vehicle
insurance cover, insuring against accidents, theft and fire. Can you identify the risk, the peril and
the object of the risk?

27.1.1 The difference between insuring and gambling

At this stage, it is important to be able to tell the difference between an insurance contract — A wager is a gambling
and a contract of wager. A contract of wager is a gambling contract. Betting on horses, contract and en example
for example, is a contract of wager. In both an insurance contract and a wager, there is an ERO CL CRE:

452 Chapter 27 | The law of insurance

element of uncertainty or chance — the parties do not know whether something is going to happen.
Both types of contract involve risk.
An insurance contract differs from a wager in a number of ways.
In a wager, the uncertain event is arbitrary. This means that the unexpected event does jf an event is arbitrary, it
not relate to or result in a loss of something that the insured already possesses. The risk of _ depends on chance.
loss is artificially created. For example, assume your friend bets you R5 000 that you will
not be able to complete the Comrades Marathon. You accept the bet. It is uncertain whether you will
finish the race or not. If you do, you will receive R5 000. This money does not replace something that
you have lost. If you do not finish the marathon, you will have to pay your friend R5 000.
You and your friend have chosen an arbitrary event and your interest in the outcome has been created
artificially. The risk was the bet.
In the case of insurance, the uncertain event is not arbitrary, but specific. This means that, if an
event specified in the contract occurs, it will result in a loss to the insured. Therefore, in a contract of
insurance, the insured acts sensibly by taking out insurance to protect against a potential loss. There is no
gamble on the occurrence of the risk.
‘The two contracts also have different purposes. The purpose of an insurance contract is to protect
the estate of the insured; the insured has a real interest in the non-occurence of the insured event. The
purpose of a wager, however, is to increase the estate of the insured.
A wagering contract, unlike a contract of insurance, is also unenforceable in court. This means that,
if you win a wagering contract and the other party does not pay you, you cannot go to court to get an
order forcing the other party to pay you. So, if you do finish the Comrades Marathon and your friend
does not pay you the R5 000, you would not be able to sue him in court for this money.
In an insurance contract, the insured takes out insurance to protect her interests against everyday
risks, which could cause a loss. In wagers, parties create their own risk. So, a contract of wager does not
comply with the principle of legality and it is unenforceable.

27.1.2 Insurable interest

For an insured person to be compensated for a loss, he must prove an insurable interest in that loss,
This means that the insured must show that he is commercially worse off as result of the event that
took place. For example, in Littlejohn v Norwich Union Fire Insurance Society 1905 TH 374, a husband
(married out of community of property) insured the contents of his wife’s shop. He was the manager of
the shop and earned a salary from it, but did not own the shop or the stock. The stock was destroyed in a
fire and the insurer refused to pay the claim, alleging that there was no insurable interest as the husband
did not own the stock. The court disagreed and held that there was an insurable interest as the husband
was in a worse off position commercially after his wife's property had been destroyed. It did not matter
that he was not the owner of the stock. So, in order to claim from the insurer, all the insured need prove
is a real financial benefit if the insured object continues to exist, or that something of value will be lost if
the object is destroyed or damaged.
These principles were recently confirmed in Lorcom Thirteen (Pty) Ltd v Zurich Insurance Company
South Africa Ltd 2013 (5) SA 42 (WCC), which is discussed below.

Lorcom Thirteen (Pty) Ltd v Zurich Insurance Company South Africa Ltd 2013 (5)
Ny Pa A fea) |

Principle
An insurable interest is required to enable an insured person to claim for a loss in terms of an
indemnity contract of insurance. It is used to determine whether the insured has suffered a loss
and also distinguishes a contract of insurance from a wager. Insurable interest, however, is not a
self-standing requirement for the contract of insurance.

Chapter 27 | The law of insurance 453

 Lorcom Thirteen (Pty) Ltd v Zurich Insurance Company South Africa Ltd 2013 (5)
SA 42 (WCC) (continued)

Facts

A fishing vessel, the MFV Buccaneer, was lost at sea in 2008. The insurer rejected the claim
on the basis that insurable interest was lacking. The insured, Lorcom, did not directly own the
vessel. At the time of the loss, the vessel was owned by Gansbaai Fishing Wholesalers (GFW),
but Lorcom held all its shares. GFW had made the boat available to Lorcom for fishing purposes.
Lorcom had a permit authorising fishing with the vessel. There were also certain contractual
arrangements in place which created a factual expectation that Lorcom would become the
owner of the vessel in the future.
The court's finding
The court found that Lorcom’s 100% shareholding in GWF, together with its right to use of the
vessel for shipping and its expectancy of becoming owner, was sufficient to provide an insurable
interest. The court was satisfied that this was a sufficient interest to allow the insured to claim
payment of the loss of the market value of the vessel from the insurer.

27.1.3 Types of insurance

We classify insurance contracts as cither indemnity insurance contracts or non-indemnity A patrimonial loss is a
insurance contracts. In the case of indemnity insurance, the amount for which the calculable financial loss.
insured is covered is related to the actual patrimonial loss that she suffers. In the case of
non-indemnity insurance, the amount for which the insured is covered is not related to the actual loss
suffered and is usually agreed upon in advance.
Indemnity insurance refers to protecting the insured against future financial loss or damage. If loss
or damage occurs, the amount of compensation is intended to return the insured to the same financial
position she was in before the insured event occured. Non-indemnity insurance does not aim to return
the insured to her previous financial position, but to pay out a specific amount of money when the
risk occurs.

Indemnity insurance
Indemnity insurance is so called because we say that the insurer indemnifies the insured against the loss
caused by the occurrence of the risk. This means that the insurer carries the risk of loss for the insured.
Indemnity insurance is based on the principle of indemnity, which does not allow the insured to
recover more than the actual loss or damage that was suffered. The aim of indemnity insurance is to put
the insured in the same position that she was in before the loss took place. Should the insured event
happen, the insurer will pay the actual amount of loss suffered by the insured.
Assume Ntombi’s car was insured for R300 000 (its value). Ntombi reverses her car into a pole. The
cost of repairing the damage is R30 000. The loss Nrombi has suffered is R30 000 and this is how much
the insurer will pay her. It will indemnify Nrombi for her loss only. So, Ntombi will not receive payment
of the full R300 000 she insured her car for.
Examples of indemnity insurance are:
= motor vehicle insurance
@ fire insurance
® public liability insurance.

454 Chapter 27 | The law of insurance

 PX
ts (Tez Public liability insurance

Public liability insurance is insurance that businesses and private persons can take out to protect
themselves if they cause financial loss to a member of the public. If you are in a supermarket and
you slip on a wet floor, you could claim your medical expenses from the shopping centre. These
medical expenses will be covered by the shopping centre’s public liability insurance.

As you have learned, in indemnity insurance, the liability of the insurer is limited to the amount of the
loss the insured can claim when the risk against which she is insured occurs. In the case of indemnity
insurance, the insurable interest must exist at the time of the loss.
If Ntombi is involved in an accident with her car, her insurable interest must exist when the damage
occurs. Assume Nrombi had sold her car to her brother and was borrowing the car at the time of the
accident. Then, she would not have an insurable interest at the time of the loss, and she would not be
able to claim for the damage to the car from the insurance company (even if she was still paying the
insurance premiums).

Non-indemnity insurance
In the case of non-indemnity insurance, the insurer undertakes to pay a specified sum of money to
the insured, if the risk against which she is insured occurs. The amount the insurer pays to the insured
is pre-determined by the parties. The amount paid out is not related to the loss suffered. This type of
insurance is usually related to the person of the insured or a third person,
An example of non-indemnity insurance is life insurance. If the insured has life insurance for
R500 000 and she dies, the insurer will pay out R500 000 to the beneficiary of the policy. This
R500 000 is not related to the value of the insured’s life, but was agreed upon by the parties in the
insurance contract.
The purpose of non-indemnity insurance is not to indemnify the insured against the risk of loss, but
to pay out an agreed amount when the risk occurs. The actual loss suffered by the insured is not relevant.
With non-indemnity insurance, the insurer is liable for the agreed-upon sum of money. The insured can
claim this sum on the occurrence of the risk.
With indemnity insurance, the insurable interest must exist at the time of the loss, In the case of
non-indemnity insurance, the interest must exist when the contract is concluded. A person has an
interest in the life of their spouse. For this reason, a wife can insure her husband's life. ‘This interest must
exist at the time at which she concludes the contract of insurance. In other words, she must be married
to him at the time at which she concludes the contract. The insurance company will still be obliged to
pay her R500 000 when the husband dies, even if they were divorced at the time of his death — because
there was an insurable interest when the contract was concluded.

Activity 27.2
Explain how a contract of insurance differs from a contract of wager.

Case study Sam and Jessica’s contract

Sam concludes a contract with Jessica. The contract provides that if Sam bungee-jumps off the
Bloukrans Bridge, Jessica will pay Sam R1 000. Is this a contract of insurance or a contract of
wager? What are the consequences of this contract?

Chapter 27 | The law ofinsurance 455

 Case study Life insurance policies

Katongo’s father is an aeroplane pilot. He takes out life insurance to provide for Katongo in the
event of his death. Katongo’s father insures his life for R800 000. Nceba’s father is a banker. He
insures his life for R700 000, and declares Nceba to be his beneficiary. It so happens that both
Katongo and Nceba’s father die in an aeroplane crash (Katongo’s father was the pilot and Nceba’s
father was a passenger). The insurance companies pay Katongo and Nceba the proceeds of each
policy. Are the life policies indemnity or non-indemnity insurance policies? Explain your answer.
Assume that Katongo tells Nceba that, because her father’s insurance paid out more money,
her father’s life was worth more than Nceba’s father’s life. Is this the case? Explain the situation
to Nceba, who is very upset about what Katongo has to say.

Case study Andiswa’s dog

Andiswa buys a dog, a bull terrier, named Bailey. The dog is very accident-prone. Andiswa
decides to take out pet insurance against potential vet's bills. After about six months, she realises
that she is unable to care for the dog, and so she sells the dog to her best friend, Josie. Andiswa
keeps the pet insurance contract and carries on paying the premiums (She forgot that she had
concluded the contract and the premiums are debited from her bank account.). The dog then
eats a fish hook while walking on the beach. Josie is very upset and takes the dog to the vet,
who operates and saves the dog's life. The vet's bill is R10 000. Josie tells Andiswa about the
incident and Andiswa then suggests that they submit a claim for the loss in terms of the pet
insurance contract. The insurer rejects the claim and says that as Andiswa no longer owns the
dog, she does not have an insurable interest. Explain to Andiswa whether she has an insurable
interest in the dog and whether she is entitled to payment from the insurer. Explain to her the
importance of the time when the insurable interest must exist.

27.2 Concluding contracts of insurance

Let us now examine the parties to a contract of insurance and the legal requirements and essential
elements of a contract of insurance. To illustrate these concepts, we will use the example of Ntombi, who
took out insurance on her car with Cut Costs Insurance Company.

27.2.1 Parties to the contract

In a contract of insurance, two parties need to be present. These parties are the insurer and the insured.
The insurer is usually an insurance company that offers insurance to make a profit.
In our example, Cut Costs Insurance Company is the insurer. ‘The insured is the person protected by
the insurance contract. Nrombi is the insured.
The insured can either be a natural person (a human being) or a juristic person, such asp jncurance law an
a company. Third parties may be involved in concluding the insurance contract between the _ intermediary is a person
two main role-players. ‘These parties are called intermediaries. who negotiates insurance
Intermediaries can be either insurance brokers or insurance agents. An insurance contracts for another
broker is an independent intermediary. The broker acts as an agent of the insured and is Petr A oes
3 advice to this person about
not employed by or tied to any specific insurer. The broker has the duty to choose the best fetes ame
insurer for the insured, depending on the insured’s needs,
If] want to insure my car, a broker compares the policies of different insurance
companies and advises me on which policy would best suit my needs. Even though the broker acts for
the insured, the broker’s commission is paid by the insurance company.
An insurance agent, on the other hand, is an intermediary who acts as an agent of the insurer.

456 Chapter 27 | The law of insurance

 In contracts of life insurance, a beneficiary is often appointed. This is the person t nue None
mo. . . . 2 . s . . sO °o R 5

whom the insurance company will pay the sum insured when the insured dies. a beneficiary is the
person whom the insured
27.2.2 Requirements for insurance contracts nominates to receive
As with any contract, certain requirements have to be met for the conclusion of a valid payment of the proceeds
contract of insurance. These requirements are: of: the policy,
™ consensus or agreement between the parties to the contract
the legal ability or contractual capacity to enter into the contract
the legality of the contract
the physical possibility of carrying out the contract
formalities or compliance with the contract's formal requirements.

Agreeing to the contract

The parties must reach agreement or consensus on the necessary elements to an insurance contract.
Consensus is reached through one party making an offer and the other party accepting the offer. In the
case of a contract of insurance, consensus must be reached on the following matters:
= = the person or property to be insured, for example, a specific car
m= the risk insured against, for example, loss caused by theft or an accident
= the amount of the premium payable by the insured
Lia} the sum of money payable by the insurer if, for example, the insured car is stolen or involved in
an accident
the period of insurance, for example, a year for car insurance or until the person insured dies in
life insurance.

‘The parties achieve consensus through offer and acceptance. In the case of a contract of insurance, the
offer is made by the insured, not the insurer. The insurer merely invites the public to apply for insurance.
The insured makes the offer by completing and signing an application for insurance. The application for
insurance is called a proposal. The proposal is a printed form issued by the insurer. It contains a number
of questions which the insured must answer.
Questions are asked by the insurer to allow it to assess the possibility of the risk in question occurring.
For example, in a proposal for car insurance, questions are asked about the age and driving experience of
the nominated driver, whether the car has an alarm system and where the car will be parked at night.
The insured is asked to warrant the truth of the answers, and to declare that they will be
The policy is the written
the basis of the contract of insurance. The insured must therefore answer the questions in 5
contract of insurance,
the proposal honestly, carefully and accurately. If the insurer accepts the proposal, consensus pic, incorporates
has been reached and a contract of insurance comes into existence. The insurer then sends _ the proposal.
the insured the policy of insurance.
These days, many proposals are completed both electronically (online via the insurer's website)
and telephonically. These are perfectly legitimate business practices. Nevertheless, once a contract is
concluded, the contract is still usually recorded in writing in a policy.
Often, at the end of the insurance period, the insurer sends a renewal notice to the insured. The
renewal notice is a new offer for insurance, this time made by the insurer. With this notice, the insurer
offers to renew the insured’s insurance. The renewal notice can include changes, such as an annual increase
in the premium. Once the insured accepts the offer, a new insurance contract comes into existence.

Who can conclude an insurance contract?

The capacity or ability of a person to be party to a contract is that person’s contractual capacity. The
general rule regarding contractual capacity is that a person obtains full capacity to conclude a contract
when she becomes a major, that is, when she turns 18. This rule also applies to insurance contracts.

Chapter 27 | The law ofinsurance 457

Legality
The purpose of the insurance contract must be legal. The manner in which the contract is concluded
must also be legal. For example, if the purpose of an insurance contract is to insure the getaway car of
a gang of thieves, the contract is not legal. If the contract is concluded by fraud, the way in which it is
concluded is not legal. Once again, a distinction must be made between an insurance contract, which
insures interests against everyday risks, and wagers, where parties create their own risk. A contract of
wager does not comply with the principle of legality and is unenforceable.

Possibility of carrying out the contract

If the insurable interest no longer exists when the parties enter into the contract, the contract of
insurance is not physically possible. If Ntombi’s car is written off in a collision when the period or term
of her insurance contract ends, she cannot renew the insurance for that particular vehicle.

Formal requirements for the contract

There are no legal formalities needed for the conclusion of a contract of insurance. The contract of
insurance does not have to be in writing. A verbal contract of insurance is valid. In practice, however, the
contract is usually recorded in a written document, known as the policy and a written contract is always
preferable to a verbal contract. The written document provides evidence that a contract was actually
concluded and also sets out the terms of the contract. The policy is often a standard document prepared
by the insurer. The insured is provided with schedules, which list the insured items and any special terms
and conditions.

27.2.3 Essential elements of insurance contracts

The essential elements, which distinguish a specific type of contract from other contracts, are referred to
as the essentialia of the contract. In the case of a contract of insurance, these are:
= = the insurer must compensate the insured if an insured loss occurs
® the insured must pay a premium or undertake to pay a premium
= = there must be an element of uncertainty or risk in the contract.

The insurer’s obligation to compensate the insured for his loss

Should the insured event occur and cause the insured a loss, the insurer is obliged to compensate the
insured for his loss. In the case of indemnity insurance, the amount that the insurer will pay depends on
the actual loss suffered by the insured. With non-indemnity insurance, the insurer pays out the agreed
upon cover. Cover means the extent of the insurer's liability to accept the loss suffered by the insured.

Payment of a premium by the insured

The premium is the sum of money the insured undertakes to pay to the insurer for the A suspensive condition is
insurance. The actual payment of the premium is not necessary for the insurance contract a condition that suspends
to come into existence. An undertaking by the insured to pay the premium is enough to the operation of the
satisfy this essential requirement for a valid insurance contract. The rule is therefore that contract until the condition

the insurance contract comes into existence when an undertaking to pay the premium has (an uncertain future event)
is met. In other words,
been given by the insured. Sometimes, an insurance contract places a duty on the insured the contract of insurance
to pay the premium. In practice, however, the contract is usually subject to a suspensive will usually become
condition of payment. enforceable only when the
insured pays the premium.
The occurrence of an uncertain future event
It is not possible to insure against events that are certain to occur. The risk must be an uncertain event.
The insurer will be obliged to compensate only if an uncertain event causes a loss. The uncertain event
that causes the loss is the peril. The possibility of the loss occurring is called the risk. An insurance
contract is concluded to protect against possible losses.

458 Chapter 27 | The law of insurance

 Uncertainty can occur in two different ways:
1. ‘The event itself could be uncertain, for example, it is uncertain whether a person's house will be
broken into or burn down in a fire.
2. An event can be uncertain in the sense that it is uncertain when it will occur — for example, in life
insurance, death is certain to occur, but it isnot known when the insured will die.

‘The risk is therefore an important element to a contract of insurance, and it must be accurately described
in the contract. The description of the risk must include the following:
@ the property or person to be insured, for instance, household contents or a person’s life
@ = the peril against which the object is insured, for example, theft or death
® any circumstances which could affect the risk, for example, not locking the doors, or participating
in an extreme sport, such as skydiving.

‘The contract of insurance may even specifically rule out certain risks, An exclusion clause is a contractual
term that provides that the insurer is not liable if the risk occurs under certain circumstances. An
exclusion clause can therefore exclude the insurer from liability. In the case of motor vehicle insurance,
for example, a typical exclusion clause may state that the insurer will not have to pay the insured, if the
damage occurs while someone without a valid driver's licence is driving the vehicle.

Is insurable interest an essentialia?

Some academics argue that insurable interest is an essentialia of a contract of insurance, but this is not
correct and the true position is that insurable interest is only needed for an insured to claim for a loss.
Let us look at the following case studies as examples.

Case study Jacob's laptop

On 1 July, Jacob insures his laptop against theft with Low Risk Insurance Company Ltd for
R15 000, being the value of his laptop. Identify the risk, peril, parties to the insurance contract
and state whether this is an indemnity or non-indemnity policy of insurance.

Case study Luvuyo’s life insurance

Randall acts as Luvuyo's broker, and helps Luvuyo conclude a life insurance contract with
First Life Insurance Company. Luvoyo stipulates that his daughter, Khwezi, should receive the
proceeds of the policy when he dies. Identify the parties to this contract of insurance.

Case study Yusuf’s car

Yusuf is a university student. Yusuf’s father buys a car for him to drive to and from university.
The car is registered in Yusuf's father’s name. He clearly indicated to Yusuf that he (Yusuf) is not
the owner of the car, but merely has the right to use it. Yusuf insures the car. The car is stolen.
The insurer does not want to pay Yusuf the value of the car, because it says he did not have an
insurable interest in the car, as he was not the owner of the car. Did Yusuf have an insurable
interest in the car?
Hint: you should consider whether Yusuf will be financially worse off without the car.

Chapter 27 | The law of insurance 459

 Case study Insurance for illegal trade?

Kim and Khaya are notorious rhino poachers. They poach approximately 10 rhinos in the Kruger
Park, and then decide to insure the rhino horn pending its delivery to the East. Is this a valid
contract of insurance?

27.3 Rights and duties of the insurer

Both the insurer and the insured have certain rights and duties in terms of the contract A right is a legal
of insurance. Consider again the case of Nrombi, who insures her car with Cut Costs entitlement to something.
Insurance Company. Assume she has an accident that was not her fault. Cut Costs A legal duty is something
Insurance company pays for the damage caused to her car. The most important duty of Cur that somebody is required
Costs Insurance Company is to compensate Ntombi for her loss, because of the occurrence © 99 Dy law.
of the risk. The most important right of the insurance company is the right to claim this
amount back from the person who caused the accident.

27.3.1 Rights of the insurer

The insurer has a right of subrogation, aright to receive payment of the premium and a Subrogation means ‘to
right to receive full disclosure of important information affecting the risk (see the discussion put one person in the
in section 27.4.2. below). place of another in respect
Subrogation is best illustrated bya practical example. Ntombi’s car is insured with of a right or claim’.
Cut Costs Insurance Company. Peter negligently drives into her car at an intersection.
Nrombi has a claim against Peter for the cost of the damage. She has two options: she can claim the
damages from her insurance company, or she can claim the amount from Peter. Peter works as a teller
at a supermarket, and he does not have insurance. It is quicker and easier for Ntombi to claim from her
insurance company as opposed to claiming from Peter, which will involve taking the matter to court. So,
Ntombi wisely chooses to claim the money from her insurance company. If the insurance company pays
out the full amount to which she is entitled, Nrombi can no longer claim the amount from Peter, but
the insurance company can choose to recover the amount paid from Peter.
The principle of subrogation prevents Ntombi from being paid out for her damage by both her
insurer and the wrongdoer. According to this principle, once an insurer has paid the insured for her loss,
the insurer can step into Ntombi’s shoes, and has the right to sue the actual wrongdoer to recover the
amount that was paid to the insured. Nrombi’s insurance company can therefore sue Peter, if it chooses
to do so. The insurer takes the place of the insured, and sues the wrongdoer.
The contract of insurance sometimes places a duty on the insured to pay the premium. If this is the
case, the insurer has a right to claim the premium from the insured should the insured fail to pay the
premium by the due date,

Activity 27.2
In the example above, Ntombi has the choice of claiming her damages from her insurance
company or from Peter. Which do you think would be the better choice for Ntombi? Why do
you think so?

27.3.2 Duties of the insurer

The main duty of the insurer is to compensate, or repay, the insured the amount that she has lost.
If Nrombi is involved in an accident and the cost to repair her car is R70 000, Cut Costs Insurance
Company will have to pay her an amount of R70 000.
‘The duty of the insurer to compensate the insured arises when the risk occurs and the insured suffers loss.
When Nrombi is involved in the accident, her motor vehicle is damaged, and she suffers a financial loss.

460 Chapter 27 | The law of insurance

It is then Cut Costs Insurance Company's duty to compensate her for the damage that has arisen. The
amount payable by the insurer depends on whether the type of insurance is indemnity or non-indemnity
insurance.
As far as indemnity insurance goes, the amount that the insurer pays out will not always be equal to
the loss suffered by the insured. The amount may be less if the insured has insurance for an amount less
than the value of the item that is insured — this is called under-insurance.
If you have ever had to claim from your car insurance company, you will know that you an exeess js the fixed
often have to pay the first few thousand rands worth of damage yourself. This is because amount of the loss payable
motor vehicle insurance usually contains an excess clause. This means that the insured is by the insured.
liable for a fixed amount of each loss. For example, the insured claims for R50 000 after her
car is damaged in a collision. If the excess is agreed to be R5 000, the insurer will only pay out R45 000.
If the loss were less than R5 000, there would be no claim. An excess clause has the effect of reducing the
premiums, because it means that the insurer does not have to pay out for small bumps to the car which
cost less than R5 000 (or the agreed excess figure) to fix.
If the insured, when claiming for loss, makes any untrue statement or hides or does not reveal any
facts that are relevant to the claim, the insurer may not have to pay any benefits in terms of the policy.
For example, Pumeza’s house is burgled and her television and surround-sound system are stolen. When
she submits a claim to her insurance company, she decides to claim for a laptop that she did not own. If
the insurer finds out and the policy contains a forfeiture of benefits clause for fraud, she will forfeit all
benefits, which means that she will not get paid a cent from the insurer. However, if the policy does not
contain a forfeiture clause, the insurer will be obliged to pay her for the valid portion of her claim (in
this case, for the television and sound system).
The General Code of Conduct in terms of the Financial Advisory and Intermediary Services Act 37
of 2002 places a duty on financial service providers, such as insurance companies and insurance brokers
and agents, to ensure that their insurance contracts are:
= clear
= provided in plain language
® appropriate for the consumer in question
= not misleading.

Financial service providers must disclose the following to the consumer:

the policy's benefits
= monetary obligations
@ risks
@ restrictions.

Special terms and conditions must be clearly pointed out and explained to the consumer, such as:
® exclusion clauses
BH excesses
= restrictions.

What can you learn from the following two case studies regarding claims and the duties of the insurer?

Case study Pumla’s car

Pumla’s car is insured with ABC Insurance Company Ltd. She is involved in an accident caused
by the negligent driving of Johan. Pumla claims her damages from ABC and it pays her the full
amount for which it is liable. Pumia then sues Johan for the damages to her car. Is she allowed
to do this? If not, who can hold Johan liable?

Chapter 27 | The law ofinsurance 461

 Case study Angelina’s household insurance

Angelina has taken out insurance for her household contents. The policy contains a forfeiture
clause. One night, somebody breaks into her house, and steals a pair of diamond earrings and a
gold necklace. Angelina claims for her loss from her insurer. She also claims for a sapphire ring,
which she has never owned, thinking that she will be able to get some extra money from her
insurer. Her insurer finds out about this and refuses to pay for her loss relating to the earrings
and necklace. She is upset and she threatens to sue them for her loss. Does she have a case
against the insurer? Motivate your answer.

27.4 Rights and duties of the insured

In our earlier example, Ntombi’s main right is to be compensated by Cut Costs Insurance Company Ltd
if she suffers a loss. Her most important duty is to disclose all information that is relevant to the contract
of insurance to Cut Costs Insurance Company.

27.4.1 Rights of the insured

When the insured suffers loss because the risk against which she is insured materialises, the insured has
the right to be compensated for the loss by the insurer.

27.4.2 Duties of the insured

When an insured person submits an application for insurance, the insurer must make two
decisions. First, it has to decide whether it will accept the risk and conclude a contract of Promise, in this context, is
insurance. Then, it has to decide what premium it will charge or which terms it will include a warranty.
in the contract. The insurer makes these decisions by calculating the extent of the risk it will
have to carry. The risk calculation is based on the information supplied by the insured in When parties act in good
the proposal form. For example, if you wish to insure your life, but you have a pre-existing faith during negotiation,
medical condition, the insurer may agree to offer you life insurance, but in all probability it means they have
regard for the public
will include a term that states that there will be no cover if you die from the pre-existing
interest, public policy,
medical condition. the community's sense
So the insured has certain duties when filling out the proposal form: of justice, fairness, and
® = The insured must answer all questions in the application form truthfully, and must constitutional values.
supply additional relevant information.
= ‘The insured must also, if required to do so by the proposal, promise that the A fraudulent claim js a
information in the proposal is correct. claim for damage that did
not occur, because the
risk did not happen. For
In order to assess the risk, the insurer relies on the information provided by the prospective
example, if you pretended
insured when answering the questions in the proposal form (which could be printed or an your home was broken
online form), This is why the parties must conclude the contract of insurance in good faith. into in order to claim from
During the existence of the contract, the insured must also act in good faith, and must insurance, your claim
not submit fraudulent claims to the insurer. Unfortunately, insurance claims are not always would be fraudulent.
honest. Insurance companies routinely lose money by paying out false claims. This usually
leads to an increase in premium charges for honest and dishonest clients alike. To protect An inflated claim is
the insurer from fraudulent or inflated claims, insurance policies often contain a clause a claim for more than
the damage actually
to protect the insurer from having to compensate the insured in the case of a fraudulent
suffered as a result of
or inflated claim. These forfeiture clauses usually provide that ifa claim is fraudulent or the occurrence of the
inflated, the insurer will be allowed to cancel the insurance, and that all benefits under the risk, such as claiming for
contract will be lost additional items that were
What is the position if the policy does not contain a ‘fraudulent claim’ clause? not stolen, when your
If the claim is entirely fraudulent, the insurer may reject the claim as there is no loss. house was burgled.

462 Chapter 27 | The law of insurance

However, if the claim is inflated, the insurer is liable for the valid portion of the claim. The insured does
not forfeit the entire claim.
Let us consider the duties of the insured in more detail.

Duty to provide all relevant information

The insured must answer all questions in the proposal truthfully and accurately. Even if the proposal
form does not ask an insured for additional information, the insured must supply any additional
information that could materially affect the insurer's decision to insure or the amount of the premium it
is going to charge. For example, in the case of motor vehicle insurance, the insured has a duty to disclose
a drunk-driving conviction. In the case of life insurance, the insured must state whether she is a smoker.
This is the insured’s duty to disclose.
If the insured fails to answer truthfully or accurately in the proposal form, there is a misrepresentation.
If the insured fails to give all relevant information, there is a non-disclosure. In both cases, where the
information in question is material to the assessment of the risk, the contract will be voidable. In other
words, the insurer can decide whether to continue with the contract or to cancel the contract. The
insurer can also decide whether it wishes to pay a claim.
If the insurer cancels the contract, the insurer will have to return any premiums paid A fact ic materiel te
by the insured. It is important to note though that the insurer can only cancel the contract _ reasonable person would
for misrepresentation or non-disclosure if the insured misrepresented or did not disclose consider the fact to be
a material fact. In other words, the fact that was misrepresented or undisclosed must relevant to the assessment
have been one that a reasonable person would believe could influence an insurer's decision _ Of the risk by an insurer.
The test to determine
to grant insurance to the insured or the amount of the premium payable. This principle a Nea
§ P Pa) e P materiality is objective.
was confirmed in Mutual and Federal Insurance Company Ltd v Oudtshoorn Municipality
1985 (1) SA 419 (A), It is also part of the statutory test for misrepresentations and
non-disclosures in section 59(1) of the Long-Term Insurance Act 52 of 1998 and section 53(1) of the
Short-Term Insurance Act 53 of 1998. These provisions are discussed in more detail shortly.
Let us assume your mother, aged 45, wishes to insure her life. In the proposal form she makes
a mistake and states that she is 44 years old. She does not disclose that she works asa police officer
assigned to address gang violence, Your mother has misrepresented her age bya year, but a small mistake
of one year is not usually a material fact in life insurance. She has failed to disclose her occupation.
This is a material fact in life insurance because the nature of her occupation is such that it places her life
in danger. A reasonable person would regard this fact to be material to an insurance company. The fact
would influence the decision of the insurer when deciding whether or not to insure your mother’s life.
If the insurance company does decide to insure your mother’s life, this fact would influence the premium
it charges. This is because most insurers charge higher premiums when the risk is increased.

Added value Reasonable person

The reasonable person standard is one often used in the law and is an objective enquiry. The
reasonable person is a hypothetical, or imaginary, person whose view of things is taken into account
when legal decisions are made. The question asked is: How would the reasonable person have acted
under the circumstances? The insurer would ask: Would the reasonable person have thought it was
necessary to disclose the fact to an insurer? The reasonable person discloses facts which influence
the insurer's decision to insure and the terms upon which the insurance is concluded.

Contracts of indemnity insurance are normally renewed every year. Upon renewal, the insured has a new
duty to disclose. If the insured’s position has changed since completing the proposal, she must inform
the insurer of the new position. If Nrombi has, since originally taking out insurance on her car, been
convicted of drunk driving, she must disclose this fact to Cut Costs Insurance Company.

Chapter 27 | The law of insurance 463

Duty to promise information is correct
Insurers often include warranties in their contracts of insurance. A warranty is a contractual undertaking
or promise by the insured that a certain state of affairs exists. In other words, the insured warrants that
the information in the proposal is correct and that all information material to the assessment of the risk
has been disclosed.
Two types of warranty exist, namely, an affirmative warranty and a promissory warranty. An
affirmative warranty confirms the correctness of a factual situation at present or in the past. A promissory
warranty warrants that a factual situation will exist after conclusion of the contract or that the insured
will act in a certain manner in the future.
For example, if you are asked about your smoking habits when taking out life insurance and you
promise that you have not smoked in the past five years, this is an affirmative warranty. Stating that you
will remain a non-smoker for the duration of the insurance contract is a promissory warranty.
Another example of a promissory warranty is an undertaking to switch on your house alarm
whenever your house is unoccupied. So, a promissory warranty is sometimes called a continuing
warranty because it usually relates to a future duty.
A breach of warranty occurs when information warranted to be true by the insured is not, in fact,
true or where the insured fails to behave as promised during the duration of the contract. A breach of
warranty is a breach of the term of the contract, and this entitles the insurer to cancel the contract of
insurance, at the same time refusing to pay a claim.
Before the Long-Term Insurance Act 52 of 1998 and the Short-Term Insurance Act 53 of 1998 came
into effect, the insurer could cancel the contract on the basis of breach of warranty, even if the incorrect
information in the proposal was not material to the insurer's assessment of the risk.
Cancelling the contract for breach of warranty was often very unfair to the insured, especially where
false information was warranted to be true, but where the information in question was not material to
the assessment of the risk.
To return to the example of your mother taking out life insurance, assume she correctly stated her
occupation, but misrepresented her age by a year. She warranted that all information supplied in the
proposal form was true and correct. This is an affirmative warranty. Assume now, that she dies in a car
accident. Before the enactment of the legislation in question, the insurer could cancel the contract and
refuse to pay your mother’s beneficiary because of breach of warranty. The insurer did not have to pay
out, despite the fact that the incorrect information was not material to the risk and could not have
influenced the insurer's assessment of the risk.
Toensure fairness for both parties, the situation is now regulated by legislation. Section 59(1)
of the Long-Term Insurance Act 52 of 1998 and section 53(1) of the Short-Term Insurance Act 53
of 1998 provide that a policy of insurance can only be cancelled by a breach of a warranty in strict
circumstances. The insurer may only cancel the policy where the insured misrepresents or non-discloses
a fact, warranted to be true, if the fact in question materially affected the assessment of the risk by the
insurer. This means that the insurer cannot cancel the contract if information warranted to be true is not
material to the assessment of the risk.
The fact that Ntombi has a drunk-driving conviction is likely to affect the assessment of risk by
Cut Costs Insurance Company Ltd when she insures her car. If she does not disclose this fact and
warrants that all material information has been disclosed, Cut Costs Insurance Company Ltd can
cancel her contract of insurance for breach of warranty. If, however, she makes a mistake when filling
out her proposal, and states that her car is blue in colour when it is actually black in colour, this will
not materially affect the assessment of the risk by Cut Costs Insurance Company Ltd. The insurance
company will not be entitled to cancel her contract.
This rule, however, only applies to affirmative warranties. The insured must comply strictly with
the promise in a promissory warranty. Assume you insure your household contents and warrant that
you will always activate the burglar alarm when the house is unoccupied. Strict compliance is required.

464 Chapter 27 | The law of insurance

It does not matter if the house is unoccupied for a short period of time. So, assume you go to the shop
to buy milk and leave home for five minutes only, but forget to switch on the alarm. If your house is
burgled during this period, you will not be able to claim for your loss. The insurer will be entitled to rely
on breach of the promissory warranty to reject the claim for the loss.

Activity 27.3
Write down your own examples of facts that you think an insured would have a duty to disclose
in these contracts of insurance:
a) motor vehicle insurance
b) house insurance
c) life insurance.

TTD cb Le bY) Donald’s life insurance

Donald concludes a contract of life insurance with Trump Heavy Insurance Company Ltd. He
States that he is a businessman, but does not disclose that he volunteers as a diving instructor
(assume this is an inherently dangerous activity). Three years later, Donald dies in a motor
vehicle accident. When Trump Heavy Insurance Company Ltd finds out about his role as a diving
instructor, it refuses to pay out the proceeds of the policy to Donald's beneficiary, his daughter,
Tiffany. Tiffany argues that this had nothing to do with the way in which Donald died. She adds
that the insurer cannot cancel the contract and reject the claim. Is Tiffany correct? Motivate
your answer.
Hint: you must determine whether the misrepresented fact was material to the assessment of
the risk by the insurer when it concluded the policy.

Case study X-Team mu lag-lana)

Aaron wants to insure the contents of his home. In the proposal he mistakenly states that the
size of his house is 255 m’. It is actually 253 m?. He signs a warranty that all the information
in the proposal is correct. His insurer wants to cancel the contract based on this contractual
warranty. Is the insurer allowed to do so? Motivate your answer.

27.4.3 Over-insurance, under-insurance and double insurance

Over-insurance, under-insurance and double insurance apply only to indemnity insurance. The
underlying principle of indemnity insurance is that the insured should insure for the true value of
the items at issue and be indemnified for their loss. However, this does not always happen.
Sometimes the insured puts too high a value on the items she intends to insure. She over-insures.
At other times, people may under-insure, or take out insurance that does not cover the value of an item.
Then, there are people who take out insurance on the same item with more than one insurer — these
people double insure.

Over-valuing an insured item

Over-insurance occurs when the amount for which the item is insured is more than the real value of the
item. For example, Nrombi’s car is worth R300 000, but she insures it for R400 000. In the case of over-
insurance, the amount payable by the insurer is limited to the actual loss by the insured. If Nrombi’s car
is stolen, the insurer will be obliged to pay her only R300 000, and not R400 000.

Chapter 27 | The law ofinsurance 465

Under-valuing an insured item
Under-insurance occurs when the insured insure their property for less than the actual value of the
property. If Ntombi’s car is worth R300 000, but it is insured for R150 000, she is under-insured.
Often insurance contracts contain an average clause. This clause provides that where there is under-
insurance and a loss occurs, the insured will only receive a pro rata share of the loss.
This means that the amount received will be in proportion to the amount that the insured was under-
insured. The insured is regarded as being her own insurer for the balance of the loss. In other words, the
insured will have to bear the rest of the loss.
If there is an average clause in the contract, the amount the insured can claim is calculated as follows:
Amount claimed =
sum insured x loss
~~ actual value
Let us return to the example of Ntombi’s car, which is valued at R300 000, but insured for R150 000.
Assume she has an accident and the damage to her car is R40 000. The contract contains an average
clause and she can claim the following:
sum insured x loss
Amount claimed =
actual value
_ 150.000 x 40 000
~ 300.000
= 20 000
Average clauses exist to discourage under-insurance. It would be unfair for Neombi to be paid out the
full R40 000 of her claim if her car was under-insured. Her premiums have been lower than those of
somebody who was insured for the full value of the car.

Insuring the same item with more than one insurer

The aim of indemnity insurance is to indemnify the insured: to place the insured in the same position
she was in before the loss occurred. The insured may not be placed in a better position. Double insurance
occurs when an insured insures the same item with more than one insurer.
If Nrombi insures her car with both Cut Costs Insurance Company and XYZ Insurance Company,
she is double insured. If her car is stolen, she cannot claim the full amount of her loss from both Cut
Costs Insurance Company and XYZ Insurance Company. In such a case, Ntombi can choose to claim
from either one of the insurers. If she decides to claim the full amount from Cut Costs Insurance
Company, the company will then have a claim against XYZ Insurance Company for its share of the loss.
This is called the principle of contribution.
According to the principle of contribution, where an insured is double insured and one insurer pays out
the full amount of the loss, this insurer can call upon the other insurers to contribute their share of the loss.
Ntombi’s car is insured for R300 000 with both Cut Costs Insurance Company and XYZ Insurance
Company. Nrombi’s car is stolen, and she claims this amount from Cut Costs Insurance Company,
which pays out the R300 000. However, because Ntombi is double insured, Cut Costs Insurance
Company can claim a rateable proportion of the loss (50% of the loss) from XYZ Insurance Company
in terms of the principle of contribution. Had there been three insurers, Cut Costs Insurance Company
would have been able to claim a third of the loss from the other two insurers.

Added value Indemnity insurance and non-indemnity insurance

These principles apply only to indemnity insurance. In the case of non-indemnity insurance,
the insured can insure the interest with as many insurers as she wishes. If the risk occurs, each
insurer will have to pay out the full amount. For example, James insures his life for R500 000
with Insurer A and for R800 000 with Insurer B. When he dies, Insurer A must pay the full
R500 000 and Insurer B must pay the full R500 000 in terms of the insurance contracts.

466 Chapter 27 | The law of insurance

 Case study Eric’s insured household contents

Eric's household contents are insured for R200 000, although the actual value of his household
contents is R400 000. While he is on holiday, his house is burgled and R50 000 worth of assets are
stolen. How much is Eric's insurer liable to pay? Assume the contract contains an average clause.

Case study Sindisiwe’s camera

Sindisiwe’s camera is valued at R100 000. She insures it for R150 000. While she is on holiday in
Thailand, the camera falls into the sea when she is on a boat trip. What amount will the insurer
pay her when she claims for the camera? Explain the principle involved.

Case study Tae 1a aco) ira dled!

Ben insures his valuable art collection with three different insurers for R600 000, being the value
of his collection. When his house burns down and the collection is destroyed, he claims the loss
from Insurer A, which pays him R600 000. How should Insurer A proceed in relation to the other
two insurers, namely Insurer B and Insurer C? Explain.

27.5 Ending a contract of insurance

A contract of insurance can come to an end in various ways.
= ‘The contract might expire at the end of the agreed-upon time period or term.
= ‘The contract can also be terminated by cancellation by either party. This will be allowed when either
party has not complied with the terms of the contract or has misrepresented a material fact.
= = The contract can also end by contractual agreement between parties. The insurer and the insured
can, for instance, agree that the insured can end the contract by giving notice of her intention to
do so,

What do you think?

Contracts of insurance are often standard contracts with a lot of fine print, which the insured does not
even read or, if he reads it, does not understand.
For example, while your car is parked, a truck crashes into it and you suffer damage. According to
the fine print of your insurance contract, your insurer is not liable to pay for your damages if your car
is not roadworthy. So, if, for example, the tread on the left back tyre was a little thin at the time of the
collision, the insurance company does not have to pay your damages, even though the condition of the
tyre in no way contributed to the collision.
Do you think this is fair? Or do you think it is an example of an insurance company abusing its
position to the detriment of the insured? Do you think the insurer and the insured are in an equal
position when concluding a contract of insurance? Or do you think that the insurer is in a position of
power over the insured? What do you think needs to be changed in insurance law, and why?

Chapter 27 | The law of insurance 467

Chapter summary
In this chapter, you learned the following about the law
of insurance:
Insurance is defined as a contract of good faith between
the insurer and the insured. In a contract of insurance,
the insured undertakes to pay a premium to the insurer.
‘The insurer undertakes to bear a certain risk for
the insured.
An insurance contract and a contract of wager are
two different concepts.
The two kinds of insurance are indemnity insurance
and non-indemnity insurance.
In the case of indemnity insurance, the amount paid
by the insurer is related to the actual loss suffered by the
insured. The insured is indemnified for a patrimonial loss.
In the case of non-indemnity insurance, the amount
paid by the insurer bears no relation to the actual loss
suffered by the insured.
The insured must have an insurable interest to be able
to claim for a loss in terms of the contract of insurance.
As with any contract, there are certain requirements
that have to be met before the contract of insurance is
valid. These requirements are consensus, contractual
capacity, legality, the physical possibility of carrying out
the contract, and formalities.
‘The essentialia of a contract of insurance are the
insurer's obligation to perform by covering the insured
for a loss, payment of a premium by the insured and the
existence of uncertainty or a risk.
Once an insurer settles an insured’s claim in full, the
insurer has the right to collect the amount paid out to
the insured from the original wrongdoer. The principle
of subrogation allows the insurer to step into the shoes
of the insured and sue the guilty party.
Review your understanding
1. Distinguish between indemnity and non-
indemnity insurance.
2. Classify the following types of insurance as either
indemnity or non-indemnity insurance:
468 Chapter 27 | Chapter summary
The main duty of the insurer is to compensate the
insured for her loss (in the case of indemnity insurance)
or to pay out the agreed-upon insured amount (in the
case of non-indemnity insurance).
The main duty of the insured is to disclose all
material facts to the insurer.
In addition, if the proposal requires it, the insured
must warrant that the information she has given to
the insurer is correct. This is known as an affirmative
warranty. Where the insured promises that she will
behave in a certain way during the course of the policy,
this is called a promissory warranty.
‘The insurer is not obliged to pay for entirely
fraudulent claims. If an inflated claim is submitted, the
insured will forfeit the entire claim where a forfeiture
clause is included in the contract, Where there is no
forfeiture clause, the insurer must pay the valid portion
of the claim.
With indemnity insurance, it is possible for the
insured to over-insure, under-insure or double insure
her property.
In the case of over-insurance, the amount payable by
the insurer is limited to the actual loss.
In the case of under-insurance, an average clause will
limit the amount the insured can claim.
In the case of double insurance, the principle of
contribution applies. This principle permits the insurer
that pays the claim to hold the other insurers liable for
their rateable portion of the insured’s loss.
A contract of insurance can be terminated if it
reaches the end of its term, if either party cancels the
contract, or by agreement between the parties.
a) motor vehicle insurance
b) household contents insurance
c) public liability insurance
d) life insurance.
3. Name and discuss the requirements of a contract
of insurance.
4. List the requirements that have to be met for a
valid contract of insurance to come into existence.
What are the essentialia of a contract of insurance?
“
Explain the insured’s duty to disclose.
an
7. How does a misrepresentation differ from non-
disclosure in the context of an insurance contract?
8. When will a fact be regarded as a material one in a
contract of insurance?
9. Distinguish between a misrepresentation and
a warranty.
10. Give a practical example of an affirmative warranty
and a promissory warranty.
11. Explain the concepts of over-insurance, under-
insurance and double insurance. To which type of
insurance do these concepts apply?
12. Cana contract of insurance come into existence
before the premium has been paid? Explain.
13. Name and discuss the essentialia of a contract
of insurance.
14. Discuss the insurer's rights and duties.
15. Discuss the insured’s rights and duties.
16. Whatis the main duty of the insurer in terms of an
insurance contract? Explain what this duty means.
17. Why do you think an insurer would want to
include an excess clause in a contract of motor
Further reading
Davis, D.M. 2003. Gordon and Getz: The South African Law of
Insurance, 2nd edn. Cape Town: Juta and Co. (Pry) Led
Fouche M.A. et al. 2012. Legal Principles of Contract and
Commercial Law, 7th edn. Durban: LexisNexis South Africa
Millard, D, 2013. Modern Insurance Law in South Africa. Cape
Town: Juta and Co. (Pry) Ltd
Reinecke M.F.B., Van Niekerk, J.P. and Nienaber, P.M.
2013, South African Insurance Law, Durban: LexisNexis
South Africa
vehicle insurance? Do you think it could possibly
have any benefit for the insured?
18. In the case of indemnity insurance, is the amount
for which the insurer is liable always equal to the
loss suffered by the insured? If not, give examples
of situations where the amount will be less than
the loss.
19, Fatima is an accountant. She concludes a
contract of life insurance with Careful Cover
Insurance Company. In her proposal, she fills
in her occupation as an accountant. She does
not, however, add that she volunteers as a
police reservist, thinking that this is not her
occupation. She warrants that all the information
in the proposal is correct. Fatima is killed while
performing duties as a police reservist. Careful
Cover Insurance Company refuses to pay out the
amount for which her life was insured. Its reason
is that she did not disclose the fact that she was
a police reservist. Is Careful Cover Insurance
Company allowed to do this?
20. Nazeer's car is insured for R200 000. It is, in fact,
worth R600 000. Nazeer is involved in an accident
and incurs R60 000 worth of damage to his car. He
claims this R60 000 from his insurance company.
How much is the insurance company liable to
pay Nazeer?
http://www.osti.co.za
(This is the link for ombudsman for short-term insurance.)
http://www.ombud.co.za
(This is the link for ombudsman for long-term insurance.)
https://www.faisombud.co.za
(This website is for the FAIS ombud.)
http://www.saia.co.za
(This link is for the South African Insurance Association.)
Chapter 27 | Further reading 469
ayy
yy: The law of carriage

The main ideas

Whar is carriage?
‘The law governing the movement of goods and people by land, sea and air
‘The rights and duties of the parties
Protecting the rights of the parties
Who is liable for loss or damage to goods or human life during carriage?
‘The impact of legislation and international conventions on the common law principles on carriage

The main skills

Identify the essential elements of a valid contract of carriage.
Understand the common law applicable to the law of carriage.
Understand the difference between the common law position and the statutory position.
Apply commen law principles and the statutory position.
Analyse factual situations, and advise which party is liable for injury to a person, or loss of, or
damage to bagpage or poods.
Draft a simple contract of carriage by road or rail.

In this chapter, awe set out the most important features of the law governing contracts thac deal with the
movement of goods and people by land, sea and air. We will define carriage, the parties to a contract
of carriage and the requirements of such a contract. Liability for loss or damage to goods or human life
during carriage is also discussed, Legislation has replaced some aspects of the common law of carriage
and this is also explored.

Before you start

Whar do the following news stories have in common?

Two Eagles on their last fight

That's how the Eagle Air flight their plane crashed near the of their release. Planes weren't
school at Wonderboom Aimport Magaliesburg. allowed to fly there because they
in Pretoria on Monday bid The plane crashed near a pen = might Ay into a vultwre, which
farewell to two pilots, who died where about 30 rehabilitated could be fatal for those in the
on Sunday aftcrmoon when vulturcs werc being kept ahcad plane as well as the vulture.

Source: hittps:m.news24. comySouthAirica’News'plane-cash-two-cagles-on-their-last-fight-20 17090

470 Chapter 28 | The law of carriage

 ‘Free beer’ as Capetonians loot SAB truck
Booxe-loving Capetonians thought southeast of the city. Nearby
Christmas came early this year residents rapidly began stripping
when an SA Breweries truck the tuck of its cargo, running
lost irs load in Wetton suburb, — off with crates of beer and call-
Source: httns:‘Awvew timeslive.co.zaf_/?017-1)-29
ing bystanders co do the same.
‘The road was Hooded with beer
as bottles broke when the truck
lest irs load.

The above extracts from newspaper articles both have to do with the wansporting of goods and
passengers and whar can go wrong. The questions this chapter secks to answer are: What are the
responsibilities of those who transport goods and passengers? What are the responsibilities of those for
whom goods and passengers are transported? More importantly, who is responsible for the loss of, or
damage to, life and property when goods or passengers are being transported? By the end of this chapter,
you should be able to recognise and apply the law that governs these situations.

28.1 What is carriage?

A common law contract of carriage is South Africa is an agreement in which one person Toundertake something
undertakes to another person to transport certain goods and/or persons from one place is to agree to do it.
to another, by road, rail, sea or air, cither for payment or for free. The law of carriage deals
with the legal relarianship between a carrier of goods and the person or company for whom
those goods are carried. The law of carriage also deals with the legal relationship between a carrier of
passengers and the passengers themselves. Trucks that transport poods across South Africa, passenger and
cargo aeroplanes, container ships and cruise ships are a few examples of the kinds of carrier that transport
goods and passengers by land (road and rail), sea and air.
Many of the principles of carriage come from contract, delict, property and agency. Nonetheless, it is
important to look at the specific legal principles and legislation that have developed under the heading of
carriage, from the time of Roman law until the present day.
Principles and legislation on the law of carriage have been developed for a variety of reasons:
a Carriage is often international by its very nature, since goods and passengers are often transported
between countries.
@ Contracts for the carriage of goods by land, sea and air are usually directly dependent on other
commercial activities.
g Special and often dangerous conditions apply when the carriage of goods and passengers takes place.

Efficient carriage of goods and people and well regulated transport systems have been an important part
of economic and socictal progress. The World Bank has identifed the cthcicnt carriage of poods and
peuple as vital to the sacio-cconomic development of modenn socictics. This is cypecially important in
developing countries such as South Africa. Good transport networks can ensure that people have access
to jobs, clinics and schools. People can be connected to their familics, communitics and to
the broader global world. More than ever before, the movement of people and goods from An intemational
place to place is a charactcristic of our modern, interconnected world and it requires fair, convention, treaty or
efheient and uniform regulation. is an intemational
covenant
‘The law of carriage
Be is a complex
picx 2area of commercial law. I Various
EROS sources a of law
EO regulate aera Seen
into between different states
the law of carriage in South Africa: at.an intemational level, and
@ the law of contract (contractual agreements between the different parties), which has been ratified by
® the law of delict (liability between the parties), Parkament and incorporated
® internariona! law (international conventions, treaties or covenants). into national law through
South Aincan leqistation.

Chapter 28 | The law of carriage 471

28.1.1 Parties to the contract of carriage
There may be multiple parties who are engaged when a contract of carriage is concluded. So, before
we start looking at the legal principles of the law of carriage, it is vital to have an understanding of the
dificrent parties, which include:
B the consignor
BS the consignee
@ the carrier cither public or private
a the passenger.

Let us use this example to explain the diffcrent partics. Rabelo is the owner of a game farm in
Mpumalanga. He sells two buffalo to the Born Free Ranch in Texas in the United States of America for
R200 000. The Born Free Ranch contracts with International Freight Incorporated to transport the
buffalo from Mpumalanga to Texas. The buffalo cravel by road from Mpumalanga to Durban, by ship
from Durban to the port in New York and by rail from New York to Texas,
Aconsignor is the party to the contract who arranges for the transportation of the goods. So, in the
example, the Born Free Ranch is the consignor.
The consignee is usually the person nominated by the consignor to take delivery of the goods. The
consignee is often an agent of the consignor. If Born Free Ranch had asked an agent to accept delivery of
the goods at the New York harbour, the agent would be the consignee.
‘The carrier transports the goods and passengers. In the example, the carriers are the truck company
that transported the buffalo overland to Durban, the shipping company that transported them to New
York, as well as the railway company that took them to the end of their journey in Texas.
‘The carrier may be classified as a public carrier or as a private carrier. A public carrier transports goods
and people as a profession. He holds himself out as willing to carry for reward for anyone who wants
to use his services. A private carricr transports goods and people en a ‘one-olf or casual basis, cither for
a fee or for free. This distinction is important as it may affect the standard of the duty of care that is
required from the carrier. Determining whether the carrier is a public or private one may also affect the
carricr's liability for injury, loss or damage.
The passenger is a person (with her hand luggage), who is transported on any of the modes of
transport that we are discussing in this chapter,
‘The contract of carriage may be concluded with different parties. It may be between the carrier and
the consignor, or between the consignot and consignes. In the latter case, the ordinary rules of contract
will be applicable.

Activity 28.1
Mosiu, who lives in Mpumalanga and has orange tree orchards, sells two tans of oranges to
Katlego, who has a store in Vereeniging in Gauteng. The oranges will be transported from
Mpumalanga to Vereeniging in a truck that is owned and operated by Fresh Carriage SA (Pty) Ltd.
It is a term of the contract that Katlego will pay a deposit into Masiu's bank account within
12 hours of the oranges being picked up. Fresh Carriage picks up the oranges and begins the
journey. Unfortunately, Katlego fails to comply with the terms and conditions as agreed as she
has not paid the required deposit. Mosiu contacts Fresh Carriage to instruct them to returm the
oranges to him. Think about the legal position of each party to this contract.
identify which party is the consignor, the consignee and the carrier?
>

If the sale of the oranges had been for cash, who is the owner of the oranges?
wn

Can Mosiu demand that Fresh Carriage return the oranges?

Would the position be different if the contract was between the consignor and the carrier?
wk

If the oranges arrived back in Mpumalanga damaged, which party will be liable? Assume
that the contract for carriage was between the consignee and the carrier.

472 Chapter 28 | The law of carriage

 In the law of carriage, it is important to know which party bears the Iegal liability for injury or death to
passengers and lass of, or damage to, goods that arc being transported by any of the carricrs that we arc
discussing. We will first look at common law in relation to the law of carriage.

28.2 The common law

The common-law principles in respect of all the modes of transport arc the same. The public carriage of
goods is poverned by the Praetor’s Edict de mauris, canponibres er srabulariis. This is a Latin verm that has
its origin in Roman law, meaning ‘an order for mariners, innkeepers and stable keepers’. We will look at
this Edict in more detail below when we discuss carriage by sea.

28.2.1 Concluding contracts of carriage

In general terms, the requirements of a contract of carriage are no different from the requirements of
any other contract. [In other words, there must be contractual capacity, consensus, performance must
be possible, the agrcement must be legal and any formalities must be completed. But, it is important to
remember that a contract of carriage has three special requirements. The carrier and the consignor need
to agree on:
1. the goods or persons (or both) co be wansported
2 the nwo points berween which the carriage is to take place
3. the freight or fare to be paid for transporting the goods or persons, if the contract is not ‘for free’.

Standard form contracts and exclusion clauses

Transport companies commonly use a standard, printed form for contracts of conriage. Transnet Freight Rail
For example, in almost all instances, air carriers and bus companies issue tickets to their ttormerly Spoornat)is
passengers. These tickets record passengers’ details and certain conditions of the contract. South Afnca's main freight
As an example, Transnet Freight Rail wil! refuse to wansport goods unless the consignor —_Calef. Passengers are
has signed a partly written and partly printed contract, known as a consignment note. carnied by the Passenger
This note will include the particulars of the contract of carriage, as well asa number of ee ees once
Sg. gis
government regulations and/or special conditions. is
Atrica (PRASA), which
Fee eas
Usually, these standard form contracts or the tickets given to the passenger or the passenger rail services in
consignor or consignee contain terms excluding the carricr’s liability. But, a carricr cannot the country.
contract out of fraud or wilful misconducs. This would be against public policy. As such,
the conduct may constitute a crime and no party can he absolved contractually if a crime is cammitted.
For example, a carrier cannot state in the contract that it will not be responsible for theft committed
by itself.
‘The regulations and/or special conditions may be set out in the contract. But, sometimes the contract
of carriage may refer to conditions or regulations contained in other documents, such as tariff booklets
or international conventions or rules. A passenger or consignor is bound by these regulations or special
conditions (even if they are only referred to in the conrract) if the passenger or consignor consents to
them and they arc not illegal. So, where a passenger or consignor signs a contract of carriage that rcfers
to special conditions and/or regulations, the law presumes that the passenger consents to the conditions
and/or regulations. However, this is only if the passenger had reasonable access to those conditions
andor regulations.
Where the contract of carriage is a ticket, such as an aeroplane ticket, a passenger is presumed to
have agreed to the conditions and/or regulations on thar ticket, in instances where the passenger knew,
or ought reasonably to have known, that the reference related to the conditions of the contract. This is
in accordance with the law relating to implied conditions and the ticket cases that you have studied in
Chapter 8 on the law of contract.

Chapter 28 | The law of carriage 473

 Activity 28.2
Think of the last time you travelled mm a bus or on a train. Were you aware that, if you suffered
any injury or loss, you would not be able to hold the carrier liable even if the loss was the result
of the carner’s negligence? Do you think that this is fair? Discuss with a classmate.

28.3 The rights and duties of the parties

In order to determine the liability of the parties, we must know the legal rights and duties of the parties.

Duties of the consignor

The consignor must:
@ deliver the goods to the carrier
@ accept delivery at the destination
@ pay the agreed or proper freight (if amy).

The consignor's duty to deliver the goods to the carrier can be changed either expressly or impliedly.
For cxample, you agree with a removal company to move the contents of your houschold from Port
Elizabeth to Johannesburg. If there is no express carriage contract, it wall be implied that the transport
company will collect the furniture from your house. You would not have to deliver your entire houschold
contents to the removal company’s local depot!
‘The parties can also change the consignor's duty to pay freight. For example, che parties may agree
that the freight will be payable by the consignee. Where there is no express agreement as to the exact
amount of freight payable, the carrier's usual rate may be implied. The carer's usual rate will obviously
be implied only where the consignor is aware that the cartier has usual rates.

Duties of the carrier

The main duties of the carrier are to:
@ Transport the passengers or goods to the destination as agreed.
® Deliver the passengers or goods at the agreed destination within the time period agreed. If no time
period has been agreed, then the delivery must be made within a reasonable time.
@ To act reasonably to ensure that the passengers or goods arrive safely.

Duties of the passenger

‘The duty of the passenger is to pay the fare.

28.4 Liabilty
If a passenger is injured or suffers a loss, or poods are lost or damaped, it is important to be able to
determine who is liable. The first step is co idemtify whether the carrier is a private carricr or a public
carrier. The next step is to identify the mode of carriage, and look at the specific regulation of that mode
whether by air, road and rail or by sca, which is poverned by the Practor's Edict.
We have already seen thar if the carrier is a professional carrier by sea (mauzae), the Edict applies and
the carricr will have to compensate the consignor for the damage to the goods, unless the circumstances
fall within the exceptions previously listed,
But what is the liability of a carrier which does noc fall under the Edict? The nature and extent of
liability will depend on whether the carrier is transporting passengers or goods. If the carrier is transporting
goods, then the carrier's liability will further depend on whether it is a public or private carrier.

28.4.1 The liability of private and public carriers

A private carrier must exercise reasonable care, and he is liable for damage caused by his negligence.
However, provided that a private carrier (even if he is paid) can prove that he was not at fault, then

474 Chapter 28 | The law of carmage

he will not be liable. Where a private carrier transports goods for no charge, he is liable only for an
intentional act or gross negligence, unless the parties have agreed otherwise.
A public carrier who transports goods or persons by sea will be strictly liable This means that he
will be liable for injury, loss or damage cven if ne fault (in the form of negligence of intention) can be
proven. This is in terms of the Practor’s Edict which is discussed below.

28.4.2 The specific liability of the carrier by air, road or rail

In terms of the common law, if a passenger is travelling on any mode of transport (other than by sca),
or goods are being transported (other than by sca), the carricr will be liable for any harm or loss caused
as a result of the carrier's negligence or its intentional conduct. The liability will arise from a delictual
action, of it can arise contractually if the carrier breaches a term of the contract of carriage. This includes
implied and tacit terms of the contract. The injured party must show that che harm complained of
occurred during the time that the person or goods were being transported. The carrier then has the onus
of proving that the harm was not caused by the negligent or intentional conduct of thar carrier.
So, if the carrier fails to take reasonable care to ensure the safery of the passengers or of the goods
entrusted to it, it will be liable for injury, loss or damage.
Acarrier overland will be liable only if fault in the form of negligent or intentional conduct can be
proven. See the case of Amderson Shopping (Pty) Ltd» Polytus (Pry) Ltd 1995 (3) SA 42 (A) discussed below.

28.4.3 The specific liability of carriage by sea

For centuries, sea travel by ship was the only mode of transport that connected different countries. [1 is still
the key mode of transport that cnables international trade. Carriage by sca is governed by the famous Practor's
Edict de matuiis, canponibus et stabndariis, An edict was an official rule or order in Roman times. The Roman
practor was an annually clected magistrate of the ancient Roman Republic who had law-making powers.
Since we are dealing with the law of carriage, we will study the Edict only as it applies co the namaste, or
carticrs by sea. With this edict. the praetor wanted to make sure that professional carriers by sca would have
a greater responsibility than other carriers who did not transport goods as a profession. ‘The praetor im
this responsibility because, along with the Roman public at the time, he suspected thar public carriers by
sea were untrustworthy and often plotted with thieves to arrange the disappearance of goods in their care.
Therefore, the Practor's Edict declared that public carticrs would be strictly liable if chey did not restore
goods entrusted to them for safekeeping. This meant that if the poods were not restored promptly and in good
condition, the public carrier would be responsible for any loss or damage, even if the casrier was not at fault.
For over 140 years, our courts have recognised that the Practor's Edict is part of South African
common law, and it has been applicable to professional carriage by sea for reward. This edict operates
harshly for the carrier of the persons and goods being carried. [t provides that the carricr is strictly liable
for any loss or damage. Strict liability means that the carrier willl be liable even if it was not negligent or
at Fault.
‘There are three exceptions to this liability:
Bf the owner or consignor was responsible for the damage, for example, if the goods were not
properly packaged.
B lf an event, such as a wis maior (an act of God) causes harm and is our of the contro! of cither party.
An example is a natural disaster, such as a flood.
# Ifsomething was wrong with the goods before they were shipped (an inherent vice).

Fora long time, our courts have recognised that the Practor’s Edict applies co professional carriers by sea. Bur,
before 1995, the courts hotly debated whether the Practor's Fdict applied (or should be extended to apply)
to the carriage of goods by public carriers by land. Fortunately, this debate was resolved by the Appellate
Division in the case of Anderson Shipping (Pry) Lid » Polysins (Pry) Erd 1995 (3) SA 42 (A).

Chapter 28 | The law of carriage 475

 Anderson Shipping (Pty) Ltd v Polysius (Pty) Ltd 1995 (3) SA 42 (A)

Principle
This case considered the legal principle of the liability of the carrier for transport over land. The
consignor had based its claim on the Praetor’s Edict (that ts, that the public carrier was strictly
liable) and claimed damages based on this Edict.
Facts

Anderson Shipping (a public carrier) transported two cases of machinery parts by land from Durban
Harbour to Leeudoorn Mine for Polysius, the consignor. The camer removed the cases from Durban
Harbour but either failed to deliver them or delivered them ina damaged state to the consiqnor.
The court's finding
After considenng the history of the Praetor's Edict, the Appellate Dimsion decided that the
Edict was not applicable to public carriers by land, and nor should the Edict be extended. In
these arcumstances, the court held public carners should be subject to the same principles of
negligence as private camers by land.

) Activity 28.3
Now that you have read the above case, answer the questions that follows.
1. The machines being transported were lost or damaged as aresult of being hijacked from a
truck on which the carrier was transporting them from the harbour to the mine. Would the
camer be liable?
2. If a private carrier was transporting the machinery for a fee, who would be responsible?
Would itmake a difference if the carrier was a fnend of the consignor and did not charge
him for the carriage of the goods overland?
3. if the court had found that the Praetor's Edict should apply to the carnage by land, would
your answer be different?

28.5 Legislation and international conventions

Although the common law is still relevant to the law of carriage, legislation and international
instruments have superseded the common law in certain instances. Certain statutory rights and
duties are imposed on the parties to some contracts of carriage. This is particularly important when
determining the liability of the different parties for injury, loss or damage. In this section, we look at the
different forms of statutory regulation of the law of carriage, as well as important pieces of legislation
governing international carriage by sea and air.

28.5.1 Carriage of persons and goods

The carriage of persons and goods is expressly included in the Consumer Protection Act 68 of 2008 (CPA).
The CPA includes ‘the transportation of an individual and any geods’ (section |(b)) in its definition
of service. The purpose of the CPA is “to promote and advance the social and economic welfare of
consumers in South Africa’ (section 3{1)). The CPA aims to:
a protect consumers from unfair trade practices
B encourage responsible consumer behaviour
a promote consumer empowerment
B provide an efficient system of redress for consumers {section}. 1 (a)—(h)).

476 Chapter 28 | The law of carriage

The CPA impacts on the law of carriage in important ways:
® ‘The preamble of Part H determines the passenger or consigner's right to ‘fair value, good quality
and safety’.
@ = Par A prohibits unfair discrimination (section 8),
m it regulates booking and cancellation of reservations (section 17).
ms it provides for the consumer's right to information and transparency (section 2? and section 23).

28.5.2 Carriage by road

Carriage by road is governed mainly by the Road ‘Transportation Act 74 of 1977, as amended by Act 39
of 1998. Ic is primarily administrative in nature and it does not regulate the relationship between the
different parties engaged in road travel. So, the common law applies to these contracts and the parties can
negotiate their own agreements. This is subject to a few exceptions set out in the Act, one of them being
that permits have to be issued in respect of certain motor vehicles.
In theory, carriage by road is in terms of the common law contract of carriage and liability for injury,
loss or damage arising out of motor vchicle accidents. and will mainly be determined by the law of delict.

28.5.3 Carriage by rail

Although its use has been declining since the 1990s, carriage by rail has cereain advantages over other
modes of carriage. Duc to the large volume that can be transported on trains, it is relatively cheap.
etheient and ccologically friendly.
Carriage by rail (other than passenger services) is regulated through a division of Transnet SOC
Limited. Passenger (commuter) services are regulated by the South African Rail Commuter Corporation
Limited. Both these entities have been created in terms of the Legal Succession to the South African
Transport Services Act 9 of 1989. This Act does not regulate the conditions of carriage by rail between
the partics. Therefore, the common law applics, and the partics’ rights and obligations must be
determined in terms of the contracts entered into by the parties.
Transnet SOC Limited usually imposcs standard-form contracts on the parties, so the consignor must
accept these standard terms if he wants to use the service,
Let us look at the court's finding in chis case dealing with passengers’ safety on commuter trains.

Pree ui ee eee ee ee ee Ree ate eee eae ee eS

Principle
This Constitutional Court case considered who is responsible for ensuring the safety of
passengers travelling on commuter trains.
Facts

The applicants had all suffered assaults of injunes while travelling on Metrorail trains, or had
relatives killed whilst travelling on the Metrorail trains. The applicants asserted that all the
respondents {Transnet Ltd t/a Metrorail, the SA Rail Commuters Corporation and the Ministers
of Transport and Safety and Security) were obliged to ensure the safety of passengers. The
respondents argued that the South African Police Services bear the primary responsibility for
ensunng the safety of passengers, not the institutions that operate the trains.
The court's finding
The court found in favour of the applicants and declared that the first and second respondents
were obliged to ensure that reasonable measures are taken to provide for the secunty of rail commuters
whilst passengers making use of rail transport services provided bythe first and second respondents.

Chapter 28 | The law of carriage 477

 28.5.4 Carriage by sea
Carriage by sca has different legal principles, depending on whether passengers (persons) or goods arc
being transported.

The carriage of passengers

Carriage of passengers by sea is governed by the Practor’s Edict, which was discussed above. The case
study gives a practical example of how the Practor's Edict law works.

beet ade Tet 3s) tel lead

Palesa is travelling with her family on a cruise ship between Durban harbour in South Africa and
Beira in Mozambique. An unusually heavy storm with gusts of wind causes the ship to crash
over the waves. A light fitting in the cabin comes lease during the storm. It falls on Palesa’s head
and although she recovers, she incurs substantial medical expenses. Is the cruise ship liable for
Palesa’s damages?
The camer (the crusse ship owners) would be liable even if they were not negligent on the bass of
the strict liability provisions of the Praetor's Edict. But, if it can be shown that the storm
was so severe
and was such an unusual event that it could not have been anticipated, this would constitute an act
of God and the ship owners would not be liable. So, Palesa would have to pay her own damages.

The carriage of goods

The transportation of goods by ship is regulated by che Carriage of Goods by Sea Act | 1986. This Act
adopts an international set of rules governing sea carriage. known ax the Hague-Visby Rules The original
Hague rules were signed in 1924 and were intended to regulate and make the carriage of goods by sea
more uniform. They were amended in 1968 and became known as the Hague—Visby Rules.
These rules govern the carriage of goods from one South African port te another, or Abill of lading is a legal
internationally. If the port From which the goods are carricd is not in South Africa, then the contract between the
partics can decide which law will be applicable. ‘This may be decided in the bill of lading. shipper of goods and the
But. contracts of carriage can be governed by the same rales, regardless of the nationality of | Gatnier providing details of
the parties and the location of goods. the goods being cartied
Hague-V isby Rules replace the common law liability of the carrier altogether. and ane nieeerin also
provisions: shi when the
ma two important

1. The carrier will be liable only if it has received notice of the loss atthe time of the loss Spe Getivered,
or within three days after the loss occurred. Then, any claim must be brought within
one year after the delivery date or the claim will be lost.
The carsicr will not incur any liability if the loss occurs as a result of the ship not being scaworthy,
th

provided the ship was in a seaworthy condition at the start of the journey, as a result of any cause
thar is not the fault of the carrier, such as acts of Gad, fire ar emergencies and if the loss accurred
due to latent defects in the goods being transported.

Added value The Rotterdam rules

Another international instrument may soon affect carriage by sea in South Africa. In 2009, the
United Nations adopted the Rotterdam Rules, officially known as the United Nations Convention
on Contracts for the International Carriage of Goods Wholly or Partly by Sea. This is intended to
create modern and uniform legal requlation of international shipping. It builds on the previous
conventions that we have already discussed and facilitates modern technological advances. It has
been adopted by more than 20 companies and it is therefore effective, but it has not yet been
incorporated into South Afnca’s shipping legislation

478 Chapter 28 | The law of carriage

28.5.5 Carriage by air
Just like the carriage of goods by sea, an international set of rules governs the relationships between
international air carriers themselves and their passengers and/or consignors. We will now look at rhese
rules in more detail.

International air travel

Up to 2006, South African carriage by air was governed by rules that were originally formulated at the Warsaw
Convention of 1946, The Warsaw Convention is an international convention which regulated liability for
international carriage of people, luggage, and goods when travelling by air for reward. It was originally signed
in 1929 im Warsaw (hence the name), and has been amended by the Hague Protocol. The Convention created
a regime of strict liability of the cartier in terms of which the carrier was liable for the death of or injury tw a
passenger, or the loss of or damage to luggage and goods where the plaintiff did not have to prove fault. This
strict liability regime prevailed unless it could be shown that there was no negligence on the part of the carer
or that the harm was caused by the negligence of the passenger or consignor of the goods
The Convention then balanced this harsh system by protecting the carrier by placing a limit on the
amount of damages that could be recovered from the carrier. This limit was not applicable if the loss was
caused by the intentional conduct of the carrier (Article 25).
In 2006, the Carriage by Air Amendment Act 15 of 2006 gave effect to the more up-to-date
Montreal Convention, which replaced the Warsaw Convention, The Montreal Convention retains the
care provisions of the Warsaw Convention, but it is more passenger-friendly. It increased the amount
payable to passengers injured or killed during air travel, and it also made it easier for claimants to
claim from the carrier. [n terms of the Montreal Convention, the carrier is presumed liable upon proof
of damage or loss during carriage. There is still a limitation on the amount of liability. The Montreal
Convention covers the liability of carriers for damage affecting passengers as well as goods, such as
baggage and cargo. [n terms of the Convention, an air carricr will be liable for:
personal injury suffered by a passenger (Article 17)
B loss of or damage to baggage and cargo (Article 18)
@ damage caused by delay (Article 19).

The carrier will escape liability in these instances if it can prove char:
@ it and its agents took all the necessary measures to avoid such injury, loss or damage
Bhat it was impossible co take such measures {Article 20)
@ the injury, loss or damage was caused in whale or part by the negligence of the injured person
(Articles 20 and 21).

It is important to note that if the carriage is not ‘international’ as defined in the Act, the common law
rules apply. However, note that in most instances a fight will be covered bya standard-form contract.
The case study below raises an interesting question as to whether an applicant can pursue her
case under the domestic law of the country thar has jurisdiction, if loss or injury is nor covered by
international conventions.

Case arr ky Loss/injury outside international conventions

In the case of Ef Al israel Airlines Limitedv Tsut Yuan Tseng 1999 525 US 155, USSC, a passenger
claimed that she had sustained psychosomatic injuries as a result of an intrusive body search. It was
accepted that there was no bodily injury within the meaning of that expressionin the Convention but
the passenger contended that she was not precluded from pursuing a separate action for damages
under domestic law. The court stated that such an action could not be taken. Therefore, for any
loss outside of the strict parameters of the Conventions, the applicant was without a remedy.

Chapter 28 | The law of carriage 479

 ee mC | Rect A mest Mcgee easel)

The court referred favourably to another case where the issue was whether, in relation to
injuries sustained whilst in an airport terminal in Kuwait during the Iraqi invasion of that country,
passengers could claim for damages from the canier transporting them from London to Malaysia
via Kuwait. The claimants hadi no right of action in terms of the Convention and had also been
left without a remedy.
30, if loss or injury is not covered ar is limited by the international conventions that are applicable,
can an applicant pursue his case under the domestic law of the country that has junsdiction?

We have looked at loss or injury to persons during air travel, so finally let us look at the case below
which dealt with the loss of important cargo.

eee ea aL coe ee mor ee Me eed erat

BG bla}

Principle
The legal issue is who has locus standi to sue for the loss of or damage to cargo that is
transported by air in terms of the Warsaw Convention.
Facts

The appellant was a South African company that was the consignor of two parcels containing
platinum and palladium (precious metals) products. The legal terms qoverning the carriage
of these parcels were set out in a waybill (a contract between the carrier and consignee) and
were governed by Article 1(2) of the Warsaw Convention. The consignee was a company in
Philadelphia, United States of America (USA).
The parcels were to be transported from Johannesburg to Amsterdam (The Netherlands)
and then from Amsterdam to Minneapolis (USA) by the first respondent, Koninklijke Luchtvaart
Maatschappy (KLM). A second airline, Northwest Airline Inc. (Northwest) was to transport the
parcels onwards to Philadelphia.
Nerther parcel arrived at its destination. The consignor sued both airlines, but withdrew the
action against Northwest as it was declared insolvent during the proceedings.
The court's finding
The court considered the relevant clauses in the Warsaw Convention, the main ones being
Article 18 and Article 30.
¢ Article 18, without specifying who has title to sue, states that ‘the carrier is liable for
damage sustained in the event of the destruction or loss of, or of damage to, any regstered
luggage or any goods, if the occurrence which caused the damage so sustained took place
dunng the carriage by air."
* Article 30 of the Convention provides that when the carriage is by different carriers, each
carer who accepts passengers, luggage or goods is subject to the rules of the Convention,
and is deemed to be one of the contracting parties to the contract of carriage in so far as
the contract deals with that part of the carriage which is performed under its supervision.’
The court concduded that the correct interpretation of these clauses was that each consiqnor
must have the right to sue, even if the consignor had not suffered any direct financial loss due
to the fact that it had insured against the lass. To decide this matter in favour of the respondents
would, according to the court, disregerd the realities of modern-day international air carriage,
would make no commercial sense and would offend against the need for unormity

480 Chapter 28| The law of carriage

 armel

In this chapter, you learned the following about the law In terms of the commen law (generally rclating to
of carriage: cartiage by road or rail), the law relating to contract and
‘The parties to the contract of carriage are: delict will be applicable.
B the cansignor, who arranges the carriage @ The standard form contacts with exclusion clauses
B® the consignec, who receives the goods are common and will vary the carrier's common
@ the carrier, who transports the goods or passengers. law liability.

A public cartier transports people and goods as a profession Carriage by sea and by air is regulated by international
and a private carricr transports people Or goods ona conventions.

once-off or casual basis, and they have different stamdards
of liability.
The duties of each party are important as they
indicate who is liable for loss or damage that may be
sustained by passcngers or goods during the carage
of these Passengers, their baggage and goods being
transported. The most important duties of each are thar:
B the carrier must carry people and goods safely and
without delay to their destination
@ the consignor must make all the arrangements
for the delivery of the people or goods to their
destination and usually must pay the fee.
Liability depends upon the carmicr, the mode of
transport and whether the common law, legislation or
international conventions are applicable.
The Hague—Visby Rules regulate camiage of goods by
sea and the Montreal Convention regulates carriage by air.
These change the common law by providing for the strict
liability of the carrier, subject to different terms. The most
important legislation that is applicable to carriage by sea is
the Carriage of Goods by Sea Act 1 of 1986.
Carriage of passengers by sea is governed by the
Praetor’s Edict.
The most important legislation that is applicable to
carnage by air is the Carriage by Air Act 17 of 1946.
Legislation for transportation by road and rail is
largely administrative in nature and docs not change the
common law regarding liability.

Review your understanding

1. Deline a contract of carriage and set out the the passenger has negligently caused her own
essential elements. injury by tripping in the plane's aisle after
Whar are the duties of the consignor? drinking too much
ha

Choose ALL the options below that are correct. In ¢) to compensate the passenger for all of her loss
too

terms of the Montreal Convention, the carrier will caused by damage ta the passenger s hand

be liable for the following: luggage, including unlimited consequential

a) personal injury suffered by a passenger on a damages asa result of the air hostess's negligence.
ship, subject to a maximum limit 4. John and Alli work for an IT company in
b) loss of oF damage to baggage and cargo Johannesburg. They have a client in KwaZulu-
c) damage caused by the delay of an aeroplane Natal, and they must both attend a mecting at
d) all injury sustained by a passenger cven when the clicnt’s office in Durban. John, who left for

Chapter 28| Chapter summary 481

 Durban first for the meeting, forgot his cellphone and gave John his phone, John found that the
at his home in Johannesburg. When he arrived in phone was damaged.
KwaZulu-Natal, he phoned Alli and asked him to Do you think Alli is responsible for the damage?
bring it. Alli agreed. When Alli arrived in Durban

Further reading

Hare. J. 2009. Shipping Law ana Admiralty Jurisdiccion in Soush Interesting and useful information on shipping law in South
Africa, Ind edn. Cape Town: Juta and Co. (Pry) Led Aftica can be found on the ICLG website— the Jneernarional
The World Bank website has an interesting discussion on the Comparative Legal Guide to Shepping Law, 3rd edn
importance of transport in the modern world.
Up-to-date information on aviation law in South Affica is
provided by the Global Legal Group Limited and can be
found on the ICLG website.

482 Chapter 28| Further reading

 aire reh cog

The law of intellectual property 29

The main ideas

B What is intellectual property?
@ Copyright law
@ Trade mark law
@ Patent law

The main skills

Explain the concepts of imtcllectual property, intellectual property rights and intellectual property law.
Identify works protected by copyright.
Explain copyright requirements and ownership.
Discuss the requirements for a trade mark registration.
Explain infringement of trade marks.
Discuss the requirements for parencable inventions.
Identify available remedies in cases of intellectual property infringement.

This chapter gives you a brief overview of intellectual property and how rights are protected in our law.
‘This branch of our law protects people's rights to their creative products. Wewill start by looking at
what intellectual property is, the different kinds of intellectual property and the different ways these are
pretected in our law. This chapter will focus on the three main types of intellectual property law, which
are copyrights, patents and trade marks.

Before you start

Have you played a video game lately? There are a multitude of different forms of intellectual property
contained im a single video game. For example, copyright laws protect the creative and artistic expression
that goes into the software, the artwork and the music of the game. The law relating to trade marks
protects the brand names, logos and slogans that are associated with the game, while patent laws protect
the hardware and technical design of the game. Obviously, these products are worth something — the
game had to be bought, after all. The inventors, designers, software enginecrs, musicians and artists, who
are responsible for creating the game, need to make a living, and so they deserve to have their creative
efforts and intellectual property legally protected.

29.1 What is intellectual property?

Intellectual preperty is the general term for intangible property which <omes about asa result of

intellectual ettort. Therefore, intellectual property results from creations of the mind and denotes objects
that are not physical or tangible things. The subject matter of intellectual property ix very wide and the
following fields of intellectual property are protected by our law:
8 copyright @ trade marks go designs
B performers rights @ patents B plant breeds.

In much the same way thar people own property in the usual sense, people can also be rhe owners of
their intellectual property. These owners will have rights to their intellectual property which is protected
by intellectual property law. As such, this branch of law protects the legal nights of those people whe

Chapter 29 | The law of intellectual property 483

 have created or own something that is original and porentially profitable. In South Africa, this is
protected in two main ways, through statute and through the common law. All the forms of intellectual
property law mentioned above are protected by various pieces of legislation or statutes but can also be
protected in terms of the common law, particularly unlawful competition.

Added value Difference between property rights and intellectual property rights

It is very important to understand the difference between property nights and intellectual
property nights. Consider this textbook. You bought this book, so you are the owner of it. The
property rights to this textbook belong to you. As owner, you can do different things with it-
you can read it, study from it, use it as a doorstop, or even throw it away. But, the intellectual
property rights to this textbook are not yours — they belong to the authors. They have rights with
regard to the content of the book. These intellectual property rights limit your property rights in
respect of the book. This means that there are certain things that you may not do with the book,
such as make copies of it, and sell them to your fellow students.

29.2 Copyright law

The primary right that an artist, writer, musician or playwright has regarding her creative It you violate 5
works, is the right not to be copied by someone else. Copyright is the right that a legal nghts, you fail to respect
subjcct, who és usually the copyright owner, has to the creative work that she has produced. their rights, and you are
Think, once again, of the video game that you like to play. If you copy it fora friend, you breaking a legal rule.
violate the copyright of the game developer, the musicians who created the music of the
game, as well as che artists who created the game's graphics.
Copyright law in South Africa is regulated by the Copyright Act 98 of 1978 together with the
Copyright Regulations, 1978. The Act protects the rights of authors and owners of copyright to the
objects of copyright. These objects are referred to as works, and include literary works, musical works,
artistic works, computer programs, cinematograph films, sound recordings, broadcasts, programme-
carrying signals, and published editions.
An author is usually the person who first created the work, and is also usually the first owner of the
work. It is important to note that someone other than the creator of the work can become the owner of
the work when it is transferred as mowable property.
Other than most forms of intellectual property, copyright does not need to be registered with any authority
in order to be protected. This means thar, as soon as it is created and meets certain requirements, the owner
thereof will be able to enforce her rights to it. Often, the owner of a copyright will indicate her ownership of
the copyright by using the phrase ‘copyright by' or the symbol ©, followed by her name and the date at the
end of the work. For example, we would indicate the copyright of this book as follows: Pearson SA, 2018.
Note that it is not a legal requirement to indicate that copyriphe subsists in a work. Therefore, one cannot
assume that ifa work does not indicate that copyright subsists therein, thar it is not protected by copyright.

29.2.1 What does copyright law protect?

As mentioned above, copyright protects various forms of works. For case of reference, these works can be
divided into the following categories:
® traditional works, which include literary works, musical works and artistic works
® communication media, which comprise big-screen movies, DVDs, videos and video games) this
media includes:
@ = sound recordings, sounds or images carried by satellite (such as DStv)
@ = thedesign and layout of literary or musical works
@ computer programs, which direct a computer toperform a particular task

We will now look at each of these categories in more detail.

484 Chapter 29| The law of intellectual property

 Traditional works
Literary works, musical works and artistic works are the traditional works protected by copyright. These
are referred to as traditional works because they are the oldest cxisting forms of copyright, the origins of
which can be traced back several centuries. For example, Marcus Valerius Martialis was a Roman poct
who published his works in Rome between AD 86 and AD 103, Known as a witty comic, he regarded
himselfto be the master of his words, and anyone who tried to ‘steal his words’ he labelled plegiarns,
the Latin word for thief or ‘kidnapper of slaves’. This is believed to be the origin of the word plagiarism,
which is the embodiment of what we understand by modem-day copyright infringement. We will now
look at cach of these in a bit more detail.

Literary works
These include novels, stories and poetical works, textbooks, encyclopaedias and dictionaries, letters and
reports and lectures, speeches and sermons. Legally speaking, a literary work consists of a grouping
of letters, words and/or numbers that, asa whole, makes sense to the public, This means that, while
individual letters or words may not make sense, people must be able to have an understanding of the
work asa whole.

Musical works
As the name suggests, a musical work is one consisting only of music. This means that the words to a
song are a literary work, not a musical work The music that goes with the lyrics isprotected as musical
works, which are protected separately from the lyrics of the song.

Artistic works
These consist of paintings, sculptures, drawings, photographs and gravures. Works of A gravureis a printing
architecture, such as buildings, and works of craftsmanship, such as protatypes, madels methodin which an image is

and furniture, are also protected by copyright. applied toa sunken surface
by using a metal plate that
Communication media is mounted on a cyinder.
Works thar are protected as communication media include cinemarograph hilms, sound
recordings and broadcasts.

Cinematograph films
A cinematograph film is asequence of images stored on Alm (or other material), and thar isseen as a moving
picture when used with appropriate equipment. This includes movies, video recordings and video games.

Sound recordings
A sound recording is the storage of sound (or data representing sounds), such asa recording on a CD,
that can be copied. This is protected as a form of copyright separate from the copyright awned by the
songwriter(s), and is owned by the person or entity that is responsible for making the sound recording,
This is usually a recording company.

Broadcasts
A broadcast consists of sounds or images that are meant for the general public and are transmitted bya
telecommunication service — for example, a television programme on SABC or a radio show on 5FM.
A broadcast refers to the signal that is transmitted to a satellite responsible for getting the programme or
show vo the general public. This is also known as the up-leg ofa signal.

Programme-carrying signals
A programme-carrying signal consists of a signal containinga programme that is carried by satellite to
the general public. [Fyou watch the news on television, the propramme-carrying signal, which sends the
broadcast to you from the sarellite, enjoys copyright protection. This is also known as the down-leg of a signal.

Chapter 29 | The law of intellectual property 485

Ir is important to nore that a broadcast refers to the signal which is transmitted to a satellite while a
programme-carrying signal includes the signal that is transmitted from a satellite to the general public.
Each of these is protected as separate forms of copyright.

Published editions
A published edition is the specific arrangement and design of the words and pictures that are on a
printed or digital page, for example, the layout of a book, a websire or a board game — copyright exists in
the layout of the board, the cards, as well as in the rules. Remember that while one person may own the
rights to a story contained in the book, another person can own the sights to how the story is illustrated
or displayed in the book.

Computer programs
A computer program is a set of instructions which, when used in a computer, causes the computer to perform
a particular task, Computer programs communicate with and give instructions to computers, thereby directing
them to carry out a specific task or fulfil a specific function. Developers write computer programs in a specific
form of language or computer code. This sct of stored instructions cnjoys copyright protection as a computcr
program. [tis interesting to note that although a computer program is written, it is protected as a scparate form
of copyright from literary works. However, this is only once the program is complete, and works. While the
programmer is in the process of writing the program. the work is protected as a literary work.

PVs
ls | Tees 1 More than one copyright

A single creative work can be protected by more than one copynght. A CD best illustrates this
The people responsible for writing the words to the songs are referred to as lyncists, and they
enjoy protection of their lyrics as literary works. Those who write the music to the songs are
referred to as composers, and they are able to protect their nghts to the music as musical works.
Together, lyricists and composers can be referred to as songwriters. A separate copyright also exists
in the sound recording, which is usually owned bya recording company while a completely different
copyright exists in the design of the CD cover. These can be held by different persons or by the same
person. It is important to remember that the musicians performing the songs are not copynght
owners in the usual sense, but are the beneficiaries of a separate form of intellectual property
known as performers’ rights. However, if the musicians are also the songwmiters of the music they
perform, then they will be entitled to protection in terms of both copyright and performers’ rights.

Activity 29.1
Consider each of the following creative works - there may be more than one copyright in each.
Identify and write down as many different works that are protected by copyright as you can, and
then compare your list wath that of a classmate.
1. this book
2. your favourite song
3. your favounte video game
4. your favourite movie.

29.2.2 Requirements for copyright protection

As stated before, a creator of a work need not register his copyright in order for it to enjoy legal
protection. As soon as it exists, it will be protected, provided it meets certain requirements. There are two
general requirements and several specific requirements. In order for a work to enjoy copyright protection,
both general requirements must be met, and any one or more of the specific requirements must be met.

486 Chapter 29| The law of intellectual property

General requirements
@ The work must be original.
B ‘The work must have been reduced to a material form.

Specific requirements
@ The work must have been created by a qualified person.
B The work was created by someone from a Berne Convention country.
@ ‘The work was created by someone from a non-Berne Convention country to whom protection
was extended.

@ The work was created in South Africa.

Let us look at each of these requirements in a bit more detail.

Originality
A work’s originality means that it is the result of the author's own unique intellectual effort and ability.
The work may not be copied from another source. A work can, however, be inspired or influenced by
another work as long as the new work is unique or original.

Material form
While the idea is in the mind of the creator, it is not protected by copyright. The idea has to exist in some
or other material form. The idea must stand scparate frem the creator. This mcans that it cannot only be
an idea in the creator's head. [fF the idea is not written down, it will not enjoy copyright protection.
Nore that the requirement of materiality docs not apply to broadcasts and programme-carrying
signals, since these cannot exist in material form.

A qualified person
The requirement thar, in order to qualify for copyright protection, it must have been created bya
qualified person does not mean that the person must have some qualification or special skill. A qualified
person is a person who is a South African citizen or who is domiciled, os resident, in South Africa, This
person can be a natural person or a juristic person. In order for a juristic person to qualify for copyright
protection, it has to be incorporated under the laws of the country. Therefore, ifa work was created
by a qualified person, it will qualify for protection in terms of our copyright laws if the two general
requirements have also been met.

Added value The meaning of domicile

The word ‘domicile’ comes from the Latin word domus, meaning ‘house’. To be domiciled in
South Africa means that the person is legally deemed to live in South Africa for the purpose of
exercising her rights and duties in private law. A person does not have to be a citizen or evena
resident of South Africa to be domiciled here. If you are interested in the legal requirements to
be domiciled in South Africa, you can refer to the Domicile Act 3 of 1992.

Berne Convention country

The Bere Convention is an international agreement which provides for copyright protection. If a creator of
a work comes from a country which is a member of this Convention, like South Africa is, he will be given
protection in terms of our copyright laws, provided that the two general requirements have also been met.

Non-Berne Convention country to whom protection has been extended

If the creator ofa work originates from a country which is not a member of the Berne Convention, the
work can still qualify for protection if the Minister of Trade and Industry has extended protection to that

Chapter 29 | The law of intellectual property 487

country by proclamation in the Government Gazerte. Nove that this is in addition to the The Govemment
requirement that both general requirements must also be met. Gazette |5 gazette of
i . record of South Africa,
Made in South Africa and itis used by the
If the work is created within the borders of South Africa, it will be protected by our government as an official
copyright laws. provided the owo general requirements have been met. This mcans that cven way of communicating to

the created works of foreigners who visit South Africa will be protected by our copyright the general public
laws. provided the works were created while they were in South Africa.

29.2.3 Who owns copyright?

The owner of a copyright is, normally, the creator or author of the work. But, there are some exceptions:
@ = Where a work is made in the course and scope of employment under a contract of service, the
copyright belongs to the employer. For example, Vusi is a game developer who works for EA Sports,
and he designed FIFA 18. The copyright in FIFA 18 will belong to EA Sports, and not to Vusi. This
means that EA Sports will make millions of rands from the sale of the game, while Vusi will only
earn his monthly salary.
@ Where 2 person commissions (that is, asks for), and pays for, the taking ofa photograph, the
painting of a portrait, or the making of a hlm or sound recording, that person — also known as the
commissioning party —is the owncr of the copyright in the creation. Consider an example where
a celebrity hires someone to take photographs at her wedding. Once the photographs have been
paid for, the copyright in those photographs belong to the celebrity, and not to the photographer,
even though the photographer created the works. Should the photographer sell these photographs
to a magazine without the permission of the celebrity, the celebrity can take legal action against the
photographer for infringement of her copyright.

Greeff en Andere v Protection 4U h/a Protect international en Andere 2012 (6)

SA 392 (GNP)

Principle
The copyright in a video belongs to the commissioning party, and not to the party responsible
for the creation of the video. This represents an exception to the general rule that copyright
belongs to the creator of the work in question.
Facts

The Provindal Division of the North Gauteng High Court, Pretoria, was called upon to adjudicate the
issue of a DVD that had been filmed at the infamous Kamp Staaldraad. At issue was the ownership
of the copyright of the DVD, and whether it was in the public interest that the DVD be distributed.
In preparation for the 2003 World Cup, Rudolph Straeubh, the then Springbok rugby coach, took
the team on a compulsory training camp, called Kamp Staaldraad, where they were subjected to
extremely unusual and humiliating forms of training. For example, the team was ordered to climb
inte deep, dark holes naked and sing the national anthem while ice-cold water was intermittently
poured over their heads. At the same time, recordings of England's national anthern, Gow Save
the Queen, and the New Zealand All Blacks Haka were played. It was reported at the time that
if anyone tried to get out of the hole, they were forced back in at gunpoint. Players were also
reportedly forced to leopard-crawi across gravel, kill chickens and were deliberately sleep-deorved.
The company responsible for maintaining security at the camp were asked to film these ordeals
for incentive purposes. Shortly afterwards, stills pictures from these videos were leaked and published
in the media. Following the public outcry, the secunty company announced plans to release a DVD
under the ttle Kamp Staaldraad- Die Ware Verhaal (Camp Steelvvire: The True Stary).

488 Chapter 29| The law of intellectual property

 Greeff en Andere v Protection 4U h/> Protect International en Andere 2012 (6) SA
392 (GNP) (continued)

Wermer Greeff approached several of the other Springboks who were at the camp, and
he decided to bring an urgent application to interdict the company from releasing the DVD,
claiming that the DVD wolated their nghts to dignity and privacy, and that copyright in the DVD
did not belong to the secunty company, but to the South African Rugby Union (SARU). The
security company claimed that releasing the DVD was in the public interest, and that it was the
owner of copyright in the DVD, since it was the creator thereof.
The caurt's finding
The court found in favour of the plaintiffs, and held that releasing the DVD would not be in
the public interest. it would constitute an unjustifiable infringement of the nght to privacy and
dignity of the players. With regard to the ownership of the copynght, the court applied the
relevant sections of the Copyright Act, and held that the ownership of the copyright in the DVD
vested in SARU, as the commissioning party, and nat in the security company, despite the fact
that it was the creator of it.

29.2.4 How long does copyright last?

In the case of literary, musical and artistic works, copyright lasts for as long as the original creator of the
works lives from when they were first created, and for an additional 50 years after the owner or author
passes away. This means that the copyright in the works belonging to someone who dies will then pass
to his heirs. In the case of other works, such as sound recordings, broadcasts, signals and published
editions, copyright lasts for 30 years from the end of the year in which the work is first published. Once
the copyright in works expire, they fall into the public domain and can then be freely used by anyone for
commercial gain, Before this time, works protected by copyright can be used only by people who do not
own the copyright to the works if they have permission from the owner, In addition, anyone wanting
to use a work owned by someone else must usually pay a fee or royalty vo the owner in exchange for the
right te use it.

29.2.5 Infringing copyright

In Icpal language, to ‘infringe’ is to break a law or agreement. In the context of intellectual property, an
infringement occurs when someone uses an object protected by intellectual property law belonging to
another person without the latter's permission, A copyright may be infringed directly or indirectly.
Direct infringement occurs when a person who is not the owner of the copyright makes a copy of the
work without the owner's permission.
Indirect infringement occurs when somebody knowingly allows another person to directly infringe
the owner's copyright. For example, Deepak, who works as a deejay, illegally downloads music from
the internet which he plays in dance clubs. This is an example of direct infringement. Donovan, who
owns one of the night clubs that Deepak plays im, knows that Deepak ix playing music that he illegally
downloaded, but continues to allow Deepak to play this music in his club. This is an example of
indirect infringement.
Copyright holders have several ditferent legal remedies which they can use if their copyright in their
works has been inf inged:
@ They can apply for an interdict to stop someone from infringing their copyright
any further. Copyright owners can aboclaim monctary damages for the loss they Se ee
have suffered. somebody to do ar to stop
@ They can claim delivery of any infringing articles still in the infringer's possession as doing something.
well as delivery of any plates used to make the infringing copics.

Chapter 29 | The law of intellectual property 489

On the other hand, there are also certain legal defences that are available toa party who infringes

someone's copyright. These defences are set out in the Copyright Act. If the Copyright Act states chat
what Deepak did does nat constitute an infringement, then he could rely on ane of the
statutory defences. [n such a case, Deepak would nor be liable to the copyright owner. secmrapdnieerte
An example ofa statutory defence is fair dealing. This means that if you reproduce a leqisiation,
part of a work (noe a substantial portion of the work or the whole work) for research or
private study, you are not guilty of copyright infringement. You can also prove that the
work in question docs not mect the requirements for copyright protection or that the person claiming
infringement lacks /ocus stand. This means that the person is not legally entitled to claim infringement,
because she is not the owner, or someone licensed by the copyright owner, to use the work.
An interesting real life example of copyright infringement occurred in 1989 when rapper Vanilla Ice
released a song called ‘Ice Ice Baby’. The song sampled the bassline popularised by Queen and David
Bowie in their 1981 hit song called “Under Pressure’. Unfortunately for Vanilla Ice, he sampled the
bassline without obtaining permission, giving credit to, or paying royalties to Queen and David Bowie.
They collectively instituted legal action against him for copyright infringement. He was found to be
liable, and he was forced to buy the publishing nghes to “Under Pressure’ in order to continuc using the
bassline in his song. More recently, Robin Thicke and Pharrell Williams were ordered by an American
court to pay the heirs of the late Marvin Gaye $7.4 million after the court found that they had copied
their father's song ‘Got To Give It Up’ to create “Blurred Lines’, the biggest hit song of 2013.

Activity 29.2
Have a listen to the mash-up of ‘Blurred Lines’ and ‘Got To Give It Up’, and decide whether you
think Thicke and Wilhams were guilty of copyright infringement. The mashup can be found
here: httpsv//www.youtube.com/watch?v=ziz9 HW2Zmm’. See if you can find two further
examples of famous artists guilty of copyright infringement.

Copyright is one of the only forms of intellectual property that also carries criminal penaltics for
infringement. This means that it is a crime or an offence to infringe someone's copyright. The Copyright
Act provides that in the case of a first conviction, the guilty party is liable to a fine of no more than R5
000 of to imprisonment of no more than three years, or both, In the event ofa second conviction, the
infringer can be liable to a fine of no more than R10 000 and/or a period of five years imprisonment.
These penalties are prescribed for each article or work that is infringed. This means that someone who
illegally downloads a television series can be liable, upon conviction, to a fine and/or imprisonment
for cach episode that she downloads. Note that this is also over and above the compensation that the
infringer can be made to pay in the event of successful civil proceedings instituted against her:

29.3 Trade mark law

Trade marks are another form of intellectual property protected by our law. This area is regulated by the
Trade Marks Act 194 of 1993, together with the Trade Marks Regulations, 1993.

29.3.1 What is a trade mark?

A trade mark is a sign, symbol] or other indication that sets apart one person's goods or services from
another person's, So, a trade mark is a unique mark used by a person or business to distinguish her goods
and services from chose of her competivors,
Trade marks are meant to help consumers tell the difference between businesses offering the same or
similar kinds of goods or services. For example, if I want to register a trade mark for my carpet-cleaning
service, the mark must be able to distinguish my carpet-cleaning service from other carpet-cleaning services.

490 Chapter 29 | The law of intellectual property

 Atrade mark can consist of a combination
of brand names, slogans and logos. For cxample,
the McDonald's trade mark consists of rhe
world-famous name and its Golden Arches logo.
The trade mark helps to create the McDonald's
brand, which is immediately recognisable in
countries around the world. A brand name
is a word — such as Coca-Cola® or Beacon®,
or a combination of words, such as Chicken
Licken®. A slogan is a short phrase or sentence,
such as McDonald's ‘I'm lovin’ it®’ or KFC’s
‘Finger lickin’ good ®", A logo isa picture or
symbol. Examples of logos are the Nike swoosh,
and the McDonald's Golden Arches. Examples
of South African logos that are registered trade
marks arc the Proudly South African logo and
the Bafana Bafana loge. Figure 29.1 The Proudly South Afncan logo
Interestingly, it is also possible to register a shape as a trade mark. An example of where this has
occurred in trade is the shape of the Virgin Cola bottle which was launched in 1996. Known as The
Pammy, the bottle was designed to resemble the shape of Pamela Anderson's body, who was at the height
of her fame in the United Kingdom at the time. The bottle, however, is not an exact replica of her body,
since the original version kept tipping over once it was filled with liquid, owing to it being top-heavy. As
a result, the contours of the bottle had to be changed dightly.
Trade marks are protected because of their brand valuc. In 2016, it was estimated thae the Apple
brand was worth $178,1 billion, the Google brand worth $1 33,2 billion and the Coca-Cola brand worth
$73.1 billion.

29.3.2 Requirements for trade mark protection

In order to quality for protection of a trade mark in terms of the Trade Marks Act, it must be registered.
An application to register a wade mark must be made to the Trade Marks Office. Registration in South
Africa only covers South Africa. Ifa business wanes the trade mark to be covered in another country,
a separate application has to be made in that country. The registration process includes payment of a
registration fee.
A business often indicates that its brand name, slogan or logo is registered as a trade mark. This is
done by using the symbol ® close to where the trade mark is used. If the trade mark is not yet registered,
but an application has already been made to register it, the letters TM can be used to indicate this. Note
that it is a criminal offence to indicate that a trade mark is regiscered when it is not.
For a trade mark to be registered, the following requirements must he met:
® The mark must comply with the definitions of ‘trade mark’ and ‘mark’ as provided for by the Act.
@ The mark must be registrable in terms of the Act, and it must not be a mark that is regarded as
unregistrable (see below for cxamples
of unregistrable marks).
® The trade mark must be capable of distinguishing the goods or services for which it is registered
from the poods or services of other persons. The Nike logo, for cxample, distinguishes Nike shoes
from the shoes of their competitors, such as Adidas and Recbok.
8 ‘The applicant must use or intend to use the mark. Use of the mark includes use by licensees.
A licensee is someone who holds a licence. The licence represents permission to do or use something
that would otherwise be prohibited. An example of a licensee using a trade mark is a franchisee.
A franchisce uses the trade mark with the consent of the owner of the trade mark, in exchange for

Chapter 29 | The law of intellectual property 491

 compensation to the owner. For example, pcople who run 7-Eleven supermarkets pay the owner of
the 7-Eleven trade mark to use the green and red 7-Eleven brand name and logo. Other licensces are
known as registered users.
@ Goods and services are classified into 45 different classes of trade mark. The trade mark needs to
be registered for cach class of product or service for which the trade mark owner intends using the
trade mark. For example, leather goods fall into class 18, and jewellery falls into class 24. Note that
someone who does business in more than one class must register in cach class they do business in.

Once a trade mark is registered, the owner of the trade mark is granted sole use of the trade mark for the
goods or services for which the trade mark is registered. The owner also has the right to prevent others
from using or registcringa confusingly similar mark for the same goods or services. The trade mark
owner can also license others to use his mark.
Certain trade marks cannot be registered. Trade marks chat cannot be registered include the following:
@ marks that are coo similar to a well known unregistered mark
marks that are confusingly similar co other registered marks.

Take, for example, the Nike logo. If 1 were merely to turn the swoosh upside down, and try to register it
as a trade mark, I would not be able to do so. My upside-down swoosh would be confusingly similar to
the Nike logo.

29.3.3 How long does a trade mark registration last?

A registered trade mark is protected fora period of ten years, subject to the payment of annual renewal
fees. However, the rights to a trade mark can be renewed indefinitely for subsequent periods of ten
years after payment of the prescribed fees. So, unlike other forms of intellectual property, a trade
mark can be prevented from falling into the public domain indefinitely, provided the registration is
renewed timeously.

29.3.4 Infringing a registered trade mark

A trade mark can be infringed nat only in the case of goods or services for which the trade mark is
registered, but also in the case of similar and even dissimilar goods and services,
People can infringe on, or violate, trade marks in various ways:
@ Using an identical or confusingly similar mark for the same goods or services for which the trade
mark is registered is a violation. For example, if someone sells washing powder using the trade mark
Somo, the owners of the registered trade mark of Omo used in relation to washing powder, could
claim trade mark infringement.
@ Using an identical or confusingly similar mark in relation to similar goods or services is also an
infringement. For example, if | try to register the Nike swoosh forthe textiles caregory, | will not be
able to do sa because textiles are sirnilar to clothing.
@ Using an identical or confusingly similar mark in relation to different goods or services if the trade
mark is so well known in South Afgica chat the use would be to the disadvantage of the trade mark.
or create unfair advantage for the person using it, will also be seen as an infringement. For example,
I will not be able to register the Nike swoosh in the tobacco category, because people might think
that Nike is selling tobacco products, which will be to the disadvantage of the brand. It could also
be an unfair advantage te me, because people might think that my tobacco products are in some
way connected to Nike, and may buy them because of this misunderstanding.
@ Using a well known forcign trade mark that is not registered in South Africa, such as
Virgia, is also not esr This is because well baton foreign trade marks, which ene ene
originate from countries that are members of the Paris Convention, arc granted which protects, amongst
protection in terms of South African law. others, trade marks.

492 Chapter 29| The law of intellectual property

If a person’s trade mark is infringed, she can apply for an interdict to stop the infringement. The trade
mark owner can also apply for a court order forcing the infringer to remove the infringing mark, as well
as damages for her loss. Orr, if the mark cannot be removed, the trade mark owner can request the court
to order the infringer to deliver the goods to the trade mark ewner. This means that all of the goods that
bear the mark or logo that infringes on the trade mark have to be handed over, The trade mark owner
will probably choose to destroy these goods in order to protect her trade mark.
Certain acts do not infringe on trade marks. The acts listed below do not infringe on trade marks,
& Using your own name or place of business: For example, JOHNSONS® is a registered trade mark.
Bur, somebody with the surname Johnson will not be infringing the JOHNSONS® trade mark by
using his surname in relation to his business.
@ Using a description of the goods or services: For example, Good Dog!® is a registered trade mark
for a magazine about dogs. Another company that describes its product as "good for dogs’ will not
infringe on the Good Dog!® trade mark.
B ‘The reasonable use ofa trade mark to indicate how goods or services should be used: For example,
LG* isa registered trade mark used in relation to microwave ovens (amongst others). Should the
manufacturer of instant dinners usc a LG® microwave oven on television to illustratc how to cook
an instant meal, she will not be infringing upon LG™"s trade mark.
@ = Importing. distributing or sclling goods with the consent of the owner: If there is permission, there
can obviously be no infringement.

Activity 29.3
Apple® is a well known trade mark used for computers and computer products. Suggest some
examples of each type of possible infringement of this trade mark. Then, provide an example
of where the Apple® brand name or logo can be used without infringing on the trade mark.
Discuss your examples with aclassmate.

29.4 Patent law

The Parents Act 57 of 1978, together with accompanying Patent Regulations, 1978, regulates parent law
in South Africa. This is an area of law thar protects people's rights to their inventions.

29.4.1 What is a patent?

Unlike copyright, a patent docs not automatically cxist as soon as an inycntion has beca Exclusive right means
created. Inventors need to complete an application at the South African Patent Office. [Fa that only the patent
patent is granted, the patent gives the patent owner the exclusive right to make, use, sell and a and nobody else,
import his invention in South Africa. In other words, a patent halder has the right to prevent ere ie
others from making, using, selling or importing his invention. Once the patent expires, the
invention falls into the public domain and other people can use the invention however they want to.
For cxample, Adcock Ingram had the patent in respect of the painkiller Myprodol®, which expired
in July 2004. This meant that only Adcock Ingram could make, use, sell or import Myprodol® until
July 2004. If another pharmaccutical company had produced this medicine during this time, they would
have infringed Adcock Ingram’s patent. From July 2004, when the patent expired, other pharmaccutical
companies could start producing this medicine — under a different name, of course. This does not mean
that Adcock Ingram can no longer produce Myprodol®, It simply means that other people are now free
to produce the same medicine as well.

29.4.2 Requirements for patent protection

For an invention to be patented, it must mect the following requirements:
@ ‘The invention must be new or novel. An invention is novel if it docs not form part of anything that
has been made available to che public worldwide before the date of application for the patent.

Chapter 29 | The law of intellectual property 493

 @ The invention must involve an inventive step. This means that, to an expert in the same field as the
invention, it must not be an obvious improvement on what already exists in that particular held.
@ The invention must be capable of use or application in trade, industry or agriculture.

Certain things are not considered inventions, and they cannot be patented. They include:
B adiscovery ofa natural phenomenon that already existed before it was discovered, for example, a
plant that has not been genctically modified
B® ascientihe theory, which is an explanation of why and how something that already exists works, for
example. Einstein's Theory of Relativity
@ a mathematical method, such as 2 method for solving an equation
@ a literary, dramatic, musical or artistic work, because these things are protected by copyright
B® ascheme, rule or method for performinga mental act, playing a game or doing business, for
example, the rules of Sceabble®, or a way to value a business's property
@ acomputer program
@ the presentation of information, because this can be protected by copyright.

Although a patent offcrs inventors protection by not allowing other people to take commercial advantage
of their inventions, inventors do not need a patent to carn moncy from their inventions. They can try to
make the best use of their invention without a patent by keeping it a secret. In order to do this, creators
usually try co protect their inventions as trade secrets by means of confidentiality agreements, One of the
most famously guarded trade secrets on the planet is a recipe originally created by John Stith Pemberton,
an American Civil War veteran and pharmacist with a morphinc addiction. In order to overcome his
addiction, he created Pemberton’s French Wine Coca, which consisted of coca wine and kola nut.
But, following prohibition of alcohol in America, he was forced to remove the alcohol from the
drink, resulting in what is today known as Coca-Cola. The manufacturers of Coca-Cola have to date
not patented the drink’s recipe, preferring to protect the formula as a trade secret. Should they decide
to patent the recipe, after 20 years, the recipe would fall into the public domain, and it would be freely
available for anyone to exploit. By protecting the recipe as a trade secret, the owners of the formula can
exploit it exclusively for an indefinite period of time, something the owners of Coca-Cola have been
able to do for almast 129 years. The downside of this plan is that should the secret recipe be discovered,
anyone will be able to recreate the drink, which would cause the Coca-Cola company to potentially lose
billions of rands.

29.4.3 How long does a patent last?

In South Africa, a patent lasts for 20 years from the date of the patent application. But the patent owner
has to pay annual renewal fees ro the South African Patent Office in order to rencw her patens. The

patent owner has to start paying these fees three years after the date of the application, Once the 20-year
time period has passed, the invention is no longer covered by a parent, and anyone is then free to exploit
it for financial gain. Also, should a patent holder neglect to pay the annual renewal fee. the patent could
lapse, resulting in the invention also entering the public domain.
A patent granted in South Africa can only be enforced in South Africa. Owners of inventions indicate
that a patent applics to their invention by indicating the patent number on the product. Note that it is 2
criminal offence to claim that an invention is patented when it is nor.

29.4.4 Infringing a registered patent

A patent is infringed ifsomcebody makes, uses, sells or imports the invention without the authority of the
patent owner. Boniswa develops a product that whitens teeth without damaging the tooth’s enamel. She patents
her product. She makes, markets and sells her product herself. Two years later, she finds out that Michael has
discovered the formula for her product and is producing and selling the product, under a different mame.

494 Chapter 29| The law of intellectual property

 Michael is infringing Boniswa’s patent. There are various remedies available to Boniswa. The first
thing that she cam do is get an interdict to stop Michael from making her product. She can also claim
compensation from Michael for the Anancial loss she suffered as a result of his production and sale of the
product. Finally, she can claim delivery. This means that Michael must give her the entire product that
he has already made.

Activity 29.4
Visit the South African patent database by clicking on:
http://patentsearch.cipc.co.za/patents/patentsearch.aspx. Click on the Advanced Search tab,
type in the following patent number. 1992/09652, and press Enter. What invention does this
patent protect? View the patent and then identify the inventor.

What do you think?

As we have seen, if somebody creates something new, the law grants that person intellectual property
rights ower what she has ercated. Thar is one of the main reasons why medicine, for example, is so
expensive. You are not only paying for what it actually costs ta make that headache pill, but you are also
helping the pharmaceutical company to pay for its research and development costs — and allowing them
to make a profit. Obviously, somebody who creates something has a right to be compensated for it. But,
de you think this has been taken too far? Do you think that the high cost of medicine should interfere
with a poor person's right to access healthcare? Should the rights of intellectual property right holders be
limited in specific instances? What do you think?

Chapter summary

In this chapter, you learned the following about the law
of intellectual property:
A copyright is the right of a legal subject in respect
of a work.
Different categories of works are protected by
copyright, namely traditional works, communication
media and computer programs.
For a work to enjoy copyright protection, the work
must be original and written down or recorded in some
way, and one af the following must apply:
@ the creator should be a qualified person
@ the creator should originate from a Berne
Convention country
@ the creator should originate from a non-Berne
Convention country to which protection has been
extended by proclamation
® the work must have been created in South Africa.
The copyright, with certain exceptions, nermally,
belongs to the creator of the work, and it lasts for
a certain period of time after which it falls into the
public domain.
But, ifa work is created within the course and
scope of someone's employment, the copyright thercin
belongs to the employer, not the creator.
Similasly, if someone commissions the creation of
certain works, the copyright therein will belong to the
commissioning party, and not to the creator.
Infringement of a copyright can be either direct
or indirect.
In the event of infringement, copyright owners are
entitled co civil remedies, and they may also lay criminal
charges against infringers.
Trade marks arc also protected in our law.

Chapter 29| Chapter summary 495

 Atrade mark is a mark used by a person to
distinguish her goods or services from the goods or
services of another person.
Aregistered trade mark grants the owner sole use of
the trade mark for the poods or services for which the
trade mark is registered.
The owner can prevent others from using or
registering a confusingly similar mark for the same, or
even different, goods or services.
‘The owner can license others to use a trade mark.
Atrade mark lasts for ten years, but the wade mark
owner can renew the trade mark after ten years for an
indefinite period of time.
Atrade mark can be infringed by an identical or
confusingly similar mark for the same goods or services
Review your understanding
1, Explain what you understand by intellectual
property, inrellectual property tighes, and
intellectual property bw.
Consider your favourite video game. Can you
to
$
explain the difference berween the property rights
and the intellectual property rights in the game?
3, Name the two ways in which intellectual property
is protected in our law.
Johan is copying his Commercial Law textbook,
-
and he is selling it to his fellow students for a third
of the price thar the book costs at the bookshop.
You tell him that he cannot do this as it is against
the law. Johan responds by saying, that the book
his property because he bought it and, as such, he
«an do anything he wants with it. Explain to Johan
why this is not the case.
5. Nico pays Mao Lin, who works for Family Portrait
Paint Shop, R7 000 to paint portraits of his family.
Who is the owner of the copyright in respect of che
portraits? Explain
6. Name and discuss the requirements for copyright
to enjay legal protection.
Mandla works for the Datly ltmes newspaper.
He publishes an award-winning story on crime
and youth in South Africa. Mandla hears thar
the newspaper has sold his story to an American
496 Chapter 29| Review your understanding
for which the trade mark is registered, but also for
similar and dissimilar goods and services.
A patent pives an inventor the exclusive right to
make, use, sell or import her invention.
For an invention to be patented, the invention
must be novel, it must involve an inventive step, and
the invention must be capable of use or application in
trade, industry or agriculture.
A patent is obtained by filing an application at the
South African Patent Office.
A patent is valid for 20 years from the date of the
patent application.
A patent is infringed if somebody praduces, uses,
sells or imports the invention without the authority of
the parent owner.
newspaper for publication without his permission.
Mandla alleges that his copyright has been
infringed. The newspaper is claiming that, since it
employs Mandla, the copyright in the stories thar
he writes belong to the newspaper. Advise Mandla
on whether or not this is the case.
&. Distinguish between direct and indirect infringement.
9. How long docs copyright last in cach of the
following:
a} =a sound recording
b} a musical work?
LQ. List the requirements for the repistration ofa
is trade mark.
11. Shipshape has been registered as a trade mark by ABC
Led for exercise equipment. XYZ Lid manufactures
clothing under the label Shipshape. Has ABC Lrd's
trade mark been infringed? If so, explain how and
discuss the remedies available to ABC Ltd.
12. A sports shoe may contain several different forms
of intellectual property. Look at a smeaker, and sec
if you can identify at least two forms.
13. Consider the following article on a South African
invention. Based on what you have learned, would
you grant this patent? In your answer, discuss the
requirements thar need to be met for an invention to
be patentable, and then apply them to the case study.
 Hippo Roller
The Hippo Roller was invented in 1991 by South Africans
Pettie Petzer and Johan Jonker following their personal
expenence of the national water cnsis. They grew up on
farms and witnessed how people were forced to cary
heavy buckets of water on their heads for kilometres
every day in order to access water. The containers used
were typically of poor quality and not very durable. The
inventors originally tred to develop a wheelbarrow with
a moulded tank resting on a wheel but soon realised that
the wheel was the most expensive component of the
dence. They then decided to rather put the water inside
the wheel and so the Hippo Roller was born
The Hippo Roller ts made from UV-stabilised
potyethylene which is designed to cope with the rough
surfaces found in rural areas. It consists of a drum, which
can hold 90 litres of water, a handle and an opening with
a Cap. The opening of the drum is large enough to allow
for it to be filled without spilling and for it to be easily
cleaned. Once filled, the cap allows the drum to be sealed,
thereby allowing the water to be hygienically stored.
Source: Based on Javan, '! “Water, dignity and the Hippo Roller Project’ (17 Gctober 2017)
httpsaiAweny. brandseuthafnica com/play-your-part-categorvwater-dignity-and-the-hippo-roller-project
14. Albert invents a machine that is used to make the
harvesting of wheat quicker and more effective.
He does nat register a patent for this machine, but
manufactures it himself and sells it to farmers. His
friend Brian rells him that without a patent, he is
not allowed to exploit his invention commercially.
Explain Albert's legal position co him.
Further reading
hetp://wwew.wipo.int/portal/ cn/index.huml
(The World Intellectual Property Organization (WIPO) is an
international organisation dedicated to promoting the use and
protection of intellectual property. Their website makes for
interesting reading on various aspectsof intellectual property law.)
‘Trade marks in South Africa can be registered on the Companics and
Intellectual Property Commission (CIPC) website.
Patents in South Aftica can be registered on the Companics and
Intellectual Property Commission (CIPC) website.
The Hippo Roller Project was launched in 1994
and is a social enterprise desiqned to be sustainable,
working closely with NGOs, corporate social
investment sponsors, donor organisations and
government departments. Since there are seldom
enough Hippo Rollers to go around in a community,
they are allocated and distributed to the neediest
community members first after consultation with
community leaders, but are often widely shared,
thereby meeting the needs of dozens of people
simultaneously. For example, in a community in
Mozambique, 30 Hippo Rollers are currently serving
the water needs of almost 4 000 people!
To date, Hippo Rollers have been distributed
to 29 countries. Individuals are encouraged to get
involved with Hippo: Roller by visiting their website
on wav, hipporeller.org, emailing them on support@
hipperoller.org, or finding them on social media
platforms such as Facebook, Pinterest, Instagram,
Linkedin and Twitter.
15. Assume that Albert has repistered a patent in
the invention. It comes to his attention that a
local farmer is using his invention, and starts
manufacturing Albert's machines and selling them
withour Albert's permission. Does Albert have any
remedies? Explain.
http:/finterbrand com/best-brands/best-global-brands/ 201 6/
ranking!
(Interbrand Best Global Brands 2016 Rankings are available
on this website)
Chapter 29] Further reading 497
eit Financial institutions

The main ideas

® ‘The business of banking — banks and mutual banks
The Banks Act 94 of 1990
The Mutual Banks Act 124 of 1993
Insider trading
‘The Securities Scrvices Act 36 of 2004

The main skills

Analyse the role played by the Registrar of Banks.
Outline the requirements for the registration of a bank.
Outline the requirements for the establishment of a mutual bank.
Outline the minimal financial requirements for the Functioning of a bank and a mutual bank.
Explain your understanding of insider trading.
Critically discuss the rationale for insider trading being a statutory offence.
Discuss the consequences of insider trading.

This chapser briefly explains the law relating to financial institutions, such as banks, mutual banks,
pension fund organisations and insurance companies. We will pay particular attention to those laws
designed to protcct the investor. This chapter focuses particularly on the relevant provisions of the Banks
Act 94 of 1990, the Mutual Banks Act 124 of 1993 and the Securities Services Act 36 of 2004.

Before you start

‘Money makes the world go round’. Although you may not yet be carninga salary, you have probably
already appreciated the value of money in our society and would agree with these words, which are
the lyrics of many a song. You may also already have opened a bank account so that the money you
do have is kepe safely. Where you do not have cnough moncy to buy something you need, you may
have berrowed money from a bank. Once you have worked for a period of time and paid off some of
your debts, such as your student loan or the amount owing on your motor vchicle, you may decide to
invest money in a company in the hope of making a profit on your investment. All of these dealings
are important to you because money docs not come casily and is normally the result of very hard work.
Because of this, laws are necessary to make sure that your money is safe when it is in the bank or in some
other financial institution and that you are not cheated when you make an investment in a company,
Financial institutions manape other people's financial assets.

30.1 The business of banking

Banking law is that area of law that regulates the relationship between the bank and its customers. It also
governs the registration, operation and functioning of banks. In this chapter, we look at the how the
business of banking is registered and regulated.

498 Chapter 30| Financial institutions

30.1.1 The Banks Act
The Banks Act 94 of 1990 was passed into law to govern and supervise the business of
Deposit. in another
public companies taking deposits from members of the public. The word ‘deposit’ deals context, can also refer
with che situation where an amount of money is paid by one person to another, in terms of to the paymentota
a specihe type of agreement, so that the moncy will be repaid. first instalment an the
A public company must be registered as a bank in terms of the Banks Act. This Act sets purchase af samething
out certain requirements that an institution must mect before it can call itself a bank and Wah fine Sahance Beans
. . : payable thereafter. Here,
do theae business of a bank. Theae Act also states the
es requirements the bank needs to meet so it could also be termeda
that it is able to do business in a way that is fair to the public. down payment.

Registering a bank
A public company
There is an office in Pretoria called the Office for Banks that sees to the registration of that has been Sena
banks, The Registrar of Banks is the head of this office and the othce is considered to be made into a company in
part of che South African Reserve Bank, which is governed by the South African Reserve terms of the Companies
Bank Act 90 of 1989. emiae ieee oes
The Banks Act and the Mutual Banks Act 124 of 1993 sct out certain functions that the — Capital by issuing shares to
the general public.
registrar must perform. The registrar may also give banks guidclines when she feels that this
is needed, by issuing circulars on how the Banks Act is to be applied and interpreted. The
registrar has the power to instruct any bank to deliver certain information the registrar feels is needed
to enable him to do the job properly (section 7). The registrar can also call for the report of a public
accountant or any other person who is able to assist the registrar in his functions.
Generally, no person, except a public company that is registered as a bank im terms of the Banks Act,
may carry on the business ofa bank in South Africa (section | 1{1)). Any person who contravenes this
principle is guilty of an ottence (section | 1(2)). One exception to section 11(1) is that a bank from a
foreign country may conduct its business in South Africa by having a branch here.
Before the Registrar will allow a bank to be registered, the company applying for registration will
have to fill out certain forms and provide certain information as the Registrar may deem necessary
(section 12). The Registrar has the power to decide whether or not an application for such should be
granted, or whether any conditions should be imposed before the registration takes place.
Before the Registrar grants an application, the following requirements must be satished:
® the establishment of the bank will be in public interest
the business to be done is that of a bank
the proposed business will be done in the capacity of a public company that is registered under the
Companies Act
the applicant will be able to establish itself successfully as a bank
the applicant will have the financial means to mect the provisions of the Banks Act
the business will be conducted in a prudent manner
every person who is to be adircetor or executive officer of the bank is, as far as can be reasonably
ascertained, a ht and proper person to hold such a po sition
every person who is to be a director or executive officer of the bank has sufficient management
experience for this kind of business
® the campasition of the board of directors af the proposed bank will be appropriate for the nature
and scale of the business (section | 3).

Each year, a bank must, once it has paid a fec, obtain a business licence from the Registrar (section 35).
‘The Registrar has the statutory power to require any person who is not properly registered asa bank to
submit any relevant document or information.
‘The Registrar is required to submit an annual report on the year's activities to the Minister of Finance
{section 10(1)).
Let us look at a case study that deals with bank registration.

Chapter 30 | Financial institutions 499

 eT ar Chancers Bank

After completing her apprenticeship at Mzansi Fashion Design Institute, Nontokozo decides
to open her own business that manufactures and sells locally made African-inspired costume
jewellery. After the first month of working from the basement of her parents’ home, she makes
a profit of R2 000, She wants to keep the money in a safe place, so that she can save up to buy
new matenals for the business. She remembers seeing an advertisement
on Facebook to the
effect that a new company, Chancers Bank, is offering to waive any bank fees once customers
invest their money with the bank.
Here, it would be a good idea for Nomtokozo to contact the Registrar of Banks to verify
whether Chancers Bank has met all of these requirements and has been properly registered as
a bank. She could also ask Chancers Bank to show her its licence for the year, if she doubts its
status. Hf the Chancers Bank has met all the requirements but has not been properly registered,
then the Registrar may apply to court for an order stopping Chancers Bank from operating.

Minimum financial requirements

Because banks generally deal with large sums of money and many different people, it is important that
they keep spare moncy available, in case an unusual number of people decide to withdraw their money
on a particular day —in these circumstances, we talk of a “bank run’. This can easily happen when
rumours spread ofa bank being in financial trouble and people are in a panic that they are about to lose
their life's savings.
Because of this, the Banks Act forces banks to comply with some strict requirements regarding how
much money they must have available at all times. This also has the ctlect of preventing too many
companies from registering as banks, For example, some types of bank must maintain reserve funds
greater than R250 million. A bank must also keep an account with the Reserve Bank. This account must
havc a minimum amount of moncy in it. This amount is decided by the Governor of the Reserve Bank.
As soon as a bank is unable to meet these minimum requirements, the bank must report this to the
Registrar, giving reasons for this problem. The Registrar is allowed to decide whether any action should
be taken against the bank concerned, such as ordering the bank to pay a fine.

Added value Long-term and short-term insurers

Any long-term or short-term insurer reqstered as such under the Long-term and Short-term
Insurance Acts ts included in the definition of finanaal institutions in the Securities Services Act.
Companies that sell life insurance and retirement products are examples of long-term insurers.
Companies that sell car insurance or household contents insurance are examples of short-term
insurers. Both long-term and short-term insurers also have to make sure that they are financially
sound and have a certain value of assets. Insurers face similar problems to banks if they fail to
keep a good financial situation.

30.1.2 Mutual banks

A mutual bank is a bank owned by the depositors, the people who entrust their money to the bank for
safekeeping or investing. The Mutual Banks Act 124 of 1993 defines a mutual bank as a juristic person
registered as a mutual bank. The members of the mutual bank qualify to be members because they are
shareholders of the mutual bank. Members are allowed to participate in peneral mectings of the mutual bank.
People are not allowed te pretend to be a mutual bank if they have not registered as such in terms
of the Mutual Banks Act (section 9(1)). Any person whe contravenes this provision will be guilty of an
offence (section 9{2)).

500 Chapter 30| Financial institutions

 The Registrar of Banks enjoys similar powers over mutual banks as those given by the Banks Act, as
well as from the Inspection of Financial Institutions Act 38 of 1984, and is responsible for:
® administering mutual banks
@ directing a mutual bank to furnish any information necded
@ calling for the report ofa public accountant or any other person who is able to assist her in her
functions (section 9)
® submitting an annual report on the year’s activities to the Minister of Fimance (section 5(1)).

A mutual bank may accept deposits, make loans or extend other credit, subject to any regulations issued
by the Registrar. Mutual banks are generally more restricted than banks when it comes to doing business.
For example, mutual banks are restricted in investing in immovable property and shares. There are also
restrictions on a mutual bank's power to issue shares.

Activity 30.1
Using the internet, find out whether there are any mutual banks in South Africa. Also, consider
what the advantages of establishing a mutual bank are, as opposed to simply making use of the
services of a bank that operates under the Banks Act 94 of 1990. Discuss your findings vath a
classmate.

Establishing a mutual bank

Seven or more persons must apply for permission to establish a mutual bank. These persons are known as the
founders. The Registrar may require them to submit further information before deciding whether or not
to grant the application. ‘The Regiscrar will grant an application for permission to establish a mutual bank if
@ the mutual bank will not be detrimental co public interest
@ the founders will be able to establish it successfully
® = sufficient financial means are or will be available to enable the mutual bank to meet the requirements
of the Act
® the business will be conducted in a prudent manner
Bevery director or executive is, as far as can be reasonably ascertained, afit and proper person to hald
the office of such
Bevery executive officer has sufficient management experience for the kind of business at hand
® the composition of the board will be appropriate, having regard te the nature and scale of the
business that is intended to conduct {section 1 1{2}a}).

Every mutual bank must obtain an annual licence from the Receiver of Revenue of the district in which
its head office is situated (section 31).

Minimal financial requirements

In terms of the Mutual Banks Act, a mutual bank must meet certain minimum financial requirements
(Chapter § of the Act).
Amutual bank must meet the following specific minimum financial requirements:
® The bank must keep a minimum reserve balance calculated in the same way as for banks. In other
words, the bank must have a certain amount of money available to deal with a sudden demand for
moncy — a back-up in case something unexpected happens.
@ The bank must have acertain minimum liquidity. Liquid assets include bank notes Liquidity is the measure
issued by the Reserve Bank, gold coins and any credit balance held in an account with _of an entity's cash reserves
the Reserve Bank. Restrictions are even put on the loans the mutual bank may give, if of how easily its assets can
that loan causes the mutual bank to risk a large percentage of its capital and reserves. be converted into cash.

Chapter 30 | Financial institutions 501

As with banks, if a mutual bank fails to meet the minimum requirements that are specified by the
Mutual Banks Act, it must report its failure in writing, with reasons, vo the Registrar. The Registrar may
take whatever action is appropriate. including imposing a fine on the mutual bank.

Converting a mutual bank into a bank

A registered mutual bank may be converted into a bank (section 62), The mutual bank must apply to
the Registrar, subject to certain procedural requirements, for permission to do so. Thereafter, the mutual
bank will continue asa registered public company, subject to the provisions of the Banks Act and not the
Mutual Banks Acc.

Activity 30.2
In a table, compare and contrast the similanties and differences between the function,
registration and requirements of a bank and a mutual bank.

Activity 30.3
With a classmate, discuss the effectiveness of the role and function of the Registrar of Banks in
protecting the public from losing their money.

30.2 Insider trading

In many countries, certain types of trading based on inside information are illegal, and insider trading
is therefore regulated by law vo protect investments and to prevent market abuses. Let us look at insider
trading in more detail.

30.2.1 What is insider trading?

Insider trading is the trading of a public company’s stock or other securities by insiders Securities refers to
who have access to non-public material information about that company, Insider trading investments in public
gives a small group of people, such as a director, employce or sharcholder of a public companies that are made
company listed on the stock exchange. an unfair advantage over the majority ef people by the general public.
who do nor enjoy the same equality of information or opportunity, and it allows thar small
minority to use that inside information for financial gain (or to avoid financial loss) at the expense of the
majority whe did not have access to that information.
An insider is a person who gains inside information in the following ways:
& = from being a director, employee or shareholder of an issuer of securities listed on a regulated market,
such as the Johannesburg Securities Exchange (JSE) to which the inside information relates
BE from having had aceess to such information by virtue of employment, office or profession
where such person knows thar the direct or indirect source of the information was a director,
ernp leo yee or shareholder .

So, a wide range af people could become insiders. Ifa person obtains inside information, and knows that
the direct or indirect source of the information is an insider, then that person becomes an insider.

Activity 30.4
Think about the following scenarios and in each instance discuss with a classmate whether the
person who obtains inside information would became an insider or not:
1. Nomsa is at a dinner party where company directors are present.
2. Shan overhears a private conversation between company directors in an airport lounge.
3. Stya has an unquarded and casual conversation with a company director on the golf course.
4. Jane finds herself in a conversation between family members that was intended to be private.

502 Chapter 30| Financial institutions

Inside information means specific or precise information, which has not been made Any share-trading
public, bur if it were to be made public, the information would be likely ta make a major marketplace, whether
difference to the price or value of any security listed on a regulated market. domestic or foreign, that
Information is made public when: deals in secunties, is a
Bethe information ispublished for the purpose of informing clients and their regulated market.
professional advisers
® the information is contained in records which are open co public inspection
® the information can be casily obtained by these people who deal in listed securities related to
the information.

But, insider trading can he legal depending on when an insider makes the trade using the inside
information. Legal insider trading can take place when directors of the company buy or sell shares, but
they disclose their transactions legally. le is illegal when the information is still non-public.

30.2.2 The Securities Services Act 36 of 2004

The Securities Services Act 36 of 2004, which governs an Insider Trading Act, aims to:
® increase confidence in the South African financial markets by:
@ = requiring that securities services be provided in a fair, efficient and transparent manner
@ contributing to the maintenance ofa stable financial market environment
@ promote the protection of regulated persons and clients
@ reduce systemic risk
@ promote the international competitiveness of securities services in the county (section 2).

The Securities Services Act strengthened carlier ctorts to reduce insider trading by establishing the
Directorate of Marker Abuse. This body has jurisdiction over nat only insider trading, but also price
manipulation and the issuing of false statements. Peter Redman of the JSE. makes clear in the paragraph
below, how effectively the Securities Services Act, in a short time, puta brake on market abuse.

Added value Effect of the Securities Services Act

According to Peter Redman, Senior Technical Adviser: Surveillance for the JSE, insider trading is
bad for shareholders and for international investors who will not invest in an exchange with a
reputation for abuse. Following the implementation of the Securities Services Act, insider trading
on the JSE is not nearly as bad as f used to be. Before the introduction of the Insider Trading Act
in 1999, insider trading was rife and, in fact, accepted practice on the JSE. Because the Insider
Trading Act punished insider trading as a criminal offence and because the burden of proof in
a criminal case Is more demanding than in a civil case, few prosecutions resulted from insider
trading. However, the Secunties Services Act allows for a civil remedy for insider trading. As early
as 2005, the introduction of the Secunties Services Act, had, through the Directorate of Market
Abuse, brought about the successful prosecution of 21 cases out of 164, whach resulted
in out-
of-court settlements amounting to R45 million.
Source: Email correspondence with Peter Redman, Nowember 2013

These are two important principles that arise from the Securities Services Act:
@ Insiders may be involved in buying and selling listed securities through an agent for their own
benefit or for the benefit of another person. Insiders such as these, who know that they have inside
information, gencrally commit an offence.
® = Iris also an offence to create a false impression im other people's minds thar the security being traded
is worth more than it actually is. No person is allowed to knowingly make false promises.

Chapter 30 | Financial institutions 503

 Activity 30.5
Look up the Securities Senvces Act 36 of 2004. Does the Act prowde for any statutory defences
against a charge of insider trading either for one's own benefit or for the benefit of another person?

eo eariy Profiting from insider trading

Koketso has recently inhented some money from a family member. She decides to invest the
money on the stock market. Her friend, Jake, is a director of Down and Out Ltd, a company
that is listed on the stock exchange. Jake tells Koketso that the company is about to enter into
a deal with a multi-national company, and he recommends that she invest some money in the
company. No one, other than Koketso, has knowledge of this information. As a result of this
information, she buys R100 000 worth of shares in Down and Out. She also pays Jake a R10 000
commission. As expected, the company's share price increases as a result of this deal. Three
months later, Koketso sells her shares at a 100% profit.
In these circumstances, we say that Koketso madea profit as a result of insider trading.
Jake would be classified as an insider because he 5 a director of a company that's listed on the
stock exchange. The information that Jake disclosed to Koketso would be classified as inside
information, as it has not been made public and, i it were made public, it would make a major
difference to the value of Down and Out. Jake knew that he had inside information. In revealing
it to Koketso, he has cammitted an offence.

Activity 30.6
With a classmate, discuss the rationale behind insider trading being an offence. What are our
laws trying to quard against by making insider trading an offence? Do you think that insider
trading is morally wrong? Do you think it should be a legal offence?

30.2.3 Penalties and liability

South Africa was the first country to initiate civil remedies for insider trading, which include compensation
for those who have been prejudiced by insider trading. This means thar South Affican’s regulation of and
remedies for insider trading are amongst the most progressive and equitable laws in the world.
The Financial Services Board Act 97 of 1990 established a juristic person known as the Financial
Services Board. The functions of the board are to supervise the laws regulating financial institutions and
the provision of financial services. The board is also responsible for advising the Minister of Finance on
matters concerning financial institutions and services. Finally, the board must educate users and potential
users of financial products and services about their risks and benefits. Each year the board must submit a
report about its activities over the past year to the Minister of Finance.
If person is convicted of insider trading, she may be fined up to R50 million or may be imprisoned
for up to ten years (section 115(a)). Section 77 of the Act deals with the consequences arising from insider
trading. The insider may also be able to pay monctary damages to the Financial Services Board (PSB).
Applying section 77 of the Act to the case study above, Jake could be liable to be sued by the PSB. The
court will be able to use the Securities Services Act to order Jake to pay to the board the equivalent of
the profit that was made by Koketso, namely R100 000. On top af this, Jake could be ordered to pay
a penalty, which serves to compensate the board and to punish him. The court will use its discretion to
determine this amount, bur it may not exceed three time the profit thar was made by Kokerso, that is,
R300 000. Finally, Jake could be ordered to pay interest on the amount that is duc, the commission that
he received from Koketso and the costs of the FSB having to take legal action against him.

504 Chapter 30| Financial institutions

 What do you think?
Approach the bank teller at the bank where you hold an account. Enquire what return the bank will give
you if you deposit R1 500 in a fixed-deposit account for a period of 30 days. Why do people imvest their
money in shares? Would it not be safer to put the moncy
do you think?
Chapter summary
In this chapter, you learned the following about
financial instirutions:
The Banks Act 94 of 1990 governs the business of
public companics taking deposits from members of
the public,
Abank is a public company that has been registered
in terms of the Banks Act.
The Banks Act requires banks to have a certain
minimum amount of moncy available ar all times.
The Mutual Banks Act 124 of 1993 governs the
establishment and functioning of mutual banks.
Amutual bank is, generally, more restricted than a
bank is in terms of the conducting of its business.
Like a bank, a mutual bank must also meet
certain hnancial requirements in order to continue
doing business.
Review your understanding
A group of commerce students consult with you. They
haye pooled R25 000, and they have decided that there
is a lot of moncy to be made in lending this money
to other people and charging them interest for this.
into property or deposit it at the bank? What
A mutual bank may be converted into a bank, with
the approval of the Registrar of Banks.
The Registrar of Banks is tasked with, among
other things, cnsuring that the requirements for the
establishment ofa bank and a mutual bank are met.
An insider is a director, employee or sharcholder ofa
public company listed on a regulated market.
Inside information is information the public is nat
aware of and which makes a big difference to the price
or value of any security listed ona regulated marker.
Insiders commit an offence when they deal in inside
information.
The Financial Services Board is responsible for
supervising the laws regulating fnancial services and
institutions, advising and reporting to the Minister of
Finance, and educating the public.
They specifically want co know whar it will rake for
them to start a bank. Advise them on how they should
Eo about this and what their chances of success are in
this regard.
Chapter 30| Chapter summary 505
 Further reading

Correia, C., Uliana, E., Flynn, D. and Wormald, M_ 2007, Porteous, D. and Harelhurse, H. 2004. Ranking on Change:
Financial Managenear, Gth edn. Cape Towm Ju and Co. Democrarising Finance in Sous Africa, £994-2004 and
(Pay) Lid beyond. Cape Towne Double Storey, a division of Juta
(Chapter 13 discusses Gnancial markets and Gnancial and Co. (Pty) Led
institutions in moredetail and provides additional (This book is interesting background reading on the
information about the different types of securities.) importance of financial systems in South Africa.)
Fier. C., Ross, S.. Westerfield, R. and Jordan, 8. 2008.
Funcdamentals of Corpora Finance, 3od South African edn
Berkshire: McGraw-Hill Education
(Chapter 8.3 provides an excclicat overview of the
Johannesburg Securities Exchange and its functioning.
Chapter 12.5 proviies further infonmation on the cifocts of
insider trading.)

506 Chapter 30] Further reading

 are
The law of competition
31
The main ideas
@ What is competition law?
® How is competition law regulated in South Africa?
@ Jasticutions, enforcement and remedies
® Prohibited practices

The main skills

Describe the meaning of ‘competition’.
Explain the meaning of ‘competition law’.
Differentiate between private and public competition.
Discuss competition law as regulated by the common law,
Discuss the salient provisions of the Competition Act 89 of 1998.
Differentiate between horizontal and vertical prohibited practices.
Discuss how a company may abuse its dominant position.
Name the institutions created by the Competition Act, and briefly discuss their respective functions.
Apply all of the salient provisions of competition law to a set of facts.

This chapter gives you a brief overview of competition law in South Africa. This branch of law is aimed
at promoting competition within the market and, conversely, preventing anti-competitive behaviour. So,
competition law aims to promote fair dealing

Before you start

Have you ever played the popular board game, or an electronic adaptation Monopoly? The aim of this
board game is to buy, build and trade properties. Ultimately, the person who is able to bankrupt all the
other players is the onc who wins the game. When there is only one trader left, that trader in a specific
field holds a monopoly, Monopolies do not cncourage free and fair trade. Why do you think this is so?
Whar are the dangers of monopolies? Whar are the disadvantages to our economy if there is no free and
fair trade? Whar is the effect on your life if there is no competition!

31.1 What is competition law?

Competition involves two or more traders who want to secure the business of customers. For example,
the cellphone industry is highly competitive in South Africa. All rhe players want customers to join
their network.
Competition law is aimed at preventing anti-competitive behaviour and in promoting open markets.
Ir therefore allows the consumer to choose from a variety of goods or services.
The regulation of competition can be traced back to the Roman Empire. The first cxample of
competition legislation is the Lex /ndia de Annond that prohibited the raising of prices of food and
prevented other unfair practices thar related to the transportation and sale of food.
In some countries, such as the United States of America, public competition law is referred to as
antitrust law.

Chapter 31| The law of competition 507

 31.2 South African competition law
Competition law in South Africa has nwo parts:
@ public competition, which is regulated by the Competition Act 89 of 1998, and deals with
maintaining and promoting competition berween businesses
@ private competition, which is regulated by common law, and deals with unlawtul competition.

‘The Competition Act established the Competition Commission, which is tasked with,
amongst others, regulating business activities between firms, or companies, to ensure a Firm, for the purposes
- s . w 9s il - of this Act, hasan
compcutive market. This is very much in the public s interest. Bus, piivate competition extended meaning Firms

is concerned with the legal relationship between the competitors themselves. This area of include juristic persons,
the law gives a wronged trader a remedy if the requirements of unlawful competition are such as companies and
met. So, if Trader A unlawfully infringes Trader B's goodwill by way of a competitive act, close corporations, sole
Trader B will have a legal remedy against Trader A. proprietors, partnerships
and trusts,
31.2.1 Unlawful competition
Unlawful competition refers to the legal position between traders, where one trader Goodwill 's an intangible
ee e a ae asset which represents
wrongfully infringes the compctitor s right to goodwill. Liability is based on the lex :
Aq wells which
ia. which provided pecr ided ion tw th
compensation to the owners of property damaged fby someone darnaged bs par al eee
add to a company’s value
else's fault. This action is delictual in nature, meaning that the elements of delict must be but cannot be easily
proven by the competitor, who is alleging unlawful competition. identified
or valued.
‘The elements of a delict are:
B conduct The lex Aquilia was
B wrongfulness @ Roman law which
B faule Protected Roman
oe citizens from vandalism,
destruction of property
B damages. and some forms
of theft.
In Matthews and Others » Young 1922 AD 492 at 507, the court stated that ‘unlawful
competition would constitute an injuria for which an action under the Lex Aquilia lies Injuria means a ‘wrong
if it has directly resulted in loss’, cme a :
I he infringement must be contra bonos mores. ‘The bani moves refer to the legal a
convictions of society and it changes from time-to-time. In Masstores (Pty) Ltd v Pick n Pay means ‘against the good
Retailers (Pry) Led 2017 (1) SA 613 (CC), the Constitutional Court confirmed that the beni — moraisof society’.
mores test must be applied against constitutional valucs. In Phamelela Gatenséreg aud lL cisurc
Lid v Griindlingh and Ozbers 2007 (6) SA 350 (CC) at para. [32]-[34), Langa C) said:
‘Any form of competition will pose a threat to a rival business. However, not all competition or
interference with property interests will constitute unlawful competition. It ic accordingly accepted
that itisonly when the competition is wrongful that it becomes actionable, The role of the common
law in the held of unlawful competition is therefore to determine the limits of unlawtul competition.
This determination, which takes account of many factors, necessitates a process of weighing up
interests that may in the circumstances be in conflict. Fundamental to a determination of whether
competition is unlawful is the benf mores or a reasonable criterion. This is a test for wrongfulness
which has evolved over the years...

“The question is whether, according to the legal convictions of the community, the competition or the
infringement on the goodwill is reasonable or fair when seen through the prism of the spirit, purport
and objects of the Bill of Rights. Several factors include the honesty and fairness of the conduct
involved, the morals of the trade sector involved, the protection that positive law already affords, the
importance of competition in our economic system, the question whether the parties are competitors,
conventions with other countries and the motive of the actor.’

508 Chapter 31 | The law of competition

 The South African courts have also relied on the concept of fairness and honesty as can be seen in
section 1 of the Constitution which states:

‘The Republic of South Aftica is onc, sovercign, democratic state founded on the following values:
a) human dignity, the achievement of equality and the advancement of human rights and freedoms
b} non-racialismand non-sexism
¢) supremacy of the Constitution and the rule of law
d) universal adult suffrage, a national common yoters roll, regular elections and a multi-party
system af democratic government, to ensure accountability, responsiveness and openness.’

Added value Only unlawful competition is prohibited

Competition is healthy, in particular — for the consumer — it allows for more choice and cheaper
prices. 4s such, competition is encouraged and protected, However, if the competition is
unlawful, the competitive conduct will not be protected by the courts.

An infringement on the basis of unlawful compctition may take place cithes directly or indirectly.
Direct infringements occur when one person makes use of another's goodwill without using his own
goodwill in that the person makes false or injurious statements regarding the business of a competitor.
For cxample, the owner of an electronic store puts up a notice outside his store that states that another
electronic store sells sccond-hand clectranics as new. This is not truc. However, this notice is published
with che intention of luring the competitor's customers to his store.
Indirect infringements, on the other hand, occur when a person uses his own goodwill in an
unreasonable manner. [he most common example of an indirect infringement is that of passing-off,
which occurs when one person uses another's trade mark in an unreasonable manner so as to confuse
the public.
Passing-off was defined as follows by Rabie JA in Capital Estate and General Agenctes (Pty) Led and
Others » Holiday Inns Inc. and Others \977 (2) SA 91G (A) at 929C:

“The wrong, known ay passing-off consists ina representation by enc person that his business (or
merchandise, as the case may be) is that of another, or thar iris associated with that of another, and,
in order to determine whether a representation amounts to passing-off. one enquires whether there is
a reasonable likelihood chat members of the public may be confused into believing thar the business
of the one is, or is connected with, thar of another’.

To summarise, these are the elements of passing-off:

@ The party alleging passing-off must have a reputation or distinctive mark chat is infringed-
@ The other party's conduct must have amounted to a misrepresentation, in other words, that that
party's goods or services are either the same or linked to the others.
® There is a likcliheed of confusion in the public's mind, in other words, that the two parties’ goods
or services are the same or are linked to each other.

Adidas is well known for its three parallel stripes on shoes, especially on sport shoes. It is the proprictor
of four trade marks, all of which consist of three parallel stripes in a specific configuration. But, Pepkor
sold trainers and soccer boots that predominantly featured two and four parallel stripes. Not only did
Adidas consider Pepkor's conduct an infringement of its trade marks but it also considered the conduct a
passing-off of its goods as being those of Adidas. In this case, Adidas AG and Another v Pephor Retail Lid
(187/12) 2013 ZASCA 3, it was held thar ehe following must be proven in order to be successful in a
passing-off action:

Chapter 31| The law of competition 509

 1. The mark on which theproprictor relies has become distinctive so that the public associates the
mark with thar of the rrader.
2. ‘The mark is used in such a manner so as to cause the public to be confused.

The degree of distinctiveness or the extent af the reputation of the party alleging passing-off is important
as this will determine whether the public will be confused or deceived into thinking that the goods of the
second trader are those of the first trader because of the similaricy of the mark or name (para. 29). So,
the more distinctive the get-up or the greater the reputation, the more likely the public will be confused.
In Premier Trading Company (Pry) Led and Another v Sportopia (Pry) Ltd 2000 (3) SA 259 (SCA) at
267, the court held thar reputation ‘is the opinion, which the relevant section of the community holds,
of the plaintiff or his product’.
The remedies for passing-off are:
@ claiming delivery of the infringing goods
Ban interdict
B® aclaim for damages.

Another example of indirect infringement is when the perpetrator uses his competitor's trade secrets
without authorisation as we will see in the following case study.

ee ETB gerhy Piig-ra ae Tale MulleraM bee ele n

Bong! is the owner of Haute Couture, a high-end fashion store in the Blueberry Shopping
Centre. Zanele is the owner of High Fashion, which also sells designer clothing in the Strawberry
Shopping Centre. The two shopping centres are within close proximity of each other. As such,
Bongi and Zanele compete for the same customers.
Bongi conducts an interview with Claire, a journalist at the Raspberry Times, a community
newspaper that circulates in the area where both the Blueberny Shopping Centre and the
Strawberry Shopping Centre are located. Dunng the internew, Bong) states that Haute Couture
is the only true fashion store that sells authentic desiqner cothing in the area, unlike the High
Fashion wannabe in the Strawberry Shopping Cenre. This constitutes a direct infringement.
Bongi has infringed on Zanele’s goodwill by making false statements.
if, on the other hand, Bong! sells dresses that Brenda, a dressmaker, makes, as labelled
Carolina Herrera dresses, this amounts to passing-off. So, this constitutes an indirect infringement.

31.2.2 The Competition Act 89 of 1998 A wannabe is 2 persan

The Competition Act 89 of 1998 was enforced on | September 1999. Its primary purpose — wh0 tries to look or act
is ‘to promote and maintain competition’, Competition, unlike monopolies, encourages like someone else, 1.2. a
the establishment of businesses, which, in turn, leads to job creation and growth in famous person.
the economy.
Moreover, the more businesses there are that sell the same type of goods or provide the same services,
the better it is for the consumer. Not only are prices controlled by competition, bue the consumer
is given a wider choice of goods and services, Also, consumer welfare is promoted, which includes
providing equal opportunitics for all South Africans to participate freely in its economy of South Africa.
‘This leads toa more ethcient economy, which allows for South Africa's participation in international
markets. Competition furthers socio-ceonomic goals of addressing past incquitics as well.
In order to achieve the purpose of the Competition Act, the following six goals are set out:
1. te promote the efficiency, adaptability and development of the economy
2. to provide consumers with competitive prices and product choices
3. to promote employment and advance the sacial and economic welfare of South Africans

510 Chapter 31 | The law of competition

 4. to expand opportunities for South African participation in world markets and to recognise the role
of foreign competition
5. to ensure that small and medium-sized enterprises have an equal opportunity to participate in
the cconomy
6, tw promote a greater spread of ownership, especially to increase the ownership stakes of previously
disadvantaged persons.

Application
The Competition Act applies to all economic activities in South Africa, but excludes:
B® collective bargaining, as stated in the Constitution of the Republic of South Africa, 1996, and the
Labour Relations Act 66 of 1995 (LRA)
@ collective agreements, as stated in the LRA
@ any concerted conduct that is designed to achieve a non-commercial socio-cconomic objective or
has a similar purpose.

31.3 Institutions, enforcement and remedies

The Competition Act has created thrce institutions to administer matters regulated by this Act:
1. the Competition Commission
2. the Competition Tribunal
3. the Competition Appeal Court.

The Competition Tribunal acts as a court of first instance in all competition matters. In the hierarchy of
courts, the Competition Tribunal is a lower court. On the other hand, the Competition Appeal Court's
status is similar to that ofa High Court, meaning that it is a superior court. [t has jurisdiction throughout
South Africa and is 2 court of record. ‘The Competition Commission acts as an investigative and procedural
authority similar to the South African Police Services and National Prosecuting Authority in criminal cases.
These bodies are independent of cach other, impartial and are answerable only vo the Constitution.
They enforce the aims and provisions of the Competition Act and, where necessary, impose remedies.

31.3.1 The Competition Commission

The Competition Commission is an independent juristic person and comprises a commissioner and one
or more deputy commissioners. [he commissioner appoints investigators and staff to assist the
Commission in fulfilling its mandate under the Competition Act 89 of 1999, The Commission has
various functions:
Z to implement measures to increasc market transparency
B to investigate and evaluate alleped contraventions
# wo authorise (with or without conditions), prohibit or refer applications for intermediate mergers (as
discussed above).

31.3.2 The Competition Tribunal

The Competition Tribunal (Tribunal) is a juristic person and a tribunal of record. It consists of a
chairperson and between three and ten members who are appointed by the President. The functions of
the Tribunal are to:
B adjudicate on prohibited practices and to impose any remedy
B adjudicate on any matter that it may consider as provided for in the Competition Act 89 of 1999
gw hear appeals from or review any decision of the Commission that may be referred to it
gq make any ruling or order necessary or incidental to the performance of its functions under the
Competition Act 89 of 1999.

Chapter 31| The law of competition 511

31.3.3 The Competition Appeal Court
The Competition Appeal Court (CAC) is a court of record. and it has the same jurisdiction as a High
Court. This Court consists of at least three judges, all of whom must be judges of the High Court. One
of these judges must be designated to be the President of the CAC, and is appointed as such by the
President of the country.
The Court's functions are to:
® review any decision of the Commission or Tribunal
® consider appeals arising from the Tribunal.

Enforcement
Enforcement is donc by the Enforcement and Complaints Division. The two main functions of this
division are to:
B investigate complaincs
B cvaluate applications for exemption,

Remedies
The competition authorities have a wide varicty of remedics available to them, which include, the
Tribunal’s right tor
® = make any order, including the issuing of an interdict, which is appropriate
B impose administrative penalties.

A fine of up to 10% of a company's annual curnoever may be imposed ifa company has been found
having participated in a cartel.
Acompany that has participated in cartel activities potentially faces claims for damages from
customers who have suffered losses as a result of the company's participation in such activities. Such
claims for damages must be instituted in the civil courts.

31.4 Prohibited practices

The Competition Act forbids certain business activities or practices which will be harmful to
competition and to public interest. These include restrictive horizontal and vertical practices and the
abuse of dominant position.

31.4.1 What are restrictive practices?

There are two types of restrictive practice that are prohibited (forbidden) by the Competition Act. They are:
@ restrictive horizontal practices, which are practices that are prohibited between competitors
B restrictive vertical practices, which are practices that are prohibited between a company and its
clients or customers and includes apreements between, for exam ple. a wholesale seller and resellers,

We will new look at cach of these practices in more detail.

Added value All restrictive practices forbidder

All companies, regardless of whether that refers to a sole proprietor or a multi-million rand
company, are prevented from participating in any restrictive practice, whether it is horizontal or
vertical. You might remember the (maize meal) price-fixing scandal of bread and mieliemeel in
2007. Four large South African companies were accused of foing flour and maize prices.

Restrictive horizontal practices

Restrictive horizoneal practice means agreements made between companies on the same level, which
restrict oF prevent competition. The best known of these practices are price fixing, collusive tendering

512 Chapter 31 | The law of competition

and market division. In some imstances, companies may be allowed ta make agreements with other
companies if they can prove that the agreements are not harmful to the economy. There can, however, be
no defence against price fixing, collusive tendering and the division of the market:
= price fixing —when competitors work together ta fix the purchase or selling price or any condition
of goods or services

B® collusive tendering — when competitors work together to tender in a manner that is not free and
fair tendering. For cxample, in one tender Competitor A makes the lowest bid, in the next tender
Competitor B makes the lowest bid, etc. In so doing, the competition is excluded or prevented from
making the lowest bid asa result of the agreement between Competitors A and B.
® division of markets — when parties (cither buyers or sellers) divide a territory of specific goods or
services in a specific market. For example, if two competitors fix quotas for the manufacturing and
the selling ot goods this is a division of che marker.

er adel Salem tial

Purple Hearts Ltd and Bluebell Holdings Ltd are the two main suppliers of high-speed fibre
connectivity in South Africa. tf these two companies entered into an agreement, verbal or
written, in terms of which they agree on a price at which they wall sell their products, this
constitutes price fixing. As they are competitors, this agreement constitutes a horizontal
restrictive practice.

Let us look at the tribunal's finding on collusive tendering in the following case.

Competition Commission v Guiricich Bros Construction (Pty) Ltd (016972) 2013

ZACT 77

Principle
Cover pricing constitutes collusive tendering, which is prohibited by the Competition Act.
Facts
The executives of two rival building companies were alleged to have engaged in a telephonic
discussion regarding a proposed construction contract of a customer, which constituted an
integral component of a conspiracy to ng a tender, also called cover pricing. An agreement was
reached in terms of which Grinaker LTA(Grinaker), a subsidiary of Aveng (Africa) Ltd, supplied
Giuricich Coastal Projects (Pty) Ltd (Gmuricich) vith a price to submit as a tender. The price
was higher than that of Grinaker (the so-called cover price) to ensure that the tender was not
awarded to Guricich, and that it would be awarded to Grinaker instead.
The tribunal's finding
On the facts, the Competition Tribunal found that Grinaker and Giuricich engaged in collusive
tendenng. It was found that ‘the presence [of the spreadsheet comparing the submitted tender
prices] is evidence of a collusive outcome. Not because the price itself has any inherent collusive
quality to it.’
An administrative penalty of R900 000 was imposed against Giuniach. Grinaker was gramed
immunity from prosecution in retum for assisting the Commission te prosecute Giuricich

Restrictive vertical business practices

The Act also forbids restrictive vertical practices. (Vertical means a relatio nship between a manufacturer,
wholesaler or a retailer.) This means thar the Act does not allow:

Chapter 31| The law of competition 513

@ agreements between these different waders that prevent or lessen competition. For example, the
Competition Commission is currently investigating anti-competitive behaviour between schools
and suppliers of school uniforms. According to reports, it has been found that some schools have
entered into exclusive agreements with a single supplier of school uniforms, which not only limits
accessibility but also drives up the price of school uniforms. Most of these agresments were entered
into without having dene se through open tenders.
@ the setting ofa minimum retail price, although a company may suggest a selling price. For example,
it was found that Italtile’s insistence that franchisees sell tiles at prices set centrally by the group,
under threat of termination of franchise agreements for failure to adhere to these prices, amounted
to a contravention of the resale maintenance provision of the Competition Act. The prohibition
against minimum resale maintenance does not prevent a firm from suggesting a selling price, which
must be accompanied by the words ‘recommended price’.

But, the reseller is not bound to sell ac this price. As with restrictive horizontal practices, businesses may
make agreements that may not be classified as restrictive practices if they can prove that these agreements
are beneficial to the economy.

31.4.2 Abuse of dominant position

A company that is dominant in a particular market may not abuse its dominance to gain an anti-
competitive advantage im that particular market.

Acompany is dominant in the market if it has:

1. at least 45% of the marker
2. atleast 35%, bur less chan 45%, of the market unless the company can show that it does not have
market power

3. less than 35% of the market but it has market power.

Market power is defined as the company having the power to control prices, to exclude compctition or
to behave to an appreciable extent independendy from its competitors, supplicrs or customers. So, if a
company can act independently and fix prices im a market, it has market power.

Prohibition of dominance
A dominant company is prohibited from:
a charging excessive prices that are detrimental to consumers
B refusing access to a competitor to an essential facility when it is economically feasible to do so
@ cngaging in exclusionary acts, for cxample:
®@ = requiring or inducing a supplier of customer not to deal with a competitor
® refusing to supply scarce goods to a competitor
@ = selling goods or services to a buyer and then requiring from the buyer to purchase something
that does not relate to the initial reason for the contract
= — selling goods or services below their marginal or average cost
= buying-up a scarce supply of goods or scsources required by a comapetitor.

ee ee eee ee lee tee Rt OL Tee

Mar01) 2005 ZACT 50

Principle
Anti-competitiveness based on inducement (as contemplated in section 8(d)li) of the Act) has three
requirements. First, the firm must be dommnant. Second, if its found that the firm is dominant, it must
have engaged in a practice that either requires or inducesa customer not to deal with a competitor.
Third, the effects of the conduct must be anti-competitive, out-weighing its pro-competitive effects.

514 Chapter 31 | The law of competition

Competition Commission and South African Airways (Pty) Ltd (final) (18/CR/
Mar01) 2005 ZACT 50 {continued)

Facts
In October 2000, Nationwide lodged a complaint with the Competition Commission
(Commission) alleging that South African Ainways (SAA), the largest domestic airline in South
Africa, was trying to exclude it from the market by engaging in a number of practices that are
prohibited by the Act SAA had entered into two incentive schemes with travel agents
itis standard practice in the industry for an airline to pay commission to travel agents for selling its
tickets. At some stage, airlines began introducing an overnde incentive scheme for paying commession.
The SAA ovemde incentive scheme with travel agents works as follows: a flat basic
commission is paid to travel agents in respect of sales. Once the agent reaches its target figure, it
becomes eligible for two additional types of commission: Firstly, the override commission, which
is payable not only on the amount of sales above target, but also on the total sales achieved
by the travel agent. This commission is paid over and above the basic commission. Secondly,
the incremental commission, which is an additional commission that is paid only on the sales
figures above the agent's sales target. The structure of both these additional commissions differs
from agent to agent. Also, the sales target is set on a case-by-case basis. In October 1999, SAA
reduced the basic commission payable to agents, raised the bar to achieve the override incentive
schemes and increased the override commissions payable.
SAA also rewarded individual travel agent consultants who achieved their SAA sales targets
with 2 free nternatonal air ticket in terms of its Explorer Scheme. This scheme also allocated
points to a travel agency as awhole, a bonus pool, based on all the sales of its consultants.
The Commission alleged that these schemes were exclusionary in contravention of
section 8(dxi}, alternatevely section 8ic}.
The tribunal's finding
The Competition Tribunal established the legal test for section 8{c} and 8id) and it may be
summarised as follows:

‘It was held that as a matter of law, that once the Commission has proven thai SAA’s conduct
“requires or induces a customer not to deal with a supplier” it has proven an exclusionary
act. As such, it is not necessary for the Commission to further prove that the conduct
“impedes or prevents a firm from entering into, or expanding within a market” (para. 105).
Therefore, conduct contemplated in section 8{d) is presumed to be exclusionary whereas the
complainant must prove exclusionary conduct contemplated in section &fc)’.
Once it has been established that the conduct is exclusionary, the next enquiry is whether this
conduct has an ant-competitive effect (para. 132). In this regard, the Tribunal held that:
‘This question will be answered in the affirmative if there is (I) evidence of actual harm to
consumer welfare or (ii) if the exclusionary act is substantial or significant in terms of its effect
in foreclosing the market to rivals. This latter conclusion is partly factual and partly based
on reasonable inferences drawn from proven facts. If the answer to that question ts yes, we
conclude that the conduct will have an anti-competitive effect’.

If itis found that the conduct has an anti-competitive effect, 11 must be determined whether
this effect outweighs the efficiency justification for the conduct. if the finding is in terms of
section Bic), the complainant (Commission) bears the onus and if it is in terms of section 8d)
the respondent (SAA) bears the onus. If SAA cannot prove the efficiency justification, then the
conduct will be found to be an abuse (para. 136).

Chapter 31| The law of competition 515

 er teu ee ue ee ee a lee ee ae er ee tee
Mar01) 2005 ZACT 50 (continued)

The Tribunal found that the incentive schemes constituted anti-competitive inducement as
contemplated in section SidXi). It noted that it was not the existence of these schemes per se
but rather the nature of the schemes that was problematic. The basic commission was reduced
and the incentive commission was higher. Meeting the sales targets was more challenging.
Agents were therefore incentivised to direct more business to SAA. The ‘effect was to induce
agents to sell SAA tickets at the expense of those of its rivals (para. 146).
SAA was ordered to pay an adminstrative fine of R45 million.

Price discrimination
A dominant company is prohibited from acting in a manner that constitutes price discrimination.
As such, a dominant company (as seller of goods or services) is prohibited from:
@ acting ina manner that is likely to have the cffect of substantially preventing or
lessening competition
® selling goods and services, in equivalent transactions,
to different purchasers
@ discriminating between those purchases in terms of:
® the price charged for the goods or services
@ = discounts, allowances, rebates or credit given
@ the provision of services in respect of the goods or services
& payment for services provided in respect of the goods or services,

For example, Company X, a company that owns 20% of the market share but has market power, sells
goods ta both Company A and Company B. If CompanyX charges different prices for the same goods
that it sells to Companies A and B respectively, then Company X is acting in a manner that is prohibited
on the bases of price discrimination.

31.4.3 Mergers
Generally speaking. a merger is the amalgamation of two or more companies into one entity. For the
purposes of the Competition Act 89 of 1999, a merger ‘occurs when one or more companies directly or
indirectly acquire or establish direct or indirect control over the whole or part of the business of another
campany (section 12(1)(a)). Mergers are regulated by Chapter 3 of the Competition Act 89 of 1999
which aims at preventing the creation of monopolies, or creating a company thar is so big thar it can
engage in anti-competitive behaviour and in so doing, prevent or lessen competition within a market.
The Mergers and Acquisitions Division of the Competition Commission reviews any merper
contemplated in Chapter 3 of the Competition Act 89 of 1999. Small mergers generally, with some
exceptions, need not be reported to the Competition Commission. In the event of an intermediate
merger, the Competition Commission must approve the merger (with or without conditions) prior to
the merger taking place. In the cvent of a large merges, the Competition Tribunal must approve the
merger (with or without conditions) prior to the merger taking place.
Various factors are taken into account in considering an application for a merger, which include the
ability of small businesses held by historically disadvantaged persons to become competitive and the
ability of national industries to compete in international markets.
Whethera merger is small, intermediate or large is determined by using a merger threshold calculator
that is available on the Competition Commission's website.

516 Chapter 31 | The law of competition

 rT dr Competition Tribuna! approves merger

In Main Street 1574 (Pty) Ltd v Mancosa (Pty) Ltd and Regent Business Schooi {Pty Ltd, the
Competition Tribunal approved the large merger in terms of véhich Main Street 1514 (Pty) Ltd,
which ss @ wholly owned subsidiary of the Actis Group, acquired Mancosa (Pty) Ltd and Regent
Business School (Pty) Ltd. As the Actis Groups not active m tertiary education in South Ainca,
the Competition Commission concluded that the transaction was unlikely to substantially
prevent of lessen competition in the tertiary education sector in South Africa.

What do you think?

Consider the number of ways described in this chapter that the Competition Act 89 of 1998 secks to control
behaviour in business that is harmful vo competition and, at the same time, promote and maintain
competition berween companies, Why do you think it is so important to promote competition in a country?

Chapter summary

In this chapter, you learned the following about the law
of competition:
Competition law is aimed at preventing
uncompetitive behaviour, So, competition law promotes
open markets. There are two parts of competition law:
public
B private.
Both private and public competition are regulated in
South Africa. Private competition refers co unlawful
competition and is regulated by the common law.
Public competition, regulated by the Competition
Act, deals with the maintenance and promotion of
competition berween businesses.
To ensure competition im markets, the Act deems both
horizonral (agreements between competitors) and vertical
(agreements between any twe or more companies in a
vertical relationship) as prohibited practices.
Orher measures to ensure thar competition is not
prevented or lessened, are to prohibit companies from
abusing their dominant position in a market and
regulare mergers to ensure that the proposed merger
docs become a threat to competition.
The remedies for unlawful competition are founded
in the law of delice. There are various examples of
unlawéul competition. For example, when one trader
makes disparaging remarks abour the business of a
competitor or when a wader passes off the poods of a
competitor as his own.
The Competition Act established the Competition
Commission that is responsible for the investigation.
contral and evaluation of anti-competitive conduct and
mergers; the Competition Tribunal that is responsible
for adjudicating on matters investigated and evaluated
by the Competition Commission; and the Competition
Appeal Court, as a specialist court.
Anti-competitive conduct includes:
B restrictive horizontal practices, which ecter to
anti-competitive behaviour hetween competitors,
such as price-fixing, collusive tendering and the
division of markets
B restrictive vertical practices, which refer to anti-
competitive behaviour between a firm and its
suppliers and/or customers, and includes the
setting of minimum retail prices
@ abuse by a firm of its dominant position by, for
example, excluding others from the marketplace,
charging cxcessive prices, cngaping in price
discrimination.

Chapter 31| Chapter summary 517

 The Competition Commission must approve intermediate
mergers and the Competition Tribunal must approve large
mergers. The main consideration in determining whether
or not to approve a merger is whether the merger will
substantially lessen or prevent competition in the market.
Review your understanding
1. Whar is the difference between private and public
competition?
What is the difference between direct and indirect
ttw
infringements in unlawful competition?
3. Discuss the aims of the Competition Act 89
of 1998,
4. Exit Manufacturing Holdings Lid (Exit) is a
manufacturer of furnicure. Exit enters into an
agreement with Purple Furniture (Pry) Led
(Purple), which is 2 furniture retailer, in terms of
which Exir will not sell any of its products to any
other furniture retailers. Name and explain the
legal principle highlighted by this set of faces.
5. Green Stars Led has cornered 37% of the solar
market in South Africa.
Further reading
Necthling, J. and Powgicter, J.M. 2015. Neerhling-Porgicerr- Visser
Lew of Delicr, 7th edn. Durban LexisNexis South Aftica
Alberts, W. Whar is unlawful competition” DR, Aug 2008,
wol. 47
Anderson, P. and Fiandeiro, F. “What constitutes ‘inducement’
in terms of section 8(d)(i}?’, available at http://www
compcom.co.za/ wp-content/ uploads! 2014/09/
Andes vonFiandcire What-constitutcs-inducement.pdf
OECD (2003) Compeatrion Law and Policy in Soush Africa:
An OECD Peer Revicw, availabic on the OECD website
hetp:/fvww.compcom.co.za/
(The Competition Commission's website contains detailed
information on the role, functions, and divisions of the
Commission)
518 Chapter 31 | Review your understanding
If nor, the merger is approved. If so, che Commission
er the Tribunal must consider whether the merper's
technological, cHicicncy or other competitive gains
outweigh the anti-compctitive cHect of the moenger or thar
it is justifiable on substantial public interest grounds.
a} = Discuss whether or not Green Start Led is
a dominant firm as contemplated in the
Competition Act 89 of 1998,
b} Assume that Green Stars Ltd is a dominant
firm. Explain which conduc it is prohibited
from doing.
6. Which economic activities in South Africa are not
governed by the Competition Act 89 of 1998?
7. Name and briefly explain the functions of the three
bodies that were established by the Competition
Act 89 of 1998.
8. Explain the meaning of ‘dominant firm’.
9. Discuss how the Competition Act 89 of 1998
prohibits a dominant firm from abusing its
dominant position in the market place.
hitp.//weww.compeom.co.za/merger-threshold-calculator!
(Whether a merger is small, intermediate or large is
determined by using a merger threshold calculator thar is
available on the Competition Commission's website.)
http. /wwew.compcom.co.za!wp-content/ uploads! 2014/09
pocket-act-august-201 41 .pdf
(The Competition Act 89 of 1998 can be found on this
website.)
http://wwew.comptrib.co.za/
hitp/ yrs comptrib,co.za/asscts/ Uploads/CR162Dec 14 spa
hips yew comptrib.co.za/asscts/ Uploads! Reasons-
for-Decision-Media24-Section-8-Case-Signature-
Documentfinal pdf Media 24
(The Competition Tribunal’s website contains information
on the role, functions, and the like of the Tribunal, It also
contains information on recent mulings by the Tribunal.)
 Bibliography

Hutchison. 1)., Pretorius, C. |. du Plessis, |., Eiselen, S. Ford.

Books
T and Hawthorne, L. 2012. Tie Law of Conenacr in Sean)
Abric. W. ct al 2015. Deceased Feeaves, VOth edn. Durban:
Africa Lew, 2nd edn. Cape Town: Oxford University Press
Lexis Nexis South Africa
Southern Africa (Pry) Lod
Bertelsmann, E. et al. 2008. Mars: The Law of Insolvency in Seat
Kerr, |. 2002 the Prenciples of he Law of Coneace, bth ecto
Afrier, 9th edn. Cape Town: Juta and Co, (Pry) Ltd
Botha, C. 2012. Snrrarery dorerpresscion. Aw Inerodtuction for
Cape Town: Butterworths
Malan, FR. and Pretorius, | T. 2015. Maden on Bills of Exctwenge.
Stwdenes, Sth edn. Cape Town: Juta
Chequer anel Proneisiory Noves in Soach African Law, 5th edn,
Buzan, Tony, with Barry Buzan. 1995. The Mind Map Root —
Durban: LexisNexis South Africa
Racliaus Thinking: The Major Fvotwcan in Hueman Thawgh.
McFadyen, T.M. 2008. eCormmnerce Bese Praceices— How vo
Revised edn. London: BAC Boswks
Mavteer, Sell, and Sereice Crstomers with Ineerner Technologies.
Cassim, F{H.L, Cassim, MF, Cassim, R., Jooste, R.. Shev, I.
USA: McFadyen Solutions
and Yeats, |. 2012. Conmmponmy Company Law, Ind edn.
Milld. D. 2013. Maddern duswnance Law iat Soh Affiam Lie.
Cape Town: furs and Co, (Pry) Ltd
Cape Town: Juta and Co. (Pty) Led
Christic, R-H.1996. The Law
ef Conensce in Soush Africa,
Naude, T., Eiselen, S. 2014. Commremary en she Consumer
3d edn. Durban: LexisNexis South Aftica/Butterworths
Proseceion Ace. Cape Town: Juta and Co. (Pty) Led
Correia, C_, Uliana E., Flynn, D. and Wormald. M. 2007.
Neethling, J. and Porgieter, J.M. and Visser, PJ. 2015. Nevehling-
Financial Managemene, 6th eda. Cape Town: Juta and Co.
Porgierer- Viner Lew of Deiiee. 7th odn. Durban Lexa Nexis
(Pty) Led
South Africa
Davis, D., Geach, W., Mongalo, T., Butler, D., Loubser, A.,
Papadopoulos, S. and Snail, S. 2012. Cybenlaw@eSA FTL Pretoria:
Coetzee, L., and Burdette, D. 2013. Companies and Osher
Van Schaik Publishers
Brstness Senaceieres tn Souk Africa, 3rd edn, Cape Towne
Portcous, D. and Hazelhurst, H. 2004. Ramting on Change:
Orford University Press (Pry) Led
Democracising Finance iu Sossch Africa, 1994-2082 and
Davis, D.M. 2003. Geseon aud Geez: The Soneh African Law of
Beyond, Cape Town: Double Storey, a division of Juta and
Jusurance, Ind odn. Cape Town: Jutaand Co, (Pry) Led
Co. (Pty) Led
De Stadler, E. 2013. Consumer Law Unlocked. Cape Town:
Reinecke M.F.B., Van Niekerk, J.P. and Nienaber, PM. 2013,
Siberink Soush African Tnenrance Liw. Durban: LexisNexis South Africa
De Waal, MJ. and Schoeman-Malan, M.C 2015. Law of
Schulze, HL, Kelbrick, R.. Manamela,T., Stoop, P. Manamela,
Succession, Sih edn. Cape Town: Juta and Co. (Pty) Led
E., Hurter, E., Masuku, B. and Stoop, C. 2015. General
Deport, P_(ed). 2011. Henochsberg an she Companies Act 71 of
Priuciples of Commercial Law, 8th edn. Cape Town: Juta and
2008 Durban: LexisNexis South Africa
Co, {Pry} Led
Firer, C., Ross, §.. Wesrerficld, R. and Jordan, B. 2008.
Sharrock, R. (od). 201, The Law of Banking aad Paymene in
Fundanseneals of Carporae Finance, 30d South African eda.
Sous Africa, Cape Town: Juta and Co. (Pry) Lid
Berkshire: MoGraw-Hill Education Sharrock, R. 2016. Bases: Tramraceions Lew, 9th edn. Cape
Fouche M.A. et al. 2012. Leg! Principle of Conerace and
Town: Juta and Co. (Pty) Ltd
Commercial Law, Tth edn. Durban: LexisNexis South Affica
Sharrock, R., Smith, A.D. and Van Der Linde. K. 2012, Hockips
Glover, G. 2015. Kerr's Law of Sule and Lease, 4th edn. Durban:
Insolvency Law, 9th eda, Cape Town: Juta and Co, (Poy) Lid
Lents Nexis South Africa Van Der Merwe, D. P. et al. 2016. [nformarion and
Grogan, |. 2017. Désortsnal, 3rd edn. Cape Town: Juta and Co.
Commrmuicarions Technology Law, 2nd cda. Dusban:
(Pry) Led
LexisNexis South Africa
Hare, J. 2009. Shipping Law anet Adminalry furisdtceion in Sourh Van der Walt, AJ. and Pienaar, GJ. 2009. fareraduesion 10 the
Afvies, Ind edn. Cape Town: Jura and Co. (Pryt Led
Law of Property. 6th edn. Cape Town: Jura and Co. (Pry) Led
Harms, L.T-C. 2015. Améer’s Precedenes of Pleadings, 8th cdn.
Van Eeden, F. and Barnard, ]. 2017. Coasamer Preseceion Law in
Durban: LexisNexis South Africa Sous Ajrica, 2nd edn. Durban: LexisNexis South Africa

Bibliography 519
 Periodicals and journals Websites
Alberts, W. “Whar is unlawful competition?’ DR, Aug 2008, Val. $7 htepofinterbrand .com/best-brands/best-piohal-hrands/20
lé/ranking/
Anderson, P. and Fiandeiro, F. “Whar constitutes ‘inducement’ hitpe//thelawreviews.co.uk/edition/the-shipping-law-review-
in terms of section §(d)(i)?’, available ar hep: www edition-3/1146103/sourh-atrica
coMmpcom.co, 2 wp-contentvuploads/ 2014/09 hetp./www.arbitration.co.za
Anderson Piandeir W hat-constitutes-inducement pat http://www. blacksash org za/files/ perscriptienact.pdf
Barratt, A. and Snyman, P.. “Researching South Affican Law’, hitpd/www.compcom.co.zar
March 2005 updated by Kapindu, BLE. Global.cx website hitp://www.comprom.co.za/merger-threshold-calculator/
of the Hauser Global Law School Program, New York hitpsliwww.compcom.co.cafwp-con tent ploads/20 | 4/09!
University School of Law (accessed on 3 October 2011) pocket-act-august-20141. pdf
hitp:'/www.nyulawglobal. org! globalcx/South Alicahim hitps/yww.comptrib.co.za/
Blackman, M.S., Jooste, R.D. and Everingham, G.K. 2002, hitp//www.comprib.co.za/assets! Uploads/CR162Dec14.pdf
Commentary
on the Companies Act, Vol 1 (as updated per herp://www com prrib.co.2za/assets!/ Uploads) Reasons
revision service). Cape Town: Juta and Co. (Pry) Lic for-Decision-Media24-Section-8-Case-Signanare-
Campbell, J. 2006. The Cost of Credit in the Micro-finance Documentfinal pdf Media 24
Industry in South Africa’. LLM thesis. Rhodes University, hup://www.icl.up.ac.cvimages/country_reporw/south_africa_
Grahamstown country_report.pdf
Dendy, M. ‘Agency and Representation’ in W.A. Joubert (od.). hitpa/yweww.omilasa.co.zal 20101 the-rotterdam-rules
2014. LAWSA, Vol. 1. Durban: LexisNexis South Africa hitp.//wwwner. ong, za
Department of Trade and Industry. Making credit markets work: http dw ombud on2a
Policy framework for consumer credit herpy/ www.ncr.org.za! hitp://www.osti.ce.za
publications/Backesound
NWCA docs/Credit%20 Law%h20 hotpelfwenw. polity.org-ga/articles the-nen-variation-chinse-ancd-
Review.pdf (accessed on 27 September 2017) its-place-in-modern-conteacts-20 14-12-07
De Vos, P.'Moralistic view of martiage leaves unmarried hitps/wawwsaia.co. ra
couples unprotected” heeps://constiturionallyspeaking.co.za/ hrtp://www-yourube.com/watch)v=G5 16H musPCe
miosralistic-view-of-martiage-lcaves-anmarried-couples- http://www! safliiorp/cgi-ban/ disp. pitilesra/cases!
unprotected/ ZACC/2009/6.heml &query-mphaphuli
Du Plessis, L.M. 2011. ‘Statute Law and Interpretation’. https: weew eff orgy
wp chicks bind-ways-usets-aprev-online-
LAWSA_ 2nd edn. Volume 25, Part 1. Durban: LexisNexis lerms-service
South Africa hitps:/ www faisombud.coza
Education & Training Unit (ETU), ‘Paralegal advice website’, hitps:/ wow. fsb coca! Departments!marketAbuse/ Documents!
February 2002, updated 2011, ETU and the Black Sash REP 20Genesis_ 2004082004,
pdf
{accessed
on 3 October 2011) httpe//wwrw_paralegaladvice. hitps://wwnw jsc.co.ra/content!

Ong-ra! [SERulesP oliciesandRegularionltems/Insider%20

Hoexter, C. (ed). 2005. “The Interpretation of Legislation’. Triding»20Booklet.pdf
Ineraductian10 Law Course Pack. South Africa: University of
the Witwatersrand
National Prosecuting Authority of South Africa, Home page,
July 2005, National Prosecuting Authority website (uccessed
on 3 October 2013) https! www.npa.govaral
OECD (2003) Compestrion Law aud Policy in Son Africa:
Ax OECD Peer Review, available on the OECD website
Papenfuss,T. 2012. “What arc the effects of the reckless
credit sections in the NCA in the prevention of
over-indehtedness?’, available on the University
of
Pretoria’s website
Da Gama. R. 2017_ “The Exclusion of Liabiliry for Emotional
Harm to Passengers in dhe Warsaw and Montreal
Convention: Moving Away from Floyd, Siddhu and Pienaar
to the Stott Case?’ PER, Volume 20 (5)

520 Bibliography
Ensries are lisced in kcrzer-by-derser alplabericad oreter, financial scrvicescxcluded from the application of questions om manors <i")
Acranyms appear ix alphaberical sequence wislin the CPA 734 questions on valid contracts 72
the index. have itin writing 204 reasonable person 463
holder of a bill 308 Regulations to the CPA 234
A how to answer multiple-choice questions 68 reliance theory 81
abuse of dominant position 514-516
how to find a case 9 reminder on how to type forcign words 205
academic textbooks and journals 10
how to prevent cessson 162 remuneration 406
acceptance
implied and imposed terms 119 representative trade unions ¥ wade
clarity and communication of 70 indemnity insurance and nen-indemnity union representatives
389
of new terms as form of compromise 168 insurance 466 restraint of trade 111
requiremenus for valid 69-71 intermedsaries im the financial services industry 242 rights disputes vy mutual interest disputes 391
acceptors 297, 303, 310, 318
is fault always a requirement? 141 tight to cooling-off in the European Union 236
accident, passing of risk in cases of 180-181
joint and several liability 249 tole of the company: Section 7 437
acknowledgement of receipt 281
keep it simple 18 Rotterdam rules 478
acting without authority 267-272 law of contractand delict 91 scales of injustice 27
actions, cessian af 364
logalisation of dagga 38 show that you kaow55
aco
legal meaningof ‘spouse’ 349-350 signing ‘pp or ‘qq 260
quae minority 188, 189
legal meaningof ‘title’ 309 some law for life lessons 228
parselisena 324
legal problem-solving steps LT specific contracts 179
redhibisoria 188, 248
legal tender 316 subjective and objective tests 79
ACLs, Meccssury Capacity of agent co lemd ¥ barrow 357 truc owner of a cheque 3)2
conclude juristic 261 long-term. and short-term insurers $00 Tusrqpnmsel-rule 263
actual delivery 183
marrage regimes and insolvency 321 Wo perspectives on one problem &9
added value:
material mistake 79 unfair dismissal? 398
acceptance requirements 71
meaning of domicile 487 verbal or written? 99
accepting a bribe 267 mistake and misrepresentation $4 reer 248
acts of insolvency 329-329 more statutes regulating labelling and mares Clause 188
advice for coodis receivers 228-229
trade descriptions 241 warnings 402
Africans Life Assunance Co Lid v MBS Bark more than one copyright 486 way to remember 370
Lod 2007 (1) SA 442 (OW) 260
Negative marking in MCQ L}4 what is a cheque? 185
all restrictive practices forbidden 512 negligence or fraud? 90 what is in the word? 353
are you ready? 147
‘Regonation 30) when is a businessa going concern? 398
be informed 401 only unlawiul competition is prohibited 509 when is a sale perferse? 181
being secure 368
opting out of receiving direct marketing 235 whwo is the ‘spouse’? $42
can they be retrenched? 408 other ways in which employment can come to without set-off or deduction 175
card changes 317
an end 397 your attorney 24
characteristics of a friendly sequestration 330 in other words 281 adjudication 410
classifying contracts | L6
pension and provident funds 390 administration ofa deceased estate 352-354
dick-wrp agreement 280 ADR ser dispute resolution reer alternative
plaintiff must make a claim ‘once and for all” 173
composition and compromise 333
pledgors and pledgees 371 advertisements 64-66
contractual variations 135
poor debtor 331 advocates 16
costs of property transfer 92 possible versus impossible performance 144 affirmative action 414
dealing with Latin tags 374 possible versus impossible performance? 145 agency
delictual damages versus contractual damages 154 post-dated cheques 296 law of 257-275
difference between property rights and intellectual power of attorney 262 nature of 257-258
property rights 484 precedent for drafting legal documents |4 requirements
for 259-26]
different meanings of order 299 prescription 249 shop agreements 390
doctrine of unanimous assent 443 prove pour claim 153, 155 agents
effect of the Securities Services Act 403 proving constructive dismissal 396 appointing of through authorisation 261-262
exclusion clauses 119
public liability insurance 455 authorityof to act 259, 26)-264
fault is not a requirement 142 puffing 245 duties of Dob 267

Index 521
 making aware of third party by 259-260 ending 273 capacity
necessary capacity of to conclude juristic acts 261 ostensihle 269-271 of agent to conclude juristicacts 261
paying of 264 sources of 262-264 contractual 46-60
repaying of expenses of 265 automated teller machine (ATM) 315 express or implied consentual 56
who can be 258 wo inherit 391-352
AGMs seegeneral meetings seeder annual B card payments 316-317
agreed work that must have been properly done 378 backdating ofa law, against 42-45 care and diligence, acting with 266
agreement 432,436 bait marketing 242-243 care, duty
arbitration 423 banking te act with 447-448
between debtor and creditor regarding service to business of 498-502 care, duty of
be rendered 377 internet 417 reasonable 215
contracts that are void due nea lack of 77-84 bargaining councils 390 until goods are delivered 180-183
costs of drawing up the 146 bearer balls 301-305 carriage, law of 470-482
ro create asurecyship agreement 351 benefit, joint 433 carriage by
Berne Convention countries 487
duration ofa lease 201 air 479-480
not tacede 161-162 bills rail 477
passing, varying and ending of nghts and duties bearer 301-305 toad 477
by 158-170 af exchange 29§, 298-303 sea ays
reaching lepalé1—7$ making out of toa specific person/beareaonder 301 carriage of
agreements payable on demand og at fixed or determinable goods 478
browsc-wrap 275-280 future date 301 passengers 475
click-wrap 279 Board of Directors (Bold) 259, 262, 264, 270, 440, persons and goods 476-477
closed shop 390 544, 498, 441, 442, 444, 445-448, 449, 499 carrier, duties of the 474
credit 218-230 BoD) see Board of Direcrars cases
lay-bye 250 boos fide fair procedure in misconduct 402-405
aids to interpreting statutes, external and internal 38-45 payment 1635. when there is no ducy 187-188
possesscr 378, 379
air travel, international 479-420 where statutes Create exceptional 363
alternative bond, covering 368-469 case studies:
dispute resolutwn (ADR) 135, 252, 253, 428 branches of the law 21-31 Aaron's warranty 465
work schemes 244 breach of adverts in the shop window 68
annual contract 139-146, 151, 153-155 Andiswa's dog 456
general mectings (ACMis} 442 duties, director's lisbility for 44% Anele’s Gym 235
leave 416 breaking che law 426-427 Angelina's household insurance 462
antenuptial contracts 101 broadcasts 485 attachment of property for debt owed 370
appeals and reviews 27 browse-wrap agreements 279-280 Ayesha and Bongani's second-hand car business 433
Appellate Division 14, 142. 192, 475 see aka business Ben's art collection 467
Supreme Court of Appeal entities 429-450 Better Bodies (Pry) Lid 448
application procedure 28 names 252-253 Busi is buying a car 261
rescue and rescue practitioners 339-340, 341
appointment, ending an arbitravor’s or umpire'’s 424 can a close family member bea trustee? 324-325
arbitration 145-136. 410, 421-428 trust 430-431 car insurance-£52
Buy.corns
arbitrater's appointment, ending an 424 ceding book debts as security 166
artistic works 485 Applicable law 277 Chancers Bank 500
assets, comteibution to partnership 442 Terms of Use of 285-293 claims when a signatreis forged 300
assignment, substitution ofa third party as buyer Competition Tribunal approves merger 917
form of 167 duticsof the 192-194 conflict of interest? 325
association, freedom af 388 when risk docs mot pass ta the ER1-183 consequence of co-sutetyship 361
ATM see automated teller machine constitutional limitation 37
attorneys 1G
Cc contract to deliver ten helicoprers 140
Cabinec 3,17
attornment 184 covering bond 36%
CAC srAppeal Court nuder Competition
attribution of online contract to somebody 280 danger
of credit purchases 221
calling-up clauses 373
auctions 6) Daniel and Shaheoda’s partnership 435
Canadian Charter of Rights. and Freedoms (182) 39
authorisation defence of prescription 366
cancellation 210
appointing an agent through 261-262 difference categories of services 379
clause 130-131
concluding a contract without 271-272 direct and indirect infringement 510
results of 152
authority Donald's lite insurance 465
cancellation of
roact on behaltof the principal 254 duties of a surety and principal debtor 362
contracts 150-153
delegating 264 entering into acontract 2G
the lease 208, 212

522 Index
 making aware of thind party by 259-260 ending 273 <apaaty
necemary capacity of to conchade juritic act 261 ostensible 26%—=271 of agent to conchaede
juristac acts 261
paying
of 264 sourcesof 262—=264 contractual 46-60
tepaying
of expenses of 265 automatedteller machine (ATM) 315 express or implied comentual
56
who
can be 258 to inherit 351-352
AG Ma ae geocral meetings ender antwual B cand payments 316=317
agreed work that must have been properly done 378 backdatingof a law, against 42=43
agreement 452, 436 bait marketing 242-245 care, duty
asbieration 423 banking to act with 447=448
between debsor and credisor regarding service to business
of 498=502 care, duty of
be sendesed 377 internet 317 reasonable 213
contracts that ase woid duc mo a lack of 77=84 bargaining councils $90 until goods are delivered 180-153
costs of deawing
up the 136 bearer
bills 301-303 carriage,
law of 470-482
to create a susetyship agreement 361 benefit, joint 433
Berne Convention countries 487
carriageby
duration of a lease 201 ar 470180
not to cede 161=162 bals rail 477
pamang. varving and ending of rights and dies bearer 1-303
of exchange 295, 298=303
toad 477
by 158-170 wa 478
reaching legal 61=75 making out of to a specific person/bearer/order M)! carriage of
agicemenss payable on demand or at fixed or determinable goods 478
beowserwrap 27280 furure dare 301
passengers 478
click-wrap 279 Board of Directors (Bol>) 259, 262, 264, 270, 40, persons and goods 476=477
closed shop 990 344, 438, 441, 442, 444, 445-448, 449, 499 carrier, duties of the 474
credit 218-230 Bol) se Board of Directors cases
lay-bye 250 boa fide fair procedure in misconduct 402=403
aids tw irmerpecting satuars, corral ard insernal S8—4$ payment 163 when there is no duty 187+185
air travel, international 479-480 possessor 378, 379 where statutes create exceptions!
363
alternative bond, covering 368-369 case studies:
dispuse resolution (ADR) 135, 252. 253, 428 beanches of the law 2131 Aaron's warranty 465
work schemes 245 bweach of adverts in the shop window
6
annual contract 1146, 151, 153=155 Andiswals dog 456
peneral meetings
(AG Ms) 442 duties, director's liability for 448 Anele’s Gym 235
leave 416 breaking
the law 4260427 Angelina's household inwurance 462
antenuptial contracts 101 broadcasts 485 attachment
of property for debe owed 570
appealsand reviews 27 browse-wrap agreements 279=280 Ayesha and Bonganih second-hand
car busines 453
Appellate Division 14, 142, 192, 475 se abe business Ben's art collection
467
Supreme Court of Appeal entities 429-450 Better Bodies (Pry) Led 448
application procedure 28 names 252=253 Basi is buying 2 car 261
appointment, cading an arbitratot’s or umpire’s 424 rescue and rescue practitioner:
35% 340, 341 can a dose family member be a trustee? 424-325
arbitration 135<134, 410, 421-425 trust 430-431 car insurance 452
arbitrator's appointment, ending an 424 Buy.com ceding book debes as security
166
artistic works 485 Applicable Lew 277 Chancers Bank 500
assets, contbusionto partnership 432 ‘Terms of Use of 285=293 claims when a signature
is forged 500
assignment, substitution of a thisd party as buyer Competition
Tribunal appeowes merger $17
form of 167 duties
of the 192-194 conflict
of incerest? 325
aaocianon, freedom of 383 when risk does not pass to the 181<183 consequence
of cosureryship M6!
ATM see anomated willer machine
attorneys 16 Cc contract to deliver ten helicopeers
140
Cabinet
3, 17
storneent 184 covering bond 369
attribution of online contract to somebody 280 danger of credit parchases 221
auctions 67 calling-up clauses 373
Daniel and Shaheeds’s parmership 455
sasienel Canadian Charter of Righes and Freedoms (1982) 99
defenceof prescripon 366
appounting am agent through 261-162 cancellation 210
diferent categories of services 379
clame 10-151
conchading
4 contact without 271-272 ditect and indivect infringement
$10
authority resinsof 152
Donald's
lige insurance 465
cancellation
of
to act on behalf of the principal
259 dduties of a surety and principal debeor M62
delegaring 264 contracts 1500153
entering into a contract 96
the lease 208, 212

$22 index
Eric’s insured household contents 467 causa 160, 162 Companies and Intellectual
Property Commission
expropriation
of property: mortgagee lasing their cause 76=77 (CIPC) 271, 335, 336, 340, 343, 344,
security via state expropriation
of land 376 caveat subscriptor rule 80, 81, 82 438, 441, 448, 450, 497
extended
car sale 162-163 CCMA see Commission for Conciliation, companies registered under the Companies Act 71
fees must fallt 149 Mediation and Arbitration of 2008, types of 440-441
Freddy's Florist 180-181 certainty of performance in contracts 102=104 company 436=437
gap in the retirement
plan 165 cession deregistration
of the 448
gold ring 90 im anticipando 162 incorporation
and registration of a 438
Halona destroys her laptop computer in a fir complete 164=165 organs
of the 441-448
of rage 141 consequences of 163=164 rules 438
procedure 160 as a separate
legal entity 439-440
is this a fair dismissal?
399 requirements for 161 compensation for unfair
Jacob's laprop 459 as security 165=166 dismixal 411
Joel's car 30 types of 164=166 labour practices 411=412
Joe’s ald Crox car 92 cession of
lessons from maize exports 186 actions 365 Appeal Court (CAC) 511, $12, 517
contractual rights, restrictions on the 161 Commission 508, 511, 513, 514, 515=516,
479—480 furure rights 162=163 517, 518
lost car 71 charges, finance 220 Tribunal $11, 513, 515, $16=517, 518
Marius has been sequestrated 58 cheques 295=296, 311=<314 competition, law of 507=518
mechanic ar fault 143 choice 153 completion 63
im mora 144 cinematograph films 485 of the partnership business or if the business
life insurance policies 456 CIPC see Companies and Intellectual becomes impossible
to perform 436
Luvuyo’s
life insurance 459 Property Commission compliancewith terms set out in offer 70
multiple mortgages 367 citation
of the parties 283 compromise 341
Peter's scooter 233 civil computer programs 486
pledgee using a spoliation
order 375 and criminal!
law 24=25 conciliation 410
Practor’s Edict 478 procedure 25=28 conditions
price fixing 513 clarity 64 of employment, variation of basic 418
profitingfrom insider trading 504 of acceptance
70 indicating whether a contract will start or
Pumla’s car 461 clauses continue
to operate 128=129
restaurant sale 110 foreclosure 372=373 conduct, unconscionable 245
risk of arbitration 426 summary sale 373=374 consentual capacity, express of implied 56
Sam and Jessica’s contract 455 termination 375=377 consignor, duties of the 474
Sarah's shurtle 246 about whether or when a contract will take effect Constitutional
Sarvesh buys immovable property 264 orend 128=131 Assembly7
setting off money for money 175 close corporations 437=438 Court (CC) 7, 8, 9, 11, 14, 15=16, 17, 19, 27,
Simpiwe and Thandeka 57 closed shop agreements
390 36, 37, 39, 215, 228, 349, 414, 422, 428,
Sindisiwe’s camera 467 coedebtors
and co-creditors 158=159 477.508
Sisiwe’scar 265 Code of Good Practice 399, 400, 403—404, 419 constructive dismissal 395=396
Solly's roof 91 collective agreements 389=390 consultation,
aim of the 407
squash dub 251 Commissioner of Oaths 28, 348 consultations,
how employers should treat other
Takealoc.com 282=283 parties
to 407
Terence’s jacket 80 Arbitration (CCMA) 389, 392, 399, 403, consumer

Thandi’s holiday 244 408, 409410, 419 duties 226

Thandi’s house 92 common marker 234-235
Thomas Crown Affair 191 claw illegality 105=106 protection 283
timid watchdogs 90 mistake 83=84 rights 224-225, 234-258
tithe to a cheque 309 common law 7=8, 473—474 containers, deposits on 251
traffic light accident 24 legal position of the other contracting party in an contra bonos mores 508
Tumi's house 71 unassisted contract in terms of 54 contract

unclear message 272 common low, legal position of a minor conditions indicating start of or continuance
of
use of a modus 133 aged
7 to 18 years in an assisted contract in terms to operate 128=129
Valley
of the Waves 123=124 of 49-52 consequences
in terms of the law of 88
X-Co and Mr James 110 in an unassisted contract
in terms of $2=53 contents
of a 115=126
Xolani’s bicycle 53 communication
67 enforcing the 148=150
Yusuf’s
car 459 media 485=486 formation 283

index 523
 intention 64=66, 88 rights, restrictions
on the cession of 161 deeming provisions 230=281
interpreting
2 124=125 terms, common 127=138 defect
perfects 180, 181 contribution
to partnership assets 432 latency
of 187
received 280 Convention on the Recognition
and Enforcement materialism
of 186=187
requirement
for written 100 of Foreign Arbitral Awards (1958) 427 defects, duty to warrant against latent 186<189
requirements
for a valid 46 conventions, legislation and international
476480 defences 462=363
voidable 84-88 conversion of a mutual bank into a bank 502 delay in performance
by the
contract of copyright creditor,
breach due to a 1442145
insurance, ending a 467 debtor, breach due to a 143=144
lease, definitions related to a 195202 law 484490 delict, consequences
in terms of the law of 89
sale, nature of a 179=180 lengsh
of 489 delivery
contract, requirement of protection, requirements for 486—4838 duty to accept
193
being signed in front of a notary public 100 costs of goods, duty of care prior to 180=183
registration
of ar the Deeds Office 100 clauses 136 refusal
of 208
contracting parties +4, 102 legal 136 typesof I83=184
contracts court delivery with the
agreeing
to 457 hierarchy 11=18 Jong hand 184
by agreement,
variation and termination of judgments, enforcement of 27=28 short hand 184
166=168 CourteAnnexed Mediation Rules 421 Department
of Justice 17
antenuptial 101 courts, chiefs’ and headmen’s
13 deposits
on containers 251
certainty
of performance in 102=104 court's discretion diligence, duty to act with 447-448
concluding
63, 271<272 compulsory sequestration at the 331 Directorate of Market Abuse 503
consequences
of sequestration on unexecuted 333 voluntary surrender at the 327 directors, appointment and removal of 446
effects of illegality
of 108=109 covering
bond 368=369 director's liability for breach of duties 448
electronic 102 credit Directors of Public Prosecutions (DPP) 16
agreements 218-230 disclosure and information, right to 240=245
formalities that must be fulfilled for online bureaus 223 discretion
280=<281 creditor compulsory sequestration at the court's 331
formal requirements
for 458 divisson as right of surety against 364 voluntary surrender at the court's 327
gambling 107 liens, debtor and 377=378 dismissal
insurance 456-400 making debtor's performance impossible 140=141 compensation for automatically unfair 411
legality
of performance in 105=108 creditors 322=323, 362=365, 377 as the correct punishment 401—402
non-voidable 92=93 creditor's need to keep posession
378 fair reasons for 398409
problems
with formation of 76={98 criminal
law 24=25 dismissal for
requirements
for concluding 71=72 crossing
of cheques 311=313 incapacity 40.5—404
rescission oc cancellation
of 150=153 curater bonis 326, 327 misconduct 400
for the sale of immovable property 101 customary law 4, 5, 7, 8, 13, 18, 19, 22, 349 operational reavons 406
termination
of 171-178 customer loyalty programmes 243-244 dismissals
unassisted 52=54 automatically unfale 397398
void and voidable 76=77 D and unfair labour practices 393—597
contractsof damages 153=154, 189, 210, 215 disputes
carriage, concluding 473—474 claimable
for breach of contract 1$3=154 clauses about how eo resolve 155=1 36
insurance, concluding 456-460 claiming
208, 212 about unfair dismiwals and unfair labour practices
suretyship 101 how much can be claimed in 91<95 40%—412
contracts thar date 296, 301, 303 District Magistrates’ Courts 11, 13, 19
are void due to a lack of agreement 77=84 dealing, right to fair and honest 245-246 division as right of surety against creditor 364
interfere
with justice 106 death 175-176 DPP we Directors of Public Prosecutions
contracts
that are voidable due to of one of the parties to a nenancy at will 205=204 drunken persons, contracnal capacity regarding 58
duress 93=95 or insolvency or insolvency of the partnership or duiress
misrepresenzation 84=93 any of the partners
436 consequences
of 95
undue influence 15=6 debe contracts that are voidable due to 93=95
contracts, voidable collection 227=229 Durch lawmakers 4
and rescinded 91=92 counsellors 223 duties
bur nor rescindable
92 debror delegation of 167
contractual and creditorliens 377=578 director's
liability for breach of 448
agreemencs
within leases 203—=204 makes own performance impossible 140 fiduciary 447
debtors 140=141, 321, 377 as form of variation, changing 166
capacity 46-60
obligations,
clauses about 131=134 Deeds Office $6, 100, 101, 182, 185 of a halder WS

524 index
 endorsers
sre indorsers required
by law 101
passing, varying and ending of by agreement English
law 4, 18, 19, 22 that must be fulfilled for online contracts 280=281
158=170 enrichment
lien 378-380 types
of 100
duties
of the entrenchment
clauses 134-135 when required 100=102
equality in the consumer market, right to 234-235 formal requirements for contracts 458
buyer 192-194 error im fraudulent misrepresentation 89=90
carrier 474 corpore 79 freedomof association 388
consignor 474 negotio 79 functional approach to statutory interpretation 35
consumer 226 persona 79 furure rights, cession of 162=163
insolvent 322 substantia
79
lexsce 211=215 essentialia
116, 458, 459 G
lessor 206-211 estate, consequences
of sequestration for the gambling
liquidator 337 insolvent’s 332 contracts 107
ai
passenger 474 difference berween insuring and 452=453
surety 362 dealing with 191 General
Code of Conduct 461
duty warranty against 190 golden rule of statutory interpretation 39
of care until goods are delivered 180-183 exclusion clauses 132 good faith, acting in 266=267
cases when there is no 187=188 excussion 364 goods, duty
not to make false statements 189=190 executor 353 of care until delivered 180-183
dutyto exemption to make goods available 183-186
accepe delivery 193 clauses 132=133 goods, right to
act with care, skill and diligence 447-448 provisions 246=247 choose
or examine 238
make goods available 183-186 expenses disclosure of grey market 241
pay the purchase price 192193 duty to reimburse
the seller for 194 unsolicited 239
promise information correct 464-465 useful 378 goods, right with respect to delivery of 238-239
provide all relevant information 463 external aids to interpreting
starutes 38=33 Government Garette 6, 327, 329, 336, 353, 354, 488
reimburse
the seller for expenses 194
warrant against larent defects 186-189 F H
dying fair Hague
with a valid will 347-349 procedure, failure by employer to follow 408 Protocol 479
withour a will 349-351 reasons for dismisxcal 398—409 -Visby Rules 478, 481
value, right to 247=249 High Courts 6, 9, 10, 11, 13, 14, 15, 16, 17, 19,
fair procedure
in 26, 27, M0, 38, 41, 58, 135, 223, 252, 262,
e-commerce 277=278 misconduct
cases 402—403 323, 410, 488, 511, 512 see also Master of
EFT we wansfers under electronic
funds poor work performancecases 404—105 the High Court
EFTPOS (electronic
funds transfer ar point- false statements,
duty not to make 189=190 historyof and historical approach to law 4, 36
ofesale) 316 family responsibility
leave 417 holder
ciusdem generis rule 41 faulr 24, 59, 77. 89, 140, 141, 142, 143, 144, 145, in due course 308=309
ejecerment 214 146, 151, 173, 180, 181, 182, 186, 187, duties of a 308
communicationand telephonic contracts 72 188, 189, 208, 215, 246, 250, 375, 403, for value 308
contracts 102 406, 460, 474, 475, 478, 479, 508
payment,
forms of 315=317 fear thar innocent party felr because of threat must
electronic funds be reasonable4 I
transfer at point-of-sale
see EFTPOS fictitious or non-existing
payee 302=303 illegalisy
transfers (EFT) 315=317 fiduciary duties 447 common-law 105=106
employee, when a person is presumed to be an 387 final sequestrationorder 330 of contracts,
effects of 108109
employees,
nature of 385=387 finance charges 220 ill bealth or injury, cases of 403—404
3 buble dispositions for
employer oe
consulting
of 406—407 liquidators 339
failure by to follow a fair procedure
408 minimal 501=502 trustees 324
employers,
rreatment of other parties to minimum 500 impossibility
Financial Services Board 504, 505 breach
due to 140=141
employment fixed-term leases 202 of performance 173=174
equity plans 415 foreclosure clauses 372-373
termination
of 417 foreign
law 10, 22
variation of basic conditions
of 418 formalities
99
endorsees
ae indorsees agreed to by contracting
parties 102

index 525
independent contractors versus employees 385-387 and inerrnstona conventions 476=480
indorwes 297, 298, M4, 305, 307, 310, 318 joint benefir 433 lemee
indorement
im blank 304 dutiesof the 211-215
jodges 17
indorsers
297, 298, 304, 305, 307, 308, 310, 318 fexox. inobvency of the 204
inferior courts 1] l=} 4 lessees
intormanon property. holding on to the 212=215
emphoyer’s daxtomure of 407 remedies and rights 205, 207=208, 20-210
tight to dinchosane
amd 240-245 lessee’s duty
informanon, duty to not to make major changes to the leased property
Promae corent +4045 without the lemor’s perminion 214-214
prowade
all eekewant 465 to pay vent 211-215
inherit, capacity so 351~352 of reasonable care of the leased property 215
injury,
cases of 403—404 bexsor’s
insider trading 502-504 duty mot to disturb the lessee’s use and enjoyment
insolvency 176 203-210
law of 320-345 perminion 213-214
natareof 321 remedies 211-215
of the lexweflessor 204 lemoc’s duty to
of the partnenhip or any of che partners, deliver the property to the lessee 20208
death or 4M
labelling,
right to ruc 241
insolvent 522 pay the rates and taxes for the leased property 211
Labour Court 11, 14, 19, S85=386,
389, 392. 393,
dutiesof the $22 seturn the property in the same condition
406, 408, 409, 410, 411, 415, 415, 417, 419
legal positionof the 331 214-215
labour
hw 383-420
perions, contractual
capacity eegarding SS Language. right wo plain and underuandable
40
warrant against eviction of the lessee
210
insolvent’s estate, consequences
of sequestration hex Aquilia 89,90, 508
lapsed offer 67
for the $82
lapse
of time 436
liability 474-476
instructions, following lawful 266 lateness, cancellation
because of 1$0<151
jomnt 159
insurable interest 455-454 in wehdium 159
lasent defects, dury no warrant against 186=189
as an cucntialia AS9=4GO to third parties 434-435
bow, nature
of 1-2
insurance, law of 451-469 liability
of
Law for Life223
insurer's obligation to compensate
the insured directorsfor breach of duties 448
law of
for loss 458 married spouses for household necessities 57=58
agency 257=275
insuring carnage 470=482
private and public carriers 474—475
and gambling, difference berween 452-453
competition 5072518
the same irem with more than one insuser 466 defective goods 249
contract, comsequences
in terms of the 85
intellectual property, law of 483-497 liability
of the
delict, consequences
in terms of the 89
intention to induce the other party to contract, acceptor 310
iuolvency 320-45
need for 88 deawer 310
murance 451-469
inserdicts 14%=1 50, 209 indomer 310-311
intellecnaal peoperty 453—497
incerese 220 lien 577-380
lease 1920217
and use clauses 572-575 liquidator 557=358
sake 179-198
incerest, insurable 455-454 huties
of the 337
security 557-382
as an cormtielia AS%AGD who cannot be 2 338-359
succemion 546-556
ineermediarics,
right 10 disclosure by 241-242 liquidaton, impeachable dispositions for 34?
Law Society
424
international
ale cravel 479—AS0
Linsbye agreements 240 lineral approach 34
fiserary works 45%
fease, Lew of 199—217
conventioes and legislation 476=450 lock-outs and arikes 991<593
leave 416—417
lew 10, 21-22 long-term leuer, protection of a 205=206
legal
International
Court of justice 22 hows,
positions im the court hicranchy
16=18
iovernet 277 or damage, incemmnifying
the agent againu 265
subjects 25-29
banking $17 imauser's obligation
to compertate the
ST pectataon legalery 455
of performance
in comzracts 105108 ineured
for 455
applying
rules of 125
muatcrish 99
legal postion of luxuriows expensrs $79

contracting
partes in terms of the Comeames
TT spmem, sending of the online contract 10 an 280
Prosection
Act 4-55
made in South Africa 488
the inmolvent
331
legislation S=7, 422 magetranes
17

$26 index
Magistrates’ Courts 11, 12, 13=14, 16, 19, 135, 226 of mectings 442-443

male fide termination

with or without 394
possessor 378, 380 transactions 282=283 notices 122=124
modi 133 NPA see Prosecuting
Authority sender National
malperformance 151 Mol see Memorandum
of Incorporation
beeachdue to 143 money,
sum certain in 301 oO
mandament
nan spolic 210 Montreal Convention
(2006) 479, 481 obligation
mandate, difference
berween agency and 258 mora to compensate the insured for his loss, insurer's 458
marketing ovditaris 152, 182 end of main 375
bait 242-243 debitorss 152, 182 obligations,
dauses about contractual 131<1}4
right to fair and responsible
242-245 fm 182 offer
markings 313=314 mortgaged property destroyed 376 compliance
with terms set out in 70
marrage mortgagee, giving up of real security by 376 current 67=69
in community
of property 55=56 mortgages form of 70
out of community
of property 56=58 common clauses in express 372<377 lapsed 67
contracts 107 express 366=370 requirements
for a valid 63-69
married persons, contractual capacity regarding judicial 370 offers
55=58 musical works 485 awareness
of 69=70
Master of the High Court 323, 324, 325, 327, 332, mutual banks 500-502
337, 338, 339, 343, 348, 352, 353, 354, sources of 69
356, 373, 431 see also High Courts N Office for Banks 499
Master's representative 353, 355 National online
material Director of Public Prosecutions
(NDPP) 16 contract, legal ixsues to look out for before
defect 186=187 Intelligence Agency 413 concluding an 283=284
form 487 Prosecuting Authority (NPA) 16, 20, 511 contractsand e-commerce 276=293
mistakes 78=80 National Consumer operational reasons, dismissal for 406
maternity leave 395, 417 Commission (NCC) 252, 253, 254 options 73
meal breaks 416 Tribunal (NCT) 222, 223, 227, 230, 252, 254 order
meaning, giving words their ordinary 124 National Credit balls 301, 302
mediation 421-422 Register 223 final sequestration
330
meetings Regulator 221, 222, 223, 230, 331 order of
annual general 442 national
law 22=24 court 4%
of creditors 323 naturalia 116, 117, 180 specific performance 215
shareholder 441-448 NCC see Commission
under National Consumer succession under the Intestate Succession Act
membership, change of 436 NCT see Tribunal sander National Consumer 350=351
Memorandum
of Incorporation (Mal) 263, 264, 271, NDPP see Director of Public Prosecutions orders 298
275, 438, 441, 442, 443, 444, 445, 446, 449 under National whar if courts refuse to grant 149=150
mergers 174, 516=517 necessary expenses 378 orders, when courts
Ministerof Finance 499, 501, 504, 505 negativeoption marketing 243 grant 148
minor pretending to be a major 54 negligent misrepresentation 90 refuse 148=149
minors, contractual capacity regarding 47=55 negotiable instruments, natureof 295=2% ordinary
mischief rule 40—41 nemo plus iuris rule 163 holder 307=308
misconduct night work 416 shareholder meetings 442-445
cases, fair procedure
in 402—403 non-

dismissal for 400 Berne Convention countries to whom protection originality 487
misrepresentation 272 has been extended 487=488 outcomes, avoiding ridiculous or out-of-
consequences of 88=89 essential parties 297=298
contracts thar are voidable due ro 84=93 existing payee 302=303
fraudulent 89=0 indemnity insurance 455
innocent 91 renewal of fixed-term contracts #M=395
types
of 89=91 not
misrepresentation, need
of ro be negotiable 313
a fact 86 reading the contract: one’s legal position 281=283
made by 2 contracting
party 87 transferable 314
material 87 notarial bonds 369-370
mistake, unilateral 78-83 notary public, signing of contract in front of 100
mistakes notice

index 527
 P Policy Protection
Rules 452 lexsees 205=206

pactme poor and the NCA 225 provisional sequestration order 330
commissorinon
374
Possesson public
de non cedenda 161 creditor's
need to keep 378 holidays 416
of money or property of a consumer 251 law 22
an pan delcte poner est condacte pemidentss a tube 108
Paris Convention 492
possibilityof published editions 486
Parliament
3, 4, 5, 6, 7. 16, 17, 22. 32. 33, 36, 99. carrying out the contract 458 punishment, dismissal as the correct 401-402
105, 134, 172, 24, 234, 393, 412 performance in contracts 104<105 purchase price 185=186
postal contracts 71<72 dutyto pay the 192195
partxapation
bond Kr)
partes
power purposive approach 35
citationof the 253 and duties of a trustee 323
essential 297 of che lxyaidator 538 Q
formatizies
agreed to by contracting 102
Practor’s Exlict 475, 474, 475=476, 478, 481 qualified person 487
involved
in cemion 160 prevemnprive rights 4440445 qualifying for compulsory sequestration 328
legal poatwon af contracting
$4055 prepaid quality, right 10 good 2474249
certificates
and vouchers 250 quorum 443
parties
to
services and access to facilities 250=251
arbetration 4250424
consultations 407 prescribed officers 446 R
insolvency proceedings $21<526 prescription 1720173
presumptions 41=43 ratio devidends 9
negotiable instruments 297=298
a tenancyat will, death of one of the 203—204
price discrimination 516 real security 359
parties to the contract 456<457 peices, right to have displayed
240 reasonable mistakes 8083
of carriage 472—475 prima facie 330 Receiverof Revenue 501 ser abe Revenue Service
partnerships 451436 principal sender South African
party, fear felt by Innocent4 accounting to the 267 reckless lending 226-227
passenger, duties of the 474 agent's authority ro act on behalf of 259 rectification 83=84
authority
to act on behalf of the 259 reremployment, selective 395
parent law 493—495
awareness of third party thar she is acting on referral selling 245
payee, fictitious of nonvexisting 502—303
payment
behalfof 259-260 Regional Magistrates’
Courts 11, 13, 19
debtor ax an unassisted minor 363 registered
by consumer 285
forms of electronic
31 S=317
methods
of 285, 294—519
duties
of the 264-265 trade marks, infringing 492~493
sust exise 259 registering of
of a premium by the insured 458
penaltiesand liabiliry 44 who can be a 259 a bank 499-500
penalty clauses 1 53=1 4, 1540155 privacy,right to 235-236 the name of the company
438
performance private law 25 Regaceatof
of debtor 140=141
probation, poor work performance in cases of 405 Banks 499, 501, 505
procedural law 23=24
delay
in 143=145 Deeds 336, 343, 367
impossibility
of 175=174 protic, object to make a 433 Labour Relations 390
programmescarrying signals 455-486 the cour 16, 336, 343
own 140
by seller 283 prohibited practices $12=517 registrars
or clerks of the court 16

performance
in contracts
protubstionaf dominance $1 40516 fegistration
of a company 438
promawsory notes 2%) regulations
4, 5, 6, 32, 136, 234, 238, 259, 249.
certainty
of 102=104
legality
of 105-108 promittens 199, 160 236, 523, 361, 384, 430, 446, 473, 501
promotional competicions 244 tchabdanon
periodic leases 202-203
permission, iewor's 213-214 proper performance 171 at the court's discretion
334
perona property by court within nen years 333-334
contracts for the sale of imenowable
101 after ten years, automatic 335
capacity 2596260
hokding om to the lewec’s 212-215 rei vindicatio 53, $4, 83, 380
security 360-366
leased 213-214 ejected offes 67
Personal Identification
Number (PIN) 315. 316, 317
PIN see Personal Idensification
Number lemwor’s duty in respect of property 206-215 selieving parties of their duties as form of release 167
placeof pre neta share of debe 159 remedies 148-155, 188-189, $12

drawingbal 303 prosecutors

16 choouing 155
protectedstrikes and lock-outs 392 hewece’s 2072208, 2096210
payment 303
procection measures for instalment sale buyen of heanoe’s 2112215
plans, employment
equity 415
pleadings 25-26 land 225-226 temediars foe

pledige 370-372 protection

of
consumers 283
beach of comeract 147<1 $7

$28 Index
 unfair dixmials and unfair labour practices in respect of fixed-term contracts 237 seller
410—412 restrictionsan the cessionof commractual 161 duties
of the 180-191, 194
remowalof the rights and duties of the duty to reimburse for expenses 14
business rescue practitioner
from office 40 insured 462-465 separate legal entity principle, exceptions to the 440
liquidatorfrom office 339 insurer 460-462 sequestration
trustee
from office 325 parties 474 compulsory 328—3531
removing of a trustee from office 325 rights of effects
of 331=333
renewal
of leases 203 first refusal 73 friendly 330
rent a holder 308 process 326=331
claiming reduction in 208 rightto purpose
of 326
lessee’s dury to pay 211-213 cancel any adwance reservation. booking or onder 238 recovering from 333=334
rental choose 236=239 sequestration order
agreement
on 201=202 disclosure
and information 240-245 final 330
bracketed 202 equality in che consumer marker 234-235 setting aside of a 331
owing, chiming the 212 have prices displayed
240 service,
type done 378-379
reduction 210 occupy agains: third parties, lessee’s 205 seteolt 174=175
plain and undersandsble
Language 240 shareholder meetings and the board
replacing
duties as form of novation 167 privacy 235-236 of directors 441-448
reporting
the estate 352=353 a quotation 237=238 shares 444
representation sheriffs 17
false, misleading
or deceptive 245 select
a supplier 236 Short Message Service (SMS) 317
need of to be untrue
85=86 true Labelling and trade descriptions 241 short-term lessee, protection of 2 206
repudiation 152 shrink-wrap agreements 278=279
breach due to 141=142 written
sales records 241 sick lexve 417
rescission 150=153, 377 right
to fair signatures 299
resignation by employee after transfer of business 397 just and reasonable terms and conditions 246—=247 forged 2
resolutions 443 value. good quality and safety 247=249 by juristic persons 300
resolutive right
to fair and unauthorised 273-300
conditiom 129 honest dealing 245-246 sample joint lisbility and joint and several liability 159
time clauses 130 responsible marketing 242245 skill, duty to act with 447-445
responsibility,
whether harmed party has 2 14 risk 180-183, 284, 426 small claims courts 12=13
restatutre
im intregram 51.95 role, identifying
terms by their 115=116 SMS ser Short Message
Service
rest periods 416 Roman sole proprictorship 430
restraint
of trade agreements 10%=1 12 -Dutch law 4, 18, 19, 22, 205 solvent spouse's estate, consequences
for the 332
restrktive law 4, 8, 89, 321, 471, 473 sound recordings 485
horizontal practices $12=513 rules 2, 39—41, 400—401 sources of
indorsement 305<307 rules of authority 262-264
practices 512—=514 arbitration 425 offers 69
vertical business practices $13=514 interpectation, applying 125 South African
Lew 4-10
result
of voidable contracts 77 South African
retrenchments 406—409 S Nasional Defence Force 413
return of replaced
parts 251 safety. right to fair value, good quality and 247=249 Pasent Office 493, 494, 496
reversing decisions 426 sale Police Service (SAPS) 140, 393, 477, 511
im execution 195<1%6 Reserve Bank 222, 319, 426, 499, 500
revoked offer 68 lew of 179-198 Revenue Service (SARS) 3, 327, 336, 343 xe abo
rewards 66-67 nature of a contract
of 179-150 Receiver
of Revenue
right sale of Secret Services 413
with respect to delivery of goods 238-239 immowable property, contracts for the 101 South African
Law Reports 9
of surety against creditor, division as 364 lad IM-195 special
rights SAPS see Police Service under South African courts 14
cewion
of farure 162-163 SARS see Rewenuwe Service under South African crossing 312=313
changing of as form of varunon 166 im securitasem: debit 165 indocsement 505
consumer 224-225, 264-258 securities 443 mortgage over immovable property 567-368
and dusies during the morgage period 574-575 security specific
lewsce’s remedies and 207=208, 20210 comion
as 1656166 contracts of sale 1'4=196
nature of legal 30 law of 357=382 performance 148, 208
pasung, varying and ending of by agreement velective re-employment 395 specific liability of
158=170 carriageby sea 475=476

index 529
 the carrier by ait, road eo call 475 employment 417 trastecs, impeachable dispouitions for $24
spoliation onder 220 2 lease without
notice 203-204 tress, formation/termination af 451
wandasd form comeracts and caclusion clauses 473 truss 431 ex trpi coma vale 108
mate teres
claimsof land 376 common contractual 127=135 U
not bound
by scarures 43 and conditions,
right to fair, jest and reasonable umpar 424
salle
of the 3 246—247
atte creation of exceptional
cases 363 expeess 117 unauthorised
contract, being party to an 267=271
scatotes, interpreting 32=45 implied 117=118 encertain fursre event. occurrence of an 458-459
statutory impoued 118=124 underevahsingan insured item 466
councils 391 st out in offer, compliance
with 70 undue influence
interpretation, thearies of 34=5% thing, use and enjoyment
of the 201 comequences
of 6
mipulans 199, 160 thind parties contracts that are voidable duc m 95=96
mipulatio
alteri \SImi awarcnces
of 29%—260 untar
strikes and lockeouts 3916593 hessee’s right so occupy against 205 contracts 107
subjects, legal 28-29 third party as form of asignment, substirution discrimination, prohibiting 41 3=414
subsiturion of a third parry as form of assignment 167 of
2 167 unfair dismixsal
succession,Law of 346-356 threat compensation
for 411
summary
sale clauses 373-374 fear thar innocent party felt because of 94 nature
of an 397
superior courts 14=16 of harm to the contracting party, his family unfair dismissals
supplicr, right wo or property
94 automatically 397=398
retum purchased goods to a 239 imminent
or of inevitable harm 94 disputes abour 409=412
selecta 236
supplier's accountability
1 consumers 250-251 enteringthe contract 4=95 compensation
for 41 1-412
suppositions 130 unbwful or against public policy 6 and dismixsals 393=397
Supreme Court of Appeal 9, 11, 14=15, 17, 19, 27, disputes abour 409=412
186, 214 sr ake Appellate Division implications
of 282 nature
of 409
surety’s tickers 120-122 United Nations
dusies 362 time Commission
on International Trade Law 427
rights when sued by the creditor 362-365 clauses 129=130 Organization
(UN) 10, 22. 478
suretyabep lapse
of 436 unjustified enrichment
and ret rimdicatio S4
agreement, agreement to create a 361 limited 377 unbwful competition 50S=5 10
COommract, requirements
to create a 361<362 timelines
of offer 70 use clauses 372-373
saretyship contracts wade
characteristics
of 101, 360-361 coupons and similar promotions
243 Ww
ending 365-366 dexcripioas.
right 10 241 warranties 131, 190, 19%
surrender, voluntary 326=327 practices
and customs 10 Warsaw Convention
(146) 479, 480
surrounding circumstances, considering the 124 made mark will
suspensive haw 490—493 basic coments
of 2 345-349
conditions 128 protection, requirements for 491492 death of ane of the parties to a tenancy at 203204
time clauses 129 registration, lengrh af 492 draftinga valid 347-348
symbolic delivery 153 wade marks, nature of 490-49! will dying
Trade Marks Office 491 with a valid M7-}49
T trading. insider $02=504 without a 49-351
tat treditio winding-up companies 5}4= 41
emanaparoa$4 revs murnw we vbort hand wader delivery with the work
mortgages 570 performance cases, fair procedure in poor
terms 118 traditional works 485 40105
Takeover Regulation Panel 555, 336, 343 transfer of schemes, alnernative 245
bearer bills 303 working time 415
72 onder balls 304-307 writing 299
tenancy
at will 202-204 personal
nights 160-166 writen
termination poscxson (cxesimcasr peurssriam) 1 S4 contract
100, 361-362
cluuses 375-377 transier of ownership 134-185 sales records,
raght no 241
with or without nocke 394 of a bil 303-307 written consent
termination
of ik: and trial procedure
25-28 of the other spouse 56
contracts
by low I71<175 wusce 325 signed by the spouse and rwo witneues 56
who cannot
be 4 524525

530 index
 Index to Legislation

A Close Corporations
Act 69 of 1984 437, 450 para 146 515, 516
Administration
of Extaves Act 66 of 1965 323. 352. Clase Corporations
Act 4 of 1983 261 «5515
3289 sO S15
3553, 555
«Mw + BAK 514, 515, 516
regulation
S{1) 353-354
« 121Ma) $16
s M1)%
bejeries
and Diseases Act 130
of 1995 Constination
of the Republic of South Africa,
s 102(1Ma) 352
s1$1 325 Companion
Act 61 of 1973 335, 337 1996
4. 5, 7. 8, 10, 14, 15, 16, 18, 82, 33,
wm M5746 SM, M2 3A, 36=38, 39, 44, 105, 252, 347, SHS,
Alienation
of Land Ac 68 of 1981 194, 198,
225<226 « 40(1) 399 384-385, 427, 437. 511

s 2(1) 262 « 554(1) 599 Chapter 27, 33

sZ9A 195
5725" iw
se 29A(1) 119 573558 sik) %6
« 371-2) 599 023.5, 36,43, MI
Alienation
of Land Amendment Act 105 of 199% 225
+ SS6(1
=2) 358 » 702) 36, 43
Arbitration
Act 2 of 1965 422, 425, 427
Arms and Ammanition
Act 75 of 1967 40
s S86CA)}-(25)
558 #B1) 36, 43
s 58644) 335 «9 2M, 349, 354, 412
+ 386444) 38 eX) 7. M7
«391 337 ss
Ranks Act 94 of 1990 498, 499-502,
9S
740
Companies Act 71 of 2008 (Companies
Act} 261. 25 uM

« 10(1) 499
Dl=ri, M5, 456, 4357, 438, 440-441, « 28(1)h)
29
446, 448, 449, 499 Mand
# 11(1~2) 499
«1 430-431, 438, 441, 445, 4404 ST
m 12=15.499
s7 a7 «90 22
wan
= 12) 439 « Whe) 10
Basic Conditions of Employment
Act 75 of 197
(BCEA) M4, 393, 395, 406, 415-418
5 20(7) 263 « YH)
« 9) 440 « 16705) 15
oats
21299 su
BCEA ser Basic Conditions of Employment
Act 7S
5 6641) 445 Comutieution Seventerath Amendment Ac, 2012 15
ain
2767 (Comeumer Protection Act 68 of 2008 (CPA) 44-55,
BEA ore Bills of Bachange Act 34 of 1964
« TOLSKb) 446 06, 82, 92-93, 107, 123, 251, 2416254
Ball of Rights 7, 8, 16, 33, 36, 37, 99, 44, 341, S84
937,590
5 TELIMc) 447 Chapeer
2 204
7
& TH 4-5S) 447 =448 Chapeer
2. Part F 245
mm 7981 334, 342 Chapter
2. Par H 247
Bills of Exchange Act 34 of 1964 (BEA) 295, 296
s4(1) 299
1220) HO Chapter
4, Part A 252
s 22 299, 100
« 13801) 340 segulation
$ 237
s 951) 299
# 199% 1-2) 40 regulation 7(6) 241
+ 1401-2) MO segulation9 242
s 14244)0 segulation
44 246
Act $5 of 2005
585
sis « 1h) 476
Broadcasting
Act 4 of 1979 105
+ 1501) S41 s M1) 46

Cc eiSs MI + Mive-b) 476

si62 408 24255
Carriage
by Air
s M12) 255
Act 17 of 1946
481
Diseases Act 130 of 1993 (OOIDA) S84 +8477
Amendment
Act 15 of 2006 479
Competition Ac 89 of 1998 232, S08, $10-511.
Carriage of Goods by Sea Act 1 of 1986 478, 481 m 11-32 255
$12, $13, 514, 516, S17 s13 2%
Children’s Act 38 af 2005 49, 261
Chapeer 3516 @ 14-15 257
a 18 262
Children’s Online Privacy Protection Act of 1998
para 105 $25 516255
pars 152515 st? 238,477
(COPPA) 285
pars 156 S15 = 18-19 2%
Civil Unions Act 17 of 2006 552, 349

index to Legislation 531

 International Arbitration Act 15 of 2017 427
ss 20-21 239 F
ss 22-25 240, 477 final Constitution
se Constitution of the Republic Incerpretation
Act 33 of 1957 39
+ 26) 66 Investate Succession Act 81 of 1987 49, 3500551, 355
of South Affica, 1996
24-26 TAI Financial s 1{1Ma=b) 350
327 242 5 1(1Mo=d)ia) 351
s W242 s (Me) 351
2002 242, 452, 461
s31 245 Sector Regulation
Act 9 of 2017 232 s 1(1)4)F) 351
#52235 Financial Services
le
Board Act 97 of 1990 504 L
= 37-38 245 Labour Relations Act 66 of 1995 (LRA) 233, 383,
Laws General Amendment Act 45 of 2013 264
+ SAI) 54-55 Fisearms Control Act 60 of 2000 105 38A, 385, 386, 388-391, 392. 393, 394,
ms 40-41 245 Foodsrufis, Cosmetics and Disinfectants Act 44 of 395. 397, 398, 399, 402, 405, 408, 410,
47-49 246
1972 232
411, 412, 418-419, $11
451246 Formalities
in Respect of Leases of Land Act 18 32385
mt $4055 247 34388
of 1969,
s 1(1) 204
5 56 247, 248 s 186(1) 393
261 249 s 189 406-407,
408
= 62-64 250 s 189A 407-409
Income Tax Act $8 of 1962 32
mt 65-66 251 s 1(1) 430
s 198B(3=4) 387
ms T9881 252 s 200A 387
Insider Trading Act 503
5822535 Legal
Insolvency
Act 24 of 1936 36, 58, 175, 176, 204,
«85 252 Practice Act 28 of 2014 16
320, 321, 322, 323, 325, 328, 331, 333,
3120234 Succession to the South African Transport Services
3H, 341, 342, 363
Consumer Protection Act Regulations 175, 234, 1324
Act 9 of 1989 477
238, 239 s Ml=-2) 326 Liquor Act 59 of 2003 241
Conventional
Penalties Act 15 of 1962 134, 155, 156
34326
Long-term Insurance Act $2 of 1998 242, 452,
s3134 464, 500
s 6(1) 326, 327
COPPA see Children’s
Online Privacy Protection 5 5N1) 463, 464
s8 328
Act
of 1998 Lotteries
Act 57 of 1997 107
s 91) 328
Copyright s 12(1) 328 LRA see Labour Relations Act 6 of 1995
Acx 98 of 1978 484, 489
s 15331
Regulations, 1978 484 s21(1) 332
CPA se Consumer Protection Act 68 of 2008 Magistrates’ Courts Act $2 of 1944.5
45 135
s 26(1) 324
Credie Agreements
Act 75 of 1980 219, 227 s2%{1) 324 Maintenance of Surviving Spouses Act 27 of 1990 347
Criminal Procedure
Act 56 of 1955 42 s ¥) 324
Matrimonial
Property Act 88 of 1984 $6, 349
Cybercrimes
and Cybersecurity Bill 317 s 31(1) 324 s 174(4) 326
Medicines and Related Substances Control Act 101
s 35 176, 333
D s37 176
of 1965 241
Domikile
Act 3 of 1992 487 s 37(2) 333 Model Law on International Commercial
Drugs and Drug Trafficking Act 140 of 1992, s S(b) 37 Arbitration 427
s 38 333
s44357 Mutual Banks Act 124 of 1993 498,
499, $00,
E s 34323 502, 505
EBA swe Employment
Equity Act 55 of 1998 355324 Chapter
5 501
Electronic Communications
and Transactions + 5{1) 323 35501
Act 25 of 2002 63, 232, 236, 277, s 8(1) 501
s 57(5) 323
M7-348 s 58 325 s Hi-2) 500
Chapeer 111 portion 1 102 359324
s 11(2Ma) 501
+ 11G) 280 sO 325
s31 501
5 20(c)282, 283, 284 +63 323
s62 502
Employment Equity Act 55 of 1998 (EEA)
384, s72 324
412-415, 419 +87 49
N
5 4(5) 413 5 83 367-68 National
sS4135 s 119 333,334 Building Regulanons and Building Standards Act
s (2)aeb) 413 s 124 333 103 of 1977 232
Employment Services Act 4 of 2014 385 s 127A(1) 333 Gambling Act 7 of 2004 107
equality clause sees 9 aonder Bill of Rights Inspection of nancial insirutions Act 38 af 1984 501 Health Act 61 of 2003 105
Estate Agency Affairs Act 112 of 1976 232 Interim Constitution
(1994) 7, 33, 36 Road Traffic Act 93 af 1996 32

532 Index to Legislation

National Credit Act 34 of 2005 (NCA) 15, 218. P s
219-230, 232, 233 Parent Regulations,
1978 493 Securities Services Act 36 of 2004 498, 500, 503=504
Chapeer 2, part A, os 12-25 222
Parents
Act 57 of 1978 493 s77 504
Chapeer 2. part B, ss 26 to 34 225 Pension Punds Act 24 of 1956 347 s EES(a) 504
Chapeer4, part A, ss 60 to 66 224 Prescription
Act 68 of 1969 172, 173, 176 Short-term Insurance Act 53 of 1998 242, 452,
Chapeer5, Part C 225 s 11172 464, 500
+3219 s 1341) 173 + 5M1) 463, 464
59221 Skills Development
Act 97 of 1998 385
s 1341)(a) 172
514223 South African Reserve Bank Act 90 of 1989 499
s 27225 Act 12 of 2004
31223 36267 T
553223 8 26 267 Trade Marks
374225 Prevention of Ellegal Eviction and Unlawful Act 1M of 1993 490, 491
s79 226 Occupation
of Land Act 19 of 1998 215 Regulasions.
1993 490
580 226 Prohibition
of Dinguises Act 16 OF 1969 44 ‘Trust Property Control Act $7 of 1988 430, 451
s81(1) 227 si(l)
s B1(4) 227 s 1(2) 45 U
392226 Promotion of Equality and the Prevention of Unfair Unemployment Insurance Act 63 of 2001 384
s 108 224 Discrimination
Act 4 of 2000
s 1291) 228
Chapeer
2 234 Vv
s 130 228 s8 234 Value~Added
Tax Act 89 of 1991, s 1 430, 432
NCA see National Credit Act 64 of 2005 Protected Disclosures Act 26 of 2000 397, 409
Protection of Personal Information Act 4 of 2015 252 Ww
oO Wills Act 7 of 1953 38, 347-349, 354
Occupational
Health and Safety Act 85 of 1993 R
(OHSA) 385 Recognition
of Customary Marriages Act 120
Official Languages
Act 12 of 2012 34 of 1998 349
OHSA we Occupational
Health and Safery Act 85 Rental Housing Act 50 of 1999 204, 232
of 1993 Road Transportation
Act 74 of 1977, as amended
by Act 39 of 1998 477

index to Legislation 533

 S95)
0) XOPU! PES
981 (Y) bOP
TLIMTEE CL)
8S VS (€) HOOT Memngsy
4 fmMyy
VS ()) 9261 4G prem sporty eoprouapy ETI*TZ1 (VOS) TRG VS (1) 6661 ey
£91 PLE VOSVZ £107
aq Meprecodsory
4 pry (Gy) arcvuny areorepury prer wpnony 4 poy Kay prorperpmngy army, rengency
mocsoodae) seumasdoqarn ] pounny jrun
62 66 897 (O) TOE VS (2) 1661 ey Memes 4 srdeacy
prsmegpeesTy a pry (Kj) swormarmmepeapry
aims) pros sneer
VOSVZ LLOr Maapyny ama ar ny pares pry pery 901 (ct) oF9 ¥S ©)
LOH 19E
£81 CL) 08! v8 (0) 8561 eRnpy a serge] HOOT sapromy paw ydleans 4 pry ay) VS aD Mermncy
(O) 99 VS (2) S961 PTT &>D pur sourpoy ; Bd (N) EL VS (2) 9561 prey 4 gency
ayof «pry Kmady yorasry srieundovery ater)
$8 (D) CaP VS (D)IS6I Aten 2 Opgecz
Madson,
tsz (yp GOT LOT PLT ALL C06 T Mrs segpeg, ag 4 Kony
viz (vos)
1€1 (11 O¢ GOT AIHA ZY emery 4 eafof 6EP OFS CIV OCG OPrD
ELT YS (1) SOOT Hynf 4 epg “ogeaTyy mampyy
f podemumpy demprastinay ayy 4 pry eapery
LLZ"69T (WIS) 96€ ¥S (1) TOOT AD
poor pry (Gag) 0p smpaas aber) a pry yung SEN Gq
O08 (VIS) 9OVS
i879
(9) S007 spony pur jy iddmypmrepy $9799 SOT SL C061 7 4 panera
CVD EL YS (Z) S61 Pweg errrmy & porreer7
(Gp) mecemvedeay wormqeasr(] PANIC) PUY pructzTy! Lermangor] aplqgeruay 4 pry mmurieys epedney tS 42 Lw7Z tier
eetozet (£6910) pry (Gig) wormcmmey many gone) 4
(IS) OLt ¥S 9 T1OT Prey Peerqueng 4 eopey OIS@P1S OS LOVZ Soot (lo=KAD
Z81 WAL YS ©) LG PT (81) (hy) pr] (Gy) nay ely gems por
nememe) mogey 2 pry (Es) spammypeny merronpey
PIevCIP LIT ¥¢ (vos)
¢or (v)
Ws (11) 0007 semay mrufy quneg a mrmffory OLS VS (1) 6661 (eeurprabry m1) 95 arapy
61> ¥S (1) $861 Gapediorenpy msooyapncy
sew) ponder) a rarncy pur muctmn) s0f sweeney
4 pry Muarduve’) secmameny pranpas pur prnsnpy
ZS WS (1) 661 eee) Gry Zengermmyof a egy}; IT1 (VD) 9S¢ Wa BY
01 (7) (OVS
$6 (N) S9Z YS (1) SL61 Bamany 4 gouges 1 OWG1 pewner sauancy wrqay) Lum a megodoyy
(2) TRG Pry (4g) ody pur saodiuy 1
6 (vos) TTteizt Lz
PSH PTT (ag) songepears mpiany very poyeerpy
1ZE VS (2) L007 Gyedrumpy wmezmamz) 2 sauley; SL POG1 Maerrpapy Menprey maeraly grmos prereery
ORE (OT) BTS
Lz “90 PIT (Ae) PHF TSE (N) GOS VS (P) TOG arepy ayy 2 Gary
FTE 81 L661 eyromy proce ypprayy fo azinrnnpy
spiuy 07 a axypouy pe pry (hy) sorsardosy myers 99 (wD)
a eae) pre wrajy ypmes fo wor rery jrorpepy
H TAD 1 LORE YD [ey ayporeg speqary
4 prey
SOS LOS ‘Z6H CIV TL61 Fwmay 4 saync) prow anaprempy
#06 (99) £19 VS (1) Lt0r
(06 676 "(V) 916 VS (Z)
6s1—s8t (IND) LLG Map prow omy any Loprpary
a surgery
Pry (hg) sacprornany Ang me yong a pry (Key) sanoaernpy
TOE VS (9) TOT 2qpep a2 pruorrmermy pur poy (Aig) topmeady praruasy pros sorry ponder
STT°LTTZ LL TOT LRG LD perry
reg gemoy fo gang purpuarty st PpOpA, yreupryR, apne soaneay Dpy (YF mor2aeLs 2 szpU m2 {520° 2
on Oom)
o% HT
(dO PTG6I PET seater pray pruoperny 4 opunpy LO VS WY 7 C10 SRD PEP Oy 20D uy xy IEPSEY VOS LVS (b) CLOT eoompy « useemg
$8 TIZ GdD MGI Peppy
4 eepy
MP N SOC VS (P) 8261 PFT « SpUpeS) £8°96 (9D) L61 VS () 9661 Sopary « gama
O1 (D9)
OCI YS TY 0L°0) OOLaGYV
LES Pez (ag) pooges sroterimg sailing poor
Pry (ag) wrarunpy pur pry (ag) ps sans wempy t (910c) syrupy pur sens 2 emne pur xebwer) S161 Gerda) qormy, many marearuey 2 moons
[R08 CY) SOF WS 2) S561 Pr7 (Gp) promumy 2 alex) 69 (VY) FOE VS (9) 1961 Apeasrmmeny2 per
Tt (CQ) 98 FS (7) Lei ee 2 we) & OO) ORS VS (1) SOOT yeqaleyy seumiepy 4 apy
TZ 9 DOVZ COOr Hprny pur 5 801 OP) TOR VS (2) O61 mapRpy 4 ery
smpuy 4 pry (lag) wrrpemy o amydegd yy wumpey
£8 (1) 169: (V8) (1) 7961 2829 4 mame] £ OO) 10 vs (9) oor oyny per
rts COM) seengy mweyy fe sererpy 3 axpeny per memes O96.»
(¥) Th VS (0) $661
TP VS (S) £107 p47 Moray gene Aeendeney jd Pry (ag) emmipay 4 pry (ag) Burddoyy moxcapey
arenas apna a pry (Kit) wamargy woeruery 9T (an) TOP VS (1) LOOT
G2E 1 GAO M61 Balony am 4 reapers ary POT PY SAN 4 pry © areranny afr7 sary
£6) PLE HLL S061
T61 (¥ $89 VS (8) £161 peep par (OS € VOSVZ 107
Lavey zrumenny aig worms) epymanyy a mypolopeery
EUALLI “LUNRS! PIAL 4 PE] (momma ) enemy: ATT (ZU/L81) Pry pray sepday 4 sapemy pur Oy eppy
D1 OLE CAO OPG1 YIM 4 PT oD parpy Mery
TOL CHS) $19 VS € SOGE enmensy
4 wearer Vv
S9Se°) O} XopuU|
 Oo R Sees: » Backup Sronage Facilities 2005 (2) BALK
Odendaal © Nerbet VTS (2) SA 749 RGB Rr 219 CCMA 402-403
Oley » Malberwugh Court Lad VOW | AR ER LIT Chama 1966 (2) SA 34 (R) 40-41 Sewssaferd amd Ca ¢ Oberbelacr 1921 CPD 895
(CA) 122 Maztbuks
1958 (4) SA 353 (A) 42-43 0-51

Tebeuers 1965 Rhod LR 162 (RA) 35

P Rai Commences Acton Greap 2 Treeseet Lod ole 7.
Patel
» Adam 1977 (2) SA G53 (AD VS Mezrarail
2005 (2) SA 359 (CC 477 Theruton # Shoe Lane Parking Lad (1971) 1 AB ER
Pamben and Ansther 0 Slap Knot lnvccments 77 Reloomel
7 Ramsey 1920 TPD 371 57258 686 (CA) 120
(Pry) Lad IOVS (3) SA 479 (OC) 15 Visher # Trident Seoet 2004 (4) BALR 404
Pen Hamman and Ca + Kotnad Municipality 1921
AD 168 447 (MEIBC) 405
IVIPAD
427 174 Repel British Bank v Tarquand 1856 6 EB 327 3 Trotman and Amecher + Edusicl 151 (1) SA 443
Phaome
(Pry) Lad w Paizes 1973 (3) SA 397 (A) (A) 86
1m 190 Ss Tchers Land and Development
Corporation (Pry) Led
Pharveacratioal
Sectery of Great Brizain + Boots Cask Sr » Hovis 1980 (1) SA G45 (A) 142
Chemist (Southern) Lad 1953 All ER 482 Secak 20M (1) SA 912 (CO) 15
(CA) 6 De Abreu 1981 (1) SA 417 (T) 40 Vv
Phumrlels Gaming and Leimre Lad ¢ Griindlingh Henckert 1981 (3) 445 (A) 72 Van Senda
and Other: 2007 (6) SA 359 (CC), paras Kohler 1979 (1) SA 861 (T) 41
» Jacobs 1921 AD 550 1170118
Min 508 Labuschagne
1979 (3) SA 1320 (T) 43 and Others » Jacobe amd Others \921 AD 334 10
Pillans
+ fooste 1999 (1) All SA 367 (SCA) 9 Makwanyane
17M ZASCA 76 39 Van Dyk » South African Railway and Harbour:
Pilly
© Nagen 2001 (1) SA 410 (Dy 352 Makwanpane and Another 1995 (3) SA 391 (CC) 16 1956 (4) SA 410 (W) 49
Masdike Berredienste
(Edmu) Epk » Chemfos Bpk Naidoo
2009 (2) SACK 674 (GSJ) 12 Veuswouskis » Queen Ace OC sha Ace Alorors 2016 (5)
1986 (1) SA $19 (AD)
267 Salomon v Salomon & Co Lid 1897 AC22 (HL) 439 SA U8 (ECG) 248-249
Premier Teading Company (I'ry) Led and Anather v Sandown Travel (Pty) Lid v Cricket South Africa
Sportepia (I'rq) Led 2000 (3) SA 259 (SCA), (42317/2011) 2012 ZAGPJHC Ww
267 $10 24907/12/2012 152 Wood Davies 1934 CPD 250 $1452
Smith
» Nallows 12 Worman » Jones 1968 (4) SA 762(C) 9
Wrthingsonv Wilen 1918 TPL 104 563

index to Cases 535