Published on November 10, 2014
1. COMMERCIAL LAW
2. COMMERCIAL LAW CONTRACT OF SALE Definition of a Contract of Sale A contract of sale is a legal contract an exchange of goods, services or property to be exchanged from seller (or vendor) to buyer (or purchaser) for an agreed upon value in money (or money equivalent) paid or the promise to pay same. It is a specific type of legal contract. A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price. There may be a contract of sale between one part owner and another. A contract of sale is a contract in which one party called the seller agrees to transfer the possession of a thing to another person called the purchaser in exchange for payment of a price. THE ESSENTIAL ELEMENTS OF A CONTRACT OF SALE VIZ. AGREEMENT TO DELIVER, AGREEMENT OF THE THINGS TO BE SOLD, AGREEMENT OF THE PRICE TO BE PAID Some essential elements are to be present in a contract which makes the contract of sale valid. If, the essential elements are missing, then the contract of sale will not be valid. For example, Ram agrees to sell his Car to Shyam without any consideration. This contract of sale is not valid since there is no consideration. From the Section 4 of the Sale of Good Act, we can understand that the following essential elements must be present in the Contract of Sale. The contract will be complete when the parties (the buyer and seller) have reached agreement on the following points: 1. The commodity or article to be sold (merx); 2. The price to be paid (pretium); 3. There must be 2 parties. and 4. All essentials of a valid contract (see LAW OF CONTRACT) Generally, no special formalities are required. However, in certain contracts of sale the law does impose formalities before there can be a valid contract, e.g. contracts for the sale of immovable property must be in writing. The parties may themselves agree that the contract will not be valid until reduced to writing. It should be noted that for a contract of sale to be complete, it is not necessary for the price to be paid or the thing to be delivered. These are rights and duties which flow out of the contract and normally it is only necessary for the parties to the contract to agree on the thing Page 1 of 72 [email protected]
3. COMMERCIAL LAW sold, the price and the intention to exchange the one for the other for the contract to be complete. Page 2 of 72 [email protected] THE THING SOLD: MERX The general rule is that anything that can be owned may be bought and sold. Certain things may not, however, be sold. They are: • The right of inheritance from a person who is still living: such a contract is unenforceable as it is contrary to public policy. • Certain public property may not be sold by the authorities who control it. • Certain things are restricted from being sold by statute: e.g. poisons, fire-arms, indecent literature, etc. THE PURCHASE PRICE: PRETIUM The price must consist of money The price must be in money which is normally local currency. If it is in foreign currency then one must be able to convert it to local currency. Where the parties agree to exchange one article for another, the contract is one of barter and not sale. Where the price is partly in money and partly by delivery of other goods, e.g. where an old motor car is traded in on a new motor car, the contract may still be a sale provided that the goods which are given in part payment have been given a definite value by the parties. The price must be fixed or readily ascertainable The price must either be fixed by the parties themselves or they must agree upon a method by which it can be fixed. There is no sale where it is left to one of the parties to fix the price. The parties may agree, however, that the price is to be fixed by a third person who is nominated at the time of the contract. As long as the price can be ascertained or calculated there will be a valid contract of sale (providing all other requirements are satisfied). The price must be real and serious If the price is far less than the value of the article sold, the transaction will not be classed as a sale and will usually be regarded as a donation which has been disguised to look like a sale. 3. There must be Two parties. There must be at least two parties, i.e. one buyer and the other seller. A person cannot buy his own goods. For example Shyam is the owner of certain goods, but he is not aware of this fact. Ram pretends to be the owner of the goods and sells them to Shyam. Since the goods already belongs to Shyam, he cannot buy his own goods, hence there is no sale and the contract is not valid. (Bell V. Lever Bros. Ltd.) There is exemption in the case of a part owner. For the purpose of sale of partnership property, partners are not regarded as separate persons. They cannot be both seller and buyer. But a partner may sell goods to the firm or buy goods from the firm. However, a part owner can sell his ownership to another part owner.
4. COMMERCIAL LAW 4. All essentials of a valid contract (see LAW OF CONTRACT) these are: a. The parties must communicate their intentions to each other. b. Parties must have full legal capacity to contract c. There must be serious intentions to contract d. Agreement must be Lawful. e. Agreement must not be vague. f. Agreement must be one for performance or non-performance in the future. g. Contract must be executed or put into writing. OBLIGATIONS OF THE SELLER IN CONTRACTS OF SALE Page 3 of 72 [email protected] The seller’s rights Once delivery has taken place, the seller has a right to receive the purchase price and to sue for it if it is not paid when it is due. Alternatively if the buyer does not pay, the seller may sue for cancellation of the contract and redelivery of the goods. The seller may also recover any loss of profits. The seller’s duties To take care of the thing sold Although the risk is the buyer’s, immediately the thing is sold the seller is bound to take good care of the thing while it is still in his possession. The seller will be liable for any damage caused through his wilful act or negligence. Negligence is the failure to exercise ordinary care and diligence. Seller’s duty to deliver The seller must deliver the goods within the time stipulated to the contract. This does not necessarily mean that the seller himself must transport it to the buyer’s home or place of business (unless this has been agreed). He must simply be prepared to hand it over when the buyer claims it. Duties of the seller Fundamentally, the main duty of the seller is delivery the ship in accordance with the terms, conditions and warranty of the contract. The time of delivery may or may not be an essential part of the contract depending on the clause of the contract. If the time of delivery is an essential part of the contact, the buyer can have the option to cancel the contract under the situation that the delivery is not made by the stipulation.
5. COMMERCIAL LAW Furthermore, the seller is also has the obligation to avoid the misrepresentations. Although there is no general duty of disclosure and the buyer is free to investigations on the ship intended to be purchased, the seller should not induce the other party to enter the contract by making material representations which are not true. Statements or assurances made during negotiations leading to a contract may be either "terms" which form the express terms of the contract or just the statements which do not intend to be part of the contract, but help to induce the contract. Even the statement is untrue "Misrepresentation", it is difficult for the buyer to claim for remedies if this misrepresentation not become a contractual terms. Page 4 of 72 [email protected] SELLER'S OBLIGATIONS Delivery of goods to buyer - The Act makes elaborate provisions regarding delivery of goods to buyer. It is the duty of the seller to deliver the goods and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale. [section 31]. Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, that is to say, the seller shall be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer shall be ready and willing to pay the price in exchange for possession of the goods. [section 32]. - - Note that this is ‘unless otherwise agreed’, i.e. buyer and seller can agree to different provisions in respect of payment and delivery. Delivery: seller must deliver confirming goods to buyer. Usually the seller and buyer agree on the place of delivery. 1. The buyer agrees to pick up the goods at particular place. In this case the seller does not have responsibility to move them. 2. Or the seller takes responsibility for transporting goods to the buyer. The second category of agreement, in which the seller ships the goods, is further divided into Shipment Contract and Destination Contract. The seller must choose the carrier (shipping company, tracking company). The seller will have contract with the carrier. The seller must prepare proper and necessary documents for the buyer to take possession of the goods. Seller must promptly notify the buyer of shipment. Rights of unpaid seller against the goods - After goods are sold and property is transferred to buyer, the only remedy with seller is to approach Court, if the buyer does not pay. Seller has no right to take forceful possession of goods from buyer, once property in goods is transferred to him. However, the Act gives some rights to seller if his dues are not paid. DIFFERENT FORMS OF DELIVERY, CARRIAGE OF GOODS METHODS OF DELIVERY It has been said that before ownership can pass there must be delivery of the thing sold. Delivery can be actual physical delivery, i.e. the seller actually hands over the article to the buyer. In many cases, however, such a method of delivery is either impractical or impossible and the law accepts that delivery can take place without an actual handing over. The other methods of delivery are called constructive or fictitious delivery. METHOD OF DELIVERY OF IMMOVABLES The only way of transferring ownership in immovable property is laid down in the Deeds Registries Act. In each province there is a Deed Registry office and all transfers of immovable property must be registered in this office. Once a transfer of immovable property is registered in the Deeds Registry Office, both delivery and the passing of ownership are deemed to have taken place.
6. COMMERCIAL LAW The basic method of delivering movables is, of course, by actual physical delivery. Other alternative methods are set out below. Page 5 of 72 METHODS OF DELIVERING MOVABLES [email protected] (a) Symbolical delivery This takes place when not the thing itself but the means by which physical possession of the thing may be obtained, is handed over, e.g. the seller hands over to the buyer the keys of the warehouse in which the goods are stored. A form of symbolical delivery very often used in commerce is a bill of lading. Bills of lading are documents signed by the master of a ship acknowledging the receipt on board of the goods to be transported. Once the buyer receives this document he is entitled to remove the goods from the ship at its destination. Immediately the buyer receives the bill of lading he is taken to be owner of the goods. (b) Delivery with the Long Hand (‘Traditio Longa Manu’) The principles of this type of delivery were set out in the case of Groenewald v Van der Merwe 1917 AD at 233. Where the articles are of great bulk and physical delivery is difficult, as soon as the buyer has been given access to the articles and is in a position to have control over them, ‘delivery with the long hand’ is said to have taken place. The buyer must be placed in a position where he can freely deal with the goods. (c) Delivery with the Short Hand (‘Traditio Brevi Manu’) This form of constructive delivery takes place when it is agreed that a person already having physical possession of the thing sold as the agent of, or on behalf of, the seller, shall in future hold the article in his own name. Thus if A, acting as B’s agent, holds a particular article on behalf of B and B now sells that very article to him it is unnecessary that A give the article back to B so that B can redeliver it to him. A merely keeps the article and delivery is said to have taken place. A hire-purchase agreement is another example. The buyer is already in possession when ownership is ultimately transferred (on the payment of the last instalment). (d) Constitutum Possessorium The opposite of delivery with the short hand is constitutum possessorium. Here the seller, after the sale, retains possession of the article acting as agent on behalf of the buyer, e.g. where A buys a car and leaves it with the garage that sold it to him for the garage to repair the car for A. Before the repairs are concluded delivery has taken place. DUTIES OF THE BUYER IN CONTRACTS OF SALE
7. COMMERCIAL LAW Page 6 of 72 [email protected] Duties of the buyer The main duty of the buyer is paying the agreed purchase price of the vessel. Normally, the time of payment is not the essential factor unless there is a related term in the contract. The buyer must also accept delivery under the Sale of Good Act 1979, s27. It is provided under section 227, the payment and delivery should be concurrent unless otherwise stipulated. Of course, the buyer also has the obligations to prevent the misrepresentation during the negotiation stage. BUYER'S OBLIGATIONS Acceptance of goods by buyer - Contract of Sale is completed not by mere delivery of goods but by acceptance of goods by buyer. ‘Acceptance’ does not mean mere receipt of goods. It means checking the goods to ascertain whether they are as per contract. - - - Where goods are delivered to the buyer which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract. [section 41(1)]. - - Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract. [section 41(2)]. Buyer must provide suited facility to receive the goods. The buyer has the rights to inspect goods upon arrival regardless the agreement between the parties. If the buyer made payment before goods arrived, it DOES NOT CONSTITUTE FINAL ACCEPTANCE. Hen confirming goods have been delivered to the buyer, the buyer's basic duty is to accept them. The buyer can verbally notify the seller of the acceptance of the goods. The goods are automatically accepted, if the buyer has failed to inspect and reject goods in reasonable time. The buyer accept the goods by starting using the goods, consuming the goods, re-selling the goods. Using the goods for testing is not an acceptance. Unless other arrangements between the seller and the buyer are made, the buyer must pay for the goods upon arrival. If the buyer accept the goods and does not pay for them, the seller can recover the purchase price plus incidental damages resulting from the breach. If seller fails to deliver the goods, the buyer can cancel the contract and can recover any pre-payments made to the seller. Suits for breach of the contract - Unpaid seller can exercise his rights to the extent explained above. In addition, seller can exercise following rights in case of breach of contract. Buyer has also rights in case of breach of contract. The buyer’s rights The buyer has the right to receive delivery of the goods. If, when the time arrives, the seller fails or refuses to give delivery, the buyer is entitled to claim for breach of contract. The buyer can sue either for specific performance, i.e. delivery of the goods or damages. The buyer’s duties (a) The buyer is obliged to pay the purchase price according to the terms in the contract. (b) The buyer is obliged to accept delivery. Where a buyer refuses to take delivery the seller can claim storage costs and any other expenses resulting from the buyer’s default.
8. COMMERCIAL LAW SPECIAL KINDS OF SALE VIZ. SALES BY AUCTION, CIF SALES, FOB SALES. Contracts Preliminary To Auction Sales Since it has been held that no contract for the sale of goods is complete until the hammer falls, it necessarily follows that even though an auction sale has been advertised to be without reserve, or has been advertised to be held under other specific conditions, the auctioneer may without liability change those conditions at any time before the fall of the hammer, unless some preliminary contract can be found, binding the auctioneer from the outset of the sale to observe the advertised conditions of the sale. In England it has been decided that a collateral contract is formed by the attendance of bidders at the auction; that is, the auctioneer is held to offer to observe the advertised conditions (as to sell without reserve) in consideration of the bidder's attendance and taking part in the auction. 44 However desirable the result reached by this similar facts were involved, but the auctioneer's principal was disclosed and the court held no action would lie doctrine may be, it seems artificial to say that the auctioneer actually makes an offer of the sort supposed. 45 It seems better to reach the result desired by statute than to strain reasoning so far as has been done in the English decisions. In a number of American States it is enacted that where an auction sale is advertised to be without reserve the auctioneer cannot withdraw the goods from sale. 46 In the absence of such statutes the announcement of an auction sale, and of the manner in which it will be held, as that the property will be sold without reserve to the highest bidder, seems merely preliminary to any bargain, and an invitation for offers rather than itself an offer. Indeed the contrary view is inconsistent with the numerous decisions holding that the sale of the property is not complete until the fall of the hammer; 47 for against the auctioneer. Warlow v. Harrison was followed by a decision of a single justice in Johnston v. Boyes,  2 Ch. 73. This was an action against the auctioneer for not allowing the completion of a sale of real estate which had been knocked down at auction to the plaintiff. Completion of the sale was refused by the auctioneer because of supposed insolvency of the buyer, and because a check for the price was tendered instead of cash. There were printed conditions of sale which included a statement that the property would be knocked down to the highest bidder. The court held the action could be maintained and that though the Statute of Frauds might prevent the direct enforcement of the sale, it did not prevent enforcement of the collateral contract to sell to the highest bidder. See also Harris v. Nickerson, L. R. 8 Q. B. 286; Spencer v. Harding, L. R. 5 C. P. 561; Mc-Manus v. Fortescue,  2K.B.1; McAlpine v. Young, 2 Ch. Chamb. (U. C.) 85; O'Connor v. Woodard, 6 Out. Pr. 223; (cp. Holder v. Jackson, 11 D. C. C. P. 543). Cost, Insurance and Freight (CIF) vs. Free On Board (FOB) Terms One of the fundamental decisions of international trade is how to structure the terms of sale between buyers and sellers. In the case of imports, Canadian and American companies can either allow their overseas suppliers to handle the shipping and insurance of goods or they can take these responsibilities on themselves. There are benefits and downsides to each, so it important to understand how these factors may affect your business. This overview is intended to provide clarity among these issues so that you may utilize the most advantageous method for your situation. Page 7 of 72 [email protected]
9. COMMERCIAL LAW The following definitions are taken from the Globe Express Services Dictionary of International Trade (Incoterms 2000): 1. Cost, Insurance and Freight (CIF) – An international trade term of sale in which, for the quoted price, the seller/exporter/manufacturer clears the goods past the ship’s rail at the port of shipment (not destination). The seller is also responsible for paying for the costs associated with transport of the goods to the named port at destination. However, once the goods pass the ship’s rail at the port of shipment, the buyer assumes responsibility for risk of loss or damage as well as any additional transport costs. The seller is also responsible for procuring and paying for marine insurance in the buyer’s name for the shipment. The Cost and Freight term is used only for ocean or inland waterway transport. 2. Free On Board (FOB) – An international trade term of sale in which, for the quoted price, the seller/exporter/manufacturer clears the goods for export and is responsible for the costs and risks of delivering the goods past the ship’s rail at the named port of shipment. The Free On Board term is used only for ocean or inland waterway transport. Why ship CIF? Generally speaking, importers prefer CIF terms when either they’re new to international trade or they have relatively little freight volume. These importers often find CIF simpler in that their suppliers are responsible for arranging freight and insurance details. Under these terms the importer relinquishes control of choosing freight carriers, routing and other shipping specifics. For these companies, convenience outweighs the need for enhanced shipment control and associated freight savings. Shipping CIF grows increasingly difficult as companies increase their number of overseas suppliers and overall freight volume. The greater the number of CIF shipments, the more problems can occur with obtaining accurate shipment information. Overseas suppliers are not well positioned to handle service issues that develop in-transit. What’s more, they are not required to arrange anything past the port of destination, so final delivery concerns, monitoring of penalty situations (demurrage, per diem), etc. are all the responsibility of the importer. Regular importers quickly grow tired of the hassle of relying on suppliers and their freight agents for shipment information. Why ship FOB? Buying Free On Board has two major benefits over CIF, more competitive freight rates and enhanced shipment control. When shipping CIF, companies must be careful that they’re shipping rates are competitive since overseas suppliers are inclined to mark up their freight cost for the extra service provided in arranging shipments. U.S. importers quickly learn that they can obtain very competitive shipping rates even with small to medium freight volumes. While cost is always important, there is another major reason for buying FOB. Increased supply chain visibility and control is a critical FOB benefit. By taking title to the goods as they cross the ship’s rail at the overseas port of shipment, importers are better able to obtain accurate and timely shipment information by working with the third party logistics provider of their choosing. In this way, they are assured their freight partner is working in their best interest, not that of their supplier’s. Page 8 of 72 [email protected]
10. COMMERCIAL LAW Page 9 of 72 [email protected] Summary of terms For a given term, "Yes" indicates that the seller has the responsibility to provide the service included in the price. "No" indicates it is the buyer's responsibility. If insurance is not included in the term (for example, CFR) then insurance for transport is the responsibility of the buyer or the seller depending on who owns the cargo at time of transport. In the case of CFR terms, it would be the buyer while in the case of CIF or CIP terms, it would be the seller. Incoterms Load to truck Export-duty payment Transport to exporter's port Unload from truck at the origin's port Landing charges at origin's port Transport to importer's port Landing charges at importer's port Unload onto trucks from the importers' port Transport to destination Insurance Entry - Customs clearance Entry - Duties and Taxes FOB Yes Yes Yes Yes Yes No No No No No No No CIF Yes Yes Yes Yes Yes Yes No No No Yes No No
11. COMMERCIAL LAW THE PASSING OF THE RISK AND THE PASSING OF OWNERSHIP OF MOVABLE AND IMMOVABLE PROPERTY Page 10 of 72 [email protected] The passing of the risk What is risk? By risk is meant the loss resulting from any damage to, or destruction of, the thing sold. It also includes any other disadvantage accruing to or affecting the article through any agency other than the breach of contract or wrongful act of the seller. Examples are the death of an animal, the destruction by fire of goods and the taxation of property. Risk can include advantages as well as disadvantages. If a cow which has been sold gives birth to a calf, then the calf is included in the risk attaching to the sale. It is obviously important to know who bears the risk once a contract of sale has been concluded. The passing of risk The risk passes when the contract is perfecta; i.e. when the contract is complete. A contract is perfecta as soon as there is agreement on the merx and the pretium. The general rule is that the risk and benefit of the thing sold pass to the buyer as soon as the sale is concluded (although ownership only passes on delivery). Thus after a sale has been concluded and the thing sold is destroyed, the seller is released from his obligation to deliver but the purchaser is still bound to pay the price. Thus in the ordinary unconditional sale the passing of ownership and the passing of the risk may occur at different times. The seller may not yet have delivered but the risk may have passed. The passing of risk in unconditional sales Generally as soon as the sale is (perfecta) complete the risk passes to the buyer. There is, however, one exception. Where in a sale of specific goods counting, weighing or measuring is necessary before the amount of the purchase price can be ascertained, the risk will not pass until this is done, even though the contract is complete insofar as the rights and obligations of the parties are concerned. For example, A buys 50 bags of mealies from B out of B’s stock. Before the 50 bags have been counted a fire destroys all B’s stock. In this case the risk remains with the seller. But if, however, the seller had already counted the 50 bags and separated them then the risk would have passed to the buyer. The passing of risk in conditional sales
12. COMMERCIAL LAW If the sale is subject to a suspensive condition and the article is destroyed before the suspensive condition is fulfilled, the risk remains with the seller. The reason for this is that the contract is effective only when the condition is fulfilled – the contract has not yet come into operation. Where the goods are sold subject to examination, inspection, approval or sampling by the purchaser, these normally constitute suspensive conditions. In such a case the rule stated above will apply. Sales subject to a resolutive condition A sale subject to a resolutive condition has full legal effect and it therefore follows that the risk is with the purchaser. If the article is destroyed before the fulfilment of the condition, the purchaser must bear the loss. Risk in sales where the seller is not the owner The ordinary effect upon sale is not varied even though the seller has sold what is not his own providing that he has acted bona fide (i.e. he was not aware that he was selling another person’s goods). The purchaser must therefore pay the full price if the thing is destroyed before delivery. Page 11 of 72 Sales subject to suspensive conditions [email protected] Agreements to vary the risk The ordinary effect of sale upon the risk may be varied by agreement express or implied. Whether there has been an implied agreement will depend on all the surrounding circumstances. Risk relating to goods in transit • In a sale of specific goods which are damaged while being transported the risk is with the buyer. An exception is the case where the goods are delivered by the seller and are damaged through the seller’s negligence. • Where the seller undertakes to deliver the goods at the buyer’s destination, the risk in transit is the seller’s. THE PASSING OF OWNERSHIP The conclusion of a contract of sale has, in itself, no effect whatsoever upon the ownership of the thing sold. Ownership cannot be passed from one person to another without the delivery of the thing or some process which the law will regard as equivalent to delivery. Furthermore the seller
13. COMMERCIAL LAW must have the intention of passing ownership and the buyer must have the intention of becoming the owner. The situation of movables must also be distinguished from immovables. Page 12 of 72 [email protected] MOVABLES Here ownership will pass at a different point in time depending on whether the sale is one for cash or on credit. A sale for cash is one where the payment of the full purchase price is to be made simultaneously with delivery. In credit sales either the full price or a part of the price will be paid after the delivery, by agreement between the parties. A credit sale should not be confused with a sale concluded under the Credit Agreement Act – they are different. (a) Cash sales Where the sale is for cash, ownership does not pass until the price has been paid even though there has been delivery. (b) Credit sales In a credit sale ownership passes immediately upon delivery. Credit may be given either expressly or impliedly. IMMOVABLES In the case of immovables the process equivalent to delivery is the registration of transfer in the Deeds Office of the province in which the property is situated. Thus even if the price has been paid there is no passing of ownership until transfer. On the other hand, once transfer has taken place the transferee becomes owner even though the purchase price has not been paid. In other words, transfer of ownership is determined solely by the process of registration. A further point on transferring ownership in contracts of sale Ownership of the article sold means the right to exercise free and undisturbed possession against the whole world. The moment ownership passes to the buyer he immediately receives his right and the seller has no further rights to the article. The passing of ownership is not dependent on the time of the agreement and occurs only when the conditions mentioned above have been fulfilled. It should be noted that the above rules for the passing of ownership only apply to normal (i.e. unconditional) contracts of sale. It is quite possible for the parties to specify other conditions for the passing of ownership. (In the case of immovables, however, the method of transfer of ownership is fixed by law and cannot be altered by the parties to the contract.)
14. COMMERCIAL LAW The difference between the passing of risk and the passing of ownership The purpose of this article is to demonstrate the necessity to carefully scrutinise all contracts of sale so as to determine your exposure in case of damage or destruction, if you are not taking delivery of the property purchased, until a future date. A fundamental legal principle which is generally not known, is the fact that there is a distinction between the passing of risk and the passing of ownership in sale. In some systems of law, both ownership and risk pass to the buyer at the same time, but this is not the case in South African Law. There are two salient rules of sale which must be understood and which effect every day transactions, these rules are:- 1) when the contract is complete, i.e. as soon as parties have agreed as to the thing to be sold and the price to be paid, “the risk passes to the buyer, even though delivery has not been made”; 2) a complete sale gives rise to personal rights between the parties, but ownership which creates real rights (rights against everybody) only passes:- •for immovables when there has been registration of transfer in the deeds registry; •for movables, there generally must be delivery of the item purchased. •for incorporeals, there must be an agreement to pass ownership, plus delivery of documents, if any. The above principle can of course be varied by express agreement it must be in writing in the case of immovable property. A practical and important example can be demonstrated when regard is had to any sale of immovable property. The document should have a clause which states that the risk will pass to the purchaser on registration, effectively passing risk to the purchaser at the same time as ownership. If this clause is absent from the written agreement, then the purchaser notwithstanding the fact that transfer has not been effected and that the purchaser is not the owner of the property, the risk in and to the property and any damage to the property whether by natural causes or through theft or vandalism will rest with the purchaser. In the case of movable property, even if the article is totally destroyed before delivery and the purchaser can never become the owner of the article or item purchased, the purchaser must nonetheless pay the purchase price. The risk comprises any form of deterioration or destruction of the thing that could not have been prevented by the seller. Accordingly, apart from any negligence on the seller’s behalf risk passes to the purchaser. In the case of immovable property risk includes also the liability to bear any loss or burden, such as payment of rates and taxes. In the case of movables a tax imposed on goods sold between the date of sale and delivery, will be for the purchaser’s account. It is naturally only equitable that advantages should follow the risk. The rule is of particular importance with reference to the sale of buildings, for while all rates and taxes accruing between the date of sale and the date of transfer are borne by the purchaser, all rentals accrue for the purchaser’s benefit. There are numerous exceptions to the basic rule regarding the passing of risk and of particular importance in this regard is the distinction between a suspensive condition in an agreement and a resolutive condition in an agreement. (a) In the case of the suspensive condition, being one which suspends the operational effect of one, or some, or all of the obligations under a contract until the conditions are fulfilled, the risk will not pass until the suspensive conditions have been fulfilled. (b) The resolutive condition has a different effect. A sale subject to this type of condition will result in the risk passing as soon as formalities required for the completion of a sale agreement have been completed. Page 13 of 72 [email protected]
15. COMMERCIAL LAW Page 14 of 72 [email protected] The risk in conditional sales is as follows:- • In the case of a sale subject to a suspensive condition, the risk of total loss remains with the seller until the condition is fulfilled (as indicated above the risk does not pass with ownership). The reason the risk remains with the seller is due to the effect that a suspensive condition suspends the whole sale and until such time as the condition is fulfilled, there is no sale, thus risk cannot pass; • On the other hand, in the case of a sale subject to a resolutive condition, the risk of total loss passes to the buyer immediately the contract has been concluded. As indicated above, the sale operates immediately, with the result, that if the thing is destroyed before delivery, the buyer must nevertheless pay the price in full, for the risk has passed to the buyer. Introduction to insurance law Insurance law is a body of law which pertains to the insurance industry. The goal of insurance law is to create regulations and standards which govern the practice of insurance sales, policy writing, and handling of claims. Such law protects both consumers and insurance companies by setting clear boundaries and creating methods for enforcement of violations of the law. The content of insurance law varies widely from nation to law, and there are lawyers who specialize in it, illustrating how complex it can be. Insurance law is the name given to practices of law surrounding insurance, including insurance policies and claims. It can be broadly broken into three categories - regulation of the business of insurance; regulation of the content of insurance policies, especially with regard to consumer policies; and regulation of claim handling. Development of Insurance Law The earliest form of insurance is probably marine insurance, although forms of mutuality (group self-insurance) existed before that. Marine insurance originated with the merchants of the Hanseatic league and the financiers of Lombardy in the 12th and 13th centuries, recorded in the name of Lombard Street in the City of London, the oldest trading insurance market. In those early days, insurance was intrinsically coupled with the expansion of mercantilism, and exploration (and exploitation) of new sources of gold, silver, spices, furs and other precious goods - including slaves - from the New World. For these merchant adventurers, insurance was the "means whereof it cometh to pass that upon the loss or perishing of any ship there followeth not the undoing of any man, but the loss lighteth rather easily upon many than upon a few... whereby all merchants, especially those of the younger sort, are allured to venture more willingly and more freely." The expansion of English maritime trade made London the centre of an insurance market that, by the 18th century, was the largest in the world. Underwriters sat in bars, or newly fashionable coffee-shops such as that run by Edward Lloyd on Lombard Street, considering the details of proposed mercantile "adventures" and indicating the extent to which they would share upon the risks entailed by writing their "scratch" or signature upon the documents shown to them. At the same time, eighteenth-century judge William Murray, Lord Mansfield, was developing the substantive law of insurance to an extent where it has largely remained unchanged to the present day - at least insofar as concerns commercial, non-consumer business - in the common-law jurisdictions. Mansfield drew from "foreign authorities" and "intelligent merchants" "Those leading principles which may be considered the common law of the sea, and the common law of merchants, which he found prevailing across the commercial world, and to which every question of insurance was easily referrable. Hence the great celebrity of his judgments, and hence the respect they command in foreign countries". By the 19th century membership of Lloyd's was regulated and in 1871, the Lloyd's Act was passed, establishing the corporation of Lloyd's to act as a market place for members, or "Names". And in the early part of the
16. COMMERCIAL LAW twentieth century, the collective body of general insurance law was codified in 1906 into the Marine Insurance Act 1906, with the result that, since that date, marine and non-marine insurance law have diverged, although fundamentally based on the same original principles. Common law jurisdictions in former members of the British empire, including the United States, Canada, India, South Africa, and Australia ultimately originate with the law of England and Wales. What distinguishes common law jurisdictions from their civil law counterparts is the concept of judge-made law and the principle of stare decisis - the idea, at its simplest, that courts are bound by the previous decisions of courts of the same or higher status. In the insurance law context, this meant that the decisions of early commercial judges such as Mansfield, Lord Eldon and Buller bound, or, outside England and Wales, were at the least highly persuasive to, their successors considering similar questions of law. At common law, the defining concept of a contract of commercial insurance is of a transfer of risk freely negotiated between counterparties of similar bargaining power, equally deserving (or not) of the courts' protection. The underwriter has the advantage, by dint of drafting the policy terms, of delineating the precise boundaries of cover. The prospective insured has the equal and opposite advantage of knowing the precise risk proposed to be insured in better detail than the underwriter can ever achieve. Central to English commercial insurance decisions, therefore, are the linked principles that the underwriter is bound to the terms of his policy; and that the risk is as it has been described to him, and that nothing material to his decision to insure it has been concealed or misrepresented to him. In civil law countries insurance has typically been more closely linked to the protection of the vulnerable, rather than as a device to encourage entrepreneurialism by the spreading of risk. Civil law jurisdictions - in very general terms - tend to regulate the content of the insurance agreement more closely, and more in the favour of the insured, than in common law jurisdictions, where the insurer is rather better protected from the possibility that the risk for which it has accepted a premium may be greater than that for which it had bargained. As a result, most legal systems worldwide apply common-law principles to the adjudication of commercial insurance disputes, whereby it is accepted that the insurer and the insured are more-or-less equal partners in the division of the economic burden of risk. Page 15 of 72 Common law of insurance - basic principles [email protected] Insurable interest and indemnity Most, and until 2005 all, common law jurisdictions require the insured to have an insurable interest in the subject matter of the insurance. An insurable interest is that legal or equitable relationship between the insured and the subject matter of the insurance, separate from the existence of the insurance relationship, by which the insured would be prejudiced by the occurrence of the event insured against, or conversely would take a benefit from its non-occurrence. Insurable interest was long held to be morally necessary in insurance contracts to distinguish them, as enforceable contracts, from unenforceable gambling agreements (binding "in honour" only) and to quell the practice, in the seventeenth and eighteenth centuries, of taking out life policies upon the lives of strangers. The requirement for insurable interest was removed in non-marine English law, possibly inadvertently, by the provisions of the Gambling Act 2005. It remains a requirement in marine insurance law and other common law systems, however; and few systems of law will allow an insured to recover in respect of an event that has not caused the insured a genuine loss, whether the insurable interest doctrine is relied upon, or whether, as in common law systems, the courts rely upon the principle of indemnity to hold that an insured may not recover more his true loss. Utmost good faith The doctrine of uberrimae fides - utmost good faith - is present in the insurance law of all common law systems. An insurance contract is a contract of utmost good faith. The most important expression of that principle, under the doctrine as it has been interpreted in England, is that the prospective insured must accurately disclose to the insurer everything that he knows and that is or would be material to the reasonable insurer. Something is material if it would influence a prudent insurer in determining whether to write a risk, and
17. COMMERCIAL LAW if so upon what terms. If the insurer is not told everything material about the risk, or if a material misrepresentation is made, the insurer may avoid (or "rescind") the policy, i.e. the insurer may treat the policy as having been void from inception, returning the premium paid. Page 16 of 72 [email protected] Warranties In commercial contracts generally, a warranty is a contractual term, breach of which gives right to damages alone; whereas a condition is a subjectivity of the contract, such that if the condition is not satisfied, the contract will not bind. By contrast, a warranty of a fact or state of affairs in an insurance contract, once breached, discharges the insurer from liability under the contract from the moment of breach; while breach of a mere condition gives rise to a claim in damages alone. The idea behind insurance is that it allows people to prepare for the unexpected. When people purchase insurance, they are taking steps to provide financial coverage in the event that they experience problems like car accidents, death, health issues, damage to a business, or destruction of a home. Insurance has been issued by a variety of companies for centuries, and at various points in history, the practice has been unregulated and sometimes highly disadvantageous for consumers. The point of insurance law is to address common issues which arise. Contents of legal codes pertaining to insurance can include a wide variety of topics. The law may spell out specific mandates, like how insurance policies can be written, the types of limitations insurance companies can use, licensure for insurance agents, how claims should be processed, and how insurance companies may advertise. The law also provides provisions for appeals from consumers who have been denied coverage or claims. Many nations have anti-discrimination laws in place to protect consumers, and they may have laws which standardize the types of coverage available. Insurance laws also spell out the definition of insurance fraud and the potential penalties for fraud. The law may include a list of activities which are specifically illegal for insurance companies, ranging from colluding with consumers to commit fraud to denying coverage to people who are considered insurance risks. Many nations also have laws mandating situations in which people must purchase insurance; for example, drivers may be required to hold insurance to register a car, and homeowners may be obligated to own an insurance policy as long as they hold a mortgage. Warrantees in Contracts of Sale viz. Implied warranty against eviction and implied warranties against latent defects – the actio redhibitoria, the actio quanti minoris – the role of a voetstoots clause – the actio ex empti Latent defect In the law of the sale of property (both real estate and personal property or chattels) a latent defect is a fault in the property that could not have been discovered by a reasonably thorough inspection before the sale. The general law of the sale of property is caveat emptor (let the buyer beware) and buyers are under a general duty to inspect their purchase before taking possession. However, it is understood at law that inspection is not often sufficient to detect certain deficiencies in the
18. COMMERCIAL LAW product that can only be discovered through destructive testing or other means that a seller could not reasonably be expected to allow under normal conditions. For example, wood beams and interior brickwork often cannot be fully assessed without destructive testing, and it would be unreasonable for the seller to allow the buyer to take apart a car's engine. As such, the law expects that buyers will protect themselves in the sales contract against defects they cannot possibly be expected to assess prior to purchase. As such, the term "latent defect" is often used as part of the guarantee clauses in a sales contract so that the buyer can recover damages from the seller if defects turn up in the property after the sale. For example, the seller may be required to pay for repairs of any such damage. There is no automatic right for a buyer to claim against a seller for such latent defects when they are discovered, absent an agreement in contract. However, if a latent defect is discovered, there is often a presumption against the seller when a claim is made in misrepresentation that the seller knew about the latent defect. As such, the seller is required to show that he or she could not possibly have known of the defect, rather than the buyer having to show that the seller did know about the defect. However, if it can be shown the seller could not have known about the defect (and was not wilfully blind to the possibility) then the buyer's claim will not succeed. However, when the defect could have been discovered by the buyer by a thorough inspection (a "patent defect"), the buyer cannot possibly succeed in a claim against the seller unless the seller actively took steps to hide the defect from a normal inspection. In all cases, where a seller actively misrepresents the condition of the property, such as by taking steps to make an inspection impossible or by lying about problems when directly asked, the buyer will almost always succeed unless it can be shown that the buyer was independently aware of the defect and completed the transaction nevertheless. Page 17 of 72 [email protected] Sales Law - Warranties In the context of the sale of goods, a WARRANTY is concerned with identifying the kind and quality of the goods that are tendered by the seller. The two basic types of warranties are express warranties and implied warranties. An express warranty is any representation or affirmation about the goods made by the seller's words or conduct. For example, the description of the goods in the sales contract constitutes an express warranty that the goods will conform to the description. Implied warranties are warranties that are imposed on sellers by law. A warranty of merchantability is implied in every sales contract. This warranty is a promise that the goods pass without objection in the trade, are adequately packaged, conform to all promises or affirmations of fact on the container, and are fit for the ordinary purposes for which such goods are used. The IMPLIED WARRANTY of merchantability also includes a promise that multiple goods will be of even kind and quality.
19. COMMERCIAL LAW Another implied warranty recognized by courts is the warranty of fitness for a particular purpose. This warranty requires that goods be fit for an identifiable, particular purpose. It is effective only if the seller has reason to know of any particular purpose for which the goods are required and also knows that the buyer is relying on the seller's expertise to select suitable goods. Some sellers attempt to disavow any responsibility for the quality of their merchandise. Sellers may not disclaim the warranty of merchantability unless they use the word "merchantability" in the disclaimer, which may be oral or written. If written, the disclaimer clause or term must be conspicuous. The implied warranty of fitness for a particular purpose may be disclaimed in writing, but it cannot be disclaimed orally. In some states, statutes or court decisions prohibit the disclaimer of warranties in consumer sales. If a seller fails to tender goods, the buyer may choose one of three remedies. First, the buyer may seek damages from the seller. Damages are the total financial losses resulting from the failure to tender. Generally, damages for non-delivery consist of the market price of the goods minus the sale price. Market price is figured by determining the market price at the time the buyer learned of the breach at the place the tender was to have been made. Second, the buyer may cover or purchase similar goods elsewhere and then recover for losses resulting from the purchase. If the purchase price of replacement goods is greater than the original sale price, the buyer may recover the difference from the seller. The buyer must cover in GOOD FAITH, without delay, and on reasonable terms. When a seller is unable to perform a sale as agreed, the buyer should try to minimize his or her damages by covering the loss. If an aggrieved buyer fails to make reasonable efforts to cover, a court may reduce any damage award to account for the failure. Third, a buyer may force the seller to perform by taking the seller to court and obtaining an order for SPECIFIC PERFORMANCE or maintaining an action for REPLEVIN. An action for specific performance may be ordered if the goods are unique and in other proper circumstances. Goods may be considered unique if the buyer is unable to find the goods elsewhere. An action for replevin is a method of recovering goods that is similar to specific performance. Replevin is allowed where the goods are specifically identified in the contract and the buyer is unable to cover the goods after a reasonable effort, or the circumstances indicate that the buyer will be unable to cover. If a buyer has paid only part of the sale price and the seller becomes financially insolvent within ten days of the first payment and is unable to tender the goods, the buyer may pay any remaining balance and sue to obtain the goods. This would give the buyer the goods and prevent the seller from using the goods to pay other debts. What Are Representations and Warranties in a Contract? Every contract has representations and warranties, which are basically the underlying matters or facts as they are being presented in terms of the contract. When selling something such as Page 18 of 72 [email protected]
20. COMMERCIAL LAW real estate, the seller represents himself to be the owner, who has the legal authority to sell the property. He warrants that the property is as he represent it to be. When you buy a new washing machine from an appliance store, you go into the process with certain basic suppositions. These include: • The store has the right to sell you the washing machine • The washing machine is what the seller says it is in terms of manufacturer and model • The washing machine does what it is advertised to do • The manufacturer/seller warrant that the product is free of defect for a specified amount of time into Page 19 of 72 [email protected] the future A representation is defined as an account or statement of facts, allegations, or arguments. Representations present everything from its past to its current status. In particular, Black's Law Dictionary defines a representation as "A presentation of fact -- either by words or by conduct -- made to induce someone to act, especially to enter into a contract." A warranty generally moves from the present to the future. The product that you are buying is warranted as being free of defects, and the company agrees to fix any defects for a specified amount of time into the future. Some products advertise that they have a lifetime warranty. As an example, if you buy a set of headphones with a lifetime warranty, then every time they malfunction, you can send them back to the company to be fixed. The warranty obligates the seller to the terms of the contract. Warranties can be either expressed or implied. Expressed warranties mean they are written into the contract, and, for the most part, buyers should insist upon them. Implied warranties fall under the Uniform Commercial Code, which in all sales of goods implies that there be a "fitness for a particular purpose." Legally within contracts, expressed warranties hold up better in a court of law than implied warranties. When a contract uses the terms "representations" and "warranties" together, they blend the past, present, and future together within terms of the contract. Every contract is different, but the language is basically the same. Representations and warranties are assurances that one party gives to another party in a contract. These assurances are statements that the purchasing party can rely on as factual. Implied warranty In common law jurisdictions, an implied warranty is a contract law term for certain assurances that are presumed to be made in the sale of products or real property, due to the circumstances of the sale. These assurances are characterized as warranties irrespective of whether the seller has expressly promised them orally or in writing. They include an implied warranty of fitness for a particular purpose, an implied warranty of merchantability for products, implied warranty of workmanlike quality for services, and an implied warranty of habitability for a home.
21. COMMERCIAL LAW An implied warranty is one that arises from the nature of the transaction, and the inherent understanding by the buyer, rather than from the express representations of the seller. The warranty of merchantability is implied, unless expressly disclaimed by name, or the sale is identified with the phrase "as is" or "with all faults." To be "merchantable", the goods must reasonably conform to an ordinary buyer's expectations, i.e., they are what they say they are. For example, a fruit that looks and smells good but has hidden defects would violate the implied warranty of merchantability if its quality does not meet the standards for such fruit "as passes ordinarily in the trade". In Massachusetts consumer protection law, it is illegal to disclaim this warranty on household goods sold to consumers etc. The warranty of fitness for a particular purpose is implied when a buyer relies upon the seller to select the goods to fit a specific request. For example, this warranty is violated when a buyer asks a mechanic to provide snow tires and receives tires that are unsafe to use in snow. This implied warranty can also be expressly disclaimed by name, thereby shifting the risk of unfitness back to the buyer. Another implied warranty is the warranty of title, which implies that the seller of goods has the right to sell them (e.g., they are not stolen, or patent infringements, or already sold to someone else). This theoretically saves a buyer from having to "pay twice" for a product, if it is confiscated by the rightful owner, but only if the seller can be found and makes restitution. An implied warranty of fitness for a particular purpose is a warranty implied by law that if a seller knows or has reason to know of a particular purpose for which some item is being purchased by the buyer, the seller is guaranteeing that the item is fit for that particular purpose. If a purchaser found a latent defect in the thing which he purchased, what two actions would be available to him? 'actio redhibitoria' and 'actio quanti minoris'. The 'actio redhibitoria', known in English as the redhibitory action, allowed the buyer to claim a return of performances by which he/she would return the object of the sale and he/she would receive the purchase price back. This was used where the latent defect was so material he could not use the thing for the purpose it was bought. The 'actio quanti minoris' on the other hand was an action which allowed a reduction in the purchase price, and therefore the purchaser could recover some of the purchase price he/she paid. Page 20 of 72 Fitness for a particular purpose [email protected] Actio Redhibitoria The action which the buyer of goods can bring to set aside a contract of sale and claim the return of the entire purchase price (if already paid) against the return of the article because
22. COMMERCIAL LAW the article sold is latently defective to such an extent that it cannot be used for the purpose for which it was sold, or because the article materially fails to satisfy a claim made by the seller in regard to its attributes. The Voetstoots Clause What is the effect of a voetstoots clause in a Sale Contract on the discovery of undisclosed defects by the buyer on taking occupation of a property? Page 21 of 72 [email protected] The Voetstoots Clause What is the effect of a voetstoots clause in a Sale Contract on the discovery of undisclosed defects by the buyer on taking occupation of a property? Every sale agreement of a normal residential property with a house and its usual outbuildings will contain a voetstoots clause freeing the Seller from any liability for patent and/or latent defects, which the Buyer may later find when taking occupation of the property. It is important to know what the effect of such a clause is and to what extent it protects the Seller. The Meaning of "Voetstoots" The word voetstoots is an Afrikaans terms generally used to effectively describe, in just one word, the action of buying something as is, that is just as it stands in whatever condition it is, warts and all. It is essential to all sales of property purchased second hand which may well have deteriorated through normal wear and tear or which may be defective to some extent as a result of its constant use or through natural decay over a period of time. Its basic purpose is to shield the Seller from any action by the Buyer, on discovering any defects he was not aware of when purchasing the property, from doing anything to jeopardize the actual sale contract. Patent and Latent Defects A voetstoots clause at face value discharges a Seller from liability for all patent and latent defects. Before looking at how far this protection goes it is important to explain the distinction between these two different types of defects. Patent Defects are flaws that will be clearly visible on a normal inspection of a property. They include wall cracks, sagging gutters, broken windows, missing tiles and the like. It is a Buyer’s duty to acquaint himself with the general condition of a property on purchasing it and he cannot later claim he did not see such defects. The test is an objective one, namely what could have been seen on the original inspection of the property. Latent Defects are faults that are not immediately obvious and are hidden from view. These include faulty pool pumps and geysers, rusted internal pipes, leaking roofs (except where strain marks make the leak obvious) and defects that have been concealed such as dampness behind a cabinet. The test is what could not normally be seen on inspection UNDISCLOSED LATENT DEFECTS A voetstoots clause completely liberates a Seller from any liability for patent defects. This exemption is not absolute in the case of latent defects, however. The Seller’s Responsibility In terms of numerous South African court cases a Seller is only excused from liability for latent defects where he himself was not aware of the problem at the time of the sale. If a Seller knowingly conceals a latent defect he will be liable to the Buyer for the cost of its repair. In such a case he cannot rely on any clause in the original contract making no warranties as to the condition of the property. A Seller will thus be liable for all cracks or dampness and other similar faults deliberately hidden from view. He is also responsible for latent defects which he is presumed to have been aware of, such as any appliance, which is not functioning properly. Examples are geysers delivering only lukewarm water, defective electrical points, and the like. The Buyer’s Recourse It is very important for a Buyer to know what his rights are in such cases. By law he cannot do any of the following: • He cannot obtain a quotation and deduct the cost of repairs from the purchase price and tender a lesser amount (or reduce his deposit); • He cannot refuse to pay occupational rental or any portion thereof unless the defective article seriously restricts occupation of the property; • He cannot repudiate or cancel the sale contract.
23. COMMERCIAL LAW It is he, and not the Seller, who will be in breach of contract if he takes any of these actions. By law his proper recourse is to institute an action for damages and sue the Seller. This will obviously not appeal to the Buyer and the best way to resolve the problem is to ask the Conveyancer doing the transfer to settle the matter amicably with the Seller. Ideally he sh