Think before you sign: 5 Things to consider before signing a contract
The simple definition of a contract is where an offer by one party is accepted by the other party. These parties are the contracting parties. There will be no agreement between the parties if there is a counteroffer to an offer. However, if a counteroffer is accepted, there is an agreement or consensus between the parties. What are the requirements of a valid contract? There must be a consensus between the contracting parties; The parties must have a legal capacity to enter into a contract; All the formalities must have been met, whether it is contained in the contract itself or by law. For example, the sale of immovable property has to be in writing. However, verbal contracts are valid contracts; Performance as per the agreement has to be possible as well as lawful; There must be certainty in respect of what the parties agree to. As with all contracts, there are certain things that need careful consideration when entering into a contract. Performance: Performance is what each party is responsible for in terms of the agreement. With an agreement of sale, the parties agree that one person will make payment in a specific amount in return for a specific item. Before entering into a contract, it is important to consider whether you will be able to perform in terms of the agreement. Will you be able to pay the purchase price? Will you be able to deliver the thing? Will you be able to provide the service as agreed? When payment is done in instalments, due consideration should be given to the instalment amounts and if the party who is liable for said instalment amounts is able to afford it for the period agreed upon. Interest on repayment plans is another factor that needs careful consideration. Although parties may agree to any amount of interest, it would be wise to agree to a reasonable interest. A credit agreement is a common form of an agreement entered into by parties. Examples of these are credit cards, vehicle finance agreements or mortgage bonds. It is important to establish whether a party offering a credit facility is a registered credit provider in terms of the National Credit Act (NCA). Non-variation: Notwithstanding that verbal contracts are valid contracts, it is wise to have a contract reduced in writing in order to avoid uncertainty. Even written contracts can be uncertain at times. If you have your contract in writing, make sure that it contains a non-variation clause to ensure that all changes to the contract shall only be valid if in writing and signed by both parties. It is important to note that variations of a contract may take place by means of email correspondence. Dispute resolution: Make sure that in the event of a dispute the parties should follow a procedure in order to resolve the dispute. For example, parties can agree to give each other written notice in order to rectify a default within a short period of time after which the aggrieved party can institute legal action against the other party. The parties can agree to proceedings they find more effective In terms of time, costs, and resolution. It is common that parties agree that the magistrates’ court has jurisdiction to preside over a dispute arising from their contract. Domicilium: Domicilium citandi et executandi is the nominated address for accepting notices and processes for purposes of court proceedings. It is important to note that the court may accept that a party has received proper notice of proceedings if there is proof of delivery to the nominated address despite the fact that you may be unaware of said delivery. Do not sign contracts that you do not know or understand the content of. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Smart contracts: Where do they fit into the legal framework?
Smart contracts are agreements that self-execute without any human intervention when the conditions, as specified in digital form, are met. Blockchain, a decentralised digital ledger that records transactions in different participating computers in order to verify and legitimise transactions, increasingly serves as the technological framework for smart contracts. Ethereum is one of the leading blockchain platforms and was designed specifically for smart contracts. The working of smart contracts can be explained by the “if-then” principle: If, for example, an insurance company writes its terms, conditions and policies in the form of a smart contract and the event triggering an insurance payout occurs, the pre-arranged conditions of the event are met, then the smart contract automatically executes and for example effects payment into the insured’s bank account, in the agreed amount. Smart contracting does away with many of the challenges posed by traditional contracting, making it an attractive alternative form of contracting. Smart contracts remove the need for human intervention and trust between the parties – certainty of performance is guaranteed by way of the advanced technology supporting the execution of the contract. Furthermore, the decentralised ledger system in which smart contracts that operate in blockchain are anchored provides smart contracts with accuracy, security, transparency and ensures that the contracts are tamper-proof. Smart contracts and its supporting technology are not new concepts, but the law regulating it is still in its infancy stage of development – smart contracts have not been tried and tested by courts as traditional contracts have been. Precisely where and how smart contracts fit into our legal framework remains to be unanswered. The first obvious question that needs to be answered in this regard is whether a smart contract is a contract at all. Arguably a smart contract can be explained by normal rules and principles of contracting and will accordingly be enforceable if it meets the requirements for a valid contract under common law. Reconciling an automated way of contracting with the underlying principles of contract law, which envisages human negotiation and consensus, may however prove to be a difficult task. In South Africa the Electronic Communications and Transactions Act 25 of 2002 (“ECTA”) allows contracts to be concluded electronically but arguably does not go far enough to regulate the execution of the contract through electronic agents, without any human intervention. ECTA views electronic agents in a passive light and as mere tools of communication. ECTA does not differentiate between electronic agents based on the degree of their autonomy and therefore the complexity of smart contracts may not fit into ECTA’s conceptualisation of contracting. One possibility is that ECTA can be amended to provide for a more complex framework to regulate smart contracts or that new legislation may be passed to provide for a more autonomous method of contracting. Some scholars argue that smart contracts should not be regulated by the law itself, but that a regulatory code must be built into all smart contracts together with a standardised practice to ensure its technical credibility, and thereby avoiding questions of legal enforcement. While blockchain technology certainly makes internal regulation and resolution possible, it remains difficult to envisage a form of contracting that stands outside of the law. Courts have recognised various values and public policy considerations that may be considered in contract law disputes, and these considerations should be imported to smart contracting to ensure fairness across the board. Furthermore, smart contracting will still pose challenges and uncertainties which should be answered by some sort of legal framework. Smart contracts are immutable in nature, which raises concerns regarding the automatic execution of performance, in all circumstances, without exception or regard to context. What if a smart contract is concluded as a result of coercion, duress, a mistaken belief or misrepresentation, for example? What if the performance of a smart contract is in fact illegal? A party may wish to prevent the automatic execution of such a contract and will need the help of the law to do so. Furthermore, smart contracts are written in code, not in plain language, which may lead to interpretation, understandability and validity issues to be decided upon by courts. As both a smart contract and a traditional contract share the same end goal, which is to give effect to the intention of contracting parties in their dealings with one another, the law arguably has the same role to play. Regardless of the method whereby a transaction is concluded, the law must afford protection and recourse to the contracting parties and therefore it is likely that the law will develop in this regard. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Demystifying “non-refundable deposits”, “rouwkoop” and “penalty clauses” in sale of property agreements
Non-refundable or forfeiture clause Sellers are sometimes sold on the idea of including a non-refundable deposit clause in the Contract of Sale. More often than not, sellers are under the impression that they will be entitled to all of the non-refundable deposit or monies already paid to the conveyancer on account of the purchase price if the purchaser breaches a Deed of Sale and such breach results in the cancellation thereof. The seller will, however, then find out that after cancellation of the contract due to breach, that not all amounts may be retained as liquidated damages or as a non-refundable deposit. In terms of our case law, Matthews v Pretorius (1984) (3) (SA547W) and the Conventional Penalties Act 15 of 1962 (“the Act”), any penalty or liquidated damages contained in a contractual obligation shall be subject to the provisions of the Act which affords the Court the discretion to, on hearing a claim for a penalty or a non-refundable deposit, find that it might be out of proportion to the prejudice suffered by the creditor and the Court may reduce the penalty to such extent as it may consider equitable under the circumstances, taking in due consideration the interests of all concerned. This means that any forfeiture stipulation resulting from the cancellation of an agreement, including non-refundable deposits, as well as the retention of certain monies already paid by a purchaser as liquidated damages, will be subject to the measurement as described in the Conventional Penalties Act. Estate agents should be very careful not to create an expectation with the seller that he or she will be entitled to all of the non-refundable deposit or monies already paid to the conveyancer on account of the purchase price if a purchaser breaches a Deed of Sale of immovable property and such breach results in the cancellation thereof. The role of conveyancers is important to understand as well. It is not expected from conveyancers to act as a Judge and Jury when dealing with monies in their trust account when a dispute arises about who should be the rightful recipient of such monies once the Deed of Sale is cancelled. Unless and until such time as an agreement has been reached between the parties or a competent Court has made an order, it cannot be expected of conveyancers to pay the monies to either party. Breach of contract The relationship between a purchaser and seller is governed by the Contract of Sale. The breach of contract occurs generally when a party to a contract without lawful excuse fails to honour his or her obligations under the contract. When a contract is cancelled in terms of the breach clause of the said contract, the aggrieved party would normally have the right to claim damages from the guilty party. When claiming damages, the aggrieved party must note that the Conventional Penalties Act will also be applicable to the amount of damages that may be claimed. In the instance of the seller, the seller’s damages will often only be liquidated once the property is resold and the seller’s claim will only be for the deficit between the amount of resale and the original contract sum of the cancelled agreement. Rouwkoop A rouwkoop clause in its pure form comes from our common law. It is derived from the Dutch words meaning “regret and purchase”. Such a clause entitles a party to a contract to pay a sum of money in order to be allowed to withdraw from the contract. It essentially sets a purchase price for freedom from the contract payable by the purchaser. If the purchaser then withdraws from the contract and pays the agreed rouwkoop amount, he will be acting in accordance with the terms of the agreement and his withdrawal will not constitute a breach of contract. (It is not regarded as a penalty.) This is clearly very distinguishable from a penalty clause which would come into operation only where there was a breach of contract. Unfortunately, many sale agreements confuse the position in law whereby the forfeiture clause is merged with a rouwkoop clause, which provides that if the purchaser breaches the agreement and the seller cancels the agreement as a result thereof, the purchaser will forfeit his or her deposit as rouwkoop. In a decision of Royal Anthem Investments 129 (Pty) Ltd v Yuen Fan Lau and Shun Cheng Liang (941/2012) (2014) (ZASCA 19) (26 March 2014), the Court had to interpret a rouwkoop clause in a Deed of Sale which read as follows: “Will have the right to cancel the agreement and to keep other amounts payable as rouwkoop, or by means of any pending decision by a Court of the real damages suffered”. The Court in this instance found that the deposit was not an amount as envisaged by the rouwkoop clause in the true intention of the rouwkoop clause history. A penalty clause will only come into operation when there was a breach of the contract. Conclusion From the said case law and the provisions of the Act above, it is clear that: Non-refundable deposits are a myth and together with forfeiture clauses, subject to scrutiny by the Courts. Unless the parties to the agreement can come to an agreement regarding the penalty, the Court must be sought to quantify the amount payable as a penalty. A rouwkoop clause in a Deed of Sale must be clearly distinguished from the penalty clauses above as it is not subject to the provisions of the Conventional Penalties Act. So, be sure to demystify the myth before you enter into one of the most important transactions of your life. Consult with an attorney. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and
Court interference in a contractual relationship
When two or more parties enter into a contractual agreement knowingly and free from duress, the terms of the agreement must be upheld by each signatory. However, it must be noted when the contract is entered into under pacta sunt servanda, which means “agreements must be kept”, principles of fairness, good faith and reasonableness don’t play a part when circumstances leading to contract breach arise. With regards to property law, for example, if a lease agreement states a date on which rental is due, then the party responsible for making this payment should meet this obligation. Failing to do so could enable the lessor to cancel the signed lease without notice and retake the property. Genuinely, because the lessee had agreed to the clause by signing the contract, that would then mean that they agree on the grounds of cancellation. But if the late payment was due to circumstances beyond the lessee’s control, does the cancellation clause still stand? If the lessee does not oblige with the lease cancellation, the lessor may approach a court to deliver judgement on the agreement and serve a notice of eviction. The lessee may argue that they acted in good faith and that the matter was beyond their control. The lessee may also argue that the implementation of the pacta sunt servanda principle varies from case to case and should be determined by the circumstances surrounding breach of the lease. If the court chooses to hand down judgement based on the lessee’s argument, it is incorrect due to the freedom each party had when entering into a contractual agreement. Each party has bargaining power and should have, before signing, ensured that any possible errors were taken into account. Good faith and fairness don’t play a part when it comes to an agreement and a court cannot base that as the reason why the lessor should not have cancelled the lease. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)