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PRINCIPLES OF LAW
PRINCIPLES OF LAW
PART 2
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:
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1. The commodity or article to be sold (merx); 2. The price to be paid (pretium);3. There must be 2 parties. and4. 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 sold, the price and the intention to exchange the one for the other for the contract to be complete.
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 moneyThe 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
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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. 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 contractc. There must be serious intentions to contractd. 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
The seller’s rights
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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.
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.
SELLER'S OBLIGATIONS
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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.
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METHODS OF DELIVERING MOVABLES
The basic method of delivering movables is, of course, by actual physical delivery. Other alternative methods are set out below.
(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
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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 OBLIGATIONSAcceptance 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
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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.
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
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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, [1899] 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, [1007] 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. 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.
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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.
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
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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
THE PASSING OF THE RISK AND THE PASSING OF OWNERSHIP OF MOVABLE AND IMMOVABLE PROPERTY
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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
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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
Sales subject to suspensive conditions
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.
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.
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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 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.
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.
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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.)
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;
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•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.
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,
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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
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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 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 of insurance - basic 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.
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
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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 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.
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
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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 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
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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.
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.
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
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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.
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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 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 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
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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.
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.
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Fitness for a particular purpose
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.
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 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 ClauseWhat 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?
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"
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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 DEFECTSA 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 ResponsibilityIn 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 RecourseIt 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. 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 should arrange a refund of the costs of repair to the Buyer on registration of transfer. It is in the best interests of both parties to agree to this. WARRANTIES AND MISREPRESENTATIONSMany Buyers think that a deliberate non-disclosure of latent defects constitutes a fraudulent misrepresentation on the Seller’s part and that they can cancel their contract. This illusion is quite common. Without a voetstoots clause such a contract might well be repudiated as the
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failure to disclose known latent defects would constitute a deliberate contractual misrepresentation on the Seller’s part.South African courts have consistently held the view, however, that the inclusion of a voetstoots clause overrules any question of contractual misrepresentation by the Seller and the Buyer accordingly cannot cancel the sale on the grounds that the property purchased has been found to be worth less than the price offered. He is deemed to have purchased it as is, defects and all, and his rights are confined to an action for damages. The non-disclosure is only regarded as a delictual misrepresentation.Warranties made by the SellerWhat, then, if a clause in a sale contract whereby the Seller guarantees the condition of any item or that it is functioning properly, only for the buyer to discover otherwise. In this case the Seller has made an express warranty and the Buyer can refuse to take transfer until the defects arc properly repaired at the Seller’s expense. Alternatively the Buyer can sue for a reduction in the purchase price, an action known as actio quantum minoris.Other Forms of MisrepresentationA voetstoots clause only covers defects on a property. In other cases of misrepresentation, however, the Buyer will always have an immediate recourse against the Seller. Where, for example, a Seller innocently or deliberately misrepresents the extent of a vacant piece of land as, say, 1500 square meters when it is actually 1200, the Buyer will be entitled to a proportionate reduction in the purchase price. In serious cases where the Seller has made a fraudulent misrepresentation affecting the very purpose for which the Buyer bought the property or primarily induced him to do so (for example falsely alleging that the property purchased solely for business purposes duly has business rights), the Buyer will be entitled to cancel the sale contract and sue for any damages suffered.
OTHER ISSUES AFFECTING DEFECTSThere are two other important issues that also need to be covered as they often affect sales of immovable property.Defects Caused After a SaleWho is responsible for damage done to a property after a sale contract has been signed but before registration of transfer takes place’? For example, a negligent motorist might smash the front wall of the property or a geyser might suddenly burst, flooding the house and damaging its fitted carpets. Responsibility will lie as follows:
On the Seller if the contract makes him liable for the risk in the property until registration of transfer (as is the case inmost contracts);
On the Buyer if the risk falls on him from date of sale or occupation (as in terms-sale contracts where transfer is delayed for more than a year);
On the Buyer if he causes the damage while in occupation. lie will be liable even if he only uncovers a latent defect, such as causing a rusted pipe under a sink to break when trying to fit his washing-machine connection to it.
Late Discovery of DefectsBuyers who only complain of defects some months after registration of transfer has taken place occasionally exasperate sellers and Estate Agents. There are two issues here. Firstly the discovery of defects that only appear later. For example, a Buyer may only experience a major roof leak when the first summer rains appear long after registration. If it can be shown that the Seller knew or must have known about the leak and consciously failed to disclose it, the Buyer can sue him for his repair costs.The second issue concerns a delayed discovery of defects by the Buyer. For example he may only first complain about a wall crack six months after taking occupation. It will be very hard to prove that the Seller knew about a defect which the Buyer himself took so long to discover or that the defect existed at the time of the sale. In such cases the Buyer will have no recourse against the Seller. THE ESTATE AGENT’S RESPONSIBILITYFar too many Buyers want to hold their Estate Agents liable for latent defects they only discover sometime after the sale has been concluded. This is particularly the case where a defect has only been discovered months after the transfer has been registered and the Seller can no longer be traced. An Estate Agent is only obliged to inspect the property for obvious patent defects, to enquire from a Seller as to what known latent defects exist, and to then disclose them before signature to the Buyer.
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Once having done this the Buyer’s recourse is against the Seller alone. Often a Seller, on being challenged about an undisclosed latent defect, will falsely claim that he had informed the agent about it prior to the sale. A Buyer’s recourse will inevitably rest against the Seller alone and the Estate Agent should not be harassed in any way.
What does 'Voetstoots' really mean?
In South Africa there is a standard Voetstoots clause which states that the buyer is buying the property "as it stands", in other words with defects and all. This is unlike the United States and the United Kingdom, where home inspections are the standard before a sale is concluded.
Many disputes have arisen from the fact that buyers and sellers don't necessarily understand what the Voetstoots clause actually means. Understanding how it affects you as a buyer or seller can go a long way to making sure the transaction runs smoothly.
If you purchase a house and there are obvious (patent) defects, which would have been revealed by a reasonable inspection of the property, then you, as the buyer, have no claim against the seller. This could be anything from visible cracks to broken windowpanes.
Where there is some defect in the house which is not apparent on a careful inspection, the seller is liable for those defects, if he or she knew about them. The Voetstoots clause in the agreement of sale will not take away the seller's liability. In other words, the seller has a duty to reveal to the buyer any latent defects. In such an instance, the seller may be called upon to refund part of the purchase price or even accept cancellation of the entire sale, depending on the nature or extent of the defect.
As the buyer, it is in your best interests to have the property thoroughly inspected before signing the sale agreement. The house should be inspected inside and out – this includes the structure, any outbuildings as well as the grounds, and all problems, whether they seem minor or major, need to be recorded.
"A home is the largest investment most people will ever make – it makes sense to find out as much as you can about the house you are interested in before you buy," says CEO of Inspect-A-Home Eric Bell. "It's a fact that houses are sold every day with a variety of undetected defects resulting in high costs of both repair and despair."
Rather than relying on a questionable Voetstoots clause, it is in the interests of both the buyer and the seller to have a thorough home inspection done before a sale agreement is entered into. The inspection would highlight any undisclosed defects and ensure that the buyer has complete peace of mind when purchasing the home.
A home inspection is an objective visual examination of the physical structure and systems of a home, from the roof to the floor. The standard home inspector's report will include an evaluation of the condition of the home's boundary wall, garage, swimming pool, roof, gutters, flashings, roof cavity, ceilings, floors, walls, windows, doors, cupboards, fittings and finishes.
There has been talk that legislation is expected some time next year to make inspections mandatory and this will effectively do away with disputes brought about by the Voetstoots clause.
(These topics carry weighting of 15% of the examination.)
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Consumer LawA broad understanding of The Hire purchase Act [Chapter 14:09], The Consumer Contracts Act [Chapter 8:03] and The Contractual Penalties Act [Chapter 8:04] as they affects the relationship between buyers and sellers.(These topics carry weighting of 5% of the examination.)
Consumer Rights & Responsibilities Consumer Rights
1. The right to basic needs This refers to the right to basic goods and services such as adequate food, health care, sanitation, clothing and health. The right to basic food is synonymous to the right to survive. Consumers of all age groups from infants to the aged should be guaranteed of these basic necessities.
2. and 3. The right to Safety and Healthy environment The right to safety calls for protection against marketing of products, production processes and services which are hazardous to health or life. Consumers also have the right to live in an environment which is neither threatening nor dangerous and which permits a life of dignity and well being.
4. and 5. The right to information and the right to choose.The right to be protected against dishonest and misleading
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advertisements or labelling. The right to be given the facts and information needed to make informative choices. The right to choose products and services at competitive prices with an assurance of satisfaction in quality.
6. and 7 . The right to be heard and to redress The right to be heard involves the right to be represented so that consumer's interests receive full and sympathetic consideration in the formulation and execution of social and economic polices. The right to redress entails the right to be compensated for misrepresentation, shoddy goods and unsatisfactory services .
8. The right to consumer education The right to consumer education entails the right to acquire knowledge and so as to be an informed consumer in life. Click here to find out more about Consumer responsibilities. It is your right to know more about how to become a member.
Consumer Responsibilities
For a member of the Consumer Council of Zimbabwe to fully serve himself/herself and the community, he/she has to accept the accompanying responsibilities in establishing a conducive environment to fair trade. Consumers have responsibilities to meet and these are :
1. Critical Awareness This refers to the responsibility of being inquisitive and questioning about the availability, price and quality of goods and services we use. Consumption decisions should not be self centred, but rational and sensible.
2. Action The responsibility to assert ourselves act to ensure that we get a fair deal in the market place. As long as we remain passive consumers, we will continue to be exploited.
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3. Environmental Awareness This refers to the responsibility to understand the environmental consequences of our consumption and actions. We should recognise our individual and social responsibility to conserve natural resources and protect the earth for future generations.
4. Social Concern This is the responsibility to be aware of the impact of our consumption on other citizens, especially disadvantaged and powerless groups whether in local , regional, international.
5. Solidarity This means the responsibility of the consumer to organise themselves into powerful groups and develop the strength and influence to protect and promote their interests.
CONTRACT OF LEASE
The definition of the Contract of Lease
A lease, by legal definition, is considered to be a contract that allows the use or occupation of property for a specific period of time, with a specified amount of rent. There are different lease types, all with variable conditions and subject to the laws governing each state.
A lease is a contract calling for the lessee (user) to pay the lessor (owner) for use of an asset.
A rental agreement is a lease in which the asset is tangible property. Leases for intangible property could include use of a computer program (similar to a license, but with different provisions), or use of a radio frequency (such as a contract with a cell-phone provider). A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from lawnmowers and washing machines to handbags and jewellry.
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A cancelable lease is a lease that may be terminated solely by the lessee or solely by the lessor. A non-cancelable lease is a lease that cannot be so terminated. In common parlance, “lease” may connote a non-cancelable lease, whereas “rental agreement” may connote a cancelable lease.
The lease will either provide specific provisions regarding the responsibilities and rights of the lessee and lessor, or there will be automatic provisions as a result of local law. In general, by paying the negotiated fee to the lessor, the lessee (also called a tenant) has possession and use (the rental) of the leased property to the exclusion of the lessor and all others except with the invitation of the tenant. The most common form of real property lease is a residential rental agreement between landlord and tenant. The relationship between the tenant and the landlord is called a tenancy, and the right to possession by the tenant is sometimes called a leasehold interest. A lease can be for a fixed period of time (called the term of the lease) but (depending on the terms of the lease) may be terminated sooner.
Under normal circumstances, owners of property are at liberty to do what they want with their property (for a lawful purpose), including dealing with it or handing over possession of the property to a tenant for a limited period of time. If an owner has surrendered possession to another (i.e., the tenant) then any interference with the quiet enjoyment of the property by the tenant in lawful possession is itself unlawful.
Similar principles apply to real property as well as to personal property, though the terminology would be different. Similar principles apply to sub-leasing, that is the leasing by a tenant in possession to a sub-tenant. The right to sub-lease can be expressly prohibited by the main lease, sometimes referred to as a "master lease".
The essentials of a valid lease viz. what is to be leased, the duration of the lease, the rent to be paid, and low leases are terminated
A lease contains three essential items:
An agreement to let you (the tenant) have the temporary use and enjoyment of the property;
An undertaking by the property owner to give you possession;
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A commitment from you to pay the rent. In a written lease it is important that the property is specified by its full street address, suburb and town (or farm name, number and magisterial district). An erf number (where it is known) may also be recorded, but make sure that it corresponds with the street address.
An agreement can be a contract of lease only if:
A definite period is stipulated; The lease is to continue until the occurrence of a certain event, of which the
precise date may be unknown (such as the death of the tenant or property owner);
The lease can be terminated by either the property owner or the tenant; The lease is for an indefinite period, with rent payable periodically - in which
case it becomes a 'periodic' lease.
Essentials of a Valid Lease:A lease is a form of contract. To be valid, a lease must meet essentially the same requirements as any other contract:
1) Offer and acceptance -The parties must reach a mutual agreement on all the terms of the contract.
2) Consideration -The lease must be supported by valid consideration. Rent is the normal consideration given for the right to occupy the leased premises. However, the payment of rent is not essential as long as consideration was granted in creating the lease itself. Sometimes, for instance, this consideration is labor performed on the property. Because a lease is a contract, it is not subject to subsequent changes in the rent or other terms unless these changes are in writing and executed in the same manner as the original lease.
3) Legal objectives-The objectives of the lease must be legal. 4) Parties and capacity – as in all forms of commercial contract the parties
need to be clearly identified and have the legal capacity (distinct from financial capacity) to contract. In commercial leasing arrangements landlords and tenants will almost invariably be companies or associations, natural persons or trustees of a trust. Although the legal capacity of parties is not normally an issue, checks should be made to verify the status of the parties. Trustees, for example, must have the express power under the trust deed to lease. The financial capacity, although not relevant to the valid creation of a lease, may be significantly different from what was anticipated through the use of a similarly named ‘shelf’ company, which is not adequately capitalised or funded. Capacity to contract -The parties must have the legal capacity to contract.
5) • Term – a commencement date must be fixed and the duration should be expressed in a manner that is certain, ideally referenced to a number of days, months or years.
6) • Written – all legal leases are required to be in writing in the form of a deed under the Conveyancing Act or in a form registrable for land under the Real Property Act.
7) • Premises – the leased premises must be ascertainable with certainty. This does not require that plans of the leased premises are included. Premises descriptions are adequate if defined within the context of a building or identified by reference to the building structures.
8) • Rent – if the parties intend that rent be payable under the lease it is necessary that the rent payable be expressed with certainty. It is possible,
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however, for a lease to be granted free of rent, but this arrangement should be explicitly stated.
9) • Registration – Real Property Act land requires that leases, where the initial term (and any option term) exceeds three years, must be registered to pass a legal leasehold interest and to obtain protection of indefeasibility of title. If registered, any other party dealing with the property will do so subject to the lease. If the lease is not registered the third party is not required to recognise the lease. Leases with terms (including any options) of three years or less need not be registered and a person dealing with the land will be subject to such leases.
Rules for leases of 10 years or more
A long-term lease is simply a lease in which the agreement term is ten years or longer. A long-term lease is typically an option used for commercial real estate rentals - your apartment or home rental should not be subject to a long-term lease, unless under very special circumstances.
Duties of the landlord and of the tenant
Property owner and tenant
The parties to a lease agreement are usually the property owner and tenant. Each has specific duties in law that must be adhered to - unless both have agreed to vary or qualify these duties in particular ways.
In most written leases of residential property, common-law duties will be varied - usually in favour of the owner.
DUTIES OF THE PROPERTY OWNER The prime duty of a property owner is to give a tenant occupation and control of the property. Furthermore, the owner has to maintain the property in its proper condition, subject to fair wear and tear (defined as the 'unavoidable consequence of the passage of time'). The owner must also ensure that normal running repairs to the property are carried out.
A second important duty of the owner is a guarantee that the tenant will enjoy the undisturbed use and enjoyment of the property for the duration of the lease. This duty has three facets:
The property owner must not unlawfully interfere with the tenant's rights although he or she is entitled, in certain circumstances, to interfere lawfully if, for instance, the tenant has to vacate the premises temporarily to allow necessary repairs to be done. Although an owner also has a right of inspection, this right must be exercised in a reasonable manner.
The owner must protect the tenant against being disturbed by 'third parties' who may claim a stronger right to the property than the tenant. For example,
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if you sub-let property from a lessee whose lease is invalid (perhaps because it has not been drawn up properly), you could be evicted by the original owner of the property. If this happens, the person who sub-let the property to you is obliged to protect you from being evicted.
If you were evicted (and in most such cases you would be), you would be entitled to sue the person who sub-let the property to you for breach of contract, because he or she agreed to let you have the use of the property - and obviously, if evicted, you would not have that use.
Note, however, that as soon as the original owner (or another 'third party' with a stronger claim to the property than yourself) approaches you, you must notify the person who sub-let the property to you to enable him or her to take timely action in your defence.
At the same time you must vigorously resist the third party's claim.
The owner is not bound to protect you against a disturbance of your occupation by a superior force, such as war or an act of God. Usually in a written agreement of lease, total or partial destruction of the premises allows you a rebate in rental and the courts have followed this line.
DUTIES OF THE TENANT As a tenant, you also have duties towards the property owner:
Your main duty is to pay the rent. You are released from this obligation only if the owner breaks the agreement or, in certain circumstances, your possession of the property is disturbed by superior forces (such as war or an act of God). The date on which rent must be paid is usually specified in the lease. In the absence of such a provision, the general rule is that rent is payable in arrears - either upon expiry of the lease, or, in the case of periodic leases, on expiry of each period (one month if rent is paid monthly).
You must use the property for the purpose for which it was let. If this is not specified in the agreement, you may use it for its 'natural function', as a flat or dwelling. You must always use the leased property in a reasonable manner.
When you vacate the property, it must be in the same condition as when you took possession of it, allowing for reasonable wear and tear. If the property is damaged by your guests, servants or children, you are held responsible.
The principle of Huur gaat voor koop
Huur gaat voor koop. A loose translation might be: rights under a lease can be enforced despite a transfer of ownership of the leased premises, whether the new owner knew of the lease or not.
The result of this rule of law is that a tenant with a valid lease can resist a claim by a new owner for ejectment of the tenant from the leased premises and can enforce the terms of the lease entered into with the previous owner.
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The simplest manifestation of this principle of the Roman-Dutch Law can be found when a property that is rented by a Lessee, is sold by the owner to a third party. Here the effect of “huur gaat voor koop” is that the Purchaser is bound to the lease agreement and the Lessee is entitled to remain in occupation in accordance with the terms thereof. The Purchaser cannot plead ignorance and the right of the Lessee is stronger than the right of ownership of the Purchaser, regardless of whether the Purchaser had notice of the existence or the terms of the lease.
'Huur gaat voor koop'
Generally speaking, the law regards the set of legal rights associated with ownership as the most complete and comprehensive array of rights a person can hold and exercise. However, these rights are not without limit or restriction, and one such restriction exists where a tenant is leasing a property which has been purchased.
By law, despite the sale and even the transfer of the property to the new owner, the tenant of the property which has been sold is entitled to continue occupying the property until his/her lease expires. The legal principle at work here is called 'huur gaat voor koop', which effectively means that a lease agreement takes precedence over a sale.
If the purchaser wishes to move into the property, he or she is therefore not entitled to do so until the tenant's lease has expired and he/she has moved out.
However, if the purchaser does not intend to occupy the property him/herself, but rather has bought it as an investment, such purchaser then takes over the role of landlord from the seller as soon as transfer of the property into his/her name has been registered.
Huur gaat voor koop
The concept "huur gaat voor koop" refers to the situation whereby a property, subject to a lease, is sold to a purchaser and a tenant occupies such property. The tenant is legally entitled to remain in such property despite the propery having been sold. In other words, the new owner may not evict the tenant, provided he adheres to the terms and conditions of the lease, which remains valid and binding until legal termination thereof ; either by the institution of legal process, effluxion of time or mutual agreement.
Remedies of landlords and tenants in the event of Breach of Contract
Although much more information is contained in the section on remedies, you may have a choice of remedies:
(1) Compensatory Damages - money to reimburse you for costs to compensate for your loss.
(2) Consequential and Incidental Damages - money for losses caused by the
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breach that were foreseeable. Foreseeable damages means that each side reasonably knew that, at the time of the contract, there would be potential losses if there was a breach.
(3) Attorney fees and Costs - only recoverable if expressly provided for in the contract.
(4) Liquidated Damages - these are damages specified in the contract that would be payable if there is a fraud.
(5) Specific Performance - a court order requiring performance exactly as specified in the contract. This remedy is rare, except in real estate transactions and other unique property, as the courts do not want to get involved with monitoring performance.
(6) Punitive Damages - this is money given to punish a person who acted in an offensive and egregious manner in an effort to deter the person and others from repeated occurrences of the wrongdoing. You generally cannot collect punitive damages in contract cases.
(7) Rescission - the contract is canceled and both sides are excused from further performance and any money advanced is returned.
(8) Reformation - the terms of the contract are changed to reflect what the parties actually intended.
Bear in mind that it often makes sense for both parties to directly negotiate a settlement for a breach. However, if the matter involves a significant amount of money, a wise option would be to retain an attorney to help you propose settlement terms and to review any proposed settlement in advance.
Other alternatives for dispute resolution include mediation and arbitration. These avenues for obtaining a remedy may be more cost effective than simply filing a lawsuit and letting the court settle the dispute.
Protection for the tenant if the property is sold
If the flat or house you are renting is sold by the owner, the protection that you are given against possible eviction will depend on the type of lease you have signed. In so-called short leases (under 10 years) the rule of 'huur gaat voor koop' applies - that is, the contract of lease takes precedence over the contract of sale.
SHORT LEASE If the property is not subject to rent control you are protected from eviction for the period of the lease for as long as you are in residence.
For example, if you have recently agreed, either in writing or verbally, to a year's lease, you will be protected until that lease has expired unless, of course, the lease contains a clause specifying a period of notice.
If the period of the original lease has expired, your lease becomes 'periodic' - in other words, it is governed by the periodic payment of rent. If payment is made once a month, you can be given a calendar month's notice.
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If you are not in occupation of the premises, a 'short lease' will still protect your tenancy, as long as the purchaser is aware of the existence of the lease. It will not protect you if you are not occupying the property and:
The purchaser is not aware of the existence of a lease; The property was sold to a creditor of the original owner.
If the property is given or bequeathed to the new owner (that is, not having been sold to him or her), then you are protected regardless of whether the new property owner knows of the lease or not or whether you are in occupation or not.
If you are renting property from a person who is not the original owner of the property, but who has 'usufructuary' rights (rights of use and enjoyment) over the property, your tenancy will end if the person loses those rights.
LONG LEASE If you have a long lease (10 years or more), you are protected from eviction by any new owner, provided that the lease is registered against the title deeds of the leased property in the Deeds Registry. The effectiveness of a long lease depends upon the date on which it was concluded. Different rules apply, depending on whether the lease was signed on or after 1 January 1970, or before that date.
If you do not pay the rent
Obviously, if you do not pay your rent, you will have broken the terms of the lease and will have to vacate the property. Furthermore, an owner may also have the right to attach your moveable goods on the property in lieu of rent. This is known as a tacit hypothec.
Unless the lease provides to the contrary, an owner has a tacit hypothec over moveables brought onto the property, and over fruits and crops produced by the property. This is a security for arrear rent; it means that the owner may attach the moveables and have them sold to pay off unpaid rent. The owner can also, in certain circumstances, attach goods on the property belonging to a third party, for example, a hire-purchase company.
Before this can be done, the owner must ensure that the following requirements have been met:
The goods must have been brought onto the leased premises with the knowledge and consent of the company;
The tenant must have intended to use the goods indefinitely; The hire-purchase company fails to inform the property owner that it is the
owner of the goods; The property owner is unaware that the goods do not belong to the tenant
(but to the hire-purchase company). The hypothec exists only in respect of arrear rent (not in respect of arrear electricity or similar charges) and only in regard to goods actually present on the leased premises at the time.
TERMINATION OF LEASE
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Moving out
A lease usually ends in the same way as any other contract: when the agreed duration ends, cancellation following breach of contract or by mutual agreement. Note that there are also three special circumstances in which a lease may be ended:
The pitfalls of sub-letting property
Sub-letting - whereby the tenant under the first lease becomes the sub-lessor - is the same as an ordinary contract of lease. The original lease continues to regulate the relationship between the parties who agreed to it - for example, an agreement to pay rent once a month.
Because the two agreements are separate, the owner of the property cannot enforce any rights against sub-tenants, who must pay rent to the original tenant, who, in turn, pays rent to the owner. The owner cannot claim any payment from the sub-tenants. Once the original lease expires, however, the owner may eject the sub-tenants, as the sub-tenants' rights depend on the lease of their sub-lessor (in this instance, the original tenant).This does not apply if the premises are rent controlled, when neither the tenant nor the sub-tenant can normally be ejected. If a lease does not specifically prohibit sub-letting, a tenant may sub-let the property, provided that it is not rural property and/or land. However, the proposed sub-tenant must not be a person to whom the owner could reasonably object.
A tenant who sub-lets property in violation of a clause in the lease that forbids this is guilty of breach of contract. This will entitle the owner to terminate the lease and eject the sub-tenant, even if there is no cancellation clause in the lease.
TERMINATION BY NOTICE If you have a lease on a property for a fixed period, but you have to leave before the agreed time, tell the owner or the agent as soon as possible. He or she may be able to find another tenant to replace you. Remember, though, that even if you do not occupy the property, you will be liable for the rent until another tenant leases the property.
In the case of a 'periodic' lease - of indefinite duration, but where the rent is payable at fixed intervals - the lease is terminated by notice given by either the owner or the tenant. This would be the case where a tenant remains in occupation after the written lease has expired. If no notice period is set out in the lease, 'reasonable notice' must be given.What is 'reasonable' is usually determined by the 'periodic' payment of rent (hence the description 'periodic lease'). If, for instance, rent is payable on a monthly basis, a calendar month's notice must be given.
TERMINATION BY DEATH A lease terminates on the death of one of the parties in the following circumstances:
If it is provided for in the lease; If the lease stipulates that the owner can terminate the agreement whenever
he or she wishes and the owner dies. If the lease provides that the tenant can terminate the agreement whenever
he or she wishes and the tenant dies.
TERMINATION BY INSOLVENCY A lease does not end if the owner becomes insolvent.
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Should the property be sold, the sale is still subject to the lease under the rule of 'huur gaat voor koop' whereby the contract of lease takes precedence over the contract of sale. This does not apply to long leases.
If the tenant becomes insolvent, the trustee of the insolvent estate may terminate the lease by written notice to the property owner. The trustee must, within three months of being appointed, inform the owner if the lease is to continue and go on paying the rent in time. If this is not done, the lease is terminated.
(These topics carry weighting of 7% of the examination.)
LAW OF AGENCY Definition of a Contract of Agency
1) Agency is a contract that exists between 2 people in terms of which one person (agent) is given authority by another (principal) to enter into contracts binding the principal and others (3rd parties).
2) Agency is an area of law dealing with a contractual or quasi-contractual relationship between at least two parties in which one, the principal, authorizes the other, the agent, to represent her or his legal interests and to perform legal acts that bind the principal. The agent has a fiduciary relationship with and is under a legal duty to act in the best interests of the principal. An agency can be expressly created for various purposes by contract or appointment, but it can also be implied from the conduct of the parties. Both an "attorney-in-fact" and an "attorney at law" agents. In the former the agent is given a "power of attorney" also known as a mandate in civil law jurisdictions.
3) The law of agency is an area of commercial law dealing with a contractual or quasi-contractual, or non-contractual set of relationships when an agent is authorized to act on behalf of another (called the Principal) to create a legal relationship with a Third Party. Succinctly, it may be referred to as the relationship between a principal and an agent whereby the principal, expressly or impliedly, authorizes the agent to work under his control and on his behalf. The agent is, thus, required to negotiate on behalf of the principal or bring him and third parties into contractual relationship.
This branch of law separates and regulates the relationships between:
Agents and Principals; Agents and the Third Parties with whom they deal on their Principals' behalf; and Principals and the Third Parties when the Agents purport to deal on their behalf.
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The common law principle in operation is usually represented in the Latin phrase, qui facit per alium, facit per se, i.e. the one who acts through another, acts in his or her own interests and it is a parallel concept to vicarious liability and strict liability in which one person is held liable in Criminal law or Tort for the acts or omissions of another.
Principal
In commercial law, a principal is a person legal or natural–who authorizes an agent to act to create one or more legal relationships with a third party. This branch of law is called agency and relies on the common law proposition qui facit per alium, facit per se (Latin "he who acts through another, acts personally").
It is a parallel concept to vicarious liability and strict liability (in which one person is held liable for the acts or omissions of another) in criminal law or torts.
Duties of the Principal
The relationship between a Principal and an Agent is fiduciary which requires the Agent to be loyal to the Principal. This involves duties:
Not to accept any new obligations that are inconsistent with the duties owed to the Principal. Agents can represent the interests of more than one Principal, conflicting or potentially conflicting, only on the basis of full and timely disclosure or where the different agencies are based on a limited form of authority to prevent a situation where the Agent's loyalty to the any one of the multiple Principals is compromised. For this purpose, express clauses in the agreement signed by each Principal with the Agent may identify specific types or categories of activities that do not breach the duty of loyalty and so long as these exceptions are not unreasonable, they bind the Principals.
Not to make a private profit or unjustly enrich himself from the agency relationship. Principals usually include a power in their contract with the Agents allowing them to inspect the Agents' accounts if reasonable suspicion of improper behavior emerges.
In return, the Principal must make a full disclosure of all information relevant to the transactions that the Agent is authorized to negotiate and pay the Agent either the commission or fee as agreed, or a reasonable fee if none were previously agreed on.
Authority
For these purposes, the Principal must give, or be deemed to give, the Agent authority to act.
Actual authority
This arises where the Principal's words or conduct reasonably cause the Agent to believe they have been authorised to act. This may be expressed as a contract or implied because what is said or done make it reasonably necessary for the person to assume the powers of an Agent. If it is clear that the Principal gave actual authority to Agent, all the Agent's actions falling within the scope of the authority given bind the Principal. This results even if, having actual authority, the Agent in fact acts fraudulently for his own benefit, unless the Third Party was aware of the Agent's personal agenda. If there is no contract but the Principal's words or conduct reasonably led the Third Party to believe that the Agent was authorised to act, or if what the
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Agent proposes to do is incidental and reasonably necessary to accomplish an actually authorised transaction or a transaction that usually accompanies it, then the Principal is bound.
Apparent or ostensible authority
If the Principal's words or conduct would lead a reasonable person in the Third Party’s position to believe that the Agent was authorised to act, say by appointing the Agent to a position which carries with it agency-like powers, those who know of the appointment are entitled to assume that there is apparent authority to do the things ordinarily entrusted to one occupying such a position. If a Principal creates the impression that an Agent is authorised but there is no actual authority, Third Parties are protected so long as they have acted reasonably. This is sometimes termed "Agency by Estoppel" or the "Doctrine of Holding Out", where the Principal is stopped from denying the grant of authority if Third Parties have changed their positions to their detriment in reliance on the representations made.
Authority by virtue of a position held
For example, partners have apparent authority to bind the other partners in the firm, their liability being joint and several, and in a corporation, all executives and senior employees with decision-making authority by virtue of their declared position have apparent authority to bind the corporation.
Even if the Agent does act without authority, the Principal may ratify the transaction and accept liability on the transactions as negotiated. This may be express or implied from the Principal's behaviour, e.g. if the Agent has purported to act in a number of situations and the Principal has knowingly acquiesced, the failure to notify all concerned of the Agent's lack of authority is an implied ratification to those transactions and an implied grant of authority for future transactions of a similar nature.
Duties of an agent
An agent owes the principal a number of duties. These include:
TO PERFOM THE MANDATE. A duty to undertake the task or tasks specified by the terms of the agency (that is, the agent must not do things that he has not been authorised by the principal to do);
DUTY TO USE DUE CARE AND SKILL. A duty to discharge his duties with care and due diligence; and
DUTY OF UTMOST GOOD FAITH (uberrima fides). A duty to avoid conflict of interest between the interests of the principal and his own (that is, the agent cannot engage in conduct where stands to gain a benefit for himself to the detriment of the principal).
DUTY TO ACCOUNT. An agent handling money or other property on behalf of the principal is under an obligation to account to the principal. He must keep the principal’s money separate from his, because if it is mixed, then the whole lot will held to belong to the principal. The agent must render a full and accurate account of the mandate.
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An agent must not accept any new obligations that are inconsistent with the duties owed to the principal. An agent can represent the interests of more than one principal, conflicting or potentially conflicting, only after full disclosure and consent of the principal.
An agent also must not engage in self-dealing, or otherwise unduly enrich himself from the agency. An agent must not usurp an opportunity from the principal by taking it for himself or passing it on to a third party.
Rights of an agent
RIGHT TO REIMBURSEMENT The agent is entitled to be reimbursed all expenses and be indemnified any
loss incurred by him in the course of executing his mandate.
REMUNERATION The principal must pay the agent either a prearranged commission, or a
reasonable fee established after the fact.
FULL DISCLOSURE In return, the principal must make a full disclosure of all information relevant
to the transactions that the agent is authorized to negotiate.
Types of agency and the principal1) Universal agency provides broad authority for agent to act on behalf of
principal. 2) General agency limits agent authority to a particular type of transaction or
business; agent may bind principal. 3) Special agency is also called "limited agency"; agent is not able to bind
principal. 4) Del Credero Agency an agent who sells on behalf of his principal and who
guarantees that payment in respect of the goods sold will be made. The commission he gets for giving such a guarantee is known as the Del credero commission.
5) Broker is a person who acts on behalf of 2 parties until they are ad idem. He is an agent of both parties and he gets his commission from both parties.
6) Factor is an agent who sells goods of the principal in his own name. he usually has the goods in his possession and he is at liberty even to sell them on credit.
7) Stock broker8) Auctioneer9) State agent10) Procurator in rem suam
Creating agency 1. Express authority is given in a written contract that defines positions,
duties, and expectations of parties 2. Implied authority is the agent's right to act where it is customary or the
norm in the specific business context 3. "Ostensible" agency is when actions cause a third party to assume someone
is an agent
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4. Agency by estoppel is created when an agent's unauthorized activity causes a third party to believe the agent has that authority.
5. Agency by ratification occurs when the unauthorized action of the agent is accepted by the principal after the fact.
6. By agreement as usual there should be offer and acceptance leading to a contract of agency.
7. Agency implied by Law for example; upon being declared insolvent, the trustee automatically has power confirmed upon him by law to act on behalf of the insolvent.
Liability of the parties of contracts entered into by the agent
Liability of agent to third party
If the agent has actual or apparent authority, the agent will not be liable for acts performed within the scope of such authority, so long as the relationship of the agency and the identity of the principal have been disclosed. When the agency is undisclosed or partially disclosed, however, both the agent and the principal are liable. Where the principal is not bound because the agent has no actual or apparent authority, the purported agent is liable to the third party for breach of the implied warranty of authority.by
Liability of agent to principal
If the agent has acted without actual authority, but the principal is nevertheless bound because the agent had apparent authority, the agent is liable to indemnify the principal for any resulting loss or damage.
Liability of principal to agent
If the agent has acted within the scope of the actual authority given, the principal must indemnify the agent for payments made during the course of the relationship whether the expenditure was expressly authorized or merely necessary in promoting the principal’s business.
Termination of the agent’s authority
An agent's authority can be terminated at any time. If the trust between the agent and principal has broken down, it is not reasonable to allow the principal to remain at risk in any transactions that the agent might conclude during a period of notice.
1. By the principal revoking the agency – However, principal cannot revoke an agency coupled with interest to the prejudice of such interest. Such Agency is coupled with interest. An agency is coupled
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with interest when the agent himself has an interest in the subject-matter of the agency, e.g., where the goods are consigned by an upcountry constituent to a commission agent for sale, with poor to recoup himself from the sale proceeds, the advances made by him to the principal against the security of the goods; in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold, nor is the agency terminated by death or insanity.
2. By the agent renouncing the business of agency;
3. By the business of agency being completed;
4. By the principal being adjudicated insolvent
5. Expiry of time
6. Renunciation
7. Death, insolvency, insanity of either the principal or agent
8. Impossibility of performance
9. Destruction of subject matter
The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to bind the principal ,though he can always do so, before such authority has been so exercised
Further, if the agency is for a fixed period, the principal cannot terminate the agency before the time expired, except for sufficient cause. If he does, he is liable to compensate the agent for the loss caused to him thereby. The same rules apply where the agent, renounces an agency for a fixed period. Notice in this connection that want of skill continuous disobedience of lawful orders, and rude or insulting behavior has been held to be sufficient cause for dismissal of an agent. Further, reasonable notice has to be given by one party to the other; otherwise, damage resulting from want of such notice, will have to be paid ,the revocation or renunciation of an agency may be made expressly or impliedly by conduct. The termination does not take effect as regards the agent, till it becomes known to him and as regards third party, till the termination is known to them
When an agent’s authority is terminated, it operates as a termination of subagent also.
Advantages and disadvantages of employees and independent contractors
What are the Advantages/Disadvantages of Employees vs. Contractors?Question: What are the Advantages/Disadvantages of Employees vs. Contractors?
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When you start a new business, you will invariably decide that you need help. Most small business owners start out by hiring outside contractors to do work for them, but at some point you may decide to hire an employee or two. This article discusses the advantages and disadvantages of hiring employees vs. independent contractors.
Answer:
Hiring Employees
An employee is a person who works in the service of another person under an express or implied contract of hire, under which the employer has the right to control the details of work performance (Black's Law Dictionary). When you hire an employee, you get the advantage of being able to completely control and direct that person's work during work time, to train the person in the way you want the job done, and to require that person to work only for you. You have few restrictions or limitations on what you can assign to the employee or about your ability to terminate the employee without paying out a contract.
On the other hand, employees come with a boat-load of laws and regulations attached to them. Both the federal government and your state regulate the payment of wages or salaries, overtime, and other work rules. You must also comply with payroll tax requirements, including paying half of the FICA taxes (Social Security and Medicare) for each employee, and collecting the other half from the employee. Other responsibilities include payment of unemployment insurance and worker's compensation insurance.
Hiring Independent ContractorsThe advantages and disadvantages of independent contractors are the opposite of those for employees. You can assign duties to an independent contractor and impose a deadline and work product, but you cannot tell that person how to get the job done. An independent contractor can work for others, can often set his or her hours of work, and often provides his/her own tools.
On the other hand, you have few reporting or tax responsibilities for independent contractors. You must report his/her the amount you have paid each year for that person on a Form 1099-MISC, but you don't have to withhold or pay FICA taxes on these payments. The payroll responsibilities for an independent worker are significantly less than for an employee.
In conclusion, you should consider hiring an employee if:
The work needs to be done under your supervision You want to control the hours of work and the tools and equipment used by the
worker If this is a long-term need (such as preparing products for shipping), and If this work is essential to your business and not a peripheral job. For example, a
marketing person is essential, while a cleaning crew may not be.
The decision to hire a worker as an employee or independent contractor is done on a case-by-case basis, but you should be aware that the IRS considers a worker to be an employee unless you can prove otherwise.
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Pros and Cons of Hiring Independent Contractors
Learn the advantages and disadvantages of using independent contractors rather than employees.
There are many benefits to hiring independent contractors (ICs), but there are some disadvantages as well. Before you decide how to staff a particular job, you'll need to weigh these pros and cons -- and make sure that your decision will pass muster with state auditors.
Benefits of Using Independent Contractors
There are several major advantages to using independent contractors rather than employees, with financial savings topping the list.
You will probably save money. Even though most employers pay ICs more per hour than they would pay employees to do the same work, it usually ends up costing employers more to hire employees. When you hire an employee, you will have to pay a number of expenses that you don't have to pay for ICs, including employer-provided benefits, office space, and equipment. You will also have to make required payments and contributions on behalf of your employees, including:
your share of the employee's Social Security and Medicare taxes, state unemployment compensation insurance, and Workers' compensation insurance.
All together, these payments can easily increase your payroll costs by 20% to 30% -- or more.
You have staffing flexibility. Working with ICs allows employers greater leeway in hiring and letting go of workers, which can be especially advantageous for employers with fluctuating workloads. You can hire an IC for a specific task or project, knowing that the worker will be gone when the job is finished. You won't have to face the trauma, expense, and potential legal trouble that often accompany firings and layoffs.
You may also enjoy greater efficiency when you use ICs. Because most ICs bring specialized expertise to the job, they are usually productive immediately, eliminating the time and cost of training.
You reduce your exposure to lawsuits. Employees have a wide array of rights under state and federal laws -- and therefore, a variety of legal claims they can potentially bring against their employers for violating those rights. Because ICs are independent businesspeople, they are not protected by many of these laws. Among the rights that are available to employees but not to ICs are:
the right to receive at least the minimum wage and, for employees who qualify, overtime compensation at the rate of one-and-a-half times their regular hourly wage
protection from discrimination on the basis of race, national origin, color, religion, gender, and so on
the right to form a union, and the right to take time off to care for a sick family member or bond with a new child.
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Employees may also be able to sue their employers for wrongful termination. ICs cannot bring this type of lawsuit (although there may be restrictions on your right to terminate an IC relationship, depending on what the written IC agreement says.
Disadvantages of Using Independent Contractors
After reading about the possible benefits of hiring ICs, you may be thinking that you'll never hire an employee again. But there are also some significant drawbacks to using ICs -- and the risk that your classification decision may be questioned by government agencies.
You have less control over your workers. Unlike employees, whom you can closely supervise and monitor, independent contractors enjoy a certain autonomy to decide how best to do the task for which you hired them. If you interfere too much in an IC's work, you risk making the IC look like an employee -- for whom the law says you should be paying payroll taxes, workers' compensation insurance premiums, and more. If you want to exercise significant control over what your workers are doing and how they're doing it, classify them as employees.
Your workers will come and go. Many employers use ICs only as needed for relatively short-term projects. This means that workers are constantly coming and going, which can be inconvenient and disruptive. And the quality of work you get from various ICs may be uneven. Employers who want to rely on the same workers day after day are better off hiring employees rather than ICs.
Your right to fire an IC depends on your written agreement. You do not have an unrestricted right to fire an IC, as you might with your employees. Your right to terminate an IC's services is limited by the terms of your written IC agreement. If you fire an IC in violation of the agreement, you could be liable for damages.
The Common law duties of the employer and the employee
Employer's Duties
What is required of employers
The common law imposes basic duties on both employers and employees (see employees' duties). Employers must pay the agreed wages, provide work in certain circumstances and ensure safe working conditions. The Labour Relations Act, 1995, imposes additional duties on the employer which do not have to be specifically included in each contract of employment, as the courts have held them to be part of every employment relationship.
The duties of employers to employees
The payment of wages and the provision of safe working conditions are common-law duties owed by employers to employees.
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Furthermore, many other statutory duties (for example, safety measures, wage-regulating measures and minimum-wage agreements), all of which stipulate minimum conditions of employment, are imposed upon employers. (See employees' rights.) An employer's responsibilities also extend to three other areas: income tax, unemployment benefits and workers' compensation.
DUTY TO PAY Employers are legally bound to pay their employees' wages but, although this obligation forms part of every contract of employment, it is generally dependent on employees performing their part of the bargain - to work. The general rule is 'no work, no pay'.
Employers who specifically instruct employees not to come to work - for example, when workers are suspended or put on short time - are nevertheless obliged to pay for the period of absence. The same rule applies if employers are unable to provide work (the legal term being 'damage lies where it falls').
On the other hand, if an employee is prevented from reaching a place of work, because of floods or washaways, for example, the loss of a day's pay 'should surely fall on his own shoulders and not on the shoulders of his master' - Norman-Scoble, C and Gordon-Lloyd, R: Law of Master and Servant in South Africa (Durban, Butterworth, 1956).
Case History - A case of incapacity
Davies was seriously injured while on duty as a senior employee of a garden service company. His employer eventually dismissed him on the grounds of his incapacity.
The Industrial Court ruled that an employer has a greater duty to accommodate an employee disabled by a work-related injury or illness.
The employer must ascertain whether the employee is capable of performing the work he or she previously performed and adapt it if necessary. If the employee cannot do the work he or she was employed to do, the employer must ascertain whether alternative work is available in the organisation, even if it is at a lower salary. Although Davies had lost the use of his right arm, he could do much of the work he had done before and most of what remained could be done by others. The court found that the dismissal was therefore unfair and ordered the company to pay him compensation.
(Davies v Clean Deale CC, 1992)
DUTY TO PROVIDE WORK The general rule is that employers are not obliged to supply work, they are only required to pay wages. In certain circumstances, however, the courts have held that employers are obliged to provide work, with the failure to do so entitling an employee to terminate a contract and sue for damages.
In the case of jobs that give employees the opportunity to increase their reputations, the employers' duty to provide work will be inferred. For example, actors and singers must be given proper opportunities for public performances - unless there is something to the contrary in the contract.
Contracts of service that include teaching - for example, articles of clerkship and apprenticeship - will also, by implication, include a duty to provide work. Where the
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employee's salary depends on work being provided (for example, piece rates), the duty to provide work will be implied. The courts have held that a person who is employed at a wage is only entitled to wages.
SAFE WORKING CONDITIONS Employers are obliged to provide safe working conditions. Failure to do so may justify the suspension of a contract by an employee until safe conditions are created or the ending of the contract and a claim for damages.
EMPLOYMENT OPPURTUNITIES Although the labour court has made no judgments on practices that prejudice employment opportunities, selection criteria other than merit could, depending on the circumstances, constitute an unfair labour practice. For instance, the hiring only of white workers, black workers or male workers, regardless of merit, might constitute an unfair labour practice. Likewise, the practice of only promoting men would be sexual discrimination and might constitute an unfair labour practice.
WORK SECURITY The courts have held that an unfair dismissal by an employer is prejudicial to an employee's work security. Employers may be ordered to reinstate employees who have been unfairly dismissed.
PHYSICAL WELFARE The definition states that 'prejudice' to the 'physical welfare' of an employee is an unfair labour practice. Unsafe working conditions, therefore, might well prejudice the physical welfare of employees. The safety of an employee is primarily the responsibility of the employer. The common law and specific safety legislation impose a duty on the employer to provide safe working conditions. Employees must, however, also take reasonable care not to endanger themselves. (See health and safety at work.)
Employees' Duties
What is required of employees
Both employers and employees are bound by the common law to certain basic duties. Employers, on the one hand, have a responsibility to pay agreed wages, to provide work in certain circumstances and to maintain safe working conditions (see employer's duties).
Employees, on the other hand, have a legal duty to work, obey orders, give proper service and keep their employers' trade secrets.
THE DUTY TO WORK
Once you have agreed to work, you are contractually bound to do so, the general principle being 'no work, no pay'. If, for instance, you report half-an-hour late for duty, your employer is legally entitled to deduct half-an-hour's wages from your weekly pay or monthly salary. Generally, your employer may not deduct more than the amount applicable to the time you were late (see fines). If you are for some reason unable to report for work, you cannot send a substitute to do your job - unless your employer has agreed to this.
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SHORT TIME If you are put on short time because of, say, a shortage of work or a fire or flood at your factory, the common-law rule is that your employer must pay your full wage or salary unless:
A wage-regulating measure allows short time with payment to be made only for time worked; or
At the time you were hired, there was an express agreement to work short time with payment only for time worked.
ILLNESS Your employer does not have a common-law duty to pay you while you are off sick. However, if you are covered by the Basic Conditions of Employment Act, 1983, and wage-regulating measures, you would be entitled to wages while absent from work through illness for a prescribed number of days only. If you are not covered by these laws, make sure when you are hired that provision is made for sick pay. Domestic workers are now also covered by these provisions of the Act. ABSENCE FROM WORK. In certain circumstances failure or refusal to work may entitle an employer not only to deduct wages for the period of absence, but also to dismiss the employee (see dismissal).
Case History - Refusal to work
Coetzee, a printer for the Argus Printing and Publishing Company, agreed in his contract of employment to work every day of the year except Christmas Day and New Year's Day. Despite a specific order to work on Union Day, he refused and was fired.
The court ruled that such wilful disobedience justified summary dismissal and Coetzee lost his case for notice pay.
(Coetzee v Argus Printing and Publishing Co, 1914)
OBEYING ORDERS
The courts have ruled that when you agree to work for an employer, you also agree to do the work in the way that your employer wants it done. In other words, your employer has the right to tell you what to do and how it should be done.
If you refuse to obey a reasonable and lawful instruction, you can, therefore, in certain circumstances, be summarily dismissed. Furthermore, you are not only bound to obey your employer's reasonable and lawful orders, you are also required to respect his or her authority. Disrespect towards an employer subverts the ability of that person to give orders and expect compliance. Insolence and disrespect have accordingly been held by the courts to be justifiable grounds for summary dismissal. (See dismissal.)
However, a refusal to carry out instructions must be serious and deliberate. If the refusal is minor or based on a misunderstanding, an employer is not entitled to dismiss an employee summarily.
Case History - Terms of employment may be changed reasonably
A manufacturer entered into negotiations with a union to temporarily increase production by requiring five of the 40 machine operators to operate two machines
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instead of one. This had been done before and the change would only last two months.
The parties were unable to agree and the company dismissed the operators for repeatedly refusing to obey a lawful instruction.
The Industrial Court ordered that the workers be reinstated on the grounds that the instruction was unreasonable and that the company was trying to change the terms of employment of the workers.
The Labour Appeal Court overturned the order, finding that a lawful and reasonable instruction had been given and that the refusal was serious, deliberate and repeated. Apart from the fact that the change was temporary, the second machine could be operated while the employee was standing waiting for the first machine to finish. The presiding officer agreed with the idea that employees do not have a vested right to preserve their working conditions unchanged from the moment they begin work: 'only if changes are so dramatic...that the employee undertakes an entirely different job...there is a right to refuse to do the job in the required manner'.
(A Mauchle t/a Precision Tools v National Union of Metalworkers of SA & others, 1995)
LAWFUL ORDERS Workers are expected to obey only lawful and reasonable orders. If, for instance, your employer orders you to steal another company's secrets or to ignore safety regulations or to resign from a trade union, you are entitled to refuse, because such orders are illegal.
Employees may also refuse to do work for which they are not employed. Thus, an accountant can refuse to sweep an office floor, a chauffeur can refuse to act as a gardener and a machine operator can refuse to act as a manual labourer providing, of course, that this was agreed on when the contract was entered into. For example, it was found that a worker was justified in refusing to teach an untrained woman how to trim a hat, because it was not an order within the scope of the duties the worker had undertaken to perform.
OVERTIME An employee cannot be ordered to work longer than the agreed hours of work. For example, a British typist who refused to type a letter at 5.15pm (the time she was due to finish work) was held to have been unfairly dismissed as there was no agreement in her contract that she had to work overtime (Kennell v Sanders and Sanders Ltd, 1972).
Courts have held that 'not every act of insubordination or disobedience ... will justify ... summary dismissal. It must be a serious and deliberate refusal'.
REASONABLE ORDERS An employer cannot expect employees to place their lives in danger. What is reasonable will depend on the job and the circumstances. It would be unreasonable, for example, to order a machine operator to operate a machine that is unsafe, but it would not be unreasonable to order a bomb-disposal expert to defuse a bomb, even though this is a life-threatening thing to do. The same principle applies to firefighters, police officers and soldiers.
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CONFLICTING ORDERS If an employee is given conflicting orders, the rule is that the order from the more senior person within the company is the one to be obeyed. However, the courts will take a lenient view if an employee disobeys a more senior person out of loyalty to a person who is an immediate superior.
GIVING PROPER SERVICE
It is an implied condition of every contract of employment that employees have a duty to do their jobs properly, to be honest and to give faithful service to their employers. An employee who is unfit for work by being drunk or under the influence of narcotic drugs, or who is negligent or dishonest, neglects this duty.
NEGLIGENCE While employees must do their work with diligence, an employer may not summarily dismiss an employee for making an occasional mistake. The degree of negligence that will justify dismissal depends on the type of job, the degree of proficiency required (and agreed upon) and the prejudice of the employer.
GOOD FAITH It is an implied condition of every contract of employment that employees have a duty to further the interests of their employers.
Included in this general duty is the duty not to compete with the employer, not to reveal trade secrets, not to use a position to obtain benefits without the consent of the employer and not to be dishonest in handling the employer's property.
Employees must look after their employers' property and give an accurate account of any employers' money for which they are responsible. They are not allowed to make a profit for themselves out of their employers' money; if they do, employers can insist that the profit be surrendered.
BRIBES Employees may not take bribes, use their employers' property without permission to make money for themselves, or take advantage of their employment to make any secret profit. (See bribery.)
PART-TIME JOBS Employees may not take jobs in their spare time that prevent them from devoting their time and energy to their full-time employers. They may not compete with their employers, either by doing 'backyard' work for clients or working for a competitor.
WHEN THE JOB ENDS Specific obligations may have been written into the contract that must be complied with even after the job ends. Some contracts have 'restraint of trade' clauses that stop employees from doing certain work at the end of the contract - such as work that may be in competition with their previous employers. (See contracts; skills and information.)
Generally, the duty of employees to keep their employers' secrets does not end when the job ends, and they may not use their former employers' secrets in their new jobs.
SAFETY
Employees have a duty to exercise due care, not only in respect of themselves, but also to their fellow workers. No compensation is paid to injured employees if the
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accident was caused by their 'serious and wilful misconduct'. Injury caused to fellow workers by negligence might expose employees to claims for damages. (See health and safety at work.)
The liability of the employer for the delicts of the employee
Vicarious liability
Vicarious liability in English law is a doctrine of English tort law that imposes strict liability on employers for the wrongdoings of their employees.
Generally, an employer will be held liable for any tort committed while an employee is conducting their duties. This liability has expanded in recent years following the decision in Lister v Hesley Hall Ltd to better cover intentional torts, such as sexual assault and deceit.
Historically, it was held that most intentional wrongdoings were not in the course of ordinary employment, but recent case law suggests that where an action is closely connected with an employee's duties, an employer can be found vicariously liable.
Justification for such wide recovery has been made in several areas. The first is that, as is common in tort law, policy reasons should allow those injured to have means of compensation. Employers generally have larger assets, and greater means with which to offset any losses.
Secondly, it is under the instruction of an employer by which a tort is committed; the employer can be seen to gain from the duties of their employees, and thus must bear the consequences of any wrongdoings committed by them.Lastly, it has been justified as a way to reduce the taking of risks by employers, and to ensure adequate precautions are taken in conducting business.
Vicarious liability is a legal doctrine that assigns liability for an injury to a person who did not cause the injury but who has a particular legal relationship to the person who did act negligently. It is also referred to as imputed negligence. Legal relationships that can lead to imputed negligence include the relationship between parent and child, husband and wife, owner of a vehicle and driver, and employer and employee. Ordinarily the independent negligence of one person is not imputable to another person.
Other theories of liability that are premised on imputed negligence include the respondeat superior doctrine and the family car doctrine.
The doctrine of respondeat superior (Latin for "let the master answer") is based on the employer-employee relationship. The doctrine makes the employer responsible for a lack of care on the part of an employee in relation to those to
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whom the employer owes a duty of care. For respondeat superior to apply, the employee's negligence must occur within the scope of her employment.
The employer is charged with legal responsibility for the negligence of the employee because the employee is held to be an agent of the employer. If a negligent act is committed by an employee acting within the general scope of her or his employment, the employer will be held liable for damages. For example, if the driver of a gasoline delivery truck runs a red light on the way to a gas station and strikes another car, causing injury, the gasoline delivery company will be responsible for the damages if the driver is found to be negligent. Because the company will automatically be found liable if the driver is negligent, respondeat superior is a form of strict liability.
Another common example of imputed negligence is attributing liability to the owner of a car, where the driver of the car committed a negligent act. This type of relationship has been labeled the family car doctrine. The doctrine is based on the assumption that the head of the household provides a car for the family's use and, therefore, the operator of the car acts as an agent of the owner. When, for example, a child drives a car, registered to a parent, for a family purpose, the parent is responsible for the negligent acts of the child at the wheel.
Liability can also be imputed to an owner of a car who lends it to a friend. Again, the driver of the car is acting as the agent of the owner. If the owner is injured by the driver's negligence and sues the driver, the owner can lose the lawsuit because the negligence of the driver can be imputed to the owner, thereby rendering him contributorily negligent. This concept is known as imputed contributory negligence.
Employers' liability
Employers are vicariously liable, under the respondeat superior doctrine, for negligent acts or omissions by their employees in the course of employment (sometimes referred to as 'scope of employment'). For an act to be considered within the course of employment it must either be authorised or be so connected with an authorised act that it can be considered a mode, though an improper mode, of performing it.
Courts sometime distinguish between an employee's "detour" or "frolic". For instance, an employer will be held liable if it is shown that the employee had gone on a mere detour in carrying out their duties, whereas an employee acting in his or her own right rather than on the employer's business is undertaking a "frolic" and will not subject the employer to liability.
Neither, generally, will an employer be held liable for assault or battery committed by employees, unless the use of force was part of their employment (e.g. police officers), or they were in a field likely to create friction with persons they encountered (e.g. car re-possessors). However, the employer of an independent contractor is not held vicariously liable for the tortious acts of the contractor, except where the contractor injures someone to whom the employer owes a non-delegable duty of care, such as where the employer is a school authority and the injured party a pupil.
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Employers are also liable under the common law principle represented in the Latin phrase, "qui facit per alium facit per se", i.e. the one who acts through another, acts in his or her own interests. This is a parallel concept to vicarious liability and strict liability in which one person is held liable in criminal law or tort for the acts or omissions of another.
Employers' indemnity
The principle of vicarious liability can also be bypassed with a legal instrument known as Employers' indemnity. When an employer is successfully sued, they have the option of suing the tortfeasor for an indemnity to recover the damages back. This principle is greatly criticised when used in the case of Lister v Romford Ice Cold Storage
Lister v Romford Ice and Cold Storage Co created a controversial principle at common law, that where an employer is found vicariously liable for an employee's actions, they are entitled to recover an indemnity from them, to cover such losses.
The House of Lords accepted by a narrow margin that there may be an implied term in the contracts of employees, by which they must exercise reasonable care and skill in their work. Such principles has received both criticism and support, for various reasons. Advocacy of the indemnity features on rules of principle liability; the person to commit a tort and to cause damage should pay damages arising from it.
Critics state that the recovery of an indemnity is contrary to equity, due to the general lack of wealth of employees and servants. The advent of widespread insurance of employers has led to the recovery of indemnities being widely abandoned. This is illustrated by the British Insurance Association entering into a gentlemen's agreement not to utilise the rule:
"Employers' Liability Insurers agree that they will not institute a claim against the employee of an insured employer in respect of the death of or injury to a fellow-employee unless the weight of evidence clearly indicates (i) collusion or (ii) wilful misconduct on the part of the employee against whom a claim is made."
As such, indemnities are not pursued from employers except in exceptional circumstances.
Imposition of vicarious liability in these circumstances has been justified on the following grounds:
Exercise of control: If penalties are serious enough, it is assumed that rational employers will take steps to ensure that employees avoid injuring third parties. On the other hand, rational employers may choose to rely on independent contractors for risky operations and processes.
Risk spreading: Many consider it socially preferable to impose the cost of an action on a person connected to it, even if a degree removed, rather than on the person who suffered injury or loss. This principle is also sometimes known as the "deep pocket" justification.
Internalizing the social costs of activities: The employer usually (though not always) passes on the cost of compensating injury or loss to the customers and clients. As a result, the private cost of the product or service will better reflect its social cost.
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These justifications may work against one another. For example, insurance will increase the ability to do risk spreading, but will reduce incentives for exercise of control.
(These topics carry weighting of 7% of the examination)
PARTNERSHIP Definition of a Contract of Partnership
1. Is an agreement or contract between 2 or more persons to pool or contribute something i.e. money, goods, property or their skill in lawful or common business or venture and to divide the loss and profit in certain proportions.
2. A partnership is a nominate contract between individuals who, in a spirit of cooperation, agree to carry on an enterprise; contribute to it by combining property, knowledge or activities; and share its profit. Partners may have a partnership agreement, or declaration of partnership and in some jurisdictions such agreements may be registered and available for public inspection. In many countries, a partnership is also considered to be a legal entity, although different legal systems reach different conclusions on this point.
Essential elements of partnership1. Contribution
Each partner must contribute something to the partnership.
The contribution need not to be of the same kind. Thus one partner may contribute skill, while the other may
contribute money, goods or labour. It is essential that what is thus contributed is staked in the
business so that the partner stands to lose should the venture prove a failure.
2. Common business Some common undertaking should be undertaken for the
joint benefit of the parties. Where 2 or more parties have agreed to contribute their
skills only; there is no common business unless they pool their work.
3. Lawful object
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The objective to be attained by the partnership should not be unlawful, immoral or contrary to public policy. If conducting the partnership business requires a licence then it should be obtained as it would be illegal to conduct such business without it.
4. Object to make and share profit Each partner must have as an objective; the sharing of
profits in the partnership. Where therefore the terms of the agreement are that one
partner will not share the profits at all; such a partnership is illegal and void.
Nature of partnershipGeneral ExplanationStory Case
Louis Adcock, owner of a plumbing business, had in his employ Nels Johnson. Adcock made this offer to Johnson: Johnson should put $1,000 in the business for which he should receive one third of the profits and an increase in salary to $150 a month; also he was to be foreman on all jobs. The contract was drawn for five years. Johnson accepted this offer and began to work upon this basis. Soon after, while engaged in a plumbing construction, Howard Baker, an employee, was severely injured. He brought suit for damages against both Adcock and Johnson, as partners. Johnson maintained in defense that he was acting only as an agent, and since there was no carelessness on his part, he was not liable. Liability depends upon whether Johnson is an agent or a partner, as determined by his contract with Adcock.
Ruling Court Case. Phillips Vs. Phillips,
About twenty years before the bringing of this suit, John Phillips, with his family, moved from Scotland to this country. At the time he was a very poor man. He was a wood turner and made a very humble beginning in that trade when he arrived in America. He had four sons, all of whom worked with him in his business. His business prospered and he eventually became a very wealthy man.
This suit was brought by one of the sons, with the claim that there was a partnership existing between the father and the sons, in respect to the business in which they had been engaged. In this suit, the complainant asked for an accounting of the profits. It was contended by the complainant that there was a partnership because the sons had continued in the business even after they had become of age, and had never received any compensation in wages for their services. It was also contended that the public had come to believe that the business was carried on by the father and his sons as partners. On the other hand, it was contended by the defendant, the father, that he never had intended that the sons should be his partners during his life; he showed that it was the custom in his native land, Scotland, for sons, who, as minors had worked for their parents, to continue upon the same basis after they became of age.
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Decision
As between alleged partners, it is a question of what the parties intended; what the public thinks is not material in determining this question between the parties themselves. The evidence in the case showed that the father did not intend that the business should be carried on as a partnership business; consequently, there is no partnership and the complainant has no right to an accounting.
Chief Justice Caton, in delivering the opinion of the Court said:" It must be remembered at the outset that this is not a controversy between a third party and the alleged members of the firm. Parties may so conduct themselves as to be liable to third persons as partners, when in fact no partnership exists as between themselves. But as between the parties themselves, the relationship depends upon their intention as determined by contract. No partnership contract is shown in this case. Therefore, it was decided that the plaintiff was not entitled to an accounting.
Ruling Law. Story Case Answer
Partnership is a legal relation between two or more competent persons created by an expressed or implied contract between them. The relation contemplates the union of their capital, property, labor, or skill, to be managed and used for their common profit. Both the subject matter and the use must be legal, else the normal rights and duties of each partner will not be recognized or enforced by the courts. This relation, generally termed "Partnership", is often referred to as "Copartnership", and is sometimes called the "Firm." Members of the relation are called "partners" or "copartners."
Since, in the Story Case, Johnson contributed capital to the business, furnished his labor and skill, and expected to receive a share in the profits, he would be considered a partner by the Court. The fact that the relation was not definitely called a partnership does not alter their implied intention, as evidenced by the terms of the contract.
Rights and duties of partners
General Duties of Partners
1) Contribution2) Sharing of management3) Reasonable care4) Duty of utmost good faith (uberrima fides)5) Duty to account6) Rendering account
“Partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful’ to each other and to render the true accounts and full information of alt things affecting the firm to any partner or his legal representative”.
All the duties of partners arise from the principle of goods faith which is to be all
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and end all of a partnership.
(a) Duties of a Partner
1. Co Advantage Partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other and to render the true accounts and full information of all the things affecting in the firm any partner or his legal representative.
2. Indemnity partner shall compensate the firm for any loss caused to it by his fraud in the conduct of the business of the firm.
3. Loss Caused by Wilful Neglect A partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm.
4. Due Diligence Every partner shall attend honestly and carefully to his duties in the conduct of business.
5. Provision of Information is the duty of the partners to give full information about the affairs of the firm to one another.
(b) Rights of a Partner
1. Right to Take Part in The Management A partner has a right to take part in the management of a business subject to the agreement.
2. Expression of Opinion A partner has a right to express his opinion before the matter is decided, but no. change may be made in the nature of a business without the consent of all the partners.
3. Inspection of Books A partner has a right to inspect and copy any of the books of the firm.
4. Right to Be Indemnified A partner has the right to be compensated by the firm in respect of expenses incurred by him or any losses suffered by h in the conduct of his business.
5. Right to Continue partner has the right to continue in the business unless he is expelled according to the provisions of Deed and in good faith.
6. Use of Property The partner has the right to see and ensure that the property of the firm is held and used exclusively for the purpose of the business.
7. Sharing of Profit/Loss Every partner shall have an equal share in profits/loss in a business, unless
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otherwise mentioned in partnership deed.
8. Interest on Capital A partner is entitled to receive interest at the rate of 6% per annum on the excess money supplied over his capital.
9. Right to Retire A partner has the right to retire according to the provisions of agreement or with the consent of the other partners.
(c) Liabilities of a Partner
1. Joint Liability Since every partner is the agent of the firm for the purpose of carrying on the business, he is, therefore, jointly and separately liable for all business debts of the firm.
2. Liability of a New Partner A new partner cannot be held responsible for the loss or claim the share of profit before his date of admission.
3. Property of The Deceased The property of the deceased cannot be held liable for any obligation incurred by the firm after his death.
4. Liability of Retiring Partner retiring partner is liable for the debts of the firm incurred before the date of his retirement.
5. Competitive Business A partner cannot engage h in any business in competition with the business of the firm. If he does so, he is liable to surrender the profits to the firm of which he is a partner.
6. No Private Use of Property A partner cannot use the property of the firm or its goodwill for his private gains, if he does so he is liable to surrender the profits so earned to the firm.
Remedies for breach of duties by partners
1) Specific performance A court will grant an order of specific performance against
a partner failing his part.
2) Damages A partner may sue his co-partner for damages for breach
of partnership agreement.
3) Rescission
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Can be granted where appropriate for example where a co- partner might have entered into partnership through fraud.
4) Interdict Can be granted in certain instances for example to
restrain a partner from acting in a manner contrary to good faith or partnership agreement.
Termination of partnerships of consequences thereof
1) Agreement Partners agree to end the contract; mutual consent.
2) Operation of law A partnership is dissolved by operation of law in any of the
following circumstances:i. Frustration.
ii. Death.iii. Insolvency.iv. Partner becoming an alien enemy.v. Mental illness.
3) Renunciation
4) Fulfilment of a condition
5) Breach of essential term
6) Conduct causing loss of confidence
7) Where one of the essentials of partnership agreement is no longer present.
(These topics carry weighting of 6% of the examination.)
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Negotiable InstrumentsA negotiable instrument is a document warranting the payment of
money contemplated by a contract for the payment of money the promise of or order for conveyance of which is unconditional and the payee designated on and memorialized by the instrument capable of change through transfer by valid negotiation of the instrument. As payment of money is promised subsequently, the instrument itself can be used by the holder in due course as a store of value; although, as in the instance of negotiation of a negotiable instrument at a discount, not necessarily redeemable by the transferee at face value (known as “discounting”). Common examples include promissory notes, cheques, and banknotes.
A negotiable instrument is a
(1) Written instrument,(2) Signed by the maker or drawer of the instrument,
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(3) That contains an unconditional promise or order to pay(4) A fixed amount of money (with or without interest in a specified
amount or at a specified rate)(5) On demand or at an exact future time(6) To a specific person, or to order, or to its bearer.
Characteristics of negotiable instruments
The important characteristics are as follows – (1) Free Transferability : A negotiable instrument may be transferred by
delivery if it is a bearer instrument or by endorsement and delivery if it is an instrument payable to order.
Thus, a Fixed Deposit Receipt, which is marked as ‘not transferable’is not a negotiable instrument. On the other hand all instruments which are transferable are not negotiable instruments e.g. share certificate. An instrument to be negotiable must possess other features also. Further, a negotiable instrument may be transferred any number of times till it is discharged.
(2) Title to transferee : The transferee, who takes the instrument bona fide
and for valuable consideration, obtains a good title despite any defects in the title of the transferor. To this extent, it constitutes an exception to the general rule that no once can give a better title then he himself has.
(3) Entitlement to sue : The holder can sue in his own name. (4) Presumptions : Every negotiable instrument is subject to certain
presumptions which are as under –
Presumption as to negotiable instrument
For deciding cases in respect of rights of parties on the basis of a bill of exchange, the Court is entitled to make certain presumptions. These are briefly stated as follow : 1. Consideration : That every negotiable instrument is made or drawn for a
consideration. Thus, this need not necessarily be mentioned. 2. Date : That the negotiable instrument was drawn on the date shown on
the face of it. 3. Acceptance before maturity : That the bill of exchange was accepted
before its maturity, i.e., before it became overdue. 4. Transfer before maturity : That the negotiable instrument was
transferred before its maturity. 5. Order of Endorsements : That the Endorsements appearing upon a
negotiable instrument were made in the order in which they appear.
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6. Stamping of the instrument : That an instrument which has been lost was properly stamped.
7. Holder is Holder in due course : That the holder of a negotiable
instrument is the ‘holder in due course’, except where the instrument has been obtained from its lawful owner or its lawful custodian by means of offence or fraud.
8. Proof of dishonour : If a suit is filed upon an instrument which has been
dishonoured, the Court shall, on proof of the protest, presume the fact of dishonour unless it is disproved.
Types of negotiable Instruments viz. Bills of Exchange, cheques, promissory notes
1. Bill of exchangeo A bill of exchange or "draft" is a written order by the drawer to the
drawee to pay money to the payee. A common type of bill of exchange is the cheque, defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today.
Bill of exchange, 1933o A bill of exchange is 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 fixed or determinable future time a sum certain in money to order or to bearer.
o It is essentially an order made by one person to another to pay money to a third person.
o A bill of exchange requires in its inception three parties—the drawer, the drawee, and the payee.
o The person who draws the bill is called the drawer. He gives the order to pay money to third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill. The party in whose favor the bill is drawn or is payable is called the payee.
o The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order.
o A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable.
o In some cases a bill is marked "not negotiable". In that case it can still be transferred to a third party, but the third party can have no better right than the transferor.
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2. Draft/ cheque: An unconditional order to pay (e.g., a cheque) by which the party creating the draft (the drawer) orders another party (the drawee), typically a bank, to pay money to a third party (the payee).
a. Time Draft: A draft payable at a time certain.
b. Sight Draft: A draft payable on presentment.
c. Trade Acceptance: A draft that is drawn by a seller of goods ordering the buyer to pay a specified sum of money to the seller, usually at a specified future time. The buyer accepts the draft by signing and returning it to the seller.
3. Promissory Note: A written promise made by one person (the maker) to pay a fixed sum of money to another person (the payee) on demand or at a specified future time. In this method, in place of the seller drawing a bill of exchange on the purchaser, the purchaser himself makes a written promise to pay the amount to the seller. It is defined as an instrument in writing containing an unconditional promise, signed by the maker to pay on demand or at a fixed or determinable future time, a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.
4. Certificate of Deposit: A note by which a bank or similar financial institution acknowledges the receipt of money from a party and promises to repay the money, plus interest, to the party or the party’s designee, on a certain date.
Bill of Exchange
Definition and Explanation of Bill of Exchange:
A bill of exchange has been defined 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 or determinable future time, a certain sum in money to or to the order of a specified person or to bearer.
Parties to a Bill of Exchange, cheque or promissory note
1. Drawer : The maker of a bill of exchange or cheque is called drawer.
2. Drawee : The person who is directed to pay by the drawer.
3. Acceptor : One who accepts the bill. Generally the drawee is the acceptor but a stranger may accept it on behalf of the drawee.
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4. Payee : Person to whom the sum stated in the bills is payable.
5. Holder : Section 8 of the Negotiable Instruments Act states that “The ‘holder’ of a promissory note, bill of exchange or cheque means “any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.”
6. Holder in due course : A person who for consideration becomes the possessor of a promissory note, bill of exchange or cheque (if payable to bearer).
7. Endorser : Holder who endorses the bill in favour of any other person.
8. Endorsee : Person in whose favour the bill is endorsed by the endorser.
9. Drawee in case of need : When in the bill or in any endorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need such person is called as the ‘drawee in case of need’.
10. Acceptor for honour : When a bill of exchange has been noted and protested for non-acceptance or for better security, any other person accepts it supra protest for honour of the drawer or of any of the endorsers, such person is called the ‘Acceptor for honour’.
Specimen/Sample of a Bill of Exchange:
Stamp Amount City1st January, 2010
Three month after date pay to Z or order the sum of [amount] only for value received
To,B (Drawer)City Sd.X. (Drawer)
Advantages of Bills of Exchange:1. It is a legal evidence of debt.
2. It is a convenient method for the transfer of debt
3. A creditor can sue on the bill itself
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4. It is a negotiable instrument and can be transferred for settlement of one's debt without difficulty.
5. It can be cashed before due date by discounting.
6. A debtor enjoys the benefit of full period of credit.
7. It affords an ease means of transmitting money from one place to another.
It is for the aforesaid advantage, a buyer can easily be included to purchase goods and accept bills drawn on him by the seller when he is not prepared to pay cash at the time of purchase.
Difference Between Bill of Exchange and Promissory Note:
Promissory Note Bill of Exchange
It is promise to pay It is an order to pay
There are only two parties the drawer, and the payee.
There are three parties, the drawer, the drawee, and the payee.
There is no necessity of acceptance It must be accepted
The maker is primarily liable The drawer is not primarily liable.
It is never drawn in sets Foreign bills are specially drawn in
sets.
Protesting is not necessary after dishonour
A foreign bill must be protested upon dishonor.
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Cheque Bill of Exchange
It is drawn on a banker It may be drawn on any party or individual.
It has three parties - the drawer, the drawee, and payee.
There are three parties - the drawer, the drawee, and the payee.
It is seldom drawn in sets Foreign bills are drawn in sets
It does not require acceptance by the drawee.
It must be accepted by the drawee before he can be made liable to pay the bill.
Days of grace are not allowed to a banker
Three days of grace are always allowed to the drawee.
No stamp duty is payable on checks
Stamp duty has to be paid on bill of exchange.
It is usually drawn on the printed f It may be drawn in any paper and need not necessarily be printed.
See more in later pages
How a Bill of Exchange Functions:
In order to fully grasp the transactions relating to bill of exchange we thoroughly learn the procedure. The following example will make it clear.
Suppose A sells goods to the value of $500 to B. The most ready means of closing the transaction will be cash payment by B to A. But payment of this nature are not many in actual practice. The greatest volume of business is done on credit. That being the case A will have to wait for some time to receive payment from B. A, merchant can hardly afford to be out of funds for long. Moreover, to sell goods on credit is rather a risky job. Therefore as soon as A sells goods to B, he will draw a bill for $500 on B and forward the same to him together with the goods with instructions to B to accept the bill and return the same to A. Upon receipt of the bill, B would write on the face of the bill "accepted" and put his signature below. It means that B approves the bill and also binds himself to pay the amount thereof when due. The bill is thus complete and comes back to A to remain in his possession till maturity or can be endorsed or discounted by him. On the due date the holder of the bill presents it before the acceptor and receives payment of the bill from the acceptor.
Thus the bill of exchange is the instrument, rather the mechanism which finances the major portion of all commercial transactions these days and it helps both the debtor and the creditor alike.
Tenor and Usance:
Tenor is the period of time after which a bill becomes payable. Thus, where a bill is payable after 90 days from the date of drawing or acceptance, the tenor of the bill is 90 days. Bill may be made payable:
On Demand. The bill so drawn is payable as soon as its payment is demanded by the holder of the bill.
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A Sight. A bill of exchange so drawn becomes payable immediately it is brought to the notice of the drawee.
After Date. When a bill is drawn 'after date' its due date is calculated from the date of the bill.
After Sight. When a bill is drawn 'after sight' its due date is calculated from the date on which it is sighted or seen by the drawee i.e., from the date of acceptance by the drawee.
Usance. It is the usual time of payment of a bill of exchange as fixed by custom.
Days of grace:
In calculating the due date of payment it is customary in business circle to allow three additional days to the drawee or acceptor to meet the bill. The extra days are called "days of grace" or "grace days". Thus a bill dated 15th March, for three months becomes payable on the 18th June and this is the due date.
Holder:
Holder of a bill is a person who is entitled in his own right to the possession thereof and to claim the amount due thereon.
Holder in Due Course:
When a person takes a bill, complete and regular on the face of it and before its due date, in good faith and for valuable consideration he is called the holder in due course.
Acceptance:
When a drawee signs his name across the face of along with the word "accepted" the bill is said to be accepted and this act of the drawee is called acceptance of a bill. Before this is done, the drawee cannot be made liable for the bill.
Different Kinds of Acceptance:General Acceptance:
When a bill is accepted without any condition to the order of the drawer, it is called general acceptance.
Qualified Acceptance:
When a bill is accepted with some qualifications to the order of the drawer it is called qualified acceptance.
A qualified acceptance again may be of five different types. These are following types:
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Time. When the acceptor agrees to pay the bill on some day other than the date required by the drawer, it is called qualified acceptance as to time.
Place. When a bill is payable at a particular place and there only, it is called local qualified acceptance.
Partial. When a bill is accepted for a part of the amount of a bill, it is called partial qualified acceptance.
Parties. When a bill is accepted by one or two of the drawees, but not all, it is called qualified acceptance as to parties.
Condition. When a bill is accepted subject to a certain condition being fulfilled it is called conditional qualified acceptance.
Definition of a holder and a holder in due course
Distinction between a holder and a holder in due course
(i) Consideration : A holder may become the possessor or payee of an instrument even without consideration, whereas a holder in due course is one who acquires possession for consideration.
(ii) Time of possession : A holder in due course as
against a holder, must become the possessor payee of the instrument before the amount thereon become payable.
(iii) Good faith : A holder in due course as against a
holder, must have become the payee of the instrument in good faith i.e., without having sufficient cause to believe that any defect existed in the transferor’s title.
Holder:
Holder of a bill is a person who is entitled in his own right to the possession thereof and to claim the amount due thereon.
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Holder in Due Course:
When a person takes a bill, complete and regular on the face of it and before its due date, in good faith and for valuable consideration he is called the holder in due course.
The holder in due course
The rights of a holder in due course of a negotiable instrument are qualitatively, as matters of law, superior to those provided by ordinary species of contracts:
The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque)
No notice need be given to any party liable on the instrument for transfer of the rights under the instrument by negotiation. However, payment by the party liable to the person previously entitled to enforce the instrument "counts" as payment on the note until adequate notice has been received by the liable party that a different party is to receive payments from then on.
Transfer free of equities—the holder in due course can hold better title than the party he obtains it from (as in the instance of negotiation of the instrument from a mere holder to a holder in due course)
Negotiation often enables the transferee to become the party to the contract through a contract assignment (provided for explicitly or by operation of law) and to enforce the contract in the transferee-assignee’s own name. Negotiation can be effected by indorsement and delivery (order instruments), or by delivery alone (bearer instruments). In addition, the rights and obligations accruing to the transferee can be affected by the rule of derivative title, which does not allow a property owner to transfer rights in a piece of property greater than his own.
Liability on a Bill of ExchangeLet us examine cases and extent of their liability:
Minor: A minor may draw, indorse deliver and negotiate such instruments so as to bind all parties except himself. A person who accepts a bill when he is of full age is liable on it though it was drawn when he was a minor. A minor can however, acquire rights on the instrument. His rights as payee, endorsee or holder are not affected. All parties are liable to the minor . Minor can sue by his next friend prior parties upon the instrument. A minor on attaining majority, cannot renew the
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instruments executed by him when he was a minor. Minor will not be held liable even if he falsely represents that he is of full age.
On the same footing, negotiable instruments drawn by lunatic persons of unsound mind, drunken persons at the time when such a person was incapable of understanding it, cannot be enforced against such a person.
Legal representative: A legal representative of a decreased person, who signs his name to a promissory note, bill of exchange or cheque is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him. Legal representative must by express writing on the instrument exclude or limit his personal liability by adding the words without recourse ailing which he will stand personally liable.
Corporation: Corporation can make, endorse or accept an instrument when it is empowered to do so by its Memorandum of Association. A trading company has an implied power to draw accept or negotiate negotiable instruments. A non trading company has to be given express powers to this effect. If the corporation exceeds is power so given by its Memorandum of Association, the act is ultra vires and incapable of ratification. The negotiable instruments shall, therefore be void. Even a bona fide holder for value cannot hold the corporation liable in case where the Corporation exceeds its powers. The Corporation should primarily be empowered by law for the time being in force to make, indorse or accept the negotiable instrument.
Agent: Every person capable of binding himself or of being bound may so bind himself or he bound by duly authorized agent acting n his name. A general authority transact business and to receive and discharge debts does not confer upon an agent the power of accepting or endorsing bills of exchange so as to bind his principal. An authority to draw bills of exchange does not itself impart an authority to indorse.
An agent who signs his name to a promissory note, bill of exchange or cheque without indicating thereon that he signs as agent, or that he does not intend thereby to incur personal responsibility, is liable personally , on the instrument except to those who induced him to sign upon the belief that the principal only would be liable. Therefore on who does not disclose the name of the principal and signs without indicating that he signs as an agent would be personality liable.
An agent in order that he may not be personally liable on the instruments must have an authority to so act and he must disclose the name of the principal on the instrument significantly. Principal will not be liable if the agent exceeds his authority, unless the principal ratified such an act of the agent. Agent may also exclude his liability by adding the words without recourse on the instruments. An agent will not be relieved of his liability by merely adding the words that he is signing as an agent unless he discloses the person for whom he is so signing.
Therefore, a secretary manager director or any such person must disclose the name of the firm or a company on whose behalf they are signing endorsing or accepting the instruments.
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Cheques – effect of cash or “to order” cheques, forged cheques, alterations on documents, crossings and marking of cheques, protection for the drawer on a crossed cheque, protection for the banker on a crossed cheque.
CHEQUE
“A Bill of Exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.”
Characteristics
1. A cheque is an unconditional order on a specified banker where the drawer has his account.
2. A cheque can be drawn for a certain sum of money.
3. Cheque is payable by the banker only on demand.
4. A cheque does not require acceptance by the banker as in the case of bill of
exchange.
5. A cheque may be drawn up in three forms i.e.
(i) Bearer cheque is one which is either expressed to be so payable or on which the last or only endorsement is an endorsement in blank);
(ii) Order cheque is one which is expressed to be so payable or which is
expressed to be payable to a particular person without containing any prohibitory words against its transfer or indicating an intention that it shall not be transferable (Section 18); and
(iii) Crossed cheque is a cheque which can be collected only through a
banker.
6. The cheque is a revocable mandate and the authority can be revoked by countermanding payment.
7. The cheque is determined by notice of death or insolvency of the drawer.
8. All cheques are bills of exchange but all bills of exchange are not cheques.
Difference Between Bill of Exchange and Cheque:
Cheque Bill of Exchange
1.Drawee Cheque can be drawn only on a banker.
1. The drawee may be any person.
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2. Time of payment
A cheque is payable on demand. 3. Grace period
Cheque is payable on demand and no grace period is allowed.
4. Notice of dishonour Notice of dishonour is not necessary.
5. Payee
A cheque can be drawn to bearer and made payable on demand.
6. Acceptance
A cheque is not required to be presented for acceptance. It needs to be presented only for payment.
7. Stamping
No stamp duty is payable on cheques. 8. Crossing
A cheque may be crossed. 9. Noting and protesting
There is no system for noting and protesting in case of dishonour.
10. Discharge of drawer
The drawer does not get discharged from his liability because of delay in presenting the cheque to the bank for payment.
11. Liability of drawee for dishonour
In case of dishonour of cheque the drawee is liable to the drawer and not to the payee.
12. Validity period
A cheque is usually valid fro a period of six months.
2. A bill may be drawn payable on demand or on expiry of certain period after date or sight.
3. While calculating maturity three day’s
grace is allowed. 4. A notice of dishonour is required.
5. A bill cannot be made bearer if it is payable on demand. A bill drawn ‘payable to bearer on demand’ is void.
6. Bills sometimes, require presentment
for acceptance and it is advisable to present them for acceptance even when it is not essential to do so.
7. Affixation of proper stamps is necessary in case of Bills of Exchange. 8. A bill of exchange cannot be crossed. 9. In case of dishonour of a bill proper
noting and protesting is necessary.
10. The drawer of the bill stands discharged from his liability if it is not duly presented for payment.
11. In case of dishonour of the bill by non-payment on an accepted bill of exchange the drawee becomes liable to the payee. 12. A bill may be drawn for any period
Marked Cheques Since a cheque is not required to be presented for acceptance the drawee of the cheque i.e. the banker, is under no liability, to the person in whose favour the cheque is drawn. However, he is liable to his customer (drawer), if he wrongly refuses to honour the cheque. In such a case, action can be taken by the drawer against the banker for the loss of his reputation. In certain cases a cheque is marked or certified by the banker on whom it is drawn as ‘good for payment’. Such a certification or marking does not amount to acceptance but it is very similar to it and protects the person to whom the cheque is issued against the cheque being refused for payment subsequently. In the United States, these are known as cashiers’ cheques. Banks in India, as a rule, do not mark
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or certify cheques in this manner and bankers in India, are not liable even if a bank has marked a cheque as “good for payment”.
Crossing of cheques
A cheque may be a open cheque or a crossed cheque. An open cheque is one that can be paid by the paying banker across the counter while crossed cheque cannot be paid across the counter. Crossing of cheques is a universally adopted practice. Crossing on a cheque is a direction to the paying banker that the payment shall not be made across the counter. The payment on a crossed cheque can be collected only through a banker. Cheques are usually crossed as a measure of safety. Crossing is made by drawing two parallel traverse lines across the face of the cheque with or without the addition of certain words. The usage of crossing distinguishes cheques from other bills of exchange. “Where a cheque bears across its face an addition of the words ‘and company’ or any abbreviation thereof, between two traverse lines, or of two parallel traverse lines simply, either with or without the words ‘not negotiatble’ that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally”.
Who may cross the cheque The following parties may cross a cheque :
(1) Drawer : The drawer of the cheque may cross the cheque generally or specially.
(2) Holder : Where the drawer does not cross the cheque, the holder may cross
it generally or specially. Even if the cheque is already crossed the holder may add the words ‘not negotiable’.
(3) Banker : Where a cheque crossed specially the collecting banker may again
cross it specially to another banker as its agent for collection. This is the only case where the Act allows a second special crossing by a banker and for the purpose of collection
When banker shall refuse the payment A banker will be justified or bound to dishonour a cheque in the following cases, viz;
(i) The cheque is undated.
(ii) The cheque is stale i.e. it has not been presented within the validity period of the cheque.
(iii) The instrument is inchoate (unclear or unformed or tentative) or not free
from reasonable doubt.
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(iv) The cheque is post-dated and presented for payment before its ostensible
date.
(v) The customer’s funds in the banker’s hands are not ‘properly applicable’ to the payment of cheque drawn by the former.
(vi) The customer has credit with one branch of a bank and he draws a cheque
upon another branch of the same bank in which either he has account or his account is overdrawn.
(vii) A garnishee or other legal order from the Court attaching or otherwise
dealing with the money in the hand of the banker, is served on the banker.
(viii) Authority of the banker to honour a cheque of his customer is determined by the notice of the drawer’s death, lunacy and insolvency. However, any payment made prior to the receipt of the notice of death is valid.
(ix) Notice in respect of closure of the account is served by either party on the
other.
(x) The cheque contains material alterations, irregular signature of irregular endorsement.
(xi) The customer has countermanded payment.
(xii) Any ambiguity in the material part of the cheque including the defects
resulting from the crossing of the cheque.
(xiii) Any difference between the amount of cheque in words and in figures.
(xiv) Any irregular endorsements.
(xv) The cheque is mutilated.
(xvi) Signature of the drawer has been forged.
(These topics carry weighting of 12% of the examination.)
SECURITY
Difference between real and personal securities
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Definition of Mortgage
Definition of Mortgage
Mortgage is a right which one person has in and over the property of another which serves to secure an obligation.
Mortgage, a security interest on real property granted to a lender.
The word is a Law French term meaning "dead pledge," apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.
In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than on other property (such as ships) and in some jurisdictions only land may be mortgaged. A mortgage is the standard method by which individuals and businesses can purchase real estate without the need to pay the full value immediately from their own resources.
The essentials of a mortgage are:1. An obligation to be secure.2. Property subject to security.3. A right to security as opposed to a mere right of preference.
Termination of mortgage1. Payment or other discharge of debt.2. Destruction of mortgaged property (in this case security is lost
but debt remains).3. Novation of the mortgage i.e. new security is given in the place
of the old one.4. Prescription of 30 years as regards capital5. Order of court e.g. when the mortgage is obtained through
fraud.6. Sale in execution or insolvency.
Definition of Pledge – how entered into, rights and duties of the parties
Definition of Pledge Is applied to movables only. As security for a loan a debtor hands over an article to the
creditor who is entitled to keep it until the loan is repaid.
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If not repaid, the creditor may sell the article and so recover his money.
Pledge
In order to secure the principal obligation (under a loan agreement, bank credit contract, etc.) both a principal debtor and a surety can sign a pledge agreement with a creditor. Then a debtor (surety) becomes a pledgor, and a creditor is referred to as the pledgee.
In the context of common law, a pledge is used to refer to a security interest in movable property, with an important feature of possession by the pledgee (lender). as compared to the mortgage which is the security interest in immovable property, although mortgage can refer to movable property (chattel mortgage). The language dates back to ancient Roman law.
Liens – Liens A lien or right of retention is a right conferred by common law
on a person who is in possession of the property of another.
In law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the lienor and the person who has the benefit of the lien is referred to as the lienee.
A lien is a legal claim or a "hold" on some type of property, whether personal or real property, making it collateral against monies or services owed to another person or entity. A lien usually exists in situations like second mortgages, loans against a vehicle title, or money loaned against any other substantial item owned by a borrower. It may keep the borrower from selling the property, or at least keep him or her from transferring title to the property.
Any property that carries a lien can be forced into sale by the lender, in order to collect what is owed, if the loan is in default. If the borrower decides to sell the property, the lien holder must be paid before the title will be cleared for transfer to the buyer.
A lien presupposes possession of the property in question. Without possession no lien can come into existence. Possession must therefore be continuous for a lien
terminates with loss of property unless the property is taken away from creditor by undue means. In that event the owner is guilty of spoliation and the creditor can institute action for a spoliation order.
Debtor and creditor liens
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This entitles the creditor to retain the property until the whole amount of expenditure has been paid. The following are examples debtor or creditor liens.
1. The builder of a new house or repairer of an existing house has a lien over it for the contract price.
2. In artificer, someone who makes or repairs articles has a lien over it for payment of amount agreed upon.
3. A carrier has a lien over the goods carried by him on the freight.4. A warehouse man has a lien on the goods stored by him for his
charges.
Enrichment lienWhere such expenditure is bona fide i.e. money is expended on the property of another and this benefits or enriches the owner then an enrichment lien arises.
Salvage lienArises where the expense is necessary for the preservation or protection of property for example expenses incurred in repairing a building; an article etc.
Improvement lienExpenses incurred which improve market value of the property. The possessor enjoys an improvement lien in such a case for example erecting a building on a vacant property, erecting a dam, sinking a well etc.
Surety ship A contract of surety is one where a 3rd party (guarantor/ surety)
undertakes to become liable to the creditor for obligation of the debtor, i.e. the principal debtor. The principal debtor however remains liable. This contract does not require any formalities.
A surety or guarantee, in finance, is a promise by one party (the guarantor) to assume responsibility for the debt obligation of a borrower if that borrower defaults. The person or company that provides this promise, is also known as a surety or guarantor.
The situation in which a surety is most typically required is when the ability of the primary obligor or principal to perform its obligations under a contract is in question, or when there is some public or private interest which requires protection from the consequences of the principal's default or delinquency. In most common law jurisdictions, a contract of suretyship is subject to the statute of frauds (or its equivalent local laws) and is only enforceable if recorded in writing and signed by the surety and the principal.
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If the surety is required to pay or perform due to the principal's failure to do so, the law will usually give the surety a right of subrogation, allowing the surety to "step into the shoes of" the principal and use his (the surety's) contractual rights to recover the cost of making payment or performing on the principal's behalf, even in the absence of an express agreement to that effect between the surety and the principal.
Traditionally a guarantee was distinguished from a surety in that the surety's liability was joint and primary with the principal, whereas the guaranty's liability was ancillary and derivative, but many jurisdictions have abolished this distinction.
Special defences against creditors viz. benefit of excussion, benefit of division and benefit of cession of action
At common law a surety enjoys a number of benefits which in practice a surety is asked to renounce. These include:
1. Benefit of excussion This enables the surety to demand that before proceeding
against him the creditor should first excuss the principal debtor if necessary by obtaining judgement and executing it against him or realising any security he holds for the debt.
2. Benefit of division This applies where there are core securities. It entitles each one
to limit his liability to his proportionate share.
3. Benefit of cession of action This enables the surety to delay the creditor’s claim against him
until the creditor has ceded any claims he has against the principal debtor and other securities.
Law of Insolvency Insolvency arises when liabilities exceed assets.
Definition of inability to pay debts (1) A company is deemed unable to pay its debts - [...]
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If it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due. This is known as cash flow insolvency.
(2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.
This is known as balance sheet insolvency.
Voluntary surrenderA debtor may realise that his chances of surmounting his financial difficulties are remote and accordingly goes to court voluntarily to surrender his estate as insolvent. This should be for the benefit of the creditors
Consequences of insolvency
The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the liquidation and elimination of insolvent entities but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of their business.
This is known as Business Turnaround or Business Recovery. In some jurisdictions, it is an offence under the insolvency laws for a corporation to continue in business while insolvent.
In others (like the United States with its Chapter 11 provisions), the business may continue under a declared protective arrangement while alternative options to achieve recovery are worked out. Increasingly, legislatures have favored alternatives to winding up companies for good.
It can be grounds for a civil action, or even an offence, to continue to pay some creditors in preference to other creditors once a state of insolvency is reached.
Sequestration is the act of removing, separating or seizing anything from the possession of its owner under process of law for the benefit of creditors or the state.
“PRE-INSOLVENCY” POSSIBILITIES:
VOLUNTARY DISTRIBUTION: If all creditors should agree we can enter into a voluntary distribution with them. You would then tender payment of an agreed amount of money to our offices each month to which we will subtract our distribution fee as set out on the mandate and power of attorney to be signed by
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yourself, and distribute the remainder of the instalment pro-rata to your creditors in relation to the size of the claims of the various creditors.
MORATORIUM OF CREDITORS: One can try and convince all creditors that you are expecting to receive a sum of money from a source that could cover your debts. However, the success of this approach is entirely dependant on the consent and co-operation of the creditors.
ADMINISTRATION ORDER IN THE MAGISTRATES COURT: This option only will only partially affect your status however one can only use this option if your due debts do not exceed the amount stipulated in the Government Gazette which is at present R50,000.00. The courts will then grant an order to the affect that you will be liable to each creditor pro-rata for a specific amount of money each month.
SEQUESTRATION OPTIONS:
VOLUNTARY SURRENDER: This option takes the form of an Ex-Parte Application to the High Court supported by a Founding Affidavit by the Debtor. There are 4 formal requirements that must be complied with for Voluntary Surrender to be granted. These requirements can be summarised as follows:
(i) Must be factually Insolvent (may not have performed an Act of Insolvency);
(ii)Sufficient Assets in your free residue (remainder of the estate after Preferent Creditors have been paid) of the estate to defray all the costs of the Sequestration. The minimum amount that may remain is R10,000.00;(iii) The Sequestration must be to the advantage of the Creditors;(iv) All formalities in terms of Section 4 of the Insolvency Act must be complied with.
Voluntary Surrender has the advantage that no security for the sequestration costs needs be given to the relevant Master of the High Court. Any sale of your property in execution will be stayed in Law once the adverts have appeared in the Government Gazette and a local newspaper.
COMPULSORY SEQUESTRATION: This option is initiated by a creditor of your estate. An Applicant for the Compulsory Sequestration of a Debtors Estate needs to show that:· That he/she has a claim which entitles him to apply for sequestration· The Debtor is actually insolvent (liabilities exceed his assets, fairly valued OR that the debtor has committed an act of insolvency)· Reason to believe that it will be to the advantage of the creditors that the estate is sequestrated.
Obviously this option is normally initiated by a Creditor and not by the Debtor and thus the Debtor cannot force a Creditor to apply for such sequestration. However, there is an application known as a “friendly compulsory sequestration” which is entails the same process as mentioned above except for the fact that the debtor in fact knows the creditor or has a relationship with the creditor and asks the creditor to apply for a compulsory sequestration. However, it must be disclosed to the court that it is a “friendly compulsory sequestration”.
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All of the above avenues have important consequences and obligations and therefore your decision requires careful consideration. The effect of the sequestration options will however seriously affect your status and estate and should not be followed without thoroughly thinking things through.
The remedies listed in paragraph 1 are very much dependant on the attitudes of the creditors while the court has the discretion regarding those listed in paragraph 2. The courts will only consider exercising their discretion regarding the latter remedies after the Advantage to Creditors hurdle has been crossed.
If you pursue either of the insolvency remedies, you have the duty of full disclosure in utmost good faith to the Court and we will need all relevant information in order to properly draft the papers. We will obviously guide you through the process and explain to you the necessary legal requirements that will need to be fulfilled in order to succeed in an Application for Sequestration.
