Commercial Law Notes: introduction & contract of sale
1.1Introduction
Commercial law is a term that does not lend itself easily to precise definition. Various definitions have been put forward and the common element in all of them is its mercantile nature and it simply the law of commerce
It is concerned with commercial transactions and consequently many different commercial activities fall within the ambit of commercial law
The term commercial law gives the impression that it is a fully fledged legal subject but the reality is that it is an umbrella term that covers many areas area of the law that are commercial in nature notably aspects of the law of contract, the law of agency, banking law, insurance law and property law
The fundamental purpose of commercial law is to facilitate commerce by creating a legal environment that encourages instead of hindering commerce
This approach was aptly captured by Lord Goff in the following manner;
“Our only desire is to give sensible commercial effect to the transaction. We are here to help businessmen, not hinder them: we are there to give effect to their transactions, not frustrate them: we are there to oil the wheels of commerce, not put spanners in the works, or even grit in the oil.”
Business people have special needs which can divided into four distinct groups;
(i)they require that their agreements be upheld
(ii)they require that decisions of the courts on commercial issues to be predictable
(iii)and for the law to be flexible enough to adopt to evolving business practises
(iv)The speedy, inexpensive and efficient dispute resolution
Consequently the courts take a non-interventionist approach to commercial contracts and prefer certainty as to the outcome of commercial disputes over those of fairness and justice
This approach is captured in the words of Lord Salmon in the case of Mardoff Peach & Co Ltd v Attica Sea Carriers Corpn of Liberia, the Laconia [1977] AC 850 @878;
“Certainty is of primary importance in all commercial transactions”
Courts have traditionally relied on mercantile custom and usage to aid in the interpretation of contracts
1.1.2 Historical Development of Commercial Law
Commercial law has its roots in the lex mercatoria (law merchant) which developed in Europe during the middle ages
The lex mercatoria was an international law of commerce that was based on the general practises of merchants which were common throughout Europe and was applied almost uniformly by the merchant courts in different European countries
The lex mercatoria derived its authority from the voluntary acceptance by the merchants whose conduct it sought to regulate
The principles of commercial law that evolved in medieval Europe forms part of Zimbabwean law due to the operation of section 89 of the Constitution of Zimbabwe provides that the law to be administered by the courts of Zimbabwe shall be the law in force at the colony of Cape of Good Hope on 10 June 1891, as modified by subsequent legislation
The law applicable at the Cape Colony as at June 1891 was based on Roman-Dutch law but which was heavily influenced by English law in the legal fields that fall within the ambit commercial law notably insurance, banking and company law and consequently the common law applicable to commercial law in Zimbabwe at present is largely based on English law which in turn is largely based on the lex mercatoria
2.1The Contract of Sale
2.1.1 Essential of a Contract of Sale
A contract of sale is a contract by which a seller transfers or agrees to transfer a thing (merx) to another (buyer) for a monetary consideration, known as the price
The contract comes into effect as soon as an agreement between the parties reached and its validity is not depended upon neither the payment being for the object of the contract of sale effected or the delivery of the object of the contract of sale
The following are the essential elements of a contract of sale;
(i)There must be a valid agreement: - There must be an intention to buy and a related intention to sell. The two parties must be in agreement that the contract is of purchase and sell and not any other some types of contracts like donation. There must be a clear intention of an exchange of property and price must be present
(ii)To deliver
(iii)A particular object
(iv)At a specified price
2.1.2The Subject Matter of the Contract of Sale
The merx must be defined & must be ascertainable. The parties must be in agreement as to the merx. In the case of H v T 1938 SR89, addition of words like etc in a contract of sale & in the description of merx was not held as to invalidate a the sale.
2.1.3The Price
There are no special rules that are applicable to contracts of sale except perhaps with respect to the price
In the absence of an express or implied agreement as to the price to be paid there is no sale. This position is aptly captured in the case of R v Kramer 1948(3) SA 48 (N) @ 52 that “consensus ad idem is essential to every contract and price is essential to every contract of sale…”
See also the case of Chikoma v Mukweza 1998(1) ZLR 54, where it was held that there cannot be a valid sale unless the parties have agreed on the purchase price. If it is not stated clearly, it must be stated implicitly & there must be an agreed method by which the price can be ascertained. Provided that this can be achieved, the sale would be invalid
The price must either be determined or is readily ascertainable – see Globe Electrical Transvaal (Pty) Ltd v Brunhuber & Ors 1970 (3) SA 99 E
It appears that it is not enough to agree to pay a reasonable price. There is a plethora of decided cases that indicate that the use of that term will render the contract of sale invalid for vagueness. See cases such as Elite Electrical Contractors v The Covered Wagon Restaurant 1973 (3) SA 195 (RA); Erasmus v Arcade Electric 1962 (3) SA 418 (T)
2.1.4Effects of the Contract of Sale
Once the 3 elements (pretium, consent, subject matter of sale) are met, a valid contract of sale comes into being. Ownership does not pass at this stage because the rights between the parties are still personal rights. In order to pass ownership of the merx, there must be delivery of the merx against payment of the purchase price where credit facilities have been granted.
2.1.5Delivery
Immovable property is delivered by registering the names of the purchaser on the title deeds of the property. The names are registered in terms of the Deeds of Registration Act.
With movable property, there are two major methods of delivery;
(i)the physical/normal delivery/traditional delivery-which involves actual movement of the merx from the vendor to the vendee.
(ii)The constructive or fictitious delivery- which occurs where actual delivery is difficult or is impossible or is unnecessary. Where fictitious delivery takes place, the merx stays where it is at the time of delivery & need not to move. The following are forms of constructive delivery;
(a)Traditio brevi manu – the purchaser is already in the physical possession of the merx & then subsequently takes delivery as the owner.
(b) Symbolic delivery – it is delivery, not of the merx itself, but of some symbol of the merx, which allows the purchaser to take delivery, e.g handing over keys to the warehouse, where the merx is stored.
(c)Attornment – occurs where an agent has possession of the merx, but sometime hold the merx, not for the seller, but for the purchaser.
(e)Constitutum possesorium: The seller remains in possession of the merx, as an agent of the buyer.
2.1.6Passing of ownership
Once a contract of sale is validly concluded or what the purchase is assured of is free or undisturbed possession of the merx, i.e. vacant possession, ownership does not automatically pass.
For ownership to pass, the following conditions have to be satisfied;
(i)There must be intention by the seller to pass ownership & a related intention by the purchaser to receive ownership upon paying the price
(ii)The seller must be owner of the merx. At law, one does not pass rights that he/she does not possess. The true owner can always vindicate the goods from whomever in possession by instituting a rei vindication action.
(iii) There must be valid contract of sale
(iv)In cash sales, the price must be paid before ownership passes. In credit sales, delivery & other requirements depending on the contract will be sufficient to pass ownership.
It is important to note that, unless otherwise agreed, sales are presumed to be for cash, in which case, the seller has the right to demand payment or reclaim the merx within a reasonable time.
Reasonable time is normally ten (10) days in terms of the Insolvency Act. (This is however a mere guideline) Parties can still agree to delay the passing of ownership till a later date.
A sale by a non-owner is valid because the seller’s duty is not to pass ownership, but to give vacant possession & to guarantee against eviction. In such cases, the purchaser may only obtain ownership by prescription. In terms of the Prescription Act, if a purchaser who is in possession of a merx for 30 years is not dispossessed; he becomes the true owner of the merx.
If the purchaser is evicted before the expiration of the 30 years, then the purchaser’s remedy is to seek damages from the seller.
Where payment of the price is by way of cheque, ownership does not pass until the cheque is honoured. If it is honoured, acquisition of ownership is with retrospective effect.
2.1.7The Passing of Risk
Upon the conclusion of a valid contract of sale the risk of loss by accidental damage passes to the buyer except in circumstances were the parties expressly vary this rule in their agreement
This rule will apply even in circumstances were the parties contact a valid agreement of sale but the seller is yet to deliver the subject matter of the contract of sale and the object of the sale is accidentally destroyed whist it is custody of the seller
risk passes, if the contract is perfecta, i.e., when the parties are clear as to what is to be sold, the quality, quantity, price & any other special terms of the contract.
The rule to the immediate passing of risk is varied where:
(i)There has been an express or implied agreement varying the rule:- the rule as to the passing of risk may be varied by an express agreement
(ii)The sale is subject to a suspensive condition:- in the case of a sale subject to a suspensive condition the passing of the risk from the seller to the buyer is suspended. The risk remains with the seller until the suspensive condition is fulfilled. See the case of Tuckers Land and Development Corporation (Pty) Ltd v Strydom 1984 (1) SA 1 (A), Jacobs v Petersen & Another 1914 CPD 705
(iii)The goods have to be counted, weighed, measured in order to fix the purchase price
(iv)There is default on the part of the seller to effect delivery
2.1.8Duties of the Seller
2.1.9Duty to take care of the thing sold
When a valid contract of sale has been concluded and the seller remains in possession of the merx he has a duty to take reasonable care of the merx and is liable for any damage to the merx that can be directly attributed to the seller’s negligence
However the seller is not liable to accidental loss that is due to negligence on the part of the seller
The risk of accidental loss is assumed by the buyer from the moment a valid contract of sale is concluded
Where the vendor has failed to take care of the merx, purchaser can claim damages. Where damages to the merx are extensive, then he/she can seek cancellation of the contract. See case of Frumer v Maitland 1954(3) SA 843
2.1.10Duty to deliver the merx (object of the contract of sale)
It is essential to the concept of a sale that the seller undertakes to deliver the subject-matter of the sale to the buyer.
The seller does not undertake to make the buyer the owner of the object of the sale but undertakes to give him vacuo possessio (free possession) which is a free and undisturbed possession – see Theron & Du Plessis v Schoombie (1887) 14 SC 192 @198
It is thus possible for the seller to sell to the buyer property which he/she does not own and without the owner’s authority
In a situation where a person knowingly sells property that does not belong to him them this would constitute fraudulent misrepresentation the contract of sale is voidable and buyer is entitled to cancel the contract
Where the seller is bona fide and there is no question of misrepresentation, there is no question of voidability and the buyer cannot set the contract aside
In these circumstances the buyer is protected by the implied warranty against eviction
The implied warranty against eviction is an implied term of a contract of sale by virtue of which the seller undertakes that the buyer will not be disturbed, whether by the seller or a 3rd party
Once delivery has been effected to the buyer, the buyer cannot be lawfully evicted lawfully without a court order. A 3rd party claiming the object cannot take the law into this/her own hands and take possession by force
Should the 3rd party succeed in doing so the courts will restore possession to the buyer without considering the merits of the 3rd party’s claim and this is known
as a spoliation order
Should the buyer’s vacuo possessio is threatened it is incumbent upon the seller to spring to the buyer’s defence
If the buyer gives up possession to a third party without notifying the seller before such eviction by judicial process, the seller will be liable for damages suffered by the buyer provided that the buyer can prove the incontestable title of the person to whom he surrendered the article but not otherwise see the case of Oliver v Van der Bergh 1956 (1) SA 802 (C) @ 804
The implied warranty against eviction can be varied by express agreement, however, even if the wake of an express waiver of the implied warranty of eviction the seller is only absolved from liability if he acted bona fide
If the seller was aware of a 3rd party indisputable title to the merx the purchaser can void the contract on the basis of fraudulent non-disclosure
2.1.11Duty to Guarantee against Defects
Generally the buyers must be given the opportunity to inspect the merx & see whether it is in accordance with what was contractually agreed. If it is not then the purchaser may reject the merx
Defects may take one of two forms, i.e. patent or latent. Patent defects are those which must have been obviously seen by an ordinary purchaser at the time of sale. A buyer, who at the time of sale inspects the merx when it is suffering from a patent defect, cannot complain when the seller subsequently delivers the merx to him in the same defective condition.
2.1.12Latent Defects
They are hidden defects at the time of sale is concluded. It is seller’s duty to guarantee against latent defects. There is an implied warrant against latent defects, i.e. the law assumes that the merx is sold free from defects which make it unfit for the ordinary or special purpose for which it was purchased.
2.1.13Buyer’s Remedies for Latent Defects in the Merx
The purchaser’s remedies for latent defects are delictual in nature as opposed to contractual and consequently the seller may be liable, even if he did not breach the contract.
These delictual remedies are called aedilitian remedies namely; actio redhibitoria and actio quanti minoris
Aedilitian remedies are available in two cases;
(a)Where the article sold is latently defective and;
(b)Where the seller makes a false dictum et promissu:- this is a material statement made by the seller to the buyer during negotiations bearing on the quality of the object of the contract of sale that goes beyond mere praise and commendation. See the case of Gannet Manufacturing Co (Pty) Ltd v Postaflex (Pty) Ltd 1981 (3) SA 216 (C)
(a)Actio redhibitoria
This action is available to the buyer only if the latent defect is material and the test of materiality is an objective one, i.e. based on the reasonable man test
This entitles the purchaser to rescission or redhibition. In order to get such relief, the purchaser must prove that the defect is so serious as to render the property unfit for the purpose for which it was sold & purchased & the purchaser would not have it if he had known of the defect.
If several articles are sold as a unit, a redhibitory defect in one of them would justify the redhibition of the total merx purchased. See the cases of Phame V Paize 1973 (3) SA 397 and Romla Products v Crick 1973 (1) RLR 225
(b)Actio quanti-minoris (actio aestimatoria)
This is an action for the reduction of the purchase price. It is normally brought by a purchaser who is entitled to redhibit, but decides not to do so, for any of the following reasons;
(i)he may not be able to give restitution
(ii)the defects in the merx may not be sufficiently serious to justify redhibition
(iii) the purchaser wants a reduction of the pretium as opposed to redhibition
However, like the action redhibitoria, the actio quanti- minoris lies where the defects take the form of failure to measure up to a dictum et promissum..
Aestomatorian damages are normally measured by assessing the difference between the pretium & the market value of the merx in its defect state at the time when defects were discovered, see the case of South Africa Oil & Fat Industries v Park Rhyme 1916 SA 400 and Harper v Webster 1956 R 7 N 10.