How to conclude business contracts?
(This article was first published in Your Business Magazine Oct/Nov 2011 issue.)
Author: Emmie de Kock, Date: 21 September 2011
Business revolves around transactions following from contractual relationships. Such contracts can be concluded in a number of ways, namely verbally, or in writing and typing on paper, communication over the internet, exchanges of faxes, or only by way of conduct without any spoken or written words.
In some instances, the law prescribes that specific types of contracts must be in writing. Written agreements are the legal instruments of a business which set the rules to govern a business relationship, transactions and obligations of all parties who conclude a contract. It is by far the best to have clear, plain language, written agreements for all business relationships, to avoid misunderstandings, disputes and non-performance.
Requirements for a valid contract:
Regardless of the type of contract, or the manner in which it is concluded, any contract must comply with the following requirements to be valid:
- The parties must have legal capacity to conclude a contract. In this regard, it should be borne in mind that minors, namely unmarried persons below the age of 18, may not conclude contracts without the consent of a parent or legal guardian. A person must also be sufficiently mentally fit at the time of concluding a contract. Further, a person who is insolvent in terms of the Insolvency Act 1936 has limited capacity to conclude contracts, especially if a contract relates to assets. In the event that a contract is concluded with a company or close corporation, it must be established that the representative is duly authorised to conclude the contract which will bind the company or close corporation.
- The parties must have the intention to conclude a contract and reach consensus and agreement on the obligations of the parties.
- The terms of the contract must be certain. In this regard, a contract may be void if there is uncertainty on the material aspects of the agreement, or the language is too vague, obscure, and indefinite to determine the contractual intentions of the parties.
- The contract must be lawful in that it may not offend against any legislation or be contrary to the public policy. For instances, in terms of the Competition Act 1998, competing firms may generally not conclude an agreement to fix prices which will have the effect of lessening competition in a market.
- The performance to which the parties agree to, must be absolutely physically or legally possible.
- The contract must comply with formalities, if legislation prescribes formalities for the specific category of agreements. Formalities usually include that agreements must be in writing, signed and sometimes recorded on a public register, or notarised.
Types of business contracts:
Any business will end up having a range of different types of agreements with various parties. For purpose of this discussion, it is helpful to divide business agreements into the broad categories set out below:
1. Contracts to primarily protect your business
1.1 Association / Shareholders Agreements, Memorandum of Incorporation / Partnership Agreement / Trust Deed. This list is not exhaustive and these types of agreements govern the relationship of the owners and executive managers of business. It is important for the owners and investors of the business to first establish their relationship, rights and obligations, especially before the business starts investing, making or losing money.
1.2 Non-disclosure or confidentiality agreements are necessary when you present you business idea to possible investors or prospective new co-owners or customers of the business. For stronger protection, any business idea and concept should first be examined for any intellectual property aspects which may be registrable, such as patents, designs and trade marks, before presenting such business idea or concept to persons outside the business.
1.3 A Lease Agreement is an important agreement to help protect the location of your business. When concluding a lease agreement, it is important to pay attention to the rent, renewal term and conditions, and escalation provisions.
1.4 In the absence of written employment agreements, generally, the provisions of the Basic Conditions of Employment Act of 1997 will apply. However, there are a number of good reasons why Employments Agreements are important agreements to reduce to writing. In this regard, to make sure your business is protected it is advisable to include a reasonable restraint of trade clause in employment agreement of key staff member, as it may be detrimental to lose such resigning employee, to a competitor in the same area. Employment agreements should also include provisions protecting the business’ intellectual property (especially client lists) during the employment and after possible termination.
1.5 To ensure your business owns the copyright in website contents, graphic designs etc developed by sub-contractors, a copyright assignment agreement must be concluded to ensure copyright belongs to the paying business as the Copyright Act 1978 prescribes that copyright can only be assigned in writing.
1.6 Insurance agreements are usually standard. However, when concluding insurance agreements, the most important aspects a business owner should look out for are the amount or premium which will be payable, escalation clauses on the amount, description of the insured interest, and the list of circumstances under which the insurer will pay the business in event of loss or damage to the insured interest.
1.7 Terms and Conditions for your website are important, especially if consumers will be relying on the contents of your websites or will be concluding online transactions. In this regard, it should be borne in mind that the provisions of the Consumer Protection Act 2008 (“CPA”) will apply to such advertising and transactions. The Electronic Communications Transactions Act 2002 (“ECT”) also lists minimum information which must be included in and reflected on a website providing for internet communications and transactions. These requirements are usually included in website Terms and Conditions to make it binding on website users. The Consumer Protection Act further prescribes specific requirements for guarantees and return policies.
2. Contracts to primarily protect your customers
2.1 Consumer contracts are governed by the Consumer Protection Act 2008 (“CPA”), whether they are in writing or not. The CPA applies to every transaction in South Africa concerning the supply of goods or services where the consumer is a natural person, or company or close corporation with an annual turnover or asset value under the threshold of R3 million. All consumer agreements must be in plain language. The Minister may prescribe categories of consumer agreements which are required to be in writing.
Franchise agreements are also regarded as consumer agreements which must be in writing and signed on behalf of the franchisee as prescribed by the Minister in the form of regulations published in May 2011.
2.2 During dealings with customers, it is often necessary to allow credit transactions, credit facilities or credit guarantees. The National Credit Act 2005 (“NCA”) applies when credit transactions are concluded with natural persons or company/close corporation with an annual turnover or asset value under R1 million. In terms of the NCA, credit agreements must be recorded in writing, either in paper form, or in printable electronic form. The NCA also prescribes forms and minimum information to be reflected for small, intermediate or large agreements, depending on the type of agreement. Consumers are allowed to request disclosure of the credit agreement before entering into the agreement.
3. Contracts with persons supplying your business with goods or services
3.1 Manufacture / Supply / Distribution agreements are applicable, especially for businesses involved in retail, distribution or wholesale of products. To ensure that all parties know what their rights and obligations are, it is recommended that these contracts must be in writing.
3.2 Service agreements apply to any third party providing a service to your business on a sub-contract basis. These types of agreements may include IT support or management service agreement or consultancy agreements with persons providing professional or training services in your business. The most important aspects to agree on are the performance which is expected, possible turn-around times and payment.
Strictly speaking, any of the above agreements may be concluded by way of electronic communication. In the event that agreements are concluded on a website, or by way of email, the ECT will apply.
The ECT came into force on 30 August 2002. The ECT Act applies to all electronic transactions concluded by “data messages”. The phrase “data message” refers to electronic representations of information in any form which is created, sent, received, or stored by electronic means. It thus includes emails correspondence, faxes, sms text messages, video or voice messages.
The ECT Act applies to all electronic transactions concluded between any size businesses, and between any size suppliers and consumers.
The purpose of the ECT Act is also to protect consumers who contract with suppliers by electronic means for the supply for goods or services. A “consumer” for purposes of the ECT Act is any natural person who enters into an electronic transaction with a supplier of good or services.
With the increase of e-commerce websites, it is not surprising that the most well known form of electronic transaction is internet contracts. As mentioned above, the ECT Act prescribes minimum information which must be listed on the website of any business offering goods or services for hire, sale or exchange by way of electronic communications. Depending on the lay-out and functionality of the website, the prescribed information could be included in the general Terms of Conditions for the use of the website.
A customer is entitled to cancel an electronic transaction, relating to the supply of goods, within 7 after the receipt of the goods, and within 7 days after conclusion of the contract in the case of a service agreement.
It follows from above, that a valid contract has to comply with certain requirements to be enforceable. The most important requirements are that the parties must have contracting capacity, reach consensus on clear terms of the agreement, and comply with formalities, if prescribed by law.
There are numerous types of agreements which are required to properly protect your business and customers. It is best that such agreements must be reduced to writing for certainty and to avoid disputes. Clear, strong agreements may also be regarded as assets in a business as it is prove of your contractual relations securing the assets and revenue of the business.
When communicating or transacting online, or via cell phones, such communications could constitute valid contracts and the ECT will apply to contracts concluded in this manner.
Various other new statutes which came into force over the past few years may apply to agreements necessary and used in your business. Standard agreements should be used with caution and regularly reviewed and updated to ensure it complies with the current law to avoid statutory penalties and consumer complaints.
Please note that the above remarks are not meant as formal legal advice. Each case should be fully considered by an attorney with appropriate knowledge and experience in contract law.