SPECFIC CONTRACT:
TOPIC 2: CONTRACT OF SALE
PART 2
2. CONSEQUENCES OF THE CONTRACT OF SALE:
a) Obligationary consequences: COS is a contract thus creates rights and duties for parties
b) Must be a transfer of possession (AND ownership, If relevant)
c) Risk rule – passing of risk from Seller to Buyer
o Who bears risk for accidental damage / destruction of merx
2.1 Transfer of ownership
Lendalease v Corporacion de Mercadeo Agricola 1976 4 SA 464 (A) 481-484C; 489A498H (CMA) (PRESCRIBED)
Facts
• CMA – Venezuelan company concluded a COS with SA maize board ito which CMA
purchased an amount of maize, because it needed to be transported from SA to Venezuela,
CMA concluded a shipping contract (contract of transport) with company Rephaely (in SA)
• CMA breached the shipping contract as halfway through it decided it no longer wanted to
use R but rather use another company
• Thus, CMA concluded another shipping contract with another company (Servicios)
o “Raphaely claimed and continues to claim that CMA unlawfully repudiated the
shipping contract and that as a result of such repudiation and breach of contract
Raphaely suffered damages in an amount of R1 970 340.”
§ This is a good example of breach of contract by CMA in form of
repudiation.
• Which gives rise to breach of contract remedies - in particular a claim
for damages.
• Raphaely wanted claim for damages
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Ratio:
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Before L could institute claim for damages it needed to attach the relevant cargo on the ship
so that is can find jurisdiction in the SA HC.
o Attachment needed to take place as CMA is a Venezuelan company (peregrinus /
foreigner) would fall outside SA jurisdiction
o L has to attach the maize (on board ship already) to FOUND court’s jurisdiction
(attach ad fundadum jurisdictionem )
Thus, the steps that must be taken:
o Prove CMA is owner of maize
o Attach maize ad fundandam jurisdictionem
o Institute its claim for damages.
[p 489] “It is clear law that an applicant seeking the attachment of his debtor's property ad
fundandam jurisdictionem must satisfy the Court, on a balance of probabilities, that
the property to be attached belongs to the debtor
o MA argument:
§ “…that ownership in the cargo would not pass to CMA until the bill of lading
and other documents relating to the cargo had been handed over to the bank
acting on behalf of CMA in exchange for the payment of the price in cash;
and that until then it remained vested in the seller, the Board [SA Maize
Board].”
Court draws a distinction between credit sale and cash sale
o Under a cash sale ownership is normally taken to have been intended to pass once
there has been, in addition to delivery, due payment of the purchase price;
whereas in the case of a credit sale the fact that credit has been granted by the
seller to the purchaser is taken as a strong indication that ownership was intended to
pass merely on delivery.
o A cash sale requires payment of the purchase price to be made against delivery of
the goods. A credit saleis one in which the time for payment has been postponed for
a substantial, i.e., non-eligible, period after delivery
In order for ownership to be transferred there must be delivery and payment of the purchase
price
o Delivery = Can we say that the merx has been delivered?
§ This has to do with the Bill of Lading which serves as a symbol of the goods.
When you hand it from person to person you are dealing with symbolic
delivery.
§ The bill of landing is issued by the master of the ship once the goods have
been loaded onto the ship and the captain is satisfies that all is in order.
§ For delivery to take place to the buyer. The seller should present the bill of
lading to the buyers bank. This constitutes delivery to the buyer.
§ Problem in this case = no correct bill of lading had ever been issued.
Thus, the court held:
o “…in my view, delivery of the maize could not take place in terms thereof until the
bill of lading was handed over, duly endorsed in blank, by the seller to the
buyer's bank. Until this happened the seller, as holder of the bill, would retain
control of the maize
Would it make a difference in the case if the sale was one of credit and not cash?
o Because delivery in a minimum requirement in both a cash sale and credit sale
o If there was no bill of lading then there can be no delivery yet
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Questions posed to class:
o When does ownership transfer in a cash sale vs a credit sale?
§ NB: Delivery of the merx is a basic requirement for transfer of ownership in
both a cash & credit sale.
o Given that delivery is a basic requirement, what role does the bill of lading play in this
context (i.e., of delivery)?
o Given the role played by the Bill of Lading, why did court conclude that ownership
had not been transferred to CMA?
o Would it have made a difference to court’s conclusion if the parties had concluded a
credit sale rather than a cash sale, as was found by the court?
2.2. RISK RULE
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Governs the passing of risk
Something happens to the merx between conclusion of contract and transfer of possession /
ownership
o Often contract conclusion and transfer of ownership happen at the simultaneously –
normally risk not an issue as buyer is in possession of merx. Where it becomes tricky is
where there is a delay between these two events. Why? Because provided certain
requirements have been met, the buyer will bear the risk for accidental
damage/destruction to the merx even if he is not in possession of that merx.
o Relevant time – after contract conclusion but before transfer of ownership/possession
(delivery)
§ Damage or destruction. Not fault on contracting parties, risk rule governs this
period. Has no effect on transfer of ownership.
§ In the absence of parties agreeing anything else this rule applies – something
happens to the merx between the conclusion and transfer of the
possession/ownership.
Risk rule: exception to general principles below
o a) General rule - OWNER (or person in possession) who bears risk of accidental
damage or destruction of an object
o b) Risk rule is an exception to consq which ensue when there had been supervening
impossibility of performance
§ When dealing with reciprocal obligations when one of those obligations
becomes impossible to perform, then obligation is extinguished BUT SO is the
reciprocal counter-performance
What does the rule say?
o If your contract of sale if perfecta (merx fixed, price fixed, no unfulfilled suspensive
conditions)
§ Risk passes to buyer: The buyer bears the risk of accidental damage or
destruction of the merx. The buyer must still pay the full price even though he
receives nothing from the seller because merx is destroyed/receives a damaged
merx. Cannot ask for reduction.
§ Benefits passes as well
o If contract is imperfecta (unfulfilled suspensive condition)
§ Risk is on the seller: Where merx has been destroyed or damaged, his obligation
is extinguished but will not receive purchase price.
o Risk rule is a naturalia = can be excluded or varied by parties
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2.2.1 Definition of concepts
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Risk: accidental destruction / damage to merx (periculum) by factors outside the parties sphere
of control
Not attributable to the seller
o Vis maior (acts of god) and casus fortuitus (theft)
§ Used interchangeably
o Can include conduct of guilty 3p provided 3p is not in sphere of control of the seller
§ Eg: if employee of seller then doesn’t fall within ambit of risk rule – not regarded
as accidental damage or destruction
o “A and B agree that B will buy A’s car and on x date it appears the car is damaged in
some form or another” – discuss
§ Dealing with a damaged merx in particular then must consider 3 possible
alternatives
• Merx is damaged because S not complied with duty/care – own consq
• Merx is damaged because of a latent defect – own consq
• Neither one of above examples is governed by risk rule
• ONLY WHERE damage is a result of vis maior then start looking at risk
rule
o Make sure you look at the reason for the damage
Benefits: arise from merx/connected to merx
o Accessory benefits: natural or civil fruit
§ Natural fruit: buys 5 cows from S, COS is perfecta (risk has passed to buyer) thus
benefits also pass to buyer, subsequently 3 calfs à also go to buyer
§ Civil fruit: rental
o Buyer entitled to substitutionary benefits
§ Compensation for expropriation
• Property, provided contract is perfect, expropriation will come to the buyer
§ Damages claim against 3p
• Merx damaged by 3p, not within S sphere of control, any claims S would
have been able to institute v 3p must be ceded to the buyer (albeit seller
must cede them)
§ Insurance benefit / payout?
• Claim from insurer is directly connected to merx/ auto there?
• Does not arise from the merx
• Rather, separate contractual benefit between S and insurer
o This insurance claim, in event merx is destroyed or damaged does
not pass with risk / benefits
o Thus insurance benefit is not transferred with the buyer together
with the risk
“Perfecta”
i)
Price fixed/ certain OR formulated as simple sum
• Simple sum: 5 bags wheat at R20 per bag = R100 = certain
• Sale Ad mensuram: destruction vs damage before measurement
o Merx must be counted, weighed or measured iot render price certain
o EG: all the bags of wheat in my warehouse at R500 per bag, must first count
bags iot ascertain the price
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General rule: contract is only perfecta ito sale ad mensuram when the merx has
been counted, weighed or measured because it is at this time that the price
becomes fixed or certain
§ Prior to this, contract is still imperfecta, therefore risk for damage or
destruction is still on the SELLER
ii)
Merx must fixed / certain
• Genus sale (family or class):
o When dealing with UNLIMITED genus sale
§ Rules relating to risk are not applicable because a genus can never
perish, thus even if S was thinking of 3 bags of ceylon tea in a particular
place and it was destroyed, irrelevant obligation of seller to deliver the
bags remains (must make another plan)
• Limited genus sale?
o Merx coming from a particular genus, but source thereof is nb
o EG: “3 bags of Ceylon tea from the farm purple haze”
§ Merx is merely ascertainable, iot make it certain you have to
INDIVIDUALISE it and appropriate it to the contract
• Must be some kind of OVERT act on part of S to separate the
merx that is obj of particular sale contract and set it aside
• Unclear what sufficient act of appropriation is, must be able to
say these bags of tea are subject of contract between A & B, merx
only becomes perfecta once act of individualisation has occurred
• because heavily fact dependant
o Acts regarded as sufficient in past
§ Load bags of tea onto truck to be transported to the
buyer
§ Label the tea indicating it belongs to B
o (popular view) Risk for damage and destruction of merx only passes to the buyer
once the merx has been individualised
o (less popular) Should be governed by split/double risk rule
iii)
No unfulfilled suspensive conditions
• If suspensive condition – valid contract but not yet enforceable
• What happens to risk if contract is subject to a suspensive condition?
• Iof contract to be perfecta the suspensive cond must be fulfilled
• Double/split risk rule applies
o If the merx is DESTROYED PRIOR to suspensive condition being fulfilled, then
the risk lies on the SELLER
o However, if the merx is damaged / deteriorates prior to fulfilment of suspensive
condition and the suspensive condition is subsequently fulfilled then the risk is on
the BUYER
o Variation of normal risk rule – risk on buyer for damage that occurred when
contract was imperfecta
§ Because where a suspensive cond is fulfilled then it’s operation is
retrospective (as if contract had always been perfecta)
§ Why doesn’t this happen for destruction – because as soon as it is
destroyed there is no hope of the obligation ever being fulfilled (ever
becoming perfecta) – why risk remains with the seller
o Act of counting, weighing or measuring (sale ad mensuraum) AND
o act of individualisation and appropriation (limited genus sale)
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o
Should be seen as analogous / similar to a suspensive cond
§ If sale ad mensuram – double risk rule, if merx destroyed before counted
, weighed or measured then risk on seller
§ However if merely damaged prior count, weigh, measure and it
subsequently takes place then this risk rests on the buyer
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Issue – why overcomplicating it when you don’t have to
§ Ie by saying split risk rule should apply to sale ad mensuram and limited
genus sale
NB! Saying a contract is perfect is NOT the same as saying that a COS is valid
• Valid COS does not equate to perfecta
o Sufficient to conclude COS were merx/price is ascertainable but where parties
have agreed on this, then this contract is NOT yet perfecta because price/merx
must be certain
o Could have a valid contract with suspensive condition – would be valid but not yet
perfecta
2.2.2. exclusion of rule by the parties
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Risk rule = naturalia of COS
o As with all naturalia, parties can exclude the risk rule either expressly or tacitly in the
contract. This presupposes that parties are aware of the rule
Agreement can be express or tacit
o However, courts will not likely conclude that CL risk rule has been excluded tacitly
§ Thus should rather do so by means of express agreement
Standard terms
o Can also exclude it by including standard terms in contract, that have developed over
time as part of mercantile custom (set out parties core duties and regulate the passing of
risk)
o Mostly found when dealing with cross-border transactions (goods have to travel – sea or
overland)
o Grouped into 4 categories (C, D, E and F terms)
§ EXW
§ FOB
§ CIF
§ See also Incoterms® 2020 (https://incodocs.com/blog/incoterms-2020-explainedthe-complete-guide/)
o
EXW: EX Works
§ Goods will be made available EX Works – Seller will make goods available at
place of business (usually)
• Ex works refers to the premises of the seller, their place of business for
example a factory or a warehouse.
§ the seller needs to make the goods available at their place of business, and it is
at the buyer’s cost to go and collect the goods at the seller’s place of business. It
is also at the buyer’s expense to transport the goods to where they need to go
§ As soon as goods are made available at sellers place of business, then risk of
accidental damage or destruction rests on the buyer
§ Least onerous for the seller
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Overrides the common law
• Risk passes when goods are made available
• Does not matter if contract is still imperfecta because parties have varied /
excluded CL
o
FOB: Free on Board
§ Goods transported over sea
§ Seller must transport the goods and deliver the goods on board a named ship
and any further costs from that point is for the buyer. Seller bears all costs until
port of shipment and thereafter the buyer is responsible. The goods are deemed
to be delivered when they pass over the railing of the ship.
§ Risk passes to the buyer at this stage, therefore the risk already passes in the
port of shipment in other words where the ship is leaving from.
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CIF - Cost Insurance Freight
§ Ito SA law, seller must arrange for insurance of & transport of goods
§ Seller is obliged to get the goods on the ship at the port of shipment and then
arrange and pay for cost of transporting goods to port of destination and
arranging insurance in favour of the buyer
§ The purchase price will take into account the costs of the goods, cost of
insurance and cost of transporting of goods
§ Risk passes to the buyer when the goods are over the railing of the ship / on
board at the port of shipment
Should we keep the risk rule?
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When contract is perfecta, risk passes to buyer, even though in some cases buyer is not in
possession of merx.
Pro: Zimmerman, Nicholas
o Justify the rule on the basis that while the buyer may not be the owner yet, legally, when
the contract is perfecta, he can be regarded as the owner in an economic sense
o When contract is perfecta risk + benefits pass to the buyer, in this perspective the buyer
is the economic owner therefore risk should pass. Also, argument that parties are not
bound by this rule and may vary it. Also, rarely a delay between conclusion of contract
and delivery of merx, transfer of ownership/possession.
Contra: layperson do not expect, outdated
o Rule itself is counterintuitive – you don’t expect to bear risk of accidental damage or
destruction when merx isn’t in your possession
§ Strange responsibility to place on a person
o Outdated – other modern systems (international)
§ Risk passes to B when they are in physical possession of goods sold. When
merx has been delivered.
o Duel track system when comes to risk rule depending on whether COS is regulated by
CL rules OR S19 CPA
S19(2) CPA “unless otherwise expressly provided or anticipated in an agreement, it is an
implied condition of every transaction for the supply of goods or services that – (c) goods to be
delivered remain at the suppliers risk until the consumer has accepted delivery of them”
o Risk passes to consumer upon delivery
o No immediate apparent reason why have different risk rules for CL and CPA
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