Forfeiture Clauses – Penalties And Prejudice

 

Property sale agreements commonly provide for the buyer to pay a deposit up front, often coupled with a forfeiture provision to the effect that, should the sale be cancelled through the buyer’s default, the seller can retain the deposit in full as “pre-estimated damages” – in other words, without having to prove the actual damages suffered.

 

The exact wording of such a forfeiture clause will vary from agreement to agreement, and the terminology may become very confusing. For example, the clause may purport to be a “rouwkoop” clause, which is in fact a different concept altogether (the distinction is of great interest to lawyers, but too complex to go into here!). Both sellers and buyers should obtain proper advice before signing anything along these lines – there are many subtleties of wording involved!

 

 

A recent High Court case, in which the Court confirmed forfeiture to the seller of the balance of a R520.000 deposit after a property sale fell through (a guarantee to be provided by the buyer was a day late), illustrates how our law deals with these clauses: – 

  1. Even when the clause provides for automatic forfeiture of the full deposit to the seller, a court has the discretion (in terms of the “Conventional Penalties Act”) to reduce the “penalty” if it is not “fair and reasonable” in the circumstances, i.e. if it is out of proportion to the prejudice suffered by the seller. 
  2. The onus is on the defaulting buyer to show that the penalty is disproportionate. 

Note also that the new Consumer Protection Act, with its insistence on fairness and transparency, is bound to have an effect – in the buyer’s favour – on the wording and enforcement of forfeiture clauses in the future.

Business Rescue: First Aid For Failing Companies

 

Companies (and close corporations) in financial distress may now, courtesy of the new Companies Act, opt in appropriate circumstances for “Business Rescue” rather than liquidation.

 

Directors: Any director of a company in financial difficulty should take proper advice on what to do sooner rather than later. Failure to act correctly, and in time, could expose you to personal liability for the company’s debts – and even perhaps to the spectre of criminal prosecution.

 

Creditors: If on the other hand you are a creditor of a company subject to business rescue proceedings, take advice immediately on your best course of action, with particular emphasis on the following questions: –

 

1. Is the chosen business rescue practitioner suitably qualified and independent?

 

2. Should you – and if so how can you – participate in the rescue proceedings being administered by the practitioner? Creditor participation could include –

 

a) Formation of a creditors’ committee (to be consulted by the practitioner during the development of the business rescue plan)

b) Voting on any proposed rescue plan

c) Proposing an alternative plan of action

 

3. Are you affected by the practitioner’s powers to suspend (and in some cases cancel) existing contracts?

 

4. Should you – if asked – provide “post-commencement finance” (as either a financier or trade creditor)? And if so –

 

a) Where will your new claim rank for payment?

b) If the company has any unencumbered assets, should you take security over them?

 

Hookers Behaving Badly – Sport Injuries And The Law

 

You have no claim in our law for any loss or injury sustained whilst voluntarily engaged in an activity which you know may cause you the harm suffered. This common sense principle – volenti non fit iniuria (“a willing person is not wronged”) came into play in a recent case before the High Court, where a schoolboy rugby player had suffered serious neck injuries whilst participating in a scrum as his team’s hooker.

Although the Court noted that “participants in a rugby game can expect to sustain injuries, even serious injuries, in the normal course of a game”, it nevertheless held the opposing hooker who had caused the injury to be liable for damages in this case.

 
The “jack-knife” scrum manoeuvre which caused the injury was, held the Court, “a serious transgression” of the laws of the game, “extremely dangerous”, and “unexpected”. Accordingly, “it would not have constituted conduct which rugby players would accept as part and parcel of the normal risks inherent to their participation in a game of rugby.”

 
The injured player could not therefore be said to have consented “to the risk of being injured in this manner”.

So – engage in dangerous activities (sporting or otherwise) at your own risk. If you are injured, you will probably only have a claim if the injury was caused by dangerous play, or by play in breach of the game’s rules and conventions.

Double Trouble: A New Debt Cap Confirmed

 

Our common law has always provided that interest stops running on a debt as soon as it equals the capital amount. This “in duplum” rule seeks to protect debtors in financial difficulty from being over-extended, by limiting their liability to a maximum of double the original debt.

 

In practice however, a debtor could still end up paying much more than double in total if, say, he or she makes interim payments which the creditor applies to outstanding interest. In that event, the interest starts running again, and the debtor is trapped in a never-ending cycle of payment just to service accruing interest. The common law rule also applies only to interest – so other charges can push the total debt over the double.

 

Good news for consumers is that the National Credit Act has modified this rule to provide better cover for them. As confirmed by a recent Supreme Court of Appeal decision, the Act has, in respect only of any debt falling under its provisions, extended the rule in two main respects:- 

  1. No longer only interest – but now also a range of fees and charges related to the debt – all cease to run if they combine to exceed the outstanding debt. 
  2. Any payment by a consumer after default (unless it has the effect of ending the default) “simply reduces the outstanding principal debt”- so post-default payments are no longer sucked into a black hole of continuing interest accrual. 

Credit providers: tighten up your lending and recovery procedures to avoid this extended rule kicking in!

 

Consumers: check what’s being claimed from you – don’t overpay!