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Some terms of a contact may be tacit

A contract is a legally binding agreement entered into by two or more persons. In a few cases (such as agreements for the sale of land) the law provides that the contract is invalid unless it is in writing. The general rule, however, is that a contract need not be in writing, and that an oral agreement is no less binding than a written one.

Where the law does not require a contract to be in writing, it is possible that the entire agreement, or parts of it, may be tacit – that is to say, agreed upon, but without ever being put into words by the parties. For example, if I regularly buy widgets from Surefire Shopping, and I telephone an order for 100 widgets, and nothing is said about the price, it would be tacitly agreed that I will pay the shop’s usual price for widgets.

Of course, where a contract is not in writing, problems of proof can arise. Generally, the party who avers that a contract has been entered into, must prove it, and must also prove all the terms of the contract. If he is unable to prove, on a balance of probabilities, that a contract was entered into, or that it contained a particular term, then a court will not award judgement in his favour.

What must be proved to establish the existence of a tacit term?

How does a person prove that an agreement contained a tacit term? In the recent case of City of Cape Town (CMC Administration) v Bourbon-Leftley and another NNO 2006 (3) SA 488 (SCA) at 19 the Supreme Court of Appeal held that –

The seller of goods should protect himself contractually against the risk of the purchaser’s insolvency

Assume that a seller, S, sells goods to P, a purchaser, for R100 000 and delivers them. Before payment of the purchase price, however, P goes insolvent and is unable to pay.

This is, of course, a very common commercial scenario, but it tends to leave the seller enraged and feeling cheated, particularly where the purchaser is a company whose directors and managers are going to walk away from the company’s insolvency, financially unscathed in their personal capacities, leaving the company’s creditors to bear the loss.

As the scenario is so commonplace, sellers are well advised to pre­empt the situation by taking legal advice when they first start doing business with a purchaser, on how to protect themselves to the maximum extent against the risk of loss if the purchaser goes insolvent before payment.

The legal principles

What exactly is the seller’s legal position where the purchaser goes insolvent after delivery of the goods but before payment of the purchase price?

he first thing to determine is – who is currently the owner of the goods? It stands to reason that the seller is in a strong position if, despite the fact that he has delivered the goods, he is still the owner.

In our law, ownership in goods passes when (1) the purchase price has been paid or credit given and, in addition, (2) the goods have been delivered.

"a tacit term is based on an inference of what both parties must or would necessarily have agreed to, but which, for some reason or other, remained unexpressed".

In this case, the court emphasised that the courts do not easily recognise the existence of a tacit term, and that this is because the courts cannot "make contracts for people nor supplement their agreements merely because it appears reasonable or convenient to do so".

In other words, in order to prove a tacit term in a contract, it is not sufficient to prove that it would have been unreasonable of the parties not to have agreed to such a term, or that it would have been convenient to include it in the contract if the parties had thought about it at the time. The court went on to say that –

"A proposed tacit term can only be imported into a contract if the court is satisfied that the parties would necessarily have agreed upon such a term if it had been suggested to them at the time. If the inference is that the response by one of the parties to the bystander’s question might have been that he would first like to discuss and consider the suggested term, the importation of the term would not be justified."

Where an attorney draws a contract, he or she will almost always include a provision which says that the written contract is the entire agreement between the parties, and nothing has been agreed upon which is not recorded in the written agreement.

The purpose of including such a provision is to rule out any possibility that one of the parties may later contend that the written agreement is not the entire agreement between the parties in regard to the subject matter of the agreement and that the agreement includes one or more tacit terms.

Hence, if the seller has granted credit to the purchaser and has delivered the goods, ownership will pass to the purchaser on delivery; if the purchaser goes insolvent before paying, the seller will be in the unenviable position of standing in a queue with all the other unsecured creditors.

Contractual clauses which defer the passing of ownership until payment is made

The obvious solution seems to be for the seller to ensure that the contract of sale stipulates that ownership in the goods sold will not pass to the purchaser until the purchase price has been paid in full.

However, in that event, section 84(1) of the Insolvency Act, 1936, will be triggered if the purchaser goes insolvent before payment. This section provides, in essence, that if the contract contains a clause which states that ownership in the goods does not pass until payment has been made in full, and if the purchaser goes insolvent before the purchase price is paid, the seller’s ownership in the goods is automatically, by operation of law, replaced by a hypothec over those goods. (See Ukubona 2000 Electrical CC v City Power Johannesburg (Pty) Ltd 2004 (6) 329 (SCA).) Hence, when those goods are sold in the course of the insolvency proceedings, the proceeds of the sale will go toward paying the seller what he is owed. This is not quite as good as the seller being able to claim ownership and reclaim the goods themselves, but is a valuable second prize – and certainly better than having no security at all for payment.

Hence, sellers of goods should instruct their attorneys to ensure that their standard terms of sale stipulate that ownership does not pass in the goods until the purchase price has been paid in full, thereby ensuring that the seller gets the benefits of section 84(1) of the Insolvency Act if the purchaser goes insolvent before payment.

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