When contracting with another party, more often than not it constitutes a start to a new business relationship. Business owners need to put the pen to paper and trust that not only will this contract govern and regulate the relationship between them, but also mitigate the damages in the event that one party does not keep to the promises made to secure the services of the other or payment of great amounts of money on the other hand.
However, many business owners have come to realise that a contract is ultimately not only as good the construction of its content. One critical consideration is often not brought to paper – the security to ensure that a party is not making empty promises.
Great amounts of legal costs are being expended to bring justice to situations where a party breach material terms of an agreement, leaving the non-defaulting party with a successful court judgment and sometimes even a cost order to recoup the wasted costs. A disappointing reality is that the defaulting party against whom such order should be enforced is often a so-called “man of straw”. Unfortunately the best of attorneys cannot turn straw into gold, no matter how fairytale-like the litigation process may be portrayed to be.
Fortunately though, the law recognises a number of mechanisms which provide some form of security to contracting parties and in many instances expose the irresponsible businessman before wasting the precious time, efforts and money of businessmen who are serious about business partners and their relationships. Four of these risk mitigating mechanisms are briefly discussed below:
- Bond: Mostly found in credit- and other loan agreements, a borrower (Mortgager) offers immovable property to a lender (Mortgagee) as security for the repayment of debt. The Mortgager agrees to pass a mortgage bond over its immovable property in favour of the Mortgagee as security for the due and punctual performances in terms of the agreement. Unless such bond over such property is cancelled, the Mortgager cannot sell and transfer the property which naturally compels the borrower to settle all outstanding monies owed in terms of the contract to enable him to have it cancelled or released in order to sell the property.
- Special and general notarial bonds: Should a lender not own any immovable property or the immovable property’s value does not satisfy the value of the possible claim for damages or otherwise, its movable property can be utilised for such purpose. A special notarial bond can be registered over specified movable assets and is described in the bond in a manner to make it easily recognisable. A general notarial bond can be taken on the remainder of the assets in general to cover the balance of the amount owing or otherwise. Apart from the fact that the borrower cannot sell these goods without the consent of the lender, it puts the lender amongst the first in line in the event when creditors are paid in insolvency proceedings.
- Pledge: One party (pledgee) may request the other (pledgor) to give possession of an asset to it for the due and punctual performance of its obligations – thereby creating a real, but limited right of security. A pledge agreement can be drafted to cater for an automatic passing of ownership of such asset in the event that the pledge does not fulfil the principal obligation in terms of the agreement. Naturally, the value of such asset should preferably be equal or as close as possible to the value or quantum of the damages the pledgee may suffer in the event of default by the pledgor which should prevent unnecessary court processes to recoup such damages.
- Guarantees: Although these forms of security are mostly found in construction contracts, it has become a useful tool for parties to ensure performance from each other in terms of service- and other agreements. A payment guarantee is usually a guarantee provided by a third party to pay a certain amount to the other contracting party in the event that the guarantor may not fulfil its payment obligations in terms of the contract. Similarly, a performance guarantee is a guarantee provided by a third party to pay a certain amount to the other contracting party in the event that it is proven that the guarantor did not fulfil its performance obligations in terms of the contract. Usually the amount to be paid is an amount equal to or a certain percentage of the contract value.
All of these and other forms of securities can be incorporated on the first day of contracting and if utilised correctly, indemnities, warranties, sureties and other terms and provisions will only be agreed to by the serious business man who does not wish to waste his own or the other party’s valuable time, efforts and money. It remains therefore critical to consult an attorney before finalising contracts with other parties with the view of avoiding payment in straw in exchange for your serious commitment to contract.
Douw Breed. (B.Com LLB)
Barnard Incorporated is a firm of attorneys situated in Centurion, Pretoria.