21 May 2010

Caveat Subscriptor - a cautionary tale of a new breed of suspensive conditions

There appear to be two species of suspensive conditions: the first, benign and simply a means to ensure that a contract only becomes effective once all the necessary pre-requisites are in place and the second (the new suspensive condition), a dangerous clause importing strict liability into that portion of the contract that is not suspended by the new suspensive condition - that is the condition itself.

The Supreme Court of Appeal (SCA) in the case of Mia v Verimark Holdings (Pty) Ltd [2009] ZASCA 99, made a finding that should alert the astute businessperson to a potential danger in the new suspensive condition. The following paragraphs intend to highlight what clients and attorneys should be aware of before signing a contract containing such a condition. Mia was faced with the second species of the clause. A proviso in the clause provided the following:

"Purchaser shall be liable to the Seller for the costs incurred by the Seller in respect of the drafting, negotiation and signature of this Agreement and any other damages suffered by the Seller as a result of such non-fulfilment."

The effect of the proviso in the new suspensive condition creates a contractual undertaking within the clause dealing with the suspensive condition itself, for liability to the Seller if the Purchaser fails to fulfil the new suspensive condition whether or not the Purchaser is at fault for such a failure. Any argument on the part of the Purchaser that he is not liable will fail, due to the fact that the contractual obligation is effective the moment he fails to fulfil the condition. The provision falls within the new suspensive condition itself and is unaffected by any suspension in relation to the remainder of the agreement.

This type of strict liability has undesirable implications for the Purchaser. The damages that could be suffered by the Seller could be extremely wide and the liability of the Purchaser equally wide, should the condition fail. What saved Mia in this case is that Verimark failed to prove the damages it alleged it had suffered. However, a Seller worth its salt in the market may soon get wind of this judgment and may include in the contract, a list of possible heads of damage it may suffer as a result of non-fulfilment of the condition, making proving those damages more likely.

Should people be aware of the possible strict liability that can be hidden in plain sight within the new suspensive condition, then part of the Purchaser's battle is won. Suspensive conditions can vary greatly in content and form, but it may serve the cautious Purchaser well to caste a wary eye over any suspensive condition that it may encounter.

Pieter Conradie, Director
Dispute Resolution: Litigation, Arbitration and Mediation

and

Neil Comte, Candidate Attorney
Dispute Resolution: Litigation, Arbitration and Mediation

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