Conversations and agreements – when are they binding?

Conversations and agreements – when are they binding?

Introduction

A major cause of disputes occurs over the content of agreements. Sometimes these disputes are a result of poorly drafted contracts; content and deliverables not being adequately described; or as a result of variations to the original contract. Another source of dispute is verbal contracts and conversations where the parties dispute the content of what was agreed upon.

Both verbal and written contracts are, in general, legally binding. However, sometimes writing is unavoidable and is a formality for the contract to be valid, for example: the sale of immovable property, antenuptial contracts, wills and executory donations. Along with the preceding list, all documents that have to be submitted to and registered with the Deeds Office must also be set out in writing.

Written contracts have various advantages, among others, they:

  • ensure that both parties are fully aware of the contents of their agreement;
  • create transparency between the parties;
  • create and maintain trust between parties;
  • can stipulate formalities that must be met for validity; and
  • serve to avoid unnecessary disputes.

Electronic communication

The Electronic Communications and Transactions Act 25 of 2002 (“ECTA“) recognises electronic messages (or “data messages“) as the functional equivalent of writing, meaning that data messages have the same legal validity as content written on paper. This results in any formality requiring writing to be met when the information is in the form of a data message. ECTA, however, imposes a requirement of accessibility to accompany data messages by requiring data messages to be easily accessible to the parties thereto.

The validity of electronic messages was confirmed by the Supreme Court of Appeal (“SCA“) in November 2014 in the case of Spring Forest Trading v Wilberry (Pty) Ltd. The court held that variations to an agreement between the parties made via email were binding – the arguments put forth were that the variation to the agreement was required to be made in writing and signed by both parties in order for it to be valid and that this requirement had not been met because the variations were only discussed and agreed to via email. The court stated that the email signatures at the bottom of the emails amount to signatures and that the email messages constituted writing in terms of ECTA.

Conclusion

Written contracts are always recommended. The rationale being that oral agreements offer no objective or clear record of the details of the agreement and the specific terms are often difficult to establish when a dispute arises. Well drafted agreements should include useful information and guidance to the parties to ensure a fair and smooth resolution of disputes or disagreements. The guidance information should address when parties may cancel the agreement, what constitutes breach and how the breach should be remedied.

Written agreements should also set out that any changes to the agreement are not valid if they are not in writing (and signed by both parties) – which prevents disputes over any amended terms of the agreement. This also prevents quarrels of a “he said, she said” nature as everything has been recorded. As set out above, this can be done via email or other electronic messages, including Whatsapp, for example, however, the name of the sender must be signed at the end of the message for it to be valid.

It is important to understand that following the abovementioned judgment, parties to a contract should specifically refer to an “advanced electronic signature” – which is a special signature provided for in ECTA – being required to amend the agreement if the intention is for the usual email type correspondence not to effect an amendment to the agreement.

Remember, you could be bound to a contract where you have willingly signed it even if you have not yet read it.

Important take-aways

  • electronic communication is legally binding and is the equivalent of writing;
  • some agreements can only be altered if the variation is in writing and signed by both parties;
  • some agreements must be in writing and signed (and sometimes commissioned or notarised) in order to be valid and binding; and
  • oral agreements are binding (but not advised!).
The difficulties involved in setting up and managing Section 12J Venture Capital Companies

The difficulties involved in setting up and managing Section 12J Venture Capital Companies

“Section 12J Venture Capital Companies” (Section 12J VCC) seem to be a bit of a buzz phrase doing the rounds in the South African entrepreneurial world at the moment. We have had several requests from new and existing clients to set one up, mainly because of the attractiveness of these structures to investors.

A Section 12J VCC is a company formed in terms of section 12J of the Income Tax Act, 1962 (ITA) – it is essentially a pooling mechanism created by the South African Revenue Service (SARS) to encourage largely high net worth individuals to invest in start ups. The incentive to invest in a Section 12J VCC comes from the fact that investors get a full tax rebate on the funds invested into the Section 12J VCC. So, if a person in the highest tax bracket (presently 45%) invests R 1 million, they will get a tax rebate of R 450,000, meaning that the net investment is R 550,000.

The Section 12J VCC itself is relatively simple to set up, but the real complexity and difficulty comes with the management of it. The legislators have included several anti-avoidance provisions in section 12J of the ITA, which have made it particularly difficult, and in our experience prohibitive, for anyone to manage and run a Section 12J VCC. In fact, at the moment, there are only fifty six Section 12J VCCs approved by SARS and according to the information that we have gathered, and less than half of those are actually trading. It is interesting to note that the legislation allowing these funds was put in place in 2009 – that equates to, on average, seven of these companies formed (not necessarily even operating) every year since inception.

So why is it so difficult to get a Section 12J VCC off the ground? Below we have highlighted some of the major difficulties that some of our clients have had:

  1. No investor into the Section 12J VCC may be a “connected person” in respect of the Section 12J VCC, which essentially means that a natural person cannot own 20% or more of the shares in the Section 12J VCC (directly or indirectly) and a company can own up to 50%, in limited circumstances, of the Section 12J VCC (directly or indirectly), but no more.
  2. No more than 20% of the capital raised through the issue of shares may be invested into any one investee company.
  3. An investee company cannot be a “controlled group company”, meaning that a Section 12J VCC cannot own 70% or more of the equity shares in an investee company.
  4. To be recognised by SARS, the Section 12J VCC must be registered in accordance with section 7 of the Financial Advisory and Intermediary Services Act, 2002 (FAIS), meaning that the company must have a “key individual” in its employment and the Financial Services Board must issue it with a certificate.

There are many more nuances to a Section 12J VCC that we have not highlighted here as they are too lengthy to get into, but they also make for significant barriers to entry.

Regarding point one above – the issue of being a “connected person” – this provision was clearly put in place to avoid situations where a single investor uses this platform to invest in a company where he ordinarily would have done so in any event, but he simply sets up a Section 12J VCC to reap the tax benefit on an investment that he was always going to make.

What we have seen is that there are legitimate arm’s length transactions where investee companies are told that the investor will only invest in them if they are able to use the section 12J of the ITA structure and because of the anti-avoidance restrictions, investee companies are losing out on a potential investment as it is often not possible for this to be done.

Regarding points two and three above, Section 12J VCCs are often restricted in the manner that they can invest when they see a good potential investee company, as they cannot invest more than 20% of their raised capital into the investee company. This means that investee companies can, and do, miss out on obtaining more funding or any funding altogether.

It can also prevent arm’s length investors from investing into one investee company, as they cannot use the Section 12J VCC vehicle to invest into a qualifying investee company because they cannot own more than 70% of the investee company and they cannot use more than 20% of the funds raised in the Section 12J VCC to invest in the investee company. The investor also cannot hold 20% or more of the equity shares in the Section 12J VCC.

The final point is possibly the most difficult, FAIS approval is difficult to obtain as you must have a person who fits the criteria to be a “key individual” in terms of FAIS, which requires experience in the industry and further study. With the fast pace of the business environment, it is often too much of a hurdle to cross to find a party with the correct industry experience to write the exam and become qualified as a key individual.

If you have a legal team that thinks laterally about it, there are ways to manoeuvre within the compliance framework, but even then, there are limitations to the extent that it can be done.

Section 12J VCCs look very attractive from the outside, but when you scratch below the surface, there is a structure that is complex and difficult to manage and balance, which is probably the reason that they have not taken off in South Africa yet. That is not to say that forming a Section 12J VCC cannot be done, as we have assisted in setting up several of them, but it is worth considering it a little bit deeper to see whether this is going to be the best structure for you.

Website terms – purpose, importance and consequences

Website terms – purpose, importance and consequences

Nowadays, websites almost always contain policies and terms that govern your use of the site. Sometimes these policies will appear as banners on the site (which you have to “agree” to in order to make them disappear), links in the page footer (like we have on our website) or as a statement along with a tick box saying that you have “read and agree with” the terms (usually when transacting online).

The questions on peoples’ minds are firstly, why do I need all these different sets of terms and, secondly, are these policies binding.

Why do we need all of these terms?

The website terms which we feel are important are browser terms, privacy policies and commercial/transactional terms. Each one of these deals with specific aspects of the website’s use, including, for example, the collection of personal information, social media integration, payment methods and your rights as a user of the website. Below we discuss each policy and its importance. These policies also protect your rights and interests in your website and can allow for you to have a claim in law against people who infringe your rights.

Browser terms

Although browser terms are not a legal requirement, they are useful to ensure that the “web surfer” understands and agrees to certain key points. Browser terms should be used to inform the surfer that:

  1. you, as the website owner, owe them no responsibilities;
  2. they get no rights to any services or IP merely by browsing;
  3. they are required to respect your website and the content thereof; and
  4. you comply with all necessary legal disclosure requirements.

Browser terms are “agreed” to through the surfer continuing to browse the website. These types of agreements are called “web-wrap” agreements. More on this below.

Privacy policies

Privacy policies are essential whenever the website collects or makes use of personal information. Personal information is often collected through cookies as well as when browsers become users of a website by creating an account or by integrating their social media accounts with the website.

The Protection of Personal Information Act 4 of 2013 (“POPI”) sets conditions for the lawful processing of personal information. Included in POPI’s ambit will be the mere storage of personal information when it is collected by cookies. POPI also requires that companies make certain information available to users when they collect their personal information. This can be achieved through a privacy policy. Privacy policies therefore also assist the website owner to comply with legal requirements

Privacy policies usually include the following important aspects:

  1. the use of cookies to collect certain information;
  2. the purposes for the processing of the personal information;
  3. the sharing of personal information by the website owner with certain select third parties;
  4. the storage of personal information, including the security measures taken and whether cross-border storage will occur; and
  5. the user’s rights in relation to his/her personal information and the recourse that he/she has.

Privacy policies are, like browser terms, usually agreed to by browsing, however, a recent trend has been to display the fact that cookies are used as a banner on a website requiring a “click-wrap” agreement to be entered into in order to remove the banner.

Commercial/transactional terms

As the name suggests, the commercial terms become applicable where the website enables users to transact with the website owner through the website. These terms serve as the terms of the contract which you conclude with the user when the user becomes a customer. The important aspects that this policy should govern includes:

  1. a general explanation of the service or product being offered by the website;
  2. the fees that are payable, which may be a once off purchase price or a subscription fee, as well as the fees relating to delivery costs, insurance and VAT;
  3. the terms applicable to returns;
  4. limitation of liability, which will be subject to the Consumer Protection Act 68 of 2008 (if it applies);
  5. the applicability of promotional codes and vouchers; and
  6. acceptable use policies, however, this is more applicable where the website offers a service and not a product.

The Electronic Communications and Transactions Act 25 of 2002 (“ECTA“) requires certain disclosures in terms of section 43 by the website owner when goods or services are offered for sale or hire through an electronic transaction. Some of the disclosures required include:

  1. company name, registration number and contact number;
  2. addresses, including physical, website and e-mail;
  3. a description of the main characteristics of the goods/services offered (which fulfils the requirement of informed consent;
  4. the full price of the goods, including transport costs, taxes and any other and all costs;
  5. the manners of payment accepted, such as EFT, cash on delivery or credit card, as well as alternative manners of payment such as loyalty points;
  6. the time within which delivery will take place;
  7. any terms of agreement, including guarantees, that will apply to the transaction and how those terms may be accessed, stored and reproduced electronically by consumers;
  8. all security procedures and privacy policy in respect of payment, payment information and personal information; and
  9. the rights of the consumer in terms of section 44 of ECTA.

ECTA also requires that the customer must have an opportunity to review the transaction, correct any mistakes and withdraw from the transaction without penalty before finally concluding the transaction. ECTA non-compliance gives the consumer the opportunity to cancel the order and demand a full refund.

Additional requirements are placed on suppliers transacting online regarding payment systems. The payment system used must be sufficiently secure in terms of current accepted technological standards. Failure to comply with these security standards can render the website owner liable for any damages suffered due to the payment system not being adequately secure.

Are these policies binding?

Essentially, yes, website terms will be binding based on the principles of contract law. Website users must be made aware of the terms that apply to their use of the website and you should always ensure that you include wording to the effect that by anyone continuing to use the website they agree to the terms.

To this effect, web-wrap and click-wrap agreements come into play.

Web-wrap agreements

Web-wrap agreements (also referred to as browse-wrap agreements) are used to acknowledge the terms of use of a website by continuing to use the website. The user indicates acceptance of the terms by using the website and does not expressly indicate acceptance of the terms. Such agreements are usually used in browser terms and privacy policies.

Click-wrap agreements

Click-wrap agreements require the user of a website to indicate their agreement with the terms through positive action – usually by clicking “I accept” before proceeding with their activity on the website. These agreements are usually used for more important agreements, such as when installing new software on your computer or when entering into online transactions.

Conclusion

Even though all of these policies may seem excessive, they are worth having. Yes, copying and pasting clauses from other policies will get the job done, but you may leave yourself vulnerable to certain consequences that you haven’t thought about. These consequences may be even worse when it comes to commercial terms. Contact us for a free quote and ensure that your online business is fully protected!

Do all credit providers need to register?

Do all credit providers need to register?

It has been widely reported that all credit providers should now register with the National Credit Regulator (the “NCR”) as a result of the new threshold for registration as a credit provider of R0 (nil) which was published on 11 May 2016. But is it really required that every business that lends money, regardless of the amount, must now, strictly speaking, register as a credit provider with the NCR?

Section 40 of the National Credit Act 34 of 2005 (“NCA”) requires a person to register as a credit provider if the total principal debt owed to that credit provider under all outstanding credit agreements, other than incidental credit agreements, exceeds the threshold determined by the Minister of Trade and Industry. Prior to the recent amendments of the NCA a person had to register as credit provider if it was the credit provider of at least 100 credit agreements or the principal debt owed to him or her in terms of all current credit agreements exceeded R 500 000. After the amendment of the NCA by the National Credit Amendment Act 19 of 2014, a person was only required to register as a credit provider if the total principal debt owed to him or her in terms of all current credit agreements exceeded R 500 000 (meaning that the number of 100 credit agreements or not became irrelevant and even if the number of 100 was exceeded but the total principal debt owed in terms of the total agreements was less than R 500 000, then no registration was required). On 11 May 2016, however, a new threshold of R 0 (nil) was published and from 11 November 2016, 6 months after the publication of the new R 0 (nil) threshold, all credit providers (irrespective of the number of credit agreements) should register as credit providers with the NCR. Failure to register as a credit provider could result, amongst others, in the credit agreement between the credit provider and its debtor being declared void as an unlawful agreement.

This does, however, not mean that every single person or business that lends money must register as a credit provider. The following should be considered to determine whether to register or not:

  • Is the credit agreement an incidental credit agreement? Section 40(1)(a) of the NCA does not require the registration of a credit provider if the transaction relates to an incidental credit agreement.
  • Is the person a credit provider as defined in the NCA?
  • Is the transaction a credit agreement as defined in the NCA?
  • Will the credit agreement be concluded within, or will it have an effect within the Republic?
  • Are the parties to the credit agreement dealing “at arm’s length“?
  • Do any of the exceptions provided in section 4 apply? For example: the NCA does not apply to a credit agreement where the consumer is a juristic person whose asset value or annual turnover, together with the combined asset value or annual turnover of all related juristic persons, at the time the agreement is made, equals or exceeds the threshold value determined by the Minister (currently R 1 million).

To determine whether you are required to be registered before the due date of 11 November 2016, do not hesitate to contact us.