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Curb your Enthusiasm - The Value of a well drafted Agreement

Ask any person who has funded litigation how much they would have been prepared to pay in order to avoid the dispute and the associated costs. With the benefit of hindsight, they would say "a lot".

The Value of a well drafted Agreement

I recently had a similar conversation with one of our clients. She is in the middle of shareholder litigation. At issue is the question of whether certain shares in a company ought to have been issued. At the time of incorporating the company, the shareholders did not see fit to conclude a shareholder's agreement. She reported that the atmosphere at the time was "enthusiastic, positive, collaborative" and "they did not want a shareholder's agreement to get in the way of a great deal".  I recoiled in horror.

Let me explain. The purpose of an agreement is to record all of the applicable terms relating the relationship between the contracting parties. A properly drafted agreement sets out:

  • the identities of the parties, the payment terms and the reciprocal obligations. The terms that are strictly necessary in order to implement the agreement are referred to as the essentialia;
  • the variations to and all deviations from the naturalia. Naturalia are the terms that are automatically included, by operation of law, in any contract belonging to one of the specific classes of agreement recognised in South African law. These are usually the implied warranties against defects, the common law sale remedies and rental remedies. Generally speaking, the Parties elaborate upon, exclude, amend or vary the naturalia in order to cater for the specific circumstances of the agreement in question;
  • the incidentalia, being all of the other terms other than the essentialia and the naturalia, which supplement or modify the rights and duties incorporated by law into a particular contract.

When they say "the law is an ass", they mean that the law moves slowly, particularly the common law. For instance, the common law has not developed fast enough to keep up with advances in information technology, data science and electronic transactions. Many of the remedies we take for granted are not provide for the common law, and it is for that reason that a comprehensive, well drafted agreement is recommended.

A well drafted agreement would define what steps may be taken in the event of non-performance. It sets out how breaches are remedied. It provides a procedure that must be followed in order to terminate the Agreement. It would regulate how the agreement may be amended.  Importantly, agreements create certainty. Certainty has a value. Uncertainty creates risk. Risk is a cost.

Getting back to the conversation I had with my client... She indicated that she would have paid a substantial sum to have a proper agreement drawn up at the time, in order to avoid the cost of having to litigate in order to resolve the dispute in question.

The One Pager

Whenever a client asks me for a "one pager " (being a short agreement, one page long) I say the same thing:

A "one pager" is bouquet of "loopholes".

Litigators love "loopholes", particularly if the loophole is one which favours his client. A "one pager" can never do the job of a well drafted agreement. No deal is so simple, that a "one pager" does the trick. The only way to ensure that a "one pager" does the job is to use a tiny font.

On to more serious matters. The case note below illustrates two important points. The first point is:

pay your attorney for a well drafted agreement in order to avoid having to pay a litigator

The second point, which shall emerge as you read the case below, is:

some fights are not worth picking

Millcreek Trading CC v Passenger Rail Agency of South Africa [2016] JOL 35537 (KZD)

ProArm (Millcreek Trading CC trading as ProArm Firearm Training Academy), sued PRASA (the Passenger Rail Agency of South Africa trading as Metrorail) for damages, claiming its loss in respect of what it referred to as "lost profit and opportunity".

ProArm provides firearm training. It also assists with obtaining competency certificates in terms of the Firearms Control Act.[1] ProArm was approached by an employee of PRASA (Chami) to give firearm training to PRASA's protection officers on an urgent basis. Given that they were required to carry firearms, the protection officers require competency certificates. ProArm commenced work without delay, taking fingerprints and photographs of the applicants for certification. It printed firearm manuals[2] and engaged trainers to conduct the necessary training.

Subsequently, ProArm was invited to submit a bid in respect of a tender put out by PRASA for the very training that ProArm had given, which it duly did. ProArm was unsuccessful in its bid.

In its claim for damages, ProArm did not rely on a written agreement. It based its claim on a verbal agreement concluded with Chami, alleging that it believed Chami was authorised to represent PRASA and to contract on its behalf.

PRASA's argued that no binding and enforceable agreement had been concluded on the basis that Chami did not have the necessary authority to transact on behalf of PRASA, a state owned entity. Since PRASA is regulated by the Public Finance Management Act[3] and the Treasury Regulations, the procurement of goods and services by PRASA in excess of R350 000 had to be undertaken via a competitive bidding process, along with all that it involves.

PRASA contended that ProArm was fully aware of the procurement procedures and should have been aware that its "contract" with Chami was unenforceable. The particulars of ProArm's claim showed that it was indeed aware of the tender processes applicable to PRASA.

ProArm’s evidence was wholly deficient. It failed to allege the contract price, the details of whether the service would comply with the Firearms Control Act and other details one would have expected in a contract of that nature. The Court went on to highlight various other aspects of the claim which were problematic.

Moreover, ProArm failed to call Chami as a witness to prove he had the authority to conclude the alleged contract and could not justify its belief that Chami had the authority in question. Given that PRASA's procurement of services is regulated, it was unreasonable to believe that Chami alone was authorised to act of his own accord and bind PRASA.

The Court concluded that Chami had no authority, no valid contract was concluded and that ProArm had proceeded at risk before the tender could be awarded.

Conclusion

It may be that ProArm was so delighted to have been invited to render services to PRASA, that its enthusiasm displaced its common sense. Had ProArm been more measured in its business dealings, it would have suggested to Chami that an agreement be drawn up to regulate the services.

A well drafted agreement would have included terms and conditions relating to milestone payments, dispute resolution, warranties relating to competence to render the services, warranties relating to the authority of the signatories to the agreement, a resolution by the board of PRASA authorising the conclusion of the agreement and the boiler plate clauses referred to above. Had ProArm presented such an agreement to Chami, one of two things could have happened:

Either: the agreement would have been negotiated and concluded in such a way as to ensure that PRASA could procure the services from ProArm, without having to put the services out to tender.

Or: PRASA would have notified ProArm that a bidding process would be required.

In either event, the costs of poorly conceived and unsuccessful litigation would have been avoided.

[1] 60 of 2000

[2] In respect of each of the firearm unit standards applicable to the protection officers

[3] Act 1 of 1999.

Adam Pike
Author: Adam Pike
Adam Pike holds BA, LLB and LLM degrees from the University of Cape Town. His LLM, attained from the School of Advanced Legal Studies at the University of Cape Town, focused on commercial and corporate law, particularly corporate governance and securities. Adam specialises in the implementation of corporate actions and transactions.

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