A suspensive "condition" in a contract of sale postpones the passing of the risk to the purchaser until the condition is fulfilled
Unfulfilled "conditions" postpone the passing of the risk in a contract of sale, but unfulfilled "terms" do not
A layman who purchases goods may be under the misapprehension that, until they have actually been delivered to him, the risk that they may be damaged or destroyed is borne by the seller and that, in the event of pre-delivery loss or damage, he (the purchaser) can refuse to pay the purchase price.
This is not necessarily so.
In a sale the risk passes to the seller immediately the contract of sale is concluded
In a contract of sale, the common law rule is that the risk in respect of the goods sold - that is to say, the risk that the goods may be damaged or destroyed - passes to the purchaser immediately the contract has been entered into, provided that the contract is not subject to a suspensive condition that has not been fulfilled.
A purchaser will thus be legally obliged to pay the seller the full purchase price of goods which, prior to delivery, have been damaged or even completely destroyed, if at the time of the damage or destruction, the risk in respect of the goods had already passed to the purchaser.
If a purchaser is wise, he will therefore insist that the contract contains a stipulation that the risk will not pass until the goods have been delivered to him.
Alternatively, the purchaser may arrange for the goods to be insured in his name against loss or damage from the time that the contract is entered into. He will still have to pay the purchase price if the goods are destroyed after the risk has passed to him, but at least he will be able to make payment out of the proceeds of the insurance policy.
The risk passes only if and when the contract is unconditional
It is, however, clear that in a contract of sale the risk in the property sold does not pass to the purchaser until the contract has become unconditional.
What exactly is a condition?
A condition in a contract refers to the happening of a future, uncertain event.
If a contract is subject to a suspensive condition, this means that the contract is incomplete and that the rights and obligations of the parties do not come into force unless and until that future, uncertain event occurs.
For example, I may agree to employ a particular person who is in his last year of study at university "if you pass all your remaining B Com examinations by the end of this year". That stipulation is clearly a condition, because the event in question - the passing of the examinations - lies in the future and it is uncertain whether it will occur.
Is a contractual clause requiring the purchaser to furnish security a "condition"?
Very often a contract of sale states that the purchaser must, prior to delivery, furnish the seller with a bank guarantee or other security for the payment of the purchase price.
Is this a "condition" that postpones the passing of the risk until it is fulfilled?
In Southern Era Resources Ltd v Farndell NO 2010 (4) SA 200 (SCA) an individual had purchased certain mineral rights in terms of an agreement which stated that the purchase price of some R1.7 million would be paid in cash against registration of the cession of the mineral rights into the name of the purchaser. The contract went on to state that -
as security for the payment of the purchase price, the purchaser will within fourteen days [of a stipulated date] furnish Seller's attorney with a bank guarantee as required and approved by the Seller or the Seller's attorney
Was this a "condition"?
If it was, then the contract was not unconditional until the bank guarantee had been furnished by the purchaser and approved by the seller - and until then, the risk in respect of the cession of mineral rights would remain with the seller and would not pass to the purchaser.
In this particular case, legislation that had come into force after the contract was entered into which made registration of the cession of the mineral rights impossible. At that point in time, the purchaser had not yet furnished the seller with a bank guarantee.
Did the purchaser still have to pay the purchase price to the seller despite the fact that the cession of the mineral rights could not be registered?
This depended on whether, at the time the legislation was passed, the risk had already passed to the purchaser.
If the risk had passed to the purchaser, then he was obliged to pay the seller for the mineral rights even though the cession to him could not be registered.
The purchaser had only argument open to him, namely, that the clause regarding the furnishing of the guarantee was a "condition" and, since it had not been fulfilled at the time the legislation was passed, the risk in respect of the mineral rights still lay with the seller.
The purchaser's argument was that the contractual clause in question said that the bank guarantee provided by the purchaser had to be "approved" by the seller, that such approval was a "future uncertain event", and that this provision was therefore a condition in the contract which postponed the passing of the risk until it was fulfilled - and that no guarantee had ever been furnished and therefore the risk had not passed to the purchaser.
The court held that the stipulation regarding the guarantee was not a condition
The court held that the stipulation in the contract regarding the furnishing of the bank guarantee, quoted above, was not a "true condition", but was merely a term of the agreement, that is to say, it was just a provision of the contract that imposed an obligation on the purchaser to furnish a guarantee.
The court held that, at the time the legislation was passed which prevented the registration of the cession of the mineral rights, the risk in respect of those mineral rights had already passed to the purchaser, and that the latter was therefore obliged to pay the full purchase price even though the cession of the mineral rights to him could not be registered.