This is Not The Sopranos!
But “If you can quote the rules, you can obey them”….
Regardless of the size of your business and whether your business is with family members or family owned, it makes no difference. Business is business. And part of every business lies the necessity for agreements – sale agreements, distribution agreements, employment agreements and even loan agreements. The fact that the agreement may be between you and your brother does not negate the need for the agreement. In fact, it makes it more necessary.
Regardless of the size of your business and whether your business is with family members or family owned, it makes no difference. Business is business. And part of every business lies the necessity for agreements – sale agreements, distribution agreements, employment agreements and even loan agreements. The fact that the agreement may be between you and your brother does not negate the need for the agreement. In fact, it makes it more necessary.
Why? Because when it comes to family, people’s business practices are often downplayed – “it’s my son, he will pay me back when he can”. Which is unlike the stance one would take if it was an ordinary debtor. And therein lies the quandary. After all, your business, whether family owned or not, needs to be run optimally. And that often requires harsh decisions to ensure the longevity of your livelihood. Especially if you intend passing it on to the next generation.
Likewise, in a family run business, it can be easy to assume that should any dispute arise, it can be handled easily and amicably, because ‘no matter what happens, we’re family’, “Blood is thicker than water”, (an old adage we were all taught). Unfortunately disputes between family members are often more acrimonious and difficult to resolve due to the very personal nature of the relationship themselves. And that is why entering into agreements, which sets out the various rights and obligations to your working relationship, ensures that everyone stays on the same page. Especially since – “blood may be thicker than water, but it can also drown you just the same”.
So whilst we love our families, it is always best to have your arm bands at the ready…..
What is an agreement?
Simply put, an agreement is entered into between two or more parties with the serious intention of creating a legal obligation.
Agreements are essential to regulate certain relationships as it provides certainty as to what the parties expect from each other – whether it is employer and employee or father and son. Agreements will provide a legal framework which regulates dealings between parties and provides peace of mind that the law will uphold their agreements and enforce them if necessary. Which is an especially valuable and important thing when your family ties are not so familiar –
“You steer the ship the best way you know. Sometimes it’s smooth. Sometimes you hit the rocks. In the meantime, you find your pleasures where you can.”
When parties enter into an agreement, obligations are created. An obligation in this sense is a legal relationship consisting of a right to performance by the other party, coupled with a corresponding duty to perform “your end of the bargain”. As simple as that. Some give and some take to form an agreement which is regulated by legal covenant.
It’s funny - we actually enter into agreements more often than we think. Particularly with friends or family. Most of the time we are completely unaware of the legal effect of our agreement or what requirements there are to ensure you actually have a valid agreement.
Let’s talk a little more about all of this “legality”…
As we said, this is not The Soprano’s.
What are the requirements for a valid contract?
Not every agreement will be legally recognised and therefore enforceable by law. A couple can agree that she will cook gourmet meals (from Woolies) for her husband every night if he agrees to buy her Louboutin shoes on a monthly basis. But this does not mean that a legally binding contract actually exists between them. Unfortunately.
So, what are the requirements for a legally binding contract?
Consensus – there must be a “meeting of minds” with regard to the intended obligation and performance, the intention to be legally bound and the parties must be aware of their agreement;
Capacity – the parties must have the required capacity to conclude an agreement. This relates to age and mental capacity;
Formalities – certain agreements require compliance with certain formalities, i.e. it must be reduced to writing, must be signed by all parties to the agreement or signed in front of a notary and subsequently registered in the deeds office, and
Legality – the terms of the agreement may not be prohibited by the law and should not be contrary to public policy.
Basically, a contract is not enforceable unless the parties intended the contract to create legal obligations. Whether or not the parties intended to create legal obligation is determined objectively by examining the circumstances existing at the time of execution of the contract
Fair enough – so if you are forced to enter into a contract by means of illegitimate pressure (threat of physical violence or damage to property), then you entered into the agreement by duress and the agreement is voidable and thus unenforceable.
What kind of contracts are there?
The list is endless and there is an agreement to govern every relationship. So each agreement is drafted with the specific needs of all the parties in mind. There is therefore no standard template which can be used for every transaction. Contrary to popular opinion.
The contract will be governed by the type of transaction envisaged by the parties, for example a sale of a business, sale of property, employment, cession, credit agreements, partnership agreements, acknowledgement of debt, lease agreements, the list goes on. Each type of agreement will also subsequently be governed by its own special set of rules. It’s like a bespoke, couture dress – made to fit your exacting measurements and requirements and will (most likely) not fit anyone else. Only in paper form. And legal.
Commercial arrangements
The basic position is that when two people (or companies) come to a commercial arrangement, there is an automatic presumption that they intended to create legal obligations. For example, it would be presumed that a person who puts in an offer to buy a house intended that any agreement with the seller of the home should have legal effect.
To claim otherwise is difficult. Few applicants in court have successfully argued that their commercial agreement was invalid because the parties did not intend to create legal obligations. The policy of the law is always to give effect to business arrangements, not to strike them down without good reason.
Family and social arrangements
When the agreement is between friends or family members, the situation is often different. The presumption here is that the parties to the agreement did not intend to create legal relations. Simply because of their close personal relationship. And this can be a huge generalisation but a reasonable one nonetheless.
Informal lending agreements between husband and wife, or parent and child are presumed to be non-binding. If a wife lends money to her husband, or if a father lends money to his daughter without acting expressly in a way that would create legal relations (such as using a formal loan agreement to formalise the arrangement) then there is no agreement that binds the borrower to repay. The law recognises that these situations are comparable to gifts - the transactions are made for personal reasons and not with a view or intention of commercial gain. Most people would consider it highly unusual if their family agreements were given legal effect. And yet……
As people are often more casual than they might otherwise be, either because they know/trust/love each other or it's unpleasant to have negotiations with loved ones, they frequently make agreements orally rather than in writing, only discussing details at a high level. Because love and blood are involved, there's also a tendency for family members to give way and make deals with each other that they would never have made with someone else *forehead slap*.
And this can creates issues, as among other things -
parties to a contract must have the mutual intention to be legally bound;
the contract must comply with certain formalities by being reduced to writing and signed by all the parties to the agreement, and
there must typically be mutual consideration (both sides getting something) to form a contract.
Without the above, no formal agreement is entered into and the relationship cannot be enforced by legal means. When something goes wrong in a family agreement, it's fairly common for one side to then claim that either their understanding of the terms was radically different (i.e. that a loan was a gift), that the deal was unreasonable, or that there was never any agreement at all (i.e. that the two sides were just discussing an idea). And finally, disputes between family members aren't like most business disputes - they can frequently be deeply personal, divisive, and impact others who aren't even directly involved as people take sides #faribels.
Thus, a contract between family members is enforceable where there is evidence that the parties intended the contract to create legal relations.
So the bottom line is - if you are contracting with family members and it's over something that matters (i.e. that you would sue over if the other side didn't hold up its end of the bargain), it's always better to put your agreement in writing and treat the business relationship like one you would make with a stranger, at least in terms of fleshing out the details….
An important outlier needs to be discussed….
Family members and the loan agreement
This requires a little more detail….
It is firstly important to remember that whenever there is a loan or other credit transaction on commercial terms and the receiver of the credit is an individual or small corporation the National Credit Act will apply.
According to Deloitte –
“The National Credit Act (NCA) applies widely to ALL consumer credit agreements. There is a misconception that only registered credit providers need to comply with the provisions of the Act. This is incorrect. Even though the Act requires certain credit providers to register with the National Credit Regulator (see below), ALL credit providers are obliged to comply with the Act.
The Act applies where a credit provider enters into a credit agreement with a consumer. In order to determine to which transactions the Act applies, one needs to consider two definitions. Firstly, who would be a ‘consumer’ for purposes of the Act, and secondly, which agreements are classified as ‘credit agreements’ in terms of the Act. The Act defines a ‘consumer’ to include ALL natural persons, as well as some juristic persons. With respect to natural persons, the Act regulates all credit agreements with natural persons, irrespective of the amount involved. With respect to juristic persons, the Act determines that only small enterprises will enjoy the protection afforded by the Act. As such only juristic persons with an asset value or annual turnover of less than R1m are classified as ‘consumers’ for purposes of the Act”.
The Act applies to all credit agreements within the Republic involving -
individuals, except transactions at arm’s length (loans between family members, partners and friends on an informal basis will not be regulated) and between a stokvel, and a member of that stokvel;
juristic persons (businesses) with an asset value or annual turnover of less than R1m, but not if such a juristic person enters into a large agreement (i.e. for more than R250 000).
Ø What is an arms-length transaction?
“An arm's length transaction refers to a business deal in which buyers and sellers act independently without one party influencing the other. These types of sales assert that both parties act in their own self-interest and are not subject to pressure from the other party; furthermore, it assures others that there is no collusion between the buyer and seller. In the interest of fairness, both parties usually have equal access to information related to the deal”.
So, if I enter into a loan agreement with a family member, am I a credit provider?
Well, this essentially comes down to whether the agreement was at arms -length or not. And this question was actually brought up in both the Beets v Swanepoel [2010] JOL 26422 (NC) matter, as well as in the Fourie v Geyer (MKP27/2018) [2019] ZANWHC 42 matter.
Accepting that a proposed transaction is a credit agreement and none of the exceptions apply, the point of departure in determining whether you would be required to register as a credit provider (if you were to grant a loan to one of your family members), is to consider whether your proposed transaction is conducted at arm’s length.
The NCA does not define the term dealing at arm’s length but it does set out an open list of arrangements which would generally not be considered as having been made at arm’s length - a credit agreement between two natural persons who are in a family relationship who are co-dependent on each other or where one is dependent on the other, is not at arms’ length.
The NCA does not provide any guidance as to when family members will be regarded as independent of each other. The Court considered this question in the case of Beets v Swanepoel. In this matter, the mother granted a loan to her daughter at a favourable interest rate. The daughter failed to honour her part of the agreement and the mother approached the court to claim the outstanding balance of the loan. The daughter argued that her mother (lender) ought to have been registered as a credit provider as required in terms of the NCA. She further argued that her failure to do so renders the loan agreement invalid. The court ruled in her (daughter’s) favour and held that the credit agreement was at arm’s length despite the mother-daughter relationship between the parties considering the fact that the parties were independent of each other. For that reason, the loan agreement between the parties was found to be invalid. Based on this judgment, it is likely that a transaction is at arms’ length in instances where the parties independently strive to gain the utmost possible advantage from the agreement. Based on the courts’ interpretation of the phrase, parties would generally be considered as striving to gain the utmost possible advantage from the agreement if the (proposed) loan bears interest, charges or fee(s). This would usually be the case regardless of the familial relationship between the parties involved. This was not however the case here.
In the Fourie vs Geyer matter, one friend (of over 18 years) had loaned a capital amount of R831 000 and interest at 18% per year to another friend under an Acknowledgement of Debt (AOD). The AOD identified the capital, the interest at 18%, deferred payments, collection fees to be levied and non-payment that could trigger litigation with litigation costs on a punitive scale between attorney and client. This is not comparable to, for instance, the Beets vs Swanepoel matter where a loan was advanced to a family member without commercial interest and without the lurking notion of litigation with punitive costs. The AOD was a clear business transaction concluded at arm’s length with none of the arm’s length exceptions in section 4(2)(b)(iii) applying. The AOD and resulting loan between the longtime friends was therefore considered to be a credit agreement for the purposes of the NCA.
It is therefore crucial that prior to loaning any amount of money to friends or family members, one considers the relevant provisions of the law regulating the credit industry. And in this instance it is crucial to obtain proper legal advice.
Governing Laws
Agreements may be governed by various different acts, depending on the type of agreement. An employment agreement would have to comply with the Labour Relations Act and Basic Conditions of Employment Act and a rental agreement would have to comply with the Rental Housing Act and so forth.
However, there are a set of acts that will commonly have an effect on most types of contracts. These are:
The Constitution – this is the most supreme law in South Africa and enshrines the Bill of Rights which contains fundamental rights which must be respected and adhered to at all times. Contractual terms which are not in accordance with the constitution, will not be enforceable i.e. they cannot be against public policy, morality or be illegal;
The Consumer Protection Act – this act strives to neutralise the imbalances in bargaining power that may exist between suppliers and consumers. This act guards against concepts such as “unconscionable conduct” and “unfair, unreasonable or unjust contract terms and prices”, and
The Protection of Personal Information Act – this act aims to protect the personal information of consumers and should be adhered to when obtaining personal information of contracting parties.
There is however not a clear-cut answer to family commercial matters, especially where agreements are concerned. The facts of each situation would need to be considered on a case-by-case-basis. As such, we would advise that you consider seeking legal advice prior to granting a loan or entering into any commercial agreement with a friend or family member. Try your best to avoid issues arising at a later stage. Or severe disappointment at a fall-out with your family. Remember, while ”sometimes it is important to give people the illusion of being in control” at Benaters we can actually help you achieve it.
Find profound Soprano’s quotes here.
Written by Alicia Koch on behalf of Benaters