The Reciprocal Nature of Contracts and the Consumer Protection Act

Reciprocity is an established principle of South Africa’s law of contract. Essentially, the principle states that when a party to a contract has failed to perform all his obligations in terms of an agreement, then the non-performing party is not entitled to demand that the other party provide any performance in terms of the agreement. The principle of reciprocity applies to agreements which have reciprocal obligations. An obligation is reciprocal when the performance of one party is conditional upon the performance by the other party. Most bilateral agreements such as agreements of sale, lease or services rendered are automatically considered to be reciprocal unless proven otherwise.

It is lawful and very common for parties to exclude the principle of reciprocity by making obligations non-reciprocal. The most common manner of doing so is to simply set a date by which performance is due, e.g. that rental is paid on the first of every month. The usage of such clauses has become so common that many parties do not consider the effect of reciprocity when negotiating and concluding agreements. This approach is recommended for parties who wish to retain the commercial efficiency of agreements, as the transactions between parties may otherwise come to a standstill whilst they wait for each other to perform.

The coming into force of the Consumer Protection Act no 68 of 2008 (the Act) will have a significant impact on the application of the principle of reciprocity. Section 48(1)(a)(ii) makes it unlawful to supply goods or services on terms that are unjust, unfair or unreasonable. Section 120(d) of the Act entitles the minister to make regulations in respect of unfair terms. Regulation 44(3)(m) of the Consumer Protection Act regulations state that a term obliging the consumer to fulfill all his or her obligations where the supplier has failed to fulfill all his or her obligations is automatically unfair. What this means is that any supplier of goods such as a lessee or retailer, cannot first demand that the consumer pay (normally the consumer’s only obligation) before receiving the goods or be entitled to take possession. Regulation 44(3)(m) also does not state that the consumer is entitled to the goods or services before payment. Quite simply if a contact entitles the supplier to performance by the consumer (e.g. payment of rent on the first of the month)without specifying that the supplier must already have performed (e.g. given occupation of the premises), that term is unlawful. Whether or not the supplier has in fact supplied the good or service first is irrelevant, the term itself is unlawful and will be struck out the agreement. In the absence of set dates for performance, the contract reverts to the default position whereby the principle of reciprocity applies. There will be no date set for performance, thus a party to a contract which seeks performance from the other contractor will have to first i) prove performance of all their obligations and ii) thereafter set a reasonable date for timeous performance. Unless these two requirements are the other party will not be in breach of contract. It may be possible to a party There will in fact be an extra burden on the suppliers of services, in terms of Section 54(1)(a) of the Act which provides that services must be supplied timeously.

The problem with the principle of reciprocity is that it can leave itself open to abuse. Reciprocity is given form in the way of the exceptio non-adempleti contractus (the exception of the non-performed contract), which is a defence to claim based on contract. To rely on this defence a defendant would have to prove that: i) the obligation not performed by the plaintiff is reciprocal; ii) the plaintiff has not fully performed all of his reciprocal obligations. The burden of proof in this respect is not always clear and will be affected by the type of contract. In order for a party to be denied use of the exceptio when defending legal action, the party claiming performance must prove that it has complied fully with its obligations in terms of the agreement. The application of the principle in this manner, would result in businesses suffering severe penalties for incomplete performance, even though most of the cost had already been incurred and the defect in performance may be not be significant. If this situation were to be allowed, the defendant would be in a position to retain almost all the performance, but not have to perform at all in return.

The courts have developed two responses to the above situation. The first is that a party who is denied by the exceptio must be given the opportunity to rectify the performance if possible. The second, is that in the interests of equity, courts have relaxed the exceptio and reduced the plaintiff’s claim by the amount necessary to repair the defective performance. In order to relax the exceptio the plaintiff must prove: i) that the defendant is utilizing the defective performance; ii) a quantifiable cost of remedying the defect ; iii) that the circumstances are such that it would be equitable for the court to relax the exceptio. It is expected that the majority of cases will be concerned with the supply of defective goods and services, in which case the provisions of Section 54 of the Act will apply, which gives consumers a further remedy.