It is submitted that a predictable and continuous supply of fish is key to any fishing business that relies on the processing and / or trading of fish or fish products into local or foreign markets.
As a consequence a common practice has developed within the South African fishing industry where long term supply agreements are entered into between traders and processors on the one hand, and rights holders (who are sometimes also the catchers) on the other hand.
More often than not these long term supply agreements provide an incentive to the supplier to commit their catches to the buyer for a long term period by means of making loans or advances available to the supplier prior to the catches being delivered to the buyer. These agreements are commonly termed loan and supply agreements and have been used regularly throughout the industry.
The regular use of such agreements is due to the balance of interests which can be achieved in that the buyer gets certainty of supply and volume which in turn inter alia may lead to the employment of more workers on a regular basis at processing facilities, investments in improvements or developments of such facilities and infrastructure, and importantly the ability to make firm commitments to their customers with regard to the supply of such fish product.
The supplier in turn may receive upfront funds prior to the delivery of the fish which allow for them to invest (eg.in their own vessels) or to cover operating expenses.
The advances or loans accrue interest and are generally repaid or set off against the sale proceeds of the catches from time to time on the rights holder’s (supplier’s) fishing right.
In this contractual scenario, the price paid for the catches from time to time is important to the fair and effective working of such agreement. Not to mention from a legal point of view an agreement on price is an essential element of any sale contract.
However, due to the long term nature of such a supply agreement (i.e. covering more than one fishing season) and changes in market conditions, the price of landed fish can vary considerably from season to season. Inter alia the following factors can affect the fish price from season to season:
- The total allowable catch determined by the Minister;
- catch rates of vessels;
- operating costs;
- fish quality;
- the exchange rate;
- supply of the same fish from other countries; and
- foreign market conditions.
In these circumstances parties to such a long term supply agreement could hardly be expected to agree one set price for the entire duration of the agreement. Therefore the agreement must remain sufficiently flexible to determine the fish price from season to season while at the same time meeting the key legal requirement of a sale, being agreement on price.
In this context we look briefly at the legal principles surrounding ”the price to be paid”.
In academic circles the question has been raised whether a contract of sale which complies in all other respects with the requirements of the law is “a sale at a reasonable price” if the parties do not agree on a price at all. Certain authors quoting a Roman Dutch law text of 1558 argue that “where there had been no such agreement on the price by the parties, the price had to be fixed by the judgement of a reasonable man”. However despite the argument, this does not constitute the law in South Africa and our case law authorities have stated as such.
The basic rule on the agreement of price to be paid is set out in Westinghouse Brake and Equipment (Pty) Ltd v Bilger Engineering (Pty) Ltd a Supreme Court of appeal matter where Corbett JA stated that “it is a general rule of our law that there can be no valid contract of sale unless the parties have agreed, expressly of by implication, upon a purchase price. They may do so by fixing the amount of the price in their contract or they may agree upon some external standard by the application whereof it will be possible to determine the price without further reference to them.”
Furthermore, subject to any statutory intervention, parties are free to agree upon the amount of the purchase price to be paid. As such there is no rule in our law that the price paid must be the “ruling economic value” of the item at the time of the sale, indeed it need not even be close to that value. However, it is important to note that if parties attempt to disguise a donation in the form of a sale the law will hold such transaction to be a donation rather than a sale.
In summary therefor the price in any sale agreement must be certain or ascertainable.
Thus, in circumstances such as the aforementioned long term supply agreement parties would be free to agree upon a formula or method which is capable of being converted into a sale price or they may nominate a person or a group of persons to determine the sale price for them. Whether or not the formula or method will be deemed to be sufficient to determine the price will depend on the circumstances of each case and of course the make up of the formula or method. It is important to note that a rule has developed in our law that where the sale contract states that one of the parties acting alone can fix the price there is no contract of sale.
While one would consider an express agreement that the buyer pays “a reasonable price” for the item to be too vague to constitute an ascertainable price, there are conflicting authorities on this point. At best it is stated that it is open for argument that in such a circumstance evidence could be led as to what the parties meant by the use of such words and should sufficient evidence be available to establish the amount of the purchase price intended then the contract would remain valid.
What if the price determined by the third person is disputed by one or both of the parties to the sale? It is submitted that where the price determined by the third person is not far off the amount which might have been expected in the circumstances of this particular sale, both parties would be bound to accept such determination. The principle being that both parties having entrusted the decision to such third person, they should have no ground to question such decision. However, this is subject to the right of either the buyer or seller to question a price determined by a third party which proves to be “unjust”, “unfair” or “manifestly unjust” or “all together to high or too low”. This is based on the principle that in agreeing to appoint a third person to determine the price the parties did not intend any arbitrary price to be determined but rather a “just estimation”.
In such circumstances where the price determined by the nominated third party is declared “unjust” or “unfair”, there is some controversy as to what happens thereafter. The general view is that the contract of sale is not automatically set aside. The court will look at the intention of the parties and in particular whether the nomination of a third party to determine the price was intended to achieve a “just estimation”. If so then it is submitted the court would substitute the nominated person’s determination with its own assessment which would be incorporated into the contract with the contract continuing with such substituted price therein. The court’s determination would be on the basis of it being a fair and just price based on evidence which would be tendered by the buyer and the seller.
In conclusion, it is important for buyers and sellers alike to ensure that the provisions of their supply / sale agreements are sufficiently clear as to the determination of the purchase price. The price needs to be certain or ascertainable through the use of a formula/method or the nomination of a third party to determine such price. It would also be useful in the provisions appointing the third party to refer to certain market or other factors to be taken into account when the third party determines the price.