Legal Consultation

Electronic Contracts

Electronic contracts initially caused great legal uncertainty as to how and whether electronic contracts could be recognised as valid and enforceable agreements. The passing of the Electronic Communications and Transactions Act (ECTA) in 2002 initiated the basic premise that digital communications are no less valid than paper-based communications.

According to ECTA, information is not without legal force and effect merely on the grounds that it is wholly or partly in the form of a data message. It is thus possible to contract by means of data messages and parties may sign agreements using digital signatures if they wish.

What you Need to Know about Digital Contracts:
The basics must be in place:
Electronic contracts must meet the common law requirements of contracts to be valid and enforceable. The minimum requirements for a valid contract under South African law include:
1. a valid offer and acceptance or consensus between the contracting parties;
2. all contracting parties must have contractual capacity. For example, a minor does not have sufficient capacity to incur binding obligations under a contract without assistance or consent of their guardian to do so;
3. the contract must be legal and capable of performance; and
4. finally, formalities are prescribed for certain contracts such as the sale of land and must be met for the contract to be enforceable.

Some agreements cannot be executed electronically:
In the case of Spring Forest Trading CC v Wilberry t/a Ecowash and Another 2015 (2) SA 118 (SCA), the Court ruled that "…when there are formal requirements of writing and signature imposed by statute or the parties to the transaction, these can generally be satisfied through electronic transactions. There are, however, exceptions where agreements may not be generated electronically. These are the agreements for the sale of immovable property, wills, bills of exchange and stamp duties." Consequently, most agreements (with the exception of the few listed above) can be concluded electronically by means of data messages.
E-mail and SMS:
In the case of Jafta v Ezemvelo KZN Wildlife 2008 JOL 22096 (LC), the Court held that “(E)-mails and SMSs and the language of text messages they carry may seem informal, but treating them as having no legal effect would be a mistake.” It is thus possible, in terms of ECTA and case law, for a contract to be concluded, varied, and cancelled by means of email or SMS. Businesses should take cognisance of this and consider excluding the right to vary or cancel an agreement by way of electronic communication in some instances. Employees should also be made aware of the risks and consequences of emails and SMSs, particularly when dealing with contractual provisions.

Time and place of conclusion:
The time and place of conclusion of contracts are important as they relate to jurisdiction and applicable law. ECTA adopts the reception theory for receipt of electronic communication, meaning that contracts are formed at the time when, and place where, the offeror receives acceptance of the offer, but acceptance of the offer does not have to come to the knowledge of the offeror for a contract to arise. This theory applies to prevent any disadvantage to the offeree by not knowing when the offeror knows about the acceptance.

When clicking on “I accept” or “I agree” on a website that offers goods for sale, a contract is concluded. However, this acceptance of the offer may not come to the attention of the seller if the thing sold is packaged and delivered automatically or through a dispatch service.

Therefore, an email or SMS will be regarded as having been received even if the addressee has no knowledge of it being in his inbox. The data message merely has to be capable of being retrieved.

Digital signatures:
ECTA defines an electronic signature as data attached to, incorporated in, or logically associated with other data and intended by the user to serve as a signature. This may include things such as typing your name at the end of an SMS or e-mail or clicking on an icon on a website to confirm your acceptance of terms and conditions. Should a contract therefore require something to “signed”, the requirement would be met if the mark inserted into the document or data message as signature is capable of demonstrating the intent of the signatory to authenticate the document.

In a technologically advancing era, businesses are relying on electronic communication to a greater extent. It is possible to enter into agreements (including their amendments or notices thereunder) not only through e-mail, but through other data messages such as SMSs. In light of the above, businesses should consider whether there are steps that can be taken to protect themselves and avoid disputes.

Fixed-term Contracts for SMMEs

The Labour Relations Act 66 of 1995 (LRA) affords protections to employees who are employed on fixed-term contracts. A fixed-term contract is a contract of employment that terminates on the occurrence of a specific event, the completion of a specified task or project, or a fixed date other than an employee’s normal or agreed retirement age.

Protection for fixed-term employees:
Fixed-term employment contracts with lower-earning employees are limited to a 3-month period. After 3 months, the employee will be deemed to be a permanent employee of the employer and will therefore be protected against unfair dismissal.
This protection, however, only applies to lower earning employees, which are employees who earn less than the prescribed earnings threshold.

This threshold is currently R205,433.30 per annum. This means that employees earning more than the threshold will not enjoy the protections afforded by the LRA relating to fixed-term contracts.

Exempted employers:
Employers should further take note that these protections will not apply to a small employer that employs less than ten employees or to an employer that employs less than 50 employees and whose business has been in operation for less than 2 years (a start-up business).

When can a fixed term agreement be extended beyond 3 months?
An employer may engage an employee on a fixed-term contract for a period of longer than 3 months only if:
• the nature of the work is of a limited or definite duration, for example where building will take longer than 3 months; or
• the employer can demonstrate a “justifiable reason” for the longer term, for example employing a student or recent graduate for the purpose of gaining work experience.

Formalities of Entering or Renewing Fixed Terms Contracts:
A fixed-term contract or the renewal or extension of a fixed-term contract must be in writing and must state the reason for fixing the term. If a dispute should arise regarding the fixed-term contract, the employer will have to prove that there was a justifiable reason for fixing the term of the contract and that the term was agreed upon by the employer and the employee.

Additional Protections
Employees who are employed on a fixed-term contract also enjoy the following additional protections -
Equal Treatment: where an employee is employed on a fixed-term contract for longer than 3 months, such employee may not be treated less favourably than a permanent employee who is performing the same or similar work, unless there is a justifiable reason for the different treatment. This would mean that they are entitled to equal pay, equal benefits, and equal leave entitlements. Factors to be taken into account when considering whether there if a “justifiable reason” for different treatment may include seniority, experience, length of service, merit, quantity or quality of work performed, and any other non-discriminatory reason.
Equal Access: employers must ensure that they provide employees employed on fixed-term contracts and employees employed on a permanent basis, with equal access to opportunities to apply for vacancies at the employer.
End-of-term Payment: where an employee is employed on a fixed-term contract which exceeds a period of 24 months, the employee is entitled to severance pay upon termination which will be equal to one week’s pay for every completed year of service.
Reasonable Expectation of Renewal: where the employer has failed to renew a fixed-term contract where the employee “reasonably expected” the employer to do so (or where the employer offered to renew it on less favourable terms), the basis for an unfair dismissal claim has been extended to also include an expectation of indefinite employment. However, the employee will have to prove the existence of such an expectation.

SMMES can therefore employ on a fixed-term contract for a maximum period of 3 months, which period can only be extended under the circumstance as set out above. Should the fixed-term contract, however, be extended beyond 3 months, the employer must take note of all the benefits that the employee will enjoy.

Negotiating an Agreement prepared by Another Party

A well-negotiated contract is the best way to secure a mutually beneficial outcome and avoid dispute with minimal trade-off.

A written contract is a great way to protect a business relationship. It outlines the terms of the agreement in plain black-and-white so there is no confusion and no misunderstandings.

The parties to the contract are bound by promise (undertaking) and duty (obligation) as stated in the contract. The contract will stipulate what the consequences are of not fulfilling or failing to deliver as promised.

One-sided Agreements
When preparing an agreement you establish the basic rights, duties, and obligations of each party, with the intention of developing a balanced agreement, whether unilateral or bilateral. However, very often one party may be of superior power or influence, or the drafter, for whatever reason, may prepare a contract that favours one party over the other. One party, for example, may be indemnified against loss but not the other, or only one party may be entitled to terminate the agreement. In such instances only one party has the benefit of protection, and the other party is exposed to loss of income and claims for damages, or trapped in an interminable relationship that simply does not work.

How does one ensure that the agreement prepared by the other party is fair, reasonable, and unbiased in either party’s favour? The objective is to ensure a mutually beneficial outcome and avoid dispute with minimal trade-off. This is achieved through negotiation. A well negotiated contract secures the business owner’s position, so they can focus on profit-making activities.

Basic Negotiation Techniques
Applying a few simple negotiation techniques may prevent future disputes and loss of income. Read and understand the contract and ensure that the agreement is clear and understandable. Then remove any ambiguity and get help interpreting content if you are unclear on terms. This includes interpretation of commercial and transactional terms or legal aspects.

Understanding basic legal requirements or principles will help guide you to ask the right questions, such as —
• Does the other party have the capacity (ability) to enter into the agreement? A minor, for example will not have capacity and it is important to establish whether the person signing on behalf of an entity (company or CC) is authorised to do so.
• Are there any specific laws that apply? This may be the case when selling or buying land/property, dealing with long leases or ante-nuptial contracts. Does the contract contain any illegal elements that is contrary to any law or norm and, if so, is the agreement enforceable?
• Do you understand clearly how to terminate or exit the contract and under what circumstances are you entitled to do so? If a material breach is grounds for terminating the contract, what exactly comprises a material breach?
• Determine and record what the significant dates or events are and the consequences of non-compliance.

As you would for any negotiation, prepare and agree on the major elements before contract preparation commences. This will avoid high costs and time delays and manage expectations. Be clear on your objectives and, among the detailed and complicated provisions, ensure that your objectives have not been lost. Establish concessions and trade-offs at the outset as this can be a powerful tool to ensure you get what you want.

Most importantly, don’t be afraid to ask for a change and if you do not receive the change requested, don’t be afraid to walk away from a dubious contract.

Proceed with Caution
Consider the following scenarios and provisions of a contract you are executing to determine whether there is a differential bargaining power or other influences which may result in a biased contract:
• Understand the termination and breach clauses (who may terminate and for what reason);
• Determine whether one party is entitled to independence in decision making but the other party still controls various aspects of the relationship, such as an independent contractor or supplier of services required to report daily to a manager;
• Consider onerous requirements for release of payment such as submission of security documentation or guarantees in terms of loan or supply of goods agreement;
• Identify all major risks to your business such as time delays on replacing damaged goods. Mitigate such risks by checking all time references, such as a 7-day notice to replenish stock or 48-hour delivery and amend these clauses to suit both parties;
• Identify when risk and ownership passes. Ownership of goods can pass on first or full payment, however risk should only pass when the goods are in your control, i.e., within your property and under your insurance cover;
• Warranties, indemnities, and representations must be considered carefully. A warranty is an undertaking or promise. An indemnity is a protection against loss and a representation is a portrayal that something is a certain way. Each of these elements is connected, as it creates an obligation by one party to the other. If, for any reason, you are unable to honour a promise, or cannot afford to cover a claim for loss, you may be faced with a potential loss of future income;
• Limitation of liability and disclaimers should apply to both parties equally. However, if applied to one party only, the other party carries the burden of loss if there are any claims whether direct or indirect; and
• Protection of intellectual property and similar provisions should apply to protect ownership, rights, and title to any new or unique product, service, process or know-how, including any future enhancements.

Any form of biased, one-sided, or unbalanced agreement favouring one party over the other to gain advantage, rarely results in creating benefits for either one or both parties. Such agreements may result in disputes or a breakdown in trust and the eventual demise of the relationship and may destroy businesses. To prevent abominable and catastrophic consequences to your business, apply simple techniques for preparing, negotiating, and executing balanced agreements that demonstrate trust and a foundation for long term relationships.

Good Faith in Negotiating and Enforcing Contracts

Common law recognizes that contracts freely entered into are enforceable and should be upheld. Organisations enter commercial agreements regularly and must therefore be wary of the conditions, whether express or implied, included in these agreements. Good faith is a key principle of contract law and is a standard of behavior expected between contracting parties when entering into agreements.

The Good Faith Principle

In our legal system, a contract that violates our morals and values is considered void. This principle is recognized as a fundamental “core” value and can be seen as an implied term in all contracts. The Principle of Good Faith brings the Law of Contract together with our Constitutional Values. Our Courts have held that it is of paramount importance for parties entering into an agreement to honor the agreement and to act with Good Faith in doing so. 
It cannot be that each party is following his or her own self-interest without consideration for the other party's interests. Good faith is the prism through which we must see contracts. It precludes contractual agreements that are unreasonable and which violate public policy and the Courts have the authority to exclude terms from contracts based on this.
In applying Good Faith to a contract, a Court will take account of the facts surrounding, and giving rise to, the given dispute or issue relating to the contract.
Fairness, reasonableness, ubuntu and public policy help in enforcing contractual clauses. Every agreement should be made in good faith between these parties. It is not enough to say a specific clause in a contract is unfair and unreasonable, but it must be proved that such unfairness or unreasonableness is contrary to public policy or any other Constitutional Value.

How is the Good Faith Principle valuable to my business?

Every business revolves around contracts relating to the purchase or sale of goods and services or commercial agreements. The Good faith principle thus obliges parties entering into a contractual agreement to refrain from uncooperative or unfair conduct when performing in terms of, and enforcing, a contract. 

The Use of Artificial Intelligence Clauses in Contracts 

The clauses below are provided as guidance only. Certain elements will need to be changed for proper use in your contract. If you require a more detailed clause, feel free to give us a call. 
In the event the Supplier of goods or services is using AI:
In general, apply the following guideline- 
1. The Parties agree that Artificial Intelligence (AI) will not be used in the provision of the Services unless expressly agreed, in writing, between the Parties, prior to the intended use of AI. 
OR The Parties agree that Artificial Intelligence (AI) may be used in the provision of the Services only where expressly agreed, in writing, between the Parties, prior to the intended use of AI.
2. Where AI is used, subject to Clause 1 above, it may only be use as a tool to supplement, edit, and enhance content created in supplying the Services.
3. Where used, AI systems must be closely monitored, and all output is managed and checked, by senior employees.
4. All final content must be the exclusive product of [the Supplier] and is in no way attributable to AI systems. 
Sample clause
Artificial Intelligence
In this clause "AI" refers to artificial intelligence, which includes technologies, algorithms, and processes that enable machines to mimic or simulate human intelligence; and "AI Outputs" refers to any results, information, or data generated by or through the use of AI.
1. The Parties agree that AI systems are an effective tool in the provision of the Goods or Services and that the use of AI as specified in this Clause 1 in providing the Services will not amount to a breach of this Agreement.
2. The Supplier acknowledges and agrees that it may utilise AI technologies in its provision of the Goods or Services, subject to compliance with applicable laws, regulations, and industry standards.
3. The Supplier shall provide the Customer with written notice of its intention to use AI within a reasonable time before implementing such technology. 
4. The Supplier shall provide information regarding the specific AI technologies it intends to use, including any associated risks, limitations, and potential impact on the quality or performance of the goods or services.
5. The Supplier shall ensure that its use of AI complies with all applicable laws, regulations, and industry standards, including but not limited to privacy laws, data protection laws, and intellectual property rights. 
6. The Supplier shall maintain the confidentiality and security of any data, information, or intellectual property provided by the Customer for the purpose of using AI, in accordance with applicable laws and regulations. 
7. The Supplier shall implement appropriate technical and organisational measures to protect against unauthorised access, loss, or alteration of data associated with the use of AI.
8. The Supplier shall promptly notify the Customer in the event of any actual or suspected data breach or security incident related to the use of AI.
9. The Supplier acknowledges that all intellectual property rights, including copyrights and patents, associated with any AI technology or AI Outputs developed or used by the Supplier shall remain the property of the Supplier.
10. The Supplier shall be solely responsible for any liability arising out of its use of AI, including but not limited to any errors, inaccuracies, or omissions in the AI Outputs or any infringement of third-party rights.
11. The Supplier agrees to indemnify and hold harmless the Customer from and against any claims, damages, losses, liabilities, costs, or expenses arising out of or in connection with the Supplier's use of AI, including any claims related to the AI Outputs limited to the value of this Agreement.
In the event the Supplier of goods or services is prohibited from using AI:
Prohibition on the Use of AI 
  1. The Supplier expressly acknowledges and agrees that it shall not utilise AI technologies in its provision of the goods or services outlined in this contract, unless expressly authorised in writing by the Customer.
  2. The Supplier shall not engage in any activities involving the development, deployment, or utilisation of AI, including but not limited to the use of machine learning algorithms, automation, or any other AI-related technologies.