Be very careful indeed when a supplier requires you to make an advance payment, in part or full, for goods or services yet to be supplied.
Firstly, you damage your negotiating position should disputes arise. The old adage “Possession is nine-tenths of the law” may not be literally true in the legal sense, but in practical terms having actual possession of disputed money or assets is a great bargaining chip!
Secondly, if your supplier is in financial trouble, you face two significant legal risks:
- If the supplier spends “your” money and is liquidated before supplying the product or service, you are left with a concurrent claim in the estate. And a concurrent claim is likely to be worthless (if you get even 5 cents in the Rand, count yourself lucky).
- If on the other hand “your” money is paid into the supplier’s bank account, the bank can appropriate it to cover its own claims. Leaving you again with your worthless claim against the supplier.
This second risk is neatly illustrated in a recent Supreme Court of Appeal case, where a buyer of product made an advance payment into the supplier’s bank account, only to have the bank appropriate the credit against the supplier’s overdraft.
Holding that the bank had acted lawfully, the Court pointed out that (as a general rule) as soon as monies are paid into an account holder’s bank account, the bank immediately acquires ownership of the funds. The account holder now has only a claim against the bank for payment of the credit.
And whilst the bank doesn’t always have “an absolute or unqualified right on it to treat the funds as its own or the credit as the property of its customer”, it was in this case entitled to set the credit off against the overdraft. The bank didn’t have to “subordinate its interests to [the customer] in the absence of agreement between them” – so presumably the product buyer could have avoided its loss if it had insisted up front on the bank agreeing to refund the purchase price if the supplier failed to deliver.
The end result – the buyer is down R710 111, 00. Don’t let that happen to you!
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