OPINION RE SALE OF ROUGH DIAMONDS AT TENDER HOUSES

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My consultant is the South African Diamonds Producers Organisation (SADPO) which has requested a written opinion regarding the issues set out hereunder.

By way of background I am advised that the basic modus operandi adopted by a Tender House in regard to the manner in which goods are received, tendered and finally sold, (in cases where diggers deliver goods for sale on behalf of the owner of the mining rights of the property on which the diamonds were won) is as follows :

The digger for and on behalf of the Mining Right Holder (MRH) arranges for the physical delivery of a parcel of diamonds to the Tender House.

The Tender House together with the digger and/or the MRH fix a reserve price on the diamonds. The reserve price indicates the minimum price which the digger of the MRH is agreeable to accept for the parcel and the representatives sign an incomplete Brokers Note.

The Tender House then arranges for the goods to be tendered and the goods are ultimately sold to the highest bidder, provided the reserve price is met or exceeded.

The highest bidder i.e. the ultimate purchaser will then issue a note of purchase in terms of form D of the Regulations which is then signed by the ultimate purchaser and the Tender House.

The purchase price for the parcel is paid shortly thereafter normally within forty eights hours of the parcel being sold to the ultimate purchaser.

After the transaction has been completed i.e. goods handed over and monies received, the Tender House then finalises its own brokers note and deals with the disbursements of the funds in terms of instructions received from the owner of the MRH and/or the digger.

The MRH then at some later stage (sometimes even after a month) signs the Brokers Note.

The questions which have been put to me are as follows –

  • What is the legal implication for all parties concerned when the MRH only signs the Brokers Note sometimes more than a month after the transaction was finalised?
  • What would be the legal implications if MRH revokes the mandate given to the Tender House at any time between the completion of the transaction but before he has signed the Brokers Note?
  • When does the Tender House become the owner of the diamonds?

In order to answer these questions an analysis is required as to the manner in which the common law interacts with the Diamond Act 56 of 1986. (the Act).

It is trite law that once a mandate has been acted upon and the transaction in respect thereof completed viz, goods delivered and moneys received that such mandate cannot be revoked. I will deal with this issue at length below.

I turn now to deal with the implication of the late finalisation of the Brokers Note by the MRH.

In terms of Section 56 of the Act  it would appear that the only party in terms of the Act who is required to sign the brokers note in order for the Act to have been complied with is the purchaser.

Section 56 states as follows –

Whenever a licensee receives or purchases any unpolished diamond he shall forthwith complete in duplicate a note of receipt of purchase on the prescribed form.

The original of every note of receipt or purchase completed in terms of such Section 1 shall be handed over to the person who delivered or sold the unpolished diamond, and the copy of it shall be retained by the licensee for a period of at least five years after date on which he or she received or purchased the unpolished diamond”.

The Regulation in this regard refers to a form D which is the Note which is commonly known in the trade as the Brokers Note but which is called “Note of purchase/receipt in respect of unpolished diamonds issued in terms of Section 56”.

This Note also makes it quite clear that the duty is on the purchaser to complete the note and to hand the original to the seller at which stage I would submit the seller should sign it and keep it for his own records. There is no requirement in the Act or the regulations to suggest that the note when signed by the purchaser and kept as a record in respect of the transaction is required to be signed by the seller/supplier beforehand.

On an analysis of the penalty provisions relating to this particular section it is quite clear that failure to do the necessary in respect of the Brokers Note is definitely an offence. However, when the Act discusses the penalties there is no penalty prescribed for this particular section.

I am satisfied that the only obligation in terms of Section 56 of the Act which is the applicable Section is for the purchaser to have done all things necessary in respect of the brokers note and to ensure that it is preserved as part of his records.

In the circumstances once the Tender House has signed the Brokers Note in terms of which it purchased the diamonds from the MRH there is no basis for any authorities to allege that the Act and/or the regulations have not been complied with.

As far as the issue relating to the revocation of the mandate is concerned at a time between the completion of the transaction and the signing of the Brokers Note by the MRH, I advise as follows:

The signing of the Brokers Note has absolutely no legal consequence as far as the common law of sale of movable goods is concerned.

The Brokers Note is merely a evidentiary note of the transaction and the manner in which the Regulator or erstwhile Diamond Board could keep control of dealing in rough diamonds generally in the Republic of South Africa.

It therefore falls to us to consider the common law as far as it pertains to the transaction concerned.

The common law is clear that once a mandate has been given the recipient of such mandate (agent), is entitled to act on that mandate and to conclude whatever deals he is mandated to conclude in terms of such mandate. Provided that all the terms and conditions of such mandate is complied with there is no basis for any recourse between the grantor of the mandate and the grantee.

Accordingly any endeavour on the part of the grantor of the mandate, in this case the MRH, to revoke such mandate after the transaction has been completed cannot be deemed to be effective in the circumstances even though the Brokers Note has not as yet been signed by the MRH.

I go so far as to state that this would be the position once the diamonds have been delivered to the ultimate purchaser but before the moneys had been paid over, since in our law it is the delivery of the movable which passes ownership and not the payment of the money in terms thereof.

It is now appropriate to deal with the question posed  above, ie when does the Tender House become owner of the diamonds?

This question  only arises because the Sale Agreement between the MRH and the ultimate licensee/purchaser is really what is termed in law a “tripartite agreement”.

It is important to appreciate the fact that when the digger or the MRH gives a mandate to the Tender House, this mandate is only a mandate and no more.  It is not a sale agreement in terms of which special arrangements are made regarding the transfer of ownership.

The sale from the MRH to the Tender House only takes place when the ultimate purchaser/licensee agrees to purchase the parcel of rough diamonds and takes delivery thereof.    Accordingly when the Tender House hands the parcel of rough diamonds to the licensee/purchaser, ownership passes to the licensee/purchaser and at one and the same time retroactively ownership passes to the Tender House from the original MRH.

In fact, if a written agreement would have to be put in place to record the transactions referred to above, the written agreement would have to include clauses reading more or less in the same vein as what is set out hereunder :

“Preamble

(a) Whereas the Mining Right Holder (MRH) is the legal holder of parcel X.

(b) MRH hereby gives the Tender House the right to dispose  of  parcel  X  for  an  amount  in  excess  of R1 000 000.

(c) In order to facilitate the transfer of ownership in parcel X to the ultimate licensee/purchaser and to be compliant with the Diamond Act, the parties have agreed as follows :

 

Recordal

(i) Ownership of the parcel X will vest in the Tender House at one and the same time as the Tender House sells and effects delivery of parcel X to the ultimate licensee/purchaser and not before.

(ii) Accordingly in order to be compliant with Section 56 of Diamond Act and to accurately record the flow of transactions relating to parcel X, the Tender House will prepare a Brokers Note for signature by the MRH in terms of which the Tender House purchases parcel X from MRH and the ultimate licensee/purchaser will sign a Brokers Note reflecting the purchase of parcel X from the Tender House.

(iii) For the sake of clarity and to avoid any confusion, the MRH will retain ownership of parcel X until such time as parcel X is delivered to the ultimate licensee/purchaser and payment is made therefor at which time ownership will pass from MRH to the Tender House and simultaneously from the Tender House to the ultimate licensee/purchaser”.

I trust that the above clarifies the issues for all concerned.

Perhaps if the Tender House wishes to “tighten up” on their procedures they should obtain a formal mandate at the time when the digger delivers the diamonds confirming the fact that the Tender House is entitled to dispose of the diamonds at a reserve price which is fixed. The Tender House should then also obtain a signature of the MRH on the same mandate document.

 

MICHAEL KARP

 

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