Law Of Contract notes

The Law of Contract

Formation of a valid contract

�Consensus ad idem (‘meeting of minds’)

� Definition of a contract:

Waheeda Amien, 2010 1

� Definition of a contract:

“[A]n agreement between two or more parties which

creates legally binding and enforceable rights and duties

between them.”

[Basic Principles of Business Law 2006: 52]


� Binding vs non-binding contract

� Constituent elements of contract:


� Constituent elements of contract:

� Offer

� Acceptance


� Contractual capacity = legally competent

� Those who lack / have ltd contractual capacity:

� Minors


� Minors

� Persons married in community of property

� Insolvency

� Mental incapacity

Minors

� Unmarried + under age of 18 years

� No / ltd contractual capacity (CC)

� Under seven years = no CC


� Between seven + 18 need parental assistance =

ltd CC

� Assisted contracts vs unassisted contracts

Assisted contracts

�Children born outside wedlock

� Consent of mother required unless:

o father was in permanent life partnership with


o father was in permanent life partnership with

mother at the time of child’s birth; or

o father acknowledged child + contributed to child’s

maintenance

Assisted contracts

�Parental consent = express / tacit

� Factors indicating tacit emancipation:

� age


� age

� living arrangements

� relationship between minor + parents

Assisted contracts

� Minors can escape liability if:

� contract was induced by misrepresentation,

duress or undue influence;


duress or undue influence;

� other party committed material breach of

contract; or

� contract is inherently prejudicial

Assisted contracts

� Remedy if contract is inherently prejudicial =

restitution in integrum


� to restore status quo ante

Unassisted contracts

� Limping contract

� Election of minor’s parents to ratify / repudiate


contract

� Repudiation of contract by minor within three

years of attaining majority

Married Persons

� Married in community of property

� Ltd CC

� Sale / mortgage of immovable property


� Sale of shares, stocks + bonds

� Sale of household furniture

� Contracts with less onerous implications

Insolvency

� Ltd CC

� Insolvent estate administered by trustee


� Contract without trustee’s permission = voidable

at election of trustee

Mental incapacity arising from mental

illness or intoxication

� No CC

� Contract = void


� Contract = void

� Presumption that every person is of sound mind

and has necessary CC must be disproved

Agreement / Consensus

�Offer = proposal by person making the offer

(offeror makes proposal to offeree)

� Acceptance = assent by offeree to the terms


� Acceptance = assent by offeree to the terms

contained in the offer

� Valid contract = valid offer + valid

acceptance

Requirements for valid offer

Offer must be:

1. Complete, clear + unambiguous


2. Made with intention of creating legally binding

obligations

3. In existence at the time that it is accepted

Offer must be complete, clear +

unambiguous

� Offer must contain all material terms on which

offeror wishes to contract


offeror wishes to contract

� Otherwise, contract = void for vagueness

Offer must be made with intention of

creating legally binding obligations

Following proposals are not valid offers:

� Offers made in jest


� Offers made in jest

� Social arrangements

� Gentleman’s agreements

� Most advertisements (except offers for reward)

Offer must be made with intention of

creating legally binding obligations

� To determine if proposal is not made with

intention to create legally binding obligations,

court will consider:


court will consider:

� Surrounding circumstances

� Precise details of proposal; and

� How a reasonable person would have

interpreted the proposal

Offer must be in existence at the time

that it is accepted

� Offer ceases to exist when it is:

� Rejected by offeree


� Rejected by offeree

(outright or with counter-offer)

� Revoked / withdrawn by offeror

� Lapsed (in terms of stipulated time period /

after reasonable time)

Requirements for valid acceptance

Acceptance must be:

1. Made by person to whom offer was addressed

2. Made deliberately / consciously


2. Made deliberately / consciously

3. Clear, unambiguous + unconditional

4. Corresponding with the terms of the offer

5. Communicated to the offeror

Acceptance must be made by person to

whom offer was actually addressed

Bird v Summerville and another


1961 (3) SA 194 (A)

Acceptance must be made deliberately /

consciously

� Offeree must know of existence of offer when


purporting to accept it

Acceptance must be clear, unambiguous

+ unconditional

� A offers to give B the option to buy / sell various

properties for R100 000. B accepts the offer to buy /

sell the properties for R100 000.


� A offers to sell her car to B for R30 000. B accepts the

offer on the condition that the car passes a roadworthy

test.

� Silence constitutes acceptance where there is a duty on

the offeree to reject the offer expressly.

Terms of acceptance must correspond

with the terms of the offer

� Mirror image of each other

� Variation of terms = rejection + counter-offer


� Variation of terms = rejection + counter-offer

� Incomplete / partial acceptance

Acceptance must have been

communicated to the offeror

� Offeror must receive acceptance

� Exceptions to above rule:

� When need for acceptance is dispensed with


� When need for acceptance is dispensed with

� When offeree is instructed to communicate

acceptance but cannot through no fault of her own

� When offeree is instructed to give notice of

acceptance but offeror makes it impossible for that

to happen

Options

� Contract where grantor undertakes to keep

offer open to grantee for specified period of

time

� Involves two offers:


� Involves two offers:

� Main offer

� Option offer

� May be ceded

Remedies for breach of option

� Interdict + damages for losses; or

� Damages to place yourself in position you

would have been in had option not been agreed


would have been in had option not been agreed

upon; or

� Damages to place yourself in position had

breach not occurred

Right of first refusal

� Grantor agrees that should she decide to enter

into a contract, she will offer contract to grantee


or accept offer by grantee before contracting

with anyone else.

Remedies for breach of right of first

refusal

� Damages; or


� Unilateral declaration of intent; or

� Interdict

Online contracting (electronic commerce)

� Electronic Communications and Transactions

Act 25 of 2002 (ECT Act)


� Regulation of Interception of Communications

and Provision of Communication-related

Information Act 36 of 2006 (RIC Act)

Online contracting (electronic commerce)

� Advanced electronic signature

� Automated transactions … make use of an

electronic agent


electronic agent

� Click-wrap agreements

� Browse-wrap agreements

Click-wrap agreements

Click on:

□ “I agree”


□ “I agree to be bound by the terms and

conditions”

Browse-wrap agreements

“the use of this website is subject to our standard

terms and conditions”


� S11(3) ECT Act: reasonable person

� Common law – standard type contracts

Supplier obliged to disclose following

information for electronic transactions:

1. Supplier’s full name + legal status

2. Supplier’s physical address + telephone no

3. Supplier’s website + email addresses


3. Supplier’s website + email addresses

4. Membership of any self-regulatory / accreditation body

to which supplier belongs + contact details of that body

5. Code of conduct to which supplier subscribes + how to

access it electronically

6. Supplier’s registration numbers, names of its office

bearers + place of registration

7. Physical address where supplier will receive legal

service of documents

8. Description of goods + services offered to enable the

consumer to make an informed decision

9. Full price of goods / services, including transport, taxes

+ other fees / costs

10. Manner of payment

11. Any terms of agreement, including guarantees that will


11. Any terms of agreement, including guarantees that will

apply to the transaction and how those terms may be

accessed, stored + reproduced electronically by

consumers

12. Time within which the goods will be dispatched /

delivered / within which the services will be rendered

13. Manner + period within which consumers can access +

maintain a full record of the transaction

14. Return, exchange + refund policy of the supplier

15. Any alternative dispute resolution code to which the

supplier subscribes + how it may be accessed by the

consumer

16. Security procedures + privacy policy of the supplier in

respect of payment, payment information + personal


respect of payment, payment information + personal

information

17. Minimum duration of the agreement in the case of

agreements for the supply of products / services to be

performed on an ongoing basis

18. Rights of consumers in respect of the cooling off period, where applicable.

Supplier obliged to enable consumer to:

� Review the contract;

� Correct any errors; and

�


� Withdraw prior to finalising the contract

Failing which, consumer may cancel contract within 14

days of receiving goods / services

Further obligations of supplier:

� Supplier must execute order placed within 30 days of

receiving the order, failing which, consumer may cancel

contract within 7 days by written notice

� Supplier must utilise secure payment system, failing which

consumer can sue for damages


consumer can sue for damages

� Provide consumer with the opportunity to unsubscribe from a

mailing list

� If requested, supplier must provide details of where + how

consumer’s personal information was obtained

Cooling off period

� Automatic right of consumer to cancel contract

within seven days of receipt of goods / services


� Available if consumer cannot rely on breach of

18 disclosure rules / cannot access three

entitlements of consumers

Cooling off period does not apply to:

� Financial services

� Auctions

� Foodstuffs + beverages for everyday use

� Customised goods

� Goods / services where the price depends on market


� Goods / services where the price depends on market

fluctuations

� Newspapers, books + periodicals

� Audio, video / software products that have been unsealed

� Gambling

� Accommodation, transport, catering + leisure services for a

specified date / time period

Factors that can taint / prevent the

conclusion of a valid contract

1. Mistake (void contract)


2. Misrepresentation (voidable contract)

3. Duress / undue influence (voidable contract)

Mistake

� Common mistake

� Unilateral mistake


� Unilateral mistake

� Mutual mistake

Material mistake

� Nature of the contract

� Subject matter of the contract


� Subject matter of the contract

� When the identity of the other party matters

Mistake is not material if it relates to:

� Quality / characteristic of the subject matter

� Party’s motives


� Party’s motives

� When identity of other party is not relevant to

the party’s ability to perform

� Reasonable mistake (iustus error)

� Reasonable reliance


� Caveat subscriptor

Misrepresentation

� Expressly

� Conduct


� Silence where there is a duty to disclose

information

Misrepresentation

� Causal

� Incidental


� Fraudulent

� Negligent

� Innocent

Distinguish misrepresentation from:

� Warranty

� Statement of opinion


� Statement of opinion

� Puff

Relationship between misrepresentation

and mistake

� If mistake is material = contract will be void for

mistake


� If mistake is not material = contract could be

voidable on the basis of misrepresentation

Duress

� Where one party threatens, coerces /

intimidates another to enter into a contract


Undue influence

� Persuasion is subtle

Legality

� Contracts that are:

� illegal;

�immoral / contrary to public policy; and/or


�immoral / contrary to public policy; and/or

�legally impossible

= invalid + unenforceable

Statutory illegality

� Act of parliament

� Absolute prohibition

� Relative prohibition


� Relative prohibition

� Void contract depending on intention of

Parliament

Common law illegality

� Void because contra bonos mores


/ contrary to public policy

Effects of contracts that are void for

Illegality

� Unenforceable

� Nullity


� Nullity

� Restitution if one party is not equally guilty or if

in the interests of justice

Severing invalid terms

� If invalid terms are capable of being severed =

contract remains valid

� Subsidiary?


� Integral?

� Consider purpose of contract + whether

purpose can be achieved in absence of invalid

terms

Contracts in restraint of trade

� Self-standing

� Form part of existing contract


Magna Alloys and Research (SA) (Pty) Ltd v Ellis

1984 (4) SA 874 (A)

Possibility of performance

� Objectively impossible = void

� Physical / legal

� Casus fortuitus


� Casus fortuitus

� Vis maior

� Initial + supervening impossibility

Formalities

� Sale of immovable property + credit agreements:

�Writing

�Signed by both parties


� Failing above: contract for immovable property = void

credit agreement = valid but criminal

Formalities

� Ante-nuptial contracts:

�Writing

�Signed by both parties

�Notary public


�Registration in deeds office within three months of

marriage

� Failing above: ANC = valid but marriage in community

of property

Contents of a contract

� Terms

� Express

� Implied

= Both give rise to rights + obligations


= Both give rise to rights + obligations

� Clauses

� Provisions that do not give rise to rights +

obligations

Express terms

� Articulated verbally or in writing

� Standard type contracts

� Caveat subscriptor rule


� Unsigned documents e.g. tickets, notices

� Exclusionary / exemption / disclaimer clauses

Exclusionary / exemption / disclaimer

clauses

Central South African Railways v McLaren

1903 TS 727


1903 TS 727

Durban’s Water Wonderland (Pty) v Botha

1999 (1) SA 982 (SCA)

Implied terms

� Residual terms / naturalia

(implied by operation of law)


� Tacit terms (implied by fact)

� Implied by trade usage

Residual terms / naturalia

� Apply to contracts of sale, lease, agency etc.

� Regulated by particular body of law


� Regulated by particular body of law

� Do not apply to franchise + distribution

agreements

Residual terms / naturalia

Examples:

� A buyer in a contract of sale is obliged to pay the

purchase price even though the goods were damaged /

destroyed while in the possession + under the control

of the seller, provided the seller is not to blame for the


of the seller, provided the seller is not to blame for the

damage / destruction of the goods.

� A lessee in a contract of lease only needs to pay the

rental in arrear (at the end of the lease period) rather

than at the beginning of the lease period.

Tacit terms

� Parties’ intention

� ‘Curious bystander’ test


West Witwatersrand Areas v Roos 1936 AD 62

Voigt Ltd v South African Railways 1933 CPD 4

Terms implied by trade usage

� Customs of particular trades / industries

Coutts v Jacobs 1927 EDL 120

� Usage must:


� Usage must:

� be generally known within trade or industry;

� be clear;

� be reasonable; +

� not conflict with common law + statutory law

MEMORANDUM OF AGREEMENT

entered into between:

Shalin Naidu of 25 Ernest Road, Rylands Estate (hereinafter called ‘the seller’)andRaeesa Suliman of 12 High Level Road, Sea Point (hereinafter called ‘the purchaser’)

WHEREBY IT IS AGREED AS FOLLOWS:

1. Sale and purchaseThe seller hereby sells to the purchaser who hereby purchases the seller’s 1996 Toyota Tazz (hereinafter referred to as ‘the Goods’).

2. Price


2. PriceThe purchase price for the Goods shall be the sum of R50 000.00 (Fifty thousand rand).

Signed by the seller at Rylands Estate this 1st day of March 2008.Shalin Naidu

-------------------------------

Signed by the purchaser at Rylands Estate this 1st day of March 2008.Raeesa Suliman

-------------------------------

Common contractual terms

� Conditions

� Time terms

� Warranties




� Cancellation clauses

� Penalty clauses

� No variation clauses

Conditions

A condition is a provision in a contract which

“makes the operation, or continued operation, of


“makes the operation, or continued operation, of

the whole or part of the contract dependent on

the happening of an uncertain future event.”

Conditions

� Not terms

� Suspensive


� Resolutive

Question is whether / not stipulated event / undertaking

will happen

Suspensive conditions

Example: Condition in a contract of sale of

immovable property

“This agreement is subject to the condition that


the Purchaser’s application for a loan be

approved by 20 June 2010, upon the security

of a mortgage bond over the property, by a

Financial Institution, for the sum of R1 million.”

Resolutive conditions

Example: Condition in a divorce agreement

“I, the husband, undertake to pay my former


“I, the husband, undertake to pay my former

wife maintenance until she remarries or dies.”

Time terms

Examples:

� I will pay you R1 million on 01 December 2008


� I will pay you R1 million when you die

Question is when stipulated event will happen

Warranties

� Express confirmation of the truth of a particular fact in

the contract

� Forms part of the contract

� Breach of warranty = breach of contract


� Breach of warranty = breach of contract

� Distinguish between warranty + misrepresentation:

Petit v Abramson (II) 1946 NPD 673

Exclusionary / exemption / disclaimer

clauses

� Courts interpret restrictively


Barnard v Protea Assurance Co Ltd t/a Pretoria

Assurance 1998 (3) SA 1063 (C)

Cancellation clauses

� Parties give themselves the right to cancel a contract

for non-material breaches

Example: Clause in lease agreement


“If the monthly rental or other amounts due in terms of

this lease are not paid on due date or if the tenant

commits any other breach of this lease, the landlord

shall be entitled to cancel this lease.”

Penalty clauses

Example: Clause in building contract

“The contractor / builder shall be liable to pay a


penalty of R500 per day to the client for the

number of days the work remains incomplete

beyond 01 June 2010.”

No variation clauses

Example:

“No variation to the contract will be of any force


“No variation to the contract will be of any force

and effect unless the variation has been

reduced to writing and signed by both parties.”

Disagreement on terms of a contract

� Could arise when terms of the written contract

are ambiguous / does not accurately reflect the

parties’ prior negotiations


� Legal principles to assist:

� Parol evidence rule

� Rectification

Parol evidence rule

� Forms part of the law of evidence

� Court must only consider written document

� No oral evidence allowed

� Exceptions to above:


� Exceptions to above:

� Where agreement is partly verbal + partly written

� Where written terms are vague / incomplete /

ambiguous

Rectification

� Application to court to rectify written contract

� Applicant bears the onus of proving that the


document is inaccurate + how it should be

corrected to accurately reflect the parties’

agreement

Breach of contract

Types of breaches

1. Mora debitoris

2. Mora creditoris


2. Mora creditoris

3. Repudiation

4. Positive malperformance

5. Prevention of performance

Mora debitoris

“Delay, without lawful excuse, of performance of a contractual duty; in other words mora is wrongful failure to perform timeously.”

� Breach of a time term by the debtor


� Breach of a time term by the debtor

� Two elements:

� Performance must be due + possible

� Obligation must be enforceable

Mora creditoris

“Delay (or refusal) on the part of the creditor to render such assistance as the law requires of him in co-operating with the debtor to enable him (the debtor) to perform.”


� Breach of a time term by the creditor

� Two elements:

� Performance is due

� Debtor tenders proper performance

Repudiation

� Rejection of contractual obligations

� Examples:

1. Seller informs purchaser she has decided to keep


1. Seller informs purchaser she has decided to keep

the goods

2. Employee fails to report for duty and starts

employment elsewhere

� Anticipatory breach

Repudiation

Typical expressions:

“I will not”


“I would like to but I cannot”

“Please cancel the order”

Positive Malperformance

� Defective performance

� Two types:


a) Incomplete / defective (substandard)

b) Where debtor does something that the

contract prohibits her from doing

Prevention of performance

� Impossibility caused by a party to the contract

� Scenario 1:


Performance is not possible as a result of the

actions of the debtor e.g. debtor is a chauffeur

and she loses her driver’s licence as a result of

a drunk driving conviction

Prevention of performance

� Scenario 2:

Performance by the debtor is prevented by the

actions of the creditor e.g. chauffeur (debtor)


tenders performance (arrives at work) but her

employer destroys the vehicle that she is

required to drive.

Remedies for breach of contract

� Declaration of rights

� Specific performance


� Cancellation

� Damages

Declaration of rights

� High Court application

� To obtain clarity regarding obligations and


� To obtain clarity regarding obligations and

rights under a contract

Specific performance

� Mandatory interdict

� Prohibitory interdict

� Requirements for interdict:


� Requirements for interdict:

� Clear right

� Injury / well founded fear that injury will be committed

� No other remedy exists


� Court has discretion to grant order:

Haynes v King William’s Town Municipality


1951 (2) SA 371 (A)


� Exceptio non adimpleti contractus:

Motor Racing Enterprises (Pty) Ltd (in liquidation) v

NPS (Electronics) Ltd


NPS (Electronics) Ltd

1996 (4) SA 950 (A)

BK Tooling (Edms) Bpk v Scope Precision Engineering

(Edms) Bpk 1979 (1) SA 391 (A)

Cancellation

� Election to cancel

� Material / fundamental breach


� Cancellation clause

Cancellation

� Material / fundamental breach

“‘goes to the root of the contract’, or affects a ‘vital part’ of

the obligations or means that there is no ‘substantial

performance’. It amounts to saying that the breach


performance’. It amounts to saying that the breach

must be so serious that it cannot reasonably be

expected of the other party that he should continue with

the contract and content himself with an eventual claim

for damages.”

(Swartz & Son (Pty) Ltd v Wolmaransstad Town Council 1960 (2) SA 1 (T) at 4)

Cancellation

� Material / fundamental breach applies to:

� Repudiation

� Prevention of performance


� Prevention of performance

� Positive malperformance

� Mora debitoris + mora creditoris

Damages

� Distinguish between damages in contract + damages in delict:

“A litigant who sues on contract sues to have his bargain or its equivalent in money or in money and kind. The litigant who sues on delict sues to recover the loss


litigant who sues on delict sues to recover the loss which he has sustained because of the wrongful

conduct of another, in other words that the amount by which his patrimony has been diminished by such

conduct should be restored by him.”

(Trotman & Another v Edwick 1951 (1) SA 443 (A) at 449B-C)

Variation of contract

� Must follow the same formalities as for the

conclusion of the contract

E.g. Alienation of Land Act 68 of 1981


E.g. Alienation of Land Act 68 of 1981

� Non-variation clause may require variation of

contractual terms to be in writing

Transfer of contractual terms +

obligations

� Cession = rights

� Delegation = obligations


� Delegation = obligations

� Assignment = rights + obligations

Cession of rights

Dr Cr 1

Cedent (Cr 1) Cr 2 (Cessionary)


Dr Cessionary

� Example 1: lease agreement

� Example 2: future book debts

Cession

Prohibition against cession of rights in:

� Compensation for Occupational Injuries and

Diseases Act 130 of 1993


Diseases Act 130 of 1993

� Statutory Pensions Protection Act 21 of 1962

� Insolvency Act 24 of 1936

Cession

� Debtor’s consent not required unless s/he has

substantial interest in the identity of the

creditor


i.e. when the identity of the creditor makes a

reasonable or substantial difference to the

debtor.

Cession

� Labour Relations Act: sale of business as a

going concern


� Paiges v Van Ryn Gold Mines Estate Ltd 1920

AD 600

Delegation of obligations

� Novation

� Creditor’s consent required

� E.g. lease agreement


Dr Cr 1

3rd party

Assignment of rights + obligations

� Novation

Dr / Cr Dr / Cr


� E.g. lease agreement

� Consent required

Termination of contractual obligations

1. Proper performance

2. Agreement

3. Cancellation

4. Death

5. Failure of creditor to perform

6. Insolvency


6. Insolvency

7. Merger

8. Novation

9. Prescription

10. Set-off

11. Supervening impossibility of performance

Proper performance

a) Perform at the agreed place + time

i. Identity of the parties

ii. Performance must follow the manner


ii. Performance must follow the manner agreed upon

b) Payment in cash + by cheque

Agreement

� Waiver

� Novation


� Novation

� Compromise

Prescription

� Defence for debtor

� Prescription Act 68 of 1969

� Three (3) years for most types of debts


� Three (3) years for most types of debts

� Delay of prescription

� Interruption of prescription

Set-off

1. Indebtedness in the same capacities

2. Debts must be due + payable


2. Debts must be due + payable

3. Debts must be of the same type and liquidated

Supervening impossibility of

Performance

� Vis maior + casus fortuitus

� Peters Flamman & Co v Kokstad


� Peters Flamman & Co v Kokstad Municipality 1919 AD 427

� Benjamin v Myers 1946 CPD 655

Law Of Contract notes

Documents

offer valid contract

offeror waheeda amien

parents waheeda amien

ante waheeda amien

reward waheeda amien

disproved waheeda amien

vagueness waheeda amien

prejudicialwaheeda amien