Law of Contract summary
A summary of the Law of Contract (SA)...
LAW OF CONTRACT PART I THE REQUIREMENTS OF A VALID CONTRACT Unit 1: Introduction to the Law of Contract and basic concepts. Learning outcomes: After completion of this unit, the student should be able to: 1. 2. 3. 4. 5. 6. 7. 8.
Discuss the historical roots of the Law of Contract in South Africa. Define the term “contract” Define the term “obligation” Classify and discuss the different types of obligations. Distinguish between the terms “contract” and “obligation” Identify and discuss the characteristics or terms of a contract. Distinguish between the terms “void” and “voidable” Analyze the Social and Constitutional values embedded within the Law of Contract. 9. List the requirements for a valid contract. Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 1. 2. From List of cases: Afrox Healthcare v Strydom 2002 (6) SA 21 (SCA) and Brisley v Drotsky 2002 (4) SA 1 (SCA)
Alternative study: 1. Christie. The Law of Contract in South Africa. Fifth Edition. Chapter 1. 2. Bhana et al. Students’ guide to the Law of Contract. Second Edition. Chapter 1.
2 1. Historical introduction According to Christie, “the law of contract is of fundamental importance in the modern world, because it is woven into and inseparable from every form of economic activity.”1 Because of this fact, international business relations are governed to a large extent by the principles of the law of contract. The RomanDutch law adopted the principle of treating each and every agreement made seriously and deliberately as a contract, obviously influenced by the canon law (specifically the ius gentium, or law of mankind), and by a notion that the honouring of promises was inherent in peoples of Germanic origin. 2 Grotius in the 17th century exclaimed that the rule stipulatio = pactum = contract and the Roman distinctions between these concepts no longer existed. The South African concept of contract According to Brand JA3, South African Private Law is essentially uncodified, and at the heart of this uncodified system lies seventeenth-century Roman-Dutch law. 4 When the Dutch occupied the Cape of Good Hope in 1652, this system was adopted in the Cape. In 1806, however, the Cape was colonised by the British, and consequently aspects of British law were incorporated into our legal system. In 1826 it had to be decided whether English law should replace Roman-Dutch law in the Cape Colony. The Supreme Court in the Cape likewise had to decide whether to adopt a basically English or basically Roman-Dutch concept of contract.5 In the case of Louisa and Protector of Slaves v Van den Berg (1830), neither counsel nor the court made any reference to English law, but instead chose to rely on Voet, Grotius and Groenewegen. However, throughout the next century, English concepts such as the parole evidence-rule were continuously incorporated into South African law of contract. The importance of the contract in modern day international business Ryan Murray, senior lecturer at the Nottingham Law School, provides a very apt description of the vital importance of modern day law of contract: “The law of contract is truly remarkable. In fact, it is difficult to think of an area of law that plays a more important part in everyday life. Literally millions of contracts are formed each day and few of us will make it through 24 hours without entering into a contract. A bus ride to work, the purchase of a sandwich at lunchtime or a ticket to see a film at the cinema, these are all simple examples of contracts that pass us by without much thought as to the legal principles that 1 Christie 2006:1 2 Christie 2006: 6 3 Justice of Appeal Brand is an Honorary Professor in the Faculty of Law, University of the Free State. 4 Brand 2008: 71 5 Christie 2006: 8
3 govern these activities. The reason so many of us are unaware of these contractual principles is that in the vast majority of cases there will be no need to challenge the contract. Most contracts are performed without difficulty with both parties meeting their contractual obligations. Despite the number of contracts that are made every day only a tiny proportion will be challenged by the parties and out of these an even smaller amount will ever reach the courts. However, it is also important to understand the fundamental principles of contract law as it not only provides the framework for resolving disputes when things go wrong under a contract, but it also provides a framework that allows individuals to regulate their own contractual obligations”.6 2. The term “contract” No two definitions of a contract are the same. However, the following definitions by different writers will indicate that certain elements are ever-present. Note to student: It is expected that you familiarize yourself with all the definitions of a contract provided herein. In any question in a test or exam, you will be required to provide all the different definitions provided below, except where indicated otherwise. Van der Merwe et al define a contract as follows: “A contract is a promise to fulfill an obligation.” “A contract is an “obligationary agreement” “An agreement will be a contract only if the parties intend to create an obligation or obligations…” Not all agreements constitute contracts. The difference is that a contract is a “legal fact”, in other words something which has its basis in empirical reality and has legal consequences. Christie, another South African writer, defines a contract as follows: “An agreement (arising from either true or quasi-mutual assent) which is, or is intended to be, enforceable at law.” Kerr provides a somewhat complex definition, or rather explanation of what a contract entails: “In contract the legal bond, the iuris vinculum, is formed by the parties themselves (or their agents), and, within the limits laid down by law, the nature of 6 Murray 2008: 1
4 the obligations is determinable by them. In some cases their agreement is actual (meaning both parties understand and concur in all the provisions of a simple sale of goods), in others apparent (meaning one of the parties, being in a position to understand what is written on a form containing the proposed provisions of a contract, but without coming to any agreement, signs the form without bothering to read it), and in yet others partly actual and partly apparent”.7 Bhana et al’s definition is simpler, and reads as follows: “Contracts are agreements between parties who have the intention to create legal rights and duties between them and which are legally binding upon the parties.8 Major, an English writer, defines the term “contract” as follows: “A contract is defined as a legally enforceable agreement. This means that a contract is enforceable in the sense that there is a legal remedy available in case one party should fail to comply with his promise under the agreement”.9 It is evident from the abovementioned definitions that academics have similar notions of what the contract as a legal document entails. Two words that pop up ever so often in the mentioned definitions are “agreement” and “obligation”. Consequently we will take a look at what is meant by the latter. 3. The term “obligation” Van der Merwe et al explain the concept of an “obligation” as follows: “Obligation” is a term derived from the Latin obligare which means “to tie” or “to bind together”. It refers to a legal bond (vinculum iuris) which binds together two legal subjects. The relation entails (on the one hand) a right to performance (this right belongs to the creditor), and (on the other hand) a duty to render the performance (which rests on the debtor). The nature of the performance is related to the delivery of a thing (dare) or the doing of something (facere) or the refraining from doing something (non facere). The creditor’s right is called a personal right, because the subject-matter or object of the right is a performance by another person. This right is also called a “claim” The debtor’s duty to perform is sometimes called a “debt”. An obligation, then, entails both a right and a duty.10 Bhana et al add hereto the following: A legal obligation is a legal tie or relationship (vinculum iuris) between two people which means that one party has a duty to give a certain performance, while the other party has a 7 Kerr 1989: 3 8 Bhana et al 2009: 2 9 Major 1990:123 10 Van der Merwe et al 2007: 2
5 corresponding right to receive the performance. Every obligation therefore involves one right and one duty. One can see from these definitions that there are always at least two parties to an obligation. As already touched on above, the party who has the duty to deliver the performance is called the debtor, while the party who has the right to receive the performance is called the creditor. It is important to remember that obligations do not arise from contracts only, but may also arise from delicts and something like unjustified enrichment, which are not dealt with in detail in this module. 4. Different types of obligations 4.1.
(obligationes naturales): Those obligations that cannot be enforced in a court of law, such as the unassisted contract of a minor. 4.2.
(obligationes civiles): Those obligations that may be enforced by a court of law, such as obligations arising from a contract of service or a contract of sale. 5. The difference between “contract” and “obligation” “Obligations” may simply be described as the consequences of a “contract”. In order to conclude that a contract has come into existence, one has to rely on certain historical facts. No subsequent events can change these historical facts. At most, its legal consequence, the obligation, can be terminated by fulfillment, release or cancellation. The existence or operation of an obligation may depend on a supposition, a condition or a modus, whereas the contract itself is not made to depend on such qualifying terms. Contracts are thus clearly distinguishable from their consequences, namely obligations. A term such as “breach of contract” is actually erroneously applied, as breach in fact refers to the obligation, rather than the contract.11 6. Identifiable characteristics of the contract: According to Bhana et al, obligations created by a contract are determined by the terms of the contract. These terms can be divided into three sub-classes: 6.1.
Essentialia: Those elements that identify and differentiate the contract from other types of contract.
11 Van der Merwe et al 2007: 8
6 Example: In a contract of sale, the essentialia will be the price and the thing that is sold. If the essentialia for a particular type of contract are not present, the contract will still be valid, but it won’t be that specific type of contract anymore. 6.2.
Incidentalia: Clauses that make provision for residual matters for which the parties wish to make special provision or to alter or exclude the naturalia. Example: The parties to a contract of sale can include a clause that the thing is sold “voetstoots” or “as is”. This means that the seller does not give a warranty against latent defects in the thing sold. In other words, the parties exclude this naturalia of the contract of sale.
Naturalia: The legal principles of the law of contract that will apply to the contract in the absence of clauses to that effect in the contract itself. These are the terms automatically attached by law to a specific type of contract without them having to be inserted by the parties. Example: One of the naturalia of a contract of sale is a warranty against latent defects, meaning that the buyer will be able to cancel the contract or claim a price reduction if the thing sold has a latent (hidden) defect. This term will automatically form part of the contract of sale, even if the parties do not specifically agree thereon.
7. Void or voidable? A contract is void ab initio (from the beginning) and has no legal effect whatsoever if the constituent requirements are absent. A contract is valid but may be declared void if an applicant proves successfully that certain factors influenced his/her mind to enter into a contract, e.g. duress, misrepresentation or undue influence. 8. Principles and policies of the Law of Contract: Social and Constitutional Values Study in particular Van der Merwe et al. pp. 11-18 The view that a contract is constituted by agreement signifies the recognition of individual autonomy as a philosophical premise. Freedom of contract means that an individual is free to decide whether, with whom, and on what terms to contract. The principle of consensuality (“consensus”) requires concurrence of at least two such decisions for a valid contract. However, autonomy also entails that the decision-maker must accept responsibility for his/her considered actions. The principle of pacta sunt servanda, in turn, requires exact enforcement of contractual obligations created in
7 circumstances which are consistent with freedom of contract and consensuality. (This doctrine entails the freedom to enter into a contract. Former Justice of Appeal JJ Hefer, who is also an extraordinary professor of law at the Department of Private Law at the University of the Free State, mentions that the pacta sunt servanda-principle is probably the most important foundation of the South African law of contract. 12 However, it is inevitable that this principle sometimes results in situations where contractants are bound by agreements which may be to their detriment. In the case of SA Sentrale Ko-op Graanmaatskappy Bpk v Shifren en Andere13 Steyn JA held that parties to a contract were bound by a stipulation in their contract that no variation in the specific contract should be of force or effect unless it was in writing. In this case, two parties entered into a lease contract, which contained a so-called “non-variation”- clause, which stipulated that no variation to the contract would be valid if not in writing. The lessee wanted to sub-let the property in question, and got the oral permission from the lessor to do so. The lessor decided to cancel the contract on the grounds that the “non-variation”-clause was not complied with. The court decided that the oral permission was insufficient. This may sound like “hard law”, especially since the decision was reached in 1964, about thirty years before the new constitution, which was initially known as Act 108 of 1996. However, it is interesting to note that the Shifren-decision was upheld in the case of Brisley v Drotsky14 (which can be found in the KON 214 list of cases, and which must be studied in detail). The fact that an obligation is recognized by law, and receives its effect through the agencies of the state, implies that contracting parties, when exercising their private autonomy, are subject to the values of society. The very principles of morality or socioeconomic expediency may in particular circumstances require that less weight be attached to the ideals of individual autonomy and freedom of action. The rules of the law of contract reflect the attempts in the legal system to achieve a balance between relevant principles and policies so as to satisfy prevailing perceptions of justice and fairness, as well as economic, commercial and social expediency. For the abovementioned reason, the law of contract has a dynamic and ever-changing nature (Van Zyl, J in Janse van Rensburg v Grieve Trust 2000 (1) SA 315 (C) on 323-324). Chapter 2 of the constitution has specific implications for the abovementioned position: The basic rights of the constitution are a concrete expression of principles, policies and values which prevail in South African society. Many of the rights awarded to the individual in Chapter 2 of the constitution, are also inherent to the law of contract: freedom to contract, private autonomy, public policy and interest, the boni mores, bona fides, reasonableness and fairness, and equality. Because of the fact that the constitution is the supreme law of the country, and the Bill of Rights is the most recent expression of the values upheld in South African society, precedent set by appeal courts after the constitution came into effect has been said to bind lower courts.
12 Hefer 2004: 1. 13 1964 4 SA 760 (A) 14 2002 (4) SA 1 (SCA)
9. Requirements for a valid contract Over the next few lectures, we are going to look at the requirements for a valid contract. There are six of them, each of which will be discussed in detail. They are the following: 9.1 Consensus 9.2 Formalities 9.3 Possibility of Performance 9.4 Legality 9.5 Certainty 9.6 Capacitated parties
Unit 2: The Requirement of “Consensus” Learning outcomes: After completion of this unit, the student should be able to: 1. 2. 3. 4. 5.
Explain what is meant by the “basis of a contract” and how it is formed. Explain what is meant by the term “consensus”. List and discuss the three theories for determining the presence of consensus. Explain what is meant by the “objective approach” for determining consensus. Explain what is meant by the term “mistake” and identify the solutions thereof.
Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapters 2, 3 and 4. 2. From List of cases: Trollip v Jordaan 1960 1 PH A 25 T Spindrifter v Lester Donovan 1986 1 SA 303 Du Toit v Atkinson Motors 1985 2 SA 893 Allen v Sixteen Sterling Investments 1974 4 SA 174 De Jager v Grunder 1964 1 SA 446 AD. Alternative study: 3. Christie. The Law of Contract in South Africa. Fifth Edition. pp. 22-24 4. Bhana et al. Students’ guide to the Law of Contract. Second Edition. Chapter 3.
1. The Basis of a contract15 The basis of a contract is either consensus, which means an actual meeting of the minds of the contracting parties, or the reasonable belief by one of the contractants that there is consensus. Roman jurists did not accept that each and every simple agreement (nudum pactum) was a legally binding agreement (contractus) to the extent that it created an obligation in law. For an agreement to be a binding one they usually required the presence of a special reason for the creation of an obligation (causa obligationis). In Roman times, verbal contracts were only binding if expressed in very specific words. Some agreements were binding only if accompanied by the delivery of a thing (contractus re), whereas another type of agreement was binding if an entry of (fictitious) payment had been made in the creditor’s account book (contractus litteris). Some agreements, however, were legally binding although they were not accompanied by special causae obligationum. These were the consensual contracts (contracts ex consensus) which were binding simply because the parties to the agreement concurred on the essential parts of their pact. Contractus ex consensus played a vital role in economic discourse as they reflected some of the most common economic transactions, such as sale, lease and employment. Roman jurists accepted the fact that a meeting of will or intentions could be the basis of a binding contract, although they did not elevate consensus to the general basis of all contracts. Germanic law did not even recognise consensus to the extent to which it was accepted in Roman law. The Germanic conception of a binding agreement seems to have required either some final cause or completed performance. In the course of time, though, the binding force of consensus as a general value in what was regarded as proper conduct came to be accepted as part of the philosophy of natural law, and the doctrines of the Catholic Church. Adherence to agreements because one had consented to them acquired a moral or religious connotation inasmuch as it was regarded as improper or sinful not to abide by one’s word. For reasons both moral and economic, medieval merchants also accepted consensuality as a basis for adhering to their agreements. Thus consensuality became a part not only of moral philosophy and canon law, but also of the lex mercatoria or law merchant, the law that was internationally accepted by merchants and traders. The outcome of this was the acceptance of the maxim pacta servanda sunt as one of the guiding principles of the law of contract, particularly in view of the reception of Roman law into the systems of law which obtained in Western Europe. On the one hand, the emphasis fell on pacta, in other words that mere agreements could be binding without recourse to form. On the other hand, the words servanda sunt indicated that it was imperative to honour simple agreements. 15 Van der Merwe et al 2007: 19-21
By the seventeenth century, the scene was set for the acceptance in the law of Holland of the principle that mere consensus was legally binding. 2. The Term “Consensus” Consensus refers to the so-called meeting of the minds of contractants, and can be said to be the basis of a contract. A contract comes into existence of the parties are agreed (ad idem) on creating between themselves an obligation (or several obligations) as well as on all its particulars, such as its content and subsidiary features. If A wants to sell his car to B, a contract will arise only if they both agree on the object which A must deliver (the particular car) and the price which B must pay in return, as well as on subsidiary matters pertaining to the obligations and which the parties regard as important (such as the fact that B must get a loan from a recognised financial institution). Reasons for binding parties in terms of a contract include the following: -
Intention of the contractants; Legal certainty; Good faith; Protection of reasonable expectations; Creation of undue risks.
The general theory that has developed for determining consensus is called the Will Theory. A contracting party’s “will” is formed by the following: Motives: (a) Own motive: Plays no role in the question of whether consensus exists or not. The other party is innocent, and did not influence you in entering into the contract. (b) False establishment of a motive: Plays a role in the question of whether consensus exists- it leads to the voidability of a contract. False information moved you to enter into the contract: Misrepresentation. (c) Motive still unknown: The other parties have no knowledge of your motive to enter into contract. This may lead to a situation where two parties have totally different motives at the signing of the contract. The argument exists that in this instance, no consensus exists.
Decision: (a) Decisions are reached after having established your motive. (b) A “legal will” requires the parties to reach consensus on all aspects of the contract. (c) The other party still carries no knowledge of the motive and/or decision, because it hasn’t been conveyed yet. Declaration of will: (a) Known as “offer and acceptance”- declarations. See Van der Merwe et al. Chapter 3 3. The three theories for the determining of consensus It has already been mentioned that the Will Theory developed for the determining of whether consensus is indeed present at an agreement, and subsequently whether a valid contract exists. However, because of critique against the Will Theory, two other theories for the determining of consensus have developed, namely the Declaration Theory and the Reliance Theory. 3.1. The Will Theory According to the “will theory”, consensus is found in the so-called “meeting of the minds”, or consensus animorum animo contrahendi. The elements of consensus are as follows:
Contractants must be agreed on the consequences they wish to create. They must intend to bind themselves legally. They must be aware of their agreement.
Advantages of the will theory:
In a society which accepts the free expression of individual will and the personal autonomy of each individual as primary values, the will theory has the obvious advantage that it can be expressed in terms of principles which are fundamental to the society.
The theory has strong historic roots in the Roman-Dutch Law.
The theory functions satisfactorily as an explanation for contractual liability where the parties are in actual agreement.
It also functions satisfactorily in the case of absence of liability where they disagree on some fundamental aspect of their intended contract.
Critique against the will theory:
The theory experiences problems with explaining misrepresentation and error. It fails to explain the doctrine of representation satisfactorily. It fails to explain the doctrine of reservatio mentalis. This theory differs from case law in instances concerning the moment of reaching of consensus in contracts concluded inter absentes. It is difficult to prove in court. The theory follows a subjective approach.
The Will Theory was preferred in the following cases: Swart v Vosloo 1965 1 SA 100 AD op 104H: A lease is a mutual contract flowing from agreement of the minds of the parties, a concursus animorum animo contrahendi. Jonnes v Anglo African Shipping: The general rule is that the court should determine what the true intention of the parties was. Maize Board v J Jackson: As a general rule parties to a contract intend it to be exactly what it purports to be. Not infrequently, however, they may endeavour to conceal its true character. In such a case, when called upon, a court must give effect to what a transaction really is and not what in form it purports to be. (Ponnan, J on 2) PW Michau v The Maize Board: He conceded, however, that he had no idea of the price of day-old chickens or poultry and that, although in terms of his agreement with Rainbow the price at which the chickens were sold would be decisive as to whether there was a profit or not, the price of chickens was to no importance to him at the time. He said he simply placed his faith in Rainbow to give him an added value on his maize. Although the abovementioned four cases need not be studied in detail,
students must have a thorough understanding of what the courts said in each case. The Declaration Theory According to the declaration theory consensus is to be found in the objective coinciding declarations of the contractants. Van der Merwe et al states the following: According to the declaration theory contractants are bound to their contract not on the basis of their subjective, co-inciding intentions but on the basis of their objective, coinciding declarations of will. This theory only takes into account a party’s declaration of will, and not its intentions. Advantages of this theory: Wessels, J stated the following in the case of South African Railways & Harbours v National Bank of South Africa Ltd 1924 AD 704 op 715-716: The Law does not concern itself with the working of the minds of parties to a contract, but with the external manifestation of their minds. Even therefore if from a philosophical standpoint the minds of the parties do not meet, yet, if by their acts their minds seem to have met, the law will, where fraud is not alleged, look to their acts and assume that their minds did meet and that they contracted in accordance of what the parties purport to accept as a record of their agreement. This is the only practical way in which courts of law can determine the terms of a contract. Critique against the abovementioned theory:
It is of a subjective nature. It causes problems with simulated acts. Contracts are forced upon parties containing clauses that they did not want. With the doctrine of representation the following question arises: Whose declaration should enjoy preference: The principle’s or the representative’s. In cases of contracts inter absentes, the problem arises that as soon as the declaration of acceptance has been made, the offeror is bound, although he/she is not even aware of the acceptance.
The following case must be studied in detail from the case list: Trollip v Jordaan 1960 1 PH A 25 T Courts of law can only judge from external facts whether this has or has not occurred. In practice therefore it is the manifestation of their wills and not the unexpressed will which is of importance.
The following case need not be studied in detail, but students should take note of the following excerpt: Union Government v Smith: …we must take the grammatical and ordinary sense of the words used in order to ascertain what the parties meant, even though we may doubt whether this was the intention of the parties at the making of the contract. It is our first duty to see what the parties intended by the language used. 3.3. The Reliance Theory The reliance theory determines that consensus is established in the bona fides of the inter partes-relationship. This bona fides and the consequential reliance on the information provided by the other contractant must be protected. Van der Merwe et al states that this theory determines that a contract is based on the intention of one party to the contract and the reasonable reliance on his/her side that the other party has the same intention. The reliance theory is seen as supplementary to the will theory: If the two parties have corresponding intentions, consensus is present and it is not a prerequisite to determine whether one of the parties had a specific idea of the intention of the other party. If one of the parties erred regarding the intention of the other party, and for that reason there’s no consensus, the reliance theory states that if one of the parties relied on the idea that consensus was present, a contract was created. Thus, a contract is created where actual consensus exists, or where the intention of one of the parties to an agreement reasonably relied on the intention of the other party. In the first instance, the contract is based on actual consensus, and in the second instance it is based on the reliance that consensus exists. Critique against the reliance theory:
It has a subjective nature. Extrinsic evidence must be used to determine the reliance. It is expected from a party who possesses more knowledge to make available all information to the other party regarding the fine print.
The following two cases must be studied as authority from the case list Spindrifter v Lester Donovan 1986 1 SA 303 Du Toit v Atkinson Motors 1985 2 SA 893
4. The Objective Approach for determining Consensus The objective approach to the determination of consensus stems from the shortcomings of previous three theories. Consensus is attached to a party or both parties, after consideration of all relevant and proven evidence before the court. By following an objective approach, a court will look at all evidence regarding inner intention, the outer version thereof and any reliance on the behaviour of the other party. The effect of the objective approach is the merging of the previous three theories. One isn’t applied at the cost of the other. This approach provides solutions for the determination of consensus at the doctrine of representation and contracts inter absentes. The following case must be studied as authority from the case list Allen v Sixteen Sterling Investments 1974 4 SA 174 I accept that our law follows a generally objective approach to the creation of contracts. The following case need not be studied in detail, but students should take note of the following excerpt: Springvale v Edwards 1969 1 SA 464: …that the test to be applied in deciding whether consensus exists, is an objective one, is firmly established in both South Africa and Rhodesia. 5.Mistake (Error) The German jurist Von Savigny distinguishes between 2 types of mistake: a.MATERIAL MISTAKE: Mistake is already present at the declaration of will. The parties are not on the same wavelength- one refers to lease and the other to buying. Dissensus exists from the beginning, and no contract is created.
b. ERROR IN MOTIVE: In this instance, consensus exists with the declaration of will, but the error exists in the motive. There are two types of error in motive: i. Unilateral mistake: - The contracting party is the cause of his own mistake. - There is consensus at the declaration of will and a contract comes into existence. The following cases must be studied as authority from the case list: Spindrifter v Lester Donovan 1986 1 SA 303 Du Toit v Atkinson Motors 1985 2 SA 893 ii. Misrepresentation or mistake caused by the other party: - The contracting party is misled by the other contracting party as far as his motive is concerned, and because of this he is led to make a declaration of will. -The misrepresentation can be intentional, negligent or innocent. The following case must be studied as authority from the case list: De Jager v Grunder 1964 1 SA 446 AD. SOLUTIONS FOR THE PROBLEM OF MISTAKE:
The iustus error-doctrine:
-This doctrine implicates that someone who mistook some element of a contract, may withdraw from such contract if he/she can prove that the mistake was made innocently, bona fide and reasonable. - Maritz v Pratley.
-The guilty misrepresentor is bound by/held liable for his misrepresentation. c.Some interpretory-rules: - The contra preferentum-rule: Determines that a clause in a contract must be interpreted keeping in mind who the author of such clause is. - The parole-evidence rule: Determines that the written documents are the only source of the contract’s contents. No extrinsic evidence is allowed.
Unit 3 Consensus obtained by improper means (I) Learning outcomes: After completion of this unit, the student should be able to: 1. 2. 3. 4.
Discuss the background of consensus obtained by improper means. Explain the term “misrepresentation” in detail. List and discuss in detail the elements of misrepresentation. Identify and discuss in detail the two different types of misrepresentation.
Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 4. 2. From List of cases: Preller v Jordaan 1956 1 SA 483 (A). Bayer South Africa (Pty) Ltd v Frost 1991 (4) SA 559 (A). Phame v Paizes 1973 (3) SA 397 (A). Labuschagne Broers v Spring Farms 1976 2 SA 828 T Alternative study: 3. Christie. The Law of Contract in South Africa. Fifth Edition. Chapter 7. 4. Bhana et al. Students’ guide to the Law of Contract. Second Edition. Chapter 10. 5. Kerr. The Principles of the Law of Contract. Fourth Edition. Chapter 11
1. Introduction The requirement of an actual or apparent meeting of the minds of contractants as the basis of a contract means that the intention or will of the parties is a central pivot in the juristic act concerned 16. The expression of such a will may be influenced by any number of factors: Fear, economic necessity, influence by someone in whom he places great trust, or simply because he desires to change his economic and social situation17. The law does not does not take cognisance of each and every factor which influences an expression of will. It is in keeping with the values protected by the constitution and with good faith, and in the public interest, that serious expression of intent must be adhered to and given their intended legal consequences18. Some factors accept that a contractant is allowed to undo the consequences of the agreement because it was ‘defective’ in the sense that it was not conceived in the free and unfettered manner regarded by the law as necessary for the expression of a contractant’s individual autonomy. In such circumstances the law may regard a ‘will’ as so ‘defective’ as to not have any legal relevance at all. No juristic act would then result. This is not the state of our modern law, however: The law has rather opted for an approach that under the above circumstances actual agreement will ensue, but may sometimes be voided at the behest of the contractant whose will has become ‘defective’19. Where consent has been obtained improperly, the injured party may rescind the contract and may often claim a financial award. The exact content of the remedies is applicable to the juridical nature of the act whereby consent is received as contractual misconduct or a delict. Traditionally, the law approached the matter of voidability on the assumption that one of two specific grounds for rescission must be proved, namely misrepresentation or duress. The courts eventually also accepted a third ground for rescission called undue influence, which intitially received a fair amount of criticism, especially in the case of Preller v Jordaan 1956 1 SA 483 (A). In this case, which must be studied in detail for the purposes of this module, the argument in the court a quo was that undue influence was an English legal principle which had no peer in Roman-Dutch Law, and did not constitute any ground for the remedy of restitutio in integrum20. The general consideration which underlies the voidability of a contract is the fact that consensus has been obtained in a manner which, in the eyes of the law, is improper21.
16 Van der Merwe et al 2007: 102 17 Van der Merwe et al 2007: 103 18 Van der Merwe et al 2007: 103 19 Van der Merwe et al 2007: 103 20 See Fagan, JA’s decision at 489. 21 Van der Merwe et al 2007: 104
21 One has to of course consider exactly what is meant by the term “improper”. There is no definite or watertight division between the three grounds for rescission of a contract, and particularly between duress and undue influence 22. In the case of Savvides v Savvides23 the applicant requested that a power of attorney which she had executed in favour of her husband be rescinded on the ground of what she called “duress”: her husband had threatened to leave the matrimonial home permanently. According to the court, the threat in question might has well have constituted undue influence, since duress and undue influence may sometimes overlap. In the case of Malilang v MV Houda Pearl24, a party to a contract of employment wished to rescind the contract on the ground of “economic duress” in the sense of commercial pressure, inasmuch as it had been threatened with the “blacking” of its ship unless it entered into a contract. The court once again pointed to the analogy between duress and undue influence 25. The viewpoint has in fact been advanced that undue influence is part of a wider concept in Roman-Dutch law, allowing redress to a contractant whose circumstances have been abused by the other party26. In the case of Plaaslike Boeredienste (Edms) Bpk v Chemfos Bpk 27, the appellate division actually went beyond the existing three grounds for rescission. The court in this case held that where a contractant had bribed the agent of his cocontractant to persuade the latter to contract, the principal was entitled to rescind the contract. Although the term “fraud” was advanced as the relevant ground for rescission, the court found that the act of persuasion through bribery did not constitute fraud as such but did amount to an improper means of obtaining consensus28. This approached raised the distinct possibility that the traditional specific grounds for rescission might be subsumed under one general principle to the extent that there would be but a single ground for rescission due to a prior “defective” will, namely improper obtaining of consensus29. In the case of Extel Industrial (Pty) Ltd v Crown Mills (Pty) Ltd 30, the appeal court held that “commercial bribery” was a ground for rescinding the contract, but accepted that such bribery and other specific grounds for rescission can be classified dogmatically as allowing avoidance of a contract because consensus, though real, was improperly procured.
22 Van der Merwe et al 2007: 104 23 1986 (2) SA 714 (A) 24 1986 (2) SA 714 (A) 25 Van der Merwe et al 2007: 104 26 Van der Merwe et al 2007: 105 27 1986 (1) SA 819 (A) 28 Van der Merwe et al 2007: 105 29 Van der Merwe et al 2007: 105 30 1999 (2) SA 719 (SCA)
Although a few cases have been mentioned above, students only need to study the case of Preller v Jordaan in detail. A thorough understanding of how the other cases fit into the discussion is essential, however.
2. Misrepresentation 2.1.
Introduction The decision of a prospective contractant to conclude a contract is often brought about by a false representation by or on behalf of the other party to the negotiations. The misled party is said to labour under a mistake. If such mistake is material, no consensus and subsequently no contract arises31. However, a representation frequently causes an error in motive. Although not material, and therefore not excluding consensus, such an error does affect the quality of the consensus. A is the registered owner of a farm. B wants to buy the farm registered in A’s name. A points out the farm to B in such a manner as to create the false impression that the farm includes certain afforested land. B purchases the farm in this belief. He signs a deed of sale in which the farm is described in terms of the seller’s title deed. B’s decision to purchase was influenced by an error in his motive, inasmuch as he wrongly believed that the land which was pointed out to him (and which he believed to include the afforested portion) which was the land described A’s title deed. If B can prove that his consent was obtained improperly, because it was given as the result of an actionable misrepresentation by A, he is entitled to relief by way of rescission or a financial award, depending on the circumstances.
Representation and contractual terms A representation that occurs during precontractual negotiations can be made a part of the consensus between the parties and as such becomes a term of the ensuing contract32. An example would be if the representation is warranted to be true. In the abovementioned example, the parties may have intended that A was binding herself absolutely by the representation that the land which was being sold included the afforested portion- a warranty being a special contractual term which requires strict adherence from the contractant who gives the warranty 33. Should the representation turn out to be false, the contract will have been breached and the normal consequences of breach of contract by way of breach of
31 Van der Merwe et al 2007: 105 32 Van der Merwe et al 2007: 106 33 Van der Merwe et al 2007: 106 fn 24
23 warranty will follow. Whether a representation amounts to a contractual term or whether it merely causes an error in motive without becoming a part of the contract must be decided according to the intention of the parties34. 2.3.
Elements of misrepresentaion
2.3.1. Act or conduct35: The act must be a representation made by the contractant or by someone for whose acts he can be held liable, such as an employee acting within the scope of his employment or someone who is executing a mandate. A misrepresentation by a third party which misleads one of the contractants cannot be the basis of a claim against the other contractant. The party who has been misled must then have recourse against the third party. A representation is any conduct which creates a particular impression on the mind of the other contractant. The conduct may be a commission (positive act) or an omission (refraining from committing a positive act). A representation by commission may be made in words (orally or in writing) or by conduct alone. For example, a declaration that a wrist-watch is made of solid gold is a representation, but so is the act of displaying the watch amongst objects of solid gold. Also, fencing off two sections of land as a single unit amounts to a representation that they are indeed one entity. A representation by omission usually occurs when someone omits to disclose information within his knowledge or refrains from removing a wrong impression which to his knowledge exists in the mind of the other contractant. Such an omission will only be actionable if it is wrongful (wrongfulness is a separate element of misrepresentation discussed below), and this depends on whether there was a duty to act positively. The representation must be false or at least inaccurate. Consequently, a representation which is correct and accurate can never found liability for misrepresentation. A representation which is not wholly false may nevertheless be so incomplete or only partially true as to be inaccurate. For example, if the question is raised “Has any proposal for insurance ever been declined or cancelled?” and the answer thereto is “ No proposal for insurance has ever been declined”, this leaves the possibility that a 34 Van der Merwe et al 2007: 106 35 Van der Merwe et al 2007: 108-109
24 proposal for insurance has indeed been cancelled. The mentioned answer to the mentioned question is thus a half-truth. A representation may relate directly to facts of the past or present, such as the previous occurrence of an accident or one’s present state of health. It may also be expressed in an opinion, particularly concerning the future, such as financial advice about the potential return on an investment (Study in this instance the case of Bayer South Africa (Pty) Ltd v Frost 1991 (4) SA 559 (A), where the “misstatement” referred to by the court may have been interpreted as an opinion). The argument goes that an opinion cannot be an actionable misrepresentation. Van der Merwe et al disagree with this argument. They state the following: Quite apart from the fact that opinions and similar statements more often than not contain some statement of fact as to the representor’s state of mind or knowledge, the question whether a representation was a ‘mere’ opinion or prediction bears upon the quality and reasonableness of the act or conduct, and thus relates to wrongfulness36
2.3.2. Wrongfulness Test for wrongfulness37: As a delict, misrepresentation involves wrongful conduct. An act is wrongful if it is contrary to the norm or standard of acceptable conduct in a particular society, often referred to as the boni mores. The most recent reference to the latter term can be found in the case of ABSA Bank Ltd v Fouche 2003 (91) SA 176 (SCA). Such an act is considered unreasonable in the eyes of the community because it offends against the standard for reasonable or socially acceptable conduct. A representation that occurs during the course of contractual negotiations will be wrongful if it infringes a norm protecting a contracting party against being misled. Commission and omission38: The wrongfulness of a representation by commission is more readily apparent than the wrongfulness of an omission. The latter will only be wrongful if the representee breached a duty to act positively in order to prevent a wrong impression from arising or to remove an existing wrong impression. South African law does not recognise a general duty to act positively to remove from the mind co-contractant each and every wrong impression by disclosing each and every fact that may be material. Omissions are, in fact, prima facie lawful. 36 Van der Merwe et al 2007: 109 37 Van der Merwe et al 2007: 10938 Van der Merwe et al 2007: 110-111
25 The existence of a duty to act will therefore depend on the circumstances of each individual case. In the past, the appeal court has often construed a duty to disclose information with reference to the type of contract involved, rather than in more general terms. In the case of ABSA Bank Ltd v Fouche 2003 (1) SA 176 (SCA) on 181, the court expressed the test involved in terms of the ordinary delictual concept of misrepresentation by omission: A negotiating party is expected to speak when the information he has to impart falls within his exclusive knowledge (so that in a practical business sense the other party has him as his only source) and the information, moreover, is such that the right to have it communicated to him ‘would be mutually recognised by honest men in the circumstances’.
Opinion39: A representation by means of an expressed opinion is not readily regarded as actionable. One reason for this is that an opinion, even if false, will often not be in conflict with the norm involved and as such will not be wrongful. A statement which purports to state actual facts made by one party to contractual negotiations and which actually misleads the other party, will usually be regarded as infringing the norm, since it would normally be reasonable for the other party to act on such a statement. A statement that is clearly an expression of the mere view or conviction of the representor cannot so easily entitle the representee to rely on it. Hence, the materiality of the facts to which the opinion refers assumes special importance. As far as the reasonableness of the act is concerned, there does not seem to be a difference in principle between a representation relating to a fact and an opinion. Puffing40: Representation made during the course of negotiations in order to persuade another to conclude a contract, will not be actionable if they amount to what is generally called mere puffing or puffery. Puffing refers to persuasive talk and claims commending and praising the properties of the representor’s performance. In the case of Cockroft v Baxter 1955 (4) SA 93 (C), the court decided that the claim that a car has an “excellent” engine, whereas its condition was merely normal considering its year and mileage, was not actionable, because it was not a wrongful representation. Such a statement amounts to a simple commendation (simplex commendatio) as long as it does not go “beyond mere praise and commendation”. Study the case of Phame v Paizes 1973 (3) SA 397 (A) in detail. 39 Van der Merwe et al 2007: 111-11240 Van der Merwe et al 2007: 112 41 Van
der Merwe et al 2007: 113-114
2.3.3. Fault41: Fault refers to the legal blameworthiness which accompanies the wrongful conduct of the misrepresentor. Fault takes two forms, intent (dolus) and negligence (culpa in the narrow sense). Intent is defined as “a legally reprehensible state of mind which consists in directing the will to attaining a particular result while conscious of the wrongful conduct in question. Negligence is the lack of the necessary degree of care in circumstances under which the reasonable person in the position of the actor would have foreseen the possibility of harm to the other and would have taken reasonable steps to guard against the harm42. Not every representation which is false is accompanied by fault on the part of the representor. We shall deal with the aspect of innocent misrepresentation later on. 2.3.4. Causation43 A misrepresentation will be actionable only if it has induced the misrepresentee to enter into the contract as it is. This means that the misrepresentation must have caused the misrepresentee to contract where he would not have contracted at all, or at least to conclude a contract on terms which otherwise not have consented. The test for determining a causal link or nexus is the one which is applied elsewhere in the law. In practice, it has developed into a two-tier test. In comprises, in the first place, an inquiry whether the misrepresentation in fact caused the contract. In the second instance, this inquiry entails determining an existing fact, yet it is commonly conducted by the application of the conditio sine qua non test. The conditio sine qua non-test asks the question whether the contract or its specific terms would have resulted but for the misrepresentation. 4142 Van der Merwe et al 2007: 113-114 4243 Van der Merwe et al 2007: 114-116 4344 Van der Merwe et al 2007: 115
27 A misrepresentee will therefore prove factual causation even if he can prove no more than that the misrepresentation was only one of the operative facts which induced him to contract as he did44. 2.3.5. Undesirable result: Contract or Damage45 When a claim for damages based on misrepresentation is brought, proof is required that damage in the form of patrimonial loss has actually been suffered as a result of the misrepresentation. This is in keeping with the general rule applicable to the law of delict in South Africa. 2.4.
The two different forms of misrepresentation.
2.4.1. Fraudulent misrepresentation: A delict is committed in the case of fraudulent misrepresentation, and so a delictual remedy is used: the Actio Legis Aquiliae. It has nothing to do with breach of contract: the delict is already committed before the creation of the contract. Intentional misrepresentation: The misprepresentor knows that the fact/statement/promise is false and that it will move the other party to contract. The motive is gained fraudulently and is intended towards moving the victim to enter into the contract. Negligent misrepresentation: The misrepresentor ought to have been aware of the falsity of his statement as a reasonable person would have done to make sure of the correctness of the statement. See the case of FF Holzhausen v ABSA Bank Ltd (280/2003) on the Supreme Court of Appeal’s website (need not be studied in detail, though). If misrepresentation is proven, the contract is voidable. The contract remains intact, however, until a court decides that misrepresentation lead to the conclusion thereof. If the victim cancels the contract, he/she would commit breach. Damages at misrepresentation are calculated according to the negative interest: Only damages actually suffered may be claimed for, not consequential damages. 2.4.2. Innocent misrepresentation: Both contracting parties act in a bona fide, innocent and reasonable manner during negotiations, but one suffers damages because certain facts are unknown to them. Study the following two cases regarding innocent misrepresentation: Phame v Paizes 1973 3 SA 297 A Labuschagne Broers v Spring Farms 1976 (2) SA 828 (T) 44 45 Van der Merwe et al 2007: 116-117
Unit 3 (Continued) Consensus obtained by improper means (II) Learning outcomes: After completion of this unit, the student should be able to: 1. 2. 3. 4. 5.
Explain what is meant by the term “duress”. List the elements of duress as established in the case of Broodryk v Smuts. Name and discuss the elements of duress. Explain what is meant by the term :undue influence”. Discuss the case of Preller v Jordaan with specific reference to how the elements of undue influence were derived from the case. 6. Name and discuss the elements of undue influence. 7. Name and discuss the remedies available to a claimant in terms of duress and undue influence. Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 4. 2. From List of cases: Broodryk v Smuts 1942 TPD 47. Malilang v MV Houda Pearl 1986 (2) SA 714 (A) Medscheme Holdings (Pty) Ltd v Bhamjee 2005 (5) SA 339 (SCA) Consol Limited t/a Consol Glass v Twee Jonge Gezellen (Pty) Ltd & Another 2005 (1) SA 1 (SCA). Alternative study: 3. Christie. The Law of Contract in South Africa. Fifth Edition. Chapter 7. 4. Bhana et al. Students’ guide to the Law of Contract. Second Edition. Chapter 10.
29 5. Kerr. The Principles of the Law of Contract. Fourth Edition. Chapter 11
1. Duress 1.1.
It sometimes happens that a contractant’s decision to enter into a contract is influenced because of the fact that he was forced or compelled to agree to the contract.47 In the case of Ilanga Wholesalers v Ebrahim 1974 (2) SA 292 (D) for instance, someone who had stolen postage stamps from his employer was compelled by threat of prosecution to agree to an acknowledgment of debt. In the case of Salter v Haskins 1914 TPD 264, a person who had committed adultery with his partner’s wife was persuaded to transfer his share of the partnership’s property to the aggrieved partner for fear of an action for damages. In the Savvides-case, already mentioned in the previous lecture, the husband threatened to leave the matrimonial home if his wife didn’t sign a power of attorney, and in the case of Malilang v MV Houda Pearl 1986 (2) SA 714 (A) a shipowner threatened not to off-load his cargo if he didn’t receive increased wages. It is important to keep in mind at this stage that there is no watertight distinction between duress and undue influence (which is for all practical purposes an English law concept). See the introduction of Lecture 3. Van der Merwe et al state that compulsion may be exercised by a direct application of physical force or indirectly by way of a threat of harm.48 The direct application of physical force is calles vis absoluta when someone is physically overpowered in such a manner that he cannot be said to act at all, for instance when a person’s signature to a document is obtained by physically forcing his hand to write. A threat of harm, on the other hand, which is used to evoke a consenting expression of will, is called vis compulsiva or duress. The will of the contractant who is subjected to the threat is nevertheless a valid expression of intent: “A forced will is nevertheless a will”. The one who consents therefore acts, albeit in fear. A prospective contractant may be in such fear of a threat that he becomes incapable of forming a legally relevant will, in which case he cannot be said to have acted at all.49 1.2.
Elements of duress
46 Van der Merwe et al 2007: 117-118 47 Van der Merwe et al 2007: 117 48 Van der Merwe et al 2007: 118 49 Van der Merwe et al 2007: 118
30 The act of duress is a delict. A contractant who wishes to avail himself of the remedies for duress must accordingly prove the existence of the elements of the delict. The important classic case to be studies in detail here is that of Broodryk v Smuts 1942 TPD 47. In the abovementioned case, Broodryk, an employee of the state, was persuaded to enlist in the armed forces by government officials who threatened otherwise to have him imprisoned or interned. In considering an exception to Broodryk’s claim for rescission of the enlistment contract, the court expressed “the elements necessary to set aside a contract on the grounds of duress” as follows: (1) Actual violence or reasonable fear. (2) The fear must be caused by the threat of some considerable evil to the party or his family. (3) It must be the threat of an imminent or inevitable evil. (4) The threat or intimidation must be contra bonos mores. (5) The moral pressures used must have caused damage. 50
1.2.1. Act (conduct)51 The act consists in compelling the other party to agree to the contract by the direct application of physical force or by a threat of harm. There must be actual compulsion in the eyes of the law. However, the immediacy of the undesirable consequences which the act of compulsion may bring about does not form part of the content of the act/conduct, although in given circumstances it may contribute to a conclusion about the presence or absence of an act of compulsion. The fact that the physical violence or impending harm is not imminent, but is experienced by the other contractant as a more remote possibility in the future, would not necessarily exclude the conclusion that compulsion has occurred. The requirement of a “threat of an imminent or inevitable evil” as set in Broodryk v Smuts can be interpreted in this light. The reference in the abovementioned case to the existence of “reasonable fear” does not refer to the act itself, in the sense that the act as such must consist in the actual excitement of fear. Fear may be the result of the act of duress. As such, the existence of “reasonable fear” may be indicative of the wrongfulness of the act, or of the existence of a causal link between the act and the alleged harm. It is doubtful, however, whether the presence or absence of reasonable fear should carry much weight in this regard. Van der Merwe et al mention that according to De Groot De jure belli ac pacis 2.11.7 the question whether the fear was 50 Van der Merwe et al 2007: 119 51 Van der Merwe et al 2007: 119-120
31 reasonable should not be considered at all, and a contractant in whom fear was actually instilled should not be open to the reproach that he should not have been so easily scared.52 Several additional factors are often mentioned in relation to the act. So, for example, in the Broodryk-case, the court required a “threat of some considerable evil against the party or his family”. The threat must also be directed against at their lives or physical integrity, whereas it is doubtful whether duress directed at the property or “goods” of a contractant should be actionable (notably in the case of Van den Berg & Kie Rekenkundige Beamptes v Boomprops 1028 BK 1999 (1) SA 780 (T) on 784-785). These factors, together with others such as gender, status and age of the other contractant, are considerations in the process of evaluating the reasonable reasonable quality of the conduct. This applies particularly to the requirement that there must be “reasonable fear”. 1.2.2. Wrongfulness53 The wrongfulness of an act of duress is determined by the same general test which applies to misrepresentation (see lecture 3). According to Broodryk v Smuts the act must be contra bonos mores. This implies in fact that the act must be wrongful, or that there must be a threat of unlawful action. The question which must be posed is whether the act of compulsion itself is wrongful. This may be the case even where a contractant is threatened with lawful action, but to obtain a result to which the contractant who exerts the duress is not reasonably entitled in the circumstances. The latter situation has occurred particularly in the context of agreements concluded under threat of criminal prosecution. Although the courts have not given a uniform expression of their approach to the matter, on a close reading (according to Van der Merwe et al) of the decisions it becomes clear that they (the decisions) are based on the same principle: A threat of prosecution is wrongful if it is employed by a contractant to exact a performance which is more advantageous than that to which he is reasonably entitled.
Obtaining consensus by a threat of civil proceedings (such as instituting action for payment of a cheque) will not be readily be regarded as contra bonos mores. It is however, according to Van der Merwe et al, unthinkable that the boni mores may frown on some threats of instituting civil proceedings.
Occasionally, a contractant concludes a contract due to duress by a third party for whose acts the co-contractant cannot be held legally liable. Anagolous to 52 Van der Merwe et al 2007: 119 fn 121 53 Van der Merwe et al 2007: 120-122
32 the position pertaining to misrepresentation by a third party, such duress should not be imputed to the co-contractant, although there is some support in our law for the opposite view. 1.2.3. Fault54 Generally, the circumstances surrounding an act of compulsion will allow an inference of fault. There will normally be a deliberate act which in law will constitute an intentional act if the perpetrator realises that his conduct is wrongful. In less obvious cases of duress, particularly threats of criminal prosecution, the present of intent (dolus) may not be so apparent, since knowledge of wrongfulness will often be absent. Although the facts of a particular case may warrant the inference of negligence, the question arises whether proof of fault is at all necessary where the contract is rescinded without a claim for damages. Since the basis of duress as a ground of rescission lies in the inability to express an intention in a free and unfettered manner due to the improper conduct of a co-contractant, one may well ask whether the unlawful expression of a threat should not suffice for rescission of the contract. In the case of Arend v Astra Furnishers (Pty) Ltd 1974 (1) SA 298 (C), the court stated the following: …it is clear that a contract may be vitiated by duress (metus), the raison d’etre of the rule apparently being that intimidation or improper pressure renders the consent of the party subjected to duress no true consent…
The court’s reference to “true consent” should be taken to mean that there was no free expression of will and not that there was no legally relevant consensus.55 1.2.4. Causation The remedies for duress will be available only to a contractant who proves that the contractant who can prove that the contract was caused by the duress. The considerations applying to causation in the context of misrepresentation (see lecture 3) apply to duress as well. 1.2.5. Undesirable result: Contract or damage56 Actual damage as a result of the conclusion of the contract is a prerequisite for a successful claim for damages. The courts have actually expressed the elements of duress so as to include damage also where the contract was being 54 Van der Merwe et al 2007: 122 55 Van der Merwe et al 2007: 122 fn 146 56 Van der Merwe et al 2007: 123
33 rescinded without a claim for damages. (See particularly Broodryk v Smuts and Arend v Astra Furnishers (Pty) Ltd In so far as duress as a ground for rescission is based on the consideration that the expression of intent is not completely free, it seems logical that actual damage need not be proved to justify rescission alone. Duress of goods and “economic duress”57
These matters have already been touched on above. Keep in mind that “duress of goods” does not constitute a spate principle in South African law. In so far as it refers to a threat directed at the property of a contractant, it must be treated like a threat directed at any other protected interest. In so far as it relates to a claim for the repayment of money paid to avoid harm to property, the term “duress of goods” relates to a claim for enrichment. The requirement that repayment will only be granted if performance was agreed to under protest, is then part of the requirements for the condictio indebiti, more particularly that performance must have been made sine causa. Where a person concludes a contract under so-called “economic duress”, like in the case of Malilang (see above), has been discussed often. In the case of Medscheme Holdings (Pty) Ltd v Bhamjee 2005 (5) SA 339 (SCA) it was decided that the principle that economic pressure may, in appropriate cases, constitute duress, does not form part of South African law. 2. Undue influence58 2.1.
According to Van der Merwe et al, a third specific ground for rescission of a contract came to be raised before the courts as a basis for relief distinct from the traditionally accepted grounds of misrepresentation and duress.59 The contention was that, under certain circumstances, a contractant who had been persuaded to conclude a contract with someone, who had previously acquired some influence over him and who had exerted that influence to obtain his consent, should be entitled to rescind the contract. As mentioned before, this new ground for rescission was not accepted easily, notably by Van den Heever JA in Preller v Jordaan. The main objections to undue influence as a ground for rescission of a contract were that it was historically not part of our law and that it was incapable of exact definition and limitation and would therefore lead to uncertainty in the enforcement of contracts. Historically, the criticism was not without substance, for undue influence did not form a part of our common law of contract. It is derived from English law, where it had originally been developed as a concept of equity, justifying rescission of a contract under circumstances where it could not 57 Van der Merwe et al 2007: 123 58 Van der Merwe et al 2007: 124-129 59 Van der Merwe et al 2007: 124
34 have been impugned under the strict principles of the common law. It was effectively incorporated into South African law by the majority decision in Preller v Jordaan. 2.2. Elements of undue influence read with the case of Preller v Jordaan60: In the abovementioned case (which has been included in your case list and must be studied in detail), the appellant was a doctor who had been treating the respondent for some years. The respondent was critically ill, of an advanced age, and mentally and physically exhausted. He had great concern over the continuance of his farming operations in the interest of his dependants if he should die. Against the respondent’s initial doubt, the appellant persistently advised and eventually persuaded the former to transfer four farms into his (the appellant’s) name, which was subsequently done. The respondent recovered and wished to rescind the contract on the ground that the appellant had exerted his influence over the respondent improperly. The majority decision by the appeal court regarded this as undue influence. According to the court61 a contractant who wishes to rescind a contract on the ground of undue influence must prove the following: (i) (ii) (iii)
That the other contractant obtained an influence over him; That this influence weakened his powers of resistance and made his will pliable; That the other contractant used this influence in an unconscionable manner to persuade him to agree to a transaction which was (a) to his detriment and (b) he would not have concluded if he had enjoyed normal freedom of will.62
Once again, as with the other two grounds for rescission, the question arises whether the requirements expressed by the courts characterise undue influence as a delict. The courts have not expressly called it such, but according to Van der Merwe et al it will be appropriate to deal with the rather wide concept of undue influence outside the strictures of the law of delict.63 2.3.
Elements of Undue influence64
2.3.1. Act The act consists in exercising influence over a co-contractant. 60 1956 (1) SA 483 (A) 61 See 492G-H 62 Van der Merwe et al 2007: 126 63 Van der Merwe et al 2007: 127 64 Van der Merwe et al 2007: 127-129
2.3.2. Wrongfulness According to the courts, the influence must have been such as to weaken the other party’s resistance and to make his will pliable, and must have been exercised in an inconscionable manner. This would mean that the act must have been wrongful. 2.3.3. Fault There is no clear indication that fault is required for a successful rescission of a contract because of undue influence. In the context of the conclusion of contracts, it does not seem necessary to prove fault as an element of undue influence. (In case one considers undue influence as a delict, fault will have to be proved, though.) 2.3.4. Causation Rescission for undue influence requires proof that the contract would not have been concluded if the contractant who rescinds had not been unduly influenced. The considerations applying to causation in the context of misrepresentation apply here. 2.3.5. Undesirable result: Contract or damage According to the courts, rescission for undue influence requires proof that the contract was to the detriment of the contractant who wants to rescind. Detriment does not necessarily mean damage in this regard, though. 2.4. Remedies for the three forms of consensus obtained by improper means 2.4.1. Upholding of the contract: The victim realises that consensus wasn’t only achieved because of the misrepresentation. The victim would still have contracted, but: -Would have paid less if he were aware of the true facts; - He claims for the difference in price on a delictual basis. - He is dissatisfied because the other party doesn’t perform in terms of the contract (positive malperformance). - He claims contractually.
36 - He claims i.t.o. estoppel or breach of contractual-principles. 2.4.2. Rescission -
The victim claims that no contract ever came into existence, because of the fact that his will was influenced by misrepresentation, and no consensus exists.
He wouldn’t have contracted if he had been aware of the true facts.
Pages 130-135 of Van der Merwe et al need not be studied for test and/or exam purposes.
Unit 4 Offer and Acceptance Learning outcomes: After completion of this unit, the student should be able to: 1. Explain where the terms “offer” and “acceptance” are derived from. 2. Discuss the term “offer” with specific reference to the following: 2.1. Elements of a valid offer. 2.2. Legal consequences of an offer. 2.3. Lapse of an offer. 3. Discuss the term “acceptance” with specific reference to the case of Steyn v LSA Motors. Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 3. 2. From List of cases: Crawley v Rex 1909 TS 1105 Bloom v American Swiss Watch Co. 1915 AD 100 Steyn v LSA Motors 1994 (1) SA 49 (A) Alternative study: 3. Christie. The Law of Contract in South Africa. Fifth Edition. Chapter 2 4. Bhana et al. Students’ guide to the Law of Contract. Second Edition. Chapter 3.
1. Introduction65 In its simplest form, a contract consists of an invitation to consent to the creation of obligations between two or more parties (called an “offer”), and an affirmative response (called an “acceptance”).66 The rules regarding offer and acceptance must accordingly be understood in the light of their underlying premise, namely that a contract entails the formation of a common intention by the contractants through an exchange of declarations which express their respective intentions.67 A clearly discernible offer and distinct acceptance are not by themselves requirements for the creation of a contract. Since a contract is a juridical act, the agreement of the parties must of course be declared outwardly in order to be legally relevant. Whether particular declarations constitute a contract must however be answered with reference to the general requirements for the creation of a contract. One of these requirements is the presence of consensus, and offer and acceptance are facts from which consensus may be inferred. Offer and acceptance may also be relevant in other respects, though. It may, for instance, serve to indicate exactly where a contract was concluded, or exactly when it generated legal consequences. In the absence of special provisions in the contract itself, the place and time of conclusion of the contract are determined by the rules governing offer and acceptance. These rules also provide a basis for explaining problematic aspects of the relations between contracting parties in the preliminary phase of their negotiations before the conclusion of the contract.68 2. The Offer 2.1.
Elements of a valid offer69
An offer is an expression of will, made with the intention of creating an obligationary relationship on certain or ascertainable terms with another, and brought to the attention of the addressee, so as to enable him to establish a contract by accepting the offer as it was made.70 Although ordinarily addresses to a specific person, an offer does not require an addressee to be valid. An offer of reward, for instance, is made to the public at large, while some kinds of auction involve an offer to a particular class 65 Van der Merwe et al 2007: 54 66 Van der Merwe et al 2007: 54 67 Van der Merwe et al 2007: 5468 Van der Merwe et al 2007: 55 69 Van der Merwe et al 2007: 56 70 Van der Merwe et al 2007: 56
68 69 70
39 of persons. An offer may be made in any particular form, and may be made in any way that the offeror thinks fit, whether expressly or tacitly. The offeror may, in the offer itself, prescribe certain formalities with which the proposed should comply. An offer made by way of a tender has been held to be ineffective where made in a way adjudged to be contrary to public policy, most notably in Warrenton Munisipaliteit v Coetzee 1998 (3) SA 1103 (NC). To constitute an offer, a declaration of intention must set out the essential and material terms of the envisaged contract too such an extent that mere acceptance will render the legal consequences of the contract certain or objectively ascertainable. In practice, declarations contained in advertisements for the sale of goods or invitations calling for tenders for the completion of specified work or for the purchase of land will often fail to meet this requirement, and will for that reason not qualify as offers. See in this instance the well-known case of Crawley v Rex 1909 TS 1105, where an advertisement for the sale of tobacco, although specifying a price, failed to specify the quantity involved in each sale. Even of a declaration sets out the detail of a proposed relationship with sufficient certainty, it will only constitute a valid offer if it was made with the intention that the offeree should have the power to create a contract by accepting it. The intention with which an offer is made, if not expressly articulated, is established by inference from the declaration and the surrounding circumstances. Whether a declaration amounts to an offer or is nothing more than an invitation to negotiate depends finally on whether the elements of an offer are present, and not on the classification of the particular declaration. There can, accordingly, be no inflexible rule that declarations contained in advertisements and similar expressions of intentions can never amount to offers. The legal effect of declarations by way of advertisements, catalogues and circulars, and the display of goods, with or without price tags, in a self-service setting or otherwise, depends on the intention with which a particular declaration is made, its content and, in exceptional cases, its form. According to Christie, “what distinguishes a true offer from any other proposal or statement is the express or implied intention to be bound by the offeree’s acceptance”.71 If the intention to be bound by mere acceptance is lacking, the offeror lacks the necessary animus contrahendi.72 The term “lack of animus contrahendi” is descriptive of the instances where it is clear from the surrounding circumstances or the manner in which the offer was made that the offer was not intended to be taken seriously.73
71 Christie 2006: 29 72 Christie 2006: 30 73 Christie 2006: 30
An offer made in jest, for instance, cannot lead to the creation of a contract. Neither can an offer made in a moment of anger, unless the offeror afterwards persists in his offer. Likewise, an offer made as an illustration of how an offer is made, or made unintentionally while telling a story, or an offer made in a vague, impersonal way, or finally an offer made as a compliment, can never constitute a valid offer fr the creation of a contract. 2.2.
Legal consequences of an offer74
A contract is a bilateral juristic act and in the main, liability ex contractu is based on the agreement of the parties. It is not accepted in our law that an obligation may be created voluntarily by a unilateral act, as was possible by the pollicitatio of Roman law. An ordinary contractual offer, therefore, does not in itself create rights and duties between offeror and offeree. It does, however, give rise to the expectation of a future right, because the offeree has the capacity to create by acceptance the obligations envisaged by the offer. No matter what value an offer in itself may have to the parties involved, its legal consequences are of limited commercial importance. In so far as it does not create obligations, an offer may be revoked and because it does not form part of the estate of either the offeror or the offeree, an offer lapses on the death of the either party and cannot be ceded. 2.3.
Lapse of an offer75
Because of the fact that an offer has no obligationary effect, it may be revoked by the offeror (according to the case of Oos-Vrystaat Kaap Bedryf Bpk v Van Aswegen 2005 (4) SA 417 (O)). Revocation is possible until the moment upon which the contract is concluded and is not precluded by a time limit set for acceptance. Because an offer is made with the purpose of eliciting a response from the offeree, the contention has been made that the capacity to withdraw lapses as soon as the offeree begins to articulate a response. Revocation of an offer is effective only if the offeree is notified of the decision to revoke. An offeror who has not communicated to the offeree his decision to revoke may -upon acceptance- be held liable on subjective grounds, regardless of the fact that that he no longer intended to incur liability. Because an offer does not create assets or liabilities in the estate of either the offeree or the offeror, it lapses on the death of either these parties. An offer will lapse if it is rejected by the offeree, and a counter-offer by the latter is regarded as tantamount to a rejection. An inquiry by the offeree merely to clarify aspects of the offer or a request to modify its terms does not necessarily amount to a counter-offer, and the same is true of an acceptance which departs from the offer in 74 Van der Merwe et al 2007: 58-59 75 Van der Merwe et al 2007: 59
41 immaterial respects only. An offer has a limited duration. Where the offer stipulates a period for acceptance, it lapses if acceptance does not take place within that period. Otherwise an offer lapses if not accepted within a reasonable period. 3. Acceptance76 In the case of Lowe v Commission for Gender Equality 2002 (1) SA 750 (W), it was decided that acceptance is a declaration of will, which indicates assent to the proposal contained in the offer and which is communicated to the offeror. Where an offer envisages a unilateral contract involving duties for the offeror only, an unexpressed decision to accept would suffice as a valid acceptance.77 An intention to enter into obligations with the offeror is an essential element of acceptance. The consensual basis of contract implies that acceptance should be by way of conscious reaction to the offer, and that for consensus to be effective it should correspond with the terms set out in the offer. The acceptance must be unambiguous, so that it is clear to the recipient, using ordinary reason and knowledge, that the agreement is complete. It should be kept in mind that anything more or less than an unqualified offer constitutes a counter-offer, and is for all practical purposes a rejection of the original offer. Where an addressee in declaring his acceptance refers to certain terms, which are not mentioned in the offer but will be included in the eventual contract by operation of law, his declaration should be a valid acceptance. An enquiry in an acceptance whether the offeror is willing to modify the offer will not affect the validity of the acceptance, as long as modification is not a condition for acceptance. According to the prescribed textbook, an incomplete acceptance may sometimes reflect an intention to create obligations with a certain or ascertainable content, while negotiations on outstanding issues continue. According to Christie, an unaccepted offer cannot create a contract, “since it emanates from the offeror alone, and the necessary agreement cannot be held to exist without some evidence of the state of mind of the offeree.78 The general rule is thus that no contract can come into existence unless the offer is accepted. 79 A logical but important question that arises is of course who, in fact, has the power to accept. Christie states that a “simple contractual offer made to a specific person can be accepted only by that person”.80 A purported acceptance by some other person is ineffective and does not bring about the conclusion of a contract. In the interesting case of Steyn v LSA Motors 1994 (1) SA 49 (A), which must be studied in detail, a valid offer was accepted by someone who did not have the power to accept the specific offer. Consequently, no contract was concluded. 76 Van der Merwe et al 2007: 61-68 77 Note that Van der Merwe et al are not entirely convinced by this argument. 78 Christie 2006: 57 79 Christie 2006: 57 80 Christie 2006: 58
Because the object of analyzing a transaction into offer and acceptance is to ascertain whether the parties have reached agreement, a party who claims to have accepted an offer, the existence of which such a party was oblivious at the time of his alleged acceptance, is “trying to place form before substance”.81 In the case of Bloom v The American Swiss Watch Co 1915 AD 100, Bloom failed to recover the advertised reward because he was ignorant of the advertised offer of reward at the time he performed the act of giving information to the CID which, had he known of the offer, would have amounted to the necessary acceptance of that offer. He thus acted without animus contrahendi. Christie states, very importantly, that acceptance must be “unequivocal or unambiguous”82, as well as corresponsive to the offer.83 Methods of acceptance84 English writers such as Chitty take the view that a method that is as advantageous to the offeror as the method he has prescribed will suffice unless he has made it clear that his prescribed method and no other is to be employed.85 In such a case the offeror’s wishes must be respected, no matter how capricious they may be, because it is not for the court to make a contract for the parties. An offer which does not make it unequivocally clear that the prescribed method and no other is to be employed should be given an equitable interpretation to permit acceptance by a method equally advantageous to the offeror.86 Silence as acceptance87 A necessary limitation on the offeror’s liberty to indicate the mode of acceptance is that he cannot force a contract on the offeree by saying that he will take the offeree’s silence as acceptance.88 Silence may, however, amount to acceptance of an offer in circumstances which give rise to a “duty to speak”, if the offeree is not prepared to accept the offer. 81 Christie 2007: 60 82 Christie 2007: 60 83 Christie 2007: 62 84 Christie 2007: 64-65 85 Christie 2007: 65 86 Christie 2007: 65 87 Christie 2007: 65-66 88 Christie 2007: 65
Unit 5 Contracts Inter Absentes Learning outcomes: After completion of this unit, the student should be able to: 1. Explain in detail, with the aid of relevant case law, what the so-called “information theory” with regard to determining where and when a contract comes into existence entails. 2. Shortly explain how Van der Merwe et al deal with certain departures form the information theory in South African Law. 3. Explain what is meant by the “dispatch” or “expedition” theory. Critically evaluate the appropriateness of this theory in South African Law. 4. Shortly discuss the declaration theory for determining the time and place when and where a contract comes into existence. 5. Discuss the acceptance theory for determining consensus with specific reference to Christie’s contribution to this topic as well as Section 23 of the Electronic Communications and Transactions Act 25 of 2002. Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 3 from p. 55-72 2. From List of cases: Reid v Jeffreys Bay Property Holdings 1976 3 SA 134 (C) Driftwood Properties v McLean 1971 1 SA 591 (A) Cape Explosive Works Ltd v South African Oil and Fat Industries Ltd 1921 CPD 244. Craib v Crisp 1984 (3) SA 594 (T) Alternative study: 3. Christie. The Law of Contract in South Africa. Fifth Edition. Chapter 2 p. 70-79
1. Introduction According to Van der Merwe et al, South African law accepts that a contract is concluded when and where consensus is reached. 89 This usually occurs at the place where and at the moment when a person who has made an offer (offeror) is informed that it has been accepted by a person legally entitled to do so (offeree). This is what has become known as the “information theory”. This theory rests on the principle that the primary basis of contractual liability is the actual agreement between the parties to the transaction.90 Consensus is the essence of the legal act, and should in principle mark the cut-off point between the stages of negotiation and obligation. Although determining the place and time consensus is reached may sound simple enough, one should take into account that in the contemporary business world, one depends on offers and acceptances made via e-mail, post, fax and others. In these instances, it becomes rather more difficult to determine exactly where and when a contract has come into existence. The information theory is not the only theory used in order to determine where and when a contract comes into existence. Three other theories exist for this purpose, namely the expedition theory, reception theory and the declaration or expression theory. They will form the basis of this lecture. These theories should not be confused with the three theories used for determining the presence of consensus, as discussed previously. 2. The 4 theories for determining the time and place where a contract comes into existence 2.1.
As mentioned above, the information theory requires the knowledge of the offeror that his offer has been accepted by the offeree. Such knowledge may be conveyed by way of the following:
Reading a letter, fax, e-mail or sms of acceptance (of which the offeree is the author) of the relevant offer. Listening to a message left by the offeree on an answering machine, or a voice message on a mobile phone, accepting the relevant offer.
The case of Reid v Jeffreys Bay Property Holdings 1976 3 SA 134 (C) presents a very interesting scenario. In this case, A was domiciled in Cape Town. A wanted to sell his property situated in Human’s Dorp, near Jeffrey’s Bay in the Eastern Cape. B was interested in purchasing the property, and engaged in negotiations with an agent of A in 89 Van der Merwe et al 2007: 55 90 Van der Merwe et al 2007: 55
45 Pinetown, Natal. B was domiciled in Durban. B subsequently signed the written agreement of sale in Durban, and it was given to A’s agent to deliver to A in Cape Town. A director of A’s company subsequently signed the agreement on behalf of A in Cape Town. Two questions are relevant here: 1. Firstly, who is the offeror and who is the offeree? 2. Secondly and most importantly: Where did the contract come into existence? The answer to the first question seems simple enough. A offered his property as for sale, B accepted the offer, which makes A the offeror and B the offeree. This is the correct assumption. Confusion sets in, however, when one considers that B signed the agreement of sale first. B in fact made A an offer on A’s property, which A accepted by proxy. Looking at it from this point of view, it would seem that B was in fact the offeror and A the offeree (for the purchase of A’s property). It should be kept in mind, however, that an agreement of sale commences as an offer to purchase, and only becomes a contract when accepted. Thus: The offer was made by A, accepted by B in Durban, and knowledge of acceptance of the offer by B was received by A in Cape Town. So where did the contract come into existence? Remember that we are currently looking at the information theory, which determines that the contract comes into existence at the time when and the place where the offeror (A) learns that his offer has been accepted. Although the acceptance was handed to A’s agent in Durban, the latter had no authority other that negotiating with B. In the current case, it was decided that the contract came into existence in Cape Town, as this was where the offeror of the property (A) learned that his offer had been accepted by the offeree (B). What would have been the situation if A’s agent had telephoned A from Durban and left a message on A’s answering machine (which of course didn’t exist in 1972, but for the sake of discussion) in Cape Town that he’s (A’s) offer had been accepted. Would it have made any difference to where the contract had come into existence? What about the question of when the contract had come into existence? In the case of Driftwood Properties v McLean 1971 1 SA 591 (A), the respondent was the offeror of certain property. V (on behalf of a trust) was the offeree. The contract stated that the offer had to be accepted by V on or before the 17th of May 1969. The respondent (offeror) already signed the “offer to purchase” (if and when accepted would amount to an agreement or contract of sale) on the 30 th of April 2009. V duly signed the offer on 17 May 1969, thereby seemingly exercising a valid acceptance of the respondent’s offer. However, at the time of the acceptance of the respondent’s offer (17 May 1969), the latter had not received any knowledge that his offer had indeed been accepted. The letter of acceptance was posted on the 18th of May 1969, and only received by the respondent on 27 June 1969. Obviously, the latter date was the one on which the respondent finally learned that his offer had been accepted.
46 The court, in its decision, quotes Grotius91 by stating the following: …I may make an offer in two ways. I can either make an offer and say that the contract will be established by your mere acceptance; or I can make the offer and say that the contract will be completed when I come to hear of your acceptance. And if there is a doubt upon the matter, we must always presume that the second was the case…
In the abovementioned case, the court decided that “the signature of V on 17 th May 1968 turned the offer into a binding contract.” The information theory is the general rule in South African Law with regards to contracts inter absentes. There are, however, certain exceptions to the general rule:
With regards to postal contracts, South African Law follows the dispatch/expedition theory. (see the discussion of the Cape Explosivescase below).
The acceptance theory is prescribed by statute with regards to internet transactions. See in particular Section 22 of the Electronic Communication and Transactions Act 25 of 2002, read with the Electronic Communication Act of 2005.
Where the parties themselves determine the moment and place when and where their contract comes into existence. (As in the case of Reid v Jeffreys Bay Property Holdings).
The case of A-Z Bazaars v Minister of Agriculture 1975 3 SA 468 (A). In this case, the offeree accepted the offer by way of a letter. He then revoked his acceptance by means of a telegram, which travelled faster than the letter. The State argued that the offer of expropriation had already been accepted by the offeree by way of letter, and that the later-sent telegram had no effect on the moment the contract came into existence. The Cape Provincial Division followed the dispatch/expedition theory. On appeal, the court interpreted the Expropriation Act applicable at the time. The Expropriation Act determined that the acceptance had to be “delivered” (“gelewer”) to the Minister. The telegram was delivered first, and consequently the dispatch/expedition theory did not apply to expropriation-offers. It must be remembered, though that each set of facts must be considered on its own.
For enrichment’ sake, you might want to read the case of Kergeulen Sealing and Whaling v CIR 1939 AD, which rather creates a contrast to the A-Z Bazaars-case. 91 De Jure Pacis ac Belli, Bk. 2, Chap. 11, para.15
Departures from the information theory
According to the courts, initially it was accepted that the time and place of the conclusion of a contract were to be determined with reference to the information theory, irrespective of whether the parties were contracting ‘inter praesentes’ or ‘inter absentes’.92 It was recognized that the offeror could prescribe a mode of acceptance which rendered it unnecessary that he should be informed of the acceptance. This principle is still recognized today- read the Driftwood-case again. The facts of a particular case will prove decisive in any attempt to prescribe a special method of acceptance aimed at displacing the information theory. The following are examples of facts that may warrant such an inference: -
Geographical separation of parties; Form and commercial nature of the envisaged contract; Existence of an execution clause Declaration that the contract will be concluded upon signature.
In the case of Cape Explosive Works Ltd v South African Oil and Fat Industries Ltd 1921 CPD 244, a different approach regarding contracts concluded inter absentes by offer and acceptance through the post was adopted (so-called “postal contracts”). In the abovementioned case, the court agreed that from a theoretical perspective the information theory accorded with the modern notion of contract based on the agreement of the parties.93 Nevertheless, in the Cape Explosive Works-case, the dispatch/expedition theory was, under the influence of English law, adopted as the most satisfactory pragmatic way of determining the time and place of conclusion of a postal contract.94 According to the court, a postal contract was held to arise at the place and moment of posting the acceptance: …where in the ordinary course the Post Office is used as the channel of communication, and a written offer is made, the offer becomes a contract on the posting of the letter of acceptance. 95
The correctness of the Cape Explosive Works-case was confirmed in the Kergeulen Sealing & Whaling Co Ltd-case. Students are expected to study the Cape Explosive Works-case in detail, although it does not appear in the case list. Students must visit the library and obtain the case by themselves. 92 Van der Merwe et al 2007: 68 93 Van der Merwe et al 2007: 6994 Van der Merwe et al 2007: 69 95 Van der Merwe et al 2007: 68
The Dispatch/Expedition Theory
As far as the original reasons for the introduction of the expedition theory in regard to postal contracts are concerned, see the very interesting article of Simon Gardner, Trashing with Trollope: A Deconstruction of the Postal Rules in Contract in the Oxford Journal of Legal Studies Vol 12, No.2 (1992). Note that this article need not be studied in detail for examination purposes, but will provide the student with a clear understanding of why the dispatch/expedition theory forms part of South African law at all. The application of the dispatch/expedition theory today is explained (or should it read “allowed”?) on the basis that the resort to the post to convey the offer serves as a prescription of the post as the mode of acceptance. 96 In the Cape Explosives-case the dispatch/expedition theory was preferred on account of its supposed practical convenience. The judge in the aforementioned case (Searle J) stated that “much confusion and complication” would arise if the rule were not adopted, because “the acceptor would certainly be at a loss to know when his notification reached the offeror and his hands would be tied until he was assured on this point.” 97 Van der Merwe et al note that the offeree will generally be favoured by the adoption of the dispatch/expedition theory, because once expedition has taken place, the offeree has certainty that the contract has been concluded, irrespective of whether the offeror ever becomes aware of the acceptance.98 Obviously, similar circumstances would not be beneficial to the offeror at all (have a look at what happened in the Driftwood Properties-case). If the offeror, on failure to receive a reply because of the fact that the letter had become lost in the post, were to assume that the offer was rejected, and on that assumption were to conclude a contract with another, he (the offeror) would bear the risk. 99 This seems unfair towards the offeror- there is no reason why the offeree should be favoured above the offeror. The explanation stems from English law. The dispatch/expedition theory originated in the English legal system in circumstances when it seemed fair to place the risk of loss on the party who initiated negotiations through the post. It is argued that the contemporary liability of the postal service results in a reasonable reliance on the part of the offeree/acceptor that his acceptance will in the ordinary course of events come to the notice of the offeror. This reliance may then provide an immediate basis for a contract at a stage when there is no consensus ad idem.100 The question must be asked, of course, whether the postal service, either in South Africa or the United Kingdom, is really so reliable as to take the view that an offeree may accept that in the ordinary course of events his acceptance will be delivered to the offeror. 96 Van der Merwe et al 2007: 69 97 Van der Merwe et al 2007: 70 98 Van der Merwe et al 2007: 70 99 Van der Merwe et al 2007: 70 100 Van der Merwe et al 2007: 71
49 It must be mentioned, though that the expedition theory places the risk on the offeror only so far as such risk/risks is/are inherent or typical of the postal system. External or abnormal circumstances which disrupt the operation of the postal service will therefore exclude the application of the expedition theory. Will the dispatch/expedition theory apply in the case where an acceptance by letter follows on an offer made inter praesentes, or made inter absentes by telephone? Find the answer in Van der Merwe et al, p. 71. The moment of expedition of an acceptance will only determine the time and place of conclusion of a postal contract in the absence of indications to the contrary. In the case of A-Z Bazaars (Pty) Ltd v Minister of Agriculture 1975 (3) SA 468 (A) an indication to the contrary was indeed found in the provisions of a statute: It was held in Section 6 of the Expropriation Act 55 of 1965 that the contract in issue could come into existence only upon actual delivery of a written acceptance to the minister, and that the offeree, who had posted a letter of acceptance, could “neutralize” it by means of a subsequent telegram, which was received before the letter.101 Another example of an indication to the contrary was found in the case of SA Yster & Staal Industriële Korporasie v Koschade 1983 (4) SA 837 (T), wherein the terms of the offer itself indicated an intention on the part of the offeror that the moment of reception of the acceptance would be decisive 102(This is similar to the information theory). Like wise, the nature of the transaction may justify an inference of a particular intention.103 In terms of the dispatch/expedition theory, acceptance of an offer can validly occur in one of the following manners:
Submittance od a letter into a post box; The speaking of an acceptance into the answering machine of the offeror’s telephone; The sending of the acceptance with a messenger; Sending of the acceptance via telegram- see Craib v Crisp.
In the case of Craib v Crisp 1984 (3) SA 594 (T), the respondent wanted to sell her property in Sedgefield, Natal. She mandated an estate agent to find a purchaser for the said property. A document named “offer to purchase” was subsequently signed by the prospective purchaser (the applicant in the current matter). The last page of the offer to purchase made provision for the signature of the seller as acceptor of the offer to purchase the property made by the applicant. There was no acceptance of the offer by any writing on the said document. What happened, in fact, was that the estate agent had telephoned the respondent, informed her of the existence of the written offer as well as its terms, and requested her to 101 Van der Merwe et al 2007: 72 102 Van der Merwe et al 2007: 72 103 Van der Merwe et al 2007: 72
50 signify her acceptance by telegram, the contents of which were dictated to the respondent by the estate agent. The telegram of acceptance was duly sent by the respondent, and stated unequivocally that the offer was accepted. The respondent, however, wished to withdraw from the contract for the following reasons: i.
The sending of the telegram did not constitute proper acceptance of an offer to purchase immovable property.
A communication of acceptance addressed to the seller’s own agent could not be considered an acceptance of the purchaser’s offer.
The court’s decision was as follows: With regard to the reason (i) above, the court said that a telegram did indeed constitute a valid acceptance of offer, especially considering Section 1 of the Formalities of Sale of Land Act 71 of 1969, which applied at the time. (It should be considered that although a writer such as Christie agrees with Preis, J’s decision in this case, De Wet & Yeats are of a different opinion regarding this issue). As far as reason (ii) is concerned, the court felt that “under the circumstances in which the respondent was asked by the estate agent to transmit the telegram, and in the light of the clear wording of the telegram, coupled with the undeniable fact that its contents were conveyed to the applicant long before the respondent purported to withdraw from this contract, a binding contract of sale came into being.104 2.4.
The Declaration Theory
The declaration theory basically holds that a contract comes into existence at the moment when and place where the offeree expresses/declares his acceptance of the offer. This can happen in one of the following ways:
Verbal expression; Writing down an acceptance of an offer; Dictating an acceptance to another; Entering an acceptance into a computer programme, such as Microsoft Word; Expressing acceptance of an offer through sign language.
The problem one is faced with at the declaration theory is of course that the offeror would not necessarily be aware of the acceptance of his offer at the time of the declaration/expression of the acceptance by the offeree. This leaves a question as to the 104 Craib v Crisp: 601-602
51 presence of consensus ad idem between the offeror and the offeree. This problem is similar to the one experienced by the dispatch/expedition theory. 2.5.
The Acceptance Theory
What makes this a very relevant and important theory, is the fact that it is used in South African law with regard to internet transactions, according to Sections 22 and 23 of the Electronic Communications and Transactions Act 25 of 2002. According to Christie, the abovementioned statutory rules equate e-mail contracting as far as possible with traditional contracting. 105 Section 23 of the abovementioned act states the following: 23. A data message – (a)used in the conclusion or performance of an agreement must be regarded as having been sent by the originator when it enters an information system outside the control of the originator or, if the originator and addressee are in the same information system, when it is capable of being retrieved by the addressee; (b)must be regarded as having been received by the addressee when the complete data message enters an information system designated or used for that purpose by the addressee and is capable of being retrieved and processed by the addressee; and (c)must be regarded as having been sent from the originator’s usual place of business or residence and as having been received at the addressee’s usual place of business or residence.
Christie exclaims that the abovementioned section assumes that when the originator’s message reaches the addressee’s information system, it stays there. Technology is currently advancing so fast that this assumption may not be correct, as the originator may be able to change his mind and remove his message from the addressee’s information system. If he does this before the addressee has retrieved and processed it, it would be unrealistic to decide that the addressee had received it, or even that the originator had sent it. 106 Typical situations where the acceptance theory may find application:
The letter of acceptance is placed on the offeror’s desk, but the latter has not read the letter yet; The offeror takes the letter of acceptance from his mailbox, but hasn’t opened the envelope yet; The message of acceptance is recorded on the offeror’s answering machine, but he hasn’t listened to it yet; Section 23 above.
105 Christie 2006: 78 106 Christie 2006: 79
52 Unit 6 Pacta de Contrahendo Learning outcomes: After completion of this unit, the student should be able to: 1. Explain what is meant by the term “pactum de contrahendo” and distinguish this terms from other forms of preliminary contracts. 2. Discuss the legal nature of the option contract. 3. List and discuss the requirements for an option contract. 4. Briefly discuss the breach of an option contract and the remedies available to a party who has suffered as a consequence of breach. 5. List examples of contracts of preference. 6. Briefly explain what is meant by the term “right of pre-emption”. 7. Discuss the requirements for a right of preference. 8. Distinguish between options and preference contracts. Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 3 from p. 77. 2. From List of cases: Venter v Birchholtz 1972 (1) SA 276 (A) Hirschowitz v Moolman 1985 3 SA 739 (A) Ficksburg Transport (Edms) Bpk v Rautenbach 1988 (1) SA 318 (A) De Jager v Burger 1994 (1) SA 402 (C). Dettmann v Goldfain 1975 (3) SA 385 (A)
Alternative study: 3. Christie. The Law of Contract in South Africa. Fifth Edition. Chapter 2 p. 37-38. 4. Bhana et al. Students’ guide to the Law of Contract. Second Edition. Chapter 3. (From p. 62 onwards)
53 1. Pacta de contrahendo 1.1.
According to Van der Merwe et al, a pactum de contrahendo is a contract aimed at the conclusion of another contract.107 An example from South African Law would be an option contract and a contract of preference. The option contract restricts the offeror’s capacity to revoke an offer. A contract of preference is intended to create a preferential right to conclude with another a specified type of contract, should he decide to conclude such a contract at all. 108 Some continental legal systems do not see the abovementioned types of contract as pacta de contrahendo, but employ the latter term to obligationary agreements which bind one of the parties, or both, to eventually conclude a substantive contract of some form or nature.109 This type of preliminary contract provides only a right to insist on the cooperation of the other party towards the conclusion of the substantive contract. Contracts of this nature are relevant where parties who have reached consensus on the conclusion of a substantive contract, but are unwilling to or unable to conclude it immediately, wish to protect themselves against a later refusal to conclude the agreement.110 The concept pactum de contrahendo in its widest sense also encompasses diverse other arrangements fulfilling a range of distinct functions. It should be distinguished from preliminary arrangements, which are devoid of any obligationary effect. Preliminary arrangements include memoranda of understanding, heads of agreement, agreements in principle, or letters of intent. The principle use of these preliminary contracts or agreements is to promote trust by demonstrating a commitment on the part of the parties to the conclusion of a contract or to place on record any progress that has been achieved in negotiations. This enables a review of progress by lawyers, identifies outstanding issues and provides a basis for further progress towards a binding agreement.111 The consequences of these preliminary arrangements depend on the interpretation of their terms in the context of the particular circumstances.112 Where such a document records a partial agreement, the question is whether what has been agreed upon can have an existence independent from what has been left open for later negotiation. Should the document reveal an intention to establish obligations and a sufficient degree of certainty as to the terms agreed to, the label attached to it cannot be decisive. Obligations, even if only of a limited or partial nature, might be agreed to and will be given effect.113 107 Van der Merwe et al 2007: 77 108 Van der Merwe et al 2007: 77 109 Van der Merwe et al 2007: 77 110 Van der Merwe et al 2007: 77 111 Van der Merwe et al 2007: 79 112 Van der Merwe et al 2007: 79 113 Van der Merwe et al 2007: 79
54 In the case of Hirschowitz v Moolman 1985 3 SA 739 (A) (to be studied in detail), Corbett JA said the following: A pactum de contrahendo is simply an agreement to make a contract in the future. 114
Christie mentions that provided the agreement results from a firm offer and is not too vague, it will be enforceable. It follows that if the remuneration or price is fixed or ascertainable the contractual duties must be performed whenever demanded within the limits fixed by the pactum.115 Each demand initiates a separately identifiable contract containing some of its own terms and some terms imported from the pactum.116 We shall subsequently study two pacta de contrahendo, namely option contracts and contracts of preference. Remember that there are also other types. 2. Option contracts: 2.1.
Van der Merwe et al call an option “a legal concept which comprises a contract between two parties, the option grantor and the option holder, to keep open an offer to contract (the substantive offer) made by the grantor to the holder”. 118 The contract which thus entrenches the substantive offer is called the option contract. Acceptance of the substantive offer (commonly referred to as “the exercising of the offer”) brings about the substantive contract envisaged by the arrangement, and is governed by the ordinary principles regarding acceptance of offers. The option agreement is distinct from the substantive contract, and the view that the option contract amounts to the substantive contract qualified by a suspensive condition has been rejected, notably in the case of Venter v Birchholtz 1972 (1) SA 276 (A) on 283, where Jansen JA had the following to say: The option is seen as a unique contract, which is dissected as an offer to purchase accompanied by an agreement to keep the offer standing for a specific period. Although the grantor of the option’s obligation to sell may probably be seen as conditional, no conditional contract of purchase exists, and the exercising of the option does not amount to the compliance to a condition by the purchaser.119
The case of Venter v Birchholtz must be studied in detail, and specific attention should be paid to how the court deals with the legal nature of the option contract.
114 Christie 2006: 37 115 Christie 2006: 37 116 Christie 2006: 37 117 Van der Merwe et al 2007: 79-84 118 Van der Merwe et al 2007: 80 119 Own translation from the Afrikaans text.
55 The option contract creates at least one obligation, in terms of which the holder of the option has the right that the option grantor shall keep the substantive offer open for acceptance, or not revoke the offer. The grantor of the option thus has a duty not to do anything to prevent the option holder from creating an enforceable contract by exercising the option.120 The option holder furthermore enjoys a legally protected power to establish the substantive contract by exercising the option. The exercise of this power, which cannot be withdrawn by the grantor of the option, may be circumscribed by the terms of the pactum de contrahendo.121 An offer can be made irrevocable only by means of an option contract. Van der Merwe et al feel that a unilateral declaration by an offeror that the offer is irrevocable is generally regarded as ineffective in our law. 122An offer that specifies a fixed period of time for acceptance merely limits the duration of the offeree’s power of acceptance and does not prevent revocation. 2.2.
An option contract must satisfy the requirements generally applicable to contracts.123Although it has been held that a period of time for which the offer is to be kept open is a requirement for an option contract, this cannot be said to be an actual requirement. The better view, according to Van der Merwe et al, is that the abovementioned “requirement” is in fact not a requirement for a valid option contract, and that an option which does not specify a period for its duration or which is stated to be of unlimited duration, is not void for vagueness, although it may terminate after a reasonable time.124 The requirements for an option contract may be listed as follows: 2.2.1. 2.2.2. 2.2.3. 2.2.4.
The object of the option must be clearly described. The price/cost of the object must be determined or determinable. The manner of payment for the object must be determined. The period for exercising the option must be determined (however- see the abovementioned argument).
The parties may agree on the manner or way in which the substantive offer must be accepted. In this instance, two cases are important for the purposes of this lecture, namely Ficksburg Transport (Edms) Bpk v Rautenbach 1988 (1) SA 318 (A) and De Jager v Burger 1994 (1) SA 402 (C). 2.3.
Useful clauses to include in the option contract125
120 Van der Merwe et al 2007: 80 121 Van der Merwe et al 2007: 80 122 Christie has a different opinion hereon. See Van der Merwe et al 2007: 81 123 Van der Merwe et al 2007: 82 124 Van der Merwe et al 2007: 83 125 Grobler 2006: 39
56 2.3.1. A restriction on transfer of the option (pactum de non cedendo). 2.3.2. Counter-performance for the granting and holding of the option. 2.3.3. Clause prohibiting the inheritance of the option. 2.4. Breach and remedies The breach of an option contract and its consequences are governed by the general principles of the law of contract.126 An attempted revocation of the substantive offer does not preclude the exercise of the option and the option holder is entitled to enforce the option contract specifically by means of an interdict against the grantor. 127 The option holder may claim damages to be placed in the position which he would have been had the option been exercised. The rights flowing from an option contract may be ceded, unless there are factors which prohibit cession (such as the pactum de non cedendo-clause). Extinction of obligations flowing from option contracts is governed by the principles applying to the extinction of obligations in general.128 In order to assist the student to further develop an understanding of the nature of the option contract and the right to cede same, the case of Dettmann v Goldfain 1975 (3) SA 385 (A) is prescribed for detailed study. 3. Rights of Preference129 3.1. Legal Nature 3.1.1. General: A contract may be concluded to grant a contractant a preferential right to conclude another contract with the other contractant. Common examples of such contracts, often referred to as “contracts of preference” or “preference contracts” are the following:
Contracts creating a “right of first refusal”, which is a preferential right to lease property. Contracts creating a “right of pre-emption”, which is a preferential right to buy property. A preferential right may also be created by a contract which grants a seller the right to sell something to another.
3.1.2. Rights of pre-emption: A contract which creates a right of pre-emption does not place a duty on the grantor to sell the subject-matter of the right. The holder of the right obtains a preferential right 126 Van der Merwe et al 2007: 84 127 Van der Merwe et al 2007: 84 128 Van der Merwe et al 2007: 84 129 Van der Merwe et al 2007: 85-93
57 to buy, if the grantor should decide to sell. It could be argued then, that the preemptive right is conditional in the sense that its operation is made subject to the occurrence of some event (the grantor’s decision to sell his property). This “event” is aptly described as a “trigger event” in the case of Breytenbach v Stewart 1985 (1) SA 167 (A). In normal circumstances and in principle, the contractants determine the event which brings the pre-emptive right into operation. But how is an agreement structured in practice to grant a preference of some kind or another? An arrangement commonly resorted to is an agreement that, should the grantor decide to sell his property, he is bound to make an offer to the holder of the right (This construction is the one preferred by the courts). The construction has also been advanced, however, that a pre-emptive right already contains an inherent offer by the grantor of the right to the holder thereof, if the grantor decides to sell. In these latter-mentioned cases, the preference mechanism is of such a nature as to enable the holder to acquire the subject-matter of the right. The granting of a preferential right does restrict the grantor’s capacity to alienate the subject-matter and, since the restraint on alienation falls away if the holder waives the preference, an offer voluntarily made to the grantee affords the grantor a way around the restraint, should it not be taken up by the holder. 3.2.
Requirements for rights of preference
A contract which grants a right of pre-emption must, like the option contract, meet all the requirements for contracts in general. Contracts of pre-emption often specify the price at which the holder may buy, or render the price objectively ascertainable. The contention that a contract which creates a right of pre-emption must “foreshadow” at least the essentialia of the substantive contract envisaged by the parties, and that the contract must therefore invariably contain a substantive offer directed at a substantive contract, is somewhat problematic, according to Van der Merwe et al.130 In Hirschowitz v Moolman, the appellate division of the High Court reaffirmed the more traditional approach that a substantive offer is not an essential requirement for a contract of pre-emption. In the latter-mentioned contract, the determination of the price may be left to the grantor. In the Hirschowitz-case the court depended on the assumption of a general rule that any pactum de contrahendo must comply with formalities prescribed for the substantive contract and the further assumption that the legislation requiring formalities would otherwise be frustrated. 3.3.
Distinction between options and preference contracts
According to the courts, an option entails an offer to the grantee, which the latter can accept, whereas in the case of a right of pre-emption, there is no offer at the time of the grant, and the grantor is not obliged to make an offer unless and until he wishes to sell the property. Accordingly, the acceptance of the offer contained in the option contract by the option-holder is sufficient for the exercising of an option, whereas the 130 Van der Merwe et al 2007: 87
58 exercising of a right of first refusal (or pre-emption) “imports the bilateral action”the making of the offer and its acceptance. Because an option contract entails an offer that is to be kept open, an agreement which does not foreshadow the terms of the substantive contract with the degree of particularity necessary to amount to an offer cannot be an option contract. Such agreements have been styled as “ordinary preference contracts”. They encompass not only the case where the grantor is obliged to make an offer on the specified eventuality, but also those instances where the duty of the grantor is a negative one. The distinction becomes blurred where what is styled as a preference contract foreshadows the terms of the substantive contract. This provides a basis for the argument that a contract of pre-emption contains a substantive offer, subject to a potestativel condition. Accordingly, this means that in such a case, what is styled as a contract of pre-emption actually becomes a conditional option. The traditional distinction between options and preference contracts can be maintained on the basis that even where the terms of the substantive contract are specified in the pactum de contrahendo, the qualification that he grantor will be bound to those terms only if he or she so desires, precludes the animus contrahendi necessary for an offer. A further possible point of distinction is that, whereas in the case of a true option the offer has to be kept open, it is a characteristic of a contract of pre-emption that the substantive offer can be revoked before acceptance, provided that the grantor no longer desires to sell.
Unit 7 Formalities Learning outcomes: After completion of this unit, the student should be able to: 1. Analyze and discuss the background and current position regarding the compliance with formalities as a requirement for a valid contract. 2. Provide a critical discussion of the legal position regarding formalities imposed by the parties themselves to a contract. 3. Analyze the position regarding non-variation clauses in South African law from the Shifren-decision in 1964 to the Cecil Nurse-decision in 2008. 4. Provide a critical discussion of the legal position regarding formalities imposed by law and statute. 5. Explain the position regarding non-compliance with formalities. 6. Analyze and critically evaluate the position and presence of the ‘parol evidence’rule in South African law, with specific reference to case law. 7. Analyze and critically discuss the position regarding rectification in South African law. Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 5. 2. From List of cases: Goldblatt v Freemantle 1920 AD 123 SA Sentrale Ko-op Graanmaatskappy Bpk v Shifren en Andere 1964 (4) SA 760 (A) Miller and Another NNO v Dannecker 2001 (1) SA 928 (C). Cecil Nurse (Pty) Ltd v Nkola 2008 (2) SA 441 (SCA) Akasia Road Surfacing (Pty) Ltd en ‘n ander v Shoredits Holdings Ltd en
60 Andere 2002 (3) SA 346 (SCA) Alternative study: 3. Christie. The Law of Contract in South Africa. Fifth Edition. Chapter 3. 4. Bhana et al. Students’ Guide to the Law of Contract. Second Edition. Chapter 4 para.5 1. Introduction South African law follows an informal approach to the creation of contracts. This was essentially decided in the case of Goldblatt v Freemantle 1920 AD 123, which is not included in the list of cases for this module, but should be studied in detail for the purposes of this unit. South African law recognizes both express contracts and terms, where the intention of the parties is articulated verbally, whether orally or in writing, and tacit contracts and terms, where the intention is inferred from the unarticulated conduct of the parties.131In the case of Conradie v Rossouw 1919 AD 279 The Appellate Division accepted into South African law the simple Roman-Dutch concept of a contract as a serious and deliberate agreement. According to Christie, it logically follows that no special formalities are required for the making of an enforceable contract.132 In order to strengthen the general rule that no formalities are required in order to create a valid contract, Christie also provides the following examples: Innes, J in Timoney and King v King 1920 AD 133 at 141: “An acceptance may be inferred from conduct” Eloff, J in Ally v Dinath 1984 2 SA 451 (T) at 454F: “the principle is firmly established that any contract can be brought about by conduct”. There are instances where statute prescribes certain formalities for the creation of a contract. A fine example would be the Alienation of Land Act. Section 2 of this act reads as follows: FORMALITIES IN RESPECT OF DEEDS OF ALIENATION 2 Formalities in respect of alienation of land
131 Van der Merwe et al 2007: 152 132 Christie 2006: 105
61 (1) No alienation of land after the commencement of this section shall, subject to the provisions of section 28, be of any force or effect unless it is contained in a deed of alienation signed by the parties thereto or by their agents acting on their written authority. (2) The provisions of subsection (1) relating to signature by the agent of a party acting on the written authority of the party, shall not derogate from the provisions of any law relating to the making of a contract in writing by a person professing to act as agent or trustee for a company not yet formed, incorporated or registered. (2A) The deed of alienation shall contain the right of a purchaser or prospective purchaser to revoke the offer or terminate the deed of alienation in terms of section 29A.
Effectively this section implies that if any deed of alienation (or contract of sale) of land (immovable property) is not in written form, such contract will be void ab initio. The reason for statute sometimes prescribing certain formalities for the conclusion of a valid contract, is because formalities contribute to legal certainty and prevent malpractices, serve a cautionary and protective function by drawing the line between negotiations and liability, and may be utilized to afford protection to those in danger of exploitation and to assist in the identification of the type of contract entered into by the parties.133 Obviously, a written contract will have certain advantages over an oral one. Christie provides that the following are three advantages of written contracts: (i)
The preparation of the contract gives the parties time to consider their positions before committing themselves by their signatures.134
The burden of proof is simplified: once the defendant’s signature is proved or admitted the plaintiff has discharged his burden, and the burden is then on the defendant to prove fraud, misrepresentation, or whatever defence he might have.135
The scope for subsequent disagreement about the terms of the contract is very much narrowed, since the terms are in writing for all to see.136
To these advantages identified by Christie can be added the following: (iv) (v) (vi)
Litigation is limited. Legal certainty is created. Remedies can be included in advance.
It is of course also possible that the contracts themselves make compliance with formalities a prerequisite for the creation of obligations, but this must not be confused with the case where the agreement is reduced to writing merely to facilitate proof. A 133 Van der Merwe et al 2007: 152 fn 3 134 Christie 2006: 105 135 Christie 2006: 105 136 Christie 2006: 105
62 reduction to writing for this particular purpose may have some legal consequences, but does not subject the operation of the agreement to a formal requirement. In the case of Bailes v Highveld 7 Properties (Pty) Ltd 1998 (4) SA 42 (N), it was stated that even in respect of contracts subject to statutory formalities, parties might stipulate a greater degree of formality than that required by the applicable statute. Formalities imposed by either the parties or statute may be of divergent nature, but but most commonly it is required that the agreement be reduced to writing and signed by the contractants.137 Basically, then, there are two instances where formalities are required for a valid contract: Formalities imposed by the contractants and formalities imposed by statute.138 2. Formalities decided on by the parties139 Parties usually resort to writing of their own accord for evidential reasons rather than to impose formalities. If the writing was intended as a formality for the creation of the contract, no legal consequences ensue and no contract exists prior to the execution of the document. A party to the agreement can probably not be compelled to comply with the formality. Parties may, however, conclude an oral contract with a term that the agreement shall be reduced to writing by them.140It often happens that during the negotiations leading to the formation of a contract, or in the terms of an informal contract itself, mention is made of a written document or of the reduction of the terms of the contract to writing.141 This raises the question whether the informal contract is binding and the written document only intended for purposes of proof of the terms of the contract, or whether there is to be no contract until the written document has been drawn up and executed. Christie even goes so far as to quote Grotius in answering this question: The contract of sale may be made in writing or without writing. A written sale is not considered to be complete until the writing has been fully executed. But with us, although there is no mention of writing this is understood not to be with a view to a written contract, but merely for the purpose of reducing to writing the terms agreed upon for better remembrance and proof, unless there is clear evidence of a contrary intention.142
This precise principle was adopted in Goldblatt v Fremantle: The burden of proof is on the party who asserts that an informal contract was not intended to be binding until reduced to writing and signed. Innes J had the following to say in the abovementioned judgment: 137 Van der Merwe et al 2007: 153 138 Bhana et al 2009: 86 139 Van der Merwe et al 2007: 153-162; Christie 2006: 105-108; Bhana et al 2009: 9197 140 Van der Merwe et al 2007: 153-154 141 Christie 2006: 105 142 Grotius 3 14 26, as quoted in Christie 2006: 106
63 Subject to certain exceptions, mostly statutory, any contract may be verbally entered into; writing is not essential to contractual validity. And if during negotiations mention is made of a written document, the Court will assume that the object was merely to afford facility of proof of the verbal agreement, unless it is clear that the parties intended that the writing should embody the contract. At the same time it is always open to parties to agree that their contract shall be a written one; and in that case there will be no binding obligation until the terms have been reduced to writing and signed. The question is in each case one of construction.143
This is exactly what happened in Goldblatt v Fremantle. The parties entered into an oral contract, but stipulated that the contract will not come into force before it has been reduced to writing. Subsequently, the parties themselves created a formality, failing to comply with would result in the contract being void. Van der Merwe et al state, however, that a self-imposed formal requirement for the creation of a contract (such as the one imposed in Goldblatt) may be done away with by a subsequent oral agreement to dispense with it. 144 Once the contract has been concluded in writing, the contractants will be entitled to cancel it orally, unless formalities have also been prescribed for cancellation. Irrespective, however, of whether parties resort to writing for the creation of a contract or merely for purposes of proof, the agreement can be varied by informal agreement. However, where by means of a so-called non-variation clause, parties have prescribed writing as a formal prerequisite for variation of a contract, the position may be different.145 The position regarding non-variation clauses in contracts146 The non-variation clause is part of the contract, and if it is phrased wide enough to entrench itself, no part of the said contract, including the non-variation clause itself, may be varied in any way other than writing. Anon-variation clause may also serve to prevent oral variation of a clause, which prescribes formalities for cancellation. Non-variation clauses are intended to protect contractants against disputes and problems of proof in regard to variations of their contract. The enforcement of such a clause in the face of a subsequent informal agreement by the parties to alter their contract seems to conflict with the freedom which contractants should have to alter their previous consensus by subsequent agreement. (Students are reminded of the cases of Brisley v Drotsky discussed in unit 1 of this study module). Yet, non-variation clauses are enforced by the courts on the very assumption that to do so does not conflict with the requirement of public policy that agreements freely entered into must be given legal effect. In the final instance, the decision of the courts to enforce non-variation clauses is a policy decision, based on an apparent preference for commercial certainty and avoidance of litigation. The strict enforcement of non-variation clauses by the courts often causes problems for contractants, and a variety of ways have been developed to mitigate the effect of what has come to be known as the ‘Shifren straight jacket’.
143 At 128-129, as quoted in Christie 2006:106 144 Van der Merwe et al 2007: 154 145 Van der Merwe et al 2007: 154 146 Van der Merwe et al 2007: 154-158
64 In the case of SA Sentrale Ko-op Graanmaatskappy Bpk v Shifren en Andere 1964 (4) SA 760 (A), the plaintiffs in the court a quo (respondents in the current case) sought damages against the respondents (appellants in the current case) because the latter had contrary to the contract between them, ceded its rights to another without the permission (written or orally) of the plaintiff. The contract in question contained the following two clauses147: 11.The tenant shall not have the right to sub-let the said business premises or any portion thereof, nor shall he have the right to cede this agreement to any person whomsoever without, in either event, the written consent of the owner first being had and obtained. 19. Any variations in the terms of this agreement as may be agreed upon between the parties shall be in writing otherwise the same shall be of no force or effect.
The appellant admitted to the cession, but pleaded that he had entered into an oral agreement with the respondents in terms of which the latter agreed to the said cession on condition that the appellant took responsibility for the payment of levy by the cessionary. The case first served before Erasmus, J, who decided that the parties were allowed to orally agree that oral permission for the said cession would be sufficient. Thereafter, the case was referred to Potgieter, R, who disagreed with the abovementioned decision of Erasmus’s. The question before the appellate division, as posed by Steyn, JP, was thus whether, despite the wording of clauses 11 and 19 mentioned above, the parties could conclude a valid oral agreement whereby the contract would be amended to allow for the fact that oral permission for cession would be permitted. Justice Steyn came to the following conclusion (freely translated): It cannot be derived from the fact that the parties were permitted to freely revoke their agreement orally, that they possessed the same freedom with regard to orally amending their agreement where they have explicitly decided that no amendment to their written contract would be valid if not in writing. On the other hand it cannot be derived from the mentioned fact that the parties were allowed to amend without consideration of the formality.
Thus, Justice Steyn decided that an oral contract couldn’t be amended orally. In the case of Miller and Another NNO v Dannecker 2001 (1) SA 928 (C), the defendant had purchased certain franchise rights from one T in respect of a guest house for an amount of R350 000.00. Part of the purchase price had been payable on signature of the agreement and the balance in two further installments. Clause 15.2 of the said agreement provided as follows: This agreement constitutes the entire agreement between the parties who acknowledge that there are no other oral or written understandings or agreements between them relating to the subject-matter of this agreement. No amendment or other modification of this agreement shall be valid or binding on a party hereto unless reduced to writing and executed by both parties hereto.
Although this case differs slightly to the matter in question and also the facts in the Shifren-case (in the current case the pactum de non petendo finds application, which is an agreement not to enforce a right), the following statement by Ntsebeza, AJ is interesting: 147 See Shifren p. 764
The dictates of public policy and the views of the community would never be served by a slavish adherence to a non-variation clause in the face of an agreement in the form of a pactum.
Careful precaution should be taken not to confuse oral amendment of a contract and oral waiver of the obligation to amend a written contract in writing only. In the case of Impala Distributors v Taunus Chemical Manufacturing Co (Pty) Ltd 1975 (3) SA 273 (T), the court had the following to say: When a contract provides that dissolution thereof can only take place in writing, such a restriction can be revoked by oral agreement. When the contract contains a further provision that no provision of the contract can be varied other than in writing, it entrenches the restriction on revocation and oral dissolution is no longer possible. An oral waiver is valid, but only by a party in regard to a right which accrues exclusively to himself in terms of the contract. An already existing right of action arising out of breach of contract can also be waived orally.
This was effectively a support of Steyn, JP’s point of view in Shifren. In the case of Brisley v Drotsky mentioned above, a tenant sought to preclude a reliance on a non-variation clause on the basis that to do so would in the circumstances be “onredelik, onbillik en in stryd met die beginsels van bona fides (goeie trou)”. This argument was of course derived from the Miller-case mentioned above. The argument that considerations of good faith are relevant in assessing whether an agreement or term meets the criterion of public policy, was “roundly rejected by the majority of the supreme court of appeal”.148 It was held that there was no general equitable discretion on the strength of which a court could decide not to enforce a non-variation clause merely because it was unconscionable or against good faith.149 The ethical principle of good faith does not, therefore, intervene in contract law directly, but is realised through the instrumentality of the technical, black-letter rules and institutions of contract doctrine in which it is discounted and balanced out with other principles and policy concerns. Inequitable results which might arise from the stance adopted in Shifren, are to be corrected by the application of “die besondere reëls en beginsels” (“the particular rules and principles”) of the law of contract.150 In the case of Cecil Nurse (Pty) Ltd v Nkola 2008 (2) SA 441 (SCA), the respondent had returned to the appellant a duly executed suretyship document and credit application form. The suretyship provided that alterations to its terms would only be binding if agreed to in writing by the appellant. The appellant instituted action in the magistrates’ court on the basis of the suretyship for payment of a debt. However, the respondent then contended that the suretyship had mistakenly been sent by his assistant in his absence as he was still negotiating limiting his liability. The magistrates’ court had found in favour of the appellant, but this was set aside by the court a quo. The appellate division found that once the original suretyship signed by the surety was sent to and received by the creditor, a contract of suretyship had come into being. Whether or not an amended document had subsequently been sent to the creditor was irrelevant. It had constituted no more than a proposed amendment to a suretyship agreement already in existence. That 148 Van der Merwe et al 2007: 155 149 Van der Merwe et al 2007: 156 150 Van der Merwe et al 2007: 156
66 being so, the onus would be on the surety to prove that the creditor had agreed to the proposed amendments, thereby bringing into being a ‘new’ contract of suretyship. The court subsequently decided that the creditor had not agreed to the proposed amendments.151 The current legal position is thus that a written contract cannot be varied by a subsequent oral one. However, the following paragraph written by Neels in the South African Law Journal should be kept in mind (freely translated from the Afrikaans): The courts should exercise the discretion to correction in a principled and hesitatory manner. The principles of legal certainty and autonomy demand that the consensus which was reached by the parties to the contract or the reasonable belief that was created should serve as motivation. Only in instances where the unreasonableness or unfairness of the preliminary legal decision is clear, must it be corrected on the grounds of fresh rules and principles.152
Van der Merwe et al finally submit then that there may well be situations where the strictures of the Shifren strait jacket should be eased by recourse to a notion of public policy or the application of estoppel informed by, or, if needs be, developed with reference to the right to dignity.153 3. Formalities required by law Christie states the following: In evolving the general principle that any serious and deliberate agreement, made with the intention that a lawful obligation should be established, is enforceable, the Roman-Dutch lawyers of the 17 th century must be credited with a very considerable achievement. It is no longer necessary to investigate whether they were mainly influenced by canon law, ius gentium (the law of mankind) or Germanic custom, because the achievement remains with us except in respect of certain classes of contracts for which the law prescribes certain formalities. The only justification for prescribing formalities can be to ensure reliable evidence of the terms of the contract and so cut out wasteful litigation caused by faulty memory or attempts to maintain fraudulent claims or defences.154
This basically provides an answer to the question why the law sometimes imposes formalities for contracts. However, statutes which prescribe formalities for contracts may have different objectives, which are relevant to the interpretation of the provisions of the relevant statute. For instance, the objective of the Alienation of Land Act is to promote certainty regarding transactions for the alienation of land, thereby limiting disputes and discouraging fraud and perjury in respect of an important class of transaction.155 The following are examples of statutes that impose formalities on contracts: 151 Cecil Nurse (Pty) Ltd v Nkola 2008 (2) SA 441 (SCA) 152 Neels 1999: 700 153 Van der Merwe et al 2007: 162 154 Christie 2006: 109 155 Van der Merwe et al 2007: 164
The Alienation of Land Act 68 of 1981 (already mentioned), which requires alienations of land to be in writing and signed by the parties or by their agents, acting on written authority.
The General Law Amendment Act 50 of 1956 requires contracts of suretyship to be in writing and signed by or on behalf of the surety. In terms of the same act, an executor donation must be in writing and signed by the donor or his agent acting on written authority.
Under the National Credit Act 34 of 2005, credit agreements are required to be in a documentary form, complying with requirements applicable to the various categories of such agreements and delivered to the consumer in the prescribed manner.
To establish whether statutory formalities apply in a particular case, the agreement must be interpreted to ascertain whether it contains the essential features of the type of transaction, which the statute, on a proper interpretation thereof, seeks to regulate. The courts have held that, in order to avoid frustration of the objectives of the legislature, material variations to contracts for which writing is prescribed must also be in writing to be effective. This applies even where the particular statute does not refer to variations as such. The approach of the courts is not without problems of its own: it may well happen that that a contractant who has agreed to an informal variation (such as an informal agreement to extend the time for performance) attempts to escape the consequences of his own agreement simply because he may rely on its formal invalidity. Subject to these limitations, a contractant who denies the validity of an informal variation to which he agreed may be held to have waived his right to rely on the relevant part of the written contract. There is also a tendency in case law to give effect to an informal agreement which grants an extension of time or amounts to a forbearance to sue, or postpones performance on the basis that such an informal agreement is not a variation of the contract, and need therefore not comply with the prescribed formalities.156 4. Non-compliance with formalities157 Non-compliance with formalities results in the nullity of the transaction. Performance rendered in terms of a formally defective agreement, is regarded as having been made without legal ground (sine causa), and recoverable by means of an enrichment action. In terms of the common law, the proper remedy where the performance consists of money or involves the delivery of property, is a condictio. For cases of performance pursuant to a formally defective alienation of land, however, the courts fashioned an enrichment liability sui generis contrary to the common law. Under this doctrine, recovery of performance was permitted irrespective of the technical requirements of the relevant condictiones, but was limited in that the recipient of performance could defeat an action by performing or tendering to perform his side of the bargain. No action was available 156 Van der Merwe et al 2007: 166 157 Van der Merwe et al 2007: 172-173
68 where both parties had performed in full. Thus, although a party who had performed could not sue on the contract for the counter-performance, recovery of his own performance was possible only where the recipient was unwilling or unable to perform his side of the bargain. This rule, which became known as the “rule in Carlis v McCusker”, was severely criticised as being contrary to the general principles of enrichment liability, as having anomalous results and rejected for enrichment claims in respect of formally defective hire-purchase agreements. In 1981, the legislature attempted to consolidate the position by introducing a statutory enrichment action in the Alienation of Land Act. The Act permits recovery not only of what has been performed in terms of a formally defective alienation of land, but also of interest and compensation for detrimental consequences of the enriching event. If the land has been transferred to the alienee, and the latter has performed in full, an action for recovery is precluded and the alienation is regarded as valid ab initio in all respects. 5. The parol evidence rule “THE PAROL EVIDENCE RULE IS A DOG WHICH HAS BEEN GIVEN A BAD NAME” CHRISTIE 2006: 192 Despite the difficulties attendant upon the parol evidence rule, it serves the important purpose of ensuring that where the parties have decided that a contract should be recorded in writing, their decision will be respected, and the resulting document or documents will be accepted as the sole evidence of the terms of the contract. 158 Van der Merwe et al add hereto that since the parties themselves integrated their agreement in a document that is a full and final crystallization of their consensus, parol evidence (which means oral or other extrinsic evidence to the document) regarding the negotiations and the contents of the agreement, is irrelevant and misleading.159 Van der Merwe et al exclaim that when a dispute arises about an agreement reduced to writing, a party will often experience the need to bring the evidence from outside the document (‘extrinsic evidence’) to prove his version of the content and meaning of the contract. In such circumstances the parol evidence rule generally comes into play to restrict the nature and extent of the evidence that may be brought. 160 The rule originated in English law, and was received into our law on the assumption that it formed part of the law of evidence. What exactly is the meaning of the parol evidence rule and what does it entail? Van der Merwe et al are consulted on this matter, as well as case law: Corbett JA in Johnston v Leal 1980 3 SA 927 (A) at 943B:
158 Christie 2006: 192 159 Van der Merwe et al 2007: 174 160 Van der Merwe et al 2007:173
69 It is clear to me that he aim and effect of this rule is to prevent a party to a contract which has been integrated into a single and complete written memorial from seeking to contradict, add to or modify the writing by reference to extrinsic evidence and in that way to redefine the terms of the contract… To sum up, therefore, the integration (parol evidence) rule prevents a party from altering, by the production of extrinsic evidence, the recorded terms of an integrated contract in order to rely upon the contract as altered.
The Appellate Division in Lowrey v Steedman 1914 AD 532 543: The rule is that when a contract has once been reduced to writing no evidence may be given of its terms except the document itself, nor may the contents of such document be contradicted, altered, added to or varied by oral evidence.
Solomon JA in Marquard & Co v Biccard 1921 AD 366 at 373 (one of the best-known English formulations of the rule, according to Christie): The rule of the law of evidence upon which he relies is nowhere more clearly stated than by Lord Denman in the well-known case of Goss v Nugent (5 B & Ad 54): ‘By the general rules of the common law if there be a contract which has been reduced into writing, verbal evidence is not allowed to be given of what passed between the parties either before the written instrument was made or during its preparation, so as to add to or subtract from or in any manner to vary or qualify the written contract’.
Watermeyer JA in Union Government v Vianini Ferro-Concrete Pipes (Pty) Ltd 1941 AD 43 on 47 (in what has come to be regarded as the leading case in this regard): Now this court has accepted the rule that when a contract has been reduced to writing, the writing is, in general, regarded as the exclusive memorial of the transaction and in a suit between the parties no evidence to prove its terms may be given save the document or secondary evidence of its contents, nor may the contents of such document be contradicted, altered, added to or varied by parol evidence.
Botha JA in National Board (Pretoria) (Pty) (Ltd) v Estate Swanepoel 1975 3 SA 16 (A) on 26 (wherein the term “integration rule” was accepted): The rule is well summarized by Wigmore, Evidence, 3rd ed vol 9 sec 2425, as follows: ‘This process of embodying the terms of a jural act in a single memorial may be termed the integration of the act, ie its formation from scattered parts into an integral documentary unity. The practical consequence of this is that its scattered parts, in their former and inchoate shape, do not have any jural effect; they are replaced by a single embodiment of the act. In other words: When a jural act is embodied in a single memorial, all other utterances of the parties on that topic are legally immaterial for the purpose of what are the terms of their act.’
The parol evidence rule has been said to comprise two distinct rules, namely the ‘integration rule’ (see Botha JA’s explanation above) and the ‘interpretation rule’. The integration rule determines the extent to which extrinsic evidence is admissible to prove the terms or content of that part of a contract contained in a document which the parties intended to be finally embodied in that document.161 The interpretation rule determines when and to what extent extrinsic evidence may be brought to interpret the words used in a document intended as a final reflection of the transaction. A document that purports to be an exhaustive record of the transaction is assumed to be an integration. Where it is 161 Van der Merwe et al 2007: 174
70 established that a specific document does not amount to an integration of the agreement, the parol evidence rule does not apply. The parol evidence rule applies principally in litigation between parties to a contract, but it may also be relevant where the terms of the contract are in a dispute between litigants who are not parties to the contract.162 When will parol evidence be admissible? The prohibition of extrinsic evidence of course extends only to evidence tending to contradict the terms of the contract as reflected by the document. Accordingly, parol evidence to counter admissions of fact recorded in a document is not subject to the rule, nor is evidence to prove the nullity or voidability of the contract, or that the transaction amounts to a simulation. Extrinsic evidence which relates to the terms of the agreement but which is not inconsistent with the document will be regarded as admissible. Thus it has been held that parol evidence is admissible in respect of a document which is part of a ‘larger agreement’ and is intended ‘to enable the main agreement to be carried out’, or in respect of an oral agreement which embodies an additional consideration which induced the written contract. Furthermore, there is authority for the view that extrinsic evidence is admissible to establish the existence of a ‘prior contemporaneous oral agreement that the written contract is not to take effect except in a certain contingency’, but the application of this exception regarding the proof by extrinsic evidence of a suspensive condition is uncertain. Parol evidence to prove that a party ostensibly contracting as a principal was in fact only an agent in order to introduce the principal as the real party is not regarded as contradicting the document, and is accordingly admissible. Van der Merwe et al feel that there is a question mark over the continued recognition of the parol evidence rule in South African law.163 The rule limits the evidence admissible to determine the intention of the parties to written contracts- an anomaly in a system of law that, in principle, bases contractual on the intention of the parties.164 It is furthermore a matter of policy whether a legal system should accept the rationale advanced for the rule, namely that certainty of transactions should be enhanced, that the number of disputes should be decreased, and that the risk of perjury should be restricted.165 6. Rectification166 Contractants who reduce their agreement to writing run the risk that, by accident or by design of one of them, the document may not give accurate expression to their common intention. Because of the subjective approach followed by South African law, and also the basis of contractual liability, it follows that parties cannot be held bound to a document 162 Van der Merwe et al 2007: 174 163 Van der Merwe et al 2007: 178 164 Van der Merwe et al 2007: 178 165 Van der Merwe et al 2007: 178 166 Van der Merwe et al 2007: 178-185
71 which does not reflect their true agreement. A party to an incorrectly recorded agreement must therefore be entitled to rely on the real consensus and even to have the document corrected to express their true common intention. Such a correction of a contractual document by a judicial decree is called rectification (of course judicial intervention will be obsolete if the parties agree to the correction among themselves). The contract itself as a juristic act is not rectified. What is rectified, is the document, inasmuch as it does not express what the contractants intended to be the content of the juristic act. In the case of Spiller v Lawrence 1976 (1) SA 307 (N) on 310, the court said that “all that the court ever touches is the document”. Although rectification has been regarded as a necessary companion to the parol evidence rule, it is not based on that rule, neither on special grounds such as the exception doli generalis, good faith or fairness, all of which has been advanced to explain rectification. Rectification is a logical consequence of the principle that a contract binds because of actual consensus or a reasonable reliance on consensus. When may a party claim rectification? Rectification may be claimed without seeking ancillary relief, and a court may be requested merely to correct a document, which records the common intention of the parties incorrectly. Since the document, and not the juristic act expressed by the document, is corrected, rectification does not amount to a variation of the contract. According to the courts, a party claiming rectification must establish that as a result of error or mistake the document does not reflect the common intention of the parties, and how the document is to be reformed to reflect that intention. Proof of a prior or antecedent agreement (‘common intention’) on the terms of the contract is a sufficient basis for rectification. Such an antecedent agreement need not in itself necessarily constitute a contract. Rectification is thus possible where writing is a constitutive requirement for the contract, and even where the agreement was first formulated when it was reduced to writing. Rectification may also be granted where there was no prior common intention, for instance where a fraudulent contractant, who represents that he has reached a common intention with his co-contractant, drafts the document so as to prevent its reflecting that common intention. This will also be the case where a party, aware of the other party’s ignorance of a mistake in the recording of their agreement, remains silent. Rectification here serves to bring to the fore in the document the reasonable belief of the victim as to the terms of the contract. In the case of Akasia Road Surfacing (Pty) Ltd en ‘n ander v Shoredits Holdings Ltd en Andere 2002 (3) SA 346 (SCA), the parties had entered into a written contract, as well as a supplementary contract in terms whereof the respondents had sold certain businesses and assets, as well as clientele of those businesses. The purchase price was constituted as follows: -
R6 237 000 in respect of the businesses and assets; R400 000 in respect of immovable property;
R2 582 000 in respect of clientele.
One of the assets in the annexure to the contract was described as a “new asphalt plant” with a market value of R2 990 850. The appellants claimed that at the conclusion of the contracts, this “asphalt plant” had not been finished. The appellants wanted to rectify their contract by including the following clause167: The purchaser shall pay the full sum of R2 990 850,58 in respect of the new asphalt plant to the sellers as hereinbefore provided, regardless of the fact whether the aforesaid asphalt plant is completed and erected at the time of signature hereof or not. The sellers shall be obliged to complete and erect the new asphalt plant according to plan and to the purchaser’s full satisfaction on or before 31 October 1996. The completion and erection of the new asphalt plant shall be effected at the seller’s cost. Should the seller fail to complete and erect the new asphalt plant, or should the sellers fail to commence with the completion and erection of the aforesaid new asphalt plant immediately after the builders’ holidays of December 1995/January 1996, the purchaser shall be entitled to complete and erect the asphalt plant at the purchaser’s cost, whereupon the purchaser shall be entitled to deduct the full amount of the moneys expended upon the construction and erection of the aforesaid plant from the outstanding balance from time to time owing and due to the sellers in terms of this agreement.
The court decided the following168: Rectification of a contract has as its purpose the bringing of the written document into harmony with the true intention of the contracting parties, which intention they failed, by reason of a common mistake, to put into writing. If that true intention is vague, it might affect the validity of the rectified contract but not a defendant’s claim for the rectification of the contract. The law is not, after all, that effect should be given to a written document which incorrectly reflects the agreement between the parties on the ground that the incorrect written version does indeed constitute a valid contract while that upon which the parties actually agreed does not constitute a valid contract.
167 See Akasia Road-case, 349. 168 See Akasia Road-Case, 347
Unit 8 Possibility of Performance Learning outcomes: After completion of this unit, the student should be able to: 1. Provide a brief background as to the position of possibility of performance as a requirement of a valid contract in South African law. 2. Fully distinguish between the terms Subjective (relative) impossibility and objective (absolute) impossibility, with specific reference to the case of Blou Bul Boorkontrakteurs v McLachlan and South African Forestry Co Ltd v York Timbers Ltd. 3. Shortly discuss the effect of impossibility of performance on a contract. Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 6. 2. From List of cases: South African Forestry Co Ltd v York Timbers Ltd 2005 (3) SA 323 (SCA) Blou Bul Boorkontrakteurs v McLachlan 1991 (4) SA 283 (T) Alternative study: 3. Bhana et al. Students’ Guide to the Law of Contract. Second Edition. Chapter 4 para.4
1. Introduction The performance agreed upon must be objectively possible when the agreement is concluded, in order to constitute a valid contract. In the case of impossibilium nulla obligatio est (initial objective impossibility) no obligations will be created by the agreement. The mere fact that circumstances attending the conclusion of a contract preclude the realization of the objective of a contractant in respect of the contract does not render the transaction void for impossibility. What is required is that a performance envisaged by the agreement should be impossible.169 Initial possibility of performance was already a requirement in respect of contracts in Roman and Roman-Dutch law. Opinions might have differed on the precise scope and effect of initial impossibility of performance with regard to the legal efficacy of an agreement intended to be a contract, but a general principle was eventually developed from the premise that individual volition was rational only to the extent that it was directed at doing what was possible.170 An undertaking to do the impossible could not, on this view, be regarded as a rational choice and would therefore preclude the conclusion of a contract. This reasoning largely underlies the requirement of initial possibility of performance in modern law in so far as a contract is based on actual consensus. Where a contract is based on an objective foundation, one might say that it would simply not be reasonable to hold someone to an impossible performance.171 There is no need to ascribe the doctrine to the operation of a tacit or implied term: the effect accorded to impossibility results from objective policy considerations underlying the theoretical basis of contractual liability.172 The point of departure seems to be that because neither party would have contracted if the actual state of affairs had been known, the risk of initial impossibility cannot, in the absence of an undertaking or legal rule to the contrary, be allocated to either of them. The reasoning is akin to that which underlies the doctrine of supervening impossibility of performance.173 2. The meaning of “impossibility” 2.1.
Subjective (Relative) impossibility
Subjective impossibility means that, although someone else may be possible to render the performance in question, the debtor is unable to do so. It thus relates to the inability of a particular debtor to perform. 169 Van der Merwe et al 2007: 186 170 Van der Merwe et al 2007: 186 171 Van der Merwe et al 2007: 187 172 Van der Merwe et al 2007: 187 173 Van der Merwe et al 2007: 187 fn 9
Example: ABC Brickmakers receives an order to manufacture 1 million bricks. Because of physical and inherent restraints, ABC Brickmakers is unable to manufacture that amount of bricks. This does not mean, however, that no brickmaker will be able to manufacture that amount of bricks, just that this specific one (ABC) is unable to do so. 2.2.
Objective (absolute) impossibility
Objective impossibility involves a general inability to perform: In the eyes of the law, noone is able to render the performance.174Examples of objectively impossible performances are:
Delivery of a non-existent thing, whether it had existed but ceased to exist, or never existed at all;
A res extra commercium, such as an attempt to sell a natural person;
A thing belonging to the purchaser is abortive on his account, such as a mandate to sell shares on the stock exchange which is objectively impossible because the shares are not listed.
The test for objective impossibility is a pragmatic standard. While an absolute physical impossibility will satisfy the test (for instance where the contemplated performance is physically or notionally wholly incapable of performance), a performance might conceivably be rendered will nevertheless be impossible if insistence of its performance would be unreasonable in the circumstances. Where performance is prohibited by law, the inability to perform may be treated as an instance of objective impossibility or illegality. Where it is clear that invalidity of the agreement is the prescribed sanction- as often appears from legislation- it would probably be best to apply the rules of illegality here. 175 Where invalidity is not so obviously required, the notion of objective impossibility may well be adequate for dealing with the matter. If such matter were to be approach as an instance of illegality, it would be necessary to consider the possible moral turpitude and other public and private interests involved.176 If performance is merely difficult, it would not amount to objective impossibility, but to subjective impossibility (this is a factual question- see the case of Blou Bul Boorkontrakteurs below). However, performance may be so difficult and lead to such economic or other hardship that it will be regarded as objectively impossible in terms of the applicable standard. The inability of the particular debtor and the general inability to perform may coincide, with resultant objective impossibility, for example where someone 174 Van der Merwe et al 2007: 188 175 Van der Merwe et al 2007: 188. 176 Van der Merwe et al 2007: 188 fn 21
76 is engaged to perform in a personal capacity at a specified time but is already incapable of doing so. For instance, if an artist’s manager undertakes that he (the artist) will give a performance in an hour’s time, yet at that very moment the artist is 10 000 km away. Also, where a tenant is unable to take occupation of the rental property because of the manifestation of a previously unsuspected allergy to materials used in its construction. No person in the position of the landlord is seemingly in a position to render the premises fit for occupation by the particular tenant. An initial impossibility attributable to the conduct of a party to an agreement will not exclude contractual liability.177 3. The effect of impossibility Subjective impossibility of performance does not prevent the creation of an obligation. 178 If the debtor eventually does not perform, he may be liable for breach of contract. Objective impossibility of performance at the time of conclusion of the agreement, will lead to the situation where no obligation is created in respect of that performance. Furthermore, no obligation is created in such a case with reference to any agreed counterperformance. Performance may be warranted (guaranteed) to be possible. The party who gives the warranty will be bound by the contract and will be liable for breach of warranty if he fails to perform correctly, and even if the performance turns out to be objectively impossible.179 Blou Bul Boorkontrakteurs The plaintiff and defendant had entered into a written settlement agreement in the Magistrates’ Court wherein it was agreed that the plaintiff would clean a drilling hole to a depth of 132 metres, at R18 per meter drilled. He would also install the necessary material up to that depth, also at R18 per meter. After drilling had started, steel poles and waste were found in the drilling hole, which made further drilling objectively impossible. The following exclamation by Eloff, JP is relevant to this unit (freely translated from the Afrikaans text): Where impossibility is raised, it is no longer about the question of the presence of consensus. What is then applicable is that one of the ways in which an obligation had arisen, can be eliminated.
177 Van der Merwe et al 2007: 189 178 Van der Merwe et al 2007: 189 179 Van der Merwe et al 2007: 190
77 It ought to be mentioned that the appellant’s claim to impossibility can only succeed if the impossibility is (objectively speaking) absolute. Also, the claim can only succeed if the plaintiff had not guaranteed performance in any way.180
The more recent case of South African Forestry Co Ltd v York Timbers Ltd 2005 (3) SA 323 (SCA), presents a somewhat more complex set of facts. Two contracting parties had entered into a contract more than thirty years before the case in question. In each case, the South African Government had been the “seller” of softwood logs obtained from two government plantations in the Mpumalanga Province. The parties had agreed that should any disagreement arise between the parties regarding the terms of the contract, the Minister of Forestry would be approached to settle the disagreement. Failure by the Minister to do so would result in arbitration-proceedings. In 1982, the respondent (York) took over all the rights and obligations of the other party in terms of both contracts. With effect from 1 April 1993, the government transferred all its rights and obligations under the said contracts to the appellant (South African Forestry Company Ltd), pursuant to the provisions of Section 4 of the Management of State Forests Act 128 of 1992. It eventually happened that the appellant approached the Minister to take a decision regarding a certain disagreement that had occurred between the parties. The Minister did not decline to become involved (as he had done some time earlier), but refused to express the opinion sought by the appellant. The appellant’s case was based on the fact that the contracts had lapsed through intervening impossibility, because of the Minister’s refusal to perform his assigned functions in terms of the contracts. The appellant subsequently cancelled the two agreements. Brand, JA held that …an order is issued declaring that the plaintiff validly cancelled the two contracts between the parties, referred to as the Swartfontein agreement and the Witklip agreement, on 10 November 1998.
180 On p. 286
78 Unit 9 Legality Learning outcomes: After completion of this unit, the student should be able to: 1. Explain what is meant by the concept “illegality”. 2. Briefly explain how concepts such as “public interest” and “good morals” determine the legality or illegality of agreements. 3. Describe in detail how illegality is determined, with specific reference to the case of Sasfin v Beukes. 4. Analyze the par delictum rule as an element of the consequences of illegality. 5. Explain what is meant by agreements “in restraint of trade”. 6. Discuss the case of Magna Alloys v Ellis, with specific reference to the way in which South African courts have dealt with restraint of trade clauses in the past, and how this case has changed the position. 7. Interpret the term “public interest” in the context of the legality/illegality of restraint of trade-clauses in contracts. 8. Analyze the problem/s identified in the case of Coetzee v Comitis with regard to restraint of trade-clauses in sport contracts. Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 7. 2. From List of cases: Sasfin (Pty) Ltd v Beukes 1989 (1) SA 1 (A) Mort NO v Henry Shields-Chiat 2001 (1) SA 464 (C) Klokow v Sullivan 2006 (1) SA 259 (SCA) Magna Alloys v Ellis 1984 (4) SA 874 (SCA) Coetzee v Comitis and Others 2001 (1) SA 1254 (C) Alternative study: 3. Christie. The Law of Contract in South Africa. 2006. Chapter 10
79 1. Introduction 1.1.
The concept “legality”
An agreement must be legal to constitute a contract, with the consequence that an illegal agreement will not create obligations. The reason why legality is a requirement for a valid contract rests on the interests or convictions of a society pertaining to the recognition of transactions between individuals, namely that it is generally desirable which are entered into seriously and properly should be enforced.181 However, agreements which are not necessarily in conflict with the interests and convictions of society ought not to be enforced. Contracts that are “unconstitutional” are said to be unenforceable, especially where “strong public policy considerations” are involved. 182 Agreements are illegal if they conflict with statutory law or common law. Illegality occurs where the conclusion of an agreement or the agreed performance or the purpose for which the agreement is concluded is contrary to the law.183 A statutory or common-law rule may clearly express that certain agreements will be illegal. This is however, not always the case.184 1.2.
Public interest and good morals
Agreements will be illegal if they are contra bonos mores (contrary to the good morals) or against public interest or policy. Remember that the law does not enforce morals simply because they are morals, but it does to a certain extent absorb moral content into legal doctrine and even specific rules.185 The reason for this absorption of morals is of course for the sake of expediency and justice, to the extent that the latter-mentioned concepts form part of the purpose and function of the law.186 The distinction between boni mores on the one side and public interest and policy on the other hand is not clear. In practice, the term boni mores with regard to illegality applies to agreements relating to the everyday morals or conduct set by a specific society. Examples would be the norms governing sexual morals and honest and proper conduct.187 The following agreements are said to be contrary to public interest and policy:
Agreements which are to the detriment of the state; Agreements which obstruct or defeat the administration of justice; Agreements which restrict someone’s freedom to act or to be economically active.
Agreements which are in accordance with public policy and in the public interest would include those which are in accordance with good morals. 2. Determining illegality 181 Van der Merwe et al 2007: 191 182 Van der Merwe et al 2007: 192 183 Van der Merwe et al 2007: 192 184 Van der Merwe et al 2007: 192 185 Van der Merwe et al 2007: 192 186 Van der Merwe et al 2007: 193 187 Van der Merwe et al 2007: 193
Sometimes, agreements are contrary to public policy to such an extent that the mere conclusion thereof would be illegal.188 The illegality of these agreements is either found in statute or in provisions of the common law. Examples of prohibitions contained in statutes:
Prohibitions relating to the sale and distribution of:
Alcohol: The Liquor Act 59 of 2003; Drugs: The Drugs and Drug Trafficking Act 140 of 1992; Dangerous weapons: The Dangerous Weapons Act 71 of 1968; Precious stones: The Diamonds Act 56 of 1986; Commodities on Sundays or outside approved business hours: Various statutes regulating shopping hours.189
Examples of common law prohibitions:
Attempts to oust the jurisdiction of the courts; Attempts to deprive a contractant of the opportunity to properly defend himself or apply for an administration order; Agreements with enemy subjects; Certain pacta de quota litis (agreement for in the proceeds of litigation); Certain pacta commissoria; Certain pacta successoria; Certain marriage brokering agreements for reward; Agreement in terms of which a contractant purports to waive, in advance, the protection afforded by the Prescription Act against the public interest.190
It is possible for an agreement which was legally concluded to be illegal because of the performance which is its subject matter. For instance, an agreement to commit a crime or a delict would be illegal. A sale of a pistol by a licensed dealer to a licensed buyer would be legal, but not if the buyer binds himself to use the pistol to kill someone. 191 Even if neither the conclusion of a contract nor the performance being undertaken is illegal, the agreement may still be illegal because of the purpose for which it was concluded. If, for instance, the buyer does not bind himself as against the seller to commit a murder, but if the seller knows that the buyer intends to kill someone, the agreement will still be illegal for its purpose: Both parties must have the same legal purpose. If one of the contractants 188 Van der Merwe et al 2007: 196 189 Van der Merwe et al 2007: 196 190 Van der Merwe et al 2007: 197 191 Van der Merwe et al 2007: 197
81 is not aware of the other’s motive, the agreement cannot be said to have an illegal purpose.192 Where it is clear that a term is illegal, the matter is simple. Where the situation is not so simple, however, one should consider the tendency of the agreement to be contrary to public policy, public interests or the boni mores. This mentioned tendency would have to be proven with a considerable degree of probability in order to result in illegality of the agreement.193 In the case of Sasfin (Pty) Ltd v Beukes 1989 (1) SA 1 (A), the appellant was a company which conducted business as a financier, and the respondent was an anaesthetist. The parties had entered into a discounting agreement in terms of which the respondent was obliged to offer for sale to the appellant any book debts he wished to sell. The purchase of such book debts was to be governed by the said discounting agreement. On the same date the abovementioned discount agreement had been entered into, the respondent had also executed a deed of cession in favour of the appellant and two other companies, in terms whereof the respondent had ceded to the creditors (the abovementioned three companies) the following: …all claims, rights of action and receivables which are now and which may at any time hereafter become due to me/us by all persons (hereinafter referred to as my/our debtors) without exception, from any cause of indebtedness whatsoever (“the claims”) as continuing covering security for the due and proper performance of all obligations which I/we may have in the past owed or incurred or may at the present or in the future owe or incur to all or any of the creditors from whatsoever cause and whenever arising…
In effect, the respondent had ceded all debts owed to him to the appellant. The question before the court was whether this cession was a valid one. Smalberger, JA decided, with Van Heerden, JA and Rabie, ACJ concurring in a minority judgment, that our common law did not recognise agreements that are contrary to public policy. He explained that when deciding what is meant by public policy and when it can be said that an agreement is contrary to public policy, the interests of the community are of paramount importance. Agreements which are clearly inimical to the interests the community, whether they are contrary to law or morality, or run counter to social or economic expedience, will, on the grounds of public policy, not be enforced. The learned judge continued to state that “no court should shrink from the duty of declaring a contract contrary to public policy when the occasion so demands. The power to declare contracts contrary to public policy should, however, be exercised sparingly and only in the clearest of cases, lest uncertainty as to the validity of contracts result from an arbitrary and indiscriminate use of the power.”194
192 Van der Merwe et al 2007: 198 193 Van der Merwe et al 2007: 198 194 See pp. 2 and 3
82 In the case of Mort NO v Henry Shields-Chiat 2001 (1) SA 464 (C), Davis, J made the following obiter observations about the principle of bona fides in South African law of contract195: For the past thirty years…it has been repeatedly claimed that in modern South African law of contract contracts are bonae fidei. ...but it is clear that if the doctrine is to be taken seriously then the primary importance accorded to the private autonomy of contracting parties must be reconsidered as must the hegemony of the will theory of contract which survives even in the context of dicta which nod in the direction of social responsibility. …Like the concept of boni mores in our law of delict, the concept of good faith is shaped by the legal convictions of the community. While Roman-Dutch law may well supply the conceptual apparatus for our law, the content with which concepts are filled depends on an examination of the legal conviction of the community- a far more difficult task. This task requires that careful account be taken of the existence of our constitutional community, based as it is upon principles of freedom, equality and dignity. …In short, the constitutional State which was introduced in 1994 mandates that all law should be congruent with the fundamental values of the Constitution. Oppressive, unreasonable or unconscionable contracts can fall foul of the values of the constitution.
3. Consequences of illegality: The in pari delictum-rule Delictum, according to Van der Merwe et al, refers to illegality.196 The question that is most often raised is whether the expression in pari delicto necessarily implies that a party who is barred from reclaiming must have been in delicto at least to the same degree as the other party. On the one hand, it is argued that degrees of disgraceful conduct cannot be distinguished. This argument rests on the fact that it is practically impossible to measure degrees of disgraceful conduct. This approach would entail that where the claimant is in any way in delicto the rule will apply without exception or relaxation. 197 As a consequence of the distinction between mere illegality and immorality it has been suggested that the par delictum rule should apply only if the party who wishes to reclaim performance has acted immorally.198 In the case of Klokow v Sullivan 2006 (1) SA 259 (SCA), Cachalia AJA noted that the par delictum rule, “which curtails the right of the delinquent party to avoid the consequences of his performance or part performance of an immoral or illegal act, is concerned with the moral guilt of contracting parties, not their criminal liability. Where a contract is in contravention of a statute, the question whether or not the plaintiff is also prima facie liable for prosecution under the (Liquor) Act, albeit as an accomplice, has no direct bearing on the question of his moral turpitude.”199 195 At 474 A/B- 475I 196 Van der Merwe et al 2007: 206 197 Van der Merwe et al 2007: 206 198 Van der Merwe et al 2007: 206 199 pp.259-260
83 The parties in the abovementioned case had entered into a written agreement in terms of which the plaintiff (in the court a quo) was to acquire from the defendant a business that provided “adult entertainment”, which included the selling of liquor to its clients. The plaintiff had paid to the defendant half of the purchase price, and subsequently took possession of the business. However, only a month after having taken over the business, the plaintiff returned the business to the defendant, and claimed repayment of the portion of the purchase price. The basis of this case is that the plaintiff alleged that the defendant (the holder of a liquor licence) had concluded the agreement permitting the plaintiff to procure a controlling interest in the business without obtaining the necessary permission of the chairperson of the Liquor Board. This constituted an omission in terms of section 38 of the Liquor Act, which reads as follows: The holder of a licence shall not permit any other person to procure a controlling interest in the business to which the licence relates, unless the chairperson has, on application by the holder, granted consent that such a person may procure such an interest in that business.
The defendant submitted on his part that the Act had placed an obligation on the plaintiff to (with the defendant) make written application for the licence in question to the chairperson of the Liquor Board. This was not done by the plaintiff. The defendant accordingly pleaded that the plaintiff was precluded from recovering the amount claimed, as “both he and the plaintiff were in pari delicto. The court decided that before the decision in Jajbay v Cassim in 1939, a party seeking to extricate himself from the consequences of an illegal or immoral contract had to demonstrate that he had come to court with clean hands. This “clean hands” doctrine from English law is similar to the par delictum maxim from Roman law. A plaintiff who was found to be in pari delicto was unable to recover any money paid or property handed over to a defendant pursuant to it, and if such plaintiff based his case on such a contract in formulating his pleading, he would fail on this basis alone. In the Jajbay v Cassim-case, the court recognized that the strict enforcement of the par delictum-rule as explained above, may sometimes cause inequitable results between parties to an illegal contract. To prevent inequities, therefore, the court said that the rule had to be relaxed where it is necessary to prevent injustice or to promote public policy. The Appellate Division found that there was no need for the plaintiff to plead relaxation of the par delictum-rule on grounds of public policy, or that the defendant had been unjustly enriched. Although the case of Jajbay v Cassim 1939 AD 537 is not prescribed for study in this module, students would benefit from reading the case. The complete maxim reads as follows: in pari delicto potior est conditio defendentis.
84 4. Agreements in restraint of trade200 Van der Merwe et al define an agreement in restraint of trade as “an agreement by which someone is restricted in his freedom to carry on his trade, profession, business or other economic activity.”201 A restraint of trade is usually imposed in order to protect the economic interests of the party in whose favour it is imposed. Employers often restrain employees in their service contracts to the extent that an employee who leaves the employ undertakes not to compete with his former employer, either independently or in the employ of another. Many partnership agreements contain a clause which restrains partners who leave the partnership from competing with it. The fact that an agreement places some restraint on one of the parties does not in itself make the agreement objectionable. If, however, the restraint is so restrictive of one of the parties as to conflict with the public interest it will be illegal and unenforceable. In the case of Magna Alloys v Ellis 1984 (4) SA 874 the respondent had instituted action against the appellant in the court a quo wherein he claimed that he had entered into an oral agreement with the latter for the sale of some of the appellant’s apparatus (mainly welding apparatus), and that he, at the time of instituting the action, had not yet received his full commission for the sale of such apparatus. In terms of a certain clause in the agreement, the respondent had undertaken that for a period of two years following the termination of the agreement for any cause, and within a radius of 10 kilometres of the perimeters of a certain geographical area, he (the respondent) would not: i.
directly or indirectly either as a partner, employee, agent, salesman, or representative enter into or engage in any business in competition with the defendant;
sell any other thing, in substance, or material, the function, use or purpose which is similar to or the same as the function, use or purpose of the products of the appellant.
seek or solicit customers or business for the sale of such said thing, substance or material within the area mentioned above;
promote or assist financially or otherwise any person, firm, association or corporation engaged in a business which competes with the appellant.
The respondent subsequently joined a rival firm of the appellant. The respondent claimed the following: The clause is a covenant in restraint of trade in that it purports to restrict the common law right of the plaintiff to trade or work and the defendant seeks, pursuant to this clause, an order which has the effect of interdicting the plaintiff from continuing with his present work. The agreement being, by virtue of the above facts, a covenant in restraint of trade, is prima facie void and unenforceable. The onus is upon the
200 Van der Merwe et al 2007: 212-218 201 Van der Merwe et al 2007: 212
85 defendant to satisfy the Court that the restraint is reasonable. The plaintiff contends that the entire clause is unreasonable and unenforceable.
The appellant responded that the clause in question was indeed reasonable and therefore enforceable, for the following reason, as stated in a clause in the contract: The agent (respondent/Ellis) acknowledges that the training materials, advice and assistance of the company’s supervisors, customer lists, route sheets and other confidential information, all given to him by the company (appellant/Magna Alloys) or acquired or formulated by him during the effectiveness of this agreement as a result of his having access to the aforementioned aids and information and dealing in the company’s products are of such a nature as to make it reasonable and necessary for the protection of the company that the agent will not compete with the company within or in the vicinity of the geographical area in question for custom amongst the customers or potential customers of the company for the period hereinafter mentioned.
The court stated that on numerous occasions in the past South African courts had followed English law in proclaiming that every restraint of trade-clause was prima facie invalid, because it was against public policy. A party who alleged otherwise, had to prove same. Rabie CJ had the following to say on this point (freely translated from the Afrikaans text): One can thus with certainty accept that there is no proclamation in our common law which declares a restraint of trade-clause invalid just because of the nature thereof. Consequently, there is no authority in our common law to follow the notion that has for so long been used by our courts, that is, that a restraint of trade is prima facie invalid. It is an approach which follows English law.
Of course, the court’s decision above does not imply that all restraint of trade clauses are necessarily valid. What it does imply, is that each set of facts should be considered and judged on its own merit. If a court should find that a restraint of trade clause indeed impeaches on public interest, the clause should be found to be invalid. But it is not prima facie invalid. Restraints of trade should be treated like all other contractual terms and, in principle, are enforceable.202 Herein lies the importance of the Magna Alloys v Ellis-case. The term “public interest” and the constitutional values embedded therein In order to determine whether a particular restraint of trade-clause is in fact contrary to the public interest, one would first have to determine what “public interest” entails. Van der Merwe et al mention that two constitutional freedoms or values come into conflict when the legality of a restraint of trade clause is in issue: freedom of contract v freedom of trade.203 The one cannot be given preference to the exclusion of the other. The fact that a contractual restraint of trade may be enforceable in principle is in keeping with the general approach to the creation and enforceability of contractual terms in Roman and Roman-Dutch law as understood by the South African Courts. It has already been mentioned above in the discussion of the Magna Alloys-case that the provincial courts in South Africa followed the approach of English courts regarding the question whether and when a restraint of trade-clause would be illegal. The position in English law was (and is still today) that restraints of trade are prima facie illegal and void (See Magna Alloys202 Van der Merwe et al 2007: 215 203 Van der Merwe et al 2007: 213
86 case). If, however, in the circumstances, the restraint is reasonable between the parties (inter partes) and not against public interest, it is valid and enforceable.204 Freedom of contract is thus the preferred value.205 Freedom of contract as a primary value can also probably be inferred from certain provisions of the constitution of the Republic of South Africa, e.g. the very fact that certain basic rights can only be effectively exercised if the particular person can freely conclude contracts, and also the provisions regarding the limitation of basic rights. When determining the public interest in respect of a restraint of trade, the courts often inquire into the “reasonableness” of a restraint. This “reasonableness” is not to be equated with reasonableness inter partes. Courts are intent, however, to focus on individual interests in general and on the particular protectable interests of the contractants. Whether the restraint is reasonable or not inter partes is not by itself a measure for legality, but unreasonableness may be an important indication that the restraint is against public interest. The most important factors to be considered when the public interest is determined are the following:
The nature of the restrictive activity; The geographical area in which the restriction is intended to operate; The period of the restriction; The particular interests which stand to be protected by the restriction, such as business or trade connections, clientele and trade secrets.
A restriction intended to exclude competition as such, without also protecting some legitimate interest, will normally be against public interest. This consideration will apply to all kinds of restraint, including those between employer and employee, since employees are no longer automatically regarded as being in an unfavourably unequal bargaining position.206 Whether a restraint conflicts with the public interest is, as a rule, determined with reference tot the circumstances prevailing at a time when a court is required to decide the issue and not when the agreement was concluded. Occasionally, though, it would be necessary to take a look at the circumstances that prevailed between the parties at the time of signing of the contract in question. Remember that public interest does have an ever-changing content and may indeed have changed since the conclusion of the agreement, or may change in future. 204 Van der Merwe et al 2007: 214 205 Van der Merwe et al 2007: 214 206 Van der Merwe et al 2007: 216
87 A court is not constrained to make a simple choice between enforcing the entire restraint or not, but may decide that a restraint is partially enforceable and partially unenforceable.207 The onus of proving the legality of a restraint of trade-clause rests on the party who relies on the existence of such a restraint of trade-clause. 208 If a restraint which runs contrary to public interest remains valid, there would be good reason to burden the contractant who resists the restraint with the onus of proving conflict with the public interest. Clarity is evasive on the whole issue of public policy and constitutional rights. The reason for this is that the text of the constitution is not definitive on the precise relation between and the weight attached to freedom of trade, freedom of contract and, overall, freedom of personal choice. The problem with restraint of trade-clauses in sports contracts: Coetzee v Comitis and Others 2001 (1) SA 1254 (C) In the abovementioned case, the applicant was a professional football player who had been contracted by Ajax Cape Town. Only months before his contract had expired, he was injured, with the result that he had to play for the Vasco da Gama club, in order to gradually retain match fitness. He remained under contract by Ajax, though. When the applicant had regained full fitness, he approached the first respondent (Comitis) who informed him that Ajax were no longer interested in his services. The applicant was subsequently approached by Hellenic, but Comitis demanded a transfer fee to be paid to Ajax before issuing the applicant with a “clearance certificate”. The court decided that SAFA’s regulations in terms of transfer fees to be paid for players were unconstitutional, as it resulted in a restraint of trade-clause that is contrary to public interest- and policy. Now, consider the following (fictitious) scenario:
Coetzee’s contract with Ajax has expired. Ajax are still very much interested in Coetzee’s services as player, and keen to keep him at the club. Coetzee receives an excellent offer from Hellenic to come and play for them, an offer which Ajax cannot match. In the original contract between Coetzee and Ajax, a clause existed that read as follows:
The player agrees that, when the current contract has expired, he will not be allowed to play for another club which is in direct opposition to his current, for a period of 1 (one) playing season after expiration of the current contract, provided the club is indeed still interested in the player’s services and wishes to enter into a new contract for a period of 1 (one) season.
207 Van der Merwe et al 2007: 217 208 Van der Merwe et al 2007: 217
Over the previous two years, Ajax have invested hundreds of thousands of rands in the development and care of Coetzee. Before they contracted him, he was an unknown player with little monetary value. Because of the quality of the coaching at Ajax and other factors, Coetzee has become the marketable player he is today.
Although Ajax cannot match Hellenic’s offer, they understand that Coetzee has developed into a much better player than when they initially contracted him, and are totally willing to offer him a contract that would cater for all his needs, while not as big as the Hellenic contract in monetary terms.
Coetzee claims that the abovementioned restraint of trade-clause infringes on his right of free trade as envisaged by section 22 of the Constitution.
Ajax claim that if they were to lose Coetzee’s services as a player now, after having invested hundreds of thousands of rands in his development as a player, it would seriously infringe their right to fair labour practices, as envisaged by section 23 (1) of the Constitution.
What has to occur now is a balancing act: Which right should carry the most weight- the player’s right to free trade or the club’s right to fair labour practices? Would it really be against public policy to compel a player to stay on for a limited period at a club to which that player basically owes his whole career? In assessment of any kind, the student will be expected to answer the abovementioned two questions depending on his/her own, well-informed opinion.
Unit 10 Certainty Learning outcomes: After completion of this unit, the student should be able to: 1. Explain what the requirement of certainty entails in terms of the validity of a contract. 2. Discuss the consequences of uncertainty. Study: 4. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 8. Alternative study: 5. Bhana et al. Students’ Guide to the Law of Contract 2009. Chapter 4 para. 3
1. Introduction The agreement in question must bring about certainty regarding its legal consequences. The contractants have a duty to clearly describe the nature and practical aspects of the performance and obligations. Failure to do so would probably result in the nullity of the agreement. Courts have in the past been unwilling and incapable of relieving the parties of the burden of determining the consequences of their transaction for themselves. Irrespective of whether the agreement is oral or in writing, or concluded tacitly by conduct, the question is whether it defines the agreement in such a way as to render the obligations capable of being enforced by the courts.209The test in this regard is an objective 210one and an agreement may be void for vagueness despite the parties’ belief that a contract has been concluded. Extrinsic evidence is not admissible to show that a contract is void for vagueness if on the face of it, its terms, on a linguistic treatment, do not justify such a conclusion. It has been said that the issue of vagueness is to be determined with reference to the state of affairs obtaining at the conclusion of the contract.211 An agreement may attempt to achieve certainty by means of a full and exhaustive description of the performances and other aspects of the relationship contemplated by the parties.212 Where it is impractical, or for business reasons undesirable, to spell out the consequences of a contract in full at its conclusion, certain aspects of the contract may be left open for determination at a later stage in terms of a mechanism agreed to by the contractants. Provided that such an arrangement renders the consequences of the contract objectively ascertainable, this course of action is unobjectionable.213 Although this requirement of a valid contract is in content not as voluminous as the other requirements, it is arguably the most important, because good writing skills and use of grammar are needed to comply with this requirement. The performance and counterperformance must be described so completely as to discharge any possibility of vagueness in terms of the performance. In the next unit, attention will be given to drafting of certain clauses in a contract. The requirement of certainty will come under sharp focus in that unit. 2. Consequences of uncertainty214 An agreement that is uncertain in an essential respect creates no obligations and the same holds true where the agreement is uncertain in a material respect, unless the affected part 209 Van der Merwe et al 2007: 222 210 Van der Merwe et al 2007: 222 211 Van der Merwe et al 2007: 223 212 Van der Merwe et al 2007: 223 213 Van der Merwe et al 2007: 223 214 Van der Merwe et al 2007: 243
91 is severable from the agreement as a whole. The possibility that uncertainty in a contractual term, intended for the exclusive benefit of one of the parties, may be circumvented by a waiver of that term by the relevant party, has been rejected. Performance in terms of a contract that is void for vagueness may be recovered by means of an enrichment action, provided that the requirements of a recognized enrichment action are satisfied. End of Part I
LAW OF CONTRACT PART II CONTENTS AND OPERATION OF A CONTRACT Unit 11 Clauses in a Contract Learning outcomes: After completion of this unit, the student should be able to: 1. 2. 3. 4. 5. 6.
Prepare the “parties”-clause in a contract by using certain provided information. Analyze a “parties”-clause in completion. Distinguish between suspensive and resolutive conditions. Discuss the legal position surrounding time clauses in contracts. Prepare a “breach of contract”-clause. Prepare an “entire agreement”-clause.
Study: Van der Merwe et al 2007. Chapter 9
1. Introduction In this part of the module, attention will be given to the drafting of some of the actual clauses that appear in most contracts. The purpose is not to equip the student with all the tools necessary for accurate and efficient drafting, but to provide the student with the introductory background to these clauses. Examples of each clause discussed will be provided, and students are expected to be able to draft these clauses for test-end exam purposes. The following clauses will be dealt with:
Parties to a contract; Conditions; Terms; Breach of Contract; Domicilium citandi et executandi; Whole agreement.
1. Parties By its nature as a juristic bond, an obligation involves at least two persons and a performance.215 The persons between whom the juristic tie or bond exists are the parties to an obligation. The party who is under a duty to render the performance to which the obligation relates is the debtor. The party who has the corresponding right to the performance is the creditor. The debtor is said to be on the passive side of the obligation, and the creditor on the active side.216 A contract can be concluded by only two persons. There may, however, be more than one person on either side. 217 Normally, the persons who contract become the parties to the ensuing obligations, but not always. Persons other than the contractants become parties to the obligations when a contract is concluded through representation or in favour of a third party.218 Examples of Party-clauses in contracts: I. 1. Johnny Walker, Identity number 720512 3045 085 is an unmarried person, who is selling his house in his personal capacity. 2. Jane Doe, Identity number 780512 3046 087 is married out of community of property, and is purchasing the abovementioned house from Johnny Walker. 3. Describe the two parties in the contract of sale between them. 215 Van der Merwe et al 2007: 245 216 Van der Merwe et al 2007: 245 217 Van der Merwe et al 2007: 245 218 Van der Merwe et al 2007: 245
1. Johnny Walker Identity Number: 720512 5045 085 Unmarried (Hereinafter referred to as “the Seller”) 2. Jane Doe Identity Number: 780512 3046 087 Married out of Community of Property (Hereinafter referred to as “the Purchaser”) Analysis: It has already been mentioned that the minimum amount of parties to any agreement is 2 (two) parties. Hence the numbering of the parties 1. and 2. The parties’ names, identity numbers and marital status are of paramount importance in the description of the parties in the contract. The seller is unmarried, and therefore may contract on his own. Although the purchaser is married, she is married out of community of property, which means that she owns an estate separate from her spouse’s. Each digit in the identity number of the parties mean something specific, and therefore care should be taken to copy a persons identity number exactly as in the example shown above, with necessary spaces between digits as indicated. The meaning of the digits is as follows: 780512 3046 087: i. ii. iii. iv. v. vi.
The “780512” is the date of birth of the party in question. The “3” is an indication of the gender of the party (0-4 denotes female, and 59 denotes male) The “046” is a sequence number for a combination of date of birth and gender, meaning that this specific person was the 46 th female-birth registered that particular day. The “0” is an indication of the party’s citizenship. A “0” is indicative of a South African citizen and a “1” will indicate a foreigner. The second last digit will usually be an “8” or a “9”. The very last digit is a control digit.
Students must have knowledge of exactly what a South African identity number entails, and should know the abovementioned analysis for test-and exam purposes.
95 For the sake of expediency, the parties are given aliases (“the Seller” and “the Purchaser”) by which descriptions they will be known throughout the remainder of the contract. II. 1. ABC Investments (Proprietary) Limited, Registration Number 1978/10025/21 wishes to sell some of its immovable property to 2. James Hudson, identity number 771212 6234 085, who is married in community of property to Jane Hudson, identity number 781224 3445 087. 3. Peter Williams, a director of the said company, has been authorized to sign the contract of purchase of the said immovable property on behalf of the company by virtue of a resolution dated 12 April 2000. 4. Describe the parties in the contract of sale. 1. ABC Investments (Proprietary) Limited Registration Number: 1978/10025/21 Herein represented by Peter Williams in his capacity as Director, authorized thereto by a Resolution of Directors dated 12 April 2000. (Hereinafter referred to as “the Seller”) 2. James Hudson Identity number: 771212 6234 085 and Jane Hudson Identity number: 781224 3445 087 Married in Community of Property to each other. (Hereinafter referred to as “the Purchasers”) Analysis: A company is a juristic person which cannot enter into legal acts without being represented. In this case, one of the directors of the company has been authorized to sign this specific contract on behalf of the company. The authorization must however be mentioned for the sake of consensus and legality. In the case of the purchasers, the parties are married in community of property. This means that whilst they are two separate private persons, they are seen by the law as one entity that possesses on estate. Therefore, parties married in community of property to each other will always have to contract jointly.
96 III. 1. A certain trust, which has not been registered yet, wishes to buy property from Jane Doe, a person married in terms of Scottish law. 2. The trust will be represented by Johnny Walker, in his capacity as future trustee. 3. Describe the parties in the contract of sale. 4. Provide your own particulars if necessary. 1. Jane Doe Identity number: 598399 Married, which marriage is governed by the laws of Scotland. (Hereinafter referred to as “the Seller”) 2. Johnny Walker, in his capacity as trustee of a trust still to be registered. (Hereinafter referred to as “the Purchaser”) 2.Conditions: A condition in a contract refers to a clause by which a contractual performance is qualified by an uncertain occurrence in future. The requirements of a condition are as follow: Uncertain future occurrence; The occurrence must be physically and juridically possible; The occurrence must not be subject to the decision of the presentor thereof only, for instance “I shall give you R50 if I feel like it”. Two main types of condition are distinguished, namely the suspensive condition and the resolutive condition. A suspensive condition suspends or postpones the full operation of the obligation which it qualifies until certainty is reached, in that the condition is fulfilled or in that it fails. 219 An example of such a condition would read as follows: “Walker agrees to loan Doe an amount of R10 000.00 on condition that the latter obtains his LL.B-degree within four years.” A resolutive condition, on the other hand, does not postpone the operation of the obligation: the obligation operates in full, but may come to an end if certainty is reached, in that the condition is fulfilled or in that it fails. An example would read as follows:
219 Van der Merwe et al 2007: 289
97 “Walker agrees to give Doe a motorcar, but if Doe does not obtain the LL.B-degree within four years, Walker will take the motorcar back with immediate effect.” 3. Time clauses220 A time clause is a contractual term which qualifies an obligation with reference to a certain moment or event in the future- a dies certus an.221 Unlike a condition, a time clause relates to a future moment or event which is certain to occur, although it may be uncertain exactly when it will happen. A time clause may, like in the case of a condition, be suspensive or resolutive. Where a suspensive time clause is incorporated into a contract, obligations come into existence when the contract is concluded, but the full operation of the obligations is postponed until the future moment or event. Since the future moment or event is certain to arrive at some stage, the position pending fulfillment of a suspensive time clause differs from the position pending fulfillment or failure of a suspensive condition. The effect of a suspensive time clause depends on whether it is intended to be in favour of the debtor (pro debitore) or in favour of the creditor (pro creditore). If the clause is in favour of the debtor, the enforceability of the obligation in terms of which the debtor is bound to perform is suspended, but the obligation remains capable of being performed. The debtor is therefore free to render performance before the time or event fixed by the fixed by the time clause and the creditor may not refuse to accept performance. If the clause is in favour of the creditor, the obligation is not capable of being performed before the time or event fixed for performance. This implies that the performability of the performance is suspended. The creditor can therefore not be compelled to accept performance before the fixed time or event, although he is entitled to enforce performance earlier. If a time clause is in favour of the creditor, to the extent that it is intended only to protect him against loss of interest, the debtor may render early performance, if he pays interest for the full period. A resolutive time clause provides that an obligation will terminate at a certain future date or when a certain event occurs in future. Normally, resolutive time clauses do not operate retroactively, but contractants may agree to the contrary. 4. Breach of Contract One of the positive aspects of freedom of contract is the fact that parties can determine their own remedies in case of breach of contract. A typical clause in a contract would look like this: BREACH OF CONTRACT Should any of the parties to this contract fail to comply with any of the provisions contained herein, and fail to rectify the failure to comply within 7 (seven) days of written notice to comply therewith, the other party will have the right, according to its own discretion, to:
220 Van der Merwe et al 2007: 294 221 Van der Merwe et al 2007: 294
98 a) Claim specific performance of the provision in question; b) Cancel the contract; and c) Claim any damages suffered as a result of the other party’s breach, including all legal costs.
5. Entire agreement Inclusion of a clause similar to the following will ensure that no additional contracts or provisions will determine the nature of the agreement between the parties. Such a clause will read as follows: ENTIRE AGREEMENT The parties agree that this will constitute the entire agreement between them, and that no additional submittances, promises, warranties or oral agreements, whether clear or by implication, will be legally binding. No variations of this document will be legally binding if not made in writing and signed by both parties to this agreement.
End of Part II
LAW OF CONTRACT PART III BREACH OF CONTRACT 1. Introduction According to Van der Merwe et al, breach of contract was originally described (eg by De Wet & Van Wyk) as “malperformance”.222 Malperformance in the strict sense of the word is breach by a contractant of a promise to perform, which is contained in the contract. A contractant who has promised to deliver on the first day of the month will commit malperformance of he performs late. Such a person will also be guilty of malperformance if he delivers defective performance. A contractant who performs late commits negative malperformance, while someone who carries out his promise in a defective manner is guilty of positive malperformance. Should a contractant promise to deliver, for instance, on the thirtieth of the month, but on the tenth of the same month denies that he is bound to perform, he is not yet on breach of his promise. Nevertheless his action constitutes breach of contract in the form of repudiation, because his conduct on the tenth is indicative of the fact the he will not perform on the thirtieth. Similarly, a contractant usually does not undertake to destroy the object of performance before delivery thereof, but if he should destroy such object, he will be guilty of breach of contract in the form of prevention of performance. Breach of contract can be committed by a debtor or a creditor. In terms of a particular contract, a creditor may have a duty to co-operate with his debtor in order to enable the debtor to perform to the creditor. If the creditor does not comply with this duty, he is committing breach of contract, either by not receiving the performance timeously (negative malperformance) or by refusing to accept the performance (repudiation). Traditionally, five forms of breach of contract are distinguished:
Mora debitoris (delay by the debtor) Mora creditoris (delay by the creditor) Repudiation Prevention of performance Positive Malperformance
The correct approach, according to Van der Merwe et al, would be to divide breach of contract into four main categories, namely mora or negative malperformance, positive 222 Van der Merwe et al 2007: 325
100 malperformance, repudiation and prevention of performance. These forms can be divided into two main categories, namely malperformance and anticipatory breach of contract (repudiation and prevention of performance).223 Unit 12 Mora Debitoris Negative malperformance by the Debtor Learning outcomes: After completion of this unit, the student should be able to: 1. Provide a critical introduction to the nature of breach of contract, and also shortly mention the forms and divisions of breach of contract and what they entail. 2. Discuss the nature and forms of mora debitoris. 3. List and critically discuss the requirements for mora debitoris. 4. Distinguish between the terms mora ex re and mora ex persona. 5. Distinguish between mora debitoris and other forms of breach of contract in general. 6. Analyze the aspect of cancellation on the ground of mora debitoris with specific reference to the case of Kragga Kamma Estates CC v Flanagan 1995 (2) SA 367 (A). Cases: Ponisammy v Versailles Estates 1973 1 SA 372 (A) Nel v Cloete 1972 (2) SA 150 (A) Willowdene Landowners v St Martin’s Trust 1971 (1) SA 302 (T) South African Forestry Co Ltd v York Timbers Ltd 2005 (3) SA 323 (SCA) Kragga Kamma Estates CC v Flanagan 1995 (2) SA 367 (A) Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 10. Alternative study: 6. Christie The Law of Contract in South Africa. Fifth Edition. Chapter 13.
223 Van der Merwe et al 2007: 337
Nature and forms of Mora Debitoris224 Mora debitoris refers to the wrongful failure by the debtor to perform timeously. The mora occurs where the debtor either fails to tender the performance owed by him in terms of a particular obligation timeously, or timeously tenders incomplete or defective performance.225 Mora can by its nature only occur in respect of positive obligations. Because the debtor does not effect performance at all, this form of breach can be described as negative malperformance. Different forms of mora are distinguished: Mora ex re; Mora ex persona Mora ex lege These will be discussed later. Delay (mora) as a form of breach of contract relates only to the time that performance must take place. Mora can only occur where performance remains possible in spite of the delay. Here the time and contents of a performance are so closely linked that performance after the due date and time would be meaningless, delay by the debtor would usually amount to prevention of performance.226 This principle was formulated in Algoa Milling Co v Arkell & Douglas 1918 AD 145. If a photographer is engaged to take pictures at a wedding ceremony on a particular date, it would be to no avail if he turns up a week later: through his delay he has made performance impossible. Similarly, if an employee does not show up for work, performance in respect of the period of time which has passed will usually have become impossible. Mora is of a continuous nature in that it may endure over a period of time. If a debtor renders performance after having been in delay for some time, he fulfills his duty in terms of the particular obligation, but he does not cure the breach of the past. He will still be liable to compensate the creditor for any loss suffered as a result of the breach of contract.227 If the creditor has acquired a right to resile on the ground of the debtor’s mora, he cannot be deprived of this right by an offer of performance. A debtor who is 224 Van der Merwe et al 2007: 337-339 225 Van der Merwe et al 2007: 338 226 Van der Merwe et al 2007: 338 227 Van der Merwe et al 2007: 339
102 already in delay can commit another form of breach of contract, for instance by performing defectively.228 By performing, the debtor will put an end to his delay, but because the performance is defective he will have committed positive malperformance. The debtor will then be liable for his mora in the past as well as for positive malperformance.229 Requirements for Mora Debitoris The element of conduct in respect of mora by a debtor is an omission or failure to act as agreed, that is to tender performance while the debtor is legally subject to tender performance.230 If, however, the failure to act leads to impossibility of performance, the omission cannot be treated as mora but it may be some other form of breach of contract (such as prevention of performance).231 To constitute breach of contract the failure to tender performance must be wrongful. But before one can even speak of the wrongfulness of the failure to perform, the debt must be due and enforceable. A debt is not enforceable before the time set for performance or, if no time has been set in the contract, before a reasonable time has elapsed. 232Depending on the circumstances of the contract “reasonable time” may mean that performance is due and enforceable immediately after conclusion of the contract. Requirements: I. The debtor must be in mora In the case of Ponisammy v Versailles Estates 1973 1 SA 372 (A), a written contract was concluded between the appellant and one Pienaar on behalf of a company that at that stage was still to be registered. The written deed of sale (contract of sale) contained the following clause: Payment of the purchase price shall be secured by a banker’s guarantee to be furnished within thirty (30) days after approval of the diagrams of the property sold by the Surveyor-General.
The deed of sale however did not contain a cancellation clause (a clause entitling the seller to cancel the contract in the event of there being default on the part of the purchaser). On 24 September 1970 the Surveyor-General approved the required diagram. However, the appellant was not informed thereof by the responsible surveyor until late in November 1970. This meant that the 30 days mentioned in the abovementioned clause had already expired by the time the parties heard of the approval of the diagrams. Subsequently, the appellant’s attorney wrote a letter dated 24 November 1970 wherein 228 Van der Merwe et al 2007: 339 229 Van der Merwe et al 2007: 339 230 Van der Merwe et al 2007: 339 231 Van der Merwe et al 2007: 339 232 Van der Merwe et al 2007: 339
103 she exclaimed that Pienaar had to furnish the appellant with a guarantee on or before 23 December 1970. Early in December 1970, Pienaar informed his attorney, who subsequently informed the appellant, that he (Pienaar) would not be able to furnish the required guarantees before 23 December 1970. The two parties’ legal representatives agreed that Pienaar would pay an amount of R200.00 as a deposit, and that the date before which the guarantee had to be delivered would be extended to 23 January 1971. On the 21st of January 1971 Pienaar informed the appellant’s legal representative that he still couldn’t deliver the guarantees, but that a company called Sapekoe (Pty) Ltd was interested in purchasing the property from him (Pienaar). The appellant’s legal representative “cancelled” the contract because of the fact that the guarantees had not been furnished within the specified time, and the appellant sold the property to a new buyer, Mr Venter. Pienaar’s legal representative said that there was no right in terms of the contract to cancel such contract, and provided the necessary guarantees, albeit late. Pienaar also got an interdict against the appellant forcing her not to transfer the property to Mr Venter. The court a quo decided that the appellant had to pass transfer of the property to the respondent. In the Appeal Court, the appellant contended that they had cancelled the contract of purchase because Pienaar on behalf of the Respondent had failed to furnish the banker’s guarantee provided for in the said contract within the period specified in the contract. In addition, the appellant’s attorney had not only initially agreed (on the 23rd of December 1970, when extension was granted to Pienaar for furnishing the guarantee) to an extension of time for delivery of the banker’s guarantee, but that she had also placed the respondent in mora (if the guarantee was not furnished on or before 23 January 1971) and which would have the additional effect of a “notice of rescission” entitling the defendants to cancel the sale in the event of failure on the part of the respondent to perform. Muller, JA exclaimed the following relevant words: Where time is not of the essence of the contract, but one of the contracting parties elects to make it so, giving a notice of rescission (a unilateral act), he should at least take care that the notice is clear and unequivocal, so that the other contracting party is aware of the consequences of a failure on his part to perform timeously.
The court decided that whilst the appellant had indeed placed the respondent in mora, that placing someone in mora did not constitute cancellation of the contract. The court thus upheld the court a quo’s decision. Mora ex re It may happen that contractants do not agree on a specific time of performance. If they do, however, failure to tender performance at that moment would be prima facie wrongful. In such a case, the creditor is not required to claim performance from the debtor, because dies interpellat pro homine (literally: “the day demands from the person”). Mora that takes place in this manner is called mora ex re, meaning mora
104 according to the nature of circumstances. In order for mora to arise ex re a “precisely calculable date” must have been set, as was decided in the case of Van der Merwe v Reynolds 1972 (3) SA 740 (A). In the case of LTA Construction v Minister of Public Works & Land Affairs 1995 (1) SA 585 (C) the construction contract read that the contractor was entitled to final payment as soon as the engineer had certified that the work was in order. Due to the uncertainties that had to be surmounted before such a certificate could be issued, it was decided that there had been no agreement as to a “precisely calculable day”233 A time will only be a “precisely calculable date” if it is not only certain that it will arrive but also when it will arrive. In the case of Repinz v Dacombe 1994 (3) SA 756 (E) the court decided that before fulfillment a debtor must indeed have certainty about the time of his performance, but that the certainty need not exist upon conclusion of the contract. Consequently, if the contract reads that the performance must be made a specific time after a certain occurrence, mora ex re can arise after that period has expired, irrespective of any uncertainty upon conclusion of the contract as to whether the occurrence will take place and if so, when it will take place. Mora ex persona Where a contract does not stipulate a time for performance, the debtor must usually take steps to recover the debt. The creditor must place the debtor in mora by means of a demand or notice that the debtor must perform by a certain time. The creditor thus determines the time of performance by a unilateral juristic act. The purpose of the demand is to inform the debtor exactly when he must perform. Mora that occurs by way of demand is called mora ex persona, because it requires an act by the creditor. A demand (interpellatio) must indicate the debt that must be discharged and set a specific time for performance, which is reasonable in the circumstances. It must contain an unequivocal and unconditional claim that the creditor desires performance. In the case of a reciprocal contract the demand must, where applicable, contain a tender of performance by the creditor. The reasonableness of the time for performance set in a demand must be determined with reference only to the circumstances affecting the time of performance of which the parties were either aware when the contract was concluded or which they could at that moment have reasonably foreseen. A demand which does not expressly lay down a time for performance may possibly be interpreted to mean that performance is required immediately. Such a demand may well be reasonable in the case of a monetary debt, but not necessarily in all other instances. In the case of Willowdene Landowners v St Martin’s Trust 1971 (1) SA 302 (T), no time was stipulated for performance and no right to cancel included. However, the one party could place the other part in mora by giving the opposite party a reasonable time within which to perform and that, if within that reasonable time performance was not accomplished, a right to cancellation ensued. It was decided that “the time given for performance must be reasonable in the circumstances. If this is not the case, the notice is 233 Van der Merwe et al 2007: 341 fn 88
105 of no effect.”234 In this case, a period given by one contractant to the other from 26 March 1969 until 30 June 1969 to perform was judged by Claassen J to be insufficient and therefore the mora was ineffective. The demand or notice by the creditor to perform may take the form of: -
Interpellatio iudicialis: Formal demand by way of summons, or Interpellatio extra iudicialis: Informal demand by way of letter, telephone, sms, etc.
II.The Performance must be due and enforceable Performance does not become due and enforceable before the determined date of performance has arrived or before a reasonable period has lapsed. Van der Merwe et al put it very clearly: Mora cannot occur in terms of an unliquidated debt. A debtor cannot object to enforcement of the obligation raising defences such as prescription or that the enforcement of the performance is subjected to a suspensive condition that has not as yet been fulfilled or that the time to perform has not yet arrived. III.
The delay must be caused by the fault of the debtor and/or his workforce.
“Fault” in this instance refers to fault in the delictual sense. Van der Merwe et al say that the duty to prove the absence of fault rests on the debtor to prove same by way of an excusatio a mora. If the delay is caused by the creditor, we are dealing with mora creditoris. IV.
The Performance must remain possible notwithstanding the failure to perform.
If the performance has become impossible, we are dealing with a different type of breach, namely impossibility of performance. See in this instance the case of South African Forestry Co Ltd v York Timbers Ltd 2005 (3) SA 323(SCA), which had to be studies in Unit 8 of this module. Distinction between mora debitoris and other forms of breach of contract According to Van der Merwe et al, mora can be readily distinguished from other forms of breach of contract.235 In the case of positive malperformance the debtor does effect performance, albeit defectively. Where performance is prevented, it is no longer possible and delay as such cannot exist. Nor can a delay in itself constitute repudiation, since it will not justify a reasonable conclusion that in the future performance will not take place at all or will be defective.236 234 Willowdene Landowners v St Martin’s Trust: 307 235 Van der Merwe et al 2007: 346 236 Van der Merwe et al 2007: 346
Special consequences of mora debitoris A special consequence of mora debitoris is that it perpetuates the obligation. This means that if performance becomes impossible after the debtor has fallen in mora, he will not be excused because of the impossibility. Under such circumstances the responsible contractant would actually be guilty of prevention of performance.237 Cancellation on the ground of mora debitoris238 There is a reason Van der Merwe et al make specific provision for a discussion of this particular ground for cancellation. The reason is that Roman-Dutch law did not provide a general right of cancellation on the ground of breach of contract. In the case of mora debitoris, a creditor was allowed to cancel a contract only where a contract contained a cancellation clause or lex commissoria. Acancellation clause could be attached to a contract whether a date for performance had been set or not. Where a date had not been set, the creditor had to put the debtor in mora by way of an interpellatio (see above) before he could exercise his right to cancel. Subject to a lex commissoria, the same applies in modern South African law. However, because Roman-Dutch law did not provide sufficient opportunity for cancellation of the contract on the ground of mora, South African courts adopted the English legal doctrine of “time is of the essence of the contract” (the term is often used in the Ponisammy and Nel v Cloete cases). The result hereof is that cancellation of a contract needs no longer be based on an express lex commissoria. A right to cancel is also recognized if the debtor is in mora, whether ex re or ex persona. The urgency of performance may be apparent from a variety of circumstances, such as: The contract may concern a performance which is subject to price fluctuations; The performance may relate to food or articles of fashion with a certain durability or attractiveness in the market; The performance may be of a speculative or commercial nature. In English law, a creditor can (after conclusion of the contract) make time of the essence of the contract by giving the debtor a notice of rescission. South African courts have adopted the same approach. If a debtor is in mora, the creditor may by a unilateral act obtain a right to cancel the contract by notifying the debtor that he reserves the right to cancel the agreement if the debtor fails to perform by a certain date. 239 In such notice, the creditor must provide the debtor with reasonable time to perform, taking into account the steps the debtor will have to take in order to effect performance.
237 Van der Merwe et al 2007: 346 238 Van der Merwe et al 2007: 347 239 Van der Merwe et al 2007: 348
107 Although usually called a “notice of rescission”, a notice of this nature does not itself cancel the contract, but simply warns the debtor of impending cancellation. To effect cancellation, in other words to resile, a further juristic act is required, namely a notice that the creditor cancels the contract. It would eliminate the possibility of uncertainty if the “notice of rescission” were rather referred to as “notice of intention to cancel”. In the case of Kragga Kamma Estates CC v Flanagan 1995 (2) SA 367 (A), the appellant and respondent had entered into a contract of sale which included a lex commissoria, which entitled the seller to cancel the agreement in the event of the purchaser breaching any of its obligations. In terms of the contract, the purchase price amounted to R120 000.00, payable as to R70 000.00 on signature of the contract and R50 000.00 at R500.00 a month. The respondent later claimed that the respondent had in fact cancelled the contract, because the appellant had not paid the R70 000.00. Additionally, the respondent claimed that she had called the appellant to pay the R70 000.00 within a reasonable time, that the latter had failed to do so, and that she (the respondent), had accordingly notified the appellant of the cancellation of the contract. Nestadt JA exclaimed that the failure of the appellant to pay the R70 000.00 constituted mora ex re, because the payment had to be made at a specific time: At the signature of the agreement. However, after the appellant had been placed in mora, the respondent had continued receiving the monthly payments of R500.00. In other words, she had given a notice of intention to cancel the contract, but not notice of cancellation. The judge continued to state that he did not agree with the stance that the respondent had given the appellant an extended period in which to pay the R70 000.00, and that the respondent had to give notice to the appellant of her intention to cancel the contract in case of non-payment. Consequences of mora debitoris Perpetuation of the obligation (perpetuation obligationes): If the performance becomes impossible after the debtor has fallen in mora, the debtor remains liable for performance. If the performance becomes impossible after conclusion of the contract, the obligation becomes void. Interest a temporae morae: This refers to interest on the loss of income which timeous performance would have meant for the creditor. The rate of interest is determined by statute, but may also be determined contractually. Interest in duplum: This means that the interest may never exceed the capital debt, and is based on public interest and fairness. It was dealt
108 with in the case of LTA Construction v Administrateur Transvaal 1992 (1) SA 473 (A). Passing of Risk: In a contract of sale, all risk passes from the seller to the buyer on the date which the contract of sale is perfecta.
Unit 13 Positive Malperformance Learning outcomes: After completion of this unit, the student should be able to: 1. Analyze and discuss the nature and forms of positive malperformance. 2. List and critically discuss each of the requirements for positive malperformance. 3. Distinguish between positive malperformance and other forms of breach of contract. 4. Discuss the special consequences of positive malperformance. 5. Discuss the possibility of cancellation of a contract on the ground of positive malperformance. Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 10. 2. From List of cases: Holmdene Brickworks (Pty) Ltd v Roberts Construction Co Ltd 1977 (3) SA 670 (A) Shatz Investments (Pty) Ltd v Kalovyrnas 1976 (2) SA 545 (A) BK Tooling (Edms) Bpk v Scope Precision Engineering (Edms ) Bpk 1979 (1) SA 391 (A) Alternative study: 3. Christie. The Law of Contract in South Africa. 2006. Chapter 13
Nature and forms of positive malperformance240 Positive malperformance relates to the manner in which an obligation is executed. Two forms of positive malperformance are distinguished: -
Defective performance. Conduct contrary to a contractual prohibition.
Defective performance: Whether performance is defective, depends primarily on whether the performance made complies with the terms of the contract. 241 “Terms of the contract” refers not only to the consensual terms (express or tacit) but also to the ex lege terms or naturalia of the contract. Delivery of a thing that is defective or to which the debtor has no title does not constitute positive malperformance. Performance can be defective whether made before, on or after the due date for such performance. Conduct contrary to a contractual prohibition: If a contractant commits conduct contrary to an express or tacit prohibition in the contract, he also commits positive malperformance. An example would be where the seller of a business undertakes not to compete with the purchaser for a specific time within a certain area and then does compete with him. Positive malperformance can endure for a period of time, for example where the quality of the possession that a lessor gives to his lessee is less than what is required by the contract. In the case of Shatz Investments (Pty) Ltd v Kalovyrnas 1976 (2) SA 545 (A), the appellant and respondent had entered into a lease agreement which contained the following clauses: 4.
The lessee (respondent in the case under discussion) shall be entitled to use the leased premises for the purpose of carrying on the business of a restaurant, take-away-foods and general dealer, and for no other purpose whatsoever, save with the consent of the lessor, which consent shall not unreasonably be withheld.
5a. The lessor (appellant in the case under discussion) agrees to give full protection to the lessee by not letting any of the existing other shops, and those still to be erected in the same building, for the same nature of business or allied business, as that of the lessee, i.e. coffee bar, fish and chips, tea room,
240 Van der Merwe et al 2007: 349-350 241 Van der Merwe et al 2007: 349
110 take-away foods, steak house etc., and such like, other than bakery and allied lines produced on the premises.
Clause 5a was inserted on the appellant’s request, except for the italicized words, which were inserted at the respondent’s request. When the agreement was still in negotiation-phase, the appellant contemplated letting one of the other shops in the same building as a bakery. The respondent agreed thereto provided that the bakery did not sell confectionery or take-away food like kosher and other Jewish foods. The respondent continued to equip the leased premises for the business of a restaurant and selling take away foods. While the respondent was preparing to open his business, an advertisement appeared in the vacant corner shop of the building stating that a new bakery (Quinta Bakery) would open there soon and that this bakery was to sell confectionery and take-away foods. The appellant had also already contracted with the owner of Quinta Bakery on these terms. When the Quinta Bakery opened, it had an immediate and a substantial effect on the business of Miami Restaurant, the name of the respondent’s restaurant and take-away business. The court a quo correctly found that the appellant had breached contract in the form of positive malperformance. Requirements for positive malperformance242 Conduct in the case of positive malperformance can be described as “any conduct of the debtor that eventually results in delivery of defective performance” 243 The two main requirements are: a. The debtor must have performed. When can it be said that the debtor has indeed performed? As a rule, performance can only be made with the co-operation of the creditor. The debtor will have to tender performance and will only have performed when such performance has been accepted by the creditor. If a debtor were to tender sufficient, correct and complete performance, and such performance is refused by the creditor, the latter would be guilty of breach of contract in the form of mora creditoris. If, however, the debtor tenders defective performance and it is refused by the creditor, there is no question of completed performance, but merely an attempt to commit malperformance. There can only be malperformance if indeed there was performance.244 As soon as performance that is defective has been made, positive malperformance as an act in breach of contract is complete. The creditor, after receiving the defective performance, bears no general duty to return it to the debtor to rectify the defects. However, in the case of BK Tooling v Scope Precision Engineering (Edms) Bpk 1979 (1) SA 391 (A), Jansen JA remarked that a creditor who has not cancelled the contract is obliged to return the defective performance in order to enable the debtor to rectify any defects. This remark by the judge 242 Van der Merwe et al 2007: 350-354 243 Van der Merwe et al 2007: 350 244 Van der Merwe et al 2007: 351
111 implies that if a contractant relies on the defence of reciprocity and thus claims counterperformance, he is obliged to allow the other party to perform or to rectify his defective performance, if such performance is still possible.245 The contractants may however make an exception to this rule by means of express or tacit agreement. A contract often states that if malperformance has taken place, the debtor must be notified to rectify the defects within a certain time. In such a case the debtor gets a “second chance” and, depending on the tenor of the provision, there can be no action against him before the period of time has elapsed. b. The performance rendered must be defective. This requirement relates to the requirement of wrongfulness that is set for breach of contract. Whether the performance is defective depends primarily on the whether it conforms to the provisions of the contract. If the performance does not conform to the contractual standard, the conduct is prima facie wrongful and therefore constitutes breach of contract, unless the shortcoming is due to vis maior or circumstances beyond the control of the debtor. Where a debtor is required to perform to the satisfaction of a third party (such as an expert like an architect or engineer), approval by the third party is of crucial importance in determining whether the performance is defective.246 Positive malperformance by way of conduct in conflict with a contractual prohibition can only be present if the debtor concerned committed an act and it is found that such act is in conflict with the particular obligatio non faciendi. Another question is whether fault is a requirement for positive malperformance. To answer this question, one must distinguish between warranties and other types of term. Warranties create strict liability in the sense that impossibility of performance and a fortiori also lack of fault offer no defence if the warranty was not carried out properly. The question of whether fault is in fact a requirement has not been dealt with much. Van der Merwe et al feel that fault should, in principle, not be a requirement or a defence in respect of positive malperformance.247 Distinction between positive malperformance and other forms of breach of contract248 Because positive malperformance can only occur by way of a positive act, it differs from the forms of negative malperformance in that the latter consists in a negative act, namely failure to perform. Performance that does not conform to the terms of the contract can be distinguished from repudiation in that such malperformance can only occur if performance has already taken place, whereas repudiation as a form of anticipatory 245 Van der Merwe et al 2007: 351 fn 156 246 Van der Merwe et al 2007: 353 247 Van der Merwe et al 2007: 354 248 Van der Merwe et al 2007: 354-355
112 breach of contract relates to conduct that occurs before actual performance and justifies the inference that the contractant is not going to perform as the contract requires. Thus, a tender of defective performance can amount to repudiation. Conduct contrary to an obligatio non faciendi amounts to positive malperformance, although such an obligation can also be repudiated, for example where the debtor indicates in advance that he is going to what he undertook not to do. Like repudiation, prevention of performance is a form of breach of contract in anticipando that takes place before actual performance and for that reason it can be distinguished from positive malperformance. Special consequences of positive malperformance249 A creditor in the case of positive malperformance has at his disposal the normal remedies for breach of contract. If the creditor accepted defective performance, he could retain the performance and insist on rectification of the defects. The question that arises is whether a creditor may reject defective performance, which is tendered or has already been received, in order to obtain proper performance in terms of the contract. The general opinion used to be that a creditor could reject defective performance (for whatever purpose) only if it was seriously or substantially defective. In the BK Tooling-case the appellate division rejected the doctrine of substantial performance for the purposes of the defence of reciprocity in respect of reciprocal contracts. The court held that a creditor who has not yet performed may retain his performance until the debtor has performed precisely and completely. Analogous hereto it is suggested by Van der Merwe et al that also where the defence of reciprocity does not come into play, a creditor may reject performance that is defective though substantially complete, in order to obtain proper performance. The only conditions are that the defect must not be trivial and that proper performance must still be possible. If complete and proper performance is no longer possible, the creditor will only be able to reject performance if the latter is substantially defective. Where this is the case, the creditor could reject performance and claim a sum of money as surrogate for the performance. If the performance is not substantially defective, the creditor will have to retain the defective performance and be satisfied with damages. Rejection of defective performance is not in itself cancellation. If performance is rejected for the purpose of obtaining proper performance or damages as a surrogate, the contract remains in force and each contractant must render his performance. If, however, the defective performance is rejected with a view to cancellation, the contractual obligations are dissolved. Cancellation on ground of positive malperformance250 A lex commissoria is a requirement for cancellation of a contract on the ground of positive malperformance. In the absence of such a cancellation clause a contractant may only resile if the breach is serious. A right to resile cannot be obtained by a notice of 249 Van der Merwe et al 2007: 355-356 250 Van der Merwe et al 2007: 356-357
113 intention to cancel (see previous unit for more information on this notice). In order to determine the seriousness of the breach, a test has been expressed in a variety of ways, for example: -
the breach must go to the root of the contract; the breach must affect a vital part or term of the contract; the breach must be so serious that it would not be reasonable to expect that the creditor should retain the defective performance and be satisfied with damages to supplement the malperformance.
The competing interests of the party in breach of the contract and the innocent party must be judged equally. What must also be determined is whether the breach in question is so serious that it would be fair to allow the innocent party to resile. This would be up to judicial discretion. If performance is divisible and only part of the performance is seriously defective, the innocent contractant may resile pro tanto only. A creditor who is entitled to resile may resile immediately, without giving an opportunity for rectification. If the creditor does not cancel the contract but claims damages for breach, the debtor cannot insist on making proper performance instead of paying damages.
Unit 14 Repudiation Learning outcomes: After completion of this unit, the student should be able to: 1. Analyse the origin and nature of repudiation. The analysis should include a discussion of the historical nature of repudiation as well as the change brought about by the case of Tuckers Land and Development v Hovis and any opposition towards this “new approach” to repudiation. 2. List and discuss the requirements for repudiation with reference to the case of Highveld 7 Properties v Bailes 1999 (4) SA 1307 (SCA). 3. Distinguish between repudiation and other forms of breach of contract in general. 4. Discuss the specific consequences of repudiation. 5. Discuss cancellation on the grounds of repudiation. Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 10. 2. From List of cases: Tuckers Land and Development v Hovis 1980 (1) SA 645 (A) Datacolor International (Pty) Ltd v Intamarket (Pty) Ltd 2001 (2) SA 284 (SCA) Highveld 7 Properties v Bailes 1999 (4) SA 1307 (SCA). Alternative study: 3. Christie. The Law of Contract in South Africa. 2006. Chapter 13
Origin and nature of repudiation251 The form of breach known as repudiation was unknown in Roman-Dutch law as a form of breach. The notion that it does constitute breach was received from English law. Repudiation refers to any conduct of a contractant from which a reasonable person in the position of the innocent contractant would conclude that the first contractant does not intend to comply with his duties, for example where a contractant erroneously denies the validity of the contract. Conduct constituting repudiation may endure over a period of time, and it is also quite possible that one and the same obligation is repudiated on various occasions. According to the traditional view of repudiation, it amounts to an offer by a contractant to cancel the contract and breach of contract is only present once the “offer” has been accepted. Acceptance of repudiation puts an immediate and abrupt end to the agreement between the parties. On the other hand, if the repudiation is ignored, contractual obligations continue to exist, as there is no breach of contract present. In the case of Tuckers Land and Development v Hovis 1980 (1) SA 645 (A), there was an express move away from the notion that repudiation can be explained in terms of offer and acceptance.252 The respondent had bought two erven from the appellant, a township developer, in a proposed township. The contract of sale was suspensive and subject to the successful demarcation of the township. The respondent had made certain payments, but became aware later on that the appellant had run into some difficulties proclaiming the township, and as a result thereof had prepared a new plan for submission to the proper authorities. The problem was, however that the two erven the respondent had purchased previously did not appear on the new plan. The respondent accepted this as an act of repudiation of the contract and subsequently cancelled same. In a lengthy analysis of the nature of anticipatory breach in general, Jansen JA had the following to say: It could be said that it is now, and has been for some time, felt in our domain, no doubt under the influence of the English law, that in all fairness there should be a duty upon a promisor not to commit an anticipatory breach of contract, and such a duty has in fact often been enforced by our Courts.
The question had to be asked whether the appellant’s action would have lead a reasonable person to believe that he (appellant) did not intend to honour the contract. Jansen JA answered this in the affirmative, and decided that the appellant indeed committed anticipatory breach of contract. The respondent was thus entitled to rescind from the contract and claim back what he had paid. Anticipatory breach in this instance was construed as breach that sets in immediately due to the breach of an ex lege duty, flowing 251 Van der Merwe et al 2007: 358 252 Van der Merwe et al 2007: 360
116 from bona fides not to commit anticipatory breach of contract. 253 Jansen JA expressed himself against the use of the concepts of offer and acceptance in this context and regarded the decision of a creditor to react to repudiation as an election. Further support for this new approach can be found in a decision that repudiation occurs at the place where the repudiating party is notified of it and not at the place where the repudiating party is informed of the acceptance of the repudiation, as it would have to be in accordance with the construction of offer and acceptance (This was decided in the case of Veneta Mineraria Spa v Carolina Collieries (Pty) Ltd 1985 (3) SA 633 (D), which need not be studied in detail for this unit). The new approach is also supported by the rule that if a contractant repudiates and his co-contractant chooses to ignore the repudiation, the aggrieved contractant can nevertheless, on the ground of repudiation, temporarily be excused from the duty to take certain steps which otherwise he would have had to take. Opposition to the “new approach” to repudiation In the case of HMBMP Properties (Pty) Ltd v King 1981 (1) SA 906 (N) the Court had to decide when prescription in respect of a claim for damages on the ground of repudiation commences.254 If acceptance is required to complete repudiation as breach of contract, prescription cannot commence before acceptance, but if acceptance is not required, prescription will commence as soon as repudiation takes place. 255 The court in this instance held that repudiation becomes a breach of contract only if it is accepted. And found that prescription commenced on the date of acceptance of repudiation. In Culverwell v Brown 1990 (1) SA 7 (A) the court held that repudiation “merely affords the injured party an election to terminate the agreement by accepting the repudiation…and unless and until that happens the repudiator’s obligation to perform and the other party’s right to receive performance remain wholly unaffected.”256 This viewpoint is in direct conflict with the “new” approach. The court also intimated that a claim for damages on the ground of repudiation arises only upon acceptance of the repudiation, because prior to acceptance of repudiation there would not yet be breach of contract.257 In the case of Datacolor International (Pty) Ltd v Intamarket (Pty) Ltd 2001 (2) SA 284 (SCA) the traditional approach was finally rejected. This means that the current position is that repudiation in itself is breach of contract because the objectionable conduct is wrongful and not because it is turned into breach of contract by offer and acceptance. Acceptance of the repudiation is not required to complete the repudiation as an act of breach of contract, but simply amounts to the exercising of an election to exile.258 253 Van der Merwe et al 2007: 360 254 Van der Merwe et al 2007: 361 255 Van der Merwe et al 2007: 361 256 At 28E 257 Van der Merwe et al 2007: 361-362 258 Van der Merwe et al 2007: 362
117 Requirements for repudiation Van der Merwe et al exclaim that repudiation is “any conduct by a contractant from which a reasonable person in the position of the innocent contractant would infer that the first contractant, without lawful grounds, does not intend to comply with his duties in terms of the contract.”259 It should however also be mentioned that a contractant who correctly refuses performance on the ground of a term in the contract, does not repudiate the contract, but actually enforces it. To complete breach in the form of repudiation, three requirements need to be met: a. The defendant must have displayed conduct that indicates an intention of future non-compliance with the provisions of the contract. The test is whether, fairly interpreted, the defendant exhibits a deliberate and unequivocal intention no longer to be bound. The law requires not only objective consideration of the defendant’s conduct, but its impact on the other party to be assessed as well. b. The plaintiff must have accepted this conduct as breach of contract, as was written by the counsel in Highveld 7 Properties v Bailes 1999 (4) SA 1307 (SCA). c. The plaintiff must have given notice to the defendant that he has accepted the conduct as breach of contract. In the case of Highveld 7 Properties v Bailes, the respondent had sold immovable property to the first appellant in terms of a written contract of sale. The property was to serve as a golf course residential estate. The original agreement obliged the appellant to facilitate steps to secure approval of a development plan for the property and, within seven days of such approval having been granted, to deliver to the respondent certain guarantees for the payment of the purchase price. After the original agreement had been concluded, the parties conducted further negotiations with a view to the possible variation thereof. It was sought to adjust the boundaries of the property in question, with a concomitant adjustment of the purchase price. As a result of these negotiations, the respondent adopted the attitude that consensus had been reached about the new boundaries and about the increased purchase price of the property. However, the appellant denied that any such further agreement had come into existence. The respondent nonetheless demanded performance from the appellant in terms of the disputed agreement. He caused application to be made for the approval of a development plan for the property, reflecting the adjusted boundaries entailed by the disputed agreement, and thereupon demanded that he appellant deliver guarantees for the payment of the increased purchase price, threatening legal action if his demand was not met. The appellant eventually formed the view that the respondent’s insistence on the implementation of the disputed amounted to a repudiation of the original agreement, and accepting such repudiation, cancelled the original agreement. The court a quo held that 259 Van der Merwe et al 2007: 362
118 the disputed agreement had not been proved, but that the respondent’s conduct had not amounted to a repudiation of the original agreement. On appeal, Streicher JA held that the question which had to be determined was whether the attitude adopted by the respondent constituted repudiation. The test to determine whether conduct amounted to a repudiation was whether, fairly interpreted, it exhibited a deliberate and unequivocal intention no longer to be bound. On appeal, the court thus overturned the decision of the court a quo, and decided that the respondent’s attitude did indeed constitute repudiation. Distinction between repudiation and other forms of breach of contract260 Repudiation differs from negative malperformance in so far as a delay per se does not justify a reasonable conclusion that performance is being refused or that defective performance will be rendered. Repudiation differs from positive malperformance in that repudiation occurs before actual performance, although repudiation may well anticipate positive malperformance. In some instances, a contractant’s conduct can constitute repudiation as well as positive malperformance. For the latter to happen, the message should be conveyed that the defaulter’s intention is not to comply with the particular obligation in future. Repudiation differs from prevention of performance in that repudiation anticipates eventual malperformance with relative and not absolute certainty. Special consequences of repudiation261 Repudiation per se does not advance the date of performance, nor does it give rise to mora debitoris where no date for performance has been fixed. If a contractant repudiates his duty to perform, the repudiation affects his co-contractant’s outstanding corresponding duties to perform even where the latter prefers to maintain the contract in spite of the repudiation. Cancellation on the ground of repudiation262 Any true form of repudiation justifies cancellation. In terms of the “new” approach to repudiation discussed above, repudiation of any contractual duty amounts to breach of contract, although repudiation in respect of a subordinate duty would not warrant cancellation. The creditor will only be able to resile if the anticipated malperformance would justify cancellation. If mora is thus anticipated, the creditor can resile on the ground of repudiation if the contract contained a lex commissoria or of “time is at the essence of the contract”. Van der Merwe et al feel that cancellation should probably also be allowed if the debtor repudiates completely by intimating that he is not going to perform at all. 260 Van der Merwe et al 2007: 364-365 261 Van der Merwe et al 2007: 365 262 Van der Merwe et al 2007: 365
Unit 15 Prevention of Performance Learning outcomes: After completion of this unit, the student should be able to: 1. Explain the nature of prevention of performance, with specific reference to the distinction between absolute and relative prevention of performance. 2. List and discuss the requirements for prevention of performance. 3. Distinguish between prevention of performance and other forms of breach of contract generally. 4. Discuss the specific consequences of prevention of performance. 5. Discuss cancellation on the grounds of prevention of performance. Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 10, pp. 366-369. 2. From List of cases: Administrator, Natal v Edouard 1990 (3) SA 581 (A). Alternative study: 3. Christie. The Law of Contract in South Africa. 2006. Chapter 13.
Nature of Prevention of Performance Prevention of performance consists in conduct after the conclusion of the contract by which the debtor makes it impossible for himself 263 to perform. Such conduct may be a positive act or a neglect to perform. The resulting impossibility may be total or partial. Performance is impossible where it is physically impossible but also where it is in fact physically possible but for all reasonable and practical purposes impossible. In the case of Administrator, Natal v Edouard 1990 (3) SA 581 (A), a medical doctor undertook to sterilise a patient immediately after the birth of her third child. The doctor failed to perform the sterilization, with the result that the woman fell pregnant again. The doctor’s failure amounted to prevention of performance in terms of his undertaking to (successfully) sterilise his patient. Prevention of performance is a form of anticipatory breach of contract, and can therefore occur before, on, or after the date set for performance. By virtue of its nature, however, prevention takes place before actual performance. Performance may be made absolutely (objectively) or relatively (subjectively) impossible.264 Absolute prevention of performance predicts malperformance with absolute certainty, while relative prevention of performance anticipates malperformance only with reasonable certainty. One can understand Van der Merwe et al’s argument, then, that relative prevention of performance should actually classify as a particular form of repudiation, rather than prevention of performance.265 Breach of contract in the form of prevention of performance is complete as soon as performance has been prevented.266 Requirements of Prevention of Performance Prevention of performance can only be breach of contract if the particular conduct infringes a contractual obligation and is therefore wrongful.267 If post-contractual impossibility of performance is due to vis maior or casus fortuitous, the obligation concerned is entirely or partially extinguished and the chain of events is called 263 Van der Merwe et al 2007: 366 264 Van der Merwe et al 2007: 366 265 Van der Merwe et al 2007: 366 266 Van der Merwe et al 2007: 367 267 Van der Merwe et al 2007: 367
121 supervening impossibility of performance.268 Under these circumstances there is no breach of contract, because the element of wrongfulness is excluded. Fault is another requirement of prevention of performance.
Distinction between prevention of performance and other forms of breach of contract Prevention can be distinguished from mora on the basis that in the case of the former, performance is no longer possible.269 The distinction between prevention and positive malperformance lies in the fact that the former is anticipatory breach of contract and thus occurs before performance is rendered. Repudiation and prevention are distinguished in that prevention predicts eventual malperformance with absolute certainty, while repudiation anticipates it with relative certainty only.270 Special consequences of prevention of performance271 No order for specific performance can be granted if the performance has become wholly impossible. If, however, performance is only partially impossible, a creditor can claim specific performance of the possible part of the performance, and claim damages in terms of the impossible part. An obligation is not extinguished by total prevention of performance and the debtor remains bound in terms of the obligation. The creditor may resile from the contract but may also decide to uphold it. If the latter decides to uphold the contract, he cannot claim damages as a surrogate for the performance. Van der Merwe et al argue that a more convincing view would be to suggest that the obligation is in fact extinguished by total prevention of performance, , and that the contractant who breaches the performance must compensate the other contractant for damages suffered.272
268 Van der Merwe et al 2007: 367 269 Van der Merwe et al 2007: 368 270 Van der Merwe et al 2007: 368 271 Van der Merwe et al 2007: 368-369 272 Van der Merwe et al 2007: 369
Unit 16 Mora Creditoris Negative Malperformance by the Creditor Learning outcomes: After completion of this unit, the student should be able to: 1. Shortly discuss the nature of mora creditoris. 2. List and shortly discuss the requirements for mora creditoris. 3. Distinguish between mora creditoris and other forms of breach of contract in general. 4. Critically evaluate and discuss the special consequences of mora creditoris. Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 10, pp. 372. 2. From List of cases: Pienaar v Boland Bank 1986 (4) SA 102 (O) LTA Construction v Minister of Public Works & Land Affairs 1992 (1) SA 837 (C)
Alternative study: 3. Christie. The Law of Contract in South Africa. 2006. Chapter 13.
Nature and forms of mora creditoris Mora creditoris occurs where the creditor wrongfully fails to render his co-operation to enable the debtor to perform.273 Mora creditoris can occur before performance by the debtor remains possible despite the delay by the creditor. This form of breach can take the same forms of mora creditoris. If an employer delays in making use of the services tendered by his employee, performance by the employee for that specific period is rendered impossible. Requirements for mora creditoris In the LTA Construction-case, it was decided that where a creditor is required to cooperate before performance is tendered and a time for his co-operation has been set in the contract, the creditor must render his performance at the required time, otherwise he will fall into mora ex re. If no time has been set for co-operation in the contract, or if the debtor wants to perform before or after the time set for performance, the debtor must demand the creditor’s co-operation in order to place him in mora ex persona.274 Other requirements for mora creditoris are as follows:
The debt (performance) must have been capable of being fulfilled. The debtor must have made proper performance or at least have tendered proper performance. The creditor must have failed to accept the performance tendered or refused to co-operate to its being made. The creditor or his employees must cause the delay. The creditor must be at fault
Distinction between mora creditoris and other forms of breach of contract. It should be kept in mind that mora creditoris is not the only form of breach capable of being committed by the creditor. This form of breach refers only to delay (negative malperformance) by the creditor. 273 Van der Merwe et al 2007: 372 274 Van der Merwe et al 2007: 372
Where, for example, a contract of locatio conductio operis requires the creditor to supply instructions, drawings, specifications, materials or tools, and he does so defectively or supplies a defective item, the creditor’s conduct may amount to positive malperformance. Also, where a creditor points out the wrong stand for a builder to build on, he commits positive malperformance. The same applies if the client of an eye surgeon does not give correct answers to the surgeon’s questions, with the result that the spectacles as delivered are ineffective. Mora creditoris can be distinguished from repudiation, in that where a creditor acts in such a manner that the debtor may reasonably conclude that the creditor will not perform (co-operate) properly, it would be repudiation. It may be distinguished from other forms of breach by the creditor by virtue of the same considerations, mutatis mutandis, as those that apply to mora debitoris. Special consequences of mora creditoris275 When a creditor falls into mora in respect of an obligation, mora by the debtor in respect of that obligation is terminated, since a debtor and a creditor cannot be simultaneously be in mora in respect of the same obligation. 276 The debtor is, however, not excused from any liability for mora prior to the termination of his delay prior to the mora of the creditor.277 From the moment of mora creditoris, the debtor is liable only for damage due to his intent or gross negligence. From the moment of his mora, the risk of supervening impossibility of performance rests on the creditor. A surety in terms of the principle debt will be released by the mora of the creditor. Therewith, liability to pay interest on the principle debt should cease in case of mora by the creditor. The same principle applies to liability to pay for the use of goods which the debtor has properly tendered to return.278 A debtor is not released from his debt just because the creditor is in mora. A debtor is, however, entitled to sue for counterperformance, provided that he himself has tendered proper performance. A debtor is entitled to an order for specific performance, in other words an order compelling the creditor to receive performance. A creditor will be liable for damages, such as wasted costs, suffered by the debtor as a result of mora creditoris.279 275 Van der Merwe et al 2007: 373 276 Van der Merwe et al 2007: 373 277 Van der Merwe et al 2007: 373 278 Van der Merwe et al 2007: 374 279 Van der Merwe et al 2007: 374
The following cases demonstrate the working of the form of breach as handled by the courts, and should be studied in detail: Pienaar v Boland Bank 1986 (4) SA 102 (O) LTA Construction v Minister of Public Works & Land Affairs 1992 (1) SA 837 (C)
LAW OF CONTRACT PART IV REMEDIES Unit 17 The Principle of Reciprocity Learning outcomes: After completion of this unit, the student should be able to: 1. Critically discuss the nature of the principle of reciprocity and the exceptio non adimpleti contractus as applied in the case of BK Tooling (Edms) Bpk v Scope Precision Engineering (Edms) Bpk 1979 (1) SA 391 (A) 2. List and discuss the requirements for the application of the principle of reciprocity. 3. Discuss the attributes of the right to withhold performance. 4. Analyze the notion of relaxing the principle of reciprocity. Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 11, pp. 388-392. 2. From List of cases: BK Tooling (Edms) Bpk v Scope Precision Engineering (Edms) Bpk 1979 (1) SA 391 (A) Alternative study: 3. Christie. The Law of Contract in South Africa. 2006. Chapter 14.
Introduction to the Principle of Reciprocity According to Van der Merwe et al, obligations are reciprocal if they are created one in exchange for the other.280 A reciprocal contract, which are governed by what is known as the principle of reciprocity, is a contract in terms of which performance (or a tender of performance) by a plaintiff is a requirement for the enforceability of his claim for counter-performance.281 Thus, a party to a reciprocal contract may withhold performance in order to secure counter-performance. The right to withhold performance is generally known as the exceptio non adimpleti contractus (hereinafter referred to simply as the exceptio).282 The exceptio is an extraordinary remedy, as it is not an action with which to commence litigation, but merely a claim in replication. In cases of reciprocal obligations where the defect in the performance of one contractant does not justify cancellation of the agreement because the defect does not affect a vital part of the contract, the other contractant is entitled to withhold his counter-performance while he remains in possession of the defective performance. Facts of the BK Tooling-case Towards the end of 1973 the appellant received a drawing for the implementation of a rubber-fitting to the engines of certain Ford vehicles from a company known as Paulstra. Paulstra would manufacture such fittings and supply them to Ford. In order to supply and manufacture these fittings, Paulstra needed metal-moulds. The appellant was to submit a tender for the manufacturing and supply of these moulds. The drawing received by the appellant from Paulstra provided complete measures, and allowed a tolerance of 0,5 mm. Basically, it was to be symmetrical, consisting of two identical halves that would fit on top of another. The appellant made the necessary drawings for the manufacturing of a mould and at the end of 1973 he requested the respondent to finalise the metal moulds in order to create a prototype. This prototype was presented to Paulstra, which found it to be acceptable, and Paulstra subsequently placed an order from the appellant for 16 moulds at R5000.00 each. Two separate order forms were used for this order, both containing the following wording: Delivery= 20 May 1974 latest. The purchaser reserves the right to cancel the whole or part of this order at any time after the mentioned delivery date for goods not yet received.
280 Van der Merwe et al 2007: 388 281 Van der Merwe et al 2007: 388 282 Van der Merwe et al 2007: 388
127 The respondent was instructed by the appellant to do some finer work, which the latter was not capable of doing, with regard to the moulds. On the 8 th of March 1974 the respondent sent a letter to the appellant with the following content: We thank you for your verbal enquiry and have pleasure quoting as follows: The sinking of 32 rubber moulds. Price for one mould (one top and bottom impression)…R150. Material to be supplied by yourselves pre-machined as discussed with (the appellant). Delivery: 9 weeks after receipt of order and material.
The appellant only received the completed products on 19 June 1974, although he was himself responsible for certain delays. The appellant did not pay the respondent in terms of a note that payment would be made, and the respondent was unwilling to continue work on a second batch of moulds. Also, the respondent went overseas and only returned on 20 July 1974. By that time, the appellant was under tremendous pressure from Paulstra to deliver the moulds and was afraid that Paulstra would cancel the agreement between them. The respondent was persuaded to finish the second batch of moulds for the appellant, and same was received by the latter on 12 August 1974. On the 15th of August 1974 Paulstra tested the moulds. They did not adhere to the specifications that were agreed upon. Paulstra refused to accept the moulds. On the 16th of August 1974, the respondent contacted the appellant regarding payment of the former’s account. The appellant told the respondent that he was not going to pay the account as the work was unsatisfactorily done. The respondent, however, requested that the moulds be given back to him in order to allow him to make rectifications. This request was refused by the appellant. Application to the current matter The respondent in the court a quo based his claim on the exceptio in denying that the plaintiff “has duly performed its obligations”. Jansen JA noted that the basis of the exceptio is an acknowledgment that with contracts which create reciprocal duties, a contractant has the right not to perform before the other contractant has performed. Jansen JA mentioned a few “aspects” of the principle of reciprocity and its application by means of the exceptio, namely: a. In contracts wherein reciprocal obligations are created it is basically a matter of interpretation whether the obligations are so closely linked that the principle of reciprocity applies. b. The sequence of performance and counter-performance also depends upon the contractual provisions. If, however, another intention does not appear, the contractant, in locatio conductio operis for example, must first perform.
128 c. On the ground that the withholding of the thing sold was already regarded in the Corpus Iuris as being analogous to the holding of a pledge, on would expect that the exceptio would only apply as a defence until performance was actually made. The right of withholding (the converse of the exceptio) is, therefore, essentially a means of enforcing the counter-performance. It can fulfil a function similar to retention moneys in a building contract. On the other hand it follows that, as long as performance remains possible and the contract is not cancelled, the other party can still perform. Indeed, this possibility should be related to our (the South African) doctrine of mora and purgatio morae. d. If the right of withholding is regarded as being analogous to the holding of a pledge, it would entail that a party’s own performance could be withheld until the counter performance is fully made. In the case of locatio conductio operis it is all the more the case that the contractor must fully perform before he is entitled to the contract price. e. According to Voet 19.1.23 the onus is on the plaintiff, when the exception is raised against him, to prove that he has in fact performed his side of the contract. Since then, this has apparently never been doubted as far as our law is concerned. In the BK Tooling-case, the whole field and application and law relating to the principle of reciprocity were reviewed. In principle, thus, a contractant who claims performance by his co-contractant must allege in his pleadings that he has already performed properly or else that he is ready and able to perform properly. If the pleadings do not contain such an allegation, the other contractant may raise the exception that the pleadings disclose no cause of action. The contractant who makes the averments will bear the onus of proving them. A denial of the averments by the other contractant is a defence in terms of the principle of reciprocity.283 Requirements for the application of the principle of reciprocity The principle can only apply if the obligations are reciprocal, and if either of the contractants are required to perform simultaneously or the contractant, who claims performance, is bound to perform before the defendant. A contract who has a duty to perform first, cannot withhold that performance by virtue of the principle of reciprocity, even if he has reasonable grounds to believe that the other contractant will not perform in turn.284 Obligations are reciprocal if the contractants intend that one obligation is created in exchange for the other obligation. Contracts such as sale, lease, mandate, locatio conductio operis and insurance are usually treated as reciprocal contracts. A relation of reciprocity may exist where more than one obligation is created in exchange for a counter-obligation. Reciprocal obligations may even arise from separate contracts, as was decided in the case of Wynns Car Care Products (Pty) Ltd v First National 283 Van der Merwe et al 2007: 389 284 Van der Merwe et al 2007: 389
129 Industrial Bank Ltd 1991 (2) SA 754 (A). As a rule, parties to a reciprocal contract must perform simultaneously, unless they have agreed otherwise. The principle of reciprocity can be invoked not only where the contract creating the rights is still in force, but also where it is cancelled and rights already accrued survive the cancellation.285 Attributes of the right to withhold performance The right to withhold counter-performance is an instrument for enforcing specific performance. In this sense, it has been compared to a pledge, in the sense that the defendant may withhold his performance until the plaintiff performs properly.286 The exceptio is also depicted as a temporary defence aimed at obtaining specific performance of a performance that is indeed still possible. The defence is, however, not necessarily temporary in nature, and may also be available where outstanding performance is no longer possible.287 The exceptio is not available to enforce a claim other than a claim for performance under the contract, such as a claim for damages based on misrepresentation or breach of contract. Finally, the principle of reciprocity, including the concomitant right to withhold performance, is not a remedy for breach of contract, but simply denotes a requirement for the eligibility of a plaintiff’s right to performance.288 Relaxing the principle of reciprocity289 Should a contractant perform improperly with regard to an indivisible obligation, and simultaneously the co-contractant upholds the contract, the latter may retain may either retain the inadequate performance or reject it and claim proper performance. 290 In case of the latter scenario, the contractant who has committed malperformance cannot claim counter performance, unless proper performance is offered anew. In terms of the now defunct doctrine of substantial performance, a contractant could only reject the defective performance if it was substantially inadequate. For the purposes of the principle of reciprocity the doctrine of substantial performance has been rejected by the BK Toolingcase. The current emphasis is on the right of a contractant to receive proper and complete performance in terms of the contract. Accordingly, a contractant from whom performance is being claimed by a co-contractant, who is bound to deliver simultaneously with or before him, may in principle withhold his own performance until the co-contractant performs properly. If a defendant does withhold his performance, he will have to allow the plaintiff the opportunity to complete the defective performance, provided that proper performance still remains possible. The explanation for this is that a defendant who upholds the contract and relies on the defence of reciprocity in effect demands proper 285 Van der Merwe et al 2007: 390. 286 Van der Merwe et al 2007: 390 287 Van der Merwe et al 2007: 390 288 Van der Merwe et al 2007: 391 289 Van der Merwe et al 2007: 391-392 290 Van der Merwe et al 2007: 391
130 performance and is therefore only entitled to withhold performance in so far as proper performance is outstanding. If defective performance is eventually properly completed by the plaintiff, the defence of reciprocity is exhausted.
Unit 18 Specific Performance, Cancellation and Damages Learning outcomes: After completion of this unit, the student should be able to: 1. Identify, analyze and critically discuss the remedy of specific performance. 2. Identify, analyze and critically discuss the remedy of cancellation. 3. Analyze and discuss the claim for damages and what it entails, with specific reference to the case of Holmdene Brickworks (Pty) Ltd v Roberts Construction Co Ltd 1977 (3) SA 670 (A). Study: 1. Van der Merwe et al. Contract. General Principles. Third Edition. Chapter 11. 2. From List of cases: 3. Holmdene Brickworks (Pty) Ltd v Roberts Construction Co Ltd 1977 (3) SA 670 (A).
Alternative study: 4. Christie. The Law of Contract in South Africa. 2006. Chapter 14.
1. Specific Performance 1.1.
Performance in forma specifica refers to performance of that on which the contractants agreed. A claim for performance is thus based on the contract, and not the breach thereof. Where a contractant elects to uphold a contract and claim damages because of not having received his co-contractant’s performance, the value of the performance that should have been made must be taken into account when the damages are calculated. When damages (additional to specific performance) are calculated, all surrounding factors must be considered. In practice, damages are usually claimed in addition to specific performance. 1.2.
The right to specific performance
In early Roman law, a contractant who committed breach of contract could not be ordered to deliver a thing or render a service- only to pay a sum of money. In later Roman times and in Roman-Dutch law, however, the order for specific performance became possible.291In some instances specific performance would not be granted, for instance where performance became subjectively or objectively impossible or where the debtor became insolvent. In such a case the creditor would be satisfied with damages. In South African cases such as Farmer’s Co-operative Society v Berry 1912 AD 343 and Haynes v King William’s Town Municipality 1951 (2) SA 371 (A), the principle was adopted that a contractant is entitled to an order for specific performance in South African law, but that a court has a discretion to refuse such an order.292 Under influence of English law (which adopts an approach that specific performance is an exceptional remedy), the courts have exercised their discretion in such a manner that it appeared as if an order for specific performance would be automatically refused in the following circumstances: -
If it were supposedly difficult for the court to supervise the execution of the order for specific performance; If damages were to award sufficient redress.
This rather rigid approach to exercising the discretion of the courts elevated the “particular circumstances” to general rules, and obscured the fact that, according to South African law, an order for specific performance should be refused only in exceptional 291 Van der Merwe et al 2007: 383 292 Van der Merwe et al 2007: 383
132 circumstances.293 The appellate division has reaffirmed that a contractant is entitled to an order for specific performance in the case of Benson v SA Mutual Life Assurance Society 1986 (1) SA 776 (A), except where specific performance is impossible or if the debtor is insolvent. The court’s discretion to refuse specific performance is regarded as a judicial discretion which must be exercised in accordance with public policy and in such a manner that it does not bring about an unjust result. In the case of Haynes v King William’s Town Municipality mentioned above, the plaintiff had a contractual claim to receive regularly a certain quantity of water from a dam which supplied the town with water. In spite of a severe drought and a shortage of water, and although she did not need the water, the plaintiff claimed specific performance. The court refused to grant an order for specific performance, as such an order would have contrary to public interest. 2. Cancellation294 Cancellation of a contract, also referred to as “resiling form a contract”, is defined by Van der Merwe et al as a “unilateral juristic act which terminates certain consequences of a valid contract.”295 Cancellation is a contractual remedy in view of the fact that it is inferred from a contractual term, which comes into operation upon breach of contract. The term referred to will usually be an ex lege term. Cancellation is an extraordinary remedy which is only available in exceptional circumstances, namely where the breach of contract is material or serious, or where the contract provides for a right to resile (a so-called cancellation clause or lex commissoria). Common practice is for contractants to agree that cancellation may only take place after a written demand by one party to the other has not been complied with within a certain time. A contractant who has obtained a right to resile, is not necessarily obligated to do so, but remains entitled to specific performance. Is it possible, however, for there to exist exceptional circumstances in which a contractant can be expected to resile rather than insist on execution of the contract? In English law, the general rule is that where a contract has been repudiated, the other contractant need not accept the repudiation and cancel the contract, but may claim specific performance. 296 In South African law there is no rule that the victim of repudiation must resile merely because upholding the obligations would result in wasting a performance. Such “wastage” may however move a court to refuse an order for specific performance. Any limitation of a contractant’s capacity to claim specific performance in these circumstances would in such a case not be restricted to instances of repudiation, but ought to apply to all instances of breach of
293 Van der Merwe et al 2007: 383 294 Van der Merwe et al 2007: 398-400 295 Van der Merwe et al 2007: 399 296 Van der Merwe et al 2007: 400
133 contract. 297 I f a court were to refuse to grant an order for specific performance, the plaintiff could still claim damages where he has suffered damage, but his claim would be subject to the mitigation rule (see further on in this unit). A contractant who wants to claim damages after cancellation, may well be compelled to cancel at a convenient time in order to mitigate his damage. The right to resile is not a subjective right, but a power or competence.298 3. The claim for damages299 3.1.
Point of departure
The plaintiff (innocent party) must be placed in the financial position he would have been in had it not been for breach of contract, in so far as he can be place in this position by the payment of money and without due hardship to the defaulting party (Victoria Falls & Transvaal Power Co Ltd v Consolidated Langlaagte Mines Ltd 1915 AD 1). This broad pint of departure is referred to as “positive interest”, and includes the actual patrimonial loss as well as the loss of profit. Study the case of Holmdene Brickworks (Pty) Ltd v Roberts Construction Co Ltd 1977 (3) SA 670 (A) in detail. 3.2.
Patrimonial loss must be suffered
A plaintiff may only claim damages if he actually suffered damage to his estate. Not all breaches of contract will result in material damage. Consequently all claims for infringement of personality property will be excluded, as will claims for mental distress. A court will, however, award a discretionary amount for personal and physical discomfort. The damages must be estimated if they are not precisely determinable. 3.3.
Causation and the claim for consequential damages
Our present legal position is governed by the judgment in Shatz Investments v Kalovyrnas (see positive malperformance). The damage suffered must be causally linked to the breach itself. Two aspects of causation are relevant:
The contemplation of the (ordinary and consequential) damage itself. The exact moment of contemplation of all the consequential loss.
297 Van der Merwe et al 2007: 400 298 Van der Merwe et al 2007: 400 299 Recognition is hereby given to Prof N.J. Grobler: KON 224 Study Guide 2006,for this section.
134 In the Holmdene Brickworks-case, the court stated that “the defaulting party’s liability is limited in terms of broad principles of causation and remoteness to: a. Those damages that flow naturally from the kind of breach in question and which the law presumes the parties contemplated as a result of the breach; and b. Those damages that, although caused by the breach of contract, are ordinarily regarded by the law too remote to be recoverable, unless in the special circumstances attending the conclusion of the contract, the parties actually or presumptively contemplated that they would probably result from its breach.” For the recovery of special damages, the following are required: 3.4.
Special circumstances. Both parties contemplated the kind of damages in question should breach of contract occur. Both parties must be aware of the abovementioned special circumstances. Both parties must have contemplated the recovery of these damages. The recovery of these special damages must be expressly pleaded in a particular case.
The Mitigation Rule
The mitigation rule basically implies the following: The plaintiff must prevent the accumulation of his damages. The principle is that the plaintiff cannot recover damages from the defendant caused by himself. Said plaintiff must take active steps to prevent further damages arising, and must also take reasonable steps to ensure such prevention of further damages. The said steps must not be laborious, arduous, or expensive. 3.5.
The “Once-and-for-all” Rule
It is a principle of our law that a person can only approach the court once on the same cause of action. If one institutes litigation, the plaintiff must claim everything and all amounts simultaneously.