Additional notes
TOPIC 3: INTRODUCTION TO LAW OF CONTRACTS
Learning Outcomes:
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Consequent to the successful completion of this module, you should be able to
have a basic understanding of valid contracts;
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capacity to contract;
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formalities required for the formation of a valid contract;
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terms of a contract;
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interpretation of a contract;
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breach of contract;
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remedies for the breach of contract;
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transfer of ownership;
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termination of personal rights.
The Term Law:
The term "law" refers to a system of rules and regulations that are established and enforced by a
governing authority or a society to regulate behavior, ensure order, and provide a framework for
resolving disputes. Laws play a fundamental role in maintaining social order, protecting individual
rights, and governing the interactions between individuals, organizations, and governments.
Commercial Law
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Commercial law, also known as business law, refers to the body of legal rules and
regulations that govern commercial transactions and the operations of businesses. It
encompasses a wide range of legal principles and rules that regulate various aspects of
commerce, trade, and business interactions. Commercial law plays a crucial role in
facilitating economic activities, protecting the rights of parties involved, and ensuring fair
and ethical business practices.
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Here are some key areas and concepts within commercial law:
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Contracts
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Sale of goods
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Commercial transactions
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Business entities
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Banking & Finance
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Intellectual property
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Consumer protection
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E-commerce and online transactions
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Dispute resolution
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Corporate compliance
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International Trade
Contracts:
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Contracts are fundamental to people’s daily lives. Agreements are constantly being
entered into by some individuals with others, and by businesses with other businesses,
to sell or buy goods and services, and to create rights and duties. When we buy food we
enter into a contract of sale; being employed we are engaged under a contract of
employment, when we rent a house or a building we have a contract of lease. The list is
endless; without enforceable contracts, the functionality of the business environment
will be negatively impacted.
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A contract is a legally binding agreement between two or more parties that outlines the
terms and conditions under which they agree to perform certain actions or fulfill specific
obligations. Contracts are an essential aspect of business and legal relationships, as they
provide a framework for parties to understand their rights, responsibilities, and the
consequences of failing to meet their obligations.
Obligation:
According to Peter Havenga et al (2014), General Principles of Commercial law;7th edition; Juta
Cape town ; P47
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“An obligation is the legal relationship that exists between parties to an agreement when
they acquire personal rights against each other that entitle them to performance and/or
oblige them to perform. Performance may entail an obligation to do or not to do
something. Personal rights may come about through various events, for instance through
delict or contract. Thus , we have the conclusion of a contract as an event giving rise to
obligations.”
Consensus:
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In order for consensus to exist there must be:
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There must be an agreement (consensus conveyed by offer and acceptance) to
perform something;
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There must be an intention to create a legally binding relationship (known as
animus contrahendi);
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There must be reality of consent between parties;
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Parties must have capacity to enter into a contract;
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The terms of the contract must be sufficiently certain to be enforced;
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The contract must be possible of performance;
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The contract must be lawful.
The essential elements of a contract:
Freedom to contract: Freedom to contract is considered to be one of the cornerstones
of the modern law of contract and one is generally free to choose with whom and on what
grounds one wants to contract with another.
1) Capacity to contract: For a contract to be valid, all the parties to the contract must
have the capacity to enter into the contract. Legal capacity is affected by the age,
insanity and the influence of drugs and alcohol.
‒ Age: s17 Children's Act 38 of 2005 states that persons under the ages of 18 –
minor – limited contractual capacity
‒ This group is divided into infants (0-7years), minors (7-18years) and
emancipated minors
‒ BCEA – employers are forbidden to employ persons under the ages
of 15years
‒ Persons between 15 – 18 years are entitled to enter into contracts,
provided:
‒ Consent from their parents/ guardians or persons has been
emancipated
‒ Insanity: A person who is insane is one who does not comprehend the nature of
the transaction that is being concluded, or who concludes the transaction under
the influence of insane delusions.
‒ Two categories – certified and uncertified insane persons: No CC.
‒ Influence of drugs and alcohol: A person who acts under the influence of
drugs and alcohol has no contractual capacity – null & void.
‒ The onus of proving intoxication or the influence of drugs, rests on
the person who alleges it.
2) The Contract must be legal: This means that the contract must be for a legal purpose,
that it must not be illegal for the persons themselves to contract. For example: illegal
contract is the selling of uncut diamonds – void.
3) The contract must be capable of being performed - For a contract to be valid,
performance under the contract must be possible. i.e, it must be both physically and
mentally possible for both parties to fulfil their obligations under the contract.
o For eg: Building contractor hiring paraplegic persons to paint a building
4) The intention of the contracting parties must be the same - Parties must have the
intention to enter into a contract of the specific nature of the alleged contract.
a. Should one party make idle conversation that the other party misconstrues as an
offer of a contract, no contract is concluded.
b. For example: If Mark and John meet and talk over a beer. Mark who owns a
business mentions that he is short-staff. This occurs soon after John mentioning
that he had been laid-off (retrenched) from his previous employment. John then
misconstrues that as an offer of employment. Only to find that when John goes
to Marks business on Monday morning, there is no work for him.
5) Voluntary Agreement - Free will – no party should be coerce another party into
entering a Contract
Agreement may be affected by misrepresentation, mistakes, undue influence or
duress:
Misrepresentation - Occurs when one party intentionally or
unintentionally deceives the other with regard to an aspect of the
contract to be concluded.
Mistake - No contract can be concluded unless the parties have reached
agreement on the object of the contract. An error renders the contract
null & void.
Undue influence - Occurs when a person in an influential position. Eg,;
Doctor of a terminally ill patient persuades the patient to sell their house.
Duress - Occurs when a threat of imminent harm is used to induce a
party to contract.
6) Duration of the contract - Two types of contracts: Fixed and indefinite period
contracts
Fixed-term contracts clearly specify the start and finish date of the contract.
Indefinite contracts is when the termination of contract is not specified, the
contract is set to run for an indefinite period. Under these circumstances'
termination of contract will occur by agreement and giving notice or dismissal.
7) Formalities –
Written contract: document that sets out the terms & conditions of the
employment (rights) of both the parties and stipulates the rights of both parties
in the most common form of contract. **- safest way of concluding a contact
as, should dispute arise, the contract will be form the evidence of the agreement.
Verbal contract: exists when parties reach verbal agreement on certain terms
& conditions of the employment, such as; wages, working hours, leave etc. –
Risky way of concluding a contract since its often difficult to adjudicate a
dispute of this type of contract, becomes one word against another & there’s no
concrete proof of what actually agreed upon.
Tacit contract: When an employment relationship exists between two parties,
but terms and conditions of that relationship have not been documented, the
conduct of the parties would shed light on the previous terms and conditions of
the employment
8) Termination of contracts:
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On expiry of the agreed period
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On completion of the task for which the contract was entered into
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By either parties giving the required notice
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By summary termination (dismissal)
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By mutual agreement
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By statutory dismissal
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By death of either party
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By insolvency
9) Remedies: When a contract is breached, meaning one party fails to fulfill its obligations
as outlined in the agreement, the non-breaching party typically has several available
remedies to address the situation. The specific remedies that can be pursued depend on
the nature of the breach, the terms of the contract, and the applicable laws in the
jurisdiction. Here are some common remedies for breach of contract:
Damages: Damages are the most common remedy for breach of contract.
Damages are intended to compensate the non-breaching party for the losses
suffered as a result of the breach. There are different types of damages:
Compensatory Damages: These are designed to put the non-breaching party
in the position they would have been in if the contract had been performed as
agreed. This could include direct financial losses, such as costs incurred due to
the breach.
Consequential (Special) Damages: Also known as indirect or special damages,
these are the foreseeable losses that result from the breach but are not a direct
consequence of it. The non-breaching party must demonstrate that these
damages were reasonably foreseeable at the time of contracting.
Specific Performance: In cases where the subject matter of the contract is
unique and damages would not be an adequate remedy, the non-breaching party
may seek a court order requiring the breaching party to fulfill their contractual
obligations. This is known as specific performance.
Rescission: Rescission involves canceling the contract and restoring both
parties to their pre-contract positions. Rescission is usually available when there
has been a material breach of contract or if the contract was entered into under
fraudulent or misleading circumstances.
Reformation: If there is a mistake or ambiguity in the contract, reformation
allows the court to modify the contract to reflect the true intentions of the
parties.
Mitigation: The non-breaching party has a duty to mitigate (minimize) their
damages by taking reasonable steps to reduce the impact of the breach. Failure
to mitigate may limit the damages that can be recovered.
Liquidated Damages: In some contracts, there might be a provision specifying
a predetermined amount of damages that will be payable in case of breach. This
is known as a liquidated damages clause. However, such clauses must be
reasonable and not function as a penalty.
Equitable Remedies: Equitable remedies, such as injunctions or specific
performance, are often available when monetary damages are inadequate to
address the harm caused by the breach.
Cancellation and Restitution: If one party breaches a contract, the other party
might choose to cancel the contract and seek restitution, which involves
returning any benefits or consideration received under the contract.
For additional information kindly read the prescribed or recommended textbook.
THE END…