CHAPTER 1 [LEARNING UNIT 1]: The Nature and Basis of Contract
1.1 The notion of a Contract
What is a Contract? How does a contract differ from any other agreements?
1.1.1 Contract as an agreement intended to create enforceable obligations
A Contract is an agreement between two or more parties, but not all agreements are
contracts.
Examples of non-binding agreements:
o Two people agree to play tennis together.
o A husband agrees to wash dishes after dinner.
o A joke agreement or an agreement made during a play.
The key difference between a Contract and a Non-binding agreement is the serious
intention to create legally enforceable obligations (animus contrahendi).
Gentlemen’s agreements are NOT enforceable because they are only meant to be binding
in honor, not in law.
Determining whether an agreement is legally binding depends on the facts and available
evidence.
[Some cases can be difficult to judge.]
If one party leads another to reasonably believe the agreement is binding, the law may
enforce the contract to protect that belief, even if genuine agreement was absent.
1.1.2
Legally binding agreements that are not Contracts
Binding Agreements vs Contracts:
o Not all binding agreements are contracts.
o Some agreements aim to destroy obligations or transfer rights, rather than create
them.
Types of legally binding agreements:
1. Obligationary agreements:
o
Create one or more obligations.
o
Example: Sale or lease contracts (e.g., seller transfers the item, buyer pays
the price).
2. Absolving agreements:
o
Discharge or extinguish obligations.
o
Example: Agreement to cancel a sale or release a party from obligations.
3. Real (Transfer) agreements:
o
Transfer rights between parties.
o
Example: Transfer of ownership in a sale by traditio (both physical and
mental elements).
1.1.3 Legally binding agreements that are more than just contracts
Some legally binding agreements create obligations but cannot be regarded as ordinary
contracts due to being sui generis in nature.
Examples of such agreements:
o
o
o
Marriage
Judgment by Consent
Agreements with Public Bodies or State
1.1.4 Definition of Contract
Definition of a contract:
A Contract is an agreement between two or more persons with the intention of creating a
legal obligation or obligations.
Additional element for a valid contract:
o
o
The agreement should be one that the law recognizes as binding on the parties.
This implies that various requirements, beyond just agreement, must be met for the
contract to be binding.
Common practice:
o
Even if some requirements for validity are absent, and the agreement fails, it is still
commonly referred to as an "invalid contract."
1.2 Requirements for a valid contract
The requirements for a valid and binding contract:
•
Consensus:
The parties must agree on all material aspects of the agreement (or at least appear to
agree).
•
Capacity:
The parties must have the necessary capacity to contract (e.g., legal age, mental
soundness).
•
Formalities:
If required, the agreement must be in a specific form (e.g., written and signed).
•
Legality:
The agreement must be lawful, meaning it cannot be prohibited by statute or common law.
•
Possibility:
The obligations must be capable of being performed when the agreement is made.
•
Certainty:
The agreement must have clear, definite, or determinable content to allow obligations to be
enforced.
1.3 The Nature of Contract
Juristic Act:
o A contract is a Juristic Act, meaning the law attaches consequences to the actions
intended by the parties.
o Unlike a delict (wrongful act), the execution of a will is unilateral, whereas a contract
is bilateral or multilateral, requiring at least two parties.
Parties Involved:
•
A unilateral promise (pollicitatio) is not binding under the law.
•
Even in agreements imposing obligations on only one party (e.g., contract of
donation), a meeting of minds is necessary.
Promises or Undertakings:
A contract involves promises or undertakings to perform specific actions:
o
To give (dare)
o
To do (facere)
o
To refrain from doing (non facere)
A contract can also involve a warranty (e.g., assuring that a car is a 2019 model and
regularly serviced).
Reciprocity:
o
Most contracts involve reciprocal promises or obligations (e.g., one party gives
money in exchange for another party’s car).
o
Reciprocity emphasizes the economic function of contracts, allowing voluntary
exchange of goods and services.
o
Some legal systems, like English law, require "consideration" (something of value
exchanged) for a promise to be enforceable.
Informal Nature of Contracting:
o
Modern contracting tends to be informal.
o
While large contracts may involve formalities, most contracts today are concluded
orally or tacitly (e.g., buying groceries, renting a movie, parking a car).
Generalized Concept of Contract:
o
A contract doesn't have to be of a specific type (e.g., sale, lease, deposit) to qualify.
o
Contracts are based on freedom of contract, allowing parties to agree on any lawful
terms.
o
All contracts are consensual (based on agreement) and bonae fidei (conducted in
good faith).
1.4 Contract and the Law of Obligations
Definition of Obligation:
o
An obligation is a legal bond (vinculum iuris) between two or more parties.
o
It obliges the debtor to give, do, or refrain from doing something for the creditor.
o
It involves a right of the creditor (to demand performance) and a duty of the debtor
(to perform).
Personal Nature of the Obligation:
o
The relationship created by an obligation is personal, binding only the parties
involved.
o
The creditor can demand performance from the debtor, and the debtor must
perform only for the creditor.
o
The right created is a personal right (ius in personam), unlike a real right (ius in
rem) such as ownership, which prevails against everyone.
Multiple Parties:
o
There may be multiple co-debtors or co-creditors involved in a single obligation.
Civil vs. Natural Obligation:
Civil obligation: Enforceable by action in court.
Natural obligation: Unenforceable by law but has legal consequences (e.g. Gambling
Debts).
o
For example, debts owed under a natural obligation may be set off against another
debt, and payments made under a natural obligation cannot be recovered in an
enrichment action.
Sources of Obligations:
•
Primary sources: Contract and Delict.
•
Other sources include unjustified enrichment, negotiorum gestio (unauthorized
administration of another’s affairs), family relationships, wills, and statutes.
Comparison of Contract, 1.4.2 Delict and 1.4.3 Enrichment
1.5 Contract and Law of Property
Property, in a narrower sense, refers to material things like books or cars, governed by the
law of things, which focuses on real rights such as ownership and servitudes. In a broader
sense, property includes both corporeal and immaterial assets, like copyrights and
personal rights. Many commercial transactions involve both contractual and proprietary
aspects, such as in sales or donations, where agreements lead to the transfer of
ownership. In South African law, even if a contract is invalid, ownership may still transfer
under the abstract system, but the transferor may face risks, like not being able to recover
property if the transferee goes insolvent, highlighting the importance of real rights in
contrast to personal rights.
1.6 The Development of the modern motion of contract
PLEASE GO READ!
1.7 The impact of the Constitution
The advent of the Constitution has profoundly influenced contract law by ensuring that all
contractual rules, principles, and doctrines must align with the Bill of Rights and the values
of the Constitution. The Constitution applies both vertically (between the State and
individuals) and horizontally (between private parties), which means that contract law is
now subject to constitutional control. There is a distinction between direct and indirect
horizontal application, with direct application allowing constitutional provisions to directly
affect contracts, and indirect application influencing the development of common law
principles based on constitutional values. Section 39(2) of the Constitution mandates that
the common law must reflect the spirit of the Bill of Rights. This has led to contracts or
provisions being deemed unenforceable if they violate constitutional rights or public policy,
as well as impacting on the exercise of contractual powers, such as termination or
withholding consent, if these actions unjustifiably infringe on constitutional rights.
Additionally, courts can now compel the formation of contracts where refusal to contract
amounts to unfair discrimination, as seen in various cases where individuals were unjustly
denied services or employment based on discriminatory grounds.
1.8 The basis of Contract
What must be proven in order to establish that a contract exists?
1.8.1 Introduction
In modern law, contracts are consensual, meaning they are based on an agreement. The
key question is whether an agreement requires a genuine meeting of minds or just an
objective appearance of agreement. This raises the issue of whether the law follows a
subjective approach (based on actual intentions) or an objective one (based on how a
reasonable person would interpret the actions and words of the parties). This distinction is
crucial in determining how contracts are formed and enforced.
1.8.2 Actual subject agreement (consensus)
Genuine agreement requires a true meeting of the minds (concursus animorum), where all
parties: intend to contract, agree on the material aspects (such as the terms and
identities), and are aware that their minds have met. This consensus is achieved through
communication, often in the form of offer and acceptance. The process involves three
aspects: A's true intention, A's expressed intention, and B's understanding of A's intention.
Ideally, all align, resulting in perfect consensus.
1.8.3 Apparent or Objective Agreement
Divergence between true intention and expressed or perceived intention may result in
dissensus, where the message sent differs from the message received. This can occur due
to hidden reservations or misunderstandings. In such cases, the question arises whether a
contract can exist despite the lack of actual agreement. If one party's conduct creates an
objective appearance of agreement, and the other party reasonably relies on it, the law
may protect the reasonable belief that an agreement exists. This depends on whether the
legal system adopts a subjective approach (focusing on actual agreement) or an objective
approach (focusing on external appearance).
1.8.4 Theories of Contract
The will theory bases contract law on individual will, asserting that parties are bound
because they have chosen to be, emphasizing autonomy in contract formation. However,
strictly adhering to this theory can lead to unfair and economically harmful outcomes, as it
ignores the reasonable expectations of parties who rely on the objective appearance of
agreement. To address this, some legal systems adopt the declaration theory, which
focuses on external manifestations of intent rather than inner will. However, this theory
also proves impractical, as it fails to account for mistakes and misunderstandings. A
middle ground, the reliance theory, suggests that contracts are based on the reasonable
reliance on the appearance of agreement, even when actual consensus is lacking. This
theory protects parties' reasonable expectations while still allowing for correction in cases
of mistake. Our legal system prefers this approach as a supplement to the will theory,
especially when genuine consensus is absent.
1.8.5
Approach to Contract: Subjective or Objective?
South African law, rooted in Roman-Dutch law and influenced by English law, has
fluctuated between subjective and objective approaches to contract formation. Early
Roman-Dutch thinkers favored a subjective approach, focusing on a true meeting of minds
(consensus). English law, on the other hand, has favored an objective approach,
emphasizing the external manifestations of intent, as seen in the case of Smith v Hughes.
In South Africa, while early cases followed Roman-Dutch thought, the I Pieters case
adopted the English approach, affirming that a reasonable appearance of agreement could
create a contract. However, South African courts have recently reasserted the importance
of genuine consensus, correcting deficiencies with the reliance theory in cases of
dissensus. The case of Steyn v LSA Motors Ltd illustrated this shift, where the court
emphasized that a reasonable person must rely on the offeror's intention, as expressed in
the offer, rather than assuming the contract based solely on outward appearances. Thus,
South African law blends subjective and objective approaches, with an emphasis on true
consensus but allowing for reliance-based liability in certain cases.
1.8.6
Dual basis of Contract in Modern Law
In modern South African law, contract formation is based on two principles: consensus
and reasonable reliance. The primary basis is consensus, meaning that a contract exists
when there is a genuine meeting of the minds between the parties. This follows the will
theory and is fundamentally subjective. If consensus is established, no further inquiry is
needed.
However, if consensus is absent, the law turns to reasonable reliance as a secondary
basis. This means that if one party’s words or conduct reasonably led the other to believe
that a contract existed, the law may uphold the agreement based on quasi-mutual
assent. This approach tempers subjectivity with objective considerations to protect
legitimate expectations.
While English law follows a declaration theory as its starting point—focusing on external
expressions of agreement—it also applies the reliance theory in cases of mistake or
misunderstanding. Ultimately, the reliance theory serves as a middle ground between
the extremes of will (pure subjectivity) and declaration (pure objectivity), ensuring fairness
in contract law.
1.8.7 Proving the existence of a Contract
In South African contract law, the onus of proving the existence of a contract lies with the
party who alleges its existence. This can be done by demonstrating either:
1. Consensus – proving that the parties actually reached an agreement.
2. Reasonable reliance – showing that one party’s conduct reasonably led the other
to believe there was an agreement.
Proving Consensus vs. Using Objective Evidence
Although consensus (a subjective state of mind) is the primary basis of contract, it is often
proven through objective evidence—such as the parties’ declarations or a signed
document. However, just because objective evidence is used to prove consensus does not
mean that South African contract law is purely objective.
Shifting the Evidentiary Burden
o
If A sues B based on a contract and B denies its existence, A must provide objective
evidence (e.g. a signed contract).
o
B’s signature serves as prima facie proof of consent, shifting the burden to B to
prove otherwise.
o
B may argue lack of true agreement due to mistake, fraud, or misrepresentation.
If B successfully proves that no consensus was reached, then A must establish reasonable
reliance—that A reasonably believed that B had consented. Since a signed document
generally indicates consent, B must then prove that A’s reliance was unreasonable, such as
by showing:
•
A knew or should have known about B’s mistake.
•
The document was misleading or deceptive of a "trap for the unwary."
This framework ensures that contract formation remains fair, balancing subjective
intention with objective indicators of agreement while protecting reasonable
expectations.
1.9 Cornerstones of a Contract
In South African contract law, consensus and reliance are central to contract formation,
but several other fundamental principles also shape contractual relationships:
By now, it will be obvious that consensus and reliance are fundamental concepts in the
modern law of contract. Other fundamental ideas include the following:
o Freedom of contract
The idea that people are free to decide whether, with whom and on what terms to contract
(party autonomy);
o Sanctity of contract
The idea that contracts freely and seriously entered into must be honored and, if necessary,
enforced by the courts (pacta sunt servanda);
o Good faith
The idea that parties to a contract should behave honestly and fairly in their dealings with
one another, showing a minimum level of respect for the interests of the other party (a
concept embraced by the African notion of ubuntu); and
o Privity of contract
The idea that a contract creates rights and duties only for the parties to the agreement, and
not for third persons.
1.9.1 The goals of Contract Law
The evolution and role of contract law in a modern economy. Initially, in a simple economy,
goods and services are exchanged through barter or immediate cash transactions,
minimizing the role of contracts. However, as transactions become more complex and
involve future obligations, parties must rely on each other's promises, increasing risk and
the need for legal enforcement.
Key Functions of Contract Law:
o
o
o
o
Facilitating Trust in Transactions
Providing Legal Enforcement Mechanisms
Balancing Freedom and Regulation
Supporting Private Enterprise
Thus, contract law is not just about enforcing promises but about creating a fair,
predictable, and reliable legal environment that enables commerce and safeguards
justice.
1.9.2 Competing values in the law of Contract
The fundamental tension in contract law: balancing sanctity of contract with fairness in
contractual dealings. These two principles often pull in opposite directions, and finding
the right balance is a key challenge in modern contract law.
Key Themes in the Debate:
1. Sanctity of Contract & Freedom of Contract
o
Rooted in individualism and economic liberalism, this principle asserts
that freely concluded contracts should be enforced by courts.
o
It promotes certainty in commercial dealings, ensuring that contracts are
predictable and legally binding.
o
Clear, rigid legal rules provide stability for businesses and individuals,
minimizing judicial discretion.
2. Fairness, Good Faith & Social Control
o
A communitarian approach emphasizes that contracts must be fair and
reasonable, aligning with public policy, morality, and constitutional
values.
o
Courts should have discretion to intervene and refuse to enforce
unconscionable or exploitative contracts.
o
This approach favors open-ended standards like good faith and
reasonableness, allowing flexibility in achieving justice.
3. The Core Tension: Certainty vs Justice
o
Enforcing harsh contracts undermines justice, but allowing escape from
obligations undermines certainty.
o
Rigid rules create predictability but limit courts’ ability to ensure fairness.
o
Flexible standards allow fairness but make contract law less predictable,
increasing legal uncertainty.
4. The Constitutional Shift
o
Historically, South African contract law favored sanctity of contract over
equity.
o
Under the Constitution, the law is shifting towards a greater focus on
fairness, emphasizing ubuntu, good faith, and public interest
considerations.
The challenge in contract law is striking a balance between individual autonomy in
contract formation and ensuring fair, socially responsible outcomes. This balance will
continue to evolve as societal values, and constitutional principles shape the future of
contract enforcement.
1.9.3 Freedom and Sanctity of Contract
Classical contract law, rooted in freedom and sanctity of contract, assumes that parties
contract freely, with equal bargaining power, and minimal state interference. However,
modern realities challenge these assumptions, such as unequal power dynamics, market
dominance, and widespread use of standard-form contracts often leave one party with
little to no choice. The rise of consumer protection laws, government regulation, and
constitutional principles like fairness, good faith, and ubuntu has led to a shift in
contract law. Courts now balance legal certainty with fairness, ensuring that contracts
are not only enforced but also just, particularly in consumer and human rights contexts.
This marks a departure from rigid classical doctrines toward a more socially responsible
approach to contract law.
1.9.4 Good Faith, Equity and Public Policy in Contract
The concept of good faith, rooted in Roman law, has evolved to balance freedom of
contract with fairness in modern law. In South Africa, debates have focused on whether
fairness and good faith should allow courts to intervene directly in contracts. While courts
acknowledge the importance of these values, they emphasize that intervention is only
justified when a contract term is unjust or contrary to public policy. The Constitutional
Court has increasingly incorporated constitutional values like ubuntu into its decisions,
promoting fairness while maintaining legal certainty. The Beadica case highlighted the need
to balance contractual freedom with public policy, stressing fairness and reasonableness
in contract law.
1.10
The Consumer Protection Act 68 of 2008 (CPA)
The Consumer Protection Act (CPA), which came into effect on 1 April 2011, aims to
protect consumers from exploitation and promote fair business practices in South Africa. It
establishes a legal framework to ensure a fair, accessible, and responsible consumer
market and protects consumers' rights, including the right to privacy, equal treatment, fair
marketing, and fair, just, and reasonable terms and conditions. The Act prohibits terms that
mislead or exploit consumers, such as waiving rights or limiting supplier liability for gross
negligence. It also mandates that terms be fair and transparent, ensuring they are not
excessively one-sided or inequitable. Non-compliance with the CPA can result in
sanctions, including fines and penalties, and may render certain contract terms void. The
CPA applies to most transactions between suppliers and consumers but excludes certain
transactions like those involving the State or larger businesses.