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.
2.1. Introduction
A contract is formed when the parties reach an agreement on ALL material aspects
of the contract. The process of reaching an agreement involves mutual declarations
of the INTENTION by the parties. These declarations are analysed in terms of the
rules of OFFER and ACCEPTANCE.
Example: A makes an offer to B by proposing certain terms on which she is prepared
to contract with B. B either accepts these terms or rejects them. If B proposes some
modification to the terms, he makes a counter-offer, which A must accept or reject.
This process of bargaining continues until consensus is reached by one party
unequivocally accepting the terms proposed by the other.
How can parties to a contract express their intentions?
-
In writing
-
Orally
-
Or by conduct (e.g. by a nod of the head or by raising a hand at an auction).
Only in high exceptional circumstances can silence signify an agreement, e.g.
where previous dealings between the parties make it reasonable to interpret a
failure to respond as the acceptance of an offer.
A contract can also be formed:
-
Tacitly, thus without any words being used.
-
In writing.
2.2. The offer
An offer is a declaration of intention by one party (the offeror a.k.a. the giver) to
another (the offeree a.k.a. the receiver), indicating the performance that he or she is
prepared to make, and the terms on which he or she will make it.
We normally know an offer to be addressed to one person, but it can be addressed
to a group of people, or even the general public (the offer of a reward, e.g.
advertisement).
2.2.1. Legal effect of an offer
A contract is a BILATERAL juristic act founded on an agreement. If it happens to be
a unilateral declaration of will by one of the parties, the offer CANNOT give rise to
binding obligations.
An agreement not to withdraw an offer is known as an option.
2.2.2. Requirements for a valid offer
2.2.2.1. The offer must be firm
The offer being a firm one must be made animo contrahendi – meaning, with
the intention that its acceptance will call into being a binding contract. This
requirement will NOT be fulfilled if one of the parties makes a statement that
isn’t certain i.e. vague to the other with the intention of sounding the other out
in order to find out whether he or she would be prepared to enter into
negotiations.
2.2.2.2. The offer must be complete
The offer must contain all the material terms of the proposed agreement –
there CANNOT be further matters that still have to be negotiated before the
overall agreement can take effect. In other words, the fact that the parties
have reached agreement on issues A, B and C cannot give rise to binding
obligations, if issues D and E still have to be discussed, and the intention of
the parties is that there will be no binding contract until a comprehensive
agreement is reached.
2.2.2.3. The offer must be clear and certain
The offer must be sufficiently certain; it should be enough for the addressee
merely to answer ‘yes’, for a contract to come into being. If the offer is so
vague that it fails to provide a reasonably clear indication of what the
offeror has in mind, no acceptance of the offer can create a binding
obligation because it will be impossible to determine the content of that
obligation. For example, if Christine says to Sepho: ‘I will buy your car if it
suits me’, then Sepho cannot accept the offer, because it is too vague. In this
case, the agreement would be regarded as void for vagueness.
2.2.2.4. The Consumer Protection Act 68 of 2008 (CPA)
The CPA introduces further requirements regarding offers
•
The offer must be in plain and understandable language.
In terms of the CPA, the producer of a notice, document or visual
representation that is required to be provided to a consumer must
provide that notice, document or representation in the prescribed form,
if any, or in plain language if no form has been prescribed. The Act also
provides that the producer must provide the consumer with a notice,
document of visual representation that is in plain language to such an
extent that the consumer could be expected to understand the content
WITHOUT undue effort.
•
The offer must disclose whether goods are reconditioned or greymarket goods.
In terms of section 25 of the CPA, a person who offers to supply any
goods that have been reconditioned, rebuilt or remade and bear the
trademark of the original producer or supplier must indicate in a clear
visible way that the goods have been reconditioned, rebuilt or remade.
•
Negative option marketing is prohibited.
Section 31 of the CPA provides that a supplier may not promote any
goods or services on the basis that the goods or services are to be
supplied unless the consumer declines the offer. Agreements, including
amendments to agreements, entered into as the result of negative
option marketing are void.
•
Consumers have the right to a cooling-off period if goods were
marketed to them directly.
A person who markets goods or services directly to a consumer at a
place other than their usual place of business must inform the
consumer that, in terms of section 16 of the CPA, he or she is entitled
to rescind any contract concluded by NOTICE to the supplier in
writing, or another recorded manner, within five days of, the later of,
either the date on which the agreement was concluded, or the date on
which the goods were delivered to the consumer.
•
Catalogue marketing is regulated.
According to section 32(1) of the CPA, if a consumer initiates and
enters into an agreement for the supply of goods or services, not in
person, but telephonically or by postal order, or in any similar manner
in which the consumer does not have the opportunity to inspect the
goods prior to conclusion of the contract, the supplier must disclose the
following information to a consumer:
o the supplier’s name and its licence or registration number;
o the supplier’s physical address;
o the sales record information required in terms of section 26;
o the currency in which the price must be paid;
o the supplier’s delivery arrangements;
o the supplier’s cancellation, return, exchange and refund policies;
and
o the manner and form in which a complaint may be lodged.
2.2.3. Offers to the public
Although one cannot contract with the general public, one can address an offer to
the public at large, or to a segment of the public, and then conclude a contract with
specific members of the public who respond to the offer.
READ: The Carlill v Carbonic Smoke Ball Co case
2.2.3.1. Advertisements
The general rule in our law is said to be that an advertisement constitutes merely an
invitation to do business rather than an offer. The authority cited in favour of this is
the old case of Crawley v Rex.
In terms of section 30(1) of the CPA, bait marketing is prohibited. A supplier may
NOT advertise goods or services as being available at a specified price in a manner
that may result in consumers being misled or deceived in any respect as to the
actual availability of the goods at the advertised price. If the supplier places a limit on
the availability of goods, it must make those goods or services available to the extent
of the expressed limit.
2.2.3.2. Promises of reward
The first person who, consciously responding to the advertisement, performed the
required act (for example, furnished information to the police) would have accepted
the offer and thus become contractually entitled to the reward. The Bloom v
American Swiss Watch
2.2.3.3. Calls for tenders
An invitation to the public to submit a tender for work to be done is NOT an offer that
is open to acceptance by the highest tenderer. At most, it is an invitation to potential
tenderers to make offers that will be considered after the closing date for the
particular tender.
2.2.3.4. Auctions
The conditions of auctions are drawn up by the seller or the auctioneer (acting as the
agent of the seller) and are communicated to potential buyers by being advertised or
displayed at the auction venue or being read out at the beginning of the sale. These
conditions are binding on both the auctioneer and on bidders.
The conditions for auctions will stipulate whether the auction is to be with or without
reserve.
•
WITHOUT RESERVE: the auctioneer is bound to sell to the bona fide
bidder.
•
WITH RESERVE: the auction is subject to a reserve price being met.
The presumption, in cases of doubt, is that the auction is subject to reserve, so that
usually it will be the bidder who makes the offer. This is consistent with section 45(3)
of the CPA which provides that a sale by auction is complete when the auctioneer
announces its completion by the fall of the hammer, or in any other customary
manner. However, section 45(4) requires that notice be given in advance that a sale
by auction is subject to a reserved or upset price.
Section 45(4) also requires notice to be given in advance if the owner or the
auctioneer (or someone on their behalf) has the right to bid at the auction. If such
notice is not given, and the goods are knocked down in response to a bid by one of
these people, the consumer may approach a court to have the transaction declared
fraudulent, and thus void.
2.2.4. Termination of an offer
2.2.4.1. Rejection of the offer
An offer falls away if it is rejected by the offeree, whether expressly or impliedly. An
offer is impliedly rejected if the offeree makes a counter-offer; that is, where the
offeree, instead of accepting the offer, makes a new offer in return.
2.2.4.2. Death of either party
Since an offer in itself creates no obligations, there is neither a debt that can pass to
the estate of the deceased offeror, nor any contractual right that can pass to the
estate of the deceased offeree.
However, if the offeror has promised not to withdraw the offer (such a promise
constitutes a contract of option, which is binding on the estate of the offeror), then
the offer does not terminate upon the death of a party.
2.2.4.3. Effluxion of the prescribed time, or of a reasonable time
Where the offeror has prescribed a time limit for acceptance, the offer lapses
automatically if it is not accepted within the prescribed period. Where no time limit
has been prescribed, the offer will lapse after a reasonable time has passed.
2.2.4.4. Revocation of the offer
Since revocation is an expression of intention, it takes effect only when
communicated to the mind of the offeree; thus, if the offeree communicates
acceptance of the offer to the offeror before learning of the revocation, a contract is
concluded.
2.2.4.5. Loss of legal capacity to act
If either one of the contracting parties loses the legal capacity to act, the offer is
terminated.
2.2.4.6. Acceptance of the offer
Once the offer is accepted by the offeree, a contract comes into being and the offer
is terminated.
2.3. The acceptance
An acceptance is a clear and unambiguous declaration of intention by the offeree,
unequivocally assenting to all the terms of the proposal embodied in the offer.
REMEMBER: An offer is accepted EXPRESSLY or TACITLY
Silence is only acceptable in exceptional circumstances.
2.3.1. Requirements for a valid acceptance
2.3.1.1. The acceptance must be unqualified
The acceptance must be a complete and unequivocal assent to every element of
the offer; there can only be a valid acceptance where the whole offer and nothing
more or less is accepted. This is the so-called mirror image rule.
If the offeree’s acceptance is conditional or contains new terms or leaves out original
terms, then there is no clear acceptance and no consensus is reached.
A qualified acceptance constitutes a counter-offer, which the original offeror may
accept or reject.
Example: Dominic offers Didier his surfboard for R5 000 cash. Didier answers, ‘I will
buy your surfboard for R5 000, but I am short of cash and can only pay in six months’
time.’ By this qualification, Didier REJECTS Dominic’s offer and makes him a
counter-offer, which Dominic may accept or turn down.
NB: An ambiguous acceptance does not qualify as a valid acceptance
2.3.1.2. The acceptance must be by the person to whom the offer was
made
Where an offer is addressed to a specific person or persons, it may be accepted only
by that person or group of persons; an offer to sell a farm to A cannot be accepted by
A and B jointly, as was held in Bird v Sumerville.
2.3.1.3. The acceptance must be a conscious response to the other
A person cannot be said to accept an offer if he or she is unaware of it. This point is
especially relevant to offers of reward. A contract requires that there should be
consensus of two minds, and if the one did not know what the other was proposing,
the two minds never came together’.
READ: Bloom v American Swiss Watch Co.
2.3.1.4. The acceptance must be in the form prescribed by the offeror (if
any)
As dominus or initiator of the contracting process, the offeror is entitled to prescribe
any method of acceptance he or she sees fit; if the offeror does so, generally no
other form of acceptance will suffice.
READ: Pillay v Shaik
2.3.2. When and where the acceptance takes effect
When parties A and B contract in each other’s presence (inter praesentes), B’s
declaration of acceptance is communicated directly to A, in her presence.
Therefore, there is NO time lag between the declaration and the ascertainment of the
acceptance.
However, when the parties contract at a distance (inter absentes), there will usually
be a time lag between B’s declaration of acceptance and A’s learning that her offer
has been accepted (for example, B posts a letter of acceptance, which reaches A
only two weeks later).
In the past the problem regarding the time lag manifested itself most often in the
context of postal contracts, where the delay between declaration and ascertainment
of acceptance can be lengthy. But today, quicker methods of communication (such
as email) are closing the temporal gap.
The question as to when and where acceptance takes effect is not unique to South
Africa and has given rise to various theories in general contract literature:
•
The declaration theory states that the contract comes into being when and
where the offeree expresses acceptance – that is, when he or she writes or
signs the letter of acceptance.
•
The expedition theory states that the contract comes into being when and
where the offeree posts his or her letter of acceptance.
•
The reception theory states that the agreement comes into being when the
letter of acceptance reaches the address of the offeror.
•
The information theory states that the agreement is concluded when and
where the offeror learns or is informed of the acceptance, in other words,
when the offeror reads the letter of acceptance.
2.3.2.1. The information theory as the general rule in our law
The information theory holds that the basis for contractual liability is actual and
conscious agreement between the parties. Therefore, the offeror must learn of the
acceptance of his or her offer before actual consensus can be said to have been
attained. Until then, the minds of the parties have not truly met.
2.3.2.2. Exceptions to the general rule
The information theory does not apply:
•
where the offeror stipulates a different method of acceptance;
•
in postal contracts; and
•
in electronic contracts.
2.3.2.3. Where the offeror stipulates a different method of acceptance
The information theory is subject to the qualification that the offeror as dominus may
dispense with the need for acceptance to be communicated to him or her, or can
indicate an earlier time when acceptance will be effective to conclude the contract.
Such a waiver of the requirement of notification of acceptance may be express, or it
may be implied from all the circumstances, including the language of the offer and
the nature of the contract.
2.3.2.4. Postal contracts: the expedition theory
Under the influence of English law, our courts apply the expedition theory as the
default rule for postal contracts, rather than the information theory. This is done on
the basis of a legal fiction – namely, that by making an offer through the post, the
offeror is deemed not only to have authorised acceptance by post, but also to have
waived the requirement of notification of acceptance.
READ: Cape Explosive Works Ltd v South African Oil and Fat Industries; Cape
Explosive Works Ltd v Lever Brothers (South Africa) Ltd. This case introduced the
expedition theory
2.3.2.5. The scope of the exception
The expedition theory applies only when all of the following circumstances are
present:
•
the offer is made by post;
•
the postal services are operating normally;
•
the offeror has NOT indicated a contrary intention, expressly or tacitly; and
•
the contract is a commercial one.
The expedition theory DOES NOT apply to contracts concluded by telephone or
email. Whereas, in the case of electronic contracts, the reception theory applies.
READ: Smeiman v Volkersz
2.3.2.8. Electronic contracts: the reception theory applies
Contracts entered into by means of email, SMS or other means of electronic
communication are governed by the Electronic Communications and Transactions
Act. In terms of this legislation, an agreement concluded between parties by means
of data messages is concluded at the time when, and the place where, the
acceptance of the offer is received by the offeror.
2.5. Pacta de contrahendo
Very often in commercial practice, before an offer has been accepted, or even made,
the parties enter into an ancillary agreement concerning the main agreement that
might follow. These ancillary agreements concerning an offer to conclude another
contract are known as pacta de contrahendo – ‘contracts about contracting’. A
pactum de contrahendo is simply a contract aimed at the conclusion of another
contract.
South African law recognises two forms of pacta de contrahendo: the option and the
preference contract.
•
An option is an agreement restricting an offeror’s right to revoke the offer.
•
A preference contract is an agreement whereby one person binds him or
herself to give preference to another person should he or she decide to
conclude some other specified type of agreement; this right to be preferred is
known as a right of first refusal or (where the contemplated agreement is
one of sale) a right of pre-emption.
2.5.1. Options
An option is an agreement to keep an offer open for a certain period of time. Being a
binding contract, its effect is to make the offer irrevocable for that period. This puts
the holder of the option in a VERY STRONG POSITION. For the duration of the
option, the choice is his or hers alone whether or not the main agreement (such as
sale or lease) will come into existence. He or she has the power to bring it into
existence by the unilateral act of exercising the option – that is, by accepting the
offer. The holder of the option is thus entitled but NOT obliged to conclude the main
agreement.
EXAMPLE: A offers a car for sale to B at a price of R130 000. B would very much
like to buy the car but is not sure if she can raise the money to do so. She needs
TIME to consider the offer but any delay on her part entails the risk that A might
withdraw the offer and sell the car to someone else. So, B asks A to give her
THREE DAYS to try to raise the money, during which time A promises not to
withdraw the offer. A agrees. B accordingly has an option to buy the car.
The option in this case is a legally binding contract that envisages the possible
formation of another contract (the main agreement). The option is ancillary to the
main agreement, which might be a sale, a lease or any other type of contract.
An option to BUY is commonly referred to as a call option; an option to SELL is
known as a put option.
2.5.1.1. Juristic nature of an option
It is now clearly established that an option comprises:
•
an offer to enter into the main agreement (the main offer); and
•
an agreement to keep the main offer open for a certain time.
Consider this example: A offers to sell her car to B for R100 000, and states that she
will keep the offer open until midnight on Monday. The offer to sell the car is the
main offer. The statement about keeping the offer open is an offer of an option,
which must be accepted by B (expressly or tacitly) to create the option, since our law
does not recognise unilateral promises as binding contracts. Now consider the
possible responses of B:
•
If B immediately accepts or rejects the main offer, the offer of the option will
fall away.
•
If B says something like, ‘Okay, I’ll think about it’, he has accepted the offer of
the option, but not (yet) the main offer.
•
If, before midnight on Monday, B informs A that he accepts the main offer, he
has exercised his option and, by doing so, has concluded the main agreement
of sale.
•
If, before midnight on Monday, B informs A that he does not wish to buy her
car, he will have rejected the main offer, no sale will come about, and the
option will be discharged.
•
If B fails to respond by midnight on Monday, the main offer will automatically
lapse, and with it the option.
2.5.1.3. Unilateral declaration that the offer is irrevocable
Our law does NOT recognise unilateral promises as binding, in theory the
declaration of irrevocability should be treated merely as an offer of an option that
requires acceptance if it is to have binding effect.
The Labour Court came to the following conclusion:
Where an offer is (either expressly or tacitly) stated to be irrevocable for a given period and
communicated to the offeree it becomes irrevocable upon receipt unless the offeree rejects
the irrevocability. To require a mental acceptance would be meaningless in practice as that
cannot be evidenced. Such requirement would merely pander to theory. To require
notification of acceptance of the irrevocability would set a standard which in normal business
practice will not be followed and will be regarded as rather foolish.
2.5.1.4. Legal effect of an option
By granting the option, the grantor incurs a dual negative obligation:
•
first, NOT to withdraw (or attempt to withdraw) the offer; and
•
second, to do NOTHING to prevent the coming into existence, through
acceptance of the offer, of a contract that is capable of being performed (for
example, by selling and transferring the property to a third person).
The grantee or holder of the option has correlative rights to insist that the offer be
kept open and that his or her preferential right to acquire the property through
exercise of the option should NOT be prejudiced.
The effect, therefore, of the option is to render the offer irrevocable. Any attempt by
the grantor to revoke the offer is not merely a breach of contract, it is also quite
ineffectual: the offer remains open for acceptance.
2.5.1.5. Duration of the option
Usually, an option agreement will specify the time within which the option must be
exercised – failure to exercise it within the prescribed period will result in
AUTOMATIC TERMINATION of the option. An option that FAILS to specify a time
limit might conceivably be VOID for Vagueness ( V for V); but the better view is that
the offer must be kept open for a reasonable time if no time limit is stipulated.
Where an option is personal to the grantee, so that it CANNOT be transferred, it
terminates on the death of the grantee.
2.5.1.6. Transferability of an option
The general rule is that, unless otherwise stated, personal rights may be freely
transferred by cession. Where A has granted an option to B, B may cede her rights
under the option to C unless A has expressly or impliedly stipulated that the option is
personal to B. In determining the intention of the grantor A, an important
consideration will be whether the identity of the option holder is of any importance
to A.
In the case of an option to buy for cash, unless there is something in the agreement
to indicate a contrary intention, the option will be presumed to be cedable because
the identity of the option holder can be of LITTLE importance to the grantor.
2.5.1.7. Formalities: options to buy or sell land
We remember that the two contracts when dealing with options are:
•
the option itself, and
•
the main contract created upon exercise of the option
The significance in relation to sales of land, which, in terms of section 2(1) of the
Alienation of Land Act, MUST be in writing and signed by the parties.
In the case of Hirschowitz v Moolman, the Appellate Division stated unequivocally
that ‘in general a pactum de contrahendo is required to comply with the same
requisites for validity, including requirements as to form, applicable to the second or
main contract to which the parties have bound themselves’. This statement, though
made in the context of a pre-emption agreement, was said to be equally applicable
to an option contract.
2.5.1.8. Remedies for breach of an option
The general pattern for breach of remedies for breach of contract is as follows:
If breach is a MATERIAL one, the innocent party can either elect to cancel or uphold
the contract,
•
if he or she elects to CANCEL the contract, the contract is terminated, and
the innocent party is entitled to restitution of any performance that he or she
might already have made under the contract.
•
If he or she elects to UPHOLD the contract, he or she is in principle entitled to
an order of specific performance – that is, a court order compelling the party
in breach to honour his or her contractual obligations.
These damages are measured according to the innocent party’s so-called positive
interest; that is to say, they are aimed at placing him or her in the financial position
that he or she would have occupied had the breach NOT occurred.
EXAMPLE: Assume that A has granted B an option to buy a piece of land for R10
million. B is a developer interested in developing the land, and pays A R400 000 for
the option, which is to endure for six months. Relying on her rights under the option,
B incurs expenditure investigating the feasibility of the development project (for
example, on market research, advertising, conducting soil tests, architect’s plans and
legal work in regard to subdivision of the land). Before B has made up her mind
whether or not to exercise the option, A commits a material breach of contract by
selling the land to a third person C. B must now elect whether to cancel the option
contract, or to hold A to it.
•
B cancels the option. If B elects to CANCEL, the option is terminated with
immediate effect, and B is entitled to restitution of the R400 000 that she
paid for the option. In principle, she is also entitled to damages aimed at
placing her in the financial position she would have been in had A not
breached the option.
•
B holds A to the option. If B elects NOT TO CANCEL the option, A’s offer to
sell the land remains intact because for the duration of the option it cannot be
withdrawn by A. B is entitled to the full period of the option before deciding
whether or not to buy the land, and can secure her position in the interim by
obtaining an interdict restraining A from transferring the land to C (or doing
anything else to prejudice B’s rights under the option). The grant of such an
interdict amounts to an order of specific performance of the option.
2.5.2. Preference contracts
A preference contract is an ancillary agreement whereby one person (the grantor)
binds him or herself to give preference to another person (the grantee), should he or
she decide to conclude another agreement (the main agreement).
The main agreement will usually be a sale, in which case the ancillary agreement is
known as a pre-emption agreement, and the right to which it gives rise is known as
a pre-emptive right.
2.5.2.1. Right of pre-emption
A right of pre-emption is a right to be GIVEN PREFERENCE in the event of a sale of
property. Its essential feature is that the grantor of the pre-emptive right is under no
obligation to sell the property; the grantee merely acquires the preferential right
to buy if or when the grantor decides to sell.
2.5.2.2. Right of pre-emption compared with an option
In the case of an OPTION TO BUY, the grantor has already made a firm offer to the
grantee, and the power to conclude the sale lies exclusively in the hands of the
grantee.
With a PRE-EMPTION AGREEMENT, however, there is as yet no firm offer ‘on the
table’ – merely an undertaking (usually) to make an offer to the grantee if the trigger
event occurs (usually, if the grantor decides to sell the property). The grantor
accordingly retains the power to decide whether or not to sell, and cannot be
compelled to do so unless or until the trigger event has occurred.
Since an OPTION presupposes the existence of a valid offer (there can hardly be an
obligation to keep open an invalid offer), in the case of an option all the terms of the
proposed sale must be set out in the offer with sufficient certainty. Otherwise, the
offer (and with it the option) will be void for uncertainty, or incompleteness.
In the case of a PRE-EMPTIVE RIGHT, the terms of the potential future sale need
not be spelled out in the pre-emption agreement since there is as yet no firm offer
to sell. The pre-emption agreement itself must have a determined or determinable
content but the terms of any future sale do not have to be stipulated in advance.
2.5.2.3. The obligations of the grantor
With an option, a pre-emption agreement constitutes a restraint upon alienation
since it prevents the grantor from lawfully selling to third parties during the existence
of the pre emptive right. Thus, it undoubtedly imposes a NEGATIVE OBLIGATION on
the grantor – that is, not to sell to a third party without first affording the grantee an
opportunity to buy the property. The grantee has a correlative legal right against the
grantor that he or she should not sell.
The POSITIVE OBLIGATION remains uncertain. In the Owsianick v African
Consolidated Theatres (Pty) Ltd case, there are opposing views from Botha JA and
Ogilvie Thompson JA which is mainly regarding whether or not the grantor has a
duty to order specific performance to the grantee.
2.5.2.4. The trigger event in a pre-emption agreement
While the NEGATIVE OBLIGATION of the grantor comes into play as soon as the
pre-emption agreement is concluded, the POSITIVE OBLIGATION (assuming that
there is one) is conditional upon the occurrence of a trigger event.
2.5.2.5. The offer must be a bona fide one
What constitutes a bona fide offer?
•
In the unusual case where the pre-emption agreement stipulates the terms of
the future sale, the offer MUST be on those terms.
•
Where a third party has made a genuine offer to the grantor, the grantee must
be prepared to MATCH THOSE TERMS, even if the price is above the
market value of the property.
•
Where the grantor has shown a willingness to sell to a third party on certain
terms (for example, by granting an option to the third party), the offer to the
holder of the pre emptive right must be on NO LESS FAVOURABLE TERMS.
2.5.2.6. Duration of the offer
In Roman-Dutch law, the offer made by the grantor had to be kept open for at least
two months.
Today, unless the parties have agreed otherwise, the offer must be kept open for a
REASONABLE PERIOD. This flows from the requirement that the grantor should act
in good faith.
Were it not so, the grantor could discharge the pre-emption agreement by making an
offer to the grantee and by then withdrawing it before the latter has had a
reasonable opportunity to consider the offer.
2.5.2.7. Formalities
READ: Hirschowitz v Moolman
In this case the Appellate Division held that a pre-emption agreement is required to
comply with the same requisites for validity, including the requirements as to form,
that apply in respect of the main agreement; and thus, that a pre-emption agreement
in respect of the sale of land must comply with the requirements of section 2(1) of
the Alienation of Land Act.
BUT and READ: Mokone v Tassos Properties CC
The decision in Hirschowitz has been OVERRULED by the CC in the above case.
it is now clear that the agreement embodying the pre-emptive right NEED NOT
comply with the formalities, any sale flowing from an exercise of the pre-emptive
right would have to be in writing and signed by the parties.
2.5.2.8. Remedies for breach
Assume the following facts: A grants to B a right of pre-emption and then in breach of
the agreement sells the property to C (or grants C an option to buy the property)
without first offering it to B. This is undoubtedly a MATERIAL BREACH and B has the
usual election of either cancelling or upholding the contract. In either event, B is
entitled to damages IF the breach has caused him financial loss.
B cancels the contract. If B CANCELS, the pre-emption agreement is TERMINATED
and B is entitled to restitution of any amount of money he might have paid for the
pre-emptive right.
B holds A to the contract. If B elects to UPHOLD the contract, one would expect that,
in accordance with the general principle, he would be entitled to specific
performance of the pre-emption agreement.
In Associated South African Bakeries (Pty) Ltd v Oryx & Vereinigte Bäckereien (Pty)
Ltd, the Appeal Court accepted that the grantee of a right of pre-emption should have
some method of positively enforcing his or her right; to expect the grantee to be
satisfied merely with a claim for damages in the event of breach was NOT in
accordance with the dictates of justice.
The court developed a new doctrine, based on the analogy of the Roman-Dutch
naastingsreg.
In terms of this doctrine (the so-called ‘Oryx mechanism’), when A sells the property
to C in breach of a pre-emptive undertaking given to B, B may ‘step into the shoes’
of C by addressing a unilateral declaration of intent to A. The effect of this is to
create a new contract of sale between A and B on terms identical to those in the
agreement between A and C.
In a sense, therefore, B can ‘hijack’ the sale to C. However, despite the misleading
terminology relating to stepping into C’s shoes, B’s unilateral declaration DOES NOT
put an end to the sale to C; rather it creates a new sale to B, which stands
alongside the sale to C.
LESSON 1:
LESSON 2:
LESSON 3:
Offer and
Acceptance: the
OFFER
Offer and
Acceptance: the
ACCEPTANCE
Pacta de Contrahendo:
Options and Rights of
Preference
LESSON 4:
LESSON 5:
LESSON 6:
Mistake/Absence of
consensus
Improperly obtained
consensus:
Misrepresentation
LESSON 7:
LESSON 8:
LESSON 9:
Duress
Undue Influence
Commercial
Bribery
Introduction
CHAPTER 3[LEARNING UNIT 2]: Formation of a Contract
3.1 Introduction
Contracts in modern South African law are based on two theories: the will theory, which
requires actual agreement between parties, and the reliance theory, which allows
contractual liability if one party reasonably believes consensus was reached. While
reliance theory seems straightforward, courts apply it in various ways to address
disagreements.
This chapter focuses on contracts lacking true consensus due to a material mistake that
prevents a meeting of the minds (consensus ad idem). Courts use objective, reliancebased criteria to determine whether a contract exists in such cases.
In contract law, mistake refers to a party acting under an incorrect impression about a fact
that affects the contract. Mistakes can either destroy consent (making the contract void)
or not affect consent but render it voidable.
If parties recognize their disagreement, they can fix it or avoid contracting. However, issues
arise when one or both parties are unaware of their disagreement due to
misunderstanding.
3.2 Classification of mistake
Mistakes in contracts are classified in different ways, each with varying legal
consequences. South African law has developed multiple distinctions to categorize
mistakes, helping to determine their impact on contractual liability. Understanding these
classifications is essential for correctly identifying the legal outcomes for the contracting
parties.
3.2.1 Unilateral, Mutual and Common Mistake
Mistakes in contracts are categorized into unilateral, mutual, and common mistakes,
influenced by English law.
o
Unilateral mistake occurs when only one party is mistaken, and the other is aware
of the error.
o
Mutual mistake happens when both parties misunderstand each other's
intentions, leading to cross-purposes. In most cases, mutual mistake is present,
making the distinction between unilateral and mutual mistakes less significant.
o
Common mistake differs from the above as both parties share the same incorrect
belief about a fundamental fact. While it does not cause dissensus, it renders the
contract void. Since common mistake is not a true case of dissensus, they are
treated separately.
3.2.2 Irrelevant and Relevant Mistake
A mistake is considered irrelevant if it does not affect the mistaken party’s decision to
enter into the contract. If a party would have agreed to the contract despite the mistake, it
does not negate consensus.
In Khan v Naidoo, the appellant signed as surety for her son’s debt, mistakenly believing
she was agreeing to something else due to his misrepresentation. Despite her mistake, the
court held her bound to the contract because she would have signed it even if she had
known its true nature. This case highlights that for a mistake to be relevant in determining
dissensus, it must have influenced the party’s decision to contract.
3.2.3 Material and Non-Material Mistake
Under the Will theory, a contract requires actual agreement (consensus ad idem)
between the parties. If consensus is reached and all other legal requirements are met, a
binding contract exists. However, if there is no agreement, the contract is void ab initio
unless it can be upheld under the reliance theory.
A key distinction exists between material and non-material mistakes:
o
A material mistake negates actual agreement, meaning no contract exists unless
reliance principles apply.
o
A non-material mistake does not exclude agreement but may make the contract
voidable if caused by misrepresentation, duress, undue influence, or bribery.
This distinction is crucial in determining whether a contract is void (no agreement) or
voidable (agreement obtained improperly). Material mistakes lead to dissensus, while
non-material mistakes do not require reliance principles since a valid contract already
exists.
3.2.3.1 Material Mistake
For consensus to exist in a contract, three elements must be present:
1. Serious intention to contract – The parties must genuinely intend to be legally
bound (animus contrahendi). If a party lacks this intention, such as in jest or social
agreements, there is no consensus. In Mondorp Eiendomsagentskap v Kemp en
De Beer, the court ruled that no contract existed because the appellant’s
representative did not intend to create legal liability.
2. Agreement on material aspects – The parties must agree on the essential
elements of the contract, including who is contracting and what is being agreed
upon. A mistake about the identity of the parties or the subject matter (as in Allen v
Sixteen Stirling Investments, where a buyer believed he was purchasing a different
property) is material and leads to dissensus. Mistakes about key contractual terms,
such as an unknown exclusion clause or a hidden suretyship obligation, are also
material.
3. Conscious awareness of agreement – The parties must know and understand
each other’s intentions. If one party is unaware of the offer or its acceptance, there
is no meeting of the minds (concursus animorum). In Bloom v American Swiss
Watch Co., a person who unknowingly fulfilled the conditions of a reward offer
could not claim the reward because he was unaware of the offer at the time.
A material mistake that prevents any of these three elements leads to dissensus,
meaning no valid contract exists.
3.2.3.2 Non-Material Mistake
Non-material mistakes usually affect a party's reason for entering into a contract, but they
do not impact on the element of consensus. Even with a non-material mistake, if both
parties are ad idem on the material aspects, a valid contract exists. Such mistakes are
often referred to as errors in motive.
In Diedericks v Minister of Lands, the defendant mistakenly offered to purchase property
from the plaintiff due to a clerical error, although a cheaper option was available through
an existing lease. The court ruled that the mistake related to the motive behind the offer,
not to the mutual agreement, so the contract was still valid.
Even if a contract exists, a mistaken party may have legal recourse if the mistake was
caused by misrepresentation. In such cases, if the requirements for misrepresentation
are met, the mistaken party could seek a remedy.
3.2.4 Traditional classification of Material and Non-Material Mistake
Historically, mistakes have been categorized into four main types, with materiality
determined based on the type of mistake involved. These are:
1. Error in corpore: A material mistake concerning the subject matter or object of the
performance. This occurs when the parties have different properties in mind. For
example, in Maresky v Morkel, the respondent mistakenly thought he was buying
property at site A, but it was actually at site B, and this mistake vitiated his consent
to the contract.
2. Error in negotio: A material mistake related to the true nature of the contract or the
juristic act. In Khan v Naidoo, the appellant mistakenly thought she was signing a
document related to property transfer, but it was actually a surety agreement for her
son's debt. This could also be considered error in corpore.
3. Error in persona: A mistake about the identity of the other party to the contract. In
Kok v Osborne, the defendant mistakenly believed he was selling his property to
both the plaintiff and another party, but he was only contracting with the plaintiff.
This type of mistake is material if the identity of the party is vital to the mistaken
party's decision to enter the contract.
4. Error in substantia (error in qualitate): Traditionally not considered material, this
involves a mistake about an attribute or characteristic of the subject matter of the
contract. In Trollip v Jordaan, the appellant believed the farm included more
afforested land than it actually did, but the court deemed this mistake non-material,
as it didn't impact the performance agreed upon.
In general, error in substantia is not treated as material and often falls under error in
motive, which is usually not legally relevant.
The case Spenmac (Pty) Ltd v Tatrim CC challenges the traditional view that mistakes
about the attributes of a property (error in substantia) are non-material. In this case, the
appellant misrepresented a characteristic of the property (a veto right over subdivision),
leading the respondent to enter into a contract under a mistaken belief. The court treated
this mistake as material, making the contract void. While this decision deviates from
previous rulings, it does not overrule them, creating uncertainty about the materiality of
error in substantia in future cases.
3.2.5 Mistake of law and mistake of fact
The distinction between a mistake of law (error iuris) and a mistake of fact (error facti) is not
clearly defined in contract law. While some common-law texts suggest that a mistake of
law cannot be grounds for enrichment actions, Roman and Roman Dutch law do not seem
to have applied this distinction in contractual disputes. In Kimberley Share Exchange Co v
Hampson, the court rejected a mistake of law as a valid defense in contract formation.
However, in Van Aartsen v Van Aartsen, the court ruled that a mistake of law regarding
motive does not negate consensus ad idem, implying that such a mistake may not
invalidate the contract.
3.3 Limitations of the will theory
While the will theory of contract holds that consensus is essential for contractual liability,
its strict application can lead to unfair outcomes. If a party can claim a lack of consensus
due to a mistake, they could avoid liability, even if a contract seems to have been formed.
In cases of reservatio mentalis, a party may outwardly appear to agree to a contract while
mentally reserving the intention not to be bound, which would normally invalidate the
contract under the will theory. Such situations could encourage fraud or lead to unjust
outcomes, especially if a party has relied on the contract. As a result, South African law,
like other systems with a subjective approach, does not apply the will theory without
qualification.
3.4 Reliance-based Correctives
Chapter 1 outlines how courts have shifted between subjective and objective approaches
to contractual liability. The subjective will theory is modified by doctrines like estoppel and
reliance theory, while the extreme objective declaration theory is adjusted by the iustus
error doctrine. Recently, courts have reconciled these approaches, recognizing that while
the primary basis for liability is subjective, reliance theory also plays a secondary role,
especially in cases involving material mistakes.
3.5 The subjective approach as qualified by Estoppel and quasi-mutual assent
The doctrines of estoppel and quasi-mutual assent both stem from the principle in Smith v
Hughes, which states that if parties intend to contract on different terms but one-party
acts in a way that would make a reasonable person believe they agree to the other’s terms,
they are bound by that conduct. In South African law, this principle has been debated:
some argue it reflects estoppel, while others believe it aligns more with quasi-mutual
assent or reliance theory. The latter view seems more accurate, as Blackburn J used
estoppel to establish a reliance-based ground for contractual liability when there is no
agreement.
3.5.1 The Doctrine of Estoppel
The doctrine of estoppel by representation, borrowed from English law, prevents a party
(the estoppel raiser) from denying a misrepresentation if they relied on it to their detriment.
Estoppel is upheld only if the impression created is legally maintainable. In Fawdon v
Lelyveld, the court prevented the true owner of a racehorse from asserting ownership, as
the other party had reasonably relied on the misrepresentation and acted in good faith.
Estoppel has been used to qualify the will theory in cases of dissensus. In Van Ryn Wine &
Spirit Co v Chandos Bar, the court accepted that estoppel could bind a party to an
apparent agreement, even if actual consensus was absent, provided the reliance on the
misrepresentation was reasonable.
3.5.2 The Doctrine of Quasi-mutual assent or (direct) reliance theory
The doctrine of quasi-mutual assent (or direct reliance theory) allows contractual liability in
the absence of consensus when one party reasonably believes that the other party has
agreed to the contract, induced by the other party's actions. Early South African cases, like
Pieters & Co v Salomon and Hodgson Bros v South African Railways, demonstrated this
reliance theory, where the courts upheld contracts based on reasonable reliance, even if
actual agreement wasn't present.
For quasi-mutual assent to apply, two conditions must be met: (1) the contract denier must
have induced the belief of agreement in the contract asserter, and (2) the contract
asserter's reliance on that belief must be reasonable. A party alleging reliance must prove,
on a balance of probabilities, that reasonable reliance occurred. The maxim caveat
subscriptor indicates that a signature on a contractual document creates an impression of
agreement, placing the onus on the contract denier to rebut the inference of reasonable
reliance.
3.6 The objective approach as qualified by the iustus error doctrine
The declaration theory, an objective approach to contractual liability, bases liability purely
on outward, objective declarations of intent, disregarding the actual inner will of the
parties. While courts typically look at external signs of agreement even when considering
subjective intent, the declaration theory goes further by ignoring true intention altogether.
This theory is controversial in South Africa, as it suggests that a contract can be imposed
on parties even if neither intended it, solely because their external declarations seem to
align. The iustus error doctrine serves to qualify this theory, balancing the purely objective
approach.
3.6.1 The Declaration Theory in case law
In South African law, the objective approach to contractual liability is supported by two key
factors. First, Wessels JA's dictum in South African Railways & Harbors v National Bank
suggests that contracts are formed based on external actions, not internal intentions.
Second, cases like National and Overseas Distributors v Potato Board apply an objective
approach, where a contract is considered valid based on external actions, even if mistakes
occur. Although criticized, this approach has influenced South African contract law,
focusing on external manifestations of agreement rather than subjective intent.
3.6.2 The iustus error doctrine
The iustus error approach in South African contract law addresses the issue of mistake in
contracts. It holds that a party may not be bound by an agreement if they mistakenly gave
consent, provided the mistake is both material and reasonable. While not a theory of
contractual liability itself, iustus error serves as a corrective measure in cases of
dissensus. The contract asserter must show that there was an apparent agreement, and
the contract denier must prove their mistake was reasonable. The court considers factors
like whether the mistake was caused by misrepresentation and whether the mistake was
reasonable in the circumstances.
The iustus error approach to mistake in contract law has a few key factors for determining
whether a mistake is excusable:
o Misrepresentation: A material mistake is often reasonable if caused by a
misrepresentation, either positive (false statements) or negative (failure to correct a
misunderstanding). A misrepresentation must be wrongful or contrary to good
morals. For example, a positive misrepresentation about the property being sold can
make a mistake reasonable, as seen in Allen v Sixteen Stirling Investments (Pty)
Ltd. Similarly, a failure to disclose key information in contracts, such as in Du Toit v
Atkinson's Motors, can also render the mistake reasonable.
o Fault and Negligence: If the contract denier behaved reasonably and without
negligence, the mistake may be excusable. However, fault is often a contentious
issue, and negligence may weigh against the excuse unless there was a wrongful
misrepresentation by the other party.
o Reliance on Appearance of Consensus: A mistake is reasonable when the
contract asserter’s reliance on the belief that the contract was agreed upon is
unreasonable, or when there was no real reliance. This criterion is a recent
development that reconciles iustus error with the reliance theory.
These criteria help establish when a mistake in a contract is reasonable and
excusable under South African law.
7.3 Reconciliation of the Subjective and Objective approaches
he use of subjective and objective approaches in South African contract law on material
mistake raises debates. Some critics argue against the declaration theory and the iustus
error doctrine, favoring the reliance theory. Others defend iustus error as a practical way to
handle material mistakes. The courts have reconciled these doctrines, applying iustus
error as an indirect form of the reliance theory.
3.7.1 Sonap Petroleum (SA) (Pty) Ltd (formerly known as Sonarep (SA) (Pty)
Ltd v Pappadogianis)
In Sonap Petroleum (SA) (Pty) Ltd v Pappadogianis, the court clarified the approach to
material mistake in contracts. Harms AJA developed a reliance test to determine if one
party misled the other into believing they had agreed to the contract. If the other party knew
or should have known about the mistake, they had a duty to inquire. Failure to do so
rendered the contract void. The reliance theory became the primary approach to mistakes,
with iustus error as an indirect application. Fault wasn’t necessary, and estoppel was not
central to the decision.
3.7.2 Slip Knot Investments 777 (Pty) Ltd v Du Toit 2011 (4) SA 72 (SCA)
In Slip Knot Investments 777 (Pty) Ltd v Du Toit, the court reconciled the iustus error
doctrine with the reliance theory in cases of material mistake. The respondent claimed to
have signed a suretyship under a mistake caused by a third party and denied liability. The
court applied the reliance theory from Sonap Petroleum (SA) (Pty) Ltd v Pappadogianis,
finding that the respondent’s mistake was not excusable because he had led the appellant
to reasonably believe he intended to be bound by the contract. The court emphasized that
a mistake caused by a third party’s misrepresentation doesn’t trigger the reliance theory or
iustus error, and both doctrines cannot coexist in such cases.
3.7.3 Direct or Indirect Reliance?
The continued use of the iustus error doctrine in South African contract law raises
questions about the application of an objective approach. Some argue the declaration
theory is outdated, while others call for the Supreme Court to overrule it. Courts still apply
decisions reflecting an objective approach alongside the iustus error doctrine.
In cases like National and Overseas Distributors Corporation v Potato Board, the
reliance theory can explain what seemed like a declaration theory decision, as the
appellant reasonably relied on the respondent’s actions.
Overall, the reliance theory is often preferred, but the iustus error doctrine remains
effective. Most cases involve clear agreement, but in exceptional cases of mistake,
reliance-based principles are used to determine contractual validity.
3.8 Common Mistake
A common mistake differs from unilateral or mutual mistakes in that it doesn't create
dissensus, but it still renders the contract void. In a common mistake, both parties agree on
the terms (consensus ad idem) but are mistaken about a fundamental fact, such as a
present or past event. The mistake doesn't concern the parties' intentions, but the contract
is void due to the shared error.
An example is Dickinson Motors (Pty) Ltd v Oberholzer, where both the plaintiff and
defendant mistakenly believed a car was another vehicle, leading to a void contract. The
most common explanation for this is the "implied term" theory, which suggests the
contract was implicitly dependent on the truth of a material fact. If the fact is false, the
contract is void, and the parties can claim restitution for any performance rendered.
3.9 Rectification
When parties reduce their contract to writing, the written document may sometimes fail to
accurately reflect their common intention. In these cases, there is no mistake in the
parties' actual agreement, but a discrepancy in the document. Usually, the parties will
correct this themselves or perform in accordance with their intention. If they cannot agree
on amendments and one party insists on enforcing the written terms, the other party can
apply to court for rectification. Rectification changes the document, not the contract itself,
to accurately reflect the parties' true intentions.
Rectification is based on the subjective approach in South African contract law, allowing
parties to have a document corrected to align with their actual agreement. It can also be
permitted when fraud (dolus) causes the discrepancy. The party seeking rectification must
show that the document does not reflect their common intention and explain the true
intention and necessary changes. Courts are generally flexible in granting rectification,
even in cases where no mistake was made in drafting the document, as seen in Mouton v
Hanekom and Milner Street Properties (Pty) Ltd v Eckstein Properties (Pty) Ltd.
However, if the contract requires writing for validity, the court will not allow rectification of a
document that does not meet the formalities for constituting a contract. But, if the
document appears to meet the required formalities, rectification is possible.
Offer and
Acceptance:
Absence of
Acceptance:
the
Improperly
obtained
consensus:
Undue
Duress
Pacta de
Contrahendo:
Options and
Rights of
CHAPTER 4[LEARNING UNIT 2]: Improperly obtained Consensus
4.1 INTRODUCTION
A contract remains valid even if one party was misled by misrepresentation, duress, or
undue influence, as long as all necessary elements of a contract are present. Unlike in
cases of material mistake, there is no lack of consensus since both parties understand
the terms and counterparties. However, because the consent was obtained improperly,
the contract is voidable at the request of the innocent party. If the contract is set aside,
both parties must return any benefits received. Until then, the contract remains in
effect.
4.1.1 Restitutio in Integrum
The remedy of rescission coupled with restitution is called restitutio in integrum.
Originally used in Roman law for fraud, duress, or minority, it is now applied to voidable
contracts on various grounds. A court order is not required to cancel the contract; an
extra-judicial repudiation is enough. However, if the right to rescind is disputed, a court
order is advisable to clarify the contract’s status for third parties.
o The remedy aims to restore both parties to their pre-contractual positions.
o The innocent party can either rescind the contract or uphold it, but once the
decision is made and communicated, it is final unless the other party agrees
to a change.
o If rescission is chosen, the contract ends upon notice, and both parties must
return what they received.
o The right to restitution depends on the innocent party’s willingness and ability
to return what was received, though courts may relax this rule for fairness.
o If the other party cannot return what was received, the innocent party can
claim its monetary value.
o The right to rescind is lost the same way as the right to cancel for breach (e.g.,
affirmation, waiver, or prescription).
4.1.2 Delictual Damages
If a party induces a contract through improper means, their conduct may amount to a
delict. In such cases, the innocent party can claim damages for financial loss,
regardless of whether they choose to rescind or uphold the contract. These damages
are delictual in nature and follow the actio legis Aquiliae principles.
o Damages are based on the negative interest principle, meaning the innocent
party should be restored to the financial position they would have been in had
the delict not occurred (usually their position before contracting).
o If the contract is rescinded, damages supplement restitutio in integrum by
covering any additional financial loss, such as wasted expenses.
o If the contract is upheld, damages can include losses suffered due to
overpayment or other negative financial impacts caused by the other party’s
misconduct.
4.1.3 A general ground for rescission
Historically, a contract could only be set aside on two grounds: fraud (dolus) and
duress (metus), apart from minority. Over time, the recognized grounds for rescission
have expanded to include:
1. Non-fraudulent misrepresentation (an extension of fraud)
2. Undue influence (distinct from duress)
3. Commercial bribery of an agent (a more recent addition)
o The common factor among these grounds is that one party’s consent was
obtained through illegitimate means.
o The principle underlying contract avoidance is that no person should be bound
by a contract entered into under improper influence.
o Future developments may lead to new grounds for rescission, such as economic
duress or abuse of circumstances.
o However, courts have resisted the idea of combining all grounds into a single
general principle that would eliminate the need to prove each specific defense
separately.
4.2 Misrepresentation
A misrepresentation is a specific type of misstatement in contract law. While a
misstatement is any assertion that contradicts the true facts, misrepresentation refers
to a false statement of past or present fact, not law or opinion, made before or at the
time of the contract. Misrepresentation can be express (verbal) or implied (conduct). In
some cases, even silence can be considered misrepresentation if there is a duty to
disclose.
Misrepresentations are categorized based on the state of mind of the person making
them:
1. Fraudulent Misrepresentation – A false statement made knowingly,
recklessly, or without belief in its truth (lack of honest belief).
2. Negligent Misrepresentation – A false statement made honestly but
carelessly.
3. Innocent Misrepresentation – A false statement made without fraud or
negligence (without fault).
Previously, all non-fraudulent misrepresentations were termed "innocent," but now a
remedy in damages exists for negligent misrepresentation, distinguishing it from truly
faultless innocent misrepresentation.
4.2.1 Misrepresentation distinguished from other pre-contractual misstatements
Misrepresentation vs. Other Misstatements
Misrepresentation must be distinguished from other types of misstatements made
during contract negotiations because the available remedies differ depending on the
type of misstatement.
In cases where categories of misstatement overlap, the misled party generally has the
right to choose between different remedies.
4.2.1.1 Warranties or Contractual Terms
Distinguishing Representations from Warranties
When a statement of fact is made during contract negotiations (e.g., "the car is a 2020
model"), it can either be a representation or a warranty (a contractual term). The key
question is whether the parties intended the statement to be legally binding.
o A representation does not automatically impose liability on the maker unless
the law requires it.
o A warranty, however, means the person guarantees the truth of the statement
and will be held liable if it turns out to be false.
Determining Intention:
Courts assess OBJECTIVE factors, such as:
o The importance of the statement.
o The stage of the transaction when it was made.
o Whether it was in response to a query.
Even if no actual intent to create a warranty exists, a person may still be held liable
based on estoppel if their actions led the other party to reasonably believe they were
warranting the statement’s truth.
Remedies for Breach of Warranty:
Since a warranty is a contractual term, its breach can lead to:
o Cancellation of the contract (if the breach is material).
o Damages, allowing the aggrieved party to be placed in the financial position they
would have been in had the statement been true.
Overlap Between Misrepresentation & Warranty:
If a misrepresentation is later incorporated into the contract as a term, the affected
party can sue either for misrepresentation or for breach of contract.
4.2.1.2 Opinions, Statements as to the future and Statements of Law
Distinguishing Representations from Opinions, Intentions, and Statements of Law
o A representation must be a statement of past or present fact.
o Opinions, forecasts, or intentions that later prove incorrect do not usually
qualify as misrepresentations.
o However, a false expression of belief or intention can amount to
misrepresentation if the speaker did not truly hold the belief or never intended
to act on it.
Opinions & Legal Statements:
o Generally, a statement of opinion is not actionable, but in rare cases, if it
implies that the speaker has reasonable grounds for their belief, it may be
considered a misrepresentation.
o Traditionally, statements of law were treated as opinions, not facts, and thus
not actionable.
o However, if a person falsely claims to hold a legal opinion or implies, they have
reasonable grounds for it, they may be liable for misrepresentation of fact.
Distinguishing Fact from Law:
o Determining whether a statement is one of fact or law can be complex.
o A statement about the legal effect of a document is considered a statement of
law.
o However, if a party induces another to enter into a contract by interpreting a
contract clause in a particular way, they may be bound by that interpretation,
even if it is legally incorrect.
4.2.1.3 Puffs (simplex commendatio)
Puffery vs. Misrepresentation
o General laudation (puffery) exaggerated praise or advertising—does not
amount to misrepresentation if it is vague and non-specific (e.g., "a desirable
residence for a family of distinction" or "well-built").
o Sellers are expected to promote their goods, and buyers should be aware of this.
When Puffery Becomes Misrepresentation:
o If exaggeration is mixed with factual details, it may lead to liability for
misrepresentation.
o Courts determine this objectively, considering the entire statement in each
case.
Why Puffery is Not Actionable:
o Puffery, opinions, and statements of intention are not legally binding because
reliance on them is considered unreasonable.
4.2.1.4 Dicta et Promissa
Dictum et Promissum (Material Statement in Roman and Roman Dutch Law)
o A dictum et promissum is a material statement made by the seller during
negotiations that goes beyond mere praise and addresses the quality of the
item sold.
o If such a statement is later unfounded, the purchaser has aedilitian remedies
available:
1. Actio redhibitoria: To cancel the contract.
2. Actio quanti minoris: To sue for a reduction in the purchase price.
Nature of Dictum et Promissum:
o This concept excludes puffery and is limited to sales contracts.
o It constitutes a form of representation.
o If the statement is guaranteed, it becomes a warranty, and its breach leads to
remedies for breach of contract.
o Alternatively, the purchaser may choose to claim aedilitian relief instead of
pursuing a breach of contract.
4.2.2 Misrepresentation and Mistake
Misrepresentation vs. Mistake
o Misrepresentation and mistake are related but distinct legal concepts.
o All misrepresentations cause a misapprehension (a type of mistake) in the
literal sense, but not all misrepresentations raise the technical doctrine of
mistake.
Mistake Induced by Misrepresentation
o In most cases, the mistake caused by a misrepresentation is not material and
does not invalidate the contract because consensus between the parties still
exists.
o If the mistaken belief is induced by misrepresentation, the contract becomes
voidable at the representee's discretion; the action would be based on
misrepresentation, not mistake.
o If the mistake is material (i.e., it concerns the very nature of the contract), the
contract is void ab initio (from the start) for lack of consensus. Here, the
mistake invalidates the contract, not the misrepresentation, although the
misrepresentation plays a key role in proving that the mistake is iustus
(justifiable).
Exclusion Clauses in Contracts
o A contract provision stating that no misrepresentation was made by either party
can exclude reliance on misrepresentation as a cause of action, unless there
was fraud.
o However, such a clause does not prevent a party from proving that they entered
the contract based on a mistaken belief induced by misrepresentation. If the
contract is void for mistake, the exclusion clause has no effect.
o If there is a duty to disclose and a party fails to do so (e.g., by not drawing
attention to the exclusion clause), this failure constitutes misrepresentation
by silence, which can make the other party’s mistake justifiable (iustus).
4.2.3 Remedies for Misrepresentation
Remedies for Misrepresentation in Contracting
A party misled by a misrepresentation during the contracting process may:
1. Set the contract aside (voiding the agreement).
2. Claim restitution (restoring what was given under the contract).
3. Use misrepresentation as a defense if sued based on the contract.
4. Recover damages for any losses caused by the misrepresentation.
4.2.3.1 Rescission and Restitution
Key Elements for Rescission and Restitution (Restitutio in Integrum) Due to Misrepresentation
For a party to be entitled to Rescission and Restitution after being misled into entering
into a contract, four factors must be present:
1. Misrepresentation by the other party:
o The misrepresentation must be made by the other party to the contract or
someone for whom they are responsible.
o If the misrepresentation was made by an independent third party, it does not
affect the contract unless it causes a material mistake.
2. Inducement:
o The misrepresentation must induce the representee to enter into the contract.
o There must be a causal connection between the misrepresentation and the
conclusion of the contract.
o The misrepresentation need not be the sole cause, but it should be one of the
inducing factors.
o The test for inducement is subjective—whether the misrepresentation actually
influenced the representee’s decision.
3. Intention to Induce:
o The misrepresentation must be made with the intention of inducing the other
party to enter into the contract.
o Even if the misrepresentation is not made with the intent to deceive, it can still be
made to induce the other party to enter into the contract.
o If the misrepresentation was made without intent to induce or was addressed
to a third party, reliance on it might be unreasonable.
4. Materiality:
o The misrepresentation must be material—meaning it would have naturally and
probably induced a reasonable person to enter into the contract.
o Some scholars suggest that materiality might relate directly to inducement, as a
misrepresentation that induces the representee to contract is inherently
material.
o Fault is not required for rescission—whether the misrepresentation was made
fraudulently, negligently, or innocently, the right to rescind exists.
Additional Notes:
•
•
Dolus Dans vs Dolus Incidens:
o The contract may be rescinded if the misrepresentation induced the
contract (dolus dans).
o However, if the contract would still have been formed on different terms
(dolus incidens), rescission may not be available, and only damages may
be recovered.
Roman Dutch Law:
o The principle of rescission for misrepresentation is now recognized in
South African law, even for innocent misrepresentations, following the
influence of English law.
This principle reflects the shift from fraudulent misrepresentation being the sole basis
for rescission to a broader understanding of misrepresentation.
4.2.3.2 Misrepresentation as a Defence
Misrepresentation as a Defence to a Claim on the Contract
Misrepresentation can serve as both an invalidating cause and a cause of action in the
context of contract law. Specifically, a misrepresentation can provide grounds for
rescission of the contract, but it can also be used as a defence when a party is sued on
the contract by the representor. Here’s how this works:
1. Misrepresentation as a Defence:
o A representee (the party who was misled by the misrepresentation) can
plead misrepresentation as a defence against an action brought by the
representor (the party who made the misrepresentation).
o The process of pleading misrepresentation as a defence is typically seen
as a form of rescission since the representee must establish the same
facts that would be necessary for rescission of the contract.
2. Rescission and Defence:
o When the misrepresentation is pleaded as a defence, the representee
essentially asserts that the contract should be set aside due to the
misrepresentation.
o Rescission serves as the remedy, which means that the contract is
cancelled and the representee is entitled to restitution (the return of any
benefits received under the contract).
3. Misrepresentation and Specific Performance:
o In cases where specific performance (an order compelling a party to
perform their obligations under the contract) is sought, a
misrepresentation could still defeat the claim for specific performance,
even if it wouldn't lead to rescission.
o This highlights that while misrepresentation can invalidate a contract in
terms of rescission, it can also prevent the enforcement of certain
specific obligations (like specific performance), even if the contract isn't
rescinded.
4.2.3.3 Damages
In the context of fraudulent misrepresentation, the key legal principles revolve around
the deliberate deception of the representee by the representor. This form of
misrepresentation is treated as a delict (tort) under South African law, specifically
actionable through the actio legis Aquiliae, allowing the representee to claim damages
for any patrimonial loss caused by the fraudulent misrepresentation. Here’s a
breakdown of the key concepts and distinctions:
1. Fraudulent Misrepresentation:
Definition: Fraudulent misrepresentation occurs when one party knowingly makes a
false statement with the intent to deceive the other party (the representee), thereby
causing financial harm.
Delictual Remedy: It is actionable under the actio legis Aquiliae, allowing the
representee to claim delictual damages. This is distinct from contractual claims, as it
seeks to compensate for the actual financial loss caused by the misrepresentation.
Elements: The key elements of fraudulent misrepresentation include:
o
o
o
o
o
A false representation is made.
The representor knows the representation is false.
The representor intends for the representee to rely on the false representation.
The representee acts upon the false representation.
The representee suffers financial loss as a result.
2. Motive and Causation:
Motive: The intent behind the misrepresentation is crucial. Even if the representor did
not intend to cause harm, fraudulent misrepresentation still entitles the representee
to damages, as long as the representation was made without belief in its truth and with
the intent to deceive.
Causal Link: The representee must show that their financial loss directly resulted from
acting on the fraudulent misrepresentation. The damages aim to restore the
representee to the financial position they would have been in had the misrepresentation
never been made.
3. Delictual vs. Contractual Measure of Damages:
Delictual Measure: In cases of fraud, the goal is to compensate for the actual loss
suffered by the representee. The damages are not meant to put the representee in the
position they would have been in if the representation had been true, but rather to
account for the financial harm caused by the fraudulent conduct.
Contractual Measure: By contrast, damages arising from a breach of contract seek to
put the representee in the position they would have been in if the contract had been
properly performed.
4. Types of Fraud:
Dolus Dans: In cases where fraud led to the formation of the contract itself, damages
are assessed based on the net loss from the transaction (e.g., the difference between
the price paid and the true value of the goods).
Dolus Incidens: In cases where fraud affects only certain terms of the contract, the
damages reflect the difference between what was paid and what would have been paid
had the fraud not occurred.
5. The “Swings-and-Roundabouts” Principle:
This principle suggests that if the representee benefits from the contract despite the
fraudulent misrepresentation (e.g., buying a house for a lower price than its market
value), they cannot claim damages for losses unrelated to the misrepresentation itself
(e.g., money spent on repairs). However, if the representee suffers a net loss, damages
may be awarded.
6. Practical Application and Challenges:
The courts often face challenges in determining exactly what the representee would
have agreed to have the misrepresentation not been made. The market value of the
goods or service is typically used to assess this, especially when the representee would
have paid the true value.
In dolus incidens, the loss is generally smaller because fraud is only influenced by
certain terms, not the entire contract.
Restitutional Damages for Innocent Misrepresentation:
The discussion on innocent misrepresentation and its potential for restitutional
damages is important. While fraudulent misrepresentation clearly leads to damages
based on the actual loss caused, innocent misrepresentation—where the representor
makes a false statement without fraudulent intent or negligence—poses a more
complex issue.
1. Actio Quanti Minoris: In cases of innocent misrepresentation (like in Phame
(Pty) Ltd v Paizes), a purchaser may invoke the actio quanti minoris to reduce
the purchase price based on the misrepresentation. This serves as a form of
restitution, but not compensatory damages. The purchaser may seek to abide by
the contract and reduce the price rather than rescind the contract.
2. Restitution vs. Compensatory Damages: Restitutional damages in the case of
innocent misrepresentation are not the same as compensatory damages. The
purchaser cannot claim compensation for consequential loss, but they may
seek to return to the financial position they would have occupied if the
misrepresentation had not occurred.
3. Equitable Considerations: In Phame, the court extended the scope of relief by
allowing restitution for innocent misrepresentation, highlighting the influence of
equitable principles. While the court did not directly address restitutional
damages for innocent misrepresentation outside sales contracts, the reasoning
opens the possibility for broader application of such relief in other contract
contexts.
4.2.4 Misrepresentation by silence: non-disclosure
Failure to disclose a material fact, when legally required, is considered a
misrepresentation by omission. While there is generally no duty to disclose, several
exceptions apply:
1. Insurance, agency, and partnership contracts.
2. Fiduciary relationships (e.g., attorney-client).
3. Statutory requirements, such as those in the Companies Act.
4. Latent defects in goods.
5. Credit applicants (e.g., unrehabilitated insolvency).
6. Misleading silence due to prior conduct or statements.
The duty to disclose arises by law, not as an implied contract term. Liability depends on
whether the undisclosed information is within one party’s exclusive knowledge and
essential for fair dealing. Even innocent or negligent non-disclosure can be unlawful in
some cases, based on the relationship and circumstances.
4.3 Duress
Duress (metus) refers to improper pressure or intimidation that forces a party to
consent to a contract out of fear of an illegitimate threat. Although this consent is
forced, the contract remains valid but voidable at the option of the threatened party.
o The threatened party can rescind the contract and claim restitution.
o Duress is a delict, meaning the innocent party can also claim damages under
actio legis Aquiliae.
o To prove duress, the threat must be unlawful and a direct cause of the
contract — meaning the party would not have agreed otherwise.
According to Sir John Wessels, the elements of duress are:
1. Actual violence or reasonable fear
2. Fear caused by a threat of significant harm to the party or their family
3. The threat must be imminent or inevitable
4. The intimidation must be against good morals (contra bonos mores)
5. The moral pressure must have resulted in damage
4.3.1 The nature of coercion
Duress involves coercion of the will, not physical force. It is classified as vis
compulsiva (psychological coercion) rather than vis absoluta (overwhelming physical
force).
o Vis absoluta: Physical force is so extreme that the victim does not act at all
(e.g., forcing someone’s hand to sign a contract). In such cases, no contract is
formed.
o Vis compulsiva: The victim is pressured into choosing between two evils—
agreeing to the contract or suffering harm. The threat of harm, rather than actual
violence, induces consent.
o Even if violence is used, duress arises from the threat that the violence will
continue unless the victim consents.
4.3.2 The reasonableness of the fear
The threat in a duress situation must be sufficiently grave to affect the mind of a
reasonable person, but this is not always the case. Some authorities suggest
considering the victim’s personal attributes (such as age or sex), but Grotius argued
that fear need not be reasonable. This view is preferred because it prevents an
unscrupulous party from exploiting the victim’s unreasonable fears.
o The intention and effect of the threat to induce the contract are crucial.
o The party issuing the threat should not be able to argue that the victim was easily
frightened, as long as the threat led to the victim consenting to the contract.
o While unreasonable fear may make it harder to prove that the threat induced
the contract, this is a matter of evidence, not law.
4.3.3 The Object of the Intent
Duress generally involves threats directed at a person's life, bodily integrity, or
property, or the immediate family of the victim. However, Grotius considered a threat
to honor as sufficient for duress. The distinction between different types of threats,
such as to personal safety versus property, is not always clear, and today, courts would
likely offer relief even if the threat was directed at a distant relative or stranger,
especially if the threat involved physical violence.
o Threat to property (duress of goods) requires an unequivocal protest at the
time of the contract or payment to prove the transaction was involuntary.
o However, the lack of protest doesn't automatically imply consent; evidence of
duress can still lead to relief.
o Economic duress (pressure on purely economic interests) is an open question
in South African law, although English and American law recognize it. The
Supreme Court of Appeal acknowledged that economic duress might be
recognized in principle but is unlikely to be common, as hard bargaining is not
usually considered duress.
4.3.4 The imminence of the harm
Wessels' statement that a threat must involve an imminent or inevitable evil is based
on Roman law and reflects the idea that the threatened party should seek legal
protection instead of yielding to the threat. However, Voet and Van Leeuwen suggest
otherwise.
o The imminence or inevitability of the threat should not be a fixed requirement
for granting relief.
o Relief should be granted if the threatened party had no reasonable alternatives
but to succumb to the threat and enter into the contract.
4.3.5 The unlawfulness of the threat
For duress to apply, the threat must be unlawful or contra bonos mores (against good
morals). A person threatened by a lawful threat has no grounds for duress because the
issue isn't fear itself but obtaining consent through improper means.
o Unlawful threats include those involving illegitimate conduct (e.g., threats of
murder or assault) or those made for illegitimate purposes.
o A threat to enforce one’s rights through legal action is generally not unlawful,
unless it involves extortion or an unjust criminal prosecution.
o Threatening criminal prosecution is unlawful if it is used to extort a benefit to
which the creditor is not entitled, or if the debtor is innocent. There is
disagreement among courts about whether such a threat is unlawful when the
debtor is guilty, but there is academic consensus that using criminal
prosecution for private gain is against public interest and may render the
contract void.
4.3.6 Damages
Financial loss is key to a claim for Aquilian damages, but some cases, following Voet
and Wessels, suggest that damage is also required for restitutio in integrum. However,
this is unclear, as restitutio in integrum focuses on improperly obtained consent, not
wrongful harm.
o The requirement for damage in the context of duress can be understood as in
Broodryk v Smuts: the person alleging duress must show that they have
incurred obligations they wouldn't otherwise have, meaning the duress must
have induced the contract. Simply entering into the contract due to duress is
sufficient to meet the damage requirement.
4.3.7 Duress by a Third Party
When duress comes from an outsider acting independently and without the knowledge
of the contracting party, the expected remedy would be an action for damages against
the third party, similar to misrepresentation cases. However, historically, the remedy
of restitutio in integrum was available in these situations.
Current expectation:
It is anticipated that the courts will reject the old approach, except in specific cases like
marriage, where public policy requires the contract to be voidable, regardless of where
the duress comes from
4.4 Undue Influence
Undue influence is a form of improper pressure used to induce someone into a
contract, but unlike duress, it involves more subtle methods, gradually eroding the
victim’s ability to make independent decisions.
This influence often occurs in close relationships, such as those between a doctor
and patient, attorney and client, or parent and child, where one party has a superior
position and misuses it to influence the other. These relationships create a
responsibility for one party to offer advice and assistance, but undue influence occurs
when that position is exploited to manipulate the other’s judgment.
4.4.1 Origin of the Doctrine
The concept of undue influence was introduced into South African law from English
law as a response to the limitations of the common-law concept of duress. Initially, this
doctrine was not recognized in Roman Dutch law, but over time, references to undue
influence began appearing in case law and textbooks. It wasn't until 1948 that a court
firmly ruled that a contract could be set aside on the basis of undue influence. This
decision was later confirmed in Preller v Jordaan by the Appellate Division, which
held that the grounds for restitutio in integrum in Roman Dutch law were sufficiently
broad to include undue influence. The case of Patel v Grobbelaar further solidified the
doctrine’s place in South African law, illustrating the importance of recognizing undue
influence and challenging older, more laissez-faire approaches.
4.4.2 Requirements
In Patel v Grobbelaar, the court outlined that to set aside a contract for undue
influence, the claimant must show:
1. The other party exerted influence.
2. The influence weakened the claimant’s will.
3. The influence was used unscrupulously to persuade the claimant into an unfair
contract.
Unlike English law, South African law requires proving undue influence without a
presumption from a special relationship. If undue influence is by an outsider, the
contract can only be set aside if the other party knew about it. Loss caused by undue
influence may allow an Aquilian action for damages.
Undue influence may overlap with fraud or duress but is distinct due to the absence of
intimidation.
4.4.3 Abuse of Circumstances
Undue influence and duress both involve exploiting a party’s vulnerability, such as in
Blackburn v Mitchell, where a ship’s master was pressured into agreeing to an
excessive tow fee. South African law typically enforces such contracts but adjusts
performance to what’s reasonable. Van Huyssteen suggests this could be called abuse
of circumstances, though courts haven’t fully accepted this.
In English law, undue influence can apply to unconscionable bargains, where one
party unfairly exploits the other’s weakness or bargaining disadvantage.
4.5 Commercial Bribery
In Plaaslike Boeredienste v Chemfos, the court held that a contract induced by bribery
can be set aside, not because of fraud, but because of the wrongful and immoral
methods used. In Extel Industrial v Crown Mills, the court confirmed that commercial
bribery is a valid ground to rescind a contract. The elements of commercial bribery
include:
1. A reward paid or promised by the briber.
2. The briber gives this reward to an agent who can influence a third party (the
principal).
3. The briber's intention is to get the agent to influence the principal without their
knowledge, benefiting the briber by altering a contractual relationship.
4.7 Consumer’s right to fair and honest dealing under the Consumer Protection Act
The Consumer Protection Act (CPA) overlaps with common law concerning improperly
obtained consensus.
o Section 40 prohibits unconscionable conduct by suppliers or their agents,
including physical force, coercion, undue influence, duress, harassment, and
unfair tactics in negotiating, concluding, or enforcing contracts. It also bars
suppliers from exploiting consumers' vulnerabilities, such as physical or mental
disabilities or illiteracy.
o Section 41 addresses misrepresentation and non-disclosure of material facts.
These provisions extend beyond common law by allowing contracts to be contested
based on harassment or unfair conduct. Consumers can seek redress through
institutions like ombuds, consumer courts, the National Consumer Commission, and
the National Consumer Tribunal. Investigations may lead to negotiated settlements or
fines for suppliers who violate these provisions.
CHAPTER 17: The Consumer Protection Act 68 of 2008
17.5.6.1 Unconscionable Conduct
Section 40 of the Consumer Protection Act (CPA) prohibits suppliers or their agents
from using2 unethical tactics like physical force, coercion, undue influence, duress, or
harassment. It defines "unconscionable conduct" as actions that shock a
reasonable person's conscience. Subsection 2 specifically targets suppliers who exploit
a consumer’s vulnerability (e.g., due to disability or illiteracy) to the consumer's
detriment. If a court finds unconscionable conduct, the supplier may be ordered to
refund, compensate the consumer, and change business practices to prevent future
issues.
17.5.6.2 False, Misleading or deceptive misrepresentations
Section 41(1)(a) of the Consumer Protection Act (CPA) prohibits suppliers from making
false, misleading, or deceptive representations about material facts. It also bars
exaggeration, innuendo, or ambiguity that could mislead consumers. This extends
beyond "puffing" or mere praise, which previously didn't lead to liability. Courts consider
factors like the value of goods, the relationship and experience of the parties, and their
conduct when evaluating such claims. If a supplier violates this, they may be ordered to
refund, compensate the consumer, and change their business practices. Additionally,
suppliers must correct any apparent misunderstandings on the consumer's part.
LESSON
Illegal Contracts
Illegal Contracts
CHATPER 6[LEARNING UNIT 3]: Formalities
6.1 Introduction
As a general rule, NO formalities are required for a valid contract—parties can express
their intentions in any form, as long as all other validity requirements are met.
However, there are TWO exceptions:
1. Statutory Formalities – Certain contracts must follow specific legal requirements
such as writing, notarial execution, or registration.
2. Agreed Formalities – Parties may agree that their contract is binding only if certain
formalities (e.g., written and signed agreement) are met. This may also apply to
variations, cancellations, or waivers of contractual rights.
It is advisable to put important contracts in writing to make it easier to prove their
existence and terms, especially overtime or for complex agreements. The burden of proof
lies with the party enforcing the contract.
6.2 Formalities prescribed by law
Certain statutes require SPECIFIC formalities for contracts, often requiring them to be in
writing, signed, notarially executed, and registered to be effective against third parties.
Electronic contracts are also subject to statutory formalities.
Material terms (not just essential terms) must be in writing.
Implied (naturalia) and tacit terms do not need to be in writing.
Terms can be in separate documents rather than a single one.
Any variation of material terms must also be in writing.
Some exceptions allow oral agreements, such as contract extensions,
cancellations, or reviving a cancelled contract of land sale.
o Estoppel cannot override statutory formalities, meaning a party misled into an
oral variation cannot use estoppel as a defense.
o Non-compliance with formalities renders a contract void. However, performance
under a void contract can be recovered through enrichment actions (e.g., Carlis v
McCusker).
o The Wilken v Kohler case held that no enrichment action is available if both parties
have fully performed.
o
o
o
o
o
o In 1981, the legislature introduced a special enrichment action, allowing certain
land transactions to be valid despite non-compliance with formalities.
6.2.1 Prescribed formalities required for validity
Some contracts must be in writing and signed to be valid. If these formalities are not
followed, the contract is void.
6.2.1.1 Alienation of Land
Alienation of land (sale, exchange, or donation) is only valid if it is in writing and signed by
the parties or their authorized agents.
Purpose:
o To ensure legal certainty, reduce litigation, and prevent fraud.
Agent Requirement:
o A person signing on behalf of a party must have written authorization, except when
a company acts through its managing director or other official organs.
Exceptions:
o Auctions and pre-emption rights related to land sales are not subject to these
formalities.
o For instalment sales at auctions (price paid in over two instalments over more
than one year), the conditions must be read publicly before the auction, and the
buyer must receive a copy of the contract immediately afterward.
6.2.1.2 Suretyship
A contract where a surety guarantees to a creditor that they will fulfill the obligations of a
principal debtor if the debtor fails to perform.
Legal Requirement:
o Under Section 6 of the General Law Amendment Act, a suretyship contract must
be in writing and signed by or on behalf of the surety (but not necessarily by the
creditor) to be valid.
Purpose:
o Ensures legal certainty, similar to land alienation laws.
o Alerts the surety to their serious financial obligation before they commit.
6.2.1.3 Donation
Executory Donation: A donation that has not yet been completed (i.e., the promised
benefit has not been delivered).
Legal Requirement:
o Must be in writing and signed by the donor (or their authorized representative) to
be valid.
o The donee must accept the donation but does not need to sign.
o The donor’s written authority must be granted in the presence of two witnesses,
but the deed of donation itself does not need witnesses.
Purpose:
o Ensures the donor’s serious intention to make the donation.
Exception:
o Oral donations are valid if completed by delivery of the promised benefit.
6.2.2 Prescribed formalities required for enforcement against third parties
Some formalities are not required for a contract to be valid between the parties.
However, without these formalities, a party cannot enforce the contract against third
parties.
Purpose:
o Ensures that third parties are aware of the contract, preventing disputes and
enhancing legal certainty.
6.2.2.1 Antenuptial Contracts
An oral antenuptial contract is valid between the parties but must be notarially
executed and registered within three months to be enforceable against third parties.
Notarial execution:
o The contract must be in writing and signed in the presence of a notary.
o The notary signs, seals, and stores a copy in their official records (protocol).
6.2.2.2 Long Leases of Land
An oral lease of land is valid.
However, a long-term lease (over 10 years) will only be effective against a creditor or
successor of the lessor if it is registered against the title deed of the land.
Third parties will also be bound by the lease if they knew about it due to the doctrine of
notice.
6.2.3 Formalities in Electronic Contracts
Section 12:
o A requirement for a document to be in writing is satisfied if the document is in the
form of a data message that is accessible.
o This does not apply to alienations of land or long-term leases of immovable
property exceeding 20 years.
o It does apply to suretyships and executory donations (except land) and is relevant
for statutory and contractual formalities.
o Section 12 also applies to contract variations.
Section 13(2):
o Electronic signatures can now serve as the equivalent of a wet signature.
o Types of electronic signatures can vary, from simple signatures (e.g., email signoff) to biometric-identification technologies.
o If law requires a signature, but the type is unspecified, it is met by an advanced
electronic signature.
o An advanced electronic signature must come from a process accredited by the
Director-General of the Department of Communications.
6.2.4 Diverse other statutory instances
Non-compliance with statutory writing formalities does not always invalidate the
agreement, but it may affect its enforceability.
Examples of Statutory Formalities:
1. Housing Consumers Protection Measures Act:
o Requires agreements between home builders and housing consumers to be in
writing, signed by both parties, and include material terms and annexures (e.g.,
specifications, plans).
o Non-compliance with writing and annexure requirements does not invalidate the
agreement but prevents the home builder from demanding a deposit or receiving
other payments from the consumer.
2. National Credit Act:
o Requires credit agreements to be in a specific form (paper or printable electronic
document) and to comply with category-specific requirements.
o Non-compliance with formalities does not automatically render the agreement
void, leaving it to the courts to assess its legality.
o Alterations to credit agreements are only valid if done in accordance with prescribed
formalities.
3. Consumer Protection Act:
o NO general requirement for writing in consumer contracts, making them valid
without written form in most cases.
6.3 Formalities stipulated by the parties
The parties to a contract may set their own formalities for the creation, variation, or
cancellation of the contract.
Neither party can unilaterally change or depart from these prescribed formalities.
6.3.1 Creation of the Contract
TWO purposes for reducing an oral agreement to writing:
1. Facilitate proof: The agreement remains binding even if not reduced to writing.
2. Formal requirement: The agreement is not binding until it is reduced to writing and
signed by both parties. In this case, it lacks contractual force until formalities are
met.
Presumption of intent:
o Unless proven otherwise, the law presumes that the intention was to facilitate
proof and not to create a formal requirement.
o The party alleging that the written agreement was intended as a formal requirement
must prove this intention.
Cases:
o Goldblatt v Fremantle: The court ruled that no contract existed because the parties
intended the agreement to be concluded in writing and signed.
o De Bruin v Brink: The court held that an agreement to embody verbal terms in
writing does not necessarily indicate the intention to be bound only by the written
document.
Electronic contracts:
o In the absence of evidence of the parties' intention, an electronic contract that
complies with section 12 of the Electronic Communications and Transactions
Act (i.e., accessible data message) should meet the written formality.
Even if the parties initially intended that the agreement would not be binding until it was
reduced to writing, they can change their minds at any time.
If they scrap the writing requirement, the oral agreement immediately becomes binding.
This change in intention can occur either expressly (through clear communication) or
tacitly (through implied actions or behavior).
6.3.2 Variation of the contract: non-variation clauses and the Shifren Principle
Non-Variation Clauses: These clauses specify that any variation of the contract must be in
writing and signed by the parties. They are commonly inserted into contracts to prevent
disputes and issues with proof if oral variations were allowed.
Legal Precedent (SA Sentrale Ko-oeratiewe Graanmaatskappy Bpk v Shifren): The
Appellate Division ruled that non-variation clauses are valid and do not go against public
policy. The clause prevents any oral variation, even if both parties agree to it orally, unless
they follow the written procedure they set out. This upholds the principle of pacta sunt
servanda (agreements must be kept).
Freedom of Contract: The clause does not remove the parties' freedom to amend their
contract but limits them to a specific procedure (writing and signing) for any variations.
Potential Unjust Results: The application of this principle can sometimes seem unfair,
such as a landlord refusing a late rent payment after orally agreeing to it and then relying on
the non-variation clause to cancel the contract.
Court Reaffirmation: In the Brisley v Drotsky case, the Supreme Court of Appeal upheld
the Shifren principle, emphasizing that parties' freedom of contract must be respected. The
non-variation clause benefits both parties and is not unconstitutional.
Court Doctrines to Circumvent: Courts have attempted to soften the Shifren principle by
using doctrines like waiver, estoppel, and good faith in some cases.
6.3.3 Cancellation of the contract: non-cancellation clauses
General Rule: Parties are free to cancel a contract at any time by mutual agreement,
meaning consensual cancellation is typically allowed.
Formalities for Cancellation: Just as parties can prescribe formalities for creating or
varying their contract, they can also impose formalities for cancellation. This was
confirmed in the case Impala Distributors v Taunus Chemical Manufacturing Co (Pty)
Ltd.
Non-Cancellation Clauses: It has become common practice to include non-cancellation
clauses in contracts, which require specific formalities (typically writing and signatures)
for the contract to be cancelled by mutual consent.
Application of the Clause: These clauses are restrictively interpreted, meaning they only
apply to consensual cancellations (when both parties agree to terminate the contract).
A non-cancellation clause will not prevent a party from unilaterally canceling the contract if
the other party breaches the contract.
Impala Case:
o The contract in question had a non-cancellation clause stating: "This agreement
may be terminated by mutual consent in writing of the parties."
o It also had a non-variation clause, which the court ruled entrenched both clauses
(non-variation and non-cancellation) against oral modification.
o The court held that to cancel the contract, the parties must comply with the written
formalities. A non-cancellation clause must be paired with a non-variation clause
to be enforceable.
Obiter Dictum in Impala: The court suggested, but did not decisively rule, that a nonvariation clause alone could potentially prevent oral cancellation of a contract. This point
remains uncertain in the law.
Current Practice: Today, it is standard to include a clause that states: "No variation or
consensual cancellation of this contract shall be of any force or effect unless reduced
to writing and signed by the parties."
6.3.4 Limiting the Shifren principle
The Shifren principle (which enforces non-variation clauses in contracts) can sometimes
lead to unjust consequences in practical situations, especially when one party acts
unfairly or in bad faith. The example provided illustrates such a scenario:
Example Scenario:
o Oral Agreement: A lessor and lessee orally agree to reduce the rent from R3 500 to
R3 000 per month, despite the presence of a non-variation clause in their written
contract.
o Assurance of Binding Agreement: The lessor assures the lessee that the oral
agreement to reduce the rent is binding.
o Rent Acceptance: The lessor accepts the reduced rent (R3 000) for four months.
o Fifth Month: In the fifth month, the lessee tenders the agreed R3 000 rent again, but
the lessor cancels the contract, demanding R3 500 and arrear rental of R2 000
(R500 per month for four months).
Consequences:
The lessor’s conduct appears unconscionable because, despite the oral agreement and
the acceptance of the lower rent for months, the lessor seeks to enforce the original
amount and cancels the contract without warning.
Court’s Response:
In such situations, courts have attempted to limit the harsh application of the Shifren
principle, particularly in cases of unconscionable conduct or where one party seeks to
exploit a technicality to their unfair advantage.
Methods Courts Have Used to Address This:
1. Waiver or Estoppel: Courts may invoke the doctrines of waiver or estoppel,
preventing a party from relying on the non-variation clause after they have acted
in a way that contradicts it (e.g., accepting reduced rent for several months).
2. Good Faith: Courts may consider whether the lessor’s conduct is in line with the
principle of good faith in contractual relationships. Acting in bad faith to cancel the
contract could lead to an unfair outcome.
3. Unconscionability: In some cases, the courts may soften the application of the
Shifren principle where the party seeking to enforce it is acting in an unjust or
oppressive manner.
While the Shifren principle allows parties to limit oral variations of a contract,
unconscionable conduct and bad faith actions may lead courts to soften or
circumvent the strict application of the principle to avoid unjust outcomes.
6.3.4.1 Restrictive Interpretation
A non-variation clause limits the parties' freedom to modify their contract and must be
interpreted restrictively. It only applies to variations (changes to the terms) of the contract,
not to other legal actions like cancellations or waivers.
For example, a cancellation of the contract by agreement or breach does not amount to a
variation and may still be valid, despite the presence of a non-variation clause. Similarly,
waivers of rights, such as not enforcing a breach, do not count as variations. In cases like
the rent reduction for example, accepting a lower payment can be seen as a waiver of the
right to cancel, but it does not change the contract terms.
If a party behaves inconsistently with the non-variation clause (e.g., by accepting reduced
rent for months), they might be prevented from later canceling the contract based on that
breach. In such cases, waiver, estoppel, or even public policy could prevent enforcement
of the clause.
6.3.5 Non-waiver clause
Non-waiver clauses are commonly included in contracts to prevent the unintended loss of
rights due to past conduct, such as showing leniency or granting extensions. These clauses
state that any indulgence or time extension given by the creditor does not waive their right
to enforce strict compliance with the contract in the future or to pursue remedies for any
past or future breaches.
While valid and enforceable, non-waiver clauses are interpreted strictly by courts.
Depending on how they are worded, they may also prevent the use of the doctrine of
estoppel, which would otherwise stop a party from acting inconsistently with their
previous conduct (e.g., accepting late payments and later claiming a breach).
LESSON
Illegal Contracts
Illegal Contracts
CHAPTER 7[LEARNING UNIT 3]: Legality
7.1 INTRODUCTION
Contracts must be legal to be enforceable (pacta sunt servanda). Agreements against
public policy—based on legislation, common law, good morals, and public interest—are
illegal and unenforceable. Since 1994, public policy follows constitutional values, requiring
a balance between private and public interests.
Illegal contracts can be void or valid but unenforceable, depending on societal views.
Contracts violating statutory or common law, including the Constitution, are unlawful. The
terms "public policy" and "public interest" are often used interchangeably.
7.2 Illegal contracts that are void
Contracts can be void for illegality if they conflict with public interest, common law,
statutes, moral or constitutional values, or if enforced unfairly. The consequences of such
illegality vary and are explored in detail.
7.2.1 Public Interest
Contracts may be illegal if they violate good morals (contra bonos mores) or public
policy, as seen in Sasfin (Pty) Ltd v Beukes. Public policy prioritizes societal interests,
balancing sanctity of contract with fairness, justice, and legal rights.
Public policy is fluid, evolving with societal changes and constitutional values. Courts
rarely invalidate contracts on this basis, favoring legal certainty, but will do so in clear
cases. Since 1994, public policy aligns with constitutional rights, as in Barkhuizen v
Napier, where unequal bargaining power limited freedom of contract.
Unfair or unconstitutional contracts may be unenforceable, and courts can recognize
illegality even if not explicitly pleaded.
7.2.3.2 Statutory Illegality
Legislation can define public policy by expressly or impliedly prohibiting certain contracts.
A contract is void if a statute explicitly declares it invalid or if it circumvents legal provisions
(in fraudem legis). Examples include laws on dangerous goods, firearms, and drugs.
Acts like the National Credit Act and Consumer Protection Act list unlawful contract
clauses and provide remedies, including severing or voiding contracts. When a statute is
unclear about voiding a contract, courts analyze factors such as legislative intent, criminal
sanctions, public interest, and potential harm. They balance convenience and fairness in
interpreting legality.
The National Gambling Act regulates gambling activities in South Africa, including wagering
and gambling contracts. While it does not explicitly declare gambling contracts void, it
prohibits certain activities. Section 8 restricts gambling to licensed activities, social
gambling allowed by provincial law, and some informal bets. Informal bets are prohibited if
the parties are bookmakers or profit from gambling.
The Act criminalizes participation in unlawful gambling and prohibits the payment of
winnings from such activities. Section 16(1) deems debts from unlawful gambling
unenforceable. The purpose of the Act is to protect individuals, society, and the economy
from gambling's harmful effects.
Based on these provisions, the legislature appears to imply that wagering contracts from
unlawful gambling activities are void, as they conflict with public interest and can cause
harm if allowed to stand.
7.2.3.3 Constitutional Invalidity
7.2.3.3.1 Private Agreements
In AB v Pridwin Preparatory School, the Constitutional Court examined whether
constitutional provisions could be applied directly to a contractual dispute, marking a
significant development in South African law. This case highlighted the distinction between
direct and indirect horizontal application of the Constitution in the context of private
contracts.
o Direct horizontal application occurs when constitutional rights are directly
invoked in a dispute between private parties, as seen in AB v Pridwin. Here, the
school’s termination of a contract with the parents was challenged not only on
public policy grounds but also on constitutional grounds, particularly the children’s
right to basic education and their best interests. The Court held that the private
school, despite not being a state institution, was still bound by constitutional
provisions when making decisions that affect constitutional rights.
o Indirect horizontal application focuses on how constitutional values, such as
fairness and justice, influence the evaluation of contractual terms, especially
regarding public policy. This was the approach in Barkhuizen v Napier, where the
court considered whether enforcing a contractual term violated public policy in light
of constitutional principles.
In AB v Pridwin, the Constitutional Court ruled that the school's decision to terminate the
contract was unconstitutional, as it failed to consider the children’s constitutional rights,
particularly their right to basic education, under sections 28(2) and 29(1)(a) of the
Constitution. This decision reinforced the idea that the Constitution could directly
influence contractual disputes when fundamental rights are at stake.
Theron J emphasized that where constitutional rights are implicated, a direct horizontal
application should be considered if it is the most appropriate means of resolving the issue,
particularly where the parties’ claims show the direct applicability of constitutional rights.
This case underscores that private parties, including private schools, must respect
constitutional obligations when their decisions affect fundamental rights.
7.2.3.5 Unfair Contracts
The individual interests of the parties are key in determining whether a contract or clause
violates public policy. Factors like fairness, justice, and the balance of bargaining power are
considered. In Barkhuizen v Napier, the Constitutional Court emphasized that fairness,
reasonableness, and good faith are integral to public policy. However, unfairness alone
isn't enough to invalidate a contract; harm to the public interest is also required. Courts
now weigh constitutional rights and values when assessing contracts, with Beadica 231
CC v Trustees for the time being of the Oregon Trust providing clarity. It confirmed that
unfairness alone isn’t sufficient grounds for invalidating a contract—public policy must be
considered, with courts exercising caution.
The Consumer Protection Act grants courts equitable jurisdiction to assess the fairness of
contracts between suppliers and consumers. Section 48(1)(a) prohibits suppliers from
offering goods or services at unreasonable prices or under unfair terms. Section 48(2)
outlines prohibited terms, such as excessively one-sided contracts or unfair, unjust, or
unconscionable terms.
When evaluating contracts, courts consider factors like the circumstances at the time of
the contract, the conduct of the parties, the necessity of the consumer's actions, the fair
value of goods, and the consumer's awareness of contract terms. If a court finds a contract
unfair or unjust, it may order the return of money or goods or compensate the consumer for
losses.
7.2.3.6 Unfair enforcement of a contract
In South African law, courts have held that enforcing unfair contracts may be contrary to
public policy. In Brisley v Drotsky, the Supreme Court of Appeal found that the lessee's
reliance on an oral agreement, despite a non-variation clause, was not exceptionally unfair.
In Barkhuizen v Napier, the Constitutional Court ruled that a court can refuse to enforce a
clause if it’s unfair or unreasonable, considering the circumstances.
However, in later cases like Bredenkamp v Standard Bank and Maphanga v Aengus,
courts emphasized that fairness must be assessed from both parties' perspectives. In
Botha v Rich NO, the Constitutional Court found it unfair to cancel a contract and forfeit
payments made by the purchaser, but this was criticized for not considering the seller's
side.
Finally, Beadica clarified that the fairness of enforcing a contract depends on both
individual and public interests, ensuring consistency in decisions.
7.2.4 The Consequences of a contract that is void from illegality
An illegal contract cannot be enforced as a general rule. However, if only part of the
contract is illegal, that part can sometimes be severed, leaving the rest of the contract
intact. If one or both parties have performed under an illegal contract, they typically cannot
claim back their performance if both are equally at fault, unless the court allows it. The
consequences of contracts voided due to illegality are examined in more detail below.
7.2.4.1 Contract cannot be enforced (ex turpi rule)
An illegal contract is considered void or invalid because it lacks one of the essential
requirements for a valid contract. Such contracts create no obligations and cannot be
enforced. Under the ex turpi causa non oritur actio rule, neither party can take legal action
or claim performance from the other party. For example, if one party suffers damage due to
an illegal contract, they cannot claim contractual damages. Courts cannot relax this rule,
and no exceptions apply—performance by either party does not make the contract legal.
7.2.4.2 Severing the illegal part of a concept
In cases where a contract is partially illegal, courts may allow the illegal part to be severed,
leaving the rest of the contract intact. However, the courts may refuse to sever the illegal
part if public policy demands that the entire contract be void. To determine if severance is
appropriate, the court considers three factors:
1. Grammatical or Notional Distinction: Whether the illegal part is separate from the
rest of the contract and can be removed without affecting the rest of the agreement.
2. Subsidiary or Collateral Nature: Whether the illegal part is minor to the main
purpose of the contract, and its removal wouldn't change the nature of the
agreement.
3. Hypothetical Intention of the Parties: Whether the parties would have agreed to
the contract without the illegal part, often considering whether the contract
includes a severability clause, although this clause is not always decisive.
A court will only allow severance if all three factors are met.
7.2.4.3 Reclaiming performance that has been made in terms of an illegal
contract (the par delictum rule)
If a contract is void, restitution is generally allowed. If ownership didn’t pass, it can be
reclaimed via rei vindicatio; if it did, through unjustified enrichment.
The par delictum rule prevents restitution if both parties are equally guilty, but courts may
relax it to prevent unjust enrichment, as in Klokow v Sullivan. Exceptions apply if the
claimant was unaware of the illegality or coerced. Courts consider:
o Unjust enrichment of the defendant.
o Whether relaxing the rule enforces the illegal contract.
o Public policy concerns.
While strict, courts may allow restitution to ensure fairness.
7.3 Illegal contracts that are valid but unenforceable
Some contracts violate public policy but are not invalid—only unenforceable in court. A
party cannot claim performance or restitution, but the contract remains valid if voluntarily
performed.
Examples include wagering contracts and restraint of trade agreements, both directly
and indirectly unenforceable. Wagering contracts often lead to further agreements (e.g.,
loans), while restraint of trade contracts usually do not.
7.3.2 Agreements in restraint of trade
Agreements in restraint of trade limit a person’s ability to engage in a profession, trade, or
business. They are common in employment contracts, business sales, and partnership
agreements.
Courts balance sanctity of contract (honoring agreements) with freedom of trade
(allowing individuals to work freely). Initially, all restraints were seen as void unless proven
reasonable. However, in Magna Alloys v Ellis, the courts shifted, making restraints valid
unless proven unreasonable by the party seeking to escape them.
In Basson v Chilwan, a four-part test was established to assess reasonableness:
1. Is there a protectable interest?
2. Is that interest threatened?
3. Does the interest outweigh the individual’s right to work?
4. Are there public policy concerns beyond the parties’ interests?
Even if it is reasonable between the parties, a restraint can be unenforceable if it
negatively impacts the public.
The Basson Test determines if a restraint of trade is enforceable.
1. Protectable Interest: The restraint must protect a legitimate proprietary interest,
such as goodwill (trade connections) or confidential information (trade secrets).
Investment in training or general skills is not protectable.
2. Threat to Interest: The interest is at risk if, for example, an employee joins a
competitor in a similar role, potentially using confidential information or luring
customers away.
3. Balance of Interests: The restraint must not go beyond what is necessary,
considering area, time, and activities. Overly broad restrictions (e.g., preventing
any work in a competing company) are unreasonable.
4. Public Policy Considerations: Even a reasonable restraint may be unenforceable
if it harms the public interest. Courts assess this based on current circumstances
and may allow partial enforcement if reasonable.
Courts will not uphold restraints requiring major modification but may enforce limited
parts of a restraint if fair and necessary.
LESSON
Illegal Contracts
Illegal Contracts
CHAPTER 8[LEARNING UNIT 3]: Possibility and Certainty
8.1 Possibility
8.1.1 The General Rule: Impossibility of performance prevents the creation
of obligations
A contract is only valid if performance is possible (impossibilium nulla obligatio est).
Contracts are void if they involve selling something that no longer exists, never existed, or
cannot be sold commercially.
If parties agree to the impossible due to a joke or lack of capacity, no binding obligation
exists. However, a common mistake about circumstances can sometimes render a
contract void.
The possibility rule applies to performance, not purpose. If a painting is destroyed but its
frame is sold, the contract remains valid, as the frame can still be delivered and paid for. A
mistake about purpose does not void the contract.
8.1.2 Different types of impossibility
Not all impossibilities prevent contractual obligations. Only certain types qualify. It's
crucial to distinguish between impossibility at the time of contract formation and
impossibility that arises later. The following classifications are key in this regard.
8.1.2.1 Subjective and Objective Impossibility
For performance to be impossible, it must be absolute (objective), not just relative
(subjective). A party’s inability to pay or deliver goods due to lack of funds or stock is mere
subjective impossibility and does not prevent obligation creation.
If no one can perform—such as delivering a nonexistent object—it qualifies as objective
impossibility. A party’s inability to use a service (e.g., missing a tour due to visa issues)
does not void the contract under common law, though statutory rights, like the Consumer
Protection Act, may allow cancellation.
8.1.2.2 Factual and Practical Impossibility
While objective impossibility prevents obligations, applying this in practice can be
complex. If parties sell plastic ducks, believing them to be on a ship, but the container fell
into the sea the day before, performance is not factually impossible—it is theoretically
retrievable but at an extreme cost. In such cases, the law may recognize practical or
economic impossibility, nullifying the obligation. However, courts are cautious in making
this determination.
8.1.2.3 Legal Impossibility
A contract is void if performance is legally impossible, but it can be hard to determine if the
issue is impossibility or illegality. When impossibility stems from illegality, it’s best to focus
on the legality requirement. In cases like Wilson v Smith, the issue was treated as
impossibility rather than illegality.
Contracts involving illegal activities, like human tissue trade, are void due to impossibility.
This distinction is important when reclaiming performances, as illegality follows the "par
delictum" rule, barring restitution in certain cases, while impossibility does not.
8.1.2.4 Initial Impossibility, supervening impossibility and making
performance impossible
This chapter focuses on initial impossibility, where performance is impossible at the time
the contract is made. Supervening impossibility occurs after the contract is concluded,
and obligations may either terminate or continue, depending on the cause.
If performance becomes impossible (e.g., a house rented by A to B is destroyed in a fire),
the obligations terminate. However, if a party is at fault (e.g., A intentionally sets the fire),
the obligations don’t terminate, and the other party can claim damages or cancel the
contract. This is known as prevention of performance and will be discussed further in later
chapters on termination and breach of contract.
8.1.3 Exceptional cases: Liability despite impossibility
8.1.3.1 Contemplation of impossibility and the assumption of risk
In South African law, the general rule that objective impossibility prevents the creation of
contractual obligations is not always applied. In Wilson v Smith, the parties agreed to sell
land, but an ordinance made it impossible to subdivide the land as planned. While the
court confirmed the principle that impossibility prevents obligations, it also noted that the
application of this rule depends on the contract's nature, the parties' relationship, and the
circumstances.
The test in Wilson v Smith was whether the parties contemplated the possibility of
impossibility when entering into the contract. Since both parties assumed the contract
could be executed normally, the contract was void due to impossibility.
If only one party foresaw or should have foreseen the impossibility, they may still claim
delictual damages if the other party wrongfully induced the belief that the contract was
valid.
8.1.3.2 Warranty: guaranteeing performance
A warranty in a contract is a term that extends one party's liability beyond what would
normally be required. If one party is concerned that the other may avoid liability due to
objective impossibility, they can insist on a warranty for performance. If agreed, the
obligation exists even if performance is impossible, and the party breaching the warranty
would be liable for damages.
Warranties can be expressly or tacitly created. In the case of SS Thekla Bohlen, the seller
tacitly warranted that 1,000 containers of potatoes were on board the ship, even though
only 106 containers were present. Due to this breach of warranty, the seller was liable for
damages.
8.1.4 The consequences of Impossibility
If performance is objectively impossible, no obligation arises, and no claim for damages
can be made. Any goods given must be returned under unjustified enrichment law.
In reciprocal contracts, if one obligation is impossible, the counter-performance obligation
is also void. For example, if a painting is destroyed, there’s no obligation to pay.
If only part of the performance is impossible, the contract may be void, or the remaining
obligations may still stand. In Stansfeld v Kuhn, the contract remained valid, and the price
was adjusted. If performance is indivisible, the contract may be void or the counterperformance reduced.
8.2 Certainty
8.2.1 The General Rule: Uncertainty about what has to be performed
prevents the creation of obligations
A key requirement for creating contractual obligations is that their contents must be certain
or capable of being made certain through provisions in the contract.
8.2.2 The application of the certainty requirement: some practical
examples
Determining if a contract is void due to uncertainty can be challenging. Uncertainty may
arise from unclear contract terms or from applying a standard or mechanism in the
contract to determine performance. The following examples highlight these issues.
8.2.2.1 The contract aimed at creating another contract: the pactum de
contrahendo or ‘agreement to agree’
A pactum de contrahendo (agreement to enter into a future contract) can be invalid due to
uncertainty, especially if the terms are provisional or subject to further negotiations.
However, it is valid if the terms of the future contract are already agreed upon. Examples of
valid agreements include:
•
Options and preference contracts: These provide certainty as the terms are
already defined.
•
Agreements to negotiate in good faith: These can be valid if they include a
mechanism to resolve deadlock, like arbitration or third-party determination, as
seen in Southernport Developments and Makate v Vodacom cases.
•
Memorandums of Understanding (MOUs): These are binding contracts if intended
to be binding and sufficiently certain, even if brief.
The law also recognizes that an agreement to negotiate in good faith may not always need a
deadlock-breaking mechanism, as seen in Everfresh Market Virginia and Roazar CC v Falls
Supermarket CC.
8.2.2.2 Vague language and gaps
A contractual term may be void for uncertainty if its language is too vague. However, South
African law favors interpreting agreements in a way that upholds their validity, following the
Roman maxim ut res magis valeat quam pereat, meaning the law seeks to make contracts
effective rather than invalidate them.
In Levenstein v Levenstein, a vague term regarding the maintenance of a transferor was
upheld, as the ability to pay was determinable. Conversely, in Beretta v Beretta, an
agreement to pay a "substantial sum" annually was considered too vague and voided.
The law does not require exhaustive details in contracts. When gaps are left, default legal
rules fill them in, such as specifying when and where performance will occur.
8.2.2.3 Contracts of indefinite duration
Contracts of indefinite duration are generally valid and enforceable, despite potential
uncertainty. Courts aim to determine the parties' actual or presumed intention. These
contracts can be interpreted in various ways:
1. Termination by Notice: The contract may remain in force until terminated by
reasonable notice, often implied in contracts requiring ongoing interaction.
2. Reasonable Duration: The contract may be intended to last for a reasonable period
before automatically ending.
3. Perpetual Duration: Some contracts may be intended to last indefinitely, though
certain contracts (like leases) inherently cannot last forever.
Under the Consumer Protection Act, a term allowing indefinite contracts to be terminated
without reasonable notice is presumed unfair unless the consumer has committed a
material breach.
8.2.2.4 Contracts containing a mechanism whereby certainty can be
obtained
South African law embraces the Roman maxim id certum est quod certum reddi potest,
meaning that something is certain if it can be made certain. This principle ensures certainty
in contracts, typically through objective mechanisms rather than relying solely on the
subjective intention of the parties.
Examples include:
1. Escalation Clauses: Contracts, like rental agreements, may include clauses for
automatic increases based on external factors (e.g., inflation), ensuring certainty
over time.
2. Objective Standards: Agreements referring to external, objectively determinable
standards, like "latest price lists," are valid. However, terms like "reasonable price"
have been debated in South African law.
3. Third-Party Determination: A third party can determine the performance required,
as long as they act reasonably and within a defined scope. Courts may intervene if
the determination is unjust.
4. Discretion by One Party: Some contracts allow one party to determine what the
other must perform, provided the discretion is exercised reasonably. For instance, a
bank's discretion to adjust interest rates in a mortgage is valid if exercised fairly.
Under the Consumer Protection Act, suppliers must provide estimates and may not
unilaterally alter terms or prices without consumer consent. Terms allowing such unilateral
changes are presumed unfair, especially those giving the supplier discretion over price
increases or product characteristics.
8.2.3 The consequences of not meeting the certainty requirement
An obligation that fails to meet the certainty requirement is invalid. If this obligation is
severable from the rest of the contract, the remaining obligations can still stand, making
the contract partially invalid. However, if the uncertain obligation cannot be separated, the
entire contract becomes void. This can be problematic if the uncertain clause was meant
to benefit one party, and that party wishes to uphold the contract. Case law sometimes
allows that party to elect to continue with the contract, even if a clause is invalid.
Transfers made in fulfillment of obligations that are void due to uncertainty are considered
without legal foundation. As a result, these transfers can be reclaimed through remedies
based on unjustified enrichment.
CHAPTER 9[LEARNING UNIT 4]: Parties to Contracts
9.1 Introduction
A contract is based on agreement, requiring a concurrence of wills or intentions.
o There must be at least two parties to the contract.
o South African law does not recognize unilateral promises or declarations as
binding contracts.
o A person cannot contract with themselves, except when acting in two different
capacities.
9.2 Multiplicity of Parties
Contracts usually involve two parties, but sometimes more.
o The contract's provisions determine each party's liability and entitlement.
o A contract creates multiple obligations, with at least one debtor and one creditor
per obligation.
o A party can be both a debtor for one obligation and a creditor for another (e.g., in
a sale, the buyer owes payment but is owed delivery).
o Multiple co-debtors or co-creditors may exist, requiring a determination of their
respective shares.
The Share of Liability or Entitlement depends on:
o Intentions of the parties
o Nature of the contract
o Divisibility of the performance owed
Understanding these aspects ensures clarity in the contractual obligations and rights
of all involved parties.
9.2.1 Divisibility of the performances
A performance can be divisible or indivisible, depending on its nature and the intentions
of the parties.
Divisible performance:
o An obligation that can be split among multiple parties.
o Example: A seller sells 100 cows to two buyers, allowing each to receive a portion.
Indivisible performance:
o An obligation that cannot be divided, either practically or contractually.
o Example: A seller sells one cow to two buyers, making division impossible.
The intentions of the parties can also determine divisibility:
o If a seller intends to sell a collection of rare paintings as a single unit, the
performance is indivisible, even though the paintings can be separated physically.
Chapter 10: Obligations and Terms
10.2.5 Divisible or Indivisible Performances and Contracts
Contractual performances can be either divisible or indivisible, which impacts on the
number of obligations created by the contract.
An obligation is a legal relationship between a creditor and debtor regarding a specific
performance.
The number of obligations in a contract is equal to the number of distinct or indivisible
performances owed.
Divisible Performance:
o A divisible performance can be split into separate parts, each capable of being
performed on its own.
o Example: Building a shopping centre can be divided into distinct tasks like land
preparation, construction, wiring, tiling, plumbing, etc.
o Each distinct part gives rise to a separate obligation.
Indivisible Performance:
o An indivisible performance cannot be divided.
o Example: Delivery of a horse is indivisible and creates a single obligation.
o In a contract of sale for the horse, there are still two obligations:
1. The seller's obligation to deliver the horse.
2. The buyer's obligation to pay for it.
Divisibility Based on Intention:
o If a performance is divisible by nature, an additional question arises: Did the
parties intend for the performance to be divisible?
o Example: Delivery of a pair of horses is divisible by nature, but the parties may
intend for it to be treated as a unit, making it indivisible.
Divisible Contracts:
o A divisible contract can be split into separate contracts, each with one or more
obligations.
Each divisible part of the contract must meet validity requirements
o If one part fails, that part is void, but the rest remains valid.
Breach of contract rules apply to each part of a divisible contract.
o A breach may allow the aggrieved party to cancel only the breached part.
9.2.2 Simple Joint Liability and Entitlement
When several debtors are liable for a divisible performance to a creditor, there is a strong
presumption that their liability is joint (each debtor is responsible for only a proportionate
share of the performance).
o Example: If the performance is to pay R5,000 and there are five debtors, each is
presumed to owe R1,000.
o However, this presumption can be altered if the contract indicates joint and several
liability, or if the debtors’ shares are unequal.
When there are multiple co-creditors entitled to a divisible performance, each co-creditor
is presumed to be entitled to an equal share unless stated otherwise in the contract.
If the creditor releases one co-debtor from their share of the obligation (e.g., delivery or
payment), this does not automatically release the other co-debtors from their respective
shares, unless the release agreement implies that intention.
A joint debtor who pays more than their share of the debt generally cannot recover the
excess from the other co-debtors unless:
o There is an agreement allowing for recovery, or
o The requirements for enrichment liability are met.
9.2.3 Joint and Several (in solidum) Liability or Entitlement
While there is a presumption for simple joint liability, the parties to a contract may agree
that their liability or entitlement is joint and several.
o Joint and several liability can also apply by operation of law in certain
relationships, such as between partners or co-signatories of negotiable
instruments, or as imposed by statute.
In joint and several liability (liability in solidum), each co-debtor is liable for the full debt,
meaning the creditor can claim the full amount (or part of it) from any one or more codebtors.
o Payment of the full debt by one co-debtor discharges the entire debt, and the
creditor cannot pursue the others.
o If only part of the debt is paid, the creditor can claim the remaining balance from
any of the co-debtors.
If a co-debtor pays more than their proportionate share of the debt, they have an
automatic right of recourse against the other co-debtors to recover their share.
o If they take cession from the creditor (transfer of the claim), they cannot recover
more than the proportionate share of any co-debtor.
If a creditor releases one co-debtor from the debt, the remaining co-debtors' liability is
reduced proportionately.
When multiple co-creditors are entitled to a divisible performance from a debtor, the
same principles of joint and several liability apply:
o Any co-creditor can claim the performance, in whole or in part, from the debtor.
o Payment in full to one co-creditor discharges the debt, and the debtor may
choose who to pay, unless a co-creditor has already claimed the performance.
o If one co-creditor receives more than their share, the other co-creditors have the
right of recourse against them.
9.2.4 Collective Joint Liability and Entitlement
When co-debtors are jointly liable for a performance as a collective, the creditor cannot
demand the performance from any one debtor individually.
Similarly, when co-creditors are jointly entitled to a performance from a debtor, no single
creditor can claim the entire or any part of the performance individually; they must act
collectively.
This collective liability or entitlement arises when the performance is indivisible and the
parties’ intention is for the liability or entitlement to be joint rather than joint and several.
o Example: If A and B are co-owners of a farm and sell it to C, C can only claim the
transfer of the farm from A and B together, not from either one individually, and
cannot claim a portion of the farm from each.
o Similarly, if A and B together buy a farm from C, they are collective joint creditors
and must act together in claiming the transfer from C, rather than each being treated
as a separate creditor for a portion of the farm.
9.3.1 Privity of Contract
Privity of contract is a key principle, meaning that a contract typically creates rights and
duties only between the parties involved, not affecting third parties.
o This prevents one party from imposing obligations on a third party without their
consent.
Rights for third parties can be created by contract, as it is not inherently unfair for two
parties to agree to confer a benefit upon someone else.
Although a contract is personal to the parties involved, third parties may still have duties
to respect the relationship.
o Example: Intentional interference by a third party in the contractual relationship
(e.g., A persuading B to break their contract with C) can lead to delict (a wrongful
act).
o In cases involving notice, a third party who acquires property in bad faith may be
compelled to discharge a contractual obligation from the previous owner.
- Example: A buys a farm from B, knowing that B has agreed to register a
servitude for C.
9.3.2 Representation: Contracting through an agent
In contract law, agency plays a crucial role, particularly when the principal party is a
juristic person (like a company). Here's a breakdown of key concepts from the passage:
1. Agency Definition: Agency refers to a relationship where one party (the agent) acts
on behalf of another (the principal), typically in contractual negotiations.
2. Power of Attorney: This is a written document granting authority to an agent to act
on behalf of the principal. It can be:
o General: allowing the agent to act on any matter concerning the principal.
o Special: giving the agent authority for specific tasks, such as a particular
property transaction.
3. Mandate vs. Agency:
o Mandate is a contract where one person (the mandator) assigns a task to
another (the mandatary). However, not every mandate constitutes true
agency.
- For example, when an estate agent is asked to find a buyer for a property, the
agent is not authorized to sell the property but only to locate a buyer, thus no
true agency exists.
o Agency, however, involves a broader authority to represent the principal,
allowing the agent to conclude contracts on behalf of the principal.
4. Agency in Practice:
o In typical agency, the principal (P) authorizes the agent (A) to negotiate a
contract with a third party (3P). If successful, the contract is between P and
3P, with A merely acting as an intermediary.
o The agent enters a separate contract with the principal, governing the
relationship between them.
5. Representation:
o Representation is the act of concluding a juristic act on behalf of another
(the principal), which can be juristic (imposed by law, e.g., directors for a
company) or conventional (granted by the principal through a contract).
o Juristic Representation occurs when the power to act on behalf of someone
comes from the law, like a guardian for a minor.
o Conventional Representation arises when the principal grants authority to
an agent, typically through a contract, which is the primary focus of the text.
9.3.3 The Contract for the benefit of a Third Party (Stipulatio Alteri)
In contract law, it is common for agreements to include provisions that benefit parties who
are not directly involved in the contract. Examples include pension agreements, life
insurance policies, and inter vivos trust deeds. A central question that arises in this
context is how a non-party (third party) can acquire rights to a benefit stipulated in the
contract.
Key Concepts:
1. Privity of Contract and Third-Party Benefits:
o The traditional rule in Roman law was that third-party stipulations (benefits
promised to non-parties) were unenforceable.
o In contrast, Roman-Dutch law and modern South African law have
developed more flexible approaches, allowing enforcement of contracts
made for the benefit of third parties.
2. Key Rules for Third-Party Benefits:
o Contracting for the Benefit of a Third Party: Parties A and B can validly
contract to benefit C, a third party, even if C does not yet exist (e.g., an
unborn child or a company yet to be formed).
o Intention to Create an Enforceable Obligation: For the benefit to be
enforceable, the parties must intend to create an obligation to perform the
benefit to C, not just provide an incidental benefit. This means the contract
must specifically obligate B to offer or confer the benefit to C.
o Acceptance of the Benefit by C: C acquires a legal right to demand the
benefit only once they accept it. Before acceptance, A and B can modify or
cancel the agreement without C’s consent.
o Reciprocal Obligations: If the benefit to C involves reciprocal obligations
(e.g., purchasing property from B), C must accept both the benefit and the
accompanying obligations.
3. Two-Bilateral Relationship Construction:
The most widely accepted view in the case law is that the stipulatio alteri (the contract
benefiting the third party) consists of two bilateral contracts:
o A contract between A and B (the initial agreement) where B is obligated to offer the
benefit to C.
o A contract between B and C, which forms once C accepts the benefit.
This construction suggests that the relationship between A and B may continue after C’s
acceptance, depending on the complexity of the contract.
4. Alternative Construction:
o Some jurists have proposed that the stipulatio alteri should be viewed as a
single contract between A and B. In this view, C’s right to the benefit is
conditional on their acceptance and would arise directly from the contract
between A and B. However, this view has not been widely adopted by South
African courts, though it is more common in European legal systems.
Legal Implications:
o The question of when exactly a third party acquires the right to enforce a
benefit is significant in areas such as insolvency, insurance, succession, and
cession.
o Jurists continue to debate the construction of third-party benefits in
contracts, with two main views emerging: one based on two bilateral
relationships and another on a single contract between A and B, with rights
flowing directly to C upon acceptance.
CHAPTER 10[LEARNING UNIT 4]: Obligations and Terms
10.1 Introduction
This chapter focuses on the subject matter of a contract, specifically the obligations it
creates and the terms that define or qualify those obligations. While many terms are set by
the contracting parties, some also arise from legal provisions.
10.2 Obligations
An obligation is a legal relationship between two or more parties, consisting of a right and a
duty. The debtor has a duty to perform, while the creditor has the right to demand
performance. Contractual obligations create personal rights enforceable only against the
other party, unlike real rights, which apply to everyone.
10.2.1 Classification of Obligations
Obligations can be categorized in multiple ways, and these classifications often overlap. A
single obligation, such as delivering a table lamp, may belong to several categories at the
same time, such as civil, simple, reciprocal, and indivisible.
10.2.3 Reciprocal Obligations
Most contracts create reciprocal obligations, meaning each party owes a performance in
exchange for the other. For example, in a contract of sale, the buyer must pay the price, and
the seller must deliver the item—neither is required to perform unless the other does.
Similarly, in a lease, rent payment is tied to the obligation to provide the premises.
Each party in such contracts is both a debtor (owing performance) and a creditor (entitled
to claim performance). In a sale, the buyer owes payment but can demand delivery, while
the seller owes delivery but can demand payment.
10.2.4 Simple, Alternative, Generic or Facultative Obligations
Contractual obligations can be categorized as simple, alternative, generic, or facultative:
o Simple obligations specify an exact performance agreed upon by the parties (e.g.,
delivering a specific car).
o Alternative obligations allow a choice between two or more specified
performances (e.g., delivering either cow Annabel or Bluebell). If not specified, the
debtor chooses. Once a choice is made, the obligation becomes simple.
o Generic obligations require performance from a broader category (e.g., delivering
three Nguni cattle), with the debtor typically choosing unless stated otherwise.
o Facultative obligations specify a primary performance but allow the debtor the
option to perform a different one instead (e.g., delivering Annabel but having the
option to deliver Bluebell).
Unlike alternative obligations, the creditor can only claim the primary performance,
not the optional one.
10.3 Terms
Contractual terms include both the stipulations agreed upon by the parties and provisions
imposed by law. These terms define the contract’s content and determine the resulting
legal obligations. While parties have the freedom to set their terms within legal limits,
terms can be classified based on their nature and effect. These classifications may
overlap, meaning a single term can fall into multiple categories, such as an incidentale, an
express term, and an exemption clause.
10.3.1 Essentialia, Naturalia, Incidentalia
Contracts do not need to fit into a specific category (such as sale or lease) to be valid, as
long as they meet general legal requirements. However, traditional contract types exist in
law, each with its own rules and consequences:
o Essentialia – The core terms that define a specific type of contract (e.g., in a sale,
the transfer of property for money).
o Naturalia – Default legal terms implied by law to protect parties (e.g., a seller's
liability for latent defects in a sale). These can usually be excluded by agreement,
such as through a voetstoots clause.
o Incidentalia – Additional terms agreed upon by the parties that modify or
supplement legal defaults (e.g., interest on late payment).
Exclusion Clauses & Legal Protection:
o Exclusion clauses can be abused in unequal bargaining situations. Courts interpret
them narrowly (contra proferentem), but they cannot strike them down if clearly
drafted.
o Legislation, such as the National Credit Act and Consumer Protection Act,
restricts certain exclusions to protect consumers from unfair contract terms.
10.3.2 Express Terms
Express terms are those specifically agreed upon by the parties, either orally or in writing.
Sometimes, the agreement is not written initially, and one party may later present a predrafted document for the other party to sign. Alternatively, the agreement may begin orally
and later be formalized in writing.
The contract typically becomes valid when the parties reach consensus, not necessarily
when the document is signed, unless writing is a formal requirement for the contract’s
validity. In such cases, the contract only comes into effect when the terms are written
down and signed.
10.3.2.2 Standard-Form Contracts
Express terms in standardized contracts (also called imposed terms) are treated
differently from those negotiated by the parties. Standardized contracts, commonly used
by large corporations or public utilities, are often complex and may not be fully read or
understood by the party signing them. These terms are typically non-negotiable.
When presenting a standardized contract, the party offering it must highlight any unusual
terms that might not be expected. If this is not done, the party being bound by the contract
may argue that they did not expect such terms, and therefore, those terms may not be
enforceable.
10.3.2.3 Unsigned Documents
Express terms do not always have to appear directly in the contract document. They can
be incorporated by reference, meaning that the contract refers to terms found in another
document, which may not necessarily be signed by the parties.
For example, in an insurance contract, the main document might outline key provisions like
what is covered and the premium, while referring to the insurer's standard "terms and
conditions" in a separate, unsigned document, which are then considered part of the
contract.
10.3.2.4 Ticket Cases
In ticket cases, express terms can be incorporated by reference when a ticket refers to
terms in another document. A customer is bound by these terms if they know or should
know that there is writing on the ticket and that it refers to external contractual terms. If the
customer is unaware of the writing or the referenced terms, they are still bound if the issuer
took reasonable steps to bring the terms to the customer’s attention.
To determine whether a customer is bound, the following questions are asked:
1. Did the customer know the ticket contained writing?
2. Did the customer know the writing referred to contractual terms?
o If both answers are "yes," the customer is bound by the terms, even if they did
not understand them.
o If either answer is "no," then it is asked whether the issuer took reasonable
steps to inform the customer. If "yes," the customer is still bound.
The steps taken to alert the customer depend on whether the document is expected to
contain contractual terms. For example:
o Tickets for transportation (e.g., airlines, trains, buses) or event entry tickets are
typically expected to contain such terms, so reasonable steps may include
highlighting terms or ensuring they are visible.
o Documents like invoices or warehouse receipts, however, are usually not expected
to contain contractual terms and generally don't have contractual effect since they
are given after the contract is concluded. Therefore, they don't usually require the
same level of attention to contractual terms.
10.3.2.5 Notices
A similar type of express term found in notices, especially in places like parking garages or
shopping centers, is an exemption clause. These clauses typically exclude liability for
negligence on the part of the service provider. Under common law, these clauses can be
effective in exempting the service provider from negligence but cannot shield them from
liability for fraud due to public policy.
A person using the service is bound by the terms of the notice if they were aware of it or if it
was displayed in such a way that it could be reasonably inferred they must have seen it. If
the person wasn't aware of the notice, the service provider can still avoid liability if it can be
shown they did everything reasonably necessary to inform the user of the terms. This rule is
similar to the ticket cases, where notices and tickets are treated as part of the same
category.
Exemption clauses are often strictly construed, meaning they are interpreted narrowly to
exempt the service provider from only minimal blame, typically ordinary negligence, but
not gross negligence.
10.3.3 Implied Terms
Implied terms are terms that are not explicitly stated by the parties but still form part of the
contract. These terms can be implied in several ways:
1. By operation of law (ex lege) – These terms are automatically included in the
contract by law, regardless of the parties' intentions. For example, certain terms
may be implied to protect consumers or ensure fairness in transactions.
2. By custom or trade usage – Terms may be implied based on established practices
or customary practices within a particular industry or trade.
3. From the facts surrounding the agreement (ex consensu) – These terms are
implied based on the circumstances or context in which the contract was formed,
reflecting what the parties would have likely agreed upon if they had considered it.
10.3.3.1 Terms implied ex lege
This section discusses implied terms in contracts, distinguishing between those implied
by law and those implied by statute:
1. Implied Terms Ex Lege
Definition: These are terms incorporated into a contract automatically by law, regardless
of whether the parties agree to them. Parties may exclude these terms, but this exclusion is
not always allowed.
Example: In a contract of sale, certain obligations of both the seller and buyer are
automatically implied by law, such as the seller's obligation to transfer ownership of the
item sold.
Common Law Implied Terms:
o Examples include the duty of employers to act in good faith toward employees and
the right of a party to terminate an indefinite contractual relationship on reasonable
notice.
o These terms aim to regulate contracts and ensure fairness, but parties may exclude
them by agreement unless such exclusion is ambiguous.
2. Implied Terms by Statute
Context: Legislative interventions are made in contracts where unequal bargaining power
could lead to unfair agreements, such as in employment contracts or credit agreements.
Examples:
o Labour Law: The Basic Conditions of Employment Act imposes terms regarding
working hours, leave, and remuneration, protecting employees.
o Credit Agreements: The National Credit Act imposes terms that can't be waived
by the parties, such as warranties against latent defects on credit sales.
o Rental Housing Act: Protects tenants (seen as the weaker party), requiring
landlords to invest tenants’ deposits in interest-bearing accounts and outlining the
return of the deposit upon lease termination.
Statutory terms cannot be excluded if they serve public policy interests or protect
weaker parties, like tenants or employees.
3. Legislative Changes Over Time
o Historical Changes: The legislature has made changes, such as abolishing
outdated common-law provisions (e.g., the Suretyship Amendment Act of 1971) to
adapt to modern conditions and ensure equality between parties.
Recent Legislative Trends:
o Consumer Protection Act: It significantly limits parties' ability to exclude terms,
creating a new set of implied terms to protect consumers from unfair practices.
This framework ensures fairness, particularly when power imbalances exist between
contracting parties, and it adapts to societal and commercial changes.
10.3.3.2 Terms implied ex consensus (tacit terms)
Tacit term: A term not explicitly agreed upon by the parties but expected to form part of the
contract based on the circumstances or the parties' conduct. It has the same legal effect
as an express term.
Establishing tacit terms:
o Courts consider the express terms and surrounding circumstances of the contract.
o The officious bystander test is often used: If an impartial bystander were to ask the
parties what would happen in an unforeseen situation, and both parties would agree
that the answer was self-evident, the term is tacitly agreed upon.
o Tacit terms may reflect both the parties' actual intention and what they are
presumed to have intended.
Requirements for a tacit term:
1. Consistency with express terms: It cannot conflict with any unambiguous express
term of the contract.
2. Business efficacy test: The term must be necessary to give effect to the contract. It
should not just be reasonable or convenient.
3. Clarity: The term must be capable of clear and exact formulation.
Trade usage: If the parties are in a particular trade with a known practice, the trade usage
can be considered a tacit term of the contract, even if one party is unaware of it, provided it
is universally accepted, reasonable, and certain.
10.3.5 Conditions and their effect on the contract
Conditions: These are specific terms in a contract that make the operation and
consequences of contractual obligations depend on an uncertain future event occurring or
not occurring.
o A condition differs from other terms in that it does not directly confer rights or duties
regarding performance of the contract.
o The fulfillment of a condition is not enforceable; it merely determines what will
happen to the contract’s obligations if the uncertain event occurs.
The focus is on whether the uncertain event will occur, not when it will occur.
10.3.5.1 Positive and Negative Conditions
Conditions in contracts can indeed be categorized as positive or negative, depending on
the nature of the uncertain event they are tied to:
Positive condition (affirmative condition): Depends on an uncertain future event
happening (e.g., “I will pay your university fees next year if you pass all your exams”). The
condition is fulfilled if the event occurs.
Negative condition: Depends on an uncertain future event not happening (e.g., “I will pay
your university fees next year provided I am not dismissed from my job”). The condition is
fulfilled when it’s certain the event will not happen (e.g., the person has not been dismissed
when the fees are due).
10.3.5.2 Suspensive and Resolutive Conditions
Suspensive condition (condition precedent): This condition suspends the enforcement
of obligations until it is known whether an uncertain future event happens or not. For
example, an agreement to buy property only if planning permission is granted. The contract
becomes operative when the condition is fulfilled, and if not fulfilled, the contract is void
from the start (void ab initio). A suspensive condition can be positive (event must happen)
or negative (event must not happen). It also creates a conditional right that can be
transferred or used as collateral.
Resolutive condition (condition subsequent): This condition allows obligations to be fully
enforceable but terminates them if a certain uncertain event occurs. For example, funding
for a student’s degree, which continues unless they fail an exam. If the condition (failure to
pass exams) is fulfilled, the contract ends retroactively, as if it had never existed. Like
suspensive conditions, resolutive conditions can be positive (event must happen) or
negative (event must not happen).
10.3.5.3 Potestative, Casual and Mixed Conditions
Potestative condition: Fulfillment depends entirely on the actions of the creditor (e.g., a
car dealer donating a car if a golfer hits a hole-in-one). The creditor has full control over the
condition.
Casual condition: Fulfillment depends on an event beyond the control of both parties
(e.g., a rent increase if municipal rates increase). The event is external to the parties'
actions.
Mixed condition: Fulfillment depends partly on the creditor's actions and partly on
external events beyond both parties' control (e.g., an uncle buying a car for his niece if she
gets her driver's license, where the outcome relies partly on her efforts and partly on
external factors like appointment availability).
10.3.5.4 Interference in the fulfilment of conditions
Fictional fulfilment of a condition: Contracting parties are not allowed to deliberately
interfere with the fulfillment or non-fulfillment of a condition (whether suspensive or
resolutive). If a party does interfere, the condition is considered to have been either fulfilled
or not fulfilled, depending on the situation.
Legal precedent (Scott v Poupard): If a party prevents the fulfillment of a condition
intentionally to frustrate the contract, the condition will be deemed fulfilled against that
party, as they are considered to have breached their duty.
10.3.6 Time Clauses
Time clause (dies): A contractual term that makes an obligation dependent on a certain
future event or time, which is different from a condition (which is uncertain). A time clause
can be suspensive or resolutive.
o Suspensive time clause: The obligation exists but is postponed until a certain date
(e.g., a borrower must repay a loan, but the repayment is postponed until a specified
date).
o Resolutive time clause: The obligation ends at a certain date or event (e.g., a
husband must pay maintenance to his ex-wife for a set number of years, after which
the obligation ends).
10.3.7 Other common contractual terms
Some other common contractual terms worthy of mention are suppositions, modal
clauses, exemption clauses and non-variation clauses.
10.3.7.1 Suppositions
Supposition: This refers to a contract made based on the assumption that a certain state
of affairs exists or existed. For example, a student may agree to buy a second-hand
textbook, assuming it is the latest edition, even though neither party knows for sure. If it
turns out to be the latest edition, the contract is valid; if not, the contract is void.
o Both parties must share the assumption for it to be part of the contract. If only one
party has the assumption, it’s irrelevant and considered an error in motive.
o A supposition differs from a condition: A condition relates to an uncertain future
event, while a supposition deals with an uncertain past or present state of affairs.
10.3.7.2 Modal Clauses
Modal clause (modus): A term in a contract that requires the recipient of a performance to
do something in the future. For example, if land is donated with the condition that it must
be used for a school, but the recipient builds flats instead, they have breached the modal
clause.
o The obligation to comply with the modal clause arises as soon as the contract is
concluded.
o Failure to comply with a modal clause constitutes a breach of contract, and the
usual principles of breach apply.
10.3.7.3 Exemption Clauses
Exemption clauses (or exclusion clauses, disclaimers): These are terms in a contract
that relieve a party from liability they would otherwise have. For example, a hotel might
exclude liability for the loss or theft of guests' property.
o Exemption clauses are generally valid and enforceable unless they are against
public policy.
o They cannot exclude liability for actions like fraud or intentional injury, as these are
considered against public policy.
10.3.7.4 Non-Variation Clauses
Non-variation clause: This is a term in a contract that states the parties cannot change the
contract’s terms without written agreement. [Chapter 6]
o Non-variation clauses are valid and enforceable.
o If a contract is varied orally, the variation typically has no legal effect.
o For example, in a lease with a non-variation clause, the tenant cannot rely on an oral
change to the rent payment terms.
10.3.7.5 Governing Law Clause
Governing law clause: This term in a contract specifies which legal system will govern the
relationship between the parties. It's often used in contracts with a foreign element, like
when the parties are from different countries.
o Governing law clauses are generally valid and enforceable.
o They can only determine the law governing the validity, effect, and interpretation of
the contract, not issues like contractual capacity or legality, which are governed by
the objectively applicable law.
o The clause cannot be used to avoid mandatory provisions of the law that apply to
the contract, such as those in the Consumer Protection Act.
o If the parties don't specify a governing law, the contract will be governed by the legal
system with which it has the closest connection.
CHAPTER 11 [LEARNING UNIT 4]: Interpretation of Contracts
11.1 Introduction
Once the terms of a contract are established, the next step is to determine their meaning.
The goal of interpretation is to give effect to the purpose expressed in the contract’s
terms. While oral contracts can be complex to interpret, they are generally simpler than
written contracts. Nonetheless, the same interpretation rules apply to both. The
Supreme Court of Appeal has brought clarity to contract interpretation, especially in the
landmark cases:
o Natal Joint Municipal Pension Fund v Endumeni Municipality
o Bothma-Batho Transport v S Bothma & Seun Transport
o These cases have been endorsed by the Constitutional Court.
Interpretation involves attributing meaning to words in a contract by considering:
o
o
o
o
The text itself (language, grammar, syntax)
The context of the provision and the document as a whole
The purpose of the provision
The circumstances in which the contract was created
If multiple meanings are possible, all must be evaluated objectively. The process is
objective (not based on personal views). Interpretation is seen as a unitary process, not
step-by-step. The factors (text, context, and purpose) are weighed flexibly depending on
the case. The “triad of text, context, and purpose” should not be applied in a rigid or
mechanical way.
11.2 The Purpose of the Contract
In modern contract law, it's no longer accurate to say interpretation aims to give effect to
the parties’ common intention. The Supreme Court of Appeal warns against focusing on
subjective intentions, as contracts are often shaped by legal, financial, or power dynamics.
Instead, courts should focus on the objective meaning of the contract’s language to
express its purpose.
11.3 The words used by the parties
When interpreting a contract, the starting point is always the words used by the parties, as
there would be no interpretation without the written text. However, words often have
multiple meanings, and disputes arise when each party interprets the same word or phrase
differently. To determine the correct meaning, courts must consider both the language and
its context from the outset—not as an afterthought. Context helps clarify meaning, but it
cannot be used to create a meaning the language cannot support. Courts must interpret,
not rewrite, a contract—even if doing so would make it better or more ethical.
11.4 The textual context
To determine the correct meaning of disputed terms in a contract, courts must interpret the
words within the context of the entire document. The goal is to give effect to the contract,
not to render it meaningless. If the ordinary or narrow meaning of a term leads to absurdity
or inconsistency, the court may adopt a broader meaning that aligns with the rest of the
contract.
11.5 The broader context
When interpreting a contract, the court may look beyond the text to external factors such
as the nature, purpose, and background of the agreement. An interpretation that upholds
the contract’s validity, practicality, and business sense is preferred. However, judges must
avoid replacing the actual words with what they personally view as reasonable or
businesslike, as this would mean rewriting the contract. To balance flexibility with certainty,
the law applies the parol evidence rule, limiting the use of outside evidence to preserve the
purpose of written agreements.
11.5.1.1 The integration aspect of the parol evidence rule
The parol evidence rule states that once a contract is written, earlier negotiations are
merged into it, and outside evidence contradicting its terms is usually inadmissible.
However, it doesn’t apply when determining if the written document reflects the full
agreement, or in cases of fraud, misrepresentation, or mistake. Oral agreements may be
allowed if the written contract wasn’t intended to be complete, but not if they contradict it.
Additionally, non-variation clauses prevent changes unless written. The rule also applies to
documents like negotiable instruments, where contradictory oral agreements are
inadmissible.
11.5.1.2 The interpretation aspect of the parol evidence rule
The parol evidence rule's interpretation aspect governs when and how extrinsic evidence
can be used to clarify a contract’s meaning. In Delmas Milling Co Ltd v Du Plessis, the court
held that if the contract’s meaning is clear, extrinsic evidence is irrelevant. However, even
clear terms may require external facts for proper application, like identifying the parties
involved. Courts traditionally allowed background evidence but restricted surrounding
circumstances to cases of ambiguity. This distinction, however, became problematic due
to unclear boundaries between the two types of evidence.
11.5.1.3 Practical difficulties in excluding extrinsic evidence: the ‘open
sesame’ of ambiguity
Historically, courts only admitted evidence of surrounding circumstances if the contract
was ambiguous and could not be clarified by the rest of the document or background. Over
time, however, courts became more open to considering the broader context of a contract,
regardless of its clarity. Initially, the parol evidence rule aimed to exclude external evidence
if the contract's wording was clear. However, courts often had to hear all evidence before
determining whether the contract was clear enough to exclude such evidence. This led to
the Supreme Court of Appeal adopting a "unitary" process of interpretation, where it is no
longer necessary to prove ambiguity before considering the broader context. This approach
is now settled law and endorsed by the Constitutional Court.
11.5.1.4 Practical and theoretical difficulties in excluding extrinsic
evidence: the distinction between background and surrounding
circumstances
Under the old approach, even when a contract was ambiguous and surrounding evidence
was admissible, it was unclear what constituted "surrounding circumstances." For
instance, in Coopers & Lybrand v Bryant, the court considered prior negotiations and
conduct but excluded direct evidence of the parties' intentions. This raised problems, as
negotiations often reveal intentions, which were supposedly excluded. The vague
distinction between "surrounding" and "background" circumstances made it difficult for
judges to exclude evidence without risk, leading to an imprecise system that was often
ignored by trial courts.
11.5.1.5 The Supreme Court of Appeal’s current approach to extrinsic
evidence
The Supreme Court of Appeal has shifted its approach by allowing a broader context when
interpreting contracts, regardless of whether the contract appears ambiguous. This
includes considering the circumstances in which the document was created. However, the
court has emphasized that the key to interpretation remains the written text, and the
admission of extrinsic evidence should only serve to clarify, not contradict, the words used.
While the court now admits evidence like the parties' subsequent conduct, it still excludes
subjective evidence of their intentions and prior negotiations to avoid undermining the
written contract and ensuring certainty in contract law. The principle remains that the
written contract must be given effect without resorting to the parties’ internal deliberations.
11.5.1.6 The Constitutional Court’s response: University of Johannesburg v
Auckland Park Theological Seminary
The Constitutional Court recently affirmed the Supreme Court of Appeal's unitary
approach to contract interpretation, meaning that context must always be considered,
even if the contract's meaning is clear. The court clarified that while the parol evidence rule
still prohibits extrinsic evidence that alters or redefines the contract, evidence regarding
the contract’s context or purpose is now admissible. This marks the collapse of the
interpretation aspect of the rule. However, the court reintroduced some uncertainty,
suggesting that evidence of pre-contractual negotiations and subjective intentions might
be admissible, contrary to the current Supreme Court position. The Court advised that
extrinsic evidence should be used cautiously, and courts must weigh its relevance
carefully. The Supreme Court may attempt to limit this broader approach in future cases.
11.5.2 Circumventing the parol evidence rule
A litigant who is confronted with difficulties of proof thrown up by the parol evidence rule
has in any event always potentially been able to circumvent it, either by alleging a tacit term
or by including a claim for rectification.
11.5.2.1 Alleging a tacit term
A party seeking to add meaning to a written contract can introduce extrinsic evidence to
prove tacit terms—terms not included but presumed to have been intended by the parties
or essential for the contract's commercial purpose. While a tacit term that contradicts a
clear written provision is not admissible (due to the integration rule), a term that modifies
or qualifies an existing one can be introduced. In such cases, evidence of various types can
be presented to support the tacit term, and courts may find it difficult to ignore persuasive
evidence, even though the purpose differs from contract interpretation.
11.5.2.2 Applying for rectification
Another approach used when interpretation rules are problematic is the doctrine of
rectification. A party can request the court to rectify a contract if they believe a term was
mistakenly included or omitted. When rectification is claimed, all relevant evidence that
shows an error or omission in the contract becomes admissible. This allows a written
contract to be amended to reflect the true intentions of the parties, even eliminating
conflicts with earlier oral agreements. Therefore, when attempting to clarify a contract’s
meaning, it's wise to include a rectification claim as an alternative. Even if the rectification
claim fails on technical grounds, a court convinced by the evidence that the contract
doesn’t reflect the parties’ true intentions is unlikely to disregard the evidence just because
of the technicalities of the integration rule.
11.6 Canons of Construction
In interpreting contracts, courts occasionally rely on traditional canons of construction,
which are viewed as guidelines rather than strict rules. These canons help courts interpret
contracts, but there is no definitive list of rules, and courts may apply them flexibly within
the broader interpretative process. Some of these rules overlap with other principles and
may have different relevance under the current approach of the Supreme Court of Appeal.
For example:
1. Eiusdem Generis: This rule limits general terms when associated with more
specific words, which is a narrower form of the broader rule that words should be
interpreted within the context of the entire contract.
2. Noscitur a Sociis: The meaning of a word can be determined by the company it
keeps, i.e., the surrounding words.
3. Preamble Interpretation: If the preamble contradicts the main text of a contract,
the latter takes precedence, unless the preamble can clarify the terms.
4. Ut Res Magis Valeat Quam Pereat: If a term is ambiguous, it should be given a
meaning that makes it effective rather than void.
5. Avoiding Tautology: Courts avoid finding terms superfluous unless the evidence
strongly suggests they are.
6. Legality Assumption: In the absence of contrary evidence, it is assumed that the
contract was intended to be legal, whether concerning common law, statute, or
constitutional law.
7. Good Faith and Fairness: When ambiguity arises, courts interpret contracts with
the assumption that the parties negotiated in good faith, and they may opt for a fair
interpretation.
8. Contra Proferentem: Ambiguous terms are interpreted against the party who
proposed them, often seen in insurance or utility contracts.
9. Quod Minimum: Ambiguous terms should be interpreted narrowly to minimize the
burden on the debtor or promisor.
Some of these canons are applied only as a last resort to ensure fairness when the
expressed intent of the parties is unclear.
11.7 When all the rule of interpretation have been exhausted
As will be clear from this chapter, the courts go to great lengths to establish the meaning of
a contract. If, however, it is unable to do so, the court will declare the contract is void for
vagueness.
11.8 Interpretation of disclaimers, indemnities and exemption clauses: a
special category?
The case Durban’s Water Wonderland (Pty) Ltd v Botha provides a clear illustration of how
courts interpret disclaimers, indemnities, and exemption clauses. Here, a disclaimer at an
amusement park's ticket booth attempted to exempt the park from liability for injuries
caused by negligence. The key points from the case regarding interpretation of such
clauses are as follows:
o Clear and Unambiguous Terms: If the language of a disclaimer is clear and
unambiguous, the court must give effect to its explicit meaning. A party cannot
argue a different meaning unless it is reasonably supported by the language. In this
case, the clause was clear in exempting the park from liability for negligence, and
the court found the wording unambiguous.
o Interpretation Against the Proferens (Contra Proferentem): If there is ambiguity in
a disclaimer, it must be interpreted against the party who inserted it (the proferens).
This rule ensures that the party who drafted the clause cannot rely on vague
language to avoid liability. For example, if there were any uncertainty about the
meaning of the terms, the court would interpret it in a way that is less favorable to
the park.
o Ambiguity and Policy Considerations: When interpreting ambiguous clauses,
courts may take into account public policy considerations, especially if the wording
is unclear. Courts will prioritize fairness, ensuring that the party inserting the clause
is held accountable for any unclear language. However, ambiguity must not be
forced into the clause where none exists.
o Effect of Harsh Terms: If a disclaimer is clear and unambiguous, even if it has harsh
consequences, the court will enforce it unless it is so unjust and oppressive that it
would contravene public policy. However, if the provision is found to be unduly
harsh, the court may refuse to uphold it.
o The Last Resort Rule: The contra proferentem rule is applied as a last resort, only
when other methods of interpretation fail to resolve the ambiguity. Courts will first
attempt to interpret the language of the contract in light of the context and the
parties' intentions.
While courts generally seek to enforce exemption and indemnity clauses, they will
also ensure that such provisions are interpreted with caution and fairness, especially
when ambiguity or unfairness arises.
11.9 An objective approach to interpretation of contracts?
The evolution of contract interpretation in South African law, focuses on the balance
between objective and subjective approaches:
o Golden Rule (Joubert v Enslin): The traditional approach focused on ascertaining
the subjective intention of the parties, using their personal intentions at the time of
contracting.
o Objective vs. Subjective:
o Subjective: Focuses on what the parties intended individually.
o Objective: Emphasizes the words of the contract, with limited reliance on
outside evidence, following the parol evidence rule.
o Shift to Objective: Courts have gradually moved toward an objective approach,
focusing more on the contract’s expressed terms and allowing broader contextual
evidence to clarify the parties’ common intention.
o Christie’s View: He argued that the key is the common intention expressed in the
contract, not individual subjective intentions.
o Written Contracts: Once a contract is written, the expressed agreement matters
most, and the subjective intentions of the parties are less relevant. Courts may use
contextual evidence when the contract is ambiguous.
South African courts now prioritize the common, expressed intention in the contract
while allowing more context to resolve ambiguities.
Breach, Remedies, Transfer and Termination
CHAPTER 12[LEARNING UNIT 5]: Forms of Breach
12.1 Introduction
Pacta Sunt Servanda Principle:
o Parties to a contract must honour their agreement and fulfill all obligations.
o Failing to do so without lawful excuse results in a breach of contract.
Unitary vs. Specific Types of Breach:
o While law recognizes specific types of breach, they all fall under one general
(unitary) concept of breach.
Types of Breach Recognized in Law:
o
o
o
o
o
Mora Debitoris: Debtor fails to perform on time.
Mora Creditoris: Creditor delays or fails to cooperate, preventing performance.
Positive Malperformance: Debtor performs, but poorly or incompletely.
Repudiation: A party shows clear intent not to perform.
Prevention of Performance: A party makes performance impossible.
Note:
o Mora Debitoris & Mora Creditoris = “Negative Malperformance” (timing issues).
o Repudiation & Prevention = “Anticipatory Breach” (occur before performance is
due).
o Breaches can overlap (e.g., late performance + refusal to perform).
Importance of Distinction:
o Knowing the type of breach helps determine the consequences and if the contract
can be rescinded (cancelled).
Remedies for Breach:
If serious, the innocent party may:
o Uphold the contract (claim performance or financial compensation), or
o Rescind the contract (cancel it, return performance, and claim restitution).
In both cases, damages can be claimed for any financial loss.
12.2 Mora Debitoris
Mora debitoris is the failure of a debtor, without lawful excuse, to make timeous
performance of a positive obligation that is due and enforceable and still capable of
performance in spite of such failure.
12.2.1 Distinguished from other forms of breach
o Mora (delay) occurs only in relation to positive obligations (doing something), not
negative obligations (not doing something).
o If a debtor breaches a negative obligation or performs incompletely or
defectively, it's considered positive malperformance, not mora.
o A creditor can reject imperfect performance and demand proper performance. If
the debtor still doesn’t comply, they may then be in mora.
o If late performance makes the obligation pointless or impossible, it's considered
prevention of performance, not mere mora (e.g., delivering a wedding suit after the
wedding).
o Delay alone isn't repudiation, but if it's combined with a clear refusal or denial of
obligation, it may be treated as either mora debitoris or repudiation.
o Courts sometimes confuse mora and repudiation.
12.2.2 Requirements
o The debt must be due and enforceable.
o The time for performance must be fixed, either in the contract or by a subsequent
demand, and the debtor must have failed to perform on time.
o The failure to perform on time must be without lawful excuse.
12.2.2.1 Debt due and enforceable
o A debt is due and enforceable when the creditor has the right to claim
performance immediately, and there are no valid defenses to the claim.
o Generally, the creditor may demand performance immediately upon conclusion of
the contract, or as soon as reasonably possible, depending on the nature of the
contract (e.g., a book may be delivered immediately, while a house may require a
reasonable period for transfer registration).
o If a specific time for performance is agreed upon or if the performance depends on
a suspensive condition, the debt is not due until that time or condition is fulfilled.
o There is no mora if the debt has been extinguished (e.g., by prescription) or if the
debtor’s performance is contingent on the creditor fulfilling their obligation first.
o In reciprocal contracts, the parties must perform simultaneously. If the creditor
hasn’t performed or tendered to perform their obligation, they cannot demand
performance from the debtor without risking their claim being defeated by exceptio
non adimpleti contractus.
12.2.2.2 Failure to perform timeously
Timeous Performance and Mora
o Timeous performance requires certainty about when performance is due. A debtor
cannot be in mora unless a definite time for performance is fixed, either by
agreement or by a subsequent demand for performance.
Two Types of Mora Debitoris:
1. Mora ex re:
o Occurs when a time for performance has been expressly or impliedly agreed upon.
o The debtor automatically falls into mora if they fail to perform by the due date.
o The time must be certain (e.g., 1 January 2010). If the time depends on an uncertain
event (e.g., "when X dies"), mora does not arise until a subsequent demand is made.
2. Mora ex persona:
o If no time for performance is stipulated, mora does not arise automatically.
o The creditor must demand performance on a reasonable date after the contract is
concluded, usually through a letter of demand.
o The debtor falls into mora once the reasonable period stipulated in the demand
has passed without performance.
Demands and Reasonableness:
o Reasonable period for performance must be considered based on the
circumstances.
o The creditor's demand must allow the debtor a reasonable time to perform.
o If the debtor fails to comply after the reasonable period has passed, they are in
mora.
o If the creditor does not allow a reasonable period, mora cannot arise, even if the
debtor fails to perform after a reasonable period has passed.
Reasonableness of Time:
o Reasonableness is judged based on the situation at the time of the demand, not
necessarily at the time the contract was concluded.
o Unforeseen circumstances arising after the contract is signed may be considered
in determining whether the demand period was reasonable.
o Disputes over the reasonableness of the demand period place the onus on the
debtor to prove the period was unreasonable, unless the demand includes a notice
of rescission.
12.2.2.3 Fault
Delay and Fault of the Debtor:
o Delay due to fault: It is generally stated that mora requires the delay to be caused
by the debtor's fault or the fault of those the debtor is responsible for.
o Excuse for Delay: However, courts may excuse the delay if the debtor has a legal
justification. For example:
- Ignorance of the nature of the performance or that the performance
was due.
- Delay caused by the creditor or circumstances beyond the debtor’s
control (e.g., vis maior (force majeure), casus fortuitus (chance
events), or actions of independent third parties).
Impossibility of Performance:
o Temporary impossibility of performance can excuse the delay (excusatio a mora),
provided it's not the debtor’s fault.
o Permanent impossibility either discharges the contract or constitutes a breach
of contract, depending on whether the debtor is at fault.
Agreement on Responsibility: If the debtor has agreed to be responsible for any delay
(regardless of fault), they cannot be excused from mora.
Burden of Proof: The debtor has the onus (burden of proof) to show that there was a legal
justification for the delay.
12.2.3 Consequences
Consequences of Mora Debitoris (Delay by the Debtor):
Remedies for Mora: Mora debitoris gives rise to remedies for breach, including:
o The right to claim damages.
o In limited circumstances, the right to rescind the contract.
Right to Specific Performance: The right to claim specific performance arises as soon
as the debt is due and enforceable and is not dependent on proof of mora.
Perpetuatio Obligationis: One unique consequence of mora (that is not shared by other
breaches) is perpetuatio obligationis (perpetuation of the obligation), which means the
obligation continues even if the debtor is delayed.
12.2.3.1 Perpetuatio Obligations
Supervening Impossibility: The contract ends when performance becomes impossible
due to uncontrollable circumstances.
Mora and Impossibility: If the debtor is in mora (delay) when performance becomes
impossible, their obligation isn't discharged unless they prove that timely performance
wouldn't have changed the outcome (e.g., the item would have been destroyed anyway).
Liability in Case of Impossibility:
o If the impossibility affects the other party, the debtor must still perform.
o If the debtor's performance is affected, they may need to pay damages or money in
lieu.
Sale Contracts:
o Risk passes to the purchaser once the sale is perfected.
o If the item is destroyed before delivery and not due to the seller’s fault, the
purchaser must still pay.
o If the seller is in mora, the risk reverts to them. If the item is destroyed during the
delay, the seller cannot recover the price unless the item would have been
destroyed anyway.
12.2.3.2 Damages
Compensation for Delay: Regardless of whether the debtor eventually performs, they are
required to compensate the creditor for any damages caused by the delay.
Liquidated Sums of Money:
o If the debtor is obligated to pay a liquidated sum of money, interest is payable
from the date of mora (the delay).
o This interest is in addition to any other damages the creditor may suffer due to the
delay.
Assumption of Loss: The courts assume that had the payment been made on time, the
sum would have been productively employed, meaning the interest represents the
damages naturally resulting from the delay.
Interest Rate:
o Unless agreed otherwise, the interest rate is determined by the Minister of Justice
as prescribed by the Prescribed Rate of Interest Act.
12.2.3.3 Recission
Rescission (cancellation) is an exceptional remedy that applies when the debtor is in mora
(delay), but only under certain conditions.
Historical Background: In Roman Dutch law, rescission for mora was tied to a lex
commissoria (clause allowing cancellation due to delay), but modern law, influenced by
English law, has expanded this right.
When Time is of the Essence: If time is critical, and the debtor fails to perform on time,
the creditor can rescind the contract. This concept was clarified in Nel v Cloete and can
arise in three ways:
o Express Lex Commissoria: The contract explicitly allows cancellation if the debtor
is late.
o Tacit Lex Commissoria: The parties’ intention implies that time is essential.
o Notice of Rescission: If neither of the above, the creditor can send a notice, making
time of the essence.
Types of Lex Commissoria:
o Express Lex Commissoria: The creditor can immediately cancel if the debtor fails
to perform on time.
o Tacit Lex Commissoria: Implied intention of the parties that time is essential,
especially in business contracts.
o Notice of Rescission: The creditor can send a notice making time of the essence,
allowing the debtor a reasonable period to perform.
Demand vs Notice of Rescission:
o Demand (Interpellatio): Requests performance by a set date but doesn’t allow
rescission.
o Notice of Rescission: Grants the right to cancel if the debtor doesn’t perform by a
specified date.
Valid Notice of Rescission:
o Must be clear and relate to a major breach.
o Can be given extra-judicially, by summons, or in a court order.
Reasonableness of Time in Notice:
o The time allowed in the notice must be reasonable, with the creditor bearing the
burden to prove its reasonableness.
12.3 Mora Creditoris
Mora Creditoris (Delay by the Creditor) occurs when the creditor fails to cooperate,
hindering the debtor from performing their obligations. While the creditor's role is passive
(to receive performance), in some cases, their cooperation is needed, such as accepting
rent or goods.
Consequences of Mora Creditoris:
1. Repudiation: If the creditor delays with the intention of not honoring the contract.
2. Prevention of Performance: If the delay makes it impossible for the debtor to
perform.
Historically overlooked, mora creditoris is now more recognized, thanks to scholars like JC
de Wet and AB de Villiers. Courts sometimes confuse it with mora debitoris, but it is an
important breach that can result in damages or other remedies for the debtor.
Release of the Debtor: In law, releasing the debtor typically requires their consent. If the
debtor refuses to accept the release, the creditor must continue to cooperate to enable the
debtor to perform.
Mora Creditoris vs. Mora Debitoris: These two forms of delay cannot occur
simultaneously for the same obligation. If the creditor delays receiving performance, the
debtor is excused from mora debitoris.
Reciprocal Contracts: In a reciprocal contract, both mora debitoris (debtor’s delay) and
mora creditoris (creditor’s delay) can occur at the same time. For instance, a purchaser
who delays both taking delivery and making payment.
12.3.1 Requirements
The requirements for mora creditoris are in many respects similar to those for mora
debitoris.
12.3.1.1 Obligations to make performance
Debtor’s Obligation: The debtor must be obligated to perform for the creditor, but the debt
doesn't necessarily need to be enforceable. Mora creditoris can apply even in the case of a
natural obligation.
Debt Due Date: The debt doesn't have to be due for mora creditoris to occur, as the debtor
can discharge the debt before its due date. However, the creditor may refuse performance
if the debt is subject to an unfulfilled suspensive condition, or a suspensive time-term set
for the creditor's benefit.
12.3.1.2 Cooperation
Mora creditoris requires the creditor's cooperation for the debtor to perform the obligation
properly. It does not apply in the case of a negative obligation (e.g., a duty not to do
something) or a positive obligation that can be fulfilled without the creditor's cooperation
(e.g., keeping a dog locked in the backyard).
12.3.1.3 Tender of performance
To properly tender performance, the debtor must take all steps possible without the
creditor's cooperation and then request the necessary cooperation. For example, if the
debtor must deliver an item, they must bring it to the agreed place and ask the creditor to
take it. If the creditor is supposed to fetch the item, a simple notice from the debtor may
suffice. The performance must be complete and without conditions; otherwise, the
creditor can reject it without being in mora.
12.3.1.4 Delay
For mora creditoris to occur, the creditor must delay in accepting performance, such as not
being present at the agreed time or refusing to allow the debtor to perform. If a time for
performance is fixed in the contract, mora creditoris arises automatically if the creditor
defaults. If no time is fixed or the debtor wishes to perform earlier, they must notify the
creditor and give them a reasonable opportunity to accept the performance.
12.3.1.5 Fault
Mora creditoris requires that the creditor's delay be due to their fault. If the delay is caused
by vis maior (force majeure) or casus fortuitus (an unforeseeable event), mora creditoris
is excluded, despite an obiter dictum to the contrary in Venter v Venter by Van den Heever
JA.
12.3.2 Consequences
Mora creditoris has a number of consequences, including the usual remedies for breach of
contract.
12.3.2.1 Cancellation
The debtor can cancel the contract in the same circumstances as the creditor can for mora
debitoris. This includes situations where time is of the essence in the contract (whether
through an express or implied cancellation clause or lex commissoria), or where time has
been made of the essence through a notice of rescission that the creditor fails to comply
with. Notably, Roman Dutch law recognized the notice of rescission in cases of mora
creditoris, but not in mora debitoris.
12.3.2.2 Damages
Regardless of whether the debtor chooses to cancel or affirm the contract, they are entitled
to damages for any loss caused by the mora. These damages typically include costs for retransporting goods, storing merchandise, or feeding animals meant for delivery.
Additionally, the debtor may recover loss of profit on the transaction if the contract is
canceled, as they are entitled to their full id quod interest (actual interest or loss).
12.3.2.3 Specific Performance
If the debtor chooses to uphold the contract, they may, in appropriate circumstances, seek
an order of specific performance to compel the creditor to cooperate and fulfill their
obligations.
12.3.2.4 Counter-Performance
In a reciprocal contract, the creditor’s delay in receiving the debtor’s performance does not
excuse the creditor from their obligation to provide counter-performance. The debtor may
strategically sue for counter-performance, as this could compel the creditor to fulfill their
side of the contract. However, if the debtor is unable to fully perform due to the creditor's
failure to cooperate, the debtor's right to counter-performance may be reduced by the
amount saved by not fully performing their obligation.
12.3.2.5 Care of article and supervening impossibility of performance
Mora creditoris limits the debtor’s liability for damage to an article they need to deliver,
making the debtor responsible only for intentional damage or gross negligence. The
creditor also bears the risk of supervening impossibility, even if it’s due to the debtor’s
negligence. If the debtor’s performance becomes impossible while the creditor is in mora,
the debtor is discharged from their obligation, but the creditor remains liable for counterperformance unless the impossibility was caused by the debtor’s intent or gross
negligence. For example, if a house built by a contractor is destroyed by an earthquake
after the creditor delays taking delivery, the creditor still owes the full contract price.
12.3.2.6 Effect on security
Mora creditoris releases sureties, but its effect on security interests like mortgages,
pledges, or liens is unclear. Under Roman Dutch law, the debtor could only demand the
release of property from security if the debt was discharged through consignatio, but this
seems inequitable given that the delay is the creditor's fault, and modern law doesn't
provide a simple method for consignatio. Whether the debtor must pay interest or
compensation for the use of money or goods during the delay is also uncertain, though it’s
likely the debtor will be liable only if they continue benefiting from the use of the money or
item.
12.3.2.7 Discharge of Debt
Unless the debtor validly cancels the contract or obtains an order to compel the creditor to
cooperate, it's unclear how the debtor can discharge the debt without waiting for the
prescription period to expire or for performance to become impossible. However, it may be
crucial for the debtor to resolve the debt promptly, such as when goods are occupying
valuable warehouse space or when the debtor is an executor of a deceased estate and
needs to wind it up quickly.
12.4 Positive Malperformance
Mora relates to the timing of performance, while positive malperformance concerns the
content of the performance. It can take two forms:
1. Positive malperformance in a positive duty occurs when the debtor performs but
does so incompletely or defectively, e.g., delivering incorrect goods, deviating from
plans, or being consistently late.
2. Positive malperformance in a negative duty happens when the debtor does
something they are contractually required to avoid, e.g., subletting property against
lease terms, breaching a non-compete agreement, or acting in a way that damages
their university’s reputation.
12.4.1 Fault
It is unclear whether fault is necessary for positive malperformance. While most cases
suggest strict liability, some argue that a debtor can avoid liability by proving the
malperformance was caused by factors beyond their control, such as illness affecting a
performance. For example, a debtor is only liable for damage to an item if caused by their
fault. In lease agreements, the lessor is liable for defects only if they knew or should have
known about them. However, in a sale contract where risk transfers only upon ownership,
the seller is liable for positive malperformance if the item is damaged before transfer, even
without fault. This suggests that a party who agrees to deliver a performance, regardless of
fault, must honor that commitment.
12.4.2 Remedies
In the case of positive malperformance, the creditor’s remedies typically involve either
rescission or fulfillment of the contract. These remedies are applicable to breaches of both
positive and negative duties. For negative duties, however, the creditor can also seek an
interdict to prevent the debtor from performing the forbidden act or an order to undo any
wrongful actions taken by the debtor.
12.4.2.1 Recession
If a contract has a cancellation clause, the creditor can cancel for malperformance, even if
the breach is minor, but must give notice to the debtor to fix it if required. Without such a
clause, cancellation is only possible if the breach is serious enough to undermine the
contract. In divisible contracts, the creditor can cancel only the affected part, but in
instalment contracts, the entire contract may be canceled if all instalments are defective.
The right to cancel remains even if the debtor later offers correct performance, but the
debtor may be allowed to fix defects in custom-made goods.
12.4.2.2 Remedies aimed at fulfilment of the contract
If the creditor chooses not to rescind the contract, they can either accept the defective
performance as partial fulfillment and claim damages for the difference in value or reject
the performance and demand specific performance or damages in lieu. These damages,
called surrogate damages, compensate for incomplete performance, but the creditor must
prove they suffered a loss.
Rejection of defective performance doesn’t cancel the contract, and the creditor must still
perform their side, unless they withhold performance in a reciprocal contract. Repeated
failures to reject defects may prevent later cancellation for similar breaches. The creditor
can also claim consequential damages for any losses caused by the breach.
12.5 Repudiation
Repudiation occurs when a party shows an intention not to be bound by the contract,
through words or actions. It can happen before or after the performance date and may
include refusing to perform or offering defective performance. Repudiation is continuous,
allowing the innocent party to cancel the contract if the defaulting party persists in their
refusal to perform. This is known as the "repentance principle."
12.5.2 Conflicting approaches to repudiation in modern law
In modern law, repudiation is seen as a breach in itself, without needing the innocent
party's acceptance. The traditional view, which treats repudiation like an offer to rescind, is
outdated and illogical. The newer, accepted view is that repudiation violates the
fundamental obligation to honor the contract, and the innocent party simply chooses to
rescind if the breach is serious. However, the traditional view still persists due to legal
precedents.
12.5.3 Effect of repudiation
The traditional theory of offer and acceptance still influences the law regarding
repudiation, but this theory is gradually being questioned. Traditionally, a repudiation of a
substantial part of the contract gave the innocent party the choice to accept it (terminating
the contract) or reject it (keeping the contract alive). However, it is now recognized that this
choice is simply the ordinary decision to either rescind or affirm the contract in all serious
breach cases.
12.5.3.1 Recession of the contract (acceptance of the repudiation)
Repudiation must be serious enough to justify rescission. A full repudiation always allows
the innocent party to rescind. If the predicted breach would justify rescission, they can act
immediately. For delays, rescission happens only if time is essential, or after a notice is
sent. In case of partial repudiation, only that part can be rescinded. If repudiation occurs,
the innocent party doesn't need to follow any procedural steps in the contract. Once
rescinded, the contract ends, and damages can be claimed, with losses mitigated.
12.5.3.2 Affirmation of the contract (rejection of the repudiation)
The innocent party can reject repudiation and continue the contract. Traditionally, rejecting
it meant no immediate claims for performance or damages. However, some argue that
rejecting repudiation should still allow the innocent party to suspend their duty to perform
and claim specific performance or damages if incidental harm occurs, even before the
breach happens.
12.6 Prevention of performance
When performance becomes impossible due to the fault of either party, the contract is not
terminated but breached, known as "prevention of performance." This occurs even if the
impossibility is subjective (specific to the party), such as when a debtor prevents
themselves from fulfilling the contract by selling the subject to someone else. While
prevention of performance can be caused negligently, it differs from repudiation, which
requires an unequivocal intention to reject the contract. If performance is made impossible
by either party, the innocent party can take action immediately, as this can be seen as an
anticipatory breach.
12.6.1 Fault
Fault is a key element in breach of contract, as supervening impossibility typically
terminates the contract. Modern law requires a standard of fault based on the care
expected from a reasonable person in the situation. The burden of proof lies with the
debtor to show that their inability to perform is not due to their fault. However, if the debtor
guarantees performance, the absence of fault won't excuse them, unless the creditor's
fault causes the impossibility. If the debtor's fault makes performance impossible while
already in mora, the breach shifts form but remains a breach.
12.6.2 Remedies
When the debtor is at fault for the impossibility of performance, the innocent party has two
options:
1. Cancel the contract, recover any performance already made, and claim damages
for losses such as wasted expenses or loss of profit.
2. Abide by the contract, perform their side, and claim damages in lieu of
performance.
If the creditor causes the impossibility, the debtor can:
1. Cancel the contract, restore any performance already made by the creditor, and
claim damages.
2. Abide by the contract, claim counter-performance from the creditor, with a
reduction for savings from not needing to perform.
In both cases, the innocent party can also claim damages for any consequential losses.
12.6.3 Partial Impossibility
If performance is partially impossible due to the debtor's fault, the creditor’s options
depend on the breach's seriousness:
For minor breaches, the contract may remain, and the creditor can seek a reduction in
counter-performance or claim damages for the missing part.
For material breaches, the creditor can:
o Cancel the contract partially and reduce their own counter-performance.
o If pro-rata reduction isn't possible, they may cancel the entire contract or accept
partial performance and claim damages.
For indivisible performance, the creditor has similar options. If the creditor is at fault, the
same rules apply.
12.6.4 Temporary Impossibility
In ongoing contracts, temporary impossibility is treated as partial impossibility. If the
debtor delays, they enter mora debitoris, unless performance becomes impossible or
worthless, turning it into permanent impossibility. If it's clear in advance that the debtor will
delay, the innocent party can cancel the contract immediately if time is essential.
Breach, Remedies, Transfer and Termination
CHAPTER 13[LEARNING UNIT 5]: Remedies for Breach
13.3 Remedies aimed at keeping the contract alive
General Principle: In South African law, contracts must be honoured (pacta sunt
servanda). A party is generally entitled to have their contract enforced according to its
terms.
Remedies for Enforcement:
1. Exceptio non adimpleti contractus:
o A self-help remedy used when parties have reciprocal obligations.
o The innocent party may withhold their performance until the other party has
fully performed.
o Late performance cannot be refused if it is properly tendered, as this remedy
aims to compel performance.
2. Specific Performance:
o A legal claim asking the court to order the other party to fulfil their
contractual obligations.
o In principle, the innocent party has the right to this order.
o However, the court has discretion to deny specific performance in
exceptional circumstances.
3. Interdict:
o A specific type of specific performance remedy.
o Used to prevent a breach of contract.
o It can be obtained quickly through an application procedure.
13.3.1 Exceptio non adimpleti contractus
A defence used in reciprocal contracts, where each party’s performance is exchanged for
the other’s.
Allows a party to:
o Withhold their own performance.
o Resist a claim for performance by the other party.
This is valid until the other party has performed or properly tendered performance of
their obligations.
Its purpose is essentially to secure specific performance from the other party.
13.3.1.1 Requirements for the exceptio non adimpleti contractus
A defence used in reciprocal contracts. Permits a party to withhold their own performance
and resist a claim until the other party has performed or tendered proper performance. It
aims to secure specific performance from the defaulting party.
Key Requirements and Concepts:
1. Reciprocity of Obligations:
o Obligations must be reciprocal, i.e., created in exchange for each other.
o BK Tooling case: Reciprocal contracts aim to exchange performances.
o Not all obligations in a contract are automatically reciprocal.
o Test for reciprocity: What was the intention of the parties (express or implied)?
Was performance meant to be in exchange for the other?
Principle of reciprocity:
o Party A can’t demand performance from B unless A has performed or is ready to
perform.
o B may withhold performance until A performs fully or tenders performance.
2. Sequence of Performances:
General rule: Parties must perform simultaneously (pari passu), unless:
o The parties agreed otherwise.
o The naturalia (default legal content) of the contract dictates otherwise.
Examples of naturalia and sequence:
o Lease: Lessor performs first (gives use/enjoyment); lessee pays later.
o Employment: Employee performs first; employer pays after service.
o Building contracts: Contractor performs first.
Parties may alter this sequence in their agreement.
Sequence is determined first by the contractual terms, then by naturalia.
Presumptions:
Interdependent obligations are presumed reciprocal (unless proven otherwise).
In reciprocal contracts, performance is presumed to be simultaneous, unless there's clear
intent otherwise.
Exceptions:
o Work contracts (locatio conductio operis): Worker must perform first unless
otherwise agreed.
o Lease contracts: Lessor must perform first.
o In credit sales, seller cannot raise the exceptio if payment is not yet due.
3. Incomplete Performance (Positive Malperformance):
Exceptio can be raised:
o If the other party has not performed at all.
o If the other party has performed incompletely or defectively.
Even minor defects in performance justify use of the exceptio, unless trivial (principle: de
minimis non curat lex).
Powerful tool to compel proper and full performance without resorting to litigation.
Procedural Aspect:
A plaintiff claiming specific performance must allege in pleadings that:
o They have performed in full, or
o They are ready to perform.
Failure to do so allows the defendant to raise the exceptio.
13.3.1.2 Factors affecting the application of the exceptio
Determining whether the exceptio non adimpleti contractus can be used depends on the
specific circumstances of the case.
Acceptance of Part-Performance:
The exceptio is aimed at ensuring full performance and keeping the contract intact.
If the innocent party:
o Accepts and uses part- or defective performance, knowing it’s defective,
o It is considered to have elected to keep the contract alive.
After electing to keep the contract:
o The party cannot later cancel the contract unless a further material breach
occurs.
o The party is limited to remedies focused on fulfilment and damages.
o The exceptio can still be raised as a defence.
Defective Performance vs. Cancellation of the Contract:
BK Tooling case clarified:
There is a distinction between:
o Cancelling the contract due to breach.
o Keeping the contract alive and using the exceptio as a defence.
If the contract is cancelled:
o The exceptio cannot be used, as it applies only when the contract is still active.
o The proper defence becomes: "performance is no longer owed due to
termination."
o All obligations to perform end, and both parties must return performance
received.
After Cancellation – Return of Performance & Unjustified Enrichment:
o Return of performance is based on contractual duties, not unjustified enrichment.
o If return is not possible (e.g. service was rendered or goods transferred to a third
party), the receiving party may be liable under unjustified enrichment.
o Enrichment occurs without a legal cause because the contract (original cause)
has been cancelled.
o Even the guilty party (in breach) must return performance if enriched.
The enrichment claim allows recovery of the lesser of:
o The impoverished party’s own costs, and
o The value by which the enriched party remains enriched.
13.3.1.3 Court’s equitable discretion: reduced contract price
General Principle: Where a party who must perform first only partially performs or
delivers defective performance, they are not entitled to counter-performance until they
have fully performed.
Use of Performance by the Innocent Party:
o Often, the innocent party accepts and uses the partial/defective performance.
o This may leave the breaching party in a difficult position—they can’t make full
performance, and the innocent party can still rely on the exceptio non adimpleti
contractus to resist payment.
o This is seen as unfair to the party in breach.
Court’s Discretion and Equity:
Courts, to avoid injustice, have developed a discretionary remedy:
o Allowing a reduced contract price to be paid.
o This is done by deducting the cost of repairing or completing the defective work
from the original contract price.
This principle was endorsed in BK Tooling (Edms) Bpk v Scope Precision Engineering
(Edms) Bpk.
Contractual Remedy vs. Enrichment Action:
o The reduced contract price remedy is contractual in nature, not based on
unjustified enrichment.
o Reduction is calculated from the contract price, not based on subjective
enrichment/impoverishment (which applies only if the contract is cancelled).
Requirements for Reduced Contract Price (Onus on Party in Breach):
The party claiming the reduced price must prove:
1. The innocent party used the defective performance to its own advantage.
2. The cost of rectifying defects or completing shortfalls.
3. It would be equitable to award the breaching party partial remuneration.
4. The overall circumstances justify judicial discretion in awarding a reduced price.
BK Tooling Case – Application of Principle:
o One party had to manufacture precision moulds.
o The moulds were defective, but the other party used and modified them instead of
returning them.
o Because the breaching party could no longer fix the defect, the innocent party
raised the exceptio as a defence to non-payment.
The court held:
o The breaching party was still entitled to a reduced price.
o The cost of modifying the moulds was deducted from the original contract price to
determine the final payable amount.
13.3.1.4 Scope of exceptio
Right to Withhold Performance (Reciprocity Principle):
A temporary defence was used to compel full and proper performance from the other
party before rendering counter-performance.
The innocent party must give the breaching party a chance to remedy the defective
performance.
Remedial Options (Common Law vs. CPA):
Common Law: The breaching party decides how to fix the issue:
o Complete the performance
o Provide a substitute
o Repair the defect
Consumer Protection Act (CPA) s 56(2):
o Consumer decides refund, replacement, or repair
o It depends on the nature and severity of the defect
Termination of Right:
Once full and proper performance is completed, the right to withhold performance falls
away.
Scope of the Exceptio non adimpleti contractus:
Available for all types of contracts (not just work and services).
Confirmed in Thompson v Scholtz:
o Applied to a sale of land contract.
o Seller didn’t provide occupation of the farmhouse but still claimed occupational
rent.
o Exceptio was a valid defence.
Limits to the Exceptio:
Cannot be raised if:
1. Failure to perform is excused by law (e.g., supervening impossibility).
2. Risk lies with the party trying to raise the exceptio.
o E.g., in a contract of sale, once the sale is perfecta (unconditional), the risk
passes to the buyer.
o If goods are later destroyed by vis maior (act of God), buyer must still pay –
no exceptio allowed.
o Not available if the contract has been cancelled – since the exceptio is
about fulfilling the contract, not terminating it.
13.3.2 Specific performance
Pacta Sunt Servanda (Principle of Binding Contracts):
Parties must fulfil their contractual obligations. Each party is entitled to demand full and
proper performance from the other, as long as they are willing to perform their own
reciprocal obligations.
Specific Performance as the Primary Remedy:
Specific performance is the primary remedy for breach of contract.
o Specific performance: Court order compelling a party to perform as per the
contract.
Can be claimed as soon as the obligation is due and enforceable (no need for the debtor
to be in mora or delay).
Roman Dutch Law vs. English Law Influence:
In Roman Dutch law, the right to specific performance was almost absolute.
Under English law influence, the remedy became more discretionary:
o Courts can refuse specific performance for equitable reasons or based on public
policy.
Court’s Discretion in Granting Specific Performance:
Over time, guidelines developed for when specific performance would be granted.
Examples:
o Specific performance would generally not be granted for employment contracts.
This restrictive approach to discretion was eventually rejected by the Appellate Division
in the Benson v SA Mutual Life Assurance Society case.
o The court reasserted the principle that contracting parties have a right to specific
performance.
o The court’s discretion to refuse specific performance remains, but it should be
exercised only in appropriate cases.
13.3.2.1 Scope
Forms of Claims for Specific Performance:
1. Claim for Payment of Money (ad pecuniam solvendam):
o This is essentially a claim for payment due under the contract.
o Although it’s often treated as a claim for damages in practice, it's still a form
of specific performance.
2. Claim for Performance of a Positive Act (ad factum praestandum):
o This refers to claiming the actual performance of an act or service that the
other party has promised, other than just paying money.
o The party seeks to have the other party fulfill a specific act as stipulated in
the contract.
3. Claim to Enforce a Negative Obligation:
o A claim to enforce an obligation that the other party should refrain from
doing something (e.g., not competing in a business as per a non-compete
clause).
o These claims often take the form of an interdict (a court order requiring the
other party to refrain from doing something).
o These are commonly seen in restraint of trade agreements.
Negative Obligations and Interdicts:
While claims to enforce negative obligations are generally more limited in certain
circumstances, such as with restraint of trade agreements, they are still subject to the
court's discretion.
The applicant may be entitled to a specific performance order restraining the other party
from performing a prohibited act without meeting all the usual criteria required for granting
an interdict.
13.3.2.2 Requirements for specific performance
The Farmers’ Co-operative Society (Reg) v Berry case laid down three main requirements
for a claim of specific performance:
Requirements for Specific Performance:
1. Plaintiff’s Own Performance or Willingness to Perform:
The plaintiff must have performed their obligations under the contract, or must be ready
to perform them. This is in line with the principle of reciprocity in contracts, meaning the
plaintiff must be willing to fulfill their end of the bargain before demanding performance
from the defendant.
2. Defendant's Ability to Perform:
The defendant must be in a position to perform their obligations. This includes ensuring
that performance is both objectively (feasibly possible) and subjectively (within the
defendant’s capacity) possible.
3. Not Against Public Policy:
The order for specific performance must not contravene public policy. For instance, in
cases involving restraints of trade, a court may refuse to order specific performance if it
finds the restraint to be unreasonable, as it could be harmful to public policy.
Exceptions Where Specific Performance May Be Refused:
1. Impossibility of Performance:
Specific performance will not be granted if the performance has become impossible,
whether due to objective (e.g., the item no longer exists) or subjective (e.g., the debtor
personally cannot perform) reasons.
o Example: If a party sold the same item to two buyers and delivered it to one, the
court cannot order the seller to deliver the item to the second buyer, as it’s
subjectively impossible.
2. Insolvency of the Breaching Party:
Specific performance will not be granted if the party in breach is insolvent. Since an
insolvent estate lacks enough assets to satisfy all its creditors, granting specific
performance to one creditor would unfairly prioritize their claim over others.
These requirements help ensure that specific performance is granted in a fair and
equitable manner while also considering practical and public policy factors.
13.3.2.3 Discretion of the courts
The right to specific performance is generally upheld, but the courts have a discretionary
power to refuse it in certain circumstances. This discretion must be exercised judicially
and is guided by several considerations to maintain fairness, consistency, and avoid undue
hardship. The following circumstances affect the court's discretion:
Circumstances Where Specific Performance May Be Refused:
1. Undue Hardship:
The courts will refuse specific performance if it would cause undue hardship to the
defaulting party or to third parties. For example:
o Haynes v Kingwilliamstown Municipality: In this case, the municipality was
required to release a specified amount of water per day, but due to a severe drought,
it failed to meet its obligation. The court refused to order specific performance,
recognizing the hardship it would cause both the municipality and the citizens, who
relied on the municipality for an adequate water supply.
2. Personal Services:
Courts generally avoid ordering specific performance in contracts for personal services
due to practical difficulties and the potential for continuous disputes over performance.
Historically, English law avoided enforcement of such contracts for this reason. However,
South African law has evolved, and this limitation has been reconsidered:
o National Union of Textile Workers v Stag Packings: The court held that there was no
need for a departure from the general rule for personal service contracts, affirming
that specific performance could still be ordered, provided there are no other
compelling reasons to deny it.
o Masetlha v President of the Republic of South Africa: The Constitutional Court
refused to reinstate the Head of the National Intelligence Agency, emphasizing the
importance of the special relationship of trust in such cases.
o Santos Professional Football Club (Pty) Ltd v Igesund: A coach’s attempt to leave
one club for another was rejected, with the court ordering the coach to return to his
original club. The court concluded that specific performance could be granted
without undue hardship to the coach, as the issue of whether he would perform
poorly was speculative.
3. Employment Contracts:
Labour legislation also provides for specific performance in employment contracts. The
Labour Court has the authority to enforce employment agreements, supporting the trend
of allowing enforcement in such cases. This further strengthens the idea that specific
performance can be granted in the context of employment relationships, countering the
notion that it is inherently problematic.
13.3.2.4 Execution of orders for specific performance
An order for specific performance is enforced in accordance with standard legal
procedures and can be pursued in several ways depending on the nature of the order and
the debtor's compliance. If the debtor fails to adhere to the order, there are multiple
mechanisms for enforcement:
Enforcement Methods:
1. Order to Pay a Sum of Money:
If the order is for the payment of money, the creditor can enforce the order through a writ of
execution. This writ allows the attachment and sale of the debtor’s property to satisfy the
debt. This is typically done by the sheriff, who seizes the debtor's assets and sells them to
raise the required funds.
2. Order to Perform or Refrain from Performing an Act:
If the order requires the debtor to perform a specific act (e.g., deliver goods, transfer
property) or to refrain from performing an act (e.g., cease doing something), failure to
comply can lead to a contempt of court charge. Contempt of court is a serious offence,
and the debtor may be committed to prison for not complying with the order.
In addition to imprisonment for contempt, the court can also enforce the order by directing
a third party (often an official) to carry out the order on behalf of the creditor. For example:
o The sheriff may be instructed to seize movable property from the debtor and
deliver it to the creditor.
o The registrar of deeds may be ordered to sign the documents necessary to effect
the transfer of immovable property to the creditor.
o If the property is in the possession of a third party, the court may direct that third
party to deliver the property to the creditor.
13.4 Cancellation
Cancellation of a contract is an extraordinary remedy available only in exceptional
circumstances. It brings the transaction to an abrupt end, contrary to the parties' original
intentions. A party can cancel a contract only if the breach is serious or material,
undermining the core purpose of the contract. In the absence of a contractual provision,
the breach must be significant enough to justify termination. Cancellation is a drastic
measure, used when continuing the contract is no longer feasible or desirable.
13.4.1 Materiality of the breach
Whether a particular breach is a material breach or sufficiently serious to justify
cancellation will depend upon the particular circumstances and the type of breach in
question.
13.4.2 Cancellation clause (lex commissoria)
Parties often include a clause in their contracts, known as a lex commissoria, that
regulates the right to cancel the agreement due to a breach. This clause typically outlines
the procedure for cancellation, such as requiring written notice of the breach and a
specified period for the breaching party to rectify it. For example, a clause might state that
if the lessee fails to meet any obligations, the lessor can cancel the contract with seven
days’ notice, provided the breach isn't fixed in that time. While common law generally
requires a material breach for cancellation, a lex commissoria allows for cancellation even
for minor breaches, as long as they fall within the clause's terms. The principle of party
autonomy ensures that such contractual provisions take precedence over common law,
unless the clause is unlawful.
13.4.3 The act of cancellation
Once a breach occurs, the innocent party can either affirm or cancel the contract. They
have a reasonable time to decide, and once a decision is made, it’s final unless a new
breach happens.
To cancel, they must notify the other party clearly. The cancellation takes effect when
communicated. No formalities are needed unless specified in the contract. If disputed, a
court order may be required.
The cancellation remains valid even if the reason is wrong, as long as a valid reason exists.
Premature cancellation has no effect unless a valid reason arises later.
13.4.4 Loss of the right to cancel elections and wavier
If the innocent party affirms the contract, they lose the right to cancel. This can be implied
by their actions, like accepting performance or continuing to use a defective product. A
delay in canceling may suggest acceptance, but it doesn’t automatically waive the right.
The exact impact of delay on cancellation rights is unclear.
13.4.5 The legal effects of cancellation
When a contract is cancelled, the primary performance obligations are extinguished. For
indivisible obligations (e.g., delivering a car), the entire obligation ends. For divisible
obligations (e.g., monthly rent), only the remaining parts are cancelled, and any accrued
rights, like unpaid rent, can still be enforced. Ancillary obligations, such as penalty,
arbitration, exclusion clauses, and damages, may still apply after cancellation, depending
on the parties' intentions.
13.4.6 Restitution
Cancellation not only ends obligations but also creates a duty for both parties to return
what they’ve received (restitution). This is known as restitutio in integrum and aims to
restore both parties to their pre-contract positions. Restitution isn't required if it’s
impossible due to reasons beyond the cancelling party’s control, like an inherent defect or
an external event. In cases where partial restitution is impossible, money can substitute for
the value of the lost performance. A party cancelling the contract must still tender
restitution, even if they have a larger damages claim.
13.5 Damages
The innocent party, whether they choose to cancel or seek specific performance, is also
entitled to claim damages for any financial loss due to the breach. Damages are often the
most significant remedy, but quantifying the loss can be complex. To simplify matters,
contracts often include a penalty clause specifying a fixed sum payable in case of breach.
This penalty replaces damages, not in addition to them. If the penalty is too high compared
to the actual loss, the court can reduce it under relevant legislation.
13.5.1 The nature and purpose of contractual damages
Damages for breach of contract aim to put the innocent party in the position they would
have been in had the contract been performed. This is done by comparing their actual
situation after the breach with the hypothetical situation had there been no breach, known
as the difference theory.
Contractual damages cover the positive interest (lost profits), while delictual damages
cover the negative interest (wasted costs). Positive interest is forward-looking, aiming to
restore expected profit, while negative interest is backward-looking, focusing on losses
incurred due to the breach.
The difference between damages for a post-contractual breach and a pre-contractual
wrong, like fraud, lies in the nature of the wrongful act. While fraud can result in reliance
losses, a breach of contract can lead to both reliance and expectation losses. There's a
misconception that only loss of profit is recoverable in contract claims, and only out-ofpocket losses in delict claims. In reality, positive interest damages can cover both reliance
and expectation losses. For example, if a contractor incurs R30,000 in reliance losses and
would have made R10,000 in profit had the contract been fulfilled, they are entitled to
R40,000 in damages to restore their position.
To fully compensate a breach victim, reliance losses must be recoverable. Some judges
mistakenly limit positive interest to profit loss, allowing reliance damages only in certain
cases. This issue is still under review by the Supreme Court of Appeal.
13.5.2 Requirements for a damage claim
To claim damages for breach of contract, the plaintiff must prove:
o
o
o
o
A breach of contract by the defendant,
Suffered financial loss,
A factual causal link between the breach and the loss, and
The loss is not too remote a consequence of the breach.
13.5.2.1 Financial Loss
To claim damages for breach of contract, the plaintiff must prove financial loss caused by
the breach. South African law does not allow for nominal damages—only actual loss. The
plaintiff doesn't need to prove the loss with mathematical precision but must provide the
best available evidence.
The loss must be patrimonial (financial) in nature, excluding non-patrimonial losses like
inconvenience or emotional distress. Damages must be claimed in one action, including
any future losses, as per the once-and-for-all rule.
To calculate damages, the difference between the actual and hypothetical financial
positions of the plaintiff is assessed. The market value approach is often used, comparing
the market value of goods or services as received and as they should have been. In cases
of pure economic loss, the difference method may apply.
Courts also consider any financial benefits gained due to the breach when calculating
damages.
13.5.2.2 Causation
To claim damages for breach of contract, the plaintiff must establish causation. This
involves two stages:
1. Factual Causation: Using the "but-for" test, the plaintiff must prove that, but for the
breach, the loss would not have occurred. If the loss would have happened
regardless of the breach, no causation exists.
2. Legal Causation: This focuses on whether the breach’s causal link to the loss is
close enough to justify liability. The courts consider remoteness and foreseeability,
but traditionally apply a distinction between general and special damages:
o General damages flow naturally from the breach and are usually
foreseeable (e.g., repair costs for defective goods).
o Special damages are not typical and arise from specific circumstances.
They are recoverable only if both parties foresaw them and agreed they could
result from the breach.
If the plaintiff's own fault contributes to the loss, damages are not apportioned under South
African law; the party in breach is liable for the full amount of the loss.
13.5.2.3 The mitigation rule
In Victoria Falls and Transvaal Power Co Ltd v Consolidated Langlaagte Mines Ltd, the court
established the mitigation rule, which requires the innocent party to take reasonable
steps to reduce their losses after a breach. If they fail to do so, the breaching party can use
the mitigation defense to reduce or eliminate damages. The innocent party only needs to
take reasonable actions, and they can claim the costs of doing so. The burden of proving
what could have been done or that the costs were unreasonable lies with the breaching
party.
13.5.3 Penalty Clauses
Contracts often include clauses to simplify the process of claiming damages and
encourage compliance. These clauses are typically:
1. Pre-estimate of damages: A predetermined sum to estimate the damages likely to
arise from a breach. It simplifies proving loss.
2. Penalty clauses: A sum to deter breach, often unrelated to the actual loss, and
serves as a strong incentive to comply.
3. Forfeiture clauses: The breaching party forfeits any benefits already received under
the contract if the contract is canceled due to breach.
Historically, under Roman Dutch law, penalty clauses were enforceable but could be
reduced if disproportionate. However, influenced by English law, a distinction emerged
between genuine pre-estimates of loss (enforceable) and penalty clauses (not
enforceable). The Conventional Penalties Act of 1962 restored the Roman Dutch approach,
making penalty clauses enforceable but subject to reduction by the court for fairness.
13.5.3.1 The Convention Penalties Act 15 of 1962
The Conventional Penalties Act (1962) regulates penalty clauses in contracts and sets out
the following provisions:
1. Enforceability of penalty stipulations:
A penalty stipulation, where a person is liable to pay a sum or perform an action for a
breach of contract, is enforceable in court, subject to the Act.
2. Prohibition on double recovery:
A creditor cannot recover both the penalty and damages for the same breach, unless the
contract explicitly allows it.
Penalties cannot be claimed for defects or delays unless the contract specifically
stipulates such penalties.
3. Reduction of excessive penalties:
If the penalty is disproportionate to the actual loss suffered by the creditor, the court may
reduce the penalty to an equitable amount, considering all rightful interests affected by the
breach.
4. Application to forfeiture clauses:
Forfeiture clauses, where a party forfeits rights due to withdrawal or non-performance
under specified conditions, are subject to the same rules as penalty clauses, including the
possibility of reduction by the court.
13.5.3.2 Scope of the Act
Section 1 of the Conventional Penalties Act removes the distinction between penalty
clauses (in terrorem) and pre-estimates of damages (liquidated damages), making penalty
stipulations enforceable in principle. However, to determine if a clause falls under the Act
and is subject to potential reduction by a court, it must meet the following criteria:
o Breach of contract: The clause must relate to a breach of contract (an act or
omission that conflicts with a contractual obligation). For example, a rouwkoop
clause, which allows a party to withdraw from the contract by paying a sum of
money, is not a penalty clause under the Act because it's not a breach of contract,
but rather an exercise of a contractual right.
o Obligation or forfeiture: The clause must either require the defaulting party to pay a
sum, deliver goods, or perform an action for the benefit of the other party, or it must
involve a forfeiture, such as losing the right to claim restitution under the contract.
o Intent: The clause must be intended either as a penalty or liquidated damages.
The Act's application to acceleration clauses (which make all future payments due
immediately upon breach) is not entirely clear. While acceleration clauses are not
inherently against public policy, their enforcement may be subject to scrutiny, especially
under the Consumer Protection Act 68 of 2008.
13.5.3.3 Reduction of the penalty
The court may reduce a penalty if it is disproportionate to the harm caused by the breach,
considering both financial damage and other factors like harm to the creditor’s reputation
or mental well-being. In Van Staden v Central South African Lands and Mines, the court
noted that all forms of harm should be considered.
In Smit v Bester, the court ruled that the debtor must prove the penalty is excessive. If they
do, the creditor must counter this. The court can also reduce the penalty on its own if it
appears excessive, even in default judgment cases.
13.5.3.4 Specific performance and penalty clauses
Under section 2(2), a party cannot claim both specific performance (for defective or
delayed performance) and a penalty, unless the contract specifically allows it. The penalty
typically applies when the contract is canceled. If the innocent party chooses to uphold the
contract despite the breach, they cannot rely on the penalty stipulation. Instead, they must
prove the damages caused by the breach, unless the contract allows for the penalty to be
claimed in such cases.
13.5.3.5 Penalty clause excludes claims for damages
A creditor cannot claim both a penalty and damages in the usual way, as the penalty is
meant to replace an ordinary action for damages. Similarly, the creditor cannot claim
damages instead of the penalty unless the contract explicitly reserves the right to do so.
This rule holds, even if the actual loss suffered due to the breach is greater than the penalty
amount.
13.5.3.6 Penalties in respect of defects or delay
If a breach involves defective or late performance and the creditor accepts it, they cannot
claim a penalty unless the contract specifically allows it. However, if the creditor justifiably
rejects the performance (with or without canceling the contract), they are entitled to any
stipulated penalty, though it may be subject to reduction by the court.
Breach, Remedies, Transfer and Termination
CHAPTER 14 [LEARNING UNIT 5]: CESSION
14.1 Introduction
Chapter 1 distinguishes between obligationary agreements (which create obligations, like
contracts) and transfer agreements (which transfer rights, like cession).
A contract creates reciprocal personal rights and duties between parties (e.g., A and B).
These rights are part of their estates and can be valuable. If A sells her right against B to a
third party, C, the sale itself is a contract (an obligationary agreement), not a transfer of the
right.
To transfer the right, a separate act—cession—is required. Cession is the transfer of a
personal (incorporeal) right by agreement, without physical delivery, and is similar to
traditio (used for tangible items).
In cession, A (the cedent) transfers her right against B (the debtor) to C (the cessionary). C
becomes the new creditor, replacing A. Cession has both obligationary effects (changing
the creditor in the relationship) and proprietary effects (moving an asset from A’s estate to
C’s).
14.2 Nature of Cession
A person’s estate consists of all their assets and liabilities, which includes both real
rights (e.g., ownership) and personal rights (e.g., claims to performance under
obligations). Personal rights can arise from contract, delict, unjustified enrichment, or
other sources, and may be more valuable than real rights (e.g., company shares, pension
rights).
Transfer of personal rights can happen:
o Automatically by law (e.g., death, insolvency, marriage in community of property)
to executors, trustees, or spouses.
o Voluntarily through cession, which is an agreement between the cedent (original
right-holder) and cessionary (new right-holder) to transfer a personal right.
Cession is similar to traditio (transfer of physical property) in that it has a mental element
(intention to transfer and acquire) but differs as it lacks a physical element, because the
right is incorporeal. The transfer happens by agreement alone.
The Law of Cession overlaps with:
o Property law, as it deals with transfer of assets (incorporeal personal rights vs.
corporeal real rights).
o Obligations law, since cession changes the creditor, not the obligation itself. The
debtor’s consent isn’t needed, but protections exist to prevent prejudice.
Cession must be distinguished from:
o Delegation: transfer of duties, requiring consent from the debtor, creditor, and
substitute.
o Assignment: substitution of both rights and duties in a contract (e.g., lease),
requiring consent from all involved. Assignment includes both cession and
delegation and is a form of novation (replacing an old obligation with a new one).
The contract to cede (obligationary agreement) must be distinguished from the act of
cession (transfer agreement). The contract creates the duty to cede, while the act of
cession fulfills that duty. Though often combined in one document (a deed of cession), they
remain distinct legal acts.
Example:
On 1 Jan, X agrees to sell to Y his claim against Z for R5,000, with Y paying R3,000 on 1 Feb.
o The 1 Jan agreement is the contract (causa) creating the obligation to cede.
o The cession occurs on 1 Feb when the right is transferred.
o If X fails to cede on time, it is a breach of contract (mora debitoris).
14.3 Subject matter of Cession
Only personal rights (claims) can be transferred by cession. Other rights require different
methods:
o Real rights in corporeal property: transferred by delivery (movables) or
registration (immovables).
o Immaterial property rights (e.g., copyright, patents): transferred by assignment, as
prescribed by statute.
Though cession documents often use broad phrases like "right, title, and interest" or
"cession of book debts," what is actually being transferred is the creditor’s personal right
against the debtor—not the debt itself or any broader title.
For a cession to be valid, there must be certainty about the specific personal right being
transferred. However, the value or extent of that right does not need to be known at the
time.
Example: In a short-term insurance policy, the right to be indemnified exists even before
any actual damage occurs—though its extent only becomes clear later.
14.4 The requirements for a valid cession
For a cession to be legally effective, the following requirements must be met:
o
o
o
o
o
o
The cedent must be entitled to transfer the personal right.
The personal right must be capable of being ceded.
There must be a transfer agreement between the cedent and cessionary.
Any necessary formalities must be complied with.
The cession must be legal.
The cession must not prejudice the debtor.
While a valid cause (causa) is not strictly required for a valid cession, its absence may
lead to a claim for unjustified enrichment.
14.4.1 A valid causa?
Every cession (like any asset transfer) typically has an underlying causa (reason), such as a
contract (e.g., sale or donation), a will, or a court judgment. This causa explains why the
transfer is happening.
An important legal issue arises when the underlying causa is invalid (e.g., due to mistake
or lack of formalities). In such cases:
o South African law follows the abstract system, meaning the validity of the transfer
(of property or a personal right) is not affected by the invalidity of the causa.
o So, the cession remains valid, even if the causa is invalid.
o However, because the right has transferred sine causa (without valid reason), the
original holder (cedent) may be able to claim it back through an unjustified
enrichment action.
Thus, while a valid causa is not required for a valid transfer, it is required for the cession
to have permanent legal effect.
14.4.2 The cedent must be entitled to dispose of the personal right
The rule nemo plus iuris ad alium transferre potest quam ipse haberet means that no
one can transfer more rights than they possess. This principle applies to all rights,
including personal rights. Therefore, for a cession to be valid, the cedent must actually
hold the personal right being transferred.
14.4.3 The personal right must be capable of cession
Subject to a number of exceptions that are discussed below, the General Rule is that all
personal rights are freely cedable.
14.4.3.1 Contingent Rights
A personal right does not have to be immediately enforceable to be ceded. The
following types of rights are still capable of cession:
o Rights subject to a time clause (dies) – enforceable only at a future date that is
certain to arrive (e.g., a specific date or event like a person's death).
o Contingent rights – dependent on a suspensive condition, and might never
become enforceable (e.g., a fideicommissary heir’s right, which depends on
surviving the fiduciary).
o Rights subject to resolutive conditions or time clauses – which may end under
certain conditions.
In all these cases, the right can still be ceded even if it is not yet, or may never be,
enforceable.
14.4.3.2 Future Rights
A future right (or spes) is merely a hope or expectation that a right will come into
existence (e.g., a shopkeeper’s potential future claims against customers). This is different
from a right subject to a suspensive condition or time clause, which already exists but is
not yet enforceable.
There is debate over whether future rights can be ceded:
o Legally, it seems illogical to transfer something that does not yet exist.
o Practically, businesses often cede existing and future book debts as security for
loans.
Courts have sometimes allowed cession of a spes, but they may not have properly
distinguished it from contingent rights. The preferred view is that while parties may agree
to transfer future rights, the actual transfer only takes effect when the right comes into
existence.
14.4.3.3 Rights too personal to be ceded
At common law, some rights or claims are considered so personal to the holder that they
cannot be ceded. Examples of such claims include:
o Claims for maintenance
o Claims for pain and suffering
o Claims under the actio iniuriarum (action for injury to dignity)
These types of claims are non-cedable due to their personal nature.
14.4.3.4 Delectus Personae
When the identity of the creditor is important to the debtor, the right cannot be ceded
without the debtor's consent. This is known as delectus personae (choice of person),
where the debtor would be materially affected by the substitution of a new creditor. For
example:
o In an employment contract, the identity of the employer is usually important to
the employee due to personal supervision and control, so the employer cannot
cede the right to the employee’s services without consent.
o However, the employee may cede their right to wages to a third party, as the
employer's obligation to pay wages is not materially affected by the identity of the
recipient.
Similarly, a bank's duty of confidentiality does not prevent it from ceding its right to
repayment from a customer to a third party.
14.4.3.5 Pactum de non cedendo
A pactum de non cedendo is a contract clause that limits or requires consent for the
cession of rights. Such clauses are valid if the debtor has a legitimate reason to restrict the
cession, like knowing the creditor's identity. In the case Paiges v Van Ryn Gold Mines Estate
Ltd., the court upheld a clause preventing cession of wages without the employer's
consent, as it served both the employer's and employee's interests.
If a contract creates a freely transferable right, a restriction on cession can make any
subsequent cession invalid. However, whether a restriction on an existing right is
enforceable depends on the specifics of the contract.
14.4.4 Transfer Agreement
Cession is a bilateral act where a right is transferred through mutual agreement. Both
parties need to have a clear intention to transfer and accept the right: the cedent must
want to transfer the right (animus transferendi), and the cessionary must want to receive it
(animus acquirendi). This mutual intention creates the transfer agreement, separate from
the underlying causa that justifies the transfer.
The agreement can be express or implied and must be genuine, not simulated. Both parties
must agree on the type of transaction (cession), the rights being transferred, and the
parties involved. If there’s any uncertainty or lack of consensus, the agreement is invalid.
The rights must be clearly described or determinable for the cession to be valid.
14.4.5 Formalities
No formalities are generally required for cession; it can be done in any manner the parties
agree on. A formal deed of cession is not necessary, and the debtor’s consent or
notification is not required. However, parties can agree on specific formalities, like
requiring the cession to be in writing or obtaining the debtor’s consent.
In some cases, laws may impose formalities, such as written consent for rural tenement
leases or electronic registers for dematerialised shares under the Financial Markets Act.
14.4.6 Legality
A cession is unlawful if it violates statutory law, common law, public policy, or moral
standards. This can apply to the cession itself, its execution, or its underlying purpose.
Examples of unlawful cessions include:
o
o
o
o
The cession of a pension right, which is prohibited by statute.
A cession made to defraud creditors (common law).
A cession to an enemy alien during wartime.
Cessions with immoral or public policy considerations, like in Nedcor Bank Ltd v
Hyperlec Electrical & Mechanical Supplies CC, where cessions made to enable a
counterclaim against a bank were deemed void due to questionable motives and
public policy concerns.
The legality of the cession is judged separately from the legality of the underlying cause.
14.4.7 Cession should not prejudice the debtor
Cession does not require the debtor's consent or knowledge, but the debtor is protected
from being unfairly burdened by the cession. This protection is seen in two key areas:
1. Prohibition on splitting claims – ensuring that claims are not divided in ways that
complicate or harm the debtor's position.
2. Prevention of mala fide cessions – such as cessions intended to deprive the
debtor of procedural advantages, like suing in reconvention.
The Law of Cession overall reflects concern for protecting the debtor's interests, such as in
rules about delectus personae (choice of person) and pactum de non cedendo
(restriction on cession), as well as in defenses the debtor may raise against the cessionary
or payments made in good faith to the cedent.
14.4.7.1 Splitting of claims
The General Rule is that a claim can only be ceded in its entirety, not split among multiple
cessionaries, to avoid prejudicing the debtor. If claims are split, the debtor could face
multiple lawsuits and additional costs. For example, if A cedes portions of a claim to C, D,
and E, the debtor (B) might have to defend multiple actions.
However, the rule against splitting claims does not apply if:
o The debtor consents to the splitting.
o The splitting is allowed by statute.
o There is no actual splitting of the claim (e.g., when multiple distinct claims arise
from a single set of facts or document).
Additionally, ceding a single claim to multiple co-creditors or joint and several creditors
does not violate this rule. These co-creditors must act together, so there is no prejudice to
the debtor.
14.4.7.2 Mala Fide Cession
If a claim is ceded in bad faith with the intent to deprive the debtor of the opportunity to
raise a counterclaim, the court will protect the debtor. In such cases, the court may delay
judgment on the cessionarys’ claim until the debtor's counterclaim against the cedent has
been decided.
This situation arises when the debtor would normally be able to raise a counterclaim
against the cedent if the cedent themselves brought the action. If both claims (the main
claim and the counterclaim) were successful, they could offset each other. To prevent
prejudice to the debtor, the court stays the cessionarys’ action until judgment is made on
the counterclaim.
For example, if X cedes a claim to Z in bad faith to prevent Y from raising a counterclaim,
the court will delay Z's claim until Y's counterclaim against X is resolved.
14.5 The consequences of Cession
The effect of an ordinary, ‘out-and-out’ cession is to transfer a personal right from the
estate of the cedent to that of the cessionary. A number of consequences flow from this
fact of transfer.
14.5.1 Cedent is divested of right
The first consequence of cession is that the cedent loses the ceded right, meaning it is no
longer part of their estate. As a result, the ceded right cannot be attached by the cedent's
creditors, and if the cedent becomes insolvent, the right will not be included in the
insolvent estate—unless the cession is later reversed on some legal grounds.
14.5.2 Rights vests in the cessionary
The next consequence of cession is that the right transfers to the cessionary, becoming an
asset in their estate. As a result, the right can be attached by the cessionarys’ creditors,
and if the cessionary becomes insolvent, it will be included in their insolvent estate.
14.5.3 Cessionary is substitute creditor
Through cession, the cessionary replaces the cedent as the new creditor. They are the sole
party entitled to enforce the right, transfer it, or release the debtor from liability. The
cessionary alone can agree to novation, cancellation, or delegation of the debt. The debtor
may also invoke set-off if the cessionary owes a debt to the debtor.
14.5.4 Nemo plus iuris alium transferre potest quam ipse haberet
The rule nemo plus iuris ad alium transferre potest quam ipse haberet (no one can transfer
more rights than they have) has key implications for cession:
o Double cession: The cedent cannot transfer the same right twice; any attempt at
double cession is ineffective.
o Transfer of rights with defects: The cessionary inherits the right with all its benefits
and disadvantages. They cannot be in a better position than the cedent.
o Defences available to the debtor: The debtor can raise any defences against the
cessionary that they could have against the cedent (e.g., unfulfilled conditions,
prescription, fraud, etc.). Set-off can also be invoked if applicable at the time of the
cession.
o No counterclaims against the cessionary: A counterclaim against the cedent
cannot be brought against the cessionary. Cession only transfers rights, not duties.
For example, if the contract is cancelled due to breach (e.g., warranty against
eviction), the debtor can only claim against the cedent, not the cessionary.
14.5.5 Performance by the debtor must be to the cessionary
The General Rule is that once cession occurs, performance must be made to the
cessionary, as they are the new creditor. However, to protect the debtor, if the debtor is
unaware of the cession and in good faith performs to the cedent, the debt is discharged.
This is fair to the debtor, as they should not be penalized for acting in good faith.
This departure from principle can be justified in two ways:
1. Estoppel: If the cessionary fails to notify the debtor, the debtor is misled into
thinking they still owe the cedent. The debtor relies on this misconception, and the
cessionary is estopped from denying the validity of the payment, meaning they
cannot claim the debt again from the debtor.
2. Good faith: If the debtor acts in good faith, even if aware of the cession, they may
still be released from liability. This approach focuses on the debtor's good faith in
making the payment to the cedent.
The Momentum Group Ltd v Van Staden case exemplifies the good faith approach, where
the debtor was not acting in good faith when performing to the cedent despite knowledge
of the cession, which led to a decision against them. However, there is no clear consensus
on which approach is preferable.
14.6 Security cession (cession in securitatem debiti)
Cession can take two forms: ordinary (absolute) cession, where the right is fully
transferred to the cessionary, and security cession, where the right is transferred
temporarily to secure a debt owed by the cedent to the cessionary. In a security cession,
the cedent regains full ownership of the right once the debt is repaid. This form is
commonly used in modern credit arrangements, such as when borrowers cede claims
against their own debtors (e.g., book debts or life insurance policies) to secure loans.
Historically, there have been two interpretations of security cession:
1. Outright transfer with an agreement to return the right after the debt is paid.
2. A form of Pledge, where the cedent retains a certain control over the right until the
debt is settled.
In recent years, courts have favored the second interpretation, treating a security cession
as a form of pledge. However, there is ongoing debate about whether parties can freely
choose the alternative form, assuming they clearly express their intentions. Despite the
court's preference for the pledge construction, it is believed that parties retain the freedom
to define their security cession, provided they make their intentions clear.
14.6.1 Fiduciary Security Cession (out-and-out cession)
A fiduciary security cession involves the complete transfer of a right to the cessionary as
security for a debt, with the agreement that the cedent can reclaim the right once the debt
is repaid. It is similar to the fiducia cum creditore from Roman law.
Key points:
o Full Transfer: The right passes to the cessionary, who can enforce it if the cedent
defaults.
o Reversion: If the debt is repaid, the right is returned to the cedent.
o Surplus: Any extra proceeds go back to the cedent.
o Non-Transferability: The cessionary typically cannot transfer the right.
o Risk: If the cessionary becomes insolvent, the ceded right falls into their estate, and
the cedent may only have a claim for its value.
This type of cession is simple but risky if the cessionary faces insolvency.
14.6.2 Pledge
A security cession is typically treated as a pledge unless specified otherwise. In this
arrangement:
o
o
o
o
The cedent retains ownership (bare dominium) but the cessionary controls the right.
The cedent continues to collect payments until the debt is settled.
Once the debt is paid, the right automatically reverts to the cedent.
If the cessionary goes insolvent, the cedent’s rights are protected; if the cedent goes
insolvent, the cessionary has priority in the proceeds.
This approach protects the cedent more, especially in insolvency cases.
.
Breach, Remedies, Transfer and Termination
CHAPTER 15[LEARNING UNIT 5]: Termination of Obligations
15.1 Introduction
Obligations can be terminated in several ways:
1. By performance (when the obligation is fulfilled),
2. By agreement between the parties,
3. By operation of law, or
4. By a unilateral act of the aggrieved party (in voidable contracts or serious
breaches).
Since cancellation and voidable contracts were already covered, this chapter focuses on
the other forms of termination.
15.2 Termination by performance
An obligation ends when the debtor properly performs as agreed. This also ends any
accessory obligations, like a suretyship or pledge. The details of what counts as proper
performance are discussed further below.
15.2.1 Required performance
Only full and proper performance ends a contract. Creditors can reject defective
performance but may accept a substitute (datio in solutum).
Cash is required for money debts; cheques are no longer accepted in South Africa. EFTs
are common, but paying the wrong person doesn't count.
If a trade-in item is worth less than agreed, the seller can demand the shortfall in cash.
15.2.2 Performance by a third party
Usually, only the debtor (or their agent) can perform an obligation. But a third party can also
perform if the creditor isn’t prejudiced, and performance is effective.
If the performance is personal in nature (e.g., acting in a play), the creditor can refuse
third-party performance — this is called delectus personae.
A third party who validly performs may claim reimbursement from the debtor, unless they
acted against the debtor’s wishes.
15.2.3 The person to whom performance must be made
Performance is usually made to the creditor, but the creditor can allow performance to a
third party (like an agent). If the debtor pays that third party, the obligation is discharged.
If the contract allows the debtor to perform to a specific third party (called an adjectus
solutionis causa), the creditor can’t demand personal performance unless there’s a valid
reason — like potential loss.
15.2.4 Place of performance
Performance must occur at the place agreed upon—explicitly or tacitly. If not agreed, the
court considers factors like trade custom, where the contract was made, where goods are
located, and the type of performance. For example, in a bull sale between two farmers,
delivery would usually be at the seller’s farm.
15.2.5 Time of performance
The time for performance can be agreed upon explicitly or implicitly. If not, the creditor can
demand immediate performance, but the debtor must be given a reasonable time to
perform. Usual rules on mora debitoris (delay by the debtor) apply.
15.2.6 Performance by a bilateral act
In South African law, performance usually requires both parties to agree that the obligation
has been fulfilled. For example, delivering a chair under a sale agreement must be
accepted as fulfilling the obligation. This mutual agreement is also important when a
debtor owes multiple debts—payment is allocated first to interest, then capital, to
enforceable before unenforceable debts, and to the most burdensome debt. Similar debts
are paid in order of time or proportionately if incurred simultaneously.
15.3 Termination by agreement
Obligations may terminate also by agreement. However, agreement, in this sense, may take
several different forms. These are discussed below.
15.3.1 Release and Waiver
A Release is an agreement that frees the debtor from an obligation, either fully or partially,
and may require mutual restitution for what has been performed, especially in continuous
contracts like leases. While a total release doesn't require formalities, a partial release
usually does. "Waiver" is sometimes used to refer to a unilateral abandonment of a right,
such as abandoning a suspensive condition. Waiver requires knowledge of the right and a
deliberate abandonment, and a delay in enforcing a right doesn’t automatically equate to
waiver.
15.3.2 Novation
A novation replaces one or more existing obligations with a new one, extinguishing related
accessory obligations like a pledge or suretyship. A debtor may be replaced by a third party
through novation, known as delegation, provided the third party agrees. If the original
obligation is void, the novation is also void, but if the novation is void, the original obligation
remains. Novation can be conditional and may depend on a suspensive or resolutive
condition. A judgment or acknowledgment of debt does not typically novate the original
obligation, though it provides a new cause of action. A party may transfer rights and
obligations to a third party with consent, without requiring a novation.
15.3.3 Compromise
A compromise is an agreement where parties settle a dispute or uncertainty, creating new
obligations and extinguishing old ones. Unlike novation, a compromise doesn't require an
existing valid debt and can be valid even without a prior obligation. A payment marked "in
full and final settlement" may indicate an offer to compromise, which is accepted if the
creditor agrees. If the debtor denies full liability, it could signify a compromise offer. If
unclear, the contra proferentem rule applies, meaning the creditor may pursue the full
amount. If the debtor breaches the compromise, the creditor may only sue on the original
obligation if agreed.
15.3.4 Effluxion of time
If a contract specifies a fixed duration, it automatically terminates at the end of that period.
Under the Consumer Protection Act (CPA), fixed-term consumer agreements must adhere
to prescribed limits, with exceptions for juristic persons. Consumers can cancel such
agreements at any time by giving 20 business days' notice, but they remain liable for
amounts owed up to cancellation. Suppliers may impose a reasonable cancellation
penalty for goods, services, or discounts provided. After the fixed term ends, the agreement
automatically continues month-to-month unless the consumer requests termination or
renewal. Suppliers must notify consumers of the impending expiry and any changes 40-80
days before.
15.3.5 Notice
A contract may allow termination by notice, and if it’s silent on duration, whether it’s
terminable by notice depends on its interpretation. For example, lease contracts without a
set term are assumed to be indefinite and can be terminated with reasonable notice.
However, public policy may limit this, as seen in Malan v City of Cape Town, where a public
housing lease cannot be terminated without good cause due to the constitutional right to
housing. On the other hand, courts may enforce terminations as long as they align with the
contract and public policy, as in Beadica 231 CC v Trustees for the time being of the
Oregon Trust. The CPA allows consumers to cancel fixed-term contracts with 20 business
days' notice and a reasonable cancellation penalty.
15.3.6 By operation of a condition in the contract
A contract with a resolutive condition automatically terminates once the condition is
fulfilled. Similarly, if a contract is subject to a suspensive condition and that condition is
not met within the specified time, the contract will end.
15.4 Termination by operation of law
Termination of obligations may also come about by operation of law. Situations in which
obligations may terminate in this way are the following:
o
o
o
o
o
o
Set-off
Merger
Supervening impossibility of performance
Prescription
Insolvency
Death
15.4.1 Set-off
Set-off occurs when two parties have mutual debts. The smaller debt is extinguished, and
the larger debt is reduced by the smaller amount. For set-off to apply:
o
o
o
o
The debts must be between the same parties and in the same capacity.
The debts must be of the same type.
Both debts must be due and enforceable.
Both debts must be liquidated (easily proven).
Certain claims, like taxes or maintenance, cannot be set off. Set-off operates automatically
if these conditions are met, but the debtor must plead and prove it. It can also be excluded
by agreement.
15.4.2 Merger
Merger occurs when one person becomes both the creditor and debtor of a debt. For
example, if A rents a house from B and then buys the house, A becomes both the lessor and
lessee. As a result, the obligations under the lease are extinguished by merger.
15.4.3 Supervening impossibility of performance
If performance is impossible at the time the contract is made, no obligation arises. If
performance later becomes impossible due to an unforeseeable and unavoidable event,
the obligation is usually extinguished. This is known as supervening impossibility of
performance, and the debtor is excused from performing due to the event being beyond
their control. If the impossibility is not due to such events, the debtor is in breach.
Contracts may include a force majeure clause to address the impact of unforeseeable
events.
15.4.3.1 Requirements for supervening impossibility of performance
For supervening impossibility of performance to terminate a contract, two requirements
must be met:
1. Objective Impossibility: The performance must be impossible for anyone, not just
the debtor. It cannot be merely difficult or expensive. For example, if a seller’s stock
of goods is destroyed but they could still obtain it elsewhere, performance is not
impossible.
2. Unavoidability: The impossibility must result from an event beyond the debtor's
control, such as natural disasters, acts of state, or strikes. If the debtor could have
reasonably foreseen or avoided the event, they may still be held liable.
The event causing impossibility doesn’t need to be unforeseen, but it must be unavoidable
by a reasonable person. For example, even if lightning is a common occurrence, damage
caused by it could still qualify as supervening impossibility if the debtor couldn’t have
reasonably avoided it.
15.4.3.2 Effect of supervening impossibility of performance
Supervening impossibility of performance affects both the main and counter-obligations:
1. Main Obligation: The debtor is excused from performance if it's impossible, unless
they were in default (mora) or agreed to bear the risk of impossibility.
2. Counter-Obligation: The creditor is excused from their performance unless the
impossibility is their fault. In sales, the buyer must still pay if the item is destroyed
unless agreed otherwise.
3. Partial/Temporary Impossibility: For divisible obligations, the debtor is excused
from the impossible part. For indivisible ones, the creditor can accept partial
performance or cancel the contract. If temporary, performance is suspended until
resolved, but the creditor may terminate if it's prolonged.
15.4.4 Prescription
Extinctive prescription refers to the termination of debts due to the passage of time, as
regulated by the Prescription Act. Key points include:
o Debt Definition: A "debt" is an obligation to pay money, deliver goods, or provide
services. Claims for contract rectification or recovery of property (rei vindicatio) are
not considered debts and cannot prescribe.
o Impact of Prescription: When a debt prescribes, the corresponding right to
performance is also extinguished. However, it is unclear whether powers like the
election to cancel a contract for breach can prescribe.
o State Organs: The Prescription Act now applies to claims against state organs, with
a requirement for a notice of intent to sue within six months. Courts can condone
failures to serve this notice.
15.4.4.1 Prescription periods
The Prescription Act sets different prescription periods for various types of debts:
o Judgment debts: 30 years
o Debts from negotiable instruments: 6 years
o Ordinary debts: 3 years
The prescription period is calculated starting from the day the debt becomes due but
excluding the last day of the period. For example, if an ordinary debt is due on 14 May, it will
prescribe at midnight between 13 and 14 May, three years later.
15.4.4.2 Commencement of prescription
Under section 12(1) of the Prescription Act, prescription begins when the debt becomes
due and enforceable. According to section 12(3), a debt is not considered due until the
creditor knows the debtor's identity and the facts giving rise to the debt. The creditor is
deemed to know this information if they could have reasonably discovered it. This means
that for a contractual damages claim, prescription does not begin until the creditor knows
or could have reasonably known about the breach. In some cases, prescription may start
later, once all elements of the cause of action, like potential loss from the breach, become
apparent.
15.4.4.3 Interruption of prescription
Prescription can be interrupted in two ways:
1. Acknowledgement of liability: If the debtor explicitly or implicitly acknowledges
their liability, prescription is interrupted, and it starts running again from the date of
this acknowledgment.
2. Judicial interruption: If the creditor serves legal process to claim the debt,
prescription is interrupted. However, if the creditor does not successfully pursue the
claim to a final judgment, or if the judgment is set aside or abandoned, the
interruption lapses unless the debtor admits liability. In this case, prescription starts
running again from the date the judgment becomes executable or from the date of
acknowledgment of liability, whichever is applicable.
15.4.4.4 Delay of completion of prescription
The Prescription Act allows for delays in the completion of the prescription period under
certain circumstances. These include:
o Minority or mental illness: If the creditor is a minor or mentally ill, prescription is
delayed.
o Superior force: If a force majeure prevents the creditor from interrupting
prescription.
o Absence of debtor: If the debtor is absent from the country.
o Partnership debt: If the debt arises from a partnership relationship.
o Arbitration: If the dispute about the debt is subjected to arbitration.
In these cases, the creditor has one year after the impediment ends to take legal action. If
the impediment ends more than a year before the normal prescription period ends, it
doesn't affect the prescription period.
For example, if a minor creditor (C) has a debt become enforceable on June 1, 2019, but is
only 16 years old, the prescription period would normally end by May 31, 2022. However, if
C turns 18 on May 14, 2021, prescription is extended, and C has until May 13, 2022, to
institute action. If C had turned 15 on May 14, 2019, the prescription period would be
extended further, ending on May 13, 2023.
Additionally, if a debt becomes prescribed before a reciprocal debt in a contract, the first
debt cannot be prescribed until the reciprocal debt is also prescribed.
14.4.4.5 Effect of prescription
Prescription extinguishes the debt and any related obligations, like interest. Under the 1969
Prescription Act, debts are fully extinguished, unlike the previous 1943 Act where debts
could remain as natural obligations for up to 30 years. If a prescribed debt is paid, it can't
be recovered. Prescription must be pleaded by the debtor, and courts can't raise it
automatically. The debtor can waive or extend the prescription period but waiving it before
it starts running is generally against public policy. The Consumer Protection Act considers
clauses that restrict a consumer's right to rely on prescription as unfair.
15.4.5 Insolvency
When a person is insolvent, creditors can apply to have their estate sequestrated,
appointing a trustee to manage the estate for creditors' benefit. A similar process,
liquidation, applies to insolvent companies. The impact of sequestration or liquidation on
contracts depends on the type of contract. Generally, the trustee or liquidator can choose
whether to continue or terminate an executory contract (one with outstanding
performance). If they decide to terminate, they cannot be forced to perform, but this
decision amounts to repudiation, allowing the other party to claim damages against the
estate.
15.4.6 Death
The General Rule is that upon death, a party's contractual rights and duties are transferred
to their estate. The executor of the estate can enforce the deceased's rights, and the other
party can enforce the deceased's duties against the executor. However, for personal
obligations (delectus personae), the contract and its counter-obligation are not transferred
upon death. Additionally, a contract may have an express or implied provision stating that
the death of a party discharges the contract.