South African contract law


South African contract law

South African contract law is "essentially a modernised version of the Roman-Dutch law of contract,"[1] which is itself rooted in Roman law. In the broadest definition, a contract is an agreement entered into by two or more parties with the serious intention of creating a legal obligation. The function of contract law is to provide a legal framework within which persons can transact business and exchange resources, secure in the knowledge that the law will uphold their agreements and, if necessary, enforce them. The law of contract underpins private enterprise in South Africa and regulates it in the interest of fair dealing.

Contents

Nature and basis

A contract in South Africa is classified as an obligationary agreement—it creates enforceable obligations—and ought therefore to be distinguished from absolving agreements (whereby obligations are discharged or extinguished) as well as from real or transfer agreements (whereby rights are transferred).[2]

Requirements

A valid and binding contract in South Africa is one which meets the following requirements:

  • There must be consensus between the contracting parties.
  • The parties must have the capacity to contract.
  • The necessary formalities must be observed.
  • The agreement must be legal.
  • The contractual obligations must be possible of performance.
  • The content of the agreement must be certain.

These are discussed in greater detail below.

Characteristics

A contract has certain characteristic features:

  • It is a juristic act. The law attaches the consequences intended by the parties.
  • It is necessarily bilateral or even multilateral; a contract cannot be unilateral.
  • It entails promises or undertakings, on one or both sides, to make certain performances: that is, to give something (dare), to do something (facere) or to refrain from doing something (non facere). Alternatively, it may be a warranty that a certain state of affairs exists.
  • It usually entails reciprocity, in that one party's performance is promised in exchange for the performance of the other party.

The modern concept of contract is generalised, such that an agreement does not have to be of a specific type before it may be enforced, but contractual parties are required to conduct their relationship in a manner consistent with good faith or bona fides.

Contract and the law of obligations

The law of contract forms part of the law of obligations. An obligation is a legal bond between two or more persons, obliging the one (the debtor) to give, do or refrain from doing something to or for the other (the creditor). The right created by an obligation is personal, a ius in personam, as opposed to a real right. If an obligation is enforceable by action in a court of law, it is a civil obligation, rather than the less common and unenforceable nautral obligation.

Contract and delict

The primary sources of obligations are contract and delict, the latter being wrongful and blameworthy conduct which causes harm to a person. There is a very close similarity between a breach of contract and a delict, in that both are civil wrongs and may give rise to a duty to pay damages as compensation. It is unsurprising, then, that certain conduct may constitute both a breach of contract and a delict (as when, in Van Wyk v Lewis,[3] a surgeon negligently left a cotton swab inside a patient's body), in which case there will be concurrent liability, permitting the plaintiff to sue on either basis.

Contract and enrichment

Another source of obligations is unjustified enrichment, which occurs when there is a shift of wealth from one person's estate to another without good legal grounds or cause. Where a party transfers an asset to another in performance of a contract that is for some reason invalid, the shift of wealth is without good cause (or sine causa), and an enrichment action for the restitution of the asset will lie.

Contract and the law of property

Many commercial transactions involve both the law of obligations and the law of property, and so have both proprietary and obligationary or contractual elements. A contract of sale, for instance, obliges the seller to deliver the thing being sold to the buyer. As such, it is the underlying reason or causa for the subsequent transfer of ownership. It does not, however, effect the transfer, which is accomplished by the real or transfer agreement (the concurring intentions of the parties to give and receive transfer of ownership). If the underlying contract is invalid, ownership will nonetheless pass, because South African law adheres to the abstract rather than the causal system of transfer. The transferor, however, will generally have the option of an enrichment action to recover the property.

Historical development of contract

Roman law

Roman law recognised a number of distinct categories of contract; it had "a law of contracts, rather than of contract."[4] This distinguishes it from the modern practice of regarding any agreement meeting certain general requirements as an enforceable contract. Only for consensual contracts (of sale, lease, partnership and mandate) was mere agreement sufficient in itself to create the contract. The development of consensual contracts was prompted by the commercial needs of the growing Roman state, but Roman law never reached the point of enforcing all serious and deliberate agreements as contracts.[5]

Roman-Dutch law

The Roman-Dutch law of contract recognised the principle that all serious agreements ought to be enforced (pacta sunt servanda).[6] All contracts were said to be consensual and bonae fidei, based simply on agreement and good faith.

Causa and consideration

Lingering views that a iusta causa was also a necessary element of contract gave rise to a celebrated dispute in early South African law.[7] In the late 19th century, under the general influence of English law, and the particular "dominating influence of Lord Henry de Villiers CJ," the courts held that this iusta causa was valuable consideration, a quid pro quo, and necessary for a valid contract.[8] This was met with fierce resistance by northern jurists like John Gilbert Kotzé, and later rejected outright by the Transvaal Supreme Court in Rood v Wallach,[9] De Villiers, however, refused to concede the point, so that the dispute continued until, almost fifty years after its beginning, it was settled in the famous case of Conradie v Rossouw,[10] where the court took the view that a binding contract may be constituted by any serious and deliberate agreement made with the intention of creating a legal obligation. It seems now to be clear that a iusta causa, in whatever form, is not a separate requirement in the South African law of contract.[11]

Basis

Actual subjective agreement

Genuine agreement (or consensus), as the basis for contractual obligations, presupposes an actual meeting of the minds of the parties. Subjective consensus of this nature exists when all the parties involved

  • seriously intend to contract;
  • are of one mind (or ad idem) as to the material aspects of the contract; and
  • are conscious of the fact that their minds have met.[12]

Objective agreement

Where there is a divergence between the true intention and the expressed or perceived intention of the parties, the question of whether or not a legal system will uphold a contract is dependent on its approach to contract: Is it subjective (focused on an actual meeting of minds), or is it apparent or objective (focused on the external appearance of agreement)?[13]

Theories of contract

Will theory

The will theory of contract postulates an extremely subjective approach to contract, whereby consensus is the only basis for contractual liability. The upshot is that, if there is no genuine concurrence of wills, there can be no contract. It is generally agreed, though, that unqualified adherence to this theory would produce results both unfair and economically disastrous.[14]

Declaration theory

The declaration theory, in contrast, stipulates that the only important consideration is the external manifestation of the parties' wills. The true basis of contract, then, is to be found in the concurring declarations of the parties, not in what they actually think or intend.[15] This extremely objective approach has also generally been found to be unacceptable in practice, unless it is qualified.[16][17]

Reliance theory

In terms of the compromise reliance theory, the basis of contract is to be found in a reasonable belief, induced by the conduct of the other party, in the existence of consensus. This protects a party's reasonable expectation of a contract. The reliance theory should be seen as a supplement to the will theory, affording an alternative basis for contract in circumstances where the minds of the parties have not truly met.[18]

South African approach

South African law, with its Roman-Dutch roots, but strongly influenced by English law, has vacillated between a subjective and an objective approach to contract.[19] It is now clear, however, that the subjective will theory is the point of departure; in cases of dissensus, the shortcomings of that theory are corrected by an application of the reliance theory.[20]

Proving the existence of a contract

The onus of proving the existence of a contract rests on the person who alleges that the contract exists.[21]

Cornerstones

Fundamental concepts in the law of contract include the following:

  • freedom of contract;
  • sanctity of contract;
  • good faith; and
  • privity of contract.[22]

There is mounting competition between them. As Dale Hutchison and Chris-James Pretorius note in the preface to their book on the subject, "The law of contract is currently undergoing a process of quite profound change and renewal as it adapts to meet the demands of the new constitutional era in South Africa."[23] Freedom of contract especially is under pressure, as the courts are increasingly willing to use public policy as grounds to strike down unfair contracts.[24] The legislature, too, is willing to intervene in private contracts in the interests of fairness,[25] most notably with the National Credit Act[26] and the Consumer Protection Act.[27] The latter prohibits certain terms or conditions outright, with the result that they are void to the extent of non-compliance. Where terms are not prohibited outright, they are subject to a requirement of fairness and reasonableness.

All law, including the common law of contract, is subject to constitutional control. The Constitution therefore exerts a strong if indirect influence on the law of contract: "The principles of administrative justice frame the contractual relationship, it has been said, and the Constitution requires that all administrative action must be lawful, reasonable and procedurally fair."[28][29][30] To what extent the Constitution can be invoked directly to challenge the validity of a contractual provision between private parties is a contentious question. The Constitutional Court appears to prefer an indirect application of the Constitution between private parties: an approach which tests the validity of a private contractual provision against the requirements of public policy, but which also recognises that public policy is now determined with reference to the fundamental values embodied in the Constitubon, and in particular in the Bill of Rights. The courts have shown a willingness to intervene if a party exercises a contractual power in a manner that fails to respect the constitutional rights of another party, and may even, in appropriate circumstances, be willing to compel one party to contract with another on constitutional grounds.

Formation

Offer and acceptance

The rules of offer and acceptance constitute a useful, but not essential, analytical tool in understanding the formation of contracts. An offer is a statement of intent in which the offeror expresses (to the person to whom the offer is conveyed) the performance and the terms to which he is prepared to bind himself. Being a unilateral declaration, an offer does not in itself give rise to a binding obligation. For an offer to be valid, it must be

  • definite;
  • complete;
  • clear and certain; and
  • compliant with the requirements of the Consumer Protection Act, which among other things
    • prohibits negative option billing and bait marketing;
    • provides for a cooling-off period for certain contracts; and
    • regulates catalogue marketing.

Although an offer is usually directed at a definite person or persons, it may also be directed at undefined persons. An advertisement does not generally constitute an offer; it qualifies merely as an invitation to do business, although a promise of reward is a form of advertisement that does constitute an offer. The status in this regard of proposals and tenders is contingent on the intention of the parties, which is in turn determined by the circumstances of each individual case.

At a simple auction, not subject to conditions, the bidder is construed as making the offer. At an auction with reserve, the potential purchaser is construed as making the offer; at an auction without reserve, the auctioneer is construed as making the offer. An auction subject to conditions is construed as two potential contracts: The first binds the parties to the auction conditions, while the second constitutes the substantive contract of sale.

An offer will lapse

  • if the offeree rejects the offer;
  • if the offeror revokes the offer;
  • if either party dies;
  • if the period prescribed by the offeror expires; or, in the absence of a prescribed period,
  • if a reasonable amount of time has elapsed.

An acceptance is an expression of intent by the offeree, signifying his agreement to the offer. For an acceptance to be valid, it must be:

  • unconditional;
  • unequivocal;
  • consciously accepted by the person to whom it was addressed; and
  • compliant with any formalities set by law or the offeror.

When parties contract at a distance, questions arise as to when and where acceptance takes place. The general rule in South African law follows the information theory, which requires actual and conscious agreement between the contracting parties, such that agreement is established only when the offeror knows about the offeree's acceptance. The place or venue of the formation of the contract is generally where the acceptance is brought to the offeror's notice.

Exceptions to the information theory include cases where there has been an express or tacit waiver of the right to notification. Another exeception is the postal contract, which is governed by the expedition theory, according to which the contract comes into being as soon as the offeree has posted the letter of acceptance. Contracts concluded by telephone are governed by the information theory, but contracts entered into by means of email or through other means of electronic communication are governed by the Electronic Communications and Transactions Act.[31] Parties involved in negotiating a contract may generally terminate the process as they wish.

A pactum de contrahendo is a contract aimed at concluding another contract. Examples include the option contract (in terms of which the grantor's right to revoke his offer is restricted) and the contract of preference (whereby the grantor gives a preferential right to conclude a specific contract should he decide to conclude this contract). An option contract constitutes two offers: a substantive offer and an undertaking or option to keep the offer open. If the option holder accepts the first offer by exercising the option, the main contract is created.

An option contract is irrevocable. (Breach invokes remedies such as an interdict to enforce the contract and damages to place the option holder in the position that he would have occupied had the option been honoured.) It is terminated through

  • the effluxion of time (prescribed or reasonable);
  • the death of the grantor or grantee;
  • the rejection of the offer by the grantee; or
  • the lapse of the right by any other means in law.

Options may be ceded if such is the grantor's intention. The cession of an option need not be in writing; it may be made orally and without formalities—unless the substantive contract is required comply, for instance, with the prerequisite that a sale of immovable property be in writing.[32] Because the exercise of an option to purchase immovable property is usually by acceptance of the substantive offer, both the option and the substantive offer must be in writing.

A right of pre-emption is a type of right of preference. It is given by a prospective seller to a prospective purchaser to give the purchaser preference if the prospective seller should decide to sell. A right of pre-emption must comply with all the requirements for contracts in general. The capacity of the grantor of a right of pre-emption to alienate the thing in question is restricted. If the grantor breaches his undertaking to offer the thing to the grantee, the grantee's remedy is an interdict preventing alienation to a third party. It is uncertain, though, whether a claim by the grantee for specific performance would be successful.

Mistake

Whereas consensus or agreement between the parties is usually regarded as the primary basis of contractual liability (will theory), mistake or error in contract refers to a situation in which the contracting party acts under an misapprehension, causing dissensus or disagreement between the parties. The courts tend to categorise a mistake as one of unilateral, mutual or common:

  • Unilateral mistake occurs where only one of the parties is mistaken, while the other party is aware of the mistake.
  • Mutual mistake refers to a situation in which both parties are mistaken about each other's intention and are thus at cross-purposes.
  • Common mistake differs fundamentally from unilateral or mutual mistake in that it does not lead to dissensus but nonetheless results in a contract's being void on the basis of an incorrect underlying supposition.

A mistake must have influenced a party's decision to conclude a contract in order to be relevant. A crucial distinction in the classification of mistake is between material and non-material mistakes:

  • A material mistake is an error that vitiates or negates actual consensus between the parties and, to this end, must relate to or exclude an element of consensus.
  • A non-material mistake does not exclude actual agreement between the parties because it does not relate to an element of consensus.

In order to reach consensus ad idem, the parties must

  1. have a serious intention to contract;
  2. be in agreement as to the material aspects of the contract; and
  3. be conscious of their agreement.

If the parties are not in agreement about one or more of these elements, there is a material mistake.

Mistakes have historically been categorised according to type. The materiality of a mistake has been determined on the basis of the type of mistake in question:

  • An error in corpore is a mistake concerning the contract's subject matter or object of performance, and is regarded as material.
  • An error in negotlo is a mistake regarding the nature of the contract and is regarded as material.
  • An error in persona is a mistake regarding the identity of the other party to the contract. The courts only regard this as a material mistake if the identity of a party is of vital importance to the mistaken party.
  • An error in substantia is a mistake regarding an attribute or characteristic of the contract's subject matter, and is generally not regarded as material.
  • Mistake as to the motive for entering into a contract is not regarded as material.
  • An error iuris is a mistake of law and is not regarded as material if it relates to motive.

A denial of contractual liability in all instances where the parties are not in agreement could result in undue hardship for a party who has incurred expense in reasonable reliance on the existence of a contract, and would, furthermore, greatly affect the general reliability of contractual commitments. The courts have alternated between qualifying the subjective and objective bases of contract in order to solve this problem:

  • The subjective approach, as encapsulated in the will theory, has been qualified by the doctrine of estoppel and its close relative, the doctrine of quasi-mutual assent or direct reliance theory.
  • The declaration theory represents the objective approach as corrected by the iustus error doctrine, which is usually regarded as an indirect application of the reliance theory.

In the case of estoppel, a party (the estoppel raiser) who relies reasonably on a misrepresentation by the other party (the estoppel denier), and acts thereon to his own detriment, may hold the estoppel denier to his misrepresentation; that means, the estoppel raiser may prevent the estoppel denier from relying on the true state of affairs. A successful plea of estoppel has the effect that the misrepresented facts are upheld as if they were correct. A fictional contract, in other words, will be recognised.

The reliance theory requires a reasonable belief on the part of one party (the contract asserter), induced by the other party (the contract denier), that the latter had assented to the contract in question. This theory is similar to estoppel, but has the advantage of giving rise to an actual contract. The declaration theory, on the other hand, grounds contractual liability purely on concurring and objective declarations of will. Inner will or actual intention is irrelevant.

On an application of the iustus error approach, where there is an ostensible agreement between the parties, the contract denier bears the onus of proving that his mistake is both material and reasonable in order to be absolved from liability in terms of the apparent contract:

  • A mistake is reasonable if it is caused by a positive misrepresentation on the part of the contract asserter.
  • A misrepresentation by omission will only give rise to a reasonable mistake if a party has remained silent where in law he ought to have spoken out to remove the other party's misunderstanding.
  • There is some authority to the effect that a mistake is excusable if the contract denier is not to blame for the mistake, in that he behaved as a reasonable person in the circumstances would have done, and if he acted without negligence.
  • An error is reasonable where the contract denier did not cause a reasonable belief in the contract asserter that he had assented to the agreement in question.

The courts, as noted earlier, have reconciled the subjective and objective approaches by regarding the iustus error approach as an indirect application of the reliance theory. The reliance theory, then, is effectively the common denominator between the will and declaration theories. It moderates the strict application of each theory either directly (as with the doctrine of quasi-mutual assent in the case of the will theory), or indirectly (as with the iustus error doctrine in the case of the declaration theory).

A common mistake differs from a unilateral or a mutual mistake in that it does not lead to dissensus, but nonetheless results in a contract's being void: Both parties make the same mistake, with the important proviso that the mistake does not relate to the intention of either party; in fact, the parties completely agree, but are both mistaken about some underlying and fundamental fact relating to the past or present. For a common error to have an effect on a contract, it must qualify as a term of the contract, either expressly or tacitly, by implication.

A document that incorrectly records the contract between two parties may be rectified to conform to the common intention. In such a case, the parties are in agreement; what is rectified is not the contract itself as juristic act, but rather the document in question, because it does not reflect what the parties intended to be the content of their juristic act.

Improperly-obtained consensus

Where a person enters into a contract on the strength of a misrepresentation made to him, or as a result of duress or undue influence by the other party, the agreement is nevertheless valid because there is no dissensus. Since the consensus was improperly obtained, however, the contract is voidable at the instance of the innocent party. The remedy used to set aside a voidable contract is rescission coupled with restitution (known as restitutio in integrum), and is available as both an action and a defence. Of course, the innocent party may also elect to uphold the contract.

The conduct of the party who induces a contract by improper means frequently constitutes a delict. In such a case, the innocent party may recover damages in respect of any financial loss suffered as a result of the delict, irrespective of whether he elects to affirm or rescind the contract. Despite the contractual context, the damages are delictual in character and are assessed according to the party's negative interest.

South African law recognises the following grounds for setting aside a contract:

It seems likely, but is not yet certain, that further grounds will be recognised in the future, in circumstances where a party's consent to a contract has been improperly obtained.

A misrepresentation is a false statement of past or present fact, not law or opinion, made by one party to another, before or at the time of the contract, concerning some matter or circumstance relating to it. Misrepresentations are classified as being fraudulent, negligent or innocent. Misrepresentations must be distinguished from

  • warranties or contractual terms;
  • opinions, predictions and statements of law;
  • puffery (general laudation or simplex commendatio); and
  • dicta et promissa or material statements which are made by the seller to the buyer during negotiations, bear on the quality of the thing sold, but go beyond puffery, and give rise to the aedilitian remedies (the actio redhibitoria and the actio quanti minoris) if proved to be unfounded.

Misrepresentation and mistake are distinct legal concepts in the law of contract; they also give rise to distinct remedies. Mistake presupposes an absence of consensus and renders the contract void ab initio, whereas a contract induced by a misrepresentation is valid but voidable.

Irrespective of whether the misrepresentation was made fraudulently, negligently or innocently, a party is entitled to restitutio in integrum if the misrepresentation

  • was made by the other party;
  • was made with the intention of inducing a contract;
  • in fact induced the contract; and
  • was material.

There are two recognised types of contract-inducing fraud, namely dolus dans locum in contractui and dolus incidens in contractum. If, but for the fraud, the contract would not have been concluded at all, it is dolus dans; if there would still have been a contract, but on different terms, it is dolus incidens. Although this point has not yet been settled, dolus incidens probably gives a right only to damages, not to rescission of the contract; this is likely also to apply to an "incidental" misrepresentation made without fraud.

Whether the contract is set aside or upheld, the representee may claim damages for any financial loss that he has suffered as a result of the misrepresentation. It makes a difference, though, whether the misrepresentation was made fraudulently, negligently or innocently. Since Ancient Roman times, it has been recognised that fraud is a delict, and that fraudulent misrepresentation accordingly gives rise to a claim for delictual damages. Only very recently was it decided that the same applies to a negligent misrepresentation. These damages, being delictual in character, are measured according to the plaintiff's negative interest and include compensation for consequential losses.

In the case of an innocent misrepresentation, there can be no claim for delictual damages, since the misrepresentation was made without fault; nor a claim for contractual damages, since there is no breach of contract—unless, that is, the representation was warranted to be true. Where the innocent misrepresentation amounts to a dictum et promissum, however, the purchaser may claim a reduction of the price under the actio quanti minoris: a limited form of relief, because not compensating for consequential losses caused by the misrepresentation.

A misrepresentation may be made by words or conduct or even silence. This last occurs when a party fails to disclose a material fact in circumstances where there is a legal duty to do so. In the past, the law recognised such a duty to speak in only a limited number of exceptional cases—where, for example, there is a special relationship of trust and confidence between the parties, as in the case of partners, or where a statute obliges a person to disclose certain information. Today, however, a general principle is emerging which requires a party to speak when the information in question is within his exclusive knowledge, and is of such a nature that the other party's right to have the information communicated would be mutually recognised by honest persons in the circumstances. A failure to speak in such circumstances will entitle the other party to the same remedies that are available in the case of a positive misrepresentation.

Duress or metus is improper pressure that amounts to intimidation. It involves coercion of the will: A party is forced to choose between entering into a contract and suffering some harm. A party who consents to a contract under such circumstances does so out of fear inspired by an illegitimate threat. The consent is real but improperly obtained. The contract, therefore, is valid, but it may be set aside at the election of the threatened party, provided that certain requirements are met.

There is some uncertainty about what these requirements are. It is established that the threat must be unlawful or contra bonos mores, and must have induced the contract. According to some authorities, the induced party must have a reasonable fear of some imminent or inevitable harm to him- or herself, or to his property or immediate family. In the case of a threat directed at property (duress of goods), the courts have required an unequivocal protest at the time of entry into the transaction. In addition to rescission and restitution, the threatened party may recover damages in delict for any loss caused through entry into the contract.

Undue influence is also a form of improper pressure brought to bear upon a person to induce a contract, but the pressure is more subtle, involving as it does, without any threat of harm, an undermining of the will of the other party. The pressure usually emanates from a close or fiduciary relationship in which one party abuses a superior position to influence the other. To set aside a contract on the ground of undue influence, the party so affected must establish that the other party obtained an influence over him, that this influence weakened his powers of resistance and rendered his will compliant, and that the other party used this influence in an unscrupulous manner to induce an agreement that he would not have concluded with normal freedom of will. (Some authority also requires prejudice, but this is disputed.) Unconscionable exploitation of another's emergency is akin to undue influence: Both have been described as abuse of circumstances, and both render the contract voidable. In suitable cases, delictual damages may also be claimed.

Commercial bribery is now recognised as a further distinct ground for rescinding a contract.

Requirements for contractual validity

Contractual capacity

All persons, whether natural or juristic, have passive legal capacity and can therefore bear rights and duties, but not all have contractual capacity, which enables persons to conclude the contracts by which those rights and duties are conferred. Natural persons can be divided into three groups:

  1. All natural persons, as a general rule, have full contractual capacity.
  2. Persons without any contractual capacity, such as infants, and some mental health care users and intoxicated persons, must be represented by their guardians or administrators.
  3. Persons with limited contractual capacity include minors. They require the consent or assistance of their parents or guardians, or of another person such as the Master of the High Court or a court order for specific transactions. A court may grant restitution to a minor where a contract is detrimental to him. Persons married in community of property must obtain the consent of the other spouse for certain, specified transactions. Trustees must act on behalf of insolvent estates.

Juristic persons, including companies, close corporations, statutory entities and certain voluntary associations, are represented by authorised natural persons. The state may generally enter into contracts just like any other person, but its capacity to bind itself and its freedom to exercise its contractual powers may be limited by principles of public law.

Formalities

As a general rule, no formalities are required for a contract to be valid. (The exceptions to this occur when the law or the parties prescribe such formalities.) South African law does prescribe writing, notarial execution and registration as formalities for certain types of contract. Examples of contracts that depend for their validity on compliance with the formalities of writing and signature are

  • alienations of land (Alienation of Land Act);
  • suretyships (General Law Amendment Act[33]); and
  • executory donations of anything but land (General Law Amendment Act).

Examples of contracts that may only be enforced against third parties if they comply with formalities are

  • antenuptial contracts (which require writing and notarial execution, in terms of the Deeds Registries Act[34]); and
  • long leases of land (which require writing and registration against a title deed, in terms of the Formalities in respect of Leases of Land Act[35]).

Electronic alternatives to writing and signature have been recognised for some contracts. The Electronic Communications and Transactions Act provides that information contained in a data message, and stored in a manner where it is accessible for future use, will substitute for writing; an electronic signature is likewise accepted as a signature. Alienations of land and certain long leases of land are specifically excluded. The Act applies to suretyships and executory donations of anything but land.

Some general features of writing as a prescribed formality can be identified:

  • All the material terms of the contract must be in writing.
  • Terms implied by law (naturalia), as well as tacit terms, need not be in writing.
  • The terms need not all be in one document.
  • Any variation of a material term of the contract has to be in writing to be effective. An extension of time, a cancellation of contract and the revival of a cancelled contract do not amount to variations.
  • The defence of estoppel may not be raised where a party has been misled to believe that there has been an oral variation of the contract.
  • If the formalities are not complied with, the contract is void. The return of a performance in a void contract may be claimed with an enrichment action. An alienation of land is valid from the beginning, if both parties have performed fully.

The legislature is motivated by diverse policy considerations when prescribing formalities:

  • The purpose behind requiring writing and signature in contracts concerning the alienation of land and suretyship is legal certainty regarding the authenticity and content of these contracts. Certainty limits litigation and discourages maipractices.
  • The purpose behind requiring writing and signatures for executory contracts of donation of anything but land is apparently to make sure that the donor has a serious intention to conclude the contract.
  • The purpose behind requiring notarial execution for antenuptial contracts and registration for long leases of land seems to be notice to third parties.

There are diverse consequences for non-compliance with prescribed formalities:

  • Alienations of land and suretyships (and any material variation of these contracts) are invalid.
  • An oral donation is completed and valid when performed.
  • Antenuptial contracts and long leases of land are valid between the parties, but are unenforceable against third parties.

The parties themselves may prescribe formalities regarding the conclusion, variation or cancellation of their contract, as well as the waiver of any right arising from their contract. Where the parties agree that their agreement must be in writing, they may have one of two possible intentions. (The first is presumed if no clear intention is evident.) Either their agreement is reduced to writing merely to facilitate proof of its terms, in which case the contract is binding immediately, or their aeement will acquire legal effect only once it has been reduced to writing and signed by the parties.

A non-variation clause prescribes formalities (usually writing) for any variation of the contract. Such a clause is not against public policy; it is valid and enforceable if it entrenches both itself and the other contractual terms against oral variation. This is known as the Shifren principle. Such a clause is in favour of both parties and therefore does not offend the constitutional principle of equality.

A non-variation clause does sometimes have unacceptable consequences, and its application is limited. It is restrictively interpreted, because it limits the principle of freedom of contract. Cancellation of the contract and certain forms of waiver of rights (waiver of an accrued right arising from a breach of contract, datio in solutum, release of the debtor and a pactum de non petendo) do not amount to variations. A non-variation clause will not be enforced where its enforcement is against public policy or where estoppel can be raised. Neither defence has successfully been raised on the facts in any reported case.

A non-cancellation clause is valid and enforceable and restrictively interpreted, and applies only to consensual cancellations. In order to be effective, therefore, a non-cancellation clause must be coupled with a non-variation clause. A non-waiver clause is also valid and enforceable, but it is restrictively interpreted.

Legality

An underlying principle of the law of contract (pacta sunt servanda or sanctity of contract) is that agreements seriously concluded should be enforced, but agreements that are clearly detrimental to the interests of the community as a whole, whether they are contrary to law or morality (contra bonos mores), or if they run counter to social or economic expedience, will not be enforced. These contracts are illegal on the grounds of public policy. The law regards illegal or unlawful contracts either as void and thus unenforceable, or as valid but unenforceable.

Void

Public policy has no fixed meaning, because it represents the public opinion of a particular community at a particular time. Considerations of public policy are to be found in legislation, the common law, good morals or the public interest. Most of the case law about performance contra bonos mores involves conduct which is immoral or sexually reprehensible. The legislator sometimes expressly or impliedly prohibits the conclusion of certain contracts. Since 1994, public policy in South Africa has been anchored primarily in the values enshrined in the Constitution.

The courts use their power to strike down a contract as contra bonos mores only sparingly and in the clearest of cases. It is required that the general tenor of the contract be contrary to public policy. When the relevant public interests are of a rival or even conflicting nature, the courts must balance the different interests against each other. Sanctity of contract often is given preference. The onus of proving illegality seems to rest on the party who relies on it, but a court will take notice of illegality in certain circumstances of its own accord. It is either the conclusion of a contract or its performance, or else the reason for its conclusion, that is regarded as objectionable and that renders the contract void.

Certain pacta de quota litis are against public policy and void. Unfair or unreasonable contracts can be against public policy and void if a more concrete indication of public interest is involved than mere injustice between the parties. The unfair enforcement of a contract by one of the parties can also be contrary to public policy and void, but the limits of this defence are uncertain.

An illegal contract which is void cannot be enforced—this is called the ex turpi rule—but the illegal part of an otherwise legal contract can be severed from the rest of the contract depending on the probable intention of the parties. If there has been performance on the void contract, in principle restitution should be granted, but the par delictum rule will bar restitution where the parties are equally morally guilty. This rule can be relaxed in order to see justice between the parties, depending on the facts of the case.

Valid but unenforceable

Certain wagers and some contracts in restraint of trade are examples of illegal contracts that are valid but unenforceable. The National Gambling Act[36] has amended the common law with regard to gambling activities, including wagers:

  • Debts arising from licensed gambling activities are valid and fully enforceable in law.
  • Debts arising from unlicensed lawful gambling activities are valid and enforceable if the parties have an independent interest besides the outcome of the wager. If they do not have such an interest, the debts are valid but unenforceable.
  • Debts arising from lawful informal bets are valid, but unenforceable.
  • Debts arising from unlawful gambling activities are almost certainly void, as are debts from gambling activities of minors or persons excluded from participating in gambling.

Public policy requires the balancing of two conflicting public interests with regard to agreements in restraint of trade. On the one hand, contracts freely entered into should be performed (sanctity of contract); on the other, everyone should be free to carry on their profession or business (freedom of trade). A contract in restraint of trade is valid and enforceable unless the party wishing to escape its consequences can prove that the restraint is contrary to the public interest and thus unenforceable. The restraint denier consequently bears the onus of proving that enforcement of the restraint is contrary to policy. An agreement in restraint of trade that is contrary to public policy is not void, but is unenforceable.

A restraint-of-trade clause is contrary to public policy if the consequence of the restraint is unreasonable. In Basson v Chilwan, the court formulated a test for determining whether an agreement in restraint of trade is reasonable:

  1. Is there an interest of the one party that is worthy of protection? Is there a protectable interest, in other words?
  2. If so, is that interest threatened by the conduct of the other party?
  3. If so, does that interest weigh up qualitatively and quantitatively against the interest of the other party to be economically active and productive?
  4. Is there another aspect of public policy (having nothing to do with the relationship between the parties) which requires that the restraint should either be maintained or rejected?

The question of whether a restraint is in conflict with the public interest is to be assessed with regard to the prevailing circumstances at the time enforcement is sought. An agreement in restraint of trade can be partially enforced subject to certain limitations.

Possibility and certainty

Parties cannot create contractual obligations which are impossible to perform. The impossibility of performance must be objective or absolute: that is, for all practical intents and purposes, nobody should be able to render the performance. In the case of initial impossibility, the contractual obligation is void; in the case of supervening impossibility, performance becomes impossible after conclusion of the contract. The obligation will then terminate. Where a party makes performance impossible, however, the obligation does not terminate: Such a party commits breach of contract.

In exceptional cases, a party may be liable despite the impossibility of performance. A party can be held liable for contractual damages if the impossibility was contemplated, or if the party warranted that performance was possible. Where performance is partially impossible, the entire contract may be void; alternatively, depending on the circumstances, there may be a proportional reduction in the counter-performance. A party can be held liable for delictual damages if he wrongfully creates the impression that performance is possible, and the other party suffers a loss. Transfers made in the purported fulfilment of contracts that are invalid due to impossibility can be reclaimed with remedies based on unjustified enrichment.

It is a general requirement for the creation of contractual obligations that their contents must be certain, or capable of being rendered certain. Courts will generally try to interpret a contract as being valid, rather than as being void for uncertainty. In some circumstances, obligations may be void for uncertainty if they are pacta de contrahendo, or because they use vague language or are of indefinite duration. The parties may agree on a mechanism for determining what has to be performed. Where this mechanism takes the form of a power granted to a third party, or possibly even to one of the parties to determine what has to be performed, the courts will (depending on the type of contract) uphold the contract, provided that the power has been exercised reasonably.

An obligation that does not meet the certainty requirement is invalid. Depending on circumstances, though, it may be severable from the rest of the contract. A transfer made in purported fulfilment of an obligation that is invalid for uncertainty can be reclaimed with remedies based on unjustified enrichment.

Content and operation

Parties to contracts

A contract confers rights and duties on the parties to it. Where more than two parties conclude a contract, their involvement in sharing rights and duties must be determined. Simple joint liability or entitlement confers upon each a pro rata share: either in equal or, by agreement, in specific shares. Where the parties have joint and several liability or entitlement, they may be held liable or be entitled to any share of performance, or even the entirety. Where performance is indivisible, be it by nature or by the intentions of the parties, a plurality of parties leads to a collective joint liability or entitlement.

Third parties may become involved in one way or another in the contractual relationship between others:

  • One person, the principal, may authorise another, the agent, to represent him in concluding a contract. Resulting rights and duties are conferred on the principal (not the agent) and on the other party to the contract. The principal in such circumstances may be unidentified or even undisclosed. (This, indeed, is often the rationale for using an agent in the first place.) The agent, however, can only bind a non-existing principal where statute allows this.
  • It is possible to conclude a contract for the benefit of a third party. This is known as a stipulatio alteri. The third party may claim the benefit only once he has accepted it.
  • Contractual rights and duties can be transferred from one of the contracting parties to a third party:
    • through cession;
    • by delegation; or
    • by assignment.
  • There are circumstances in which a person who is not a party to the contract may perform on behalf of a debtor, or in which a debtor may deliver performance to the third party.

Obligations and terms

The subject matter of a contract is contained in the terms of an agreement. These terms define and qualify the obligations to which a contract gives rise.

Obligations

An obligation is a legal bond between two or more persons and comprises both a right and a duty.

Classification

Obligations may be classified in various ways.

  • A moral obligation is not regarded as a legal obligation; it has no legal significance at all. Conversely, a civil obligation is a legal obligation enforceable by a right of action. A natural obligation may not be enforced in a court of law; if, however, a person performs in terms of a natural obligation, he may not later reclaim the performance on the basis that it was not owed. Natural obligations may also be set off against civil obligations.
  • Reciprocal obligations are linked obligations, where one obligation is owed in exchange for another.
  • A simple obligation involves a performance that has been specified exactly by the parties in their agreement. An alternative obligation is one in which the parties have agreed that someone can choose a performance from two or more specified alternatives. A generic obligation is one that allows a party to choose a performance from a specified family of performances. A facultative obligation specifies the performance owed by the debtor, but gives the debtor the right to choose to make a different specified performance.
  • An indivisible performance gives rise to a single obligation. A divisible performance gives rise to more than one obligation. There are as many obligations as there are indivisible performances owed in terms of a contract. A divisible contract is one that can be divided into separate contracts, each having one or more obligations.

Terms

Terms are those stipulations, incorporated into the contract, which the parties have agreed upon and which bind the parties to perform. Not all of them are necessarily in the written contract itself: The terms of a contract comprise both the stipulations that parties include in their contracts and those provisions which are included by operation of law. Contracts do not have to fall into any particular category, but certain traditional types of contract are recognised together with their own particular rules and terms and consequences.

Essentialia, naturalia and incidentalia

According to their mediaeval classification, terms may be classified as essentialia, naturalia or incidentalia:

  • Essentialia are distinctive terms used to identify or classify a contract as one of the specific types of contract recognised by law.
  • Naturalia are terms automatically included, by operation of law, in any contract belonging to one of the classes of specific contracts traditionally recognised in South Africa. Generally, the parties may exclude or vary naturalia by express agreement—that is, in exclusion or exemption clauses, known as "voetstoots clauses"—although the courts will interpret such agreements narrowly.
  • Incidentalia (or accidentalia) are all terms other than the essentialia and naturalia: that is, additional terms agreed upon by the parties which supplement or modify the rights and duties incorporated by law into a particular contract.

Modern classification, as applied by the courts, generally favours the distinction between terms express and implied.

Express terms

Express terms are specifically and explicitly agreed upon by the parties, and are either articulated in an oral contract or written down. They are the most important terms in the contract.

Signed contracts: caveat subscriptor

A person who signs a written contract is ordinarily held bound by its terms in terms of the maxim caveat subscriptor: let the signatory beware.

Standard-form contracts

Express terms in standardised contracts are dealt with differently from express terms negotiated by the parties, in that a party presenting a standardised contract to another for signature is expected to draw his attention to any unexpected terms, failing which the signatory may not be bound.

Unsigned documents

Express terms may also be incorporated into a contract by reference to one or more other documents.

Ticket cases and notices

Express terms contained on tickets and notices that are posted up in public places may also be binding, depending on whether the party denying that he is bound by the terms was aware of their existence or ought reasonably to have been aware of them in the circumstances.

Consumer Protection Act

The Consumer Protection Act provides that customers' attention must be drawn to certain categories of clauses or notices which could be prejudicial. In respect of serious or unexpected risks, customers must indicate their assent by signature or by other positive conduct.

Terms prohibited by law

Certain terms are prohibited by law. Terms contrary to public policy, or that conflict with a statutory prohibition, will not be enforced. Sometimes courts are given the power to modify objectionable terms.

Tacit contracts

Tacit contracts are inferred from the conduct of the parties and are very controversial. Some writers hold that terms expressed by the parties' conduct may be regarded as tacit, whereas others hold that actual agreement is necessary. Tacit contracts also present problems as to their conceptual basis, the question being whether or not they should fall under the banner of express terms at all.

Implied terms

Implied terms are not explicitly agreed upon by the parties but nevertheless form part of the contract. As Corbett AJA noted in Alfred McAlpine & Son v Transvaal Provincial Administration,[37] "In legal parlance the expression 'implied term' is an ambiguous one in that it is often used, without discrimination, to denote two, possibly three, distinct concepts."[38] Terms may be implied, in other words,

  1. by operation of law (ex lege);
  2. by custom or trade usage; and
  3. from the facts surrounding the agreement of the parties (ex consensu).

For present purposes it suffices to focus on the first and the last of these—the second is usually merged into the first—and on the ambiguity between them.

Terms implied ex lege

Terms implied ex lege, or by operation of law, may derive from the common law (as developed by the courts), from trade usage or custom, or from statute. (In the case of the common law, they have already been discussed in the section dealing with naturalia.) Terms implied ex lege may be varied or excluded expressly by the parties.

Tacit terms

A tacit term is a wordless understanding between contracting parties and has the same legal effect as an express term. Courts often deploy the officious bystander test to determine whether a contract contains a tacit term. The court imagines that an impartial bystander had been present at the conclusion of the contract and had asked what would happen in a situation the parties had not expressly foreseen: if the answer is self-evident to the parties, then the term is taken to be incorporated as a tacit term. If the parties are engaged in a particular trade and know that there is a trade usage governing their transaction, they are taken to have tacitly incorporated it into their contract.

Material terms

Terms that are vital to the performance of obligations are called material terms. A breach of a material term entitles the innocent party to cancel the contract.

Conditions

A condition is a term that qualifies a contractual obligation so as to make its operation and consequences dependent on whether an uncertain future event happens or does not happen.

Positive and negative conditions

A positive condition depends on the occurrence of an uncertain future event. A negative condition depends on an uncertain future event not happening.

Suspensive and resolutive conditions

If the parties agree that the performance of obligations under the contract will not be enforceable until a condition is fulfilled, the condition is a suspensive condition. If the parties agree that obligations under a contract should operate in full, but will come to an end if an uncertain future event does or does not happen, they are said to have agreed to a resolutive condition.

Potestative, casual and mixed conditions

Conditions may also be potestative, casual or mixed, depending on whether the operation of the obligation is dependent on the creditor's actions or on events beyond the control of the parties.

Time clauses

A time clause (dies) is a contractual term which makes the existence of an obligation dependent on an event or time that is certain to arise in the future.

Other common contractual terms

Other significant contractual terms include suppositions, modal clauses, exemption clauses and non-variation clauses.

Interpretation

Because many contractual disputes, perhaps the majority, arise out of disagreement concerning the meaning of contractual provisions, interpretation of contracts is an important area.

The intention of the parties

"The primary purpose of the interpretation of a contract," writes Catherine Maxwell, "is to give effect to the intentions of the parties."[39] The primary rule, therefore, is that effect must be given to the parties' common intention: that is, to what both of them intended on entering into the contract. As Innes J put it in Joubert v Enslin,[40] "The golden rule applicable to the interpretation of all contracts is to ascertain and to follow the intention of the parties."[41]

Ordinary meaning

In fact, however, the approach is objective. Probably it is best articulated in Hansen, Schrader & Co. v De Gasperi:[42]

Now, it is not for this Court to speculate as to what the intentions of the parties were when they entered into the contract. That must be gathered from their language, and it is the duty of the Court as far as possible to give to the language used by the parties its ordinary grammatical meaning.[43]

In determining the common intention of the parties, then, the court must consider first the literal and ordinary meaning of the words in their contract.[44][45] The court in Hansen was concerned not with the intention of the parties so much as with whether an intention could clearly be apprehended in the actual document. Hence Innes J continues, in Joubert v Enslin, "If the contract itself, or any evidence admissible under the circumstances, affords a definite indication of the meaning of the contracting parties, then it seems to me that a court should always give effect to that meaning."[46] If the wording speaks with sufficient clarity, it must be taken as expressing the parties' common intention.

"Recourse to authoritative dictionaries is, of course, a permissible and often helpful method available to the Courts to ascertain the ordinary meaning of words," notes Hefer JA in Fundstrust v Van Deventer.[47] "But judicial interpretation cannot be undertaken, as Schreiner JA observed in Jaga v Dönges[48] [...] by 'excessive peering at the language to be interpreted without sufficient attention to the contextual scene'."[49]

Textual context

"It is, in my view, an unrewarding and misleading exercise to seize on one word in a document, determine its more usual or ordinary meaning, and then, having done so, to seek to interpret the document in the light of the meaning so ascribed to that word."[50][51] The next step, accordingly, is to interpret the wording of a contract in the context of other provisions in the document read as a whole: that is, the textual context. This is done to give effect to the contract, rather than to make it ineffectual. The words are to be construed in their extended context: One may point to one of several "ordinary" meanings, or to an unusual or technical meaning.

Broader context

If intra-textual treatment does not clearly yield the intention of the parties, the interpreter must look to the extended context to draw useful inferences from the nature of the contract, its purpose and the background against which it was concluded.

Parol evidence rule

The parol evidence rule, however, places strict limits on the evidence that may be adduced in aid of interpretation. The rule dictates that, where the parties intended their agreement to be fully and finally embodied in writing, evidence to contradict or vary the terms of the writing, or add to or subtract from them, will be inadmissible. Where the parties have decided that a contract should be recorded in writing, their decision will be respected and the resulting document accepted as the sole evidence of the terms of the contract. The document itself discloses the obligations.[52] Union Government v Vianini Ferro-Concrete Pipes[53] is the leading case here:

Now this Court has accepted the rule that when a contract has been reduced to writing, the writing is, in general, regarded as the exclusive memorial of the transaction and in a suit between the parties no evidence to prove its terms may be given save the document of secondary evidence of its contents, nor may the contents of such document be contradicted, altered, added to or varied by parol evidence.[54]

Evidence of earlier negotiations, for example, is usually inadmissible. This aspect of the rule, which is the background to all other rules of interpretation, is known as the integration rule.[55]

Integration rule

"It is clear to me," wrote Corbett JA in Johnston v Leal,[56]

that the aim and effect of this rule is to prevent a party to a contract which has been integrated into a single and complete written memorial from seeking to contradict, add to or modify the writing by reference to extrinsic evidence and in that way to redefine the terms of the contract. The object of the party seeking to adduce such extrinsic evidence is usually to enforce the contract as redefined or, at any rate, to rely upon the contractual force of the additional or varied terms, as established by the extrinsic evidence.[57]

The integretation aspect of the parole evidence rule therefore "defines the limits of the contract."[58] The parties have "integrated" their negotiations into a single document, which should be regarded as the complete and final expression of their will: an "exclusive memorial" of their agreement.[59] The purpose of this rule is to prevent a party from claiming other than what is provided for in the document. In Le Riche v Hamman,[60] for example, Hamman sued Le Riche to transfer Victory Hill, which had been sold to Le Riche in error. Le Riche relied on oral evidence, but the parol evidence rule dictates that the court look first at the ordinary meaning of the contract. This was clear and unambiguous, and did not, in its description of the land, refer to Victory Hill. Hamman was successful.

The parol evidence rule is inapplicable when the question before the court is whether or not the parties intended to draw up an exclusive memorial in the first place,[61] and when it is apparent that a written document was not so intended; indeed, the rule applies only to written contracts, and it only comes into play once everyone is satisfied that a contract actually exists. Furthermore, the rule does not apply if the document in question represents only one part of the contract, or if the contract is partly written and partly oral; it must apply to the contract in its entirety.

The integration rule is only a backstop, however, which comes into operation in absence of some more dominant rule. It does not operate when an aggrieved party alleges fraud, misrepresentation, mistake, undue influence, duress or illegality. Although it does not exclude evidence of a subsequent oral agreement,[62] a non-variation clause may be deployed to that purpose.[63][64] Nor does the rule prevent the leading of evidence to show that the written document was subject to a precedent condition not expressed in the document, provided that the condition is a true condition which suspends the operation of the contract without varying any of its terms.

Interpretation rule

The integration aspect of the parol evidence rule is supplemented by the interpretation rule, "which determines when and to what extent extrinsic evidence may be adduced to explain or affect the meaning of the words contained in a written contract."[65] In other words, it controls the kind of evidence that may be led to establish the meaning of contractual provisions. Irrelevant evidence is inadmissable.[66]

In the quest to exclude irrelevant evidence, the courts have historically drawn a distinction between background circumstances and surrounding circumstances, with the former being admissible and the latter usually not. Coopers & Lybrand v Bryant[67] describes the "correct approach to the application of the 'golden rule' of interpretation after having ascertained the literal meaning of the word or phrase in question."[68] This case should be read with Delmas Milling v Du Plessis,[69] which cites the same three classes of evidence:

  1. The courts must have regard firstly (after determining the literal meaning) to "the context in which the word or phrase is used with its interrelation to the contract as a whole, including the nature and purpose of the contract."[70] If there be difficulty, even "serious difficulty," it should "nevertheless be cleared up by linguistic treatment," if this is possible.[71]
  2. If the problem cannot be sorted out with reference to the language, consideration of background circumstances is permitted. These convey "the genesis and purpose of the contract, i.e. to matters probably present to the minds of the parties when they contracted,"[72] but not the actual negotiations and similar statements.[73] Although "it is commonly said that the Court is entitled to be informed of all such circumstances in all cases,"[74] this does not permit it to arrive at a different interpretation if the meaning is already clear from the words themselves.
  3. Finally, but only "when the language of the document is on the face of it ambiguous,"[75] the courts may consider surrounding circumstances: "what passed between the parties during the negotiations that preceded the conclusion of the agreement."[76][77] These include "previous negotiations and correspondence between the parties, [and] subsequent conduct of the parties showing the sense in which they acted on the document, save direct evidence of their own intentions,"[78] by which is meant actual negotiations between the parties.

Where even the use of surrounding circumstances does not provide "sufficient certainty"[79]—where, that is, there is ambiguity in the narrow sense—and there is still no substantial balance in favour of one meaning over another, then "recourse may be had to what passed between the parties on the subject of the contract."[80] The court may also refer to evidence of the parties' negotations: the way they acted in carrying the contract out. The court should use outside evidence as conservatively as possible, but use it it must if necessary to reach what seems to be sufficient certainty as to the meaning.[81] The court is still not allowed, however, to hear evidence as to what the parties subjectively thought the disputed term meant.

Criticism

The golden rule of interpretation, together with the principles reflected in Delmas, has in recent years endured much criticism.[82][83][84][85] The trend, in recognition of this, has been to erode the influence of the parol evidence rule, admitting rather more kinds of evidence than fewer, although the practice of allowing all evidence has been also been criticised.[86]

No court, yet, has gone so far as to overturn Delmas—judges usually confine their disapproval to obiter dicta—but it remains the case that the rules of interpretation in the South African law of contract are themselves hard to interpret, so that it falls to the particular views of each individual judge.

Too literal

The contention is made that so literalist an approach overlooks the fact that language may be imprecise, with no single meaning. The contention that words are always susceptible to one clear meaning is doubious. If this were the case, there would very rarely be the need to approach the court to interpret them.

Too hierarchical

The hierarchical nature of the exercise has also been criticised. While its rigid procedures may look good on paper, moving progressively, until a solution is found, through all the options available, in practice it is difficult to apply in court; indeed, it is very rarely followed, as it would extend proceedings unnecessarily, and instead the whole exercise is generally integrated, with counsel leading as much evidence as possible.

There is, therefore, a clear disconnect between theory and practice in this area of the law.

Terminologically confusing

Furthermore, it is contended that the distinction between background and surrounding circumstances is imprecisely drawn. It is clear that "background circumstances" are always admissible, whereas "surrounding circumstances" are admissible only when linguistic treatment is unsuccessful. It is unclear, however, what separates them in substance. Background circumstances are "matters probably present to the minds of the parties when they contracted,"[87] while surrounding circumstances have been defined as "what passed between the parties during the negotiations that preceded the conclusion of the agreement."[88]

It has proven difficult in practice to separate "matters probably present to the minds of the parties" from "what passed between the parties during the negotiations," so much so that "no-one knows precisely what the dividing line between the two categories is." The whole procedure, therefore, has been "bedvilled by the haziness,"[89] and the future usefulness of the distinction is questioned.

The strongest judicial attack on Delmas was launched by Harms DP in KPMG v Securefin:

The integration (or parol evidence) rule remains part of our law. However, it is frequently ignored by practitioners and seldom enforced by trial courts [...]. The time has arrived for us to accept that there is no merit in trying to distinguish between "background circumstances" and 'surrounding circumstances". The distinction is artificial and, in addition, both terms are vague and confusing. Consequently, everything tends to be admitted. The terms "context" or "factual matrix" ought to suffice.[90]

This obiter dictum has been read as effectively heralding a new era in the interpretation of contracts in South Africa, suggesting that the Supreme Court of Appeal will abandon the distinction "as soon as it is presented with an opportunity to do so.[91]

Circumventing the parole evidence rule

A litigant can circumvent the parol evidence rule by alleging a tacit term or by applying for rectification. Evidence relevant to such an allegation or application then becomes admissible, although it would have been inadmissible for the purposes of interpreting a written term of the contract.

Canons of construction

Where the meaning of a contract remains unclear despite application of the primary rules (whereby the court establishes the intention of the parties by considering the ordinary grammatical meaning of the words in their textual and extra-textual context), the courts use various further canons of construction.

Secondary rules of interpretation

Secondary rules include rules or assumptions that

  • words with a general meaning are restricted when used in association with words relating to a species of a particular class (the eiusdem generis rule);
  • words are known or understood by the company they keep (noscitur a sociis);
  • written or typed insertions in a printed agreement are interpreted as a more accurate reflection of the parties' intention than the printed terms;
  • preambles are regarded as subordinate to the operative part of a contract if they are sufficiently clear;
  • an ambiguous term should be given a meaning that would make it legally effective (ut res magis valeat quam pereat);
  • the parties intended their contract to be legal rather than illegal; and
  • the parties intended their contract to have a fair result.

Tertiary rules of interpretation

As a last resort, the courts may use tertiary rules of interpretation, whose purpose is to provide a fair outcome rather than to give effect to the parties' common intention. The tertiary rules include

  • the contra proferentem rule, which states that ambiguous terms of a contract are to be interpreted against the party who proposed them, as the onus is on him to make them clear; and
  • the quod minimum rule, which states that ambiguous words must be narrowly interpreted, so as to encumber a debtor or promisor as little as possible.

When all rules are exhausted

If a court, having used all the rules of interpretation, is still unable to ascertain the meaning of a contract, in which case it must be too badly written to admit of interpretation, it will declare the contract void for vagueness.

Disclaimers, indemnities and exemption clauses

In the interpretation of disclaimers, indemnities and exemption clauses, the courts give effect to language that exempts the proferens from liability in express and unambiguous terms. If, however, there is ambiguity, the language is construed against the proferens—but a court must not adopt a strained or forced meaning in order to import some ambiguity.

Subjective versus objective

South African law seems to be moving from a relatively objective approach to interpretation, with a correspondingly restrictive attitude to admissibility of evidence, to one that is more subjective: that is, one whose aim is to discover what the parties subjectively intended.

Breach of contract

Failure to honour a contractual obligation amounts to breach of contract.

Forms of breach

Although South Africa recognises a general concept of breach, specific recognised forms include

  • ordinary breach;
  • mora, which comprises
    • mora debitoris; and
    • mora creditoris;
  • repudiation and anticipatory breach; and
  • prevention of performance.

Repudiation and prevention of performance are forms of anticipatory breach, since both can be committed prior to the stipulated time for performance.

Ordinary breach

Ordinary breach or positive malperformance relates to the content of the performance made. In the formulation of AJ Kerr, "If without lawful excuse a party fails to do what he has contracted to do, or does what he has contracted not to do, an ordinary breach of contract is said to have occurred."[92] Ordinary breach is breach in its starkest, most commonsensical form: essentially a failure to comply with the terms of a contract. There are two requirements for ordinary breach where the debtor has a positive obligation:

  1. There must have been some performance; the debtor must have performed.
  2. The performance must, however, have been incomplete or defective.[93]

Where the debtor has a negative obligation, positive malperformance occurs when the debtor does the act that he is bound to refrain from doing. (It is unclear whether fault is an element of positive malperformance.) The usual remedies are available. Where damages are awarded in lieu of, or to complete, the performance, they are known as surrogate damages, as opposed to other consequential damages. In the case of the positive malperformance of a negative obligation, the creditor is also entitled to apply for an interdict to restrain the debtor.

Mora

Mora is best defined as "delay without lawful excuse of the performance of a contractual duty or a wrongful failure to perform timeously."[94] It relates, then, to the time of the performance, and is for this reason sometimes referred to as negative malperformance.

Mora debitoris

Mora debitoris is the culpable failure of a debtor to make timeous performance of a positive obligation. There are four requirements:

  1. The debt must be due and enforceable and, in spite of the failure as of yet to perform, still capable of performance.
  2. The performance must have been fixed for a particular time, either in the contract or by a subsequent demand for performance.
  3. The delay must be the debtor's fault, in the sense of its being his responsibility, and not out of his control. If a debtor has guaranteed timeous performance, lack of fault will not prevent him from falling into mora. The onus is apparently on the debtor to show that a delay was not his fault.
  4. The debtor must have not yet have performed.

The time element, for obvious reasons the most crucial of mora, depends on whether it is mora (ex re) or mora (ex persona). Where the parties have fixed in their contract a time for performance, either expressly or by necessary implication, a culpable failure by the debtor to perform on or before the due date automatically places him in mora (ex re), without the need for any intervention by the creditor. This standard is easier to meet than its counterpart: Where no time for performance has been stipulated in the contract, the creditor must place the debtor in mora (ex persona) by demanding performance on or before a definite date or time that is reasonable in the circumstances.[95] (The onus will be on the debtor to show that the time given is unreasonable.) Mora (ex persona) requires an interpellatio to fix the date of performance. An interpellatio is a demand added or appendd to the contract after the fact. It is extra-judicial and may be verbal or written, but is usually made in a letter of demand, beginning with the words "I am now putting you to terms..."

The usual remedies, discussed more fully in the next section, apply for breach in the form of mora debitoris, namely

  • specific performance;
  • cancellation;
  • damages; and
  • interest (as per the Prescribed Rate of Interest Act,[96] currently 15.5 per cent per annum, or as agreed by the parties).

One consequence shared by other forms of breach is that, in the case of performance becoming impossible after a debtor has fallen into mora, the debtor is not excused from performance (a consequence known as perpetuatio obligationis or, literally, the perpetuation of the obligation. If a debtor is in mora, the creditor may rescind the contract if time is of the essence of the contract—which it will be if there is an express or implied lex commissoria (cancellation clause) to the effect that a failure to perform timeously entitles the creditor to cancel, or if the creditor has made time of the essence by sending the debtor a notice of rescission.

Mora creditoris

Mora creditoris is the culpable failure of a creditor to cooperate timeously with the debtor to enable him to perform. There are five conditions:

  1. The debt must have been due and capable of being fulfilled.
  2. The debtor must have tendered proper performance.
  3. The cooperation of the creditor must have been necessary.
  4. The creditor must have failed to receive performance.
  5. The delay must have been the fault of the creditor.

The details are, mutatis mutandis, the same as for mora debitoris. Mora creditoris is a very rare form of breach, its value inhering mostly in its reflection, primarily conceptual, of mora debitoris. The usual remedies for breach are available to the debtor. If the creditor is in mora, the risk of damage to contractual goods, caused by supervening impossibility and the debtor's negligence (short of gross negligence), passes to the creditor. Sureties are also released.

Repudiation

Repudiation is a party's demonstration, by words or conduct, and without lawful excuse, of an unequivocal intention no longer to be bound by the contract or by any obligation forming part of the contract. The intention to repudiate is judged objectively. As in all serious cases of breach, the innocent party has a choice of whether to rescind or to affirm the contract.

Prevention of performance

Where performance on either side becomes impossible due to the fault of one of the parties, the contract is not terminated, but the party who rendered performance impossible is guilty of prevention of performance. Objective impossibility is not necessary; the subjective variety will suffice. Fault is an essential element of this breach, unless the debtor has guaranteed the performance and the creditor is not at fault. The usual remedies, except for specific performance, are available to the creditor. In the case of material prevention of the performance of a divisible obligation, the creditor may only cancel pro tanto, and his counterperformance will be reduced proportionately.

This form of breach is very rare, in part because it is so often categorised under one of the other forms. It offers very little by way of case law, as such cases are, for the most part, easily settled.

Remedies for breach

Remedies for breach are aimed either at the fulfilment or at the rescission or cancellation of a contract. Full performance is the natural cause of termination of an agreement. Breach of contract interferes with proper fulfilment; the primary remedy is therefore aimed at fulfilment. Cancellation is an extraordinary remedy. An innocent party may generally either

  1. uphold the contract and insist on its fulfilment, by claiming either specific performance or its financial equivalent; or
  2. rescind the contract, tender the return of the other party's performance and claim restitution of any performance already made by himself.

Parties to an agreement may agree on remedies in the event of breach. Such agreement then takes precedence in the application of remedies for breach. Three types of remedy are available:

  1. remedies aimed at enforcement (which include specific performance and the exceptio non adimpleti contractus);
  2. cancellation; and
  3. remedies aimed at compensation (which include damages and interest).

Enforcement and cancellation are mutually exclusive remedies. Damages and interest are cumulative to other remedies. An innocent party may have alternative or additional claims in delict.

Remedies aimed at keeping the contract alive

A claim for specific performance is the primary, obvious and most basic remedy for breach of contract; it upholds the expectation interest of the creditor. It may be a claim for the payment of a sum of money (ad pecuniam solvendum), a claim for the performance of some positive act other than payment of money (ad factum praestandum) or a claim to enforce a negative obligation.

The remedy of specific performance does not guarantee success; it is a discretionary remedy. Even where it is shown that there has been a breach, it will not be granted unless the innocent party is ready to perform and performance is subjectively and objectively possible for the defendant. The courts have exercised an equitable discretion to refuse a claim for specific performance, usually on the grounds of impossibility, undue hardship or in claims for the enforcement of personal services. Enforcement of an order for specific performance is in accordance with the ordinary rules of procedure. A court will not make an order for specific performance in cases

  1. of relative impossibility;
  2. of insolvency on the part of the defendant; and
  3. where it conflicts with public policy and would be inappropriate.

The facts and circumstances of each case are determinative in this regard.

The exceptio non adimpleti contractus is a defence that may be raised against a contractual claim for specific performance. The exceptio may be used if the parties' obligations are reciprocal to one another, and if the other party is obliged to perform first (or simultaneously with the party raising the exceptio) but is in breach. The exceptio may also be used where that party has performed incompletely.

Reciprocal contracts are subject to the principle of reciprocity. In terms of this principle, a party is not entitled to claim performance of a reciprocal obligation from another party where the former has to perform his obligation first or simultaneously, unless he has already performed or is tendering performance of his obligation. Where the innocent party receives and starts using part-performance or defective performance, the contract cannot then be cancelled, as an election to keep the contract alive has been made, but the innocent party may raise the exceptio. Where the contract has been lawfully cancelled, the innocent party becomes liable to the breaching party for restitution of any performance received.

The courts have exercised their discretion to relax the principle of reciprocity where a breaching party has made defective or part-performance, which the innocent party has nonetheless started using; and where the innocent party (using the exceptio) is refusing to pay until full performance is made. In these circumstances, a court may order the party making use of the defective or incomplete performance to pay a reduced amount to the party in breach. The onus to prove the amount of the reduction is on the breaching party.

The exceptio non adimpleti contractus is available in all types of contract, but not where a breach is excused by law, or where the risk of defective performance lies with the party who wishes to raise the exceptio.

Cancellation

Cancellation is an extraordinary remedy, available only if a breach is sufficiently serious or material—unless the parties have provided a cancellation clause (a lex commissoria) in the agreement, in which case the agreement takes precedence over common-law rules. If an innocent party elects to cancel the contract, the other party must be notified of the decision. The notice of cancellation must be clear and unequivocal. If an innocent party expressly or tacitly manifests an intention to abide by the contract despite the breach, the right to cancel on account of the breach is waived. The effect of cancelling a contract is that the primary obligations of the parties are extinguished. Upon cancellation, each party is obliged to restore whatever performance has been received—that is, make restitution—to the other party.

Damages

Damages are a primary remedy for breach of contract. They may be claimed in addition to other remedies. Their purpose, if they are positive-interest or expectation damages, is to place the innocent party in the position he would have occupied had the contract been properly performed. Negative-interest or reliance damages aim to place the plaintiff in the position he would have occupied had he not entered into the contract at all. Contractual damages may include both expectation and reliance losses.

The requirements for a damages claim are:

  1. a breach of contract by the defendant;
  2. financial or patrimonial loss by the plaintiff;
  3. a factual causal link between the breach and the loss; and
  4. legal causation: The loss must not be too remote a consequence of the breach.

In terms of the difference rule, a plaintiff's financial loss is determined by comparing the patrimonial position occupied after the breach with the hypothetical patrimonial position that would have been occupied had the contract been properly performed. The courts often use a more concrete approach to calculate damages: comparing the value that the specific asset or obligation would have had with its actual value after the breach (rather than on the patrimony as a whole). In terms of the market-value approach (where performance consists of marketable goods), the amount of damages is determined by the difference in the market value of the goods as received and the market value they would have had if the goods had conformed with the requirements of the contract. In terms of the once-and-for-all-rule, the plaintiff must claim all of his damages in one action. If not all of the loss has been suffered at the time the action is lodged, the plaintiff must include a claim for prospective losses in that action.

Factual causation is established by means of the "but-for" (or conditio sine qua non) test. The test for legal causation asks whether the causal connection between the breach and the loss is sufficiently close to justify the imposition of liability. General damages are generally and objectively foreseeable as flowing from the type of breach and are thus not too remote and are recoverable. Special damages would not normally be expected to flow from the type of breach in question and are thus presumed to be too remote unless exceptional circumstances are present. In terms of the convention principle, special damages can be claimed where the parties entered into the contract on the basis of their knowledge of the special circumstances, and thus can be taken to have agreed that there would be liability for damages arising from such circumstances.

An innocent party only needs to prove that a breach of contract was a cause of the loss, not that it was the dominant cause of the loss. There is no apportionment or reduction of damages where the plaintiff shares the fault for the loss. The mitigation rule, however, states that, where a breach of contract has occurred, the innocent party must take reasonable positive steps to prevent the occurrence of losses, or his claim may be reduced or eliminated.

To provide quick and easily provable relief in the event of breach of contract, contracts often include penalty clauses or other similar clauses (pre-estimates of damages and forfeiture clauses). Clauses falling within the scope of the Conventional Penalties Act[97] are enforceable but subject to reduction on equitable grounds. A penalty clause excludes a claim for damages.

Interest that a creditor would have earned on an amount, had it been paid, is a loss that flows naturally from the breach and therefore constitutes damages that can be claimed. At common law, mora interest on a debt becomes payable from the date that a liquidated debt falls due. Where no date for payment is agreed, payment becomes due on demand from the creditor. In a claim for unliquidated damages, the debtor cannot be in mora until such time as the amount of damages has been fixed by a court. Interest is therefore only payable from the date of judgment.

The Prescribed Rate of Interest Act[98] now governs claims for the payment of interest. In terms of the Act, interest at the prescribed rate is payable on any debt that bears interest, unless the rate of interest is set in the contract or by a trade custom. The Act also provides for interest to run on unliquidated debts from the time of demand or summons, whichever is earlier. The amount on which the interest is calculated is the amount as finally determined by court or in arbitration. The Act also provides for payment of mora interest on judgment debts where such debts would ordinarily not be interest-bearing.

Other remedies

Other remedies available in the case of breach include the interdict and the declaration of rights.

Interdict

An interdict is a court order that prohibits the respondent from doing some specified thing. It may be used as a form of specific performance, to protect ancillary rights, to prevent a threatened breach of contract and to prevent third-party intervention. The requirements to be met for the granting of an interdict are

  1. a clear right;
  2. injury; and
  3. no other effective ordinary remedy.
Declaration of rights

Where there is uncertainty about rights under a contract, usually in the context of a dispute, a party may approach the court for a declaratory order that binds all interested parties, who should therefore be joined.

Transfer and termination of rights and obligations

Cession

Cession is an act of transfer of a personal right (claim) from the estate of the cedent (transferor) to that of the cessionary (transferee) by means of an agreement between the two. For example,

Assume A has a right to claim money from B, arising from a contract or any other source of obligation. A might sell that right to C. The sale of the right is a contract, or obligationary agreement that obliges A to transfer the right to C.The sale itself does not transfer the right; that is achieved by cession, which in theory is a separate agreement entailing concurring intentions: to transfer the right on A's part and to take transfer of it on C's part.[99]

As a general rule, all claims can be ceded. The following are requirements for a valid cession:

  • The cedent must be entitled to dispose of the personal right.
  • The personal right must be capable of cession.
  • A transfer agreement must be concluded.
  • The formalities set by law or by the parties must be complied with.
  • The cession must not be prohibited by law or against public policy or the good moral standards of the community.
  • The cession should not prejudice the debtor.

A valid causa is not necessary for a valid cession, but it is a requirement for the cession to have a permanent effect.

Consequences

Cession transfers a claim from the estate of the cedent to that of the cessionary. This has a number of consequences:

  1. The personal right now falls into the estate of the cessionary.
  2. The cessionary is the only person entitled to enforce, novate, delegate or set off the debt.
  3. The rule nemo plus iuris ad alium transferre potest quam ipse haberet applies to the cession of claims. The cedent cannot cede the same claim more than once; nor can he confer upon the cessionary any greater right than the cessionary has himself. The whole claim is transferred to the estate of the cessionary, together with all its benefits and privileges and disadvantages.
  4. As a general rule, once the cession has taken place, the debtor can validly perform only towards the cessionary, because the cedent is no longer the creditor. The debtor is, however, released if he performs towards the original creditor (the cedent) in good faith and without knowledge of the cession.

Security cession

The fiduciary security cession and the pledge are the two known forms of security cession. A security cession will be interpreted as a pledge unless the parties make it clear that they wish their security cession to be in the form of the fiduciary cession.

The fiduciary security cession is an ordinary cession of a personal right as security coupled with a fiduciary agreement, which is an ordinary contract. In a pledge of a personal right, the ownership of the personal right is retained by the cedent, while only quasi-possession is transferred to the cessionary (pledgee).

Termination of obligations

Obligations may be terminated upon full and proper performance, by agreement or by operation of law.

Termination by performance

Most contracts are not breached. The primary means of termination is by due and full and proper performance.

Performance is usually rendered by the person upon whom the duty to perform is imposed. In cases of delectus personae, there is no alternative performer; in the absence of delectus personae, performance could be rendered by

  • an agent, appointed by the debtor to perform on his behalf;
  • a surety (as per the previous section); or, more generally,
  • another third party, either charitably or by agreement (which is to say, in the latter case, by delegation).

As for the question of to whom performance must be made, there is, depending on the circumstances, a variety of possibilities:

  • to the creditor;
  • to the creditor's agent;
  • to some third party indicated by the creditor;[100] or
  • to a third party, the adiectus solutionis causa, agreed on by the original parties.[101] This party will be entitled to receive performance.

The time and place of performance are usually stipulated in the contract. If there is no specific stipulation, the type of contract will generally determine the place for the requisite performance; if no date is stipulated, performance must occur "within a reasonable time," to be determined, again, by the nature of the contract. Concrete Products v Natal Leather Industries[102] is the leading and most illustrative case on the determination of reasonable time.

As for what constitutes performance, BK Tooling v Scope Precision Engineering[103] sets out several clear requirements:[104]

  • There must be strict compliance.
  • Performance may not be made in instalments, unless such have explicitly been permitted or agreed upon; otherwise it must be made whole. Authority for this position goes as far back as Grotius.[105]
  • There is no election to pay damages in lieu of performance—unless, again, this is agreed upon.[106]
  • No substitution is permitted: that is, no giving the creditor something else in lieu of performance. This is once more subject to the qualification that the parties may agree to this alternative, which is known formally as datio in solutum.

The basic requirements for performance in the form of monetary payment are to be found in the South African Reserve Bank Act,[107] the most important of which is that it must be in the form of legal tender.[108] The Act also establishes limits on the volume of change or coinage that one may use. With respect to inflation, the principle of nominalism applies: The courts do not make inflation adjustments.[109] Similarly, the no-difference principle applies to foreign exchange: There are no currency conversions, so that what is claimed in one currency is owed in that currency.

Termination by agreement

Termination of an obligation by agreement may take several forms.

Release and waiver

A release is an agreement between the parties that the debtor be freed or "released" from an obligation. (The term "waiver" is sometimes used synonymously, but "release," for reasons shortly to become apparent, is more accurate here.) Releases are most often to be found in employment contracts.

A waiver occurs when the creditor elects, without discussion or arrangement (and therefore, unlike release, usually without agreement), to "waive" certain claims or rights under a contract; it is, in other words, the unilateral act of abandoning a right that exists for the creditor's sole benefit. For example, the non-breaching party has the right, in cases of major breach, to claim cancellation, but that right may be waived.

The core features of waiver were set out in Alfred McAlpine & Son v Transvaal Provincial Administration.[110] There is, for one thing, generally a presumption against waiver, such that the burden of proof is his who alleges it.[111][112] The requirements for meeting this burden are carefully specified. Two questions should be asked, keeping in mind "the fact that persons do not as a rule lightly abandon their rights"[113]:

  1. Was there an intention to waiver? The creditor must have full knowledge of his rights in terms of the waived obligation.[114][115]
  2. Would a reasonable person in the circumstances believe the right to have been waived? This inquiry is important because a waiver need not be made expressly by the creditor; it may be "derived by implication from his conduct," in which case "his conduct must be such that it is necessarily inconsistent with an intention to maintain his rights."[116][117] In other words, as De Villiers CJ put it in Smith v Momberg,[118] "his conduct must be such as to leave no reasonable doubt in the mind that he not only knew what his rights were, but intended to surrender them."[119]
Novation

A novation is an agreement to extinguish and replace one or more obligations with a new obligation or obligations. In De Groot's words, "An obligation is released upon the terms that simultaneously another obligation takes its place."[120] If the original obligation is void, the novation also will be void. In South Africa, there are two forms of novation: novatio voluntaria and novatio necessaria.

Novatio voluntaria

Voet defines the former, voluntary novation, as "a transformation and alteration of an earlier obligation, whether natural or civil, into another obligation whether natural or civil, when a fresh cause is created out of a foregoing cause in such wise that the earlier cause is destroyed."[121] In Swadif v Dyke,[122] voluntary novation is described as "essentially a matter of intention and consensus. When parties novate they intend to replace a valid contract by another valid contract."[123] This is novation in the strict and most common sense: The parties agree to novate the entire contract, but they retain their contractual relationship. Unless, as in the case of insurance agreements, it has been explicitly removed, the first contract can revive itself (residual position) if the second contract folds. There is a presumption against novation, so that "where there is doubt the court prefers not to imply a novation."[124] An important case in this regard is Electric Process Engraving and Stereo Co v Irwin:[125]

The question is one of intention [.... I]n the absence of any express declaration of the parties, the intention to effect a novation cannot be held to exist except by way of necessary inference from all the circumstances of the case.[126]

The second contract, then, "is much rather deemed to have been made in order to strengthen the first one, and for the purpose of being annexed to it, than for the purpose of extinguishing it."[127] Variation, in other words, is usually preferred to novation: It is generally assumed "that the parties intended only to modify, augment, or diminish the obligation, and not to extinguish the old debt, and substitute a new one, unless the contrary is particularly expressed."[128]

Novatio necessaria

Compulsory novation, absolute in English law and less common than voluntaria, takes place by operation of law, from "judicial proceedings between parties whose rights and obligations are in issue between them."[129] Not all judicial proceedings lead to novation; where they do, it is the damages awarded by the court which novate the contract. It is important, however, to note that "compulsory novation does not release pledges or securities nor are sureties discharged; it does not interrupt the running of interest nor is mora purged."[130] This is "because properly speaking, it is not a novation, but an additional confirmation or continuation of a previous obligation."[131]

Compromise

A compromise is an agreement whereby parties settle a dispute or some uncertainty between them. New obligations are created, and any existing obligations are extinguished. Where payment is made in full and final settlement, it will depend on the circumstances whether this is an offer to compromise.

Effluxion of time

If a contract fixes a specific period for its duration, it terminates automatically at the end of such period. The Consumer Protection Act contains mandatory rules on fixed-term contracts covered by the Act.[132]

Notice

Contracts for an indefinite period are terminable upon reasonable notice unless specifically agreed otherwise.

Termination by operation of law

Obligations may also be terminated by operation of law, as in the case of set-off, merger, supervening impossibility of performance, prescription, insolvency and death.

Set-off

Where two parties are reciprocally indebted to one another by reason of distinct obligations, one debt can be "set off" against the other, to forestall the onerous burden of two different sets of litigation. The set-off occurs automatically, provided that its requirements are met, but it applies only to liquidated claims, which are quickly and easily proved.

Set-off in its simplest form might be instanced thus:

  • X owes Y R1,000 for a couch (the first obligation).
  • Y owes X R1,000 for rent (the second).
  • The first obligation is set off against the other.
  • There are now no further obligations between the parties.

Very rarely, however, are the obligations identical. Where one party's is greater than the other's, the smaller claim will be terminated and the greater diminished. This usually occurs by way of a claim which is followed by a counter-claim.

Merger

The extinction of a debt by merger occurs when one person becomes both creditor and debtor in respect of a debt. This is a rare but straightforward form of termination, described in Grootchwaing Salt Works v Van Tonder[133] as "the concurrence of two qualities or capacities in the same person, which mutually destroy one another."[134] Tjakie Naudé provides this example:

A owes B R100. B dies and leaves her estate to A. A is now both debtor and creditor in respect of the debt of R100, so that the debt is extinguished by merger.[135]

Similarly, if a tenant decides to buy the property he is renting, he would not thereby become his own landlord; the relationship would be merged and thus cease to exist.

Insolvency

In the event of the debtor's insolvency, the resolution of the contract is left to the trustee, to whom the insolvent estate is handed over.

Supervening impossibility of performance

Supervening impossibility of performance takes place where an event occurs (or supervenes) after the contract has commenced which objectively renders the contract no longer possible of performance. This event must have been unforeseen and unavoidable by a reasonable person, such that no-one in that position could have performed the obligation.

The distinction between supervening and initial impossibility (which does not terminate the contract) is an important one and often confused. The performance must have become objectively impossible, even if at first it was perfectly doable.

These circumstances, however, must have arisen due to some unavoidable and supervening event; the cause must not have been the debtor's fault.[136]

Generic goods and services are not subject to supervening impossibility, because they are easily obtainable and performance is still theoretically executable. An inability to meet one's debts is also precluded, because it entails fault. The impossibility must, in an objective sense, be outside of one's control. The following are classic examples:

  • Vis maior: an act of god, beyond one's control; fault is precluded and performance rendered objectively impossible.
  • Casus fortuitus: intervention by the state or legislature which renders performance impossible.

Supervening impossibility generally terminates the obligation, as well as any counter-obligation, from the point at which impossibility arose. Accrued rights are enforceable, but future obligations disappear. Where, however, there has been a guarantee of performance, this will override the supervening impossibility—even acts of god.

The effect of partial or temporary impossibility of performance depends on the circumstances of the case. The general rule is that the contract will be suspended until the impossibility disappears; if the supervening event goes on for an unreasonably long period of time, the creditor will have the election to cancel.[137]

Prescription

Exinctive prescription entails the termination of obligations by lapse of time. It is regulated by the Prescription Act[138] and the Institution of Legal Proceedings Against Certain Organs of State Act.[139] The former indicates that claims to a debt are restricted to a certain period of time, after which they fall away; one has to exercise one's rights within that time if one wants performance.[140] This residual period is three years,[141] and the prescription begins to run when "the debt falls due":[142] that is, from the time of the breach, so the 3-year period begins as soon as performance is owed. Furthermore, "a debt shall not be deemed to be due until certain requirements are satisfied." They are

  1. "Knowledge of the identity of the debtor; and
  2. "Knowledge of the facts from which the debt arose.

"Provided the creditor shall be deemed to have such knowledge if he could have acquired it by exercising reasonable care."[143]

The Act counteracts slow or busy courts with a provision to the effect that "the running of prescription shall be interrupted by the service on the debtor of any process whereby the creditor claims payment on the debt,"[144] on the grounds that it would be unfair to penalise someone for the tardiness of the administrative process.

Death

Contractual rights and duties are generally transmissible on death, although not in the case of a delectus personae or an express or tacit agreement to the contrary. The resolution of the contract is left to the executor of the deceased's estate.

Drafting

The main objective of the parties at the time of negotiation of the contract should be to achieve agreement regarding the exact purpose of their agreement on the best commercial terms and conditions.

Parties to the contract

It is vital to first determine the identity of the parties to the agreement and the nature of the agreement they wish to conclude and which has to be drafted on their behalf. The parties and their contact details should be properly described in the contractual document.

Nature of contract and heading

The nature of the agreement depends on its contents. Where the contract is a nominate agreement, care must be taken to include the essentialia for that agreement in the contract. Other essential elements that should feature at the beginning of any contract include clauses describing the extent of the obligations of the parties.

Date of agreement

The contract should be properly signed and dated. The contract may be dated at the beginning or at the end in a signature block.

Sequence of clauses

The contract should be structured in a logical and practical fashion. After the heading and the description of the parties, and the definitions and interpretation clause, the core clauses should appear.

Specific clauses

These are followed by specific clauses on aspects negotiated by the parties for their contractual relationship, such as clauses on the remedies for breach of contract, including cancellation, penalty, forfeiture, limitation and exemption clauses; and conditions and time periods.

General clauses

General clauses such as clauses on how the contract must be amended, and on entire agreement, cession or assignment, waiver, communications and notices, applicable law and jurisdiction, alternative dispute resolution procedures, force majeure, costs, and confidentiality follow.

Structure and language

Lastly, principles of good language and grammar, and proper numbering, should be used throughout.

See also

References

Articles

Books

Cases

  • Afrox Healthcare Ltd v Strydom 2002 (6) SA 21 (SCA).
  • Alexander v Perry (1874) 4 Buch 59.
  • Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial Administration 1974 (3) SA 506 (A).
  • Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial Administration 1977 (4) SA 310 (T).
  • Aucamp v Morton 1949 (3) SA 611 (A).
  • Bay Loan Investment (Pty) Ltd v Bay View (Pty) Ltd 1971 (4) SA 538 (C).
  • Benson v SA Mutual Life Assurance Society 1986 (1) SA 776 (A).
  • BK Tooling (Edms) Bpk v Scope Precision Engineering (Edms) Bpk 1979 (1) SA 391 (A).
  • Bonne Fortune Beleggings Bpk v Kalahari Salt Works (Pty) Ltd 1974 (1) SA 414 (NC).
  • Botha v Fick 1995 (2) SA 750 (A).
  • Bredenkamp v Standard Bank 2010 (4) SA 468 (SCA).
  • Broderick Properties Ltd v Rood 1962 (4) SA 447 (T).
  • Cassim v Kadir 1962 (2) SA 473 (N).
  • Concrete Products v Natal Leather Industries 1946 NPD 377.
  • Conradie v Rossouw 1919 AD 279.
  • Coopers & Lybrand and Others v Bryant 1995 (3) SA 761 (AD),
  • Coutts v Jacobs 1927 EDL 120.
  • Culverwell v Brown 1990 (1) SA 7 (A).
  • Datacolour International (Pty) Ltd v Intamarket (Pty) Ltd 2001 (2) SA 284 (SCA).
  • Delmas Milling Co Ltd v Du Plessis 1955 (3) SA 447 (A).
  • Drifter's Adventure Tours v Hircock 2007 (2) SA 83 (SCA).
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  • Fundstrust v Van Deventer 1997 (1) SA 710 (A).
  • Gericke v Sack 1978 (1) SA 821 (A).
  • Goldblatt v Merwe 1902 (19) SC 373.
  • Golden Cape Fruits (Pty) Ltd v Fotoplate (Pty) Ltd 1973 (2) SA 642 (C).
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  • Government of the Republic of South Africa v Thabiso Chemicals (Pty) Ltd 2009 (1) SA 163 (SCA).
  • Grootchwaing Salt Works Ltd v Van Tonder 1920 AD 492.
  • Hansen, Schrader & Co. v De Gasperi 1903 TH 100.
  • Haynes v King William's Town Municipality 1951 (2) SA 371 (A).
  • Hepner v Roodepoort-Maraisburg Town Council 1962 (4) SA 772 (A).
  • Holmdene Brickworks (Pty) Ltd v Roberts Construction Co Ltd 1977 (3) SA 670 (A).
  • Hyprop Investments v Shoprite Checkers 2011 ZASCA 51.
  • Jacobs v Adonis 1996 (4) SA 246 (C).
  • Jaga v Dönges 1950 (4) SA 653 (A).
  • Johnson v General Insurances Ltd 1983 (1) SA 318 (A).
  • Johnston v Leal 1980 (3) SA 927 (A).
  • Joubert v Enslin 1910 AD 6.
  • KPMG Chartered Accountants (SA) v Securefin LTD and Another 2009 (4) SA 399 (SCA).
  • Lavery & Co Ltd v Jungheinrich 1931 AD 156.
  • Le Riche v Hamman 1946 AD 648.
  • List v Jungers 1979 (3) SA 106 (A).
  • Martin v De Kock 1948 (2) SA 719 (AD).
  • Maseko v Maseko 1992 (3) SA 190 (W).
  • Motor Racing Enterprises (in liquidation) v NPS (Electronics) Ltd 1996 (4) SA 950 (A).
  • Nash v Golden Dumps (Pty) Ltd 1985 (3) SA 1 (A).
  • Nedcor Bank Ltd v Hyperlec Electrical & Mechanical Supplies CC 2000 (2) SA 880 (T).
  • Oatorian Properties (Pty) Ltd v Maroun 1973 (3) SA 779 (A).
  • Paiges v Van Ryn Gold Mines Estates Ltd 1920 AD 600.
  • Peters, Flamman and Company v Kokstad Municipality 1919 AD 427.
  • Rand Rietfontein Estates Ltd v Cohn 1937 A.D. 317 at 325.
  • Reigate v Union Manufacturing Co 1918 (1) KB 592.
  • Rood v Wallach 1904 TS 187.
  • Santos Professional Football Club (Pty) Ltd v Igesund 2003 (5) SA 73 (C).
  • Schmidt v Dwyer 1959 (3) SA 896 (C).
  • Scott v Poupard 1971 (2) SA 373 (A).
  • Segal v Mazzur 1920 CPD 634.
  • Shatz Investments (Pty) Ltd v Kalovyrnas 1976 (2) SA 545 (A).
  • Shirlaw v Southern Foundries 1939 (2) KB 206.
  • Smith v Momberg 1895 (12) SC 295.
  • Stewart Wrightson (Pty) Ltd v Thorpe 1977 (2) SA 943 (A).
  • Steyn v LSA Motors Ltd 1994 (1) SA 49 (A).
  • Strachan v Prinsloo 1925 TPD 709.
  • Swadif (Pty) Ltd v Dyke NO 1978 (1) SA 928 (A).
  • Swartz & Son v Wolmaransstad Town Council 1960 (2) SA 1 (T).
  • Thompson v Scholtz 1999 (1) SA 233 (SCA).
  • Thoroughbred Breeders' Association v Price Waterhouse 2001 (4) SA 551 (SCA).
  • Trotman v Edwick 1951 (1) SA 443 (A).
  • Tucker's Land and Development Corporation v Hovis 1980 (1) SA 645 (A).
  • Union Government v Vianini Ferro-Concrete Pipes (Pty) Ltd 1941 AD 43.
  • Van der Merwe v Nedcor Bank Bpk 2003 (1) SA 169 (SCA).
  • Van der Westhuizen v Arnold 2002 (6) SA 453 (SCA).
  • Van Wyk v Lewis 1924 AD 438.
  • Victoria Falls & Transvaal Power Co Ltd v Consolidated Langlaagte Mines Ltd 1915 AD 1.
  • Weinberg v Olivier 1943 AD 181.
  • Wells v SA Alumenite Co 1927 AD 69.
  • Wilkens v Voges 1994 (3) SA 130 (A).
  • Willowdene Landowners (Pty) Ltd v St Martin's Trust 1971 (1) SA 302 (T).
  • World Leisure Holidays (Pty) Ltd v Georges 2002 (5) SA 531 (W).

Statutes

  • Alienation of Land Act 68 of 1981.
  • Auditing Profession Act 26 of 2005.
  • Consumer Protection Act 68 of 2008.
  • Conventional Penalties Act 15 of 1962.
  • Institution of Legal Proceedings Against Certain Organs of State Act 40 of 2002.
  • National Credit Act 34 of 2005.
  • Prescribed Rate of Interest Act 55 of 1975.
  • Prescription Act 68 of 1969.

Notes

  1. ^ Du Plessis et al 11.
  2. ^ Du Plessis et al 4.
  3. ^ 1924 AD 438.
  4. ^ Du Plessis et al 11.
  5. ^ Du Plessis et al 12.
  6. ^ Du Plessis et al 12.
  7. ^ See Zimmermann & Visser 166-173.
  8. ^ Alexander v Perry (1874) 4 Buch 59.
  9. ^ 1904 TS 187.
  10. ^ 1919 AD 279.
  11. ^ Du Plessis et al 13.
  12. ^ Du Plessis et al 14.
  13. ^ Du Plessis et al 15.
  14. ^ Du Plessis et al 15.
  15. ^ Du Plessis et al 15-16.
  16. ^ De Wet & Van Wyk 12-13.
  17. ^ Du Plessis et al 16.
  18. ^ Du Plessis et al 16.
  19. ^ Du Plessis et al 17, 18.
  20. ^ Du Plessis et al 20.
  21. ^ Du Plessis et al 20.
  22. ^ Du Plessis et al 21.
  23. ^ Du Plessis et al xxii.
  24. ^ Du Plessis et al xxii.
  25. ^ Du Plessis et al xxii.
  26. ^ Act 34 of 2005.
  27. ^ Act 68 of 2008.
  28. ^ Du Plessis et al 6.
  29. ^ Hoexter, Cora. "Contracts in Administrative Law: Life after Formalism." South African Law Journal CXXI (2004): 595-618.
  30. ^ Government of the Republic of South Africa v Thabiso Chemicals (Pty) Ltd 2009 (1) SA 163 (SCA) 168H.
  31. ^ Act 25 of 2002.
  32. ^ Alienation of Land Act 68 of 1981, s 2(1).
  33. ^ Act 50 of 1956
  34. ^ Act 47 of 1937
  35. ^ Act 18 of 1969
  36. ^ Act 7 of 2004.
  37. ^ 531.
  38. ^ 531.
  39. ^ Du Plessis et al 254.
  40. ^ 1910 AD 6.
  41. ^ 37.
  42. ^ 1903 TH 100.
  43. ^ 103.
  44. ^ Rand Rietfontein Estates Ltd v Cohn 1937 A.D. 317 at 325.
  45. ^ Coopers & Lybrand and Others v Bryant 1995 (3) SA 761 (AD) at 767E.
  46. ^ 37.
  47. ^ 1997 (1) SA 710 (A) 727B.
  48. ^ 1950 (4) SA 653 (A) at 664H.
  49. ^ 727B-C.
  50. ^ List v Jungers 1979 (3) SA 106 (A).
  51. ^ 180.
  52. ^ It should be clear from this that the parol evidence rule applies only to written contracts.
  53. ^ 1941 AD 43.
  54. ^ 47.
  55. ^ Du Plessis et al 255.
  56. ^ 1980 (3) SA 927 (A).
  57. ^ 943B-C.
  58. ^ 943.
  59. ^ Du Plessis et al 256.
  60. ^ 1946 AD 648.
  61. ^ Where there is a problem with the foundation of the contract, the courts must resolve that before attempting to interpret the contract.
  62. ^ Johnston v Leal 938G.
  63. ^ Du Plessis et al 256.
  64. ^ Non-variation clauses provide that no variation of a written contract will have effect unless it is reduced to writing (Du Plessis et al 163).
  65. ^ Johnston v Leal 943A.
  66. ^ It is a general rule that no evidence may be led to alter the clear and unambiguous meaning of a contract, whether written or oral.
  67. ^ 1995 (3) SA 761 (A)
  68. ^ 768A.
  69. ^ 1955 (3) SA 447 (A).
  70. ^ Coopers & Lybrand 768A-B.
  71. ^ Delmas Milling 454F.
  72. ^ Coopers & Lybrand 768B.
  73. ^ Delmas Milling 454G.
  74. ^ 454H
  75. ^ Coopers & Lybrand 768C-D.
  76. ^ Engelbrecht v Senwes 2007 (3) SA 29 (SCA).
  77. ^ Para 7.
  78. ^ 768D.
  79. ^ Delmas Milling 454G.
  80. ^ Delmas Milling 455B.
  81. ^ Delmas Milling 455B.
  82. ^ Du Plessis et al 259.
  83. ^ Lewis "Demise."
  84. ^ KPMG v Securefin 2009 (4) SA 399 (SCA) para 39.
  85. ^ Kerr 220-223.
  86. ^ KPMG v Securefin para 38.
  87. ^ Coopers & Lybrand 768B.
  88. ^ Engelbrecht v Senwes para 7.
  89. ^ Du Plessis et al 259.
  90. ^ Para 39.
  91. ^ Du Plessis et al 257.
  92. ^ Kerr 601.
  93. ^ See Holmdene Brickworks v Roberts Construction.
  94. ^ Mulligan 276.
  95. ^ See Willowdene Landowners v St Martin's Trust.
  96. ^ Act 55 of 1975.
  97. ^ Act 15 of 1962.
  98. ^ Act 55 of 1975
  99. ^ Du Plessis et al 5.
  100. ^ This usually comes in the form of a unilateral instruction from the creditor: "You will pay so-and-so the following amount..."
  101. ^ This route, for obvious reasons, is generally more cordial than the previous one. It is established by way of a simple agreement, and is also far more practical, eliminating unnecessary steps.
  102. ^ 1946 NPD 377.
  103. ^ 1979 (1) SA 391 (A).
  104. ^ 433.
  105. ^ 3.39.9.
  106. ^ The law does not require that the creditor accept an offer to this effect; he is entitled instead to continue to demand performance.
  107. ^ Act 90 of 1989, ss 14, 15, 17.
  108. ^ This includes krugerrands.
  109. ^ If, therefore, one was owed R100 in 1990, it will remain R100 today.
  110. ^ 1977 (4) SA 310 (T).
  111. ^ 324D.
  112. ^ Cassim v Kadir 1962 (2) SA 473 (N) 478A.
  113. ^ 324D.
  114. ^ Alfred McAlpine v Transvaal 324.
  115. ^ Hepner v Roodepoort-Maraisburg Town Council 1962 (4) SA 772 (A) 778H.
  116. ^ Bay Loan Investment (Pty), Ltd v Bay View (Pty), Ltd 540G-H.
  117. ^ Martin v De Kock 1948 (2) SA 719 (AD) 733.
  118. ^ 1895 (12) SC 295.
  119. ^ 304.
  120. ^ 3.43.1.
  121. ^ 46.2.2.
  122. ^ 1978 1 SA 928 (A).
  123. ^ 940G.
  124. ^ Kerr 270.
  125. ^ 1940 AD 220.
  126. ^ 226-227.
  127. ^ Van der Linden 1.18.2.
  128. ^ Pothier 387.
  129. ^ Swadif v Dyke 940H.
  130. ^ 941B.
  131. ^ Van Leeuwen 1.4.34.7
  132. ^ s 14.
  133. ^ 1920 AD 492.
  134. ^ 497.
  135. ^ Du Plessis et al 381.
  136. ^ Peters, Flamman and Company v Kokstad Municipality 1919 AD 427.
  137. ^ World Leisure Holidays (Pty) Ltd v Georges 2002 (5) SA 531 (W).
  138. ^ Act 68 of 1969.
  139. ^ Act 40 of 2002.
  140. ^ Chapter VII. See also s 10(1) and s 11.
  141. ^ s 11(d).
  142. ^ s 12(1).
  143. ^ s 12(3). See Gerike v Sack 1978 (1) SA 821 (A), and Jacobs v Adonis 1996 (4).
  144. ^ s 15(1).

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