PVL3702 CONTRACT LAW STUDY SUMMARY NOTES.

PVL3702 CONTRACT LAW STUDY SUMMARY NOTES. A contract is an agreement between two or more parties with the intention of creating enforceable obligations. To constitute an enforceable contract, an agreement must be one which the law recognizes as binding on the parties. → The extra ingredient that distinguishes contracts from non-binding agreements is a serious intention to create legally enforceable obligations (animus contrahendi). → The absence of an animus contrahendi explains why ‘gentlemen’s agreements’ are not enforceable as contracts (binding on their honour only). Legally binding agreements that are not contracts: → The fact that the parties seriously intend their agreement to have a binding legal effect does not necessarily mean that it is a contract. → Classification of legally binding agreement: 1. Obligationary agreements (e.g. sale/lease), whereby one or more obligations are created. This is by far the most important of the three agreements; 2. Absolving agreements (debt), whereby obligations are discharged or extinguished. Discharge is achieved by the debtor's performing what he has undertaken to perform with the consequence that the obligation concerned is terminated in a natural way; 3. Real (or transfer) agreements, whereby rights are transferred. Real rights, for example ownership, are transferred by delivery (movable property) or registration. → These agreements may sometimes overlap to a greater or lesser extent. Suppose D walks into a cafe, puts his R5 on the counter and points to a packet of sweets. The proprietor takes his money and hands over the sweets. Requirements for a valid contract – must all be complied with  Consensus: the minds of the parties must meet (or at least appear to meet) on all material aspects of their agreement;  Capacity: the parties must have the necessary capacity to contract;  Formalities: where the agreement is required to be in certain form (for example, in writing and signed), these formalities must be observed;  Legality: the agreement must be lawful – not prohibited by statute or common law;  Possibility: the obligations must be capable of performance when the agreement is entered into;  Certainty: the agreement must have a definite or determinable content, so that the obligations can be ascertained and enforced. The nature of a contract → A contract is a juristic act. The conclusion of a contract is bilateral or multilateral. There must be at least two parties to an agreement. → A contract entails undertakings on one or both sides. Undertaking may be to make a certain performance immediately or in future. May be an undertaking that a certain state of affairs exists/existed (warranty). Most contracts entail reciprocity (an exchange). → All contracts are consensual, in the sense of being based on an agreement of some sort and are bona fide (with good faith). Contract and the law of obligations → The law of contract forms part of private law (specifically the law of obligations). → From a contract, arises an obligation or 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) to demand a performance by the debtor, and the duty of the debtor to make that performance. → Right created by obligation is a personal right (ius in personam). If the obligation is enforceable by action in a court of law, it is referred to as a civil obligation. → Primary sources of obligations are contract and delict. Other sources include undue enrichment, family relationships, negotiorum gestio (unauthorized administration of another’s affiars), wills and statutes. → A distinction is made between civil obligations (obligatio civilis) and natural obligations (obligatio naturalis). → Civil obligation may be enforced directly by recourse to a court of law, whereas a natural obligation may not. → However, a natural obligation does have some legal effect: it is a legal relationship as opposed to a merely moral relationship, and just as in the case of a civil obligation, it can be validly discharged, is capable of indirect enforcement by way of set-off, and can serve as the basis of an accessory contract such as suretyship. → An example of a natural obligation is a contractual obligation that requires a minor who acted without the necessary consent, to perform something, or an obligation which requires the payment of a wagering or gambling debt. Real rights and Personal Rights → The only real right recognised in our law is ownership. Where a person has complete title (or control) over a thing or property. A person may also hold a limited real right in relation to property, which is a subcategory of real rights - they are held by a person in relation to someone else's property. One can never have a whole real right in relation to someone else's property. → A personal right is one against another person for the performance of an obligation, i.e.: the other person must either do or refrain from doing something. These rights are usually created by contract. Contract and Delict → A delict is wrongful and blameworthy conduct that causes harm to a person (i.e. defamation or negligent damage to property). Such conduct obliges wrongdoer to compensate injured party. → Essential difference between contractual and delictual obligations: Contractual obligations are voluntarily assumed by the parties themselves. Delictual obligations are imposed by law, irrespective of the will of the parties. → Breach of contract and a delict are very similar – both constitute civil wrongs and give rise to a duty to pay damages. → Sometimes concurrent contractual and delictual liability can arise so that Plaintiff can sue on either basis. Plaintiff who sues in delict must prove that all the elements of delictual liability are satisfied – the conduct must infringe a right of the Plaintiff that exists independently of the contract. Contract and Enrichment → Key to distinguishing contractual from enrichment lies in question whether or not a transfer of wealth from one estate to another occurred pursuant to a valid contract. Where such ground is present in form of a contract, one is dealing with a contractual obligation; whereas if it is absent, one is dealing with an enrichment obligation. → Undue enrichment is a principle of our law that no-one should unjustifiably be enriched at the expense of another. Here undue enrichment means that there is no valid legal ground for the one's obtaining a benefit at the expense of the other. → Comparison of contract, delict and enrichment: CONTRACT DELICT ENRICHMENT Event giving rise to obligation Agreement to make the performance (to give, do or not do) Wrongful conduct that causes harm to another Unjustified shift of wealth or asset from ne estate to another Content of obligation To make promised performance To avoid causing harm by wrongful conduct To return the enrichment Nature of remedy Actual performance, or compensation for nonperformance Compensation for harm caused Return of enrichment Source of obligation Self-imposed Imposed by law Imposed by law Void and Voidable contracts → The fact that a contract is valid when it was concluded, however, does not mean that it cannot be challenged subsequently. → The contract may for example, be terminated because the performance has become impossible or illegal; or one of the contracting parties may cancel because of the other’s breach of contract; or one of the parties may cancel the contract because of the other’s misrepresentation, duress or undue influence. → A material mistake will have the result that a contract is void (that is no contract comes into existence) since it excludes the basic requirement for the existence of a contract, namely consent. A void contract creates no obligations. → Misrepresentation, duress or undue influence, can only render a contract voidable, because in such a case there is consensus, so that the contract cannot be void, but the consent has been obtained in an improper manner, rendering the contract voidable. → A contract which is merely voidable does create obligations, and these obligations then exist until the contracting party who has the election (choice) decides to terminate them. He is not, however, obliged to terminate them and if he does not, the obligations continue to exist unaffected. Actual Subjective Agreement → Actual subjective agreement (consensus ad idem) means: the parties are in complete agreement regarding important aspect of their contract; intend agreement to be binding in law; are aware of each other’s intention in this regard. Apparent or Objective Agreement → Apparent or objective agreement implies that, although parties are not actually in agreement regarding conclusion of a contract (i.e. there is dissensus or a material mistake), the outward manifestations of their intention (conduct) indicate that agreement has been reached. The law holds a party bound to a contract, despite the lack of actual agreement, on objective grounds. → While most contract are based on agreement, in the absence of true agreement, sometimes contracts are still found to exist on an objective basis. Theories of Contract → The will theory (subjective approach), the basis of contract is to be found in the individual will. Parties are bound by their contract because they have chosen to be bound (subjective). → An objective approach to contract (declaration theory) is the polar opposite of the will theory. The inner wills of the parties are irrelevant; what is important for contract is not what the parties think but what they say or do: the external manifestations of their wills. → A compromise theory is the reliance theory. The basis of contract is to be found in detrimental reliance on the appearance of the agreement; in the reasonable belief in the existence of consensus, induced by the conduct of the other party. Will Theory Declaration Theory Compromise Theory Basis of Contract Consensus; Concurring wills Appearance of consensus; concurring declarations of will Belief in existence of consensus, induced by other party Nature of Agreement Subjective Objective Semi-objective Effect of mistake Contract fails Contract stands Contract fails if reliance unreasonable Drawback Fails to protect reasonable reliance Favours form over substance Merely a secondary basis for contract Approach to contract: SUBJECTIVE or OBJECTIVE? → It was previously said our law follows a ‘generally objective approach’. More recent pronouncements suggest that our approach is ‘fundamentally subjective’ though tempered by objective considerations in cases of dissensus. The Roman-Dutch writers adopted a subjective approach (animus contrahendi and concursus animorum, or meeting of the minds). → English law has always preferred a more objective approach. Smith v Hughes ‘if the parties are not ad idem, there is no contract, unless the circumstances are such to preclude one of the parties from denying that he has agreed to the terms of the other’. → Rule of Law was ‘If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that the other party upon belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms’ [Smith v Hughes]. → Pieters & Co v Salomon the court chose to adopt the English approach. ‘When a man makes an offer in plain and unambiguous language, which is understood in its ordinary sense by the person to whom it is addressed, and accepted by him bona fide in that sense, then there is a concluded contract. Any unexpressed reservations hidden in the mind of the promisor are in such circumstances irrelevant. He cannot be heard to say that he meant his promise to be subject to a condition, which he omitted to mention, and of which the other party was unaware’. → Our law does permit escape from a contract on grounds of justifiable mistake; it does entertain claims for rectification of contractual documents that incorrectly reflect the parties’ common intention. It recognizes the importance of animus contrahendi in a variety of contexts. → Saambou-Nasionale Bouvereniging v Friedman ‘the true basis of contractual liability in our law… is not the objective approach of the English law, but is, save in cases where the reliance theory is applied, the real consensus of the parties’. Court said the point of departure when testing for existence of a contract is the will theory. In cases of dissensus, the shortcomings of that theory are corrected by applying the reliance theory (as in Smith v Hughes). → The decision in Steyn v LSA Motors Ltd illustrates that this is now the accepted approach of our law. Steyn, an amateur golfer, participated in a golf tournament that was open to both amateurs and professionals. Next to the 17th hole, there was on display a new car and alongside it a board proclaiming: ‘Hole-in-one prize sponsored by LSA Motors’. Steyn duly scored a hole-in-one, but the sponsor refused to give him the car on the grounds that the prize had only been intended for professional golfers. In the litigation that followed, it became plain that the garage had never intended to make any offer to an amateur such as Steyn, and that there was accordingly no consensus between the parties. Steyn tried to brush aside this fact with an argument that what was important was not the garage’s intention but rather what was stated on the advertising board. The court rejected this argument. The court held that a reasonable person in Steyn’s position would have realized that the offer was only open to professionals and accordingly that he had no contractual claim to the car. Dual basis of contract in modern law → There are two bases on which to establish a contract in modern South African law: Consensus and reasonable Reliance. Primary basis is consensus (will theory) and the approach is essentially subjective. → If the conclusion is that the minds of the parties never truly met, the enquiry has to go one step further. One must then ask whether either party by their words or conduct led the other party into the reasonable belief that consensus had been reached. If so, the contract will be upheld on the secondary basis of reasonable reliance. A contract can be founded on quasi-mutual assent. This is because our approach to contract is not wholly subjective (it is tempered by objective considerations). Proving the existence of a contract → The onus of providing the existence of a contract rests on the person who alleges that the contract exists. The onus will be discharged by adducing (objective) evidence of either actual consensus (primary basis) or reasonable reliance (secondary basis) on the appearance on consensus. Consensus → Consensus or ostensible consensus is one of the requirements for the conclusion of a valid contract. (1) The basis of a contract There are at present 2 reasons why the law will attach contractual liability to a contract. These 2 reasons are the following: (1) Actual agreement of the intention of the contracting parties. Agreement is generally accepted as the primary basis of contractual liability. (2) Where actual agreement does not exist but one of the parties has a reasonable reliance that it does exist. In such a case there is ostensible agreement. The will theory – the notion that contract are based on consensus has given rise to a theory called the will theory. Since this theory requires actual or conscious consensus between contractants a contract will not arise where consensus has been excluded by a material mistake. The reliance theory – consensus is the primary basis of contractual liability because in most contracts the contracting parties do actually correctly express their intentions. In a minority of contracts one of the parties fails to express his intention correctly. Here, the problem is solved by holding the erring party bound to his expressed intention because of the fact that he has created a reasonable reliance in the mind of the other party that they have reached consensus. This is the secondary basis of contractual liability. (2) The elements of consensus The elements of consensus are the following: (1) unanimity between the parties as to the consequences they wish to create – COMMON INTENTION (2) unanimity between the parties as to the fact that they wish to create juristic consequencesSERIOUS INTENTION (3) awareness among the parties of their unanimity – AWARE OF EACH OTHERS INTENTION. Thus where both parties are not agreed that they want to create juristic consequences, that is, where there is no mutual intention to be bound; there is actually no question of juristic consensus. → The rule is plus valet quod agitur quam quod simulate concipitur, which means that with simulated acts the true intention of the parties will be given effect. The simulated agreement will therefore be void. Where neither of the parties has the intention to be bound, but they create the impression outwardly that they do have such intention, a simulated juristic act exists because there is no juristic consensus. The law judges such an act in terms of the true intention of the parties. → Where only one of the parties did not have the intention to be bound, for example where A makes an offer as a joke, or makes an offer at an auction, without the intention to buy, solely in order to push up the price. In such a case, despite the dissensus, he may be held liable by virtue of the reliance theory. → Inter partes effect is given to the true intention of the parties; however, if this could prejudice outsiders, the impression created by the parties may be upheld against them by means of the doctrine of estoppel, → THUS INTENTION THE BASIS OF CONTRACTUAL LIABILITY = PRIMARY (WILL) THEORY! Cornerstones of Contract → Consensus and reliance are fundamental concepts in the modern law of contract. Other fundamental ideas include the following:  freedom of contract – the idea that people are free to decide whether, with whom and on what terms to contract (party autonomy);  sanctity of contract – the idea that contracts freely and seriously entered into must be honoured and, if necessary, enforced by the courts (pacta sunt servanda);  good faith – the idea that parties to a contract should behave honestly and fairly in their dealings with one another; and  privity of contract – the idea that contract creates rights and duties only for the parties to the agreement, and not for third persons. The goals of contract law → What are the aims of contract law?  To ensure that people keep their promises as a matter of honour and morality in society;  To promote legal and commercial certainty, by providing a framework within which persons can safely transact and conduct business, secure in the knowledge that agreements seriously entered into will be enforced;  To promote fairness and reasonableness in contractual dealings by imposing standards that encourage ‘good’ commercial behavior, and that discourage chicanery and over-reaching; and/or  To provide a workable system of rules that will encourage private enterprise and underpin the operation of the free-market economy. Competing values in the law of contract → The law of contract is concerned not only with freedom and sanctity of contract, but also with the values of fairness and good faith in contracting. → Although freedom and sanctity of contract are primary valued in contract law, there are several ways in which the courts temper these concepts to effect contractual justice in appropriate circumstances. It is the task of a court to find a balance between the competing goals of certainty and fairness in a given instance. Freedom and sanctity of contract → The dominant features of this classical model of contract law are the following (rather idealistic and unrealistic picture of contract as experienced by ordinary people):  Freedom and autonomy of the parties;  Minimal state intervention;  A preference for clear and certain rules, rather than open-ended standards;  Self-interested individualism;  Assumed fairness of the exchange;  A discrete event. → The main features of classical doctrine are that parties have the utmost freedom in engaging in contractual relations with others (freedom of contract), but, once freely entered into and if not contrary to public policy, a contract should be enforced by a court of law to the hilt, irrespective of patent unfairness to one of the parties [Printing & Numerical Registering Co v Sampson (1875)]. The idea was that the exchange was inherently fair, since it was the product of negotiation between parties with equal bargaining power. → In modern law, it has become increasingly obvious that the assumed fairness of the exchange and the equality of the parties are simply mythical, and that absolute freedom of contract simply does not exist. → Perhaps, where large corporate entities contract with each other, the classical notions apply, but far less so when private individuals are involved. Consumers, for instance, often have very little leverage when entering into contracts: a person can usually bargain for a better price at a retail store but not when entering into contracts for essential services, such as electricity or water provision. So, although still relevant in modern law, freedom of contract is not an absolute value. → Constitutional Court said in Barkhuizen v Napier 2007:  Described pacta sunt servanda (“agreements must be kept”) as ’a profoundly moral principle on which coherence of any society relies’;  The principle ‘gives effect to the central constitutional values of freedom and dignity’.  General rule that agreements must be honored cannot apply to agreements that are immoral or contrary to public policy. Unfair or unreasonable contractual provisions would therefore generally not be enforced.  Leaves open for future consideration the question whether ‘onerous and unilaterally imposed terms’ in contracts should in general be regarded as offensive to public policy in our new constitutional dispensation.