Applied Contract Law

1.Principles of Contract Law 1




PRINCIPLES OF CONTRACT LAW
1. DEFINITION OF CONTRACT
Agreement between parties with the intention to create legal obligations.
NB: A contract is binding because the parties enter an agreement with the
intention to create legal rights and obligations between themselves.
Any agreement that lacks that such an intent to be legally binding between the
parties is not a contract. (Referred to as social agreement or gentlemen
agreement)
• E.g., Agreement to meet for coffee tomorrow after class
• Flat mate agreeing to do the dishes after dinner next week If you do it
this week
• Two actors in a movie entering a contract of sale
For contractual analysis as to whether a contract is legal or not, a factual
inquiry based on available evidence to know the intention of each party is
carried out.
An oral contract is as valid as a written contract.
2. CORNERSTONES OF CONTRACT
• Agreement/consent
 Consensus between the parties; meeting of the minds
• Freedom of Contract
 People are free to decide whether, with whom and on what terms to
contract
 Limited interference by the state – usually only to enforce terms of
contract
 Compare standard form contracts, unequal bargaining power (Consumer
Protection Act – Protect the weaker Party)
• Sanctity of Contract
 Contracts entered freely and seriously must be honored (also enforced
by courts, if necessary)
• Good Faith/Bona Fides
 Contracting Parties should behave honestly and fairly towards each
other
 Sense of what is fair, Just & reasonable
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 Note: Courts hesitant to strike down clause for being
unfair/unreasonable – would cause uncertainty & interfere with
principle of sanctity of contract. Clause may only be disregarded if
exceptionally unfair.
• Privity of Contract
 Contract creates rights & duties, only for parties to agreement (not for
3rd parties)



3. FORMS OF CONTRACT

Written

• Single document (e.g., Formal Contract, handwritten note)
• Exchange of offers & counteroffers/correspondence

Oral/Verbal

• Face to Face
• Telephone

Implied

• Behavior indicates agreement

Mixture of Above

• Verbal & Implied



4. REQUIREMENTS OF VALID CONTRACT
• Intention to Contract – not social arrangement
• Free Will – duress, undue influence, misrepresentation prohibited
• No substantial/material mistake – e.g., buying wrong erf
• Capacity – Parties must have required legal capacity to contract
• Formalities – compliance with prescribed form (e.g., writing)
• Legality – agreement must be lawful, i.e., not prohibited by statute or
common law (e.g., contract to commit murder)



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• Possibility – obligations must be capable of performance (judged
objectively)
• Certainty – agreement must have definite content (to ascertain and
enforce obligations)
• Consensus – meeting of the minds


5. CONTRACTUAL CAPACITY (NATURAL PERSON)
The capability and legal authorization, the person or entity must enter a legal
relationship and to perform a particular undertaking or transaction.
 Married persons – Applied only to those married in community of
property - Both spouses need their consent, they can’t incur obligations
on the couple’s joint estate otherwise.
 Minors – Underage of 18, minors are not allowed to get into a legally
binding decision. A guardian/parent will be needed to assist the minors
or infants (underage of 7) to get into a legally binding contract.
 Mental capacity – If a natural person lacks sufficient mind and memory
to understand the nature and character of the transaction in which they
are engaged. They do not have mental capacity to get into contract. The
court must determine whether the person they had the appropriate
mental state at the specific time they were entering the contract.
 Intoxicated persons – Whether or not, the intoxication rises to such a
level that the natural person is incapable to consenting to an agreement.
 Insolvent Persons – If a natural person has been declared insolvent by
the court, rather the consent of a trustee would be required.
 Spendthrift – Someone who is considered to have no control over
himself when it comes to money or financial activity, a curator is often
appointed to manage that person financial estate. They do have mental
capacity, but they need their curators consent before getting into an
agreement.




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6. CONTRACTUAL CAPACITY (JURISTIC PERSONS)
Juristic persons are Companies and Trustees.
A company and a trust cannot enter into an agreement on their own. A natural
person is required to act on behalf of the company or trust. A director will
represent a company, or a person duly represent by the company through a
resolution. In the case, of a trust, a trustee is appointed by the trust.
With respect to companies, authorization can be given after the
agreement/contract is concluded. A resolution can be passed retrospectively
after an agreement has been reached.
Note: Under the companies’ act, an internal rule is that approval need to be
received before signing the agreement, a director breaks the rule, the
contract will still be valid.
With respect to trusts, the trustee must have authorization with the trust
before getting into agreement/contract.
7. FORMATION OF CONTRACT
Typically – Offer & Acceptance (with possible intermediate counter – offers)
Offer: -
• Proposal of one party as to the terms of the contract
• Must comply with all requirements for valid contract – acceptance by
other party should be only the outstanding issue.
• Revocation of offer? Must offers do include a revocation clause. If there
is no revocation clause, it would remain open indefinitely.
Acceptance: -
• Acceptance must be unconditional (otherwise regarded as counteroffer)
• Done in proper format (e.g., Writing, if required)
• Acceptance must be communicated to offeror
• Place and date of acceptance = place and date of conclusion of contract




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