MERCANTILE LAW 193

STUDY UNIT 2

GENERAL PRINCIPLES OF THE

LAW OF CONTRACT
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CONTENT

STUDY GUIDE: STUDY UNIT 2

GENERAL BACKGROUND

CHAPTER 1: THE OBLIGATION

CHAPTER 2: CONTRACTUAL CAPACITY

CHAPTER 3: AGREEMENT AND RELIANCE OF AGREEMENT

CHAPTER 4: GROUNDS FOR RESCISSION

CHAPTER 5: FORMALITIES

CHAPTER 6: LEGALITY

CHAPTER 7: POSSIBILITY OF PERFORMANCE

CHAPTER 8: CERTAINTY AND ASCERTAINABILITY OF PERFORMANCE

CHAPTER 9: MULTIPARTY OBLIGATIONS

CHAPTER 10: CONDITIONS, TIME CLAUSES AND SUPPOSITIONS

CHAPTER 11: BREACH OF CONTRACT

CHAPTER 12: REMEDIES FOR BREACH OF CONTRACT

CHAPTER 13: CESSION

CHAPTER 14: DISCHARGE OF OBLIGATIONS

CHAPTER 15: AGENCY

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Purpose and function of the study guide

The study guide acts as a supplement to the notes and is aimed at assisting students in their
preparation for lectures and assessments. The study guide must be read in conjunction with
the work programme contained at the end of the module framework document that is available
on SUNLearn. It contains a lecture programme that enables students to draw up their own
study and preparation schedule. Because contact time is limited, lectures will focus on so-
called “problem areas”. Students are therefore required to prepare for contact sessions.

This module is aimed at the development of comprehension and application skills and the
ability to formulate arguments in a well-articulated manner. A student should approach each
chapter at the hand of the study guide and after having finished the chapter, test his or her
theoretical knowledge by means of the “test-yourself” questions. After having mastered the
theory, the next step is to apply the acquired knowledge to solve practical problems. Tutorial
exercises provided in class and during tutorials, as well as examples in the form of past papers,
are aimed at developing the skill of problem solving. The study guide provides guidelines on
how such questions should be approached. Further assistance will be provided during contact
sessions and tutorials on the “art” of formulating logical and systematic arguments.

Each student is welcome to discuss individual problems with the course convenor, your
lecturer or tutor. The sooner a problem is identified, the better! The formation of study groups
to discuss problems and helping and motivating each other can be very beneficial.

Good luck!

Proposed study method

 First read through a chapter to form a general picture of the content (theme).
Thereafter, attend the lecture in conjunction with the PowerPoint slides. In some
instances, additional podcasts will also be made available.
 Subsequently, you must make sense of the chapter by dividing it into sections
(themes), identify requirements and connections with other chapters and themes.
Requirements and definitions as well as insight in the work are important for
application purposes. Supplement the typed notes, or your own notes, with
information and examples provided in the lectures and during contact sessions.
 Test your theoretical knowledge of the chapter by means of the “test-yourself”
questions. Check your answers by referring back to the chapter. You can test your
knowledge further by means of the compulsory SUNLearn quizzes.
 The next step is to test your insight and understanding of the work by answering
application questions. Here the applications discussed during the contact sessions
and the tutorials you have to complete will develop your application skills. To
answer application questions, you can keep the following guidelines in mind:

1) First read through the question to get a general grasp of the question.

2) Consider the following before answering the question:

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(i) What does the question expect you to do?

(ii) What is this question about? (Which part of the work is covered by this
question?) It is important to focus on the ”question part” of the question.
Application questions consist of both a fact set and a question part that
state what the question requires you to do, eg to advise one of the
parties on its legal position; will one of the parties be successful in
obtaining a remedy in certain circumstances, etc. This part of the
question (together with the facts provided) will provide you with clues so
that you can identify the appropriate theory applicable to the question.

3) Underline or highlight facts and information relevant to answering the question.

4) Make a few notes on issues that strike you and which you would like to address
as result of (c).

5) Now start to formulate your answer:

i) Write an introductory sentence / sentences / paragraph (keep it short).
ii) Write down the theory (definitions, requirements etc.) and discuss briefly.
DON’T use bullets in your answer. You are allowed to number the
requirements, but the answer should still consist of full sentences divided
into separate paragraphs (i.e. essay style). You are not allowed to make
use of an abbreviated or shorthand writing style, e.g. SMS language.
Students will be penalised for bad writing style and poor formulation.
iii) Apply the theory to the facts of the question with reference to the issue.
(This step may be combined with the previous step, or may be discussed
separately, depending on your personal preference.)
iv) Conclude with a conclusion (if required by the question) and connect the
conclusion to the discussion and application of the theory (in one or two
sentences) in order for it to be a properly motivated conclusion. Remember,
law modules require that you motivate your answers. Never write “yes” or
“no” without explaining how you have come to that conclusion (even if it is
an apparent yes or no). You will receive marks for your argument, and not
so much for the “yes” or “no” conclusion. You can still earn marks, even if
your conclusion is incorrect. Remember, often there is no straightforward
answer to contractual problems. That is because one can argue differently
on the same set of facts, and therefore you could come to different
conclusions, and both arguments and conclusions might be correct.
Although you should never “read in “ facts that have not been provided in
the fact set, it is possible to interpret the same fact set differently, or there
might be instances where the courts have reached different conclusions on
basically the same facts. In such cases, you can refer to all viewpoints.
v) Do not rely on ‘general knowledge’ when you answer questions. Law
modules require that you must study the content of the subject thoroughly.
Know the definitions and the requirements – those are the tools that you will
need to answer the question. Without these tools you will be remain in the
dark and will never be successful. You will earn marks for stating the correct
theory (e.g. requirements), even if your application to the facts is not correct.
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Therefore, if you want to be successful in this module, you must be prepared

to spend enough time on studying the content. Enough time is not to quickly
read through the notes the day before an assessment. The content of law
modules needs time to filter through, and you must be comfortable with the
terminology to thoroughly understand the content and be able to repeat your
knowledge.

The assessments that you have to complete in this module consist of two types of questions,
namely theoretical questions and application questions. Theoretical (short) questions test your
knowledge of the theory, i.e. that what you have learnt, understand, and is again able to repeat.
Theory is assessed in different forms, namely by way of short questions (multiple choice and
true/false questions) – ie similar to the questions you will find in the quizzes, but they can also
include paragraph type questions. Application questions also test theory but at the same time
comprehension and your ability to apply theory to practical scenarios. These questions are
asked on the basis of a fact set (“story”) and are similar to the questions that you will find in
the tutorials.

This is a guideline for studying the content of this study unit:

1. The obligation
This chapter lays an important foundation in regard to terminology which is essential to
understand the chapters that are to follow. Students should be able to:
 define a contract;
 explain what the concepts “multiparty obligations”, “positive obligation” and
“negative obligation” are;
 explain the concepts “debtor”, “creditor”, “right” and “obligation” in the context
of a contract;
 explain what an obligation is;
 as well as its defining characteristics;
 have an understanding of how natural obligations differ from civil obligations in
regard to their legal effect;
 explain why social agreements and gentlemen’s agreements cannot constitute
contracts although they are agreements;
 also why marriage (in contrast to an antenuptial contract); debt extinguishing
agreements and real agreements are not considered to be contracts;
 explain the concept “material” or “essential distinguishing characteristics”
(essentialia) of a contract;
 can distinguish between a unilateral, bilateral and reciprocal contract by way of
examples;
 state the requirements for a valid contract.

This chapter will merely be tested by means of short questions.

2. Contractual capacity
Students should:
 understand the core function of contractual capacity;
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 be able to identify the factors that may influence a person’s capacity to act and
to apply that to a practical question. Both the legal position of the debtor and
the creditor are important. Remedies and exceptions are also important.

This chapter can be tested by means of short questions but also through application questions.

3. Agreement and reliance

This chapter can test both theory and application.

Students should be able to:

 distinguish between the two basic requirements, namely agreement and reliance of
agreement. For test purposes, agreement is the important aspect. Offer and
acceptance and the conclusion of contract (including e-contracts) are also
important.
 This section lends itself to practical/application questions but also short questions.
 In regard to the aspect of reliance as alternative ground for liability, students should
only have a basic knowledge of reliance, reasonable material error (iustus error)
and the situation regarding written contracts where misrepresentation gives rise to
a material error. There is no need to remember case citations for test/exam
purposes – the references to cases only serve as examples. This applies to all parts
of the module right through the year.

4. Grounds for rescission

This chapter will be tested mainly by means of practical examples but is it also possible to use
short questions. Remember, although application is tested mostly by way of longer questions,
one can also test application skills through short questions.

Students must be able to:

 Distinguish the different grounds for rescission and the remedies available for each
one.
 In regard to misrepresentation, be able to distinguish its operation in this context from
that in the previous chapter.

5. Formalities
This chapter will only be tested by means of short questions.

6. Illegality
As regards application questions, the focus in this chapter will be on statutory illegality and
restraints of trade. The remainder of the chapter will be tested by means of short questions.

Students must be able:

 to identify the different forms and sources of illegality, know their requirements and
should be able to explain them by means of examples.
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 to identify the 2 types of restraints of trade and solve a practical problem on restraint
by applying the principles and requirements.

7 & 8 Possibility of performance; certainty and ascertainability of performance

These chapters will only be tested by means of short questions.

9 Multiparty obligations
Although this chapter is primarily aimed at short questions, multiparty obligation questions
require application skills.

10 Conditions, time clauses and suppositions

This chapter is primarily aimed at short questions.

11. Breach of contract

Application questions. Note, however, that this content can be tested very effectively by way
of short questions.

Students should:
 note that chapters 11 & 12 must be studied together since questions will often involve
both aspects. Examples that address both are available at the end of ch 12.
 be able to identify the type of breach by applying the requirements.

12. Remedies on breach of contract

Application questions. (Both in long and short question format.)

Students must:
 study this chapter in conjunction with ch 11;
 know the requirements for each type of breach;
 comprehend that the availability of a particular remedy depends on the type of breach,
the seriousness of the breach and also on the terms of the contract (i.e. what the parties
have agreed upon.)

13 Cession of obligations
Although this chapter is aimed at short questions, it still requires the ability of applying theory.

14. Termination of Obligations

Although this chapter is aimed at short questions, it still requires the ability of applying theory.
15. Agency
 In regard to application questions, be able to distinguish between estoppel and
the liability of the agent.
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 In regard to the Doctrine of the Undisclosed Principal, only basic knowledge is

required.
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GENERAL BACKGROUND:

When a natural or juristic person contemplates the conclusion of a contract, it has to take place
within the framework provided by the law of contract. Take the following example: a company
doing business as manufacturers of solar panels is contacted by another company which
specialises in environment friendly heating systems to start a joint venture with them in order
to provide low income rural households with alternative heating systems. To regulate this
undertaking, they conclude a joint venture agreement. What requirements does the agreement
(contract) have to meet in order to be a valid agreement? Why would it be important for these
parties to conclude a contract? What protection would a contract provide to them? Does the
contract have to be in writing to have any legal effect or to provide the parties with legal
protection? What would be the consequences if one of the parties does not keep to the
agreement? What can the other party do about that? If the parties intend to conclude the
agreement for a specified period of time or for a specific purpose, what would happen at the
end of that period of time or when the purpose has been met? Do the parties have to conclude
the contract in person, or can the same legal results be achieved through agents? If one of the
parties decides to sell their business, how can one transfer any rights against debtors to the
new owners? These questions will all be answered by the general principles applicable to the
law of contract.

Other aspects will be dealt with under the principles applicable to specific types of contracts.
(These aspects will be addressed in study unit 3.) Contracts to buy components required to
manufacture the solar panels will, in addition to the general principles of contract law applicable
to all contracts, also be regulated by the law applicable to sales. Depending on the size and
turnover of the business, the contract may also be regulated by the Consumer Protection Act.
It is, therefore, important to know when this Act applies and how it differs from the common
law principles applicable to sales contracts. If extra space is required for manufacturing
purposes, new premises have to be bought. Once again, the law will regulate the contract and
specific legislation will apply when land is bought. Similarly, if premises are rented, certain
legal principles will apply to the lease of land depending on the duration of the lease. When
the business wants to buy vehicles to be able to deliver their product, they can do so by way
of a credit agreement which entitles them to ownership of the vehicles without having to pay
the full purchase price at once, or they can conclude a financial lease agreement. These
contracts are regulated by the National Credit Act. This Act plays a very important role in
business ventures as it regulated all types of credit. Credit agreements are also important in
another context. For example, where a third party contemplates buying the solar panel
business, the buyer will investigate the viability and profitability of the business in order to
determine a reasonable price to offer for the business. The auditor or financial advisor will
make an assessment of the business by looking at ongoing contracts and the rights and
obligations connected thereto, such as for instance any property which was bought, instalment
sales agreements or financial leases to buy vehicles or contracts with suppliers of goods and
services.

To bring the example perhaps a bit closer to home, one can refer to a chartered accountant
(CA), which is what many of you like to become one day. One of the duties of a CA is to audit
companies’ annual financial statements. You will be contacted by the company to render this
service to them, and you will of course only be prepared to do so if they remunerate you for
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that service. The company will have certain terms and conditions on how the service is to be
rendered, such as when you are to commence the audit and when it is to be completed; and
on your part you might have certain requirements in order to complete your task, such as to
have access to passwords, documentation etc. These rights and duties will be set out in a
contract and, furthermore, be regulated by the law of contract. When you perform your duties
as a CA in terms of such an agreement with your client it is important to have a basic knowledge
of the law of contract as it will play in important role during the performance of your audit
procedures. You need to know, for example, when your client becomes the owner of an asset
which was bought in order to determine whether the asset is correctly reflected in the financial
statements at the end of the financial year. If your client commits breach of contract, or if your
client has a claim in terms of breach committed by the other party, it could give rise to
conditional liabilities (the possible liability as a result of the breach) or conditional assets (the
possible claim as a result of the breach) which must be disclosed in the financial statements
in accordance with the correct accounting principles. You therefore have to know what a
“condition” is. This is only one example of how the law impacts the work of a CA.

This part of the module sets out the law applicable to these aspects so that you can acquire a
working knowledge of the law of contract. The aim of this course is not to turn you into an
instant lawyer but to enable you to handle routine legal aspects confidently, but at the same
time to realise when you need to seek legal advice from an attorney.
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CHAPTER 1
THE OBLIGATION

LEARNING OBJECTIVE:
This chapter provides an introduction to the general principles of contract law. Core concepts
and terminology are laid down. The main objective is to define the contract and determine its
characteristics. At the end of this chapter a student should be able to define the contract and
to distinguish between various types of obligations as well as between contracts and other
types of agreements.

1.1 Definition and characteristics

Contract law forms part of the law of obligations. A contract is, therefore, defined as an
agreement which creates obligations.1 The most important consequence of a contract
(obligation in the broader sense of the word) is the rights2 and duties (obligations in the
narrower sense) that arise from it. However, it should be noted that obligations do not only
arise out of contract. They may also flow from delict or enrichment.

But what is an obligation? An obligation is a relationship between at least two legal subjects
(which can either be natural persons or juristic persons). The relationship can also exist
between one natural person or juristic person and a group (for example a partnership or co-
creditors/co-debtors) where the party/parties is/are bound to the other(s) to do or give
something or refrain from doing something.

From this definition you can already learn a few things about contracts and obligations:

(i) The first is that it is possible for a contract to create obligations for more than one
person, so-called multiparty obligations.
(ii) The second is that the performance that is to be rendered in terms of the contract
can be a duty to do something or a duty to give something (a so-called positive
obligation), for example an obligation to build a house or to deliver a car. However,
it is also possible that the contract can create so-called negative obligations,
entailing that you refrain from doing something, for example not sub-letting a flat.

The person who is bound to perform in terms of the contract has a duty/obligation and is called
the debtor. The person to whom he is bound has a right. He is the creditor. In the context of
contracts this right is called a personal right.

An obligation has two very important consequences:

(i) The first is that performance of such obligation is recognised by the law and once
it is performed in accordance with the contract it cannot be claimed back.

1
Note that “obligation” can be used in two ways in the English language, namely in the broader sense to refer to
the contract as a whole, and in the narrower sense to refer to the debtor’s duties.
2 In the case of contract, it is personal rights.
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(ii) The second is that the obligation may be legally enforced. The second element
defines the character of a contract. Once a valid contract is concluded, the debtor
has to perform. If he fails to do so, the creditor can enforce his obligation in a court
of law.

Sometimes the second element may be absent, in which case the agreement is not a contract,
albeit it can still create obligations in the form of a natural obligation.

1.2. Natural obligations

Natural obligations also arise from agreement. As already said, the difference between natural
obligations and so-called civil obligations (such as contracts) is that natural obligations are not
enforceable in a court of law. If the debtor performs, performance will be valid but if he fails to
perform, performance cannot be claimed or enforced. Informal bets and gambling contracts
(at least those which are not regulated by gambling legislation) are examples of natural
obligations.

1.3. Other agreements

Not all agreements create obligations. Only agreements that are made with the intention of
creating obligations are contracts. Agreements to do something or to refrain from doing
something, but which are made without the intention to be legally bound by them, are not
contracts, for example social agreements (such as to agree to go for coffee) and so-called
gentleman's agreements (such as to agree to remain friends for life).

On the other hand, you must also realise that there are other types of agreements that may
create or terminate obligations but which are not contracts. Marital agreements (marriage),
debt extinguishing agreements (such as release from or waiver of a debt) and real agreements
(a deed of transfer to effect transfer of immovable property) are examples of agreements that
fall into this category and should therefore be distinguished from contracts.

1.4. Contract types

As we have mentioned already, a contract is an agreement that creates obligations (which are
enforceable). It is possible to create a wide variety of obligations by contract. Generally,
because of the principle of freedom of contract in South African law, it is possible to conclude
any type of contract as long as its content or its performance is not illegal or against the public
good (so-called contra bones mores contracts). However, there are certain standard or set
relationships which are regulated by law. Sales and leases are typical examples of such
relationships. Although these contracts have to comply with the normal requirements for all
contracts and are regulated by the legal principles generally applicable to all contracts, there
are essential elements that define them and distinguish them from other types (the so-called
essentialia) and certain consequences that will arise from these categories of contract. These
specific types of contract will be addressed later on in the course (Section C). At this stage we
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will focus on the general principles, i.e. those principles that apply to all contracts irrespective
of their type.

However, generally, three types of contracts are distinguished, namely unilateral,

bilateral/multilateral and reciprocal contracts. The distinction is derived from the nature of the
obligations created by each type of contract.

 A unilateral contract creates obligations which only involve rights for one party/group
and duties for the other, for example a donation.

 A contract also may be bilateral or multilateral. Then both parties/groups have rights
and duties. In other words, there is more than one obligation, for example a contract
for loan of use (so-called financial lease) or a loan.

 A reciprocal contract is also a multilateral contract, but it contains an additional element,

namely that the obligations of the parties exist in exchange for one another. For
example, the obligation to pay the purchase price and the obligation to deliver the
goods in the case of a cash sale.

1.5 Requirements for a valid contract

To conclude a valid contract, certain requirements have to be met. These requirements are:
 Capacity to act (chapter 2)
 Agreement or reliance of agreement (chapter 3)
 Proper behaviour at conclusion (chapter 4)
 Formalities (chapter 5)
 Lawfulness (chapter 6)
 Possibility of performance (chapter 7)
 Certainty of performance (chapter 8)

These requirements are discussed in the subsequent chapters.

It must be kept in mind that the common law principles of contract law are based on the
foundations of freedom of contract (private autonomy) and the principle of sanctity of contract
(namely that contractual obligations must be kept and, therefore, are enforceable). These
principles are in line with the constitutional values of freedom and equal protection before the
law (s 9). Since the Constitution is the highest law of the country, constitutional values will
always rank before the common law. Section 39 of the Constitution provides that the
application of and the interpretation of the existing legal principles, such as those of the law of
contract, as well as the creation of new legal principles, should always reflect the underlying
values of the Constitution. Where these values have already had an effect on existing
principles of law, reference will be made to the Constitution in the discussion.
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TEST YOURSELF:

1. Define a contract.
2. How does a contract differ from other agreements or arrangements?
3. How does a natural obligation differ from an obligationary (civil) obligation?
4. Differentiate between the different types of contracts with reference to how they
operate.
5. What are the requirements for the conclusion of a valid contract?
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CHAPTER 2
CONTRACTUAL CAPACITY

LEARNING OBJECTIVE
Students must realise that certain factors, such as age or mental capacity, may influence a
person’s capacity to conclude a contract in so far that he or she cannot act independently and
must be assisted by a parent, guardian or curator, depending on the circumstances.
Contractual capacity is the first requirement for concluding a valid contract. At the end of this
chapter, a student will be able to distinguish between situations where a person has full
contractual capacity, has no contractual capacity whatsoever or has limited contractual
capacity and what the implications are on the rights and duties of both parties to the contract.

2.1 Introduction

Contractual capacity3 is the capacity to perform juristic acts, such as to conclude contracts,
independently without the assistance of anyone else. The crux of a juristic act lies in the will of
the acting party. The capability to form a will (volition) and to express that will is essential for
the performance of a juristic act. The law only recognises a contract if it is concluded by a
person who is capable of forming and expressing his will.

The point of departure is that a person must realise the nature, scope and consequences of
his acts before he will be regarded as having contractual capacity. Until a person has reached
a certain level of intellectual capacity, insight and judgement he will not be considered
contractually competent. Age and mental condition are two factors that influence a person’s
contractual capacity.

2.2 The influence of age on contractual capacity

The law determines two age limits which have important consequences for contractual
capacity. These limits are 7 years and 18 years.4 A person under the age of 7 years is called
an infans, while a person who is 7 years or older but still younger than 18 is called a minor.

2.2.1 The infans

An infans has no contractual capacity whatsoever. All contracts must be concluded on his
behalf by a parent or guardian. When a contract is concluded on behalf of the infans it is,
however, important to note that the infans himself acquires the relevant rights and obligations.
The personal rights and obligations which arise from the contract bind the infans and not the
parent or guardian (but will be enforced by them on behalf of the infans).

3
Contractual capacity must be distinguished from legal capacity (the capacity to have rights and obligations; i.e. to
be a legal subject) and right of appearance (the capacity to act independently as plaintiff or defendant in a legal
matter). It must also be distinguished from the capacity to incur liability in civil and criminal matters.
4 According to the Children’s Act 38 of 2005 a person reaches majority at the age of 18. (This used to be 21 years.)
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2.2.2 The minor

A minor has limited contractual capacity. By his own juristic act he can acquire rights but no
obligations. As for the acquisition of rights, he has full contractual capacity, but as for the
acquisition of obligations, his contractual capacity is limited. It is limited insofar as the minor
will only become contractually obligated if he has acted with the permission or assistance of a
parent or guardian. The parent or guardian can also conclude the contract on his behalf. When
a parent or guardian grants permission to contract, it can be granted expressly with a specific
transaction in mind, or it can be a wide general permission for a specific class of transactions.
Permission may also be given after the contract has been concluded by means of ratification.
Permission may be given tacitly or be implied from the circumstances.

If a minor concludes a contract without assistance and obligations arise for him from that
contract, the contract does not operate as it normally would. To the extent that the minor has
acquired rights the contract is binding, but to the extent he has acquired obligations, it is not
binding. The contract is not void since the minor can still enforce the rights he has acquired
from it. However, the other party cannot enforce the rights he acquired against the minor.
Under the Consumer Protection Act5 (which was introduced to protect the rights of consumers
when goods or services are supplied to the consumer6 by a supplier in the normal course of
such supplier’s business for consideration or counter-performance7), an unassisted contract is
voidable at the choice of the consumer. Furthermore, if the minor has performed in terms of
the contract he can, with the assistance of his parent or guardian, recover his performance. 8
That would mean that, if the minor, for example, has paid he can claim back the money with
the assistance of his parent or guardian, but the major will not be able to recover his
performance outright.

In light of the above it is clear that a person who contracts with an unassisted minor may find
himself in an unenviable position. There are, however, two possible remedies for him:

(i) In the first place, if the contract is reciprocal, the minor will not be able to enforce
performance unless he tenders performance as well. (This is the defence of the
exceptio non adimpleti contractus and will be dealt with under 12.6 infra as one of
the remedies for breach of contract.)

(ii) In the second place, the possibility exists that the minor may be held liable on the
grounds of unjustified enrichment. Unjustified enrichment is not linked to a juristic
act and, therefore, contractual capacity is irrelevant. In order to succeed with a
claim on the grounds of unjustified enrichment, the plaintiff will have to prove that
at the moment of instituting the action, the minor was enriched at the plaintiff’s
expense. This implies that he can only claim his own impoverishment or the minor’s
enrichment, whichever amount is smaller at the time the action is instituted. A credit

5 Act 69 of 2008.
6 A consumer is all natural persons as well as juristic persons with an annual turnover of less than R2 million. It also
excludes the State.
7
The Act defines consideration or counter-performance rather broadly to include that the goods and services are
provided in exchange for money, but it can amongst other things also be given in exchange for other goods or
services, or in exchange for loyalty credit or any other undertaking.
8 That is known as restitutio in integrum.
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purchase provides an example where unjustified enrichment can become relevant.

If an unassisted minor bought goods on credit and took delivery the seller cannot
enforce payment against the minor. The seller’s estate has been impoverished with
the cost price (the price he paid for the goods). The minor is enriched in an amount
equal to the value of the goods at the moment the action is instituted. If the goods
have been damaged or depreciated in value, the enrichment claim will be limited to
that amount. Therefore, if the minor has damaged or consumed the goods by that
time, this would erode or extinguish the seller’s enrichment claim, unless it is a
claim for living necessities, such as food, clothes or medicine. In the case of living
necessities, the minor will be liable for the full purchase price. If it does not relate
to living necessities, and the minor has already sold the goods to a third party, the
amount of his enrichment would be equal to the price received if he has not spent
the money yet or the value of the asset bought with the proceeds. If the minor is
still in possession of the goods he bought, he can return it in whatever condition it
might be in and whatever value it may now have.

There are, however, a number of exceptions to the principles discussed above. They are:

(a) Fraud by the minor

If the minor fraudulently misrepresents himself as being 18 or older and has already reached
such a stage of development that he could reasonably be mistaken for a major, and the other
party acts in good faith on the misrepresentation, the minor will be held bound by the contract.

(b) Ratification

Once he becomes a major, he can ratify any agreements he concluded when he was a minor.
The effect of ratification is that the agreement becomes fully operative with retrospective effect
as if the minor had the necessary assistance at the time of concluding the contract. Ratification
can take place expressly or tacitly.

A parent or guardian may also ratify a contract that was made without the necessary
permission. Again, this can be done expressly or tacitly, for example by paying for the item
that the minor has bought without assistance.

(c) Statutory exceptions

There are a few statutory exceptions on the above rules. For instance, a minor who has
reached the age of 16 years can open a savings account at a financial institution and can also
make a will without parental assistance.
 18

(d) Emancipation

An emancipated minor can conclude certain agreements without specific permission from
his/her parents or guardian for that particular transaction. The minor becomes emancipated
when his/her parents or guardian allows him/her to independently conclude certain types of
agreements within the economic sphere in which he/she is active. Emancipation, therefore,
does not imply permission to perform any juristic act, but a certain class or category of juristic
acts which are related to the economic sphere which he/she is active in. Emancipation requires
that the minor has the ability to act independently when it comes to financial or economic
matters. In general, a certain degree of economic independence is required. A separate place
of residence and an own business might provide some indication that the minor is
emancipated, but the determining question would be whether his parents allow him/her a
certain degree of contractual freedom. Emancipation can take place expressly or tacitly, but
where it is given it does not mean that his/her minority status has come to an end. The consent
can later on be revoked.

2.3 The influence of mental capacity on contractual capacity

The mental condition of a person can influence his ability and therefore also his contractual
capacity. Two forms of mental incapacity are specifically relevant, namely mental illness and
prodigality. It should also be kept in mind that liquor and drugs can influence a person’s
capacity for volition (the ability to form a will) and to fully comprehend the legal effect of his
acts. It will, however, depend on the circumstances of the case whether such person will be
totally contractually incapacitated or whether his contractual capacity will only be limited. This
is a factual enquiry to establish the extent to which the alcohol or drug has limited the person’s
ability to form a will.

2.3.1 Mental illness

Once the High Court has declared a person mentally ill, that person has no contractual capacity
whatsoever. All contracts must be concluded on his behalf by his curator. Any juristic act that
a mentally ill person attempts to perform is null and void. If performance was made to a
mentally ill person in terms of a contract that was concluded without assistance of the curator,
the other party would only have a claim based on enrichment.

Mental illness (insanity) is a question of fact, though. If a mentally ill person experiences a lucid
interval at a moment when he is temporarily sane (a so-called lucidum intervallum), he has full
contractual capacity at that moment even though that transaction was concluded without the
assistance of the curator.

2.3.2 Prodigals

A prodigal (or spendthrift) is someone who, due to a defect of judgement or character,

recklessly squanders his assets. The fact that a person has a tendency to squander does not
 19

affect his contractual capacity. The Supreme Court must declare him a prodigal and forbid him
to manage his own affairs before his contractual capacity is affected. The effect of such an
order is that the prodigal’s contractual capacity is limited. A curator is appointed and without
the assistance of the curator, the prodigal cannot acquire obligations. He can, however,
acquire rights if unassisted. His position is therefore the same as that of a minor. 9

2. 4 The influence of marriage10 on contractual capacity

Unless they have concluded an antenuptial contract (ANC), all marriages concluded in South
Africa are in community of property. This matrimonial property regime entails that the husband
and wife have a joint estate and that all their assets and liabilities (even those that they had
before the marriage) are consolidated into one estate. Both spouses have a 50% share to the
estate which will be divided at the dissolution of the marriage, whether by death or divorce. It
is important to note that all liabilities are also shared equally (so-called community of assets
and liabilities). Marital power was abolished by statute in 1984; thus, for all marriages both
spouses now have full contractual capacity and contracts concluded by any of the spouses will
bind the joint estate, even if concluded without the consent or permission of the other spouse.
Both spouses will acquire rights and obligations from such contracts. There are, however, a
few transactions where permission of the other spouse is still required in order to bind the joint
estate. Written consent is required to alienate or attach immovable property and investments,
to stand surety, to enter into a credit agreement as a credit receiver (consumer), to buy certain
immovable property or to withdraw money held in the name of the other spouse at a bank or
other financial institution.

On the other hand, if the parties decide to marry without community of property, they will have
to conclude an antenuptial contract. This would entail that each spouse keeps his/her separate
estate and that there will be no community of assets and liabilities, except for household
necessities. Each marriage concluded without community of property after 1 November 1984
is automatically concluded on the basis of the accrual system, unless such system is also
excluded by means of the antenuptial contract. In all cases of marriage without community of
property, both spouses have full contractual capacity to bind their personal estate except for
household necessities, where they will be jointly and severally liable for expenses.

Also note that a minor who enters into marriage with the consent of his/her parents or guardian
obtains full contractual capacity.

9
Also note that once a person has been declared insolvent by the Court, certain restrictions will be placed on his
contractual capacity as well. This aspect will be dealt with in the 2nd semester.
10 “Marriage” includes same sex unions and customary unions.
 20

TEST YOURSELF:

1. What is the main requirement for contractual capacity?

2. Which factors may influence a person’s capacity to enter into a contract?
3. What is the legal position on the contractual capacity of an infans?
4. What is the legal position on the contractual capacity of a minor?
5. What is the legal effect of a contract that is concluded by a minor without the assistance
of a parent or guardian? Refer to both the legal positions of the minor and the other
party to the contract. What remedies are available for the other party?
6. Explain the exceptions that exist on the legal position of the minor.
7. What is the legal position on the contractual capacity of an insane person?
8. What is the legal position on the contractual capacity of a prodigal?
9. What is the effect of marriage on the contractual capacity of a person?
 21

CHAPTER 3
AGREEMENT AND RELIANCE OF AGREEMENT

LEARNING OBJECTIVE:
This chapter discusses the most important validity requirement of all. Agreement is the basis
of contract conclusion. However, in certain circumstances a contract may still be valid despite
the fact that there was no agreement but merely reliance of agreement. Students will be
introduced to the concepts of offer and acceptance as well as to different theories on when
and where a contract is concluded. Emphasis shall also be placed on conclusion of contracts
in the electronic environment. The different forms of mistake will also be discussed. At the end
of this chapter a student will be able to identify whether a valid contract exists, and if so, where
and when the contract was concluded.

3.1 Agreement as requirement for validity

The most important requirement and basis for contractual liability is agreement (consensus) or
reliance of agreement.

Chapter one explained that not all agreements create obligations. A contract will only be
created when the parties reach agreement with the intention of creating an obligation. Once
their intentions are directed at the same thing and they agree or reach consensus with the
intention of creating obligations, the first requirement for a valid contract is met.

To reach agreement, the parties must consciously agree. It is of no use if parties accidentally
have the same intentions but do not consciously agree. (For example, I want to sell my car
and X, who is unknown to me, has been admiring my car for a long time and wants to buy it
but he does not inform me of his intentions. No contract will come into existence as there is no
conscious meeting of the minds.) Because the law is unable to enter the heads of the parties,
it is forced to make deductions from their declarations. The parties therefore have to declare
their will, either in writing, orally or sometimes even tacitly without words or through deeds
(such as to nod your head, take a card from a machine, pay money, or simply by not objecting
and thereby creating the impression that you agree). In other words, their wills or intentions
have to be communicated before they can reach consensus. In legal terminology we refer to
declarations of will made with the intent to create obligations as an “offer” and “acceptance”.

3.2 Offer and acceptance

3.2.1 What is an offer?

An offer is a proposal or expression of willingness to contract on certain terms, the acceptance

of which will create a contract.
 22

3.2.2 Requirements for a valid offer

To constitute a valid offer, three requirements have to be met.

(i) The offer must be made with the serious intention to conclude a contract (obligation).
In chapter 1 we already distinguished between contracts and other agreements, such
as social dates where there is no intention to create enforceable rights and obligations.
The same applies where you make an offer to someone else in jest but you have no
intention to create a contract. It should also be noted that a statement of intent (which
is a document that indicates that a person has the intention to conclude a contract) is
not an offer (or a contract) as it only serves as the basis for further negotiation or
contractual terms.

(ii) The offer must be clear, certain and unambiguous.

(iii) There must be a clear communication of wills and the offer must be made to a particular
person or persons and generally not made to the public at large.

It is on these grounds that one distinguishes between an offer and an invitation to make an
offer.

An advertisement is an example where a declaration of intent will sometimes be an offer but

in most cases will merely constitute an invitation to make an offer and thereby to do business.
The reason for that appears from the facts of Crawley v Rex 1909 TS 1105. In this case a store
displayed a notice on its window stating that tobacco was for sale at a special price. After he
already bought some tobacco, Crawley re-entered the shop and wanted to buy more for the
special price. The shop owner refused to sell more tobacco to Crawley. Crawley argued that
by means of the notice the shop owner made an offer, which he had accepted and that the
shop owner was therefore obliged to deliver. The court rejected this argument and held that
the advertisement was merely an invitation to the public to make an offer. Crawley was the
one making the offer and the owner was not obliged to accept the offer. The court held that no
contract was concluded since the owner refused Crawley’s offer.

If an advertisement were to constitute an offer at all times, it would mean that the advert is an
expression of willingness to conclude a contract on the terms stated in the offer, resulting in
an obligation being created which may be enforced in a court of law. If a store were to run out
of the advertised product it could be bombarded with hundreds of claims from angry customers.
This is the principle that applies in general to advertisements in newspapers, magazines,
catalogues, pamphlets, junk mail or on websites. It also applies to the prices on items in self-
service stores. The Consumer Protection Act 68 of 2008,11 however, has very specific
regulations in place when the price displayed is incorrect.

But how is the public then protected against false advertising? That is done through complaints
to the Advertising Standards Authority of SA and by means of the Trade Practices Act 1976.

11 Which came into operation on 1 April 2011.

 23

Also note the provisions of the Consumer Protection Act regulating the right to fair and
responsible marketing (ss 29-31).

However, the courts have held that an advertisement where a sum of money is offered if a
product does not function properly will constitute an offer. The case of Carlill v Carbolic Smoke
Ball Co [1893] 1 QB 256 illustrates this point. The Carbolic Smoke Ball Company’s
advertisement stated that if people inhaled their smoke ball three times a day it would prevent
them from contracting the influenza virus. They also warranted that they will pay £100 if the
product failed. Mrs Carlill used the product as prescribed, but still contracted flu. The Court
held that, despite the fact that an advertisement is normally considered to be a mere invitation
to do business, it will constitute an offer if it is linked to a money back guarantee.

Communication of wills means that an offer should be directed to a specific person or persons.
An offer to the public, as in the case of an advertisement, would normally not constitute an
offer. A reward, on the other hand, may sometimes be regarded as an offer. However, the offer
still has to come to the knowledge of the offeree before he can accept it. In the case of Bloom
v American Swiss Watch Co 1915 AD 100, after a robbery at an American Swiss store, an
reward was promised to anyone who would come forward with information which could lead to
the arrest of the robbers. Bloom provided the necessary information. However, he never had
any knowledge of the reward. Consequently, because there was no communication of wills he
never was in a position to accept the offer. Take note that in this instance the advertisement
would normally constitute an offer, being an advertisement for a reward, but no contract could
come into being because Bloom did not have any knowledge of the offer (reward).

A tender is similar to an advertisement. Tenders are well known in business contexts and are
regularly used for big building projects or government projects. The person who requests the
tender does not make an offer but merely invites an offer (tender) from the other party. The
legal position regarding auctions differs slightly. Here certain rules or conditions apply as
regards the manner in which the auction will be handled, which rules are made known
beforehand. A distinction is made between auctions with a reserve price (where a
predetermined price is to be exceeded before the sale takes place) and auctions without a
reserve price. Auctions are normally held with a reserve price, unless it is stated differently.
The auctioneer invites the attendees (bidders) to make an offer which is then to be accepted
or rejected by the auctioneer. When he accepts the offer, agreement is reached and a contract
is concluded. In the case of auctions without a reserve price, the auctioneer makes the offer
and the terms of the offer are that the item is to be sold to the highest bidder. The offer becomes
accepted when the highest bid is made, and the contract is concluded. In Frank R Thorold
(Pty) Ltd v Estate Late Beit 1996 4 SA 705 (A), valuable books were auctioned at a public
auction on condition that the highest bidder would be the buyer and all disputes would be
settled at the discretion of the auctioneer. The auctioneer (Frank Thorold) did not see L raising
his hand and closed the bidding on Beit for R80 000. L immediately objected and the auctioneer
decided to reopen the bidding. Once again the bidding was closed on B, but this time for the
sum of R300 000. B, however, refused to pay more than R80 000. The court held that there
was a dispute and that the auctioneer was entitled to declare the first sale void and to reopen
the bidding.
 24

The Consumer Protection Act 8 of 2008 sec 45 provides special provisions regarding auctions.
In terms of sec 45(3) a sale by auction will only be complete when the auctioneer announces
its completion by the fall of the hammer, or in any other customary manner, and until that
announcement is made, a bid may be retracted. Sec 45(4) further provides that if any item on
auction is subject to a reserved price then notice must be given of this condition before the
item is auctioned.

It is also important to refer to cases where one of the parties has stronger bargaining power
than the other one. Here, one has to determine whether the terms of the offer (or contract)
have come to the knowledge of the other party. An example here is an airline ticket where the
terms of the contract are either print in small print on the backhand of the ticket, or there is only
a reference to the issuer’s standard terms. Did the receiver of the ticket have knowledge of the
terms, or was his attention drawn to them? The Consumer Protection Act requires that such
terms should be made public, and that they must be reasonable. The same principles apply to
the small print found on insurance contracts and bank loan documentation which are
concluded by way of standard form contracts. Where contracts are concluded electronically by
clicking on an icon, the terms of a standard contract which appear on a linked page would only
become part of the contract if a reasonable person could notice the reference to such page
and the content of those terms are accessible and in a legible format that are downloadable
and storable.

3.2.3 Revocation of an offer

An offer is not a contract yet. It may, therefore, be revoked before acceptance. Normally,
revocation is only possible when such revocation has come to the knowledge of the offeree.

An option constitutes an exception to the general rule. Where the offeror is contractually bound
to keep an offer open by means of an option, the offer may not be revoked. An option is an
agreement to keep open an offer for a certain period of time. Within the option period, the
offeror may neither make an offer to anybody else nor accept an offer from anybody else, not
even for a higher price. When the option is exercised (meaning the original substantive offer
is accepted), a contract is concluded on the terms set out in the offer. E.g. A wants to sell his
house and makes an offer to B. B wants more time to think it over and A offers to give him two
weeks to think about it. B accepts it. In this case, A made two offers to B: the first one was the
substantive offer to buy the house and the second was an offer for a two week option on the
house to keep the substantive offer open for that time. When B accepts the second offer, the
option is concluded. This does not mean that he accepted the substantive offer; a contract of
sale will only come into being once B exercises the option. However, he might decide not to
exercise the option, in which case the substantive offer will lapse. If A were to accept an offer
from C within the option period, the option contract will be breached and B will be able to sue
A for breach of contract.

Because an option is based on contract it is important to remember that the option contract
must also meet the same validity requirements as all other contracts.
 25

3.2.4 Various grounds for lapse of an offer

(a) An offer lapses after a reasonable time or at the time determined in the contract. That
means that it has to be accepted within a reasonable time. E.g. Dietrichsen v
Dietrichsen 1911 TPD 486 where Dietrichsen wished to buy a portion of a farm owned
by his brothers. After negotiations the transaction was put into writing in a document
dated 1 November 1907, which was signed by his brothers as the sellers on that date
but only by him during February of the following year. The Court held that the offer was
not accepted within a reasonable time and that no contract was concluded. In Bloom v
American Swiss Watch Co supra, Bloom came forward with the information that could
lead to the arrest of the robbers after the police had already solved the crime, by which
time the offer had already lapsed.

(b) An offer may also lapse if one of the parties dies or becomes incapable of concluding
a contract, unless the offer provides for substitutes. However, this principle will probably
not be applied as strictly today as it used to be.
(c) An offer lapses when it is rejected by the offeree or when a counter offer is made. A
counter offer is therefore a rejection of the original offer followed by a new offer. A offers
to buy B’s car for R100 000. B responds by telling A that he is prepared to sell it to him
for R120 000. If A does not accept, B cannot fall back on A’s original offer of R100 000
as that has lapsed already.

(d) An offer lapses when it is not accepted in accordance with the offer. A states that his
offer must be accepted in person but B accepts by means of an sms. The offer lapses
due to the acceptance not being made in the prescribed manner.

(e) An offer lapses when it cannot create an obligation, for example the content of the offer
is impossible or illegal such as to offer to sell your baby on the internet.

3.2.5 What is an acceptance?

An acceptance is an express or implied declaration by the offeree to the offeror of his intention
to be bound contractually on the terms of the offer.

3.2.6 Requirements for a valid acceptance

(a) An offer may only be accepted by the person to whom the offer was made (the so-
called addressee). An offer may sometimes be a general offer, such as in the case
of a reward. It must, therefore, be interpreted in order to determine its scope.

(b) An acceptance must be made with a serious intention to conclude a contract (and
therefore an obligation).

(c) An acceptance must be unequivocal and made in accordance with the terms of the
offer. It cannot be qualified; if so, it will not amount to an acceptance but it will be
 26

a counter offer. For example, the offer states A wants to sell his car for R50 000 to
B. B cannot reply by accepting the offer to buy A’s car for R48 000 as that will
amount to a counter offer. However, the offeree may ask whether the offeror would
accept different terms, such as a lower price. That is not an acceptance, but at the
same time it is also not a counter offer. This is still part of the negotiations. The
same will apply where the offeree partly accepts but still requires information about
some of the terms, such as the engine capacity of the car, for example.

(d) The acceptance must be communicated to the offeror. (However, in the case of
the postal contract, things will be slightly different.) Silence is not enough.
However, a nod of the head, a handshake or payment may constitute an
acceptance.

(e) The acceptance must be made at a time and in a place and manner prescribed by
the offer. In Ficksburg Transport (Edms) Bpk v Rautenbach 1988 1 SA 318 (A), R
granted an option to F to buy a farm. The option had to be exercised in writing by
15 May. On 15 May, F’s attorney went to R’s farm to notify him that the option is
being exercised but he found that R was temporarily out of town. Subsequently,
the attorney attached the letter to the front door and handed a copy to an employee.
On his return the following day, R found the letter. He argued that the option was
not exercised in time. The majority of the court held that F did not do everything in
his power to comply with the prescribed manner of acceptance, because he did
not make any enquiries as to the whereabouts of R prior to serving the notice and
did not make any arrangements to serve the notice at a later time if R was not
available. The minority, however, took a more reasonable stance. They held that
F did everything possible to serve the notice in time and that the option was,
therefore, served in time. A subsequent case came to a similar conclusion. In
Amcoal Collieries Ltd v Truter 1990 1 SA 1 (A) T granted A an option to purchase
coal rights to a property. In terms of the contract, T chose his farm “Vandyksput”
as service address for all notices. Three days before expiry of the option, A
instructed X to deliver a letter to T exercising the option. As T was not home, X
slipped the letter under the door. By the time T read the letter the option had
already expired. The Court held that the option was exercised as T indicated this
address as the chosen address for exercising the option.

3.3 When and where does the contract come into being?12

A contract comes into being at the time when and place where agreement is reached. One can
stipulate the time and place contractually. In the absence of such a stipulation, one of three
theories is applicable, depending on the circumstances of the case.

When the offer is made by means of an instantaneous form of communication, e.g.

telephonically (landline or cellphone), the contract is concluded when the offeror is informed of

12
It is, amongst other things, important to know when and where a contract is concluded, as it will indicate which
court has jurisdiction over the contract, and which legal system applies. It can also have implications for certain
duties such as, for example, if payment is to be made on conclusion or within a certain time after conclusion.
 27

the acceptance of the offeree. This theory is called the information theory. The acceptance
does not have to be made by telephone. It can be done by means of the post (snail mail), as
long as it is not an electronic means of communication. In other words: where A, in
Stellenbosch, makes a telephonic offer to B, in Johannesburg, on the 1st of January, and B
accepts the offer by post, and the letter reaches Stellenbosch on 10 January, but is only read
by A on the 15th when he returns from vacation, the contract is concluded on 15 January as
that is the day on which A is informed of the acceptance of his offer.

In the case of a postal contract, where the offer is made by post (snail mail), the postal theory
determines that the contract comes into being at the time and place of posting the acceptance,
unless the offeror specifically states otherwise. In other words: the contract is concluded at the
time and place where the letter of acceptance is dispatched, which is normally indicated by
means of the post mark. The postal theory is applicable when the following requirements are
met:
:
(a) The offer must be made by post and in the normal run of business.
(b) The transaction must be a commercial transaction.
(c) The acceptance must be made via the post.
(d) The acceptance must not be addressed or posted incorrectly because of a mistake
by the acceptor and the postal services must be in proper working order.

The basis for the postal contract is an assumption, namely that the offeror had consented to
the acceptance being made at the time of posting. The scope of the postal theory is not clear.
It is probable that the postal theory also applies to telegrams, although there is some criticism
towards this approach. The postal theory does not apply to telephones. In S v Henkert 1981
(3) SA 445 (A) it was ruled that telephones present a method of instantaneous communication,
and that these contracts are therefore covered by the information theory. The Supreme Court
of Appeal in Jamieson v Sabingo 2002 (4) SA 49 (SCA) also ruled that telex and telefax
communication should be treated similarly to telephone communication and that the
information theory would therefore apply. (Note, however, that this case was heard before
ECTA came into operation.)13

In the case of a postal contract, the withdrawal of an acceptance or the rejection of an offer is
problematic, especially when a faster means of communication is used for the withdrawal or
rejection. For instance: A sends an offer in the post to B. B accepts it by post. B then changes
his mind. He sends a rejection with a faster medium of communication, such as e-mail. Or B
rejects an offer by mail. However, thereafter he sends an acceptance with a faster medium,
which reaches A before the rejection does. In the first scenario, strictly speaking, the contract
was concluded when the letter of acceptance was placed in the mailbox. However, on grounds
of public policy and fairness, the withdrawal will be allowed unless there is some detriment for
the offeror. The same applies for the second scenario.
Where the offer or the acceptance, or both, is made by means of an electronic means of
communication, (e.g. e-mail, sms or other electronic data message), the situation is regulated
by the Electronic Communications and Transactions Act (ECTA) 25 of 2002. Section 22 of this
Act stipulates that a contract is concluded when the acceptance of the offer (in the form of an

13 One can also argue that a facsimile, or a telex, is a data message which is regulated by the Act.
 28

electronic data message) is received by the offeror. “Received”, in turn, means that the data
message has entered an information system and is capable of being retrieved by the
addressee14 (s 23(b)). The Act also provides that the message is deemed to be accepted at
the usual place of business or residence of the addressee. In other words: even if the
acceptance is read at an internet café or abroad, it will still be deemed that the contract is
concluded at the usual place of business or residence of the offeror. It is also irrelevant when
the message is read since the Act is based on the receipt theory. The date on which the
message is received in the offeror’s inbox will be the date on which the contract is concluded.
This would mean that the contract could technically be concluded without the offeror’s
knowledge. Problems could thus arise where the network or computer software malfunctions,
especially where the acceptance of the offer is linked to a particular date. However, these are
problems that are experienced in the context of the postal theory as well.

Contracts that are concluded during video conferences or in chatrooms on the internet are for
all practical purposes treated similar to instantaneous communication methods and, therefore,
similar to contracts concluded by telephone.

Because the users of electronic means of communication can be anywhere in the world when
data messages are exchanged, the parties are advised to agree on where and when the
contract has been concluded and to indicate that in the contract, especially where an
international contract is concluded.

3.4 Mistake

Where one of the parties makes a mistake, there is no consensus and no contract, unless a
contract can be based on reliance (which will be discussed later).

The mistake/error must be material with regard to the content of the contract/obligation.
According to the facts of Maritz v Pratley (1894) 4 SC 345, a mantle-piece was displayed
together with a mirror at an auction. The buyer made an offer because he thought the mantel
piece and mirror were sold as a set, only to discover that he made a mistake and that it was
only the mantel piece that was for sale. No contract was concluded on grounds of material
mistake.
However, when a person makes a mistake but it is a case where he would at any rate have
concluded the contract, even if he had known about the error, such an error is not material. In
the case of Parow Lands (Pty) Ltd v Schneider 1951 3 SA 183 (SWA) a German buyer did not
understand the terms of a contract written in English. However, during cross-examination it
appeared that, even though he paid more for the property than it was actually worth, he would
in any case have bought the property, even if he had understood the terms of the contract.

14
“Addressee” here refers to the person to whom the electronic message was directed and not necessarily to the
offerree (addressee). This is the direct words as used in s 23 of the Act. The addressee can therefore either be the
offeror or the offeree, depending on the circumstances and the facts of the case.
 29

3.4.1 Types of mistake

One has to distinguish between two types of mistake, namely material mistake and error in
motive.

Material mistake occurs in connection with the material terms of the contract (e.g. the identity
of the other party, the content of the performance15 or the nature of the contract16), in the
absence of which the parties would not have concluded the contract. Material mistake deals
with an error as regards the content of the contract.
An error in motive is not material. It is merely a mistake which motivated a party to conclude a
contract. But it does not affect the content of the agreement as such. E.g. A buys a cow
because he thinks his cow is dead but in actual fact she is not. Error in motive deals with an
error as to why the contract was concluded.

The two types of errors differ in their legal effect. In the case of material error, no consensus
is reached and, therefore, no contract is concluded. (It is often said that the contract is void,
though, technically, no contract was concluded.) However, in the case of an error in motive,
consensus is reached and a contract comes into being.17

3.5 Reliance as alternative basis for a contract

Up to now we have concentrated on agreement, BUT there are cases where contracts may
come into being although one or both parties laboured under a material mistake/error. A party
(A) may hold another (B) to a contract if no agreement was reached because of material error
but A reasonably expected that there was agreement between them. In other words, he had a
reasonable reliance of agreement.

3.5.1 Requirements for the reliance theory

(i) Firstly, reliance should be created through the conduct of the other party.
(ii) However, reliance on its own does not suffice; the reliance must also be
reasonable.

The requirement of reasonable reliance was why Steyn lost his case against LSA Motors in
Steyn v LSA Motors 1994 (1) SA 49 (A), and why he did not become the proud owner of a car
sponsored by them after playing the required hole-in-one at a golf tournament. The prize was
mentioned in the press and that is where Steyn read about. It was also advertised on a bill
board at the 17th hole. The Court held that Steyn was an amateur and that prizes are only given
to professional players. It was, therefore, not reasonable for Steyn to have expected to win
more than a few hundred rand

15
See the facts of Maritz v Pratley in 3.3 as example.
16
You want to buy the thing but the other party only wants to lease it to you.
17 In the event of an error in motive, the contract might be rescindable in certain circumstances. See Ch 4.
 30

Where a material mistake is made, one can still ask whether a contract could have come into
existence based on reliance. Is the person who wants to enforce the contract able to show a
reasonable reliance that agreement was reached? The onus is on the person who wants to
enforce the contract. However, this procedure is seldom followed by the courts as the question
is mostly asked from the other side around. This approach is discussed in the next paragraph.

3.5.2 Iustus error

Where there is clear proof of the existence of a contract, for example if there is a signed
document, the court places the onus on the contract denier. He must show that his error is
reasonable. In other words, they do not ask whether the reliance of the contract enforcer was
reasonable, but whether the denier has made an iustus error (reasonable material mistake).

The process works as follows: The person who wants to enforce or assert the contract, firstly,
has to show that there is an ostensible (apparent) contract, for example a written and signed
document. According to the maxim caveat subscriptor,18 the person who signed the contract
can usually not avail himself of the fact that he did not read the contract or did not understand
its terms. By signing the contract, he created the reliance that he will be bound by the terms of
the document. The person who denies the contract must then show that his mistake was
material. The onus is, therefore, on him. The denier of the contract must also show that his
error is reasonable (iustus). Generally, this requirement will be satisfied if his error was caused
by the misrepresentation of the other party.

In the case of George v Fairmead 1958 (2) SA 465 (A), George signed the hotel register and
by doing so exempted the hotel from liability in the case of theft of any of his luggage. The
exemption clause appeared in the middle of the page where he had to sign, between the space
where he had to fill out his particulars and the space where he had to sign. Some of George’s
possessions were stolen and the Court held that, even if he had never read the exemption
clause, he was still bound to the exemption on the grounds of caveat subscriptor. He would
only be able to claim compensation for his loss if he could prove an iustus error. In this instance,
his error was not reasonable as the exemption clause was in a conspicuous place. However,
if the exemption clause was printed in small print on the reverse side of document or contained
in a separate document which was only referred to in the contract that was signed, there rests
a duty on the contract assertor to have pointed out this fact to the contract denier. This is also
what is required by s 49 of the Consumer Protection Act. Where a party, for example, seeks
to excluded from liability for injuries sustained by the other party to the contract, the Act
requires that such party must acknowledge the existence of this exclusion by signing this
clause explicitly before it will be enforceable.

In both Sonap Petroleum v Pappadogianis 1992 (3) SA 234 (A) and Horty Investments v
Interior Accoustics 1984 (3) AS 537 (W), typing errors in the leases resulted in the content of
the agreements being materially different from that which the parties orally agreed on. In the
Sonap case the parties signed a written lease in terms of which P leased a premise to S from
where they would run a garage. The period of the lease was 20 years, to commence once the

18
This means that the person who signs the contract must be careful since you are normally bound to the terms of
a contract that you have signed.
 31

premises had been certified as ready for occupation. For some reason no certificate was
issued and S only realised that after a couple of years. S’s attorney prepared an addendum to
the lease stating that the lease was to run for a period of 15 years commencing on 1 December
1974. The date was correct but the period incorrect. When S signed the addendum, he did not
notice the reduction in the period of lease. Although P noticed it, he never made any inquiries
as these terms were to his advantage. The lessor wilfully misled the lessee because he was
aware of the typing error, which resulted in the lease period being shorter than originally agreed
upon, and never directed the lessee’s attention to the error. The Court held that, despite the
signed lease and the ostensible consensus, the lessee was not bound to the contract because
of iustus error caused by the misrepresentation (silence) of the lessor.

In the Horty Investments case, a typing error appeared in the contract, which stated the lease
could not be cancelled for the period 1 May 1981 to 1 May 1993. During this time the rent could
not be increased either. The reference to “1993” was a typing error and according to their
agreement should have read “1983”. Although the lessee spotted the change in dates he never
inquired about it and signed the contract, believing those were the terms the lessor was
satisfied with. The lessor later on applied to court to have the lease voided. The court held that
the reliance of the lessee was unreasonable and that there was an iustus error. In this particular
case it was the lessee who made the misrepresentation and not the lessor. The lessee spotted
the mistake but decided to keep quiet. Misrepresentations can occur if the other party fails to
clear up a misunderstanding about the terms of a contract in circumstances where there was
a duty on that party to do so.

In short, the concept iustus error can be summarised as follows: Iustus error is a mistake that
would exclude consensus and make the contract void. The term translates as a material
mistake (excludes consensus) which is also a reasonable mistake. A mistake would be
reasonable if the other (non-mistaken) party does not have a reasonable reliance on there
being consensus. Generally, the courts say that a material mistake would be reasonable if the
non-mistaken party caused such mistake (e.g. by making a misrepresentation to the mistaken
party), knew about the mistake or ought reasonably to have known of the mistake.
If the mistaken party’s material mistake is NOT a reasonable mistake, then the non-mistaken
party is deemed to have had a reasonable reliance on there being consensus, and the contract
will be deemed to be valid (even though there is no true agreement as a result of the material
mistake).
 32

TEST YOURSELF:

1. Explain the meaning of agreement (consensus) and how it is reached.

2. Define an offer.
3. What are the requirements for a valid offer?
4. What is the situation regarding advertisements? Do they always constitute an offer?
5. How does an option function?
6. When will an offer lapse?
7. Define an acceptance.
8. What are the requirements for a valid acceptance?
9. Where and when can a contract be concluded? (3 possibilities) What aspect
determines the theory that should apply?
10. What is an error (mistake)?
11. Distinguish between material and non-material error in regard to the nature and effect
of the mistake.
12. When is it possible for a contract to be concluded despite the fact that there is a
material mistake?
13. When will you be able to dispute the validity of a contract after you have signed a
written document?
 33

CHAPTER 4
GROUNDS FOR RESCISSION

LEARNING OBJECTIVE:
Students should realise that even though a contract could be valid, the circumstances which
led to its conclusion may warrant its rescission. Application for rescission should be made to
court on certain grounds. In each case, certain requirements have to be met to be successful.
When given a set of facts, students should be able to identify the applicable ground for
rescission and apply its requirements to establish whether the contract can be rescinded. They
should also be able to work with the concept of damages and determine the amount of
damages that will be awarded. Students must also be aware of the available remedies and
their requirements.

4.1 Introduction

Sometimes a contract is validly concluded and consensus was reached on all the material
terms but the contract can still be avoided because one of the parties has acted improperly
during its conclusion. In such an instance consensus was obtained but in an improper manner.
The result is that the contract is voidable; in other words, the consensus may be rescinded.

At this point it is important to distinguish between the concepts “void” and “voidable” contracts.
A void contract is a contract where the requirements for the validity of a contract have not all
been met (e.g. there is no agreement, or the contract is illegal, or the formalities were not
complied with, etc). In this case no contract came into being. A voidable contract is a contract
where all requirements for validity have been met and the contract is valid, but one of the
parties may have a choice to exercise the remedy of escaping from the contract (having the
otherwise valid contract declared void).

4.2 Grounds for rescission

In South African law, there are certain recognised grounds of rescission, e.g.
misrepresentation, duress and undue influence.19 It is an open question whether any form of
improper behaviour will suffice. The possibility that a contract may also be rescinded on other
grounds, for example on grounds of abuse of circumstances, economic duress or economic
bribery, has been recognised by the courts.

19 Also note that in addition to the common law, ss 40-41 of the Consumer Protection Act provides protection against
misrepresentations, undue influence, duress and other forms of unconscionable conduct in the context of a
transaction between a supplier and a consumer for the delivery of goods or services.
 34

4.3 Misrepresentation

4.3.1 What is a misrepresentation?

A misrepresentation is a representation that is false.

4.3.2 When is a misrepresentation a ground for rescission?

Sometimes the error in motive of one party (A) is induced by a false representation
(misrepresentation) of the other party (B). The misrepresentation moved A to conclude the
contract. However, because there is consensus on the material terms of the contract there is
a valid contract. The consensus was however obtained by improper means, i.e. through
misrepresentation. The consensus is therefore voidable and A can apply to court to have the
contract rescinded if he is able to meet certain requirements.

The following example serves to illustrate: A is the owner of a farm. B wants to buy the farm
and meets A to show him around. A points out the boundaries to B but in such a manner that
it creates a false impression causing B to believe that the farm includes some forested land. B
purchases the farm in this belief – this being his motive for buying. Subsequently B signs the
deed of sale which describes the land in terms of the title deed. According to this description,
the farm does not include the forest. There was consensus on the material facts, namely the
identity of the parties, the price and the subject matter of the sale namely that particular farm
as well as the nature of the contract and a valid contract is concluded. However, the contract
can be rescinded on the grounds of misrepresentation if the requirements for a
misrepresentation are met.

However, before we deal any further with misrepresentations, it is necessary to distinguish the
various functions that a misrepresentation can fulfil in the law of contract. In the previous
chapter we learned that misrepresentation can be used to prove that an error is reasonable,
so-called iustus error. In this chapter we deal with misrepresentation as a ground for rescission.

If the misrepresentation causes a material and reasonable error (iustus error), there is no
consensus and no contract. For example, the buyer expressly asked whether the land included
the afforested area and made it clear that he was not interested in buying if the farm did not
include the forest, but the seller assured him that it did, whilst that is not the case. If the buyer’s
error is caused by the seller’s misrepresentation, it could be an iustus error which causes the
contract to be void even though there is ostensible proof of a sale in the form of a written and
signed deed of sale.

However, if the misrepresentation merely causes an error in motive, then there is consensus
and a valid contract, but the contract could be voidable due to a misrepresentation. The
representation as to the forestation of the land influenced the buyer’s decision to buy, in the
absence of which he would never have bought the farm.20 But how does this example differ
from the previous scenario? In this case the seller made a misrepresentation but the buyer

20 Alternatively, he would still have bought the farm but he would have paid less for the farm.
 35

never asked him whether the land includes the forest; in other words, whether the forest is part
of the land never became part of the (material) terms of the contract and, therefore, at the most
only played a role in motivating him to conclude the contract.

To make things even more complicated, a misrepresentation must also be distinguished from
guarantees. The parties can decide to make representations part of the terms of their contract
(consensus) by guaranteeing that a certain state of affairs exists. E.g. A guarantees that his
farm has a forest. If the representation is false, A breaches the contract (breach of warranty)
and the normal remedies for breach of contract are available for B. It may be difficult to
distinguish misrepresentations and guarantees, but it should be done on the facts of a
particular case and with reference to the intention of the parties.

4.3.3 Requirements for misrepresentation as a ground for rescission:

(a) There must be a misrepresentation (express or tacit). A misrepresentation can also

consist of silence or a failure to provide information.21

(b) It must be made by the other contracting party or someone who acts on his behalf (e.g.
his agent or an employee).

(c) It must be a misrepresentation with regard to fact. A mere prediction or opinion is not
enough; neither is mere puffing. An opinion as to a reasonable price, therefore, does
not amount to a misrepresentation. Lamb v Walters 1926 AD 358: L concluded a
contract with W to buy some land near the then Salisbury (today Harare). L, however,
was a foreigner, who only arrived in the country from Britain 3 days prior to the sale.
Before entering into the contract, L asked W whether the asking price is fair and
reasonable, and W assured him that it was. The truth was that the price was much
higher in comparison to the prices in that region. When W wanted to enforce the
contract, L argued that there was a misrepresentation made in regard to the price. The
Court, however, held that W only gave an opinion and that it did not constitute a
misrepresentation as he was not an estate agent. However, when a person gives an
opinion which he does not believe himself, he makes a misrepresentation with regard
to fact, namely his state of mind. That could amount to a misrepresentation. In Feinstein
v Niggli 1981 2 SA 684 (A), although the seller of shares in a restaurant knew that the
monthly turnover of the restaurant was not enough to cover the buyer’s financial
commitments, he still informed the buyer that it would be enough. The court held that
F made a misrepresentation.

(d) The misrepresentation must be material. The question is whether a reasonable party
would have been misled by the misrepresentation. However, where the person makes
a misrepresentation to defraud the other party (intentional misrepresentation), should
the reasonableness test still apply? There are two views in this regard. A line of cases
following Lourens v Genis 1962 1 SA 431 (T) states that it would still apply; whilst the
other line of cases following Otto v Heymans 1971 4 SA 148 (T), states that there is no

21
Silence will amount to a misrepresentation in circumstances where there is a duty on a contractual party to provide
information, such as a failure to provide medical information when applying for life insurance.
 36

need for the reasonableness test. In the Lourens v Genis case, Lourens defrauded
Genis by telling him that his son has so-called x-ray eyes and that he is capable of
spotting underground soil water without having to drill for it. The court held that no
misrepresentation was made since no reasonable person would have believed L’s
story. The contract could, therefore, not be rescinded. In the Otto case it was held that
the defrauder could not rely on an argument that a reasonable person would not have
believed the misrepresentation and that the other party was too easily induced by it.
Until now there has not been any clear answer to this issue but it seems that the
majority is inclined to not require proof of materiality in cases of fraudulent
misrepresentation.

(e) The misrepresentation must have led to or induced the contract before the contract can
be avoided. In other words, there must be a causal link between the misrepresentation
and the contract. Where the contracting party would have concluded the contract in
any event, even in the absence of the misrepresentation, and the misrepresentation
simply resulted in the contract being concluded on different terms, it cannot be avoided.
In such a case, only damages can be claimed in the amount of what was paid in excess.
According to the facts of Bird v Murphy 1963 2 PH A42 (D), Bird admired Murphy’s
Mercedes for quite some time and saved money until he thought he had enough to
approach Murphy with an offer. During negotiations Murphy represented the car as a
1957 model and Bird based his offer on that. After he had bought the car, he found that
it was actually a 1953 model. He consequently applied for rescission of the contract.
However, during cross-examination he admitted that he still would have bought the car
even if he had known the car was an older model but that he would have offered less
for it. The court ordered that he was only entitled to damages in the amount that he
paid in excess to what he would have paid in different circumstances and that he could
not have the contract rescinded. The issue of damages will be discussed in more detail
later on.

It should be noted that fault is not a requirement for rescission. However, fault is a requirement
for a claim for damages.

To be able to rescind the contract, the contract should not contain an exemption clause.

4.3.4 Exemption clauses

The possibility of rescinding a contract on the grounds of misrepresentation may be excluded

by contract. A clause may be added to the contract which excludes rescission on the basis of
misrepresentation. This is called an exemption clause. In such a case, the representee cannot
rescind the contract on the basis of misrepresentation, since the ground for rescission was
contractually excluded by means of consensus. The only exception is fraud. An exemption
clause may not exclude fraudulent misrepresentations. Such an exemption clause is void, and
it would mean that the contract can still be rescinded on the basis of a misrepresentation.

It should also be noted that, where a misrepresentation causes a material mistake (iustus
error), the contract will be void. The exemption clause will then be void and of no effect.
 37

Contracts regulated by the Consumer Protection Act are subject to additional requirements.
Sec 49 states that exemption clauses must be drawn to the attention of the consumer. Such
an exemption will be void by virtue of s 51(3) and according to s 52(4) can be severed from
the remainder of the agreement.

4.3.5 Remedies22

The remedies or forms of legal relief that are available to the aggrieved party would depend
on the circumstances of the particular case. In principle, there are two types of remedies
available, namely remedies aimed at termination of the contract (namely rescission and
restitution, together with supplementary damages) and remedies aimed at maintaining the
contract and damages for loss suffered.

Firs, one would have to determine whether a valid contract was concluded. If the
misrepresentation led to a material and reasonable error, the contract would be void and there
would be no need to rescind the contract. However, where the misrepresentation only led to
an error in motive, the contract will be valid and performance must be rendered until the
contract is rescinded. Where there is no misrepresentation, or other ground for rescission, and
a valid contract was concluded, the contract cannot be rescinded and no other remedy would
be available, and performance must be made.

If there is a valid contract and the answer to the question whether there was a
misrepresentation made is “yes”, the availability of the remedies will depend on whether all the
requirements for rescission are met, and more specifically whether the misrepresentation
induced the contract (or the error in motive). To put it differently, was there a causal link
between the misrepresentation and conclusion of the contract? If the answer is yes, the
aggrieved party has a choice between rescinding the contract (and restitution) and maintaining
the contract (with a claim for damages). If the answer is no, the contract cannot be rescinded
and a claim for damages would be the only remedy available for the aggrieved party.

The different remedies will now be discussed in more detail.

4.3.5.1 Rescission and restitution

Where the aggrieved party meets all the requirements for misrepresentation as a ground for
rescission he/she has a choice whether to abide by the contract or to rescind (cancel) the
contract.23 It should be remembered that until the contract is rescinded by the court, the
contract still remains a valid contract and the parties still have to perform their obligations.

To rescind the contract, certain requirements have to be met:

(i) The innocent party must give notice of his intention to rescind by means of
unambiguous conduct or words.

22
Legal relief.
23 Rescission is strictly speaking a unilateral act and the court is merely confirming a rescission.
 38

(ii) The decision to rescind must be communicated to the misrepresentor within a

reasonable time.
(iii) In the case of rescission, restitution24 normally has to take place, although there are
exceptions where a party can avoid a contract even if he cannot give restitution.
(This aspect will not be discussed in detail.)

4.3.5.2 Damages

Damages are a supplementary remedy to rescinding or upholding (maintaining) the contract.

The amounts of damages will differ depending on whether the contract is rescinded or not. In
the case of rescission and restitution, normally only wasted expenses can be claimed as
damages. Where the misrepresentee abides by the contract, the damages that can be claimed
will however be broader.

For damages to be claimed, certain requirements have to be met. In essence, a

misrepresentation will have to meet the requirements of a delict:

(a) There must be a misrepresentation (unlawfulness) which meets the requirements as

set out above in 4.3.3.

(b) Causality: The misrepresentation must have caused the damage. However, he does
not have to show that the misrepresentation induced the contract.

(c) Fault: The misrepresentation must be either fraudulent or negligent. This must be
contrasted with the remedy of rescission where no fault is required. Initially the courts
were only prepared to grant damages in cases of fraud, but it is now accepted that
negligence is sufficient.

(d) The loss suffered must be patrimonial (financial) loss.

4.3.5.3 Method of calculation

Sometimes it is difficult to determine the amount of damages that can be claimed. Damages
must be calculated according to the method of negative interest. The actual position (after the
misrepresentation was made) of the party claiming damages must be compared with the
hypothetical position that would have applied if no misrepresentation were made. In other
words, the innocent party must be placed in the position that he would have been in if no
misrepresentation were made.

The amount that can be claimed will differ depending on whether the misrepresentation caused
(induced) the contract (causation) or whether the parties would in any case have concluded
the contract but only on different terms. Remember, the misrepresentee may only avoid the
contract if the misrepresentation caused the contract. However, he may still claim damages if

24 Returning the performance that was received.

 39

he would have concluded the contract in any event, but due to the misrepresentation the
contract was concluded on terms that were more detrimental to him.

For example: A buys a car from B for the amount of R100 000. However, the contract was
induced by B’s misrepresentation. The actual value of the car is R80 000. In the absence of
the misrepresentation he would not have concluded the contract. A meets all the requirements
for rescission. However, A decides not to rescind the contract but to claim damages. A’s actual
position is that he now has an asset worth R80 000. His hypothetical position would be that he
would not have concluded the contract and that he still would have had R100 000. His loss is
the difference between the two and he will be entitled to R20 000 damages. However, if he
would have bought the car in any event, he will be unable to prove a causal link between the
misrepresentation and the contract and, therefore, he will not be able to cancel the contract.
However, if he can prove that he would only have been prepared to pay the actual value of the
car, he will be able to claim damages. In these circumstances, his actual position is that he
paid R100 000 and his hypothetical position would be that what he would have been prepared
to pay if he had known what the real value was, namely R80 000. Once again, the amount of
damage will amount to R20 000.

4.4 Duress

4.4.1 When does duress occur?

Duress occurs where a contract is concluded by one party based on fear induced by a threat
made by the other contracting party. Coercion takes place in these situations, which does not
only include physical coercion but also psychological coercion.

4.4.2 Requirements for duress as ground for rescission:

(a) Threats must be made against the contracting party, his family or goods. It seems the
threat can even be one that affects your economic interests. However, this aspect has
not been decided by our courts yet. In the case of economic duress, the threats must
be illegitimate and unconscionable and not merely a case of hard bargaining. In
Hendricks v Barnett 1975 1 SA 765 (N) an economic threat was made but in the end
the case was decided on other grounds. Hendricks, an expert horse breeder was the
manager of Barnett’s stud farm. Barnett visited the farm from time to time but never
had enough knowledge of the horses to be able to identify them. When Barnett decided
to sell the farm, he told Hendricks that he would pay him a bonus when his services
were to be terminated. There was no agreement on the amount of the bonus. Hendricks
would stay on until the horses had been sold on an auction. The auctioneers advertised
the auction widely in the press and also printed a catalogue of the horses that were for
sale. A few days prior to the auction, Hendricks threatened to leave before the auction
was held unless Barnett paid him R10 000. If he would leave, for all practical purposes,
the auction would not proceed because he was the only person who could identify the
horses. Barnett would suffer a huge financial loss if that were to happen. Out of fear,
he agreed to pay the bonus. However, economic threats will not easily give rise to
 40

rescission as you will have to prove that the threat was unlawful. Here you will have to
distinguish between economic duress and pure hard bargaining. The latter will not be
unlawful.

(b) The fear of the party who wants to escape the contract must be reasonable. The fear
must be of such a nature that it is reasonable for this type of person to suffer it. The
test to determine this is, therefore, partly subjective, partly objective.

(c) The danger must be imminent or inevitable.

(d) The contract must be concluded because of the threat (causality). If the threat only led
to the contract being concluded on different terms, then the only possible remedy will
be damages.

(e) The threat must be unlawful (contra bonos mores). To put it differently, the purpose of
the threat must be unlawful. It is unlawful if the conduct or act with which he is
threatened is wrongful (e.g. assault). However, the threat can still be unlawful, even if
the threatened conduct is not in itself unlawful (e.g. a threat of prosecution). This will
be the case where the threat is used to obtain something that is unlawful, i.e. something
that the person who made the threat would otherwise not have been entitled to. In such
a case, the threat as a whole is unlawful.

The last requirement is particularly relevant in cases where someone steals money, is
caught out by his superiors, and a contract is subsequently concluded where he agrees to
pay back the money owed under the threat of criminal prosecution. Three standpoints can
be distinguished:

 In the Witwatersrand court in Machanick Steel & Fencing v Westrhodan; Machanick

Steel & Fencing v Transvaal Cold Rolling 1979 1 SA 265 (W), the court held that these
contracts could sometimes be enforced. The court said that a threat is unlawful only
when the person making the threat receives an advantage that he otherwise would not
been entitled to, e.g. where the threatened person is obliged to pay back the money
stolen plus an additional amount for keeping silent about the theft.
 The Durban High Court in Ilanga Wholesalers v Ebrahim 1974 2 SA 292 (D) said the
threat is not unlawful if the money is actually due, but that it would only be if the amount
is not known with precision.
 In the Cape in Arend v Astra 1974 1 SA 298 (C), the court took a much narrower
approach. The court said that such a threat is always unlawful because the contract
amounts to compounding a crime and stifling its prosecution, and that there is always
an unfair benefit for the person who exerts the threat. [But see the BOE case.]

In BOE Bank Ltd v Van Zyl 1999 (3) SA 813 (C), Van Zyl signed surety for his son-in-law’s
debts with BOE Bank. The bank discovered that the son-in-law (K) was defrauding the bank
by not paying back his debts as per their agreement. Subsequently, the bank threatened to
have K arrested or to have his estate sequestrated. Because Van Zyl’s daughter was married
in community of property to K it would mean that their joint estate would be sequestrated and
that both his daughter and his grandchildren would suffer. The same result would happen if K
 41

were to be arrested. Because of this threat, Van Zyl signed as surety and co-debtor for K’s
debts towards BOE. When the bank sued Van Zyl on the deed of suretyship, he alleged that
the contract was signed under duress. The Cape Court, however, held that the threat was not
unlawful. Compare this judgement of the Cape Court with their judgement in Arend v Astra
supra. Is this judgement correct? The bank benefited from the surety in a way that it otherwise
would not been entitled to. Under normal circumstances, the bank would only have shared in
the proceeds of the insolvent estate as a preferent creditor, whilst now they were ensured of
the full amount plus interest.

4.4.3 Remedies

4.4.3.1 Rescission and restitution

The same situation applies as in the case of misrepresentation. See para 4.3.5.1 supra.

4.4.3.2 Damages

The same situation applies as in the case of misrepresentation. See para 4.3.5.1 supra.

4.5 Undue influence

4.5.1 When does undue influence take place?

Undue influence takes place where one party exercises his influence over the other in an
undue manner because of the relationship between them. Initially there was doubt whether
undue influence is part of the SA law. It originated in the English law, but the Appeal Court in
Preller v Jordaan 1956 1 SA 483 (A) introduced it into SA law. For years Preller had been
Jordaan’s medical doctor, but also his confidant and financial advisor. At a time when Jordaan,
now an elderly man, was hospitalized, and therefore both mentally and physically weak, Preller
convinced him to donate four of his farms to him; something which, under normal
circumstances, he would never have done.

4.5.2 The requirements for undue influence as a ground for rescission

(a) The person who commits undue influence must be in a position of influence over the
other party, e.g. a priest and a woman on her deathbed, a husband and wife, persons
planning to marry or an attorney and his client. In other words, there must be a
relationship of trust between them.

(b) The will of the influenced person must be pliable (capable of being manipulated) - see
the examples mentioned above.

(c) The relationship between the parties must be abused by the influencer in an
unscrupulous manner.
 42

(d) For the purpose of rescission the undue influence must have caused or induced the
contract which was to his detriment, and which he otherwise would not have concluded
(causality).

4.5.3. Remedies

4.5.3.1 Rescission and restitution

The same situation applies as in the case of misrepresentation. See para 4.3.5.1 supra.

4.5.3.2 Damages

The same situation applies as in the case of misrepresentation. See para 4.3.5.2 supra.

4.6 Consumer Protection Act

The Consumer Protection Act specifically provides for improper behaviour in the context of a
contract between a consumer and a supplier in the normal course of its business. Section 40
prohibits unconscionable conduct of the supplier, such as duress, force or undue influence
during the marketing, conclusion of the agreement, delivery of the goods or services, collection
of payment etc, while s 41 prohibits misrepresentations, any other false presentations as to a
material fact made during the marketing of the goods. The same applies for puffing or
exaggeration or failure to correct an apparent misapprehension that would amount to a
misrepresentation. The court can, after considering a range of factors, declare that the contract
was, in whole or in part, unconscionable, unjust, unreasonable or unfair, and it can make any
further order the court considers just and reasonable in the circumstances, such as restitution
of monies or compensation for losses and expenses incurred as a result of the contract (s
52(3)).
 43

TEST YOURSELF:

1. When will you be able to rescind a contract and what are the grounds on which you
can rescind in the SA law?
2. When will misrepresentation function as a ground for rescission?
3. What is the role misrepresentation fulfils in cases of iustus error?
4. What is the difference between a misrepresentation and a warranty?
5. What steps do you have to take to determine when a contract may be rescinded on
grounds of misrepresentation? Be sure that you understand the exceptions to the rule
as well as all the different situations that may occur.
6. What remedies are available when a contract is rescinded on grounds of
misrepresentation? Be sure that you know the requirements for each remedy and that
you are able to apply them.
7. What steps do you have to take to determine when a contract may be rescinded on
grounds of duress? Be sure that you understand the exceptions to the rule as well as
all the different situations that may occur.
8. What remedies are available when a contract is rescinded on grounds of duress? Be
sure that you know the requirements for each remedy and that you are able to apply
them.
9. What steps do you have to take to determine when a contract may be rescinded on
grounds of undue influence? Be sure that you understand the exceptions to the rule as
well as all the different situations that may occur.
10. What remedies are available when a contract is rescinded on grounds of undue
influence? Be sure that you know the requirements for each remedy and that you are
able to apply them.
 44

CHAPTER 5
FORMALITIES

LEARNING OBJECTIVE
Contracts, in general, do not have to be concluded in any particular form. This chapter
introduces students to form requirements that particular types of contract have to meet in order
to be valid. These requirements can be imposed by law or self-imposed. Students will also get
to know the basics behind the Parol Evidence Rule and the concept of rectification.

5.1 General principle

Generally, no formalities are required for a contract to be valid. Agreement or reasonable

reliance is sufficient. A contract may be concluded expressly or tacitly. However, in some cases
formalities are required. Formalities can take on different forms.

5.2 Types of formalities and sources

5.2.1 Types

(i) The most general requirement is writing.

(ii) Notarial execution means that the contract must be concluded in writing before a
notary public who will then have to comply with certain formalities.
(iii) Registration means the contract will have to be registered in an administration office,
such as the deeds office or companies’ office.25

5.2.2 Sources

Formalities may arise from 3 sources.

(i) Formalities are sometimes required by legislation.
(ii) Parties themselves may lay down formalities in their contract.
(iii) The law of evidence determines how and when something can be put before a court
as evidence. The law of evidence sometimes requires that the content of a contract
may only be evidenced in certain forms.

5.3 Statutory formalities

There are many statutory formality requirements, but we will only look at the most important
ones. In each case we will focus on the scope, requirements and consequences of non-
compliance.

25
In terms of the Companies Act of 2008 which came into operation on 1 May 2011, companies are to be registered
by CIPRO (The Companies and Intellectual Property Registration Office.)
 45

5.3.1 Alienation of Land Act 68 of 1981

If land is alienated26 the contract must be in writing. If it is not in writing, it is void. (The meaning
of "writing" will be discussed later on.)

5.3.2 General Laws Amendment Act 50 of 1956

This Act provides that certain contracts need special formalities, for example:

 Sec 3: A lease or transfer of mineral rights must be notarially executed.

 Sec 5: Where one person undertakes to make a future donation to another person or
to a charity organisation, the contract has to be in writing. If not, it is void.
 Sec 6: Where one person agrees to pay the debts of another person if such other
person does not pay (called suretyship), the contract of surety has to be in writing. If
not, it is void.

5.3.3 National Credit Act 34 of 2005

A credit agreement is an agreement whereby one party sells goods or services on credit to
another and the purchase price is to be paid in instalments over a period of time. The contract
has to be in writing and has to contain certain clauses. There is no explicit requirement that
the contract should be in writing but this requirement is implied since a particular form is
required and all subsequent amendments should also be in writing. There is, however, no
indication that the contract will be void if the contract was not put in writing but it will amount to
an offence for the credit provider if a copy of the document is not provided to the consumer.

5.3.4 Consumer Protection Act 68 of 2008

In all transactions where consumer goods or services are provided in the normal course of
business for value, a written record of the transaction has to be made available to the
consumer. The contract will not be void if the consumer never signed the contract.

5.3.5 Formalities in Respect of Leases on Land Act 18 of 1969

Generally, a lease does not have to be in writing (irrespective of the term of the lease). But
what happens if A leases a property from B and B now sells the property to C? The general
principle is "huur gaat voor koop". The lessee has a right against the new owner to complete
his lease. However, a long term lease (a lease for 10 years and longer) will have to be
registered in the Deeds Office to protect the lessee. If not, the lessee will not be able to exercise
the "huur gaat voor koop" rights against a bona fide third party for longer than 10 years. Note
that a long term lease will still be valid even in the absence of registration.

26 “Alienate” means to sell, exchange or donate.

 46

5.3.6 Which terms have to be in writing?

Alienation of land, donations and suretyship merely require that the contract must be in writing
and signed by the parties. But what does that mean?

 Not necessarily all the terms of the contract have to be in writing. Merely the material
terms have to be in writing. If all of the material terms of the contract are not in writing,
the contract as a whole is void. This was decided in Johnston v Leal 1980 3 SA 927
(A). In this case the parties did not fill out the blank spaces in a standard contract of
sale. The information needed dealt, amongst other things, with the purchase price,
details of a mortgage bond for that amount as well as the date on which the bond should
be obtained. Also note that the Consumer Protection Act requires that the terms should
be clear and in plain language that is easily understandable.

 It is not necessary that the contract must be contained in one written document; it can,
for example, be contained in several letters or faxes.

 There are also no specific requirements as to the quality of writing. A note that is hand
written on scrap paper will suffice.

 There is no minimum requirement of legibility in the Act. However, most probably the
contract has to comply with a minimum standard of legibility.

 The contract will be regarded as signed if it contains any mark which signifies consent,
i.e. a finger print, initials or a cross as long as the signor can be easily identified.
Signatures can also be effected in the form of an electronic signature. It is not essential
that the signature must be on every page or at the end of the document but it must be
clear that the signature applies to the whole contract. In practice, a contract is usually
signed on each page in the presence of two witnesses and on the last page the
signatures are accompanied by the date and place of signature.

5.3.7 Statutory requirements in the field of e-commerce

The Electronic Communications and Transactions Act, No 25 of 2002 (ECTA) makes provision
for electronic contracts. In terms of s 12 the requirement that a document must be ‘in writing’
is met if it is in the form of a data message (e.g. e-mail or fax). Section 13 provides that an
electronic signature is valid and provision is also made for an ‘advanced electronic signature’
which has been accredited by the authorities to avoid fraud. Section 18 further provides for a
document to be notarised electronically by an electronic signature by an authorised person.
Note, however, that not all types of contract can be electronically executed. E.g. land may not
be alienated by means of a deed of sale which is concluded electronically; the same applies
for long term leases.
 47

5.3.8 How do you effect variations (amendments) to a contract?

If writing is a statutory requirement, variation (amendment) of the terms of the contract may
only be effected in writing. If the variation is not in writing, it will be void. The contract itself,
however, remains valid.

There are certain important exceptions where writing is not required. Those deal with
termination of the contract and revival. The parties may orally agree that the contract is
terminated. The parties may also orally agree that a contract should be revived where it was
terminated by agreement or otherwise.

5.4. Formalities laid down by the parties themselves

The parties themselves may lay down formality requirements that have to be met. The offeror
may already lay down formalities for acceptance in the offer. Moreover, the parties may
conclude a preliminary agreement that the later contract will only be valid once certain
formalities are met. However, variations of the terms of such a later contract may still be
effected orally.
It is possible to protect a written contract by agreement against tacit and oral variation. That is
done by means of an entrenchment or non-variation clause.

5.4.1 Entrenchment against variations

The mechanism for entrenching a contract was developed in the case of SA Sentrale
Graanmaatskappy Bpk v Shifren 1964 4 SA 760 (A)27 (and is therefore known as the “Shifren
conduit”). It is very important that the clause stating that only written variations are allowed (the
so-called entrenchment or non-variation clause) should also be contractually protected against
oral variation.

In other words, it is not sufficient to have a clause (e.g. clause 11) which states: "Clause 10
may only be amended in writing", because then the non-variation clause (clause 11) may still
be amended orally and subsequently also clause 10.

Thus, the best way to formulate it is:

 “The contract as a whole may only be amended in writing.”
 OR if clause 11 says: “Clause 10 as well as this clause (clause 11) may not be amended
except in writing."

Again, it is not always easy to determine what constitutes a variation. But a contract can be
orally terminated or revived, unless it is specifically excluded in the contract.

27 Confirmed by the Supreme Court of Appeal in Brisley v Drotsky 2002 (4) SA 1 (SCA).
 48

5.5 The Parol Evidence Rule

Pursuant to the Parol Evidence rule, external evidence may not be given to add to, vary, detract
from, or qualify the content of an agreement where the parties have incorporated their contract
into one document. The fact that the parties have decided on one document is the important
aspect here (the so-called integration rule). In this case, the court may neither look at
utterances that precede the contract or are contemporaneous with the contract, nor at other
previous or contemporaneous memoranda. (It is still possible to look at these aspects to prove
the content of the contract, as long as they are not used to supplement, vary or qualify the
content of the contract.)

5.5.1 Purpose

The purpose of the rule is to create certainty for written documents where the parties have
agreed to put their contract into one document. The legal basis is that the parties intend to
have their agreement contained in one document. For example, A sells “his car” to B. The
entire contract is in writing. Can B now argue that they actually agreed that A would sell his
wife’s car?

5.5.2 Scope

The Parol Evidence rule must be distinguished from other formality rules. The Parol Evidence
rule merely prohibits evidence which shows the parties had agreed to something different from
what is expressed in the written contract. But subsequent oral variations may still be proven
unless the parties have agreed otherwise in the contract.

The rule is based on the agreement of the parties to integrate their contract into one document
with the purpose that this document is to be the sole source of information on the content of
their agreement. You may still lead evidence that shows:

 that the parties did not intend to integrate their entire agreement into one written
document;
 that the parties did not reach agreement at all;
 that there was misrepresentation, undue influence or duress.

5.6 Rectification

Rectification is possible where the contract was integrated into one document, but was
incorrectly reflected in the document due to a honest mistake or fraud by either of them. It is
important to note that, in this context such a mistake is not an error which influences the
consensus of the parties. Rectification is only possible if there was a valid underlying
agreement (consensus). For example; the parties agreed to price X. Both wanted to have the
document read X but a mistake is made or there is fraud and the contract now reads price Y.
 49

Often the Parol Evidence rule applies in situations where legislation requires the contract to be
in writing. However, this is not a prerequisite for the operation of the rule. The Parol Evidence
rule only applies where the intention is to integrate the contract into one document.
(Remember: a contract can be in the form of various documents and can still be valid in terms
of the writing requirement). In the case of statutory formalities, rectification will be possible, but
only if the contract complied with the legislative formalities in the first place. (In other words,
rectification cannot be used to rectify a lack of formalities.)

It is important to distinguish between rectification and variations (amendments). In case of the

latter, the parties will reach agreement on the variation or amendment and it will be made in
accordance with the guidelines as set out earlier on in this chapter. However, if they cannot
reach agreement and the contract contains mistakes (often caused by fraud committed by the
other contractual party), rectification can only be effected by the court.
 50

TEST YOURSELF

1. Generally speaking, does the law require writing or other form requirements for a
contract to be valid?
2. What are the different types of formalities and what are their sources?
3. Be sure that you know the formalities which are required by the Alienation of Land Act,
the General Law Amendment Act, the Credit Act and the Formalities in Respect of
Leases of Land Act.
4. What does it mean if a statute requires a contract to be “in writing”?
5. If a statute requires writing, does that mean that any amendments to such a contract
should be in writing as well?
6. How can the parties to a contract lay down formalities for their contract?
7. How will amendments be effected in cases that fall under 6?
8. What is an entrenchment against variations and how do you effect such an
entrenchment?
9. Define the Parol Evidence Rule as well as its purpose and scope.
10. What is rectification and when can a contract be rectified?
 51

CHAPTER 6
LEGALITY

LEARNING OBJECTIVE:
Despite the general principle of freedom of contract, no contract may be contrary to public
interest. This chapter introduces students to the requirement of legality. The three main
sources of illegality are discussed. Students must be able to identify when a contract is illegal
and to discuss the legal effect of such a contract and apply the legal principles. Specific
emphasis will be placed on restraints of trade.

6.1 General

Freedom of contract is a general principle of South African law. That entails that parties may
conclude contracts on any terms that they prefer, as long as the public interest28 is protected.
Hence some contracts are regarded as illegal or unlawful.

6.2 Forms of illegality

Contracts can be illegal in 3 different ways:

(i) the conclusion of the contract can be illegal;
(ii) performance of the contract can be illegal; and
(iii) the purpose of the contract can be illegal.

6.3 Sources

Illegality may originate in several sources. Three sources are identified:

(i) legislation (statute);
(ii) good morals;
(iii) public interest in the broader sense.

6.4 Contracts concluded under circumstances where behaviour is prohibited by

statute

Sometimes certain types of behaviour are prohibited by law or are considered crimes. What
happens with a contract that is concluded in such circumstances? It is a question of statutory
interpretation. Is the statute (legislation) aimed at prohibiting the contract or not? If the answer
is yes, then the contract is void.

However, the question is often difficult to answer because legislation seldom deals with this
question expressly. Certain rules of thumb have been developed as tools to assist the court in
determining these difficult issues.

28 After 1994, public interest is hugely determined by the Constitution.

 52

(i) The purpose of the statutory provision and the evil which it is trying to stamp
out must first be determined. The court must then ask:
 Does the contract as such undermine this purpose?
 Does the contract fall directly within the ambit of the prohibited evil?

(ii) If the act contains a penal provision, it must be asked whether the legislator did
not intend that this penalty would be sufficient. Would invalidity of the contract
not lead to even more unacceptable consequences?

Examples:
According to the facts of Metro Western Cape (Pty) Ltd v Ross 1986 3 SA 181 (C), M traded
without the necessary licence required by provincial ordinance. The court found that the
contract M concluded with R was not void because the penal provisions of the ordinance
effectively served its aim, namely ensuring that businesses are to be run from suitable
premises by suitable people. To declare the contracts of sale void would cause grave
inconvenience and even more injustice towards innocent customers.

In Henry v Branfield 1996 1 SA 244 (D&CLD), a private sale of foreign currency contravened
currency regulations and was held to be unenforceable because the regulations are based on
strong policy considerations.

6.5 An illegal contract may also be against public interest or good morals.

Good morals often concern sexual mores, e.g. insurance of a building in which a brothel is
conducted if the insurer is aware that the insured premises is used for this purpose

A range of aspects may fall under the heading public interest, such as:
 An agreement to commit a crime, delict or some unlawful act will normally be illegal
under this heading.
 What about a life policy that covers suicide? Usually there is a two year waiting time.
 What about an exemption clause? Here negligence and fraud must be distinguished.
In Afrox Healthcare Bpk v Strydom 2002 (6) SA 21 (SCA) 33-34, the appeal court stated
that an exemption clause may be against public policy or interest because of excessive
inequity. (Cf also the Consumer Protection Act.)
 Parties may not attempt to exclude the jurisdiction of the court, e.g. self-help in the case
of a lease contract. Arbitration and mediation clauses, however, are allowed as those
are alternative dispute resolution mechanisms that are widely recognised.
 Agreements to share in the proceeds of litigation. Contingency fee agreements which
provide for attorneys to share in the proceeds of a claim used to be illegal but are now
regulated by statute (the Contingency Fee Act 66 of 1997) and thus no longer illegal.
The Highest Court of Appeal also ruled that it is no longer against public policy.
 A contract with an enemy subject during a time of war.
 53

The Court of Appeal has ruled that, in this context, public policy is to be determined with
reference to the protection of constitutional principles of freedom, equality, human dignity, non-
racism and non-sexism. Although public policy mainly refers to the interest of society at large,
it can in some instances also cover the interests of an individual or a group if that would be to
the benefit of society.

6.6 Contracts in restraint of trade

In practice, contracts in restraint of trade are the most important contracts in the context of
illegality. A restraint of trade contract is one where a person undertakes to refrain from doing
certain work under certain circumstances or from exercising a trade or profession.

Two principles of public interest come into conflict in these situations:

(i) Sanctity of contract: Every person should be free to conclude a contract on the terms
that he prefers. Once a party has agreed to certain terms then he should be bound by
them.
(ii) Freedom of trade: Every person should be free to exercise his trade or profession
freely. (Sec 22 Constitution 108 of 1996)

The courts have designed a test which is aimed at balancing these principles on every set of
facts. The contract must not be contrary to the public interest. The court in Magna Alloys v
Ellis 1984 4 SA 874 (A) held that the restraint will normally be against the public interest if it is
unreasonable between the parties to the contract. However, the Constitution also influences
the interpretation and application of the standard of public interest.
The most important question is whether the restraint is reasonable between the parties. This
issue is normally conclusive. So how do we determine reasonableness? Two elements play
an important role.
(i) Does the person who wants to enforce the restraint have a legitimate interest?
(ii) If there is a legitimate interest, the question is: does the restraint attempt to protect
only this legitimate interest?
In the case of Basson v Chilwan 1993 3 SA 742 (A) the court added a further element. It should
be asked whether protection of the legitimate interest weighs up against the freedom of trade
of the restricted person. (This element has however not yet played any significant role in the
case law).

To satisfy the first element, only legitimate interests may be protected. But when are interests
considered to be legitimate? That depends on the type of contract. Restraints normally appear
in one of 2 types of contracts, namely

(i) A restraint can be in a sale of a business.

(ii) A restraint is also often found in an employment contract.

So it is important to firstly establish the type of contract involved and then to determine whether
the restraint purports to protect a legitimate interest.

 In a sale of a business, the most important interest that may be protected is goodwill.
 54

 In an employment contract, two interests may be protected, namely

(i) trade secrets that have come to the knowledge of the employee; and
(ii) customers with whom the employee had contact and over whom he, therefore,
has influence.

To satisfy the second element of the reasonableness test, it should be established whether the
restraint only protects those interests that were identified as worthy of protection. In each case
the court must look at the duration, area and scope of the restraint to determine whether the
clause is not too wide and, thus, unreasonable.

Examples:
According to the facts of Weinberg v Mervis 1953 3 SA 301 (C), W sold his medical practice
to M because he wanted to emigrate. The contract of sale contained the following clause: “Dr
Weinberg shall as from the delivery of the assets be restrained at all times thereafter from
practising as a doctor of medicine in any form directly or indirectly within the radius of ten miles
from the City Hall of Cape Town except as a specialist.” After W returns to SA he starts
practicing again in Cape Town. Is the restraint of trade enforceable? In other words, is the
restraint reasonable? This inquiry entails establishing whether the enforcer has a legitimate
interest, and then to establish whether the restraint only protects those interests that have been
identified. Whether the enforcer has a legitimate interest depends on the type of contract
involved. Because it involves a sale of a business, goodwill may be protected. In this instance
this is what is being protected here. Therefore, one can move on to the next aspect. Is the
restraint perhaps not too broadly worded? Time, area and scope of activity have to be taken
into consideration. In this instance goodwill is being protected for ever (lifelong). The Court
found that it is possible to do that, because goodwill is a factor that determines price and is an
aspect that will continue to exist even after the business is sold again. Although, generally, the
area of 10 miles is very wide, it was not considered to be too wide in this case because the
buyer should still be given the opportunity to expand the business. In regard to scope of activity,
it is found that the restriction is also not too wide, because W could still come back and practice
as a specialist within that area. Generally speaking, however, a restraint of 10 miles on a
general practitioner to practice in any form would be considered too wide. On the facts of this
case the restraint is, therefore, reasonable and enforceable.

In Cowan v Pomeroy 1952 3 SA 646 (C), P sold his shares in a company which sells toys and
a small range of plastic goods to retail merchants. The contract states that P was not entitled
to interest himself “in the sale of toys and goods made of plastic materials.” After P became
the representative of a toy company C applied to court for a restraining order. The application
failed because the restraint of trade was formulated too wide to include all plastic goods and
also to prohibit the sale of toys in general, whilst the business never sold to the general public.

Katz v Efthimiou 1948 4 SA 603 (O): E sold to K a general dealer’s business in Harrismith and
undertook not to be interested in any such business within a radius of 100 miles of Harrismith.
The general dealer’s business was a comparatively small one “carried on in one room with
dimensions 5 feet by 12 feet, run entirely on the cash basis, and carrying a very limited stock
of the usual commodities dealt in by the average small grocer” (614). The court held that,
although a restraint is usually aimed at protecting the possibility of expanding the business for
 55

the new owner, this expectation should also be reasonable. In light of the facts the restraint
was unreasonable.

In the case of Paragon Business Forms (Pty) Ltd v du Preez 1994 1 SA 434 (SE), P is a
company that sells business forms. D was employed by P as a salesman. D sold products in
Port Elizabeth and its surroundings. He had so-called reserved clients (whom he served
exclusively). D’s contract of employment contained a restraint of trade which read as follows:
“The employee undertakes that for a period of 9 months from the date that his employment
with Paragon ceases, he will not, either alone, jointly or together with or as agent for any other
person, partnership, body corporate or association of any nature whatsoever accept
employment with any business which is the same or similar to that of Paragon or any company
or body corporate carrying on business which is the same or similar to Paragon. The clause
shall only apply to the area of jurisdiction defined in schedule 1.” Schedule 1 included the
magisterial districts of PE and surroundings. Once again the question is whether the restraint
is reasonable. Does the enforcer have a legitimate interest? This question depends on the
type of contract involved. This is an employment contract and 2 interests are here at stake, i.e.
trade secrets known to the employee and clients over whom the employee has gained or
maintained influence because of his employment. P argued that there are trade secrets in the
form of secret price lists. The court accepted that the lists might have been secret but because
they were highly complex and changed regularly it meant that a salesman never knew the
prices by heart and each time had to look at the lists to determine a price. On the facts there
were no trade secrets as the employee never knew the price lists. On the other hand, it was
clear that there were clients over which the employee had influence. The employee had a
golden opportunity to gain influence over his reserved clients. The second question is whether
this restraint only protected this particular interest. A period of 9 months was definitely not too
long. The influence that an employee could have gained over a reserved client could definitely
have lasted for 9 months. The restraint was also not too wide. The employer served clients in
the PE district and surroundings and that was the area of the restraint. The restraint was also
not too wide as regards scope of activity. D is not allowed to work for a similar type of business.
If he were to work for a similar business, he would be able to poach clients over whom he had
gained some influence. The restraint was therefore found to be reasonable and enforceable.

According to the facts of Sibex Engineering Services (Pty) Ltd v van Wyk 1991 2 SA 482 (T)
V is employed by S as an expert technician to perform on-line maintenance on pipelines of
Sasol I and II. His employment contract provided that V is restrained to engage in direct or
indirect competition with S after leaving their employ for a period of 24 months. S argues that
the restraint is necessary in order to protect their trade secrets and secret information. The
court held that the restraint is against public policy as, due to the nature of V’s employment as
a technician, he never had access to any trade secrets or secret information.

6.7 Unreasonableness as ground for illegality

The basic principle is that you cannot escape from a contract merely because it is unfair.
However, a contract may become illegal if it is so unfair that it offends the public interest. This
will only be allowed in extraordinary circumstances. Sasfin v Beukes: Beukes applied for
finance from Sasfin and ceded his book debts (as a dentist) to them as security. No date was
 56

stated for cancellation of the cession. Even after the loan had been paid, the cession still
remained in force, resulting in Beukes’ monthly income being affected to the extent that he
could no longer provide in his own monthly needs and that of his family. The Court held that
the finance contract was illegal because the cession was against public interest. More recently,
the Constitutional Court in Barkhuizen v Napier 2007 5 SA 323 (CC) held that the right to
freedom of contract can be limited in the interests of fairness (equity) in contracting. The
Supreme Court of Appeal in Bredenkamp v Standard Bank of SA Ltd 2010 4 SA 468 (SCA)
subsequently confirmed this sentiment, but pointed out that there is still no over-arching
requirement of equity in the enforcement of contractual provisions, but that it is to be measured
against public policy considerations that are to be found in the Constitution29 and elsewhere
(such as the Consumer Protection Act).30 The Constitutional Court, in Beadica 231 CC and
Others v Trustees for the time being of the Oregon Trust and Others [2020] ZACC 13,
confirmed that the proper route for a contract party to challenge the unfairness of a contract or
its enforcement is by challenging the contract as offending against public policy (in terms of
the test as was set out in the Barkhuizen case).

S 48 of the Consumer Protection Act provides eg that a supplier must not offer goods or
services on terms that are unfair, unreasonable or unjust. Similarly, goods and services must
not be marketed and the agreement must not be concluded in a manner that is unfair,
unreasonable or unjust. S 48(2) “lists” unfair, unreasonable or unjust transactions, eg: if the
agreement is one-sidedly in favour of the supplier; adverse and inequitable to the consumer;
false, misleading or fraudulent representations were made by or on behalf of the supplier; or
the transaction was subject to a term or condition that is unfair, unreasonable or unjust. This
provision is supplemented by regulation 44(3) of the Act. Remedies are provided by s 52 and
range from a declaratory order coupled with restitution and relief for losses and expenses, to
severing the void parts from the other contract terms, to declaring the whole of the contract
void.

6.8 Effect of illegal contracts

Illegal contracts are mostly void but there are cases where they are merely unenforceable, e.g.
in the case of a restriction on freedom of trade or in the case of a natural obligation such as a
wager. The point of departure is that no action can arise from an illegal cause (ex turpi causa
non oritur actio).

6.8.1 Severance of contracts

If part of a contract is illegal and void the entire contract will be affected, unless the legal part
can be separated from the illegal part.

29
Such as freedom, equality and human dignity.
30
Secs 41, 41 and 48 of the Consumer Protection Act regulates unfair, unreasonable or unjust contract terms
where the contract is regulated by the Act. The notion of unfair, unreasonable and unjust terms are defined in s
48(2).
 57

Two questions should be asked:

(i) Are the different parts physically separate? Can the illegal part be taken out without
changing the meaning or word order?
(ii) Did the parties intend to keep the legal and illegal parts separate and would the parties
have contracted only on the legal part?
Restraint of trade clauses are the only exception. The courts follow a wider approach where
there is an attempt to enforce only part of the restraint. Under certain circumstances they are
prepared to add words or to change the word order, even if it alters the initial intention of the
parties.

Sec 54(4) of the Consumer Protection Act provides for severance as well as alteration of the
terms in certain instances, especially where the supplier has contracted out of liability without
bringing it to the attention of the consumer.

6.8.2 Return of performances

Where performance has been made but the contract is illegal, performance may be claimed
back by means of an enrichment claim.

Certain requirements have to be met. Because performance is claimed by means of an

enrichment claim, the contract must be void. Some forms of illegality only make the contract
unenforceable, e.g. restraint of trade or unfairness. Where the contract is only unenforceable,
performance cannot be claimed, but if it is made, it is valid.

The Courts will not allow restitution of performance when it is against public interest.
Performance may not be claimed back where the in pari delicto rule applies. It means that in
cases where both parties have acted illegally they are “equally blameworthy” and restitution of
performance will not be allowed as it would be against public policy. There are, however,
certain exceptions on the rule:

 Where one person has nothing to do with the illegality he may claim back his
performance, e.g. where the police sell diamonds to catch smugglers.

 Where a contract is illegal because it is contrary to a statute but the act only prohibits
the actions of one party, restitution will be granted. In Van Staden v Prinsloo 1947 4
SA 842 (T) P sold and delivered a second hand tractor to V for £600. A price control
regulation stated that the price may not be in excess of £400. In terms of this regulation
it was an offence to sell for more than this amount but no mention was made of buying
for a higher amount. P had knowledge of the regulation but V didn’t know about it. After
V had obtained knowledge of the regulation he offered restitution of the tractor and
claimed the instalments he had already paid. The claim was successful as the parties
were not in pari delicto.

 Even where both parties are involved in the illegality of performance, it may still be
claimed back if:
(i) it is not against the public interest, AND if
 58

(ii) it conforms to the principle of simple justice between man and man.

Where a contract enjoys protection under the Consumer Protection Act, s 52(3) provides for
statutory restitution.

TEST YOURSELF:

1. State the ways in which a contract can be illegal, and what the sources are from which
illegality may originate?
2. Assume that a particular municipal ordinance requires that businesses may only trade
within that municipal area with a licence, failing which the trader will be guilty of an
offence and punishable with a fine. Assume a particular supermarket that trades within
the area does not have a licence. What effect will that have on the transactions
(contracts) that the supermarket concludes with its customers? Are these contracts
invalid, resulting in the customers having to give restitution of the goods they have
purchased, or how will the law treat these situations?
3. Make sure that you understand the examples mentioned in regard to contracts against
public interest and/or good morals.
4. What are contracts in restraint of trade?
5. Which conflicting interests are weighed up in these instances?
6. What test(s) should be applied to determine whether a contract in restraint of trade is
reasonable between the parties?
7. How do you determine whether there is a reasonable interest at stake which needs to
be protected? State examples of such interests.
8. How can one determine whether a specific restriction is not too widely formulated and
therefore unreasonable?
9. What is the general position regarding unreasonable contracts in the SA law?
10. What is the effect of illegality on the contract? Will it always affect its validity? What is
the position with restraints of trade?
11. Can you separate the legal and illegal parts of a contract?
12. If the contract is invalid, when can performance be reclaimed and which action will be
used?
 59

CHAPTER 7
POSSIBILITY OF PERFORMANCE

LEARNING OBJECTIVE:
This chapter discusses the validity requirement of possibility; defining its content, meaning and
legal effect.

7.1 General

Performance must be possible at conclusion of the contract. If performance is impossible, no

obligation will come into existence due to impossibility of performance. If performance of
obligations becomes impossible after conclusion of a contract and it is not due to the fault of
either of the parties, the obligation will be extinguished due to supervening impossibility of
performance.

It is important to distinguish impossibility from prevention of performance. Whilst the former is

a validity requirement, the latter is a form of breach of contract.

7.2 When is performance impossible?

(a) Performance will only be impossible if it is objectively impossible. It must be impossible

for any person to render performance. For example, if A sells a particular car to B and
the car is destroyed by a fire then it is objectively impossible. Subjective impossibility (i.e.
where a particular person cannot perform) will not make performance impossible. For
example, A sells his car to B, but it appears that A was never the owner of the car.
Performance becomes subjectively impossible if the previous owner claims the car and
makes it impossible for A to perform.

(b) Today it is difficult to say that something is physically impossible, but the court will look
at the risk and cost of performance. If the risk and cost are disproportionately high to the
standard/commercial value of the performance, then performance will be regarded as
impossible.

(c) Performance will not be impossible if impossibility is due to the fault of either of the parties
- then it will be a case of breach of contract, namely prevention of performance.

7.3 Effect

If performance is or becomes impossible then both the obligation and counter performance
become void due to impossibility. If performance becomes impossible after conclusion of the
contract, the obligation is extinguished due to supervening impossibility.
 60

When no obligation is created or the obligation is extinguished, there is no need to perform

any longer. In the case of reciprocal contracts, the counter performance will be extinguished.

7.4 Contractual exclusions

The parties may nevertheless agree to a different result by way of express and tacit provisions,
e.g. through warranties. If performance is warranted (guaranteed) it causes breach of contract
if performance is not made, even if performance is impossible.

In some cases, the effect is excluded by the common law, e.g. the effect of the passing of risk
on the buyer under contracts of sale. Here, the buyer still has to perform even though
performance has become impossible. (The risk rule applies when the contract becomes perfect
(perfecta) and will be discussed later on in the context of specific contracts.)

TEST YOURSELF

1. Distinguish between impossibility and supervening impossibility of performance.

2. In which circumstances is performance considered to be impossible? (requirements for
impossibility / supervening impossibility)
3. What is the effect of impossibility on the operation of the contract (obligation)?
4. Can you deviate from the normal consequences of impossibility? Explain briefly.
 61

CHAPTER 8
CERTAINTY / ASCERTAINABILITY

LEARNING OBJECTIVE:
This chapter discusses the validity requirement of certainty; defining its content, meaning and
legal effect.

8.1 General

The terms of a contract must be certain or ascertainable for the parties to know what is
expected of them and for the courts to enforce the performance. The contract must be
concluded in such a way that a certain or ascertainable obligation can be discerned.

However, sometimes the language used is of such nature that it is impossible to establish the
intention of the parties. Courts do not like to find contracts void on the basis of uncertainty and
they will attempt to give meaning to the contract. They will try to interpret the contract and for
this purpose extrinsic evidence is allowed. Contract terms are normally interpreted with
reference to their normal understanding and where that cannot be established, the surrounding
circumstances will be looked at, e.g. the purpose of the contract or whether the parties had
previous negotiations or their later conduct. The Parol Evidence rule would not prohibit this
because that rule only applies to variations, editions, etc. when the parties have agreed to
integrate their agreement into one document. The rule, therefore, does not prohibit
interpretation of the contract.

8.2 Special situations

8.2.1 Determination by third party or other method

An obligation will come into being even if its content is uncertain at conclusion if the content is
capable of determination by a third party or it is ascertainable through another objective
method. E.g. A buys a business from B at a price to be determined by an auditor.

8.2.2 Discretion of one of the parties

The principle of certainty and ascertainability is being watered down in cases where a
discretion to decide the content of an obligation is given to one of the contractual parties. It has
long been accepted that a lessee or the buyer may not determine the rent or purchase price.
E.g. A buys a car from B. They agree that A will pay the purchase price determined by him.
This principle has been questioned in NBS Boland Bank v One Berg River Drive 1999 4 SA
928 (SCA), but not finally decided.
 62

It has also been held that an essential term cannot be determined by means of a discretion,
but again this was questioned in NBS Boland Bank v One Berg River Drive supra (on Appeal).
The courts will allow a discretion in the case of a non-essential term if there is an objective
element to the discretion. E.g. A may perform when his position is financially sound, and if
such discretion is subjected to the requirement that it should be exercised reasonably. This
requirement will become part of the contract by operation of law.

An important practical problem that has occurred is the following: A receives a loan that is
secured by a bond from Bank B. The loan contract determines that Bank B may alter the
interest amount payable in its discretion. Whilst the Witwatersrand court in the cases of NBS
v Badenhorst-Schnetler Bedryfsdienste BK and NBS v One Berg River Drive 1998 3 SA 729
(W) said that this is too vague, the Cape Court in The Standard Bank of SA Ltd v Friedman
1999 2 SA 456 (C) and the Natal Court in Deeb v Absa 1999 2 SA 656 (N) both held that such
a contract was valid as one has to read into the contract that the bank should exercise its
discretion reasonably. The One Berg River, Friedman and Deeb cases together went on
Appeal. The Appellate Court regarded the discretion as valid on the following grounds:

 The rules regarding the limitations of discretions with regard to rent and purchase prices
should not be extended.
 The determination of interest is not an essential term.
 The problem with discretions really only exists where the debtor is able to perform if he
so pleases.
 There is an implied term in all contracts that discretions should be exercised
reasonably. If the discretion is exercised unreasonably the court may strike down the
exercise of the discretion.

8.2 Effect

If an obligation is not certain or ascertainable, it is void. Counter-performance will also be void.

TEST YOURSELF:

1. When is the content of a contract certain and when ascertainable?

2. What is the situation regarding discretions? (only an overview)
3. What is the effect of uncertainty on a contract?
 63

CHAPTER 9
MULTI-PARTY OBLIGATIONS

LEARNING OBJECTIVE:
Students should be able to distinguish between three types of multiparty obligations and
determine the liability of the creditors and debtors in each case.

9.1 General

Different types of contractual relationships may be distinguished by law. The simplest form of
relationship exists between one creditor and one debtor. However, it is also true that
obligations can exist between more than one debtor or creditor, so-called multiparty
obligations.

9.2 Different types of multiparty obligations:

Three types of multiparty obligations are distinguished.

9.2.1 Simple co-debtor/creditor relationship

In a simple co-debtor relationship, the parties agree to pay a debt and that every debtor is
liable for an equal portion.

E.g. A, B, C and D agree to pay E R100. If they are simple co-debtors, each debtor is
then liable in a proportionate amount of R25 per person towards creditor E. Each debtor has
a liability towards E for R25 and the creditor E has a personal right against each debtor for
R25.

Persons are simple co-creditors where each creditor is entitled to a proportional amount of a
debt.

E.g. E agrees to pay A, B, C and D R100. Each creditor (A, B, C or D) can claim R25 from
debtor E. In other word, each of the creditors have a personal right against the debtor for R25.

9.2.2 Joint co-creditors or co-debtors

Persons are joint co-debtors when the full amount of the debt must be claimed jointly from all
of them.

E.g. A, B, C and D owe E R100. E may only collect the debt from A, B, C and D jointly and
must hold them liable as a group.
 64

Persons are joint co-creditors when they must claim the full amount jointly.

E.g. E undertakes to pay A, B, C and D R100. A, B, C and D may only claim this amount
together as a group.

9.2.3 Joint and several (solidary) co-creditors and co-debtors

In joint and several co-debtor relationships every debtor is liable for the full amount but if one
performs all of them are freed.

E.g. A, B, C and D owe E R100. A, B, C and D are each liable for the total of R100. If one of
them pays the full amount, the others will be freed.

This form of debt relationship is often used for security.

Different scenarios have to be distinguished in relation to its performance:

 The obligations of the other debtors only expire on this basis if substantial
performance was made. Payment, set-off and novation are considered to be
substantial performance, but prescription is not.

 If the creditor frees one debtor from performing the whole obligation, the other
debtors will be liable for the whole amount minus the amount for which that
debtor would have been liable if they were each liable for a pro rata share.

 If a solidary co-debtor performs only part of the whole debt, then he and the
other debtors will remain liable for the remainder of the debt. However, if the
creditor claims a lesser amount from him and he pays that, he will be freed.

 The question whether a solidary co-debtor can claim from the others where he
has performed more than his pro-rata share will depend on the express or
implied agreement between the debtors.
In the case of joint and several co-creditors all creditors are entitled to the debt. However, if
compared to joint and several co-debtor relationships this type of relationship is not used that
often in practice.

E.g E agrees to pay R100 to ABCD. If anyone of the creditors claim the amount from Z and
he pays, he will be freed and the other creditors will have no right against Z.

9.3 Which type of relationship is applicable to a specific situation?

Sometimes it is difficult to determine exactly which type of relationship the parties wanted to
conclude. It mostly depends on the parties' intention. Generally, courts are reluctant to hold
that the relationship is joint and several. Partners are joint creditors and debtors during the
 65

operation of a partnership and after the termination of the partnership they become joint and
several co-debtors and creditors. Sureties are joint and several co-debtors.

TEST YOURSELF

1. Distinguish between simple, joint and joint and several (solidary) co-debtor
relationships in regard to the legal position of both debtor and creditor.
2. What effect does payment, set-off and novation have on a co-debtor relationship?
3. As far as joint & several co-debtor relationships are concerned, you should also be able
to explain the legal position of the debtor concerned as well as the remainder of the
debtors if:
 one of the debtors is freed from his full obligation
 one of the debtors only performs part of his obligation.
 the creditor claims a lesser amount than is owed from one of the debtors.
 Will a solidary co-debtor have a right of recourse against his co-debtors if he
paid more than his pro rate share?
4. Which type of co-debtor relationship is used as a form surety?
5 Which type of co-debtor relationship exists in the case of a partnership and with
suretyship?
 66

CHAPTER 10
CONDITIONS, TIME CLAUSES & SUPPOSITIONS

LEARNING OBJECTIVES:
Students should be able to distinguish between conditions, time clauses and suppositions,
their function and legal effect.

10.1 General

The operation of an obligation may be made subject to certain contractual terms. Conditions,
time clauses and suppositions are examples of these terms.

10.2 Conditions

10.2.1 Definition

A condition is an uncertain future event to which an obligation can be subjected. The

requirements for a condition is that it should relate to a future event, contain the element of
uncertainty, refer to a lawful event and not be contrary to the nature of the obligation.

10.2.2 Classification

Conditions may be classed according to different criteria:

(a) Suspensive or resolutive

Suspensive conditions suspend the operation of an obligation until fulfilment of the condition.
E.g. I shall pay you R10 if (on condition that) it rains tomorrow.

An obligation that is subject to a resolutive condition comes into operation immediately, but
dissolves when the condition is fulfilled. E.g. I sell my house to you as long as (on condition
that) I do not receive a better offer within a month.

They may also be classified according to the extent to which fulfilment of the obligation may
be influenced by the parties.

(b) Potestative / casual / mixed

Potestative conditions imply that one of the parties has some control over the fulfilment of the
condition. E.g. I will pay you R100 if (on condition that) you climb Table Mountain.
 67

A casual condition is completely outside the control of the parties. E.g. I will pay you R100 if
(on condition that) there is an earthquake this year.

Mixed conditions contain elements of both casualty and control. E.g. A pays B R100 if (on
condition that) he marries C.

(c) Positive / negative

Positive conditions apply where something positive has to happen for fulfilment. E.g. I will give
you the car if the bank approves the loan.

In the case of a negative condition the condition fulfils when the event should not happen. E.g.
I will give you R100 if (on condition that) you do not marry A.

It is important to note that these categories interact with each other and that they can operate
in combination.

10.2.3 Operation

A condition fulfils if:

 the condition is positive, and the event happens.
 the condition is negative, and it is certain that the event is not going to happen.

A condition fails if:

 a condition is positive and it is certain that the event is not going to happen.
 a condition is negative and it is certain the event is going to happen.

What happens if one of the parties interferes with the fulfilment of the condition by wilfully
preventing its fulfilment? The law will regulate the position as if the interference did not take
place through the doctrine of fictional fulfilment of conditions. E.g. A buys a company from B
subject to it making a profit in 2015. The company would make a profit in the normal course of
business but B does not want to sell any longer. He now intentionally concludes a very bad
deal so that a loss is in actual fact made.

A condition must be fulfilled within a reasonable time. If not, it will be regarded as having failed.

10.3 Time clauses

10.3.1 Definition

A time clause establishes a future certain event to which the operation of an obligation is
subjected. Time clauses differ from conditions in that it is certain that the future event will take
place. Sometimes it is certain that the event will take place and also certain when it will take
place. E.g. I will give you R100 on Christmas Day. If it is not certain when a certain event will
 68

take place but certain that it will take place, then it is still a time clause. E.g. I will give you R100
when your wife dies.

10.3.2 Different types

As in the case of conditions, suspensive and resolutive time clauses are distinguished.

10.3.3 Operation

It is important to determine in whose favour a time clause operates. E.g. A owes B R1000,
which must be paid in monthly instalments of R100. If the clause is in favour of the debtor the
creditor may not claim any amount until it becomes payable. However, the debtor may perform
beforehand. If the time clause is in favour of the creditor, he may claim beforehand but the
debtor may only perform beforehand in certain circumstances. When will a time clause be in
favour of a creditor? When payment of interest is to be insured. Therefore, the debtor can
perform beforehand if he pays the full amount of interest. If doubt exists, then there is a
presumption that the time clause is in favour of the debtor.

10.4 Suppositions

10.4.1 Definition

Conditions and time clauses concern future events, but in the case of a supposition the
operation of an obligation is made subject to an event that has already taken place (of the past)
or a set of facts that already exist (of the present). E.g. A buys a plot subject thereto (on the
supposition) that B is the owner.

10.4.2 Operation

If the supposition is wrong, the obligation falls away.

Normally an error in motive will not affect the validity of a contract, but if such a motive was
made a supposition (contractual term) by agreement, the contract can be void.
 69

TEST YOURSELF

1. Distinguish between a condition, time clause and supposition and take note of the
differences and similarities.
2. Distinguish between a suspensive and resolutive condition by means of examples.
3. Distinguish between a potestative, casual and mixed condition by means of examples.
4. Distinguish between positive and negative conditions by means of examples.
5. Take note that the above classifications can be used in combination. E.g. a negative
suspensive potestative condition.
6. Make sure that you understand the operation of a condition and how it influences the
operation of the obligation (contract).
7. Explain the circumstances in which and how the doctrine of the fictional fulfilment of a
condition works.
8. Distinguish between the different types of time clauses.
9. Make sure that you understand how time clauses work.
10. The same applies to suppositions and their effect on the operation of the contract.
11. How would the law regulate the position where one of the parties to the contract
interferes with the fulfilment of the condition by wilfully preventing its fulfilment?
 70

CHAPTER 11
BREACH OF CONTRACT

LEARNING OBJECTIVES:
This chapter introduces students to the concept of breach and the various forms it takes in
South African law. Students should be able to identify the particular type of breach in a given
situation.

11.1 General

If a contract is valid and enforceable, it must be performed. If a party does not perform in
accordance with the contract he commits a breach of contract.

The law distinguishes between different types of breach, namely

 repudiation
 prevention of performance
 positive malperformance
 mora debitoris
 mora creditoris

11.2 Repudiation

Repudiation occurs where a person creates the objective impression that he is not going to
perform in accordance with the contract. For example, by denying the validity of a contract or
disputing its terms; resiling from a contract without valid grounds; giving insufficient notice of
cancellation; or notifying a co-contractant that you cannot perform.

Repudiation may take place both before or after the time when performance must take place.

The question is not whether a person subjectively intended to comply with the contract but
whether he created the objective impression that he is not going to perform; i.e. whether it is
reasonable in the circumstances to infer from his conduct that he will not comply. In Tuckers
Land and Development v Hovis 1980 1 SA 654 (A) plots were sold in a new town development.
Hovis bought a plot from a plan in an area that was originally demarcated for residential
purposes. However, this particular set of plans was rejected by the authorities concerned,
resulting in the town planners having to go back to their drawing boards. The second set of
plans was subsequently approved. However, on this plan the plot H bought was now situated
in an area demarcated for non-residential purposes. The Court held that the amended plans
created the objective impression that the developers were not intending to honour their
agreement with Hovis and that they repudiated the contract.
 71

11.3 Prevention of performance

If a party makes his/her own performance or that of the other party impossible, it will constitute
breach of contract in the form of prevention of performance. E.g. A sells his car to B but before
delivery thereof he drives through a red traffic light and the car is written off.

Prevention of performance as a form of breach must be distinguished from impossibility of

performance. (See ch 7.) Both objective impossibility of performance at conclusion of the
contract and objective impossibility of performance after conclusion do not constitute breach
of contract.

Performance can be made impossible before or after the time for performance.

Both objective and subjective prevention constitute breach of contract. For example, if the
seller negligently destroys something prior to delivery, it is a case of objective (absolute)
prevention. However, if the seller sells a thing that is already sold to someone else, it is
subjective (relative) prevention.

Fault will be required, but the person who prevented performance will be deemed to have fault
unless he proves otherwise. (There is a rebuttable presumption to this effect.)

11.4 Positive malperformance

Positive malperformance takes place where the performance of a contracting party (debtor)
does not meet the standards for performance as set out in the contract, or where he does
something he has undertaken not to do. For example, building a house with defective material,
or sub-letting in contravention of a prohibition against sub-letting. Positive malperformance is
the most common form of breach.

Fault is probably also not a requirement here, although there is no case law on that. Normally
there is a presumption that fault was present when the malperformance took place.

11.5 Mora debitoris

This type of breach takes place where a person delays timeous performance but still performs,
albeit late. (mora = delay; debitoris = of the debtor). E.g. A undertakes to deliver a car which
he sold to B on Friday but only arrives on the following Monday with the car.

Mora debitoris must be distinguished from prevention of performance. Where the time and
content of performance are so intertwined that late performance will have no purpose (i.e. it
becomes impossible) it is prevention of performance rather than mora debitoris. E.g. You must
provide me with a fancy dress costume for a ball on Friday evening. What happens if you bring
it to me on Saturday morning? This will be a case of breach in the form of prevention. On the
other hand, if it is a contract for an everyday wear dress, it would be mora debitoris.
 72

To be successful with a claim for mora debitoris, certain requirements have to be met:

(a) Before there can be mora debitoris, a time for performance must be stipulated. If
the contract sets the time for performance, mora debitoris will be committed
automatically on that date if performance was not rendered on such date. However,
if no date is set in the contract, notice (a demand) has to be given to the party who
failed to perform to demand performance and mora will only take place after the
time stipulated in the notice. In these circumstances, the debtor is “placed in mora”
by way of notice. E.g. I agree to pay you R100 but we do not agree to a time. You
will now have to give me notice that I must perform before I will be in breach. I will
only be in breach of contract when I do not perform at the time set in the notice.
No formalities are required for such a notice. It may be written or oral. However, it
is better to put it in writing because it will then be easier to prove that notice was
given. The parties may also lay down some formalities for the notice in the contract.
However, it must be remembered that the debtor must be given a reasonable time
to perform.

(b) Mora debitoris can only occur where performance is due. Mora will not occur where
performance is subject to a suspensive condition or time clause.

(c) Until recently it was believed that fault is a requirement. However, the Supreme
Court of Appeal has recently decided that fault is not a requirement for mora
debitoris but if there is a legal justification for why performance was late there will
be no breach of contract. E.g. a debtor undertook to deliver goods but on its way
from overseas, the ship that carries the goods was delayed due to a storm at sea.
(I.e. there is no need to prove fault in order to succeed with a claim for mora
debitoris but the debtor can defend himself against a claim for breach of contract
by proving that he had no fault.)

A unique feature of mora debitoris is that the duties of the debtor increase with mora debitoris.
Obligations of the debtor will no longer fall away if performance becomes impossible and he
still has to perform. And from the moment when someone is in mora, interest is payable.

11.6 Mora creditoris

Where the creditor fails to co-operate to ensure timeous performance by the debtor, he is in
mora creditoris. E.g. A undertakes to build B’s house before the end of the year but after a
month B has not provided A with the plans yet.

Mora creditoris should be distinguished from other forms of breach. Where the creditor
objectively creates the impression that he is not going to perform, he repudiates the contract.
E.g. where by the end of the year, B has not provided the plans yet. Where the creditor makes
performance impossible by his lack of co-operation it will be prevention of performance. E.g. if
A had to build a stadium for a World Cup rugby match and the World Cup is already on but the
plans have not been delivered yet.
 73

The requirements are:

(a) The creditor must have a duty to co-operate.

(b) The debt must be payable or performable by the debtor. This means that there
must be a date for performance, or performance must have been demanded by
means of a notice of demand. Furthermore, all conditions and must be fulfilled and
suspensive time clauses met.

(c) The debtor must offer to perform. The debtor must do everything that he can do
without the co-operation of the creditor. The co-operation of the creditor must be
the only outstanding element for proper performance.

(d) The creditor must refuse to co-operate in the manner required.

(e) The creditor does not have to be at fault. (In future this requirement will probably
be dealt with as in the case of mora debitoris and the guilty party will be able to
use the absence of fault as a defence against a claim for breach of contract.)

Where mora debitoris makes the duties of the debtor more onerous, mora creditoris lightens
the load of a debtor. The debtor will only be liable in the case of impossibility of performance
where it is caused by his wilful or grossly negligent acts. If performance becomes impossible
then the creditor will remain liable to render counter-performance.

TEST YOURSELF:

1. What is repudiation? Give an example.

2. When does prevention of performance occur? Give an example.
3. Explain what positive malperformance is and give an example.
4. When does mora debitoris occur? Give an example. Use that same example to explain
how mora debitoris differs from prevention of performance.
5. What are the requirements for mora debitoris?
6. When does mora creditoris occur? Give an example.
7. What are the requirements for mora creditoris?
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CHAPTER 12
REMEDIES FOR BREACH OF CONTRACT

LEARNING OBJECTIVE:
This chapter sets out some of the main remedies available for breach of contract in South
African law. Students should be able to identify and apply the appropriate remedies in a given
situation.

12.1 General

Where breach of contract has occurred the innocent party has several remedies. They are
remedies aimed at enforcing or upholding the contract (specific performance); or at cancelling
the contractual relationship (cancellation). Damages can also be claimed, either as an
independent or a supplementary remedy.

12.2 Specific performance

The innocent party may ask the court for specific performance. Specific performance is an
order of court that a debtor must perform in accordance with his contract. If a person does not
comply with the order, he commits contempt of court. If he is ordered to pay money, the order
may be executed by judicial procedure, whereby his assets can be seized and sold in execution
to meet his obligations.

Specific performance is regarded as the primary remedy for breach of contract in South Africa.
But there are cases where the court will refuse to grant it and in such cases the creditor will
have to claim damages. Specific performance cannot be granted in the Magistrates' Court
without an alternative order for damages (Magistrates' Court Act 32 of 1944 s 46).

The court will always have a discretion to grant specific performance. The discretion to grant
specific performance must be freely exercised. There are no fixed rules, but each case will be
treated on its own merits according to the principles of public policy and fairness. Some
principles have developed in the common law where specific performance will not be granted:

 No specific performance will be given where performance is impossible.

 The debtor will not be excused from performance even if it causes him hardship, but
courts will not grant specific performance where it will lead to undue hardship. It will
also not be granted if performance would cause undue expense or detriment for the
debtor or the public in comparison to the benefit it would have for the creditor.

 The courts are reluctant to force an employee onto an employer because of the
personal nature of the relationship between employer and employee. The same applies
for partners in a partnership. In the case of Troskie v Van der Walt 1994 3 SA 545
(OPA), where a rugby player breached the contract with his club to play for another
 75

club, the Court held that they cannot grant specific performance because of the
personal nature of an employment contract. However, in principle, an employer is
entitled to specific performance, although in a particular instance there may be factors
which justify a court in refusing such an order such as when fundamental human rights
are being affected when an employee is forced to go back. It would therefore depend
on the specific circumstances of the case. In Santos Professional Football Club v
Igesund 2003 3 SA 73 (C), though, the coach was, for example, forced to go back to
the club where he was employed, though, because the nature of the contract between
them was not a typical employer-employee agreement. (Contracts between employers
and employees are also regulated by labour legislation.)

 A court will not enforce a contract if performance is not clearly defined to the extent that
it is impossible to determine whether performance has taken place in accordance with
the court order and therefore to enforce the order. It will depend on the circumstances
whether it is only difficult or impossible to enforce the order of court.

According to the courts a debtor cannot argue that damages will be a sufficient remedy. The
creditor will have a right to specific performance even if the creditor could be sufficiently
compensated by a claim for damages. Damages will not be a defence even if a contract of
sale has been concluded and the goods sold can be obtained in the open market. In the case
of Benson v SA Mutual Life Assurance Society 1986 1 SA 776 (A) SA Mutual failed to deliver
the full number of shares to Benson as per their contract. They offered to pay Benson damages
to put him in a position to buy the balance of the shares on the stock market. The Court held
that damages are not sufficient in this case, even though the shares were available in the open
market.

12.3 Cancellation

The innocent party may cancel the contract in certain circumstances. Cancellation is an
extraordinary and drastic remedy.

A contract may be cancelled only if:

(i) the contract makes provision for cancellation in the event of any or a specific type of
breach (so-called lex commissoria = right of cancellation or right of rescission).
(ii) the breach is sufficiently serious or material.

Whether it is indeed sufficiently serious to justify cancellation depends on the type of breach
committed:

 In the case of positive malperformance the question is whether the breach is

serious or goes to the root of the contract to the extent that it cannot be expected
of the creditor to be bound to the contract.

 In the case of repudiation and prevention of performance the question is whether

the breach is sufficiently grave. If only part of the contract becomes impossible or
 76

is repudiated, the question is whether the debtor can be reasonably expected to

abide by the contract.

 In the case of mora creditoris and mora debitoris cancellation will be possible if time
is of the essence.

(i) Time will be of the essence if the contract allows for cancellation. This is in
accordance with the principle stated above.
(ii) But time will also be of the essence if the contract is commercial and speculative
or subject to price fluctuations, or if it deals with perishable or seasonal goods;
(iii) or if time is made of the essence, i.e. the innocent party gives notice that he is
going to cancel if performance does not take place within a specified time. If
time is made of the essence by means of a notice, the debtor must be given a
reasonable time to perform. In this context one has to distinguish between two
scenarios; one where the parties have agreed on a date for performance and
one where there was no date for performance. Where there is a date for
performance but the debtor fails to perform on that date, the debtor will
automatically fall into mora, and the creditor only needs to make time of the
essence (i.e. secure a right of cancellation) by giving the debtor notice to
perform within a reasonable time, and indicating that the contract is to be
cancelled on failure to do so. Where no date was stipulated, the creditor first
has to place the debtor in mora by means of a notice to secure breach of
contract and thereafter send a second notice to make time of the essence.
Because it is rather impractical to send two separate notices, it is possible to
combine them into one notice. Normally no formalities are required, but
preferably it should be in writing.

Where breach has occurred and it entitles the innocent party to cancel the contract, that party
will have a choice or election between cancellation and specific performance. The innocent
party cannot be forced to cancel the contract. But once the choice is exercised, it will be final.
The Supreme Court of Appeal ruled that the election is to be made within a reasonable time
after the creditor has become aware of the breach.

Notice has also to be given to the other party to the contract before the cancellation becomes
effective. Parties may again agree expressly to a specific form of cancellation. Often it is
agreed that notice must be given at a particular place. Once again it is possible to combine
this notice with the notices referred to above. In practice, this usually happens by way of a
summons.

Where the innocent party has acquired a right to cancel, the innocent party normally cannot
purge (accept or ignore) the default and extinguish the right thereby. The only exception is
where the right to cancel derives from repudiation.

Cancellation has certain consequences, namely:

(i) the duties to perform in accordance with the contract will be extinguished, and
(ii) restitution must be made of all performances already rendered (except where restitution
was made impossible by circumstances beyond the control of the debtor).
 77

12.4 Damages

Damages for loss suffered as a result of breach of contract may be claimed whether a contract
is cancelled for breach of contract or not. The amount of damages claimed in the case of
cancellation differs from the amount that can be claimed where breach occurs but the contract
is not cancelled.

What is the method of calculation? The purpose of damages is that the innocent party should
be placed in the position he would have been in if the contract was performed properly (in other
words if no breach of contract occurred). The position that the innocent party is in at this point
in time must be compared with the hypothetical position that he would have been in if proper
performance had taken place. This method is called positive interest.

Certain limitations should be taken into consideration when claiming contractual damages:

 Only pecuniary losses may be claimed. You may not, for instance, claim with a
contractual claim for damages suffered to your good name, or for pain and
suffering. According to the facts of Jockie v Meyer 1945 AD 354, Jockie, a Chinese
person, was not allowed to stay in a beachfront hotel in PE whilst the ship on which
he was a sailor was docked for repairs in the harbour. As a result, Jockie each day
had to travel a longer way to work from a boarding house. The Court held that he
did not suffer any pecuniary loss that could be compensated by means of damages
even though he was humiliated and had to suffer discomfort. If X were to build a
house for B and the house collapses because of faulty workmanship resulting in B
being badly injured, what may he claim? He cannot claim for his lost looks.
(Although he has no contractual claim for damages he may claim for that by means
of a delictual claim.) If B were a model, though, he would have suffered pecuniary
loss as a result of the loss of his job and he would be able to claim contractually
for loss of income.

 The breach must be the factual cause of the harm suffered (causal link). This must
be determined by means of the "but for" test. If it was not for the breach of contract,
you would not have suffered any losses.

 The “but for” test is just a minimum requirement and the liability is restricted even
further. Was the harm foreseeable? Here a distinction is drawn between general
and special damages. General damages are the damages that normally flow from
a particular transaction. They may be claimed in all instances (e.g. loss of interest
on money paid in terms of the contract, loss in market value, or loss of normal use
of thing that was bought). Special damages are extraordinary damages that flow
from a particular contract (e.g. loss of profit; consequential damages). Special
damages may only be claimed if it was within the contemplation of the parties at
conclusion of the contract that such damages could flow from a particular breach.
(In other words, the debtor must have known at the time of conclusion that there
might be a possibility of the creditor suffering loss if he were not to perform his
contractual obligations.) This approach has often been criticised and it seems it
would be more acceptable to allow a claim for special damages if the loss was
 78

reasonably foreseeable for the person who breached the contract at the moment
of breach.

 The innocent party may not simply sit back and wait for damages to accumulate.
He must take reasonable steps to limit the damages; in other words there is duty
on him to mitigate his losses. In North and Son (Pty) Ltd v Albertyn 1962 2 SA 212
(A), Albertyn, a wheat farmer, had his tractor serviced by North and Son.
Subsequently, the tractor broke down five times, resulting in Albertyn missing the
main planting season. Albertyn informed the garage that he needed the tractor for
planting purposes. In between, at times when the tractor was in working order, he
ploughed and planted a few lands. He, however, enjoyed a smaller harvest as
usual. The Court found that he mitigated his losses by working the land when he
could.

12.5 Penalty clauses

Sometimes it is very difficult to prove damages. The parties, therefore, may agree that a party
who breaches the contract should pay a fixed amount of money to the innocent (aggrieved)
party on breach. That will save the creditor the trouble of proving the amount. This is called a
penalty stipulation. Thus, a penalty clause is a clause by which someone bounds himself to
pay a specific amount in the form of damages or as a penalty in case of breach.

It is obvious that penalties can sometimes be abused and they are, therefore, controlled by the
Conventional Penalties Act 15 of 1962 which places certain limitations on penalty stipulations:

 Sec 2 (1):
If the contract provides for a penalty, the innocent party MUST claim the penalty. He
may not choose between the penalty and damages UNLESS the contract allows for
such an election. Even where the contract provides for such a choice you will not be
able to claim both damages and the penalty amount.

 Sec 2(2):
Where defective or late performance is made and accepted, a penalty may only be
claimed if it was specifically determined for this particular type of situation. A general
penalty clause will not suffice in such instances.

 Sec 3:
The court is empowered to reduce a claim if it is out of proportion to the damage
suffered. It may be reduced to the extent that it is regarded equitable. The onus to show
that the amount is disproportionate rests on the party who avers it. The court may
consider a wide range of factors in determining this. Even factors like inconvenience
and loss of reputation may be looked at.
 79

12.6 Exceptio non adimpleti contractus

In the case of a reciprocal contract where the other party is obliged to perform beforehand (as
in the case of a credit sale) or simultaneously (as in the case of a cash sale), a party may
refuse to perform before counter-performance is given. If the contract does not say anything,
then there is a presumption that performance must take place simultaneously.

Since performance is refused until proper counter-performance is rendered, the exceptio

ensures proper performance. (It may, therefore, at the same time operate as a defence to
claims from a party who has not performed properly or in full yet.) Although the exceptio is
aimed at ensuring proper performance, there are cases where the courts will relax the exceptio
and not enforce it rigidly. The court will sometimes use its discretion and allow counter
performance where defective performance was made. In that case a reduced contract price is
allowed. For such a claim the following requirements have to be met:

(i) Defective performance is being utilised by the creditor or he must have received
some benefit from it.
(ii) If it would be fair for the court to exercise its discretion in favour of the debtor.
(iii) If the debtor can show the amount with which his claim should be reduced
because of the defect (in other words, the amount needed to correct the
breach).

The reduced contract amount is often determined by subtracting the cost of getting
performance up to standard from the contract price. However, other methods may also be
used, depending on the facts of the case.

Examples:
In BK Tooling (Edms) Bpk v Scope Precision Engineering (Edms) Bpk 1979 1 SA 391 (A) BK
Tooling subcontracted Scope Precision Engineering to engineer or create moulds which they
could use to produce rubber mounting pieces for engines in Ford cars. On delivery it was found
that they could not use all the moulds due to their diameters not being correct. However, they
did manage to deliver their order to Ford with the remaining moulds that were up to standard.
They then refused to pay Scope on the basis of the exceptio. Scope argued that although their
performance was not up to standard, BK Tooling utilised the defective performance and they
were therefore entitled to a reduced contract amount. On appeal the Appellate Court set down
the requirements for relaxing the exceptio (as set out above).

In the case of Thomson v Scholtz 1999 1 SA 232 (SCA), Thomson sold his farm to Scholtz. In
terms of their agreement Scholtz could take occupation of the farm on a certain date against
payment of occupational rent until transfer of ownership. Although the buyer was able to farm
the land he was unable to take possession of the farm house since the seller remained in
occupation. He was forced to reside in a hotel in town whilst working the farm during the day.
The buyer refused to pay occupational rent as per their agreement on grounds of the exceptio.
The Court held that is difficult to determine the amount with which the rent should be reduced
as there was no formula available. After taking all relevant circumstances into consideration,
such as the extent to which Scholtz’s enjoyment of the farm had been reduced, it was decided
that the occupational rent should be reduced by 25%.
 80

TEST YOURSELF:

1. State the different remedies available in the SA law for breach of contract.
2. What is specific performance? How is this remedy treated in the SA law? (Is it granted
in all cases or what are the criteria?)
3. When can you cancel a contract? Take note of each form of breach.
4. Explain the effect of cancellation on the contract. And when does the cancellation
become effective?
5. How does one calculate damages for breach of contract?
6. In which circumstances can you claim damages for breach? (requirements/limitations)
7. What is a penalty clause and which limitations are laid down by the Conventions
Penalty Act?
8. When can you use the exceptio non adimpleti contractus?
9. What is the purpose of the exceptio?
10. In which circumstances will the courts relax the exceptio?
 81

CHAPTER 13
CESSION

LEARNING OBJECTIVE:
This chapter deals with the transfer of personal rights. Students are introduced to the specific
characteristics of cession and how they are applied in practice.

13.1 General

Cession is a transfer of claim or personal right by one person to another.

If A transfers his right to B, A is called the cedent and B is the cessionary. E.g. X owes R100
to A. A cedes his right to B. B now becomes the creditor.

13.2 Characteristics

 Cession is always possible unless it is prohibited by statute, common law or contract.

Where there is a contractual prohibition, our courts argue that a prohibition which is not
in the same contract as the right that is purportedly ceded is invalid, UNLESS it can be
shown that the debtor had an interest in such a prohibition.

According to the facts of Paiges v Van Ryn Mines Estates Ltd 1920 AD 600, despite a
contract prohibiting it, V Company’s employee (X) ceded his monthly wages to Paiges.
Paiges sued the company for the amount; his argument being that the prohibition was
not contained in X’s employment contract where the personal right against the
employer was created. Therefore, the prohibition was not valid and he was legally
entitled to cede such right. The Court held that in this case the mine could show an
interest in the prohibition, in that they were a big company with thousands of employees
which would mean a huge administrative burden if they had to pay out to cessionaries.
Therefore, even though the prohibition was contained in a separate contract it could
still be enforced because of the employee’s interest in such a prohibition.

 The right cannot be ceded if it is so inextricable with the identity of the creditor that
performance to another person will change the nature of the obligation. E.g. a contract
with an artist to paint my (the creditor’s) portrait cannot be ceded to a third party as that
would no longer be a contract to paint my portrait.

 The consent of the debtor is not required for a valid cession. It is simply done by
agreement between the creditor and a third party. But the debtor is protected; cession
is only valid if the debtor is not prejudiced. It will not be regarded as prejudice if the new
creditor is simply stricter.

 In principle a cession can be made without compliance with any formalities, but
sometimes formalities are prescribed, e.g. statutes may prescribe formalities. Shares
 82

are personal rights and can be transferred in accordance with the Companies Act.
However, these formalities are not a prerequisite for cession. Parties may also
prescribe formalities in their contract.

 As was noted above, cession can take place without any assistance of the debtor. It is,
therefore, possible that the debtor may not know who his real creditor is. If the debtor
performs in good faith to his old creditor (cedent), it will be as good as performance to
the real creditor (cessionary). It is sometimes said that notice by the new creditor is
necessary for a valid cession. However, this is not true. However, it is still advisable to
notify him so as to ensure that the debtor does not pay the old creditor (cedent) in good
faith.

 The old creditor (cedent) can never transfer more rights to the new creditor (cessionary)
than he had himself. The debtor retains every defence which he had against the original
creditor (cedent), e.g. undue influence, misrepresentation. Claims (for cancellation,
restitution and damages) have to be instituted against the cedent because he only
transferred personal rights and no obligations. In Van Zyl v Credit Corporation of SA
1960 4 SA 582 (A), Van Zyl bought a car from T garage who ceded its rights against
Van Zyl to Credit Corp. When van Zyl bought the car from the garage they
misrepresented the model. Van Zyl did not know that at the time of the sale, but only
discovered it later on. The court held that, even though Van Zyl could use the
misrepresentation as a defence against claims from Credit Corp, the claim for
rescission should be instituted against the cedent. Van Zyl should therefore claim the
instalments that he had already paid from the garage; the reason being that they did
not transfer their obligations to Credit Corp.

13.3 Cession of debt/debts as security

In the commercial world, cession is often used as a form of security, e.g. cession of book debts.

TEST YOURSELF:

1 Define cession.
2 Who is the cedent and who the cessionary? Who is the third party? Explain this at the
hand of an example.
3 Discuss the requirements for a valid cession. Make sure that you understand how a
contractual prohibition against cession works as well as the exceptions on the rule.
Give an example of a case where the identity of the creditor is so closely related to the
contract that cession will be prohibited. Does one require the co-operation of the debtor
to conclude a valid cession? What will happen if the debtor performs towards the
cedent? Does the debtor retain his original defences against the new creditor?
 83

CHAPTER 14
DISCHARGE OF OBLIGATIONS

LEARNING OBJECTIVES:
The purpose of this chapter is to discuss the different ways in which an obligation can be
terminated so that the parties are no longer bound to the contract. Students are required to
know the theoretical background (characteristics and requirements) of the various forms of
discharge and be able to apply them to factual situations.

14.1 Performance

Discharge of performance is the natural way by which an obligation is extinguished. The debtor
does what he has agreed to do, namely to perform.

A third party may perform on behalf of the debtor, but he may only do so if performance by
other parties will also constitute proper performance. If it is still proper performance, the creditor
may not object. Whether the third party has a claim for recourse against the debtor depends
on the relationship between the debtor and the third party. If there is a contract, it will be in
terms of the contract. If there is no contract to that effect, it will be on the grounds of unjustified
enrichment.

To discharge the contractual obligation through performance, certain requirements should be

met:

(a) In principle, performance must be in accordance with the contract. However, it is

possible for the creditor to accept performance other than that which was agreed to.
The only requirement is that there must be agreement. (Van Diggelen v De Bruin 1954
1 SA 188 (SWA)). If the substitute performance is defective the creditor will have an
election between claiming proper performance or insisting again on performance of the
original obligation.

(b) The creditor may reject piecemeal performance where the contract does not provide
for it. E.g. where a debt is paid off in instalments whilst the agreement provided for
payment in one lump sum.

(c) Performance must take place at the time agreed to; if no agreement then the rules of
mora apply.

(d) The place of performance is the place agreed to. Agreement may be express, tacit or
implied, but if no agreement then it is the place where the agreement was concluded.
 84

Other features that should be noted are:

 Where the debtor chooses the method of performance, he bears the risk thereof.
Where the creditor insists on a certain manner of performance, he will have to bear
the risk if something goes wrong (e.g. payment by means of a cheque sent by mail
which is lost in the mail.) According to the facts of Goldfields Confectionery and
Bakery (Pty) Ltd v Norman Adam (Pty) Ltd 1950 2 SA 763 (T), cheques were used
to pay for G’s debts towards N for quite some time. However, the creditor never
authorised this method of payment. Acceptance of the cheques for some time did
not mean that they tacitly authorised or consented to this method either. When the
cheque got lost in the mail, the Court held that the debtor still had to pay.

 Sometimes performance will be unilateral, depending on the contract, but mostly

performance will be bilateral. One party must agree to receive performance and the
other must agree to perform it.

 What happens if A owes B three debts of R100 each and he only pays R100?
Which debt is discharged? Firstly, the intention of the debtor will be conclusive,
where he declares that a certain debt should be discharged. If the debtor does not
specify, then one should look at whether the creditor specified anything. Further
complex rules apply when none of the parties have specified any sequence.

In regard to the payment of money, further rules apply:

(i) The creditor may refuse to accept money in another currency unless the contract
determines differently.

(ii) If the contract expresses the sum owed in another currency, then the debtor may still
pay in the currency of the place of performance and the creditor may still insist on
local currency.

(iii) The interest rate would be the rate at the time of payment.

(iv) There is no automatic adaptation for inflation.

(v) Interest may be stipulated subject to the regulations of the Credit Act 34 of 2005.

(vi) The creditor is not obliged to accept a cheque where money is owed. But cheques
are of important commercial value. In a commercial transaction, a creditor may not
refuse to accept a cheque performed in good faith on mere technical grounds.

(vii) Money must be paid in acceptable notes and coins. A creditor may refuse to accept
larger payments in coins (Act 78 of 1964).
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14.2 Termination of obligations by agreement

Obligations can also be terminated by agreement between the parties. Release/waiver,

novation and compromise are examples of such agreements.

14.2.1 Release / waiver

Release or waiver takes place where the parties agree that an obligation will be terminated. It
is sometimes said that waiver may be unilateral, but this is doubtful. It must be done by
agreement. E.g. B owes A R100 but A waives his rights against him and releases him from his
obligation.

14.2.2 Novation

Novation takes place where an obligation is replaced by agreement by another obligation

between the same parties. E.g. B owes A R100 but A has a sweet tooth and she agrees that
B should give her R100 worth of chocolates instead.

Requirements:

(a) The existence of an old and valid debt is necessary. (This is a supposition on
which novation is based.)

(b) A novation agreement must comply with the normal requirements for a valid
contract. If it does not, the old debt will continue.

Novation can also take the form of delegation. In the event of delegation, the existing obligation
is replaced by an obligation with another party. Delegation consists of a trilateral agreement
between a creditor, a debtor and another party. Here, B’s brother would undertake to pay A
the money (or give her the chocolates). Delegation can result in either creditors or debtors
being replaced by a third party. However, in most cases it will be the debtors. Delegation is
probably the only method by which duties can be transferred from one debtor to another.
Delegation must be distinguished from cession. In the latter case, a creditor transfers his
personal rights to a new creditor.

14.2.3 Compromise

Compromise is an agreement by which parties resolve a dispute between them. E.g. A renders
a service to B, but B is not satisfied with the service and refuses to pay the amount as
previously agreed. He is prepared to pay a lesser amount. If A agrees to that, the dispute is
settled through compromise. It is not always the case, but the new obligations may differ from
the old ones. Even if the new obligations are different, novation and compromise should still
be distinguished. In the case of compromise, it is not necessary that old obligations must exist
and that they have to be valid as is the case with novation.
 86

Where there is a compromise any process between the parties terminates. All previous
obligations are terminated as well. Naturally, this only applies to the process and obligations
within the ambit of the compromise.

Parties sometimes perform in full and final settlement. Will this mean that the obligation is
terminated even if performance did not comply with the contract? The meaning of the phrase
"full and final settlement" differs depending on the intention with which the performance is
made. It does not necessarily mean that because the creditor accepted payment, the balance
cannot be claimed from him. If payment is made as an offer to compromise and the offer is
accepted, the obligation will be erased even if it did not comply with the contract. This means
that the creditor cannot claim the balance. If the debtor paid because he thought that he was
paying what was due, the obligation will not be terminated and the creditor could still claim the
balance as that would not amount to performance. (Performance requires payment of the full
balance.)

In cases of novation and compromise the following situations must be distinguished:

 If the novation or compromise contract is void, the old obligation will continue.
 If the novation or compromise contract is voidable, the old obligation is revived.
 If the novation or compromise contract is cancelled on grounds of breach, the old
obligation will not revive unless the parties have specifically agreed to that.

14.3. Set-off

Where two persons owe each other duties, performance by each party to the other would be
superfluous. Hence the law will allow set-off to take place.

Requirements:

(a) The obligations must be between the same persons in their personal capacities.
E.g. A owes B R100, but the company B works for has overcharged A with
R100. Set-off will not apply here.

(b) Set-off may only take place between debts of a similar nature. Set-off mostly
takes place with regard to money but it may also apply to other things described
with regard to kind, e.g. grain, similar shares, futures.

(c) Both debts must be due and payable before set-off can take place. Every party
may waive a time clause in his favour.

(d) Both debts must be susceptible to reasonably easy proof. Where the nature and
extent is not sure, no set-off will take place. Set-off cannot take place in the
case of a claim against an insolvent estate until the amount of the dividend is
fixed.
 87

Whether set-off will apply automatically if all the above requirements are met, or only when
one of the parties insists on it, is a difficult issue. The prevalent view is that it works
automatically. In any event, it is held that the moment at which set-off is to take place is the
moment when all requirements are met. Even if set-off works automatically, the creditor is not
obliged to rely on the set-off if a claim is brought against him. However, it should be noted that
the operation of set-off may be excluded in a contract.

14.4. Merger of debts

Where the same person becomes debtor and creditor for an obligation, such obligation will be
extinguished through merger. E.g. A buys the house that he is currently renting.

However, it should be noted that merger only takes place where it concerns the same
obligation. No merger will, for example, take place where a lessee sub-lets to the lessor. The
contract of lease and the contract of sub-lease are two separate contracts and do not concern
the same obligations. If the lessor would die and leave the property to the lessee, merger will
take place as the lessee then becomes debtor and creditor of the same obligation. The same
applies where the creditor cedes his right against a debtor to that particular debtor. The right
will be extinguished through merger and it will not revive.

14.5. Prescription

There are different types of prescription. In the law of contract, we deal with extinctive
prescription, i.e. extinguishing of a debt by passing of time. This particular type of prescription
is controlled by the Prescription Act 68 of 1969.

Prescription extinguishes a debt completely (sec 10(1)), but if performance is still made, such
performance cannot be reclaimed (sec 10(2)).

Different periods for prescription are set out in sec 11. Most important for our purposes, is that
ordinary obligations prescribe after 3 years.

The point of departure is that prescription starts to run when the debt is due (s 12(1)). E.g. A
sells his car to B but the agreement states that B will pay at the end of the month. Prescription
will only start to run at the end of the month.

Where a debtor is to refrain from doing something, prescription will start to run when the debtor
acts contrary to the obligation. Prescription does not start to run when the debtor intentionally
prevents the creditor from knowing that there is a debt (s 12(2)). Prescription only starts to run
when the creditor has knowledge of the debtor and the facts from which the debt arose (s
12(3)).

It should be noted that certain factors will operate as impediments to the completion of
prescription:
 when a creditor is a minor;
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 when a debtor is outside the country;

 or when the debtor and creditor are married or are partners.

In these events, the normal running of prescription is delayed if need be so that the period of
prescription will only be completed at least one year after the impediment has lapsed. If the
prescriptive period would have been completed before, on, or within one year of the date on
which the impediment ceases to exist, the completion of prescription is delayed with one year
from the date on which the impediment ceases to exist. E.g. A sells his car to B on 1 July. B
takes the car but before paying for it, drives across the border. The debt will normally prescribe
within 3 years of 1 July. (You may assume that the debt is due on 1 July.) However, because
the debtor is outside the country, the running of prescription is impeded. After 3 years and 2
months B returns to SA. The debt would not have prescribed due to the impediment. A still has
another year from the date that B has returned to SA. If B returned after 2 years and 9 months
from buying the car, A will still be left with another year from the date of return. However, if B
returned exactly 2 years after buying the car, the normal running of prescription would not be
extended as the extra year would still fall within the normal 3-year period for prescription.

Prescription is also interrupted in certain circumstances. When the debtor

 acknowledges liability to the creditor (art 14);
 or where a process for claim of a debt is served (sec 15) AND PROVIDED it is
prosecuted to a final judgment, OR the debtor acknowledges liability,

prescription will start to run all over again. Note that a judgement debt only prescribes after
thirty years. E.g. A owes B R1000 but fails to pay the amount on the due date. Two years and
364 days later, default judgment is obtained. Prescription will now be interrupted and will start
running afresh. If judgement cannot be obtained, the interruption in the running of prescription
lapses and it is deemed that prescription was never interrupted. The effect is that the normal
running of prescription will apply again and that the debt will become prescribed after three
years from the date that the debt has become due and payable.
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TEST YOURSELF

1. Define performance. What are the requirements for performance in general?

2. Is it possible for a third party to perform the obligation? Explain the requirements.
3. If a third party does perform, will he still have a right of recourse against the original
debtor? Explain.
4. Will the obligation be considered as performed if the debtor performs his obligation, but
payment does not reach the creditor, e.g. because the cheque got lost in the mail?
5. Make sure that you know how payment of money debts works, e.g. currency, interest
rate, payment instrument etc.
6. State 3 ways in which an obligation may be terminated by agreement.
7. What is release (waiver)?
8. What is novation? Explain this concept by means of an example.
9. What are the requirements for a valid novation?
10. What is delegation and how does it work?
11. Explain how compromise works.
12. If payment is made in “full and final settlement” and you pay less than the amount
actually owed, will the obligation be extinguished?
13. What happens to the old obligation in cases where the compromise / novation
agreement is void?
14. What happens to the old obligation in cases where the compromise / novation
agreement is voidable?
15. What happens to the old obligation where the compromise/novation agreement is
cancelled because of breach of contract?
16. What is set-off? Give an example.
17. Discuss the requirements for set-off.
18. What is the general opinion on the question whether set-off acts automatically?
19. What is merger? Give and example.
20. What are the requirements for merger?
21. What is prescription?
22. When does extinguishing prescription start to run?
23. In which circumstances will prescription be suspended? When will prescription then be
completed?
24. When will prescription be interrupted? What is the effect of interruption on the running
of prescription?
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CHAPTER 15
AGENCY

STUDY OBJECTIVES:
This chapter deals with the concept of agency and the effect it has on the obligations of the
parties. Students are introduced to the requirements for agency with the emphasis on the
requirement of authorisation and the liability of the principal and the agent in cases where there
is no authorisation. The Doctrine of the Undisclosed Principal and other legal concepts related
to agency are briefly discussed as well.

15.1 General

Agency is the conclusion of a juristic act (by an agent) on behalf of another person (the
principal) with a third party. The act is performed by the agent, but the legal consequences
(rights and duties) will accrue to the principal.

The requirements are:

(a) The agent must intend to act on behalf of another person.

(b) The third party must intend to contract with the principal.

(c) The principal must exist when the contract is concluded.31

(d) The agent must be able to perform the act on behalf of the principal.

15.2 Sources of authorisation

The fourth requirement is the most important one. To be able to perform on behalf of the
principal, the latter should authorise the agent to act on its behalf. Authority can be derived
from different sources.

(i) Firstly, the agent can be given authority. If a person is authorised by the
principal, authorisation is a unilateral juristic act by which one person gives
another the power to act on his behalf. E.g., I authorise you to buy a car on my
behalf. Although it is a unilateral act, it may sometimes be part of a contractual
relationship. Authority can be given expressly and tacitly. The scope of the
authority depends on the intention of the principal. It can be a general power of
attorney or aimed at a specific transaction.

31 Except for pre-incorporation contracts.

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(ii) Secondly, the agent may derive his authority from a certain position or office
that he holds. In these cases, authority will not be given to the agent as such
but the agent will have it automatically. For instance, a natural guardian may
act on behalf of a minor; an official may bind the State; directors have the power
to act on behalf of the company which is derived from its constitution (deed);
partners may bind a partnership within its sphere of activity.

15.3 Termination of authority

Termination of authority depends on the type of authority that was given. Where authority
depends on a certain position, it will be terminated when the agent leaves the position, e.g. in
the case of a director and a guardian. Authority that was given for a particular purpose will
terminate if the purpose has been achieved, e.g. authority to conclude a specific contract.
Authority given for a particular time will terminate when the time has passed. Death of the
principal or loss of the capacity to act (contractual capacity) will also terminate the authority.
Where a principal provided authority, it may be terminated at any time. Termination is possible
even if the parties expressly agreed that authority will be irrevocable. There are only a few
exceptions to this rule, such as for example where authority was given to provide some form
of security.

15.4 Liability of the principal where no authority was given

The important question is what happens if the agent acts without the necessary authorisation?
Will the principal still be held liable or will the agent be liable? If the agent acted without the
necessary authorisation he does not comply with all four requirements for agency set out
above. Therefore, in most cases it will not be possible to hold the principal liable. In limited
instances, however, it will be possible.

15.4.1. Ratification

Where the contract was concluded on behalf of a principal, authority may be given afterwards
by means of ratification, but further requirements have to be met. Authorisation will then have
retrospective effect.

Requirements:

(a) The principal must have existed at the conclusion of the contract.

(b) Ratification must take place within a reasonable time.

(c) The third party may avoid ratification by giving notice to the principal that he will no
longer be bound.
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15.4.2. Estoppel

In certain cases, a principal will be bound on the basis of estoppel even if he did not authorise
the agent to act on his behalf. Where the principal negligently creates the impression that a
person has authority and the third person acts on the basis of this impression to his detriment
then the principal may no longer rely on the real position.

Requirements:

(a) An impression must be created by the principal that the person who concluded the
contract had authority to do so.

(b) The third party must act on the basis of such impression.

(c) There must be fault on the side of the principal (fraud or negligence).

(d) The third party must act to his detriment. This requirement will be easily met in practice.

E.g. A concludes a contract on behalf of B. He is an employee of B in a certain position. B

actually withdraws his authority but A remains in his position.

15.5 Liability of the agent if no authority

The liability of an agent towards the third party is limited. He only acts on behalf of another.
But what happens if there is no authority?

15.5.1. Express guarantee of authority

Sometimes an agent will guarantee his authority. The guarantee will be a separate contract.
Damages can be claimed if the authority does not exist. This contract can be express or
implied.

15.5.2. Implied warranty of authority

Even where there is no contract, liability may arise for the agent on the basis of the implied
warranty of authority.

Requirements:

(a) The agent must represent that he has authority.

(b) There must be a lack of authority.

(c) The third party must suffer loss.

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(d) There must be a causal link between the loss and the representation.

(e) Sometimes it is said that fault is also a requirement, but it seems that this is not correct.

It is very important to note that an implied warranty of authority does not establish the original
contract between the agent and the third party. It only allows the third party to claim damages
on the grounds of the implied warranty.

15.6 Doctrine of the Undisclosed Principal

Normally the agent must act on behalf of the principal, but there is also an exception to this
where the “agent” acts in his own name. This can happen on the basis of the so-called Doctrine
of the Undisclosed Principal.
The doctrine originated in English law, but was confirmed as part of our law in Cullinan v
Noordkaaplandse Aartappelkernmoerkwekers Koop Bpk 1972 1 SA 761 (A).

For this doctrine to come into operation, certain requirements have to be met:

(a) The agent must act in his own name but in the interest of another party.
(b) The undisclosed principal must authorise the agent to act on his behalf or must at least
give the agent a mandate to act on his behalf. The order or authorisation must exist
when the contract is concluded.

Effect of the doctrine:

(a) The doctrine gives the undisclosed principal the right to step into the shoes of the agent.
He may claim the rights to which the agent would otherwise be entitled. The third party
cannot refuse to perform towards the agent before the undisclosed principal steps in,
but once he does, he (the undisclosed principal) will be the only creditor.

(b) Even where the undisclosed principal steps in, he only obtains rights and no
obligations. However, a third party also has an election. Once it finds out that there is
an undisclosed principal behind the agent it may hold either the agent or the principal
liable. The third party will have to decide which one to hold liable and its election, once
exercised, will be final.

Example: X concludes a contract with A. He instructs A to buy a car on his behalf. A buys the
car from B without telling him that he is acting on behalf of X.

The doctrine will not operate if there is more than one undisclosed principal.
(Aartappelkernmoer case supra)
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15.7 Related concepts

There are a few legal constructs that are related to agency of which you should take note.

15.7.1 Contract for the benefit of a third party

A contract may be concluded for the benefit of a third party. Here two parties agree that one
of them will give a benefit to a third party. The original party to whom the promise is made will
be able to force the promissor not to do anything that will interfere with his possible obligation
towards the third party. When the third party accepts the benefit, a contract is concluded
between him and the promissor. Rights will only arise for the third party on acceptance of the
benefit. A pre-incorporation contract32 is a typical example here. After its incorporation the
company will accept the benefit and the contract will come into existence between the company
and the promissor.

15.7.2 Estate agents

Estate agents are called agents, but mostly they are not agents in the true sense of the word.
They normally only bring parties together and they do not perform juristic acts themselves.

15.7.3 Messengers

A messenger is also not an agent. A messenger informs one party to the agreement of the
intention of the other party, but he does not perform any juristic acts himself.

TEST YOURSELF

1. What is agency? Who acts as the principal, agent and the third party?
2. State the requirements of agency.
3. Make sure that you know the sources from which authority originates and that you
understand them.
4. In which circumstances will the principal be bound to the contract in the absence of any
prior authority for the agent to conclude same?
5. Explain the concept and state the requirements for ratification.
6. Explain the concept and state the requirements for estoppel.
7. How will authority be terminated?
8. In which circumstances will the agent be liable against third parties?
9. Explain how the Doctrine of the Undisclosed Principal works.
10. How does a contract for the benefit of a third party work?

32 This is a contract that is concluded by a company before it is incorporated (registered).