LEARNING UNIT 2: THE LAW OF CONTRACT

OBJECTIVES: Describe the essentials of a valid contract Explain the difference between a valid, void and voidable contract Explain the contractual capacity of minors and married persons Explain the concepts of “mistake” and “misrepresentation” and be able to distinguish

between them Explain when restraint of trade clauses will be enforced by a court Explain the operation of cession Explain what brings about the termination of a contract with particular reference to

performance, prescription and intervening impossibility of performance Explain what constitutes a breach of contract and the remedies available to the

injured party

“CONTRACT”

“a contract is an agreement binding in law between persons in which they promise to do something, not to do something or to deliver something”

= an agreement between at least two parties which gives rise to legal obligations(rights and duties) •A contract may, in certain circumstances, be required to meet certain requirements regarding formalities •The parties must intend for a legal relationship to come about between them •The intention of creating enforceable rights and duties (obligations) AND to be bound by them is what sets a contract apart from other agreements •Rights = an advantage which entitles the holder to demand another person to act or refrain from acting •Duties = a responsibility imposed by law and which obliges a person to act or to refrain from acting

Service/ employment contract

Restraint of trade contract

Contract of sale

VOID CONTRACTS • There is NO contract due to a serious defect •Void due to serious mistake •Contract does not exist and is not enforceable VOIDABLE CONTRACTS •Innocent party has the choice to continue (execute) the contract or to cancel the contract •If choice is made to execute the contract, the contract is valid and enforceable •Voidable due to: 1. Misrepresentation (material misrepresentation?) 2. Duress 3. Undue influence

ALL contracts have certain “general principles” which are applicable thereto 1. Lawfulness 2. Capacity to contract 3. Serious intention to create legally enforceable obligations 4. Communicated by offer and acceptance 5. Terms are not vague or ambiguous 6. Consent 7. Physically possible to perform

Essential elements…

VALID contract contains all of

these

Consensus Capacity Legal possibility Physical possibility Formalities

Speaks to consensus

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MISTAKE AND MISREPRESENTATION The existence of a valid contract is dependent on real consent (consensus) no meeting of the minds means that the contract is void where consensus was improperly obtained the contract is voidable

MISTAKE “ A misapprehension or misunderstanding of the existence or non- existence of fact or a

state of facts ” o There are 4 type of misrepresentation 1. Mistake of law 2. Mistake of expression 3. Mistake of motive 4. Mistake of fact

1. Mistake regarding the nature of the contract 2. Mistake regarding the identity of the subject matter of the contract 3. Mistake regarding the attributes of the subject matter 4. Mistake regarding the identity of the parties of the contract

Only a mistake of fact renders a contract void

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MISREPRESENTATION

“ A false statement of fact made by one person to another, before or at the time of the contract, of some matter or circumstance relating to the contract, with the intention of

inducing the latter to contract and that actually induces him or her to do so ” oMisrepresentation is a FALSE statement which INDUCES a party to enter into a contract oWhere 1 party makes an incorrect statement of the true state of affairs to the other party and this induces that party to conclude a contract (misrepresentation is made with the aim of getting the other party to conclude the contract)

oBy express statement or by conduct oConcealing a fact is also misrepresentation but only where the party had a duty to disclose such information

oHonest opinion / estimate / sales puffing is NOT misrepresentation

o3 types of misrepresentation

Fraudulent misrepresentation

Negligent misrepresentation Innocent misrepresentation

Where a person knowingly makes a false statement OR was made recklessly in that person did not know whether it was true or false

Where a statement is made believing it to be true BUT a reasonable person would have known the statement was in fact false

Where a person makes a false statement believing it to be true and a reasonable person would ALSO have thought it to be true

CAPACITY TO CONTRACT •= capacity to perform juristic acts or to participate in legal transacts •NATURAL persons have capacity to act but not all natural persons have capacity •Juristic persons? •A person has full capacity to contract unless some or other factor limits this capacity. Numerous circumstances may impact on a person’s capacity eg. Mental state, drugs, alcohol, insolvency •You need to know 2 such circumstances: 1. Age 2. Martial status

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CAPACITY OF MINORS Unmarried, natural person below 18 years of age = minor 3 important “age bands” 1. Minor < 7 years of age o Have no capacity to act o Guardian must act for the minor 2. Minors > 7 years of age < 18 years of age o Limited capacity and generally a guardian must assist such a minor to contract by either a) being

present at the time of conclusion; b) prior permission or c)ratification o WITH assistance of a guardian, a valid contract is concluded and the minor is bound thereto 3. Persons > 18 years of age o Full capacity unless some other factor exists

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Emancipated minors o = where a minor has economic freedom to enter into contracts (relating to their

trade) o Guardians should actually give their consent o The minor may VALIDLY conclude a contract BUT only within the scope of their

emancipation

Statutory exceptions to parental consent: o Medical treatment – 12 o Will/ testament – 16

Where a contract is concluded WITH assistance

Contract concluded WITHOUT assistance

• the minor is bound by the contract • But if the contract is prejudicial to the

minor, the minor may apply to the high court to set the contract aside

• Minor must then make restitution (as well as the other party to the contract)

•Void •Where minor wishes to enforce the contract and has performed where other party has not or refuses to, minor may sue with assistance of guardian •Where minor wishes to repudiate the contract, both parties must make restitution( where the minor has lost the entire benefit or part thereof they need only return what is left of it while the other party must return the full performance)

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Fraudulent misrepresentation of majority o Void as the minor concluded the contract without consent o Minor may not be held liable and cannot claim restitution o Other party may claim for unjustified enrichment of the minor

IMPACT OF MARRIAGE ON CAPACITY Every marital regime has certain patrimonial consequences such as impacting on a

person’s capacity to contract 2 regimes in SA 1. Marriage in community of property = automatic UNLESS ante- nuptial agreement has been concluded o Separate estates of the spouses are joined together into a joint estate o A spouse may contract of behalf of the joint estate BUT must have consent o Consent my be given by later ratification o Consent is DEEMED to have existed at the time of contracting where the consent of

the spouse was absent and the other party to the contract could not reasonably or did not reasonably know that consent was required due to marital regime

oFormal written consent is required for alienation of immovable property, suretyship agreements and credit agreements oThe sale of household items and receiving an inheritance requires informal consent

Formal vs informal consent

2. Marriage out of community of property = ante- nuptial agreement has been concluded between the parties o Each person’s estate is kept separately and each party has full capacity regarding their

own estate o The spouses are jointly and separately liable for household expenses

o Parties may choose to be married out of community of property and then with or without accrual…

o Same- sex marriages are recognised as legal marriages ito the Civil Union Act o Customary marriages are recognised as marriages ito the Customary Marriages Act

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WITH accrual WITHOUT accrual

Growth of each separate estate during the marriage is divided between the parties at the dissolution of the marriage

No division of growth and each party keeps the amount by which their estate had grown during the course of the marriage

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RESTRAINT OF TRADE AGREEMENTS A restraint of trade (RoT) agreement is a contract that restricts a person’s freedom to participate in their trade

conflict Previously… Seen as being against public policy and thus void Currently… Valid and enforceable UNLESS the RoT is unreasonable and in that manner against public policy nature of restraint time of restraint geographical are of restraint Party who wishes to enforce the RoT will have to prove the following The RoT does not go further than what is necessary to protect the interest The RoT is reasonable Public policy is not violated by enforcement Courts will enforce the RoT where there is a real interest and the above has been proven

Contracts are binding and should be enforced

Everyone should have the freedom to participate in trade

TERMINATION OF A CONTRACT Contract may be terminated in various ways which include: 1. Performance 2. Intervening impossibility 3. Prescription

PERFORMANCE = party performs the obligation that they were meant to perform ito the contract

INTERVENING IMPOSSIBILITY OF PERFORMANCE = performance becomes objectively impossible after contract has been concluded •May occur by: 1. An act of God 2. Where the law is changed 3. Where personal performance is required and that person can no longer perform •Extinguishes the rights and obligations of the parties, UNLESS: 1. Parties agreed otherwise 2. Impossibility is only subjectively impossible 3. Impossibility is due to the fault of a party 4. The debtor is in mora

PRESCRIPTION = passing of time Extinctive prescription means that a claim lapses after the passing of a certain amount of time (CDT only has window of time to sue the DBT) Periods: 30 years – debts secured by mortgage, judgement debts and taxes 15 years – debts owed to the State resulting from a loan or the sale or lease of land from the State 6 years – for debts arising from negotiable instruments 3 years – for debts arising from contract or delict

CESSION = transfer of personal rights from the holder of the right (cedent) to another (cessionary) Formalities are usually not required •The debtor (DBT) need not give his consent for the cession…does not even have to know •Cedent loses his rights against the DBT (is substituted as creditor but remains the debtor where reciprocal duty is owed) •Usually all rights may be ceded, except where prohibited by: 1. Common law 2. Statute 3. Agreement between the parties •Where right is of such a personal nature (DBT has substantial interest in performing to one person only), cession cannot take place without his consent. Eg. Contract of employment – doctor

BREACH OF CONTRACT BREACH = when a party fails or refuses to perform what they agreed to perform •5 types of breach of contract: 1. Mora debitors – the debtor is in default 2. Mora creditoris – creditor causes the debtor to be in default 3. Positive malperformance – debtor gives defective performance or does something that

they had agreed not to 4. Repudiation – a party shows that he or she does not intend to continue with the

contract 5. Prevention of performance – a party makes it impossible to perform •Debtor = party who must perform a specific obligation “DO / GIVE” •Creditor = party who is entitled to performance of that obligation “RECEIVE” •Where a contract creates reciprocal obligations, each party will be the debtor and creditor in turn…

REMEDIES •An innocent party has certain remedies in the case of breach of contract: continue (execute) the contract or cancel the contract •The following remedies are available: 1. Specific performance 2. Interdict 3. Cancellation and damages 4. Penalty clause

The innocent party must choose to either execute/ cancel the contract and may then,

irrespective of what they choose, claim damages…

SPECIFIC PERFORMANCE •Remedy whereby the court orders the DBT to perform ito the contract •May not be able to be granted…eg. Performance has become impossible •Reduced performance may be ordered if the party seeking it can prove: 1. The debtor is using the defective performance 2. Circumstances justify granting reduced performance 3. The amount of reduced performance

INTERDICT = a court order which orders a person to refrain from doing something or to prohibit a person from doing something •“Do” or “threatens” •An interdict will be granted if the following can be proven: 1. A clear right exists 2. Injury has occurred or is reasonably expected to occur 3. There is no other suitable remedy

CANCELLATION AND DAMAGES •ONLY where there has been a material breach of contract or the contract includes a cancellation clause •Regarded as an abnormal remedy ( parties concluding a contract WANT to achieve the object thereof ) pacta sunt servanda •Thus cancellation is not available in every instance of breach of contract

•Innocent party may ALSO claim damages amount of money paid to the innocent party to compensate the monetary damage suffered due to breach of contract Innocent party must prove the damages and the guilty party must then pay it •Generally, the innocent party must be placed in the position the WOULD have been had the breach not occurred (proper performance) •Position AFTER breach < position Prior to contracting = damages •IRRESPECTIVE of whether party chooses to uphold (execute) the contract of cancel the contract, they are entitled to claim damages •Thus an additional remedy •But must prove: 1. The loss was a natural and direct consequence of the breach of contract 2. Loss was foreseen by the parties 3. Loss is measurable in money 4. Amount of the damages (past and future) •Innocent party has the duty to mitigate their loss

PENALTY CLAUSE = clause stating that in the event of breach , the guilty party is liable to pay •Amount may be reduced by a court if it is unreasonable •CDT must choose between the stipulated penalty clause OR damages (cant have both!)