CONTRACT LAW PRINCIPLES

LAW 201

By PROF. A.A Okharedia

LLD (UNISA) Ph.D. (VIENNA) Ph.D. (WITS)

 1. DEFINITION OF CONTRACT:

• A contract is a lawful agreement, made by two or more persons within the limits of their contractual
capacity, with the serious intention of creating a legal obligation, communicating such intentions,
without vagueness, each to the other and being of the same kind as the subject matter, to perform
positive or negative acts which are allowed and possible of performance.

• In each contract, there are common principles which guides the contractual relationship.

• In South African law, contracts are based on agreement between two or more individuals or
institutions.
• In the absence of an agreement it is assumed that there are no contractual obligations between two or more individuals.

• In view of this, a contract can only be honoured if two or more parties have applied their minds simultaneously and
reached a conscious agreement on all important issues on the contract.

• Any contractual relationship creates a legal obligation and the identity of the parties.

• The conscious agreement reached by both parties is often through a negotiation process which is based on offer and
acceptance.

• The legal obligation created between the parties can be defined as a legal tie in terms of which one party can claim
performance from the other and the party from whom the claim is made is compelled by law to perform.

• This performance consists of either doing something e.g. delivering goods or rendering a service.

• The performance could also be refraining from doing a specific thing or in the case of restraint of trade.

• No legal conduct against a person may be effected unless a legal obligation exists which entitles one party to act against
another.

• All contracts are agreements, but unfortunately not all agreements are contracts.

• Only those agreements which are made with a serious intention to create a legal obligation between the parties, and which
also comply with the other requirements are deemed to be contracts.
2 . T H E E S TA B L I S H M E N T A N D T E R M I N AT I O N O F A
C O N T R A C T.
 3.THEORIES OF CONTRACT

• 3.1 The agreement theory:

• In terms of the agreement theory, the classical theorists are of the view that the purpose of a contract is to conclude
and finalize an agreement, to illustrate concurrence of the wills of two or more parties to undertake and to perform
certain duties.

• In a normal situation, this is illustrated in the statement that for any valid contract there must be consensus ad idem
(Study the historical background of this theory and its application in your prescribed textbook)

• 3.2 The Consensus Theory:

• This theory is of the view that where parties admit that they did agree to undertake obligations to each other in a
particular term, there is no doubt they should be bound on the best possible terms that they both expressed their
will and in this situation the law will help to enforce the parties to perform what they have agreed upon.
• 3.3 The injurious reliance theory:

• This theory is of the view that if one party makes a promise to the other party which is reasonably understood by that
party to bind the promissor and the other party relies thereon and acts, as it turns out, to his detriment by reason of
the inability or failure of the promissor will be held legally bound and liable on the promise whether or not he truly
intended to contract or to contract on these terms.

• 3.4 The interest theory:

• This often occurs in a situation where parties are dealing with each other on a matter of business and each of them
has an interest and expectation to look forward.

• In the above situation, each will get something based on the other's promise, each party will get from the other what
he or she expects to get or at least compensation for the disappointment of his expectations.

• An individual has an interest in the fact that he or she will gain by the satisfaction of the expectation indeed by the
making of a promise.

• Under this theory, both parties know their legitimate expectations as supported by the law or on the promise made.
(Please study this in detail from the prescribed textbook)
• 3.5 Bargain theory:

• The bargain theory is not very popular in understanding contractual relationship between parties.

• This theory is of the view that only a bargain in which each party is doing something for the other that can be
enforced. This indicates the principle of a quid pro quo.

• Please Study the Current Position of contract issues in S. African Law in the prescribed textbook, page 52-53.
 4. FUNCTIONS OF CONTRACTS.

• In our daily transaction, contract has an important function of ensuring that expectations created by a promise of future
performance are meant, or that compensation will be paid for its breach.

• The second function of contract is the constitutive one. In this premises contract helps to facilitate forward planning of
the transaction and make provision for unforeseen contingencies.

• Thirdly, contract helps to define and establish the responsibilities of parts and the standard or performance expected of
them. For example, in a construction company, this is well spelt out. The contract spells put clearly the responsibilities of
the developer, architect, quality surveyor, main contractor, project manager and subcontractor and the method of
payment.

• Fourthly, contract helps in the redistribution and allocation of economic risk among parties for example, in the
construction contract, a clause may be included in the contract as to who bears the risk in the case of inflation for the cost
of material.

• Fifthly, contract may provide for something that should be done when things go wrong in future. For example, suppose
the architect instructed the main contractor to remedy a defect in the building and the main contractor refused to comply
with the instruction, the contract should spell put clearly the remedies that are available to both the architect and the
developer against the main contractor.
 5 . E S S E N T I A L S O F A VA L I D C O N T R A C T.

• (a) The parties must communicate their intentions to each other:

• For example, the buying of a house.

• Sometimes there is no discussion- your daily experience with you daily transport to the university from your private
residence.

• When you buy newspaper from the news vendor on the road.

• The above two transactions will always manifest itself by offer and acceptance between the offeror and offeree. Both
parties are contractually bound by their conduct of whether expressed or implied.

• Please study the case of: Wessels vs Swart No 2002 (1) SA 680(T)

• (b) The agreement must be within the limit of the parties’ contractual capacity. Study the case of (Edelstein vs
Edelstein No)
• (c) The parties must seriously intend to contract.

• Study the case of: (i) Stevenson v McLean

• (ii) Collen v Rietfontein Engineering Works.

• (D) The agreement must not be Vague. Study the case of Levenstein v Levenstein.

• (E) Performance must be possible: study the case of Wilson v Smith and Another.

• (F) The agreement must be Lawful.

• (G) The parties must be of the same mind as the to the subject matter.

• 5.A Man Cannot Make a Contract with Himself:

• Study the case of: Strydom V Protea Eiendomsagente 1979(2) SA 206(T)

 6 . R E D U C T I O N TO W R I T I N G O F A C O N T R A C T.

• Where the parties agree that it must be reduced to writing and signed before it becomes
binding, it must be reduced to writing.

• Study the case of Goldblatt V Freemautle 1920 AD 123.

• Where the legislature stipulates that the agreement must be in writing and signed before it
becomes a valid contract, it must be put in writing.

• For example, a contract for the sale of land must be reduced to writing and signed by the
parties or their authorized agent (Alienation of Land Act No. 68 of 1981 Section 2). A Contract
of suretyship must be in writing and signed by or on behalf of surety. For cheques and
promissory notes to be valid it must be signed and put in writing.
 7 . F O R M AT I O N O F C O N T R A C T:

• The concept of offer and acceptance in contracts:

• (A) An offer:

• (1) An offer must define all terms on which agreement made.

• (2) An offer which leaves certain terms to be discussed at a later date is not a complete offer.

• Study the following cases: (i) Gelbuild Contractors cc V Rare Woods SA (Pty) Ltd

• (ii) OK Bazaars V Block 1929 WLD 37.

• (B) An offer must be consistent with the essentials of contract.

• (1) The offer must be lawful, made within the limits of the offeror's contractual capacity.
• (2) It must be made seriously with the intention that a binding contract shall result on acceptance, communicated to the
other party, not vague, and possible of performance (the essential that the parties must be of the same mind as to the
subject matter becomes relevant only after an offer has been accepted).
• (C) An offer must be firm and deliberate with an intention of its being accepted and not a mere invitation to do business.

• (D) Offer and Advertisement

• (i) Is an advertisement an offer?

• Study the following case law:

• (a) Crawley v R 1909 TS 1105

• (b) Bloom v American Swiss Watch Co 1915 AD 100

• (c) Lee v American Swiss Watch Co 1914 AD 121

• (E) Tender and quote

• The court stated that generally a tender or quote could constitute an offer, but in each case, it was a question of fact.

• For a quote to constitute a valid offer it should have been made in animo contrahendi

• To decide whether the quote was made with the necessary animosity contrahendi the court will consider the nature of
the quote, the words in which it was expressed, the surrounding circumstances and the explanations detailed account
of events as provided by the parties evidence.

• Study the case of Gelbuild Contractors CC v Rare Woods South Africa (Pty) Ltd 2002 (1) SA 886

• (F) The offer must be communicated to the person with whom it is intended that the contract should be made.

• This occurs in a situation where a “general offer” is made in an advertisement of a reward from information.

• In the above situation, acceptance only takes place when the informant gives information after reading about the
advertisement.

• If the informant gives information ignorant of the advertisement, there is no contract because an offer has not been
communicated to him that he could accept.

• Study the case of Bloom v American Swiss Watch Co.

• (G) Processes in which an offer may be brought to an end:

• )Revocation

• An offeror may revoke his offer at any time before acceptance has taken place.

• The revocation is ineffective until brought to the knowledge of the offeree

• Study the case of: Greenberg v Wheatcroft 1950 (2)

• Lapse:

• An offer lapses on the death or insanity of either party, after a reasonable time, or if the intended performance becomes illegal or
impossible.

• Study the case of Laws v Rutherfurd 1924 AD 261

• Rejection

• An offer comes to an end if rejected by the offeree, either by communicating an express rejection to the offeror or by making a
counter-offer. The counter- offer is itself open for acceptance by the original offeror.

• Study the case of: Watermeyer V Murray 1911 AD 6.

• Please note that where there is a mere request for information, this is not a refusal of the offer, and the offer remains open for
acceptance by the original offeree.
 8 . T H E C O N C E P T O F A C C E P TA N C E I N A C O N T R A C T.

• Accepting the offer

• Before an acceptance can turn a valid offer into a contract, the acceptance must be.

• Made during the life of the offer.

• There must be no ambiguity or doubt as to whether acceptance has taken place.

• Study the case of Boerne v Harris 1949(1) SA 793(A)

• A. An acceptance must be consistent with the essentials of the contract.

• (i) Lawfulness

• In the case where sales on a Sunday are prohibited by statute, am acceptance on a Sunday of a valid offer to sell on
prohibited days will not constitute a valid contract.
• (ii) An acceptance should be made within the limits of the offeree's contractual capacity.

• If an unassisted minor accepts an offer from an intending spouse to enter into an antenuptial contract, the acceptance is
invalid and there is no contract.

• Please study Edelstein v Edelstein

• (iii) Acceptance should be serious and made with the intention that a contract should be created.

• (iv) An acceptance must be communicated to the offeror

• In the same vein, the offeree must show in some way his intention to be bound.

• (v) A Contract must not be Vague

• If an agreement is incomplete or uncertain that it's meaning cannot be determined by court on the evidence before it, the
contract is void for vagueness. Study the case of Levenstein v Levenstein

• (vi) A Contract must be made with both parties of the same mind as to the subject matter.
• (vii) A Contract must be possible of performance

• In a situation where a person sells another portion of land in a township, both parties thinking the land can be subdivided
when in fact, it is not possible, performance of the contract by the seller is impossible and there is no contract study
Wilson v Smith and Another.

• (viii) A Contract comes into being when the letter of acceptance is posted.

• Once the letter of acceptance is posted the contract is conclude, even though the letter of acceptance does not reach the
offeror.

• It should be noted that the revocation of the offer must be communicated to the offeree before the letter of acceptance is
posted.

• Can the offeree revoke his letter of acceptance once it has been posted?

• Study the case of A to Z Bazaars (Pty) Ltd v Minister of Agriculture 1975(3) SA 468.
 9A. SPECIAL TERMS

• (A) In situation where an offer is made subject to special terms the offeree will not be bound by them unless he or she has
expressly or impliedly accepted them.

• Study the following cases in respect of signed documents.

• (i) Afrox Health care Bpk v Strydom 2002 (6) SA 21 (SCA)

• (ii) Van Vuuren v Klopper Diskontohuvis 1979 (1) SA

• (iii) Gevge v Fairmead 1958 SA

• (iv) Burger v Central South Africa Railways 1903.

• 9b. Tickets, Receipts & Programmes.

• Where agreement has taken place in the normal manner and the offeree has been given a ticket or receipt by the offeror
which contains written matter purporting to contain terms of the agreement, the offeree will be bound by those terms if he
was aware or ought to have been aware at the time of acceptance that the offer was subjected to them.
• Study the case of Dyer v Melrose Steam Laundry 1912 TPD 164.

• 9c. The approach of the courts in ticket cases therefore is to ask: Did the person who received the ticket know that there
was printing or writing on it? If so, did he know that the printing or writing contained provisions of, or references to
provisions of, the contract in question? If these questions are answered in the affirmative the provisions are part of the
contract. If these questions, or even only the second of them, is answered in the negative a third question is : Did the
person giving the ticket do what was reasonable sufficient to give the other notice of the conditions? If yes, the
provisions are part of the contract; if no, they are not part of it.
 1 0 . W H E R E T H E P R I N T I N G A P P E A R S O N A P R O G R A M M E W H I C H C A N O N LY B E
O B TA I N E D B Y PAY M E N T, T H E O F F E R E E W I L L N O T B E B O U N D U N L E S S
R E A S O N A B LY S U F F I C I E N T N O T I C E H A S B E E N G I V E N TO H I M .

• Study the following cases:

• Roseveare v Auckland Park Sporting Clubs 1907 T4

• Van Deventer v Louw 1980 (4) SA 105(0)

 11 . I M P L I E D T E R M S :

• Usually offer and acceptance are made in express terms whether written or verbal. But the agreement so made may
be subject to implied or unexpressed terms. Such terms may be implied by law or the facts.

• 11(a) Implied terms are often derived from common law, trade usage or custom or from statute.

• 11(b) Trade Usage: When persons enter into an agreement under circumstances which are governed by a particular
usage, then that usage must be considered part of the agreement whether the parties knew of the usage or not, unless
they have expressly agreed to exclude it.

• The requirements of trade usage are that it must be certain, reasonable and not contrary to positive law.

• Study the case; Bertelsmann v Per 1996(2) SA.

• (The issue of an advocate v Attorney) P97

• 11(c) Terms implied on the facts.

• Example is an attorney who has been dismissed for not obeying the attorney practice rules. Based on fact or
circumstances as evidential proof.
 12(A) AGREEMENT BY CONDUCT

• Conduct can take the place of written and spoken words in the case of both offer and acceptance of in the
case of the one or the other. In deciding whether there is an intention to contract, the test is objective not
subjective.

• 12(b) This intention is determined from the manner in which the person concerned conducts himself.
 1 3 . C O N T R A C T U A L C A PA C I T Y:

• 13A. An agreement must be made within the limits of the parties is contractual capacity.

• The general rule is that every person is able to contract freely within the limits of the law. However the following persons
below have limited contractual capacity to enter into binding agreements and they are subjected to special rules.

• Minor, mentally ill persons, Drunk persons, Prodigals, insolvent person, Artificial person, Alien enemies, and illegal
association.

• 13b. Minors

• A minor under the age of 7 years is an infant and has no contractual capacity. A major of 7 years and under the age of
majority who has not married has limited contractual capacity.

• He is under the custody and lawful of a guardian whose duty it is to maintain the minor until he can maintain himself,
administer his property and assist him in contracting.

• The guardian is normally a natural guardian, ie, the father or the mother. Where the father is dead, a court has awarded the
sole guardianship to her, or the child is illegitimate, but may be appointed by deceased natural guardian's will or by
Supreme Court.
• B. Unassisted Contracts:
• As a general rule, a contract made by a minor without the guardian's assistance is void as far as the minor is concerned.

• Study the case of Edelstein V Edelstein

• C. Fraudulent Misrepresentation:

• This occurs where a minor fraudulently misrepresents his age or pretends, he has been emancipated and so deceives another person,
who is induced to contract with the minor believing him to be of age or emancipated.

• Study the case of Louw v MJ & H Trust

• (d) Tacit Emancipation

• This occurs when a minor is allowed by his guardian to carry on business, or any other occupation, on his own behalf.

• Please study Grand Prix Motors WP (Pty) Ltd v Swart 1976(2) SA 221(c)

• Assisted Contracts:

• A minor is bound by contracts made on his behalf by his guardian or made by himself with his guardian's assistance given at the
time, beforehand or afterwards.

• The guardian's consent may be expressive or tacit or may be implied from the fact that the guardians with full knowledge of the
transaction raised no objection.
• A guardian need not consent to the contract before it is made; it is sufficient if, knowing of the terms, he gives his
consent after the event and so ratifies the contract.

• the general Law Fourth Amendment Act no 132 of 1993.

• This Act abolished the marital power in all marriages, irrespective of the date on which a marriage was entered into. A
wife now enjoys full contractual capacity and husband and wife are joint administrators of the community of property:
the wife now has the same rights of acquiring or disposing of assets and managing the joint estate incurring debts
which can be claimed from it.

• Mentally ill Persons.

• (A) A Contract made by a mentally ill person is void if at the time of the agreement he could not understand and
appreciate the transaction into which he entered or if his consent was motivated or influenced by an insane delusion
caused by mental disease.

• (1) Study the case of Lange v Lange 1945 AD 332.

• (2) Study the case of Uys v Uys 1953(2) SA 1

• (B) A mentally ill person may incur an obligation on the ground of enrichment. This mostly occurs in situation where a
person becomes negotiorum gestor (Manager of another affairs) for a lunatic.
• (C) Where a person had been declared mentally disordered or defective under the Mental Health Act (No. 18 of 1973), the
order operates while in force so as to create a rebuttable presumption that he is mentally ill and any contract made by him
will be void unless it is proved that at the time he was in full possession of his faculties or his state of mind was such that
he was able to understand the nature of the contract and appreciate properly the duties and responsibilities created by it.

• (D) Impaired Persons:

• Persons impaired by old age, blindness etc could lack contractual capacity.

• Study the case of Eerste National Bank van Suidelike Afrika Bpk V Saayman No 1977(4) SA

• (E) Drunk Persons

• Where a person enters into a contract while so drunk that he does not know he is entering into a contract or has no idea of
the terms, the contract is void but not if the drunk person is merely more easily persuadable or more willing to conclude the
contract.

• A drunk person can incur an obligation on ground of enrichment.

• (F) Prodigals:

• A prodigal, who is a person declared by the court to be incapable of managing his affairs as a results of a propensity to
squander his assets, cannot contract with regards to his property and if he does so the contract is void, but apart from his
property he is entitled to contract freely.
• Study the case of Cillie v Cillie 1938 CPD 513

• (G) Insolvent persons:

• Insolvency is the condition of a person when his financial position reaches the stage that he is unable to pay his debts or his
liabilities exceed his assets.

• In the above situation, the debtor may be officially recognised by law for the protection not only of his creditors, but also of
other persons.

• The following restrictions are places on the insolvent's freedom of contract.

• An insolvent may not contract in such a way as to purport to dispose of any property of his insolvent estate.

• He may not without the written consent of his trustee enter into any contract whereby his estate is likely to be adversely
affected.

• He may not without the written consent of his trustee deal with any business entity when he has been declared insolvent.

• (H) Artificial Persons:

• In principle an artificial person's contractual capacity is determined by its constitution.

• If it is created by a statute, reference must be made to that statute.

• (I) Illegal association

• An illegal association has no locus standi in judicio and any contract made by it is void and unenforceable.

• Under the doctrine of unjust enrichment, a remedy lies against its members who have derived benefits at the
expense of others or to which they were not entitled and any person doing a business with illegal association or
with its member has a liability to pay for benefit received by him.
 1 4 . S E R I O U S I N T E N T I O N TO C O N T R A C T:

• A. The parties must seriously intend to contract.

• Legal system have developed various means by which the parties have required to indicate the seriousness of their
intention to contract:

• B. Where the parties do not intend that binding legal relations will flow from their agreement, the agreement is not a
contract.

• For example, an agreement of social nature: (l will take you for lunch this evening)

• Agreement excluding the jurisdiction of courts.

• Agreement entitled into as a jest Sarcastic overstatement.

• Agreement entitled into for some ulterior motive and without intending to be binding.
 1 5 . T H E C O N C E P T O F VA G U E N E S S I N C O N T R A C T S

• (A) A Contract agreement must not be vague.

• Contract agreement which are not certain enough to be enforced are regarded as vague.

• Where the language used is not clear and the issues involved are uncertain, the agreement is regarded as vague.

• Where the agreement is not final and there are still terms to be negotiated such agreements are regarded as vague.

• However, the mere fact that a contract appears to be incomplete or uncertain does not render it void for vagueness if
its meaning can, in fact, be determined by a court on the evidence before it.

• Study the following case laws:

• (1) Carthew- Gabriel v Fox and Carney Pty Ltd 1978(1) SA 598

• (2) Fluxman v Brittain 1941 AD 273

 1 6 . P O S S I B I LT Y O F P E R F O R M A N C E :

• A. Contract is void if at the time of its conclusion there is an absolute impossibility of

performance (where performance is impossible for everyone)

• Study the case of Wilson v Smith & others 1956 (1) SA 393

• In the case of absolute impossibility the contract is valid if the promisor has warranted that
performance is possible.

• When the contract become impossible of performance after it has been entered into
(supervening impossibility of performance) the contract is extinguished as soon as it become
impossible.
 1 7 . L AW F U L N E S S

• A valid contract cannot come into existence if the agreement is unlawful.

• (1) The above can occur on any of the following ground.

• (a) An agreement prohibited by common Law

• (b) An agreement prohibited by statute.

• It is prohibited by common law when it is regarded as contrary to public policy or contra bonos mores.

• The prohibition by statute may be express or implied. Implied prohibition arises whereas statute, without expressly
prohibiting an act, provides a penalty for the performance of the act and the imposition of the penalty is not simply
a fiscal provision for the benefit of the revenue or included in the statute for some similar purpose.
• Agreement in restraint of trade:

• In legal paradigms, it is often argued that all contracts in restraint of trade were Prima face unlawful and only
enforceable if the restraint can be proved to be reasonable.

• In employment situation, restraint of trade often occurs where an employee of a particular industry or organisation
are placed under special conditions if they are to take their exist from that industry or organisation.

• Please study the following case laws:

• (a) Magna Alloys and Research SA (Pty) V Ellis 1984(4) SA 874(A)

• (b) Sunshine Records (Pty) Ltd V Frohling and others 1990(4) SA 782.
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