Chapter 1- Nature and Basis of a Contract

Question 0

What distinguishes a contract from non-binding agreements?

Answer 0

The extra “ingredient” that distinguishes a contract from non-binding agreements is a serious intention to create legally enforceable obligations. (Animus Contrahendi)

Question 1

What essentially is a contract?

Answer 1

It is essentially an agreement between two or more parties, but not all agreements are contracts.

Question 2

Why are gentleman’s agreements not enforceable as contracts?

Answer 2

These agreements are intended by the parties to be binding on them in honor only and not in law.

Question 3

What is intended by persons who sign a ‘letter of intent’ or note that an agreement is ‘subject to contract’?

Answer 3

They are indicating that the agreement in question is not yet to be regarded as a legally binding contract.

Question 4

How is it determined whether or not a party intended for there agreement to be binding in law?

Answer 4

It is a matter of fact to be determined on all available evidence. In some cases, the issue might be a difficult one to determine, as when a father promises to buy his daughter a car should she pass her law exams.

Question 5

What is the definition of a contract?

Answer 5

A contract may be defined as as an agreement entered into by two or more persons with the intention of creating a legal obligation or obligations.

Question 6

What is another element that should be added to the general definition of a contract?

Answer 6

A further element should be, namely, that the agreement should be one that the law recognises as being binding on the parties. This is because in order for it to be binding, various other requirements apart from mere agreement must be satisfied.

Question 7

Is the label ‘contract’ reserved for agreements that succeed in creating binding obligations?

Answer 7

No, even if one or more of the requirements for validity are absent, so that the contract fails, it is common practice to describe the agreement as ‘an invalid contract’.

Question 8

What are the requirements for a valid contract?

Answer 8

In order to be recognised as a valid and binding contract, the agreement must satisfy the following requirements:

1) Consensus- minds of parties must meet (or at least appear to meet) on all material aspects of their agreement;
2) Capacity- parties must have necessary capacity to contract;
3) Formalities- where agreement is required, unusually, to be in a certain form (eg in writing & signed), these formalities must be observed;
4) Legality- agreement must be lawful, I.e. not prohibited by statute or common law;
5) Possibility- the obligations undertaken must be capable of performance when the agreement is entered into; and
6) Certainty- agreement must have definite or determinable content, so that obligations can be ascertained and enforced.

Question 9

What are the characteristic features of a contract?

Answer 9

A contract is:

1) A juristic act- an act to which law attaches consequences intended by the parties;
2) Conclusion is necessarily bilateral or multilateral- at least 2 parties to an agreement;
3) Contract entails promises/undertakings on one or both sides;
4) Undertaking may be to make a certain performance- immediately or at future date;
5) Most contracts entail reciprocity- in sense that one party’s performance promised in exchange for other party’s performance;
6) Consideration- something of value must be given or promised in return as a quid pro quo.
7) All contracts are consensual- in sense of being based on agreement of some sort; and are
8) Bonae fidei- in that parties required to conduct relationship in manner consistent with good faith.

Question 10

What type of performance could be sought through a contract?

Answer 10

• To give something (dare);
• To do something (facere); or
• To refrain from doing something (non facere)

Question 11

What else may the undertaking entail in a contract?

Answer 11

The undertakings on one or both sides of a contract may entail a performance or, alternatively, it may be an undertaking that a certain state of affairs exists, or has existed (eg that car is 2004 model, and has been serviced regularly) this is known as a Warranty.

Question 12

What does a person’s freedom of contract entail?

Answer 12

It means that parties can agree to anything that is possible and lawful.

Question 13

What doe it mean that the modern concept of contract is a generalized one?

Answer 13

An agreement doesn’t have to be one of a specific type, such as sale, lease or deposit, in order to qualify as a contract. The flows from the fact that there is freedom of contract.

Question 14

Where does contract law fit into our legal system?

Answer 14

It forms part of private law, and more particularly, the law of obligations.

Question 15

What is an obligation?

Answer 15

It is a legal bond (vinculum iuris) between two or more persons, obliging the one (debtor) to give, do, refrain from doing something to the other (creditor).

Question 16

What does an obligation comprise of?

Answer 16

It comprises a right and a corresponding duty: the right of the creditor to demand a performance by the debtor, and the duty of the debtor to make that performance.

Question 17

What is the right created by the obligation?

Answer 17

It is a personal right (a ius in personam)- it is binding only on the parties to it. Creditor can demand performance only by debtor; the debtor is obliged to perform only to creditor.
As opposed to a real right (ius in rem)- such as a right of ownership, which lies directly in the thing owned and prevails against the world at large.

Question 18

What is an obligation which is enforceable by action in a court of law, known as?

Answer 18

It is referred to as a civil obligation, to distinguish it from less common natural obligation.

Question 19

What are the primary sources of obligations?

Answer 19

Contract and delict. Other sources include unjustified enrichment, negotiorum gestio, family relationships, will and statutes.

Question 20

What is a delict?

Answer 20

Wrongful and blameworthy conduct which causes harm to another person. Such conduct obliges the wrongdoer to compensate the injured party.

Question 21

What is the difference between a contract and a delict?

Answer 21

The essential difference between Delictual and contractual obligations is that contractual obligations are, as a general rule, voluntarily assumed by the parties themselves, whereas Delictual obligations are imposed by law, irrespective of the will of the parties.

Question 22

What are the terms of a contract?

Answer 22

They are the provisions that set out the nature and details of the performances reciprocally owed by the parties. Any breach of those terms might entail legal consequences, including a duty to pay damages by way of compensation.

Question 23

In a case where the same conduct might constitute both a delict and a breach of contract, on what basis may the plaintiff sue?

Answer 23

This is a case of concurrent liability in contact and delict, and the plaintiff may sue on either basis. Traditionally, claims for damages in contract have been for financial losses suffered as a result of the breach, whereas claims in delict have been for injury to person or property.

Question 24

What is unjustified enrichment?

Answer 24

This occurs when there is a shift of wealth from one person’s estate to another’s without a good legal ground or cause for this shift.

Question 25

When is does actual subjective consensus (agreement) exist?

Answer 25

Genuine agreement presupposes an actual meeting of the minds of the parties (concursus animorum). Subjective consensus of this nature exists when all the parties involved:

• Seriously intend to contract;
• Are of one mind (ad idem) as to the material aspects of the contract- namely, the terms of proposed agreement and identity of parties to it; and
• Are conscious of the fact that their minds have met.

Question 26

How is consensus achieved?

Answer 26

Through a process of communication involving declarations of wills by the parties. The declarations may be expressed in words, by conduct or even by silence in some cases. The process is traditionally analyzed in terms of offer and acceptance- A makes B an offer, which, upon acceptance by B, produces consensus.

Question 27

What aspects does the communication of an intention by A to B have?

Answer 27

It has 3 aspects:

• The true intention in A’s mind (A’s inner will; msg intended to be sent);
• The expressed intention (A’s declaration of will; the msg sent); and
• The perceived intention (B’s belief or understanding of what A intends; the msg received).

Question 28

What are the different theories of contract?

Answer 28

1) Will theory;
2) Declaration theory;
3) Reliance theory.

Question 29

What does the will theory entail?

Answer 29

• Basis of Contract: Consensus; must be concurring wills.
• Nature of Agreement: Subjective
• Effect of Mistake: Contract fails
• Drawback: Fails to protect reasonable reliance.

Question 30

What does the declaration theory entail?

Answer 30

Basis of Contract: Appearance of consensus: concurring declarations of will.

Nature of Agreement: Objective

Effect of Mistake: Contract stands

Drawback: Favours form over substance.

Question 31

What does the reliance theory entail?

Answer 31

Basis of Contract: Belief in existence of consensus, induced by other party.

Nature of Agreement: Semi-objective

Effect of Mistake: Contract fails if reliance unreasonable.

Drawback: Merely a secondary basis for a contract.

Question 32

In modern SA law, on what basis may a contract be established?

Answer 32

There are 2 bases in which to establish a contract:
1) Consensus-
this is the primary basis, when determining whether contract has been formed, one must first ascertain whether minds of parties actually met. Point of departure is thus the Will Theory, and approach is essentially subjective. If conclusion is that consensus was reached, that ends the enquiry.

2) Reasonable reliance-
If the conclusion is that minds of parties never truly met, the enquiry has to go one step further. Must then ask whether either party by their words or their conduct led the other party into reasonable belief that consensus had been reached. If so, the contract will be upheld on secondary basis of reasonable reliance. In absence of true mutual assent, contract can be founded on quasi mutual assent. In cases of dissensus, the point of departure (will theory) is tempered by application of the Reliance Theory.

Question 33

Who bears the onus in proving the existence of a contract?

Answer 33

The onus rests on the person who alleges that the contract exists. The onus will be discharged by adducing evidence of either consensus or reasonable reliance on the appearance of consensus.

Question 34

What are the cornerstones of contract?

Answer 34

1) Consensus;
2) Reliance;
3) Freedom of contract- idea that people free to decide whether, with whom and on what terms to contract (party autonomy);
4) Sanctity of contract- idea that contracts freely and seriously entered into must be honored and, if necessary, enforced by courts (pacta sunt servanda);
5) Good faith- idea that parties to a contract should behave honestly and fairly in their dealings with one another;
6) Privity of contract- idea that a contract creates rights and duties only for parties to the agreement, and not for 3rd persons.

Question 35

What is the function of contract law?

Answer 35

It is to provide a legal framework within which people can transact business and exchange resources secure in the knowledge that, provided they act honestly and fairly, and follow the right procedures where appropriate, the law will uphold their agreements, and if necessary, enforce them. As such, the law of contract underpins private enterprise and regulates it in the interest of fair dealing.