Chapter 6 : Legality

Question 1

Explain legality

Answer 1

A rule of law may prohibit a contract in various of ways. It is possible that the contract itself is prohibited. It may also happen that the contract is at first glance valid, but it is indeed prohibited because it was concluded for an illegal purpose. Thirdly possible reason that the contract is illegal because of the performance being unlawful. Contracts are normally void in these cases

Contracts may be illegal as being prohibited either by particular legislation or by the common law. Contracts contrary to good moral or contrary to public interest (public policy) are regarded as being prohibited by the common law. Sometimes legislation aims at prohibiting certain contracts, while these contracts are also prohibited at common law as being against public interest

Question 2

Discuss contracts to statutory provisions

Answer 2

An Act of Parliament, or provincial legalisation or even regulations or proclamations Passed in terms of such Act, may prohibit contracts of a particular nature or require that permission be obtained for the conclusion thereof. Sometimes the contract is expressly declared invalid. Sometimes the prohibited is coupled with a criminal sanction. In such case it is possible that the parties merely commit an offence and that the contract remains valid. It is possible that the parties commit an offence and that the contract is void even though the legislation does not expressly declare it invalid. It is a matter of interpretation of the statute in order to determine the legislature’s intention. A contract in conflict with legislation will normally but not necessarily be void.

Question 3

What are the two acts that provide for unlawful agreements which are of particular importance to commercial law?

Answer 3

▪️The National Credit Act 34 of 2005 prohibits a number of credit agreements, example, credit agreements with emancipated minors and agreements by an unregistered credit provider that is obliged to register As such terms of the act.

▪️The Consumer Protection Act 68 of 2008 places a general prohibition on unfair contract terms in contracts to which the Act applies and authorise the relevant Minister to make regulations relating to unreasonable terms.

Question 4

What is contracts contrary to the common law?

Answer 4

Contracts are prohibited at common law if legally impossible of performance, or being against good morals or public policy.

Question 5

At what extent is it difficult to distinguish if a contract is against good morals and public interest?

Answer 5

It is difficult to distinguish as good morals and public policy may differ from time to time and from community to community. The courts however generally conservative regarding these matters. Accordingly there are certain cases which are trite and have been regarded as unlawful for centuries. The courts do not lightly declare contract void and it must be manifestly improper or immoral before such declarations will be made.

Question 6

Explain contracts contrary to good morals

Answer 6

A contract which runs counter to what the society regards as proper, virtuous, right and in accordance with one’s conscience will be void. Accordingly a contract which leads to sexual misbehaviour will be void.
Contracts are also illegal if they are prejudice the sanctity or stability of marriage as an institution.

Question 7

Discuss contracts contrary to public.

Answer 7

The most important common law prohibitions are those of contracts in conflict with the public interest or public policy.

Public policy like good morals change time to time. The criteria adapt to the society in which and when they are applied. They are flexible as they are dependent on public opinion in a particular community.

Question 8

What are the different common laws prohibitions that contracts are in conflict?

Answer 8

▪️public interest/policy
▪️obstructing the administration of justice and prejudice to the public service
▪️limitations of free participation in legal and commercial Life
▪️restraint of trade
▪️validity of agreements in restraint of trade
▪️Unreasonable restraints
▪️Solus contracts
▪️Wagers and lotteries
▪️Wilful misconduct

Question 9

Discuss obstructing the administration of justice and prejudice of the public service

Answer 9

Contracts which could obstruct the administration of justices, or which could be prejudicial to the public service.

Question 10

Explain pactum de quota litis

Answer 10

This is contract between a legal practitioner and his client in terms whereof the practitioner’s remuneration will consist of part of the proceeds of the case. Such a contract is now allowed but only n certain cases and subject to a number of limitations. And another form is a contract between a litigant and a third party in which terms of which the third party obtains an interest in a court case. It is a forbidden in common law.

Question 11

What is limitations of free participation in a legal and commercial life?

Answer 11

Contracts which restrict or prohibit a person from participating in legal processes, trade and commercial life sometimes be void. It must be borne in mind, though, that most commercial agreements place restrictions on one or both parties. This does not render the contract invalid. Contracts need not treat the parties equally. The law will only interfere where a contract infringes on a person’s freedom to such an extent that public policy cannot tolerate it. The contract must be grossly exploitative before court will declare it void.

Question 12

Explain restraint of trade

Answer 12

A buyer of a business often insists that a provision be included in the contract which prohibits the seller from starting a similar business for a certain period within a certain area. Similarly, employers contract with employees on the basis that the employee shall not do the same work within a certain period after termination of the contract of employment.

Question 13

Briefly discuss what is validity of agreements in restraint of trade

Answer 13

Two principles of public policy are in conflict with each other. It is in the public interest that people should freely participate in the commercial world and that they should not be restrained in their commercial activities. On the other hand, public policy demands that contracts should be carried out and that people who agreed to a restraint of trade with open eyes should honour the restraint. A choice should therefore primarily be made between freedom of trade and sanctity of contracts.

Question 14

Discuss unreasonable restraints and the test questions formulated by the courts

Answer 14

Are normally against the public interest. Factors that the courts will take into consideration to evaluate the restraint include the nature of the act which is forbidden; the nature and the extent of the interest which is protected; the period of the restraint; the area of the restraint; the type of business or employment concerned; and the relationship between parties. Courts have been started to take subjective factors such as the personal attributes and characteristics of the parties into account.

The test questions formulated by courts:

1. Is there an interest of party worthy of protection?
2. Is this interest threatened by the conduct of the other party.
3. Does this interest weigh up qualitatively and quantitatively against the interest of the other party to be economically active and productive
4. Is there any other aspect of public policy beyond the relationship between the parties requires the restraint to be maintained or ejected?

Question 15

Explain solus contracts

Answer 15

These are agreements in terms of which a person undertakes to sell only the other party’s products, and nobody else’s.
The attitude of the courts is that such a contract is not restraint of trade and that it is valid and enforceable. The reason for this is apparently that a person is directed to trade, and not prohibited and that trade is encouraged thereby. A person who wants to challenge such an agreement will have to advance good reasons. That will depend on the provisions of the contract and the circumstances of the case

Question 16

What is Wagers and lotteries ?

Answer 16

A wager (bet) is a contract in terms of which a party undertakes to perform to another at the occurrence of an uncertain future event. 
A wager regarded as completely valid by the common law.  But, because of the fact that public policy frowns upon wagers, they are enforceable. 
These rules of the common law still apply in SA, except where wagers and lotteries are authorised and regulated by legislation. 
The complete prohibition on lotteries, casinos and similar institutions which existed at one stage, has been relaxed by Parliament recent times due to new social convictions. A licence and necessary permission and permits from the authorities must still be obtained but to undertake this type of business.

Question 17

Explain wilful misconduct

Answer 17

Contracts in terms of which a person’s liability for wilful misconduct is excluded are invalid, with result that the guilty party will still be responsible for his conduct

Question 18

Discuss consequences of illegal contracts

Answer 18

▪️no one can claim performance from the other. This is expressed by the maxim ex turpi causa non oritur actio - no action arises from a scandalous cause.
▪️a further consequence is that should one of the parties have indeed performed, he will be unable to claim return of his performance on the grounds of unjustified enrichment. The person in possession of the performance has the stronger right if both parties are equally guilty of the unlawfulness. This so called par delictum rule which serves as deterrent for person not to enter into illegal contracts.

Question 19

Discuss Physical Possibility of Performance

Answer 19

The performance to which the parties have agreed must be capable of delivery. If the object of performance does not exist at the time of conclusion of the contract, no contract comes into existence.

Question 20

Distinguish between the three forms of impossibility of performance

Answer 20

Firstly, impossibility of performance at the time of entering, into the contract which has the effort that no contract comes into existence.

Secondly, it can happen that performance is possible at the time of contracting but it becomes impossible afterwards. In such a case, a contract does come into being but it is terminated due to impossibility of performance.

Thirdly, it may happen that performance is possible but it made impossible by the debtor after conclusion of the contract. The contract remains in force in such a case and the debtor commits breach of contract. Only the first instance (impossibility at conclusion of the contract) is relevance here, at it impinges on one of the requirements for a valid contract.

Question 21

Explain Certainty

Answer 21

Related to the requirement that performance must be physically possible is the requirement that the content of the contract and the performance should be determined or at least determinable. If a party’s performance cannot be determined, no obligation comes into being.

Question 22

Briefly discuss Generic obligation

Answer 22

If a A agrees with B to buy a cow from B’s Jersey cattle stud at a particular price, the performance is determinable and the contract valid. Unless otherwise agreed, the election lies with the debtor (B) to select the particular object from the genus or kind (he must then select a cow of average quality). This kind of obligation is known as generic obligation

Question 23

What is Alternative obligation?

Answer 23

Where performance is selected from alternatives. In this case a party is give the choice (if agreed otherwise, the choice lies with the person who must perform) to choose the object of performance from various alternatives within a given period or reasonable period.

Question 24

Explain Facultative obligation

Answer 24

Where the parties agree that A has to deliver a specific performance to B, yet that A could deliver a difficult performance should he want to, their agreement contains a facultative obligation.

Question 25

Discuss Mechanisms to attain certainty

Answer 25

Where performance is only determinable, the parties can agree on a formula or mechanism that will determine the final performance due in future.
Mechanism include:
▪️One negotiation and agreed upon by the parties, such as escalation clause for the renewal of a lease agreement
▪️Determination by third party
▪️Determination by an objective external standard or mechanism
▪️Determination by one of the parties.

It is possible for the parties to agree that one party may unilaterally determine what the other has to perform,.

Question 26

Explain Gaps and vague language

Answer 26

In some cases a contract fails to include an important aspect regarding delivery of performance.
Where a contract is concluded for an indefinite and thus uncertain duration, the court will determine the true intentions of the parties in specific circumstances by applying the following guidelines:
▪️The parties might intend for the contract to continue until terminated by reasonable notice
▪️The parties might intend for the contract to continue for a reasonable time
▪️The parties might actually intend for the agreement to be perpetual