Chapter 7: Legality Flashcards
identify the various factors that cause illegal contracts to be void
- Public Policy
- Public interest
- specific illegality (such as common law or in statute or simply in reference to certain moral and constitutional values
- Unfairness of a contract.
discuss the effect of fairness on the enforcement of contracts
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Explain the consequences of illegality of contracts
- Contract cannot be enforced
- Severing the illegal part of a contract
- Reclaiming performance that has been made in terms of illegal contract (par delictum rule)
Distinguish between the application, scope and effect of the ex turpi causa rule and the application, scope and effect of the par delictum rule
- Ex turpi rule: “From an illegal cause no action arises”
- An illegal contract is void or invalid since one of the requirements for a valid contract is absent.
- An illegal contract creates no obligations and, consequently, it cannot be enforced.
- Neither party can institute action on the contract or claim performance from the other party because from an illegal cause no action arises.
- A court doesn’t have discretion to relax rule and there are no exceptions to it.
- Performance by one or even both the parties to illegal contract does not make the contract legal.
e.g. If party has suffered damage as a result of such a contract, he or she may not claim contractual damages from the other party.
Par delictum rule: (Reclaiming performance that has been made in terms of an illegal contract (the par delictum rule)
The par delictum rule prescribes that a party should not obtain satisfaction from a court of law with where his own conduct is wrongful..
*where two parties are equally ‘guilty’
* The one who is in possession of the stronger position will prevent restitution from taking place.
*Two considerations of public policy:
1. A court will not assist those who approach the court with ‘unclean hands’
2. Unlawful contracts should be discouraged.
*Klokow v Sullivan
*Can be relaxed
identify situations where contract are illegal yet not void, but unenforceable
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evaluate restraints of trade and apply and discuss the relevant principles
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Sanctity of contract (pacta sunt servanda)
Agreements seriously entered into should be enforced.
What are taken into account when considering public policy?
Legislation
Common law
Good morals
Public interest
*Primarily enshrined in terms of the values set out in the Constitution.
Contra bonos mores
Contrary to good morals
- Maphango v Aengus Lifestyle Properties
Unfair enforcement of a contract
-14 tenants
- Each of the tenants had a lease that ran for a specified period and continued automatically unless either the landlord or the tenant terminated it with written notice.
-After purchasing and upgrading the building, the landlord exercised its power to cancel the tenants’ leases, by giving the required written notice.
- However, the landlord offered each of the tenants an opportunity to enter into a new lease on the same terms, but at much higher rentals.
-The landlord said these increases were necessary because the building’s costs had long surpassed the tenants’ rentals, which were substantially below market rates.
>Constitutional court: critical question: whether the landlord was entitled to exercise the bare power of termination in the leases for the sole purpose of securing higher rentals.
>Court held:
-“The respondent’s business venture (to acquire and upgrade residential buildings in the inner city of JHB) is commendable.
-Among other things it appears to be in line with the initiatives of the JHB City council.
-However, since the respondent is not a charitable organisation, it cannot be blamed for it’s unwillingness to pursue this commendable business venture at a loss as would be the result if the current leases were to be maintained at agreed to rentals.
-The respondent therefore decided to terminate the leases, as it was contractually obliged to do, to save its business from commercial demise.
- In doing so it behaved transparently by disclosing its motive, which it wasn’t obliged to do.
- Had it not done so the present litigation would probably not have ensued.
-Objectively, I can find nothing in the respondent’s conduct that can justifiably be described as unreasonable and unfair.
- Klokow v Sullivan
Par delictum rule:
> Purchaser reclaimed his performance in terms of an invalid sale of a liquor-licensed business.
>Contract was contrary to the requirements of the liquor-ace and invalid.
> He argued that the par delictum rule did not affect him as the Act only criminalised the conduct of the seller and not also that of the purchaser.
> The court rejected this argument: The fact that the plaintiff was not criminally liable was irrelevant with regard to the question of his moral guilt (or turpitude).
- Reddy v Siemens
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- Sasfin v Beukes
Unfair contracts
->2 Contractual terms
>gave a finance immediate and effective control of Doctor’s income
>Doctor wasn’t able to end this situation (only the financier had the capacity to do so)
The contract gave the Financer protection beyond what was reasonably necessary to protect its interest in having security fort the Doctor’s indebtedness.
>Appellate division found that terms placed Doctor in a position of virtual slavery for the benefit of the Financer.
> Court concluded: An agreement having this effect is clearly unconscionable and incompatible with the public interest, and therefore contrary to public policy.
- Brisley v Drotsky
Unfair Enforcement of a Contract
>Supreme court of Appeal assumed, without further consideration, that the Sasfin principle could be extended to the enforcement of contractual terms.
> Parties had concluded an oral agreement contrary to a non-variation clause in a lease agreement.
>Lessee was late in payment for 5 months, the lessor cancelled the lease (after accepting late payments)
>Court found lessee’s case fell far short of the requirement of exceptional unfairness.
> Purpose of the non-variation clause was to avoid disputes over the existence of later oral agreements.
> The Unfairness enforcement of the non-variation clause related to the existence of the oral agreement and thus very purpose of this clause would be defeated if the defence of unfairness was upheld.
>Mere fact that late payments were accepted , didn’t leave the lease worse off, as contract could have been cancelled upon first late payment.
>No specific public interest was infringed.
- Barkhuizen v Napier
- The constitutional court discussed the question whether the validity of a contractual term can be directly tested agains a provision of the Bill of Rights.
- The majority seriously doubted appropriateness of such an approach because of two insurmountable obstacles related to the fact that a contractual term is neither a law of general application, nor conduct.
1. The first difficulty is that a contractual term cannot be subjected to a limitation analysis under s36(1) of the CRSA (because this section only applies to a law of general application.)
2. S172(1)(a) of the Constitution cannot apply to contractual terms as this section requires a tour to declare a law or conduct inconsistent with the Constitution as invalid.
—The correct approach to constitutional challenge to a contract term therefore is to determine whether the term o f the contract is contrary to public policy.
Majority of the court stated:
“This leaves space for the doctrine of pacta sunt servanda to operate, but at the same time allows courts to decline to enforces contractual terms that are in conflict with constitutional values even though the parties may have consented to them.”
- Court approved the preference displayed toward sanctity of contract by adhering to the traditional (pre-constitutional) approach.
*Unfair contracts:
–> “Notions of fairness,justice and equity, and reasonableness cannot be separated from public policy. Public policy is informed by the concept of Ubuntu.
>Time limitation clause in a short-term insurance policy released the insurer from liability if the insured failed to serve summons on the insurer within 90 days after the insurer repudiated a claim submitted under the insurance policy.
>Argued that it limits the rights
>Court held that the provision under scrutiny was valid and not against public policy as it gave the insured a real and fair opportunity to exercise his right to seek the assistance of a court.
*Unfair enforcement of a contract
> Constitutional Court held that enforcement of clause would be invalid if the enforcement was so unfair or unreasonable that its enforcement was contrary to public policy.
> Would’ve been case if time-limitation clause didn’t allow party approach a court to enforce his rights
> Principle could be determined based on good faith (only obiter dicta)
