Chapter 7- Legality

Question 0

What does the determination of legality in law of contract entail?

Answer 0

When an agreement is considered contrary to public policy and unenforceable, in effect, the policy consideration indicating that the agreement shouldn’t be enforced is given precedence over the policy consideration that agreements seriously concluded should be enforced. This suggests that the determination of legality (or illegality) often entails a process of weighing up or balancing of public and private interests.

Question 1

What does the principle pacta sunt servanda entail?

Answer 1

An underlying principle of law of contract is that agreements seriously concluded should be enforced (pacta sunt servanda or sanctity of contract).

Question 3

Does pacta sunt servant apply to contracts that are detrimental to interests of the community as a whole?

Answer 3

Agreements that are clearly detrimental to the interests of the community as a whole, whether they are contrary to the law or morality (contra bonos mores), or run counter to social or economic expedience, will not be enforced. These contracts are illegal on the grounds of public policy.

Question 4

How does the law regard illegal contracts?

Answer 4

The law regards illegal (unlawful) contracts either as void, and this unenforceable or as valid but unenforceable.

Question 5

What does public policy entail?

Answer 5

Public policy has no fixed meaning because it represents the public opinion of a particular community at a particular time. Considerations of public policy are to be found in legislation, common law, good morals or public interest.

Most of the case law about performance that is contrary to good morals involves conduct that is immoral or sexually reprehensible. The legislator sometimes expressly impliedly prohibits the conclusion of certain contracts.

Since 1994, public policy has been anchored primarily in the values enshrined on the Constitution.

Question 6

When will courts use their power to strike down a contract for being in conflict with public policy?

Answer 6

The courts use their power to strike down a contract for being in conflict with public policy sparingly and only in the clearest of cases. The general tenor of the contract must be contrary to public policy.

Question 7

What happens in cases of determining illegality of a contract, when the relevant public interests are of a rival or even conflicting nature?

Answer 7

When the relevant public interests are of a rival or even conflicting nature, a court must balance the different interests against each other. Often sanctity of a contract is afforded preference in this regard.

Question 8

Who bears the onus of proving illegality of a contract?

Answer 8

The onus of proving illegality seems to rest on the party who relies on illegality. A court will of its own accord take notice of the illegality of a contract in certain circumstances.

Question 9

What renders an illegal contract void?

Answer 9

It is either the conclusion of a contract, its performance, or the reason for its conclusion that is regarded as objectionable and which renders the contract void.

Question 10

What are pactum de quota litis?

Answer 10

It is an agreement in terms of which one party will provide funds for litigation by the other party in exchange for a share of proceeds should the case be successful.

Question 11

When will a pacta de quota litis be void?

Answer 11

Certain pacta de quota litis are against public policy and void. Unfair and unreasonable contracts can be against public policy and void if a more concrete indication of public interest is involved than mere injustice between the parties. The unfair enforcement of a contract can also be contrary to public policy and void, but the limits of this defence are uncertain.

Question 12

Can an illegal contract be enforced?

Answer 12

An illegal contract that is void can’t be enforced (ex turpi rule). The illegal part of an otherwise legal contract can be severed from the rest of the contract depending on the probable intention of the parties.

Question 13

What happens when there has been performance on a void contract?

Answer 13

In principle, restitution should be granted, but the par delictum rule will bar restitution where the parties are equally morally guilty. This rule can be relaxed in order to do justice between the parties, depending on the facts of the case.

Question 14

What are examples of illegal contracts that are valid but unenforceable?

Answer 14

Certain wagers and some contracts in restraint of trade are examples of illegal contracts that are valid but unenforceable.

Question 15

How has the National Gambling Act amended the common law with regard to gambling activities?

Answer 15

The National Gambling Act has amended the common law with regard to gambling activities (including wagers), as follows:

1) Debts arising from licensed gambling activities are valid and fully enforceable in law.
2) Debts arising from unlicensed lawful gambling activities are valid and enforceable if the parties have an independent interest besides the outcome of the wag. If they don’t have such an interest, the debts are valid but unenforceable.
3) Debts arising from lawful informal bets are valid but unenforceable.
4) Debts arising from unlawful gambling activities are probably void, as are debts from gambling activities of minors or persons excluded from participating in gambling.

Question 16

What are agreements in restraint of trade?

Answer 16

They are characterised by the limitation of someone’s freedom to carry on a profession, trade or business. They are encountered frequently in the following contracts:

1) Contracts if employment, where employee undertakes not to compete with his employer after he has left the employer’s service;
2) Sales of the goodwill of a business, where the seller agrees with the purchaser not to carry on a similar business in competition with the purchaser; and
3) Partnership agreements, where each of the partners undertakes not to compete with the partnership after leaving it.

Question 18

With regards to agreements in restraint of trade, what does public policy require?

Answer 18

Public policy requires the balancing of two conflicting public interests with regard to agreements in restraint of trade:

• Contracts freely entered into should be performed (sanctity of contract/pacta sunt servanda); and
• Everyone should be free to carry on their profession, trade or business (freedom of trade).

Question 19

Is a contract in restraint of trade valid?

Answer 19

A contract in restraint of trade is valid and enforceable, unless the party wishing to escape the consequences of the agreement can prove that the restraint is contrary to public interest and thus unenforceable.

Question 20

Who bears the onus of proving that the restraint in an agreement in restraint of trade is contrary to public policy?

Answer 20

The restraint denier consequently bears the onus of proving that enforcement of the restraint is contrary to policy. An agreement in restraint of trade that is contrary to public policy isn’t void but is unenforceable.

Question 21

When will a restraint of trade clause be contrary to public policy?

Answer 21

A restraint of trade clause is contrary to public policy if the consequence of the restraint is unreasonable. In Basson v Chilwan, the court formulated a test for determining whether an agreement in restraint of trade is reasonable.

Question 22

In Basson v Chilwan, what test did the court formulate for determining whether an agreement in restraint of trade is reasonable?

Answer 22

The test is as follows:

1) Is there an interest of the one party worthy of protection (a protectable interest)?
2) If so, is that interest threatened by the conduct of the other party?
3) If that is further so, does such interest weigh up quantitatively and qualitatively against the interest of the other party to be economically active and productive?
4) Is there another aspect of public policy (having nothing to do with the relationship between the parties) that requires that the restraint should either be maintained or rejected?

Question 23

How must the question whether a restraint is in conflict with public interest be assessed?

Answer 23

It is to be assessed with regard to the circumstances prevailing at the time that enforcement is sought.

Question 24

When can an agreement in restraint of trade be enforced?

Answer 24

An agreement in restraint of trade can be partially enforced subject to certain limitations.