Other requirements for a valid contract

Question 1

What are the other requirements for a valid contract?

Answer 1

1) capacity
2) formality
3) legality

Question 2

What is legal capacity?

Answer 2

All persons have legal capacity to acquire rights. However, not all persons have capacity to perform a juristic act. For example, an infant, elderly person or a person suffering from a mental incapacity cannot perform a juristic act.

Question 3

What is contractual capacity?

Answer 3

The competence to create rights and duties by concluding a contract with another person or persons. This competence depends on the person’s ability to form and express a legally relevant will, which in turn depends upon their ability to appreciate the nature and effect of their act.

Question 4

Which natural persons lack contractual capacity?

Answer 4

Infants, some persons who are mentally ill, and persons are severely under the influence of alcohol or drugs fall into this category.

A person under the age of 7 can bear rights and duties, but they cannot independently conclude contracts. They can if the child’s guardian acts on their behalf.

The person claiming incapacity must prove that the other party lacked capacity at the time of contracting. A person who lacks capacity can only acquire rights and duties if their administrator concludes the contract on their behalf.

A person claiming intoxication must prove that the person was under the influence of alcohol/drugs to such a degree that they could no longer appreciate the nature of their actions. The fact that it impaired judgment is insufficient.

Question 5

Which persons have a limited contractual capacity?

Answer 5

a) minors
b) married persons
c) insolvent persons
d) prodigals

Question 6

Elaborate more on a) minors

Answer 6

A minor is a person between 7 and 18 years of age. Consent from the guardian is required either before the contract was entered into, or afterwards by ratification of the contract. The court may consent to a contract, or set aside a guardian’s consent. If a child is emancipated by the consent of their guardian, they may contract in accordance with that emancipation without further consent from their guardian. However, if the contract is detrimental to the minor, then the minor can still claim restitutio in integrum. A minor will be denied this remedy if they fraudulently pretended to be a major at the time of conclusion of the contract, where they ratified the act after attaining majority or where the action has prescribed (three years). A minor can ratify or repudiate any contract that they concluded during minority.

Question 7

Elaborate more on b) spouses married in community of property

Answer 7

Spouses have a joint estate. Their contractual capacity to bind that estate is limited by statute. Everything is co-owned, but spouses can usually contract independently. However, consent of the other spouse will be required in certain transactions. If not acquired, and the third party was not aware, the joint estate will still be bound. However, upon dissolution of the marriage, the loss caused by the unauthorised contract can be recouped from the contracting spouse’s share of the joint estate.

Question 8

Elaborate more on c) insolvent persons

Answer 8

This does not affect contractual capacity. Only upon sequestration is the insolvent’s capacity limited. They can still enter into contracts that do not affect the estate, but if they do, written consent of the trustee of the estate is required.

Question 9

Elaborate more on d) prodigals

Answer 9

A person with normal mental ability who squanders their assets irresponsibly so as to impoverish themself or their dependants. Such a person may be declared a prodigal by a court, whereupon their capacity mirrors that of a minor. The estate is placed in the hands of a curator, who must approve or ratify any further contracts entered into by the prodigal.

Question 10

Which persons have full contractual capacity?

Answer 10

All persons who do not fit the above descriptions of incapacity will be considered to have full capacity. However, if a person has been guilty of a crime involving fraud, they may be disqualified from being appointed as a company director.

Question 11

Do juristic persons have capacity to enter into contracts?

Answer 11

A juristic person is an artificial entity, with no physical existence, upon which the law confers legal personality - the capacity to acquire rights and incur obligations. Juristic persons do not have the full capacity or powers of a natural person. Legislation regulates their capacity to enter into contracts. Natural persons will sign contract on behalf of the juristic person, in their representative capacity.

Question 12

Does the State have contractual capacity?

Answer 12

The State may enter into contracts, and be held to a higher standard than private citizens, due to being subject to public policy and administrative law.

Question 13

What is the general rule and exceptions concerning formalities?

Answer 13

As a general rule, no formalities are required for the formation of a valid contract. Exceptions are:

1) statute may prescribe that intention be expressed in a particular, formal way
2) the parties may agree that their contract will only be binding when certain formalities have been observed

Question 14

Define a sale and an exchange, and elaborate on the formalities that are prescribed by law for an alienation of land

Answer 14

A deed of alienation must be signed by the parties thereto or their agents. This applies to a sale, exchange or donation of land.

A sale is an agreement in which one part undertakes to deliver a thing in exchange for a price.

An exchange is an agreement in which one party undertakes to deliver a thing to another party in exchange for the counter-delivery of another thing.

Question 15

Define a suretyship agreement and elaborate on the formalities that are prescribed by law for a suretyship agreement

Answer 15

A contract in terms of which the surety undertakes to the creditor of the principal debtor, so that if the principal debtor fails to perform the principal obligation, the surety will perform it or indemnify the creditor. Such a contract must be embodied in a document signed by or on behalf of the surety.

Question 16

Define a donation and elaborate on the formalities required

Answer 16

A donation is a contract in which the donor undertakes to deliver a thing to the donee out of sheer liberality or benevolence, and without any counter-performance. Must be embodied in a written document signed by the donor or by a person acting on the donor’s written authority, granted in the presence of two witnesses.

Question 17

How is an antenuptial contract formalised?

Answer 17

An oral antenuptial contract is valid, but it has to be concluded in writing and signed in the presence of a notary within three months.

Question 18

Must long leased be formalised?

Answer 18

If longer than ten years after having been entered into, it must be registered against the title deed of the leased land.

Question 19

What are the formalities for an electronic contract?

Answer 19

A document is in writing if it is in the form of a data message and is accessible. Includes a voice recording stored electronically. A signature may be electronic, and can be as simple as writing the person’s name at the end of the email message. However, if required by law, then the signature must be an advanced electronic one.

Question 20

What was held in Spring Forest Trading v Wilberry?

Answer 20

The court a quo decided that it is not permissible for a written agreement, which required cancellation to be in writing and signed by the parties, to be cancelled by email. On appeal, the SCA held that the email exchange between the parties met the requirements for the cancellation agreement to be in writing. It also held that the typewritten names of the parties at the foot of the emails constituted electronic signatures as envisaged in s 13(3) of the Electronic Communications and Transactions Act 25 of 2002. The signatures therefore complied with the requirements of the parties for the cancellation agreement to be signed by them.

Question 21

What formalities may be stipulated by the parties concerning writing?

Answer 21

Parties who contract orally may wish to have their agreement reduced to writing. One party may want the written record of the agreement merely to prove its terms, while the other might want the oral agreement to only be binding once it has been reduced to writing. The first interpretation is favoured, and the party wishing to prove the second must provide proof to the contrary, based on the intention of the parties.

Question 22

What is a non-variation clause?

Answer 22

It is standard practice to include a clause in a contract which stipulates that no variation of the agreement shall be of any force or effect unless reduced to writing and signed by the parties to the agreement.

Question 23

What is the Shifren principle?

Answer 23

This allows a landlord, who may have orally agreed to allow the tenant to pay the rent late, to then cancel the contract on the ground that the change was not reduced to writing.

Question 24

What was held in Brisley v Drotsky?

Answer 24

The courts attach preference to the parties’ original exercise of their freedom of contract by referring to the analogous instance where the legislature or parties prescribe writing as a formal requirement. A non-variation clause operates for the benefit of both parties, and so it does not detract from constitutional considerations of equality.

Question 25

What is non-cancellation clause?

Answer 25

It has become standard practice to insert a non-cancellation clause in a written contract, prescribing certain formalities for the cancellation of the contract. This only applies to consensual cancellations. In order to be effective, it must be coupled with a non-variation clause e.g. “No variation or consensual cancellation of…”

Question 26

What is a variation and a waiver, and how do these restrictively interpret the Shifren principle?

Answer 26

A variation is a bilateral, consensual act by which the parties change the terms of the contract. Certain forms of waiver do not amount to variations. A waiver is the abandonment of a legal right by the right-holder with full knowledge of the existence of the right. Examples of those that do not amount to a variation include:

a) waiver of an accrued right arising from breach of contract
b) the discharge of an accrued obligation to make a certain performance under a contract by the creditor’s acceptance of a substituted performance, or by not releasing the debtor from their obligation.
c) an agreement not to enforce a right accruing under a contract, at least for a limited period of time

Question 27

What was held in Van As v Du Preez?

Answer 27

“It will be a question of fact (and perhaps of law) in each case as to whether the conduct or agreement in question is merely a waiver or whether it goes further and amounts to a variation. Whether the right in question is one which has already accrued or whether it is only enforceable in the future will be an important determining factor. In the latter case it is difficult to imagine the waiver not being other than in the form of an agreement which has the effect of varying the original contract giving rise to the right. An oral variation masquerading as or in the guise of a waiver remains what it truly is. It remains a variation. To hold otherwise … would be to render nugatory the principle of the effectiveness of contractual entrenchment as laid down in Shifren’s case.”

Question 28

What was held in Kovacs Investments v Marais?

Answer 28

Provided the obligations under a written agreement are to be complied with in full, performance of one of the obligations in a manner different from that stipulated in the written agreement, and accepted by the other party, would be considered as sufficient, or substantial, compliance and the obligation as having been discharged. And where the different manner of performance was at the request of one party, and orally (or tacitly) agreed to by the other, the fact of such performance, ie that the obligation has been discharged, may be proved by extrinsic evidence. The agreement for a different manner of performance does not have to be in writing.

Question 29

When would enforcement of the Shifren principle be contrary to public policy?

Answer 29

Some examples include:

a) where a party fraudulently relies on the clause
b) would enforcement of the contract be so unfair as to be contrary to the public interest

Question 30

What is a non-waiver clause?

Answer 30

It is now standard practice to include a non-waiver clause in written contracts, to the effect that no extension of time granted by the creditor on any particular occasion should be construed as a waiver of their right to insist upon strict compliance with the terms of the contract, or of their remedies in respect of any prior or subsequent breach of the contract.

Question 31

When will a contract be void for illegality for contravening a public interest?

Answer 31

A contract is illegal if it is contra bonos mores or public policy. These relate to society’s view of morality. The interests of a section of society have to be evaluated within the context of society as a whole. Recognition of such interests include:

a) voluntarily concluded contracts should be complied with and enforced
b) simple justice between individuals should be taken into account
c) as far as possible, parties to a contract should have equal bargaining power
d) administration of justice should not be defeated, obstructed or perverted
e) the safety of the State should be preserved
f) the public service should function properly
g) the full exercise by persons of their legal rights should not be interfered with

Question 32

When will a contract be void for an unlawful conclusion, performance and object

Answer 32

The content of some contracts may be valid, but they are concluded illegally:

a) void based on statutory provisions
b) contracts with enemy subjects
c) agreements that oust the jurisdiction of the courts

Illegal performances include contracts to commit a crime or a delict.

The purpose or object of the contract must also be lawful. This illegal purpose must be borne in mind by both parties to the contract.

Question 33

What is a contract against good morals?

Answer 33

These include a contract to pay a prostitute, or the insurance of a brothel.

Question 34

When may a statute render a contract illegal?

Answer 34

The sale of dangerous weapons, firearms, alcohol, drugs and uncut diamonds may be regulated by statute and contracts not concluded in accordance with the legislation may be considered to be illegal.

Question 35

What is a pactum de quota litis?

Answer 35

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

Question 36

Can lawyers charge contingency fees?

Answer 36

The Contingency Fees Act regulates contingency fees for lawyers, available to poor clients. They only have to pay their lawyer a contingency fee if they win the case.

Question 37

Will an unfair contract be rendered illegal?

Answer 37

Has the one party so unreasonably and one-sidedly promoted their own interest at the expense of the other party that this infringement of the principle of good faith outweighs the public interest in the enforcement of the contract?

Question 38

What was held in Sasfin v Beukes?

Answer 38

S had effective control over B’s income as a doctor.

Was the contract fair?

The contract placed B in the position of a slave. It is unconscionable and incompatible with the public interest, and therefore contrary to pubic policy. The power to declare contracts contrary to public policy should, however, be exercised sparingly and only in the clearest of cases, lest uncertainty as to the validity of contracts result from an arbitrary and indiscriminate use of the power. One must be careful not to conclude that a contract is contrary to public policy merely because its terms (or some of them) offend one’s individual sense of propriety and fairness.

Question 39

What are the consequences of a contract that is void for vagueness?

Answer 39

1) the contract may not be enforced

2) the illegal part of the contract may be severed from the rest

Question 40

Why can’t 1) the contract be enforced?

Answer 40

Neither party can institute action on the contract or claim performance from the other party, because from an illegal cause no action arises (ex turpi).

Question 41

How would 2) severance take place?

Answer 41

The illegal part of a contract may be severed from the rest. This depends on the intention of the parties:

1) is the illegal part grammatically or notionally distinct from the rest of the agreement?
2) is the illegal part subsidiary or collateral to the main purpose of the contract so that, if it is eliminated, the substantive character of the contract remains unchanged?
3) would the parties have entered into the agreement without the illegal part?

The answer to all three of these questions must be in the affirmative.

Question 42

What is the par delictum rule?

Answer 42

The par delictum rule prevents restitution from taking place. Specific performance of the other party’s performance may be rendered, but it does prevent a party from reclaiming their performance in terms of an unlawful contract. The parties must have been of equal guilt.

Question 43

When will the par delictum rule be relaxed?

Answer 43

a) whether the defendant will be enriched at the expense of the plaintiff if the rule is not relaxed
b) whether relaxing the rule would indirectly enforce the illegal contract; and
c) any other consideration of public policy

Question 44

What is a wagering contract?

Answer 44

In a wagering contract, both parties reciprocally promise each other some performance depending on the result, determination or occurrence of an uncertain situation or event, without an independent interest in the result, outcome or occurrence of the situation or event. These are not illegal, but they are contrary to public policy because they encourage wastefulness and prodigality.

Question 45

What are agreements in restraint of trade?

Answer 45

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

a) contracts of employment, where the employee undertakes not to compete with their employer after they have left their employer’s service
b) 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
c) partnership agreements, where each of the partners undertakes not to compete with the partnership after leaving it

Question 46

What was held in Magna Alloys?

Answer 46

A contract of restraint 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 enforcement of the agreement is contrary to public policy.

Question 47

How is the reasonable of a restraint of trade agreement determined, as per Basson v Chilwan?

Answer 47

A restraint of trade clause is contrary to public policy if the consequence of the restraint is unreasonable. The reasonableness or otherwise of a restraint is decided by weighing the interest of the community on the one hand, and the individual interests of the contracting parties on the other hand. The test requires four questions to be asked:

1) is there an interest of one party worthy of protection?
2) if so, is that interest threatened by the conduct of the other party?
3) does such interest weigh up qualitatively and quantitatively against the interest of the other party to be economically active and productive?
4) is the 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 48

What was held in Reddy v Siemens Telecommunications?

Answer 48

Restrained a former employee of Siemens from taking up employment with a competitor, Ericsson, in breach of a restraint clause in his contract of employment. The court held that it was sufficient if it could be shown that there was a risk that the former employee could disclose secret information to which he had access, not that he would do so. This was the very risk that the employer sought to protect itself against by entering into the restraint agreement. The employee was therefore held to the restraint agreement he had entered into voluntarily.