Law of Contract Essay

A contract intends to formalize an agreement of two or more parties, in relation to a particular subject. Contracts can cover an extremely broad range of matters including the sale of goods or real property, the terms of employment or of an independent contractor relationship, the settlement of a dispute and ownership of intellectual property developed as part of work for hire. Essential Elements of a Contract * Clear certain and communicated agreement. Meaning that the parties are consensus ad idem or are of the same mind. The parties to the contract have mutual understanding of what the contract covers, eg. In a contract for the sale of a ‘mustang’ the buyer thinks that he will obtain a car and the seller believes he is contracting to sell a horse, there is no meeting of the minds and the contract will likely be held unenforceable. Offer and Acceptance Agreement = offer + acceptance Requirements of a valid offer * Offer must be definite. It must not: * Leave aspects of the agreement dependent upon the future will of parties (Kantor v Kantor) * Leave aspects of the agreement blank or open to subsequent negotiation (Bundell v Blan & King v Potgieter & Finestone v Humburg) * Contain wording which is vague * Offer must be made with the intention of being accepted by some other person. Excludes the following which are not offers but simply invitations to do business. * General statements of lowest price (Efroiken v Simon) * Statements of lowest price in response to a specific inquiry (Harvey v Facey) * Invitations to tender (Spencer v Harding) * Newspaper advertisements in general (Shepherd v Farrel Estate Agency) * Advertisements by transport companies of their charges for conveying goods (Frazer v Frank Johnson) * Displays in shop windows (Crawly v Rex) * Displays on self service counters (Pharmaceutical Society of Great Britain v Boots Cash Chemists Ltd) * Restaurant menus. Reward Cases Adverts constitutes offer (Carlill v Carbolic Smoke Co One reward is only offered first person doing what is required is entitled to that reward. (Lee v American Swiss Watch Co.) No reward may be claimed by anyone who fulfilled the requirement not knowing of that reward (Bloom v American Swiss Co.) What is required must be done voluntarily. * Offer must not have been revoked. Offer may have been revoked or lapse in one of the following ways: * Offeree is notified that it has been revoked. * Either the offeror or offeree dies. * Lapse of a reasonable period of time. * Supervening impossibility or illegality * Rejection as where the offoree makes a counter offer which contradicts the original offer by proposing specific alterations to the terms of that offer. * Offer must be one on which an optimal time limit has not expired. * Note: keeping an offer open until the offeree is in a position to accept is permissible, since the period, although unknown, is not indefinite (Hanekan v Mouton) * In the case of an option which is offered gratuitously, silence is not acceptance (Beinart v Zeffert) * The right of acceptance of an option, provided that it is also a cash sale, can be ceded. (Hersh v Nel) * Written acceptance of an oral option is only valid upon receipt regardless of the distance between the parties. (Smeiman v Volkersz) * A provisional option allows either party to withdraw before the due date, whilist an option for a limited time at the descetion of the offeror similarly allows that offeror to withdraw, as state at his discretion. (Gerson v United Tobacco Co.s) Termination of the Offer * By acceptance- an offer which has been accepted constitutes a contract. That offer is no longer available for acceptance. * By rejection- an offer is rejected if: 1) The offeree notifies the offeror that he does not wish to accept the offer. 2) The offeree attempts to accept the offer but subject to certain conditions. 3) The offeree makes a counter offer (Hyde v Wrench) * By revocation before acceptance- an offer may be revoked (withdrawn) any time before acceptance, but will only be effective when the offeree learns about it. * If the offer lapses-the offeror may stipulate that the offer is only open for a limited period of time. Once it has lapsed any acceptance is invalid. Even if no time limit is mentioned, the offer will not remain open indefinately. It must be accepted within a reasonable period of time. * Death- if the offeror dies after having made an offer and the offeree is notified of the death any acceptance will be invalid. * Failure of a condition attached to the offer. An offer may be made subject to conditions. Such a condition may be stated expressly by the offeror or implied by the courts from the circumstances. If the condition is not satisfied, the offer is not capable of being accepted. Requirement of a valid acceptance * Acceptance must be definite and unconditional. (Watermeyer v Murray & Jones v Reynolds) acceptance must be unequivocal and stated intention to accept is not adequate. (Boerne v Harris) * Acceptance must be communicated. * Mere stated intention to accept is insufficient. (Dietirchsen v Dietrichsen) * Acceptance may be ither expressly stated or manifested by conduct. (Reid Bros v Fisher Bearings Co) * Silence can not be acceptance. (East Asiatic Co.v Midland Manufacturing Co.) except where there is a duty expressly to repudiate as with brokers notes. (Benoni Produce & Coal Co. v Grendelfinger) * An offeror is free to dispense with the normal modes of communication to indicate alternative methods of acceptance eg by dispatch of goods (Rex v Net &Mackenzie v Farmer’s Co-op Ltd) * Where specific form of communication is demanded by the offerror acceptance by any other method is void. (Eliason v Henshaw) * Whilist an offeror may prescribe the manner of acceptance, he may not prescribe the manner of refusal.eg by taking acceptance for grantedif the offeree has not acted in a certain way by a certain time. (Felthouse v Bindley) Acceptance by post or telegram or telephone or telex In acceptance by post, the basic rule is that the manner of offer implies the manner of acceptance, consequently: * Where written acceptance follows a written offer, acceptance is valid at the timeof posting (Cape Explosive Works Ltd v Lever Brothers Ltd) * Where written acceptance follows an oral offer or option (Smeiman v Volkers) acceptance is only valid upon receipt regardless of the distance between the parties. But * Where offeror has demanded some other form of acceptance, written acceptance is void (Eliason v Henshaw). Note: * Acceptance to a wrong address due to the offeror’s fault, is valid unless the offeree knew or suspected without checking, but where the mistake is the offoree’s acceptance is void. * Acceptance to the correct address, where the offeror has left that address without notifying the offeree is valid. (Naude v Malcom) * Correctly addressed and posted acceptance which does not arrive is valid. (Household Fire Insurance Co. v Grant) * An address incorrectly spelt by the offeree will only postpone acceptance to the time of receipt if the error was so fundamental as to cause delay. (Levben Products Ltd v Alexander Films Ltd) * Acceptance must be made by person for whom the offer was intended. Right of acceptance can not be ceded by offeree to a third party. (Blew v Snoxell & Bird v Summerville) * Acceptance must not be based on some justifiably mistaken. A contracting party may only avoid a contract based on his mistake if: * Justus error was present and he was therefore blameless plus * Mistake was maternal and essential or important. Ticket Cases Unsigned document such as tickets or receipts, which contain terms waiving liability on the part of contracting party A which are unknown to the other party B. Thus B can only sue A if B is blameless and this will only be the case if all of the following apply * There was no public notice displaying the terms. * The terms were not pointed out. c) The ticket was not of the type. * Contractual Capacity, meaning that the parties are legally capable of contracting. Only persons can contract, a person having the capacity to acquire rights and duties. But not only natural persons can do so. Our law recognizes the existence of artificial persons who can likewise acquire rights and duties. The most important of these are companies incorporated in terms of the companies act. The general rule is that every person is able to contract freely, within the limits of the law. But there are certain persons of limited contractual capacity whose power to enter into binding agreements is limited. Minors: a minor is a unmarried person under the age of 18. During the term of his minority he is under the custody and lawful authority of a guardian whose duty it is to maintain the minor until he can maintain himself, administer his property and assist him in contracting. * Unassisted contracts A minor may not, as a general rule sue or be sued or contract without the assistance of his guardian should he attempt to do so the contract is void. The Roman Dutch authorities speak of such purpoted contracts as being void in one direct (that is as far as the minor is concerned) and valid in another (that is as far as the other is concerned. A minor may, however, in certain cases acquire a perfectly valid obligation without his guardian’s assistance. These obligations are only exceptionally contractual, even though they often arise in the course of attempts to contract. * Enrichment Wherever a minor is unjustly enriched in terms of a purpoted contract he is bound to the extent that he is enriched. He is bound to restore to the other party to the purpoted contract so much of what he has received as remains in his possession or to pay a sum of money to the value of the advantage received. But the minor is not bound by the contract, the contract remains void. His obligation arises simply because he has been enriched at someone else’s expense. (Tanne v Foggit) * Fraudulent Misrepresentation of Majority Where a minor fraudulently misrepresents his age or pretends that he has been emancipated and by so doing deceives another person who is induced to contract with the minor, believing him to be of full age or emancipated, the minor incurs an obligation. But once again the obligation is not contractual. The minor is not bound by the contract, which is void. But the fraud being a delict, he is bound delictually to make good to the other party any loss he suffered as a result of the fraud. It is essential that the other person be misled, otherwise there can be no loss as a result of the fraud. It follows that a minor must be of such an age that it is possible for an innocent person to be misled. * Tacit Emancipation Where a minor is tacitly emancipated he can incur a binding contractual obligation within the field of his emancipation. Tacit emancipation occurs where a minor is allowed by his guardian to carry on business, or any other occupation, on his own behalf. In such circumstances the minor may himself validly contract in regards to that business. He may not, however, contract outside that business without his guardian’s consent. * Ratification Where a minor purports to contract without his guardian’s consent the contract may be subsequently ratified by either guardian, when the effect is precisely the same as if the guardian had consented at the time of the contract or the minor himself on attaining majority. Such ratification may be express or implied. It is implied eg where a person after attaining his majority, continues to use an article, which he purpoted to buy during his minority as his own, or indicates otherwise by his actions an intention to be bound. (Stuttaford & Co v Oberholzer) Once the ratification has taken place the contract is rendered valid and effective from the time of the purpoted agreement. The authority which was lacking is supplied by the subsequent ratification. Assisted contracts A minor is bound either by contracts on his behalf by his guardian or by contracts made by himself with the assistance of the guardian. * Mentally ill persons A purpoted contract made by a mentally ill person is void if at the time of agreement he could not understand and appreciate the transaction into which he purpoted to enter or if his consent was motivated or influenced by an insane decision cause by mental disease. All persons are presumed to be sane, unless they have been declared mentally disordered by an expert in the medical field. The contract is presumed void unless it can be shown that it was entered into at a time when the person concerned was in full possession of his faculties. (Prisloo’s Curators v Crafford & Prinsloo) or that his state of mind was such that he was able to understand the nature of the contract into which he entered and to appreciate properly the duties and responsibilities which were created by that contract. * Drunk Persons Where a person enters into a purpoted contract while so drunk that he does not know he is entering into a contract or he has no idea of the terms of the contract, the contract is void. The fact of drunken ness will not prevent the person concerned from incurring an obligation on the ground of enrichment. * Prodigals A prodigal (that is a person declared by the court to be incapable of managing his affairs as a result of a propensity to squander his assets) cannot contract with regard to his property. If he purports to do so the contract is void. Ut outside the field of his property he is entitled to contract freely. He may marry. The court in declaring a person to be prodigal appoints a curator bonis whose duties are to administer the affairs of the prodigal, subject to the overriding approval of the courts. * Insolvent Persons The sequestration of the estate of insolvent divests him of his estate and vests it, after appointment in a trustee. Property which he subsequently acquires before rehabilitation also vests in the trustee with certain exceptions. Certain restrictions are place on his freedom to contract, but he is in all other respects fully capable of contracting The restrictions are: -an insolvent may not contract in such a way as to purport to dispose of any property of his insolvent estate. -he may not without the written consent of his trustee enter into any contract whereby his estate is likely to be adversely affected. -he may not without the written consent of his trustee have any interest in or be employed in the business of a trader who is a general dealer. Should the insolvent, however purpot to contract in breach of these provisions of the act the contract is not void. It remains valid until it is set aside by the trustee. * Persons who have been convicted of Crime In certain cases, which do not require setting out in detail, ad which vary dependency on the crime committed and the sentence, imposed convicted persons are subject to various disqualification eg if convicted of theft, fraud, forgery or perjury and sentenced to imprisonment, they are disqualified from being appointed company directed. * Alien Enemies An alien enemy (namely a person residing or carrying on business in enemy territory) may not sue on our courts and all commercial relations with him is prohibited. * Serious Intent, meaning the parties intend their agreement to be binding and legally enforceable. When parties enter into an agreement ‘subject to contract’ they are expressly stating that they will not be bound unless and until a formal contract is drawn up. * Necessary Formalities. In some cases , certain formalities (writing) must be observed. * Contracts which must be in the form of a deed. Certain transactions involving land require a deed that is conveyances, legal mortgages and leases for more than 3 years. A promise of a gift is not binding unless in this form. * Contracts which must be in writing a contract for the sale or other disposition of land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed. In one document or where the contracts are exchanged in each. The document must be signed by or on behalf of each party to the contract. Bills of exchange, cheques and promissory notes must be in writing. Similarly the transfer of shares in a limited company must be in writing. Employment contracts should be in writing with terms and conditions of employment. * Possibility of performance that is performance of the contract must be possible. * Legality that is the agreement must be lawful. The purpose of the agreement must not be illegal or contrary to public policy where a contract involves some wrong doing, It will be illegal. If however, the conduct is neither immoral or blameworthy but simply undesirable the contract will be void. A court may object to an agreement either because of a rule of common law or because it is contrary to statute. Contracts illegal at common law * Contracts to commit crimes or civil wrongs eg a contract to assassinate someone or to defraud Zimra * Contracts involving sexual immorality * Contracts tending to promote corruption eg contract to bribe an official. * Contracts trading with an enemy of the state * Contracts directed against the welfare of a friendly foreign state. * Contract prejudicial to the administration of justice eg contract not to prosecute a person for an offence concerning the public. * Genuineness of Consent The agreement must have been entered into freely and involves a meeting of the minds. The agreement must not be invalidated by a number of factors, mistake, misrepresentation, duress and undue influence. * Mistake The general rule is that mistake does not affect the validity of a contract. The guiding principle is the caveat emptor which means ‘let the buyer beware.’ So if a person agrees to pay $1000 for a car which in reality is only worth $500, the contract is valid and he must stand the loss. It should be noted that a mistake at law will not invalidate a contract, since everyone is presumed to know the law. There are , however some kinds of mistake which so undermine the agreement that the contract is void. If this is the case, no rights of ownership can pass and any goods which have changed hands can be recovered. A mistake will invalidate the contract in the following situations. * Mistakes as to the subject matter of the contract. The parties may be mistaken as to the identity of the subject matter. If a seller makes an offer in respect of one thing and the buyer accepts, thinking of something else, the parties are clearly talking at cross purposes and there is no contract. * – mistake as to the identity of one of the parties. This may invalidate the contract where the identity of the party to the contract is material to the contract, a mistake will result in the contract being void. Where the identity of the party is not material, the contract will be valid until the mistaken party avoids the contract for misrepresentation. * Mistaken signing of a written document. As a general rule, a person who signs a document is assumed to have read, understood and agreed to its contents. Exceptionally, a person may not be able to plead ‘nonest factum’- ‘it is not my deed.’ 3 factors must be present if the contract is to be avoided, the signature must have been induced by fraud, the document signed must be fundamentally different from that thought to be signed and the signer must not have acted negligently. Rescission of terms The court may be prepared to set aside an agreement provided the parties accept the conditions imposed by the court for a fairer solution to the problem Rectification If a mistake is made in reducing an oral agreement into writing, the court may rectify the document so that it expresses the true intention of the parties. Specific performance A court may refuse to grant an order for specific performance against a party who made a mistake, if it would be unfair to enforce the contract against him. * Misrepresentation The formation of a contract is often preceded by a series of negotiations between the parties. Some of the statements made may turn out to be false. The nature of the statement will determine whether a remedy is available and if it is what type of remedy. A false stamen which is not incorporated into the contract is known as misrepresentation. A misrepresentation is a false statement made by one party to induce the other to enter into a contract. It must be shown that the statement has induced the person to whom it was made to enter into a contract. Kinds of misrepresentation and their effects There are 3 kinds of misrepresentation; fraudulent, negligent or innocent. In each case the contract is voidable. * Fraudulent Misrepresentation If the person making the statement knows that what he said is false, he will be liable for fraud. The injured party may rescind the contract and also sue for damages for the deceit. * Negligent Misrepresentation This is where the person making the false statement has reasonable grounds for believing it to be true. Damages may be awarded for a negligent misstatement. * Innocent Misrepresentation Is a false statement made by a person who had reasonable grounds to believe that it was true, not only when it was made, but also when the contract was entered into. The basic remedy is rescission of the contract. Rescission It aims to restore the parties to their pre contractual positions. Money or goods which have changed hands must be returned. * Duress and Undue Influence The general rule of law is that a contract will only be valid if the parties entered into it freely and voluntarily. Where a party to a contract or his family is subjected to threats of violence, the contract may be avoided on the grounds of duress. In undue influence, the relationship between the parties may be such that one occupies a position of dominance and influence over the other. There are several relationships such as doctor and patient, solicitor and client, parent and child where it is automatically assumed that undue influence has been at work. The contract will be set aside unless the dominant person can prove that the complainant had independent advice. Where there is no special relationship between the parties the complainant must prove that pressure was applied. Breach of Contract This may occur in a number of ways. It may be an anticipatory or actual breach. * Anticipatory Breach This is where a party states in advance that he does not intend to carry out his side of the contract or puts himself in a position whereby he will be unable to perform. The injured party may sue immediately for breach of contract or alternatively wait for the time for performance to arrive to see whether the other party is prepared to carry out the contract. * Actual Breach One party may completely fail to perform his side of the bargain or he may fail to carry out one or some of his obligations. Not every breach of contract has the effect of discharging the parties from their contractual obligations. The terms of the contract may be divided into those terms which are important (conditions) and the less important terms (warranties). A breach of a condition does not automatically terminate the contract. The injured party has a choice: he may wish to be discharged from the contract and claim damages for the breach. A breach of warranty only entitles the injured party to sue for damages. Remedies Every breach of contract will give the injured party the right to recover damages (financial compensation) other remedies such as specific performance and injunction, may be granted at the discretion of the court as part of its equitable jurisdiction. Damages In the business world it is quite common for the parties to agree in advance the damages that will be payable in the event of a breach of contract. These are known as liquidated damages. If there is no prior agreement as to the sum to be paid, the amount of damages is said to be unliquidated damages. Liquidated Damages The parties establish at the outset of their relationship the financial consequences of failing to live up to their bargain. Provided the parties have made a genuine attempt to estimate the likely loss, the courts will accept the relevant figure as the damages payable knowing the likely outcome of any legal action, the party at fault will simply pay up without argument. Unliquidated Damages The aim is to put the injured party in the position he would have been if the contract had been carried out properly. Damages are designed to compensate for the loss. If no loss has been suffered, the court will only award nominal damages: a small sum to mark the fact that there had been a breach of contract. Equitable Remedies The normal remedy for breach of contract is an award of damages at common law. There are some situations, however where damages would neither be adequate nor appropriate. Equity developed other forms of relief to ensure that justice is done. The more important of these equitable remedies are specific performance and injunction. Specific Performance A decree of specific performance is an order of the court requiring the party in breach to carry out his contractual obligations. Failure to comply with the directions of the court, lays the defendant open to imposition of penalties for contempt of court. Injunction This is an order of the court requiring the party at fault not to break the contract. Its main use is to enforce the negative promises that can that can occassionaly be found in employment contracts. The employee may agree eg not to work in a similar capacity for a rival employer during the period of his contract. Cancellation of the Contract The parties to a contract may expressly agree that breach of a certain term will entitle one of them to cancel the contract. Such express terms entitling cancellation may take any form, but the most common are forefeiture clauses, fore closure clauses and the lex commissoria. A forefeiture clause in a contract of letting and hiring is a clause which entitles the landlord to cancel the lease and have the tenant ejected. If the tenant is in breach of certain specified terms one of which is usually the payment of rent on the due date. In the absence of such a forefeiture cluse, a term governing the payment of the rent on a particular date is not material term and the land lord canot therefore terminate the contract merely on the ground that the lesee is in arrear with the rent. A foreclosure clause in a mortgage is a clause entitling the mortgagee to call up the bond where the mortgagor is in default usually by non payment of interest on due date. A lex commissoria is a provision in a contract of sale that the seller is entitled to cancel the contract on breach of one or other of the terms of the contract usually non payment of an instalment in the case of a sale where payment is made by instalments. Such a lex commissoria may, and usually does, contain valid penal provisions entitling the seller to retain so much of the purchase price as had already been paid to him, despite his cancellationof the contract and recovery of the subject matter of the sale. Termination of Contracts Performance A contract is terminated by the performance of the reciprocal obligations of the parties. Set off Where 2 parties are in debt to each other and the debts are due and liquidated, both debts are automatically extinguished if they are of the sameamount. If one is larger than the other, the smaller is extinguished and the larger automatically reduced by the amount of the smaller debt. Merger It is the concurrence of the debtor and creditor in the same person and in respect of the same obligation. It destroys the obligations in respect of which it operates. Thus if x is the tenant of y and he purchases the property from y, the lease comes to an end and for the capacities of landlord and tenant are merged in x. Agreement The parties may by agreement put an end to contractual obligations by waiver or novation. In both cases the express or implied agreement of both parties is necessary. * Waiver Is the abandonment of rights by one or both parties to a contract. It is itself a contract which requires offer and acceptance in the ordinary way. Agreement to waive may be implied, but the courts will not lightly infer the abandonment of a right. It must appear clearly from the words or conduct of the parties. The person who waives a right can only effectively do so if he has full knowledge of the right. If he purports to waive a right while ignorant of its extent even as a result of ignorance of the law the waiver is ineffective, despite the rule ignoratia uris haud excusat, provided the ignorance is probable and justifiable. The abandonment may be of all rights under the contract, which is in other words cancelled by mutual agreement, or of only certain of the rights eg waiver of one party only. Novation It occurs where the parties agree to a new contract which replaces the only one completely. The original contract is therefore terminated a new contract comes into being. The new contract, may indeed bring third parties to the original contract into the new one as parties (eg assignment and delegation) Cession on the other hand is really something different. There is not a rule to the new contract and therefore no novation. The original contract remains in existence but the right to receive performance is ceded by the cedent to the cessionary. Compromise is an agreement between persons for the settlement of a matter in dispute, each party abating some of its previous demands. If parties to a contract dispute each other’s rights in terms of the contract and subsequently they compromise their rights are regulated by the compromise and not by the original contract which falls away. In such a case, as the parties enter into a new contract which replaces the old one, it is clear that compromise is a form of novation and the ordinary rules apply eg a compromise requires strict proof, the presumption being against it. Insolvency The contractual rights and duties of an insolvent are affected in various ways by the sequestration of his estate. The majority of the rights and duties of the insolvent vest automatically in the master of the supreme court until the appointment of a trustee when they vest in the trustee. It is the duty of the trustee to recover all debts due to the estate, to liquidate the estate and to distribute the proceeds among the creditors who have proved claims against the estate. Insolvency is terminated by rehabilitation by court order. Rehabilitation discharges all debts of the insolvent, which were due, or the cause of which had arisen before sequestration. Death Death of a party does not terminate the contract. A form of compulsory assignment takes place and the rights and duties of the deceased, other than in terms of contracts involving personal skill which are terminated, pass to the executor.