CONTRACT - 2007

I INTRODUCTION

1. Nature of a contract
2. Requirements for a contractual obligation to be formed.
3. Purpose and function of contract law
4. Freedom of contract

II FORMATION OF A CONTRACT

1. Contractual Capacity
2. Agreement
3. Intention to Create Obligations
5. Certainty
6. Lawfulness
7. Possibility of Performance
8. Formalities

III VOIDABLE CONTRACTS

1. Misrepresentation
2. Duress
3. Undue Influence
4. Bribery

IV OPERATION/ EFFECT OF THE CONTRACT

1. Contents of the contract

2. Interpretation of the contract
3. Different types of provisions in contracts
4. Plurality of parties
5. Stipulatio Alteri
6. Cession
7. Variation
8. Termination
9. Performance

V NON-PERFORMANCE OF THE CONTRACT

1. Excuses for Non-Performance
2. Breach of Contract
2.1 Forms of Breach
2.2 Remedies for Breach
2.3 Choice of Remedies and election
2.4 The ‘once and for all’ rule

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I. INTRODUCTION

1. Nature of a contract
A contract has been defined in various ways. One definition is that it is a promise or set
of promises which the law will enforce. Another definition of a contract is an agreement
which gives rise to obligations which are enforced or recognised at law. Probably the
most useful definition is: a contract is an agreement which creates a legal obligation
between the parties to the agreement. This definition gives us some idea of the basic
features of a contract: agreement forms the basis of a contract, not all agreements are
contracts: only those which create an obligation, there must be at least two parties to a
contract, and only the parties to a contract are bound by it.

To understand the nature of a contract, one needs to understand the following basic
concepts.

Obligation
In legal terms, an obligation is a legal bond (vinculum iuris) between two persons in
terms of which one person (the debtor) is bound by law to render performance of some
kind (ie to give something, or to do or refrain from doing something) to or for the other
(the creditor). The debtor has a duty to render the performance and the creditor has a
right to receive it. If the debtor fails to perform his/her duty, the law will grant a remedy
to the creditor against the debtor.

A unilateral contract is a contract in terms of which only one of the contracting parties is
required to perform, for example, a contract of donation. In a bilateral contract, in which
each of the parties is required to perform something, two obligations are created. A
reciprocal (synallagmatic) contract is a contract in which one party is bound to perform in
exchange for performance by the other party. There is reciprocity of obligations, in that
one obligation is only created because the other is created, and so one obligation may not
be enforced until there has been performance in terms of the other obligation.

Personal and Real Rights

The creditor‟s right to receive performance in terms of an obligation is a personal right.
It lies against the debtor and no one else. The debtor is the only person who is under a
duty to perform. A personal right should be viewed in contradistinction to what the law
recognises what is known as a real right, which may be enforced against the whole
world.

Students must be able to distinguish between a real and a personal right.

In a contract, the creditor‟s personal right to receive performance by the debtor is one that
is created by consent between the parties. A breach of contract is a civil wrong brought
about by the breach of a duty which a contracting party voluntarily assumed. That is,
both parties agreed to enter into the contract, therefore, if one party does not perform
his/her side of the bargain, the other party has an action against him/her for breach of
contract.

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 Privity of contract
As Christie 310 puts it, “[I]t would obviously be ridiculous if total strangers could sue or
be sued on contracts with which they were in no way connected. The doctrine which
prevents this ridiculous situation arising is usually known as the doctrine of privity of
contract: parties who are not privy to a contract cannot sue or be sued on it. ...”

2. Requirements for a binding contract

For an agreement to create a legal obligation, in other words, to be enforceable at law, the
following requirements must be fulfilled:
· The parties must have capacity to contract;
· There must be consensus ad idem;
· The agreement must be certain, lawful and possible to perform;
· The parties must have animus contrahendi, ie they must intend their agreement to
be legally binding.
 Any formalities which the Legislature has laid down, by statute, as a requirement
for validity of that type of contract, must be observed.

Where the requirements have not been satisfied, the agreement may be described as
“void”, or it may be referred to as an “invalid contract”. An agreement in which the
requirements have been fulfilled is called a binding (valid) contract.

2. Purpose and function of contract law

A question which has kept writers and commentators busy for many years is: Why does
(or should) the law enforce contracts? An answer which has been suggested is that there
is a moral duty upon us to perform promises. On the other hand, others believe that the
reason is the need to realize reasonable expectations induced by promises.

4. Freedom of contract
The law holds that parties to a contract are free to decide whether and with whom and on
what terms they wish to contract. This is summarised in the time honoured phrase
„freedom of contract‟. This freedom means that parties are free to contract without
interference from the state AND once they have entered into a contract this contract will
not be interfered with.

See Wells v SA Alumnite Co 1927 AD 69

Burger v Central South African Railways 1903 TS 571

The courts are extremely reluctant to interfere in contractual arrangements because the
parties are generally regarded as having contracted as equals and to interfere would be
contrary to the parties right to contract freely. Judicial intervention is also seen as a threat
to legal certainty.

See Hahlo “Unfair Contract Terms in Civil Law Systems” (1981) 88 SALJ 70.

So what about unfair contracts?

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(1) If there is unfairness when the contract is made, the common law has developed
certain principles - reliance theory and mistake
- misrepresentation and fraud
- duress, undue influence and bribery
- illegality

(2) If the terms of the contract themselves are unfair or enforcing the contract in a
particular set of circumstances would be unfair it is much more difficult to set the
contract aside. The courts will set aside a contract that is SO unreasonable as to
be contrary to public policy but will not set aside a contract simply because it has
imposed an onerous burden on one of the parties.

See Eastwood v Shepstone 1902 TS

Sasfin Pty Ltd v Beukes 1989 (1) SA 1 (A)
Botha v Finanscredit 1989 (3) SA 773 (A)

These cases were decided before the introduction of the new Constitution.
Constitutional rights and values are all persuasive and the courts are obliged to
develop the law in the light of fundamental constitutional values.

See Cameron JA‟s judgements in Brisley v Drotsky 2002 (4) 1 (SCA) and Napier
v Barkhuizen 2006 (4) SA 1 (SCA) 8 D
Davis J‟s comments in Mort NO v Henry Shield-Chiat 2001 (1) SA 404 ©) and
Reddy v Siemens [2006] SCA 164 (SA) - a judgement handed down by the
Supreme Court of Appeal on 30 November 2006

So, from these decisions it can be seen that the Constitution does not give the courts the
power to release parties from their contracts based on the judge‟s view of what is fair.
Sasfin v Beukes and the statement that „the power to declare contracts contrary to public
policy should be exercised sparingly and only in the clearest of cases‟ is still good law.

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II FORMATION OF A CONTRACT

1. CONTRACTUAL CAPACITY

To be able to form a contract, parties must have legal capacity to bind themselves in an
agreement. Certain persons or organisations have limited legal capacity because there are
other requirements which must be met before they may conclude binding contracts. For
example, minors, married persons and companies or close corporations may have limited
contractual capacity. We are going to focus particularly on the contractual capacity of
minors and married persons.

1.1._ Minor persons

A minor is a natural person of either gender below the age of 21 years. This must be
qualified in certain respects. Students must understand the effect of each of the following
upon the rule that a minor is a natural person below the aga of 21.

 marriage
 emancipation by the court

1.1.1. Legal Capacity of a Minor

 A minor under the age of 7 is DOLI INCAPAX ie the minor has no understanding or
discretion.
* Such a minor is incapable of committing a crime or a delict.
* Contracts must be entered into by the minor‟s guardian on the minor‟s behalf.

 A minor above the age of seven:

* crime/delict :
Between the age of 7 and 14, the minor is responsible for his/her actions provided
it is proved that s/he knows the difference between right and wrong. Over the age
of 14, the minor is responsible for his/her own conduct.

* contract :
Between the age of 7 and 21, a minor may enter into contracts with the assistance
of his/her guardian. This assistance may be given

(a) before the contract is concluded;

or
(b) at the time that the contract is concluded;
or
(c) the guardian may ratify an unassisted contract after the contract has been
concluded.

In terms of certain statutes a minor can make contracts without assistance. Students must
be able to give some examples.

 A person under the age of 21 who has been „tacitly emancipated‟ by his/her guardian has

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 capacity to enter into contracts without assistance. Students must be able to explain what
is meant by tacit emancipation and the test which the courts use to determine whether a
minor has been tacitly emancipated.

Watson v Koen h/a BMO 1994 (2) SA 489 (O)

Dickens v Daly 1956 (2) SA 11 (N)
Grand Prix Motors W P (Pty) Ltd v Swart 1976 (3) SA 221 (C)
Ahmed v Coovadia 1944 TPD 364

1.1.2. The Legal Effect of an Assisted Contract

If the minor has received the assistance of his/her guardian, the minor is bound by the
contract. The guardian is not liable.
Marshall v National Wool Industries Ltd 1924 OPD 238

If the contract is patently prejudicial to the minor, the minor may approach the court and
ask the court to set the contract aside and grant restitutio in integrum.
Wood v Davies 1934 CPD 250

1.1.3. The Legal Effect of an Unassisted Contract

If the minor has not been assisted by the guardian, the minor is not bound by the
agreement. The other party is bound (since his capacity is not impaired). Hence the
contract is voidable at the instance of the minor. The minor has a choice (election)
whether to enforce the transaction or not.
Tanne v Foggit 1938 TPD 43

Students must be able to explain why an unassisted minor‟s contract is referred to as a

„limping transaction‟.

The minor may, however, be liable on the basis of unjustified enrichment if the minor has
benefited from the contract.

If a minor acts fraudulently, ie, s/he lies about his age, or about having his/her guardian‟s
consent, s/he is liable should the other party suffer loss. He is liable on the basis of delict
and not contract.

An unassisted contract may be ratified by the minor when s/he reaches majority.
Stuttaford v Oberholzer 1921 CPD 855

1.2. Married persons

1.2.1. Contractual capacity of spouses to a marriage out of community of property

Each spouse may perform juristic acts in respect of his or her estate. So, both spouses
have full contractual capacity to enter into binding contracts with third parties or with
each other. Generally, neither spouse is liable for the other‟s contractual debts. However,
the spouses are jointly and severally liable to third parties for all debts incurred by either
of them in respect of necessaries for the joint household.

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Answer the following questions:
What is „joint and several‟ liability?
What are „necessaries for the joint household‟?
Reloomel v Ramsay 1920 TPD 371

1.2.2. Contractual capacity of spouses to a marriage in community of property

The effect of a marriage in community of property is that the assets of the spouses at the
time of the marriage merge into a single estate of which the spouses are co-owners in
equal shares. Similarly all liabilities become joint liabilities. Property acquired by spouses
after the marriage falls into the joint estate and debts incurred by a spouse are debts
jointly owed. The spouses are joint administrators of the joint estate. In certain
circumstances, one spouse may not perform certain acts without first obtaining the
consent of the other spouse.

Section 15 of the Matrimonial Property Act, 1984, states that a spouse may not without
the written consent of the other:
* Alienate or mortgage immovable property, or buy such property.
* Alienate or pledge any investment or financial asset.
* Sell or give away jewellery, paintings, stamps which are held for investment.
* Withdraw money banked in the name of the other.
* Enter into a credit agreement as a credit receiver.
* Bind oneself as surety.

There is an exception to all of the above: If these acts are performed by a spouse in the
ordinary course of his/her profession, trade or business, then prior consent is unnecessary.
Amalgamated Bank of SA v Lydenburg Passassiersdienste en andere 1995 (3) SA 314
(T)
Amalgamated Bank of SA v De Goede en ’n Ander 1997 (4) SA 66 (SCA)
Distillers CorporationLtd v Modise 2001 (4) SA 1071 (O)
Tesoriero v Bhyjo Investments Shareblock (Pty) Ltd 2000 (1) SA 167 (W)

Recommended Reading: L Steyn „When a third party “cannot reasonably know”

that a spouse‟s consent to a contract is lacking‟ (2002) 119
SALJ 253
and
JS McLennan “The Perils of contracting with persons
married in community of property” (2000) 117 SALJ 367

Section 15(3) of the Matrimonial Property Act, 1984 also states that a spouse can not
without the consent of the other:
* Alienate the household effects of the matrimonial home.
* Receive any money due to the other eg salary, inheritance, insurance or damages
due to a court action.
* Donate a community asset to a third party.

Students must be able to explain what the effect is of a transaction entered into by a

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 spouse, married in community of property, without obtaining the requisite consent?

Section 15(9)(a) of the Act provides that, where a spouse enters into a transaction with a
third person without obtaining the requisite consent, the transaction is not invalid
provided the other person does not know and cannot reasonably know that the
requirement of consent has not been complied with.

Comment:
If you are doing business with strangers, how are you to know whether they are married
in community, or, indeed, whether they are married at all? This subsection does not seem
to provide a satisfactory safeguard for third parties. See Amalgamated Bank of SA v
Lydenburg Passassiersdienste 1995 (3) SA 314 (T). It would seem that the legislature, in
its zeal to provide equality of powers of spouses married in community, has done so to
the potential prejudice of innocent third parties. Cf Distillers CorporationLtd v Modise
2001 (4) SA 1071 (O).

2. AGREEMENT

The most important element of a contract is an agreement between two (or more) persons.
There must be a meeting of the minds (consensus ad idem) on all aspects of the
transaction.

Most agreements can be broken down into an offer by one party (the offeror) and an
acceptance of that offer by the other (the offeree). Solomon J in Watermeyer v Murray
1911 AD 61 at 70 stated: „every contract consists of an offer made by one party and
accepted by the other‟. Courts often use the concepts of offer and acceptance to
determine not only whether a contract has been formed, but also when and where a
contract was concluded.

However it must be borne in mind that it is not always possible to fit the dealings of
parties into the comfortable slots of offer and acceptance and there are many instances
where a contract undoubtedly exists but it cannot be neatly resolved into an offer and an
acceptance of that offer. See, for instance, the dictum of Denning MR in Gibson v
Manchester City Council [1978] 2 All ER 583 (CA) at 586 where he stated:
„To my mind it is a mistake to think that all contracts can be analysed into the form of offer and
acceptance. I know in some textbooks it has been the custom to do so; but, as I understand the
law, there is no need to look for a strict offer and acceptance. You should look at the
correspondence as a whole and at the conduct of the parties and see therefrom whether the parties
have come to an agreement on everything that is material.‟

Two preliminary points should be mentioned.

 It is not enough that parties are thinking along the same lines. For example, I
know that you are prepared to sell me your car for R6 000; I am prepared to
purchase it for that price. Thinking alike does not bring about a contract. The
tracks must `intersect': we must declare our mutual intention.

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  In all the cases dealing with offer and acceptance, the ultimate issue is whether or
not a contract has come into existence. This must not be confused with issues
relating to breach of contract or interpretation of terms.

2.1. THE RULES OF OFFER AND ACCEPTANCE

{ must be a serious proposal to enter into binding

legal relations
{ must be communicated to the offeree
OFFER { must not have lapsed
{ must not have been revoked
{ must be accepted by the right person
+
{ must be unequivocal
{ must correspond with the offer
ACCEPTANCE { must be made in the correct manner
{ must be communicated to the offeror
=
AGREEMENT

See: Roberts v Martin 2005 (4) SA 163 (C)

2.1.1. The offer must be a serious proposal

There must be an intention to enter into a binding legal agreement. Casual social
arrangements, or promises made as a joke, are not offers in the legal sense. The offer
must be a firm offer.

An offer must be distinguished from an „invitation to do business‟. Only a „firm‟ offer

can be converted, by acceptance, into a contract. See, for example, Efroiken v Simon
1921 CPD 367 where a broker in Johannesburg sent a telegram to another broker at Cape
Town stating that he has a seller of 3 000 bags of oats at eleven shillings a bag for
delivery by rail over the period January to June. It was held that the telegram did not
constitute an offer, being only an invitation to negotiate. Gardiner J stated:
“The question which I have to consider is whether the telegram .... was so worded that, if
accepted, a binding contract was constituted. There are certain offers, offers made to the whole
world, acceptance of which before withdrawal constitutes a binding contract, but it is not every
offer that is of this nature. One has to ascertain from the offer itself whether it is tentative, or
whether it is meant to constitute upon acceptance a binding contract. This telegram states „Have
seller 3 000 oats‟ and it goes on to give certain terms. To my mind it means this: „I have seller,
can you find a buyer‟..... There are many considerations, and I do not think, in a telegram worded
like this, that the seller could have intended, or can be held to have intended, that mere acceptance,
without anything further, should constitute a contract.”

The most common example of an invitation to do business is an advertisement. The

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 general rule is that an advertisement is not an offer which is open for acceptance. One
cannot purport to accept an advertisement and thereby create a binding legal contract.
Advertisements are simply invitations to do business. .
Crawley v Rex 1909 TS 1105

Similarly, the display of goods with a price tag attached does not constitute an offer by a
trader. This display of goods is also regarded as an invitation to do business, or to
negotiate.
Pharmaceutical Society v Boots Cash Chemist [1953] 1QB (CA).

NOTE:
The general rule is that an advertisement is not an offer, but merely an invitation to do
business. However, if an advertisement is phrased in such away that it constitutes a
serious proposal of certain terms of performance, then it will be open for acceptance and
acceptance of it may result in the conclusion of a contract. Thus, care should be taken in
the drafting of an advertisement lest its wording or nature indicate that you intended it to
be a binding offer. Look what happened in the case of Carlill v Carbolic Smoke Ball Co
[1893] 1 QB 256 (CA)

2.1.2. The offer must be communicated to the offeree

This stands to reason: you cannot accept an offer which you do not know about!

Bloom v American Swiss Watch Co 1915 AD 100.

2.1.3. The offer must not have been revoked

The offeror may revoke his offer any time before acceptance but he must tell the offeree
that he is revoking his offer BEFORE the offeree has accepted it. In other words, for the
revocation to be effective, it must be communicated to the offeree before the offer is
accepted.
Odendaal v Norbet 1973 (2) SA 749 (R).

Problems may arise where a person has made an offer to the world generally, and s/he
then decides to revoke it. How would you revoke an offer which has been made to the
general public? There is no clear authority on this point. Some commentators state that
you must publish your notice of revocation in the same way as that in which the offer was
published. For example, if a notice offering a reward is published in the Daily News and
the Sowetan, in order to revoke that offer, a notice should be published the same
newspapers. Obviously, such revocation is effective if the offeree reads it but what
happens if s/he does not happen to read it? Shouldn‟t the law‟s sympathy lie with the
offeree?

OPTION
Often an offeree would like some time to consider the offer before s/he accepts it. In
such circumstances the offeree should ask the offeror for an option. An essential feature

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of an ordinary offer is that it may be revoked at any time before acceptance. An option is
an independent bi-lateral contract to keep an offer open for a certain time.

Looking at it from a different angle we could say that there are two elements:
(1) an offer, for instance, to sell for Rx;
AND
(2) an offer to keep offer (1) open for a certain period of time.

It is only when offer (2) is actually accepted that the contract of option comes into being.
Until acceptance of the offer of an option, there is only an offer of an option.

If and when (and, obviously, within the stipulated time period) the option-holder accepts
offer (1), s/he is said to exercise the option. At that stage, a binding contract of sale
comes into existence between the former option-grantor and option-holder and the option
contract is discharged.

Problems may arise, however, where an offer is simply stated to be open for a fixed
period. For example, the offeror says "This offer is open for acceptance until 30 April
2000." Is the offeror entitled to revoke the offer before that date? The answer seems to
be “ yes” because there is no contract to keep it open. In our law, unilateral binding
promises ("pollicitations") do not exist. The unilateral binding declaration of will is
foreign to our law. The problem is that our rule can sometimes cause inequitable results.
For example, I make you an offer on 15 April 1999 and I say it will be open until 30 May
1999. You are interested, but before committing yourself to the contract, you wish to
carry out certain feasibility studies or tests to be sure that you will not lose on the
contract. On, say, 25 May 1999, at a stage when it begins to appear certain that you will
accept, you receive a notice of revocation from me. One advantage of the other systems
is holding the offeror to his word.

Read: Oos-Vrystaat Kaap Bedryf Bpk v Van Aswegen 2005 (4) SA 417 (O) where the
court discussed when an option arises and stated that placing a time limit on an offer is
not an indication that the offer is irrevocable namely that an option contract had been
offered

2.1.4. The offer must not have lapsed.

An offer will lapse if:-

 it is rejected by the offeree, or
 if the offeror has stipulated a particular mode of acceptance, the offeree does not
accept in the manner so stipulated by the offeror
 the offeror stipulates a time for acceptance and the offeree fails to accept within
that time
 there is no time for acceptance BUT the offeree does not accept within a
reasonable time. What is a reasonable time depends on the nature of the
transaction.
 either party dies or becomes legally incapable of making contract
 the contract becomes impossible to perform or illegal prior to performance.

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If X publishes a notice in the newspaper offering a reward for information and he then
receives that information, the original offer will lapse.
Lee v American Swiss Watch Co 1914 AD 121

2.1.5. The offer must be accepted by the person intended by the offeror to do so.

This simply means, for example, that if you make an offer to sell something to a specific
person, then only that person, and not somebody else, is entitled to accept the offer. (This
forms part of the doctrine of privity of contract.)

This rule is, however, not inflexible: it is essentially a question of the intention of the
offeror. Generally the intention of the offeror is presumed to be that the offer is personal
to the offeree but see Hersch v Nel 1948 (3) SA 686 (A) where Schreiner JA stated:
“It is sometimes said to be trite or elementary law that an offer can be accepted only by the person to whom
it is made ... It seems to me, however, that this statement may be misleading if „the person to whom the
offer is made‟ is understood in its ordinary sense as the person to whom the words of the offer are uttered or
the letter or other writing is addressed; for what decides who can accept an offer is the intention of the
offeror as proved by the terms of the offer and by any other evidence that may be admissible. In the great
majority of cases an offer made by A to B is intended by A to be open to acceptance by B an no one else,
but there is no notional or juristic obstacle to an offer addressed to B being acceptable by C; it is simply a
question of interpretation of the offer. So if an offer is made by A to B and his assigns, A‟s intention is
clear that B may pass the offer on to C, who may make a binding contract with A by notifying his
acceptance to the latter. If B merely told C that he had received such an offer this would not enable C, by
notifying A of his acceptance, to bring a contract with the latter into existence.... It may, however, be
assumed that, in general and in the absence of indications in its terms or in the circumstances to the
contrary, an ordinary revocable offer is intended by the offeror to be acceptable only by the person to whom
it is addressed.”

The general rule is different in the case of options. An option is assumed to be freely
transferable, unless the nature or terms of the option or the surrounding circumstances
show that it was intended to be personal to the grantee. There appear to be two reasons
for treating an option differently:-

 The sale of options, particularly options in respect of shares and mining rights, is
common in the business world.

 An option creates a contractual right and the general rule is that contractual rights
can be ceded without the consent of the debtor.

2.1.6. The Acceptance must be Unequivocal

Van Jaarsveld v Ackerman 1975 (2) SA 753 (A).

May silence constitute acceptance? In other words, what is the position where a person
makes an offer and the offeree does not respond, but remains silent; the offeree does not
say „yes‟ or „no‟?

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The general rule is that silence does not mean consent.
Felthouse v Bindley (1862) 11 CB (NS) 869

An exception arises however, in circumstances where there is a ‘duty to speak’. Wessels

says:
„But if there is a legal duty upon me to speak and I refrain from doing so, the Court will presume that I
assented .... Thus if a merchant writes to his constant correspondent that he will forward to him certain
goods at a certain price unless he hears from him to the contrary, and the addressee received the letter but
neglects to reply, the Court may well consider that silence in such a case gives consent ... The course of
dealing between such merchants will legitimately lead the offeror to conclude that his correspondent would
reply in case he rejected the offer, and the Court will infer that if the offeree had not intended to accept, he
would have answered that he did not want the goods.
If, therefore, from the business relationship between the offeror and the offeree the Court finds that the
circumstances are such that the offeree could reasonably be expected to reply, then it may infer that by
remaining silent the offeree did in fact intend to accept.‟

Mc Williams v First Consolidated Holdings (Pty) Ltd 1982 (2) SA (1) (A)

2.1.7. The acceptance must correspond with the offer.

This means that when you accept an offer you must not try to introduce new terms.

Watermeyer v Murray 1911 AD 61

If the offeree tries to introduce new terms, it is not a proper acceptance and the offeror is
entitled to regard the offer as having been rejected.

If the offeree introduces new terms, s/he is making a COUNTER OFFER.The effect of a
counter-offer is the same as a rejection (refusal): the original offer lapses and is thus no
longer open for acceptance. The offeror can, of course, renew or repeat the original offer.

An attempt by the offeree to annex new terms or to vary the terms would amount to a
counter-offer. For example, I offer to sell you my car for R40 000. You reply, "I'll accept
if I can pay R20 000 down and the balance in instalments over 6 months". This is a
counter offer. The original offer implied R40 000 cash and the offeree sought to insert a
new material term. (Terms regarding the manner of payment, in a contract of sale, are
always material.)

Consider the following example:

Offeror: "I offer to buy your car for R40 000."
Offeree: "I accept on condition that payment is in cash."
This is not a counter-offer because payment in cash is a term normally implied in a
contract of sale.

Similarly, if the offeree says, "I agree to purchase your cow provided that, if it is found to
be suffering from foot-and-mouth disease, I can rescind the contract and recover my
money." Here again, a seller‟s warranty against latent defects is implied by law and
would form part of the contract anyway.

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 One must distinguish a counter-offer from a request for information, or a mere inquiry.
For example, I offer to sell you my car for R40 000 and you say, "Is that the lowest price
you will take?" This is not a counter-offer and therefore my original offer is still open for
acceptance. Or, suppose the offeree replied, "Would you be prepared to accept R20 000
down and the balance in 6 months?" The result is the same: the offeree is merely
inquiring whether the offeror is prepared to vary or negotiate his terms. If the offeror is
not happy with the terms suggested in the offeree‟s inquiry, then the offeree is still
entitled to accept the original offer, should s/he wish to do so.

It is sometimes difficult to distinguish counter-offers from requests for information or

suggestions that the terms be changed. Perhaps the hall-mark of a counter-offer is that the
offeree requires the term to be changed: a clear intimation that the terms of the offer are
not acceptable.
Amalgamated Society of Woodworkers v Schoeman 1952 (3) SA 85 (T).

NOTE:
In the above case, it could be argued that the offeree‟s reply came very close to a counter-
offer!

2.1.8. The acceptance must be made in the prescribed manner.

If the offeror stipulates that the offer must be accepted in a particular way, then these
instructions must be followed. If the offeree purports to accept in some other way, this
will not constitute a valid acceptance and a contract will not be concluded.

If the offeror does not stipulate how the acceptance should be made the offeree can accept
in any way s/he likes. Bear in mind, however, the next rule in your notes, the requirement
that for a contract to be concluded by the acceptance of an offer, the acceptance must be
communicated to the offeree.

2.1.9. The acceptance must be communicated to the offeror.

The general rule is that the offeror is only bound by the acceptance once the offeror is
aware of it. In other words, a contract will not be concluded unless the acceptance has
reached the mind of the offeror. This is known as the information theory.

Therefore, it is no good for the offeree to make up his mind to accept the offer without
communicating this to the offeror. And REMEMBER the rule that the OFFEROR IS
ENTITLED TO WITHDRAW HIS OFFER AT ANY TIME BEFORE
ACCEPTANCE, ie, at any time before the acceptance has been communicated to the
offeror.

BUT there are certain exceptions to the general rule that a contract will only be
concluded when the acceptance is communicated to the offeror, ie there are exceptional
situations where the information theory does not apply, and where a contract will be
concluded before the acceptance actually reaches the mind of the offeror. These

13
exceptional circumstances may be summarised as follows:

 where the offeror has dispensed with notification of acceptance

In other words, where the offeror has told the offeree that s/he does not have to notify him
of acceptance. (Look again at Felthouse v Bindley.)

The general rule, requiring communication of acceptance for the conclusion of a contract,
is entirely for the benefit of the offeror. He may, therefore, expressly or impliedly
dispense with this requirement.
R v Nel 1921 AD 339
Solomon JA stated:
“Now accepting it is a general rule that it is necessary that the communication of
an acceptance should be made to the offeror in order to effect a contract, it is clear that it
is competent for the latter to dispense with such notification either expressly or impliedly,
and to indicate the manner in which acceptance may be manifested. In a case like the
present where an order is sent to a person at a distance to supply certain goods at a certain
price, the offer is accepted not by the delivery but by the despatch of the goods, and the
offeror impliedly dispenses with the necessity of the acceptance being communicated to
him.”

 where the stipulated method of communication is used, but is unsuccessful

In other words, where the offeror has stipulated a particular method of communicating the
acceptance, and the offeree uses the stipulated method, the contract is concluded even if
the offeror does not actually get to see or hear of the acceptance.
Amcoal Collieries Ltd v Truter 1990 (1) SA 1 (A)

 where the offeror makes it impossible for the offeree to communicate with
him

If the offeror makes it impossible or very difficult for the offeree to communicate with
him, it is sufficient, for a contract to be concluded, if the offeree makes a reasonable
attempt to notify the offeror of the acceptance. BUT, the mere fact that the offeree is
unable to get hold of the offeror does not mean that the offeree does not have to
communicate the acceptance to the offeror.

Compare
Baker v Marshall and Edwards 1913 WLD 156
with
Ficksburg Transport v Rautenbach 1988 (1) SA 318 (A)
(Do you agree with this decision? What did the minority judges decide?)

 where acceptance is by post AND use of the post has been authorised

Applying the information theory in circumstances where communication of acceptance is

by post, inevitably leads to time delays between the offeree deciding to accept an offer

14
and the actual conclusion of the contract. For commercial expediency, other rules have
developed for communication of acceptance and it has been held, in South Africa and
other jurisdictions, that in certain circumstances the information theory will not
necessarily apply, but that a contract may be concluded according to either the (1)
reception theory or, (2) the expedition theory.

(1) The reception theory

This would apply in a situation where the offeror says: “ Your letter of acceptance must
reach me by 15 March 1999.” As long as the letter reaches the offeror‟s address by the
stipulated date, the contract is binding even if the offeror does not actually read the letter.

The reception theory would also apply if the offeror says: “Let me know by 15 March
1999". On 15 March 1999 you look for the offeror but you cannot find him. If a letter of
acceptance is left at his home or his work address on the final day, this should constitute
acceptance on the basis that at the crucial time, the offeree is unable to bring his
acceptance to the mind of the offeror. (But note that I have said that you must leave a
letter at the address, not post a letter on the final day of acceptance.)
Smeiman v Volkersz 1954 (4) SA 170 (C).

(2) The expedition theory

According to the expedition theory, a contract is concluded WHEN and WHERE the
letter of acceptance is posted by the offeree. This rule is adopted for the convenience and
protection of the offeree.

Application of the expedition theory has important consequences for the parties,
particularly with regard to the question of which court has jurisdiction to hear matters
concerning the contract. For example: Jo lives in Cape Town and Sam lives in Durban.
They use the post to conclude a contract. The court says that the expedition theory
applies and that as Sam posted his letter of acceptance in Durban the contract was
concluded in Durban. If, at a later stage, Jo were to want to sue Sam on the contract,
where would she have to institute action?

In order for the expedition theory to apply it must be shown

* that use of the post was authorised
AND
* that there were no contrary indications contained in the offer.

Note that the mere fact that the parties live far apart does not mean that use of the post
has been authorised. If X makes an oral offer to sell his car to Y, who lives 50km away,
and Y decides to send a letter to X accepting the offer, where and when will the contract
be concluded? Look again at Smeiman v Volkerz.

An example of a “contrary indication” is to be found in

SA Yster en Staal Industriele Korporasie v Koschade 1983 (4) SA 837 (T).

The expedition theory has been extended to acceptance by telegram.

15
 Yates v Dalton 1938 EDL 177

The expedition theory does not apply to acceptance by telephone.

S v Henckert 1981 (3) SA 445 (A)

There have been no reported decisions regarding the theory to be applied for conclusion
of contracts using telephone answering machines, fax machines or e-mail. Note that since
1 August 2002, the situation has been governed by section 22 (2) of the Electronic
Communications and Transactions Act 2002 which provides that an agreement concluded
between parties by means of data messages is concluded at the time when and place
where the acceptance of the offer was received by the offeror. So, the reception theory
applies. Note that, by virtue of s 23 (b) - (c), a data message is regarded as having been
received by the addressee at his usual place of business or residence once the complete
data message enters an information system which he has designated or used for the
purpose of receiving messages and he is capable of retrieving and processing the
message.

2.2. CONTRACT WITHOUT AGREEMENT

2.2.1. Introduction

Mistake
The general rule is that there must be agreement between the parties before it can be said
that there is a binding contract between them. What is required is consensus ad idem, a
meeting of the minds. What is the effect of a party labouring under a mistake when s/he
enters into a contract? There are different kinds of mistake which a party may make. For
instance, s/he may be mistaken as the nature of the contract, or s/he may be mistaken as
to the terms of the contract, or as to the subject matter of the contract. S/he may be
mistaken as to the intention of the other party, or s/he may be ignorant of some fact or
other, or mistaken as to such fact.

Writers on Roman Law identified certain categories of mistake. These were:

· error in persona - mistake as to the identity of the other party;
· error in corpore - mistake as to the central subject matter of the transaction;
· error in substantia - mistake as to the essential quality of the property;
· error in negotio - mistake as to the nature of the transaction;
· error in pretio - mistake as to the price.

Whether a mistake excludes consensus between the parties, that is, whether it is an
essential mistake, depends on the type of mistake which was made. If a mistake does not
exclude consensus, i.e., if it is not an essential mistake, then the parties will be bound.

Immaterial dissensus
In some cases, even though one of the parties has made an essential mistake and,
consequently, they are not in complete agreement, they will nevertheless be contractually

16
bound to one another. This may occur where the dissensus is immaterial, or, in other
words, where the mistaken party would have entered into the contract anyway, even if
s/he had not been labouring under the mistake.

For example, a mistake as to the identity of the other party to the contract (error in
persona - see above) may or may not be material, depending on the particular
circumstances. For example, if I think I am buying the car from Joe when in fact it is
Joe's wife who owns that car, it is not a material mistake. However there are cases where
the identity of the other party is crucial. For example, the identity of the charity to which
I wish to make a donation may be material, or the identity of the other party is important
when it comes to granting credit to that person. One may be prepared to extend credit to
X but not to anyone else; it involves a personal decision.

Reliance theory/ Iustus error

While, theoretically, it may be desirable to require consensus ad idem, it is also necessary
that the law should give effect to the reasonable expectations of parties to commercial
transactions. Thus, even though a party might have made a mistake which is essential and
material, s/he may nevertheless be held bound to a contract incorporating particular
terms, if s/he led the other party reasonably to believe that s/he intended to contract on
such terms. This is known as the reliance theory.

It is important to note that the belief of the other party must be reasonable. So, therefore,
the other party cannot hold the mistaken party bound if the other party
· knew that the mistaken party did not intend the terms;
· ought to have known that the mistaken party did not intend the terms; or
· him/herself misled the mistaken party regarding the nature or effect of the terms.

Another way of putting this is that the mistaken party may resile from the contract if s/he
made a iustus error. That is, A cannot hold B bound to terms if A knew about, or ought
to have known about B‟s mistake as to the nature or effect of the terms intended by A, or
if the mistake was in fact caused by A.
So, when will a mistake be operative, in the sense that the mistaken party will not be
bound by the contract?
When the mistake is essential (in that it excludes consensus), when the mistake is
material (in that, had the truth been known, the contract would not have been concluded)
and where there is no need to protect the reasonable reliance of the other party.

2.2.2. The reliance theory

The reliance theory was expressed in the famous dictum of Blackburn J in Smith v
Hughes (1871) LR QB 597
„If, whatever a man‟s real intention may be, he so conducts himself that a reasonable man
would believe that he was assenting to the terms proposed by the other party, and that other party
upon that belief enters into the contract with him, the man thus conducting himself would be
equally bound as if he had intended to agree to the others party‟s terms...‟

Flemming J expressed the reliance theory quite vividly in Standard Bank v Neugarten

17
1987 (3) SA 695 (W):
„The law goes by the signal received and not by the message which the sender thereof
was desirous of transmitting.‟

So, if you are mistaken as to the other party‟s intention, and the other party has no way of
knowing that you are mistaken, you will still be bound by the contract. Look what
happened in the case of
National and Overseas Distributors v Potato Board 1958 (2) SA 473 (A).

An unsuccessful attempt was made to invoke the reliance theory in

Steyn v LSA Motors Ltd 1994 (1) SA 49 (A).

The reliance theory is very important when we are dealing with SIGNED DOCUMENTS.
The general rule is that if you sign a document you cannot later be heard to say that you
did not read the document or that it does not express your true intention.

George v Fairmead 1958 (2) SA 465 (A)

In relation to written documents, we say ‘CAVEAT SUBSCRIPTOR’ which means „let

the signor beware.‟ The principle „caveat subscriptor’ is based on the reliance theory
and, upon the application of the reliance theory, a party will be bound by the contract only
if the other party‟s belief is a reasonable one. So, you will not be bound by the contract if
you can show that:

· the other party knew that you were making a mistake

Sonap Petroleum v Pappadogianis 1992 (3) SA 234 (A).
(Someone who acts in the way that Pappadogianis acted could be said to have
snatched the bargain.) This is a particularly important decision because the AD
clarified what enquiries should be made and how the reliance theory applies.

 the other party ought reasonably to have known that you were making a mistake
Horty Investments v Interior Accoustics 1984 (3) SA 537 (W).
Fourie NO v Hansen and Another 2001 (2) SA 823 (W)

 the other party misled you as to the nature or contents of the document you were
asked to sign. If a document varies from what the signatory is led to believe it
contains, it is the duty of the other party to inform the signatory of this.
Du Toit v Atkinson’s Motors 1985 (2) SA 893 (A).

This case approved the decision in the earlier case of Shepard v Farrell’s Estate Agency
1921 TPD 62. Fagan HR stated:
„When a man is asked to put his signature to a document he cannot fail to realise
that he is called to signify, by doing so, his assent to whatever words appear above his
signature. .... the party who seeks relief must convince the court that he was misled as to
the purport of the words to which he was thus signifying his assent. That must, in each
case, be a question of fact, to be decided on all the evidence led in that particular case.‟
In terms of the reliance theory, it could not be said that the defendant in either case
reasonably relied on the signor‟s conduct that he intended to be bound by the terms of the

18
 document.

Diner’s Club South Africa v Livingstone 1995 (4) SA 493 (W) (See especially
p498 of the judgment, where the document is set out.)
Dlovo v Brian Porter Motors Ltd t/a Port Motors Newlands 1994 (2) SA 518
(C)
Spindrifter (Pty) Ltd v Lester Donavon (Pty) Ltd 1986 (1) SA 303 (A)
Home Fires Transvaal v Van Wyk 2002 (2) SA 375 (WLD)
African Solar (Pty) Ltd v Divwatt 2002 (4) SA 681 (SCA)
Cape Group Construction (Pty) Ltd t/a Forbes Waterproofing v Government of
the United Kingdom 2003 (5) SA 180 (SCA)
D & H Piping Systems (Pty) Ltd v Trans Hex Group Ltd 2006 (3) SA 593 SCA

For a progressive approach to consumer rights see Davids v Absa Bank Bpk 2005 (3) SA
361 (C) where the court stated that public interest demands that complicated documents
such as deeds of suretyship must be explained to signatories, particularly where signing
might have such drastic consequences.

Students must compare this approach to that of the SCA in Afrox Healthcare Bpk v
Strydom 2002 (6) SA 21 (SCA).

In Sonap Petroleum v Pappadogianis 1992 (3) SA 234 (A) the AD (as it then was)
clarified what the essential enquiries are and how the reliance theory applies. Despite this
there is still apparent confusion in some decisions. For a recent example see Brink v
Humphries & Jewell 2005 (2) SA 419 (SCA)

See also Orban v Stead 1978 (2) SA 713 (W)

and Allen v Sixteen Stirling Investments 1974 (4) SA 164 (D)

How would you have approached the situation if the buyer's agent had pointed out the
wrong land and not the seller's agent?

Read:
T Woker “Caveat Subscriptor: How careful are we expected to be?” (2003) 15 SAMercLJ
109

2.3. COMMON MISTAKE

The hall-mark of a common mistake is that both parties make the same mistake. In this
situation, the parties are ad idem, but in vain. For example, you agree to sell me a horse;
unbeknown to both of us the horse is dead.
Dickinson Motors v Oberholzer 1952 (1) SA 443 (A)
Van Reenen Steel (Pty) Ltd v Smith NO and Another 2002 (4) SA 264 (SCA)

3. INTENTION TO ENTER INTO A LEGALLY BINDING AGREEMENT

19
 The Roman Dutch writers say that every contract must have a redelijke oorzaak or justa
causa. At one stage our courts took this requirement to mean the same thing that in
English law is known as the doctrine of „valuable consideration‟. The effect of this is
that there is no contract unless there is a quid pro quo, however small, passing between
the parties. However in 1919 it was finally decided by the AD that the English doctrine is
not part of our law: see Conradie v Rossouw 1919 AD 249. The redelijke oorzaak or
justa causa of the Roman Dutch law meant merely that all that is required is that the
parties must seriously and deliberately enter into a contract with the intention of
establishing binding legal relations (animus contrahendi). There is no need for a quid pro
quo. Many agreements are not legally binding because the parties do not intend them to
be. For examples, agreements made in jest; domestic arrangements and social
engagements.

In each case it is a question of fact whether the parties intended to enter into a legally
binding agreement. If the agreement is of an ordinary commercial nature, this intention
will be inferred unless it is clearly shown that the parties did not have such intention. In
addition, if one party did not intend to be legally bound by the agreement, but he creates
the reasonable impression in the other party‟s mind that he did intend to be bound, the
contract will be a binding agreement. This is in accordance with the
theory. This principle is well illustrated in

Lucy v Zehmer 196 Va 493, 84 S.E. 2d 516 (1954) (American case)

Facts: L and Z went out drinking one night. Z offered to sell his farm to L for $50 000.
L accepted the offer. When L sued Z, Z argued that the agreement was just a bluff and he
was trying to get L to admit that he did not have the money.
Held: Z‟s words and actions, judged by a reasonable standard, manifested an intention to
be bound. The court rejected Z arguments and upheld the contract.

Even if the parties enter into a business contract, they may agree that it is not legally
binding or that it is binding in honour only. In the English case of Rose and Frank Co v
Crompton and Bros a document contained the following clause:
„This arrangement is not entered into, nor is this memorandum written, as a
formal or legal agreement, and shall not be subject to legal jurisdiction in the law courts
either in the United States or England, but it is only a definite expression and record of
the purpose and intention of the three parties concerned to which they each honourably
pledge themselves with the fullest confidence, based on past business with each other that
it will be carried through by each of the three parties with mutual loyalty and friendly
cooperation.‟

The court held that the agreement between the parties was not enforceable.

4. THE AGREEMENT MUST BE CERTAIN

20
 The language of the agreement must be sufficiently clear and precise so that it is possible
to determine what each party must do (or when he/she must do it) in order to fulfil his/her
obligation. If the language is not clear enough, the agreement may be held to be too vague
to enforce (void for vagueness).

NOTE, however, that, where the language is unclear, the court may nevertheless consider
the circumstances in which an agreement was made in order to ascertain, and give effect
to, the intention of the parties.

If the agreement leaves it open to one of the parties to fulfil his/her side of the bargain
only if, or when, that party wishes to do so, then the agreement is void for uncertainty.
But note that a contract may make provision for variation by only one of the parties.
See NBS Boland Bank Ltd v One Berg River Drive CC and Others; Deeb and Another
v ABSA Bank Ltd; Friedman v Standard Bank of SA Ltd 1999 (4) SA 928 (SCA)

See also Absa Bank v Lombard 2005 (5) SA 350 (SCA) where the court held that a
clause providing that interest rates applicable to a loan are subject to increase or decrease
at the discretion of the bank was valid BUT the discretion had to be exercised reasonably.
The court held that it was prima facie invalid for the bank to increase the interest rate
when the prime lending rate was increased but to refuse to decrease the rate when the
prime lending rate was decreased.
If material terms are omitted, the agreement will be void. For example, in a contract of
sale, agreement as to price is material to the contract. If the price is not agreed upon, the
agreement may be void.
De Beer v Keyser and Others 2002 (1) SA 827 (SCA)

5. THE AGREEMENT MUST BE LEGAL

A contract may be illegal either at common law or by operation of a statute, regulation

etc.

5.1. Statutory Illegality

In terms of certain statutes, enactments, regulations etc certain contracts or types of
contracts are prohibited. Often, but not always, there is also a criminal penalty. We can
divide statutory prohibitions into three possible cases:

(i) Where a contract is illegal and void and a crime is committed. One or both
parties commit an offence. For example: buying and selling drugs or uncut
diamonds.

(ii) Where the contract is valid and binding but an offence is committed.

If a statute imposes a penalty, it does not necessarily mean theat the legislature
intended the contract to be void. It is always a matter of construction. See
Continental Bakery v Giannakakis 1956 (4) SA 324 (W) where Ramsbottom J
stated:

21
 The legislature may prohibit a certain contract with the intention that any such
contract, if entered into, shall be null and void. Or it may impose a penalty upon anyone
who enters into the contract, without rendering the contract void. Whether it has done
one or the other depends upon the construction of the statute ... Or the legislature may
require some act to be done in relation to a valid contract for the purpose of the revenue
or for some other purpose. Failure to perform the required act, although it may be
penalised by the statute, does not necessarily invalidate the contract .... The intention of
the legislature must be ascertained from the statute as a whole, and in so doing it is
material to consider what the effect of rescission would be - what inconvenience or
hardship might result.

A common example is where the legislature makes it an offence to conduct a

business without a license. The legislature is not necessarily trying to stop you
from operating your shop, it is merely trying to regulate and control such
businesses.
Metro Western Cape v Ross 1986 (3) SA 181 (A)

(iii) Where the contract is void but no crime is committed. For example:
section 37 of the Insolvency Act. This provides that a term of a lease that
stipulates that the lease shall terminate on the insolvency of either party is
void. No criminal penalty is imposed.

5.2. Illegality at Common Law

A contract may be illegal or, at least, unenforceable because its objects are
discouraged by the common law. For example: they are contra bonos mores or
offensive to public policy. It is not always easy to say what is contrary to good
morals and, particularly, what is against public policy. The AD has held that
some contracts are contrary to public policy if they are grossly unfair or
oppressive.
Sasfin v Beukes 1989 (1) SA 1 (A).
Botha and Another v Finanscredit (Pty) Ltd 1989 (3) SA 773 (A)
Baart v Malan 1990 (2) SA 862 (E)

Ideas vary in different communities and public policy changes from time to time.
Some examples are quite simple: agreements to commit crimes or delicts or to
obstruct the administration of justice are obviously against public policy.
Agreements regarding sexual morality are not always so easy to decide.
Prostitution traditionally is an illegal agreement, but in some countries this has
been legalised. A promise to marry after the promissor has obtained a divorce has
been held to be not binding.

Brisley v Drotsky 2002 (4) SA 1 (SCA)

Napier v Barkhuizen 2006 (4) SA 1 (SCA)

5.2.1. Contracts in Restraint of Trade

22
A restraint of trade provision is a term in a contract restricting a party from carrying on
his trade, business or occupation, in such manner and with such persons as he chooses.

(a) Test of enforceability

Until recent years this topic was very largely influenced by English law. The Roman
Dutch law did not prohibit contracts which restricted an individual‟s freedom to trade and
generally enforced them.

In English law, originally all restraints on an individual‟s freedom to trade were regarded
as contrary to public policy and any agreement to this effect was void. This extreme view
proved to be unworkable and the law was changed to the following effect. All contracts
that restricted a person‟s freedom to trade and earn a livelihood were prima facie void but
they were enforceable to the extent that they were reasonable - reasonable both in the
interests of the parties and in the public interest. The public interest lay in the prevention
of such things as monopolies and the stifling of competition by such devices as resale
price maintenance and price- fixing agreements. (There is legislation in SA on this: The
Competition Act 89 of 1998).

A restraint would only be reasonable, inter partes, if it went no further than was
necessary to protect the interests of the person who imposed the restraint.

An important case regarding restraints of trade is that of Magna Alloys v Ellis 1984 (4)
SA 874 (A) where the AD adopted new principles. The law is now that a restraint of trade
is prima facie valid, but the court will not enforce it to the extent that enforcement would
be contrary to public policy. The onus of proving that enforcement of the restraint would
be contrary to public policy is on the party alleging this. However, in the recent decision
of Canon KwaZulu-Natal (Pty) Ltd v Booth 2005 (3) SA 205 (N) the NPD held that
because a restraint of trade constituted a limitation on a person‟s constitutional right to
earn a living (s22 of the Constitution) it was no longer correct to impose the onus of
proof on the restrained party. The court held that the restraining party has to establish, in
addition to invoking the contract and proving the breach, that the restraint was reasonable
and justifiable in an open and democratic society based on human dignity, equality and
freedom. In Reddy v Siemens [2006] SCA 164 (SA) the court referred to the question of
onus but found that, in this particular case, the court was not called upon to decide the
issue (para 14). So the matter must still be decided by the SCA. Note also that in the
Canon matter the judge‟s comments appear to be obiter.

See: M Tait „Who should bear the onus in restraint of trade disputes‟ 2004 25 Obiter 488

Although the AD has moved the emphasis from reasonableness to the requirements of
public policy it seems clear that a restraint which is unreasonable is against public policy.
Decisions decided before 1984 are therefore still relevant.

(b) Partial Enforcement

23
The AD in Magna Alloys accepted that if a restraint is too wide in its scope of operation,
the court can enforce it in part: it does not have to hold that the entire restraint is
unenforceable. Again public policy is the overriding criterion. Considerations of public
policy determine whether a restraint will be enforced totally, partially or not at all.

The leading case on partial enforcement is

Sunshine Records v Frohling 1990 (4) SA 782 (A).

The court was however prepared to enforce a partial restraint in

Branco t/a Mr Cool v Gale 1996 (1) SA 163 (E).

In deciding whether a restraint is too wide there are two factors which the court will look
at, that is, time and space.

(c) Types of restraints

Restraint agreements come in many forms but the two that most commonly come before
the courts are restraints in the sale of the goodwill of a business or professional practice
and restraints against employees competing with their employers or former employers.

Sales of goodwill
The goodwill of a business is a combination of all the factors which help to attract
customers or clients to that business. Often the main elements of goodwill will be the
name and location of the business. Especially where the personality of the previous
proprietor of the business plays a part, the purchaser of the goodwill has an interest in
excluding the seller from opening or taking over or conducting a competing business
where his personality will play a part, until after a lapse of that reasonable period which is
necessary for the purchaser to establish his own relationship with the customers of the
business.

The goodwill of a business has a separate identity and can be valued apart from the
material assets of the firm. Where a person also buys the goodwill of a business he buys
more than the material assets. If he imposes no restraint upon the seller, then the seller
can enter into competition with him and in doing so erode the goodwill for which the
purchaser has paid. This is not necessarily contrary to law or morals since competition is
in the public interest. On the other hand, since the seller has been paid for the goodwill,
it is recognised that the buyer has an interest in restricting competition by means of a
clause in restraint of trade in so far as may be necessary to protect the goodwill of the
business he has bought.

The law therefore recognises reasonable restraints of trade designed to protect the buyer
of the goodwill of a business in so far as is necessary to protect that goodwill. It can
extend only to acts which will diminish the goodwill of the business he has bought. As
regards time, the restraint should be operative only for that period that is necessary to
acquaint the customers or clients with the business and ability or qualities of the buyer
that are relevant. The area may be so selected that it will prevent the seller competing for
the same customers or clients.

24
 In dealing with the matter the court will assume that the parties contracted as equals and
that the clause is prima facie valid. In terms of the Magna Alloy decision the seller of the
goodwill will have to show that it would be against public policy to enforce the restraint
but students should also consider the recent decision of Canon KwaZulu-Natal (Pty) Ltd
v Booth 2005 (3) SA 205 (N) and Tait‟s comments in „Who should bear the onus in
restraint of trade disputes?‟ 2004 25 Obiter 488
.
Diner v Carpet Manufacturing Co of SA 1969 (2) SA 101 (D).

This case can be compared to Cowan v Pomeroy 1952 (3) SA 646 (C) where the court
refused to uphold the restraint.

Employer/employee restraints
The courts view these restraints far more strictly because it is usually assumed that the
parties are not in an equal bargaining position: ie the employer is in the stronger position
and, if the employer does not accept the restraint, he might not get the job. The courts
insist that the restraint must not go any further than is necessary to protect the legitimate
interests of the employer. Unlike in the case of goodwill restraints, mere competition as
such cannot be restrained as between employer and employee. It is clearly against public
policy to prevent a person from earning his living.
Highlands Park Football Club v Viljoen 1978 (3) SA 191 (W)
However, an employer can validly restrain his employees from using confidential
knowledge of trade secrets or special processes; confidential knowledge of clients or
customers he acquired during employment. This will occur where the employee becomes
personally known to the customer/client and becomes familiar with its requirements. It is
not fair to the employer if the employee could make use of this kind of private knowledge
and influence to take away customers and clients.
Thompson v Nortier 1931 OPD 147 (T)
Reddy v Siemens [2006] SCA 164 (SA)

See what the court had to say about ordinary general knowledge about business in Canon
KwaZulu-Natal (Pty) Ltd v Booth 2005 (3) SA 205 (N) and why the court refused to
uphold the restraint in Valunet Solutions Inc v eTel Communications Solutions (Pty)
Ltd 2005 (3) SA 494 (W)

NOTE: It is in any event a breach of the employment contract for an employee to misuse
trade secrets, knowledge of secret processes and business connections. Whether or not
there is a restraint agreement, an employer could interdict an employee or ex-employee
from doing such things and he could also claim damages if he had suffered any. See, for
example, Sibex Construction v Injectaseal 1988 (2) SA 54 (T) where there was no
restraint but the former employer was entitled to prevent the ex-employees from using
their knowledge of prices to provide customers with services at lower prices. It was held
that this was unlawful competition.
Where an employee has had access to protectable information confidential to his/her
previous employer and, objectively speaking, there is a reasonable possibility that he may

25
disclose trade secrets to the new employer, the court will uphold the restraint. The court
considers the facts of each case and the assessment is objective. See, for example,
International Executive Communications Ltd t/a Institute for International Research v
Turnley 1996 (3) SA 1043 (W) where the court stated that the decision does not turn on
whether the employee admits remembering anything relevant or whether the court
believes his denial of knowledge. Once it is established that an ex-employee has been
exposed to trade secrets and entered into the employment of a competitor the court
conducts an objective assessment into whether there is a danger that he may disclose
these trade secrets to his new employer. In making such assessment the court is not
influenced by undertakings that the employee will not disclose trade secrets.

In terms of English law, if an employer wrongfully terminates the contract of

employment, he is precluded from enforcing a restraint of trade contained in the contract.
This was the approach of the court in Info DB Computers v Newby 1996 (1) SA 105
(W) and an earlier case where it was stated that an employer cannot repudiate his
obligations under the contract of employment and at the same time claim to enforce the
restraint clause. The Appellate Division in dealing with this issue has stated that this
rule does not apply in situations where the parties have expressly agreed that the restraint
is enforceable no matter how the contract of employment comes to an end. In Reeves v
Marfield Insurance Brokers CC 1996 (3) SA 766 the employee had signed an
employment contract which contained the following restraint:
„The employee hereby undertakes to Glenvaal that during his employment and for a period of 3
years after the date upon which he ceases to be employed by Glenvaal for any reason whatsoever, he will
not, within a radius of 350 km from the City Hall of East London .... be engaged in ....any of the business of
insurance broking....‟

Because of the words „for any reason whatsoever‟, the court held that there was no room
for the application of the English rule. It declined to state whether this rule would apply
in circumstances where the words do not apply. The court did however state that if the
employer‟s conduct was fraudulent, ie he employed the person simply to impose a
restraint on him and then fired him the court would not uphold the restraint because the
employer was acting in bad faith. Scott JA stated:
„Indeed, an express provision in terms of which one contracting party undertakes to condone or
submit to the fraudulent conduct of the other will be regarded as contra bonos mores and so offensive to the
interests of society as to render it illegal and hence void.‟

Therefore, even where the employer has wrongfully terminated the contract, in the
absence of bad faith, the normal considerations of public policy will still apply and the
court will consider whether it is contrary to public policy to enforce the restraint. In
Reeves v Marfield Insurance Brokers the court found that notwithstanding the wrongful
termination of Reeves‟ services the enforcement of the restraint was not contrary to
public policy. (This does not of course prevent the employee from seeking damages for
the wrongful termination of his contract).

In Securicor (SA) (Pty) Ltd v Lotter 2005 (5) SA 540 the court had to consider s197 of
the Labour Relations Act of 1995 which has made inroads into the common-law principle
that a contract of employment may not be transferred without the consent of the
employee. This provision is aimed at facilitating commercial transactions and protecting

26
 unfair job losses. Its effect is that the new employer is automatically substituted in the
place of the old employer in respect of all contracts of employment when a business is
sold as a going concern. So the rights and obligations between the old employer and the
worker are transferred to the new owner. In the matter the court discusses the
circumstances in which the obligations of an employee under a restraint agreement
survive the transfer of a business under s 197 so that the new employer can enforce the
restraint.

Rawlins and Another v Caravantruck (Pty) Ltd 1993 (1) SA 537 (A)
Bonnet and Another v Schofield 1989 (2) SA 156 (D)
Basson v Chilwan and Others 1993 (3) SA 742 (A)

5.3. Effect of Illegality

Even if the parties do not raise the illegality, the court is bound to do so provided the
illegality is clear. There are two main rules which apply to illegal contracts.

5.3.1. Ex turpi causa non oritur actio

Literally translated, from an evil cause no action arises.

What it means is that the courts cannot enforce illegal contracts. So this rule will apply
where someone is asking the court to enforce the contract. The courts can never order
specific performance of such agreements, or award damages in place of an order of
specific performance, for the simple reason that they would be ordering the parties to do
something that is prohibited by law. It follows that there can be no exceptions to the rule
even if the plaintiff was unaware of the illegality.

Lion Match v Wessels 1946 OPD 376

NOTE: Strictly speaking, 'illegal contract' is a contradiction in terms because, if the

transaction is illegal, it is not a contract in law. The phrase is used for convenience.

5.3.2. In pari delicto potior est conditio possidentis (defendentis)

Literally translated - In equal guilt the possessor is in the stronger position. The rule only
applies when the parties are in equal guilt. In order to decide whether or not the parties
are in equal guilt the court considers their moral guilt and not whether they are both
committing a criminal offence.

Klokow v Sullivan 2006 (1) SA 259

This rule applies when a party is not asking the court to enforce a contract; he is trying to
recover something that he has paid over or delivered in pursuance of the illegal contract.
The normal operation of the maxim is that the party will fail in his claim because the
possessor/defendant is in a stronger position. The maxim can be freely translated by
saying that the consequences of illegality lie where they fall: the courts are not there to
help people who get involved in illegal dealings.

27
A simple illustration will show the different operation of the two maxims. A sells B a
parcel of uncut diamonds for R1 000. If A sues for payment of the purchase price or if B
sues for delivery of the parcel, both claims are hit by the ex turpi causa rule. Suppose B
had paid the purchase price and he now wants to recover the money that he has paid
because A has failed to deliver the diamonds, he is hit by the par delictum rule. (The
courts do however have the discretion to relax the par delictum rule - see below).

An example of where the court confused the two rules is

Henry v Branfield 1996 (1) SA 244 (D).

Relaxation of the par delictum rule

Prior to 1939 the rule was rigidly applied. This resulted in severe injustice in a number of
cases and also encouraged trickery. In Brand v Bergstedt 1917 CPD X sold Y a cow in
contravention of an ordinance prohibiting trading on a Sunday. The seller delivered the
cow but the purchase price was never paid. When the seller sued for the return of the
cow he failed.

This case was expressly overruled in the leading case Jajbhay v Cassim 1939 AD 537.
The court decided that in appropriate circumstances the par delictum rule may be relaxed,
in order to allow a party recovery of performance. The court set out the factors which it
would take into consideration in order to decide whether or not to relax the rule. Note
these factors.

See also Limbada v Dwarka 1957 (3) SA 60 (N).

Maseko v Maseko 1992 (3) SA 190 (W)
Extel Industrial (Pty) Ltd and Another v Crown Mills (Pty) Ltd 1999 (2)
SA 719 (SCA))

Read: AB Leslie “Bribery - some civil consequences” (1983) 46 THRHR 312

5.3.3. Illegality of purpose

Sometimes, an agreement may itself be legal, but it is made for an illegal purpose.
If both parties are aware of the illegal purpose, the agreement is illegal and void and the
ex turpi causa and par delictum rules apply. But, on the other hand, if only one of the
parties has the illegal purpose in mind, the agreement is illegal only as against him/her
and not the other party, who may enforce it.

For example: You lend me R10 000; if I fail to repay the amount due, it is clearly not
open for me to say that I used the loan to buy drugs or stolen goods. However, if you
knew, at the time of the contract, of my intended purpose, then the loan agreement is
unenforceable. The rule is that if only one party has an illegal purpose and the other does
not know of it and performs, then the court will enforce the contract at the suit of the
innocent party. The guilty party cannot enforce the contract.

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 5.3.4. Severance

Where part of a contract is lawful and another unlawful, it is possible to sever (cut out)
the unlawful part and enforce the rest. Severance is not possible where the unlawful part
'goes to the root' of the contract: the whole contract is bad. The lawful promise must be
substantially separate from and independent of the unlawful one/s. If the unlawful
promise constitutes the main purpose of the contract, it cannot be severed. Similarly,
severance is not possible if it would render the contract meaningless or something
different from the common intention of the parties.

Sasfin v Beukes 1989 (1) SA 1 (A)

6. THE AGREEMENT MUST BE POSSIBLE OF PERFORMANCE

If at the time of the agreement, the performance was impossible of performance, the
agreement is void. No binding contract comes into existence. We say the agreement is
void ab initio.

7. FORMALITIES

The general common law rule is that no formalities are required for a valid contract.
Contracts may be entered into orally, in writing, partly in writing and may even arise
tacitly, by conduct of a party, or the parties.

Exceptions
There are two categories of exception to the general rule that formalities are not required
for the formation of a valid contract.

 Self-imposed Formalities

Sometimes parties agree that there will be no binding agreement between them
unless the agreement is reduced to writing. Almost invariably they also stipulate
that the writing must be signed. If this is the parties' intention then the writing
and signatures are regarded by the parties as a 'condition precedent' to being
bound. Unless it is clear that the parties intended such a condition precedent, the
courts will usually hold that there is, in fact, a binding contract in existence and
that the formality is merely required by the parties to facilitate proof of the
existence of the contract. It is therefore important to ascertain the parties‟
intention. Look at the following two cases:

Goldblatt v Freemantle 1920 AD 123

De Bruin v Brink 1925 OPD 68.

 Formalities Required by Statute

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Some contracts are valid inter partes without formalities, but require formalities
to be effective against third parties. For example, see the Formalities in Respect
of Leases of Land Act, 1969.

Some statutes require formalities to have been complied with in order for specific
types of contract to be binding between the parties, for example, the Alienation of
Land Act 1981 requires a sale of land to be in writing and signed by both parties,
The General law Amendment Act, 1956, requires a suretyship contract to be in
writing and signed by the surety. Some contracts require additional formalities,
for example, an antenuptial contract has to be notarially executed and also
registered in the Deeds Registry. The purpose of the latter kind of formality is to
protect third parties by giving publicity.

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III VOIDABLE CONTRACTS

INTRODUCTION
A voidable contract is one which is valid, but which may be rescinded (ie set aside) by
one of the parties. We have, earlier in this module, considered the effect of an unassisted
minor‟s contract: the contract is valid; if the minor elects to abide by the contract, then it
is binding against the other party, but the minor may, on the other hand, rescind the
contract, ie the contract is voidable at the instance of the minor.

In this section, we study other examples of voidable contracts. Here, we consider the
legal position when a contract has been formed, ie consensus has been reached, but where
one party may be entitled to rescind the contract because his/her assent was obtained as a
result of improper conduct (before or at the time of formation of the contract) on the part
of the other party.

Traditionally, three types of improper conduct have been held to entitle a party to rescind
the contract, if he/she chooses to do so. These three are misrepresentation, duress and
undue influence. Recently, the Supreme Court of Appeal regarded bribery as conduct
which entitled the other party to rescind a contract. (See Extel Industrial (Pty) Ltd and
Another v Crown Mills (Pty) Ltd 1999 (2) SA 719 (SCA))

1. MISREPRESENTATION

8. Overview

Let us begin with an overview in the form of a summary of the law regarding
misrepresentation.

A party who wishes to rescind a contract on the grounds of misrepresentation must prove
the following elements:
· a false representation as to a fact;
· which was material;
· made before or at the time of contracting;
· by the other contracting party;
· with the intention of inducing the contract
· and which induced the contract.

If all these elements are proved, then the contract is voidable. The aggrieved party may
· rescind the contract, and
· obtain restitution (ie recover money or property which he/she has handed over
and tender return of what he/she received)

and, only if the representation has been fraudulent or negligent,

· obtain (delictual) damages.

If the misrepresentation did not induce the contract, in that the representee would have

31
 entered into the contract anyway, but would have contracted on different terms, the
contract is not voidable, but the representee may be entitled to claim delictual damages.

Now let us analyse each element in more detail:

1.2 Essential elements

1.2.1 False representation of fact

(a) Misrepresentation by action

A misrepresentation may be in the form of words or conduct or both.

Trotman and Another v Edwick 1951 (1) SA 443 (A)

(b) Misrepresentation by silence

Silence cannot, strictly speaking, amount to a misrepresentation. However, non-
disclosure of a material fact may, in certain circumstances, amount to a misrepresentation
if the party remaining silent is under a „duty to disclose‟ that fact.

Make notes in which you list and explain such circumstances.

See the following cases:
Marais v Edlman 1934 CPD 212
Dibley v Furter 1951 (4) SA 73 (C)
Cloete v Smithfield Hotel (Pty) Ltd 1955 (2) SA 622 (O)
Pretorius v Natal South Sea Investment Trust Ltd 1965 (3) SA 410 (W) 418

One may anticipate a measure of non-disclosure in business dealings. The law permits
this if this is merely part of keen bargaining, but where it reaches the point where the non-
disclosure degenerates into „trapping‟ or blatant dishonesty, the law will regard the non-
disclosure as fraudulent misrepresentation. Sometimes it is difficult to distinguish
between permissible non-disclosure of a fact and misrepresentation by silence, or
fraudulent non-disclosure. One test which has been suggested is: Would the person from
whom the information has been withheld reasonably be entitled to regard himself as
having been swindled?
See Hulett and Others v Hulett 1992 (4) SA 291 (A).

Regarding a negligent misstatement by silence, see ABSA Bank Ltd v Fouche 2003 (1)
SA 176 (SCA)

(c) Misrepresentation of fact

The misrepresentation must be one of fact. Where one party honestly expresses his/her
opinion, and this opinion turns out to be incorrect, this does not amount to a
misrepresentation.
Lamb v Walters 1926 AD 358

However, a dishonest opinion may constitute misrepresentation.

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Feinstein v Niggli and Another 1981 (2) SA 684 (A)

1.2.2. Material
Usually, a misrepresentation would be regarded as material if it would have induced a
reasonable person to enter into the contract.
Lourens v Genis 1962 (1) SA 431 (T)

It is submitted that the better approach is that „material‟ should be understood to mean
that a reasonable person would have considered the fact important in deciding whether to
enter into the contract. This approach to the requirement of materiality would avoid the
possible consequence of an ignorant or uneducated person being without a remedy
against the other party who dishonestly induced him/her to enter into a contract.
Otto v Heymans 1971 (4) SA 148 (T)

1.2.3 By the other party to the contract

1.2.4 Intention of inducing the contract

This requirement distinguishes actionable fraudulent misrepresentation from mere deceit.

For example, if I tell you that a painting on my wall is a genuine work by a certain artist
when in fact it is not, then I am lying. If I have no intention that you should act upon my
lie, there is no actionable fraudulent misrepresentation, but, obviously, if I were trying to
sell you the painting, it may amount to actionable fraudulent misrepresentation.

1.2.5 Induced the contract

The test here is whether the contract would have been concluded, had the
misrepresentation not been made.
„Fraud in the air‟ is not a basis for liability for misrepresentation. If at any time when
s/he entered into the contract, the plaintiff in fact knew the truth, s/he cannot later
complain that the statement is incorrect. For example, in Poole and McLennan v Norse
1918 AD 404, N advertised in the Farmer's Weekly that his farm, for sale, was 6 300
acres in extent, the store on it was bringing in £60 per month, a timber interest in a
syndicate brought in £100 a month and would last twenty years and charcoal rights
brought in £80 a month. P and M who had read the advertisement and then bought the
farm, alleged that they had been induced to buy through fraudulent statements in it. The
evidence however showed that during interviews with N the true state of affairs was
disclosed to P and M and that they were aware of the situation by the time they purchased
the farm. The court therefore concluded that they could not complain that they were
misled by the false statements contained in the advertisement.

It is not a defence for the defendant to argue that the plaintiff would have found out the
truth if he had made inquiries or that the plaintiff acted unreasonably in believing the
misrepresentation. The law does not take kindly to defendants who say “you should not
have believed me” or “you should have checked up on me” or “you were foolish in

33
believing me”. The test is a subjective one: was the plaintiff induced by the fraud to enter
into the contract? If the rule were otherwise it would mean that a gullible person or fool
was fair game for a crook.

The remedy of rescission is not available unless the misrepresentation induced the
contract.
Bird v Murphy 1963 (2) PH A42 (D)

It is necessary to distinguish between:

(a) causal misrepresentation and an incidental misrepresentation

and

(b) between a representation, ‘puffery’ and a warranty

* a puff or simplex commendatio

This is mere commendation or “puffery” - sales talk. For example, “This car is the best
in the world”; “This washing powder washes whiter than white”. The hall-mark of a puff
is that nobody takes it seriously. It is not intended to be taken seriously nor could any
reasonable person attach any serious consideration to it. This does not mean that you can
make any statements you like. If, for example, you tell a person that the piece of land you
are selling is the “best in the world”, the statement is not entirely meaningless. It is a
representation at least to the extent that the soil is of good quality. If it later turns out that
the soil is barren, you may be liable for a misrepresentation. In Carlill v Carbolic
Smokeball, the directors of the company tried, unsuccessfully, to convince the court that
their advertisement for their smoke balls was a mere puff. It is sometimes difficult to
decide whether a statement is a representation or a mere puff. For example, see
Geldenhuys and Neethling v Beuthin 1918 AD 426.

* representation
This is a factual statement made by one party to another, before or at the time of the
contract, regarding some existing fact or past event, which is made with the intention of
inducing the contract. The representation does not become a term of the contract. For
example, the seller of a house tells the buyer that approval has been given for a school to
be built in the neighbourhood.

It may often be difficult to distinguish between a representation, made with the intention
of inducing a contract, on the one hand, and a term of the contract, on the other.
However, it is important to be able to distinguish between them, especially because the
remedies available for misrepresentation, on the one hand, and for not complying with a
term of the contract, on the other hand, are so different.

Of course, parties may always agree that a representation made by one party be included
as a term of their contract.

* warranty (guarantee or undertaking)

34
 A warranty is a contractual undertaking that a factual statement is correct. It is a
statement which does form part of the contract. It is a term of the contract. As Sharrock
explains, at 120, the maker of the statement intends, not only to induce the contract, but
also to assume liability for the correctness of the statement. So, a warranty is a term of the
contract and failure to comply with it will lead to liability for breach of contract.

In Petit v Abramson 1946 NPD 673, P inspected three horses belonging to A. Upon
being asked their ages, A said that two were 6 years old and the other 5 years old. P then
bought the three horses. It turned out that each horse was not less than 10 years old. P
sued for rescission of the contract on the basis of a breach of warranty as to the ages of
the horses. P succeeded in his action.

1.3 Remedies

1.3.1 Contractual remedies

The remedies of rescission and restitution are contractual remedies which are afforded to
the representee because his/her consent has been obtained in an improper manner and it
would be unfair to hold him/her to a contract if s/he does not wish to be bound.

(a) Rescission
The representee has an election whether to abide by the contract or whether to rescind the
contract. If the aggrieved party elects to rescind, s/he must not do anything to lead the
representor reasonably to believe that s/he intends to abide by the contract and must
communicate the intention to rescind the contract to the representor within a reasonable
time.

(b) Restitution
A party who wishes to rescind the contract and claim return of what s/he has performed
under the contract, must himself/herself make restitution. In other words, the aggrieved
party is entitled to recover whatever s/he may have paid or delivered under the contract.
In turn, s/he must restore to the defendant what s/he has received. A problem arises when
the plaintiff is unable to restore what s/he has received. If it is impossible to restore, but
this is not the plaintiff's fault, s/he does not necessarily lose his/her remedy. For example,
in one case, fertilizer had been ploughed into the ground before the misrepresentation
about the fertilizer was discovered. In another case, a cow which was represented to be
free of foot-and-mouth disease had been destroyed (as required by law).

Where the impossibility to restore was due to the plaintiff's fault, the traditional rule was
that s/he lost his/her remedy. However, it has more recently been held that in a proper
case, the plaintiff will be allowed to purge his/her default by means of a money payment,
that is by paying the value of what s/he ought to have been able to restore. In these
circumstances, therefore, the plaintiff may still obtain restitution if s/he makes a money
payment in lieu of restoration.

Look again at Feinstein v Niggli, where F alleged that the respondents were unable to
restore the business in the same state as they had received it because the value of the

35
shares had depreciated considerably and that they were consequently precluded from
rescinding the contract. Explain why the court still allowed restitution notwithstanding
the fact that they would be restoring a business that was virtually worthless.

The court does have a discretion to relax the requirement that the aggrieved party must
make restitution, if the court considers that it would be equitable to do so.
Harper v Webster 1956 (2) SA 495 (FC)
Extel Industrial (Pty) Ltd and Another v Crown Mills (Pty) Ltd 1999 (2) SA 719 (SCA)

1.3.2 Delictual Damages

(a) Only allowed where fraud or negligence is involved

If the misrepresentation was made fraudulently or negligently, it amounts to a delict and

the aggrieved party may claim damages in addition to rescission and restitution, or, if s/he
does not rescind the contract (because s/he doesn't want to, or because s/he is not entitled
to do so), instead of rescission and restitution.

A statement is made fraudulently where the representor knows that his/her statement is
false, or foresees that the statement may be false but is reckless as to whether it is false or
not. As a general rule, ignorance cannot form the basis of a fraudulent misrepresentation.
But there can come a stage when a person can be said to be indulging in a “fraudulent
diligence in ignorance”. This is referred to in Halsbury‟ Laws of England, where it is
said that a belief is not honest which,

„though in fact entertained by the representor, may have been itself the outcome of a fraudulent diligence in
ignorance - that is, of a wilful abstention from all sources of information which might lead to suspicion, and
a sedulous avoidance of all possible avenues to the truth, for the express purpose of not having any doubt
thrown on what he desires and is determined to, and afterwards does (in a sense) believe.‟

A statement is made negligently if a reasonable person in the same position would have
foreseen the possibility of the statement being incorrect and would not have made the
statement, or would have taken reasonable steps to ascertain the truth of it before making
it. A negligent misrepresentation by silence may also occur where a person's failure to
disclose is as a result of forgetfulness or inattention.

For an example of a case involving negligent misrepresentation, see

Bayer South Africa (Pty) Ltd v Frost 1991 (4) SA 559 (A)
Amount recoverable

Damages awarded should aim to place the representee in the economic position that s/he
would have occupied had the representation not been made. Therefore, in calculating the
amount of damages to be awarded, a court will take into account whether the representee
has elected to have the contract rescinded or not and whether there has been restitution.

 Causal misrepresentation, contract rescinded

The delictual measure of damages is sometimes called “out of pocket loss”. In other
words, the defendant must compensate the plaintiff for financial loss which s/he has

36
caused him/her.
For example, A sells to B a mobile crane for R10 000. A tells B that the crane can lift 5
tons when he knows that it can only lift 3 tons. B uses the crane to lift 4 tons, the cable
snaps and the goods being lifted are smashed. If the fraud is causal, B is entitled to
rescind the contract. He returns the crane to A and reclaims his R10 000. In addition, he
can claim for his damaged goods and, as it takes time to find a new crane, he can also
claim for the profits he has lost as he is unable to continue with his work.
Davidson v Bonafede 1981 (2) SA 501 (C)

 Causal misrepresentation, contract not rescinded

Sometimes, even though the misrepresentation induced the contract and the representee is
therefore entitled to rescission, s/he elects to abide by the contract. In such a case, the
representee may recover an amount of damages representing the difference between the
value of what s/he gave and the value of what s/he received under the contract, plus the
amount of any additional loss which s/he suffered as a consequence of the
misrepresentation.
Trotman v Edwick and Another 1951 (1) SA 443 (A).

See also Hulett and Others v Hulett 1992 (4) SA 291 (A), in which the court held that
the plaintiffs were entitled to the difference between the price which they had received for
the shares and their true market value at the date of the sale. „Market value‟, the court
said, is the price commanded in a fair market - the price determined as between a seller
willing but not compelled to sell and a buyer willing but not compelled to buy.

Obviously, if the aggrieved party has, overall, benefitted financially from the contract,
that is, if, for example, the price which s/he paid was in any event a good one, from
his/her point of view, and what s/he received is worth more than his/her own
performance, and s/he has not suffered any other losses as a result of entering into the
contract, then s/he will not be entitled to damages. This is sometimes referred to as the
„swings and roundabouts principle‟.

Students are required to read A Cameron “Measuring Delictual Damages for fraudulent
misrepresentation; the law as it was before Ranger v Wykerd, is now and ever shall be?”
1982 99 SALJ 99

 Incidental Misrepresentation
The aggrieved party is entitled to an amount of damages equal to the difference between
the value of what s/he gave under the contract and the value of what s/he would have
given had the representation not been made, plus the amount of any additional loss
sustained as a result of the misrepresentation.

(b) Price Reduction for Innocent Misrepresentation

Where a statement is made neither fraudulently nor negligently, that is, where it is made
honestly, and where a reasonable person in the same position would have acted in the
same way as the representor did, it is known as an innocent misrepresentation. This does
not amount to a delict as there is no fault (in the form of dolus or culpa) and so the

37
 aggrieved party is not entitled to claim delictual damages.

However, in a contract of sale, the law does allow a right of recovery for this kind of false
statement. The purchaser of an article who has been misled by a false dictum et
promissum made by the seller is entitled to a reduction in the purchase price equal to the
difference between the purchase price and the market value of the article in its damaged
or defective state.

The term dictum et promissum is used to refer to „a material statement made during
negotiations between the parties which concerns the qualities of the article to be sold and
which goes beyond mere praise and commendation, ie puffing‟.

1.3.3 Contractual Exclusion of Reliance on Misrepresentation

It is, in general, possible to contract out of liability for negligent and innocent
misrepresentation. It is quite common for 'standard form' contracts to contain a clause
excluding a party from liability for misrepresentation.

This cannot cover fraud because of the general principle of law that nobody can contract
out of liability for his own intentional wrongdoing. Also, the clause cannot be relied
upon where the misrepresentation prevented the parties from reaching consensus on a
material part of the contract, in which case the entire agreement would be void. (Refer to
your notes on the reliance theory.)
Allen v Sixteen Stirling Investments (Pty) Ltd 1974 (4) SA 164 (D)

2. DURESS

Duress is the situation where a party is induced to enter into a contract because of
violence, threat or fear. We do not need to consider the extreme case where such physical
force was applied as to make it impossible to say that there was an contracting mind at
all: where, for example, the other party grabs your hand and forces your signature on a
piece of paper, obviously there is no contract. What we have to consider is the situation
where there is a mental choice - that of contracting, on the one hand, or risking some
imminent or inevitable evil, on the other. If duress is proved, the contract is voidable at
the instance of the party who was coerced into it.

In Broodryk v Smuts 1942 TPD 47 the court applied the elements of duress stated in
Wessels on Contract.
Paragon Business Forms (Pty) Ltd v Du Prezz 1994 (1) SA 434 (SE)
Hendricks v Barmett 1975 (1) SA 765 (N)
BOE Bank Bpk v Van Zyl 2002 (5) SA 165 (C)
Medscheme Holdings (Pty) Ltd v Bhamjee 2005 (5) SA 339 (SCA)

Note that Kahn, at 343, argues that the fear does not have to be reasonable, but that the
test should be subjective. Do you agree? Note also that a threat to a person's property
may constitute duress.

The threat must also be contra bonos mores. It would not be contra bonos mores for a

38
 creditor to threaten to sequestrate a debtor if s/he failed to pay his debt however it would
be contra bonos mores to threaten to go to police with information of a crime unless the
person entered into a contract with you. This is commonly known as extortion.

A person induced to enter into a contract by duress is entitled to rescind the contract.
S/he must do so without delay after the duress has ceased. If s/he fails to do so he might
be estopped from asserting this right.

3. UNDUE INFLUENCE

Undue influence applies in cases where one person has influence over another which
weakens his/her resistance and makes his/her will pliable and where s/he then exercises
that influence in an unconscionable manner in order to persuade that person to enter into
a contract which s/he would not otherwise have agreed to with normal freedom of will.
Preller v Jordaan 1956 (1) SA 483 (A)

A person unduly influenced to enter into a contract has the right to rescind the contract.
S/he must act promptly after the influence has ceased otherwise questions of waiver and
estoppel may arise.

In certain circumstances duress and undue influence may overlap.

Savvides v Savvides 1986 (2) SA 325 (T)

In deciding that the defendant's conduct constituted duress the court also remarked that it
was not clear why the claim was not based on undue influence. The court referred with
approval to a statement in Lawsa:
„If a person's consent to a contract is obtained by some form of pressure which the law regards as improper,
the contract is voidable at the instance of the person imposed upon.‟

Clearly duress and undue influence are both forms of improper pressure. It may be a
good idea if we abolished the distinction between duress and undue influence and
adopted the seemingly simpler concept of improper pressure. As it is, the SCA has
extended the remedy of rescission of a contract to cases of bribery.

4 BRIBERY?

Extel Industrial (Pty) Ltd and Another v Crown Mills (Pty) Ltd 1999 (2) SA 719
(SCA))

39
IV OPERATION/EFFECT OF THE CONTRACT

1. CONTENTS OF THE CONTRACT

1. Provisions which make up a contract

A contract is made up of express or implied terms. The express terms are those which the
parties have specifically articulated, either orally or in writing. Implied terms are those
terms which the law reads into a contract to give effect to the common intention of the
parties, or to maintain a trade usage, or to give effect to a rule of law, that is, either a rule
of the common law or a statutory provision.

Before we proceed to study the nature and effect of express and implied terms which are
contained in a contract, it is useful first to acquaint ourselves with the following
concepts/terminology.

„Naturalia‟ - Our common law recognizes different types of contract, such as sale, lease,
employment etc. The law reads into each type of contract a set of terms which are known
as naturalia or natural consequences of that particular type of contract. (The naturalia,
therefore, form part of the implied terms, ie they are implied by the common law.) The
naturalia can be excluded, or varied, by agreement.

For example, in a contract of lease, one of the natural consequences which arises is that
the landlord is under a duty to maintain the property in a condition reasonably fit for the
purpose for which it was let.

„Essentialia‟ are the terms on which the parties must agree for their agreement to qualify
as a particular type of contract. For example, for a transaction to qualify as a sale, there
must be agreement as to the price, the property to be sold, and the transfer of free and
undisturbed possession, or ownership, of that property.

„Incidentalia‟ are additional terms, over and above the essentialia, which the parties
expressly agree upon in their particular contract.

1.1._ Express terms

Express terms are the oral or written statements made by the parties in the process of
reaching consensus. Not all statements are terms of the contract: contractual
undertakings must be distinguished from representations and from puffs (see above) .

The express terms may be a re-statement of the naturalia. For example, the parties may
state „This sale is for cash‟, or „The landlord undertakes to assume responsibility for
maintenance of the leased premises‟.

On the other hand, the parties may expressly exclude one or more of the naturalia of a
contract. For example, the contract might read, „This sale is voetstoots.‟ The effect of this
would be that the common law duty of the seller to assume responsibility for latent
defects is excluded.

40
1.2 Imposed terms
The requirements for a valid contract require that there be agreement (consensus ad
idem) between the parties. This suggests that parties negotiate each and every term
contained in their final agreement. In practice this seldom occurs. In most instances the
contract is drafted by one of the contracting parties and the other is simply informed of
the terms on which that party is prepared to do business. These terms are known as as
„imposed terms‟. Since contracts are created by mutual consent, the expression „imposed
term‟ seems to be a contradiction and, on a philosophical level, it would be. However, as
will be seen, in practice, the expression is all too true!

Very often, a party makes a provision a part of a contract by issuing a ticket or displaying
a notice which contains the provision. If the provision is incorporated into a document
which the customer signs, the reliance theory ( and the caveat subscriptor rule) must be
applied - see above. Where the document is not signed by the other party, or where the
provision is incorporated in a notice, a problem may arise in that, while the one party may
intend the term to be part of the contact, the other party may not necessarily be aware of
this intention. Does the other party‟s ignorance of the existence/ incorporation of the
term prevent his/her being held bound by that term?

(a) Tickets
Often a supplier of goods or services issues the customer with a document setting out the
provisions which the supplier wishes to incorporate in the contract.

A provision which is commonly sought to be made part of a contract, in this way, is an

exemption clause. An exemption clause is one which exempts a party from a duty or
from liability which the law would ordinarily attach to him/her. For example, a dry
cleaner may intend that he be exempted from liability for any damage caused to clothing
during the dry cleaning process.

The legal position regarding enforceability of provisions in a „ticket‟ may be summarised

as follows.

Even if the customer was unaware of the writing on the ticket, or, if he knew that there
was writing on it, he was unaware that the writing contained terms of the contract, he will
be bound by a contract incorporating such terms as long as the supplier did what was
reasonably necessary to bring the terms to the customer‟s attention.

Note the following:

· The ticket must, obviously, be handed over before the agreement is concluded.

In other words, the term must be introduced, or incorporated, either before, or

contemporaneously with, the conclusion of the contract. It is a very clear principle, in our
law of contract, that, once a contract has been concluded, one party cannot unilaterally
vary its terms. Thus if steps are taken to bring a provision to the customer‟s notice only
after the conclusion of the contract, the customer will not be bound by a contract
incorporating such provision.
Thornton v Shoe Lane Parking Ltd 1971 All ER 686 (CA)

41
· The „ticket‟/document should be one in which the reasonable person would
expect to find contractual terms.
Chapelton v Barry Urban District Council [1940] 1 KB (CA)
D & H Piping Systems v Trans Hex Group Ltd 2006 (3) SA 575 (SCA)

· Other considerations in deciding whether reasonable notice has been given are
whether the writing on the ticket was prominent, whether the customer had an
opportunity to examine it, and whether the customer‟s attention was specifically
drawn to the writing on the ticket.
See CSAR v McLaren 1903 TS 727 where it was held that a reasonable person would not
expect a railway cloakroom ticket to contain contractual terms. In addition, the attendant
had written over the writing on the ticket, and this tended to suggest that the writing was
unimportant. The term was not printed in a distinctive fashion, nor was the customer‟s
attention drawn to it.
In its judgment, the court refers to Rowntree's case [1894] AC 217 (HL) (referred to in
Kahn 487), in which it was held that there are three questions which needed to be
considered.
1 Did the plaintiff know that there was printing or writing on the ticket?
2 Did she know that the writing or printing contained ...(terms) relating to the
contract ...?
3 Did the defendants do what was reasonably sufficient to give the plaintiff notice
of the ...(terms)?

It must be noted that McLaren's case was decided in 1903. Since then there has been a
proliferation of tickets containing terms. Today, it is submitted, a reasonable person
would expect such a ticket to contain terms.

In Kings Car Hire v Wakeling 1970 (4) SA 640 (N), Harcourt J pointed out that question
(3) becomes relevant if either question (1) or (2) is answered in the negative.

So, if the customer is made aware that the ticket contains terms of the contract, s/he is
bound whether s/he reads them or not, and, possibly, even if s/he was unable to read
them, for example, on account of blindness or illiteracy. If s/he does not know that the
ticket contains terms, s/he is bound if the supplier took such steps as would have drawn
the attention of the reasonable customer to the terms contained, or referred to, in the
document.

What steps are sufficient is a question to be decided from the fact of each case. King AJ
summed up the principles involved in
Bok Clothing Manufacturers v Lady Land 1982 (2) SA 565 (C):
(T)he nature of the document is relevant to the steps required of a party in order to bring the
contractual provisions to the other party's attention. The more contractually obscure or incidental
the document, the less likely it is to expect it to contain contractual provisions and the more
specific and positive must be the steps to be taken to bring this to the attention of the other party.
Per contra in the case of carriage tickets and bills of lading, where long established usage has
created a situation where a contracting party, even an ordinary member of the public, will be taken
to be aware of the existence of such provisions on the relevant document, or at least of a reference
thereto, and to have knowledge thereof.

42
 Sun Couriers (Pty) Ltd v Kimberley Diamond Wholesalers 2002 (3) SA 110
(NC)

(b) Notices
Often the supplier, instead of issuing a ticket containing the terms of a contract, puts up a
notice setting out the provisions which s/he wishes to be included in their contract. The
rule is that even if the customer did not see the notice, or did not read what it contained,
the customer will be bound to a contract containing these terms as long as the supplier did
what was reasonably necessary to bring such terms to the notice of the customer.
Durban’s Water Wonderland (Pty) Ltd v Botha and Another 1999 (1) SA 982 (SCA)

 As with tickets, the notification of the provisions must be contemporaneous with

the conclusion of the contract. So, the notice must be placed where it would be
conspicuous before or at the time of entering into the contract. A customer will
not be bound by terms which are „imposed‟ after conclusion of the contract.
Olley v Marlborough Court[1949] 1 All ER 127 (CA)

 Other considerations in deciding whether reasonable notice has been given are
whether the notice was conspicuous, how prominent the writing containing the
contractual terms was, and the opportunity which the customer was given to read
the notice.
Yeats v Hoofweg Motors 1990 (4) SA 289 (NC)

It appears, from reported judgments, that certain limitations have been placed on the
enforceability of „imposed‟ terms. For example, in Weinberg v Oliver 1943 AD 181, it
was held that a `Cars garaged at owner's risk' notice did not cover an improper activity
wholly unrelated to the contract.

HSM v Volkswagen Motor Port 1986(4) SA 22 (C)

Students are required to read the following article:

L Steyn “The inclusion of „additional terms or standard terms and conditions‟ in a

contract: the significance of the „ticket‟ case” (2003) 15 SAMercLJ

compare the approach of T Woker “Caveat Subscriptor: How careful are we expected to
be?” (2003) 15 SAMercLJ 109

1.3 Implied terms

(a) Terms implied to give effect to the parties‟ common intention („tacit terms‟)

The courts may be prepared to imply a term in order to give effect to the intention - actual
or presumed - of the parties. Sometimes during negotiations parties may omit to spell

43
 everything out or it may be that they failed to foresee some contingency which later arose.
If it can be said that there is only one clear way the parties would have dealt with the
matter, then the necessary term can be implied on the basis that it represents the common
intention of the parties. A test often applied is known as the „bystander' or „officious
bystander' test which was propounded in the English case of

Reigate v Union Manufacturing Co (1918) 1 KB 592 (CA):

„A term can only be implied if it is necessary in the business sense to give efficacy to the
contract: that is, if it is such a term that it can confidently be said that if at the time the
contract was being negotiated someone had said to the parties, “What will happen in such
a case?” they would both have replied: “Of course, so-and-so will happen; we did not
trouble to say that; it is too clear.”‟

In Wilkins NO v Voges 1994(3)SA 130 (a), Nienaber JA said the following:

„A tacit term, one so self-evident as to go without saying, can be actual or imputed. It is
actual if both parties thought about a matter which is pertinent but did not bother to
declare their assent. It is imputed if they would have assented about such a matter if only
they had thought about it - which they did not do because they overlooked a present fact
or failed to anticipate a future one. Being unspoken, a tacit term is invariably a matter of
inference. It is an inference as to what both parties must or would have had in mind. The
inference must be a necessary one.‟

Most of the relevant rules are set out by Colman J in

Technipak Sales (Pty) Ltd v Hall 1968 (3) SA 231 (W).

First National Bank of SA v Transvaal Rugby Union and Another 1997 (3) SA
851 (W)
Strydom v Duvenhage NO en `n Ander 1998 (4) SA 1037 (SCA)
Botha v Coopers & Lybrand 2002 (5) SA 347 (SCA)
City of Cape Town v Bourbon Leftley 2006 (3) SA 488 (C)

Note:
Reasonableness of the terms is not the test of whether the terms should be implied or not.
It must be necessary to give „business efficacy‟ to the contract. See for example Consol
Ltd v Twee Jonge Gezellen (Pty) Ltd 2005 (6) SA 1 (SCA) where the SCA held that
there was no scope for the introduction of a term to overcome the harsh effect of an
exemption The term sought to be implied (1) must not contradict any of the express
terms of the contact; and (2) must be capable of clear and exact formulation in only one
way. The courts will not imply ambiguous terms. In the Consol decision the court held
that if there is difficulty or doubt existing about what a term should be, or how far its
should extend, it is not possible to say that the parties clearly intended anything at all.

See also South African Forestry Co Ltd v York 2005 (3) SA 323 (SCA) where the SCA
held that a term could not be implied merely because it was reasonable or to promote
fairness and justice between the parties in a particular case. SAFCO argued that a term
could be implied if it was dictated by fairness and good faith. But the court did not
accept this argument. For a full discussion of the principles relating to implied terms see
pgs 339-340. The court said that it is not entitled to superimpose on the clearly expressed

44
 intention of the parties its notion of fairness however the position is different if the
contract is ambiguous. If the contract is ambiguous the courts will apply the principle
that all contracts are governed by good faith and in order to determine the intention of the
parties the court will assume that they negotiated with one another in good faith.

Also remember common mistake.

Van Reenen Steel (Pty) Ltd v Smith NO and Another 2002 (4) SA 264 (SCA)

(b) Terms implied on the basis of a trade usage

Sometimes a term will be implied in, or imported into, a contract by trade usage. There
may be usages of a particular trade in a particular locality which are so well known in the
trade or locality that they are imported into contracts made there. The terms will be
implied whether the parties knew about the trade usage or not. Of course, should the
parties so wish, they can agree that the trade usage will not apply in their contract: they
exclude the operation of the trade usage, by agreement.

Trade usages are a species of custom. The requirements for a trade usage to be implied in
a contract are as follows:
 The trade usage must be certain.
 It must be reasonable and not contrary to the law.
 It must be notorious (generally known) and universally and uniformly observed
within the particular trade concerned.
 It must be consistent with the other provisions of the contract.

Coutts v Jacobs 1927 EDL 120.

(c) Terms implied as a consequence of common law principles and statutory

enactments

1.4 Provisions excluded from a written contract

Although it is usually not necessary to reduce a contract to writing, it is often very useful
to do so because written contracts provide a good indication of the intention of the
parties. Remember when the reliance theory was discussed we saw that it is difficult for
a party to dispute that an agreement exists where it has been reduced to writing and
signed by both parties.

Another advantage of a written contract flows from the operation of the parol evidence
rule. Basically, the aim of the parol evidence rule is to „prevent a party to a written
contract from redefining the terms of the contract by reference to the prior negotiations of
the parties or the surrounding circumstances.‟ The parol evidence rule has two
consequences: the integration rule and the plain meaning rule.

1.4.1 Integration rule

Where a contract has been reduced to writing, the written document is regarded as the

45
 „exclusive memorial‟ of the transaction and no evidence may be given of any earlier
agreement made by the parties which is inconsistent with the terms of the written
contract. The contents of the written contract cannot be contradicted, altered, added to or
varied by oral evidence.

1.4.2 Plain meaning rule

Where the terms of a written contract are clear and unambiguous, no evidence may be
given to alter their plain meaning.

In Venter v Birchholtz 1972 (1) SA 276 (a) 282 Jansen JA accepted Wigmore's
description of this rule as the „integration‟ rule and this way of looking at it was
confirmed by Botha JA in National Board (Pretoria) Pty Ltd v Estate Swanepoel 1975
(3) SA 16 (A).

This rule is well summarised by Wigmore, Evidence, 3rd ed vol 9 sec 2425, as follows:
„This process of embodying the terms of a jural act in a single memorial may be termed the integration of
the act, ie its formation from scattered parties into an integral documentary unity. The practical
consequences of this is that its scattered parts, in their former and inchoate shape, do not have any jural
effect; they are replaced by a single embodiment of the act. In other words: When a jural act is embodied
in a single memorial, all other utterances of the parties on that topic are legally irrelevant for the purpose
of determining what are the terms of their act.’

If the parol evidence rule were to be applied rigorously, without exception, it could lead
to injustice. It has therefore been the constant endeavour of the courts to ensure that the
rule is not used as an engine of fraud by a party who knows full well that the written
document does not represent the true agreement. Perhaps the best way to look at the rule
is to see it as a back-stop which comes into operation only in the absence of some more
dominant rule. Thus, this rule must give way to the rules concerning misrepresentation,
duress, undue influence, illegality and mistake. In all such cases, of course, the burden is
on a party who has signed a written contract to displace the maxim caveat subscriptor.

1.5 Rectification
As stated above, the parol evidence rule is not applied without qualification. The most
important exception arises where parties fail accurately to record the terms of their
agreement in the document. Obviously, it would be grossly unfair to hold a party to a
contract which does not correctly reflect either party's original intention. Accordingly,
the law holds that either party may seek an order of rectification of the document so as to
bring it into line with the true original intention of the parties.

Note:
There is no question of reasonableness here: the sole issue is what the true intention of
the parties really was. Rectification is NOT a question of altering the actual contract.
The central and crucial point about rectification is that the written document does not
reflect the real agreement between the parties: the essential process of rectification is to
change the written document so that it does express the real intention of the parties.

46
 The mere fact that one party alleges that the document is incorrect, does not mean that the
court will simply rectify it. The other party may contest the application alleging that the
document does in fact reflect the true intention. The court will then have to make the
decision, based on the evidence laid before it. The party seeking rectification must prove
4. that the written agreement does not correctly record what the parties agreed upon;
and
 what the terms of the written agreement should be.
If the party seeking rectification is successful, s/he will be bound by the contract in its
rectified form.

The leading case is Weinerlein v Goch Buildings Ltd 1925 AD 282.

NOTE where the court said:

‘Once the contract is in writing the court will not allow it to be used as an engine of fraud to extort from an
adversary what the claimant knows that he never was entitled to, and in order to prevent this it will cause
the written contract and the register to be rectified. I think this right is an inherent right of our courts and is
well within their traditional equitable jurisdiction.‟

Tesven CC and Another v South African Bank of Athens 2000 (1) SA 268
(SCA)
Magwaza v Heenan 1979 (2) SA 1019 (A)
Intercontinental Exports (Pty) Ltd v Fowles 1999 (2) SA 1045 (SCA)

2. INTERPRETATION OF WRITTEN CONTRACTS

As stated above, if the meaning of the words used in the contract is perfectly clear and
unambiguous, no evidence can be led to alter the plain meaning of the words. This is
known as the „plain meaning rule‟ and it forms part of the parol evidence rule. However,
problems arise because language is not precise and although parties may think they are
expressing themselves clearly, at a later stage the contract may be ambiguous. Where
there is a dispute, the court endeavours to resolve the matter in the following way:

2.1 Linguistic Construction

The court attempts to determine the ordinary grammatical meaning of the words used as
they are proceeding on the assumption that the ordinary meaning of the words accurately
reflects the common intention of the parties.

But, the words are not looked at in isolation. It is essential to see the words in the context
in which they appear.
Young v Liberty Life Association 1991 (2) SA 246 (W)

The court will also take note of the preamble and marginal notes as well as background
circumstances.

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2.2 Extrinsic Evidence
Where words, read in their context, have more than one meaning, the court will allow
extrinsic evidence to discover the true intention of the parties.

2.3 Rules of Construction

If after hearing extrinsic evidence the Court is still unable to ascertain the intention of the
parties it refers to the rules of construction.

2.3.1 Equitable Construction

2.3.2 Construction favouring validity
2.3.3 Construction avoiding inconvenience
2.3.4 Change of language
2.3.5 Eiusdem generis
2.3.6 Construction contra proferentem

3. MISCELLANEOUS PROVISIONS IN CONTRACTS

3.1 CONDITIONS

In English law the word `condition' is used in the same sense as we understand
„warranties‟ or „terms‟ in South African law. Even in this country, the word „condition' is
often loosely used in the same sense, but this is, strictly speaking, incorrect. In South
African law, „condition‟ has a more specific, technical meaning than in English law: a
contract is entered into, subject to a condition, if the contract‟s continuance - wholly or
partly - is made dependent on the happening or non-happening of a future and uncertain
event. As Sharrock, at 179, puts it, a condition is „a provision which makes the operation
of one or more obligations arising from the contract (or the entire contract) dependent
upon some uncertain future event.‟

The essential difference between a term and a condition is illustrated by the fact that a
contractual undertaking/obligation can be enforced, but it is impossible to compel the
performance of a condition. A party may commit a breach of a term, but there is no such
thing as breach of a condition.

The event upon which the operation of the obligation is made conditional must be
physically and legally possible. The fulfilment of some conditions is entirely outside the
powers of the parties: for example, `if Caesar comes to Rome' or `if it rains' or `if there is
a change of government'. However, in some cases the fulfilment may, to some extent, lie
within the power of a party. For example, the purchase of a hotel may be made
conditional upon the Liquor Board granting the purchaser a liquor licence. Here the party
may be able, by making application to the Board in compliance with the Liquor Act, to
obtain the licence.

It is very important, in determining the operation of a condition, to consider the express

or implied intention of the parties. The condition must not be viewed in isolation and
must not be taken to operate in a manner not intended by the parties. This is particularly

48
important where the happening or non-happening of the future uncertain event is to some
extent within the control or either or both parties.

3.1.1 Suspensive condition

A suspensive condition is a condition which suspends the operation of some or all of the
obligations flowing from a contract until the occurrence or non-occurrence of an
uncertain future event. Prior to fulfilment of the condition, the conditional debtor is not
liable to perform the suspended obligation, but a binding contract has come into existence
and the parties must carry out any obligations which are not affected by the condition.

In Odendaalsrus Municipality v New Nigel Estate 1948 (2) SA 656 (0) Van den Heever
J explained that a contract of sale comes into existence immediately. What is suspended
is not the contract itself, but its „exigible content‟. In other words, what is suspended is
not the contract itself, but the operation of the obligation/s.

Where a suspensive condition is fulfilled, the debtor must perform the obligation which
was suspended. The contract is deemed (in the absence of express or implied agreement
to the contrary) to have been in force retrospectively, ie from the date of the agreement.
(This can be of importance, in contracts of sale, in questions regarding the passing of
risk.) Where a suspensive condition is not fulfilled, the suspended obligation comes to an
end, as does, generally the contract itself, as if it had never been entered into. Anything
paid or delivered under the agreement, must be restored.

It should be mentioned that if a condition operates exclusively for the benefit of one
party, in the event of the condition not being fulfilled, s/he may, depending on the terms
of the contract, elect nevertheless to abide by the contract, that is, s/he may waive
fulfilment and hold the other party to the contract. For example, A enters into a contract
to purchase property from B. The sale is made conditional upon A obtaining a bank loan
for the purchase price. A fails to obtain a bank loan, but manages to find the money
elsewhere and pays cash. A can hold B to the contract.

Another example would be where a travel agency contracts with X to provide to him a
group tour to some foreign country. The agency makes it a condition of the contract that
there must be at least 20 participants (presumably because the tour would be a financial
failure with a lesser number). The agency gets 19 participants, but decides that it will
nevertheless proceed with the tour. The agency will be able to hold X to their contract.
Cardoso v Tuckers Land and Development Corporation 1981 (3) SA 54 (W)

As mentioned above, there is no such thing as a `breach' of a condition. It was also

mentioned earlier that the fulfilment of a condition is, in some cases, to a greater or lesser
degree within the power of one party. What, then, is the position where a party prevents
the fulfilment of a condition, ie s/he causes it to fail? Essentially, the position will
depend on the intention of the parties. For instance, it may be that the parties intend that
the conditional debtor will be at liberty to prevent the event from occurring.
On the other hand, the intention of the parties may be that the conditional debtor will be
under a duty either not to obstruct, or to bring about, the occurrence of the event. In such
a situation, the rule is that a suspensive condition will be deemed to have been fulfilled

49
 (ie treated as fulfilled) against a party who has deliberately prevented it from being
fulfilled. This rule is known as the doctrine of fictional fulfilment.

The leading case is MacDuff & Co v JCI 1924 AD 573.

See also Scott v Poupard 1971 (2) SA 373 (A)

3.1.2 Resolutive condition

If a contract is subject to a resolutive condition, the obligation or contract is immediately
enforceable, but the continued operation of the obligation or contract is dependent upon
the occurrence, or non-concurrence, of a future uncertain event. Until the condition is
fulfilled, both parties must carry out what they undertook to do. If the condition is not
fulfilled, the contract is regarded as if it were unconditional from the beginning. If the
condition is fulfilled, the obligation or contract comes to an end. The contract becomes
void retrospectively and the parties must be restored to their respective positions. An
example would be: „I'll let my house to you for 5 years, but if there is a change of
government the lease will be terminated forthwith.'

3.2 WARRANTY

A warranty, or guarantee, is a contractual undertaking to the effect that a certain

statement of fact, often relating to the subject matter of the contract, is correct. A
warranty is a term of the contract, and so, if the statement is shown to be incorrect, the
maker of the statement will be liable for breach of contract.

Remember to distinguish a warranty from a representation. (See above.) A representation

is not a term of the contract. It is important to distinguish between a warranty and a
representation because the remedies for breach of a warranty differ from those for
misrepresentation. For breach of a warranty, the aggrieved party has the ordinary
remedies for breach of contract, and damages should be awarded so as to put him/her in
the economic position s/he would have been had the statement been true. On the other
hand, a party induced to enter into a contract by a false statement which is only a
misrepresentation, cannot claim the remedies available for breach of contract, but may
claim delictual damages in order to place him/her in the economic position s/he would
have been had the misrepresentation not been made. Of course, if a representation is
incorporated in the contract as a warranty, the aggrieved party can elect whether to claim
the remedies available for misrepresentation or breach of warranty (ie breach of contract).

3.3 EXEMPTION CLAUSE

It is common for a party to incorporate in a contract one or more terms excluding him/her
from liability which the law would otherwise attach to him/her. This is called an
exemption clause, or an exclusion clause.

Generally, the following rules apply.

 Exemption clauses are enforceable, as long as the other party has freely agreed to

50
 it.
 Courts will construe exemption clauses strictly and narrowly.
 An exemption clause cannot exclude liability for fraud or duress on the part of a
party to a contract.
 Certain statutes do not permit exemption clauses in certain types of contracts.
(One example is the Credit Agreements Act, 1980, which does not permit certain
types of exemption clauses in favour of the credit grantor.)

Wells v South African Alumenite Company 1927 AD 69

Lawrence v Kondotel Inns (Pty) Ltd 1989 (1) SA 44 (D)
Hotels, Inns and Resorts SA (Pty) Ltd v Underwriters at Lloyds and Others
1998 (4) SA 466 (C)
Minister of Education and Culture (House of Delegates) v Azel and Another
1995 (1) SA 30 (A)
First National Bank of SA Ltd v Rosenblum and Another 2001 (4) SA 189
(SCA)
Afrox Healthcare Bpk v Strydom 2002 (6) SA 21 (SCA)

3.4 NON-VARIATION CLAUSE

Brisley v Drotsky 2002 (4) SA 1 (SCA)

3.5 CANCELLATION CLAUSE

At common law, a party is only entitled to cancel a contract upon a material breach of the
terms of the contract. Frequently, a party will incorporate a cancellation clause in a
written contract. Such a clause entitles a party, upon the breach by the other party of any
of the terms of the contract, to cancel the contract.

4 PLURALITY OF PARTIES

Where two or more co-parties agree to render a performance, ie they are co-debtors, the
general rule is that they are jointly liable. This means that each one may be sued for
his/her pro rata share, and not for any more than that.

The above rule needs to be qualified in the following way.

 If performance is indivisible, then the co-debtors are liable together to carry out
the whole performance.
 The agreement may provide that the debtors will be jointly and severally liable, or
liable in solidum. In such a case, the creditor can choose to proceed against one
or more of the co-debtors for the full performance. If one of the co-debtors
performs in full (or at least performs in respect of more than his/her pro rata
share) s/he can claim pro rata reimbursement from his/her co-debtors.

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 Co-creditors are not common. Generally, co-creditors have joint entitlement, that is they
are entitled to a pro rata share of the performance. If the agreement is that they are co-
creditors jointly and severally, this means that the debt is discharged if the debtor pays
any one of them in full. The creditor who receives the payment is liable to pay the co-
creditors their pro rata shares. If a debt were ceded to joint and several co-creditors, the
cession would not be hit by the partial-cession rule because the debtor can discharge his
liability by paying one of the co-creditors. See below.

5 STIPULATIO ALTERI

First, a word regarding privity of contract. The general rule is that parties have the right to
choose with whom they wish to contract. So if you contract with A, he cannot, without
your consent, bring B into the contract, or substitute B for himself. Similarly, a person's
rights cannot be affected by contracts made by other people. There are some exceptions
to this rule. For example, rights can be ceded to another person (to be dealt with later);
also, an agent for an undisclosed principal can bring about legal relations between the
other party and the undisclosed principal (to be dealt with in the Insurance and Agency
module of the LLB degree), and contracts may be concluded for the benefit of third
parties (stipulatio alteri), which bring about legal relations between the other party and
the third party.

A contract for the benefit of a third party, or stipulatio alteri, is a contract between A (the
promissor) and B (the stipulator) whereby A undertakes to B that he will keep open for
acceptance by C (the beneficiary or third party) an offer to contract on certain terms
which he (A) has made to C.
The contract between A and B in effect creates an offer to C, and C may take the benefit
by notifying A of his acceptance.

(1)
A <-----------> B

(2)

This is a diagram of the usual stipulatio alteri situation. The first contract is between A
and B, the second is between A and C. Normally, the conclusion of the second contract
causes the first to lapse and B falls out of the picture. Naturally, C is not obliged to accept.
The contract between A and B in effect creates an offer to C which C may accept by
notifying A. As with ordinary offers, communication of acceptance may be dispensed with.
Once C has accepted, he may sue and be sued on the contract in the ordinary way.

It is not necessary that C be in existence at the time when A and B contract. Thus a person
can stipulate for the benefit of an unborn child (eg by creating a trust) or a company not yet
incorporated. (In company law these are called „pre-incorporation contracts'). This aspect
highlights the importance of distinguishing stipulatio alteri from agency. B is not C's agent

52
 and if he purports to act as such there is no stipulatio alteri. The reason is that an agent's
authority to act is created by his principal's consent. This could not possibly be an agency
situation if C were an unborn child or a company not yet incorporated: a non-existent
principal is obviously incapable of consenting to give authority. Thus it is essential for a
valid stipulatio alteri that all three parties act as principals.

The leading case is McCullogh v Fernwood Estate 1920 AD 204

Until C accepts, there is a binding contract between A and B. They are free to agree to
abandon the contract before C accepts. However, neither A nor B may unilaterally
terminate their contract. This means that B could interdict A from doing something that
would constitute a breach of the contemplated contract between A and C. For example, B
could interdict A from transferring the property to some outside party.

It is an essential requirement of a stipulatio alteri that the whole intention of A and B in

making their contract was to benefit C. See Baikie v Pretoria Municipality 1921 TPD 376
where the main purpose of the transaction was to benefit the seller of the property, not the
third party (the municipality).

6. CESSION

Rights arising from a contract, as well as other personal rights arising from delict and
unjust enrichment, are transferred by cession. Cession is a “transfer agreement”: one
person (the cedent) agrees to transfer rights which he holds to another person (the
cessionary).

A simple illustration: I owe you R100; you cede your right (to receive R100 from me) to
X; consequently I must pay R100 to X (the cessionary), and I must not pay the money to
you. You no longer have the right to demand performance from me, and so you can no
longer sue me for payment of the debt: now only X has that right.

Cession does not create obligations, and therefore is not a contract. But the underlying
reason for a cession is often a contract between the cedent and the cessionary. For
example, it may be that you are making a donation to X; or it may be that you owe X
money and the cession will operate to discharge or at least reduce your indebtedness to X.

It must be noted that only rights are ceded. As a general rule, contractual rights -
including rights arising out of breach of contract - may be ceded without the consent of the
debtor.

The transfer of duties, including contractual duties, is known as delegation. For a

delegation to be valid, the consent of all three parties, especially that of the creditor, is
required. For example, you sue me for R100 that I owe you. It is no defence for me to say
that I have entered into a contract with X in terms of which X agreed to pay you the R100.
It would only be a defence if you had agreed to accept X's undertaking in exchange for my
obligation.

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6.1 What rights can be ceded

In general, personal rights may be freely ceded. A right may be ceded even though it is not
yet enforceable. Generally speaking, contractual rights, including rights arising out of
breach of contract, can be ceded. Even rights which are expected to arise in the future are
capable of cession, so a business person may cede future book debts, and a farmer can cede
his right to payment for future crops.

No new contract is created between the parties - it is simply that the payment (or other
performance) must now be rendered to the cessionary and not the cedent.

An important rule is that, in general, the consent of the debtor is not required for cession.
There are certain exceptions to these rules.

· A right involving a delectus personae (a choice of person) cannot be ceded without

the debtor‟s consent.
These are cases where the contract is so personal in its character that it makes a
substantial and reasonable difference to the debtor (promissor) whether it is to the
cedent or to the cessionary that he should render performance. Examples are
partnerships; contracts for personal services to be rendered (One cannot cede one's
rights to an employee's services without his/her consent. An employee is deemed to
have a substantial interest in the identity of his/her employer. This has been
recognized in s197 of the Labour Relations Act, 1995.); where the personal skill of
the party due to perform is of the essence of the contract; options to purchase on
credit; and to obtain a loan. In the last example the creditworthiness of the cessionary
is a very material consideration. You may be prepared to extend credit to X, but not to
any person to whom X wants to cede his rights.

· By statute, certain rights cannot be ceded (in some cases, not even with the debtor's
consent). For example, the right to a pension (s 2(1) of the Statutory Pensions
Protection Act 1962) or an insolvent‟s right to his/her earnings (s 23(6) of the
Insolvency Act, 1936).

· Where the creditor and his/her debtor have agreed that the creditor will not cede
his/her right, s/he cannot do so without the debtor‟s consent. Such an agreement is
known as a pactum de non cedendo (literally translated, an agreement not to cede).

· A right cannot, without the debtor‟s consent, be ceded in part or be split up and ceded
to a number of different persons. For example, if I owe you R100, you cannot cede,
say, R10 to each of 10 cessionaries without my consent. Such `fragmentation' or
`splitting' of debts would place an unfair burden on the debtor, because s/he would be
faced with a greater number of creditors.
Van der Merwe v Nedcor Bank Bpk 2003 (1) SA 169 (SCA)

6.2 Requirements for a valid cession

As a general rule, no formalities are required to effect a valid cession. All that is required

54
 is a clear and unambiguous intention on the part of the cedent to divest him/herself of
his/her right and to transfer it to the cessionary.

There are some exceptions and quasi-exceptions to the above rule.

· Some statutes require special formalities. For example, a cession of rights to minerals
must be registered in the Deeds Registry.

· Where the proof of the right to be ceded is in the instrument recording it, the question
arises whether delivery of the instrument (document) to the cessionary is necessary to
effect a valid cession. Insurance policies and share certificates are examples of such
documents. The idea is to prevent fraud: if the cedent does not deliver the instrument
s/he could use it again and again to raise money from different people. The position
seems to be this: as between cedent and cessionary, delivery of the instrument
evidencing the right ceded is not necessary; but as between competing cessionaries,
the one who is in possession of the document has first claim on the right. For
example, in order to raise a loan X cedes his shares in a company to A, B and C,
thereby obtaining, say, R20 000 from each of them. Only C insisted on and obtained
delivery of the share certificate. In the event of X's default, C will have first claim on
the shares.

In Botha v Fick 1995 (2) SA 750 (A), the Appellate Division emphasized that cession was
concluded by agreement alone. The duty to deliver documents evidencing the cession was
a separate obligation and was not a requisite of a valid cession. Presumably, the positions
of competing cessionaries remain the same - the AD did not really deal with this point.

6.3 Consequences of cession

Vesting of right in cessionary

The general principle is that the cedent is divested of the right in question and it is vested in
the cessionary. Thus, the debtor is no longer liable to the cedent: only the cessionary can
enforce the rights against the debtor.

Cessionary takes subject to equities

The cessionary `steps into the shoes' of the cedent. This means that the cessionary can
acquire no greater rights than the cedent him/herself had, and the cessionary suffers the
same disadvantages as the cedent had. In the language of English law, the cessionary takes
`subject to equities'. What all this means is that any defence (such as payment already
given, misrepresentation, mistake, duress, set-off) that the debtor could have raised against
the cedent (at the time of the cession), s/he can raise against the cessionary.

Bear in mind that it is only rights that can be ceded. If a party to a contract cedes his/her
rights, this does not affect his/her duties to the other party to the contract. There is no way
that the cessionary incurs or takes over such duties. Contractual obligations can be
transferred only by the process of delegation which requires the consent of all three parties:
see Novation, below.

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7 VARIATION

The parties to a contract may vary the obligations arising from it by subsequent agreements.
No formalities are required, except where a statute requires the contract to be writing in
order to be valid, then, obviously the variation of the contract must also be in writing to be
valid. Also, if the parties have themselves agreed, in the original contract, that no variation
to their agreement will be of any force or effect unless it is in writing, then the variation, to
be valid, must be in writing.

8 TERMINATION

8.1 Release or Waiver

Just as consensus makes a contract, so consensus, either express or implied, can terminate
it. Thus the parties may simply agree to abandon their contract. By consent, this could be
free of any charge, but if one party wishes to terminate the contract and the other doesn't,
the former may have to pay the latter to obtain his/her consent to release. This is what is
known as „buying oneself out of a contract.‟

Generally no formalities are necessary: all that is necessary is an unequivocal abandonment

by the parties of their rights under the contract. Release can be in whole or in part.

Waiver is not lightly presumed: it must be shown that the promissee (the creditor), with full
knowledge of his/her rights, unequivocally abandoned them.

8.2 Novation

This is an express or implied agreement whereby a new obligation is substituted for the old
one, the old obligation being extinguished. The original obligation must be valid. If it is
non-existent, the novation is of no force and effect.

It must be clear that the parties had animus novandi (the intention to replace the old
obligation with a new one). It has been held that this animus will not lightly be presumed.
For example, if the parties modify their contract by providing for a different place of
performance, or adding interest-liability, or providing for a substitution of performance,
there is no novation. Unless a contrary intention appears, the parties will be taken to have
intended only to modify, augment or diminish an obligation and not to extinguish the old
obligation and substitute a new one.

8.3 Delegation

In the case of delegation, the debtor is released from his/her debt and a third party
undertakes an identical obligation. So, delegation usually means the substitution of one
debtor for another; delegation is the means whereby an obligation is transferred by one
party to another. Delegation does not affect the debtors righst against the creditor. The
debtors entitlements under the contract remains the same and he may recover any

56
 performance promised to him by the creditor. But, the creditor must look to the third party
for what the debtor was supposed to perform (eg the creditor must still deliver the goods to
the debtor but he must go to the third party for payment) It therefore stands to reason that
delegation can be done only with the consent of the creditor ie this is an agreement that
involves three parties. Here, too, the courts are loathe to assume delegation.

For example, X owes you money, Y offers to pay X's debt, you accept. It would require
very clear evidence to persuade the court that, by accepting Y's offer, you released X, that
is, that if Y failed to pay you, you would no longer have any claim against X.

8.4 Compromise

Where parties are in dispute as to whether they have a contract, or as to the nature or extent
of their obligations under their contract, they may agree to settle the matter by way of
compromise. Compromise is concluded by offer and acceptance.

It may be difficult to distinguish compromise from novation. Bear in mind that compromise
differs from novation in that it is not a requirement for a compromise that a valid prior
obligation exists between the parties. Often a compromise is entered into to settle a dispute
as to whether a contact, or obligation, exists or not. An agreement of compromise has the
effect of res judicata and it precludes an action on the original contract except where the
parties expressly, or by necessary implication, provide that the original contract can be sued
upon. This may occur, for example, if one party breaches the compromise.

What if a debtor feels that the creditor is overcharging him, or s/he doesn‟t believe that s/he
owes any money at all, for example, where an attorney sends his client a bill for R5 000 and
the client says that is too much and offers to pay R1 000? How should the attorney react to
such a tender? Where the debtor tenders less than what is claimed by the creditor, and says
that he is paying `in full settlement' the question arises whether the creditor may keep the
payment and still sue for the balance, or whether keeping the payment means an acceptance
of the payment of the lesser amount as performance of the obligation. In such
circumstances, has a compromise been reached?

The basic principle must be borne in mind that, once a contract has been concluded, a party
cannot unilaterally alter or vary the terms of that contract. Thus, if a debtor attempts to
annex a condition to a payment, the creditor is entitled to disregard the condition and retain
the money. For example, where the client, after receiving the bill for R5 000, simply sends
the attorney a cheque for R1 000 and says in an attached note, “This is in full settlement of
my debt”, the attorney is entitled to deposit the cheque and still sue for the balance. If,
however, the parties have been discussing the account rendered by the attorney and it is
clear that there is a dispute, the debtor may be making an offer of compromise. That is, the
debtor may be offering to pay so that the matter can be cleared up quickly without the
parties having to resort to expensive litigation. The position here is that, if the creditor
banks the cheque, s/he is deemed to have accepted the offer of compromise and has thus
terminated the original contract. In any event, s/he is precluded from suing for any balance
which s/he may consider to be due.

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 Andy's Electrical v Laurie Sykes 1979 (3) SA 341 (N)
Notice Didcott J's remarks about the many decided cases: `fine distinctions',
`artificial', `loose terminology', `too simplistic' so it is not always easy to decide
whether this is an offer of compromise or a unilateral attempt to vary the terms of the
contract.

Paterson Exhibitions CC v Knights Advertising and Marketing CC 1991 (3) SA

523 (A)
ABSA Bank Ltd v Van der Vyver NO 2002 (4) SA 397 (SCA)

9. PERFORMANCE

Most contracts are terminated by the performance of the reciprocal obligations which arose
out of those contracts. For example, a contract of sale is discharged when the seller
delivers the res vendita and the purchaser pays the price. When all the obligations under
the contract are fully performed by all parties, the contract is at an end.

Performance must take the form specified in the contract unless it is clear from the terms of
the contract or the surrounding circumstances that the parties contemplated performance of
an equivalent kind. So, whether what each party has performed constitutes discharge of the
obligation, depends primarily on what the parties intended performance to consist of.

For a more full discussion of performance, see other appropriate texts. In these notes, only
the following topics will be included under this general heading:
* Time and place of performance/payment.
* Appropriation of payments.
* Tender of payment.
* Conditional tenders and conditional payments.

9.1 Time and place of performance/payment

Payment must be made at the time and place expressly or impliedly agreed upon. If no
place of payment is agreed upon, and no time for payment has been fixed, the general rule
which applies is that the creditor must seek out his/her debtor. If no place of payment has
been fixed, but a time for payment has been fixed, then the debtor must seek out the
creditor and pay him at any convenient place of his choosing. That is, it is for the debtor to
ensure that the debt is discharged timeously.

9.2 Appropriation of payments

Where the debtor owes more than one debt to the creditor and makes a payment which is
insufficient to discharge all the debts, the debtor must indicate expressly, or it should be
very clear from the circumstances, to which debt (or debts) his/her payment is to be

58
 applied.

If the debtor gives no such indication, and the circumstances do not suggest how payment
should be appropriated, the creditor is entitled to choose the debt to which to apply the
payment provided the creditor informs the debtor of his/her intentions at the time that the
debtor makes the payment and gives the debtor an opportunity to stipulate otherwise.

If the creditor does not do this, then the creditor is obliged to apply the payment to the most
onerous debt, or, if they are equally onerous, to the oldest of them, or, if they are equally
old, then to all the debts proportionately.

There is an exception to the above rule in that the payment does not have to be applied to
the most onerous debt where the debts are capital and interest thereon. In such a case, the
creditor must first credit the account relating to interest before that of the principal sum.

9.3 Tender of payment

The word „tender‟ is ambiguous in that it can be, and often is, used in different senses. In
the narrow sense, tender merely means an offer. Sometimes it is used to mean an offer of
performance, for example, „money tendered in performance‟. The word is also used in the
sense of an offer of compromise. (As we have seen, a compromise is a method of
terminating a contract.) Using tender in the sense of an offer to perform a contract fully, we
note that such a tender must be strictly performed in accordance with the terms of the
contract and it must be unconditional. If a proper and sufficient tender is made the creditor
must accept it. If the creditor refuses to accept, this conduct may amount to a repudiation
of the contract: at the very least he will fall into mora creditoris - to be discussed later.

9.4 Conditional tenders and conditional payments

See notes in relation to offer of compromise, above.

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V NON-PERFORMANCE OF THE CONTRACT

1. EXCUSES FOR NON-PERFORMANCE

1.1 SET-OFF

A party is excused from performing if the other party owes him/her a debt which can be set
off against the first party‟s debt. In other words, this is a mode of discharging a debt,
wholly or in part, where the two parties become mutually indebted to one another.

For example, let us say that X owes Y R1 000 for monies lent and advanced to him;
subsequently X sells Y goods on credit for R1 000. The two amounts can be set off and the
debts are discharged. If one debt is greater than the other, set-off operates to effect a partial
discharge of the greater debt and a total discharge of the smaller.

There are certain requirements to be met for set-off to operate:

(i) The mutual debts must be owed by the parties to each other in identical capacities.
For example, an executor of an estate cannot set off an estate debt against one he owes
in his personal capacity.
(ii) The debts must be of the same kind, for example, a money debt cannot be set off
against a claim for delivery of property.
(iii) The debts must be presently due and enforceable. A debt subject to a suspensive
condition cannot be set off against a debt presently owing.
(iv) The mutual debts must be liquidated, that is, the amounts must be fixed or readily
ascertainable by simple arithmetical calculation. Claims for damages, whether arising
out of contract or not, are, by their very nature, unliquidated. They only become
liquidated when the court has given judgment on them (or if the parties agree to settle
for a definite amount). Obviously all judgment debts are liquidated.

Thus an unliquidated claim for damages cannot be set off against a claim, for example, for
the purchase price of goods sold and delivered.

1.2 SUPERVENING IMPOSSIBILITY OF PERFORMANCE

Initial impossibility of performance was dealt with earlier in this module. We saw that
initial impossibility of performance is really a matter of common mistake, and that the
effect was to render the contract void from the very beginning. In other words, a contract
never came into existence.

Here, we deal with the situation where the contract was initially capable of performance,
but where it subsequently became physically or legally impossible for the debtor to render
performance. In these circumstances, the debtor is excused from having to perform.

„Physical impossibility‟ is tested according to the reasonable business person in the

community. Also, the impossibility must be „absolute‟, as opposed to merely „relative‟ or
personal to the debtor. One instance where physical impossibility becomes relevant is

60
 where the subject matter of the contract has been destroyed by vis major (`act of God') or
casus fortuitus (some inevitable event which is not foreseen or which, in any case, could
not have been guarded against). There is no material difference between these expressions.
Examples are earthquake, war, flood. So if, for example, leased premises were destroyed
by flood, the lessor is excused from performing under the contract. (Note that, in contracts
of sale, this rule is subject to the rule regarding „passing of risk‟ .)

„Legal impossibility‟ is where, for example, the law has changed thereby making it illegal
to be involved in such a contract, or illegal to perform. For example, a law is passed which
prohibits the manufacture/importation of goods that you have contracted to sell to me. You
will be excused from having to deliver the goods to me. Another example is where land
which you have contracted to let to me is expropriated by the government. You will be
excused from performing under our contract.

Peters Flamman & Co v Kokstad Municipality 1919 AD 427

Gordon v Pietermaritzburg-Msunduzi Transitional Local Council and Another 2001 (4)
SA 972 (N)

Generally, death or incapacity does not operate to discharge a contract, but this will be the
effect in some contracts for personal services. For example, a person employed to sing,
loses his voice; a professional tennis player breaks his leg in an accident.

Partial impossibility of performance does not automatically excuse a party from

performing. For example, if a portion of the land which X has agreed to sell to Y is
expropriated, then X is not excused from performing. Y may be entitled to terminate the
contract, but if Y elects to accept partial performance, the debtor must perform.

If the debtor is excused from performing because of supervening impossibility of

performance, the creditor is also discharged from liability to perform any reciprocal
obligation. The parties must restore whatever they have received under the contract.

The general rule is that supervening impossibility operates to discharge the contract ab
initio, that is, retrospectively. Clearly, there are exceptions to this general rule. Suppose
there is a 5-year lease. Two years after commencement, the premises are destroyed by
flood. This may perhaps be a case of `partial impossibility' but, in any event, a
retrospective restitution is out of the question. The lease will be discharged from the time
of impossibility. It is submitted that the effect of supervening impossibility depends on the
nature of the contract and the circumstances of the impossibility.

Note:
that there is no question of impossibility if the contract merely turns out to be more difficult
or more expensive to perform than a party contemplated at the time. He is bound.
Furthermore the plea of supervening impossibility will fail if the impossibility is only
relative or subjective.
Hersman v Shapiro 1926 TPD 367

A plea of supervening impossibility will also fail if the impossibility is self-created, or if it

61
 was the fault of the defendant:
See Benjamin v Myers 1946 CPD 655

A similar situation may arise where the defendant is in mora, that is, late in performing.
For example, X is obliged to deliver certain goods to Y on or before 30 June. On 2 July,
the goods are still lying in X's warehouse and on that day the goods are destroyed when the
warehouse is burnt down. In such a case, X cannot rely on supervening impossibility, for if
he had delivered the goods timeously, they would not have been destroyed.

1.3 PRESCRIPTION

A debt becomes `prescribed' if it is not enforced within a certain time. The matter is
governed by sections 10 to 23 of the Prescription Act 68 of l969. Essentially, the idea
behind `extinctive prescription' is that, if a creditor cannot be bothered to enforce a debt, he
will lose his right after the lapse of a certain time. The debt is `extinguished' after the lapse
of the prescribed time. There are various time periods laid down for various types of
debts. For example, a judgment debt, or a debt secured by a mortgage, or a debt in respect
of taxation imposed by law, prescribes after 30 years; a debt owed to the State and arising
out of an advance or loan of money or sale or lease of land by the State prescribes after 15
years; debts arising out of negotiable instruments and notarial contracts prescribe after 6
years. Generally, the period of prescription is 3 years, except where it is otherwise
provided for by another statute. „Debt‟ is not defined in the Act and its meaning is not
altogether clear.

Note:
Some statutes make specific provision for the expiry of claims. In these cases the
Prescription Act does not apply. The Act contains complex provisions regarding, inter alia,
commencement of prescription, delay and interruption of prescription. These provisions
will not be the subject of any examination question.

1.4 FAILURE OF CREDITOR TO PERFORM RECIPROCAL OBLIGATION

Where both parties to a contract undertake to perform something, then the principle of
reciprocity, or dependence of promises, usually applies. One party will not be obliged to
perform until the other has performed, or tendered performance of, his/her reciprocal
obligation. So, non-performance will not always constitute breach of contract. It may be
that, in the circumstances, the non-performance is justified in that the other party has not
performed his/her side of the contract.

In most cases, a party will not have a case for breach of contract unless he has performed
his/her own obligation/s. (There are, of course, contracts where one party‟s performance is
expected to precede the other's. For example, A sells goods to B. It is agreed that payment
will be made once the goods have been delivered. If B sues for delivery, he must tender
payment.)

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If a claim for performance (or damages in lieu of performance) of a contract is brought by a
party who has not himself/herself performed under the contract, the defence which the other
party (the defendant) may raise is the exceptio non adimpleti contractus. In effect, the
defence amounts to the following: the defendant is arguing that the plaintiff cannot claim
performance, or any other compensation for breach of the contract, because the plaintiff
himself/herself has not performed.
That is, the defendant is saying that the principle of reciprocity should be applied.

Motor Racing Enterprises (Pty) Ltd (in Liquidation) v NPS (Electronics) Ltd 1996 (4) SA
950 (A)

It is a question of interpretation whether the parties‟ obligations are so closely linked that
the principle of reciprocity applies. See
Dawnford Investments CC and Another v Schuurman 1994 (2) SA 412 (N)
Grand Mines (Pty) Ltd v Giddey NO 1999 (1) SA 960 (SCA)

However, it has long been recognised that, when the principle of reciprocity does apply, to
allow the exceptio to operate as a complete defence in all cases, could result in severe
inequity. This is particularly the case where there has been what is called „substantial
performance‟ by the plaintiff. Take, for example, a building contract in which the builder
has undertaken to construct a 20-storey building. He completes 19 floors and then walks
away from the job. Is it not unfair if the owner could take the benefit of the uncompleted
building without having to pay anything for it? So, the courts have held that, in such cases,
the exceptio non adimpleti contractus is not a complete defence for the defendant, but that
the defendant should be liable to the extent that he benefitted from the defective
performance.

There was much controversy as to the basis upon which one could hold the defendant liable
for the extent to which he had benefitted. Critics argued that the claim of a party who has
performed only partially cannot be a contractual claim, but that it should be regarded as a
claim based upon unjustified enrichment, or quantum meruit. A claim for unjustified
enrichment could, strictly speaking, not be brought unless the contract had already been
cancelled by the defendant. The issue was resolved, to some extent, in

B K Tooling (Edms) Bpk v Scope Precision Engineering (Edms) Bpk 1979 (1) SA 391
(A)

In this case, the Appellate Division said, in effect, that such a claim was a contractual claim
for a „reduced contract price'. The court held that if a party who has not completed his side
of the contract wishes to claim a reduced contract price he must prove 3 things:
(i) that the other party is utilising the incomplete performance;
(ii) that the circumstances are such that it would be equitable for the court to exercise its
discretion in his favour; and
(iii) what the reduced contract price should be.

The Appellate Division approved the method of calculation used in Hauman v Nortje
1914 AD 293, that is, that the contractor must show what it will cost to remedy his

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 defective performance. This amount, deducted from the contract price, will yield the
„reduced contract price‟.

BUT, the formula formulated in BK Tooling has been found to be inadequate in that it is
restrictive and somewhat inflexible.
Thompson v Scholtz 1999 (1) SA 232 (SCA)

It must also be borne in mind that the creditor may also have incurred damages as a result
of the breach by the debtor. For example, what if the property owner had lost anticipated
rentals as a result of the delay in completion of an office block? The owner may be entitled
to bring a counterclaim for these damages which could eventually (that is, on judgment) be
set off against the reduced contract price. In certain circumstances, such a counterclaim
may exceed the reduced contract price where, say, only a small part of the building contract
had been completed.

2. BREACH OF CONTRACT

First we will consider various types of conduct which may amount to breach of contract,
that is, we will consider various forms of breach. Thereafter, we will consider the remedies
available for each form of breach.

2.1 FORMS OF BREACH

There are various ways in which a debtor may breach his/her obligation. For instance, a
debtor will be in breach of his/her obligation where s/he
9. fails to perform timeously (ie where the debtor is in mora);
10. renders incomplete or defective performance (ie positive malperformance);
11. repudiates the obligation (ie where the debtor makes it clear by words or conduct that
s/he does not intend to perform in terms of the obligation.

2.1.1 Failure to perform (mora)

Mora debitoris
This means, literally, „delay on the part of the debtor‟.

The rule is that where a debtor fails to perform timeously, without legal excuse, s/he is said
to be in mora. Mora has also been explained as the culpable failure by a debtor to perform
timeously in a case where performance still remains possible in spite of such failure. So, an
important aspect of mora is the existence of fault on the part of the debtor; the onus of
proving absence of fault is on the debtor.

What is meant by „timeously‟? In other words, at what stage can we say that a debtor is
late in perfoming and is therefore in mora? We need to distinguish between two situations:
first, where a date for performance has been fixed in the contract, and, secondly, where no
date for performance has been fixed in the contract.

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Where a date for performance has been fixed in the contract, if the debtor fails to perform
on or before such date, s/he falls into mora. On the other hand, where no time for
performance is agreed upon, either expressly or tacitly, the debtor does not automatically
fall into mora if s/he fails to perform immediately or within a reasonable time. The creditor
must first demand performance within a specified time, which must be reasonable in the
circumstances, and, if the debtor has still not performed within such specified time, only
then will the debtor be regarded as being in mora.

The demand for performance is called an interpellatio. The demand for performance may
be written or oral and it may be made at any time after, or even contemporaneously with,
the formation of the contract. Sometimes a creditor will include the demand in a summons
commencing legal action. This is permissible, but the demand must be unambiguous and
must specify a definite time within which the debtor must render performance.
Kragga Kamma Estates CC and Another v Flanagan 1995 (2) SA 367 (A)

As stated above, the interpellatio must give the debtor a reasonable time within which to
perform. What is reasonable depends on the nature of the performance and any difficulties
or obstacles which were, or which ought reasonably to have been, in the minds of the
parties at the time when the contract was concluded. For example, in Nel v Cloete 1972 (2)
SA 150 (A), the purchaser of immovable property demanded transfer of ownership of the
property within two months. The seller failed to transfer the property to the purchaser
within two months because the title deed of the property was lost and he failed to obtain a
certified copy of it in time. The court held that the delay caused by the lost title deed
should not be taken into account in deciding whether a reasonable time for performance
had been allowed. In the circumstances, the court held that the time given was reasonable:
neither party had known that the title deed was lost, and neither party could have foreseen
that a delay of this kind would occur.

The creditor is well advised to exercise some latitude (generosity?) when stipulating the
time period within which performance must be rendered: don't ruin a perfectly good case by
allowing too short a period. If the creditor fails first to place the debtor in mora, and, for
example, just goes ahead and employs someone else to do the work for him/her, the
creditor might find himself/herself in breach of contract, and may possibly have to pay two
people for the same job!

However, see Federal Tobacco Works v Barron & Co 1904 TS 483.

Students must be able to explain why the court allowed Federal Tobacco to repudiate the
contract notwithstanding the fact that no date for performance had ever been fixed AND
Barron &Co had never been put in mora.

Several writers, for example, De Wet and Yeats, and De Vos, submit that the case was
wrongly decided. They say the suppliers (Barron & Co) should first have been placed in
mora. Various attempts have been made to reconcile different cases on this point.
Commercial dealings are enormously complex and we should accept that some transactions
simply cannot be fitted neatly into the rules. McLennan suggests the following line of
reasoning: If X's performance is so delayed that he leads Y (the other party) reasonably to

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 believe that he (X) has abandoned the contract, then Y is entitled to take the point that X
cannot later enforce the contract. The following rules would therefore apply: If X's
performance is so delayed that it leads the other party (Y) reasonably to believe that X has
no intention to perform, Y is entitled to refuse to accept later performance and the contract
simply lapses.

Read JS McLennan “Mora debitoris and abandonment of contract - Federal Tobaccos

revisited” (2000) 117 SALJ 69

Note:
There are two problems which a creditor will face if he does NOT use the procedure to first
place the debtor in mora:
 The creditor cannot himself/herself bring any action for breach of contract.
 The creditor also runs the risk that the court will hold that the delay in performance
was not such as would entitle him/her reasonably to believe that the debtor had
abandoned his obligation. In such case the creditor will either have to go through with
the contract or himself/herself be liable for breach of contract.

Mora creditoris
This is where the creditor fails to accept performance tendered by the debtor. For example,
where a lessor refuses to accept payment of rental which is tendered by the lessee in terms
of a lease agreement.

2.1.2 Incomplete or defective performance

This is also called „positive malperformance‟.

The debtor may perform timeously, but s/he may not perform as required by the contract.
For example, where a builder, in constructing the house which s/he has undertaken to build,
has used inferior materials or has departed from the agreed specifications.

2.1.3 Repudiation

Repudiation occurs where the debtor makes it clear, before or after the due date of
performance, by words or actions, that s/he does not intend to perform, or perform properly,
in terms of the contract.
For example, X agrees to sell his car to Y for R50 000. When Y tenders payment of the
purchase price and wishes to take delivery of the car, X informs him that he has decided to
sell the car to Z instead. Another example is where the debtor makes it impossible for
himself or the other party to perform the contract. For instance, A sells a thing to B, and,
instead of delivering it to B, A sells and transfers it to C.

The test whether a party has repudiated an obligation is whether the debtor acts in such a
way as to lead a reasonable person to the conclusion that the debtor does not intend to fulfil

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 the obligation, or does not intend to be bound by it. If the renunciation relates only to some
minor aspect of the contract, which is not material, or does not go „to the root‟ of it, then
this does not amount to repudiation. What is significant is that, if it does not amount to
repudiation, then the creditor is not entitled to cancel the contract and, if the creditor
purports to cancel and does not proceed with the contract, the conduct of the creditor
himself/herself may amount to breach in the form of repudiation!
Culverwell and Another v Brown 1990 (1) SA 7 (A)
Highveld 7 Properties (Pty) Ltd and Others v Bailes 1999 (4) SA 1307 (SCA)
Datacolor International (Pty) Ltd v Intamarket (Pty) Ltd 2001 (2) SA 284 (SCA)

Repudiation by a party at a time before performance is due is sometimes referred to as

anticipatory breach of contract. For example, I am bound to deliver goods to you in 6
months' time. Today I repudiate my obligation by informing you that I will not deliver the
goods either in 6 months' time, or at all. There is really no difference in principle between
this situation and the situation where repudiation takes place at the time when performance
is due. The creditor has the right to decide whether to enforce the contract or to cancel.
(See notes on cancellation as a remedy for breach of contract, below.) This principle may,
however, pose difficulties.

See White & Carter (Councils) v McGregor (1962) AC 413 (HL)

McGregor entered into a contract with W&C in terms of which W&C would, for the next
three years, advertise M‟s business by placing signs on rubbish bins. M repudiated the
contract before W&C had done anything under it, but W&C refused to accept the
repudiation. W&C went ahead and advertised the business for 3 years and then demanded
payment. The House of Lords held that W&C were entitled to payment under the contract.

The problem revealed by this case was that the creditor‟s election to enforce the contract
resulted in 3 years' useless performance and waste.

Unibank Savings and Loans Ltd (formerly Community Bank) v ABSA Bank Ltd 2000 (4)
SA 191 (W)

Consider the following problem. T enters into a contract to hire L's house for a year, the
lease to commence in 6 months' time. Shortly thereafter, T tells L that he no longer wishes
to hire the house. Is L entitled to enforce the lease (and claim all rentals due) in a situation
where T never occupies the house and, owing to a serious shortage of accommodation, L
could easily have found another tenant?

Later in this module we will study the various remedies for breach of contract, and the rule
that the innocent party must mitigate his/her loss. We will revisit this problem once we
have covered all relevant aspects.

2.2 REMEDIES FOR BREACH

When one of the parties breaches the contract, the innocent party has a choice of
remedies. The innocent party may claim

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 EITHER

specific performance, or damages in lieu of performance. In addition, the innocent party

may claim damages for further losses resulting from the breach.

OR,

if the contract contains a cancellation clause (see above), otherwise known as a forfeiture
clause or lex commissoria, or if the breach is serious enough to entitle the innocent party
to cancel the contract, then the innocent party may, instead of claiming performance of
the obligation, cancel the contract and claim damages.

In other words, the innocent party may either ignore the breach and hold the other party to
the contract, or, if circumstances permit, the innocent party may „accept the breach‟ and
terminate the contract. Note that, in this context, the term „accept the breach‟ does not
mean that the innocent party condones the breach, or that s/he excuses the debtor in any
way. It merely means that the innocent party has decided that the contract should come to
an end, so that his/her own obligation will also cease to exist.

For example, A agrees to sell his car to B for R30 000. Now A tells B that he has
changed his mind and no longer wishes to sell the car. B is entitled to claim an order of
specific perfomance, that is, a court order compelling A to perform the obligation and to
deliver the car to B.

On the other hand, B may accept the fact that A does not intend to deliver the car to him,
and B may take the view that he will then not have to pay the purchase price. However,
the obligation does not automatically come to an end just because B responds in this way.
B must first cancel the contract. In addition, B may claim any damages which he has
sustained. For example, what if B now has to pay R35 000 to obtain an equivalent car?
B will be entitled to claim R5 000 in damages for loss which he suffered as a result of
A‟s breach.

2.2.1 Specific performance

This is an order compelling the party who is in breach to perform what s/he has
undertaken to do. In other words, this is the remedy which the innocent party uses where
s/he elects to enforce the contract.

Since the Appellate Division's decision in Benson v SA Mutual Life Assurance Society
1986 (1) SA 776 (A), an order of specific performance has been regarded as the ordinary
remedy for breach of contract. The general rule is that a creditor is entitled to an order of
specific performance. It is not for the defaulting party to elect whether to pay damages
instead of specifically performing the obligation. Nevertheless, the Appellate Division
has stressed that the court always has a discretion to refuse an order of specific
performance and to award the plaintiff damages in lieu of specific performance.

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In the following circumstances the court will usually exercise its discretion to refuse an
order of specific performance.

 Where it would be impossible for the debtor to comply with the order.
(In this context, the impossibility may be a subjective impossibility, as opposed to the
kind of absolute impossibility of performance which excuses a party from performing at
all and which discharges liability under a contract. Refer to notes on supervening
impossibility of performance, above.)

 Where the order would be inequitable to the debtor or to third parties.

In Haynes v Kingwilliamstown Municipality 1951(2) SA 371 (A), an order of specific
performance would have caused serious hardship to many people. Explain why the court
refused to grant specific performance in this case.

It is submitted that, if the basis of the discretion is equity, it ought to be exercised against
a party who elects to enforce a contract where this causes needless economic waste. (See
the discussion of White and Carter (Councils) v Mac Gregor, above.)

 Where performance is of a highly personal character involving a continuous

confidential relationship, for example, where performance requires a spirit of
amicable co-operation.
The general rule is that the courts do not order specific performance of employment
contracts, that is, they do not usually order the reinstatement of an employee who has
been unlawfully dismissed or compel an employee who has deserted to return to his/her
employer. In such cases, an award of damages is generally the appropriate remedy.

Schierhout v Minister of Justice 1926 AD 99

National Union of Textile Workers v Stag Packings 1982 (4) SA 151 (T).
Troskie en `n Ander v Van der Walt 1994 (3) SA 545 (O)
Santos Professional Football Club (Pty) Ltd v Igesund and Another 2002 (5) SA 697
(C) and see on appeal Full Bench decision 2003 (5) SA 73 (CPD)

Read: T Naude “Specific Performance against an employee - Santos Professional

Football Club (Pty) Ltd v Igesund” (2003) 120 SALJ 269

R Le Roux “How divine is my contract - reflecting on the enforceability on player

or athlete contracts in sport” (2003) 15 SAMercLJ 116

(Thus, there is no hard-and-fast rule; the order is discretionary in all cases.)

 Where the court cannot supervise the carrying out of its decree of specific
performance.
This rule is rather vague and may be dubious. The example usually given is an order to
carry out repairs to a leased property. The idea is that it might be difficult to determine
whether the order has in fact been complied with. If, for instance, it might involve a full
trial to resolve a dispute whether the order had in fact been complied with, it might be
better to refuse specific performance and award damages instead.

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Where the court refuses to order specific performance, the innocent party may recover
damages in lieu of performance. It is said that the innocent party should recover the
„benefit of his bargain‟. Such damages are sometimes referred to as „substitutionary'
damages, or damages awarded as a „surrogate‟ for the defendant's non-performance.

However, an order of specific performance, or an award of damages in lieu of

performance, may not be enough to make up for the breach. The innocent party may have
suffered additional losses as a result of the breach. In these circumstances, the innocent
party is entitled to claim damages for additional losses suffered. See notes on damages,
below.

2.2.2 Cancellation (rescission)

No matter how serious a breach of an obligation may be, it does not automatically
terminate a contract. It is only when the innocent party cancels the contract on account of
the breach, that the contract will come to an end.

An innocent party may cancel the contract, on account of breach by the other party, where
their contract contains a cancellation clause (forfeiture clause or lex commissoria)
permitting cancellation for such breach, or where the breach is sufficiently serious to
entitle the innocent party to cancel. Whether the breach is serious enough to entitle the
innocent party to cancel, depends on a number of factors. Different criteria are applied,
depending on the nature of the breach.

Where the debtor has failed to perform timeously, that is, where the debtor is in mora,
then the innocent party is entitled to cancel the contract if „time is of the essence of the
contract‟. See appropriate texts for examples of contracts where time is considered to be
„of the essence‟. It is possible for the innocent party to make time of the essence of a
contract by serving on the defaulting party notice that, if s/he does not perform within a
specified period (which must be reasonable in the circumstances), then the innocent party
will have the right to cancel the contract. This notice, reserving the right to cancel, is
known as a „notice of rescission‟. Thereafter, if the debtor has still not performed within
the specified period, the innocent party must inform the defaulting party that s/he has
cancelled the contract.

Compare a „notice of rescission‟ with an „interpellatio‟ described above.Ensure that you

can distinguish between them. It is permissible for the innocent party to combine, in one
document, an interpellatio with a notice of rescission. (This was confirmed by the
Appellate Division in Nel v Cloete 1972 (2) SA 150 (A)). For example, the creditor
issues the debtor with the following notice: „I demand that you deliver the goods not later
than 30 September and, should you fail to do so, I reserve my right to cancel the contract
forthwith‟. The first part of the sentence is the interpellatio; the words following „and‟
make up the notice of rescission.

In order to avoid having to go through this procedure to cancel a contract when the debtor
falls in mora, the creditor may, at the outset, include an express cancellation clause (lex
commissoria) in their contract. The clause could, for example, read as follows: „Failure

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to deliver by 30 June 2000 will have the effect of immediate cancellation of this
contract.‟ If the debtor fails to perform by due date, he is automatically in mora and the
contract is cancelled. However, if the clause reads: „The seller reserves his right
immediately to cancel the contract if the debtor fails to deliver by 30 June 2000‟, then the
creditor must first inform the debtor who has failed to perform timeously that the contract
is cancelled.

Where the breach is in the form of incomplete or defective performance, the innocent
party may cancel the contract only if the breach is a material one, if the breach affects a
vital part of the contract, or if the debtor has substantially failed to perform. The court
enquires whether the breach is such that the sufferer cannot reasonably be expected to
abide by the contract and content himself with a claim for damages.

Where the debtor has repudiated the entire contract, the innocent party may cancel the
contract. Remember that repudiation will entitle the innocent party to cancel the contract
only if it is repudiation of a material aspect of the obligation, that is, the repudiation goes
to the root of the obligation. (Refer above.)

2.2.3 Damages

An award of damages is an order to pay a sum of money for loss suffered. The basic rule
for determining damages for breach of contract is that the innocent party should be placed
in the economic position s/he would have occupied had the contract been properly
performed. This is referred to as an award of damages for „positive interesse‟. The
damages are referred to as „compensatory‟ damages.

The innocent party may claim gains or profits which s/he has not made as a result of the
defaulting party not having performed the obligation (lucrum cessans), as well as losses
which s/he has suffered as a result of the defaulting party not having performed the
obligation (damnum emergens). Damages may be recovered whether the innocent party
cancels the contract or not.

Remember that, for breach of contract, damages are awarded so as to place the innocent
party in the economic position s/he would have occupied had the contract been properly
performed. Therefore, damages cannot be awarded for emotional factors such as pain,
suffering, humiliation or annoyance, but only for pecuniary loss.

Jockie v Meyer 1945 AD 354

Administrator, Natal v Edouard 1990 (3) SA 581 (A)

To successfully claim damages for breach of contract, the innocent party must show that
the losses for which s/he claims were caused by the breach, and were reasonably
foreseeable. The basic rule is that damages may be awarded for losses which arise
naturally from the breach („general damages‟) and for losses which may reasonably be
supposed to have been within the contemplation of the parties as likely to arise from the
breach („special damages‟). General damages, therefore, are awarded for losses which
arise in the ordinary course of events when a contract is breached; special damages are

71
awarded for losses which arise out of some special circumstance which exists and which
may reasonably be supposed to have been within the parties‟ contemplation.
Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 1 All ER 997 (CA)

The general principles are set out in

Victoria Falls & Transvaal Power Co Ltd v Consolidated Langlaagte Mines Ltd 1915
AD 1
Study the commentary to the above case at Kahn 802.

South African law, in this area, is very similar to the applicable English law. The basic
rules were formulated in the famous English case of
Hadley v Baxendale (1854) 9 Exch 341.
The defendant was a common carrier; the plaintiffs were millers. The mill's crankshaft
had broken and the parties contracted for the defendant to take the crankshaft to the
manufacturers, in order for a new one to be made. In breach of their contract, the
defendant delayed in delivering the crankshaft to the manufacturers. The plaintiffs sued
him for loss of profits occasioned by the delay. The court held that the defendant was not
liable, as he knew only that he was asked to carry the broken crankshaft of a mill and that
the plaintiffs were owners of the mill. He did not know that the mill would stand idle.
The court said that damages should be such as may fairly and reasonably be considered
either (1) arising naturally, that is, according to the usual course of things, from the
breach itself, or (2) as may reasonably be supposed to be within the contemplation of the
parties, at the time the contract was entered into, as the probable result of the breach.

See also AA Alloy Foundry (Pty) Ltd v Titaco Projects (Pty) Ltd 2000 (1) SA 639 (SCA)

Mitigation of loss
There is another very important principle in our law which limits the innocent party‟s
claim for damages. This rule is that there is a duty upon the plaintiff to take reasonable
steps to mitigate (minimise) his/her loss. In other words, the plaintiff cannot recover
damages for loss which s/he could reasonably have avoided. This rule, which also
applies in the law of Delict, is based on policy grounds: to avoid unnecessary economic
waste. The plaintiff must not simply `sit back' and allow damages to accumulate when,
with the exercise of reasonable prudence, this could have been avoided.

Note that reasonable steps must be taken to avoid the loss: the courts do not expect
plaintiffs to go to extraordinary lengths. Indeed, the courts are reluctant to hold that a
plaintiff has failed to mitigate loss unless there is clear proof of wilful default on his/her
part. In Soar h/a Rebuilds for Africa v J C Motors (Pty) Ltd 1992 (4) 1 SA 27 (A), it
was held that the aggrieved party could not reasonably be expected to institute an
uncertain and risky enrichment action against a third party in an attempt to mitigate loss.

The onus is on the defendant, the defaulter, to prove that the innocent party has failed to
mitigate his/her loss as required by this principle.

Although, basically, the rule in South African law is that an award of damages for breach
of contract should be such as to place the innocent party in the economic position s/he

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would have occupied had the contract been properly performed, that is, damages are
awarded for „positive interest‟, there is some authority in our case law for an award of
damages for „negative interest‟. Such an award of damages would aim to place the
innocent party in the economic position s/he would have occupied had the contract not
been concluded. Such damages are also known as „restitutionary‟ damages.

Awards of damages for negative interest are commonly made in foreign jurisdictions.
Claims for damages for negative interest often include claims for wasted expenses. A
good illustration is the English case of Anglia Television Ltd v Reed [1971] All ER 690
(CA). Anglia Television entered into a contract with Mr Reed, an American actor, to
make a TV film. Very soon before filming was due to start, Reed repudiated the contract.
Anglia Television could not find a suitable replacement, so it decided to abandon the
project and it cancelled the contract. It could not claim loss of profit, since it is
impossible to tell whether an unmade film would have been a commercial success or
failure. What it claimed instead was the money it had spent in preparation, hiring of other
actors, engaging a script-writer, and money spent looking for suitable locations. The
Court of Appeal held that it was entitled to these damages. Lord Denning said, at 692:
`...a plaintiff in such a case as this has an election: he can either claim for loss of profits, or for his
wasted expenditure. But he must elect between them. He cannot claim both. If he has not suffered
any loss of profits - or if he cannot prove what his profits would have been - he can claim in the
alternative the expenditure which has been thrown away, that is, wasted, by reason of the breach.‟

Note that the rules regarding remoteness, foreseeability and mitigation also apply to
claims for restitutionary damages.

For South African case authority on awards of restitutionary damages, see the following
cases. Make your own notes on them. Consider any limitations which have been placed
on claims for restitutionary damages.
Probert v Baker 1983 (3) SA 229 (D)
Svorinic and Others v Biggs 1985 (2) SA 573 (W)
Mainline Carriers (Pty) Ltd v JAAD Investments CC and Another 1998 (2) SA 468 (C)
Tweedie and Another v Park Travel Agency (Pty) Ltd t/a Park Tours 1998 (4) SA 802
(W)
Masters v Thain t/a Inhaca Safaris 2000 (1) SA 467 (W)

Read: RD Sharrock “Damages for breach of contract: the recovery of lost opportunities”
(1985) 102 SALJ 616.

2.2.4 Penalty clauses

To avoid the cost and difficulty of proving a claim for damages, parties often include
penalty clauses in their contracts. Such a clause would provide that if the debtor breaches
the contract, s/he will be liable to pay a sum of money to the creditor. Penalty clauses are
frequently found in building contracts, for example, where the parties agree on a date for
completion of the building and they further agree that the building contractor will pay a
certain sum, say R1 000, for each day that the work remains unfinished after the agreed
date of completion.

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 Thus, where a penalty is agreed upon, the plaintiff has only to prove that the breach has
been committed, and then s/he is entitled to the agreed penalty. The plaintiff does not
have to prove damages.

Penalties are enforceable in South Africa: the matter is governed by the Conventional
Penalties Act, 15 of 1962. Note that section 3 of the Act empowers the court to reduce
the penalty if it considers it to be out of all proportion to the prejudice suffered by the
innocent party as a result of the breach.

2.3 CHOICE OF REMEDIES AND ELECTION

As mentioned above, when a party breaches the contract, the innocent party has a choice
of remedies. S/he may choose to claim specific performance, or, alternatively damages in
lieu of performance. In addition, the innocent party may claim damages for further losses
sustained as a result of the breach. On the other hand, if the contract contains a
cancellation clause, or if the breach is sufficiently serious to warrant cancellation, then
the innocent party may cancel the contract and, in addition, claim damages, including
damages for additional losses.

So, where circumstances are such that the innocent party is entitled to cancel, s/he has a
choice: s/he may cancel the contract or s/he may abide by the contract and insist on
performance by the defaulting party. What the innocent party chooses to do will
obviously depend on the particular circumstances. For example, let us revisit the problem
posed above. T enters into a contract to hire L's house for a year, the lease to commence
in 6 months' time. Shortly thereafter, T tells L that he no longer wishes to hire the house.
Is L entitled to enforce the lease (and claim all rentals due) in a situation where T never
occupies the house and, owing to a serious shortage of accommodation, L could easily
have found another tenant? Shouldn‟t there be some equitable limit placed on the
doctrine of election? Perhaps this would be an appropriate case for the court to use its
discretion to refuse an order of specific performance? Thus the creditor would, in effect,
be forced to be content with an award of damages as compensation. Another factor to
bear in mind is the general rule requiring the plaintiff to take reasonable steps to mitigate
(minimise) his losses. In this case, L could, on the facts given, have mitigated damages in
toto.

The basic principle applicable is that choice of one remedy will necessarily exclude the
other, that is, if the innocent party chooses to pursue one remedy, s/he will not be
permitted to change his/her mind and claim the other remedy without the consent of the
defaulting party. So, if the innocent party elects to enforce the contract, s/he cannot
thereafter change his/her mind and cancel the contract. However, it is possible that, even
after an order of specific performance is granted, the defaulting party fails to comply with
such order. The courts have accepted that the innocent party may approach the court
again for an order cancelling the contract. In order to avoid having to bring two separate
actions, it is permissible ask for both forms of relief, in the alternative, in the same action.
This is known, colloquially, as the „double-barrelled‟ remedy. The plaintiff claims (1)
specific performance and, failing compliance therewith, (2) cancellation and damages.

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2.4 THE ‘ONCE AND FOR ALL’ RULE

In terms of the so-called „once and for all‟ rule a plaintiff is not permitted to bring more
than one claim for damages on the same cause of action. This applies not only when
delictual damages are claimed but also where damages are claimed for breach of contract.
Subject to the terms of a contract, a plaintiff claiming contractual damages for breach of
contract must claim all such damages, both past and prospective, in one action.

Some academics have advocated the abolition of the rule, contending that it has been
introduced into our law of damages from English law. However, Christie states that „the
rule has developed, and has the potential for developing further, in accordance with most
people‟s idea of justice‟. He further submits that „defendants are protected from
harassment and plaintiffs are given a fair opportunity, in a variety of different
circumstances, of recovering the damages they have suffered‟. The only victim of the
rule is the plaintiff who has recovered accrued damages (but not future damages because
they could not be proved) and then later suffered more damages out of the blue. The
claim for these further damages will not be allowed because the cause of action would be
the same. Christie argues that it would be difficult to argue that „public policy requires
the rule to be reversed so as to make the defendant the victim in such a case‟.
See further RH Christie „The once and for all rule and contractual damages (2003) 120
SALJ 445

THE END

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