General

Principles of
Contract

Introduction

Dr P Magau
 Learning Outcomes

PROVIDE KEY DEFINITIONS IDENTIFY THE FOUNDATIONS DISCUSS THE THEORIES OF

OF CONTRACT LAW CONTRACT
Resources

BUSINESS
LAW

SEE CHAPTER
-2
 A Contract

There is no fixed or universally settled definition of a contract.

A contract is an agreement which creates an obligation or obligations between the parties to

the agreement.

Definitional The basic features of a contract include:

Aspects
agreement as the basis of a contract

only agreements which create a legally binding obligation or obligations

there must be at least two parties to a contract

only persons privy to a contract are bound by it.

Section 1 of the Consumer Protection Act 68 of 2008: ‘‘agreement’’ means an arrangement or

understanding between or among two or more parties that purports to establish a relationship
in law between or among them.
 An Obligation

An obligation consists of a right and a corresponding duty.

Legally, an obligation is a legal bond between two persons of which one person is bound by
law to render a performance to or for the other person.
In other words the debtor has a duty to render performance and the creditor has a right to
receive it.

Definitional A contract may create either of the two obligations namely unilateral obligation or bilateral
obligation.
Unilateral obligations are those where one party only has rights in terms of the contract

Aspects while the other only has duties (however, both must still agree).
E.g: Stéfan donates R1000 to a local church.

A bilateral obligation requires both parties to a contract to perform an action.

With bilateral obligations, both parties have rights and duties.

E.g: Abel and Bongi enter into a contract for the sale of Abel’s laptop to Bongi for R3000. This
contract creates two obligations, namely:
Abel has the duty to deliver the laptop to Bongi, and Bongi has the right to receive the laptop
from Abel. Abel is therefore the debtor for this obligation, and Bongi is the creditor.
Bongi has the duty to pay Abel R3000, and Abel has the right to receive the payment from
Bongi. Bongi is therefore the debtor for this obligation, and Abel is the creditor.
 Freedom of Contract
The freedom of individuals to enter into contracts with
one another, on the terms that they choose, without
interference from the state

Sanctity of Contract (pacta sunt servanda)

Foundations Parties to a contract must comply with the terms of the

of Contract contract

Law Good Faith (bona fides)

Parties to a contract must behave honestly and fairly

Privity of Contract
Rights created under a contract are enforceable only
against the parties to the contract.
 The consensual/will theory (subjective)

Theories In terms of this theory, the parties are bound by a

contract because they intended to be bound to it.

of They have freely chosen (out of their own will) to be

bound to their agreement, and so the law respects
their choice by enforcing the contract.

Contract For the parties to be bound, they must have had the
same subjective intention to be bound, i.e there must
be consensus hence the theory is called the
consensual theory.

Note: This theory therefore focuses on what the

parties subjectively intended.
 The declaration theory (objective)

In terms of this theory, parties are bound by the

contractual terms because they have declared

Theories
their intention to enter into a binding contract,
usually in a formal way.

of The focus is on the parties’ declarations, i.e what

they said or did when they entered into a
Contract contract.

Note: that the emphasis is on their conduct,

viewed objectively. What they really meant (their
subjective mind) is ignored.
 The reliance theory (objective-subjective)

The fact that a party can easily escape liability under the consensual

Theories theory may be unfair to the other party because he/she has no way of
reading the mind of the fellow contractant.

of The reliance theory has therefore been developed to protect a party

who had a reasonable belief that a contract is created between himself
and the other party.

Contract In terms of the reliance theory, if one party creates the impression that
the parties had reached consensus, and the other party reasonably
relied on this impression, the parties will be bound by the contract,
even if there is no subjective consensus.

This theory is applied in South Africa.

Quick Recap

By now you should be Define a contract Define an obligation Identify the Discuss the theories
able to master the foundations of of contract and the
learning outcomes. contract law one which applies in
SA
Thank You! Next Class – Formation of
Contracts