The Law of Contract December 2006.

The Law of Contract December 2006.

The general principles of the law of contract form an indispensable foundation for business law in Zimbabwe.

Definitions:

Bampton & Drury: A contract is an agreement which creates and defines and which intends to create and define legal obligations between parties to it.

Madhuku & Manase: An agreement between parties which is recognised and enforced by law

Pireyi: A contract is an agreement between two or more parties which makes and defines legal obligations. The parties must intend to be bound by law and their agreement to be enforced at law.

Christie: A serious and deliberate intention to create a legal obligation or animus contrahendi.

Christie “An agreement which is, or is intended to be, enforceable at law.”

These definitions apply to all contracts though special contracts incorporate additional requirements e.g. in Gwisai “a contract of employment comes into existence when one person, the employee, enters into an agreement with another, the employer, to render personal services to and under the control of the employer, in return for remuneration.”

Agreement is clearly necessary for the existence of a contract – “A meeting of the minds, a coincidence of the wills, consensus ad idem”. However to determine whether a agreement took place, “the court is not interested in the state of mind of the parties … it must decide the issue on the state of mind of the parties as manifested by word or deed” (Levy v Banket Holdings (Pvt) Ltd 1956) Any mental reservations or unspoken qualifications will not count. The court makes an objective inquiry.

Kerr AJ: “ In contract the legal bond, iuris vinculum is formed by the parties themselves, and, within the limits laid down by law, the nature of the obligations is determinable by them. In some cases their agreement is actual, in others apparent, and in yet others partly actual and partly apparent.”

To establish a contractual bond, the parties must communicate with each other. In some cases however parties do not negotiate from a position of equality e.g. for water/electricity with the municipality, or when the law compels a car owner to obtain 3rd party insurance.

“every agreement……… made deliberately and seriously, by a person capable of contracting, and having a ground or reason which is not immoral or forbidden by law, may be enforced by action.” [Innes CJ in Rood v Wallach. 1904. TS]

The definitions above highlight that

A contract involves agreement between two or more parties.

It must be enforceable at law

The parties must intend to be bound: a serious and deliberate intention to be bound.

Subjective Consensual Theory. Enforceability depends on consensus ad idem or the concurrence of subjective wills of the contracting parties. In the Objective Declaratory Theory, enforceability depends on concurrence of the declared intentions of the parties. Under the Reliance Theory, enforceability depends on reasonable expectation conveyed to the mind of each party by word or conduct.

Consensus ad idem involves: a union of wills; a meeting of minds in one and the same intention comes about when an offer from one party is accepted by another. There can be no agreement without an offer by one party or an acceptance by another. In addition, every contract is created through an agreement. Thus in a contract: Agreement = Offer + Acceptance.

Quasi-mutual Assent. An offer is not what the offeror thought he meant but what a reasonable third party, knowing the facts, would interpret him to mean. For example when a party means to do one thing but acts in a manner indicating something quite different. Here the first party is bound to what a reasonable person would understand from his own conduct – even though he intended a different thing. This is quasi- mutual assent. Apparent contracts of this nature are based on a fiction that there is consensus when in fact there is not. The law does not concern itself with the working of the minds of the parties but with the external manifestation of their minds – by their acts their minds seem to have met.

In Quasi-mutual assent it is accepted that there is no true consensus ad idem.

One party says: But I never agreed.

The court replies: Quite so, but your conduct led the other party reasonably to believe you agreed, so you will be treated as if you had agreed.

If one party’s words or actions give one reasonably to understand that their minds had met, then a contract was concluded even if in truth their minds did not meet. This is so because there is an expectation of good faith, by a reasonable person relying on the words/actions of another who leads a reasonable man to believe that he was binding himself.

A person’s state of mind is evidenced by words/actions. However such words/actions may be ambiguous or be misunderstood or may lead others to conclude that the speaker/actor has a certain intention which in fact he does not have. In such cases agreement is reached to all appearances. This principle is summed up in Smith v Hughes 1871

“ If whatever a man’s real intention may be, he so conducts himself that a reasonable person would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into a contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.”

The principle was adopted in Zimbabwe by Blackburn, J’s words in Diamond v Kernick, 1947 SA and by Innes J in Pieters & Co v Salomon, 1911 AD.

The matter thus focuses on the effect of a party's conduct on the other as reasonable person.

Diamond & Kernick 1947 SA: An estate agent who had the sole right to sell certain properties gave a mandate to another [who became his agent] to sell the properties, the amount of remuneration being “7.5 per cent”

[Benoni Produce & Coal Co. ltd v Gundelfinger, 1918: BPC ordered matches from Gundelfinger through a broker for immediate delivery. But G had no stocks. He therefore was dealing subject to arrival. He had a duty to speak but he did not. Qui tacet cum loqui potuit et debuit, consentire videtur- he who remains silent when he could and ought to speak is regarded as consenting.

OFFERS. An offer is a proposal made by one person [the offeror] to another the offeree.It must be accompanied by animus contrahendi, the intention of putting the conclusion of the negotiations out of one’s further power, allowing the offeree by mere acceptance to create the contract. There may be an offer and acceptance without a contract e.g. social or family arrangements. A gratuitous promise is enforceable if there is a serious and deliberate intention to create a contract [redelijke oorzaak or justa causa] “The only element our law requires for a valid contract is consensus [De Villiers. AJA in Conradie v Rossouw, 1919 AD]

Offers may be addressed to a particular individual, a particular group of people or the public at large. A contract comes into being when a valid offer is accepted by the intended offeree. However the following do not constitute offers:

An advertisement does not constitute an offer and so an advertiser cannot be compelled to enter into a contract on the basis of his advertisement, except in reward cases [Carlill v Carbolic Smoke Ball Co, 1893 Bloom v American Swiss Watch Co, 1915]. It is merely an invitation to treat or do business. Where a contract arises from an advertisement, the terms of that advertisement must be adhered to. [Shepherd v Farrel Estate Agency, 1921- Our Motto: no sale, no charge]

A statement that goods are for sale at a particular price is not an offer. [Crawley v Rex, 1909 &Boots v Pharmaceutical Society of Great Britain, 1953 QB].

An offer to the whole world may be accepted by anyone provided the offer reached him and he accepted it. E.g. advertisements for reward. Offer and acceptance must be made freely and voluntarily [Bloom v American Swiss Watch Co.].

A call for tenders is not an invitation to submit offers. At an auction without reserve the auctioneer makes an offer by calling for bids. This offer is accepted by the highest bona fide bidder. In other cases the auctioneer is inviting offers.

A statement of the lowest price is not an offer. [Efroiken v Simon, 1921] Even in response to a specific inquiry. [Harvey & Another v Facey &Others, 1893- “Will you sell us Bumper Hall Pen?”]

A firm offer must be distinguished from an offer to open negotiations or do business known as an offer to treat or "offer to chaffer", mere puffing, or commendations [Naude v Harrison-A house was advertised as well built]. The same principle generally applies to tenders and auction sales- they are not firm offers but invitations by persons who conduct them to do business.

Offers not accepted lapse or expire in the following ways:

  • Effluxion or expiry of fixed time. Laws v Rutherford, 1924 AD is the leading case: Mrs. Rutherford offered Laws a contact to cut wood on her farm; acceptance to be registered letter by 26 July. Laws moved on to the farm and started work but omitted to send the necessary registered letter. Innes CJ: Laws was interdicted from remaining on the farm. "Speaking generally, when the acceptance of an offer is conditioned to be made within a time or a manner prescribed by the offeror, then the prescribed time limit and manner should be adhered to".
  • No time limit set by offeror – The offer lapses after expiry of reasonable time. Reasonable time is a matter of fact ascertained from surrounding circumstances. [Dietrichsen v Dietrichsen 1911 TPD].
  • Death. Normally death of offeror or offeree terminates offer. De Kock v Executors of Van de Wall [1899] 16 SC 463 - offer of donation could not be accepted after death of offeror.
  • Loss of contractual capacity. Contractual capacity lost through insanity, insolvency, etc.
  • Rejection terminates the offer.
  • Counter offer. Destroys the original offer. Hyde v Wrench [1840] 49 ER 132 - W offered to sell his farm to H for £1000. H counter-offered £950 - W rejected. H purported to accept the previous offer. However W was no longer keen to sell the farm. H sued W. It was heldthat thecounter-offer amounted to rejection of offer - therefore no longer open to acceptance.
  • Withdrawal or revocation of offer. As a general rule the offeror can withdraw/revoke his offer at any time before acceptance unless specific time was given for acceptance. Withdrawal/revocation must be communicated to offeree. [Yates v Dalton]

Option This is an offer to enter into the main contract together with a concluded subsidiary contract [the option] binding the offeror to keep the main contract open for a certain period. The Offeror is then bound to keep the option open for the period agreed. Failure to keep the option open amounts to breach for which offeror can be sued. An option to buy obliges the seller to sell. A right of pre-emption [or first refusal] allows the holder first opportunity to buy if the seller decides to sell. - Van Pletzen v Henning 1913 AD: An offer to sell with agreement to keep offer open for certain time Boyd v Nel 1922 AD [gave an option to purchase an farm but then allowed prospecting as a result the Government declared the farm an alluvial digging. The buyer Boyd unaware of this had arranged to cut the farm into plots and sell them. Held: An option is a separate contract binding on the offeror

Acceptance. To achieve agreement an offer must be accepted –even if it is a donation. An offer made to a specific person can be accepted by that person only. A person who gives information to the police in ignorance of an advertised offer is not entitled to claim reward. Acceptance must be unequivocal. A purported acceptance in the form ‘Yes but…..” will not do.

Methods of Acceptance. If the offeror specifies a particular method of acceptance, this must be adhered to [Laws v Rutherford 1924 AD]. [Eliason v Henshaw][LawsHowever silence is not acceptance. “Quiescence is not acquiescence.” [Gonese v Mufudza 1977 RLR]

Communication of Acceptance. For true agreement, each party must be aware that the other party is in agreement with him. The general rule is that communication of acceptance must reach the offeror who may prescribe a method of acceptance. Equally he may allow a contract to be created before acceptance is communicated to him e.g. expressly when companies allot shares.

Contracts by Post. An offeror may send his offer by post and specify the method of acceptance. If he does not, the presumption is that acceptance by post is authorized. Then [as in English & American law] the contract is created upon postage of the letter of acceptance.

The general rule is that acceptance must be communicated to the offeror. The English House of Lords laid down in Dunlop v Higgins 1848 that a contract registered through the post is concluded by the posting of the letter of acceptance. This matter was settled in our law in Cape Explosive Works Ltd v SA Oil & Fats Industries Ltd 1921 & CEW v Lever Brothers (SA)]. The letter of acceptance must be properly addressed but a minor error e.g. of spelling does not invalidate the acceptance. [Levben Products (Pvt) Ltd v Alexander Films (SA) (Pvt) Ltd 1959 SA. The letter, which never arrived, was correctly addressed except that it read 'Sinola Street' instead of 'Sinoia Street'. The difference was held to be immaterial. The same principles apply for telegrams as well.

When the offeror expressly or impliedly agrees to the use of post or telegraph. However a letter of withdrawal becomes affective the moment it reaches the offeree; if acceptance has taken place the withdrawal is ineffective. This rule is called the expedition theory.

Telephone - Tel Peda Investigations Bureau Pty Ltd v Van Zyl

Contracts by telephone are inter praesentesand are virtually instantaneous and the court in Tel Peda decided that the general rule applies

Tacit Contract. Offer and acceptance may take the form of actions e.g. between a bus company and a passenger or in sending a machine for repairs.

Agreements which cannot in law be Contracts.

Some agreements are not contracts until some other act is carried out e.g. marriage. These are only steps in the creation of a different legal relationship. This occurs in the following circumstances:

  • Initial impossibility. No legal obligation arises if an agreement is impossible of performance at the time the contract is made–lex non cogit ad impossibilia. However the impossibility must be absolute not relative; and not a business risk and the real object of the contract cannot be fulfilled. [Hersman v Shapiro 7 Co, 1926. Here Shapiro bought top grade corn from Hersman. He subsequently sold these ‘futures’ on the London market. Hersman then failed to deliver when the time came. The parties were assumed to have taken a business risk.
  • Impossibility may be legal/physical. A promise made for an illegal/immoral purpose is void. S v Nkambala, 1980,SA. Accused gave R10 to a prostitute in payment for R5 “due”. But she had no change. Nkambala snatched the R10 from her. He was convicted of theft: but the reviewing judge ruled that the “disgraceful and invalid” agreement could not give the woman a lawful right to the money.
  • Agreements void for vagueness or uncertainty. E.g. contracts giving an unlimited option to the promissor/offeror [Kantor v Kantor, 1962 SA & Finestone v Hamburg, 1907 where terms were incomplete]; where vague and uncertain language is used; where negotiations are still incomplete.
  • Initial Impossibility
  • Physical impossibility renders the contract void ab initio. The impossibility must exist at the time the contract is concluded, provided one party did not warrant its possibility expressly/implicitly.
  • Legal impossibility –Here the object is illegal, immoral or contrary to public policy. Illegality may arise from statute or common law. Such contracts are void.
  • Contracts in restraint of trade – e.g. sale of goodwill; employers and employees. The principle that such contracts are void for impossibility is expressed in the maxim ex turpi causa non oritur actio – from a base cause no action arises. So neither party can claim performance nor can damages be claimed for non-performance. This rule is different from the in pari delicto or par delictum rule where both parties are guilty of illegal conduct.
  • Ex turpi causa rule is absolute and there are no exceptions, but the par delictum rule may be relaxed at the discretion of the judge in order to do “simple justice between man and man”.
  • Ex turpi causa prohibits enforcement of immoral/illegal contracts but par delictum limits the rights of delinquents to escape the consequences of their performance. Thus, ex turpi rules apply if
  • Neither party has performed his side of the bargain
  • Both have performed

Par delictum arises if in the course of an illegal agreement only one side has performed.

  • Ex turpi causa is used as a defense where one side seeks to enforce an illegal contract by relying on the illegal contract itself. Par delictum is a defence to an action for unjust enrichment.
  • Subsequent Impossibility.If a person is prevented from performing his obligations under a contract through vis major or casus fortuitus he is discharged from liability (lex non cogit ad impossibila) – Peter Flamman & Co. v Kokstad Municipality 1919. Such a contract is thus similar to one which was impossible from the beginning. But the impossibility must not have been forseen [Hersman v Shapiro] and it must be insuperabl

Formalities: Written Contracts In our common law, in general no formalities are required and so an oral/tacit contract is valid. However a written contract facilitates proof and reduces the scope for argument. [Wood v Davies: The parties entered into an agreement for the lease of land, a furnished house and other buildings. Woods argued that he was not bound because the contract had not been reduced to writing as had been agreed. The court ruled that Woods was bound to lease the property to Walters because the parties were clearly ad idem and there was no evidence that they should not be bound until the written lease had been done/executed.

Innes CJ: The “broad rule is that writing is not essential [except in certain cases] to the validity of a contract. But the mere mention of a written document during the negotiation will be assumed to have been made … with the view of convenience of record and facility of proof.” Thus when a signed written document is agreed to be a precondition of a contract such a contract is void without it. The courts assume that the written document is not a pre-condition to the validity of the contract.]

In early Rome every contract had to meet very strict formalities to be valid. However, these formalities were discarded and today Roman-Dutch law looks instead to the intention of the parties. Thus, a mere verbal agreement is sufficient and in some cases a contract arises from the conduct of the parties without a single word spoken as long as the parties clearly intended to bind themselves in a contract. Thus, formalities are the exception except by: