Law of Contract Notes 3 PDF

LAW OF CONTRACT PVL3005W University of Cape Town By Jamie-Lou Ross 2024 TOPIC 1: NATURE AND BASIS OF CONTRACTUAL LIABILITY NATURE OF CONTRACT What exactly is a contract? How does a contract differ from any other agreement? Definitions of a Contract An agreement between 2 or more persons with the intention of creating a legal obligation/s An agreement will be a contract only if the parties intend to create an obligation and if…the agreement complies with all other requirements which the law sets. Sources of Contract Law 1. Largely follow RDL rules, although some English law influence - Largely common law base. Comm law rules impacted by leg such as Consumer Protection Act. 2. Contract law must also reflect Constitutional values 3. Customary law of contract Contract as an agreement intended to create enforceable obligations Contract is agreement between two or more parties that is legally enforceable. Agreements that are not contracts - e.g. social agreements, jokes, or theatrical agreements. Key factor that distinguishes contracts from non-binding agreements is parties' serious intention to create legally enforceable obligations (animus contrahendi). Gentlemen's agreements & agreements labelled as "subject to contract" are not legally enforceable because they lack intention to create legal obligations. Whether parties intended their agreement to be legally binding is determined based on available evidence, which can sometimes be challenging, especially in cases involving familial or ambiguous promises. Even if one party lacks intention to create legal obligations, if they lead other party to reasonably believe otherwise, law may uphold contract to protect that reasonable belief. Legally binding agreements that are not contracts Not all binding agreements are contracts. Some agreements are intended to either create, discharge, or transfer obligations. Classification of Legally Binding Agreements: Obligationary agreements: create one or more obligations, such as contracts of sale or lease. Absolving agreements: discharge or extinguish obligations. For example, agreement to cancel sale or release someone from their obligation. Real (or transfer) agreements: These agreements involve transfer of rights, such as in case of cession. Examples & Explanation: - In contract of sale, seller is obligated to transfer sold item to buyer who, in turn, is obligated to pay price. Cancelling this sale would constitute absolving agreement. - Transfer of ownership involves both physical (delivery of item) & mental (intention to transfer & acquire ownership) elements. - Cession is another example where right to claim money is transferred from one party to another. While sale of right is obligationary agreement, actual transfer is achieved through cession, involving separate concurring intentions. Legally binding agreements that are more than just contracts Some agreements that create obligations cannot be simply classified as contracts due to additional elements that give them distinct character. Marriage is highlighted as prime example. While it involves agreement of parties & entails reciprocal duties, it transcends typical contract principles. Marriage is not easily dissolved by will of parties alone but requires state intervention. Additionally, it carries certain unavoidable consequences, leading it to be considered sui generis agreement, bestowing public status upon parties. Another example = judgment by consent in litigation. Parties in legal disputes may reach agreement to settle some or all issues, which court then formalises into judgment or order. This agreement, while having authority of court decision, retains its contractual essence. It is elevated due to court's endorsement but remains fundamentally contract between parties. Agreements with public bodies or state organs pose challenges as they straddle line between public & private law. Typically, relationship between State & individuals is one of superiority versus subordination. However, in commercial contracts, State is often treated similarly to other parties, though not always. State may receive more favourable treatment in certain situations, such as when statutes grant discretion to public officials in public interest. Conversely, it may be treated less favourably when its contractual rights conflict with its public duties under Constitution. State's contractual rights may be overridden by its constitutional obligations, which demand lawful, reasonable, & procedurally fair administrative action. Principles of administrative justice influence contractual dealings involving public bodies, emphasising need for lawful, reasonable, & procedurally fair actions. Definition of contract Contract = agreement between 2/+ parties with intention of establishing legal obligations. Can potentially adding another element to the definition of a contract: agreement should be recognised by law as binding on parties. Merely agreeing to terms is not enough for contract to be legally binding; other requirements must also be met. Despite need for validity, term "contract" is commonly used even when certain requirements are absent, resulting in what is termed an "invalid contract." Requirements for a valid contract (Need ALL or invalid/void) 1. Consensus: The agreement must involve the meeting of minds between the parties on all material aspects of their agreement. (Actual or ostensible) 2. Capacity: Parties involved in the contract must possess the necessary legal capacity to enter into the contract. 3. Formalities: If agreement requires specific formalities, such as being in writing & signed, these requirements must be fulfilled. (Not an absolute requirement) 4. Legality: agreement must be lawful - should not be prohibited by either statute or common law. 5. Possibility: Obligations outlined in agreement must be capable of being performed at time the contract is entered into. 6. Certainty: agreement must have clear & definite terms, enabling obligations to be understood & enforced effectively. Void = invalid as missing a requirement Voidable = possibly invalid due to problematic requirement What are the characteristic features of a contract? Contract is juristic act, meaning it's act to which law attaches intended consequences of parties, akin to will but different from delict. Unlike will, which is unilateral, contract necessarily involves at least two parties. Our law doesn't recognize unilateral promises as binding. Elements of contract: Contracts involve promises or undertakings from one or both parties, which may include giving something (dare), doing something (facere), or refraining from doing something (non facere). There can also be undertakings regarding existence or state of affairs, known as warranties. Most contracts involve reciprocity, where one party's performance is promised in exchange for other's. This underpins concept of contract as bargain, where promises are enforced when supported by consideration—a quid pro quo. Contracts serve as medium for voluntary exchange of goods & services in economy, forming basis of free-market system. Individual transactions at microeconomic level influence broader movement of goods & services at macroeconomic level. Process of contracting is becoming increasingly informal, reflecting broader trend away from formality in modern law. While some may still envision contracts as formal documents drafted by lawyers & signed in presence of witnesses after intense negotiation, this is more typical of large commercial contracts rather than norm. Majority of contracts today are often concluded orally or tacitly, without any formalities. Everyday transactions like buying groceries, using public transportation, refueling car, renting movie, or parking car can involve elements of contracting. Even notices on walls or backs of tickets & invoices can have contractual effect. Modern concept of contract is generalised, meaning agreements aren't limited to specific types (e.g., sale, lease, deposit) to qualify. Freedom of contract allows parties to agree to anything possible & lawful. All contracts are consensual, based on some form of agreement, & bone fidei, requiring parties to conduct their relationship in good faith. CONTRACT AND OTHER LEGAL CONSTRUCTIONS Contract and the law of obligations The law of contract forms part of private law and, more particularly, the law of obligations. How does contract relate to other branches of the law of obligations, in particular delict and enrichment? The concept of obligation Obligation is legal bond between two or more persons, with debtor obligated to give, do, or refrain from doing something for creditor. Obligation consists of right (creditor's right to demand performance) & corresponding duty (debtor's duty to make performance). In contracts, each party typically acts as both debtor & creditor, as contracts often involve multiple obligations. Many obligations are created in contracts, & each party is obliged to perform in exchange for counter-performance of other party. A party in contract can simultaneously be debtor & creditor, as roles are assigned based on specific obligations rather than overall contract. Using example of contract of sale, seller is debtor for duty to deliver sold item & creditor for duty to receive payment. Labels "debtor" & "creditor" are associated with specific obligations rather than particular contract, which can involve numerous obligations. Obligation creates personal legal relationship between parties, binding only those involved. Creditor can demand performance solely from debtor, who is obligated to fulfill obligation only to creditor. Right resulting from obligation is personal right (ius in personam), not real right (ius in rem) like ownership. Single obligation may involve multiple co-debtors & co-creditors. Civil obligations, enforceable by legal action, are more common than natural obligations, which lack enforceability but still have legal consequences. Natural obligation may allow for actions like setting off debt or preventing recovery of paid debt in certain circumstances. Examples of natural obligations include gambling debts. Primary sources of obligations include contract & delict, with others such as unjustified enrichment, negotiorum gestio, family relationships, wills, & statutes also playing role. Contract and delict Delict refers to wrongful & blameworthy conduct that causes harm to person, such as defamation or negligent damage to property. Wrongdoer is obligated to compensate injured party. Contractual obligations are voluntarily assumed by parties themselves, while delictual obligations are imposed by law, irrespective of parties' will. Contracting parties are free to determine nature & content of their obligations through negotiation & agreement on terms of their contract. Breach of these terms may lead to legal consequences, including compensation for damages. Both breach of contract & delict are civil wrongs that can result in duty to pay damages as compensation. While breach of contract might flow indirectly from parties' will, it is ultimately imposed by law due to unlawful breach. In some cases, same conduct can constitute both delict & breach of contract. For example, when surgeon negligently leaves cotton swab inside patient's body despite having contract to perform operation. In such instances, plaintiff can sue on either basis, resulting in concurrent liability in contract & delict. Historically, claims for damages in contract have been for financial losses resulting from breach, while claims in delict have been for injury to person or property. Recently, delictual liability has expanded to include pure econ loss, blurring boundary between contract & delict. Despite expansion of delictual liability, courts have been hesitant to allow claims in delict for economic losses caused by breach of contract. To succeed in delictual claim, plaintiff must prove all elements of delictual liability, including wrongfulness of conduct. Merely breaching contract doesn't necessarily mean conduct is wrongful for purpose of imposing delictual liability. Conduct must violate right of plaintiff that exists independently of contract. Example: - If contract to supply machine capable of producing 5,000 bolts per hour is breached by delivering machine that only produces 3,000 bolts per hour, there's breach of contract but not necessarily delict because there's no independent right for plaintiff to receive machine capable of producing 5,000 bolts per hour. However, if machine explodes & causes injury to plaintiff, they may have valid claim in delict because right not to be injured exists independently of any contract between parties. Contract and enrichment Definition of Unjustified Enrichment: transfer of wealth from one person to another without valid legal reason or cause. Example: If person A's wealth increases at expense of person B's wealth without legally recognized cause, A is obligated to make restitution, & B has right to pursue enrichment action to enforce claim. Roman-Dutch law recognized specific enrichment actions in particular circumstances. South African courts extended these old actions in ad hoc manner, but were hesitant to recognize general enrichment action until recently. Enrichment must be unjustified in technical legal sense, meaning it lacks valid legal cause, rather than being morally unjust. Injustice alone doesn't justify restitution. Valid contract is considered causa par excellence for any wealth transfer resulting from it. If contract is invalid or subsequently fails for some reason, transfer of wealth is considered unjustified, & enrichment action may be pursued depending on reason for contract's failure. Contract and the law of property See LegatorMcKennavShea Property in Broader Sense: Extends beyond tangible objects to include anything of monetary value that can form an asset in individual's estate. This includes immaterial prop like copyrights, patents, trademarks, & personal rights arising from contracts, delicts, or other obligations. Composition of Personal Wealth: much of personal wealth today consists of bundles of personal rights, such as shares in company, insurance policies, beneficial interests in trusts, & pension rights. Commercial Transactions Involving Law of Obligations & Property: Many commercial transactions involve both contractual (obligationary) & proprietary aspects. For example, sale of house includes both contract of sale & actual transfer of ownership through registration. Similarly, donations involve both promise to donate & actual transfer of gift, while cession involves both agreement creating duty to cede right & real transfer of that right. Causa in Ownership Transfer: Contract serves as causa, or underlying reason, for transfer of ownership in mentioned examples. If contract is invalid, there is no just cause (iusta causa) for transfer to occur. Despite invalidity of contract, ownership still passes due to South African law following abstract system of transfer. This means that ownership can pass without proper cause (sine causa). Despite ownership passing without proper cause, transferor generally has enrichment action available to recover property. But this action is considered personal, posing risk for transferor if transferee becomes insolvent before returning property. Risk of Insolvency: In cases of insolvency, where transferee's estate lacks sufficient assets to meet all creditor claims, transferor may only have concurrent claim against insolvent estate, potentially receiving only fraction of property's value after secured & preferent creditors are paid. NB distinguishing between real & personal rights. If ownership had not passed, transferor could have used vindicatory action (rei vindicatio) to recover property from insolvent estate. THEORIES OF CONTRACT Will Theory of Contracts Foundation of contracts lies in individual will of parties involved. Party Autonomy: Contract law aims to uphold freedom of parties to enter into agreements & organise their affairs as they wish, within legal & moral boundaries. Will theory suggests highly subjective approach to contracts, where consensus between parties is paramount for contractual liability. Genuine agreement between parties is essential for contract to be binding. Mistakes or undisclosed reservations can invalidate contract. Strict adherence to will theory may lead to unfair outcomes by disregarding reasonable expectations of parties who rely on apparent consensus created by other party's actions. Overly subjective interpretation of contracts could have detrimental economic effects by undermining legal certainty in commercial transactions. Business people need assurance that signed documents & other objective indicators of consent will be legally upheld as binding contracts. Lack of such assurance could disrupt commercial activities significantly. Declaration Theory Many legal systems do not solely follow will theory. Some adopt declaration theory, which emphasises external manifestations of parties' wills over their internal intentions. According to declaration theory, subjective intentions of parties are irrelevant. What matters is external actions or statements that indicate agreement. An objective, detached perspective is crucial in determining if agreement exists. Potential Issues with Pure Objectivity: Purely objective application of declaration theory is considered impractical. It may lead to absurd outcomes, allowing contracts unintended by either party, enabling transaction disguise, preventing rectification claims, & eliminating room for doctrine of mistake in contract law. Qualifications & Practical Viability: extreme objectivity of declaration theory must be qualified in practice. Theory's impractical aspects raise doubts about its viability in real-world legal applications. Reliance theory Theory offers middle ground between will theory & declaration theory. According to this theory, contracts are based on detrimental reliance on appearance of agreement or reasonable belief in consensus induced by other party's conduct. Reliance theory protects party's reasonable expectation of contract, even in absence of explicit consensus. While reliance theory adopts objective approach to contract like declaration theory, it allows for exceptions based on material mistake & unreasonable reliance. Reliance theory supplements will theory by correcting its deficiencies & providing alternative basis for contract when genuine consensus is lacking. Reliance theory is favored approach in contemporary law - balance between subjective intentions & objective appearances. TOPIC 2: THE FORMATION OF CONTRACTS GENERAL Contract is formed when parties agree on all material terms. Agreement process can be brief or prolonged, depending on negotiation. Agreement involves mutual declarations of intention by parties. Process of reaching agreement is analysed using rules of offer & acceptance. Party makes offer, other party may accept, reject, or propose modifications (counter-offer). Bargaining continues until consensus is reached through unequivocal acceptance. Offer & acceptance framework is convenient analytical tool for determining contract conclusion. However, consensus, not offer & acceptance, is primary basis of contract formation. Sometimes, it's hard to determine offeror & offeree, especially in situations like simultaneous signing of contracts. Despite difficulty in isolating offer & acceptance, if it's clear that agreement has been reached, this distinction is relatively unimportant. Parties can express their intentions in various forms: written, orally, or through conduct. Silence can signify agreement in highly exceptional circumstances, such as when previous dealings between parties make it reasonable to interpret silence as acceptance. Contracts can be formed tacitly, without verbal communication (e.g., buying groceries) or with one party's offer being written & other's acceptance being tacit (e.g., driving into parking garage). In some cases, law or parties themselves may require specific formalities for contract creation (e.g., sales of land must be in written deed). OFFER See Steyn v LSA Motors See Legator McKenna Inc v Shea An offer is a proposal to contract. Declaration of intention by 1 party (offeror) to another (offeree), indicating performance that they are prepared to make, & terms on which they will make it. An offer is usually addressed to specific person, but may also be addressed to group of people, or general public. Offer of reward, by advertisement, is common example of an offer to general public. Legal effect of an offer A contract is a bilateral juristic act founded on agreement. Being unilateral declaration of will by 1 of parties, an offer can’t in itself give rise to binding obligations. But it does have practical effect of placing offeree in position where, by unilateral act of acceptance, they can call contract into being. Until such acceptance, offeror may withdraw offer, unless they are bound by separate agreement not to. An agreement not to withdraw an offer is known as an option. Requirements for valid offer 1. The offer must be firm: The offer must be a firm one, made animo contrahendi - intention that its acceptance being a binding contract. This requirement is not fulfilled if one of the parties makes a tentative statement with the intention of sounding the other out in order to find out whether they would be prepared to negotiate. Whether a particular declaration amounts to a firm offer, or is merely a tentative indication to do business, may not always be easy to determine. It is ultimately a question of fact to be decided in the relevant circumstances. Efroiken v Simon: Requirement found in this case. 2. The offer must be complete: Offer must contain all material terms of proposed agreement - there can’t be further matters to be negotiated before overall agreement can take effect. Often, when large contracts are negotiated, various terms have to be settled before the deal can go ahead. In such case, it is said that 'nothing is agreed until everything is’ Fact that parties have reached agreement on issues A, B & C can’t give rise to obligations, if issues D & E still have to be discussed, & intention of parties is that there will be no contract until comprehensive agreement is reached. But if intention of parties is that agreement in respect of issues A, B & C should be binding on them, irrespective of whether they ever reach agreement on outstanding issues D and E, then the preliminary agreement will constitute a binding agreement If agreement subsequently reached on issues D and E, the preliminary agreement will be incorporated or superseded by the more comprehensive agreement. 3. The offer must be clear and certain: Content of proposed obligation must be easily determinable. An offer must be clear and specific enough for the recipient to understand and accept it. Vague offers, such as conditional ones, where the conditions are too subjective or indefinite, cannot be accepted because the terms are unclear. Agreements that depend on future negotiations for essential terms are generally unenforceable due to lack of certainty. However, if mechanisms like deadlock-breaking mechanisms (such as third-party arbitration) are included, making it possible to resolve disputes, such agreements can become enforceable. Agreements giving one party the authority to determine the performance of the other party aren't void due to vagueness, but there's a risk of the first party acting unreasonably. To mitigate this risk, the determining party is usually required to act reasonably, and their decisions can be reviewed by the court. Certainty is different from ambiguity. While vague terms are problematic, if a provision is capable of multiple reasonable interpretations, courts will employ contract interpretation rules and consider extrinsic evidence to determine its meaning. Courts are generally hesitant to invalidate agreements that were intended to be legally binding. They recognize that not all agreements are perfectly drafted, especially in business contexts, and often rely on the good faith and commercial expediency of the parties involved. Mouton v Hanekom: court held that an offer to perform based on the offeror's financial capacity is not too vague, emphasising that context and intent play significant roles in determining enforceability. The Consumer Protection Act 68 of 2008 (CPA) The Consumer Protection Act (CPA) introduces further requirements in regard to offers. Offers, notices, documents, or representations provided to consumers must be in plain and understandable language. This ensures that ordinary consumers with average literacy skills and little experience can understand the content without undue effort. Sellers must disclose whether goods are reconditioned, rebuilt, or remade. If such goods bear the trademark of the original producer or supplier, this information must be conspicuously indicated. Negative option marketing, where consumers must decline an offer to avoid being charged, is prohibited. Suppliers cannot induce consumers to accept goods or services or enter agreements based on negative option marketing. Agreements resulting from negative option marketing are void. Consumers have the right to a cooling-off period if goods or services are marketed to them directly at a location other than the usual place of business. They can rescind any contract within five days of either the conclusion of the agreement or the delivery of goods, whichever is later. Catalogue marketing, where consumers initiate agreements remotely (e.g., telephonically or by postal order) without inspecting the goods in person, is regulated. Suppliers must disclose specific information, including their name, registration details, physical address, sales record information, payment currency, delivery arrangements, cancellation policies, and complaint procedures. Offers to the public Legal issues arise in offers of reward, advertisements, & auction sales, which are addressed using principles of offer & acceptance in law. Offers are typically directed to specific individuals but can also be made to public at large or specific segment of public. Carlill v Carbolic Smoke Ball Co. illustrates this concept: - Company advertised reward for anyone who contracted influenza after using their medicine according to instructions. - When customer fulfilled conditions & contracted influenza, they were entitled to reward. - Case establishes that an advertisement can constitute a valid offer to public, & acceptance occurs when conditions of offer are met. By extension of this principle, company offering prize for specific achievement, such as hole-in-one in a golf tournament, could be legally required to fulfil their promise if someone meets conditions outlined in advertisement. Advertisements Q of whether an advertisement constitutes an offer for a contract or merely an invitation to do business. There's a distinction between an offer made by the business in the advertisement and an offer made by the person responding to the advertisement. The general rule in law is that an advertisement is considered an invitation to do business rather than a direct offer. Crawley v Rex is an example where an advertisement was deemed an invitation to do business rather than an offer. In this case, a shopkeeper's advertisement of tobacco at a low price did not constitute a binding offer, and therefore, no contract was formed. The intention behind a statement, including advertisements, determines whether it constitutes an offer or an invitation to do business. Traders often include disclaimers such as "while stocks last" to clarify the availability of goods at special offer prices. Bait marketing, where goods or services are advertised at a specified price with the intent to mislead consumers about availability, is prohibited under section 30(1) of the CPA (Consumer Protection Act). Suppliers must make goods available up to the expressed limit if they place a restriction on availability. Who makes the offer in supermarkets? Courts have not as yet decided who makes an offer in the case where goods are displayed in supermarkets and prices appear on the goods or on the shelf where the goods are stacked. It has been suggested that, unless there are indications to the contrary our courts may follow the English case of Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd: - It was decided that where goods are displayed with the price on the article, the customer makes an offer to purchase by presenting the article they wish to buy for payment. - The shopkeeper therefore makes an invitation to do business and the customer makes the offer to purchase. Promises of reward It is common for a reward to be offered to any person who performs a certain act for example, restores a lost article to its owner, or furnishes information that would lead to the arrest of thieves Following the reasoning of the English case of Carlill v Carbolic Smoke Ball Co, AD held in Bloom v American Swiss Watch Co that the advertising of such a reward might be construed as an offer to the public. The first person who, consciously responding to the advertisement, performed the required act (for example, furnished information to the police) would have accepted the offer and thus become contractually entitled to the reward. Of course, for this result to follow, the offer would have to be sufficiently certain; many offers of reward are so vaguely worded as to be quite unenforceable (for example, when the content or amount of the reward is not specified). Calls for tenders An invitation to the public to submit a tender for work to be done is not an offer that is open to acceptance by the highest tenderer. At most, it is an invitation to potential tenderers to make offers that will be considered after the closing date for the particular tender. Auctions The pivotal question in auctions revolves around who initiates the offer: the auctioneer or the bidder, which is contingent upon the conditions of sale established beforehand. These conditions are typically outlined by the seller or the auctioneer (acting on behalf of the seller) and are communicated to potential buyers through various means such as advertising or display. The conditions are binding for both the auctioneer and the bidders, and any bid made at the auction is presumed to be made in accordance with these conditions. The conditions of sale usually specify whether the auction is conducted with or without a reserve price. If the auction is without reserve, the auctioneer is obligated to sell to the highest bona fide bidder, with the auctioneer's calling for bids considered an offer, accepted by the highest bona fide bidder. Conversely, if the auction is subject to a reserve price or the auctioneer's right to refuse bids, then it's the bidder who initiates the offer, and the auctioneer accepts it by actions like the fall of the hammer. The presumption, unless otherwise stated, is that the auction is subject to reserve, making it typically the bidder who initiates the offer. Relevant legislation (Section 45(3) of the CPA) outlines that a sale by auction is completed when the auctioneer signals its completion, typically by the fall of the hammer or another customary manner. Further requirements (Section 45(4)) mandate advanced notice if the auction is subject to a reserved or upset price, or if the owner or auctioneer (or their representative) has the right to bid. Failure to provide such notice can lead to legal consequences, such as a consumer being able to approach the court to void the transaction if the goods are sold in response to a bid from the owner or auctioneer without prior notice. Termination of an offer Rejection of the offer An offer falls away if it is rejected by the offeree, whether expressly or impliedly. An offer is impliedly rejected if the offeree makes a counter-offer; that is, where the offeree, instead of accepting the offer, makes a new offer in return. A qualified acceptance (for example, where the offeree accepts subject to certain conditions being met) will usually be construed as a counter-offer. Death of either party The offer is terminated by the death of either the offeror or the offeree. Since an offer in itself creates no obligations, there is neither a debt that can pass to the estate of the deceased offeror, nor any contractual right that can pass to the estate of the deceased offeree. However, if the offeror has promised not to withdraw the offer (such a promise constitutes a contract of option, which is binding on the estate of the offeror), then the offer does not terminate upon the death of a party. Effluxion of the prescribed time, or of a reasonable time The fact that an offer has not been rejected or revoked, and has not lapsed as the result of the death of one of the parties, does not mean that the offer will remain open indefinitely. That would be unreasonable towards the offeror. Where the offeror has prescribed a time limit for acceptance, the offer lapses automatically if it is not accepted within the prescribed period. When no time limit has been prescribed, the offer will lapse after a reasonable time has passed. What constitutes a reasonable time will depend on the facts of the particular case. Note that the inclusion of a time limit for acceptance does not necessarily imply that the offeror may not revoke the offer within that period. Revocation of the offer Unless the offeror has promised not to revoke the offer for a certain period (in which case one is dealing with an option contract), the offer may be withdrawn at any time prior to its acceptance. Since revocation is an expression of intention, it takes effect only when communicated to the mind of the offeree; thus, if the offeree communicates acceptance of the offer to the offeror before learning of the revocation, a contract is concluded. Loss of legal capacity to act If either one of the contracting parties loses the legal capacity to act, the offer is terminated Acceptance of offer Once offer is accepted by the offeree, a contract comes into being and the offer is terminated. ACCEPTANCE See A to Z Bazaars v Minister of Agriculture See Jamieson v Sabingo See Jafta v Ezemvelo See Seeff Commercial and Industrial Properties Acceptance: clear and unambiguous declaration of intention by offeree, unequivocally assenting to all terms of proposal embodied in offer. Van Huyssteen definition: a declaration of will, which indicates assent to the proposal contained in the offer & which is communicated to the offeror. The offeree's intention to accept the offer may be expressly stated (for example, 'I accept your offer') or it may be tacitly indicated (for example, where the offer is made in the presence of the offeree and he or she nods his or her head). Silence cannot ordinarily be treated as acceptance. Thus the offeror may not force a contract on the offeree by sending unsolicited goods through the post with a stipulation that, unless the offeror hears to the contrary within a certain time, they will assume that the offeree has agreed to buy the goods. Requirements for a valid acceptance Acceptance will give rise to the formation of a contract between the offeror and the offeree, provided that certain requirements are fulfilled: 1. Must be unconditional/unqualified 2. Made by the offeree 3. A conscious response to the offer 4. Made in the prescribed manner The acceptance must be unqualified Mirror Image Rule: The acceptance must precisely mirror the terms of the offer. Any deviation from the terms of the offer renders the acceptance invalid. Acceptance must be clear and unambiguous, showing agreement to all terms of the offer. If the acceptance contains conditions, new terms, or omits original terms, it is not a valid acceptance but rather a counter-offer. A qualified acceptance constitutes a counter-offer, giving the original offeror the choice to accept or reject it. Example 1: Dominic offers Didier his surfboard for R5 000 cash. Didier's response, where he states he can only pay in six months, constitutes a counter-offer, not an acceptance. Ambiguous Acceptance: An acceptance that is unclear or uncertain does not qualify as valid acceptance. Example 2: Didier's response, expressing interest but uncertainty about affordability, is considered ambiguous and does not constitute a valid acceptance. Legator relevant. The acceptance must be by the person to whom the offer was made Steyn relevant. Unspecified Persons: Offers addressed to the general public or a class of people can be accepted by any member of that group. Offers directed to specific individuals or groups can only be accepted by those individuals or groups. Example - Joint Acceptance: An offer to sell a farm to person A cannot be jointly accepted by A and B. This was established in the case of Bird v Sumerville: - Appellant intended to sell his property to the first respondent only. - However, both the first and second respondents signed the offer as buyers. - Appellant was unaware of the second respondent at the time of making the offer. - Court determined that the offer was intended for the first respondent alone. - Even though appellant would not have been harmed by both parties purchasing property, he was not obligated to sell to both because he never intended for his offer to be accepted by both respondents. A cessionary may be able to accept an offer Keep in mind that an offer of reward is an offer addressed to the public in general; any member of the public may accept it. Where the offeror has granted the offeree an option, the offeree has not only a right or competence to accept the offer, but also a right to insist that the offer be kept open for the duration of the option. If the rights under the option may be ceded to a third party (called a cessionary), the cessionary will be able to accept the offer. The acceptance must be a conscious response to the offer As a matter of logic, a person cannot be said to accept an offer if he or she is unaware of it. This point is especially relevant to offers of reward. Relevant to will theory - minds must meet. Aware of what other intends. Bloom v American Swiss Watch Co: - Respondent company offered reward to anyone who provided information leading to arrest of thieves who had stolen jewellery from company. - B furnished such information while ignorant of offer of reward. - When he subsequently became aware of it, he claimed the reward from company. - Court held that he could not recover reward, because, ‘until plaintiff knew of offer he could not accept it, & until he accepted it there could be no contract, for contract requires that there should be consensus of 2 minds, & if the one didn’t know what other was proposing, 2 minds never came together.’ The acceptance must be in the form prescribed by the offeror (if any) As dominus or initiator of contracting process, offeror is entitled to prescribe any method of acceptance they see fit; if offeror does so, generally no other form of acceptance will suffice. Can also be specific requirement in legislation (e.g. ECT Act) But in Pillay v Shaik, SCA held that reliance theory can be applied where acceptance doesn’t take place in accordance with prescribed mode of acceptance, but where offeree leads offeror to reasonable belief that prescribed form of acceptance has in fact been complied with. Note further that offeror may authorise particular method of acceptance without thereby intending to prescribe it as only acceptable method (e.g. 'please let me know by return of post whether these terms are acceptable to you'). When and where acceptance takes effect When acceptance takes effect is NB as acceptance of an offer leads to contract creation. Because that is when contract is formed, that is time and place when legal consequences take effect. When parties are present during acceptance (inter praesentes), there is no ambiguity in determining when & where contract is concluded. Easily established. When parties contract at distance (inter absentes), there's time gap between acceptance declaration & offeror's awareness of acceptance. This raises Qs about when acceptance takes effect. More problematic to establish. Time lag prompts Qs about when acceptance is considered effective - at declaration, posting, receipt, or when the offeror becomes aware of it. Precise time and place of contracting are crucial for various legal considerations like timeliness of acceptance, revocation of offers, commencement of prescription in debt, and jurisdictional issues. Postal contracts historically exemplified this problem due to significant delays in communication, but modern methods like email are narrowing this gap. Quicker communication methods raise new legal issues that haven't all been resolved yet. Q as to when & where acceptance takes effect isn’t unique to SA & has given rise to various theories in general contract literature: - Declaration theory: Contract comes into being when & where offeree expresses acceptance - that is, when they write or sign letter of acceptance. - Expedition theory: Contract comes into being when & where offeree posts their letter of acceptance. - Reception theory: Agreement comes into being when letter of acceptance reaches address of offeror. - Information theory: Agreement is concluded when & where offeror learns or is informed of acceptance, i.e. when offeror reads letter of acceptance. The information theory as general rule in SA law Default theory is information theory which holds that basis for contractual liability is actual & conscious agreement between parties. So offeror must learn of acceptance of their offer before actual consensus can be said to have been attained. Until then, minds of parties haven’t truly met. Since consensus is primary basis of contract in our law, general rule = contract comes into being only when acceptance is communicated to mind of offeror. 3 instances information theory doesn’t apply: 1. Where offeror stipulates different method of acceptance 2. In postal contracts 3. In electronic contracts (includes email) (1) Where offeror stipulates different method of acceptance Information theory is subject to qualification that offeror as dominus may dispense with need for acceptance to be communicated to them, or can indicate an earlier time when acceptance will be effective to conclude contract. Such a waiver of requirement of notification of acceptance may be express, or it may be implied from all circumstances, including language of offer & nature of contract. If offeror prescribes specific method of acceptance, that method prevails. This is due to freedom of contract & party autonomy (Unconstitutional methods excluded). Thus, offeror may be held to have tacitly agreed that contract would be concluded as soon as offer is signed; or when goods ordered are despatched by rail, or when written notice of acceptance is delivered to an address specified in the contract for delivery of all notices under contract, or (in case of an offer of reward) when offeree performs some act, such as furnishing info leading to arrest of thief, or scoring a hole-in-one in a golf tournament. (2) Postal contracts: expedition theory applies NB exception to general rule occurs in case of postal contracts. Under influence of Eng law, our courts apply expedition theory as default rule for postal contracts. This is done on the basis of a legal fiction/presumption that by making an offer through post, offeror is deemed not only to have authorised acceptance by post, but also to have waived requirement of notification of acceptance. Unless they indicate otherwise, they are presumed to have intended that contract would be concluded as soon as letter of acceptance is posted. Cape Explosive Works SA Oil & Fat Industries 1921 (CPD) Introduced expedition theory into our law, influenced by English law. SA Oil wrote letter from Delmore in Gauteng to plaintiff in Somerset West in Cape, offering to sell glycerine to plaintiff at certain price. Plaintiff accepted offer by letter. At later stage, plaintiff also accepted by letter another offer to buy glycerine, from Lever Brothers in Durban. Both letters of acceptance were posted at Somerset West. In actions on contracts instituted by plaintiff in CPD, defendants took exception to court's jurisdiction on ground that contracts weren’t entered into in Cape, but in Gauteng & Natal, respectively, since that was where letters of acceptance were received & read by respective defendants. Court held that contract was concluded in each case when letter of acceptance was posted at Somerset West. Therefore, contracts were both concluded in Cape & Cape Provincial Division had jurisdiction. Court justified this departure from general rule on various grounds, including: commercial convenience; need to protect offeree who otherwise would be at a loss to know when contract was concluded; & general reliability of post office, leading to presumption that properly addressed letter will reach its destination. Of course, this presupposes normal operation of postal services. When those services are disrupted, such as in times of war, expedition theory would probably not apply. Decision in Cape Explosive Works was approved by AD, without much discussion, in Kergeulen Sealing and Whaling Co Ltd v Commissioner for Inland Revenue. However, decision has attracted much criticism, most of it quite justified, & in recent times, courts have seemed eager to distinguish it whenever possible. Whether it will ever be overruled is open to doubt. It should also be noted that Cape Explosive Works decision is not based on assumption that Post Office is tacitly appointed agent of offeror; this argument was explicitly rejected by court. Scope of exception Expedition theory applies only when all of the following circumstances are present: (Cape Explosive Works) 1. Offer is made by post or telegram 2. Postal services are operating normally 3. Offeror has not indicated contrary intention, expressly or tacitly 4. Contract is commercial one. Expedition theory doesn’t apply to contracts concluded by telephone or email. In these cases, where communication is almost instantaneous & parties are regarded as being 'to all intents & purposes in each other's presence, the general rule applies - contract is concluded when & where offeree's acceptance is communicated to offeror. In the case of electronic contracts, the reception theory applies. The expedition theory does also not apply where the offer is made inter presentes, even if the parties reside at a distance from one another and a reply by post is clearly envisaged. Smeiman v Volkersz: - Parties were together in the office of their common attorney G in Cape Town, when V made a verbal offer to S. - S returned to the Transvaal to consider the offer. - On the final day for acceptance, he instructed G to accept the offer on his behalf. - G, being unable to contact V by telephone to inform him of the acceptance, wrote a letter of acceptance, which was posted before but reached V only after the deadline for acceptance had passed. - Court held that no contract had been concluded in the circumstances. Criticism of the expedition theory Decision in Cape Explosive Works has met with considerable criticism from legal commentators. Although true that offeror may waive requirement of notification of acceptance, it is a fallacy to assume that he or she does so merely by using the postal system to communicate the offer. The posting of the offer might indicate that a reply by post is anticipated (not authorised; the offeree does not require special permission to respond by post) but in itself is insufficient to ground an inference of waiver. The justification of commercial convenience is unconvincing. Why is it commercially more convenient to make the offeror rather than the offeree bear the risk of the letter of acceptance going astray? Adoption of the expedition theory implies, as a matter of logic, that a posted acceptance may not be revoked or neutralised by a faster means of communication, such as email. A to Z. Bazaars (Pty) Ltd v Minister of Agriculture: - Appeal Court stated that although decision in Cape Explosive Works had been reinforced in our law by long recognition, it was difficult to shut one's eyes to the many criticisms that have been raised against it. - Nevertheless, court stopped short of overruling it. The result is a decision that is generally considered to be wrong but which retains its status as a binding precedent. Revocation or neutralisation of the posted acceptance In terms of the expedition theory, the contract comes into being as soon as the offeree posts his or her letter of acceptance. The question arises: What if the offeree wishes to revoke that acceptance? Example: - Jean-Luc, who lives in France, makes an offer by letter to Bongani, who lives in Cape Town, to buy Bongani's wine estate for R30 million. - Suppose further that Bongani accepts, also by letter. - Immediately after Bongani has posted his letter, he receives an offer from a German by the name of Dieter for R40 million. - As Bongani is anxious to accept Dieter's offer, he would like to revoke his acceptance of Jean-Luc's offer. - In terms of the expedition theory, it will not help him to send Jean-Luc an email instructing him to ignore the letter; it will not even help him to intercept the letter before it reaches Jean-Luc, because in terms of the expedition theory, the contract came into being when Bongani posted his letter. - If Bongani somehow manages to recover his letter, intending to revoke his acceptance, he will be guilty of breach of contract if he fails to proceed with the sale to Jean-Luc. - The question that now arises is whether the expedition theory operates too harshly against Bongani, the offeree. - Would it not be fairer if an acceptance could be revoked at any time before it comes to the attention of the offeror? - In these circumstances, the information theory appears to be the most equitable. - In terms of the information theory, the contract comes into existence only when and where the offeror learns of the acceptance; until such time the offeror may revoke the offer and so too the offeree may revoke his or her acceptance. Consider the equities of when a posted acceptance takes effect In A to Z Bazaars court questioned whether the Cape Explosive Works principle, mainly conceived for the protection of the offeree, should necessarily preclude possibility of neutralisation of a posted acceptance before its receipt by the offeror. Would it not be logically inconsistent to hold, on the one hand, that the contract is concluded as soon as the letter of acceptance is posted, and, on the other, that the offeree may nonetheless revoke the acceptance by a quicker means of communication, without committing a breach of contract? Should fault not perhaps play a role where the letter of acceptance is delayed or lost in the post? If a letter of acceptance is delayed or lost in the post, this is irrelevant in terms of the expedition theory, because a contract came into being when the letter of acceptance was posted. However, the offeror may be at a disadvantage, since they are uncertain whether their offer has been accepted. The most equitable solution to the problem might be to determine which party is at fault. If delay or loss is due to the offeror's fault (for example, because he or she has given the wrong address or has failed to give notice of change of address), they should bear the risk and offeree should be able to rely on existence of the contract. If the offeree is at fault (for example, because he or she wrote the wrong address on the letter), then the offeror should be able to dispute the existence of the contract even though the offeree has posted a letter of acceptance. Where neither of the parties is at fault and the letter of acceptance does not reach its destination, the problem becomes more intricate. One is once again left with the allocation of risk by operation of law if the expedition theory is applied. There should be sound reasons of policy to favour the offeree by applying the expedition theory. (3) Electronic contracts: the reception theory applies Contracts entered into by means of email, SMS or other means of electronic communication are governed by the Electronic Communications and Transactions Act. In terms of this legislation, an agreement concluded between parties by means of data messages is concluded at the time when, and the place where, the acceptance of the offer is received by the offeror. Consequently, the reception theory rather than the expedition theory applies in these circumstances. A data message is regarded as having been received by the offeror at his or her usual place of business or residence when the complete data message enters an information system designated or used for that purpose by the offeror and is capable of being retrieved and processed by them. PACTA DE CONTRAHENDO We are discussing ancillary agreements made in commercial practice before an offer is accepted or even made, concerning the main agreement that might follow. Examples of such ancillary agreements = promise not to revoke an offer for a specific duration or a promise to offer the property to a specific person first if the seller decides to sell it. These ancillary agreements are referred to as "pacta de contrahendo," which translates to "contracts about contracting." SA law recognises 2 forms of pacta de contrahendo: 1. The option contract 2. The preference contract. An option contract restricts offeror's right to revoke offer. Preference contract binds 1 party to give preference to other party if they decide to conclude specified type of agreement. The right to be preferred in preference contract is known as right of first refusal or, in context of sale, right of pre-emption. OPTIONS An option is a legally binding agreement to keep an offer open for a specified period, making the offer irrevocable during that time. The holder of the option has the sole discretion to decide whether to bring the main agreement (e.g., sale, lease) into existence by exercising the option. Examples illustrate the utility of options in commercial transactions, such as allowing time for consideration of a purchase, ensuring an offer remains open for a set period, or securing rights for future potential gains. Options can be granted for various considerations, including monetary payment or gratuitously. Options can be referred to as call options (for the right to buy) or put options (for the right to sell). Options may be restricted to the original grantee or transferable to third parties, potentially holding considerable value, as seen in options trading on stock exchanges. Options can have significant financial implications, as demonstrated in the example of buying oil barrels at a predetermined price in anticipation of future market fluctuations. Juristic nature of an option An option consists of 2 components: 1. An offer to enter into the main agreement (main offer). 2. An agreement to keep the main offer open for a specified time. The main offer is likened to the subject matter of the contract, such as a car in a sale contract. The option must fulfil all conditions for a valid contract, including consensus ad idem (meeting of minds). The formation involves offer and acceptance, with 2 offers considered - main offer & offer to keep the main offer open. Example: - A offers to sell her car to B for a specific price and time, with B having the option to accept or reject within that timeframe. - B's responses determine outcome of option - acceptance, rejection, or failure to respond within the stipulated time. - If B accepts the main offer within the specified time, it concludes the main agreement. - If B rejects the main offer, the sale doesn't occur, and the option is discharged. - Failure to respond within the specified time causes the main offer and the option to lapse automatically. Earlier views on the nature of an option Early decisions, including those of the AD, have shown confusion regarding the legal status of options. Different court decisions have presented varying interpretations of options, leading to uncertainty. Some interpretations erroneously equate options with unilateral contracts, implying offer becomes binding upon acceptance. In Hersch v Nel Davis AJA criticised characterisation of options as unilateral contracts, emphasising that options involve 2 parties and represent a serious agreement. Options are seen as agreements between the giver and holder, where the giver commits to sell at a specified price if the holder chooses to exercise the option within the agreed timeframe. Another perspective suggests that options may be considered contracts of sale subject to a suspensive condition, which is the option holder's decision to exercise the option. AD rejected the notion of options as contracts of sale subject to a suspensive condition in Venter v Birchholtz. Unilateral declaration that the offer is irrevocable Q whether an offer can be rendered irrevocable through means other than granting an option, specifically through a unilateral declaration by offeror. There are diverse views among writers on this matter, & case law is not consistent. The law generally doesn't recognise unilateral promises as binding, so theoretically, a declaration of irrevocability should be treated as an offer of an option requiring acceptance. However, in practice, offers are often declared irrevocable without explicit acceptance from the offeree. Practical challenges of treating silence as tacit acceptance - may involve resorting to a legal fiction. Labour Appeal Court's conclusion is that an offer becomes irrevocable upon receipt by the offeree, unless the offeree rejects the irrevocability explicitly. Mental acceptance is deemed meaningless in practice and can’t be evidenced, so requiring it would merely pander to theory. Notification of acceptance of irrevocability is considered impractical in normal business practice and would be regarded as foolish. Legal effect of an option An option functions as a contract, establishing rights and obligations for both parties involved. The grantor of the option holds a dual negative obligation: first, not to retract the offer, and second, not to impede the formation of a contract through the acceptance of the offer. The holder of the option (grantee) possesses corresponding rights to demand that the offer remains open and that their preferential right to purchase the property through exercising the option is maintained. The option renders the offer irrevocable, meaning any attempt by the grantor to revoke the offer is ineffective. The offer stays open for acceptance by the grantee. While the grantee can ignore the attempted revocation and retain the option, it's advisable for them to take measures to safeguard their position, such as preventing the sale of the property to another party, as third parties acquiring rights in good faith may be protected by law. Duration of the option Usually, an option agreement will specify the time within which the option must be exercised Failure to exercise it within the prescribed period will result in automatic termination of the option. An option that fails to specify a time limit might conceivably be void for vagueness; but the better view is that the offer must be kept open for a reasonable time if no time limit is stipulated. In principle, death of a party won’t put an end to option, unless contract stipulates otherwise, expressly or by implication. Where an option is personal to grantee, so that it can’t be transferred, it terminates on death of grantee. An election by grantee not to exercise the option will cause it to lapse; as will any other event that puts an end to obligations, such as supervening impossibility. Transferability of an option The general rule is that, unless otherwise stated, personal rights may be freely transferred by cession. Where A has granted an option to B, B may cede her rights under the option to C unless A has expressly or impliedly stipulated that the option is personal to B. In determining the intention of the grantor A, an important consideration will be whether the identity of the option holder is of any importance to A. In the case of an option to buy for cash, unless there is something in the agreement to indicate a contrary intention, the option will be presumed to be cedable because the identity of the option holder can be of little importance to the grantor. An option to obtain a loan or to buy on credit would stand on an entirely different footing. Formalities: options to buy or sell land 2 contracts are involved when dealing with an option: the option itself and the main contract upon exercising the option. Q arises whether the formalities required for creating the main contract are also necessary for the ancillary contract of the option. Particularly significant in land sales due to requirements under the Alienation of Land Act. In principle, it seems unnecessary for the option to comply with formalities required for the main contract. The offer and acceptance forming the option must be in writing and signed, but the option itself might not need to follow the same form. Past provincial cases hinted that the option might not need to meet the same formalities as the main contract. But, a ruling in Hirschowitz v Moolman stated that a pactum de contrahendo (a preliminary agreement to enter into a contract) must meet the same requirements for validity as the main contract. This ruling was later overturned by the CC in Mokone v Tassos Properties, which clarified that the formal requirements of the Alienation of Land Act do not apply to an option to buy or sell land. Remedies for breach of an option See Boyd v Nel See Sommer v Wilding Consequences of breaching an option contract are determined by general contract principles governing breach and remedies. Remedies for Breach of Contract: - If breach is material, innocent party has the choice to cancel or uphold the contract. - If cancelled, innocent party is entitled to restitution of any performance already made. - If upheld, innocent party may seek specific performance from the breaching party. - Regardless of cancellation or upholding, innocent party is entitled to damages if financial loss occurred due to the breach. Damages are calculated based on the innocent party's positive interest, aiming to place them in the financial position they would have been in if the breach had not occurred. This includes compensating for both reliance losses (e.g., wasted expenditure in preparing to perform under the contract) and expectation losses (net profit that would have been made if the contract was properly performed). Remedies for breach of contract: the general pattern Applying these broad principles to the an example set of facts. Legal implications & consequences of breach of contract. Option to buy land granted by A (landowner) to B (developer). A grants B an option to buy land for R10 million. B pays R400,000 for the option, which lasts for six months. Before B decides to exercise the option, A breaches the contract by selling the land to a third party, C. Cancellation of Option If B chooses to cancel the option, it terminates immediately. B is entitled to restitution of the R400,000 paid for the option. B may also claim damages to place her in the financial position she would have been in had A not breached the option. If B wouldn't have exercised the option anyway, her expenditure wouldn't be recoverable. B can only recover losses if she proves she would have exercised the option and would have made a profit from it. Holding A to the Option If B decides not to cancel the option, A's offer to sell the land remains valid. B is entitled to the full duration of the option before deciding whether to buy the land. B can obtain an interdict to prevent A from transferring the land to C. If B exercises the option, it's replaced by a contract of sale, and B can claim specific performance. B's claim to the land supersedes C's claim based on the principle 'first in time, first in law'. C would have a claim against A for breach of the contract of sale. If C is a bona fide successor, his claim prevails; if mala fide, C may be compelled to transfer the land to B. B may be entitled to damages if she suffers financial loss due to A's breach, regardless of outcome regarding land transfer. Potential Outcomes Whether C is onerous or lucrative successor may influence whether he can be compelled to transfer the land to B. B may receive damages if she can prove financial loss due to A's breach, regardless of the land transfer outcome. PREFERENCE CONTRACTS See Hirschowitz v Moolman See Mokone v Tassos Properties Preference contract: ancillary agreement where grantor promises preference to grantee for another agreement (main agreement). Main agreement often sale; ancillary agreement known as pre-emption agreement, granting pre-emptive right. If main agreement not sale (e.g. lease), ancillary contract called 'first refusal', granting right of first refusal. Preference contract = pre-emption agreement Principles apply to all preference contracts with changes as needed. Right of pre-emption (Type of preference contract) Right of pre-emption: preferential right to buy property if/when grantor decides to sell, without obligation on grantor to sell. Conditional & preferential right, depending on contract between parties. Must consider construction, may impact remedies 2 constructions proposed: - Grantor obliged to make offer to holder - Grantor required to inform holder first in the event that they decide to sell. Commonly, grantor offers sale to grantee, assumed as common intention unless indicated otherwise. Right of pre-emption compared with an option Pre-emption agreement & option both forms of pactum de contrahendo but differ significantly. Option: grantor makes firm offer, sale's conclusion lies with grantee. Pre-emption: no firm offer, just an undertaking to offer if trigger event (usually sale decision) occurs. Grantor retains decision power to sell. Option requires all sale terms set in offer; void if uncertain or incomplete. Pre-emption doesn't need future sale terms in agreement; terms need not be predetermined. Rarely, if pre-emption spells out sale terms, it may be a conditional option for grantee. The obligations of the grantor Obligations from pre-emption agreement depend on its terms between parties; default to common law rules ONLY if original agreement unclear. But issue = common law not set. Pre-emption acts as restraint on alienation, barring grantor from selling to third parties while right exists. Clear that grantor has negative obligation: may not sell to third party without giving opportunity to grantee to buy or offer. Grantor will not make offer to anyone else or notify anyone else = duty. Less clear if grantor has possible positive obligation (to make offer once right triggered). Owsianick v African Consolidated Theatres: - Was disagreement on whether pre-emption enforces positive obligation on grantor to sell. - Botha JA: no compulsory sale via specific performance - Ogilvie Thompson JA: opposite view. - Subsequent cases appear to prefer the view of Ogilvie Thompson. They recognise that once the trigger event has occurred, the grantor is under a duty to make an offer to the grantee. However the Q of positive enforcement of a pre-emptive right by means of an order of specific performance remains uncertain. Enforceability of positive obligation & its content depend on agreement's specified preference form. Duty often to address offer to grantee, but could also be to invite offer from grantee The trigger event in a pre-emption agreement While the negative obligation of the grantor comes into play as soon as the pre-emption agreement is concluded, the positive obligation (assuming that there is one) is conditional upon the occurrence of a trigger event. What constitutes the trigger event is a matter of interpretation of the agreement in Q and may sometimes be a matter of some difficulty. In Owsianick, for example: - Lessee's pre-emptive right to buy the leased property was made conditional upon the lessor desiring to sell the property during the currency of this lease. - Before the lease had come to an end, the lessor granted to a 3rd party an option to buy the property, exercisable only after termination of the lease. - Appeal Court split 3:2 on Q whether the lessee's pre-emptive right had been triggered by the grant of the option, with the majority holding that the right had not been so triggered. If the parties have failed to specify what will bring the pre-emptive right into operation, the court will have to fall back upon the default construction of pre-emption agreements, and in this regard it has been argued with considerable force that nothing short of a valid offer to, or a contract with, a third party should suffice as the trigger event. The offer must be a bona fide one Trigger event locks grantor into obligations under pre-emption agreement; can’t evade by making unreasonable offer to grantee. Offer must be bona fide. If pre-emption agreement specifies future sale terms, offer must adhere to these terms. Grantee must match terms of any genuine 3rd party offer, even if price exceeds market value. Grantor's offer to pre-emptive right holder must match or be better than terms offered to 3rd parties. Bona fide offer determined by objective criteria like market value & other factors in absence of specific stipulations above. In RDL, the offer made by the grantor had to be kept open for at least 2 months. Today, unless the parties have agreed otherwise, the offer must be kept open for a reasonable period. This flows from the requirement that the grantor should act in good faith. Were it not so, the grantor could discharge the pre-emption agreement by making an offer to the grantee and by then withdrawing it before the latter has had a reasonable opportunity to consider the offer. Wissekerke v Wissekerke: - AD decided that if grantor, having made an offer to the grantee, genuinely changes their mind about selling property at all, they may withdraw the offer. - In that event, the pre-emptive right would continue to have effect and the grantor could not sell to a 3rd party in breach of that right. Formalities Hirschowitz v Moolman: - AD held pre-emption agreement must comply with same validity requisites as main agreement, including form requirements. - Pre-emption agreement for sale of land must meet Alienation of Land Act's s 2(1) requirements. CC overruled Hirschowitz in Mokone v Tassos Properties: - Stated pre-emptive right agreement need not comply with formalities. - But sale from pre-emptive right exercise must be in writing & signed by parties. - Unless pre-emption agreement specifies otherwise, holder can enforce right by submitting signed offer to grantor on terms no less favourable than 3rd party's offer or as allowed by right, & compel grantor to countersign or have registrar/official do so. Remedies for breach See Owsianick v African Consolidated Theatres. Breach = other party can claim for cancellation & damages if they suffered losses (as in option). The remedies for breach are most easily explained using an example: A grants B right of pre-emption, then breaches it by selling property to C (or grants C an option to buy the property, as in Owsianick) without offering it to B. Breach allows B to cancel or uphold contract & claim damages for financial loss. If B cancels: - Agreement ends & B gets back money paid for pre-emptive right. - B may claim damages for lost profit on main sale contract or from sale of pre-emptive right, if A had not breached. If B upholds: - Expected to entail specific performance of pre-emption agreement, though legal certainty lacks. B entitled to specific performance to prevent A from selling/transferring property to C. - Uncertainty over B's entitlement to specific performance for A's obligation to make sale offer. - Pre-emption agreement doesn't grant B property transfer; requires valid sale. - B needs A's cooperation for sale; possible through court-ordered specific performance. - B theoretically entitled to this relief, subject to court's discretion. - Courts hesitant to grant order, possibly due to freedom of contract concerns. Owsianick: - Botha & Potgieter JA expressed the view (obiter, since the case turned on whether the trigger event had occurred) that there can be no positive enforcement of a pre-emptive right - Only Ogilvie Thompson JA was prepared to hold otherwise. In subsequent cases, AD has assumed, without deciding the point, that where appropriate, specific performance can be ordered. New mechanism introduced - Oryx mechanism: Associated South African Bakeries (Pty) Ltd v Oryx & Vereinigte Bäckereien (Pty) Ltd: - Appeal Court accepted grantee of right of pre-emption needs method of positively enforcing right; damages for breach deemed insufficient. - Court developed new doctrine based on Roman-Dutch naastingsreg, instead of applying ordinary specific performance principles. - 'Oryx mechanism' allows B to 'step into shoes' of C when A sells property to C in breach of preemptive undertaking given to B. - B can create new contract of sale with A on terms identical to A & C's agreement through unilateral declaration of intent to A. - B can "hijack" sale to C but does not end sale to C; creates new, concurrent sale to B. - B's sale, based on earlier preemption agreement, has priority ("first in time, first in law") for property transfer over C, if C's transfer not yet occurred. - If transfer to C has occurred & C is bona fide successor for value, B can’t recover property & is left with damages claim against A. The court in Oryx specifically left open 3 questions: 1. Whether B can employ this novel mechanism only once A has actually sold the property to C, or whether a mere offer to sell to C will suffice; 2. Whether the mechanism is competent when the sale must by law comply with certain formalities (as in the case of a sale of land); and 3. Whether B can recover the property from C in circumstances where C was ignorant of B's pre-emptive right at the time of the sale but acquired knowledge of it prior to transfer into her name. These Qs, along with many others relating to the nature and enforcement of pre-emption agreements, remain unresolved. An opportunity for clarification of the law was lost when, in Tiekiedraai Eiendomme v Shell SA Marketing, CC refused to grant leave to appeal on grounds that, though the points which counsel sought to raise were arguable and matters of general public importance, they should have been, but weren’t, raised in the courts below. Difficulties with the Oryx mechanism Courts have hesitated to apply ordinary principles of specific performance to pre-emption agreements Instead, opted for Oryx mechanism, allowing unilateral compulsion of sale by grantee of pre-emptive right without court intervention Oryx mechanism seen as a form of self-help, bypassing need for court-ordered specific performance of pre-emption agreement Enables grantee to seek specific performance of sale from unilateral declaration of intent, offering shortcut to acquiring property This approach commended from grantee's perspective but challenges contract theory & may create more problems than it resolves Basic principle of consensuality in contract lacking if sale can be created by unilateral declaration by B unless seen as acceptance of an offer by A Possibilities for justifying unilateral declaration include: A's offer to C seen as tacit offer to B, legal fiction deeming A's offer to B, or pre-emption agreement containing conditional offer to B triggered by sale to C Reconsideration of legal nature of pre-emption agreement required, potentially viewed as conditional option Sale from acceptance by unilateral declaration must be on terms in pre-emption agreement, not terms agreed by A with C If A & B haven't agreed on future sale terms, offer in pre-emption agreement unclear until A offers to C Issues arise if terms offered to C not applicable to B (e.g., payment partly in cash, partly in shares) View supports B matching terms offered to C, substituting cash for non-matchable parts Authority suggests Oryx mechanism only competent if B can fully step into C's shoes Oryx mechanism considered competent for sales requiring specific forms for validity (e.g., land sales requiring written agreement) Sale must be in writing & signed by both parties for validity Written unilateral declaration of intent by B may suffice to create contract of sale with A if pre-emption agreement & offer to C are in writing Van Rensburg: - Argues deed of sale can be embodied in multiple documents: pre-emption agreement, offer to C, & B's unilateral declaration - Reading documents together provides sufficient evidence of sale terms by A to B to meet Alienation of Land Act requirements Mokone v Tassos Properties: - CC upheld Oryx mechanism's competence in land sale cases - Court can compel grantor of pre-emptive right to comply with formal requirements if he fails to cooperate Naude ‘The rights and remedies of the holder of a right of first refusal or preferential right to contract’ 2004 Preference contracts, also known as first refusal contracts, involve 1 party promising to prefer another in concluding specific type of contract Right to be preferred can be created by will, where testator stipulates beneficiary must offer another chance to buy inherited object first. Right may also be established by legislation. Despite wide use of preference agreements, basic rights, duties & remedies of parties involved are controversial Conflict in the case law: 4 conflicting views Controversy around residual rules highlighted by AD decisions in Owsianick & Oryx. Majority in Owsianick, per Botha JA, interpreted to mean an order for specific performance can’t be obtained to compel grantor of right of first refusal to make offer. Majority held no legally recognised procedure exists for holder to demand to step into buyer’s place if sale conflicts with their rights, due to lack of enforceable obligation on grantor. - Holder's remedy limited to interdicting grantor from selling or transferring property to 3rd party. - Holder cannot oblige grantor to make offer, even if third party took transfer mala fide; can only have transfer set aside. - Holder of right of pre-emption cannot compel sale through own declaration or court order; sale only possible if grantor voluntarily makes offer. - Right of first refusal gives holder a "weapon" that may persuade grantor to sell but does not ensure it. Majority view implies grantor has only negative obligation, subject to condition that holder rejects offer. Obligation termed as obligatio non contrahendo cum tertii, not enforceable to make grantor offer, but if made, releases grantor from obligation. Minority judgment by Ogilvie Thompson JA supports holder's entitlement to order compelling grantor to make offer to sell. AD in Oryx contrasted with majority in Owsianick, ruling holder of right of pre-emption may step into buyer's place if sale conflicts with rights, known as Oryx mechanism. Oryx mechanism seen as novel in law compared to views before Owsianick & Oryx decisions. De Vos J in Hartsrivier Boerderye offered variation on Botha JA's construction in Owsianick, emphasising right of first refusal involves grantor's obligation not to contract with others without giving holder chance to make offer. - This places positive duty on grantor to notify holder of intent to sell. - If holder makes offer, grantor can reject but loses right to sell to 3rd party, giving holder R to make offer, not right to buy. Different constructions in decisions not justified by specific wording of preference contracts or facts but on uniform construction based on precedent & historical authority, rather than parties' interests & intentions. A breakdown of the system of precedents and questionable reliance on other authority 4 judgments mentioned above, & others concerning preference contracts, rely on incorrect interpretations of previous decisions & disregard contrary decisions. Ogilvie JA's argument in Owsianick, for example, relied on Le Roux v Odendaal, but his view that specific performance of right of pre-emption had been granted in that case is incorrect. Plaintiff in Le Roux's case had accepted voluntary offer by grantor & obtained specific performance of resulting contract of sale. Thompson JA took out of context statement in Le Roux that ‘in each case holder is entitled, by due exercise of his right, to become purchaser’. In Oryx, court wrongly relied on this minority judgment in support of Oryx mechanism. Oryx relied on Vorkaufsrecht of German law, which doesn’t prohibit contract with 3rd party. Instead, it allows grantor to contract first with third party before holder decides whether to exercise their right. This contrasts with Vorkaufsrecht, which prohibits sale to third party unless prior offer is made to holder. This leads to application of Vorhand, different construct in German law, rather than Vorkaufsrecht. Type of Vorhand contract depends on context, bargaining power, holder purpose, & preference clause wording. Default Vorhand construction is an obligatio non contrahendo cum tertii, similar to Botha JA's construction in Owsianick. Majority judgments in Owsianick & Oryx based on historical sources resulted in conflicting views on remedies of holder in RDL. Precise construction of preference contracts in Roman & RDL is uncertain, & it is possible that they only led to claim for damages or setting aside of transfer to third party. They could have operated like ex lege right of retraction or naastingsrecht, allowing holder to compel performance on same terms agreed with third party without prior chance to contract. This construction may have been received into early SA law. Absence of clearly defined default regime for preference contracts in RDL may explain plurality of constructions in SA law. Court's misreading of D 18 1 75 may have prevented buyer from claiming specific performance of seller's duty to deliver, as pre-emption agreements were regarded as mere pactum adiectum or ancillary pact to contract of sale. Oryx has left unclear position on operation of preference contracts, with judges in Crundall Brothers v Lazarus NO admitting difficulty in understanding effect of order made in Oryx. Cogency of reasons for decision in Oryx has also been questioned - court's failure to spell out basis of Oryx mechanism leaves impression that fiction is at work, with all dangers flowing from it. Court's formulation of Oryx mechanism appears inappropriate in some situations, such as when terms agreed with third party differ from those to which holder is entitled in terms of preference contract. These shortcomings place question mark over court's rejection of alternative constructions advocated in Owsianick. Oryx has left controversial issues unresolved in subsequent cases. In Hirschowitz v Moolman, AD assumed that Oryx mechanism is triggered by grant of option & that order for specific performance in form of order to make an offer is still available as alternative remedy. But court decided that contract of pre-emption in respect of land must comply with formalities legislation before holder may claim specific performance against grantor. Other cases that conflict with Oryx have exacerbated confusion, such as Rogers v Phillips & Dithaba Platinum v Erconovaal, which held that specific performance can be granted to enforce pre-emptive right & that court has discretion to refuse this remedy. Exact construction of preference contracts remains uncertain, & detailed policy analysis is necessary to arrive at fair set of residual terms for these contracts. Is the view of the majority in Owsianick and the court in Hartsrivier worthy of further consideration? Academic commentators have criticised Botha JA's view in Owsianick as 'erroneous' & 'misleading simplification' due to commercial efficacy, principle, practical utility, reasonableness, & logic. But their criticisms are vague & don’t explain their objections. Some writers also concede that parties may structure preference contracts as set out in Hartsrivier Boerderye. Majority in Owsianick & court in Hartsrivieris' view is not meaningless from practical or commercial perspective & deserves attention. Balance of bargaining power in case could result in grantor agreeing only to be subject to an interdict or damages claim in case of breach, rather than an order compelling an offer or specific performance of substantive contract. Holder might be satisfied with such an arrangement. Negative construction of 'preference' doesn’t make holder's right something other than 'right of first refusal' or 'right of pre-emption'. 'Preference' implies negative, but doesn’t necessarily indicate when & how selection must take place. Construction is not illogical & doesn’t necessarily imply that grantor must have an enforceable duty to make an offer. View of Botha JA & De Vos J in Hartsrivier is only correct view on construction of right of pre-emption, which aligns with policy considerations that restraints on alienation must be narrowly construed in interests of commerce. This negative construction is championed in Germany & Scotland as default construction of pre-emption rights, requiring an obligation not to contract with 3rd party first. Variety of preference contracts with different rules on holder rights & remedies are available as alternative approaches. Proposal on the basic rights and duties of the parties Preference arrangements can be interpreted in various ways, but clear drafting is often not done. These agreements often state a 1st option, right of pre-emption, or right of first refusal. But these contracts often fail to define the condition or trigger event, often indicating a desire to conclude the main contract rather than a clear indication of a contract with a specific 3rd party. 2 main types of preference contracts should be recognised for unclear cases: preference contracts that specify a price for the main contract or a mechanism for ascertaining the price, and those that are silent in this regard. Conditional options to contract at a predetermined price Preference contract predetermines main price, making it an option conditional upon any manifestation of desire to contract by grantor. Stipulation of price indicates that grantor has no interest in sounding out market, such as negotiating with 3rd parties. Holder has right to contract with grantor on terms determined in preference contract, & commencement of negotiations with 3rd parties is sufficient to trigger right. Liability depends on actions of grantor that manifest desire or intention to contract, not on grantor's ipse dixit. Preference contracts that simply provide for an offer at price grantor is prepared to accept from 3rd parties don’t fall into this category of contracts. Reference to "usual price" or "reasonable price" is also sufficient to bring preference contract under this type. Distinction between options & pre-emption rights isn’t always clear to contract-makers due to overlap of options & preference contracts. Preference contract gives holder right to contract at specified price, despite better offer from 3rd party. Primary obligation of grantor is not to prefer holder above 3rd parties, but to ensure all things are equal. Any option is also preference contract, as option holder has R to contract at specified price & has R of 'first refusal' to contract at that price. Academic writers may criticise typifying certain pre-emption Rs as options, but there is no inherent virtue in retaining this distinction. Ordinary preference contracts The 2nd default type of preference contract, commonly used in SA = ordinary preference contract. Allows holder to have 1st chance to contract with grantor without specifying price or mechanism for determining price. It only obliges grantor to prefer holder above interested 3rd parties if holder matches terms offered by them. Default type for ordinary preference contracts must address 2 key issues: 1. Triggering the holder's right to contract, determining what rights the holder has upon the trigger event, & 2. Determining remedies for breach. The holder may also enforce performance of the main contract. Policy considerations will be examined before a solution is proposed for recognition in SA. Should any conduct short of a third-party contract breach or trigger the holder’s right? Default rule in preference agreements is that breach by grantor is only considered if valid offer or contract with 3rd party is made. So grantor's first offer should be made to holder, not 3rd party. No lesser manifestation of desire to contract should trigger any enforceable right to an offer or other remedy for holder, except for prohibitory interdict. This rule should be applicable even if preference contract provides that grantor will offer to contract with holder upon desiring to contract. Default rule should only be excluded if parties clearly state that holder is entitled to enforce preference contract on occurrence of lesser manifestation of desire to sell. This policy aims to maximise wealth & economic efficiency, benefiting society as whole. However, lesser trigger than conclusion of contract or valid offer would cause grantor to act at his peril in land deals, leading to clandestine caution & limited negotiation opportunities. In sectors like publishing industry, 3rd parties would not be willing to negotiate if serious negotiations would trigger right to contract to detriment of holder. Defining trigger event for desire to contract creates uncertainty. Efforts to narrow trigger event to specific actions are insufficient without actual contract or offer to 3rd party. Uncertainty exists regarding contract price without clear standard. Law would need to set standard for contract price before offer or contract. Criteria like fairness, reasonableness, & "good faith offer" are vague & disputable. Grantor should be allowed to explore market for highest possible price. Approach in Souteriou v Retco Poyntons should not be followed due to vague standards for determining rental & conditions. Standards for what grantor would offer to others are vague without actual offer or contract. Lesser manifestation of desire to contract unfairly limits grantor to reasonable price, ignoring interest in highest possible price. Preference contracts seen as restraints on alienation should be strictly construed. Preference contract terminates only after grantor contracts & performs with third party, allowing holder to match terms. Pro

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