Mercantile Law 102: Formalities, Certainty, Possibility, and Legality PDF

MERCANTILE LAW 102 Theme 5: Formalities + Certainty + Possibility+ Legality Weekly Theme Activity List 1. Read the notes for that week’s Theme under the “MER102 Lessons” tool on iKamva. You will have to read these notes several times as law is a new subject for any students, especially for...

MERCANTILE LAW 102 Theme 5: Formalities + Certainty + Possibility+ Legality Weekly Theme Activity List 1. Read the notes for that week’s Theme under the “MER102 Lessons” tool on iKamva. You will have to read these notes several times as law is a new subject for any students, especially for non-law students. 2. Read the relevant pages (indicated) in the textbook (details of textbook on your Module Outline) for an expanded explanation. 3. “TRACK YOUR UNDERSTANDING” activity. These are pauses in the Theme Notes. These pauses pose important questions at regular intervals and test your understanding of the key concepts being discussed in the notes. You will know early on at Step 3, whether to go back and repeat Steps 1 and 2. 4. Complete the E–Quiz activity, at the end of each theme. The E-Quiz is accessible online on iKamva in the ‘Tests & Quizzes’ tab. The 6 Validity Requirements for Contracts 1) The parties must have contractual capacity (have the legal ability to conclude contracts). 2) There must be consensus (agreement) between the parties. 3) Any formalities such as writing & signature must be complied with. 4) The contractual terms must be clear and certain (not vague). 5) Obligations or promises undertaken by the parties must be possible. 6) The contract must be legal.  Formalities Formalities are processes or formal steps or technicalities that must be fulfilled/ complied with in order for the contract to be valid and therefore binding on the parties. Examples are that the contract be in writing, signed by the parties, signed by witnesses, signed in front of an attorney, registered with the deeds office within a given period (the deeds office is responsible for the registration, management and maintenance of the property registry of South Africa). As a general rule --- no formalities are needed for contracts such as writing, to be valid. The contract can be oral, written, or even be concluded by conduct (at an auction you can simply raise your hand or nod at the auctioneer to indicate your acceptance of his offer).That means most contracts do not need to comply with any particular form or format. Many contracts don’t require a formality such as writing or signature. Most contracts can be concluded verbally or even simply by your actions, so long as the intention of the parties is made clearly as between the parties. For example, if you walk into the student cafeteria, put the bottle of coke you took from the fridge on the counter together with R50, and the cashier takes the money and gives you change and the coke, you have entered into a contract of sale. You may even not have spoken a single word! Writing or signature are also not required. So, verbal contracts are therefore just as valid as written contracts. But oral contracts may be difficult to prove, the opportunities for miscommunication/ misunderstanding are greater with a verbal contract. It’s easier to prove something written down. However, some contracts DO require specific formalities/ steps / processes/ formalities to be valid.  Formalities (Cont…) Formalities required by statute/required by parliament: E.g. sale of land – the Alienation of Land Act 68 of 1981 states that contracts for the sale of land have 3 formalities: (i)contract must be in writing ; (ii) signed by the seller and purchaser; and (iii) be registered in the Deeds Office (if not complied with the contract is invalid). If, for instance the the writing does not adequately identify the property , or it is not signed, the contract is void. So, if you want to make an offer to buy your friend’s flat, you must write it down, sign the offer and give it to your friend. Your friend accepts your offer by writing the acceptance and signing it. In the case of the sale of immovable property like this flat, a verbal offer or acceptance of the sale is void and has no force or effect. What if any of these 3 formalities are not satisfied? Is the contract void or voidable? As already indicated, if the writing does not adequately identify the property, the contract is void. The Alienation of Land Act also requires that the written agreement must indicate to the buyer of a cooling-off period, if this is not included the contract is voidable. Another example is an antenuptial contract. –the Deeds Registries Act 47 of 1937 requires that contract to be in writing, signed by the parties, signed in front of a specialist attorney called a notary public, and registered in the Deeds Office within 3 months of the parties being married.  Formalities (Cont…) Formalities required by statute/required by parliament (Cont…): What of any of these formalities are not satisfied? Is the contract void or voidable? Answer- it depends. In Schimtz v Schimtz the ANC is valid as between the parties themselves but not against third/ other parties, or it may be valid and the parties may be liable to an offence e.g. the National Credit Act 34 of 2005 requires that all credit agreements must be reduced to writing, if not the credit agreement is valid, but the credit provider may be liable to a criminal offence, such as a fine or cancellation of their registration. Just Names Properties 11 CC & Another v Fourie & Others – the sellers signed two blank pages of paper in a contract for the sale of land. The court held that the Alienation of Land Act required that all material terms of the agreement must be reduced to writing, for the contract to be valid. In this case, the requirements were not complied, as such the contract was void. Other statutes that impose formalities: –lay-bye agreements in terms of the Sale and Service Matters Act 25 of 1964, requires that the contract be in writing and signed by both parties. –an agreement to sell or to construct a home must be in writing and signed by the parties in terms of the Housing Consumer Protection Measures Act 95 of 1998. –long leases (10 years or more) can only be enforced against third parties if they are registered against the title deed of the property in terms of the Deeds Registries Act 47 of 1937. –all credit agreements must be on paper or stored electronically in terms of the National Credit Act 34 of 2005. But if this requirement is not complied with the credit agreement is still valid, but the credit provider may be liable for an offence.  Formalities (Cont…) Self-imposed formalities Even if there is no statute demanding formalities, the parties themselves can insist on formalities. E.g. they agree that their contract will only be valid if it is written down and signed, that is reduce the contract to writing. Parties may also require that the contract be signed, in which case it must be adequately detailed because extraneous evidence may not be used to interpret the now written contract in keeping with the parol evidence rule. Goldblatt v Freemantle- X and Y concluded a contract to sell some lucerne, every month. They both agreed that the contract would be in writing. Several months letter X ignored the agreement to reduce the contract into writing, and instead demanded performance, despite the absence of a written agreement for a specific month. The court held that both parties had agreed tat the contract would not be binding until it was reduced into writing and therefore no valid contract had come into existence,  Formalities (Cont…) Examples of formalities 1. Writing Refers to any visible form of writing. “in writing” --- means the essential terms of the contract must be in writing i.e. not every little detail has to be in writing. For a contract of sale, the essential terms would be the parties, the item sold and the price. Herselman v Orpen– a piece of land i.e. immovable property was sold. What was in writing? The price, identities of the parties and the property description were in writing. What was not in writing? breach of contract consequences nor a date of occupation. Court: essentials were in writing: That is enough to comply with the formalities in the Alienation of Land Act. The contract is valid. 2. Signature Definition: a signature is any mark made with the intention that’s it’s a signature. Can be made by a party to the contract / duly authorised representative. This mark/ signature can be a thumb print or a cross. In terms of the Electronic Communication + Transactions Act 25 of 2002, an electronic signature can suffice. Where must the signature be? end of document? usually at the end of the document but can be anywhere. However, if there is a designated space or block in the document then the signature MUST be in the designated space to be a valid signature. Brack v City State– there were three designated spaces in the document: a block for the seller and a block for the witness. The seller signed in the wrong block (he signed in the witness block). Court: the signature of the seller is not valid as it is not in the designated, correct space.  Formalities (Cont…) The parol evidence rule This rule is part of the law of evidence and it’s to the effect that if parties have reduced it into writing, then that written doc is all that the court looks to determine the terms of the contract. The court may not permit oral evidence to be presented in a bid to show that the true terms of the contract are different from what is written in the contract. Purpose: prevent parties changing terms after contract is concluded Rule: if a document/contract is in writing --- it is the exclusive (only) record of the terms of the contract and No other evidence is permissible if the other evidence outside the contract tries to amend, alter, add to, contradict, or delete terms in the written contract. So: the terms of the contract are to be found in the “four corners of the document” and not by looking outside the written contract at phone calls or emails or any other sources. But there are exceptions. Question: What about evidence that attempts explain a term in contract? That would be permissible e.g. If there was a dispute about a petroleum contract, the Court could listen to evidence from a chemical engineer about what the term “raw petroleum” means. No terms are being altered. The evidence outside the document is explaining a technical term.  Formalities: Track your understanding ☞ Explain the effect the Parol Evidence Rule has on written contracts. ☞ Give an example of a contract that is subject to formalities. ☞ In a contract of sale of immovable property, there are certain formalities to be met. How much (what terms) must be in writing for a contract of the sale of land?  Certainty Certainty requires requires that it must be clear what each party to a contract has to do in terms of the contract. The terms of the contract must not be vague or ambiguous. They must be clear and certain. What standard is required? “Reasonable certainty” is required, not 100 % certainty. If there is not reasonable certainty, the contract can be void for vagueness. The possibility of the contract being regarded as void because if the court cannot work the meaning of the contract, the court cannot be expected and indeed it cannot negotiate the contract in the stead of the parties. “Certain” means determined / established or at least determinable / can be established with reasonable certainty. Example of ‘determined' : A ----- sells house to B for R800 000. The price is determined and clear. Example of ‘determinable’: A ---- sells house to B for “ a fair price to be determined by a 3rd, identifiable person”. So, for instance the parties may seek the services of a property valuer is a trained and qualified professional who does a thorough inspection of a property and provides an independent and customised valuation report on its market value. Here the price is determinable – once the third person has set the fair price we will know the price. It is certain enough.  Certainty (Cont…) Some Observations: You have a certainty problem when you don’t know where or for how long or what the debtor must do to perform. For example, the buyer shall make payment in instalments on a regular basis. See example at the end and include it here. –The policy of the courts is not to easily say the contract is vague and therefore “void”. –But the Court will also not finish drafting the contract for the parties. –Courts approach is to look at the language and circumstances and context. So for example, words have ordinary meaning unless technical language is being used (such as petrol vs unleaded petrol; damages has different meaning depending on the context it is used), ambiguous language ought to be interpreted in favour of validating the contract; ambiguous language or words should be interpreted against the interests of the person who wrote the document. –Example of too vague: where party has unlimited choice whether to perform or not. –E.g. A will pay purchase price/ the rentals “when he is able to do so”. That is too vague. Who will decide when A is able to do so? Or A will pay an amount as the purchase price/ as the rental. That is too vague. How much is “an amount”? District Bank v Hoosain–the contract stated that transfer of the property at the Deeds Office would take place “in a few months”. Was that too vague? The Court ruled that in the context of Deeds Office processes and average timelines, “in a few months” meant between 3 and 4 months and was not too vague.  Certainty (Cont…) Some Observations (Cont)…: Ma-Afrika Hotels (Pty) Ltd & Another v Santam Ltd- M had a policy insurance with S and lodged a claim due to financial losses as a result of the COVID-19 lockdown. S declined to pay out the insurance because M’s losses were a a result of the government mandated lockdown and not the local cases of COVID-19 where the M’s businesses were located. The court held that the words of the contract should be interpreted in context, to produce a fair and sensible result consistent with the purpose of the contract. In cases of ambiguity, the interpretation must be done in favour of the policy holder. Provisions that limit liability in insurance contracts must be interpreted restrictively because it is the insurer’s duty to specifically spell out the risks that are excluded. The court held that the nationwide outbreak of COVID and the government’s responses was the factual cause of the loss. Court held in favour of M. Delmas Milling Co Ltd v Du Plessis- a contract of sale that did not specify the date of delivery, the penalty for late delivery, the conditions. The court held that if the document embodying the contract is ambiguous, extrinsic evidence may be admissible to explain what the parties meant. The court also identified 3 classes of ambiguity: (i) ambiguities that can be clarified by studying the language that the parties used in the contract; (ii) ambiguity that can be clarified by resorting to the surrounding circumstances; (iii) ambiguities clarified by relying on the communications between the parties.  Certainty: Track Your Understanding ☞ How much certainty is required for a contract not to be too vague? ☞ Describe the courts policy when it comes to the requirement of certainty. ☞ Give an example of a contractual obligation that is too vague.  Possibility of Performance Possibility is important because life happens- say I enter into a contract to do a painting for you, then I am involved in accident, lose my hand and can’t do the painting; a contract of purchase and sale is concluded but the thing is destroyed before delivery; the law changes and that which was previously lawful is now prohibited. Under SA law A contract must be physically and legally capable of being performed at the time of conclusion to be valid. If the promised performance was already impossible to perform at conclusion? --- the contract is void. Therefore, for example, certain things cannot be sold e.g. the moon, the sun, impossible at conclusion already. Performance can become impossible after conclusion of the contract.  Possibility of Performance (Cont…) Examples of physical and legal impossibility The object sold is destroyed after conclusion of the contract but before delivery- other examples natural disaster occurs making performance impossible e.g. earthquake / fire/flood. This is supervening impossibility- factors beyond human control, in which case the contract is terminated.. Laws can change after conclusion of the contract but before transfer can take place ---the law could then prohibit transfer. Agreements to commit crime, a delict or break the law: Lion Match Company v Wessels where the parties had an agreement to sell wood, but the necessary government permit had not been obtained. The contract was held void. Agreements contrary to public policy (against good morals) such as wagering contracts. Agreements in restraint of trade Magna Alloys & Research (SA) (Pty) Ltd v Ellis- the law view restraints of trade to be valid, unless the person being restrained can prove that it would be unreasonable and against public policy to enforce the restraint.  Possibility of Performance (Cont…) If performance becomes impossible AFTER conclusion: there are two potential outcomes: I. If performance became impossible due to the fault of a party – that is breach of contract (prevention of performance) and that party will be held liable for damages (money compensation) (we will deal with breach in a later theme / chapter). II. If performance became impossible due to no one’s no fault –the contract is terminated - (no breach). We call this “supervening impossibility” Legislation is changed shortly after conclusion – see example horses from UK below --- that is called supervening impossibility, that is, performance of one’s contractual obligations is prevent by a superior force/ an eventuality that cannot be reasonably guarded against. Supervening impossibility is also referred to as vis maior (major force) force majeure. Using a trade test is used to decide whether something is physically impossible or not. Example: You sold and undertook to deliver steel rods to a client. The steel rods are being transported on a ship. There is a terrible storm at sea and the rods are washed overboard. They now lie 3000m below on the ocean floor. The “trade test” works like this: if it is too difficult, time and cost wise, to retrieve the steel rods from 3000m on the ocean floor, then in law, it is considered physically impossible to deliver the rods (although the rods do in fact still exist).  Possibility of Performance (Cont…) Peters Flamman & Co v Kokstad Municipality–in this very old case, two brothers had concluded a contract to light up the town with gas lamps. However, a war broke out and all foreigners, including the two brothers, were interned in war camps. They were unable to perform in terms of their contractual obligations. War is beyond human control. It was a case of supervening impossibility. The contract was terminated due to impossibility. There was no breach of contract.  Possibility of Performance (Cont…) The impossibility must also be absolute ie it must be an objective impossibility in other words complete impossibility (that is impossible for anyone in the world to perform in terms of contract, there is no way that the contract could be performed by anyone. If anyone could have the contract is not impossible). It must be impossible for anyone in that situation and not just that particular debtor, to perform. For example, a contract of lease is concluded between the landlord and the tenant, Before the landlord can “deliver” i.e. hand over the keys to the tenant, the house burns down due to an electrical fault. NO landlord, not just that particular landlord, would be able to “deliver” - provide the premises to the tenant. Objective impossibility must be distinguished from subjective impossibility: Example 1: a landlord and a tenant conclude a contract of lease. The tenant cannot pay the deposit because he/she is suddenly retrenched, and is without an income. Sadly, it is true that another tenant with an income would be able to perform. It is only this particular tenant that cannot perform. This is not a case of supervening impossibility. This is a case of subjective impossibility. It is breach of contract by the tenant and the landlord can take legal measures to have the tenant evicted. Example 2: Kaiser Chiefs Football club conclude a contract with their manger Thabang Shabalala. The bonus payable to Thabang if the team win the Premier League is R1 million. Kaiser Chiefs win the league. The Board inform Thabang they don’t have the R1 million as fewer spectators than predicted bought tickets for home matches. This is not supervening impossibility. It is only that club ie Kaiser Chiefs that have a cashflow problem. It is subjective impossibility. The club is in breach of contract and Thabang can sue for the promised bonus.  Possibility of Performance (Cont…) NOTE: The law views certain speculative contracts in a different light. Parties to these speculative contracts assume the risk of factors beyond their control happening. They will not be allowed to hide behind “supervening impossibility” to escape their liability for performance. E.g: Crop speculators conclude contracts with farmers to buy their crops even before the crops have been planted. They sell crops to stores like Pick and Pay before the crops have been planted. They foresee and accept there may be obstacles or unplanned events e.g. drought. The speculator accepts that if it happens, he cannot plead impossibility. If he cannot perform (deliver the crops to Pick and pay), he is liable for breach of contract. Orda AG v Nuclear Fuels Corp- X concluded a contract for the sale of uranium. The sale was subject to ministerial consent. The consent was refused. Delivering the uranium was therefore not possible. The Court ruled that the risk of not getting ministerial permission was within the “contemplation” of the parties. They had taken on the risk of not getting consent. They had, in effect, assumed the risk of supervening impossibility. Not delivering the uranium amounts to a breach of contract.  Possibility of Performance: Track Your Understanding ☛ C, the seller in London, sells two thoroughbred horses to D, the purchaser in South Africa. The horses will be flown to South Africa in a cargo plane. Identify the kind of impossibility. Say whether there is a contract or not. ☞ 1. At the time of conclusion of contract, the horses, unknown to the seller, were dead (due to aggressive equine flu on the farm where they were stabled). ☞ 2. Two days after the sale was concluded, the UK government issued a ban on transporting horses due to equine flu. ☞ 3. What would be the case if the seller, 2 days after contract signed, forgot the horses in a snowstorm and they died from hyperthermia?  Legality (Lawfulness) While contracting parties have the freedom to conclude contracts as they please and that these should be enforced by our courts ‘sanctity of contract’. Therefore, courts can enforce a contract only if the contract is allowed/ permitted by law. All agreements are considered lawful unless prohibited either by statute or Common Law. If the contract is prohibited by statute or Common Law, it is unlawful, and the contract is void. We make a distinction between statutory illegality and common law illegality.  Legality (Lawfulness) (Cont…) 1. Statutory illegality An act or statute passed by Parliament may make it illegal to enter into certain contracts For example, it is a criminal offence to employ minors below 15, its crime to sell of body parts. Or a statute may require you to have a licence before you can sell certain items such as alcohol or weapons. However, such statutory prohibition does not always mean that the contract is void- some only result in a penalty vs those that result in both, a penalty + the contract being void. Some statutes simply impose a penalty/ punishment , which means that the contract will continue notwithstanding the penalty and sometimes in addition to the penalty the contract is also void In the first category, the penalty is considered enough punishment, and the contract continues and in the second, it reflects the legislature displeasure by also making the contract void. For example, conduct that is both, a crime + void would be price fixing under the Competition Act. The Court will consider: (i) he intention of the legislature and (ii) whether the penalty is sufficient to deter the activity it seeks to prevent  Legality (Lawfulness) (Cont…) 2. Common Law Illegality Agreements that are against public policy or against good morals are illegal because enforcing the contract is against our morals as a society. Such agreements are also referred to as contra bonos mores. While the concept of public policy is broad and may change over time, the role of our courts is to define what it is at any given point in time. Public policy reflects the social values in a society: constitutional values of human dignity, equality, human rights. Examples: a contract that interfere/ undermine justice will be against public policy, a contract for an immoral purpose e.g. sell a human being; a contract to undermine public order --- e.g. bribe a public official; a contract to unreasonably prevent a person’s freedom to marry or divorce, unreasonably interfere a person freedom to trade, agreement to defraud the public purse or offer bribes, agreements that have immoral motivations for example to sell body parts. Such contracts are illegal and therefore void.  Legality (Lawfulness) (Cont…) Bafana Finance v Makwakwa–money lending contract deprived one of the parties the right to access court relief if a dispute arose, in effect, preventing the party from seeking legal relief. This is offensive to a sense of justice. It is against public policy because all people should have access to help from courts if there is a dispute. Sasfin v Beukes–a debtor, Beukes ceded his salary to a creditor, Sasfin Bank, while he was paying back the loan to the creditor. In addition the bank (creditor) could terminate the agreement, and not Beukes the debtor, even if he had paid back the loan in full. Court: this contract could deprive the debtor of his salary, his means of support, potentially forever. This is an unconscionable. It is against public policy and therefore void. Baart v Malan–the parties divorced and entered into a maintenance contract whereby the wife, agreed to pay an amount equal to the amount she received a s a salary every month, plus her annual bonus, to her husband for a period of 20 years. The Court held this agreement was “unconscionable” i.e. so harsh and unfair it was against public policy because it deprived the wife of any benefit coming from her employment as a teacher for a very long time.  Legality (Lawfulness) (Cont…) CONSEQUENCES OF ILLEGALITY If a contract is illegal, two rules come into play. A. Ex Turpi Causa Rule –the ex turpi causa rule states that “no action can be based on a dishonourable cause”. –which means that illegal contract are unenforceable. Neither party can force/ compel the other party to the illegal contract, to perform (carry out) the contract. –there are NO exceptions to this rule. How is this rule applied? No party can compel the other party to perform. No court will order the other party to perform. Because no party can compel performance, it also means that no party can claim damages for non- performance i.e. breach of contract when the other party does not perform. Lion Match v Wessels– W, a farmer, sold poplar wood without a permit to Lion Match. Lion Match knew a permit was required. W was unaware the sale was prohibited without a permit. Wessels delivered wood – Lion Match refused to pay. The Court ruled: Wessels cannot compel Lion Match to pay: ex turpi causa rule says an illegal contract is unenforceable. So, what happens if a party has performed in terms of an illegal contract? The answer lies with the par delictum rule  Legality (Lawfulness) (Cont…) B. Par Delictum Rule This rule is about recovering performance already delivered under an illegal contract. “in pari delicto”: equal guilt --- when both parties know the contract, they are concluding is illegal. If the parties are “in equal guilt”: the position of possessor is strongest in that the one who parted with goods cannot claim them back! Purpose? ----- to discourage participation in illegal contracts. Go back to Farmer Wessels: was he and Lion Match equally guilty? On the facts, Wessels did not know a permit was required. He was less guilty. Lion Match was more guilty – they knew a permit was required. So fortunately for Wessels, the par delictum rule will not apply here since there is UNEQUAL guilt. Therefore, Wessels can claim his wood back. (But if Wessels DID KNOW a permit was required, there would have been EQUAL GUILT, and he would NOT have been able to get his wood back). Sometimes the Courts are prepared to make exceptions to applying the Par Delictum Rule strictly. They are prepared to relax the rule “ if it is necessary to do simple justice between man and man, or where one party will be enriched at the expense of the other”. But the Courts will not relax the rule i.e. there will be no exception, if the contract was particularly offensive e.g a bribe.  Legality (Lawfulness) (Cont…) Limbada v Dwarka A contract was concluded. Limbada paid a bribe to Dwarka who would get a municipal official to get a trading licence he did not qualify for. Dwarka failed to successfully bribe the official. Limbada is very upset. Firstly: Can Limbada compel the man to bribe the official i.e. complete the contract”? No – ex turpi causa rule: an illegal contract is unenforceable. Can Limbada claim the bribe money back from Dwarka? No: par delictum rule: in equal guilt, the party cannot claim back. Limbada and Dwarka are in equal guilt. The par delictum rule was applied strictly (no relaxation of the rule) because a bribe contract is particularly offensive.  Legality (Lawfulness): Track Your Understanding Give an example of statutory illegality. Give an example of Common Law illegality. Explain an “unconscionable” contract and give an example from case law. What is the crux of the ex turpi causa rule? How and when does the par delictum rule affect a contract that is illegal? The par delictum rule can be relaxed by the Courts. When may it be relaxed or not applied strictly? In the case Limbada v Dwarka the Court would not relax the par delictum rule. Why not? Sources Consulted in Compiling these Notes ✓ Prescribed Textbook: ✓ Kopel S Guide to Business Law 7th Edition (2022) Oxford University Press. ISBN 9780190748463 –Chapter 6 (page 91–98), 7, 11 and 13. ✓ Recommended Textbooks: ✓ Collier-Reed D & Lehman K Basic Principles of Business Law 2nd Edition (2010) LexisNexis. ISBN 9780409049381 – Chapter 2. ✓ Govindjee A et al Commercial Law: Fresh Perspectives 3rd Edition (2019) ISBN 9781485702092 –Chapter 7.