KTR Chapter 1 PDF

1.1 The notion of contract At the very outset, before we begin to discuss the law of contract, we must address the obvious questions: What exactly is a contract? And how does a contract differ from any other agreement? 1.1.1 Contract as an agreement intended to create enforceable obligations A contr...

1.1 The notion of contract At the very outset, before we begin to discuss the law of contract, we must address the obvious questions: What exactly is a contract? And how does a contract differ from any other agreement? 1.1.1 Contract as an agreement intended to create enforceable obligations A contract is essentially an agreement between two or more parties, but not all agreements are contracts. Consider the following: A and B agree to play tennis together on Saturday afternoon; a married couple agree that the husband will wash the dishes after the evening meal; A and B pretend to agree, as a joke on C; or two actors sign a formal agreement on stage, as part of a play. Quite clearly, none of these agreements could be enforced in a court of law as binding contracts. But why is this so? What makes these agreements different from, say, an agreement in terms of which A sells her law book to B for R200? A moment’s reflection will reveal that the parties to social and domestic agreements do not intend their agreement to give rise to legally binding obligations. And the same holds true for agreements entered into as a joke, or as part of a play. The extra ingredient that distinguishes contracts from these non-binding agreements is thus a serious intention to create legally enforceable obligations (animus contrahendi). The absence of an animus contrahendi explains why ‘gentlemen’s agreements’ are not enforceable as contracts. These agreements are intended by the parties to be binding on them in honour only, and not in law.1 So too, when parties sign a ‘letter of intent’, or note that an agreement is ‘subject to contract’, they are indicating that the agreement in question is not yet to be regarded as a legally binding contract. Whether or not the parties intended their agreement to be binding in law is a matter of fact to be determined on all the available evidence. In some cases, the issue might be a difficult one to determine, as when a father promises to buy his daughter a motor car should she pass her law examinations. As will be seen in due course, where a party lacks animus contrahendi, but leads the other party into the reasonable belief that he or she does seriously intend to bind him or herself, the law will protect that reasonable belief and uphold the contract, despite the absence of genuine agreement. 1.1.2 Legally binding agreements that are not contracts On the other hand, the fact that the parties seriously intend their agreement to have binding legal effect does not necessarily mean that it is a contract. This is because not all binding agreements are contracts. Some agreements are intended not to create obligations, but to destroy them, or to honour an obligation by transferring rights. In this regard, the following classification2 of legally binding agreements is important, and a valuable tool for understanding the relationship between contract and the law of property (including cession): obligationary agreements, whereby one or more obligations are created; absolving agreements, whereby obligations are discharged or extinguished;3 and real (or transfer) agreements, whereby rights are transferred. Obligationary agreements are contracts, such as sale and lease. A contract of sale, for example, obliges the seller S to transfer the thing sold to the purchaser P, who is bound to pay the price. An agreement between S and P to cancel the sale would be an example of an absolving agreement. Other examples would be an agreement by S to release P from her obligation, or the payment by P of the price (payment being a bilateral juristic act). S’s obligation would be fulfilled by transferring the ownership of the thing sold to P. Such transfer would take place by traditio, which has both a physical element (delivery of the thing) and a mental element (the concurring intentions on the part of S and P to transfer and to acquire ownership, respectively – the animus transferendi and the animus acquirendi). This mental element of traditio is a real or transfer agreement, quite distinct from the obligationary agreement that is the underlying reason for the transfer (the causa traditionis). Another example of a real agreement is cession. Assume A has a right to claim money from B, arising from a contract or any other source of obligation. A might sell that right to C. The sale of the right is a contract, or obligationary agreement that obliges A to transfer the right to C. The sale itself does not transfer the right; that is achieved by cession, which in theory is a separate agreement entailing concurring intentions: to transfer the right on A’s part and to take transfer of it on C’s part. 1.1.3 Legally binding agreements that are more than just contracts Some legally binding agreements that create obligations for the parties cannot be regarded merely as contracts because they contain elements giving them another dimension altogether, or elevating them into a separate category. The most obvious example of such an agreement is marriage. Although it is based on the agreement of the parties, and gives rise to obligations such as the reciprocal duty of support, marriage can hardly be treated like any other contract. Its primary purpose is not the creation of obligations, and many of the normal principles of the law of contract do not apply to it. Thus, it cannot be made or unmade by the free exercise of the will of the parties without the intervention of the State, and it has certain invariable consequences that cannot be excluded by the parties. Marriage is accordingly best regarded as an agreement sui generis giving rise to a relationship that confers on the parties a status of a public character.4 Another example is a judgment by consent. Parties to litigation frequently conclude an agreement settling some or all of the issues in dispute between them and thereafter ask the court to give a judgment or to make an order that reflects the terms of their agreement. Such a judgment or order, if the court acquiesces, has a dual character. On the one hand, it is clearly a judicial act, with all the authority, force and effect of any other judgment or order of the court. On the other, it remains in substance a contract of the parties, albeit one of an elevated status because of the superimposition of the command of the court.5 Agreements entered into with public bodies or organs of state also present special difficulties because they straddle the divide between public and private law. The relationship between the State in its various manifestations and the persons subject to it is generally one of superior versus subordinate. However, when the State enters the commercial domain and concludes contracts with its underlings, the playing fields are to a large extent levelled, with the State generally (but not always) being treated in the same way as any other contracting party. Sometimes it enjoys more favourable treatment (for example, when a statute confers upon a Minister or other public official a discretion that must be exercised in the public interest, any contractual provision that seeks to fetter that discretion will not be enforced). At other times, the State is treated less favourably than ordinary contracting parties, because its contractual rights must yield before its public duties under the Constitution of the Republic of South Africa, 1996. Thus, while there is, as a rule, no obligation to give the other party a hearing before exercising a contractual right to cancel an agreement, an administrative body or official might have to do so, by virtue of its public status. The principles of administrative justice frame the contractual relationship, it has been said, and the Constitution requires that all administrative action must be lawful, reasonable and procedurally fair.6 1.1.4 Definition of contract In light of the discussion above, a contract may be defined as an agreement entered into by two or more persons with the intention of creating a legal obligation or obligations. To this definition one might perhaps wish to add a further element – namely, that the agreement should be one that the law recognises as being binding on the parties. This is because, in order to be binding, various other requirements apart from mere agreement must be satisfied. However, the label ‘contract’ is in practice not reserved for agreements that succeed in creating binding obligations. Even if one or more of the requirements for validity are absent, so that the contract fails, it is common practice to describe the agreement as ‘an invalid contract’. 1.2 Requirements for a valid contract In order to be recognised as a valid and binding contract, the agreement must satisfy the following requirements, each of which will be considered at length in subsequent chapters: consensus – the minds of the parties must meet (or at least appear to meet) on all material aspects of their agreement; capacity – the parties must have the necessary capacity to contract; formalities – where the agreement is required, unusually, to be in a certain form (for example, in writing and signed), these formalities must be observed; legality – the agreement must be lawful, that is, not prohibited by statute or common law; possibility – the obligations undertaken must be capable of performance when the agreement is entered into; and certainty – the agreement must have a definite or determinable content, so that the obligations can be ascertained and enforced. 1.3 The nature of contract What are the characteristic features of a contract? A contract is a juristic act – that is, an act to which the law attaches the consequences intended by the parties. In this respect, it is like a will and unlike a delict. However, whereas the execution of a will is always a unilateral juristic act, the conclusion of a contract is necessarily bilateral, or even multilateral. There must be at least two parties to an agreement, and our law does not recognise a unilateral promise (pollicitatio) as binding. Even where an agreement imposes obligations on only one of the parties, as with the contract of donation, a meeting of two minds is required: the donor’s offer or promise to donate must be accepted by the donee. A contract entails promises or undertakings on one or both sides. The undertaking may be to make a certain performance, immediately or at a future date: to give something (dare); to do something (facere); or to refrain from doing something (non facere). Alternatively, it may be an undertaking that a certain state of affairs exists, or has existed (for example, that the car is a 2019 model, and that it has been serviced regularly); this is known as a warranty. Most contracts entail reciprocity, in the sense that the one party’s performance is promised in exchange for the other party’s performance (for example, A will give B a sum of money in return for ownership of B’s car) – hence the idea of contract as a bargain, which is so ingrained in some legal systems (such as English law, but not our own) that a promise will not be enforced unless it is supported by consideration, by which is meant that something of value must be given or promised in return, as a quid pro quo. This reciprocity highlights the economic function of contract as a medium of voluntary exchange of goods and services in the economy. Indeed, contract forms the very basis of the free-market system: the myriad transactions concluded by individual consumers and businesses at the micro-economic level shape the broad pattern of movement of goods and services at the macroeconomic level. The process of contracting is by and large an informal one, reflecting the general trend away from formality in modern law. Most people probably still think of contracts as documents drawn up by lawyers and signed by the parties in front of witnesses after a period of hard negotiation. This might be true of large commercial contracts, but is hardly the norm. By far the majority of contracts today are concluded orally, or even tacitly, without any formality whatsoever. Consider the following everyday transactions, all of which involve an element of contracting: buying groceries from a supermarket; boarding a bus or taxi; filling a car’s tank with petrol; renting a movie; or parking a car in a public garage. Even notices on walls (for example, ‘parking at owner’s risk’) or on the back of tickets and invoices can have contractual effect. The modern concept of contract is a generalised one: an agreement does not have to be of a specific type, such as sale, lease or deposit, in order to qualify as a contract. This flows from the fact that there is freedom of contract, which means that parties can agree to anything that is possible and lawful. All contracts are consensual, in the sense of being based on an agreement of some sort, and are bonae fidei, in that the parties are required to conduct their relationship in a manner consistent with good faith. These aspects of contract are discussed in greater detail where appropriate. 1.4 Contract and the law of obligations The law of contract forms part of private law and, more particularly, the law of obligations. In this section, we are primarily concerned with the question: How does contract relate to other branches of the law of obligations, in particular delict and enrichment? 1.4.1 The concept of obligation An obligation is a legal bond (vinculum iuris) between two or more persons, obliging the one (the debtor) to give, do, or refrain from doing something to or for the other (the creditor). As such, an obligation comprises a right and a corresponding duty: the right of the creditor to demand a performance by the debtor; and the duty of the debtor to make that performance. Each party to a contract is usually both debtor and creditor Most contracts create not one but many obligations, with each party being obliged to make a performance in return for the other party’s counter-performance. It follows that a party to a contract can be, and usually is, both a debtor and a creditor. The seller under a contract of sale, for example, is debtor in respect of the duty to deliver the thing sold and creditor in respect of the duty to pay the price. This is because the labels ‘debtor’ and ‘creditor’ are used in relation to a particular obligation, rather than to a particular contract, which might create numerous obligations. The legal relationship created by an obligation is a personal one, binding only the parties to it. The creditor can demand performance only by the debtor; the debtor is obliged to perform only to the creditor. The right created by the obligation is therefore a personal right (a ius in personam), as opposed to a real right (ius in rem), such as the right of ownership, which lies directly in the thing owned and prevails against the world at large. Of course, there may be more than one party on either side, since a single obligation may exist between any number of co-debtors and co-creditors. If the obligation is enforceable by action in a court of law (as is usually the case), it is referred to as a civil obligation, to distinguish it from the less common natural obligation. Although a natural obligation is unenforceable, it does have certain legal consequences, unlike a merely moral obligation. For example, a debt owed under a natural obligation may be set off against another debt; and if the debt, though unenforceable, is nonetheless paid, it cannot be recovered in an enrichment action on the basis that it was not owed. Gambling debts are said to fall into this category.7 The primary sources of obligations are contract and delict. Other sources include unjustified enrichment, negotiorum gestio (unauthorised administration of another person’s affairs), family relationships, wills and statutes. 1.4.2 Contract and delict A delict is wrongful and blameworthy conduct that causes harm to a person (for example, defamation or negligent damage to property). Such conduct obliges the wrongdoer to compensate the injured party. The essential difference between contractual and delictual obligations is that the former are, as a general rule, voluntarily assumed by the parties themselves, whereas the latter are imposed by law, irrespective of the will of the parties. Within limits, contracting parties are free to determine the nature and content of the obligations that regulate their relationship. They do so by negotiating and agreeing upon the terms of their contract – that is, the provisions that set out the nature and details of the performances reciprocally owed by the parties. Any breach of those terms might entail legal consequences, including a duty to pay damages by way of compensation. That duty might flow indirectly from the will of the parties (in concluding the agreement in the first place), but in reality is imposed by law as a consequence of the unlawful breach of the contract. There is accordingly a close similarity between a breach of contract and a delict. Both are civil wrongs giving rise, in appropriate circumstances, to a duty to pay damages as compensation. Indeed, the same conduct might constitute both a delict and a breach of contract, as when a surgeon who has contracted to perform an operation negligently leaves a cotton swab inside a patient’s body.8 In such cases, there is concurrent liability in contract and delict, and the plaintiff may sue on either basis. Traditionally, claims for damages in contract have been for financial losses suffered as a result of the breach, whereas claims in delict have been for injury to person or property. With the recent expansion of delictual liability into the field of pure economic loss, that boundary line has become blurred, and the potential overlap between contract and delict has correspondingly grown. However, the courts have shown great reluctance to permit claims in delict for economic losses caused by a breach of contract.9 This is a difficult topic that is best left until after completion of the courses in contract and delict. For present purposes, it suffices to say that a plaintiff who sues in delict must prove that all the elements of delictual liability are satisfied, including the wrongfulness of the conduct in question. The mere fact that the conduct constitutes a breach of contract does not necessarily mean that the conduct is wrongful for the purposes of imposing delictual liability – the conduct must infringe a right of the plaintiff that exists independently of the contract.10 For example, if A contracts with B to supply a machine capable of producing 5 000 bolts per hour, and the machine supplied produces only 3 000 bolts per hour, there is a breach of contract, but no delict, because B has no right independently of the contract to receive a machine that can produce 5 000 bolts per hour. But if the machine explodes and takes out B’s eye, B may well have a claim in delict because the right not to be injured in one’s person as a result of the negligence of another exists independently of any contract between the parties.11 1.4.3 Contract and enrichment Unjustified enrichment occurs when there is a shift of wealth from one person’s estate to another’s without a good legal ground or cause for this shift. For example, when A’s estate has increased at the expense of B, without a legally recognised cause (sine causa), A comes under a legal duty to make restitution, and B has a corresponding enrichment action (usually a condictio) to enforce the claim. Roman-Dutch law recognised a limited number of enrichment actions that were available in specific circumstances. The South African courts have extended these old actions in an ad hoc manner, but until recently have been reluctant to consider recognising a general enrichment action – that is, one that is available whenever certain broad requirements are met.12 It is important to emphasise that the enrichment must be unjustified, in the technical legal sense of lacking a causa, rather than being unjust. If injustice were the criterion, any enrichment arising from a harsh or unreasonable contract would have to be returned; but that is not the law. Provided that it is valid, a contract is a causa par excellence for any shift of wealth that flows from it. On the other hand, where a party transfers an asset to another in performance of a contract that is invalid for some reason, or that subsequently fails, the shift in wealth is sine causa, and one or other of the enrichment actions will lie, depending on the reason for the failure of the contract. Table 1.1 Comparison of contract, delict and enrichment13 Contract Delict Enrichment Event giving rise to the obligation Agreement to make the performance (to give, do or not do something) Wrongful conduct that causes harm to another Unjustified shift of wealth of an asset from one estate to another Content of the obligation To make the promised performance To avoid causing harm by wrongful conduct To return the enrichment Nature of the remedy Actual performance, or compensation for non-performance Compensation for harm caused Return of the enrichment Source of the obligation Self-imposed Imposed by law Imposed by law 1.5 Contract and the law of property Property in the narrower sense denotes material things (corporeals), such as a book, a car or a farm. Whereas the law of contract is concerned with interpersonal relationships arising from agreement, and hence with personal rights and duties, the law of things regulates the legal relationships between persons as legal subjects and corporeal things as legal objects. Thus, it is concerned primarily with real rights in things: ownership and lesser real rights such as servitudes and real securities (mortgage, pledge and hypothec). In a broader sense, property denotes anything with monetary value that is capable of forming an asset in a person’s estate. In this sense, property is not restricted to corporeal things, but includes also immaterial property (such as copyright, patents and trademarks) and personal rights (whether arising from contract, delict or any other source of obligations). Much personal wealth today is made up of bundles of personal rights (for example, shares in a company, insurance and endowment policies, beneficial interests in a trust, and pension rights). Many commercial transactions involve both the law of obligations and the law of property – that is to say, they have obligationary (or contractual) and proprietary aspects. The sale of a house, for example, entails both an agreement to give transfer of the property against payment of the price (the contract of sale) and the actual transfer that occurs when the agreement is implemented (by registration of change of ownership). So too, in a donation, the donor’s promise to donate is implemented (executed) when the donor honours his or her promise by handing over the gift. In the context of cession, as has been seen, it is common to distinguish between the obligationary agreement creating the duty to cede the right in question, and the real agreement of cession whereby the right is actually transferred. In the examples just mentioned, the contract is the underlying reason, or causa, for the transfer of ownership that follows. If the contract happens to be invalid, there is no just cause (iusta causa) for the transfer. Ownership will nonetheless pass because South African law adheres to the abstract rather than the causal system of transfer.14 However, since ownership has passed without a proper cause (sine causa), the transferor will generally have an enrichment action to recover the property. This being merely a personal action, the transferor is at risk: if the transferee goes insolvent before the property is returned, the transferor will not be able to get the property back, and will have only a concurrent claim against the insolvent estate. When an estate is insolvent, there are insufficient assets in the estate to meet the claims of all the creditors; after the secured and preferent creditors have been paid, the balance of the estate, if any, is shared equally among the concurrent (unsecured) creditors. The transferor might thus receive only a fraction of the value of the property. This illustrates the importance of the distinction between real and personal rights. Had ownership not passed, the transferor would have been able to recover the property from the insolvent estate with a vindicatory action (rei vindicatio). 1.6 The development of the modern notion of contract The modern South African law of contract is the product of more than two thousand years of legal development, and is currently undergoing a necessary process of critical assessment and further development in light of the demands of the Constitution – the fundamental bedrock or grundnorm from which all law in South Africa derives its validity. In its present form, our contract law is a blend of common law and statute, with a growing infusion of values derived from the Constitution and from African customary law. The common law comprises principles inherited from Roman and Roman-Dutch law (as well as from the wider ius commune that prevailed in Europe prior to the age of codification), as adapted and applied by our courts over the past two centuries, with a not-inconsiderable amount of borrowing from English law. Foremost among the statutes bearing on contract law – apart, of course, from the Constitution itself – are the Consumer Protection Act,15 the National Credit Act16 and the Conventional Penalties Act.17 African customary law is now accorded recognition as an independent and original source of law, subject to the Constitution and any legislation that specifically deals with customary law,18 but its influence in the sphere of contract, apart from specific family- and community-oriented transactions, is likely to be mainly through the infusion into the common law of African values, specifically the concept of ubuntu, which incorporates key values of social justice, fairness, respect and dignity.19 In this section, we focus on the historical development of our common law of contract; in the following section, we will consider the impact of the Constitution on the common law. Whatever changes may come in the future, it remains true today that, despite some significant legislative changes and a great many more judicial adaptations or innovations, the fundamental principles of our law of contract are those expounded by the Dutch institutional writers. And although those same principles have their roots in Roman law, the modern notion of contract differs fundamentally from the Roman one. To understand the foundations of the modern law of contract – including statements often encountered, such as that today all contracts are consensual and bonae fidei – we need to be aware of the historical background of our system, and more particularly of the generalisation of the notion of contract that took place in the seventeenth and eighteenth centuries. We need to appreciate the significance of the acceptance of the principle pacta sunt servanda (agreements must be honoured). 1.6.1 Roman law When considering Roman law, we must remember that we are dealing with six centuries of legal development, progressing from the strict formality of the early stricti iuris contracts to the sophisticated informality of the later consensual contracts, based on good faith (bona fides). Roman law had a law of contracts, rather than of contract. It never developed a fully generalised theory of contract – that is, one that regards any agreement meeting certain general requirements as an enforceable contract. Instead, it recognised a number of distinct categories of contract: real contracts, created by agreement plus the delivery of the thing in question; verbal contracts, of which the most important was stipulatio, created by the use of prescribed, formal words to express a promise; literal contracts, created by recording an agreed debt in a ledger; and consensual contracts, created by mere agreement. No agreement that fell outside these defined categories was a contract, no matter how seriously it was intended by the parties, because the fundamental principle was ex nudo pacto non oritur actio: informal agreements, or bare pacts, give rise to no action. Thus, only in the case of the consensual contracts (sale, lease, partnership and mandate) was mere agreement sufficient in itself to create the contract. All the other contracts required some further element. It may be that this additional element is the causa that some texts say is required for a valid contract, but the meaning of causa remains obscure. Roman contracts were further classified as being either stricti iuris or bonae fidei. The earlier unilateral contracts were stricti iuris, characterised by a strict and rigid formalism, while the later bilateral contracts (including all the consensual contracts) were bonae fidei – disputes arising out of them had to be settled by the judge in accordance with the flexible principle of good faith. The development of the consensual contracts was prompted by the commercial needs of the growing Roman state, as formalism impedes trade and commerce. The trend towards informality and generalisation of the notion of contract continued in later centuries, first with the recognition of the so-called innominate contracts, then with the enforcement of certain informal pacts (either as independent agreements, or as additional terms modifying the consequences of one of the recognised contracts), and finally, most important of all, the relaxation of the formal rules with regard to stipulations. The general view, however, is that Roman law never quite reached the stage of enforcing all serious and deliberate agreements as contracts. 1.6.2 Roman-Dutch law The Roman-Dutch writers completed the process of generalisation. Influenced, it would seem, by Canon Law, by the body of medieval commercial law known as the Law Merchant, and by Germanic customs, they discarded the subtle distinctions of the Roman law of contracts and accepted as the basis of the Roman-Dutch law of contract the fundamental principle that, as a matter of good faith, all serious agreements ought to be enforced (pacta sunt servanda). All contracts were now said to be consensual and bonae fidei – that is, based on mere agreement and good faith. Strangely, however, many of the writers continued to assert that a iusta causa (or redelijke oorzaak) was a necessary element of contract, without defining that elusive concept. This uncertainty gave rise to a celebrated dispute in early South African law. 1.6.3 Causa and consideration: a celebrated dispute20 In the late nineteenth century, the Cape Supreme Court, under the dominating influence of Lord Henry de Villiers CJ, adopted the view that by iusta causa was meant valuable consideration, in the English legal sense of a quid pro quo.21 In other words, even a serious promise should not be enforced as a contract unless the other party gave or promised something in return. This interpretation of iusta causa met with fierce resistance from learned jurists in the north: it was challenged as historically incorrect by the eminent Mr Justice Kotzé in his annotated translation of one of the great books on Roman-Dutch law,22 and was later rejected outright by the Transvaal Supreme Court, under Innes CJ, in Rood v Wallach.23 Lord De Villiers refused to back down,24 however, and so the dispute rumbled on until it was finally settled, nearly 50 years after it started, by the Appellate Division in the famous case of Conradie v Rossouw.25 The court ruled that the English doctrine of consideration forms no part of our law; in South Africa, any serious and deliberate agreement made with the intention of creating a legal obligation is a binding contract, provided only that the agreement is lawful and possible of performance, and that the parties have the requisite capacity to contract.26 Unfortunately, although all the members of the court agreed that causa did not mean consideration, they could not reach agreement on what it did mean. The dominant view was that it meant ‘the ground or reason of the contract – that which brought it about’,27 but another view was that it meant ‘the particular transaction out of which the obligation is said to arise, be it sale, hire, donation or any other contract or handeling’.28 Subsequently, however, iusta causa came to be treated both by the courts and by academic writers as meaning no more than that the parties should have a serious intention to create a binding contract and that the agreement should be a lawful one. Thus, the concept of iusta causa is entirely redundant for it merely repeats other requirements for a valid contract. Regrettably, in Saambou-Nasionale Bouvereniging v Friedman,29 Jansen JA questioned this tendency to allow iusta causa to be absorbed into the requirements of legality and animus contrahendi, and the concept was unnecessarily employed to deny liability in a subsequent case.30 Perhaps, therefore, the last word has yet to be spoken on the meaning of iusta causa in the modern law of contract. However, the overwhelming weight of academic opinion is that the concept has become redundant and should be allowed to die a natural death.31 1.7 The impact of the Constitution The advent of the Constitution32 was bound to have a profound impact on the law of contract, once it became clear that the Constitution applied not only vertically (that is, to relationships between the State and the individual) but also horizontally (that is, to relationships between private persons, as in most contractual situations). This is because the Constitution is the supreme law. A court is bound to declare any law or conduct that is inconsistent with the Constitution invalid to the extent of its inconsistency. This leaves no room for doubt that the law of contract is subject to constitutional control. No rule, no principle and no doctrine of contract law, no matter its pedigree, can survive unless it is consistent with the Bill of Rights and the values underlying the Constitution. When considering how the Bill of Rights might apply to relationships between private parties, a distinction is often drawn between ‘direct’ and ‘indirect’ horizontal application. By direct application is usually meant that a provision of the Bill of Rights is applied directly to a dispute between private parties, without the intermediation of the common law. In other words, a litigant could invoke the provision to establish a cause of action, or a defence to a claim. For example, if a term in a contract violated one of the fundamental rights protected by the Constitution, direct application would entail that a party could attack the term simply on that ground, and without any reference to a rule of the common law. On the other hand, by indirect horizontal application is meant that the Bill of Rights impacts on a dispute between private parties by exerting an influence on the common law relevant to the dispute. In the example just given, the litigant who attacked the contractual term might argue that because it violated a fundamental constitutional right, the term was contrary to public policy and was thus illegal under the common law. Section 39(2) of the Constitution makes provision for indirect horizontal application of the Bill of Rights: ‘When interpreting any legislation, and when developing the common law or customary law, every court, tribunal or forum must promote the spirit, purport and objects of the Bill of Rights.’ The purpose of section 39(2), the Constitutional Court has said, is to ensure that our common law is infused with the values of the Constitution.33 It imposes an obligation on courts to be alert to the normative framework of the Constitution, and to ensure that the rules of the common law conform to the requirements of the Constitution, not only when some startling new development of the common law is in issue, but in all cases where the incremental development of a common-law rule is in issue.34 ‘(T)he common law is not to be trapped within limitations of the past … it needs to be revisited and revitalized with the spirit of constitutional values.’35 Developing the common law of contract in line with the Constitution The obligation of the courts to develop the common law of contract where it is deficient in promoting the section 39(2) objectives is a general one, and not purely discretionary.36 Some commentators appear to believe that the ‘broader constitutional project’ requires a radical transformation or restructuring of the law of contract.37 The Constitutional Court, recognising the need for legal certainty (‘essential for the rule of law – a constitutional value’), and that our commonlaw principles contain much of lasting value (‘Age is not necessarily a reason to change. Some of the lessons gained from human experience over the ages are timeless and have passed the logical and moral tests of time.’), has advocated a more cautious approach: ‘Before a court proceeds to develop the common law, it must (a) determine exactly what the common-law position is; (b) then consider the underlying reasons for it; and (c) enquire whether the rule offends the spirit, purport and object of the Bill of Rights and thus requires development. Furthermore, it must (d) consider precisely how the common law could be amended; and (e) take into account the wider consequences of the proposed change on that area of law.’38 Moreover, said the court, respect for the principle of separation of powers requires that ‘the major engine for law reform should be the Legislature and not the Judiciary’.39 To what extent the Bill of Rights finds direct horizontal application is a matter of some difficulty. The answer to that question depends upon the interpretation of the application clause of the Constitution – that is, section 8 – which provides as follows: 1) The Bill of Rights applies to all law, and binds the legislature, the executive, the judiciary and all organs of state. 2) A provision of the Bill of Rights binds a natural or a juristic person if, and to the extent that, it is applicable, taking into account the nature of the right and the nature of any duty imposed by the right. 3) When applying a provision of the Bill of Rights to a natural or juristic person in terms of subsection (2), a court – (a) in order to give effect to a right in the Bill, must apply, or if necessary develop, the common law to the extent that legislation does not give effect to that right; and (b) may develop rules of the common law to limit the right, provided that the limitation is in accordance with section 36(1). Section 8(2) makes it expressly clear that the rights contained in the Bill of Rights can, depending on the nature of the right and the duty imposed by it, be applied directly to bind private parties.40 In that sense, at least, the Bill of Rights finds direct horizontal application. However, once a court has determined that a constitutional right does apply directly against a private person, section 8(3) requires the court to apply or, if necessary, develop the common law to give effect to the right. Thus, the direct application of the constitutional right against a private person must, according to the subsection, be effected through the mediation of the common law; to hold otherwise would render section 8(3) without any purpose, as the Constitutional Court pointed out in Khumalo.41 This looks more like indirect than direct horizontality.42 In Barkhuizen v Napier,43 a majority in the Constitutional Court expressed grave doubts about the appropriateness of testing the constitutionality of a contractual term directly against a provision in the Bill of Rights. Any attempt to do so, said Ngcobo J, would encounter serious difficulties. If the contractual term limited a right in the Bill of Rights (such as the section 34 right of access to courts in that case), the court would have to enquire whether the limitation could be justified under section 36 of the Constitution. However, section 36 stipulates that a right in the Bill of Rights may be limited only ‘in terms of a law of general application’, and a term in a contract is self-evidently not such a law. Also presenting difficulties in so far as direct application of the Constitution is concerned, section 172(1)(a) of the Constitution requires a court to declare invalid ‘any law or conduct’ that is inconsistent with the Constitution, but a contractual term is neither law nor conduct. In light of these difficulties, the majority preferred an indirect application of the Bill of Rights to the contractual dispute before them, apparently under section 39(2). The proper approach to constitutional challenges to contractual terms, said Ngcobo J, is to determine whether the term challenged is contrary to public policy; and what constitutes public policy must today be discerned with reference to the fundamental values embodied in the Constitution, and in particular in the Bill of Rights.44 Only Langa CJ expressed any doubts in this regard.45 While he agreed that indirect application under section 39(2) might ordinarily be the best way of addressing the problem, he was not convinced ‘that section 8 does not allow for the possibility that certain rights may apply directly to contractual terms or the common law that underlies them’. Ultimately, it made little difference which approach one adopted because in his view the ‘distinction between direct and indirect application would seldom be outcome determinative’. Two recent decisions of the Constitutional Court suggest that Langa CJ was correct in his approach to the matter. In Beadica 231 CC v Trustees for the time being of the Oregon Trust,46 the public policy route was again favoured, while in AB v Pridwin Preparatory School47 the majority preferred the direct application route. In Pridwin, an independent school had purported to terminate its contract with the parents of two boys who attended the school, owing to the bad behaviour of the father of the boys. The decision to terminate was challenged by the parents on both public policy and constitutional grounds. In setting aside the termination of the contract, Theron J, in the majority judgment, considered it unnecessary to determine the public policy challenge, since she held that the action of the school directly infringed the boys’ constitutional rights to a basic education and to have their best interests considered of paramount importance Section 8(2) imposed constitutional obligations on private entities such as Pridwin, and those obligations arose directly from the Constitution, not from the contract with the parents.48 In her view, direct horizontal application should not be avoided where it appears to be the most appropriate means of resolving a constitutional dispute.49 While Nicholls AJ, in her minority judgment, preferred to follow the public policy route, she too considered that, where constitutional rights are directly at issue, Barkhuizen does not inhibit determining the enforceability of a contractual clause by direct application of the Bill of Rights.50 As is evident from the discussion above, the first and most obvious way that the Constitution may have an impact on a contract, whether directly or indirectly, is by rendering unenforceable the contract itself, or some of its provisions. Another way in which the Constitution may affect a contract is by rendering invalid the exercise of a contractual power by a contracting party, such as the power to terminate a contract or to withhold consent to the cession of rights derived from the contract. Traditionally, the courts have been reluctant to concern themselves with a party’s reasons for exercising the power, or to question the substantive manner in which the power has been exercised.51 Today, however, the courts will not give effect to the exercise of the power if it unjustifiably affects a constitutional right or value, for example, if it amounts to unfair discrimination.52 The principle of freedom of contract suggests that a court would not normally compel a person to enter into a contract with another. However, it is now well established that a court may indeed do so where a refusal to contract amounts to unfair discrimination.53 Thus, for example, it has been held that an airline cannot refuse to employ an HIV-positive person,54 a hairdresser cannot refuse to cut a black person’s hair,55 and a baker cannot refuse to sell a cake to someone because he or she is gay.56 1.8 The basis of contract In this section, we address the fundamental question: What must be proved in order to establish that a contract exists? 1.8.1 Introduction We have said that in modern law all contracts are consensual, in that they are based on agreement. But what do we mean by agreement? Does it require a genuine meeting of minds on all aspects of the contract, or will an objective appearance of agreement suffice? In other words, does our law adopt a subjective or an objective approach to the formation of a contract? That is one of the most fundamental questions in any system of contract, as the answer to it influences all that follows. 1.8.2 Actual subjective agreement (consensus) Genuine agreement presupposes an actual meeting of the minds of the parties (concursus animorum). Subjective consensus of this nature exists when all the parties involved: seriously intend to contract; are of one mind (ad idem) as to the material aspects of the contract – namely, the terms of the proposed agreement, and the identity of the parties to it; and are conscious of the fact that their minds have met – as a learned commentator has pointed out, it is not enough that you wish to sell me your book for R1 000 and that I would be willing to buy it at that price: ‘Our minds are on parallel tracks, but a contract emerges only when the tracks intersect.’57 Consensus is achieved through a process of communication involving declarations of wills by the parties. The declarations may be expressed in words, by conduct or even by silence, in some cases. The process is traditionally analysed in terms of offer and acceptance:58 A makes B an offer, which, upon acceptance by B, produces consensus. At the risk of stating the obvious, the communication of an intention by A to B has three aspects: the true intention in A’s mind (A’s inner will; the message intended to be sent); the expressed intention (A’s declaration of will; the message sent); and the perceived intention (B’s belief or understanding of what A intends; the message received). Ideally, A will express his intention clearly, and B will understand perfectly what A intended to communicate. The true intention will coincide with both the expressed intention and the perceived intention, and perfect consensus will have been achieved. 1.8.3 Apparent or objective agreement As all too often happens, however, there may be some divergence between the true intention and the expressed or perceived intention, with the result that the message sent or intended to be sent is not the same as the message actually received. This divergence may be due to a hidden mental reservation on A’s part (he said one thing, but secretly intended something rather different) or due to some misunderstanding or mistake (A may have expressed his intention badly, or B may not have paid sufficient attention to what A said or wrote). In such cases, there is dissensus rather than consensus, and the question is whether any contract can have come into existence between the parties. Since all contracts are said to be based on agreement, one might think that the answer is obviously no. However, what if, despite the absence of actual agreement, there is an objective appearance of agreement created by the conduct of one party and on which the other has reasonably relied? For example, B appends her signature to a document that clearly and unambiguously states the terms of A’s offer. Should the law in such circumstances not protect A’s reasonable belief that agreement has been reached, at the very least if B was at fault in creating the impression that she assented to A’s terms, and if A would be prejudiced if the existence of the contract could be denied? Consider the following scenario: having applied for a job in another city, you are invited to an interview; you attend the interview and it seems to go well for you; you subsequently receive a letter from your prospective new employer informing you that your application has been successful and that the job is yours; in reliance on that letter, you resign from your present job, sell your house and make arrangements for the movement of your furniture and effects to your intended new home; but then you receive a further letter from the prospective employer informing you, with appropriate apologies and embarrassment, that the letter of appointment was addressed to you by mistake, and that it should have gone to another person interviewed by the selection committee.59 Could you not insist that a contract exists, despite the mistake? Whether or not a legal system will uphold a contract in such circumstances depends upon whether its approach to contract is wholly subjective (focused on an actual meeting of minds) or, to some extent at least, objective (focused on the external appearance of agreement). The choice of approach will depend upon why the system in question regards a person as bound by a contract. This raises philosophical issues on which a number of theories have been advanced, particularly in continental legal literature. 1.8.4 Theories of contract According to the will theory, the basis of contract is to be found in the individual will. The parties are bound by their contract because they have chosen to be bound. The purpose of the law of contract is to give effect to this expression of party autonomy – that is, the essential freedom of the parties as adults of full capacity to undertake binding obligations and to organise their affairs as they see fit, within the limits of the law and public morality. Taken to its logical conclusion, the will theory postulates an extremely subjective approach to contract: consensus is the sole basis of contractual liability, with the result that if there is no genuine concurrence of wills, there can be no contract. Thus, whenever a party is mistaken about a material aspect of the proposed agreement, there is no binding contract – as will be the case if a person signs a contractual document without bothering to read it properly, or with some mental reservation that is not disclosed to the other party. No matter that the other party might reasonably think, in light of this behaviour, that a contract has come into existence; in the absence of consensus, there can be no contract. It hardly takes a genius to realise that such an unqualified adherence to the will theory would produce results that are both unfair and economically disastrous. It would be unfair because it fails to protect the reasonable expectations of a party who has relied on the objective appearance of consensus created by the other party’s conduct. And it would be economically disastrous because it ignores the need for legal certainty in commercial dealing. Business people must be able to rely on signed documents and other objective indications of consent, knowing that they will be upheld as binding contracts by the courts; if they cannot do so, much commercial activity will grind to a halt. It should come as no surprise, therefore, that few, if any, legal systems follow the will theory without qualification. Some profess to adopt an objective approach to contract, in line with the so-called declaration theory. This theory is the polar opposite of the will theory. According to the declaration theory, the inner wills of the parties are irrelevant; what is important for contract is not what the parties think but what they say or do: the external manifestations of their wills. Thus, the true basis of contract is to be found in the concurring declarations of the parties. In determining whether agreement has been reached, one should adopt a position of detached objectivity, as if one had been a neutral observer listening at the keyhole, or a fly on the wall, while the negotiations were taking place.60 If judged purely objectively, when one party has made an offer that has been unambiguously accepted by the other party, there is a contract, irrespective of what either party actually had in mind at the time. This extremely objective approach to contract would also prove unacceptable in practice, unless qualified.61 By favouring form over substance, it could rather absurdly result in a contract intended by neither party. It would permit parties to disguise their transactions (for example, dressing up a donation as a sale in order to avoid donations tax). It would preclude a claim for rectification, where the contract document fails to reflect the common intention of the parties. And it would leave absolutely no room for a doctrine of mistake in contract law: the fact that one or both of the parties laboured under a material misapprehension concerning the nature or contents of the contract would be wholly irrelevant. None of this reflects what courts around the world actually do or permit, which casts serious doubt on the practical viability of the theory. A compromise theory occupying the middle ground between the other two is the reliance theory. In terms of this theory, the basis of contract is to be found in detrimental reliance on the appearance of agreement; or, in simpler terms, in the reasonable belief in the existence of consensus, induced by the conduct of the other party. Thus, for example, where A signs a document that unambiguously sets out the terms on which B is prepared to do business with A, she will in most cases create in B’s mind the reasonable impression that she has agreed to B’s terms, and B will be entitled to rely on that impression. Therefore, even if A is mistaken about the contents of the document that she has signed, B will be able to enforce it as a contract if his belief in the existence of consensus was reasonable in the circumstances. The reliance theory thus protects a party’s reasonable expectation of a contract. To the extent that it does so in the absence of consensus, it too represents an objective approach to contract. However, the upholding of the objective appearance of agreement is less absolute than under the declaration theory, since A can escape liability on the grounds of material mistake in circumstances where B’s reliance on that objective appearance is unreasonable.62 Most people would readily accept that it is right to uphold a contract in circumstances such as these. To suggest, however, that reliance is the only basis of contract – as some writers would seem to have it63 – is another matter altogether. Cases of dissensus are the exception, rather than the norm, and where the parties have reached genuine consensus, it seems somewhat artificial to base the contract on reliance rather than the common intention to be bound. The reliance theory should thus be seen as a supplement to the will theory, correcting its deficiencies, and affording an alternative basis for contract in circumstances where the minds of the parties have not truly met. This is the approach currently favoured by our law and is discussed further below. 1.8.5 Approach to contract: subjective or objective? South African law, with its roots in Roman-Dutch law, but strongly influenced by English law, has since the earliest times vacillated between a subjective and an objective approach to contract. As late as 1958, the Appellate Division could say that our law followed a ‘generally objective approach to the creation of contracts’.64 However, more recent pronouncements of that court suggest that our approach is fundamentally subjective, though tempered by objective considerations in cases of dissensus.65 The Roman-Dutch writers adopted a subjective approach to contract formation, in line with the general trend in Europe at the time. This was hardly surprising in light of the triumph of consensualism with its emphasis on animus contrahendi and the need for a concursus animorum, or meeting of the minds. To what extent the writers were prepared to protect a reasonable reliance on the appearance of contract is not clear.66 English law, by contrast, has always preferred a more objective approach on the grounds that ‘the intent of man cannot be tried, for the Devil himself knows not the intent of man’.67 For a while, in the nineteenth century, under the influence of continental jurists such as Pothier and Savigny, there was some flirtation with the will theory and the notion of consensus ad idem; but then came the famous case of Smith v Hughes,68 which left no doubt that the English courts would protect a reasonable expectation of contract in the absence of true agreement. After declaring that ‘if the parties are not ad idem, there is no contract, unless the circumstances are such as to preclude one of the parties from denying that he has agreed to the terms of the other’, Blackburn J said that the rule of law was as follows: If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.69 This meant that in the absence of true mutual assent to the proposed terms, a contract might nonetheless be founded upon what was termed ‘quasi-mutual assent’, a doctrine that clearly has much in common with estoppel and reflects adherence to the reliance theory of contract. English writers today are generally scornful of the will theory as a relic of nineteenth-century thinking.70 Although some seem to favour the declaration theory, the general approach of English law seems more in line with the reliance theory.71 The South African courts, as stated earlier, have over the years vacillated between these different approaches. The earliest cases, naturally enough, followed the Roman-Dutch writers in suggesting that there could be no contract in the absence of consensus; but when the matter arose for crisp decision in I Pieters & Co v Salomon,72 the Appellate Division chose to adopt the English approach. A offered to pay B’s debt to C, believing the amount in question to be £345 when it was actually £490. C accepted the offer in good faith, not realising that A was mistaken as to the amount. The court upheld C’s claim for the full amount, saying: When a man makes an offer in plain and unambiguous language, which is understood in its ordinary sense by the person to whom it is addressed, and accepted by him bona fide in that sense, then there is a concluded contract. Any unexpressed reservations hidden in the mind of the promisor are in such circumstances irrelevant. He cannot be heard to say that he meant his promise to be subject to a condition which he omitted to mention, and of which the other party was unaware.73 The influence of Smith v Hughes is readily apparent in this case. Indeed, the famous Blackburn dictum was thereafter frequently quoted with approval by South African judges, leading to a general belief that our approach to contract was fundamentally objective. This belief was strongly reinforced by the following statement of Wessels JA in South African Railways & Harbours v National Bank of South Africa Ltd:74 The law does not concern itself with the working of the minds of parties to a contract, but with the external manifestations of their minds. Even therefore if from a philosophical standpoint the minds of the parties do not meet, yet, if by their acts their minds seem to have met, the law will, where fraud is not alleged, look to their acts and assume that their minds did meet and that they contracted in accordance with what the parties purport to accept as a record of their agreement. On the face of it, this dictum seems to be an unequivocal affirmation of the declaration theory, but Wessels JA could hardly have intended his words to be understood as such, for it would be manifestly false to state that under South African law the subjective intentions of the parties to a contract are without relevance. Thus, by way of example: our law does permit escape from a contract on the grounds of justifiable mistake;75 it does entertain claims for rectification of contractual documents that incorrectly reflect the parties’ common intention;76 it will strip away the disguise and follow the true intention of the parties to a simulated transaction;77 it recognises the importance of animus contrahendi in a variety of contexts;78 and where the parties have used words in a specialised sense understood by both of them, the court will follow their intention rather than the objective meaning of the words when interpreting the contract.79 That the Wessels dictum is not to be taken too seriously was confirmed by the Appellate Division in Saambou-Nasionale Bouvereniging v Friedman,80 the first in a series of cases in which that court (and particularly Jansen JA) began to reassert that ‘the true basis of contractual liability in our law … is not the objective approach of the English law, but is – save in cases where the reliance theory is applied – the real consensus of the parties’.81 The point of departure when testing for the existence of a contract, said Jansen JA, is the will theory, but in cases of dissensus, the shortcomings of that theory are corrected by an application of the reliance theory, more particularly in the form of the principle enunciated by Blackburn J in Smith v Hughes. The decision in Steyn v LSA Motors Ltd82 illustrates that this is now the accepted approach of our law. Steyn, an amateur golfer, participated in a golf tournament that was open to both amateurs and professionals. Next to the 17th hole, there was on display a new car and alongside it a board proclaiming: ‘Hole-in-one prize sponsored by LSA Motors’. Steyn duly scored a hole-in-one, but the sponsor refused to give him the car on the grounds that the prize had only been intended for professional golfers. In the litigation that followed, it became plain that Smal, the representative of the defendant, had never intended to make any offer to an amateur such as Steyn, and that there was accordingly no consensus between the parties. Steyn tried to brush aside this fact with an argument that what was important was not Smal’s intention but rather what was stated on the advertising board. The court rejected this argument, reasoning as follows: The argument is fundamentally fallacious inasmuch as it treats Smal’s subjective intention as irrelevant and postulates the outward manifestation of his intention as the sole and conclusive touchstone of the respondent’s contractual liability. That is contrary to legal principle. Where it is shown that the offeror’s true intention differed from his expressed intention, the outward appearance of agreement flowing from the offeree’s acceptance of the offer as it stands does not in itself or necessarily result in contractual liability. Nor is it in itself decisive that the offeree accepted the offer in reliance upon the offeror’s implicit representation that the offer correctly reflected his intention. Remaining for consideration is the further and crucial question whether a reasonable man in the position of the offeree would have accepted the offer in the belief that it represented the true intention of the offeror, in accordance with the objective criterion formulated long ago in the classic dictum of Blackburn J in Smith v Hughes … Only if this test is satisfied can the offeror be held contractually liable.83 In light of all the evidence, the court held that a reasonable person in Steyn’s position would have realised that the offer was open only to professionals and accordingly that he had no contractual claim to the car. 1.8.6 Dual basis of contract in modern law What emerges from all this is that there are two bases on which to establish a contract in modern South African law: consensus, and reasonable reliance. The primary basis is consensus: when seeking to determine whether a contract has been formed, one must first ascertain whether the minds of the parties actually met. The point of departure is thus the will theory, and the approach is essentially subjective. If the conclusion is that consensus was reached, that ends the enquiry; one need not look for any other reason to hold the parties bound. If, on the other hand, the conclusion is that the minds of the parties never truly met, the enquiry has to go one step further. One must then ask whether either party by their words or conduct led the other party into the reasonable belief that consensus had been reached. If so, the contract will be upheld on the secondary basis of reasonable reliance. In the absence of true mutual assent, a contract can be founded on quasi-mutual assent. This is because our approach to contract is not wholly subjective; it is tempered by objective considerations born of a desire to protect reasonable expectations induced by the other party. The will theory may be the point of departure, but, in cases of dissensus, it is tempered by an application of the reliance theory. In systems that profess to adopt an objective approach to contract, like English law, it is probably correct to say that the point of departure is the declaration theory, and that in appropriate cases (such as where escape from the contract is permitted on grounds of mistake), the reliance theory operates as a corrective to the declaration theory. Therefore, whether a particular system proceeds from a subjective or an objective premise, in cases of dissensus, a more moderate position will be adopted than is suggested by either premise. The reliance theory occupies that moderate ground between the two extremes represented by the will and declaration theories. 1.8.7 Proving the existence of a contract The onus of proving the existence of a contract rests on the person who alleges that the contract exists. In light of what has just been discussed, the onus will be discharged by adducing evidence of either consensus or reasonable reliance on the appearance of consensus. In this regard, one must take care not to confuse that which must be proved (frequently, a subjective state of mind) with the means of proving it (objective evidence indicating that state of mind). The fact that a party must inevitably rely on objective evidence to prove a subjective state of mind does not mean that the approach to contract must inevitably be an objective one. Assume that A sues B on a contract and that B denies the existence of the contract. In order to prove that the parties reached agreement, A will adduce objective evidence of the agreement, in the form of declarations made by the parties. Usually, this will entail handing in as evidence a document signed by both parties. B’s signature appended to the document serves as prima facie proof that B agreed to the terms reflected in the document. The evidentiary burden thus shifts to B to show that, despite the objective appearance of agreement, no consensus was reached. B might do this by proving, for example, that she was mistaken about the contents of the document when she signed it. If the court believes her on this point, the primary basis of contract is missing, and if A’s claim is to succeed, he must then prove reasonable reliance on the appearance of agreement. In most cases, the signed document will serve as prima facie proof not only of consensus but also of reasonable reliance, because it will usually be reasonable to rely on a person’s signature as indicating consent. Ultimately, therefore, the evidentiary burden will rest on B to prove that A’s belief in the existence of consensus was unreasonable in the circumstances.84 This she might do, for example, by leading evidence to show that A knew she was mistaken,85 or that A ought to have been aware of this possibility, because the document was potentially misleading – ‘a trap for the unwary’.86 1.9 Cornerstones of contract By now, it will be obvious that consensus and reliance are fundamental concepts in the modern law of contract. Other fundamental ideas include the following: freedom of contract – the idea that people are free to decide whether, with whom and on what terms to contract (party autonomy); sanctity of contract – the idea that contracts freely and seriously entered into must be honoured and, if necessary, enforced by the courts (pacta sunt servanda); good faith – the idea that parties to a contract should behave honestly and fairly in their dealings with one another, showing a minimum level of respect for the interests of the other party (a concept embraced by the African notion of ubuntu); and privity of contract – the idea that a contract creates rights and duties only for the parties to the agreement, and not for third persons. Whereas consensus and reliance are the technical bases upon which contractual liability is founded, these other concepts are more in the nature of values that inform the law of contract, and provide its ideological underpinning. It is important to appreciate at the outset that there is some competition between these underlying values, and that this competition produces tensions that run throughout the whole body of contract law. Before considering this competition, it might be worthwhile first to reflect on the goals of contract law. What are the aims of contract law? What purposes are served by having this elaborate structure of detailed rules and principles governing when people are bound by their undertakings to one another? Consider whether the following goals, or a combination thereof, are important: to ensure that people keep their promises as a matter of honour and morality in society; to promote legal and commercial certainty by providing a framework within which persons can safely transact and conduct business, secure in the knowledge that agreements seriously entered into will be enforced; to promote fairness and reasonableness in contractual dealings by imposing standards that encourage ‘good’ commercial behaviour, and that discourage chicanery and over-reaching; and/or to provide a workable system of rules that will encourage private enterprise and underpin the operation of the free-market economy. 1.9.1 The goals of contract law In a simple economy, goods and services are exchanged through barter or immediate payment in cash, and the role of contract is small. However, as soon as time lags are introduced between the undertaking and the performance of obligations, the parties to a transaction must inevitably begin to rely on their reciprocal promises to perform at a future date. This greatly increases the risk of the transaction, and requires a certain degree of trust between the parties. But trust alone is not sufficient. If commercial enterprise is to take off on any significant scale, the parties must know that should either of them fail to honour their promise, the other might invoke the assistance of the law to hold them to the agreement. The law must therefore provide mechanisms for the enforcement of promises, or for the payment of appropriate compensation when they are broken. At the same time, the State should and will lend its muscle for the enforcement of private bargains only if satisfied that it is fair and reasonable to do so in the circumstances. It must accordingly regulate, to some extent, the conclusion and performance of agreements, to ensure that there is no over-reaching or coercion, and that the parties conduct themselves in an appropriate manner. The function of contract law is thus not merely to ensure that people keep their promises, as a matter of honour or morality. Rather, it is to provide a legal framework within which people can transact business and exchange resources secure in the knowledge that, provided they act honestly and fairly, and follow the right procedures where appropriate, the law will uphold their agreements and, if necessary, enforce them. As such, the law of contract underpins private enterprise and regulates it in the interest of fair dealing. 1.9.2 Competing values in the law of contract87 The law of contract is accordingly concerned not only with sanctity of contract, but also with fairness in contract dealings. To a large extent, as already noted, these goals or values are in competition with one another and, as commentators have pointed out, finding the right balance between them is one of the most intractable problems facing modern contract law.88 It goes without saying that the balance struck must be consistent with constitutional values and should serve to promote the spirit, purport and objects of the Bill of Rights. The notion of sanctity of contract goes hand in hand with freedom of contract, and with it the philosophies of individualism and economic liberalism. Provided they have the requisite contractual capacity, parties should be free to determine the contents of their contracts free of external control, and the role of the State should by and large be limited to enforcing agreements that have been freely concluded. The knowledge that contracts freely and properly entered into will be enforced by the courts promotes legal and commercial certainty – an essential requirement for a flourishing, free-market economy. To the same end, the law should be stated in clear and precise rules, since vague, open-ended standards invite uncertainty. On the other hand, a concern for fairness and good faith in contractual relations implies a degree of social control over the private business of contracting, and reflects a more communitarian approach to contract. While parties might enjoy considerable freedom in determining the contents of their contracts, they cannot legitimately expect the courts to enforce provisions that are offensive to law, morals, public policy, or to broad community notions of what is fair and reasonable. The law of contract should accordingly import open-ended standards like good faith and reasonableness in order to give judges sufficient flexibility to ensure justice in each particular case.89 The tension between these competing goals of contract law is quite evident. The pursuit of individual freedom of contract, or of certainty in contractual relations, will come at a price in terms of contractual justice, and vice versa. Every time a court enforces an unreasonably harsh contractual provision, a price is paid in terms of the ordinary person’s sense of what justice requires; conversely, every time a court allows a party to escape liability under what was thought to be a binding contract, a price is paid in terms of legal and commercial certainty. The more the law is framed in terms of rigid rules, the less scope there is for judicial manoeuvring in the interests of justice; the more it is framed in terms of flexible standards, the less certain will be the outcome of any particular case. Clearly, as in other areas of life, there is a need here for a trade-off between two desirable goals. Where the balance ought to be struck requires a value judgement that will differ from person to person, and from community to community; and ideas in this regard will change over time. Historically our law has tended to favour sanctity of contract over considerations of good faith and equity, but as we shall see the pendulum is now swinging in the opposite direction, under the influence of the Constitution.