Mercantile Law 102: Contents of a Contract PDF

MERCANTILE LAW 102 THEME 6: CONTENTS OF A CONTRACT 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....

MERCANTILE LAW 102 THEME 6: CONTENTS OF A CONTRACT 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. What do we mean by ‘Contents of a Contract’? Contracts consist of terms, conditions and time clauses. TERMS When parties conclude a contract, they reach agreement (consensus) on what the rights and obligations of each party are. The terms set out what. The respective rights and duties of each party are. The terms of a contract refers to the parties rights + duties/ obligations – what each party to the contract is required to do in terms of the contract. Since the terms lay out the contractual rights + obligations, if one party falls short of their obligations/ fails to act as required by the contract, then that party is in breach of the contract and may be sued by the other party to whom performance it owed. The terms that become part of the contract are classified as express, implied or imposed.  The classification of contractual terms. A. Express Terms These terms are expressly agreed upon. That is, those that have been recorded in writing or stated/ uttered out aloud/ verbally. That is, the terms have articulated is some way. Example: A and B agree that the price of a 1998 VW Polo Vivo sold is R50 000 this is an express term. OR A and B agree that the monthly rental for a studio apartment in R5000/ month. B. Implied Terms These are terms in a contract the parties don’t expressly agree to, but they are read into the contract automatically either by the law or because of a particular trade usage. When we read terms into a contract, it seems we are seeing/ understanding or assuming things from the contract that are actually not there. Law --- ––these are also known as the naturalia of the contract (natural terms of the contract). ––these apply to automatically to a contract , by operation of the law, and form part of the contract in the absence of agreement to the contrary. So, in other words, the parties to a contract are free to reach express agreement on particular issues, but it if so happens that they fail to do that and the contract silent on that particular issue, then the law comes in and fills that vacuum/ and sets out the respective rights and duties on that issue. We have different types of contracts/ specific contract, so once a contract has been identified there are terms that the law automatically reads into that contract. So, these terms are implied by the law) For example, the law holds the seller liable for latent (hidden) defects in a sale (one of the naturalia or automatic terms of every sale) A 'latent defect' is a material defect, which was not visible after 'reasonable' inspection. So, we are talking about a hidden/ concealed defect which one could not have discovered by reasonable observation + inspection. When a latent defect is present, it means that the product lacks the quality promised in terms of the sales agreement. Example, a leaking roof, faulty geyser, a slow leak in a swimming pool which is not readily apparent, structural weakness in the roof of a building. The law holds the landlord responsible for the repairs and maintenance of the house he is renting out (one of the naturalia or automatic terms in every lease). Another example, all contract of lease have the implied term that the lessee can use the entire property. However, the parties can agree that the lessor will leave some of his belongings in one of the rooms in the property which will be locked and not used by the lessee. So, the parties’ express agreement will override the implied term.  The classification of contractual terms. Trade Usages Trades and professions tend, over time, to develop particular ways of doing their business and as such there will be certain terms that are generally understood to be part of every contract in that trade. In Theme 1, talks about sources of law and one of these is custom as a source of law. On the same vein, the customs developed over time of a particular trade or industry may give rise to terms that automatically form part of a contract entered into by members of that trade or industry, even where these terms are not expressly stated in the contract itself. These terms are binding on the parties to a contract even if, say one of the parties unaware of the existence of the trade usage/ customs. Our courts have said that person who enter into contract with members of a particular trade must familiarise themselves with the customs/ practice/ usages of that trade, because they will not be able to plead ignorance to try and prevent the custom/ trade usage being applied to them also. So certain terms are generally understood to be part of every contract in that particular trade. The law will treat a trade usage term as being implied or automatically part of that contract if it meets the following requirements. For example, in mortgage loan transactions it is customary for the borrower to pay for an appraisal of the value of the property. To qualify as a trade usage, the custom must satisfy the following. ––It is reasonable and lawful; ––Everyone in that trade and profession knows and follows that usage; ––The term must be certain – there must be no confusion about what it is; and ––The parties must not have expressly varied it or excluded it from their contract. Suppose for example there is a trade usage in the fishery industry about how certain catches of fish are priced. Assume that there is a trade usage that catches of hake are valued at R10 per kg. Then this price will apply unless the parties exclude that price and agree on something else.  The classification of contractual terms. Imposed Terms These are terms which the parties are forced/ compelled to include into their contract either because the law requires that term, or one of the parties has insisted on the inclusion of that particular term. There is specific legislation that requires specific contracts to include particular terms. These are terms that the parties cannot change. Example- the Alienation of Land Act stipulates that if immoveable is sold for less than R250 000, the contract must include a ‘cooling-off’, a term that gives the buyer 5 days to change their mind and get out of the contract. Parties themselves can also include imposed terms. The most common one is an exclusion clause. An exclusion term can prevent a customer from suing the other party. Examples? when you drive into a parking garage at a shopping mall you will see a notice saying, “ Parking at owner’s risk” or you drop clothes off at the laundry and your ticket has a note on it saying” The laundry will not be responsible if clothes are lost or damaged”. Distinguish implied terms from the law from imposed terms – terms implied by the law are automatically part of the contract, but the parties can exclude these terms ie parties can change these terms i.e. leave them out. Imposed terms are also automatically part of the contract but the parties cannot change these terms.  Track Your Understanding. Can You Answer the Following? ☞ What is an implied term? ☞ Give an example of a term implied by law. ☞ What is an imposed term? ☞ How does a term imposed by the law differ from a term implied by law? ☞ Can parties themselves impose terms in their contracts? Give an example.  Conditions in a Contract A condition is a provision in a contract which makes the operation of a contract/ its continued operation of the contract in its entirety or part of it dependent on an uncertain future event. At first glance, it might seem that terms and conditions are the same thing, but they are different. Terms impose a positive obligation on a party to perform, a condition does not. Rather, what a condition does is suspend a party’s obligation to perform, as required by a term, pending the occurrence of an uncertain future even. Then the obligation, required by a term of a contract, only becomes due/ effective once the condition has been fulfilled or the condition terminates a party’s existing obligation to perform. A condition is defined as an uncertain future event. Conditions influence whether or for how long a contract exists. Two types of conditions can be distinguished: suspensive and resolutive.  The Classification of Contractual Conditions Suspensive Conditions The contract exists - but the full working of the contract is suspended or delayed. The rights and duties are delayed or suspended until the uncertain event happens. If the condition does not happen --- there will be no binding contract. A suspensive condition suspends the operation of the contract until the occurrence of an uncertain future event, meaning that even though there is indeed a contract it is neither operative nor enforceable until the happening of that event. The parties’ obligations to perform (as required by the terms of the contract) take effect only if and when the condition is fulfilled. If the condition is fulfilled, the contract at that time become fully operative + enforceable and both parties to the contract are expected/ required to fulfil the duties as dictated by the terms of the contract. If the condition fails ( it becomes clear that the uncertain future event will not transpire), the contract then dies, and becomes a legal nullity. In the intervening period between period between the conclusion of the contract and the time that the condition is fulfilled or fails, the contract is suspended, awaiting fulfilment to breathe life into it. Example: A sells a house to B. The sale of the house is subject to the bank granting B a loan( that is the condition – it is uncertain if the bank will grant B a loan). Another example, you and I agree that I will buy for iPhone, on condition that I sell the Samsung phone I have by the end of this month, then we say that the contract of sale comes into operation only if I am able to sell my Samsung phone. If the loan granted / I am able to sell my Samsung phone. --- there is a valid and binding contract of sale. If the loan is not granted/ I fail to sell my Samsung phone ----- there is no contract of sale.  The Classification of Contractual Conditions Suspensive Conditions The contract exists - but the full working of the contract is suspended or delayed. The rights and duties are delayed or suspended until the uncertain event happens. If the condition does not happen --- there will be no binding contract. A suspensive condition suspends the operation of the contract until the occurrence of an uncertain future event, meaning that even though there is indeed a contract it is neither operative nor enforceable until the happening of that event. The parties’ obligations to perform (as required by the terms of the contract) take effect only if and when the condition is fulfilled. If the condition is fulfilled, the contract at that time become fully operative + enforceable and both parties to the contract are expected/ required to fulfil the duties as dictated by the terms of the contract. If the condition fails ( it becomes clear that the uncertain future event will not transpire), the contract then dies, and becomes a legal nullity. In the intervening period between period between the conclusion of the contract and the time that the condition is fulfilled or fails, the contract is suspended, awaiting fulfilment to breathe life into it. Example: A sells a house to B. The sale of the house is subject to the bank granting B a loan( that is the condition – it is uncertain if the bank will grant B a loan). Another example, you and I agree that I will buy for iPhone, on condition that I sell the Samsung phone I have by the end of this month, then we say that the contract of sale comes into operation only if I am able to sell my Samsung phone. If the loan granted / I am able to sell my Samsung phone. --- there is a valid and binding contract of sale. If the loan is not granted/ I fail to sell my Samsung phone ----- there is no contract of sale.  The Classification of Contractual Conditions Resolutive Conditions The contract exists and is fully working immediately meaning that the parties must before their obligations. The contract will cease to work (terminate) when the condition is fulfilled. Thus, the contract is immediately fully operative with both parties enjoying their rights and carrying out their duties. A contract with a resolutive condition is immediately binding on the parties. The rights and duties will cease on the happening of the uncertain future event (i.e. the condition): A resolutive condition has the opposite effect to a suspensive condition, in that it ends the contract that has already become operative and enforceable. The fulfilment of a resolutive condition extinguishes the contract. Example: You conclude a contract of lease with your landlord. You agree that you can rent the flat until you graduate. (you graduating is a condition i.e. an uncertain future event). When you graduate, the contract of lease will cease or come to an end because the uncertain future event, your graduation, has happened. You will have to move out. When the uncertain future event occurs, restitution will take place: you vacate the flat & return keys to the landlord. Example- divorce settlement agreements, husband undertakes to pay maintenance for his wife until she remarries or dies. So if the former wife remarries, there goes the pay check.  Track Your Understanding. Can You Answer the Following? ☞ Define a “condition”. ☞ Give an example of a suspensive condition. ☞ Give an example of a resolutive condition. ☞ Describe the influence a condition has on a contract.  Time Clauses TIME CLAUSES Definition: a time clause is a certain future event i.e. a date. Distinguish time terms from conditions- conditions introduce uncertainty (to as whether the condition will be fulfilled or not and that uncertainty is removed when the condition is fulfilled or fails, but a time terms operates differently) and you will see why. (i) A suspensive time clause The contract exists when the parties reach consensus. The duty to perform for a party is suspended or postponed. Example: A buys a book on the 1 July. The contract states that he must pay on 30 July. A, the buyer, duty to perform (to pay) is suspended or delayed until 30 July. (ii) A resolutive time clause The contract exists when the parties reach consensus. There are no delays or suspension of performance. The contract has full working immediately. The contract will cease on a particular date. Example: A rents a flat (contract of lease is concluded) till 31 /12. The contract of lease exists and all the rights and duties of both the landlord and the tenant are active. Thus, the landlord must maintain and repair the property while the tenant must pay his rent on time. The contract will terminate on 31/12 and the tenant must vacate the premises.  Track Your Understanding. Can You Answer the Following? ☞ Define a time clause. ☞ Give an example of a suspensive time clause. ☞ Give an example of a resolutive time clause.  Other Special Clauses Indemnity clause Excludes normal liability. Example:” The seller is not liable for latent (hidden) defects in the item sold”. Normally the seller would be responsible for hidden defects in the item he sold. Non-variation clause If the contract is in writing the parties may state that any changes must also be in writing, and not be merely verbal variations. This clause reads “no amendments to this contract are valid and binding unless the amendments are in writing and signed by the parties”. Cancellation clause The contract has a clause which states that if either party fails to perform (breaches the contract) then the other party may cancel of contract. (See discussion of breach of contract and remedies in Theme 7). Acceleration clause If you get into arrears with a payment, you then have to pay the balance immediately. Example: you are paying off car instalments. The contract states that if you skip a payment then you have to pay the whole outstanding balance the following month. Price For the car =R40 000. You pay R2000 per month off on the purchase price. You pay on time for 15 months (you have paid R30 000). In the 16th month you fail to pay your instalment. In month 17 you have to pay the whole of the outstanding balance of R10 000 because you are now in arrears. Paying the balance is accelerated. Sources Consulted in Compiling these Notes ✓ Prescribed Textbook: ✓ Kopel S Guide to Business Law 7th Edition (2022) Oxford University Press. ISBN 9780190748463 –Chapter 6 ✓ Recommended Textbooks: ✓ Collier-Reed D & Lehman K Basic Principles of Business Law 2nd Edition (2010) LexisNexis. ISBN 9780409049381 – Chapter 3 ✓ Govindjee A et al Commercial Law: Fresh Perspectives 3rd Edition (2019) ISBN 9781485702092 –Chapter 8.