BUSINESS LAW

BLAW1B-6

© SAP 2012 | 1
TOPIC 3: VALID, VOID AND VOIDABLE CONTRACTS

Chapter 13-18 (Prescribed Textbook)

Sub-topics

 Introduction
 Parties to a contractual relationship
 The elements to a contractual relationship
 Consequences of a valid contract
 Consequences of a void contract
 Consequences of a voidable contract
 Breach of contract
 Remedies for breach of contract
 Termination of contracts
 PARTIES TO A CONTRACT
Co-debtors
 Co-debtors are liable either jointly or jointly and
severally
 Joint = pro rata: each debtor is liable for his portion of
the debt or a proportional portion (ultimately all of
them are liable for entire debt)
 Joint & Several = in solidum: entire debt may be
claimed from only one debtor
 PARTIES TO A CONTRACT
Co-debtors
 Debtor who has rendered performance is entitled to
claim payment of pro rata portion from each of the
other debtors
 If creditor releases one of the debtors, debt not
extinguished but is reduced proportionally by the
amount due from that debtor
 Rule – jointly liable unless the contrary is stipulated
 PARTIES TO A CONTRACT
Third Parties
 Parties to a contract – only those who owe each other
reciprocal obligations
 Third parties are not and cannot be party to the
contract
 Third parties can only get involved in a contract by
means of (a) contract for the benefit of a third party (b)
assignment (c) cession or (d) delegation
 PARTIES TO A CONTRACT
Third Parties
 Parties to a contract – only those who owe each other
reciprocal obligations
 Third parties are not and cannot be party to the
contract
 Third parties can only get involved in a contract by
means of (a) contract for the benefit of a third party (b)
assignment (c) cession or (d) delegation
 CONTENTS OF A CONTRACT
Read and make sure you understand:
 Essentialia, naturalia and incidentalia
 Essential and non essential terms of a contract
 Express and implied terms of a contract
 Conditions in a contract
 Time clauses in a contract
 Guarantees in a contract
 Interpretation of contracts
 CONSEQUENCES OF VALID, VOID & VOIDABLE CONTRACTS
Introduction
 Valid, void and voidable contracts have legal
consequences
 It is important for parties to such contracts to
understand the legal implications of each
 Various remedies are available depending on which
contract it is
 CONSEQUENCES OF VALID, VOID AND VOIDABLE
CONTRACTS
Valid contract - Recap
 An agreement that is legally binding and legally enforceable
 An agreement that complies with the prescribed
requirements
 An agreement that creates rights and duties (i.e.
obligations)
 Creditor & debtor relationship created between parties
 CONSEQUENCES OF VALID, VOID & VOIDABLE CONTRACTS
Void “contract” - Recap
 Despite endeavors of the parties, no legally binding and
enforceable contract
 One or more of the requirements of validity are missing
 No rights or duties (i.e. obligations) are created therefore
no performance has to be rendered and no performance
can be claimed
CONSEQUENCES OF VALID, VOID & VOIDABLE CONTRACTS
Void “contract” – restitution & unjust enrichment
 If performance is duly rendered and parties discover that
contract is void – there must be restitution
 Restitutio in integrum – putting the parties back to the
position in which they were had contract not concluded
 Restitution arises not ex contractu but on grounds of
unjustified enrichment (no person should be enriched at
the expense another when no legal basis for such)
 CONSEQUENCES OF VALID, VOID & VOIDABLE CONTRACTS
Void “contract” – Restitution and unjust enrichment
 If performance rendered as a result of mistake of law, no
restitution takes place
 Benning v Union Government – B paid import duty on
machine he had imported under mistaken impression that
duty was payable. The Court ruled that he could not claim
repayment of the amount because he had paid it as a
result of a mistake of law
 CONSEQUENCES OF VALID, VOID & VOIDABLE CONTRACTS
Void “contract” – ex turpi causa & par delictum rules
 Where a contract is void because of unlawfulness above ex
turpi causa and par delictum rules apply
 Ex turpi causa – no performance has been rendered but
one party desires to claim performance (e.g. seller of drugs
refuses to deliver drugs that have been paid for in full)
 Party cannot enforce a void contract by claiming
performance on it or from the other party
 CONSEQUENCES OF VALID, VOID & VOIDABLE CONTRACTS
Void “contract” – ex turpi causa & par delictum rules
 Par delictum rule - performance has already been rendered
before discovery of unlawfulness of contract
 Where parties equally guilty (i.e. share fault for
unlawfulness) – party who has performed cannot claim
restitution
 If one party is less guilty (e.g. forced to perform) – may
claim restitution
 CONSEQUENCES OF VALID, VOID & VOIDABLE CONTRACTS
Void “contract” – ex turpi causa & par delictum rules
 Brandt v Bergstedt – par delictum rule applied strictly (i.e.
no relaxation or exceptions)
 Bergstedt sold a cow to Brandt on a Sunday against the law.
Conclusion of contract on Sunday was illegal. He delivered
the cow following day and Brandt failed to pay for it.
Bergstedt sued and claimed restitution of cow.
 The Court held that he was not entitled to restitution
 CONSEQUENCES OF VALID, VOID & VOIDABLE CONTRACTS
Void “contract” – ex turpi causa & par delictum rules
 Jajbhay v Cassim - SCA held that the par delictum rule
should be relaxed in the interest of “simple justice between
man and man” to allow restitution
 Padayachey v Lebese – Court decided that it was against
public policy to allow one person to be enriched at the
expense of another person by retaining performance that
had been duly rendered
 CONSEQUENCES OF VALID, VOID & VOIDABLE CONTRACTS
Void “contract” – ex turpi causa & par delictum rules
 Pietzch v Thomson - P & T lived together while T was still
married. They had agreed to get married soon after T ‘s
divorce was granted. P had given T jewellery and money. It
was common cause that the agreement was against public
policy and therefore void. P claimed back the jewellery and
money given to T. Court applied par delictum rule and
refused claim for the return of the jewellery & money.
 CONSEQUENCES OF VALID, VOID & VOIDABLE CONTRACTS
Voidable “contract” - Recap
 An agreement that is capable of being binding and of
being enforced
 An agreement that was properly and validly concluded
but has a fault that exposes it to legal challenge thus
casting doubt about its legal binding-ness and
enforceability
 Fault = defective consensus
 CONSEQUENCES OF VALID, VOID & VOIDABLE CONTRACTS
Voidable “contract” - Recap
 Defective consensus = consent of one of the parties
was improperly obtained
 Consent given in circumstances where ordinarily or
under normal circumstances it would not be given
 Defective consensus is caused by (a) misrepresentation
(b) duress and (c) undue influence
 Consent not wholly absent but is deemed to be absent
 CONSEQUENCES OF VALID, VOID & VOIDABLE CONTRACTS
Voidable “contract” - Recap
 Contract voidable at the instance of the aggrieved or
wronged or injured party
 Choice to enforce or set aside the contract rests with
party who gave defective consent
 Choice must be exercised upon becoming aware of the
voidability of contract or with reasonable period
 Choice exercised - wronged party cant change mind
 CONSEQUENCES OF VALID, VOID & VOIDABLE CONTRACTS
Voidable contracts - Recap
 Contract voidable at the instance of the aggrieved or
wronged or injured party
 Choice to enforce or set aside the contract rests with
party who gave defective consent
 Choice must be exercised upon becoming aware of the
voidability of contract or with reasonable period
 Choice exercised - wronged party cant change mind
 CONSEQUENCES OF VALID, VOID & VOIDABLE CONTRACTS
Voidable contracts – Rescission & restitution
 Wronged party may decide to set aside the contract
(rescission) and claim to be restored to his original
position (restitution)
 Rescission and restitution are contractual remedies
 Considered unconscionable for a party to enforce or
benefit from a contract which they obtained by
improper means
 BREACH OF CONTRACT
Introduction- purpose of contracting
 Parties enter into contracts with the intention to
achieve certain objectives, outcomes and results
 If the intended objectives, outcomes or results are not
achieved because of the acts or omissions of one of the
parties – breach of contract
 Breach of contract takes various forms
 BREACH OF CONTRACT
Forms of breach of contract
 Mora debitoris (i.e. breach of contract by the debtor)
 Mora creditoris (i.e. breach of contract by the creditor)
 Repudiation (i.e. refusal to perform obligations)
 Rendering performance impossible
 Positive malperformance (i.e. defective performance)
 BREACH OF CONTRACT
Mora debitoris
 Failure of the debtor to perform on time (i.e. late
payment by the debtor)
 Requirements
1. The debtor fails to pay on time (mora in re vs mora in persona)
2. The debt must be due (no prescription, no conditional performance by creditor)
There must be a valid right to claim performance against which there is no defence.
3. The delay must be due to the fault of the debtor or a person for whose actions he is
responsible
 BREACH OF CONTRACT
Mora creditoris
 Failure by the creditor to accept proper performance
tendered by the debtor on due date
 Arises only where the debtor requires the co-operation
of creditor in order to perform and creditor fails to give
his co-operation
 A and B agree that delivery will take place to B at a
particular place and time and B is not available at place
 BREACH OF CONTRACT
Mora creditoris
 Requirements:
 The creditor fails to accept performance. If debtor performs on due date, creditor in mora
if he does not accept performance. If no date or time fixed, creditor must be given a
reasonable opportunity to make arrangements to accept.
 The debt must be due. If debt not due, creditor will not be in mora if he does not accept.
 The debtor must tender proper performance. Debtor must place performance at the
disposal of the creditor and afford creditor opportunity to accept. Notice that performance
is being tendered must be given. Performance should be such as would extinguish debtors
obligations in terms of the contract.
 The failure to receive proper performance must be due to the fault of the creditor. Creditor
will not be in mora if performance tendered is improper (e.g. incomplete or defective)
 BREACH OF CONTRACT
Repudiation
 Notice given by the debtor (expressly or impliedly or
tacitly) that he will not comply or continue to comply
with his obligations
 Denial of obligation coupled with notice given by one of
the parties to a contract that he will not perform
 Notice of discontinuance of obligations by one party +
subsequent acceptance thereof by the other party
 BREACH OF CONTRACT
Repudiation - Requirements
 Debtor gives notice that he will not comply or continue
to comply with obligation
a. Notice
b. Positive refusal
c. Not mere failure to perform
 The repudiation must be accepted
a. Other party has option to accept or reject repudiation, if refused, contract continues and
the debtor is held to his obligations
b. Acceptance = breach of contract, innocent party can resile from contract and claim
damages, entire contract is terminated and no more obligations
 BREACH OF CONTRACT
Rendering performance impossible
 By acts or omission, one of the parties renders
performance impossible
 Fault – on party who renders performance impossible
 Obligation is not terminated – debtor remains bound
 Subjective impossibility vs objective impossibility
 If performance is divisible, there is partial guilt of
breach of contract
 BREACH OF CONTRACT
Positive malperformance
 Two types of positive malperformance
 Debtor performs, but performance inappropriate, incomplete or defective (delivers less chairs
than ordered, use of inferior quality material, deliver something with a defect, no valid title)
 Debtor does something prohibited or that he may not do (e.g. subletting when such is
prohibited, working or doing business in contravention of restraint of trade)
 Generally all remedies are available except cancellation
 Cancellation only available where malperformance is so inappropriate or defective that it
must be rejected
 Concepts of “substantial performance”, “vital part” or breach goes to the root of the contract
 REMEDIES FOR BREACH OF CONTRACT
Introduction- purpose of contracting
 Parties enter into contracts with the intention to
achieve certain objectives, outcomes and results
 Should one of the parties commit a breach of the
contract there are certain remedies available to
the innocent party.
 Remedies = legal recourse available to the
innocent party
 REMEDIES FOR BREACH OF CONTRACT
Remedies available to the aggrieved party
 Specific performance (performance in forma specifica)
 Cancellation
 Damages
 Penalty clause
 Interdict
 Exceptio non adimpleti contractus
 REMEDIES FOR BREACH OF CONTRACT
Specific Performance (Performance in forma specifica)
 Purpose: aimed at bringing about fulfilment of the
contract
 Aggrieved party seeks to achieve result envisaged when
contract was concluded
 Aggrieved party requires other party to perform as
agreed (i.e. as stipulated in contract)
 The other party must render actual performance
 REMEDIES FOR BREACH OF CONTRACT
Specific Performance (Performance in forma specifica)
 If actual performance not possible, innocent party can
claim value thereof
 In addition, aggrieved party can claim damages for
losses suffered due to the breach committed
 Where performance is no longer possible, damages can
be claimed as a substitute for performance
 Courts have a discretion when dealing with damages
 REMEDIES FOR BREACH OF CONTRACT
Specific Performance (Performance in forma specifica)
 Order for specific performance will not be granted
a. Where performance is impossible
b. Where order of specific performance will be unduly detrimental to
the public or guilty party
c. Where guilty party has become insolvent
d. Where court will not be able to supervise the execution of its order
e. Where damages will sufficiently compensate the aggrieved party
f. Where performance consists of rendering personal services
 REMEDIES FOR BREACH OF CONTRACT
Cancellation
 When there is a breach, aggrieved party has a choice:
(a) cancellation or (b) fulfilment
 Choice must be exercised within a reasonable period of
time after breach or notice of breach
 Once choice has been made, no change of mind
 If choice is cancellation, aggrieved party must notify the
other party
 REMEDIES FOR BREACH OF CONTRACT
Cancellation
 If cancellation, obligations are terminated, no duty to
perform and no claim to perform
 Restitution of any performance must be made by both
parties
 Aggrieved party has the right to claim damages if he
has suffered loss as a result of the breach of the
contract
 REMEDIES FOR BREACH OF CONTRACT
Cancellation – available in the following cases:
 Where an essential term of the contract has been breached
 In cases of serious positive malperformance
 Where repudiation has been accepted by the creditor
 Where time is of the essence of the contract
(a) Time for performance stipulated
(b) Nature of the contract makes time of the essence
(c) Issuing of notice of rescission, where time not of the essence
(d) Where time can be implied to be of the essence
(e) Where the contract stipulates the right to resile (i.e. lex commissoria, in a lease it’s a
forfeiture clause and in mortgage it is called a foreclosure clause)
 REMEDIES FOR BREACH OF CONTRACT
Damages
 Definition – amount of money paid to the aggrieved
party to compensate him for financial losses suffered as
a result of the breach
 Guilty party is liable to redress the losses
 Test (loss and extent): innocent party must be placed in
the position he would have been in had performance
taken place timeously and properly
 REMEDIES FOR BREACH OF CONTRACT
Damages
 Damages are claimable only if aggrieved party has
suffered loss
 Loss suffered must not be exact, suffice to prove loss
 Where amount not easily ascertainable, the court will
determine an appropriate amount
 Assessment of damages is governed by various
principles
 REMEDIES FOR BREACH OF CONTRACT
Damages - Principles
 Damages must stem from the breach
 Breach must have caused the loss
 Damages must be direct consequences of breach
 Guilty party must be held liable for the natural or
general consequences of his breach
 Damages suffered must sound in money (i.e. financial
loss or loss of profits)
 REMEDIES FOR BREACH OF CONTRACT
Damages - Principles
 Damages must have been foreseen or reasonably
foreseeable
 Guilty party liable only for damages that parties
foresaw at the conclusion of the contract (cf De Wet
and Van Wyk)
 Damages must be mitigated. Aggrieved party must take
reasonable measures to mitigate his losses
 REMEDIES FOR BREACH OF CONTRACT
Penalty Clause
 Clause that specifies predetermined amount payable as
damages in the event of breach
 Conventional Penalties Act – clause in terms of which
someone undertakes to pay an amount of money or to
deliver or to perform something in the event of breach
of contract, either by way of penalty or liquidated
damages
 REMEDIES FOR BREACH OF CONTRACT
Penalty Clause
 Where there is a penalty clause – proof of breach only,
no need for proof of damages nor extent of loss or
quantum of damages
 Penalty clause = usual form is payment of money but
can take other forms (e.g. forfeiture of right to claim
restitution)
 Penalty clause, alternative to & substitute for damages
 REMEDIES FOR BREACH OF CONTRACT
Interdict
 A court order in terms of which a person is ordered to
act or refrain from acting in a certain manner
 Types: (a) mandatory and (b) prohibitory interdicts
 Mandatory = person ordered to act in a certain manner
(i.e. to do something)
 Prohibitory = person ordered to not to act in a certain
manner (i.e. not to do something)
 REMEDIES FOR BREACH OF CONTRACT
Interdict
 Foreseeable breach of contract – interdict deals with a
threatened or impending breach of contract
 Example: restraint of trade situation – person under
restrain advertises that is starting business next to
business of previous employer, interdict stops him from
do such
 Interdict is remedy of last resort
 REMEDIES FOR BREACH OF CONTRACT
Exceptio non adimpleti contractus
 In reciprocal contracts (i.e. both parties must perform)–
one party cannot require other to perform if he himself
has not yet performed or is at least willing to perform
 If performance is claimed by a party who has not yet
performed, other party has a defence against claim
known as exceptio non adimpleti contractus
 Offer of performance by claimant is a prerequisite
 TERMINATION OF CONTRACTS
Introduction
 Obligations do not exist in perpetuity
 All obligations do come to an end at some point in
time
 Some obligations are of longer duration (e.g.
employment contract, leases, bond over a house)
 Despite their length, all obligations do come to an
end in one way or another
 TERMINATION OF CONTRACTS
 Contracts may be terminated in one or more of the
following ways:
 (1) Fulfilment (proper fulfilment)
 (2) Prescription
 (3) Set-off
 (4) Merger
 (5) Agreement
 (6) Supervening impossibility of perfornace
 (7) Insolvency
 (8) Death
 TERMINATION OF CONTRACTS
Performance (fulfilment)
 Obligations terminate naturally by fulfilment
 Both parties to a reciprocal contract perform properly as
per the contract
 There is actual and complete performance
 Debtor entitled to a receipt and may request it
 Payment by cheque is conditional fulfilment of debt
 When there is more than one debt, debtor must indicate
which debt is being settled, otherwise apportionment
 TERMINATION OF CONTRACTS
Performance (fulfilment)
 1. Interest is paid before capital
 2. A due debt is settled first before a debt not yet due
 3. Secured debts are paid first (i.e. secured by pledge,
mortgage and other forms of security or debts burdened
by a penalty clause)
 4. Older debts are settled before recent debts
 5. if none of above apply, payment is pro-rated
 TERMINATION OF CONTRACTS
Prescription
 Prescription deals with acquisition of rights or discharge of
debts after passing of time
 Acquisitive prescription = acquisition of rights after expiry
of prescribed time
 Extinctive prescription = extinction of debt after a
prescribed period of time
 Contract is terminated after debt has been extinguished
 Debt prescribes if after a time creditor has not claimed
 TERMINATION OF CONTRACTS
Prescription
 If creditor does not claim and a specified period of time
lapses, debtor may legally refuse to pay on basis of
prescription
 Prescription period starts to run when debt is due
 Debt by agreement is immediately due, prescription starts
to run as soon as contract is concluded
 Conditional contracts, prescription starts to run when
condition has been fulfilled
 TERMINATION OF CONTRACTS
Prescription Act – Periods of prescription
 30 years – mortgage bond debts, judgment debts, revenue
debts, debts due to the state regarding mining of minerals
 15 years – debts due to state from sale or lease of state
land
 6 years – debts from negotiable instruments, notarial
contracts
 3 years – any other debt not included or covered by above
 Prescription period may be interrupted or suspended
 TERMINATION OF CONTRACTS
Prescription Period – Interruption
 Prescription period runs its course if creditor does not act
timeously to claim debt
 If creditor acts, prescription is interrupted
 If a debtor acknowledges debt, prescription runs denovo
 Legal action taken by creditor against debtor interrupts
prescription as soon as legal process is served on debtor.
While legal action is running, prescription does not run.
Only starts to run after judgment granted against debtor
 TERMINATION OF CONTRACTS
Prescription Period – Suspension of prescription
 Completion of prescription is delayed if an impediment
prescribed by the Act exists
 Year must lapse after impediment has been eliminated
 The impediments are:
 1. Creditor is a minor, insane, or under curatorship
 2. Debtor is outside of the country
 3. Creditor and debtor married to each other
 4. Where creditor and debtor are partners
 TERMINATION OF CONTRACTS
Prescription Period – Suspension of prescription
5. Where creditor is a body corporate and debtor member of
the governing body
6. Where debts subject to arbitration
7. Where debt is a claim against deceased estate, insolvent
estate, company in liquidation or an applicant in terms of the
Agricultural Credit Act
8. Where either debtor or creditor is deceased and an
executor has not yet been appointed
 TERMINATION OF CONTRACTS
Set off
 Occurs where two persons owe each other money
 Debts are weighed up against each other and if amounts
equal debts are extinguished
 If one debt is larger than the other, smaller debt is
extinguished and larger one reduced proportionately
 Set off is deemed to be payment
 Requirements for set off to take place
 TERMINATION OF CONTRACTS
Set off
 Requirements for set off
 1. The debts must exist between parties in their same
capacities
 2. The reciprocal debts must both be due and capable of
settlement
 3. The reciprocal debts must sound in money or be
identical in nature
 TERMINATION OF CONTRACTS
Merger
 It is the concurrence of the capacities of debtor and
creditor
 Uniting in the same person of capacities of debtor and
creditor
 Debt is extinguished because one cannot owe self
 Example: A (lessee) leases a house from B (lessor). Later
A buys house from B. Lease is extinguished. Capacities of
lessor and lessee are now one in A
 TERMINATION OF CONTRACTS
Agreement
 Parties can terminate their contract by mutual agreement
 Where no performance, agreement terminates
immediately
 Where there has been performance, agreement of
termination must make provision for restitution
 Novation = parties agree to replace their old contract with
a new one
 Compromise = parties to a dispute agree to settle dispute
 TERMINATION OF CONTRACTS
Agreement
 Compromise = parties abandon their prior claims and settle
their differences by agreeing on new terms
 Original contract is terminated and parties bound by new
terms of the compromise or settlement
 Waiver of rights =one or both parties decide not to enforce
some or all of their rights in terms of agreement
 Waiver is a contract itself and must be clear (words/conduct),
and must flow from understanding of nature & extent of rights
 TERMINATION OF CONTRACTS
Supervening impossibility
 Vis major (i.e. Act of God)
 Casus fortuitous
 Exception:
 1. Where the risk rule forms part of the agreement
 2. Risk passes where contract has been perfected

Death does not terminate a contract unless where the services

were of a personal nature (e.g. contract of employment)
 TERMINATION OF CONTRACTS
Insolvency
 Declaration of insolvency – rights and duties controlled by
Master of High Court until a trustee is appointed to administer
insolvent estate
 Rights & duties in the insolvent estate vests upon trustee in
his official capacity
 Contracts are not terminated by insolvency
 There are exceptions to the general rule (Read Fouché p
127-128)
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