CLS cc ©
Law of Contract Notes – 2015
1
LAW OF CONTRACT NOTES:
Contract as an agreement intended to create enforceable obligations
A contract is an agreement between two or more parties.
The extra ingredient that distinguishes contracts from non-binding agreements
is 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.
Legally binding agreements that are not contracts:
The fact that the parties seriously intend their agreement to have a binding legal
effect does not necessarily mean that it is a contract.
1.1. Obligationary agreements (eg. Sale), whereby one or more
obligations are created
1.2. Absolving agreements, whereby obligations are discharged or
extinguished; and
1.3. Real (or transfer) agreements, whereby rights are transferred.
Definition of a contract
A contact may be defined as an agreement entered into by two or more persons
with the intention of creating a legal obligation or obligations. A further element
exists – namely, that the agreement should be one that the law recognizes as
being binding on the parties.
Requirements for a valid contract
• 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 to be in 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
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2
• certainty: the agreement must have a definite or determinable
content, so that the obligations can be ascertained and enforced.
The nature of a contract
A contract is a juristic act. The conclusion of a contract is bilateral or
multilateral. There must be at least two parties to an agreement.
A contract entails promises or undertakings on one or both sides.
Most contracts entail reciprocity.
Contract and the law of obligations
The law of contract forms part of the law of obligations.
Obligations – is a juristic bond i.t.o. which the party or parties on the one side
have a right to a performance and the party or parties on the other side have a
duty to render that performance.
In other words, it is a legal relationship between 2 or more legal subjects.
Sources of obligations are derived from the following:
(1) contract
(2) delict
(3) from other causes:
- Undue enrichment.
- Family relationships.
- Negotiorum gestio.
- Exercising of administrative authority.
There are as many obligations as there are indivisible performances
owing under the contract, and it is these obligations which henceforth
govern the relations between the parties to the contract.
A distinction is made between civil (obligatio civilis) and natural obligations
(obligatio naturalis).
Civil obligation may be enforced directly by recourse to a court of law, whereas a
natural obligation may not.
However, a natural obligation does have some legal effect: it’s a legal relationship
as apposed to a moral relationship.
Void and voidable contracts
The fact that a contract is valid when it was concluded, however, does not mean
that it cannot be challenged subsequently.
The contract may for example, be terminated because the performance has
become impossible or illegal; or one of the contracting parties may cancel
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Law of Contract Notes – 2015
3
because of the other’s breach of contract; or one of the parties may cancel the
contract because of the other’s misrepresentation, duress or undue influence.
So, too, a material mistake will have the result that a contract is void (that is no
contract comes into existence) since it excludes the basic requirement for the
existence of a contract, namely consent.
The concept of obligation
An obligation is a legal bond 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) to demand a performance by the debtor, and the duty of the debtor to
make that performance.
The legal relationship created by an obligation is a personal one.
If the obligation is enforceable by action in a court of law it is referred to as a
civil obligation.
A natural obligation is unenforceable.
Theories of contract
The will theory, the basis of contract is to be found in the individual will.
Parties are bound by their contract because they have chosen to be bound
(subjective).
An objective approach to contract (declaration theory) is the polar opposite of
the will 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.
A compromise theory is the reliance theory. The basis of contract is to be found
in detrimental reliance on the appearance of the agreement; in the reasonable
belief in the existence of consensus, induced by the conduct of the other party.
Approach to contract: subjective or objective?
Smith v Hughes (1871) LR 6 QB 597.
Pieters & Co v Salomon1911 AD121.
South African Railways & Harbours v National Bank of South Africa Ltd 1924 AD
704.
Saambou-Nasionale Bouvereniging v Friedman1979 (3) SA 978 (A).
Steyn v LSAMotors Ltd 1994 (1) SA 49 (A).
The Roman-Dutch writers adopted a subjective approach (animus contrahendi
and concursus animorum, or meeting of the minds).
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4
English law has always preferred a more objective approach. Smith v Hughes ‘if
the parties are not ad idem, there is no contract.
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 the other party upon 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.’
Pieters & Co v Salomon the English approach.
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 promissor 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.
Our law does permit escape from a contract on the grounds of justifiable
mistake; it does entertain claims for rectification of contractual documents that
incorrectly reflect the parties’ common intention. It recognizes the importance of
animus contrahendi in a variety of contexts.
Saambou-Nasionale Bouvereniging v Friedman. ‘the true basis of contractual
liability in our law… is not the objective approach of the English law, but is the
real consensus of the parties.’
The decision in Steyn v LSA Motors Ltd 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 the
garage 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 the
garage’s intention but rather what was stated on the advertising board. The
court rejected this argument.
Critical Law Studies cc ©
Law of Contract Notes – 2015
1
LAW OF CONTRACT NOTES:
Contract as an agreement intended to create enforceable obligations
A contract is an agreement between two or more parties.
The extra ingredient that distinguishes contracts from non-binding agreements
is 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.
Legally binding agreements that are not contracts:
The fact that the parties seriously intend their agreement to have a binding legal
effect does not necessarily mean that it is a contract.
1.1. Obligationary agreements (eg. Sale), whereby one or more
obligations are created
1.2. Absolving agreements, whereby obligations are discharged or
extinguished; and
1.3. Real (or transfer) agreements, whereby rights are transferred.
Definition of a contract
A contact may be defined as an agreement entered into by two or more persons
with the intention of creating a legal obligation or obligations. A further element
exists – namely, that the agreement should be one that the law recognizes as
being binding on the parties.
Requirements for a valid contract
• 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 to be in 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
Critical Law Studies cc ©
, CLS cc ©
Law of Contract Notes – 2015
2
• certainty: the agreement must have a definite or determinable
content, so that the obligations can be ascertained and enforced.
The nature of a contract
A contract is a juristic act. The conclusion of a contract is bilateral or
multilateral. There must be at least two parties to an agreement.
A contract entails promises or undertakings on one or both sides.
Most contracts entail reciprocity.
Contract and the law of obligations
The law of contract forms part of the law of obligations.
Obligations – is a juristic bond i.t.o. which the party or parties on the one side
have a right to a performance and the party or parties on the other side have a
duty to render that performance.
In other words, it is a legal relationship between 2 or more legal subjects.
Sources of obligations are derived from the following:
(1) contract
(2) delict
(3) from other causes:
- Undue enrichment.
- Family relationships.
- Negotiorum gestio.
- Exercising of administrative authority.
There are as many obligations as there are indivisible performances
owing under the contract, and it is these obligations which henceforth
govern the relations between the parties to the contract.
A distinction is made between civil (obligatio civilis) and natural obligations
(obligatio naturalis).
Civil obligation may be enforced directly by recourse to a court of law, whereas a
natural obligation may not.
However, a natural obligation does have some legal effect: it’s a legal relationship
as apposed to a moral relationship.
Void and voidable contracts
The fact that a contract is valid when it was concluded, however, does not mean
that it cannot be challenged subsequently.
The contract may for example, be terminated because the performance has
become impossible or illegal; or one of the contracting parties may cancel
Critical Law Studies cc ©
, CLS cc ©
Law of Contract Notes – 2015
3
because of the other’s breach of contract; or one of the parties may cancel the
contract because of the other’s misrepresentation, duress or undue influence.
So, too, a material mistake will have the result that a contract is void (that is no
contract comes into existence) since it excludes the basic requirement for the
existence of a contract, namely consent.
The concept of obligation
An obligation is a legal bond 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) to demand a performance by the debtor, and the duty of the debtor to
make that performance.
The legal relationship created by an obligation is a personal one.
If the obligation is enforceable by action in a court of law it is referred to as a
civil obligation.
A natural obligation is unenforceable.
Theories of contract
The will theory, the basis of contract is to be found in the individual will.
Parties are bound by their contract because they have chosen to be bound
(subjective).
An objective approach to contract (declaration theory) is the polar opposite of
the will 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.
A compromise theory is the reliance theory. The basis of contract is to be found
in detrimental reliance on the appearance of the agreement; in the reasonable
belief in the existence of consensus, induced by the conduct of the other party.
Approach to contract: subjective or objective?
Smith v Hughes (1871) LR 6 QB 597.
Pieters & Co v Salomon1911 AD121.
South African Railways & Harbours v National Bank of South Africa Ltd 1924 AD
704.
Saambou-Nasionale Bouvereniging v Friedman1979 (3) SA 978 (A).
Steyn v LSAMotors Ltd 1994 (1) SA 49 (A).
The Roman-Dutch writers adopted a subjective approach (animus contrahendi
and concursus animorum, or meeting of the minds).
Critical Law Studies cc ©
, CLS cc ©
Law of Contract Notes – 2015
4
English law has always preferred a more objective approach. Smith v Hughes ‘if
the parties are not ad idem, there is no contract.
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 the other party upon 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.’
Pieters & Co v Salomon the English approach.
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 promissor 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.
Our law does permit escape from a contract on the grounds of justifiable
mistake; it does entertain claims for rectification of contractual documents that
incorrectly reflect the parties’ common intention. It recognizes the importance of
animus contrahendi in a variety of contexts.
Saambou-Nasionale Bouvereniging v Friedman. ‘the true basis of contractual
liability in our law… is not the objective approach of the English law, but is the
real consensus of the parties.’
The decision in Steyn v LSA Motors Ltd 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 the
garage 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 the
garage’s intention but rather what was stated on the advertising board. The
court rejected this argument.
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