Chapter 3 - complete - Summary Law of Contract 201 PDF

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Summaries compiled from the Prescribed Textbook, as well as lecture notes and case research. Passed both 201 and 202 with distinction. ...

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Chapter 3: Mistake/absence of consensus “Background” Dual basis of contract law: - Primary basis: Will theory (actual, subjective agreement between the parties for contractual liability) - Secondary basis: Reliance theory (reasonable belief) Classification of mistake Mistake (general): To be under misconception about something. Mistake (in contract): The situation where a contracting party acts while under an incorrect impression regarding some or other fact that relates to, and affects, the contract between the parties. NB: Important distinction between a mistake that vitiates (destroys) consent, and one that does not affect consensus but may render a contract voidable (rescindable). 1. Unilateral Mistake Only one party is mistaken, while the other party is aware of his/her mistake. 2. Mutual Mistake Both parties are mistaken about each other’s intention and are at cross-purposes (neither is aware of the other’s mistake). 3. Common Mistake A mistake that is shared by the parties, and does not lead to dissensus. Results in a contract being void as it rests on a common underlying supposition (belief) that is later revealed to be incorrect. Summary of classification of mistake Unilateral mistake A is mistaken about B’s intention B knows of A’s mistake, but remains silent There is dissensus Mutual mistake A and B are at cross-purposes Each is mistaken about the other’s intention There is dissensus Common mistake A and B make the same mistake There is consensus The consensus is based on a common, false supposision/assumption Irrelevant and relevant mistake - An irrelevant mistake does not negate consensus, as it does not affect the mistaken party’s decision to enter into a contract. - If the mistaken party would have entered into the contract despite the mistake that causes dissensus = mistake irrelevant. - Khan v Naidoo: Party to an agreement would have signed the document even if she had been aware of its true nature. In other words: A mistake must influence a party’s decision to conclude a contract in order for it to be relevant to the question of possible dissensus. Material and non-material mistake Material (operative or essential) mistake: An error that vitiates or negates actual consent between the parties; must relate to or exclude an element of consensus. Non-material mistake: Does not exclude actual agreement between the parties as it does not relate to an element of consensus. A valid contract will still arise, it may be voidable if consensus has been obtained in an improper manner by misrepresentation, duress, undue influence or commercial bribery. Distinction between a material and non-material error is vital in determining the appropriate resolution to a situation.

NB: Material mistake -> dissensus -> contract void for mistake, unless it can be upheld on the secondary basis of reliance. Not material mistake -.> consensus -> contract valid, may be voidable if the mistake was induced by the other party’s misrepresentation Material mistake (further categories) If the parties are not in agreement about one (or more) of these element, there is a material mistake: - Serious intention to contract: No intention to be legally bound (animus contrahendi) = no consensus. A party may make a declaration to contract in jest or merely intend a social agreement (gentlemans agreement) to arise. - Agreement as to the material aspects of the contract: Parties must be ad idem regarding the consequences they intend to create: the persons between whom the obligations arise and the content of the obligations (the performances to be rendered). o Mistake regarding parties to a contract = material o Mistake regarding contractual performance: In Allen v Sixteen Stirling Investments (Pty) Ltd parties were not in agreement about what was being bought and sold. o Mistake regarding legal consequences: usually the mistaken party is unware of the provision in a document that embodies the terms of the contract. Generally, any mistake regarding a contractual clause that permits a party unilaterally to vary an aspect of performance (date of performance) or to release himself from liability, will be material. Consciousness of agreement: A mistake that precludes conscious agreement = material. The offeree must be aware of the offer before he can accept it; the offeror must be aware of the acceptance for a true meeting of the minds (concursus animorum) to occur. In Bloom v America Swiss Watch Co: Appellant could not accept an offer until he knew of it. Non-material mistake (further categories) - Typically relates purely to the reason or motive of the mistaken party for entering into an agreement = error in motive. - No exclusion of consensus = valid contract. - NB: If the mistake in motive was induced by the misrepresentation of the other party, the mistaken party may have a remedy. Traditional classification of material and non-material mistake 1. Error in corpore: Material mistake concerning the subject matter of the contract (the object of performance). I.e. where property is purchased, and the parties have different properties in mind. 2. Error in negotio: Material mistake relating to the true nature of the contract (the juristic act). 3. Error in persona: Usually material mistake regarding the identity of the other party to the contract. The error is only material if the identity of a party is of vital importance to the mistaken party. 4. Error in substantia: Not material. A mistake regarding an attribute or characteristic of the subject matter of the contract (the object of performance). Such a mistake will usually amount to an error in motive = not material. Mistake of law and mistake of fact If the mistake in question (whether of law or fact) merely relates to motive = not a material mistake. In summary: Error in corpore Error in negotio Error in persona Error in substatia/qualitate Error in motive Error iuris

Mistake as to the subject matter of the contract Mistake as to the nature ot the contract Mistake as to the identity of party to the contract Mistake as to attributes/characteristics of subject matter Mistake as to party’s reasons for entering into the contract Mistake as to the law relating to some aspect of the transaction

Material Material Sometimes material Not material Not material Material only if it relates to terms of agreement, rather than motive

Limitations of the will theory - Unqualified acceptance of the will theory as the basis of contract = if there is dissensus = contractual liability cannot arise. - Every material mistake prevents the existence of a contract. - Unwavering application of the will theory would have unfair results: I.e. a party could set up a mistake in advance and then argue lack of agreement should he/she later wish not to be bound. Also: reservatio mentalis: A person deliberately creates the impression that he is agreeing to a contract, while tacitly has mental reservation that he does not really intent to be bound. On application of the will theory = no contractual liability (which could promote fraud and perjury). - Consequently: will theory is not applied without qualification. I.o.w. Courts have alternated between subjective and objective bases for contractual liability: - Subjective approach (Will theory) qualified by the doctrine of estoppel and doctrine of quasi-mutual assent (direct reliance theory). - Objective approach (Declaration theory) corrected by the iustus error doctrine (indirect application of reliance theory) 1. The subjective approach as qualified by estoppen and quasi-mutual assent The doctrines of estoppel and quasi mutual assent have a common heritage in the English case Smith v Hughes. 1.1 The doctrine of estoppel Where one party (the estoppel raiser) has a reasonable belief in a misrepresentation made by the other party (the estoppel denier) and relies thereon to his/her detriment, the estoppel raiser may hold the estoppel denier to the misrepresentation – the raiser can prevent the denier from relying on the true state of affairs. Fawdon v Lelyfield o Owner of a racehorse hired it to B&L. o To evade Jockey club regulation, an agreement was made to create the impression of a contract of sale – B&L received false receipts to act as owners. o B&L sold horse to Def. – true owner then claimed it from Def. with rei vindicatio – Def. pleaded estoppel (successful) o True owner placed B&L in a position to represent themselves to Def. as owners of the horse to the public. o Worked with fiction of a contract – that B&L were the owners. There is support for estoppel as a means of qualifying the will theory in instances of dissensus. 1.2 The doctrine of quali-mutual assent or (direct) reliance theory In contrast to estoppel, the doctrine of quasi-mutual assent is a basis for an actual, rather than a fictitious, contract. For contractual liability to arise in the absence of consensus, a reasonable belief on the part of the one party (the contract asserter) is required. The belief must be induced by the other party (the contract denier) that he had agreed to the contract in question. - Liability is grounded in a reasonable belief in the existence of a consensus that was induced by the other party. - First instance of this approach: Pieters & Co v Salomon - Also, Hodgson Bros v South African Railways The elements of the doctrine of quasi-mutual assent may be divided into 2 dependable parts: 1. The contract denier must have induced the reliance or belief of the contract asserter that the parties have reached consensus / the contract denier had agreed to the contractual terms in question. 2. The contract asserter’s reliance must be reasonable in the circumstances. The party who alleges a contract on the basis of quasi-mutual assent bears the onus of proving, on a balance of probabilities, the facts that warrant such a conclusion.

3. The objective approach as qualified by the iustus error doctrine The will theory (objective approach) to contractual liability grounds liability purely on concurring, objective declarations of will – inner will/actual intention is irrelevant. - One of the main points of contention to the theory: a contract that neither party intended may be imposed, merely because their declarations indicate concurring intentions. - Authority for objective approach: National and Overseas Distribution Corporation (Pty) Ltd v Potato Board. - Thus: A need for a qualification of the declaration theory. The iustus error doctrine - Not in itself a theory of contractual liability. - Corrective measure in the case of dissensus. - A party will not be held bound to an agreement if that party apparently (but mistakenly) gave his/her consent and if his/her mistake is material and reasonable. The contract asserter: Has to show that there is consent from an objective viewpoint/common intention expressed. The contract denier: Bears onus of proving that his/her mistake is both material and reasonable. - If the contract denier succeeds: contract void ab initio. - If the contract denier fails: He is contractually bound on the terms originally proved by the contract asserter. Is the mistake material? Already dealt with. Is the mistake reasonable? 1. A material mistake will usually be reasonable if caused by a misrepresentation on the part of the contract asserter (or someone for whose acts he/she may be legally liable). - For a misrepresentation to render a mistake reasonable, it must be unacceptable in the eyes of the law (wrongful or contra bonas mores) A misrepresentation can either be positive or negative: - Positive misrepresentation (one party has stated something that is false) o Allen v Sixteen Sterling: The plaintiff mistake was reasonable, as it was caused by misrepresentation of the defendant’s agent in pointing out incorrect property. - Negative misrepresentation (a party has kept quiet in circumstances where, in law, he ought to have spoken out – i.e. to correct the misunderstanding of the other party) A legal duty to speak exists when: o Where the contract asserter knows/ought to know as a reasonable person, that the other party is mistaken, he/she must correct the contract denier’s wrong impression. Prins v ABSA: Bank knew of the contract denier’s misrepresentation, and failed to remove it = iustus. o Where, prior to the conclusion of the agreement, the contract asserter created an impression directly conflicting with the provisions of the agreement that he/she alleges to be the contract. The contract asserter must draw the contract denier’s attention to the discrepancy. Du Toit v Atkinson’s Motors: Advertised a 1979 Mercedes, sold a 1976. o NB: Where a contractual term, such as an exclusionary clause, may be reasonably expected to be part of the contract, a duty to speak on the part of the contract asserter does not arise. The converse is also true, where a term is not expected = must be disclosed. 2. If the contract denier is not to blame for his/her mistake (he/she behaved as a reasonable person in the circumstances would have done AND acted without negligence). - If there was fault on the part of the contract denier, it will weigh against him/her, but will not necessarily be definite – especially if the denier can prove a wrongful misrepresentation from the asserter. 3. If the contract denier did not cause a reasonable belief in the contract asserter, that the contract denier had assented to the agreement (contract asserter unreasonably relief on consensus).

Reconciliation of the subjective and objective approaches The iustus error approach is an indirect application of the reliance theory. NB: Sonap Petroleum (SA) (Pty) Ltd v Pappadogianis - Parties entered into a 20 year lease agreement. - Appellant’s attorney drafted an addendum to the lease, and mistakenly shortened the period to 15 years. - Respondent (owner of the property) would gain from a shortened lease period and signed the addendum without saying something – stated he believed the appellant wanted to shorten the lease period. Court of first instance: Found in favour of the respondent: held that the appellant’s mistake had not been iustus as it was due to its own fault. Appeal Court: - Appellant’s mistake was unilateral: Only the appellant mistakenly believed that its declared intention conformed to its actual intention. - Court confirmed that, when dealing with contract, the law concerns itself with the external manifestations and not the workings of the minds of the parties. - However, in the case of dissensus, the law has regard to other considerations (the reliance theory). The court formulated a test for the reliance theory: Did the party who’s actual intention didn’t conform to the common intention expressed, lead the other party as a reasonable man to believe that declared intention represented his actual intention. To answer this question, a 3 fold enquiry is needed: (Sonop Test) 1. Was there misrepresentation as to one party’s intention 2. Who made the misrepresentation 3. Was the other party misled thereby The court found that the respondent was aware of the possibility of a mistake on the part of the appellant, and had a duty to speak and enquire. The respondent failed to discharge this duty, and therefore there was no consent, and the addendum was declared void.

Common Mistake - Parties have reached consensus, but are mistaken about a fundamental fact (it is thus not dissensus). - Still renders a contract void. Implicitly agreed that contract is dependent on the truth of supposition: Parties render their contract dependant on the presence of some fact of the past/present. Rectification Rectification: The process of correcting a written document so that it properly reflects the actual, common intention of the parties. - What is rectified is not the contract itself as juristic act, but merely the document in question because it does not reflect what the parties intended to be the content of their juristic act. Rectification is generally regarded as a consequence of the primarily subjective approach of the SA law to contractual liability. The party claiming ratification must establish: - The document does not reflect the common intention of the parties. - The true intention of the parties - How the document is to be amended to reflect that intention....