Chapter 7 - 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 7: Legality Introduction Underlying principles of law of contract: - Sanctity of contract (pacta sunt servanda): Agreements seriously entered into should be enforced. - Considerations of public policy: Agreements contrary to public policy will not be enforced. As per legislation, the common law, good morals and the public interest. o Since 1994, public policy has been anchored primarily in the values enshrined in the Constitution. Generally speaking, the illegality of contract has two possible consequences: - The contract can be void (and thus unenforceable) - The contract van be valid, but unenforceable – depending on the degree to which society regards a specific contract as reprehensible (disgraceful). Agreements are illegal if: - They are in conflict with common law or statutory law (including the Constitution) - In that either the conclusion of the agreement, its performance, or the reason for its conclusion is contrary to public interest or a statutory prohibition. Illegal contracts that are void Public Interest The courts often state that a contract is illegal because: - It is contrary to good morals – contra bonos mores - It is contrary to public policy In Sasfin v Beukes, the Appellate Division put it as follows: “Agreements which are clearly inimical to the interests of the community, whether they are contrary to law or morality, or run counter to social or economic expedience, will accordingly, on the grounds of public policy, not be enforced.” Recognised public interests include:  Voluntary concluded contracts should be complied with and enforced (sanctity of contracts)  Simple justice between individuals should be taken into account  As far as possible, the parties to a contract should have equal bargaining power  The administration of justice should not be defeated, obstructed or perverted  The safety of the State should be preserved  The public service should function properly  The full exercise by persons of their legal rights should not be interfered with Public policy is an open-ended standard; but public policy is not as problematic as it initially appears to be, for the following reasons: - The courts use their power to strike down a contract for being contrary to public policy sparingly and only in the clearest of cases. Two things to be manifested: the impropriety of the transaction, element of public harm. Two reasons for such an approach: An arbitrary and indiscriminate use of this competence will undermine certainty and security in contractual relations. The principle of sanctity of contract is usually afforded preference over public interests. - The courts will declare a contract illegal if they consider the tendency of the contract, and not its proven result, to be against public policy. If the contract is capable of being implemented, but the tendency is neutral, the contract will be valid. - The court will be careful not to conclude that a contract is contrary to public policy simply because it offends the court’s individual sense of proprietary and fairness. - Public policy is primarily rooted in the Constitution and the values enshrined particularly in the Bill of Rights, but is not the sole source of public policy. - Legal precedents provide guidelines as to whether a particular contract or term is contrary to public policy. Two cautions attached to the use of case law: Case law before 1994 should be tested against entrenched constitutional values. Public policy on a particular issue could also have changed in the meantime.

A court will consider all relevant public interests in deciding whether a specific contract is against public policy. Preference is shown to sanctity of contract (Barkhuizen v Napier) - Self-autonomy/the ability to regulate one’s own affairs is the very essence of freedom of contract and dignity. - Freedom includes the principle of sanctity of contract - The inequality of bargaining power between parties that reduces the weight of freedom and dignity. A party who wishes to rely on illegality should plead it; the onus to prove rests on him/her. The conclusion, performance and object of the contract must be lawful Contracts that are void due to conclusion: - Contracts that are void on the basis of statutory prohibitions - Certain pacta successoria - Contracts with enemy subjects - Agreements that oust the jurisdiction of the courts (summary execution clauses and conclusive proof clauses) A conclusive proof clause: A certificate of balance constitutes conclusive proof of the indebtedness of the debtor. If the author of such a clause is a creditor, the clause will be against public policy: it makes the creditor the judge in his/her own case. If the author is a third party = clause valid. Examples of contracts with illegal performances: - Contracts to commit a crime or a delict When a contract can be carried out in a lawful AND unlawful manner, the presumption is that the parties intended the contract to be carried out in a lawful manner. The purpose/object of the contract will be illegal if: - Both parties have the same illegal purpose in mind. Thus: If one party is not aware of the other’s illegal motive = contract has no illegal purpose = innocent party may refuse to perform. NB: Kennedy v Steenkamp: purchasing of illegal uncut diamonds Specific examples of illegal contracts that are void Contracts against good morals (contra bonos mores) Good morals refer to good behaviour in the community. In most cases where performance is contrary to good morals, the conduct involved is immoral or sexually reprehensible. In Maseko v Maseko : plaintiff got married and transferred her house into her husband’s name, with the purpose of avoiding attachment of the house by creditors. Illegal on three grounds: 1. Morally reprehensible because it was designed to mislead existing/potential creditors 2. Undermined the institution of marriage 3. If perpetrated fraud against the court in the divorce proceedings Statutory Illegality On occasion. The legislator gives concrete content to public policy by expressly or impliedly prohibiting the conclusion of specific types of contract in general/under certain circumstances. The intention of the legislator is of primary importance in determining whether a contract is void. A contract that is aimed at circumventing the provisions of a statute that prohibit an act of contract, is also illegal and void. - S90 of the National Credit Act states that certain clauses in a credit agreement are unlawful, and sets out available remedies (sever the unlawful provision from the agreement, alter the agreement, declare the entire agreement unlawful). - S51 of the Consumer Protection Act prohibits a number of clauses in consumer contracts and states that such clauses are void. The following factors are taken into consideration in determining whether the legislator impliedly intended for a contract to be void if it falls foul of a prohibition: - What is the object of the statute and what mischief is the statute directed against? If the validity of the contract brings about the harm the statute is directed against – contract = void. - Does the enactment impose a criminal sanction? Contract = void. Unless the sanction provides adequate protection against the mischief the statute is directed against. - Does the enactment merely serve to protect the revenue of the State? Contract = valid. - Does the provision merely protect individuals or does it involve a public interest that requires protection by voiding the contract? Contract = void.

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What are the consequences of a particular interpretation of the contract? Balance-of-convenience test employed: whether the nullity of the contract would cause greater inconvenience/injustice that allowing the illegal conduct to stand.

The National Gambling Act “Gambling” includes all forms of wagering and gambling. S8 provides that a person must not engage in, conduct or make available a gambling activity, except: 1. Licensed gambling activities 2. Social gambling specifically permitted by provincial legislation 3. Informal bets S1 describes an informal bet as a bet or wager or agreement between two or more persons provided that: - None of the parties is a bookmaker or derives a significant proportion of his/her livelihood from gambling - None of the parties is paid a fee or derives any gain other than winning the bet itself An informal bet that does not comply with the above limitations is prohibited. S8 further prohibits informal bets if there are valid grounds to conclude that any of the parties to the bets intended to establish enforceable contractual relationships when they staked/accepted a stake/money on that contingency. Contravention of s8 is a crime. S16(1) provides that a debt incurred in the course of an unlawful gambling activity is not enforceable in law. A wagering or gambling contract is valid but unenforceable at common law. The National Gambling Act also creates a mechanism whereby a winning, which may not be paid out, is forfeited to the State. Observations about the legislator’s intention in the National Gambling Act: - S16(1) merely states that bets arising from unlawful gambling activities are unenforceable; does not state that the wagering contract is void. - The purpose of the act is to regulate, license, control and police gambling in South Africa as a whole. Important: s(8) – discussed above. The purpose of S8 is apparently to protect individuals, society and the economy against adverse effects of gambling. S8 – in public interest, not protecting revenue of the State. - S8 is directed against certain wagering contracts and the conclusion of such contracts is criminalised. If such contract were regarded as valid but unenforceable, the harm that s8 aims to alleviate will still occur. - The paying-out of winnings from an unlawful activity is prohibited as a crime. - A winning from an unlawful activity can be declared forfeit to the State. The legislator has thus implied that wagering contracts arising from unlawful gambling activities are void. Pacta de quota litis, champerty and maintenance - Pacta de quota litis: One party will provide funds for litigation by the other party, in exchange for a share of the proveeds should the case be successful. Regarded with disfavour in Roman and Roman-Dutch law: encouraged speculative litigation and the abuse of the legal process. - Champertous agreements in English law are similar to pacta de quote litis and fall into the wider category of maintenance agreements. - Maintenance agreements: One party improperly assists another party in litigation because the assisting party has not legitimate interest in the litigation and has no just case to become involved in the litigation. Last two agreements are illegal, unenforceable and invalid. o Exception: Where an agreement has been concluded in good faith to assist the litigant in the exercise of his/her rights. - Contingency Fees Act: enacted to enable litigants with insufficient resources to litigate in the courts o Contingency fee agreement: A legal practitioner can validly conclude such an agreement if the practitioner thought that the client had a reasonable prospect of success.  No win, no fee agreement OR  The practitioner will receive more than his/her usual fee if the case is won - In Price Waterhouse Coopers Inc v National Potato Co-operative Ltd the Supreme Court of Appeal held that pactum de quota litis is no longer against public policy/void: o The civil justice system is now well developed and civil courts are independent o The Contingency Fees Act indicates a change in public policy (see above)

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Potential conflict between the duties and interests of legal practitioners will not lead to an abuse of the legal process. Recognition of the need to enable people to take their disputes to court (as per: constitutional right to have legal disputes resolved in a fair public hearing before a court; freedom of contract)

Unfair contracts The individual interests of the parties also play a role in determining whether a contract/clause is against public policy. The unfairness or unreasonableness of a contract towards one of the parties, as well as the interest that the other party seeks to protect with the contract, are taken into account. Barkhuizen v Napier: Notions of fairness, justice and equity, and reasonableness cannot be separated from public policy. Public policy is informed by the concept of ubuntu. The objective test for good faith: Has to one party so unreasonable and one-sidedly promoted his/her own interest at the expense of the other party, that this infringement of the principle of good faith outweighs the public interest in the enforcement of the contract? - The unfairness or unreasonableness of a contract is in itself insufficient reason for declaring the contract contrary to public policy - The courts do not have a general equitable jurisdiction to declare unfair or unreasonable or unconscionable contracts invalid. - Good faith alone cannot determine whether a contract is contrary to public policy - African Dawn Property Finance 2 Ltd v Dreams Travel and Tours CC: The fact that a term is unfair/it operates harshly, does not lead to the conclusion that it offends constitutional principles. Two cases to illustrate the aforementioned point: - Sasfin v Beukes (a financier received immediate and effective control over a person’s income) – AD found that the terms placed the person in a position of virtual slave working to the benefits of Sasfin. - Barkhuizen v Napier (time limitation clause released the insurer from liability if the insured failed to serve summons on the insurer within 90 days after the insurer repudiated a claim submitted) – CC found that it limits the right to seek legal redress. S42(2) of the Consumer Protection Act gives specific examples of prohibited agreements and terms: - The contract is excessively one-sided in favour of the party other than the consumer - The contract is so adverse to the consumer as to be inequitable - A term is unfair, unreasonable, unjust or unconscionable - The attention of the consumer has not been drawn to the fact, nature or effect of certain terms of the contract The court may take the following factors into account to determine whether the contract is in whole/in part unconscionable, unjust, unreasonable or unfair: - Circumstances of the contract that existed or were reasonable foreseeable at the time the conduct occurred or the contract was concluded - The conduct of the parties respectively - Whether the consumer had to do anything that was not reasonably necessary for the legitimate interest of the supplier as a result of the conduct of the supplier - The fair value of the goods or services - The amount for which, and circumstances under which, the consumer could get identical goods or services from a different supplier - Whether the goods were manufactured - The nature of the parties, their relationship, and their relative capacity, education, experience, sophistication and bargaining power - Whether there was any negotiation between the parties and the extent thereof - The extent to which a document complies with the requirement that information has to be in plain and understandable language - Whether the consumer knew/ought to know of the existence and extent of the provision that is alleged to be unconscionable, unjust, unreasonable or unfair, having regard to any custom and trade and previous dealings between the parties. If a court finds that a contract is unconscionable, unjust, unreasonable or unfair, it may order that the money or goods be restored to the consumer/consumer be compensated for loss or expenses relating to contract/court proceedings.

Unfair enforcement of a contract The unfair enforcement of a contract could be contrary to public policy. - Brisley v Drotsky: The SCA assumed that the Sasfin principle could be extended to the enforcement of contractual terms. (Lessee accepted late payments for 5 months, and only cancelled contract thereafter). - Barkhuizen v Napier: The enforcement of a clause would be invalid if the enforcement was so unfair or unreasonable in the circumstances that its enforcement was contrary to public policy: o I.e. if the time limitation clause in question did not afford one party a reasonable and fair opportunity to approach a court to enforce his/her rights o Onus of proof rests on the party seeking to avoid enforcement o Court will have regard to all the circumstances of the case and the reasons for noncompliance with the clause The consequences of a contract that is void for illegality Absolute rule: An illegal contract cannot be enforced. Exception: Where the illegality only affects a part of a contract, that part can be severed from the rest of the contract. Consequence: Where one or both have performed in terms of that void contract, such performance cannot be claimed back where the parties are equally guilty, unless specifically allowed by the court. Contracts cannot be enforced (ex turpi rule) - An illegal contract is void or invalid since one of the requirements for a valid contract is absent - An illegal contract creates no obligations and, consequently, it cannot be enforced - Neither party can institute action on the contract or claim performance from the other party, because from an illegal cause no action arises – ex turpi causa non oritur actio. Severing the illegal part of a contract A contract is sometimes only partially illegal – whereby the illegal part of a contract can be severed from the rest, thus permitting the remainder of the contract to remain in force. Courts have refused to do so: where public policy requires the whole contract to be void. Whether the illegal part is severable depends on the probable intention of the parties. Test to determine the intention of the parties: 1. Is the illegal part of the contract grammatically or notionally distinct from the rest of the agreement? 2. Is the illegal part subsidiary or collateral to the main purpose of the contract so that, if it is eliminated, the substantive character of the contract remains unchanged? (Severance should not affect the nature of the contract) 3. Would the parties have entered into the agreement without the illegal part? The courts will only find in favour of severability if all three questions are in the affirmative. Reclaiming performance that has been made in terms of an illegal contract (the par delictum rule) If a contract is void and there has been performance: restitution should be granted: - Where ownership has not passed: performance reclaimed with the rei vindication - Where ownership has passed: performance reclaimed based on unjustified enrichment The par delictum rule prevents restitution from taking place: Where two parties are equally morally guilty, the one who is in possession is in the stronger position. - The rule does not prevent: the enforcement of an unlawful contract by means of a claim for specific performance – function of ex turpi rule. - The rule prevents: Parties of reclaiming their performance in terms of an unlawful contract. The rule is based on two considerations of public policy: 1. A court will not assist those who approach it with ‘unclean hands.’ 2. Unlawful contracts should be discouraged. The rule only applies where the parties are equally guilty in concluding an illegal agreement. The rule will not apply where the plaintiff is less guilty than the defendant/is not morally guilty at all. A plaintiff’s guilt is diminished where: 1. He/she did not know of the illegality of the contract 2. He/she is reclaiming money paid to a blackmailer

Cases: Minister of Justice v Van Heerden: The State could recover diamonds that had been sold in an illicit diamond transaction designed to ‘trap’ the defendant = par delictum did not apply. Klokow v Sullivan: Purchaser reclaimed his performance in terms of an invalid sale of a liquor-licensed business. Contract was contrary to the requirements of the Liquor Act. Purchaser argued that the par delictrum did not affect him as the Act only criminalised conduct of the seller. Court rejected this argument: the fact that the purchaser was not criminally liable was irrelevant regarding moral guilt. Jajbhay v Cassim: Court held that the par delictum rule could be relaxed in appropriate circum...