Chapter 8 - complete - Summary Law of Contract 201 PDF

Preview

Summary

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

Description

Chapter 8: Possibility and certainty Possibility A contractual obligation must be possible to perform for it to be valid. General rule: Impossibility of performance prevents the creation of obligations (impossibilium nulla obligation est). Examples of contracts that are void due to non-compliance with possibility: - The sale of an object that cannot be delivered as it has been destroyed at the time of conclusion of the contract - The sale of an object that does not exist Parties can agree to do the impossible for various reasons: - They are joking or lack mental capacity: here the necessary intention to create binding obligation is absent. No need for the requirement of possibility. - They have the intention to create obligations, but they labour under a common mistake as to the circumstances surrounding the conclusion of the contract: the contract may be rendered void, and because of the possibility requirement, parties are absolved from liability. Different types of impossibility Not all types of impossibility prevent the creation of contractual obligations. 1. Subjective and objective impossibility Subjective/relative impossibility: A particular party cannot perform; not sufficient to render performance impossible. I.e. where a party agrees to make a payment, but does not at the time of the agreement have the money to do so/ a party agrees to deliver goods, but does not have them in supply. Mere subjective inability to receive/make performance does not entitle a party to escape liability. Only possible remedy: exercise a right of cancellation in terms of s17 of the Consumer Protection Act. Objective/absolute impossibility: The impossibility is so serious that nobody can make the performance. I.e. where the subject matter has been destroyed. 2. Factual and practical impossibility Factual impossibility: The subject matter of sale still exists at the time of the conclusion of the contract, therefore performance is not factually impossible. Practical/economical impossibility: The cost of retrieving/repairing/delivering the subject matter would be disproportionate to its value – no obligation arises. 3. Legal impossibility Where a contract is legally impossible, the impossibility flows from the illegality, thus the legality requirement has not been met. - However, Wilson v Smith: The promised performance by the seller was illegal, but the case was dealt with as one of impossibility. Other agreements:  Agreements to perform things that cannot be traded are regarded as invalid due to noncompliance with the possibility requirement, and not the legality requirement. The distinction between voidness for illegality and voidness for impossibility is relevant when reclaiming performance maid in purported fulfilment of void contracts: - Voidness for illegality: Restitution governed by the par delictum rule. - Voidness for impossibility: Par delictum does not apply. 4. Initial and supervening impossibility Initial impossibility: Where it is not possible to perform the contract at the time of its conclusion. (When impossibility arises after the conclusion of the contract, valid obligations arise, but the obligations could either terminate or continue to exist, depending on cause of impossibility). Supervening impossibility: Obligations can no longer be performed because performance has become objectively or absolutely impossible after the contract has been concluded.

Exceptional cases: Liability despite impossibility Contemplation of impossibility and the assumption of risk General rule: Objective impossibility of performance precludes the creation of contractual obligations. Not uniformly applied in South African law. Wilson v Smith: Kuper J confirmed the general rule, but recognised that it is not applied in all cases. As referred to in earlier case law, the following must be considered to see whether the general rule ought to be applied:  The nature of the contract  The relation of the parties  The circumstances of the case  The nature of the impossibility invoked by the defendant This is a very broad test, and Kuper J the real test is: 1. Whether when the parties entered into the contract, the possibility was contemplated by them that the event which rendered performance impossible might occur, for if possibility was contemplated and no provision was made in the contract against the event = the claimant should not be relieved because the event did occur. Other scenarios: 2. Both parties contemplated that the contract could be capable of execution in the normal way = contract is void in terms of the general rule. 3. If only one party foresaw/should have foreseen impossibility: Nothing excludes awarding such a party a claim for delictual damages, if the other party wrongfully and culpably instilled this belief. Warranty: guaranteeing performance Warranty: A term inserted in a contract in favour of one party to extend the liability of the other party beyond what it would normally be. A warranty could be created expressly or tacitly. Reason for including a warranty: A party who is concerned that the other party may escape liability on the ground that no obligation was created due to initial objective impossibility of performance. - If a warranty is agreed to: obligation is created, even though performance is impossible. Party in breach of warranty can be liable to pay damages. - SS Theka Bohlen: The seller warranted he had 1000 containers to sell, when in fact only 106 were on board. Due to the breach of the warranty, the seller was liable to pay the purchaser damages. The consequences of impossibility In accordance with the general rule: No obligation arises if performance is objectively impossible. - There cannot be a claim for either performance or contractual damages based on breach. - Anything given in purported fulfilment of the non-existent obligation has to be returned. The duty to return can be enforced with a claim based on the unjustified enrichment of the recipient. 1. Where contractual obligations are reciprocal. Reciprocal: When one performance is promised in exchange for another. - The impossibility of performance of one obligation automatically means that there cannot be an obligation to render the counter-performance either. 2. Where performance of the contractual obligations is only partially impossible at the time of agreement. - Contract could be regarded as invalid in its entirety (Or, obligations could arise in respect of those performances that are still possible) - Divisibility of the performance is important in determining consequences: o Stansfeld v Kuhn: A smaller portion of land could be transferred than originally agreed upon. The remainder of the land could still be transferred, and the price was proportionally reduced. o Where performance is not divisible: the contract could be invalid in its entirety, or there could be a proportionate reduction of the counter-performance. Certainty General rule: Uncertainty about what has to be performed prevents the creation of obligations. General requirement for the creation of contractual obligations: Contents must be certain OR be capable of being rendered certain through mechanisms set out in the contract.

The application of the certainty requirement: practical examples Contracts aimed at creating another contract: the pactum de contrahendo or ‘agreement to agree’ ‘Pactum de contrahendo’ invalid due to uncertainty: If the parties’ consensus is only provisional and subject to further variation, the content of the contract is too uncertain to give rise to obligations. ‘Pactum de contrahendo’ that are valid: provided that the terms of the contract to be made in the future are agreed upon. I.e: - Options and preference contracts: o Option: the terms of the envisaged agreement are already set out in the substantive offer contained in the option o Preference: the mechanisms aimed at protecting the party enjoying the right create sufficient certainty not to render the contract a nullity - Agreements to negotiate in good faith o Southernport Developments v Transnet Ltd: If no agreement could be reached pursuant to good faith negotiations, the matter would be referred to arbitration for final determination. Not invalid: the arbitration process created sufficient certainty as to the ultimate content of the agreement. o Premier, Free State v Firechem Free State: An agreement to negotiate a further contract contained no deadlock breaking mechanism, and was held to be invalid. o Courts do not uniformly insist on such a mechanism: In Brink v Premier, Free State an agreement of lease provided the tenant with an option to extend the lease period for a period of 5 years with a second option of 5 years with the same and/or new conditions as would be mutually agreed. Vague language and gaps A contract could be void for uncertainty due to the vague language in which it is implied. Courts will try and interpret agreements in a manner that leads to validity rather than invalidity (ut res magis valeat quam pereat) - Levenstein v Levenstein: “to the best of his ability during the remainder of her life” was not void for uncertainty, as the ability to pay was a determinable matter of fact. - Beretta v Beretta: an agreement to pay off an “substantial sum” was regarded as too vague. The full amount had to be repaid. The law does not expect parties to set out exhaustively every aspect of their relationship in a contract. If parties leave certain gaps, the law simplifies matters by automatically creating rights and duties, unless the parties determine otherwise. Contracts of indefinite duration Parties may enter into contracts of indefinite duration (without stipulating the expected duration). Usually gives rise to uncertainty, but courts give effect to these contracts by seeking guidance from the actual/presumed intention of the parties. - The parties intend that the contract will be in force until such time as it is terminated by (reasonable) notice. - The parties intend that the contract will only remain in force for a reasonable period, and then terminate. - The parties intend that their agreement will endure forever. (Certain agreements are incapable of lasting forever, i.e. lease) Regulation 44(3)(1) of the CPA: a term is presumed to be unfair if it has the purpose to enable a supplier to terminate an open-ended agreement without notice (except where the consumer committed a material breach of contract).

Contracts containing a mechanism whereby certainty can be obtained Id certum est quod certum redid potest: Something is certain if it can be rendered certain. - The mechanism for obtaining certainty must function independently of the intention of the parties. This does not mean that one of the parties involved in the further determination of the performances – the determination will potentially be subject to an element of objective control. - Instructive examples: 1. Certainty is obtained with reference to a mechanism contained in the contract.  It may be necessary to provide for an increase in what has to be performed over time to account for changed circumstances, such as inflation.  Instead of renegotiating the contract, the parties may simply incorporate an escalation clause – provides an automatic increase in the amount of performance over time. 2. Certainty is obtained with reference to an objectively determinable external standard or mechanism.  Shell v Corbitt: ‘latest price listing at the time’ – valid.  Valid to enter into an agreement to render a service at a ‘reasonable price’  Invalid to sell/rent something at a ‘reasonable price’  Tenants can agree to be held liable for ‘reasonable expenses’ 3. Certainty is obtained through a determination by a third party  A third party can determine what has to be performed as long as the third party is identifiable, and exercises the discretion objectively and reasonably 4. Certainty is obtained through a determination by one of the parties  A discretion to determine one’s own performance/to perform only if one wishes to do so (condicio si voluero) is invalid.  NBS Boland v One Berg River Drive CC: A party can enjoy a discretion to determine what the other party has to perform. S15 of the CPA: a supplier may in certain circumstances be obliged to provide an estimate, and obtain prior authorisation from a consumer, when providing repair or maintenance service. Regulation 44: Certain terms that provide the supplier with a discretion to determine what must/may be performed are unfair, i.e.: - Terms that allow the supplier to increase the price agreed with the consumer when the agreement was concluded, without giving the consumer the right to terminate the agreement - Terms that enable the supplier to unilaterally alter the terms of the agreement, including the characteristics of the product/service - Terms that give the supplier the right to determine whether the goods/services supplied are in conformity with the agreement The consequences of not meeting the certainty requirement An obligation that does not meet the certainty requirement is invalid. - If such obligation is severable from the other obligations created by a contract: the other obligations may remain in force = contract only partially invalid. - Not possible to sever = contract void as a whole. - Transfers made in purported fulfilment of obligations that are void due to uncertainty: retained without legal ground. = Transfers can be reclaimed with remedies based on unjustified enrichment....