The Law of Contract August 2009.doc

The Law of Contract August 2009.doc

The general principles of the law of contract form an indispensable foundation for business law in Zimbabwe. The law of contract is woven into and is inseparable from every form of business activity. We enforce contract because it is morally right and commercially sound to do so.

Definitions of a contract:

Bampton & Drury: A contract is an agreement which creates and defines and which intends to create and define legal obligations between parties to it.

Madhuku & Manase: An agreement between parties which is recognised and enforced by law

Pireyi: A contract is an agreement between two or more parties which makes and defines legal obligations. The parties must intend to be bound by law and their agreement to be enforced at law.

Christie: A serious and deliberate intention to create a legal obligation or animus contrahendi. An agreement which is, or is intended to be, enforceable at law.

These definitions apply to all contracts though special contracts incorporate additional requirements e.g. in Gwisai “a contract of employment comes into existence when one person, the employee, enters into an agreement with another, the employer, to render personal services to and under the control of the employer, in return for remuneration.” Such a definition incorporates all concepts in the general definition of a contract as well as applying the concept to the special field of employment.

Agreement is clearly necessary for the existence of a contract. A person cannot contract with himself. The literature highlights that agreement is “a meeting of the minds, a coincidence of the wills, consensus ad idem”. However, in practice, to determine whether a agreement took place, “the court is not interested in the state of mind of the parties … it must decide the issue on the state of mind of the parties as manifested by word or deed” (Levy v Banket Holdings (Pvt) Ltd 1956). Any mental reservations or unspoken qualifications will not count. The court makes an objective inquiry.

Consensus ad idem involves a union of wills; a meeting of minds in one and the same intention which comes about when an offer from one party is accepted by another. Therefore there can be no agreement without an offer by one party or an acceptance by another. In addition, every contract is created through an agreement. Thus in a contract: Agreement = Offer + Acceptance.

To ascertain agreement one looks for offer and acceptance. As a general proposition the contract will be made at the time and place where agreement is reached – when each party becomes aware that the other is in agreement with him. Normally an offer is communicated by words. However some offers arise from conduct/actions eg in shops, buses, railway stations etc. similarly acceptance may arise from conduct. Thus a tacit contract may be concluded.

A statement such as I will pay when I feel like cannot be tested objectively as opposed to a statement that I will pay when I can.

In Innes CJ in Rood v Wallach. 1904, it was highlighted that “every agreement……… made deliberately and seriously, by a person capable of contracting, and having a ground or reason which is not immoral or forbidden by law, may be enforced by action.” And further, Kerr AJ: states that“ In contract the legal bond, iuris vinculum is formed by the parties themselves, and, within the limits laid down by law, the nature of the obligations is determinable by them. In some cases their agreement is actual, in others apparent, and in yet others partly actual and partly apparent.”

To establish a contractual bond, the parties must communicate with each other. In some cases however parties do not negotiate from a position of equality e.g. for water/electricity with the municipality, or when the law compels a car owner to obtain 3rd party insurance.

The definitions above highlight that

q  A contract involves agreement between two or more parties.

q  It must be enforceable at law

q  The parties must intend to be bound: a serious and deliberate intention to be bound.

However a special case concerning agreement, offer and acceptance arises in

Quasi-mutual Assent. In contract three perspective prevail:

l  Subjective Consensual Theory. Enforceability depends on consensus ad idem or the concurrence of subjective wills of the contracting parties.

l  In the Objective Declaratory Theory, enforceability depends on concurrence of the declared intentions of the parties.

l  Under the Reliance Theory, enforceability depends on reasonable expectation conveyed to the mind of each party by word or conduct.

An offer is not what the offeror thought he meant but what a reasonable third party, knowing the facts, would interpret him to mean. For example when a party means to do one thing but acts in a manner indicating something quite different. Here the first party is bound to what a reasonable person would understand from his own conduct – even though he intended a different thing. This is referred to as quasi- mutual assent. Apparent contracts of this nature are based on a fiction that there is consensus when in fact there is not. The law will not concern itself with the working of the minds of the parties but with the external manifestation of their minds – by their acts their minds seem to have met. The law looks to their acts and assumes that their minds have met.

In Quasi-mutual assent it is accepted that there is no true consensus ad idem.

One party says: But I never agreed.

The court replies: Quite so, but your conduct led the other party reasonably to believe you agreed, so you will be treated as if you had agreed.

If one party’s words or actions give one reasonably to understand that their minds had met, then a contract was concluded even if in truth their minds did not meet. This is so because there is an expectation of good faith, by a reasonable person relying on the words/actions of another who leads a reasonable man to believe that he was binding himself. A person’s state of mind is evidenced by words/actions. However such words/actions may be ambiguous or be misunderstood or may lead others to conclude that the speaker/actor has a certain intention which in fact he does not have. In such cases agreement is reached to all appearances. This principle is summed up in Smith v Hughes 1871

“ If whatever a man’s real intention may be, he so conducts himself that a reasonable person would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into a 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.”

The principle was adopted in Zimbabwe by Blackburn, J’s words in Diamond v Kernick, 1947 : An estate agent who had the sole right to sell certain properties gave a mandate to another [who became his agent] to sell the properties, the amount of remuneration being “7.5 per cent”

[Benoni Produce & Coal Co. Ltd v Gundelfinger, 1918: BPC ordered matches from Gundelfinger through a broker for immediate delivery. But G had no stocks. He therefore was dealing subject to arrival. He had a duty to speak but he did not. Qui tacet cum loqui potuit et debuit, consentire videtur- he who remains silent when he could and ought to speak is regarded as consenting.

A party may lead another to believe there is agreement when in fact this is not so as was decided in Pieters & Co v Salomon, 1911.

Mr Burger, a businessman owed Mr. Salomon some money. Pieters & Co then bought the Burgers business and contracted with Salomon to pay what Burger owed. Salomon knew the amount but Pieters & Co thought it was much smaller. The court decided that they must pay the full amount because they had led Salomon to believe that they would do so.

“When a man makes an offer in plain and unambiguous language, which is understood in its ordinary sense by the 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 the 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”.

OFFERS. An offer is a proposal made by one person [the offeror] to another, the offeree. It must be accompanied by animus contrahendi, the intention of putting the conclusion of the negotiations out of one’s further power, allowing the offeree by mere acceptance to create the contract. There must be a firm offer which is distinguished from an offer to open negotiations or do business known as an offer to treat or "offer to chaffer", mere puffing, or commendations [In Naude v Harrison-A house was advertised as well built]. The same principle generally applies to tenders and auction sales- they are not firm offers but invitations by persons who conduct them to do business.

There may be an offer and acceptance without a contract e.g. social or family arrangements. [Balfour v Balfour. 1919]. However, a gratuitous promise is enforceable if there is a serious and deliberate intention to create a contract [redelijke oorzaak or justa causa] “The only element our law requires for a valid contract is consensus [De Villiers. AJA in Conradie v Rossouw, 1919 AD]. There is no need for a quid pro quo.

Offers may be addressed to a particular individual, or a particular group of people or the public at large. A contract comes into being when a valid offer is accepted by the intended offeree. A statement that goods are for sale at a particular price is not an offer. [Crawley v Rex, 1909 &Boots Cash Chemist v Pharmaceutical Society of Great Britain, 1953 QB]. However the following do not constitute offers:

v  An advertisement does not constitute an offer and so an advertiser cannot be compelled to enter into a contract on the basis of his advertisement, except in reward cases [Carlill v Carbolic Smoke Ball Co, 1893 Bloom v American Swiss Watch Co, 1915]. It is merely an invitation to treat or do business. Where a contract arises from an advertisement, the terms of that advertisement must be adhered to. [Shepherd v Farrel Estate Agency, 1921- Our Motto: no sale, no charge]

v  An offer to the whole world may be accepted by anyone provided the offer reached him and he accepted it. E.g. advertisements for reward. Offer and acceptance must be made freely and voluntarily [Bloom v American Swiss Watch Co.].

v  A statement of the lowest price is not an offer. [Efroiken v Simon, 1921] Even in response to a specific inquiry. [Harvey & Another v Facey &Others, 1893- “Will you sell us Bumper Hall Pen?”]

Offers not accepted lapse or expire in the following ways:

o  Effluxion or expiry of fixed time. Laws v Rutherford, 1924 AD is the leading case: Mrs. Rutherford offered Laws a contact to cut wood on her farm; acceptance to be registered letter by 26 July. Laws moved on to the farm and started work but omitted to send the necessary registered letter. Innes CJ: Laws was interdicted from remaining on the farm. "Speaking generally, when the acceptance of an offer is conditioned to be made within a time or a manner prescribed by the offeror, then the prescribed time limit and manner should be adhered to".

  • No time limit set by offeror – The offer lapses after expiry of reasonable time. Reasonable time is a matter of fact ascertained from surrounding circumstances. [Dietrichsen v Dietrichsen 1911].
  • Death. Normally death of offeror or offeree terminates offer. De Kock v Executors of Van de Wall 1899 SC - offer of donation could not be accepted after death of offeror.
  • Loss of contractual capacity. Contractual capacity lost through insanity, insolvency, etc.
  • Rejection terminates the offer.
  • Counter offer. Destroys the original offer. Hyde v Wrench [1840] - W offered to sell his farm to H for £1000. H counter-offered £950 - W rejected. H purported to accept the previous offer. However W was no longer keen to sell the farm. H sued W. It was held that the counter-offer amounted to rejection of offer - therefore no longer open to acceptance.

o  Withdrawal or revocation of offer. As a general rule the offeror can withdraw/revoke his offer at any time before acceptance unless specific time was given for acceptance. Withdrawal/revocation must be communicated to the offeree. [Yates v Dalton 1938]

Option This is an offer to enter into the main contract together with a concluded subsidiary contract [the option] binding the offeror to keep the main contract open for a certain period. The Offeror is then bound to keep the option open for the period agreed. Failure to keep the option open amounts to breach for which offeror can be sued. An option is thus a separate contract binding on the offeror. An option to buy obliges the seller to sell. A right of pre-emption [or first refusal] allows the holder first opportunity to buy if the seller decides to sell. In Boyd v Nel 1922 AD it was held that an option is a separate contract binding on the offeror. If the offeror makes acceptance impossible before the option expires he is liable. However an option which involves a cash sale can be cede to a 3rd party {Hersch v Nel, 1948].

Acceptance. To achieve agreement an offer must be accepted –even if it is a donation. An offer made to a specific person can be accepted by that person only. Acceptance must be unequivocal. A purported acceptance in the form ‘Yes but…..” will not do. If the offeror specifies a particular method of acceptance, this must be adhered to. [Laws v Rutherford 1924 AD and Eliason v Henshaw, 1848]. However silence is not acceptance. “Quiescence is not acquiescence.” [Gonese v Mufudza 1977]. An offeror cannot force a contract by saying that the offeree's silence will be taken as acceptance. This point also applies to the sending of unsolicited goods through the post followed by invoice and statement. However where there is a duty to speak silence mat amount to acceptance.